Shrinking loan portfolios at a handful of banking companies during the third quarter allowed some to reduce their provisions for loan losses, and others plan to follow suit.
Though not every company that trimmed provision levels during the period shrank their loan totals, portfolio reductions at Comerica Inc. and First Horizon National Corp. coincided with lower provisioning costs at the former, and First Horizon said its provision could be reaching its highest point.
Comerica Inc., which reported earnings Friday, reduced the size of its loan portfolio during the quarter and also cut its provision level from the second.
First Horizon, which also reported results Friday, said it expects provisioning to begin tapering off early next year as the company continues to shed assets.
Speaking in his first earnings conference call since being named the Memphis company's chief executive Sept. 1, D. Bryan Jordan said: "We continue to perform detailed assessments of inherent losses and are liquidating portfolios," particularly construction loans. "We believe that our current reserve level coupled with our strong capital position are sufficient to absorb higher-than-expected credit costs."
Mr. Jordan said his company reduced assets by roughly $2.7 billion in the third quarter and expects to shed another $1 billion to $2 billion this quarter. Total loans fell 2.7% from a quarter earlier, to $21.6 billion.
To date much of the reduction has come from letting loans in its national businesses run off the balance sheet. First Horizon's sale of its mortgage unit to MetLife Inc. in the quarter also helped, he said.
He expects to sell more assets, Mr. Jordan said, a move that should take pressure off existing loan-loss reserves and reduce the need to set aside more funds to cover problematic loans.
Provision expense has been a major impediment on First Horizon's bottom line in recent quarters. It reported a third-quarter net loss of $118.3 million, compared with a $19.1 million loss in the second quarter and a $7.9 million profit a year earlier. The net loss of 59 cents a share surpassed the average of analysts' expectations for a 14-cent loss per share, according to Thomson Reuters.
Its provision rose 54.5% from the second quarter and 117% from a year earlier, to $340 million.
Net chargeoffs in the third quarter rose 21.1% from the second quarter and 393% from a year earlier, to $154.7 million.
At Comerica, the loan portfolio shrank 1.6% during the quarter from a quarter earlier, to $51.5 billion (see related story). The company's loan-loss provision fell 2.9% from the second quarter, to $165 million.
Net chargeoffs nearly tripled from a year earlier, to $116 million, but were up 3% from the second quarter.
Comerica said Friday that it will look to sell roughly a dozen residential construction loans this quarter.
Beth Acton, the $65.2 billion-asset Dallas company's chief financial officer, said in an interview Friday that the cost of selling the loans "will be similar" to what it has already charged off or reserved for. "What we are finding in negotiations … is that there won't be incremental writeoffs from selling those loans. Some will be better, and some … worse, but on average that haircut is pretty consistent to what we're seeing."
However, some companies reported lower provisions despite loan portfolio growth during the quarter.
Wells Fargo & Co. in San Francisco said its provision dropped 17.1% in the third quarter from the second, to $2.5 billion.
The decline came even as the $623 billion-asset company's loan portfolio grew 3%, to $411 billion, and net chargeoffs jumped 31.9% from the second quarter, to $2 billion.
The decline at Wells, which is poised to complete a deal for embattled Wachovia Corp. this quarter, sparked some concern among analysts, many of whom believe that credit quality will not improve until the second half of 2009, at the earliest.
"The only justification for that in this environment that I can see — aside from credit [quality] actually improving, which I haven't seen anywhere yet — would be a shrinkage in the loan portfolio," Mark Fitzgibbon, the head of research at Sandler O'Neill & Partners LP, said in an interview Friday.
Paul Miller Jr., an analyst at Friedman, Billings, Ramsey & Co., wrote in a note to clients last week that the loan-loss provision at Wells was insufficient and that he considered the company to be "underreserved" as a result.
However, in an interview last week, Howard Atkins, Wells' chief financial officer, said: "We're comfortable with our provision levels and our ability to integrate Wachovia."
Anthony Davis, an analyst at Stifel Nicolaus & Co. Inc., who covers First Horizon, said in an interview Friday that he was generally comfortable with the company's provisioning. Its third-quarter provision for loan losses was nearly double what he had expected. The fact that the company has proactively built a sizable reserve and has a Tier 1 capital ratio of 10.9% and a shrinking loan portfolio, he said, should give it flexibility to shed more assets.
This will be crucial because the environment for selling distressed loan portfolios has gotten increasingly difficult, analysts said, and could lead to bigger writedowns and chargeoffs. Private-equity firms are less willing to buy assets after losing big on other banking-related investments. More banks have been looking to unload portfolios, and many more could enter the market when the government begins to use public funds to buy such assets.
Mr. Jordan said First Horizon is evaluating whether to sell loans to the government, though he said during Friday's call that it could use auctions to unload assets such as other real estate owned. "We don't want to take imprudent steps and sell in bulk just to sell in bulk and not get good value for the assets we're resolving," he said. "In all likelihood, there's probably going to be some marginal cost of an accelerated disposition strategy."