Time to Sell Sour Loans? BB&T and PNC Say 'Yes'

Several banks believe now is the time to take an aggressive stance on selling problematic loans.

BB&T Corp. and PNC Financial Services Group Inc. were among those discussing Thursday how they are purging such assets at an accelerated rate, citing improved buyer interest and better pricing, particularly for residential development and mortgages.

The trade-off may be a more prolonged recovery from the credit issues that have plagued the industry for the past three years because such sales often lead to higher net chargeoffs and provision expenses. Executives at the banking companies in question said during quarterly conference calls with analysts that they were willing to make such sacrifices.

"With the market for these loans opening up, we see an opportunity to reduce risk with reasonable valuations," said James Rohr, the chairman and CEO of PNC, while discussing plans to shed $2 billion of "seriously delinquent" loans during the third quarter.

BB&T sold nearly $700 million in problematic loans during the second quarter, with expectations of similar-sized dispositions during each of the next two quarters. "We've avoided dumping assets into a highly stressed market," said Clarke Starnes, BB&T's chief credit officer. "It's time for us to be more aggressive."

BB&T and PNC have held on to scores of bad loans while others rushed to unload theirs. Regions Financial Corp., for instance, took hefty losses in late 2008 after shedding roughly $1 billion of nonperforming assets for prices that averaged half of face value. Fifth Third Bancorp and Synovus Financial Corp. have also taken hits as they unloaded troublesome credits.

Mary Tuuk, Fifth Third's chief risk officer, said it avoided major loan sales last quarter. "I will tell you that we do continue to see some signs of improved pricing and demand for properties," she said. "You would expect to see that at this point in the cycle, given some of the cash that's on the sidelines and some of the excess liquidity. So we'll continue to work through that strategy."

Robert Patten, an analyst at Regions' Morgan Keegan & Co. Inc. unit, welcomed BB&T's new view of dispositions. "It proves that a tiger can change its stripes," he said. "We view this as a progressive and correct move by management to better position the company in a rapidly changing environment. We believe the bank has the earnings power and capital strength to work its way through these over the coming quarters."

Neither PNC nor BB&T specified how much they recouped — or expect to recoup — from the loan sales. The sales, however, may keep them from following the lead of other banks that released loan-loss reserves, which many analysts see as rocket fuel for profitability.

PNC's loan-loss provision, at $823 million, was $17 million less than its net chargeoffs. Rohr, however, noted during the company's call that PNC had set aside $109 million in the second quarter to cover losses tied to the planned sales, which amounted to $75 million in net chargeoffs. Nonperforming assets fell 7.1% from the first quarter, to $6.1 billion.

BB&T, meanwhile, continued to build its loan-loss reserve. Its provision of $650 million exceeded net chargeoffs by $8 million. Nonperforming assets fell 3.1% from the previous quarter, to $4.33 billion. It was the first time this has happened at the $155.1 billion-asset Winston-Salem, N.C., company since early 2006.

Kelly King, BB&T's chairman and CEO, said a reluctance to release reserves was more about playing it safe. "You know a lot of folks this time are maybe rushing to release allowance, but we're not doing that," he said. "We don't think the economy is ready to go into a double dip [recession], but we do think it is in a bit of a stall. We want to be conservative as we move into the next couple of quarters to be sure we're on solid footing as we look forward."

Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, estimated that BB&T's nonperforming assets may have grown 13% from the first quarter had it not aggressively sold bad loans. He said the company appeared to use a large securities gain ($219 million) to offset much of the losses from purging its balance sheet.

In fact, BB&T continued an interrupted profitability streak, with earnings up 11.7% from the first quarter and 73.6% from a year earlier, to $210 million. The company continued to benefit from last year's government-assisted takeover of Colonial Bank, which provided lower-cost deposits and some lending opportunities.

Total loans rose 0.5% from the first quarter but fell 1% from a year earlier, to $95.4 billion. Deposits fell 2.9% from the first quarter but rose 14.5% from a year earlier, to $101.1 billion. (The company also booked $100 million in income after a reevaluation of Colonial loans indicated better-than-expected performance.)

Still, King used portions of Thursday's call to discuss his concern about a "stalling" U.S. economy, shocked in the last two months by the European debt crisis, Gulf of Mexico oil spill and uncertainty regarding the recently signed financial reform bill. "Frankly, I thought by this time in [the] cycle we'd have more clarity," he said, adding that he expects a return of slow growth. As a result, a dividend hike planned for later this year is likely to be postponed into 2011, he said.