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Competition Among Banks Heating Up for CRE Lending

Wait. What? It's True. Some Banks Even Getting Back into Construction and Development Lending
April 25, 2012
While a host of banks are still working through mounds of distressed commercial real estate assets, a number have decided the time is right to jump back in. Those banks that are lending again see lower risk owner-occupied properties and multifamily properties as preferred targets. But with lenders focusing on the same 'safe shelter' property sectors, it is creating widespread competition for the better-quality borrowers in those areas.

The real battle ground may be next year from the coming opportunities in construction and development lending - the one area that more than any other brought down a significant number of banks when the subprime housing loan market collapsed and drove the world economies into a Great Recession.

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"The area [of lending] that we see being the most competitive on pricing continues to be the commercial real estate arena, with a lot of players in and including the life insurance companies," said Kirk W. Walters, senior executive vice president and CFO of People's United Financial Inc., a $27 billion bank holding company in Bridgeport, CT, speaking on the company's earnings conference call this past week.

People's United has been active in the New York commercial real estate lending market for a number of years but said it is still under-represented relative to its size and geography.

It recently added to its commercial lending teams on Long Island, as well as in Westchester County.

Robert B. Kaminski, chief operating officer, executive vice president of Mercantile Bank Corp., noted in his call that, "while we are engaging some great new clients, the market still remains very competitive with some banks continuing to lead with low-priced banking."

Mercantile Bank is a$1.4 billion in Grand Rapids, MI. In its first quarter, the bank posted new loan volumes in owner-occupied commercial real estate of $23 million and non-owner-occupied commercial real estate of $14.3 million and commercial/industrial lending of $13.4 million.

Kelly S. King, chairman, CEO and president of the $172 billion BB&T Corp. in Winston-Salem, NC, said the competition is not yet so fierce that existing customers are getting picked off, but he did say that banks are looking for more diversity as their own customer base is dwindling.

"What we have is basically clients that have had real challenges in the marketplace understandably," King to analysts. "In some cases, they've gone out of business. In some cases, their volumes were just really low. And frankly, we're not looking for anything new, and so we are focusing on our risk diversification strategy."

For its part, BB&T is looking to Florida.

"I would say the real estate market in Florida is stabilized and improving. For example, if you go to the Gulf Coast, clearly, prices have firmed up and beginning to go up. Activity is substantially up," King said. "If you go to Miami where, as you recall, there was a huge glut from 28,000 condo units on the market. There's been a major surge of Latin America investors coming in, and the latest report I saw was there's a -- is a 90% -- 93% occupancy. So all of that is because they turned the condos into rental properties. So I'm sure you could probably find some spots of Florida that still have some issues. But overall, I'd [say] it's stabilized to improving."

Where King won't go he said is back to financing the super high-rise, office buildings and hotels that other banks may be doing.

Monte N. Redman, president and CEO of the $17 billion Astoria Financial Corp. in Lake Success, NY, said, "The vast majority of the pipeline is multifamily. In fact, previously we had probably a 75%-25% breakdown between multifamily and commercial real estate with our legacy loans, but in terms of our new closings and new pipeline it is much more weighted toward multifamily."

In the first quarter, Astoria closed about the $340 million of loans, almost $200 million of that was in March.

On the West Coast, Cort O'Haver, executive vice president commercial banking of at the $12 billion Umpqua Holdings Corp. in Portland, also said apartments are the property of choice.

"Last year we put into place couple of real estate teams in the Seattle, Portland and now we have a team in Walnut Creek, CA. So, the growth is primarily coming out of those metropolitan markets," O'Haver said. "The product of choice right now is mostly apartments which we started seeing some opportunities in early last year."

"We are seeing a lot of aggressive pricing and we walk away from a good percentage of deals on price," O'Haver said.

Fighting for Stabilized Class A CRE

Richard K. Davis, chairman, president and CEO, of the $336 billion U.S. Bancorp in Minneapolis, MN, said the two coasts are where the activity is most competitive.

"For commercial real estate, where we'll see strength are on the coasts and the larger cities that kind of line the two oceans," Davis said. "We don't see any other distinct geography to note."

U.S. Bancorp is picking up loan growth in stabilized properties Class A properties, a lot of them with institutional investors.

