US banks' high-volatility commercial real estate loan balance falls again

US banks' exposure to high-volatility commercial real estate loans declined in the third quarter to the lowest level in three years.

The aggregate high-volatility commercial real estate (HVCRE) loan balance of US banks at the end of the third quarter stood at $30.13 billion, down 18.2% from the second quarter and down 11.7% from the same period a year earlier, according to S&P Global Market Intelligence data. The third-quarter balance was the lowest figure since the community bank leverage ratio framework became effective at the start of 2020, falling below the multiyear low recorded in the first quarter.

Third-quarter HVCRE loans accounted for 0.21% of the sector's total risk-weighted assets, down from 0.25% in the second quarter and 0.23% in the 2022 third quarter.

Regulators define HVCRE ADC loans as credit facilities that primarily finance or refinance acquisitions, developments or constructions of real properties and are used to 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 does not apply to qualifying community banking organizations that elected to use the community bank leverage ratio framework.

Prosperity Bancshares top HVCRE lender in Q3 2023

Houston-based Prosperity Bancshares Inc. surpassed Goldman Sachs Group Inc. to become the top HVCRE lender in the third quarter. The company's total HVCRE balance at the end of the quarter was $2.03 billion, a 3.7% quarterly increase, representing 8.4% of its risk-weighted assets.

Goldman Sachs landed in the second spot, reducing its HVCRE loan balance by 7.4% since the last quarter to $1.99 billion. Minneapolis-based U.S. Bancorp retained the third spot, with a total HVCRE loan balance of $1.24 billion, a 2.4% decline from the second quarter.

Laredo, Texas-based International Bancshares Corp. recorded the highest sequential increase in HVCRE loan balance among the top 20 HVCRE lenders in the third quarter. The company's balance grew by 68.6% during the third quarter to $432 million.

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Raleigh, NC-based First Citizens BancShares Inc. grew its HVCRE loan balance by 16.8% on a quarterly basis to $585.1 million as of Sept. 30.

Of the 20 US banks with the highest exposure to HVCRE loans in the third quarter, seven logged quarterly balance declines. As of the end of the third quarter, Chicago-based Northern Trust Corp. posted a 20.5% decline in HVCRE loans to $462.6 million, the largest percentage decrease in the group.

Highest ratios of HVCRE loans to risk-weighted assets

Ammon, Idaho-based Bank of Commerce remained the bank with the highest ratio of HVCRE loans to risk-weighted assets. Total HVCRE loans for the institution stood at $323 million at the end of the third quarter, representing 18.4% of its risk-weighted assets.