Third Quarter Bank Earnings Reports Clear Up Picture of Commercial Real Estate Conditions
The second week after the end of quarter is always a revealing time for commercial real estate. That's when many of the nation's largest bank holding companies go live to discuss their earnings, and how their CRE lending is faring. In this latest go-around, the bank executives provided the clearest picture of CRE conditions that they have in a long time.
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As we do each quarter, we present the most telling statements regarding bank CRE-related activities from the presentations we heard:
• For major banks, the recession is receding further and further away in the rearview mirror.
• Provisions for loan losses are falling, which means banks have more money available to lend.
• The disposition values of foreclosed assets are increasing, so banks plan to make more property available for sale.
• Many banks have cleared through their distressed assets and are ready to start growing again.
• They see demand in the marketplace increasing.
• There is pressure on pricing as competition for loans heats up.
• However, lenders view CRE as still inherently risky, but federal banking policies are mitigating the risks, and,
• Conditions will continue to get better, as long as we don't go over the 'fiscal cliff.'
We'll take you through each point and tell you who said what.
Recession In the Rearview Mirror
"If [you] step back a little bit, a couple issues are encouraging. First of all, real estate is getting better. We saw it in housing a year ago and every quarter, we have more confidence. We're not back to where we need to be and it's not as robust as we all want to be, but that's good on the repurchase side as values go up. And secondly, we continue to get further and further away -- or it's within a rearview mirror, the 2006 and 2008 portfolio."
John G. Stumpf, chairman, president and CEO of Wells Fargo & Co.
Falling Provisions for Loan Losses
"We could certainly envision more zero [dollar] provision quarters going forward. So long as we have healthy coverage of our non-performers and we see a continued decrease in classified assets, our methodology really kind of drives down the required reserves, and we think it will go that way. So I would anticipate that that would be the case going into at least early 2013."
Kim R. Bingham - executive vice president and chief credit officer for Cathay General Bancorp
Getting Near Book Value for REO
"I'm particularly encouraged with the drop in OREO expenses to nearly zero, and while this may not be sustained, there is a positive trend in collateral values within many of our markets, which is leading to gains on sale of some of our foreclosed real estate that are relative to book values."
Harris H. Simmons, chairman, president and CEO of Zions Bancorp.
"Other real estate was flat at $77 million during the quarter, with $11 million in additions largely offset by $9 million in sales. For the first time since the financial crisis, sales proceeds exceeded book value as we have seen a shift from often receiving lowball offers for real estate holdings to bids above our book balance on occasion. Repossessed land is held at 17% of original appraisal and improved property is held at 40%."
Dale M. Gibbons, executive vice president and chief financial officer of Western Alliance Bancorp.
Able To Start Growing
"For the first time in several quarters we've seen growth in commercial real estate. We shaped that business down when things got tough to a level we thought made sense from a risk perspective. And we are now in a position to be able to start growing that.
While we're focused on doing things with our customers, we've seen one or two portfolios, not huge size, that have come up that we've been able to bring in. When we do that, the first thing that we look at in those portfolio are how much exposure do the portfolios have to people that we do business with, and we'd like to do more [with]. We've had a couple situations where we've been able to bring those portfolios in and become more significant with clients that we want to become more significant with."
Bruce R. Thompson, chief financial officer of Bank of America Corp.
Increase in Demand
"We are beginning to see fair amount of activity -- more than people just nibbling around the edges from a transaction standpoint. There remains a big segment of resort and hotel inventory that was moved to problem loan status through the crisis that will represent future opportunity as we move forward as those assets reprice. We think that commercial lending represents a pretty good opportunity for us moving forward.
Peter S. Ho, chairman, president and CEO of Bank of Hawaii Corp.
"Another thing to think about is 75% of our mortgage volume this past quarter was refinance and 25% was purchase money; that’s still a very low overall purchase money market. As we see real estate continue to improve as refis ebb, we might see the purchase volume pick up. Furthermore, as the purchasing volume or if rate rise and those things slow down, then the servicing (asset becomes) more valuable.
Timothy J. Sloan - senior executive vice president and chief financial officer of Wells Fargo & Co.
Our "largest increase in loans came in our commercial real estate portfolio, which increased 6% from June 30, 2012. We have seen a considerable increase in commercial real estate refinancing activity, as borrowers are looking to lock-in lower interest rates before they inevitably start to rise again."
Alvin D. Kang, CEO of BBCN Bancorp Inc.
"There are in abundance of stabilized properties that need refinancing and there are fewer lenders that have returned to these markets and those that are active seem to be showing quite a bit of discipline in structures and in pricing."
Richard D. Fairbank, chairman, CEO and president of Capital One Financial Corp.
Pressure On Pricing
"Particularly at the commercial real estate side, the life [insurance] companies have come back into play along with the (conduits) are actually slowly coming back into play as an alternative. And that puts a little bit of pressure on pricing. Overall while I would expect the competition to be very aggressive, it hasn't been too bad relative to what we've seen in the past."
Rene F. Jones, executive vice president and chief financial officer of M&T Bank Corp.
"The larger loans are coming under more significant competitive pricing pressure than smaller balance loans as you might imagine. The one impact that was more significant than we had expected this quarter quite frankly was the compression we got out of maturing loans and the compression we got out of loans that were repriced of maturity, were fairly equal."
William Lloyd Prater, treasurer and chief financial officer of BancorpSouth Inc.
"The market pressures are having impact, there's no doubt about that, especially in more of the commodity-driven deals. So, if you are going out to the market to finance a fully stabilized leased apartment complex, we are not competing for that. If you're going out to the market to finance a fully leased 100% stabilized anchored retail center, we're not competing for that. We are in the value-add business, we want our customers to pay us for our relationship, the level of service, what we're doing and so we can't compete in everything."
Robert G. Sarver, chairman and CEO of Western Alliance Bancorp.
Still Inherently Risky
"My personal view is that, more so than any big change in the inherent loss on portfolio, is the effect that delinquencies overall in the United States are on real estate, and delinquencies specifically on residential mortgages are really, really high still. Why you're seeing improvement is because (of) the underlying rate environment, which is really being stimulated by the Fed and the policies. So we believe there really hasn't been a big change in the inherent risk in the portfolios. We remain cautious as we kind of look at the underlying portfolio, but obviously things are pretty stable.
Rene F. Jones, executive vice president and chief financial officer of M&T Bank Corp.
"Going forward, we expect commercial real estate loans to continue to decline… the current uncertain economic environment does bear on demand for new loans, and we intend to continue to exercise relationship pricing discipline.
Karen L. Parkhill, chief financial officer and vice chairman Comerica Inc.
"I think you would see our company growing the [CRE] book 6% to 7% on an annualized basis up until now, and I think I'm going to guide you down to 4% to 6% in the next quarter and until we know what happens after the elections, fiscal cliff. We don't want to go too far out when there's too many variables.
I do think that it’s (emblematic) that with customers feeling less comfortable I think it makes sense too. I wish it was higher, but I think it makes sense, because you've got the near-term election uncertainty, you've got the fiscal cliff uncertainty, you've got the European recession, you've got the economy, and all those are not going to be solved imminently, but they are going to solved eventually. So I'm going to be pleased with 4% to 6% annualized [growth]. We'll take anything we can get above that.
Commercial is a great proxy for sentiment, and while it's still growing nicely, people are getting more lines than they are using and they are still not using the lines they have. So I think that uncertainty reminds us that there is still plenty of pent-up possibility."
Richard K. Davis, chairman, president and CEO of U.S. Bancorp
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