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  • normlasky normlasky Jan 23, 2011 1:58 PM Flag

    What has the credit crisis cost?

    "It is my opinion they did so by postponing recognition of the problems, rather than through profitability. The marks could be a symptom of that. Your thoughts? "

    Precisely. However, there a few things to consider and I think shareholders including me who have criticized King on this subject have been talking out of both sides of their mouth:

    First, the adc raw land market was virtually nonexistent so if you liquidated the bad loans you ended up getting pennies on the dollar. Absolutely ridiculous. I think property values have improved some but they are a small fraction of where they were pre-crisis. I know this first hand because I sold SCE&G an easement on some power transmission lines in 2008 and today the same easement would only bring me a fraction of what I realized - maybe 1/3. So it's very difficult to appraise raw land and if it's prime stuff why even sell it at ridiculous price levels.

    Second, King's "back end" loan loss strategy minimized dilution. Bbt was able to do a secondary at $26 share. If King had been more aggressive on provisioning, I think he would sold a lot more shares to raise the same amount of equity.

    Third, King changed strategies on the reo stuf about 9 months ago. He said market conditions had improved and instead of holding the prime reo stuff he would be selling much of it assuming price levels were well off the bottom. I think he did this because he saw the importance of getting bbt share price up to $40 so he would be in a better position to do acquisitions. Let's face it. The banking industry will undergo a massive consolidation over the next few years and bbt needs to be in a position to take advantage of the situation.

    Comments about marks are:

    At the time of the nonaccrual, the bad loan is marked generally 20 to 30%. When foreclosed, an additional mark is taken depending on the average value of the appraisals on the bad loan. Generally, this would result in an additional 20 to 30% mark. If the reo was liquidated within 90 days after the property was seized by the bank, any difference between the liquidated value property and net book value after the mark was taken as a favorable or unfavorable adjustment to charge-offs. If the reo was liquidated after 90 days any gain or loss was booked in non-interest expense. If a new appraisal was ordered on the reo older than 90 days, any mark was also run through non-interest expense. Also, I believe, if management felt that the general market condition has deteriorated, I believe they could also take a markdown across the board and it was run through non-interest expense. Anyway, a huge chunk of money has been run through non-interest expense from the marks which is not included in the charge-offs and their respective stats so any comparison between bbt and peers may not be appropriate.

    The marks started at around 30% - then increased to 35%, 40%, 44%, 45, and now 47%. That's pretty bad. But remember that King saved shareholders imo much dilution with his back end strategy and let's face it the raw land adc market was absolutely horrendous.

    Overall, I think King had done a nice job. Loans and deposits are growing, much better than competition. He's worked out of the adc , commercial land, lot loan and alt-a loan mess. Colonial has been successfully absorbed. Dilution minimized Investment security risk has been reduced a lot. Much more emphasis is being placed on non-interest revenues. Expenses have been tight. Dividend cut only 2/3 while most peers saw 90% plus reduction.

    Hope that answers your questions.

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