A number of major regional banks reported a general slowing in the rate of deterioration of their commercial real estate loan portfolios in the fourth quarter, with several reporting a decline in the rate of charge-offs -- loans deemed mostly uncollectable -- along with signs that credit quality and portfolio performance are stabilizing.
However, even as some executives expressed optimism that their institutions may have weathered the worst of the storm, they acknowledged that non-performing CRE loans continued to mount in their portfolios. The pace of economic growth, specifically job creation, will determine how quickly fundamentals such as occupancies and property values will recover.
"We are encouraged by some of the recent trends but remain cautious about the pace and substance of improvement," said Regions Financial Corp. President and COO Grayson Hall. "We clearly see improvement in our credit quality metrics but remain measured in our forecast regarding the pace of improvement."
As much as 35% of the approximately $270 billion in commercial real estate loans maturing this year are reported to be backed by property worth less than the loan balance. And that level is expected to increase among loans coming due in 2011 and 2012. Meanwhile, at least nine banks have closed so far this year, and the Federal Deposit Insurance Corp., which insures the deposits of 8,200 U.S. banks, warns that exposure to troubled loans was a key factor in most of those failures.
See related CoStar coverage: "FDIC Chief: CRE Delinquencies, Bank Failures to Keep Rising." That said, several of the regional banks, which many observers say along with community banks are bearing the brunt of exposure to troubled CRE loans, reported smaller-than-expected fourth-quarter losses over the last few days. One of the largest, Atlanta-based SunTrust Banks, Inc., said overall bank loan deterioration slowed and net charge-offs dropped 18.7% from the previous quarter to $820.5 million.
Charge-offs, early-stage delinquency and non-performing loans across SunTrust's entire loan portfolio declined in the quarter -- albeit at relatively high levels -- and asset quality is beginning to stabilize, said SunTrust Chief Risk Officer Tom Freeman.
Non-performing loans in the bank's CRE portfolio increased in the quarter to just over $400 million, or 2.6% of the portfolio, across a variety of property types including office and hotel. However, "the commercial real estate portfolio, including owner-occupied and income producing properties, is performing satisfactorily overall. The charge-off ratio in the quarter declined to single-digit basis points, where it was during the first half of the year, while early-stage delinquency improved slightly," Freeman said.
The majority of fourth-quarter CRE charge-offs related to one loan secured by an owner-occupied property to a manufacturer supplying the auto industry.
All of the increase in non-performing CRE loans was in smaller loans of $7 million or less, a portfolio that SunTrust expects continued stress and losses, Freeman noted.
Another regional bank with exposure to construction and CRE loans, Zions Bancorporation, also reported a narrower loss in the quarter. Despite its fifth consecutive quarterly loss, Zions, which operates banks in 10 Western U.S. states, "enters into 2010 feeling increasingly confident that peak levels of loan losses are behind us and that economic conditions in the majority of our markets have begun to stabilize," Chief Executive Officer Harris Simmons said. "Various measures of credit quality have steadied or improved compared to prior quarters, which is likely to lead to lower loan losses and provision expenses."
Zions' losses are beginning to shift away from "high severity loans" in commercial and residential real estate, construction and development, said CFO Doyle Arnold.
"We’re encouraged by the lower level of net charge-offs," Arnold said. "Construction loan losses accounted for just under half the total charge-offs, which is down from about 70% of the total a year ago. Total commercial real estate charge-offs declined $52 million for the quarter and construction and land development were down by a much larger amount."
Given its substantial exposure to commercial real estate, Zions continued to increase its reserve provisions in the fourth quarter to mitigate the risk. However, if non-performing loans continue to shrink at the current rates and the economy improves, "the need for continued reserve build may be over," Zions Senior Executive Vice President Bill Wells said.
Nearly all banks, however, reported that commercial and real estate construction loan demand and activity continued to be weak, reflecting the continued standstill in development. "Although our commitment levels remain high, commercial utilization rates were declining through year-end and are substantially lower than in a normal environment," said Regions CFO Irene Esteves. "Nevertheless, we're beginning to see some stabilization and are continuing to search for and extend loans to creditworthy customers. There is no doubt that we are poised to grow balances once the economy improves and demand returns to more normal levels."
In a sentiment echoed by other banks, Esteves said Regions continued to try and eliminate credit risk from the balance sheet by selling $1.3 billion of investment portfolio securities, including commercial and residential non-agency mortgage-backed securities and municipal bonds. Regions reinvested those proceeds into agency guaranteed MBS and as a result, the investment portfolio now has "very minimal risk" to CMBS, non-agency mortgage-backed securities or municipal bonds, Esteves said.