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Bankers won’t get caught holding real estate bag
Most agree rising interest rates won’t hurt their loan portfolios
By Matthew French
Staff Writer
It’s no secret that the housing market has been in a boom cycle for years now, thanks in large part to interest rates lower than they have been in a generation. The Lowcountry has benefited from this by a massive influx of people, jobs, and, for municipalities, a deluge of tax revenue.
But the real risk-takers in a real estate boom are the lenders, the banking institutions that loan out money, expecting to be paid back and turn a profit. As interest levels creep back up to levels that predate the wild rate decreases at the hands of the Federal Reserve, there is some concern that banks could be left holding the bag on office space that remains unfilled and homebuilders unable to find tenants.
But that trend seems to be absent in the Lowcountry, as construction continues at a brisk pace and lenders still approve loans with little concern for backlash.
“All of the banks in this area are real estate-driven,” says Robert “Chip” Coffee Jr., president and chief executive officer for Tidelands Bank in Mount Pleasant. “We finance the growth in this area. In this particular area, I don’t think there’s much worry about getting caught in a real estate bubble.”
Coffee points to the tremendous growth the Charleston region has seen over the past several years, as an increasing number of people move to the region from the upper Midwest, Mid-Atlantic and Northeast regions of the country. Plus, there are what North Charleston Mayor Keith Summey calls “half-backs,” former residents of the Northeast who moved to Florida, but following last year’s particularly damaging hurricane season, are moving halfway back and settling in the Lowcountry.
Most banks in the region, Coffee says, don’t hold onto most of their real estate loans once they’re granted. Instead, they sell the loans to investors and third-party partners, who absorb any risk of the property owner defaulting.
“We have no concern about our resources,” says John Bryan, senior vice president of loans for South Carolina Federal Credit Union. “As the volume (of real estate loans) peaks, we have the relationships established to outsource excess underwriting and processing so we can close the loans in an efficient and effective manner for our customers. We don’t expect any kind of panic if rates go back up. If we overflow our resources, we have the third-party resources we need to sell the loans to the third party.”
Given what has largely been managed growth in the area, which extends beyond residential and into corporate and office space, Coffee says the Lowcountry is probably one of the safer areas in the nation to hold a lot of real estate investment.
“Banks are traditionally pretty conservative lenders,” he says. “We don’t do a bunch of office building loans on spec. Banks love to fund a building project for a fully or partially owner-occupied building. Plus, the great majority of those (commercial) loans are offered at floating rates, so the loan holder actually benefits when the rates go up.”
Banks and lending institutions that grant a large number of fixed-rate loans could see their margins squeezed, however.
“We carefully monitor our real estate portfolio, particularly the fixed rate portion, on an ongoing basis,” says John Tant, South Carolina Federal Credit Union’s vice president of lending. “We are able to control our interest rate risk by holding only the level of fixed rate loans that we are comfortable with and selling the rest on the secondary market. We retain the servicing on those loans that are sold.”
Tant says the bank expects that rates will increase gradually over a longer period of time, and will not suddenly spike.
Coffee says Tidelands, one of the area’s newest banks, protects itself by not holding too many residential loans, and instead selling the loans on the secondary market. By not holding too many fixed-rate loans, many of which are residential loans, Coffee says the bank is protecting itself from much of the risk associated with loans.
“The yield curve is definitely flattening and short-term rates are going up,” he says. “A bank will see its margins get squeezed and there is some risk involved in getting caught with too much real estate in your portfolio—if those loans are fixed rate and the values of the properties don’t increase.”
But in this area, banks and builders aren’t generally driven by irrational exuberance, he adds. The popularity of the Lowcountry as a destination and the added popularity of real estate as the chosen investment choice in the region makes real estate loans a comparably safe arena in which to work.
Mount Pleasant has been particularly attractive to Tidelands, thanks in large part to the controlled growth and ongoing building construction squeeze.
“The city fathers have sought to control growth through the control of building permits, and that has strongly driven the demand higher than the supply, and I don’t see that changing very soon,” Coffee says. “The demand will continue to be strong and I think the new Cooper River Bridge completion will actually add to that demand.”
Areas other than east of the Cooper River are equally attractive, he says. Just because would-be home builders can more easily obtain the necessary permits in West Ashley, Johns Island, James Island and Summerville doesn’t mean the demand for property is any less.
“The region as a whole will surely continue to be hot, because people love the quality of life in Charleston,” he says. “And we aren’t just talking about retirees; young, educated people are moving here.
“As a banker, I’m no more concerned about real estate loans in an area outside of Mount Pleasant,” he continues. “We aren’t there on Johns Island or James Island yet, but we plan to be. When we are, we will participate in the growth and continued development of those areas and be an active leader in real estate loans. I’m bullish on the Charleston area as a whole.”
Matthew French covers financial services for the Business Journal. E-mail him at mfrench@crbj.com.
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