The number of U.S. banks exceeding federal guidance on commercial real estate loan concentration rose sequentially in the second quarter for the first time since the fourth quarter of 2018.
Because the increase followed a long decline, fewer banks exceeded the guidance in the quarter than a year earlier. Still, two key metrics grew sequentially: the number of banks with construction loans exceeding their level of risk-based capital and the count of banks with both high loan levels and high growth in their CRE books. Banks that exceed the concentration thresholds are subjected to increased scrutiny of their risk processes for the asset class.
Lending data shows a commercial real estate market recovering from the COVID-19 pandemic — which struck the U.S. in the first quarter of 2020 — in uneven fashion, as landlords and their tenants worked through the consequences of more than a year and a half of remote work, travel restrictions and store closures.
CRE loan delinquencies, which rose steadily through 2020, fell for the second straight quarter to represent 0.85% of total bank CRE loans, according to S&P Global Market Intelligence data. But while the second-quarter level was down from a fourth-quarter 2020 peak of 1.02%, it remained higher than any quarterly delinquency rate from 2016 through 2019.
Lenders appeared to be originating CRE loans with renewed enthusiasm in the second quarter, as the aggregate balance of CRE loans at U.S. banks posted its largest sequential gain since the first quarter of 2020, growing by 2.81% to $2.080 trillion.
"As we emerge from the pandemic, real estate-related loan demand has been the first area to pick up," Pacific Premier Bancorp Inc. Chairman, President and CEO Steven Gardner said in a July 27 earnings conference call. Over the last 36 months, CRE loans at the Irvine, Calif.-based bank, which acquired Opus Bank in May 2020, grew by 243.1%.
Wayne, N.J.-based Valley National Bank, with $41.29 billion in total assets, was the largest institution exceeding CRE loan guidance, after a break from the list in the first quarter. Bethesda, Md.-based EagleBank and Baton Rouge, La.-based b1Bank also returned to the list after one quarter away.
In a July 22 earnings conference call, Valley National executives expressed optimism about the bank's CRE book. They noted that Valley National's non-PPP commercial loans grew by 7% for the year-to-date and expected even more robust growth for CRE.
Valley National's real estate loans are balanced between New York, New Jersey, Florida and Alabama markets and among the apartment, retail and industrial property types, with Florida representing 40% of loan production and 55% of growth in the second quarter, Chief Banking Officer Thomas Iadanza said.
Valley National is one of several banks whose executives said in recent conference calls that originating CRE loans has been easier than originating commercial and industrial loans.
"Obviously, the C&I market is a little less robust than the CRE market, but we're still developing new relationships and booking new loans in terms of C&I," Kevin O'Connor, CEO of Bridgehampton, N.Y.-based Dime Community Bank, said in a conference call. Dime's CRE loans represented 538.4% of Tier 1 capital plus allowance for loan and lease losses in the second quarter.
Executives at McKinney, Texas-based Independent Bank, where CRE loans represented 308.5% of Tier 1 capital plus allowance for loan and lease losses in the quarter, have been open about their desire to reduce the bank's CRE concentration by growing its C&I book relative to real estate.
In a July 27 conference call, Chairman, President and CEO David Brooks said Independent has been hiring in the C&I space, with some traction in energy lending in recent quarters.
"We would love an opportunity to acquire a bank that has a bigger C&I book or a special product or something that they've got expertise in that would be additive to us," Brooks said. "I think we've been successful. We're right on track with where we hope to be three years ago when we began moving this direction. And I think in a couple of years, you'll see us be even more balanced."
