These 28 regional and community banks exceed regulators' threshold for high commercial real estate concentration risk: here's what's really at stake. (2024)

Where there's smoke, there's usually fire. But where banks' exposure to commercial real estate is concerned, locating that fire may be difficult.

Rising interest rates quickly increased the cost of borrowing for investors in commercial real estate, including offices and multifamily homes. Higher rates also meant a riskier asset class for investors. For Michael Barr, the second vice chair of the Federal Reserve, the office segment is most at risk, largely due to the rise of remote work. This means banks with elevated exposure to commercial real estate loans are also at risk —a situation Fed chair Jerome Powell described as "sizable" but "manageable."

So who exactly will take the hit? New York Community Bank put the question back on investors' minds this week as it scrambled for cash after announcing an unexpected quarterly loss, partly due to commercial real estate loans that soured. As analysts scramble to pinpoint where the pressure is building, they're saying some of the most readily available data may not provide an immediately satisfactory answer, but it could provide clues as to where to look.

"It's the parlor game now to try to figure it out by looking at the call reports and the SEC reports to try to get a sense of who, if anyone, is under reserved," said Todd Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University. "Because the question here is not, 'will some of these loans go bad?' They absolutely will. The question is, are the bank reserves and capital adequate enough to deal with a significant downturn in their portfolio?"

A call report, a quarterly statement that shows a bank's balance sheet and more, isn't comprehensive enough to determine the actual risk a bank could be exposed to. It doesn't reveal details such as borrowers' track records, said Mark Hillis, a former chief risk officer for commercial real estate at JPMorgan.

This report is also a lagging indicator: an ongoing review may not show that things have deteriorated much further, said Clifford Rossi, the director of the Smith Enterprise Risk Consortium at the Robert H. Smith School of Business, University of Maryland.

"By the time you're looking at that call report data, it's kind of like looking up at the stars," Rossi said. "That star has already probably blown up billions of years ago and you're seeing stale data."

Varying risks

According to the Mortgage Banker's Association, $929 billion in commercial real estate loans is due to mature in 2024, with $257 billion in multifamily and $206 billion in office.

Smaller banks faced further pressure after Silicon Valley Bank, Signature Bank, and First Republic Bank collapsed. Business deposits exceeding the FDIC's insured limits moved to larger banks or money markets. Meanwhile, rising interest rates meant smaller banks had to offer higher yields to keep and continue attracting deposits, Baker said.

There's also varying concentration risk: the largest banks with commercial real estate exposure are more diversified, meaning that any losses won't be as devastating, Baker said.

Within the dreaded office category, location and quality matter for defining risk. Older class C spaces are at amplified risk of default than higher-end class A buildings due to higher operating costs from outdated systems, rehab requirements, and lack of conversion options to residences, Hillis said.

Historically, multifamily had been a low-volatility asset class. But expensive debt due to rising interest rates, rent control laws, and environmental laws have considerably increased operating costs for landlords and their risk of default, Hillis noted. As some of these loans begin to roll over, requiring renewal in a high-interest-rate environment, some landlords may have trouble affording them.

Who defines risk?

In interpreting various regulations, one of the issues is that banks have their own risk-rating systems. It isn't until regulators examine the bank that they conclude whether that system is adequate or needs adjustment, said Hillis. The Basel III endgame proposal would change this by setting a standard risk-weighting system rather than allowing banks to define it. It would also require banks to increase their capital to offset risk, Rossi noted. The downside of this proposal is that it could pass the added costs to depositors and borrowers, Rossi added.

More experienced FDIC examiners are typically assigned to larger and more complex financial institutions. Less experienced examiners are often assigned to smaller banks. And while many smaller banks can be incredibly well run, they may not have adequate talent to address an increasingly complex risk environment, Hillis said. Additionally, banks can set their underwriting standards with different risk levels, which aren't readily transparent externally. Some can be more risk-averse and approve loans that other banks rejected, he added.

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"It's word of mouth," Hillis said of how analysts sometimes pinpoint the risk-averse banks. "Sometimes it's borne out in terms of performance over time. But because we haven't had a real downturn, it hasn't really borne itself out in terms of losses. You'll probably see it in this commercial real estate cycle. You'll see higher levels of losses that will be driven by a variety of factors. One would be looser underwriting."

