Economic Focus: Real Estate Loans Remain a Critical Part of Eighth District Bank Portfolios

William R. Emmons

A lot has changed at Eighth District banks during the last three years, but some things remain the same.  One thing that endures is the critical importance of real estate loans in bank portfolios.

There were 719 commercial banks headquartered in the District on Dec. 31, 2007, but only 681 three years later.  Annualized return on average total assets averaged 0.98 percent during the fourth quarter of 2007 but only 0.53 percent during the fourth quarter of 2010.  Loans secured by real estate declined from $135 billion to $126 billion, falling from 53 percent of total assets to 49 percent. 

Yet some numbers for banks varied little from the end of 2007 to the end of 2010.  Total assets at District banks remain almost the same, increasing from $252 billion to $256 billion.  Perhaps most surprising, the median Eighth District bank’s concentration of total real estate loans relative to risk-based capital was almost identical at year-end 2010 to what it was three years ago.  (The median bank has a concentration ratio precisely in the middle of the ranking of all banks headquartered in the Eighth District.)

Specifically, the total real estate loan concentration relative to risk-based capital at the median bank was 460 percent on Dec. 31, 2010.  The median bank had a total real estate loan concentration level of 458 percent on Dec. 31, 2007.  Thus, the median, or typical, real estate loan concentration among Eighth District banks is about what it was before the recession.

This apparent constancy of the overall real estate loan exposure obscures some notable shifts within banks’ real estate portfolios.  The median bank’s CRE-2 concentration ratio—that is, commercial real estate loans excluding those that are owner-occupied relative to risk-based capital—fell from 115 percent to 102 percent.  The median bank’s total construction and land development concentration ratio fell from 43 percent to 30 percent.  Ratios at many banks that were more highly concentrated in commercial real estate loans in 2007 also fell notably by the end of 2010.

On the other hand, concentration ratios increased across the board in multihousing loans, residential real estate loans and loans secured by farmland, with the exception of those banks that already were highly concentrated in residential loans in 2007.  For example, the median Eighth District bank’s concentration ratios increased from 4 to 6 percent of risk-based capital for multihousing loans, from 31 to 33 percent for farmland-secured loans and from 172 to 190 percent for residential real estate loans.  Increases in concentration levels in these three categories from year-end 2007 to year-end 2010 generally were even larger for more concentrated banks (with the exception noted above for residential real estate).

In summary, loans secured by real estate remained a critical part of Eighth District banks’ portfolios at the end of 2010.  Commercial real estate exposures have come down at many banks, but these largely have been replaced by increased exposure to residential, farmland and, to a lesser extent, multihousing loans.  Eighth District bank performance will continue to depend on conditions in local real estate markets, which, in turn, depend on the strength of the economic recovery.

Real Estate Loan Concentration Levels at Banks Headquartered in the Eighth District at Year-End 2007 and 2010

  Loans as a Percent of Risk-Based Capital
Total Real Estate Loans Total CRE-2 Loans1 Total CRE-2 Loans2 Total CLD Loans3 Multi-housing Loans Farmland-Secured Real Estate Loans Residential Real Estate Loans
All District Banks 2007 2010 2007 2010 2007 2010 2007 2010 2007 2010 2007 2010 2007 2010
99% had concentrations
at or below:
927% 889% 539% 533% 642% 641% 324% 173% 66% 99% 240% 283% 352% 504%
90% had concentrations
at or below:
713 664 323 270 442 394 178 102 31 35 112 133 330 327
75% had concentrations
at or below:
602 580 230 182 331 287 109 65 14 20 68 79 242 250
50% had concentrations below: 458 460 115 102 202 184 43 30 4 6 31 33 172 190
25% had concentrations
at or below:
312 329 21 51 92 92 11 10 0 0 11 13 114 124

SOURCE: Reports of Condition and Income for Insured Commercial Banks
KEY:  2010 levels that are above 2007 levels are in green; those below 2007 levels are in red.
NOTES:
1 Total commercial real estate loans excluding loans secured against owner-occupied properties
2 Total commercial real estate loans
3 Construction and land development loans

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