Executives at several regional banks said this week that they have done what they could to resolve credit losses and now must wait on the economy before making more progress.
BB&T Corp., SunTrust Banks Inc. and TCF Financial Corp. are among a growing number of banks that claim to have pulled all the available levers, from tighter underwriting to aggressive asset sales, to rein in nonperforming assets.
Further fine-tuning depends on the "economy and the markets and how … individual clients perform against those variables," BB&T Chief Credit Officer Clarke Starnes said in a conference call Thursday.
In recent quarters, improving credit has helped many banks cut losses or return to profitability, largely in the form of reserve releases. But with the solvency of commercial lending clients increasingly in question, a full turnaround may be on hold until next year, some warned.
A major issue has been a natural migration in the credit cycle among business lines, with issues in consumer lending giving way to problems in commercial real estate and some commercial and industrial loans.
Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co., said banks had been able to write off losses in areas such as mortgages and home equity in the "most stressed markets," contributing to lower levels of nonperforming assets. Now, banks are working through a series of "one-offs" among big commercial clients where "even those customers who held up during the early days of the cycle are feeling the pain," he said.
That scenario played out at a number of companies including First Horizon National Corp., whose third quarter ended a yearlong run of declines in nonperformers. Executives pointed to a "handful" of large credits, and waning benefits from a decision in 2008 to exit certain business lines such as national specialty lending, for a 2% increase from the second quarter.
"I think we're at a fulcrum point," D. Bryan Jordan, First Horizon's chief executive, said during the Memphis, Tenn., company's conference call last week. He projected "a couple of quarters as we work through this, where the NPAs will be level and begin to improve."
SunTrust managed to reduce nonperforming assets by 7% from a quarter earlier, to $5.1 billion, helping the $174.7 billion-asset company post its first profit to shareholders in two years. Net chargeoffs and the loan-loss provision expense also fell, but management warned that future improvements would be hard to predict.
"We do not expect significant improvement in overall early-stage delinquencies until general economic conditions improve," Chairman and CEO James Wells 3rd said during the Atlanta company's conference call.
Comerica, of Dallas, and M&T Bank Corp. of Buffalo, N.Y., reported increases in nonperformers after reducing such assets during the second quarter. Comerica, which had trimmed them for a year, said problematic assets rose 8% from a quarter earlier, to $1.3 billion, as a result of issues with home builders and retail development. M&T's nonperformers rose less than 1%, to $1.29 billion, due to residential projects. Both companies warned that inflows of nonperforming assets could be bumpy until CRE issues are resolved.
TCF blamed an acceleration of growth in nonperforming assets on legal quagmires hampering its disposal of foreclosed properties. The Wayzata, Minn., company's nonperformers rose 13% from the second quarter, to $506 million, its biggest quarterly increase in at least a year. The problem is it is seizing more housing and business real estate faster than it can sell it: Chargeoffs rose modestly from the prior quarter while the total amount of loans it identified as troubled fell slightly. The home foreclosure debacle and waves of corporate bankruptcies are jamming the courts, particularly in its core market of Chicago, according to Chairman and CEO William A. Cooper.
"It's lengthened the time from when somebody stops paying us until I can sell the piece of real estate," Cooper said in a call with analysts on Thursday.
The biggest drivers of new nonperforming assets were delinquent first home mortgages and commercial real estate loans.
BB&T, of Winston-Salem, N.C., also warned about uncertainty with nonperforming assets, despite a 5% drop in such assets from the second quarter. The issue for BB&T remains inflows, which remained above $1 billion. The company aggressively sold troublesome assets, including $207 million in nonperforming loans and $244 million in real estate. (Another $350 million are under contract and could be sold this quarter, executives said.)
Unlike many other regional banks, the $155.7 billion-asset BB&T has yet to turn the corner on credit. Starnes said BB&T could claim victory over credit issues when nonperforming-asset inflows are halved to about $500 million, though he declined to say when that could happen.
"We don't believe we're that radically far from it, particularly with the action we're taking," Starnes said.
Still, the credit trend failed to dampen overall results. BB&T, which earned $219 million, and M&T, with $179.3 million in profit, continued their ongoing profitability streaks. Comerica earned $59 million and SunTrust, reporting its first profit since 2008, made $84 million. Net income at TCF fell 18% from the prior quarter but rose 111% from a year earlier, to $36.9 million.
"At least banks are still making money and have enough capital," Patten said. "They're doing a darn good job in a tough environment."
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