The US banking industry's exposure to high-volatility commercial real estate (HVCRE) loans declined 21.8% sequentially in the first quarter to its lowest level in years.

Regulators define high-volatility commercial real estate ADC loans as credit facilities that primarily finance or refinance acquisitions, developments or constructions of real properties and are used to provide financing to acquire, develop or improve properties into income-producing ones that are dependent on future income, sales or refinancing of such real properties for repayments.

These exclude one- to four-family residential properties, community development projects, agricultural land, existing income-producing property secured by permanent financings, certain commercial real property projects, real property where the loan has been reclassified as a non-HVCRE ADC loan, and real estate where the loan was made before Jan. 1, 2015.

The rule is not applicable to qualifying community banking organizations that elected to use the community bank leverage ratio framework.

The aggregate HVCRE loan balance for US banks stood at $32.37 billion in the first quarter, down from $41.39 billion in the fourth quarter of 2022, and $34.29 billion in the prior-year period, according to S&P Global Market Intelligence data. This marks the lowest balance of such loans since the first quarter of 2019.

Total risk-weighted HVCRE loans as a percentage of total risk-weighted assets was 0.22% at the end of the first quarter, down from 0.28% in the 2022 fourth quarter and 0.24% a year earlier.

Goldman Sachs top HVCRE lender in Q1

Goldman Sachs Group Inc. retained the top position among 20 banks and thrifts with the largest HVCRE loan balances in the first quarter. The analysis was limited to top-tier US banks and thrifts with at least $1 billion in assets that did not opt into the community bank leverage ratio (CBLR) framework, based on regulatory filings as of March 31.

Thirteen banks in the list logged increases in their sequential HVCRE loan balances, while seven reported declines.

Goldman increased its HVCRE lending by 3.4% sequentially to $3.38 billion in the first quarter, which represented 0.51% of its risk-weighted assets (RWAs). Cleveland, Ohio-based KeyCorp clocked in the highest quarterly increase in HVCRE loan portfolio, with a 48.2% jump to $478.6 million in total loan balance.

– View US industry data for commercial banks, savings banks and savings and loan associations. – Download a template that can generate a bank's regulatory profile. – Read some of the day's top news and insights from S&P Global Market Intelligence.

Wells Fargo & Co., which occupied the No. 3 spot on the list in the final quarter of 2022, slid four positions. The bank's HVCRE loan balance fell 40.6% quarter over quarter to $765.0 million.

On a call to discuss first-quarter earnings, Wells Fargo executives discussed a weakening in its commercial real estate office portfolio due to lower demand, higher financing costs and challenging capital market conditions.

"Given what we're seeing, we're taking incremental actions to tighten credit on higher risk segments, but continue to lend broadly," CEO Charles Scharf said. "We increased our allowance for credit losses for the fourth consecutive quarter."

Bank of Commerce had highest exposure to HVCRE

Ammon, Idaho-based Bank of Commerce's HVCRE loan balance of $279.7 million, represented 17.00% of its risk-weighted assets, the highest exposure to HVCRE in the analysis.

Among the 20 US banks with the highest HVCRE-to-RWAs ratios, Houston-based Prosperity Bancshares Inc. had the highest HVCRE loan balance of $1.71 billion at the end of the first quarter, a 0.7% quarterly increase, representing 7.57% of its risk-weighted assets.