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These Banks Are Exposed To Long-Distance Commercial Real Estate Lending

This article is more than 6 years old.

It seems almost counterintuitive to think of distance as a possible financial risk factor in a global economy marked by its interconnectedness, yet economic theories suggest that what’s called the “friction of distance” can cause trouble. If that’s the case – and if it applies to lenders financing commercial real estate loans outside their geographical areas of expertise – it’s useful to examine regional commercial real estate lenders that are exposed to the distance factor, as we do below.

Of course, as with any risk, there’s always the upside to think about too. If a bank is successfully able to manage whatever element of risk may be involved in expanding its lending to more distant markets, that can be a good way to enlarge and diversify its loan portfolio as well as drive overall institutional growth.

The ‘friction of distance’

The Federal Reserve Bank of Saint Louis examined over 2,000 U.S. community bank acquisitions and consolidations between 1988 and 2009 and found that the performance of community banks deteriorates with the geographic distance between an acquiring bank and the target acquired.

Though this report focused on acquisitions, its findings may relate to lending as well.

“Various theories suggests that the ‘friction of distance’ does matter – albeit in conflicting ways – through its impact on information costs, managerial costs, competition, risk diversification, and growth opportunities,” the 2013 report found, adding that “information asymmetries increase along with managerial costs” as distance grows.

“The bottom line for community banks is that long-distance acquisitions are riskier than nearby acquisitions, and they should be done only when management can justify the marginal risk and lower returns,” the report found. “Otherwise, banking in one’s backyard appears to be the safer, more profitable strategy.”

Whether lending outside one’s backyard poses the same risks as banking was not addressed in the report, nor was the question of whether the bank’s size, access to information or other factors could mitigate the risk. All the same, it’s worth taking a look at which regional banks have been financing commercial properties in someone else’s backyard. Here are a few:

Bank of the Ozarks

Out-of-state banks originated 8% of commercial real estate mortgages New York City and 11% each in Chicago and Los Angeles, according to CrediFi data for the first six months of the year.

One common thread in all three markets was Arkansas-based Bank of the Ozarks.

Though it’s not a top bank by asset size – ranking No. 70 on the Federal Reserve’s list of U.S.-chartered commercial banks, with over $20 billion in consolidated assets – Bank of the Ozarks was on CrediFi’s list of top 10 loan originators for commercial properties in New York City, Chicago and Los Angeles in the first half of the year.

The Little Rock lender originated over $800 million in New York City CRE financing, about $400 million in L.A. and about $300 million in Chicago in that period, including a relatively large proportion of construction lending.

Bank of the Ozarks was a top 10 NYC loan originator in Q3 as well, and is on track to being one of the 10 leading CRE loan originators in the Big Apple in 2017. Its NYC origination is up 43% year-over-year, as of the the first nine months of the year.

PNC Bank

A much bigger bank than Ozarks, PNC is the sixth-largest U.S.-chartered bank, with over $360 billion in consolidated assets.

PNC Bank is based in Delaware and its parent company, PNC Financial Services Group, is based in Pennsylvania, but it headed westward to become a top 10 loan originator for commercial properties in Chicago and Los Angeles

PNC originated between $200 million and $300 million in commercial real estate loans in both cities in the first half of the year.

First Republic Bank

Another lender crossing state lines is San Francisco-based bank and wealth management company First Republic Bank, which has more than $80 billion in total assets and comes in at No. 31 by asset size.

First Republic financed over $400 million in CRE loan originations in New York City in the first half of the year. First Republic was also a top 20 originator in Boston in that period.

Customers, Umpqua and Merchants Bank of Indiana

Pennsylvania’s Customers Bancorp originated nearly $500 million in NYC commercial mortgages in the first half of the year, making it a top 20 originator in New York City – out of state, but still within the Northeast. As the 94th-largest U.S.-chartered commercial bank, Customers is one of the smaller banks to make CrediFi’s list of leading originators. Its total assets dropped from $10.9 billion at the end of Q2 to $10.5 billion at the end of Q3.

Other top 20 lenders also reached across state lines but stayed within their broad geographical regions. Oregon’s Umpqua Bank (the 54th-largest bank, with over $25 billion in total assets) remained on the West Coast when it originated about $100 million in CRE loans in Los Angeles. Similarly, PR Mortgage & Investments, a subsidiary of Merchants Bank of Indiana that specializes in multifamily housing and health care facilities, stayed in the Midwest when it originated about the same amount for Chicago properties. Merchants Bank of Indiana is far down the Federal Reserve list, coming in as the 245th bank by assets, which amount to about $3 billion.

While some may see long-distance lending as posing risks for regional lenders, there are clearly banks that don’t seem to be afraid to hop over the backyard fence or even leap across the country. The question is whether each of those lenders will find the grass to be greener on the other side.

Ely Razin is CEO of CrediFi, a big data platform serving the commercial real estate finance market, and CredifX, the technology-driven platform connecting commercial real estate borrowers with financing. He can be reached at ceo@credifi.com.