The nation's biggest regional banking companies are likely to use a defensive strategy most of next year as they continue to absorb loan losses and chew through capital.

Most of the largest banking companies took advantage of acquisitions encouraged or brokered by regulators to build scale this year, but most of the next tier avoided major deals.

The prevailing thought is that firms like Fifth Third Bancorp, Regions Financial Corp., and SunTrust Banks Inc. may remain on the sidelines until at least mid-2009, except to take advantage of failed-bank deals offered by the Federal Deposit Insurance Corp.

The regionals are expected instead to spend time and resources - including billions of dollars from the Treasury Department's Capital Purchase Program - on getting a handle on their credit quality, which many observers say deteriorated at an alarming rate this quarter and will remain a major problem through a prolonged recession.

Regions may have set the tone for large regionals Monday by saying it would report up to $1 billion of nonperforming asset sales for the fourth quarter; the $144 billion-asset Birmingham, Ala., company did not reveal the prices. Analysts said the moves could lead to a quarterly loss and cut into capital.

Other large regionals are expected to follow suit with hefty chargeoffs in subsequent quarters. Doing so might force them to seek more capital, perhaps by selling common stock when equity markets stabilize. The financial health of such companies could be critical to bailing out crippled competitors, and those that regain their footing the fastest should be in the best shape to solidify balance sheets and build their retail banking operations through transformative acquisitions.

Jeff K. Davis, a principal at Wolf River Capital LLC, said the first half of next year "will be abysmal and will be all about reserve building" at large regionals. "Ultimately, how bad does asset quality get, and therefore how do investors view the capital bases of these companies?"

Before making a purchase, he said, bankers should wait another six to nine months "to see how the economy is going to play out in their own portfolios, as well as those of their targets."

SunTrust and Regions are drawing the most scrutiny for worsening credit and capital levels that might need further fortification. The continued drop in real estate values in Florida and Georgia could spur both companies to be more aggressive in shedding assets at depressed prices.

Regions said its actions should reduce nonperforming assets to less than the $1.77 billion it had on Sept. 30. While giving no specifics, it said its fourth-quarter provision would outstrip chargeoffs, thus padding overall reserves. Both actions should eat into capital levels fortified by a dividend cut this year and $3.5 billion of capital from the Troubled Asset Relief Program.

Still, Regions has "some fairly formidable problems," said Frank Barkocy, the director of research at Mendon Capital Advisors Corp. "They are exposed to markets that continue to deteriorate, and loan demand will be an issue for them."

Capital is also a concern at SunTrust, which drew attention this month by going back to the Treasury for the full $4.5 billion it was eligible to receive under the Capital Purchase Program. The $175 billion-asset Atlanta company has largely cashed out its profits on its Coca-Cola Co. stock, and it cut its dividend in October.

As of Sept. 30, SunTrust's nonperforming assets as a percentage of equity stood at 22.7%, compared with 9.2% at the end of last year, according to data from SNL Financial LC in Charlottesville, Va. (See chart.)

James M. Wells 3rd, SunTrust's chairman and chief executive, said in a Dec. 9 press release that it sold more preferred stock to the Treasury because of a "decidedly bleaker" economic outlook. "We have concluded that further augmenting our capital at this point is a prudent step, especially if the current recession proves to be longer and more severe than previously expected."

SunTrust's loan-loss allowance represented just 0.91% of total loans at Sept. 30, and building reserves in a slow economy would make profitability a challenge.

"The need to build reserves and a higher level of chargeoffs are going to deliver a double whammy to their earnings," said Albert Savastano, an analyst at Fox-Pitt Kelton Cochran Caronia Waller.

Earnings have held up reasonably well at BB&T Corp., leading many analysts to view it as a likely consolidator. But souring loans continue to accrue, particularly in its residential development portfolio. At Sept. 30, nonperforming assets as a percentage of equity was 12.7%, leading some analysts to wonder if the company will reconsider its decision this year to raise its dividend.