In line with projections, M&T Bank reported a drop in commercial real estate loans in the third quarter as rising rates continued to curb demand from New York’s multifamily borrowers, a major client base of the lender.
The Buffalo-based bank shed $946 million in commercial real estate loans, a 2 percent decline from the previous quarter, reducing the average size of the portfolio in the quarter to $46.3 billion. It was the second straight 2 percent quarterly drop.
“We can only provide loans that are demanded by our customers,” said CEO Darren King in explaining the weaker lending stream.
Three months ago, the executive had predicted that continued rate hikes by the Federal Reserve would result in fewer loans made to commercial real estate clients.
On an earnings call Wednesday, King said a dip in construction loans and permanent mortgages had contributed equally to the reduction in commercial real estate lending.
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Construction financing waned as more projects wrapped up than began. Development of multifamily buildings is expected to peter out because the 421a tax abatement — a key incentive for rental development — expired June 15. Firms are now considering alternative projects, such as condominiums, or focusing on their existing pipeline.
King said permanent — meaning long-term — commercial mortgages declined as the bank converted permanent loans to off-balance-sheet financing.
Overall, though, the bank’s average loans and leases remained steady from the second quarter to the third.
Deposits, meanwhile, fell by $7.4 billion or 4 percent from the second quarter. The drop stemmed from the macroeconomic environment and intentional action by the bank to sink excess cash into investment securities, King said.
Amid higher rates, that combination of flatlining loans (on which the bank collects interest) and falling deposits (on which it pays interest) boosted the firm’s net interest margin, a measure of profitability.
M&T Bank’s margin jumped 67 basis points to 3.68 percent in the third quarter from 3 percent in the second. Typically, higher margins indicate greater profitability.
The bank’s earnings reflected that improvement. Diluted earnings per share hit $3.53 in the third quarter, up from $1.08 in the second. The third quarter figure did represent a 4.3 percent decline from the $3.69 reported in the same period last year, when cheap money was benefiting banks’ bottom lines.
Net income for M&T rose nearly 31 percent annually and tripled quarter-over-quarter to $647 million this period.
M&T’s CEO said net interest income should continue to expand until the Federal Reserve stops raising rates. Some have guessed that might not happen until February.
“So when we look into next year, we do expect to see some expansion into the fourth quarter and into early 2023,” King said.