Commercial loan performance is all over the map in pandemic era

Commercial loan performance at U.S. banks is starting to diverge, with some lenders — particularly those catering to industries hit hard by the pandemic — reporting elevated levels of problem loans and others showing vast improvement in credit quality.

The disparate paths have become evident in second-quarter results, as companies such as energy-focused Comerica reported declines in criticized loans, while M&T Bank, which has exposure to the hospitality industry, has seen its troubled loans nearly double in the past year.

The $150.6 billion-asset M&T said Wednesday that certain parts of its loan portfolio — namely the hospitality and health care industries — are recovering from the pandemic-induced recession more slowly than others. The credit questions concerned Frank Schiraldi, an analyst at Piper Sandler.

“I would think that in an area like hospitality, cash flows would be improving as the economy opens back up,” he said in an interview. “The saving grace is that they don’t expect significant loss content in these loans.”

Through June 30, nonaccrual loans at M&T totaled $2.2 billion, up 93.8% from the same quarter in 2020, and representing 2.31% of the firm’s outstanding loans at the quarter’s end.

The company expects to disclose an increase in criticized loans in an upcoming securities filing, Chief Financial Officer Darren King told analysts Wednesday during M&T’s earnings call.

M&T has a large commercial real estate portfolio, which is where most of the criticized assets are sitting. In addition to keeping tabs on each troubled property’s cash flows, M&T continues to receive updated appraisals for each site, which helps the bank keep better track of property valuations, King said.

“The question, obviously, will be the timing on when the cash flows get to a point where we would see them as not criticized any longer,” King said. “We are seeing improvements in occupancy rates in the hotel portfolio across the board, but we’re not quite back to pre-pandemic levels there, mainly because business travel hasn’t resumed.”

Another company that saw an increase in nonaccrual loans during the second quarter was Signature Bank. The New York-based bank is almost entirely a commercial lender, with commercial real estate loans comprising about half of its total portfolio, and commercial and industrial loans accounting for most of the rest.

Signature reported that $136.1 million worth of loans were in nonaccrual status, compared with $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 the firm’s earnings call Tuesday, though he also said: “Our past-due loans remain within the normal range.”

At Salt Lake City-based Zions Bancorp, executives named commercial real estate loans as an area that they are watching carefully, even though signs of serious distress have yet to arrive.

During the second quarter at Zions, term commercial real estate that were in nonaccrual status totaled $28 million, compared with $31 million in the two prior quarters and $23 million a year ago.

“There’s still a lot of risk in the world despite the fact that we’re not seeing it emerging as losses today,” Chairman and CEO Harris Simmon said Monday during an earnings call.

But across the industry, the picture remains murky, with some banks reporting strong payment trends in commercial real estate loans. One reason for the disparity — in addition to the pandemic’s variable impact on different types of commercial property — may have to do with how different banks classify their loans.

“Criticized assets for one bank might not be criticized assets for another bank,” said Schiraldi of Piper Sandler.

At Massachusetts-based Berkshire Hills Bancorp, net charge-offs on commercial real estate loans totaled $2.3 million in the second quarter, down 80% from a peak of $11.8 million in the fourth quarter of 2020.

At Pittsburgh-based PNC Financial Services Group, nonperforming commercial real estate debt declined for the second-straight quarter to $218 million, down 1.3% from the previous three months, though it was still well above the $43 million reported during the same period last year.

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

The outlook for commercial real estate has continued improving, with the reopening of the economy helping to improve cash flows among retailers and hotels in particular, Chief Financial Officer Mike Santomassimo told analysts last week.

Losses in office loans have been “very low,” but the $1.9 trillion-asset Wells Fargo is continuing to monitor the sector to see how changes in work-from-home models impact credit quality, Santmassimo said.

Commercial credit trends were also positive at Comerica, where troubled loans declined to levels last seen before the COVID-19 pandemic began to shutter businesses. The Dallas bank’s energy clients have benefited from higher oil prices.

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

Business loans designated as nonaccrual at Comerica, including commercial mortgages, declined for the second straight quarter to $256 million, down 9.5% from the peak of $283 million at the end of last year. But nonaccrual business loans were still above the $222 million the bank reported during the same period a year ago.

Overall, the $88.3 billion-asset bank reported slightly more than $2.1 billion in criticized loans, which often have payments in arrears and are considered to be doubtful of avoiding a loss. The total was down from a peak of more than $3.4 billion in the third quarter of last year, and below the $2.4 billion recorded in the second quarter of 2020.

The credit improvement at Comerica spanned various commercial lending categories. Troubled energy loans totaled $223 million for the second quarter, down nearly 73% from the $822 million reported a year earlier, when shelter-in-place orders took hold and demand for oil plummeted.

Despite the jump in oil prices, Comerica is still likely to be cautious about the often volatile industry. “The underwriting is probably more conservative than it was in years past,” Peter Sefzik, executive director of Comerica’s commercial bank, said Wednesday during the company’s earnings call.

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