Banks that feast on commercial real estate better have plenty of capital set aside.
Many institutions stacked their balance sheets with CRE loans in recent years, particularly in areas such as multifamily lending. Now there is evidence regulators may soon require those banks to maintain higher capital ratios.
Suffolk Bancorp in Riverhead, N.Y., expects the Office of Comptroller of the Currency to require its bank to maintain a 12% total risk-based capital ratio, Howard Bluver, the $2.3 billion-asset company's chief executive, said in a press release tied to quarterly results. Suffolk, as a result, will "temporarily pull back" from CRE lending, despite having ample capital, he said.
Bluver's comments come five months after federal regulators sounded a warning about increasing concentrations and loosening underwriting standards in certain CRE sectors.
While it is unlikely Suffolk is facing a formal regulatory order, Collyn Gilbert, an analyst at Keefe, Bruyette & Woods, wrote in a note to clients that it is possible that regulators are quietly pushing new capital requirements on other CRE-heavy lenders.
Regulators have been paying close attention to banks where CRE loans make up 300% of total risk-adjusted capital, particularly as a result of ramped-up originations over the last three years, industry experts have said.
Those trends are evident at more than two dozen banks covered by KBW. While several institutions are multifamily lenders in New York, the list also includes California companies such as Opus Bank, BBCN Bancorp and PacWest Bancorp, as well as Bank of the Ozarks, BNC Bancorp and Stonegate Bank in the Southeast.
At Suffolk, CRE loans were equal to 356% of total risk-adjusted capital, based on Sept. 30 data compiled by KBW that includes loans for multifamily projects and farmland.
Bluver, who once worked for the Office of Thrift Supervision, also said he expects the OCC to require Suffolk's bank to maintain a 9% Tier 1 leverage ratio and an 11% Tier 1 risk-based capital ratio. He said Suffolk, where capital levels current exceed those targets, could sell selected investment securities and multifamily loans, if necessary, to maintain those ratios.
Those capital requirements would be significantly higher than the typical standard for well-capitalized banks, which have to maintain a 5% Tier 1 leverage ratio, an 8% Tier 1 risk-based capital ratio and a 10% total risk-based capital ratio.
An OCC representative declined to comment.
So far, no other bank has publicly discussed higher capital requirements, though First of Long Island, another company with significant CRE concentrations, recently disclosed plans to raise $35 million to support organic growth.
Gilbert called the timing of the $3.2 billion-asset company's stock offering "interesting," given Suffolk's disclosure. "While we do not believe that [First of Long Island] is explicitly subject to similar minimums at this point, this capital raise will bolster regulatory ratios and should allow for continued CRE growth," she said.
A call to First of Long Island, where CRE loans were equal to 330% of total risk-based capital at Sept. 30, was not immediately returned.