REPORT: Regional Banks See Big Jump In Nonperforming CRE Loans, Related Losses
A strong majority of midsized, regional financial institutions have logged an increase in nonperforming commercial real estate loans and costs from unpaid debts written off as losses, according to a new analysis.
Of 18 regional banks with assets ranging from $50B to $250B, 15 reported more nonperforming loans compared to the same period a year ago, Yahoo Finance found. The average rise was 80% from a year earlier and 8% from the previous quarter, according to the analysis. Charge-offs — a measure of unpaid debts written off as losses — also climbed at 15 banks from the same year-ago period.
Smaller banks — those with less than $250B in assets — have far more significant exposure to commercial real estate loans than their larger counterparts. Small and midsized banks held about three-quarters of all CRE loans in the second quarter of this year. At that time, banks of all sizes had a roughly $3.6T exposure to commercial real estate, a Wall Street Journal analysis found.
Many regional banks began ramping up their CRE lending after the 2008 financial crisis and stuck with it through the pandemic, according to Yahoo Finance. Banks almost doubled their direct lending to landlords to $2.2T during a period of historically low interest rates in the seven years prior to 2022, Bisnow previously reported.
Small and midsized banks made up 74% of the increase over that seven-year period.
The ramp-up in CRE lending is bringing trouble now that property values are declining, interest rates are high, and $331B in U.S. commercial and multifamily mortgage debt is set to mature this year, per the analysis.
For New York Community Bank, two office-related loans helped bump its nonperforming loans up 64% from last quarter and eight times higher than the same quarter a year ago, Yahoo Finance reported. This brings its pile of nonperforming loans to $642M, with the bank attributing the increase largely to office loans in Syracuse and Manhattan.
Salt Lake City-based Zions Bank moved $64M in loans this quarter to nonperforming status, mainly due to two suburban office properties in Southern California and a business loan the bank plans to sell in the fourth quarter.
“Those were loans where the properties were being improved and then when the project got completed, they had problems leasing it,” Tim Coffey, a managing director with Janney, told Yahoo Finance about Zion’s loans. “That totally makes sense in this environment, but it is kind of unusual.”
So far, many of the loan problems popping up are “one-offs” or “two-offs” that can be chalked up to a particular circumstance, Scott Siefers, an analyst with Piper Sandler, told Yahoo Finance.
“Having said that, it feels like the further along we go, the more of these could go from one-off issues to just broader deterioration in credit,” said Siefers, adding that “we aren't quite there yet.”
But losses are expected, especially considering that smaller banks have larger exposure to real estate, Federal Reserve Chairman Jerome Powell said earlier this month at the New York Economics Club.
“All of the bank regulators are working with banks that have, you know, concentrations of troubled real estate to work it out,” Powell said.
Regional banks have pulled back on their CRE lending. In the second quarter, regional banks accounted for 25% of all new commercial real estate loans worth at least $2.5M, a 900-basis-point drop from the first quarter, according to data from capital markets research firm MSCI.
That was the largest quarterly decline in market share for regional banks since MSCI began tracking the statistic in 2011.
