Risky Specialties Are Practiced by These 15 Banks

After Silicon Valley Bank collapsed on March 10, regional banks have been subjected to merciless scrutiny. The bank stock prices have been cut in half where uninsured deposits and cash levels have been found wanting.

‍

Regional banks are likely to be concerned about commercial real estate in the near future. There are vacancies across the country due to postpandemic changes in work and shopping. There is a risk of property owners defaulting on their loans if a recession occurs, experts warn.

‍

What are the biggest stakes for which lenders? According to Regulators, banks need not exceed concentration limits in commercial real estate loans; to find out if a bank surpasses those limits, Trade Algo consulted S&P Global Market Intelligence. Our next step was to look at the 15 largest banks in this group of 15 banks.

‍

In terms of assets, most of these lenders are midsized banks. Trade Algo reports that banks specialize in commercial real estate loans since they're good at them. By year's end 2022, their bad loan levels appeared to be below the industry average. The percent of nonperforming loans at 11 out of 15 banks was less than half the median percentage of 0.84%.

‍

The value of these properties is said to cover most of the bank's loans -- suburban office parks, retail spaces, and apartment buildings, for example. Investors will need to keep an eye on these banks and other local institutions if commercial property foundations crack in the next few years. A total of 80% of commercial real estate loans are made by regional and community banks.

‍

There is an end to the panic

In our list, we have included names that have made headlines in recent times. It is Pacific Western Bank that is ranked as the second largest bank in the country. In the aftermath of Silicon Valley Bank's collapse, PacWest Bancorp (ticker: PACW), which is based in Beverly Hills, Calif., saw its shares plummet after venture-backed depositors pulled cash from the bank's account following the collapse of Silicon Valley Bank. PacWest filed a funding request and has arranged enough funding to cover the uninsured deposits as well as its floating rate obligations. The company says that it has a good mix of loans that are in good shape and diversified.

‍

One of the most common types of loans PacWest makes is real estate loans. Pacific Western Financial Corporation's commercial real estate loans amounted to more than 375% of the bank's capital after the end of 2022, which is its buffer for loan losses when they occur. In terms of risk, the bank was exposed to almost 140% of its capital when it came to the riskiest type of real estate loans - those for land and construction.

‍

A bank's commercial real estate concentration risk can be further examined by regulators if two tests are met. A bank's non-owner-occupied commercial real estate loan portfolio has grown more than 50% in the past 36 months and exceeds 300% of its capital. Additionally, the loan must exceed the capital requirement for construction and land development.

‍

Those banks with a high concentration of commercial real estate loans are the largest in the U.S.

PacWest scored better than one or both of these "300/100" tests, as did all the banks on this list.

‍

Speculative land loans are some of the first assets to fail during a recession, so commercial real estate loans are often a leading indicator, says Kathryn Dick, a banking consultant. In 2006, when the loan concentration guidelines were developed, Dick was deputy comptroller at the Office of the Comptroller of the Currency.

‍

In other words, Dick says that the purpose of the guidance is to set a trigger point for a discussion with regulators. The limit was issued as guidance instead of a hard-wired limit since many community banks rely heavily on this kind of revenue.

‍

Trade Algo did not receive a response from PacWest. Chief Executive Paul Taylor predicted PacWest would continue to offer "relationship" real estate lending in January. At year-end, nonperforming loans were just 0.38% of total loans, he told conference-call listeners. "As you look at our balance sheet," he explained, "one thing we do very well is real estate."

‍

According to the latest data, Valley National Bancorp (VLY), a New York and New Jersey-focused lender, had more than 440% of capital available for commercial real estate loans in December, up over 70% from December 2015.

‍

Valley's growth can be attributed to two acquisitions, according to Senior Vice President Marc Piro. As Piro writes, the bank's commercial real estate loans are unique in that they are designed to be highly diversified by regions, types of property, and loan amounts. In order to maintain our excellent credit quality, our portfolio is highly granular, with no significant concentrations in any particular area of the business.

‍

One of the three biggest banks with the highest concentration is the Little Rock, Ark.-based Bank OZK (OZK), an institution that specializes in commercial real estate, and whose capital loans in December surpassed 345% of its capital, while its construction and development loans topped 180%. In response, OZK declined to comment on its loans, saying that it is currently in the middle of a quiet period. There was a small degree of lending concentration acknowledged by the bank in its 10-K filed with the Securities and Exchange Commission in February, but the bank stressed that all appropriate underwriting and monitoring procedures were in place to ensure the loans met the bank's criteria. In our list of the top 15 banks, its common equity was among the highest at 14% of assets, which was among the highest of all banks.

