10 Strong Commercial Real Estate Lenders

NEW YORK ( TheStreet) -- Commercial real estate credit quality continued to decline during the third quarter, but there are signs that losses in the asset class are starting to abate.

Defaults on commercial properties, which includes mortgages at least 90-days delinquent and those loans in non-accrual status, continued their ascent to 4.36% vs. 4.27% in the second quarter and 3.41% a year ago, according to the most recent report by Real Capital Analytics.

The rise was one of the smallest sequential increases since the market downturn began. However, multifamily default rates, which dropped "sharply" in the prior quarter, jumped back to a new high for the three months ending in September, according to Real Capital.

"As property prices and rent measures stabilize in many markets, the increase in strain on bank health related to commercial real estate is also becoming more measured," Real Capital Analytics' global chief economist Sam Chandan writes in the November 30 report.

Defaulted commercial real estate mortgages and multifamily loans on banks' balance sheet totaled $57 billion at September 30, according to Real Capital. Banks have only worked through "a subset of these loans," and so the potential for losses is still high, the report says.

Real Capital also points out that default rates at banks with between $100 million and $1 billion in assets is 3.29% -- 107 basis points below the national average -- despite the fact that these institutions typically hold high concentrations of commercial real estate, multifamily lending and construction lending.

Still challenges remain.

Banks' Commercial Real Estate Collapse Has Yet to Hit

"We're certainly not at the end of the credit cycle with CRE, but I would say at the same time a lot of the heavy lifting has been done," says Peter Winter, an analyst at BMO Capital Markets, a unit of Bank of Montreal ( BMO). "Banks haven't really made a loan in over two years in that area. They've aggressively written down the loans in that area."

Winters adds that with the economy starting to stabilize, commercial real estate prices are also stabilizing.

"The secondary market has been more active for loan sales and that's helping the banking industry," he says. "As banks have written down the loans and pricing has stabilized, the valuation gap (between buyers and sellers) has narrowed, which is leading to more sales activity."

TheStreet decided to take a look at banks with the best positioned loan portfolios given their high CRE concentrations.

We looked at the top 50 largest holding companies, with at least 25% of their loan portfolios comprised of commercial real estate loans, construction loans and multifamily loans. We then narrowed that list down to top 10 banks based on their nonperforming assets vs. total assets. Regulatory data was provided by SNL Financial.

The major difference between banks that had better resiliency in their CRE portfolios is likely a combination of factors. First, banks like M&T Bank Corp. ( MTB), New York Community Bancorp ( NYB) and Valley National ( VLY), which all the made TheStreet's Top 10 List, are located in the Northeast, an area where real estate prices in general held up better than the rest of the country.

However, as Winter points out, banks like M&T and New York Community (the only two on the list which he covers) are "relationship-oriented banks," meaning neither bank went out of their natural footprint to make loans.

"That's where a lot of banks got into trouble," Winter says.

Additionally, both banks have good track records for underwriting and never really strayed from that throughout the heavy lending years earlier in the decade.

Winters noted that it didn't surprise him that M&T and New York Community made the list."In fact it would surprise me if they didn't make the list," he says.

Here are the ten with the strongest loan quality among those loan types.

10. Cathay General Bancorp

Shares of 10. Cathay General Bancorp ( CATY) of El Monte, Calif. closed at $14.59 Thursday, returning 90% over the previous year.

Total assets were $11.3 billion as of September 30. Loan quality has improved, as nonperforming assets - including loans past due 90 days and nonaccrual loans (less government-guaranteed balances) and repossessed assets - made up 3.29% of total assets as of September 30.

Commercial real estate, multifamily mortgages and construction loans made up 39% of assets as of September 30, and 5.73% of these loans were nonperforming.

Earnings have steadily improved, with third-quarter net income to common shareholders of $13.2 million, or 17 cents a share, improving from a net loss of $21.8 million, or 43 cents a share, a year earlier, when the company set aside $76 million for loan loss reserves. The provision for loan losses declined to $17.9 million in the third quarter.

Net income to common shareholders excludes $4.1 million in dividends on preferred shares, including $258 million held by the U.S. Treasury Department for bailout assistance provided through the Troubled Assets Relief Program, or TARP. Capital levels are strong, with a tangible common equity ratio of 7.85% as of September 30.

Five out of ten analysts polled by Thomson Reuters who cover Cathay General Bancorp rate the shares a buy while the other five recommend investors hold the shares.

Following the company's third-quarter earnings release, Joe Gladue of B Riley & Co. upgraded his rating on Cathay to a buy with a price target of $15, saying the company had in recent quarters "shown rapid improvements in credit quality, leading to a return to profitability," adding that a further lowering of credit costs and expansion of the net interest margin should "keep the momentum going."

9. FirstMerit Corporation

Shares of FirstMerit Corporation ( FMER) of Akron, Ohio closed at $18.44 Thursday, declining 9% over the past year. Based on a quarterly payout of 16 cents, the shares have a dividend yield of 3.47%.

