Both sides plan to clean house.

Both Sides Plan To Clean House

When the applause for their merger subsides, NCNB Corp. and C&S/Sovran Corp. must quickly grapple with a mountain of bad loans, company officials concede.

At a meeting with analysts on Monday, NCNB officials said they are consciously clearing the decks of bad loans prior to the planned merger - and forcing their junior partners at C&S/Sovran to do the same. The idea is to take the heavy credit hits now, making it possible to present a profitable earnings machine in 1992 when the new institution is unveiled.

"They are being more aggressive now so they can thrive in 1992," said Thomas Brown, a banking analyst at Donaldson, Lufkin & Jenrette Inc. "They know the market is not really going to care what happens between now and yearend."

Clean Sweep Obligatory

Despite reputations as strong banking companies, both institutions have considerable housecleaning to do. Taken together, NCNB and C&S/Sovran have $2.3 billion of nonperforming assets, which equals 3.3% of their total loans and repossessed real estate.

Speaking of C&S/Sovran's $6 billion commercial real estate portfolio, James Hance, chief financial officer of NCNB, said: "Asset values are declining. Nonperforming assets will rise, chargeoffs will be high for several quarters, and further additions to reserves will remain high."

Meanwhile, C&S/Sovran seems to be most concerned about NCNB's $3.5 billion of highly leveraged corporate loans. C&S/Sovran chairman Bennett Brown, in the Monday meeting with analysts, alluded to the fact that Citizens & Southern got stuck with so many sour loans after taking over Sovran last year. But Mr. Brown indicated that C&S/Sovran was especially careful in reviewing its current merger partner, NCNB.

|Absolutely Satisfied'

"We did 20 times the man-hours of due diligence here," Mr. Brown said. "We solicited outside professional help. We are absolutely satisfied that we understand the process."

But even NCNB concedes that it expects to face credit-quality burdens over the next six months, prior to consummation of the merger. Chargeoffs at NCNB will remain high for the rest of the year, the company's $1.1 billion of nonperforming assets will not be reduced, and its loan-loss provision will likely continue running at $125 million per quarter.

At C&S, the costs will also be enormous through 1991. The company, which set aside $352.8 million of provisions for possible future loan losses in the first six months, will add another $600 million in the second half, said Mr. Hance, who is the designated chief financial officer of the proposed new entity.

Volatility in Nonperformers

Nonperforming assets could ascend to $1.7 billion at year-end, and that's after additional chargeoffs of $400 million, Mr. Hance told analysts.

"Six hundred million dollars of provisioning can cover a lot of sins," said Mr. Brown of Donaldson Lufkin, "and it will need to cover a lot of sins."

NCNB executives said they will immediately begin converting their new partner to the acquirer's own credit culture and imposing their asset management expertise. In a blitzkrieg action, for example, an NCNB executive said the company is "airlifting" 150 people into the Washington area by next Monday to help sell down C&S/Sovran's bad commercial real estate.

D.C. to Get Special-Asset Unit

NCNB chairman Hugh McColl said managing bad assets for a fee is one of the few growth opportunities in the financial services industry today. A special metro D.C. special-asset division is being formally established, Mr. McColl said.

Ironically, according to some analysts, Citizens and Southern - prior to its takeover of Sovran - had a much stronger credit culture than NCNB. "It would not be bad if NCNB itself emerges from this with a more conservative credit policy," said an analyst, who asked for anonymity.

With a wink at his new merger partner, C&S/Sovran's chief credit officer Willard Alexander said of Fred Figge, his NCNB counterpart: "Fred will be a great, intelligent benevolent dictator, I'm sure."

Speedy HLT Sales Sought

NCNB, meanwhile, has been working hard to speed the selldown of its highly leveraged loan portfolio, possibly in an effort to clean up its balance sheet for the merger, loan traders say.

Loan sales experts who have bought some of the loans at steep discounts said the banking company has sold upwards of $200 million in distressed highly leveraged transactions in the past several months.

Leveraged buyout loans comprise 9% of NCNB's total loans, versus 4% for all superregional banks, according to Prudential Securities. Moreover, 2.4% of NCNB's $3.5 billion highly leveraged-transaction portfolio is nonperforming.

Marking to Market

Sources said NCNB has been selling blocks of Federated Department Stores Inc., Lomas Financial Corp., Circle K Corp., Southland Corp., and Interco Inc. In a sign of its eagerness to shed the assets, the Circle K loans have been selling at 36 cents on the dollar, a source said. Other prices have ranged from 40 cents on the dollar to over 70 cents on the dollar, loan traders said, and the sizes have ranged from $20 million to $30 million.

NCNB is essentially marking its distressed loans to market, which means those left on the books could require additional reserving actions.

One analyst, who asked for anonymity, said the sales of the loans are not being driven by the merger. "Hugh McColl's strategy from the beginning of the year has been to build loss reserves up front, especially when NCNB has securities gains, and move problem assets - be they HLTs or commercial real estate - as fast as possible."

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