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CRE loan growth slows as delinquencies inch higher in Q1'18

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CRE loan growth slows as delinquencies inch higher in Q1'18

A dwindling number of U.S. banks are concentrated in commercial real estate loans in the eyes of regulators. But even as industrywide CRE lending slowed in the first quarter, banks reported their first quarter-over-quarter uptick in CRE delinquencies in years.

Since 2006, U.S. banking regulators have advised that CRE loan concentrations above a certain threshold could lead to increased regulatory scrutiny. They reissued that guidance to banks in late 2015 in light of substantial CRE loan growth.

The guidance states that banks may be considered concentrated in CRE loans if they meet at least one of two thresholds: First, if CRE loans are greater than 300% of risk-based capital and CRE loans have grown by more than 50% during the prior three years, or second, if construction and land development loans are more than 100% of risk-based capital.

The number of U.S. banks and thrifts that meet this definition fell in the first three months of 2018, marking the fourth consecutive quarter of declines. As of March 31, 463 institutions were concentrated in CRE, down from 489 in the fourth quarter of 2017 and 530 in the year-ago quarter.

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The industry's overall CRE lending slowed during the first quarter. Aggregate CRE loans rose by 1.3%, the second-lowest rate since detailed reporting began in 2012.

At the same time, delinquent CRE loans rose to 0.61% of total CRE loans as of March 31, up from 0.57% at year-end 2017. This was the first time that delinquencies increased quarter over quarter since 2012, when CRE data became available in its present form. Even with the uptick, delinquencies remain far lower than in the first quarter of 2012, when they stood at 6.07%.

The regulatory definition of CRE includes four categories: construction and land development loans, multifamily loans, loans secured by nonowner-occupied commercial properties, and loans used to finance CRE or C&D activities that are not secured by real estate.

Nonowner-occupied loans, which account for almost half of all CRE lending, grew by 4.9% year over year in the first quarter, the lowest growth rate among the four categories.

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In the first quarter, 57 banks became concentrated in CRE, according to the regulatory definition, while 84 dropped off the list.

At nearly $23 billion in assets, Nashville, Tenn.-based Pinnacle Bank was the largest lender to become concentrated in CRE, after it climbed above the 300% threshold. The bank has grown CRE loans by 447.7% in the last three years. During an April 17 earnings call, management pointed to the continued high levels of growth in the CRE and construction lending practice of BNC, which Pinnacle acquired in 2017.

But CFO Harold Carpenter Jr. said he expects to drop back below the 300% threshold after the first half of 2018.

Carpenter also noted that the bank's construction and land development lending did not breach the 100% threshold, and is not expected to. "[W]e're likely to see construction begin to come down here in the second quarter and go down from here as the percentage of total risk-based capital," he said.

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Note: Figures reported in this article may not match figures reported in prior articles due to the frequent restatement of call reports.

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Click here to access an Excel spreadsheet that lists all of the companies concentrated in CRE as of March 31, 2018.