US banks reported elevated pressure in their multifamily loan books as elevated interest rates continued to hit borrowers.
In the quarter ended June 30, the multifamily delinquency ratio at US banks climbed to 0.9% from 0.6% in the first quarter and 0.3% in the second quarter of 2023, according to S&P Global Market Intelligence data.
Banks' multifamily loans rose 0.8% quarter over quarter and 4.1% year over year to $624.97 billion in the second quarter. Net charge-offs (NCOs) on multifamily loans were 0.09% of average loans, versus 0.05% a quarter earlier and 0.04% a year earlier.
The recent credit challenges at lenders are mostly in the commercial real estate sector, specifically office and multifamily, D.A. Davidson analysts said in an Aug. 6 note. While the multifamily lending space is pressured by higher rates and overbuilding in some markets, "management teams expect the loss content to be low given plenty of equity in these deals, and for apartment buildings to be leased up over time," the analysts wrote.
The quality of multifamily loans is still holding up well at large-cap banks, with minimal NCOs and very low levels of nonperformers, J.P. Morgan analyst Vivek Juneja said in a Sept. 6 note, adding that sponsors have been supporting deals that have run into trouble.
Englewood Cliffs, NJ-based ConnectOne Bancorp Inc., which recently announced a deal to acquire First of Long Island Corp., had the 14th highest multifamily loan delinquency ratio among US banks with multifamily loan concentrations of at least 25% in the second quarter. ConnectOne logged $2.50 billion in multifamily loans, with a delinquency ratio of 1.06%, down 14 basis points sequentially.
In the First of Long Island deal, ConnectOne plans to take on about $500 million of multifamily loans collateralized by rent-regulated New York City apartment buildings and will add to its credit reserves accordingly.
New York-based banks topped the list of banks by multifamily loan delinquency ratio, with Piermont Bank landing on the top spot with a ratio of 8.15%, up 459 basis points quarter over quarter. New York Community Bancorp Inc. recorded the second-highest delinquency ratio at 4.68%, an increase of 348 basis points from the first quarter, followed by Esquire Bank NA at 3.11%, down 3 basis points.
New York Community reported the second-highest amount of multifamily loans as of the second quarter, with $36.01 billion in such loans making up 43.7% of its gross loans. The company built up loss reserves for multifamily loans in the second quarter after a deep dive into its CRE loan portfolio.
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Peapack-Gladstone Financial Corp. booked the fifth-highest delinquency ratio of 2.62%, down 31 basis points quarter over quarter. Some credit issues emerged at the Bedminster, NJ-based company in the second quarter, President and CEO Douglas Kennedy said.
"[W]e believe [the issues] are presently isolated to a small number of specific multifamily sponsors and will work through each credit one at a time," Kennedy said in a news release. "All of the multifamily loans that matured or repriced in 2024 have continued to make their scheduled payments despite the higher rate environment."
Two of the other banks on the list are Uniondale, NY-based Flushing Financial Corp., which is "pretty confident that there's very low loss content" as it relates to its multifamily nonperformers, according to its CEO, and Wilmington, Del.-based The Bancorp Inc., which expects little or no losses due to its CRE portfolio of multifamily transitional loans.
Top lenders
JPMorgan Chase & Co. led the industry with $102.05 billion of multifamily loans as of June 30. The company's multifamily delinquency ratio rose 22 basis points quarter over quarter to 0.42%.
PNC Financial Services Group Inc. was fourth with multifamily loans of $12.93 billion, up 6.0% from March 31. The company's multifamily delinquency ratio fell 7 basis points to 0.41%. PNC Chairman and CEO William Demchak said multifamily is a space in which "higher rates have hurt coverage ratios."
"It's not going to cause us losses, but it's caused us to downgrade that asset class simply because the excess isn't there," Demchak said during an earnings call. "I think that'll flow through to corporate America over a period of time as well, but I'm not particularly worried about it."
First Foundation Inc.'s multifamily loans ticked up 0.1% quarter over quarter to $5.25 billion in the second quarter. Early in the third quarter, the company closed a $228 million capital raise that would help it trim its multifamily exposure by adding commercial and industrial loans and potentially selling loans.
Among those in the top 25, New York Community posted the highest quarter-over-quarter jump in multifamily delinquency ratio, followed by KeyCorp, in which the ratio rose 288 basis points to 4.10%. Webster Financial Corp. booked the largest ratio reduction at 50 basis points to 0.02%.
