Smaller areas ease commercial real estate concerns

Executives at Cullen/Frost Bankers, OZK Bank and BankUnited have all recently praised the credit quality of their banks’ commercial real estate portfolios.

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As investors fret that a downturn in commercial real estate could hurt U.S. banks, some small and mid-sized lenders with significant exposure to commercial real estate say there is nothing to worry about.

Banks whose commercial real estate portfolios are being closely watched include San Antonio-based Cullen/Frost Bankers, Florida-based BankUnited, Arkansas-based Bank OZK, Seattle-based WaFd Inc. and Boston-based Brookline Bancorp.

The five banks have assets ranging from roughly $10 billion to $50 billion, and executives on recent earnings calls with pediatric analysts sought insights into their commercial real estate books despite high interest rates and remote work. exist. Mark sectors with question marks.

The efforts at the top were generally successful. Shares of all five banks have risen over the past five trading days, although some have only seen modest gains.

The largest of them, $49 billion Cullen/Frost, reported an increase in charge-offs in the fourth quarter. But Chief Executive Phil Green said Thursday that commercial real estate loans, which account for 36% of the bank’s $18.8 billion book balance, were not the source.

“There was an increase in problem loans during the quarter, but they actually weren’t from commercial real estate at all,” he said on the company’s earnings call.

Nearly half of Texas Bank’s commercial real estate transactions are classified as investor properties — a category that includes office, multifamily and industrial properties — while most of the remainder are owner-operated properties.The largest exposure on paper is related to multifamily construction rather than office properties, which has become So it has a place in the industry” Green said in an interview.

He said Cullen/Frost, Frost Bank’s holding company, has actually made payments on three office properties totaling $95 million.

Cullen/Frost’s credit quality remained above historical levels in the fourth quarter, but charge-offs still increased year over year, from $3.8 million to $11 million. Green said he expects further normalization in 2024.

The relationships Cullen/Frost has built with tenants and the underwriting decisions it has made are playing a role, Green said in an interview after the company’s fourth-quarter earnings call.

“The reason I’m not concerned about that is the type of property, the location, the quality of the project and most importantly, the quality of the relationship we have,” Green said.

“That’s not something I’m really worried about. The reason isn’t because of anything we’re doing right now. You can’t do too much right now. It’s about what you’ve done over the last few years as you’ve developed your portfolio.”

Analysts at Wedbush Securities, who have a neutral rating on Cullen/Frost shares, wrote in a research note that positive signs for the company include improved loan loss reserve levels. While Cullen/Frost shares fell 1.8% on Friday, they were still up 0.4% for the week.

Rajinder Singh, chairman and CEO of Miami Lakes, Fla.-based BankUnited, said on Friday that the level of nonperforming loans, including commercial real estate loans, is so low that “reducing the level further would more difficult.”

Net charge-offs in the fourth quarter were just 0.09% of average loans, beating analysts’ expectations.

Some credit normalization appears to be heading in BankUnited’s direction, but that will start from a very low base. While commercial loans, which have been criticized, rose 15% month-on-month to $1.14 billion, non-performing loans fell by $10 million in the three months to December 31, finishing last year at 0.52% of total loans.

“Overall, I had a good night’s sleep,” Singer said on the company’s quarterly earnings call.

BankUnited’s office building loans are focused on the growing South Florida market as well as Manhattan. Across its Manhattan portfolio, the $35.8 billion company reported an occupancy rate of 96%. “We don’t see much in the way of losses,” Chief of Operations Tom Cornish said on a conference call.

BankUnited shares fell 0.6% on Friday but gained 0.5% for the week.

Like Bank United, $11.4 billion-asset Brookline Bancorp reported sequential declines in both total nonperforming loans and CRE nonperforming loans. The latter was $19.6 million as of 2023, down 7% from September 30. Net charge-offs were $7.1 million at an annualized rate of 0.30% of total loans, down from 0.47% on September 30.

Seaport Research Partners analyst Laurie Havener Hunsicker, who covers Brooklyn, raised her price target on the stock by $2 to $14, citing strong credit quality.

“Credit costs continue to normalize but are better than we expected,” Henske wrote in a research note on Friday.

Brookline reported quarterly earnings on Wednesday, and its shares rose 5.5% for the week.

Little Rock, Arkansas-based OZK Bank had $61 million in nonperforming loans as of Dec. 31, or 0.23% of total unpurchased loans. OZK Bank’s national CRE lending arm reported full-year net charge-offs of $5 million, equivalent to $300 million. basis points of its $16.9 billion portfolio.

Chairman and Chief Executive George Gleason said on a Jan. 19 earnings call that the $34.2 billion bank’s credit quality was “relatively good and limited to a small number of transactions.”

Shares of Bank of OZK have risen 6.4% since last week’s earnings report.

WaFd Inc., a Washington federal bank holding company with assets of $22.6 billion, had a ratio of nonperforming loans to total loans in the fourth quarter of 0.26%. WaFd shares are up about 1.5% since its 2018 quarterly earnings report. January 16th. .

At the time, Chief Executive Brent Beardall expressed optimism about the prospects for continued strong credit performance in 2024. He cited recent declines in long-term interest rates, which should make it easier for commercial real estate borrowers to repay.

“There has been much speculation about a potential downturn in the commercial real estate market, and we are not sure how or if that will happen, but we do know that falling long-term interest rates narrow the refinancing gap for borrowers, thereby reducing credit risk for banks. ,” Bill Dole said in a press release earlier this month.

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