This past December, federal regulators issued a warning that large concentrations of commercial real estate holdings were being viewed as a greater risk of loss and failure and were going to be coming under greater scrutiny. This in turn led to speculation that banks with a high percentage of assets in CRE would be forced to either hold more capital, diversify or unload some part of those investments.
Right now, everyone in the industry needs to be keeping a close watch on their own CRE concentrations, and looking at how federal regulation could effect their business. Regulators are forcing banks to make a choice: reduce their CRE portfolio or raise significant capital. The better managed the CRE lending branch of an institution is, the less appealing it is to decrease that part of the portfolio. Additionally, in today’s market, there is the worry of whether those investments can be replaced with assets that perform equally well, although there is certainly a trend right now in seeing banks put additional resources towards consumer lending and commercial and industrial loans.
It is frustrating for banks that have carefully managed their CRE lending, and are secure in risk level assessment and collateral, as it can seem as though regulators are viewing CRE concentrations solely as a numbersgame, one in which they are only looking at the percentage of the concentration. Right now the magic number is capped at 300% of total risk-adjusted capital. Banks with CRE holdings significantly over that need to be looking into holding more capital if they want to keep their full inventory of CRE.
Of course raising capital is more easily said than done, and for some banks it is not a good option. While we are not yet seeing small banks sell themselves solely in response to the new federal regulation enforcement regarding CRE concentrations, it certainly could be a factor in speeding along sales, as we saw with the recent acquisition of Suffolk Bancorp by People’s United Financial in Bridgeport, Connecticut.
Another proactive technique that we are seeing banks take is geographic expansion and entering the national lending marketplace. One example, Berkshire Hills Bancorp of Pittsfield, MA recently purchased First Choice Banks in Lawrenceville, NJ, giving Berkshire Hills the ability to enter Philadelphia as well as add a national mortgage lending business to its portfolio. But putting these plans into place takes time, as it involves introducing new products and services.
Rather than finding themselves racing against the clock or being forced into taking less than ideal actions, like forced sales of valuable assets, it’s important that all community banks take a careful look at their current concentration of CRE holding. Start taking action now towards raising capital if potentially necessary, so as to not be caught off guard by regulation enforcement that can seem haphazard based on internal risk assessment.