Garnet Capital Advisors Blog

In December 2015, the Federal Deposit Insurance Corporation (FDIC) issued a warning to banks about commercial real estate (CRE) portfolios. The regulators noted that they felt heightened levels of CRE lending were increasing the probability of 'loss and failure'. Going forward in 2016, the regulators warned, they will be focusing on institutions whose CRE loans are more than 300% of their risk-adjusted capital.


U.S. regulators will be scrutinizing the ratio of CRE loans to risk-adjusted capital in 2016.

Banks holding over that ratio have two options: reduce their CRE loans or raise their risk-adjusted capital.

Banks Respond to the Regulators
The regulatory warning's effect on banks is evident throughout the banking landscape. Several have merged with other banks - as American Banker characterizes it, sold themselves to other institutions - so that their CRE portfolios become part of a larger capital pie and hence under the regulators' threshold. Others have sold portions of their CRE portfolios either in whole loan or participation form. A loan sale serves two purposes, it decreases concentration while evidencing liquidity, especially if the sale is executed at a price of par or above.

Becoming part of a larger entity can benefit a bank's strategy in other ways besides adjusting CRE concentration. A bank can diversify geographically, taking advantage of market conditions and customers in other areas. In a venture reported by American Banker, for example, Berkshire Hills Bancorp in Massachusetts bought First Choice Bank in New Jersey. The latter's location in a suburb of Philadelphia allows Berkshire Hills to enter the Philadelphia market. Berkshire Hills also plans to use the acquisition to develop a national lending platform.

In addition to merging to increase capital, banks may reduce their CRE loans by moving to other types of lending: commercial, industrial, or consumer. However, it may be challenging to replace CRE with good earnings in the current interest rate environment. That is where consulting with a seasoned advisor can benefit a bank. A trusted advisor can give a bank current market feedback that is integral in any buy or sell decision.

The CRE Landscape
Banks moved heavily into CRE because the CRE market has overall been robust for nearly a decade. CRE portfolios on average are the highest they have been since the second quarter of 2007, and they have been performing quite well. In last year's third quarter, U.S. banks held $1.8 trillion in CRE loans. The previous high in CRE lending, reached eight years earlier, was $170 billion less.


CRE loans are at the highest levels since 2007.

Many in the banking community continue to feel that pricing and fundamentals are good in the CRE market. CRE prices overall have increased 100% since the fourth quarter of 2009, and rents in the U.S. have advanced 15%.

But lumping all CRE into one bucket may not give a clear view of the whole picture. CRE fundamentals vary, in addition, by geography and loan type. John Kanas, chairman, president and CEO of BankUnited, points out that the FDIC classifies CRE as one category, but the lending conditions may be profoundly different state by state and commercial type by commercial type.

The regulatory warning, however, will likely result in more selective CRE lending and an icrease in strategic sales and partnerships going forward. Banks may need to restructure their portfolios and a loan sale may be the desired course to follow.

Loan sale advisors can help adjust portfolios to comply with regulator focus. Scrutiny by regulators concerned about CRE portfolios can be time-consuming and expensive. Seasoned loan sale advisors can provide possible solutions and address a bank's balance sheet needs. Garnet Capital can assist with placing banks and other financial institutions in touch with ideally positioned partners in the buying and selling of loans.

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