U.S. banks' exposure to riskier commercial real estate loans edged lower in the third quarter to the lowest aggregate level since the first quarter of 2022.
Regulators define high-volatility commercial real estate Acquisition Development or Construction loans as credit facilities that 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-high-volatility commercial real estate Acquisition Development or Construction 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.
In the third quarter, the sector's aggregate balance of high-volatility commercial real estate, or HVCRE, loans dipped to $34.08 billion, down 16.6% sequentially and 3.5% from the year-ago total, according to S&P Global Market Intelligence data. The analysis includes U.S. banks and thrifts that did not opt into the community bank leverage ratio framework.
During the third quarter, total HVCRE loans represented 0.23% of risk-weighted assets, down from 0.29% in the previous quarter and from 0.27% in the year-ago quarter.
Top HVCRE loan lenders
Among the banks with at least $1 billion in total assets based on regulatory filings as of Sept. 30, eight registered a sequential decline in their portfolios while 12 notched a quarter-over-quarter increase in their HVCRE loan balances.
Goldman Sachs Group Inc., which has the largest portfolio of HVCRE loans, maintained its position at the top with $3.01 billion worth of HVCRE loans. However, the leader had the biggest sequential decline among its peers in the top 20 with a 27.4% decrease in its HVCRE loans in the third quarter.
M&T Bank Corp. had the second-biggest quarter-over-quarter decline in its HVCRE loan portfolio in the third quarter. The Buffalo, N.Y.-based bank saw its portfolio decline by 16.4% to $379.4 million.
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Among the banks with HVCRE loan balances over $1 billion for the quarter, only Prosperity Bancshares Inc. grew its portfolio sequentially: Prosperity Bancshares' total of $1.65 billion was up 6.9% from the prior quarter.
Beverly Hills, Calif.-based PacWest Bancorp posted the highest sequential increase in its HVCRE loan balances with a 46.1% jump to $382.8 million in the quarter. San Antonio-based Cullen/Frost Bankers Inc., whose portfolio grew 45.4% to $522.0 million in the third quarter, had the next highest increase.
Ratio of HVCRE loans to risk-weighted assets
Ammon, Idaho.-based Bank of Commerce's $262.6 million in HVCRE loans represented 16.48% of its risk-weighted assets, the highest such percentage in the analysis.
Among banks in the analysis with more than $10 billion in assets, HVCRE loans made up the highest proportion of risk-weighted assets at Prosperity Bancshares, followed by WSFS Financial Corp., W.T.B. Financial Corp. and International Bancshares Corp.
