In a pandemic, the effectiveness of commercial loans is everywhere


Commercial lending figures from US banks are beginning to diverge, with some lenders – especially those serving industries hit hard by the pandemic – reporting increased NPL rates, while others reporting significant improvements in credit quality.

The controversy became apparent in the second quarter results, with companies such as energy utility Comerica reporting a cut in criticized loans, while M&T Bank, which has ties to the hospitality industry, has nearly doubled its bad loans over the past year.

M&T said Wednesday that parts of its loan portfolio, namely the hospitality and healthcare industries, are recovering more slowly from the pandemic-related downturn than others. The credit issues concerned Frank Shiraldi, an analyst at Piper Sandler.

“I think that in an area like the hospitality business, cash flows will improve as the economy reopens,” he said in an interview. “The advantage of the savings is that they do not expect significant losses on these loans.”

As of June 30, outstanding loans to M&T were $ 2.2 billion, up 93.8% over the same quarter in 2020, and accounted for 2.31% of the company’s outstanding loans at the end of the quarter.

The company expects to disclose an increase in the number of criticized loans in upcoming securities filings, CFO Darren King told analysts on Wednesday during an M&T earnings report.

M&T has a large portfolio of commercial real estate, in which most of the criticized assets are concentrated. In addition to tracking cash flows for each distressed property, King said, M&T continues to receive updated valuations for each property, which helps the bank better track property valuation.

“The question is obviously going to be when the cash flows will reach the point where we no longer criticize them,” King said. “We are seeing an improvement in hotel portfolio occupancy rates across the board, but we have not yet returned to pre-pandemic levels, mainly because business travel has not resumed.”

Another company that saw an increase in NPLs in the second quarter is Signature Bank. The New York-based bank is almost entirely a commercial lender, commercial real estate loans account for about half of its total portfolio, and commercial and industrial loans make up the bulk of the rest.

Signature said there were $ 136.1 million in loans, compared to $ 133.7 million in the first quarter and $ 46.9 million in the second quarter of 2020.

CEO Joseph DePaolo touted Signature’s efforts to reduce its concentration in commercial real estate loans during Tuesday’s earnings announcement, although he also said, “Our delinquent loans remain within the normal range.”

Salt Lake City-based Zions Bancorp executives have named commercial real estate loans an area they are watching closely, although there are no signs of serious disaster yet.

In the second quarter, Zions had $ 28 million worth of urgent commercial real estate, compared with $ 31 million in the previous two quarters and $ 23 million a year ago.

“There is still a lot of risk in the world, even though we don’t see it turn into a loss today,” Chairman and Chief Executive Officer Harris Simmon said on Monday in a phone call with financial results.

But in the industry, the picture remains unclear, with some banks reporting strong trends in commercial real estate loan repayments. One of the reasons for the discrepancy – apart from the variable impact of the pandemic on different types of commercial property – may be related to how different banks classify their loans.

“Criticized assets of one bank may not be criticized by assets of another bank,” said Piper Sandler’s Shiraldi.

At Massachusetts-based Berkshire Hills Bancorp, net write-offs on commercial real estate loans in the second quarter were $ 2.3 million, 80% below the peak of $ 11.8 million in the fourth quarter of 2020.

At PNC Financial Services Group of Pittsburgh, commercial real estate arrears fell in the second straight quarter to $ 218 million, down 1.3% from the previous three months, although it was still well above the $ 43 million reported reported for the same period last year. …

San Francisco-based Wells Fargo reported $ 5 million in commercial real estate loans in the second quarter, up from $ 46 million in net write-offs a quarter earlier and $ 162 million in losses two quarters earlier.

CFO Mike Santomassimo told analysts last week that the outlook for commercial real estate continues to improve as the economic recovery helps improve cash flow among retailers and hotels in particular.

Office loan losses were “very low,” Santmassimo said, but Wells Fargo, with $ 1.9 trillion in assets, continues to monitor the sector to see how changes in work-from-home patterns are affecting credit quality.

Commercial lending trends were also positive in Comerica, where non-performing loans fell to levels last seen before the COVID-19 pandemic began to close businesses. Dallas Bank energy clients have benefited from the rise in oil prices.

Commercial real estate loans, which Comerica classified as criticized, were down 15% from their peak in the third quarter of last year to about $ 97 million. Only 18% of Comerica’s commercial real estate portfolio is associated with retail and office buildings, which are particularly hard hit by the pandemic.

Business loans that Comerica deemed non-repayable, including commercial mortgages, declined for the second quarter in a row to $ 256 million, down 9.5% from their peak of $ 283 million at the end of last year. But business loans not received from accrual were still in excess of the $ 222 million the bank reported during the same period a year ago.

Overall, the bank, with $ 88.3 billion in assets, reported critical loans of just over $ 2.1 billion, which often have late payments and cannot avoid losses. The total is down from a peak of over $ 3.4 billion in the third quarter of last year and below $ 2.4 billion in the second quarter of 2020.

The credit improvement at Comerica has covered various categories of commercial lending. Distressed energy loans totaled $ 223 million in the second quarter, down nearly 73% from the $ 822 million reported a year earlier, when in-situ shelter orders remained unchanged and oil demand plummeted.

Despite the jump in oil prices, Comerica remains wary of an often volatile industry. “Underwriting is probably more conservative than in years past,” Comerica commercial bank executive Peter Sefzik said Wednesday in a company report.

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