Regional Banks Under Increased Scrutiny Based On Weight Of Their Commercial Real Estate Loans

With office occupancy rates at 50% in major U.S. cities, according to key card company Kastle, and brick-and-mortar retailers still struggling to get customers to come back following the pandemic, there will be some late or entirely missed loan payments this year. With the impending foreclosure of companies like Bed Bath & Beyond, commercial real estate (CRE) — once the golden ticket for investors — is becoming a significant liability for regional banks.

“The banks have $270 billion of commercial real estate loans coming due this year,” Matt Anderson, managing director of Trepp Inc., a provider of data and analytics to the structured finance, commercial real estate and banking markets, told Marketplace. “By our estimate, about $80 billion of that is in the office space, which we’re extra concerned about. Regional and smaller banks tend to be more loan heavy in the first place, and commercial real estate even more so.”

Since Silicon Valley Bank (SVB) collapsed on March 10, regional banks have been placed under a public and regulatory microscope, with banks' stocks cut in half, according to Barron’s.

Barron’s asked S&P Global Market Intelligence to look at midsize bank lenders at the bottom half of the nation’s top 100 in assets, many of which have CRE as their primary concentration. At 11 of the 15 banks examined, nonperforming loans amounted to less than half the regional bank median of 0.84% of total loans. 

Some banks on the list have been dogged by bad publicity, including Pacific Western Bank. PacWest Bancorp suffered from venture-backed depositors who took back cash after SVBs downfall. In its defense, PacWest reports it found funding and has more than enough cash to cover uninsured deposits. But 140% of its capital — its cushion for losses — was attached to riskier CRE loans.

According to Barron’s, Federal guidelines define two tests that may alert regulators to analyze further “the level, nature and management” of a bank’s commercial real estate concentration risk. The first test is whether loans for nonowner-occupied commercial real estate exceed 300% of a bank’s capital and have grown more than 50% in the past 36 months. The second test is whether construction and land development loans exceed 100% of capital.

Other regional banks in that category include Washington Federal Inc., Independent Bank, Axos Financial, First United Bank and Trustmark. 

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