US banks are increasingly selling commercial real estate loans to get ahead of stress in the sector.
During first-quarter earnings calls, many banks discussed their plans to sell commercial real estate (CRE) loans, continuing a trend from the fourth quarter of 2023. The sales are motivated by a desire to get ahead of problem loans or diversify their loan books away from the sector.
Offloading problem loans
Pacific Premier Bancorp Inc. sold about $32.7 million in loans in the first quarter as it looked to get ahead of credit challenges in its CRE portfolio, and it anticipates it will sell more in the coming quarters.
"We'll continue to consider it," Chairman, President and CEO Steven Gardner said. "We put loans out to bid pretty regularly and then decide on what the best course of action is."
Brookline Bancorp Inc. also sold some problem CRE loans during the quarter, specifically in the office space. The sales resulted in an uptick in net charge-offs.
"They were sold a little bit under par, which is what created the small loss, but we got rid of a couple of properties that were a bit troubled," Chairman and CEO Paul Perrault said.
Hilltop Holdings Inc. is currently looking to sell a non-owner occupied CRE loan it moved to nonperforming status in the fourth quarter of 2023. The company moved the loan to held for sale in the first quarter and began floating it for sale through a loan sale company.
"That sale process continues and we do not have any specific updates as to the final disposition of this asset at this time," CFO William Furr said on the company's first-quarter call.
Diversification
CRE-heavy lender Valley National Bancorp is working on a strategy shift to reduce its concentration in the sector. As the company uses loan sales and slowed growth to diversify its loan book, it sold $151 million of CRE loans and $45.6 million of construction loans through loan participation agreements with Bank Leumi le-Israel B.M. at par value in the first quarter.
The company plans to continue to sell and participate out CRE loans as it works down its exposure to the industry, President and Chief Banking Officer Thomas Iadanza said on Valley National's first-quarter earnings call.
"We will still be active and involved in real estate, but we will still continue to sell loans," Iadanza said.
Similarly, Webster Financial Corp. plans to reduce its CRE concentration partly through loan sales, executives said in an earnings conference call.
Over the next four to six quarters, Webster will bring its CRE concentration to roughly 250% of its Tier 1 capital plus reserves, and as the company approaches the $100 billion asset threshold, closer to 200%, Chairman and CEO John Ciulla said on the bank's first-quarter earnings call. Webster had $76.16 billion in total assets as of March 31, according to S&P Global Market Intelligence data.
To hit its target, the company will execute "proactive, selective and opportunistic loan sales," especially if the interest rate environment moderates heading into 2025, Ciulla said.