‍

In the three years ended December 2022, Pacific Premier Bancorp PPBI +0.61% (PPBI)'s real estate lending doubled, reaching a level of 329% of its capital, making it one of our most concentrated lenders. Multifamily residential buildings made up two-thirds of these loans, and they performed well.

‍

He writes, "In spite of different economic and interest rate cycles, these [commercial real estate] loan concentrations have been well managed." He points out that our credit underwriting standards have been disciplined for a long time.

‍

In comparison with most companies on the list, Washington Federal (WAFD) has shown better performance. The reason for the Seattle bank's loan growth is the fact that its loans are backed by commercial properties worth twice as much as the amount of the loans, according to its marketing director Brad Goode. According to him, we have one of the lowest non-performing assets among regional banks that we are a part of.

‍

It is important for banks that know their territory to focus on real estate lending as a means of growing their business. It has been more than a decade since Sandy Spring Bancorp (SASR) has had its headquarters in the greater Washington, D.C., area, which has seen an increase in housing, office space, and retail properties. As a result of doubling over the previous three years, the bank's commercial real estate loans had reached 360% of its capital by the end of the year. In order for that growth to be possible, an acquisition was made in 2020. During an earnings call in January, the company's CEO, Dan Schrider, mentioned that retail loans made up about 29% of the company's loan portfolio, while suburban offices made up about 15% of the loan portfolio.

‍

There is only one thing we do to keep our loan-to-value ratios as low as possible.”

‍

Managing Director, Axos Financial, Greg Garrabrants

The vast majority of loans that are made as part of the commercial real estate portfolio of First Foundation (FFWM), a Dallas-based lender focusing primarily on multifamily residential properties, are structured as conservative five-percent loans, according to FFWM CEO Scott Kavanaugh, with the loans generally being made in relation to the properties' value at the time of making the loan. In terms of nonperforming loans, the bank's percentage is the lowest among those on this list. He says that as far as default rates are concerned, multifamily is the best asset class in the commercial real estate industry. As far as our multifamily loans are concerned, we have never taken a charge-off for any of them."

‍

OceanFirst Financial (OCFC), which has its headquarters on the coast of New Jersey, provides the majority of its commercial loans in the region, beginning in New York City and ending in Philadelphia. A representative of the bank, Jill Apito Hewitt, tells Trade Algo that the bank has a diverse portfolio of loans and has fewer offices in urban areas. The company had a net non-performing loan ratio of 0.11% for commercial real estate loans last year.

‍

There are a number of banks on this list that Trade Algo has contacted about their lending practices. The majority of respondents responded, with the exception of seven.

‍

In addition to spurring conversations about the concentration of loans in a bank, the 300/100 tests are also able to point out a bank's strengths. In December, Axos Financial (AX), a San Diego-based company that specializes in commercial real estate loans, and construction and development loans, had loans totaling more than 420% of its capital, while its home financing loans reached 110%.

‍

However, the share price of Axos has dropped the least of all the concentrated lenders we have listed. In recent weeks, regional banks have been feeling the pain of a low level of uninsured deposits and an unrealized loss in their bond portfolio, the two most prominent pain points that have plagued the industry.

‍

Moreover, Axos has also developed a unique way of lending real estate, namely through taking loan interests that are senior to nonbank lenders including the Michael Dell family office MSD Partners, with whom it co-finances the sale of Donald Trump's hotel in Washington, D.C., which was completed last year. This arrangement keeps Axos' loan-to-value levels below 50%, which means that a 50% drop in property value would have to occur before the collateral would be put at risk.

‍

According to Greg Garrabrants, CEO of the company, the loan-to-value ratio is kept at an extremely low level. As part of our investment in commercial real estate and lender finance transactions, we are in a senior position and well secured, including subordination from both of our fund partners in significant proportions."

‍

So, one can conclude that a bank's concentration of commercial real estate lending can be indicative of a bank's local expertise, or it could represent the bank's risk.

‍

Across the country, community and regional banks fill a very important role in satisfying the financial needs of their communities," pointed out Schrider. There's nothing worse than what being disrupted in that role in the nation's economy would do to that country's economy.