Multifamily and Construction/Development Lending Remain Fastest Growing Categories
The amount of commercial real estate loans on U.S. bank books has swelled by more than $100 billion in the past four quarters, a 6.6% increase and now totals more than $1.65 trillion (excluding farming), according to the latest FDIC numbers released this past week. The total basically matches outstanding the CRE loan balance at the last peak of CRE markets seven years ago.
Multifamily lending continues to be the fastest growing category, increasing 14.5% over the past four quarters and now totaling $289 billion.
Banks have also returned to construction and development lending with the latest total standing at $230 billion, up 11.9% in the past four quarters.
Other CRE nonresidential lending is up 6% to $654.5 billion.
Meanwhile, bank lending in the only other CRE category the FDIC breaks out, owner/occupied properties, has remained relatively flat at $478.7 billion, up less than 1% as banks continue to remain shy of small business lending.
In addition, the quality of CRE loans on the books continues to improve. The amount of past due loans held by banks has dwindled to less than $30 billion for the quarter ended Sept. 30. That is down 6.6% for the past year and down from the nearly $149 billion in delinquent loans at the height of the Great Recession five years ago.
In addition, the amount of charge-offs on real estate loans secured by nonfarm nonresidential properties declined by $360 million (61.1%).
The amount of foreclosed properties held by banks continues to fall-off dramatically. Currently at $13.1 billion, the total is down more than 22% from a year ago. In the last year, the amount has decreased by $3.78 billion – a rate twice as fast as it decreased in four previous years combined.
Multifamily Preferred
Looking specifically at multifamily, of the 25 banks with the largest amount of multifamily loans on their book at the end of September, only two posted decreases in that amount in the last year: Bank of America and Regions Bank.
The other 23 increased their multifamily loan totals by more than 15%.
Umpqua Bank in Roseburg, OR, increased its total 558% in the past year. That growth came primarily from its parent company’s acquisition of Sterling Financial Corp. in April, creating the West Coast’s largest community bank.
“We’re seeing solid growth in multifamily coming out of our Southern California operations. The major urban areas, San Francisco, Bay Area, Portland, Puget Sound, those are obviously, for obvious reasons, the strongest areas where we have the largest amount of teams on the ground and we’re seem to be doing very well there,” Raymond Davis, president and CEO of Umpqua Holdings reported.
KeyBank, PNC Bank, Investors Ban and People’s United Bank have increased their multifamily totals more than 33%.
People’s United Financial Jack Barnes, president and CEO of People’s United reported that are slowing their pace of growth in that portfolio, however, because of where spreads are going.
JPMorgan Chase Bank is far and away the largest multifamily lender in the country with $48.5 billion of such loans on its books, up $5 billion (11.7%) in the past year. Its total is more than twice the total of the bank with the second-largest amount: New York Community Bank with $21.3 billion.
Bank Profits Rising
The improving CRE lending performance at U.S. banks has helped drive higher earnings.
Commercial banks and savings institutions insured by the FDIC reported aggregate net income of $38.7 billion in the third quarter of 2014, up $2.6 billion (7.3%) from a year earlier.
“Earnings were higher, revenues were up at more institutions, asset quality continued to improve, and there were fewer unprofitable banks, ‘problem’ banks, and bank failures,” said FDIC Chairman Martin J. Gruenberg. “However, the current operating environment remains challenging for banks. Low interest rates have put downward pressure on net interest margins, especially at larger banks. While the economy continues to recover, loan demand remains modest. And reductions in loan-loss provisions, which have supported earnings growth during the recovery, appear to be coming to an end.”
For the past five years, reductions in loan-loss provisions have been the most consistent contributor to earnings growth. However, third quarter earnings did not get a boost from lower provision expenses. Instead, loss provisions were $1.4 billion higher than a year ago. This is the first year-over-year increase in quarterly loss provisions since the third quarter of 2009.
