Executives at Cullen/Frost Bankers, Bank OZK and BankUnited have all made favorable comments recently about credit quality in their banks’ commercial real estate portfolios.
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As investors fret about how a downturn in commercial real estate could hurt the U.S. banking sector, several small and midsize lenders with substantial exposure to CRE say not to worry.
Banks whose commercial real estate portfolios have come under the microscope include Cullen/Frost Bankers in San Antonio, Florida-based BankUnited, Bank OZK in Arkansas, Seattle-based WaFd Inc. and Brookline Bancorp in Boston.
At all five of those banks, which range in size from roughly $10 billion-$50 billion of assets, executives sought during recent earnings calls to reassure analysts about their commercial real estate books, even as high interest rates and remote work stamp the sector with question marks.
The executives’ efforts were generally successful. The share prices of all five banks have risen over the last five trading days — though some increased only slightly.
The largest of the bunch, the $49 billion-asset Cullen/Frost, reported a rise in charge-offs during the fourth quarter. But CEO Phil Green said Thursday that commercial real estate loans, which make up 36% of the bank’s $18.8 billion book, weren’t the source.
“We saw an increase in problem loans this quarter,” he said during the company’s earnings call, “but it really wasn’t from commercial real estate at all.”
Nearly half of the Texas bank’s CRE transactions are classified as investor real estate — a category that includes office, multifamily and industrial properties — while the rest are mostly owner-operated properties. The biggest exposure risk on paper relates to multifamily construction, rather than office properties, which have been a sore spot for the industry, Green said in an interview.
He said that Cullen/Frost, the holding company for Frost Bank, actually had three paydowns of office properties that totaled $95 million.
During the fourth quarter at Cullen/Frost, credit quality remained above historical levels, but charge-offs still rose year over year to $11 million from $3.8 million. Green said he expects further normalization in 2024.
Cullen/Frost is hitching its wagon to the relationships it has built with borrowers, as well as the underwriting decisions it has made, Green said in the interview, which occurred after the company’s fourth-quarter earnings call.
“The reason I don’t worry about that is because of the types of properties, the locations, the quality of the projects and, most importantly, the quality of the relationships that we have,” Green said.
“It’s not something I’m really worried about. The reason is not because of anything we’re doing now. You can’t do very much now. It’s about what you’ve done over the last few years as you develop your portfolio.”
Analysts at Wedbush Securities, which have a neutral rating on Cullen/Frost’s stock, wrote in a research note that positive signs for the company include an elevated level of loan loss reserves. While Cullen/Frost’s stock price fell by 1.8% on Friday, it was still up by 0.4% for the week.
At Miami Lakes, Florida-based BankUnited, Chairman and CEO Rajinder Singh said Friday that the level of nonperforming loans, including CRE loans, is so low “it will be harder to drive them down further.”
Fourth-quarter net charge-offs were just 0.09% of average loans, which beat analysts’ expectations.
Some credit normalization appears headed BankUnited’s way, but the trend will start off a very low base. While criticized commercial loans rose by 15% quarter over quarter to $1.14 billion, nonperforming loans declined by $10 million during the three months ending Dec. 31, finishing last year at 0.52% of total loans.
“Overall on credit,” Singh said during the company’s quarterly earnings call, “I’m sleeping very well at night.”
BankUnited’s office building loans are anchored in growing South Florida markets, as well as in Manhattan. In its Manhattan portfolio, the $35.8 billion-asset company is reporting a 96% occupancy rate. “We don’t see much in the way of loss content,” Chief Operating Officer Tom Cornish said on the conference call.
Shares in BankUnited fell by 0.6% on Friday, but were up 0.5% for the week.
Similar to Bank United, the $11.4 billion-asset Brookline Bancorp reported linked-quarter declines in both total and CRE nonperforming loans. The latter category ended 2023 at $19.6 million, down 7% from Sept. 30. Net charge-offs of $7.1 million amounted to an annualized 0.30% of total loans, down from 0.47% on September 30.
Laurie Havener Hunsicker, an analyst who covers Brookline for Seaport Research Partners, raised her price target for the company’s shares by $2 to $14, largely on the strength of its credit quality performance.
“Credit costs continue to normalize, but have been better than our expectations,” Hunsicker wrote Friday in a research note.
Shares in Brookline, which reported its quarterly earnings on Wednesday, were up 5.5% this week.
At Bank OZK in Little Rock, Arkansas, nonperforming loans totaled $61 million, or 0.23% of total non-purchased loans on Dec. 31. Bank OZK’s national CRE lending unit reported full-year net charge-offs of $5 million, amounting to three basis points of its $16.9 billion portfolio.
Credit quality at the $34.2 billion-asset bank is “relatively benign and limited to a handful of transactions,” Chairman and CEO George Gleason said during a Jan. 19 earnings call.
Shares in Bank OZK are up 6.4% since it released its earnings report last week.
At the $22.6 billion-asset WaFd Inc., holding company for Washington Federal Bank, the ratio of nonperforming loans to total loans was 0.26% for the fourth quarter. Shares in WaFd are up by about 1.5% since it released its quarterly earnings report on Jan. 16.
At the time, CEO Brent Beardall sounded optimistic about prospects for continued strong credit performance in 2024. He cited a recent decline in long-term interest rates, which should make it easier for commercial real estate borrowers to make their payments.
“Much has been speculated about the potential downturn of the commercial real estate market, and we don’t know with certainty how or if that will occur, yet we do know that this decline in long-term rates narrows the refinance gap for borrowers and thus lowers credit risk for banks,” Beardall said in a press release earlier this month.