Commercial Real Estate Hasn’t Quite Become a Positive for Banks, But It’s No Longer a Negative
When it comes to bankers and CRE loans, no news is good news.
As the economic recovery continues, the nation's bankers are spending noticeably less and less time in their quarterly conference earnings conference calls talking about commercial real estate
as a factor in the underperformance of their loan portfolios. It was hardly a topic at all in the most recent round of calls, which wrapped up this past week.
The change denotes the growing point that commercial real estate has become much less of a drag on bank performance. At the same time, though, CRE lending has not yet become a positive either.
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"If you look at overall attitudes today versus a year ago, I’d say across the board it’s more positive, just because, and frankly as time goes on, people kind of get tired of feeling bad and they start turning a little positive just with the passage of time," said Kelly S. King, chairman and CEO of BB&T Corp., adding that the certainty following the election is also helping banks move forward in the new environment.
Clarke R. Starnes III , senior executive vice president and chief risk officer of BB&T Corp., was quick to add that plenty of uncertainty exists. "This whole fiscal cliff debate, what was going on with taxes, now the debt ceiling, the general economy, the world's geopolitical situation, the world economy pending health care cost is coming in 2014. All that still is weighing on business," said Starnes.
“I think [businesses] are still a bit cautious. They are being very careful and I think that manifests itself in just being very careful about what they borrow,” he added. “We are seeing increased borrowings and that's good, but they are not borrowing what they are signing the notes for. We are not seeing significant increases in utilization.”
“All we can do right now is to be sure we are meeting the needs of the clients that we are talking to and we are doing that. Then, as the economy improves, certainty builds back in and we think that loan growth will be accelerating for us,” Starnes said.
What follows is our quarterly roundup of the most telling statements we heard regarding bank CRE-related activities from the earnings conference calls:
Worth Repeating: It’s Getting Better
The most substantial category of improvement [in nonperforming loans] was in the construction real estate portfolio, which declined from 25% of nonperforming at the beginning of the year to 10% of nonperforming at the end of 2012.
We continue to see the inflow into nonperforming loans slowing, and the outflow through pay downs, charge-offs, or foreclosures remaining steady.
I’m going to say that again because I like the way it sounds" We’re seeing the inflow into nonperforming slowing down and the outflow remaining steady.
Other real estate declined to $33 million as of Dec. 31, from its peak of $54 million just two quarters ago. Inflow into other real estate this quarter was $7 million with the majority of the increase being one commercial property.
We think other real estate peaked in 2012, and although the balance may bounce around a bit from the current level depending on the timing of sales and foreclosures, our other real estate inventory is expected to decline during this year.
So headed into 2013, we’re optimistic and expect to see continued levels of improvement in our asset quality ratios, with our focus on reducing nonperforming assets by at least one-third during 2013.
Ed Garding, President, CEO and COO of First Interstate BancSystem
Intense Competition Leading to Irrational Behavior?
The competition for high quality, moderate loan-to-value commercial loans remains intense in our marketplace.
The larger money center institutions have become much more aggressive in pricing smaller credit facilities, which historically were of little interest to those institutions. Similarly, smaller, local community banks are equally as assertive on rate and term, and in some instances we believe overly flexible on traditional standard loan covenants.
Expanding the loan portfolio merely to demonstrate growth is not an objective at Valley. Generating positive returns, priced appropriately for both the inherent credit and interest rate risk is the focus at Valley. Often a challenging external environment leads to irrational behavior, such as extending duration or failing to price with the underlying credit risk.
Gerald Lipkin, President and CEO of Valley National Bancorp
If you look at the makeup of the portfolio, there continue to be some real estate credits that meet our choice [for exiting] or the customer finding more attractive terms moving out of the bank. So you'll continue to see some of that in addition to normal portfolio runoff, but we do have a pretty healthy pipeline still.
