Lenders reliant on CRE face tough road

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These are trying times for banks that rely heavily on commercial real estate lending.

Investors Bancorp in Short Hills, N.J., is reportedly looking to sell itself, while Oritani Financial in Washington Township, N.J., reported a $39 million decrease in its loan portfolio during the third quarter after a wave of prepayments.

Bank OZK in Little Rock, Ark., has seen its stock punished this year, largely on concerns about its CRE exposure. Its shares are down nearly 46% in 2018, including a sharp slide last month when it reported large charge-offs tied to a shopping center and a residential project.

Such narratives could become more prevalent as interest rates keep rising and investors become increasingly convinced that the economic cycle will turn. At the same time, industry observers warn that serious problems loom for banks that remain heavily committed to one type of asset class.

Struggles at banks like Oritani "highlight the difficult operating environment for a monoline multifamily player,” Frank Schiraldi, an analyst at Sandler O'Neil, wrote in a recent note to clients. Oritani "has largely turned off growth given what it sees as a hypercompetitive marketplace where pricing and structure have become irrational.”

“Monoline banks have been MIA in developing their business for years and years," said Tom O'Brien, former CEO of Sun Bancorp in Mount Laurel, N.J.

“For the last 20-plus years the business risk tied to relying on … a single asset class has been fatally flawed for most institutions," added O'Brien, who recently became the vice chairman at Emigrant Bank in New York. "The smart ones either sold or began to diversify. We're heading into 2019 — there's a major problem if that message hasn’t resonated in boardrooms."

Current conditions are forcing banks to fight more than ever for CRE loans, or pull back, Kevin Lynch, Oritani's CEO, said during a conference call last month to discuss the $4.1 billion-asset company's quarterly financial results. He said Oritani is among the banks tapping on the brakes.

“The CRE market has grown beyond highly competitive to a point where transactions are being completed by our competitors at ever thinner spreads as the yield curve have flattened,” Lynch said. “We have seen numerous instances of higher loan-to-value ratios and extended interest-only periods, which we choose not to match.”

Oritani said in its recent quarterly filing that outstanding loans will likely shrink again in the fourth quarter.

Not all news involving CRE lenders has been so dire.

Dime Community Bancorp in Brooklyn, N.Y., is making strides in commercial and industrial lending, reducing its dependence on CRE.

The $6.3 billion-asset company's C&I book increased by 86% from a year earlier, totaling $208 million at Sept. 30. Outstanding commercial real estate loans fell by 11%, to $5.2 billion. Dime's CRE concentration ratio was 706% at Sept. 30, down from 849% a year earlier.

The slow turnaround has a cost, with President and CEO Kenneth Mahan noting in Dime's third-quarter earnings release that the company would absorb "modest increases in near-term operating expenses" as it hires more commercial lenders and support staff.

Still, there are signs regulators might be willing to work with banks with proven track records handling CRE.

New York Community Bancorp in Westbury recently disclosed that its regulators lifted a cap that had limited its portfolio of multifamily, non-owner-occupied CRE, and acquisition, development and construction loans to 850% of total risk-based capital at its banks. The $51 billion-asset company's CRE concentration ratio was 757% at Sept. 30.

The move seems to reflect New York Community's long track record of "very strong" risk management and low losses, Mark Fitzgibbon, an analyst at Sandler O'Neill, wrote in a note to clients. At Sept. 30, nonperforming loans made up just 0.14% of total loans at New York Community.

New York Community did not immediately return calls seeking comment, while a spokesman with the Federal Deposit Insurance Corp. declined to discuss the cap's removal.

Jelena McWilliams, the FDIC's chairman, has been sending a message that the agency wants a more collaborative relationship with banks.

“Regulatory agencies know a lot, but frankly, we don’t know everything,” McWilliams said in prepared remarks Tuesday at a conference hosted by Kroll Bond Rating Agency. “We need to engage a little bit more with the industry than we have in the past.”

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