Community banks' multifamily retreat gives private credit an opening

Merchants Bancorp and Mechanics Bancorp are the same size, roughly $21 billion in assets, and both carry large multifamily books. Their second-quarter earnings calls are heading opposite ways: Merchants is buying, Mechanics is on a runoff schedule. Trepp's review of ten community banks with meaningful multifamily concentration turns that pair into a pattern.

The ten-bank group includes nine publicly traded community banks plus United Community, a limited CRE lender, as a comparator. Their calls diverged from one another and, with two exceptions, from recent super-regional commentary where lenders reported stronger pipelines and production. The collective read Trepp draws from the calls: government income-based restrictions are biting, supply-based programs are supporting.

Concentration was the screen Trepp used to build the group, and the review's title says what the results argue: multifamily concentration is only the starting point. Six of the ten banks are shrinking their books. Two are growing. The banks on one side of that split are not obviously sicker on paper than the banks on the other. The difference is what is in the book and what the rent rules do to it.

The two headline losses were self-imposed, tied to choices made at the 2021 peak. Banc of California sold $2.3 billion of securities yielding 2.1% and reinvested at 4.87% — a 277-basis-point pickup that only arrives after the loss is recognized. It also initiated the sale of $827 million of CRE and multifamily construction loans and retired $385 million of subordinated debt ahead of the reset. FirstSun's loss came from closing the First Foundation acquisition; its adjusted pre-tax pre-provision income nearly doubled to $70 million. Neither quarter reads as a common credit break.

The bank with the smallest CRE appetite was the only one to offer a CRE pricing view. United Community missed operating earnings despite its strongest loan growth in some time, and its management said commercial real estate pricing has stopped falling. Small exposure, apparently, can come with a clearer view.

Trepp's tally: six of the ten are shrinking their multifamily books at varying speeds, particularly legacy thrifts with New York exposure. Two are growing. One did not state a target direction. The growers are Merchants and Columbia. Merchants took its multifamily book to $5.86 billion, up roughly 10% in six months, and now carries it at 47% of loans receivable. Mechanics, the same-size peer, is letting its book run off. When two banks the same size treat the same asset class as a growth line and a runoff line, concentration ratios alone no longer set the risk.

The difference between the two camps is less about underwriting discipline and more about policy exposure. The banks shedding loans are the ones with New York books, where income-based restrictions squeeze cash flow. The banks adding are those positioned around supply-based programs. That distinction is the reason concentration ratios alone don't predict direction.

Banc of California's reset shows the math of leaving old paper behind: the 277-basis-point pickup is real, but it is only available to a bank with capital to take the loss. The six shrinking lenders may be running the same trade at slower speed — running off instead of selling — and that is the move with market consequences. PWD's earlier coverage of 2025 originations found multifamily volume up 32%, Fannie and Freddie at 40% of the market, and a $381.8 billion total. If community banks are ceding shelf space, the next lender on each credit is likely a GSE, a super-regional, or a private-credit shop. The refinancing demand gathering in income-restricted portfolios will test which of those actually steps in.