The U.S. banking industry reduced exposure to riskier commercial real estate loans in the first quarter, although some banks bucked the trend.
Regulators define HVCRE ADC 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-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 sector's aggregate balance of high-volatility CRE, or HVCRE, loans in the first quarter dropped 12.4% sequentially and 8% year over year to $34.26 billion, according to a S&P Global Market Intelligence analysis. The analysis includes U.S. banks and thrifts that did not opt into the community bank leverage ratio framework and have at least $1 billion in total assets based on regulatory filings as of March 31.
Top HVCRE loan lenders
Twenty institutions held more than 50% of the HVCRE loan balance as of March 31. Goldman Sachs Group Inc., which had the largest HVCRE loan portfolio at the end of 2021, remained at the top of the list with HVCRE loans amounting to $3.73 billion. The company increased its HVCRE portfolio by 34.4% quarter over quarter.
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The trend among the top 20 banks on the list was mixed. Including Goldman Sachs, nine other institutions increased their exposure to HVCRE loans during the first three months of 2022. Laredo, Texas-based International Bancshares Corp. recorded the highest increase, with its portfolio growing 280.7% to $381.6 million.
The remaining 11 institutions on the list reduced their HVCRE loan balances, some by over 10%. Regions Financial Corp. recorded the sharpest drop in HVCRE loans, with its portfolio declining 28.5% to $333.0 million during the quarter.
At M&T Bank Corp., which reduced its HVCRE loans exposure by 14.6% to $411.7 million, three factors contributed to such a decision.
"Elevated payoff activity was the primary driver, including several criticized and nonaccrual loans assumed by other lenders," CFO Darren King said during M&T's first-quarter earnings call. "The quarter also saw construction loans converted into permanent off-balance-sheet financing, often facilitated by our M&T Realty Capital Corp. subsidiary. And finally, new origination activity remained subdued compared to prior years."
Geopolitical scenarios cast a darker shadow on an already "fragile" economic landscape. Amid these challenges, Nashville, Tenn.-based Pinnacle Financial Partners Inc. and some other banks are keeping a close eye on their CRE portfolios. Pinnacle Financial shed its HVCRE loan balance by 2.9% during the first quarter to $466.6 million.
"The full impact of the ongoing supply chain issues, inflation, inverted yield curves and potential recession aren't yet known," Pinnacle's President and CEO Michael Terry Turner said during the institution's first-quarter earnings call.
Ratio of HVCRE loans to risk-weighted assets
As a percentage of risk-weighted assets, HVCRE loans were at 0.24% as of March 31, compared to 0.29% at the end of the previous quarter and 0.30% at the end of the 2021 first quarter. The industry median was 0.52%.
Ammon, Idaho-based Bank of Commerce recorded the highest ratio of HVCRE loans to risk-weighted assets. The bank ended the first quarter with its HVCRE loan balance at $227.0 million, or 15.7% of risk-weighted assets.
