Three big Midwestern banks posted better-than-expected results on Thursday, signaling the credit picture may be improving for banks in one of the U.S. regions hardest hit by the extended recession.

Analysts said the results from KeyCorp , Fifth Third Bancorp and PNC Financial Services Group Inc
suggest last year's third quarter may have been the industry's low point, even for banks with high loan concentrations in the Midwest and battered Sun Belt states such as Florida.

It's quite a strong earnings season for the banks, said Gary Townsend, chief executive of Hill-Townsend Capital in Chevy Chase, Maryland. It seems increasingly clear that the high point in credit expense will be seen as third-quarter 2009 with improvements in the outlook.

But while shares of Fifth Third and KeyCorp rose sharply, PNC Financial stock fell 5.26 percent to close $55.70. Analysts said bank executives were not as positive on PNC's outlook as its Midwestern competitors, even as they said loan losses were slowing.

PNC

PNC Financial reported a quarterly profit of $1.1 billion, or $2.17 a share, compared with a loss of $246 million, or 77 cents a share, a year earlier. Excluding a one-time gain it earned 90 cents a share, beating analysts' estimates of 78 cents.

PNC increased its loan loss reserve to a total of $5.1 billion in the fourth quarter, up from $4.8 billion in the third quarter and $3.9 billion a year earlier.

PNC is the fifth-biggest U.S. bank by assets. It is among the strongest survivors of the financial crisis, but it has not yet repaid the $7.6 billion it borrowed under the government's Troubled Asset Relief Program.

It bought Cleveland-based National City at the end of 2008 after the latter struggled with losses from subprime mortgages and other troubled assets. Analysts said there could still be further losses on National City loans.

There's a fair amount of concern that there will yet be stuff that pops out of the Nat City franchise, said Nancy Bush, an analyst at NAB Research. You can't clean these things up to such an extent that you don't get surprises at some point.

The Pittsburg-based bank was also more cautious on its guidance, analysts noted.

Chief Executive James Rohr said PNC is still focused on risk management, while Fifth Third said an end to its loan loss reserve additions is in sight.

FIFTH THIRD, KEYCORP

Despite quarterly losses -- Cleveland-based KeyCorp lost $258 million in fourth quarter, Fifth Third lost $160 million -- both reported some problem loan areas were improving. KeyCorp noted its total nonperforming assets, or its whole spectrum of bad loans, declined from quarter to quarter for the first time since the end of 2006.

Fifth Third's total charge-offs, or defaulted loans the bank was writing off as losses, dipped to $708 million in fourth quarter, half the level of fourth-quarter 2008 and down nearly $50 million from September 30. The Cincinnati-based bank also said it did not expect to set aside more money to protect against bad loans.

KeyCorp's fourth-quarter loss amounted to 30 cents per share, beating analysts' estimates of a 39 cents per share loss. Fifth Third posted a similar surprise, reporting a fourth-quarter loss of 20 cents per share, when analysts had expected a loss of 31 cents per share, according to Thomson Reuters I/B/E/S.

Fifth Third shares closed up 6.28 percent at $12.02 on the Nasdaq, while KeyCorp shares closed up 5.46 percent at $7.34.

The broad KBW Banks Index <.BKX> was down 0.5 percent. Larger banks, including JPMorgan Chase & Co and Bank of America Corp were hurt by proposals announced on Thursday by U.S. president Barack Obama that would limit financial risk-taking by big banks.

(Reporting by Elinor Comlay and Joe Rauch, editing by Matthew Lewis)