Managing CRE portfolios: Real-time data becomes critical in volatile times

By John Hintze

Data has become the panacea across business sectors and banking is no exception. To manage their commercial real estate portfolios, banks are harnessing data to fuel dashboards that provide detailed and timely insights to guide their lending strategies as the pandemic continues to unfold and new risks emerge.

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

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

OceanFirst’s CRE concentration requires timely and meaningful information to monitor risk. Miller said that dashboard improvements will soon provide daily information by metropolitan statical area.

“We’re in the process of enhancing our dashboard to track additional performance metrics, including loans with policy exceptions,” she says. “Having this information at our fingertips enables us to quickly identify emerging trends.”

Zions Bancorporation, with $90 billion in assets and headquartered in Salt Lake City, has implemented internal loan-management and core-operating systems with the help of vendors that generate data fed to dashboards. Ralph Pahnke, SVP at Zions, says that the real-time information is used to generate regular reports for bank executives that adhere to the OCC’s heightened standards guidance for institutions with assets greater than $50 billion.

Zions manages its CRE concentration by geography through its regional brands. “We monitor the portfolio closely and we use data to watch for changes in the loan portfolio, credit quality, risk-grade migrations and other metrics,” Pahnke says.

Miller adds that reporting to the bank’s board of directors about CRE concentrations, policy exceptions and other metrics increased to monthly with the onset of the pandemic but based on the bank’s trends and the cycle of the pandemic recently returned to quarterly intervals. “However, management and executive management have real time information on the dashboard, including concentration levels,” she says.

Models and judgment

Bank staff’s ability to work remotely during the pandemic was impressive, Pahnke says, and the experience has enhanced directing information to where it is most needed.

Volatility over the last few years has made predicting CRE’s performance challenging, he says. The bank uses data to assess the risk of its CRE asset-class exposure and limit levels in accordance with its views on opportunities and risk.

“We’ve consciously limited our exposure to CRE categories where there’s higher perceived risk,” he says.

OceanFirst is sticking to fundamental credit metrics such as leverage, debt-service coverage, loan structure and pricing, Miller says. She added the bank competes with large money-center institutions in the metropolitan areas, within its geographic footprint. Those markets include New York, Philadelphia, and since 2021, Boston and Baltimore.

Competition is especially heated 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 which was in progress, and views the segment as selectively attractive with appropriate leverage and structure. Similarly, the bank is selective in the retail space, focusing on grocery-anchored properties.

“Pre- and post-COVID, we’ve generally view hospitality as a higher risk class and do not actively pursue that category,” she explains.

Pahnke cites industrial properties as one of Zions’ more active asset classes today. “Our community baking model has helped us throughout the pandemic,” he says. “We haven’t bought into large, syndicated transactions and we’ve made loans to clients who we know.”

Gauging CRE risk

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

“However, there’s no replacement for the first line of defense, leadership in our varying markets,” Miller says. 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-established triggers that when reached indicate potential CRE-portfolio concerns and raise management’s and ultimately the board’s awareness. “Until two years ago, the major concern was loan growth in CRE, and recently the focus has been more on credit quality,” Pahnke adds.

Have examiners expressed concerns? Regulators perpetually ask about CRE status, Pahnke says, most recently about potential impacts to the bank’s office portfolio. Regulators are also asking about 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 actions taken based on the reports..

Miller notes ongoing CRE conversations with regulators. OceanFirst follows interagency CRE concentration risk management guidelines to ensure it has the tools to monitor CRE portfolio risk, including comprehensive stress-testing. Miller says the most recent stress test considered the Federal Reserve severely adverse assumptions of a 35 percent decline in collateral value, an increase from 30 percent last year.

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

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

OceanFirst also tested assumptions related to future growth projections and its portfolio mix, Miller adds. The bank also it tested outside the main stress-test sample to provide insight into smaller portfolios that could present higher risk.

In terms of CRE deal structures, both Miller and Pahnke note that borrowers seeking shorter guarantee periods and longer interest-only, or IO, periods. Miller says the requests for longer IOs has emerged in the last six to nine months, and that, along with more aggressive pricing, has given her the most pause.

“We lend less money if borrowers are asking for longer IO periods, so the risk fits our risk profile,” Miller adds in a follow-up interview. “Pricing has gotten very, very aggressive and competitive—banks are all hungry for loans.”

John Hintze is a frequent contributor to the ABA Banking Journal and its digital channel ABA Risk and Compliance.