Sector Snap: Banks pare some of prior day's losses

"There was a little bit of panic for bank stocks yesterday," said Frederick Cannon, chief equity strategist for Keefe, Bruyette & Woods. "Hopefully we're seeing a situation where people are saying, 'Wait a second, depositors are good.' People are going back to a little more sense of relief."

Washington Mutual Inc. shares posted one of the sector's biggest rebounds, climbing 43 cents, or 13.3 percent, to $3.66 in afternoon trading. Shares plunged 35 percent Monday and are down about 73 percent year to date.

WaMu's shares were lifted in part by the Seattle-based bank's reassurance that it has enough spare cash to handle the current economic downturn.

KBW's Cannon, however, warned that WaMu isn't out of the woods yet.

"The release yesterday does imply they are going to have a weak second quarter, but that shouldn't surprise anybody," he said. Cannon estimates the loss could exceed $2 per share. Analysts polled by Thomson Financial, on average, forecast a loss of 93 cents per share.

Regional bank stocks plummeted Monday as investors worried about the prospect of more bank failures after the government's takeover of IndyMac Bancorp Inc. last week. Concern over the fate of mortgage financiers Fannie Mae and Freddie Mac also weighed on the market, after the Federal Reserve and the Treasury said they would lend financial support to the firms if necessary.

Financial stocks also remain vulnerable as earnings season heats up, and Wall Street braces for more bad news.

First Horizon National Corp. on Tuesday reported a second-quarter loss wider than the Street's expectations. While the operating results were disappointing, Sandler O'Neill & Partners analyst Kevin Fitzsimmons said he suspects investors are encouraged by the company's outlook for improved capital ratios.

The Memphis, Tenn.-based bank also said that D. Bryan Jordan will take over as president and chief executive as part of a succession plan to replace current president and CEO, Jerry Baker.