Managing CRE portfolios: real-time data becomes essential in times of volatility

By John Hintze

Data has become the panacea in all industries and banking is no exception. To manage their commercial real estate portfolios, banks are leveraging data to power dashboards that provide detailed and timely information to guide their lending strategies as the pandemic continues to unfold and new risks emerge.

Panelists from a recent session of the ABA Risk 2022 conference discussed how they are managing current CRE portfolio challenges, including concentration and credit quality risk. Neena Miller, chief credit officer at OceanFirst Bank, with assets of $12 billion, headquartered in Toms River, New Jersey, stressed the importance of “robust management information systems with good data governance and up-to-date information easily accessible to bankers and management”.

Over the past year, she said, OceanFirst has developed a dashboard to provide real-time tracking of key information about the bank’s CRE portfolio by region of origin, including sub- underlying limits on property types and building portfolio.

OceanFirst’s CRE focus requires timely and meaningful information to monitor risk. Miller said the dashboard enhancements will soon provide daily information by metropolitan static area.

“We are enhancing our dashboard to track additional performance metrics, including loans with policy exceptions,” she says. “Having this information at our fingertips allows us to quickly identify emerging trends.”

Zions Bancorporation, with $90 billion in assets and headquartered in Salt Lake City, has established internal loan management and core operations systems with the help of vendors that generate data powered by dashboards. Ralph Pahnke, senior vice president at Zions, explains that the real-time information is used to generate regular reports for bank executives that adhere to the OCC’s enhanced standards guidelines for institutions with assets exceeding $50 billion. dollars.

Zions manages its CRE focus by geography through its regional brands. “We closely monitor the portfolio and use the data to monitor changes in the loan portfolio, credit quality, risk level migrations and other metrics,” Pahnke said.

Miller adds that reporting to the bank’s board on CRE mergers, policy exceptions and other metrics shifted to monthly frequency with the onset of the pandemic, but based on the bank’s trends. and pandemic cycle have recently returned at quarterly intervals. “However, management and senior management have real-time information on the dashboard, including focus levels,” she explains.

Models and judgment

The ability of Bank staff to work remotely during the pandemic was impressive, Pahnke says, and the experience has improved the direction of information to where it’s needed most.

The volatility of recent years has made it difficult to predict CRE’s performance, he says. The bank uses data to assess the risk of its exposure to the CRE asset class and limit levels in accordance with its views on opportunities and risks.

“We have consciously limited our exposure to CRE categories where the perceived risk is higher,” he says.

OceanFirst sticks to fundamental credit metrics such as leverage, debt service coverage, loan structure and pricing, Miller said. She added that the bank competes with large monetary institutions in metropolitan areas, as part of its geographic footprint. These markets include New York, Philadelphia and, since 2021, Boston and Baltimore.

Competition is especially fierce in the industrial warehouse space, where OceanFirst continues to be bullish. The bank had taken a conservative approach to office properties, even before the pandemic, in light of the work-from-home trend that was underway, and sees the segment as selectively attractive with appropriate leverage and structure. Likewise, the bank is selective in the retail space, focusing on properties anchored in grocery stores.

“Before and after COVID, we generally view hospitality as a higher-risk class and don’t actively pursue this category,” she explains.

Pahnke cites industrial properties as one of the most active asset classes in Zions today. “Our community bakery model has helped us through the pandemic,” he says. “We have not participated in large syndicated transactions and have provided loans to customers we know.”

Measure CRE risk

In terms of CRE risk measurement, says Miller, the risk management department provides independent market analysis which is used to support OceanFirst’s internal limits. The bank’s risk team is currently implementing third-party software to assess correlation risk within CRE and broader loan portfolios.

“However, there is no substitute for the first line of defense, leadership in our various markets,” says Miller. She adds that the bank holds quarterly meetings to share “feet on the ground” updates and real-time information across all regions.

Zions’ credit metrics have pre-set triggers that, when met, indicate potential concerns with the CRE portfolio and raise awareness among management and ultimately the board. “Until two years ago, the main concern was loan growth in CRE, and recently the focus has been more on credit quality,” adds Pahnke.

Have the reviewers expressed any concerns? Regulators perpetually request CRE status, Pahnke says, most recently on potential impacts to the bank’s office portfolio. Regulators are also asking what the bank does with the information it generates and the processes it follows to generate reports, as well as whether there is follow-up and action taken based on the reports.

Miller notes CRE’s ongoing conversations with regulators. OceanFirst follows inter-agency CRE Concentration Risk Management Guidelines to ensure it has the necessary tools to monitor CRE portfolio risk, including comprehensive stress testing. Miller says the most recent stress test saw the Federal Reserve highly adverse assumptions of a 35% drop in collateral value, up from 30% last year.

“Given where we are in the cycle and, to a lesser extent, the lingering effects of the pandemic, we felt it was important to incorporate this increased haircut into our testing,” she says.

OceanFirst has also increased the granularity of its portfolio segmentation sampling, assessing 11 distinct commercial loan pools in 2021 versus three in 2020. “The revised approach ensures that the sample best represents the risk attributes of the entire business portfolio,” she says.

OceanFirst also tested assumptions related to future growth projections and the composition of its portfolio, Miller adds. The bank also conducted tests outside of the main stress test sample to provide insight into smaller portfolios that may pose higher risk.

In terms of CRE agreement structures, Miller and Pahnke note that borrowers seek shorter guarantee periods and longer interest-only, or IO, periods. Miller says longer IO requests have emerged over the past six to nine months, and that, along with more aggressive pricing, has given him the most time.

“We lend less money if borrowers request longer ES periods, so the risk matches our risk profile,” Miller adds in a follow-up interview. “Pricing has become very, very aggressive and competitive – banks are all hungry for loans.”

John Hintze is a frequent contributor to theABA banking journaland its digital channel ABA Risk and Compliance.

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