Getting Real With High-Risk Lending
Experts: Commercial real estate loans may combat thrift losses
newsday.com
By Tania Padgett
STAFF WRITER
June 9, 2003
Two years ago, the revenues and profits of savings and loans were flying high.
But the wings of some thrifts soon may be clipped as the economy languishes and interest rates - which can't go too much lower - eventually rise.
"The chickens are coming home to roost," said James Ackor, senior analyst at RBC Capital Market in Portland, Maine. "The days when thrifts could make money so easily are coming to an end."
Nationwide, thrift profits rose 15.6 percent to $11.8 billion in 2002 and assets rose 22 percent to a record $1 trillion, according to the Office of Thrift Supervision. The last time thrift industry assets surpassed $1 trillion was in 1990, the office said. Thrifts in New York City and Long Island experienced a similar earnings surge.
Experts say, however, that some thrift executives have seen the writing on the wall and are attempting to combat shrinking profit margins by doing riskier lending, namely commercial real estate lending. Thrifts new to this might be walking a dangerous line. Commercial real estate lending, which includes loans for apartments, is far riskier than home mortgage lending, so much so that it put many savings and loans out of business in the 1990s, experts said. "Banks that tend to go into new lending lines, especially low risk to higher risk, often end up with credit problems," said Kevin Timmons, analyst at C.L. King & Associates in Albany.
Revenues for the thrift industry took off in 2001 as low interest rates sparked a refinancing boom and investors skeptical of the stock market plowed money into savings and checking accounts.
In the past year, investors also have started to find other places to invest their money. And the refinancing boom that once fueled strong profit margins now has begun to hurt savings and loans as lower interest yielding loans replace higher interest yielding loans on balance sheets. Another potential problem is higher interest rates, which can hurt spread income - the difference between what they pay customers for deposits and the amount they charge for loans.
The more challenging economic landscape for financial institutions in 2003 has prompted many analysts to reduce their "buy" ratings on some savings and loans to "holds." The consensus rating on Roslyn Bancorp in Jericho last May was 2.2 (close to buy), but is now 3.2 (between hold and sell), according to Thomson Financial/First Call Corp., a research company that compiles analysts ratings. Last May, the rating of Astoria Financial Corp. in Lake Success was 1.8 (close to strong buy) last year, but now is 3 (hold).
Meanwhile, the rise in New York City property values has lured some thrifts, looking for ways to sustain the boom, into the commercial real estate business.
"The market is lucrative now," said Michael Devine, president of Dime Community Savings Bank. "There's more demand for property in New York City, which makes it intrinsically more valuable."
Generally, commercial banks do commercial real estate lending, but several New York thrifts, such as New York Community Bancorp, Independence Savings Bank and Dime Community Bancshares have become specialists.
However, the high yields that the multifamily lending offers attractg new thrifts to the market and heat competition and raise analysts' eyebrows.
"Savings and loans doing multifamily lending has had a sketchy past," said Scott Valentin, analyst at Friedman, Billings, Ramsey Group in Arlington, Va.
Deregulation of the industry in the 1980s enabled many savings and loans to enter the market - with dire consequences. Many collapsed because of losses from bad loans on commercial real estate.
In 1992, Brooklyn-based Crossland Federal Savings Bank was seized by the government amid huge losses from bad loans, stemming mostly from real estate lending. The bank tried to recover by focusing more on mortgages but eventually was bought by Republic New York Corp., which is now HSBC.
History aside, industry experts argue that new lenders in the market don't have the expertise and in their effort to gain market share have loosened their underwriting standards, a charge executives at Roslyn and Astoria deny.
Jack Bransfield, president at Roslyn, acknowledged that the $11 billion-asset thrift has ramped up its lending in multifamily lending. But he argues that the bank's endeavors have helped bolster revenues. He also says the company has a good track record evaluating loan risk, evidenced by its small credit losses.
Roslyn's net income rose 11.5 percent in the first quarter, fueled in part by its lending in this area.
Roslyn's real estate funding has risen to $750 million up from $450 million last year and Bransfield predicts it will have $2 billion in real estate loans on its balance sheet by the end of the year.
Asset quality for this portfolio has been pristine, as the company has not experienced since 1995, according to the company's first quarter earnings.
Bransfield said Roslyn has had a position in the market ever since it acquired aggressive multifamily lender Roosevelt Bank in 1997.
"So it's not like we are actually new to this," Bransfield said.
Thomas Drennan, executive vice president and senior lending officer, feels similarly about Astoria, which has been doing such loans since 1996.
Astoria's mortgage portfolio as of March holds $2.5 billion in multifamily and commercial loans, up 150 percent from $1 billion in loans in 1999.
Drennan argues that the bank sticks to its underwriting and as a result, losses are low.
Still, critics say relative newcomers to the market are not familiar with the cycles of the market and could be in for an unpleasant surprise when real estate values head downward.
"Real estate lending is good now," Devine said. "But nothing does well forever. More challenging times will determine who stays in this market."
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