BB&T Shows Renewed Interest in Commercial Real Estate

BB&T (BBT) is slowly warming back up to commercial real estate.

Banks have largely avoided such loans since the financial crisis, after declining land values wreaked havoc on credit quality. BB&T, however, senses an opportunity to expand its dealings in commercial real estate, though Kelly King, the company's chairman and chief executive, said it is doing so with eyes wide open.

"We'll continue to be as conservative in terms of underwriting as we've always been," he said in a conference call Thursday to discuss the Winston-Salem, N.C., company's quarterly financial results. "We're not going out and doing the crazy stuff that got everybody in trouble [such as] big land loans and equity projects."

Loan growth was a key contributor to BB&T's bottom line in the third quarter. Earnings available to shareholders rose 28% from a year earlier, to $469 million. Net income slipped 8% from a quarter earlier because of acquisition costs and dividends paid on newly issued preferred stock.

King, who has long shown a willingness to strike at an opportunity, discussed the potential of funding apartment projects and office development should demand for office space rebound. "It would be in our natural boring manner," he assured.

Analysts have suggested the past two years that stronger banks should take a second look at commercial real estate. BB&T's renewed appreciation for such loans comes at a time when many institutions are ditching CRE to focus more on commercial lending. Other banks remain hamstrung by capital constraints or regulatory orders.

Commercial real estate loans, excluding residential acquisition and development, grew 4% from the second quarter, to $10.9 billion, ending eight consecutive quarters of shrinkage in that portfolio. The acquisition and land development portfolio, which includes residential tracts, decreased by 9% from a quarter earlier, continuing an ongoing effort at BB&T.

BB&T's overall loan book grew by 3% from the second quarter and 9% from a year earlier, to $117.6 billion. BB&T added loans in several areas, including commercial lending, revolving credit, residential mortgages and specialty finance. "We're pleased with our overall loan growth," King said.

"The C&I market out there is very competitive," he added. "We're holding to our discipline and not doing leveraged financing and other forms of high-hold positions in syndicated lending."

A larger loan portfolio helped offset a shrinking net interest margin, which contracted by 1 basis point from the second quarter and 15 basis points from a year earlier, to 3.94%. BB&T warned during its conference call that the margin could dive down to roughly 3.75% in the fourth quarter as loan yields continue to fall, long-term debt costs rise and accounting benefits from failed-bank acquisitions dissipate.

Credit quality continued to improve, though. The $182 billion-asset company's loan-loss provision fell 11% from the second quarter and 2% from a year earlier, to $244 million. Nonperforming assets and net chargeoffs also declined from previous quarters.

King used Thursday's conference call to repeatedly tout BB&T's financial strength, which he said was masked somewhat by economic uncertainty. "I'll be honest with you guys that it is really challenging to think about what next year is going to be" like, he said. "The economy is slowing and there's an awful lot of hesitation out there in the marketplace."

Still, King said BB&T should manage to increase earnings by 5% to 7% next year. "I've never felt better about our overall fundamentals," he said. "If you look at the underlying strength of the core business of BB&T, it was still very, very strong."

An analyst asked King to discuss a scenario where the economy perks up and the Federal Reserve reacts by aggressively raising interest rates in a move that would mimic the shift that caught the banking industry off guard in early 2006.

King had discussed earlier in the conference call how BB&T had all but stopped holding residential mortgages in its loan portfolio, along with the company's success at luring low-cost deposits. "That would be a huge win for us," he said of a rising rate environment. "That's a boon for us. It would be a really, really fun time."