Joseph Ficarola, chairman, president and CEO of New York Community Bancorp, said that his $42 billion holding company in Westbury, NY, is only targeting the best borrowers.

"We had a couple of very attractive large commercial loans that we decided that we would actually do. The market is rich with assets of that caliber," Ficarola said. "We have not chosen to continually add these large loans to the portfolio. There were only two out of the ordinary in the quarter."

The two loans in size were about $400 million in combination and one of the borrowers was Vornado Realty Trust.

"Vornado is a party that we've been doing business with in the past, obviously a very strong sponsor, very, very attractive property, very good loan," Ficarola said. "So it's not something that we're actively involved in, meaning there is far more product on the table that we could choose to do than we obviously do, and in that unique circumstance we decided that that was a loan that we'd be willing to do."

Continuing, Ficarola said, "This is maybe unique to us and not to others, but the reality is we lose less money on commercial than we lose on multifamily, and it doesn't change our risk profile at all," he said. "So the way we lend is demonstrated by the way we lose, as is the case for every single lender in the nation. Certainly, we have lost significantly less on commercial than we've lost on multifamily."

Gerald P. Plush, president and COO of Webster Financial Corp., a $19 billion institution in Waterbury, CT, is also sticking to nonresidential.

"Our commercial real estate lending is another bright spot with investor and owner-occupied CRE balances up about $41 million, or 2% on a linked quarter basis and $211 million or 9.5% year-over-year with originations more than doubling year-over-year," Plush reported.

Between the coasts, many of the regional Midwest bank holding companies are following the $54 billion Huntington Bancshares Inc.'s lead.

"The natural resources boom from the Utica and Marcellus shale covers half the states in our footprint, and the multiplier effect of the E&P, exploration and production, investment is clearly evident within the commercial real estate and the growth in jobs relating to steel, construction, and broader chemical industrial complexes," said Stephen D. Steinour, chairman, president, and CEO of the Columbus, OH-based Huntington. "We are clearly capitalizing on the benefits of this recovery, as evidenced by improving credit quality, growth in SBA loans, and eight consecutive quarters in commercial loan growth. The Midwest is an exciting place to be and Huntington is right in the middle in capturing a disproportionate benefit from this recovery."

Construction & Development Lending: It's What We Do Best

The most unapologetic return to aggressive lending for commecial real estate though was heard from George Gleason, chairman and CEO of the $3.8 billion Bank of the Ozarks Inc. in Little Rock, AR.

"In the quarter, our commercial real estate book went up $30 million," Gleason told analyst. "It went from 37.6% of the portfolio at year-end 2011 to 39%. Our construction and development loan book went up $10 million from 25.4% of the total portfolio to 25.8%. Our multifamily went down $10 million and part of that was - we had about $15 million pay-off in that book."

"So, the commercial real estate and the construction development book both grew in the quarter and I would expect that's going to be just the way we are going - that's what we do best. We are really good at that and that's what we are going to continue to do and that's where most of our growth is coming," Gleason said.

"If we generate the growth in that book that I would expect over 2012, '13, '14 and probably continuing beyond that, we will have a really high concentration of those types of loans and we totally understand that," Gleason said. "But we are looking at it within those categories we are looking at broad based diversification of the portfolio based on geography; broad based diversification of the portfolio based on product type, tenant, users and the real key is not how much of it you have, the real key is how well unwritten is it."

"We're going to live in [that] world and if you are [a] shareholder in our company, you are going to be investing in a company that is a construction and development and CRE lender," Gleason said. "We are really, really good at it and we know we are heavily concentrated in it."

Bank of the Ozarks will be opening a new office in Atlanta in June that will be a satellite office of its Real Estate Specialties Group team. The bank will also be opening a second office in Mobile, AL, later this year. It is relocating its Bluffton, SC, and Wilmington, NC, offices to new expanded facilities and relocating its Charlotte loan production office into a full-service banking operation in a new facility it is building there.

"We think there is really good potential in the Southeast and that's going to be a real important growth area for us in the future," Gleason said. "That's going to be much more 2013, 2014, 2015, than it is 2012 growth, but you've got to put the platforms in place and build what you need to capitalize on those future opportunities now. So we want to start getting in and really carefully cherry pick and mining some good business opportunities."

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