A bank's internal risk management function works with the business division to create risk metrics that are recommended to the board. But risk management is often set aside and not looked upon as an equal partner, Rossi said. Banks get into trouble when weak governance practices allow the business areas to dominate the risk-taking discussion. And Board members don't always have direct risk experience to ask the right questions and challenge management.

"I worked for Countrywide Bank, which is no more. I worked for Washington Mutual, which is no more. I worked for Citigroup, which almost was no more," Rossi said. "You can point to any excessive risk-taking; I am absolutely convinced, having looked at this, not just in my own experience, but looking at what happened over the course of last spring or any bank failure, you'll ultimately be able to put your finger on some sort of lapse in risk governance that led that institution to taking on excessive risk beyond what they should have done."

How regulators look at risk concentration

A few factors draw an FDIC regular's attention to a bank for CRE concentration risk. According to the agency's 2006 guidance, the threshold for CRE concentration risk is met when a bank's loans in construction, land development, and other land and loans secured by multifamily and nonfarm nonresidential property are above 300% of the bank's total capital. This ratio does not include loans secured by owner-occupied properties.

Another flag is if a bank increased its exposure by 50% within the last three years. The agency emphasizes that higher scrutiny is placed on institutions that have seen significant growth in CRE as opposed to those with higher concentrations that have managed their risk successfully.

Rebel Cole, a professor of finance at the Florida Atlantic University and former economist and analyst at the Fed, has been sifting through call-report data to determine which banks face those risks. He compiled the list below using data from the Federal Financial Institutions Examination Council's (FFIEC) repository.

These 28 financial institutions have the highest concentration risk based on the FDIC's threshold. The agency's definition to determine concentration risk varies based on a bank's capital and how much it relies on borrowed money. Generally, smaller or community bank ratios are based on tier 1 capital, which factors in common stock and retained earnings, plus the money it has set aside for potential losses, which is classified as ALLL (column RCRE).

To provide a standard measure across banks, including those that don't report ratios based on the above guidelines, the CRE to total capital is included (column TCRE). Regulators concentrate more closely on banks that exceed a 300% ratio and have also increased their exposure by more than 50% in 36 months.




TCRE to Equity



Dime Community Bank





First Foundation Bank





Provident Bank





Valley National Bank





Flagstar Bank





Merchants Bank of Indiana





Apple Bank for Savings





Oceanfirst Bank





Independent Bank





Lakeland Bank





Bank Ozk










Washington Federal Bank





Axos Bank





Sandy Spring Bank





Columbia Bank





Farmers and Merchants Bank of





Banc of California





Popular Bank





Pacific Premier Bank





First United Bank and Trust Co





Rockland Trust Company





Veritex Community Bank





Umpqua Bank





ServisFirst Bank





Bell Bank





Stellar Bank





City National Bank of Florida




Fifth-ranked Flagstar is a subsidiary of New York Community Bank, which recently saw its shares plunge after news they were seeking to raise $1 billion in capital to cover potential losses from commercial real estate loans. NYCB had absorbed assets from Signature bank, which failed in 2023.

NYCB's issues weren't due to CRE exposure alone, says Matt Reidy, director of economic research at Moody's Analytics CRE. It takes multiple contributing factors to cause a bank to fail, and it could be why we haven't seen other banks under stress yet, he added.

"We think very few banks will run into issues just from their commercial real estate exposure," Reidy said. "From the way that this system is designed, obviously in what you've seen with New York Community Bank, where the pain has been largely felt to this point is in their share price. So stockholders are taking it on the chin from that standpoint."

Deposits that are under the FDIC-insured limit are protected and unlikely to take a hit, Reidy added.

Cole noted that one of the issues with the ratio regulators use is that it doesn't factor in loan commitments, which can be binding depending on the terms of the agreement. Adding commitments places some of these banks at almost double the threshold.

Rossi noted that it's unsurprising to see concentrated CRE portfolios at small banks because it's their sweet spot. The issue is that many of those banks aren't geographically diversified.

"We have a major issue in this country, in our banking system, where the people that are there to look after the long-term interests of these banks are not necessarily doing that in a good way because we have too many of these recurring problems, either with large banks or with smaller banks," said Rossi. "And until we've solved this one and get the governance straight on this, we're going to be in these recurring episodes of where banks are going to get into trouble."

