Billions in Bank Profits Not Yet Turning into New Lending

Even though commercial real estate [CRE] asset quality continues to improve gradually on bank’s books across the country, it has not translated into additional lending for commercial real estate. In fact, new lending continues to slide in all categories with the exception of multifamily.

New lending from banks on multifamily projects has increased by about $4 billion year to date. Outside of that category, lending activity continues at slightly declining levels for nonresidential properties and continues to fall off sharply for construction and development projects.

Still, a handful of banks have reported that demand has picked up slightly in the competition for quality loans.

For that reason and others, Federal Deposit Insurance Corp. (FDIC) chairman Sheila C. Bair is indicating that the end of a two-year period of contraction in loan portfolios may have run its course.

“Total loans and leases held by FDIC-insured institutions declined by just $6.8 billion, or 0.1%, in the third quarter,” Bair said. “Many large banks have had sizable reductions in their loan portfolios over the past couple of years, but in the third quarter, such reductions were notably absent. I hope we are close to seeing genuine increases in loan balances again.”

“The industry continues making progress in recovering from the financial crisis,” the FDIC chairman added. “Credit performance has been improving, and we remain cautiously optimistic about the outlook. Lower provisions for loan losses are driving bank earnings by allowing a larger share of revenues to reach the bottom line.”

But Bair also added, “at this point in the credit cycle it is too early for institutions to be reducing reserves without strong evidence of sustainable, improving loan performance and reduced loss rates. When it comes to the adequacy of reserves, institutions should always err on the side of caution.”

Commercial banks and savings institutions insured by the FDIC reported an aggregate profit of $14.5 billion in the third quarter of 2010, a $12.5 billion improvement from the $2 billion the industry earned in the third quarter of 2009. This marks the fifth consecutive quarter that earnings have registered a year-over-year increase.

The FDIC noted signs of further improvement in asset-quality trends as the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) fell for a second consecutive quarter. Before these two quarterly declines, the industry’s noncurrent loan balances had risen for 16 consecutive quarters.

However, noncurrent balances increased in multifamily residential real estate loans (up $1.2 billion, or 13.6%) and in nonfarm nonresidential real estate loans (up $604 million, or 1.3%).

Insured banks and thrifts charged off $42.9 billion in uncollectible loans during the quarter, down $8.1 billion (15.8%) from a year earlier. This is the second quarter in a row that net charge-offs posted a year-over-year decline. Prior to the past two quarters of improvement, quarterly NCOs had increased year-over-year for 13 consecutive quarters. NCOs for most major loan categories declined year-over-year in the third quarter.

Real estate construction and development loan NCOs were down by $2.5 billion (32.4%), while NCOs of real estate loans secured by nonfarm nonresidential properties were $1.1 billion (46.2%) higher.

More banks are also continuing to report an increasing amount of asset sales. The number of banks reporting assets sales has increased 3.2% this year and the amount of assets sold in each quarter has increased 10.4% since the start of the year. In the past quarter 847 banks reported selling $53 billion in loans, leases and foreclosed assets not related to home, consumer or business loans.

As of Sept. 30, the nation’s banks reported having $36.1 billion in distressed CRE assets, which includes past due loans on and foreclosed construction and land development, nonresidential income-producing and multifamily properties. That amount is approximately 2.2% of all outstanding loans on construction and land development, nonresidential income-producing and multifamily properties. The third quarter amount is up from $29.4 billion at the end of 2009.

The number of institutions on the FDIC’s “Problem List” rose from 829 to 860. However, the total assets of “problem” institutions declined from $403 billion to $379 billion. The number of “problem” institutions is the highest since March 31, 1993, when there were 928. Forty-one insured institutions failed during the third quarter, bringing the total number of failures for the first three quarters of the year to 127.

MBA: Commercial and Multifamily Mortgage Delinquency Rates Mixed in Third Quarter

Separately, the Mortgage Bankers Association (MBA) reported this week that the delinquency rates for different commercial/multifamily mortgage investor groups were mixed in the third quarter. The bad news was that the delinquency rate for loans held in CMBS is the highest since the series began in 1997. The good news is that delinquency rates for other groups remain below levels seen in the early 1990s, some by large margins.

“Greater strength in the economy is bringing some stability to commercial mortgage delinquency rates,” said Jamie Woodwell, MBA’s vice president of commercial real estate research. “Commercial mortgage performance among most investor groups, including life insurance companies, Fannie Mae and Freddie Mac and commercial banks and thrifts, continues to be better than during the last major downturn of the early-1990s. Although weak, the economic recovery is just beginning to be seen in commercial real estate fundamentals and the mortgages they support.”

Based on the unpaid principal balance of loans (UPB), delinquency rates for each group at the end of the third quarter were as follows.

  • Banks and thrifts: 4.41% (90 or more days delinquent or in non-accrual);
  • CMBS: 8.58% (30+ days delinquent or in REO);
  • Life company portfolios: 0.22% (60+days delinquentt);
  • Fannie Mae: 0.65% (60 or more days delinquent); and
  • Freddie Mac: 0.35% (60 or more days delinquent).
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