FirstMerit has remained profitable through the credit crisis. Third-quarter net income was $25.6 million, or 27 cents a share, compared to $22.8 million, or 27 cents a share, a year earlier.

The company had $14.4 in assets as of September 30, and strong overall loan quality, with a nonperforming assets ratio of 1.32%. Commercial real estate, multifamily mortgages and construction loans were 25% of total assets as of September 30, and 5.29% of these loans were nonperforming. The company's balance sheet has expanded by a third over the past year, with the purchase of two failed Illinois banks from the Federal Deposit Insurance Corp., as discussed in TheStreet's 5 Chicago Banks Poised for Long-Term Growth.

FirstMerit exited the TARP program in April 2009. The company raised $334.4 million in common equity during the second quarter, following a first-quarter raise of $80.3 million. The tangible common equity ratio as of September 30 was 7.53% according to SNL Financial.

Out of 13 analysts covering the company, five rate FirstMerit a buy, while the other eight analysts recommend investors hold the shares.

8. Susquehanna Bancshares

Susquehanna Bancshares ( SUSQ) of Lititz, Pa. has seen its stock 45% over the past year, closing at $8.32 Thursday.

For the third quarter, Susquehanna reported net income to common shareholders of $4.6 million, or 4 cents a share, increasing from $2.7 million, or 3 cents a share a year earlier, mainly because the dividends paid on preferred shares declined to $1.4 million from $2.7 million, because the company has repaid $200 million out of the $300 million in TARP assistance provided by the government.

Total assets were $14 billion as of September 30 and the nonperforming assets ratio was 1.86%. Commercial real estate, multifamily mortgages and construction loans made up 28% of assets as of September 30, and 3.84% of these loans were nonperforming.

Susquehanna's tangible common equity ratio was 7.30% as of September 30.

Out of 14 analysts covering Susquehanna, three rate the shares a buy, nine analysts have hold ratings and two recommend investors sell the shares.

7. Fulton Financial

Shares of Fulton Financial ( FULT) of Lancaster, Pa. closed at $9.17 Thursday, returning 7% over the previous year.

The company reported third-quarter net income to common shareholders of $31.5 million, or 16 cents a share, increasing from $18.3 million, or 10 cents a share, a year earlier. Fulton's annualized return on average assets (ROA) for the third quarter was 0.93%, for its best earnings performance since the first quarter of 2008, when the ROA was 1.05%.

Fulton had $16.3 million in total assets as of September 30 and a nonperforming assets ratio of 2.28%. Commercial real estate, multifamily mortgages and construction loans made up 35% of assets as of September 30, and 3.68% of these loans were nonperforming.

The company exited the TARP program in July, repaying the government $376.5 million, following a common equity raise of $230 million in April. Fulton's tangible common equity ratio was 8.41% as of September 30, according to SNL Financial.

four out of 12 analysts covering Fulton Financial rate the shares a buy, while the other eight recommend investors hold the shares.

6. New York Community Bancorp

Shares of New York Community Bancorp closed at $17.14 Thursday, up 55% over the previous year. Based on a quarterly payout of 25 cents, the shares have a dividend yield of 5.83%.

With an attractive dividend yield that is well-supported by increased earnings following its acquisition of the deposits and key assets from the failed AmTrust bank of Cleveland in December 2009, New York Community Bancorp was featured as one of TheStreet's 10 Banks with Real Earnings Improvement, having previously been covered as part of the Best in Class series.

For the third quarter, New York Community reported net income of $135.6 million, or 31 cents a share, increasing from $98.6 million, 28 cents a share, during the third quarter of 2009. A bright spot for the bank was $76.5 million in mortgage banking income during the third quarter - a business acquired as part of the AmTrust transaction.

Total assets were $41.7 billion as of September 30, with a nonperforming assets ratio of 1.76%. Commercial real estate, multifamily mortgages and construction loans made up 55% of assets as of September 30, which was the highest concentration among the banks listed here, reflecting the company's focus on its niche of making multifamily mortgage loans secured by rent-controlled or rent-stabilized apartment buildings in the New York City area. The nonperforming assets ratio for these combined loan categories was 2.82% as of September 30.

New York Community Bancorp didn't participate in TARP. The company's tangible common equity ratio was 7.59% as of September 30.

Out of 18 analysts covering the shares, 10 rate New York Community Bancorp a buy, while seven have hold ratings and one analyst recommends investors sell the shares.

5. Umpqua Holdings

Shares of Umpqua Holdings ( UMPQ) of Portland, Ore. closed at $11.05 Thursday, down 7% from the previous year.

The company reported third-quarter net income of $8.2 million, or 7 cents a share, compared to a net loss to common shareholders of $10.4 million, or 14 cents a share, a year earlier. Provisions for loan losses declined to $24.9 million in the third quarter from $52.1 million a year earlier.

