Turn to Commercial Loans

American Banker
February 21, 2008 Thursday
Hurt by Mortgages, Some Turn (Cautiously) to Commercial Real Estate (CRE)

BYLINE: Jennifer Gordon

SECTION: MARKETS; Pg. 20 Vol. 173 No. 35

Aiming to diversify as losses on residential mortgages mount, some companies are banking on commercial real estate, despite concerns that the business could be the industry's next trouble spot.

Executives at BankUnited Financial Corp. Webster Financial Corp. of Waterbury, Conn., and South Financial Group Inc. of Greenville, S.C., all say the gambit is worth the risk.

"We are significantly deemphasizing our wholesale mortgage channel, and it's back to a significant focus on the commercial bank entity," said Ramiro Ortiz, the $14.4 billion-asset BankUnited's president and chief operating officer. "We think that sector will do very well for us."

H. Lynn Harton, South Financial's chief risk and credit officer, said it is also looking to "balance our portfolio out a little more."

And James C. Smith, Webster's chairman and chief executive, said it has "ample commercial real estate capacity" as it seeks to compete as "a pure-play regional commercial bank in our southern New England market."

Of the three, BankUnited is much more heavily weighted in residential lending. At yearend commercial loans, including real estate ones, made slightly more than 10% of its $12.6 billion loan portfolio, while residential loans made up 85%. Seventy percent of its residential loans were option adjustable-rate mortgages.

Commercial real estate loans made up nearly 17% of the $17.2 billion-asset Webster's $12.5 billion portfolio, while residential loans made up 30%.

At the $13.9 billion-asset South Financial, commercial real estate loans made up 40% of the $10.2 billion portfolio. The company did not break out the amount of residential loans on its books at Dec. 31.

Both BankUnited and Webster are exiting wholesale mortgage lending and said they may hire bankers as they look to make more commercial real estate loans.

This month South Financial hired Andy Morris, a commercial real estate executive at Regions Financial Corp. of Birmingham, Ala., to lead an effort to increase income-producing loan volume, including loans funding apartment buildings and other rental property.

However, analysts say that companies looking to replace troubled residential mortgages with commercial real estate may face issues, since a growing number of companies have cited deteriorating loan quality in the sector.

"The problems within the residential market are spreading to the commercial real estate market," said Mark Fitzgibbon, director of research at Sandler O'Neill & Partners LP. This year he expects most of the industry's growth to come from commercial and industrial loans.

The Federal Reserve Board's January Senior Loan Officer Opinion Survey showed that about 15% of U.S. respondents and 20% of foreign respondents expect a substantial deterioration this year in commercial real estate. Meanwhile, 80% of U.S. bankers reported tightened commercial real estate lending standards, the highest percentage since 1990.

Roughly 45% of U.S. and foreign bankers said demand for commercial real estate loans had weakened during the previous three months.

"If you're about to jump into a business that is seeing an overall weakening in demand and an increase in credit costs, I think you'd have to seriously question why now is the time to go into it," said Terry McEvoy, an analyst at Oppenheimer & Co.

All three companies reported deteriorating credit quality in the fourth quarter. But with the exception of South Financial, which cited an alleged loan scheme involving a Spruce Pine, N.C., development that affected several banks, the deterioration was concentrated in the residential sector.

Executives at the three companies said they are mindful of the environment as they put more emphasis on making commercial real estate loans.

"We think that modest growth is the right way to go about it," Mr. Ortiz said. He would like BankUnited to expand its commercial portfolio by less than 10% this year.

Alfred Camner, the company's chairman and CEO, said that the south Florida market remains strong, particularly for infrastructure projects such as hospitals, schools, and municipal expansions.

Also, BankUnited will look to sell fee-generating products and services, such as wealth management, to commercial real estate clients, "so we can ultimately end up with a more profitable relationship for us and a greater service for customers," he said. With cross-selling, underwriting is "driven by not only the spread on the loans."

Mr. Smith said he expects commercial real estate loan growth in the low or mid-single digits this year at Webster, because of softening in the sector.

"We are not expecting significant growth in 2008, due to the fact that we're in a down leg in the economic cycle and in the credit cycle," he said.

Webster's tight underwriting standards in commercial real estate have helped keep its commercial real estate portfolio on track and without a loss in a decade, Mr. Smith said.

Mr. Harton has not said how much he would like to expand South Financial's commercial real estate portfolio. However, he said in an interview last week that he is comfortable with its risk profile, despite concerns about credit deterioration.

"In that environment, we think really the winners will be people that have the best relationships and best contacts and are dealing with the best developments," Mr. Harton said. "Those are the relationships that we want to grow with."