We've got some nice things teed up for the first quarter and hopefully for the first half of the year and the rest of the year as well certainly. But it is very competitive out there and it's hard to predict what the competition may or may not be regarding their appetite for being more aggressive or a more willing to cut prices and to go with the more skinny margin structure.
Michael Price, Chairman, President and CEO of Mercantile Bank Corp.
Still De-Risking Investment Real Estate
At quarter end, investor real estate ending balances stood at $7.7 billion, down $3 billion from one year ago. This portfolio now comprises 10% of our total loan portfolio compared to 14% a year ago. We expect this portfolio to continue to decline at a moderate pace over the next couple of quarters. And more specifically, we believe that we have approximately $1 billion of investor real estate that we will de-risk and then grow from there.
David J. Turner, Jr. Senior Executive Vice President and CFO of Regions Financial Corp.
If you look at our loan growth last year, our loans period-end to period-end were down about $3.6 billion; $3 billion was in investor commercial real estate portfolio.
If we look at our commercial line of business, really most of our growth over the last year is really coming from the upper-end of what we could call in the middle market, and what is generally referred to as corporate banking… Where we've seen the decline really has been - in owner-occupied real estate has continued to decline throughout the year, but that's not surprising because most of that product is in the lower half of the middle market space and in the business in community banking space.
The other side is the investor commercial real estate. That portfolio had so many stressed loans in it, a lot of those stressed loans have had to be resolved in the course of business one way or the other, and so you're seeing that de-risking activity. But as I mentioned earlier in the call, our production has increased on that segment.
O. B. Grayson Hall, Jr., President and CEO of Regions Financial Corp.
Foreclosed Property Values on the Increase
We calculated our OREO [other real estate owned, i.e. foreclosures] values on the assumption that by the time we got those assets sold that values would have gone down further and that was a very accurate assumption.
We predicted values would continue to decline, and that was a really good observation, because they did for a considerable period of time. So we had those things written down to allow for that in most cases, and we are seeing values begin to get a lift in lot of markets, particularly in residential properties, we are seeing those begin to come back and have that positive sales prices versus the last appraisal.
We're seeing it on well-located improved commercial property. Poorly located commercial properties seem to just be languishing out there and then some residential lots and commercial lots in really excellent locations are doing well, but most lots in, either commercial or residential are not showing much positive traction yet.
George Gleason, Chairman and CEO of Bank of the Ozarks Inc.
Fiscal Cliff Drove Year-End Activity
We have seen a notable increase in demand for CRE loans in our markets. The demand has been broad-based across both geographies and property types. During the fourth quarter, our hotel/motel, mixed-use facilities, multifamily and other property type categories each increased by at least 10% over the balances at Sept. 30, 2012. At least some of the CRE activity appears to have been driven transactions that were accelerated ahead of year-end in anticipation of a potentially higher tax rates going into effect in the New Year.
The new CRE production was a split - (spread) evenly between refinancings and new investments. In particular, we are seeing quite a bit of refinancing opportunities in the hospitality sector.
Alvin D. Kang, President and CEO of BBCN Bancorp Inc.
Florida Joining New York City as Hot Market - You Read that Right: Florida
As the Florida market has improved, we are getting more and more comfortable with commercial real estate down here; and in fact, it is a growing component of our loan growth. We will also be impacted significantly in that category as we move to New York because commercial real estate - and by commercial real estate, that encompasses traditional commercial real estate and multifamily lending - is expected to be a large part of our asset growth in New York City.
John Bohlsen, Vice Chairman and Chief Lending Officer of BankUnited
Refinancings Outpacing New Commitments
While properties are still being refinanced in the end market faster than new commitments are drawn, our commercial real estate pipeline continues to grow and demand is improving. We expect loan growth to continue but at a slower pace… We also expect the rate of decline of our commercial real estate loans to continue to slow and eventually turn, but it's difficult to predict the exact timing by quarter or year.
Karen L. Parkhill, Vice Chairman and CFO of Comerica Inc.
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