It’s no secret that commercial real estate concentrations at community banks have been on the rise. While regulators maintain a keen eye on the sector, their concerns do not seem to have increased in recent months as asset quality has remained strong.

But even if asset quality holds, some fear that banks have become so reliant on CRE loans that it might be difficult for them to grow once the current real estate boom subsides.

“Regulators have been concerned about CRE concentration, but we are as equally as concerned when it comes to CRE growth down the line,” said Collyn Gilbert, managing director of community and regional banks at the Boston office of Keefe, Bruyette & Woods, a New York-based banking investment firm. “Eventually pricing will rise, and demand and values will fall. When that happens, it will negatively impact a banks’ business model, especially when so much of their growth has been in that CRE sector.”

Regulators take notice of an institution that has experienced rapid growth in CRE lending, has notable exposure to a specific CRE type or is approaching or exceeds certain supervisory criteria.

One threshold in that criteria is whether a bank’s total CRE loans represent 300 percent or more of the institution’s total capital, and the outstanding balance of the institution’s CRE loan portfolio has increased 50 percent or more during the prior 36 months.

Many community banks in Massachusetts – indeed, across the country – have exceeded these levels, of which regulators are of course aware. But when asked recently about the situation, a spokesperson for the Massachusetts’ Division of Banks referred to prior comments made by Commissioner Terence McGinnis and said not much had changed.

“Over the last 18 months, there has been heightened awareness [by all regulators] of high commercial real estate concentration,” McGinnis told Banker & Tradesman last August. “A high concentration in and itself is not bad if it is being managed appropriately. … Our banks have very strong capital and good liquidity.”

McGinnis said high concentration alone does not set off the alarm; risk management is another serious consideration – how detailed is a bank’s stress testing? Does the bank’s board know about the high CRE concentration? How is the bank funding its loans?

Bram Berkowitz

What Guidance?

Some banks, regardless of the checks they may have in place, have gotten to a point where the 300 percent guidance from regulators seems irrelevant.

In Massachusetts, East Boston Savings Bank has the highest commercial real estate concentration of community banks.

EBSB’s parent Meridian Bancorp has a commercial real estate to risk-based capital ratio of 577 percent, according to an analysis by Connecticut-based United Bank in its most recent investor presentation.

One of the fastest-growing banks in the state, EBSB increased its CRE loan volume from roughly $1.33 billion to roughly $1.78 billion between the end of 2015 and 2016. The bank grew commercial real estate volume another $287 million between the end of 2016 and 2017, reaching $2.06 billion in total CRE loan volume.

The bank has financed major projects all over Boston: It provided $76.35 million in construction financing for the new Boston Celtics practice facility in Brighton, $38.5 million for The Wave, a 132-unit rental complex under construction in Allston, and a $51.4 million construction loan for the Innovation Square Seaport office lab, which is slated for completion in 2019.

Still a Good Market

Other banks in Massachusetts with high CRE to risk-based capital ratios, according to Gilbert, are Brookline Bank’s parent company at 356 percent and Rockland Trust’s parent company at 312 percent.

And some other banks Gilbert covers in New York, such as Dime Community Bank and New York Community Bank, have even higher CRE concentrations than EBSB.

But banks have maintained strong asset quality and, in some cases, taken the necessary steps to improve their ratios.

Dime Community Bank’s parent company reduced its CRE concentration from 849 to 807 percent by completing a $280 million securitization of multifamily loans through a Freddie Mac sponsored program, American Banker reported last December.

As part of the deal, Dime bought structured pass-through certificates that it will treat as available-for-sale securities.

Despite EBSB’s huge CRE growth, the bank decreased its provision for loan losses from roughly $7.2 million at the end of 2016 to $4.9 million at the end of 2017. Non-performing assets were $8.4 million at the end of 2017, or 0.16 percent of total assets, the lowest level for the bank since 2006.

“Loss levels and delinquencies in CRE have been non-existent for five plus years, so that is the tricky part. Through this period of excessive growth, portfolios have not yet been tested from credit standpoint,” said Gilbert. “Once we start to see longer term interest rates rise, it will pressure cap rates and also pressure borrowers’ capacities to pay. At that point, we could start to see cracks in credit. But for now, the market seems to still be in very good shape.”