Banks With High Commercial Real Estate Loan Exposure In Regulatory Spotlight: Valley National Bancorp And 15 Others To Watch

More than a dozen banks in the U.S. find themselves under the keen eye of financial watchdogs due to their sizable portfolios of commercial real estate (CRE) loans.

The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency jointly indicated their intent to scrutinize banks with CRE loan portfolios exceeding triple their capital and with growth that has exceeded 50% over the past three years.

New York Community Bancorp, Inc (NYSE:NYCB) is not among institutions deserving increasing scrutiny. Despite having a CRE loan to total capital ratio of 462% — surpassing the regulatory concern threshold of 300% — NYCB’s portfolio growth of 25% over the past five years keeps it below the critical 50% growth threshold that watchdogs find alarming.

This distinction is particularly noteworthy in light of NYCB’s recent underperformance and increased investor scrutiny following a lackluster earnings report earlier this month.

Regional Banks Under the Microscope

A Bloomberg analysis of federal data spanning over 350 bank holding companies highlighted that numerous smaller lenders have attracted increased regulatory scrutiny. This is because they’ve rapidly built up significantly large concentrations in their CRE portfolios in recent years.

Valley National Bancorp (NASDAQ:VLY) is identified as the largest institution that fits the criteria for heightened regulatory examination, with a staggering 80% growth in CRE loans over the past three years and an exposure that constitutes 471% of its total capital.

Alongside Valley National, other banks such as HomeStreet Inc. (NASDAQ:HMST), First Foundation Inc. (NASDAQ:FFWM), Dime Community Bancshares Inc. (NASDAQ:DCOM), Bridgewater Bancshares Inc. (NASDAQ:BWB), Hometown Financial Group MHC, Axos Financial Inc. (NYSE:AX), OceanFirst Financial Corp. (NASDAQ:OCFC), First Bancshares Inc. (NASDAQ:FBMS), Chemung Financial Corp. (NASDAQ:CHMG), Watford City Bancshares Inc., Civista Bancshares Inc. (NASDAQ:CIVB), BCI Financial Group Inc., Veritex Holdings Inc. (NASDAQ:VBTX), ServisFirst Bancshares Inc. (NYSE:SFBS), Independent Bank Corp. (NASDAQ:INDB), Southern Missouri Bancorp Inc. (NASDAQ:SMBC), QCR Holdings Inc. (NASDAQ:QCRH) and Enterprise Bancorp Inc. (NASDAQ:EBTC) are slated for closer inspection by regulators.

Market Reactions

Despite the regulatory cloud hanging over these institutions, the broader regional bank industry, as monitored by the SPDR S&P Regional Banking ETF (NYSE:KRE), witnessed a 2.4% uptick on Thursday.

This surge is attributed to a confluence of factors, including some positive news derived from the latest 13F filings and the market anticipation of Federal Reserve rate cuts prompted by disappointing retail sales data.

A couple of renowned fund managers added exposure to New York Community Bancorp in the fourth quarter of 2023. Notable among them is Soros Fund Management, which escalated its stake to 1,476,180 shares, valued at $15 million by the quarter’s end. Similarly, AQR Capital Management and Millennium Management substantially increased their holdings in New York Community Bancorp.

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