As the Mid-Atlantic convenience store chain Wawa has been expanding into Florida, USAmeriBank in Clearwater has been there to finance the construction for some locations.

No matter that the $4 billion-asset USAmeriBank's commercial real estate loan book already exceeded regulators' guidelines for how many such loans the bank should have. USAmeriBank had already proved itself to regulators as a dependable underwriter of CRE loans and retailers like Wawa are safe bets, said Al Rogers, chief lending officer.

"Some banks are good at floor-plan lending, some are good at restaurants. We think we are particularly good at commercial real estate," Rogers said. "We're financing things like Walgreens and Publix and Wawa [store construction], investment-grade tenants."

USAmeriBank isn't alone. Banks nationwide have continued to raise their exposure to commercial real estate, even as regulators have repeatedly urged them to scale back. Interagency guidelines first issued in 2006, and reiterated in December, have said that banks should aim to keep CRE at or below 300% of risk-based capital to guard against an economic downturn that could cause real estate values to decline.

In the latest Office of the Comptroller of the Currency Semiannual Risk Perspective, the agency expressed concern about the rapid growth in CRE lending, saying it has been "accompanied by weaker underwriting standards and examiner-identified weaknesses in concentration risk management practices in many banks with growing portfolios."

But many banks are able to boost their CRE lending, despite high concentrations, because they followed regulators' orders to upgrade their credit-analysis procedures, internal controls and software, said Chris Marinac, an analyst at FIG Partners. They're seen as better able to pinpoint trouble spots ahead of time.

"Some banks have built this capability while others fought the request of regulators many years ago to build internal tracking capacity," Marinac said.

There are several ways to calculate the CRE-to-total risk based capital (CRE/TRBC) ratio. But the equation that regulators most commonly use includes only multifamily, nonresidential construction and nonowner-occupied commercial real estate, Marinac said. The 2006 interagency guidance stipulated that the ratio should not exceed 300%, if the institution's CRE portfolio rose by at least 50% over the previous three years. Additionally, the agencies cautioned against a bank holding nonresidential construction loans over 100% of risk-based capital. Institutions that exhibit these characteristics "may be identified for further supervisory analysis," the agencies said.

Even with that warning, at least two-dozen publicly traded banks that already surpassed 300% went even further beyond that mark in the third quarter. USAmeriBank increased its CRE concentration to 386% in the third quarter, up from 375% in the previous quarter.

"Regulators are comfortable with us and people like us when it's a core competency that you've built your bank on," Rogers said. "We're not financing as substantial amount of speculation, be it land development or condo high rises."

Other banks have been more careful about treading beyond the 300% mark or are intentionally reducing their CRE exposure, even if they consider commercial real estate to be a strength. The $2.7 billion-asset Franklin Synergy Bank in Franklin, Tenn., dropped its CRE/TRBC concentration to 298% in the third quarter, down from 319% in the previous quarter.

Franklin Synergy, a unit of Franklin Financial Network, decided "out of an abundance of caution" to diversify its loan book away from commercial real estate, even though "that's our market and that's our expertise," said Sarah Meyerrose, its chief financial officer. So Franklin Synergy is diversifying, adding new lines of business such as healthcare lending.

Franklin Synergy also took a pass on funding the construction of a new hotel in downtown Nashville, even as the $18 billion-asset Bank of the Ozarks in Little Rock, Ark., swooped in to provide about $100 million of financing for the project. Franklin Synergy shied away from the project because it involved an out-of-town developer and out of fear that the Nashville hotel market is overheating, Meyerrose said.

"There's a new hotel being opened up every day and we wonder if it's going to start slowing down a bit," she said.

Bank of the Ozarks' CRE/TRBC ratio was 391% at Sept. 30. George Gleason, the bank's chairman and CEO, said during an Oct. 11 conference call that he's comfortable with its level of CRE lending because "we have robust policies, procedures and processes in place to assure the quality of our CRE portfolio."

Some regional banks, too, are salivating at the possibility of adding more CRE loans as other banks reduce their exposure. With competition abating somewhat, profit margins on CRE loans are starting to improve, Bryan Jordan, the chief executive at the $28 billion-asset First Horizon National in Memphis said during an Oct. 14 conference call.

"Pricing has shown improvement, structure has showed improvement," Jordan said. "Given our relative underexposure to that space, we do think that is an opportunity."

Some have speculated that high CRE concentrations could stymie attempted mergers and acquisitions. The $49 billion-asset New York Community Bancorp's proposed acquisition of the $15 billion-asset Astoria Financial has not yet received regulatory approval even though the deal was announced more than a year ago. New York Community's third-quarter CRE/TRBC ratio of 860% is one of the industry's highest.

New York Community's loan book is already heavily weighted toward multifamily and that, combined with Astoria's own multifamily exposure, could be causing regulators to probe the deal with extra care, Marinac said.

"If multifamily was a layup, why isn't the Astoria Financial merger approved?" Marinac said.

Joseph Ficalora, New York Community's CEO, said during an Oct. 26 conference call that the company continues to await regulatory approval, but he declined to elaborate.

Ultimately, banks are going to be able to keep adding CRE loans as long as they demonstrate to regulators that they have proper safeguards in place, said Steve Heitel, the CEO of the $738 million-asset Presidio Bank in San Francisco, which had a 298% CRE/TRBC ratio at Sept. 30.

"Regulators don't like excess concentrations, regardless of what the loans' values are," Heitel said. "It's still going to come down to the basics — what is the debt coverage? What is the loan-to-value ratio? It's just good credit management."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.