If any banker has the leeway to get a little cocky, it's Kelly S. King of BB&T Corp.
His company has consistently been among the strongest regional banking companies this credit cycle, but the Winston-Salem, N.C., company's president and chief executive offered a guarded forecast of credit quality, lending and real estate valuations Monday. Far from predicting the worst is over, King's remarks foreshadowed an indefinite case of the doldrums for the industry.
"Based on all of the feedback that I see, the underlying metrics are turning, but whether it continues to turn will be a function of confidence," he said during a conference call to discuss third-quarter results.
"If I had to stake my claim, I would say you are going to find the peak [in credit deterioration] in the next two or three quarters," he added. "We are cautious because the economy is mixed today. …It is just too early to call any kind of an end to this cycle."
BB&T's credit quality was mixed, revealing a pattern that could be seen in other big regionals later this week. Comerica Inc., M&T Bank Corp. and Regions Financial Corp. are scheduled to report today, with others due later in the week.
BB&T's loan-loss provision edged higher than a quarter earlier, while net chargeoffs fell slightly. Nonperforming assets jumped 22% from the second quarter, to $4.1 billion, though executives largely pointed to loans it picked up in the August takeover of Colonial Bank and a $90 million shared national credit.
King noted that early-stage delinquencies had been stable throughout 2009 and that its Colonial loans were protected by a loss-sharing agreement with the Federal Deposit Insurance Corp. The client responsible for the large syndicated loan is continuing to pay, he added.
Investors leaned toward pessimism, sending BB&T's shares down 4.3%, to $27.03.
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said investors were probably focusing on the fact that foreclosed assets increased 10% from a quarter earlier, to $1.4 billion, and foreclosure expenses rose 23%, to $118 million. "It makes you wonder whether they had written their loans down enough," he said. "Things are catching up with the company," he said. "This is a story of long-term opportunity and short-term concerns."
Robert Patten, an analyst at Regions' Morgan Keegan & Co. Inc., agreed that nonperforming loans could "creep up" at BB&T in coming quarters, though "these are unlikely to result in significant writedowns, especially given the recent improvement that we have seen in home prices and the overall economy."
BB&T was able to sell some soured assets, many of which were troubled residential developments, for about 37% of the original loan value, King said. "We have been flushing our problems right on through the cycle," he said. "We don't think it makes sense to let stuff hang around at 90 days."
For those looking for a bottom to real estate valuations, optimism was again tempered over the near term. "I think we are at a level where we will be at for the next two or three quarters," King said of the 37% rate.
Despite the significant haircut, net chargeoffs fell 1.1% from a quarter earlier, to $446 million. The amount rose 84% from a year earlier. The loan-loss provision rose 1.1% from the second quarter and nearly doubled from a year earlier, to $709 million.
The higher provision and asset disposition costs ate into the bottom line, though BB&T continued its streak of profitability. Net income rose 25.6% from the second quarter, when the company paid to get out of the Troubled Asset Relief Program, but fell 57.5% from a year earlier, to $152 million. Earnings per share of 23 cents beat the average analysts' estimate by a penny.
Daryl Bible, the company's chief financial officer, said during Monday's call that Colonial bolstered the results, contributing 10 basis points to a net interest margin that widened 12 basis points from the second quarter and 2 basis points from a year earlier, to 3.68%. Interest income rose 6.3% from the second quarter and was down just 2.5% from a year earlier, at $1.78 billion.
Excluding Colonial, BB&T's loan portfolio shrank 0.8% from a quarter earlier and rose negligibly from a year earlier, to $95.6 billion, including a 1.5% decrease in commercial lending. Bible warned analysts during the conference call to expect more of the same "for the next quarter or two."
King said weak loan demand was a function of waning confidence, and he seized an opportunity to place much of the blame on the government. Borrowers, he said, are "apprehensive about what's coming out of Washington about health care and tax increases, and they are trying to get a sense of clarity around the economic direction."
King also provided an update on the integration of Colonial, saying BB&T had already put its brand on the branches and will begin its first major product push next week. BB&T will keep and expand Colonial's warehouse lending business in existing markets, along with the bank's homeowners associations unit. Deposit balances remain stable. The final step will involve getting Colonial lenders to focus on more than just real estate.
Still, he warned that "it will take a couple of years or so to get the loan machine going where we want it to go."
King was measured in predicting a turnaround in Florida, where BB&T — thanks to the takeover — has become a large player. "We think 2010 will be a year of finding a solid bottom in Florida and 2011 will begin to see some steady improvement," he said.