These 28 regional and community banks exceed regulators' threshold for high commercial real estate concentration risk: here's what's really at stake. (2024)


Which regional banks have the most CRE exposure? ›

The five are First Commonwealth Financial, M&T Bank, Synovus Financial, Trustmark and Valley National Bancorp, which have “some of the highest exposures” to commercial real estate loans among the banks it rates, the rating agency said.

What banks are most exposed to commercial real estate loans? ›

Top 20 U.S. Banks by Assets: Commercial Property Exposure
BankTotal AssetsTotal Commercial Real Estate Loans
Wells Fargo & Company$1.9T$145B
U.S. Bancorp$668B$56B
PNC Financial Services Group, Inc.$557B$49B
Truist Financial Corporation$543B$42B
16 more rows
Mar 11, 2024

What is the threshold for concentration risk? ›

Different concentrations of the same size may represent very different levels of risk. Although 25 percent of capital remains the threshold for capturing concentrations for regulatory purposes, concentration risk management should be commensurate with the risk that a pool of loans represents.

What is the highest risk to community banks? ›

The 2023 CSBS Annual Survey of Community Banks revealed that community bankers are most concerned about net interest margins, the cost of funds and core deposit growth as their top three external risks.

Why are regional banks more at risk? ›

The simplest risk, one that all regional banks face, is geographic: Regional banks tend to lend to businesses and landlords in their region. So by its nature, this is a risk that's hard for regional banks to hedge away. And NYCB actually amplified this risk with its acquisition of Signature's assets.

Do commercial banks offer high risk loans? ›

Do commercial banks offer high-risk business loans? Banks don't typically offer loans to high-risk borrowers; however, some may use different methods, such as collateral or special programming, to offset the risk.

What is the commercial real estate exposure of US regional banks? ›

CRE holdings are significant across the U.S. banking industry, comprising 13% of large banks' balance sheets and 44% for regional banks, an Ares Alternative Credit report showed.

What are commercial banks more exposed to? ›

Market Risk

It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.

What banks to watch if commercial real estate weakens? ›

But further deterioration in the real estate sector may require additional loan reserves at some banks with above-average property loans. Those banks include Cullen/Frost Bankers, Synovus Financial, M&T Bank, and Citizens Financial Group.

What does high concentration risk mean? ›

What Is Concentration Risk? Concentration risk is the potential for a loss in value of an investment portfolio or a financial institution when an individual or group of exposures move together in an unfavorable direction.

How to measure concentration risk in banks? ›

Concentration risk can be calculated for a single bank loan or whole portfolio using a "concentration ratio". For a whole portfolio, a herfindahl index is used to calculate the degree of concentration to a single name, sector of the economy or country.

What is concentration risk in real estate? ›

Concentration risk in real estate is a scenario where an investor has put too much investment capital into a single property type or geographical location.

Are community banks risky? ›

You may be worried that if you opt for a community bank, your money will be at risk, since these banks don't have the same vast financial resources as larger banks. But actually, keeping your money at a community bank is generally a perfectly safe option. And doing so could really work to your benefit.

Are community banks safer? ›

You can bank with confidence at your local community bank because no one has ever lost a dime of FDIC-insured funds. Community banks hold FDIC deposit insurance, which covers each depositor's account, dollar-for-dollar, up to the insurance limit ($250,000).

Are community banks struggling? ›

Commenting on the Q1 2024 profit declines for many community and regional (i.e., “Main Street”) banks: “The results underscore the uneven toll that two years of higher interest rates have taken on regional banks, which tend to have plain-vanilla businesses taking in deposits and loan.

What banks hold the most CRE loans? ›

Top U.S. Banks, by Share of Commercial Property Loans
BankCommercial Real Estate Share of Total LoansTotal Commercial Real Estate Loans
Independent Bank Group, Inc.56.1%$8.0B
Valley National Bancorp54.9%$27.5B
CVB Financial Corp.50.2%$4.5B
Independent Bank Corp.48.9%$7.0B
16 more rows
Mar 13, 2024

What is the most protected bank in America? ›

JPMorgan Chase, the financial institution that owns Chase Bank, topped our experts' list because it's designated as the world's most systemically important bank on the 2023 G-SIB list. This designation means it has the highest loss absorbency requirements of any bank, providing more protection against financial crisis.

Which banking products are at the highest risk? ›

Card-present transactions are lowest in risk while card-not-present (CNP) transactions get progressively riskier. Subscriptions or recurring billing are considered some of the highest risk. Annual billing is of particular interest to the banks.


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