Concerns Mount That Small Banks Are Taking On Excessive Real Estate Loan Risk

Bank OZK, the Arkansas lender, saw its stocks plunge late last week after it took a more than $45 million write-down on two commercial real estate loans, stoking fears that small banks in the U.S. are taking on too much commercial real estate loan risk.

The Financial Times, citing analysts, reported Bank OZK has $22 billion in assets, with half coming from commercial real estate and multi-family real estate loans. But Bank OZK isn’t alone. With big banks reining in commercial real estate loans, small banks have moved to fill the void as a way to expand. But that, noted the Financial Times, is injecting more risk into their businesses and spooking some investors. “It is a risk you have too many of your eggs in one basket,” Paul Fiorilla, an analyst at Yardi Matrix research, said in the Financial Times report. “You do hear talk in the market that some banks have become really aggressive on some deals.” The FT reported banks with assets under $100 billion have significantly increased their commercial real estate exposure during the past few years, with it accounting for about 20 percent of the assets at these small banks as of the second quarter. The loans also include construction ones, noted the report. Five years ago that stood at 15 percent.

Meanwhile, David Ellison, a portfolio manager specializing in financials at Hennessy funds, told the FT that assets at Bank of OZK have quadrupled since 2013, with most of it via real estate loans in southern U.S. He did note that close to $3 billion in loans were made in New York. The bank took write-downs on loans secured by a mall property in South Carolina and a residential development in North Carolina, the analyst told the FT. The mall has a Sears store as an anchor tenant. Sears declared bankruptcy last week, noted the report. Bank OZK said when announcing the write-downs that the two loans were issued in 2007 and 2008 and were older than the rest of its loans, which were originated mainly since 2015.