The number of U.S. banks that went beyond regulatory guidance on commercial real estate loan concentration rose for the fifth straight period in the second quarter and reached its highest level in five years.

Regulators define commercial real estate loans as construction and land development loans + multifamily loans + nonowner-occupied nonresidential property loans + commercial real estate loans secured by collateral other than real estate.

Regulators increase their scrutiny of banks that exceed either of two thresholds: construction loans surpassing 100% of risk-based capital or CRE loans above 300% of risk-based capital levels and 50% growth in CRE over the last 36 months.

The number of banks exceeding either metric rose 14.0% sequentially and 50.3% year over year in the second quarter to 505. That total is up 71.8% from a low point of 294 in the first quarter of 2021. The most recent peak in the number of banks exceeding the CRE guidance was in the first quarter of 2017, when there were 530, followed by 507 one quarter later.

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Delinquency rate ticks up

Meanwhile, the delinquency rate on CRE loans at U.S. banks edged up 1 basis point from the prior quarter to 0.73%.

The delinquency rate reached a recent peak of 1.02% in the fourth quarter of 2020. CRE delinquencies rose consistently over the course of 2020 as the U.S. battled the initial stages of the COVID-19 pandemic. Delinquencies fell in 2021 as pandemic-related government restrictions loosened; the rate has stabilized in recent quarters above pre-pandemic levels. The second-quarter rate is 23 basis points higher than the rate of 0.50% seen in the fourth quarter of 2019.

Largest banks exceeding thresholds

As was the case in the first quarter, the largest bank to be beyond the regulatory guidance in the second quarter was Wayne, N.J.-based Valley National Bank. With $54.44 billion in total assets, Valley National posted 101.2% growth in CRE loans in the last 36 months while having a ratio of CRE loans to Tier 1 capital plus allowance for loan and lease losses of 425.4%.

Beverly Hills, Calif.-based Pacific Western Bank, with $40.91 billion in total assets, was the largest bank to exceed regulatory guidance based on its ratio of construction and development loans to Tier 1 capital plus allowance for loan and lease losses, with a ratio of 125.6%.

The largest banks to exceed both guidance criteria were Seattle-based Washington Federal Bank, with $20.16 billion in total assets, and San Diego, Calif-based Axos Bank, with $16.00 billion in total assets.