Total assets were $11.5 billion as of September 30, and the nonperforming assets ratio was 1.83%. Commercial real estate, multifamily and construction loans made up 40% of total assets and 2.74% of these loans were nonperforming.

Umpqua exited the TARP program in February, repaying the government $214.2 million after raising $94.9 million in common equity. The company's tangible common equity ratio as of September 30 was 8.95%, the highest among the banks listed here.

Out of 11 analysts covering Umpqua Holdings, three rate the shares a buy, while the other eight analysts recommend investors hold the shares.

4. M&T Bank Corp.

Shares of M&T Bank Corp. closed at $80.64 Thursday, returning 28% over the previous year. Based on a quarterly payout of 70 cents, the shares have a dividend yield of 3.47%.

The company has agreed to acquire Wilmington Trust ( WL) for roughly $351 million in stock, in a deal expected to close in the middle of next year.

M&T reported third-quarter net income to common equity of $179.3 million, or $1.48 a share, improving from $115.1 million, or 97 cents a share, during the third quarter of 2009. The company has remained profitable through the credit crisis.

Total assets were $68.2 billion as of September 30 and M&T's nonperforming assets ratio was 1.88%. Commercial real estate, multifamily and construction loans made up 30% of total assets and 2.61% of these loans were nonperforming.

The company owes $600 million in TARP money and will assume responsibility for the $330 million in TARP money owed by Wilmington Trust. The tangible common equity ratio was 5.93% -- the lowest among the companies listed here.

Out of 20 analysts covering M&T, four rate the shares a buy while the rest recommend investors hold the shares.

3. Wintrust Financial

Shares of Wintrust Financial ( WTFC) of Lake Forest, Ill. closed at $31.00 Thursday, up 22% from a year earlier.

The company was one of TheStreet's 5 Chicago Banks Poised for Long-Term Growth.

Wintrust reported third-quarter net income applicable to common shareholders of $15.2 million, or 47 cents a share, declining from $27.3 million, or $1.07 a share during the third quarter of 2009, when the company booked $113.1 million in gains on bargain purchases of failed banks from the FDIC. During the third quarter of 2010, gains on bargain purchases totaled $6.6 million.

Total assets were $14.1 billion as of September 30 and the nonperforming assets ratio was 1.63%. Commercial real estate, multifamily and construction loans made up 25% of total assets and 2.17% of these loans were nonperforming.

The company owes $250 million in TARP money. Wintrust raised $221.8 million in common equity in March and its tangible common equity ratio was 5.94% as of September 30.

Out of 11 analysts covering the shares, two rate Wintrust a buy while the other nine all recommend investors hold the shares.

2. International Bancshares

International Bancshares ( IBOC) of Laredo Texas has seen its stock rise 11% over the past year, closing at 18.42 Thursday.

For the third quarter, the company reported net income to common shareholders of $30.3 million, or 45 cents a share, declining $33.7 million, or 49 cents a share, a year earlier. While the provision for loan losses declined to $6.8 million from $10.3 million in the third quarter of 2009, overall earnings performance suffered as the net interest margin declined to 3.15% from 3.43%. Still, earnings performance has been remarkably consistent through the credit crisis, with an ROA of 1.21% during the third quarter and ranging from 1.14% to 1.33% over the past year, and 1.13% to 1.23% for the three full years through 2009.

Total assets were $12.1 billion as of September 30 and the nonperforming assets ratio was 1.47%. Commercial real estate, multifamily and construction loans made up 26% of total assets and 1.85% of these loans were nonperforming.

The company owes $16 million in TARP money and its tangible common equity ratio was 8.16% as of September 30.

Brett Rabatin of Sterne Agee has a neutral rating on International Bancshares.

1. Valley National

Shares of Valley National Bancorp closed at $13.28 Thursday, returning 9% over the previous year. Based on a quarterly payout of 18 cents, the shares have a dividend yield of 5.42%.

Valley reported third-quarter net income to common stockholders of $32.7 million, or 20 cents a share, improving from $25.6 million, or 17 cents a share, a year earlier. The company's net interest margin increased to 3.70% from 3.65% a year earlier and its provision for loan losses declined to $9.2 million from $12.6 million in the third quarter of 2009.

Total assets were $14.1 million as of September 30 and the nonperforming assets ratio was 0.87%, for the strongest overall asset quality among the banks listed here. Commercial real estate, multifamily and construction loans made up 29% of total assets and 1.47% of these loans were nonperforming.

The company finished repaying $300 million in TARP money in December 2009. Its tangible common equity ratio was 6.90% as of September 30.

Out of nine analysts covering Valley National, two rate the shares a buy, five analysts recommend investors hold the shares and two recommend investors part with the shares.

-- Written by Laurie Kulikowski in New York and Philip van Doorn in Jupiter, Fla.

>To see these stocks in action, visit the 10 Strong Commercial Real Estate Lenders portfolio on Stockpickr.

To contact Laurie Kulikowski, click here: Laurie Kulikowski.

To contact the Philip van Doorn, click here: Philip van Doorn.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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