Two of the biggest U.S. banks wrote off more bad commercial real estate loans in the third quarter as they worked to clear troubled debt from their books.

Wells Fargo’s CRE write-offs rose to $107M from $16M in the second quarter. Over the same period, its problem CRE loans — those it doubts will be fully repaid — fell 20% to $2.7B, led by declines in office and hotel loans. At Bank of America, CRE write-offs rose to $105M from $2M, while troubled CRE loans fell 17% to $888M.

The two trends are linked. Writing off a loan removes it from a bank’s problem loan totals, so rising write-offs often accompany shrinking problem portfolios as lenders resolve bad debt.

Distress across the industry remains elevated. At banks with more than $250B in assets, 3.08% of CRE loans were past due or in nonaccrual status in the second quarter, according to the latest data from the Federal Deposit Insurance Corp. That share has fallen for seven straight quarters but remains more than five times the pre-pandemic average of 0.59%.

Write-offs are only one way banks are reducing problem loans. At Bank of America, borrower paydowns removed more nonperforming commercial loans from the books in the third quarter than write-offs did, and the bank also sold some of those loans, according to its supplement. Those figures cover all commercial loans, not CRE alone.

JPMorgan Chase, the country’s largest bank, doesn’t report CRE problem loans separately in its earnings supplement. Its nonaccrual business loans overall edged down to $4.8B.

Wells Fargo Chief Financial Officer Michael Santomassimo said the bank’s credit losses have stemmed from individual borrowers’ situations rather than a broader decline in credit quality.

Wells Fargo and Bank of America also reduced the reserves they hold against future CRE losses, signaling they expect reduced losses ahead. Wells Fargo now holds about $1.61 in reserve for every $100 of CRE loans, down from $1.77 in the second quarter. Bank of America’s reserve fell to $1.14 per $100 from $1.28. Big banks also lowered their CRE loss reserves last quarter.

“One of the bigger areas of improvement over the course of the past year has been commercial real estate office,” Bank of America Chief Financial Officer Alastair Borthwick said on the bank’s earnings call last week. “We’re at the very tail end of that now.”

Borthwick estimated the bank’s criticized office exposure, meaning loans it has placed on a watchlist as potentially troubled, has fallen 50% to 60% over the past year. He attributed the improvement partly to a strong economy and said the bank’s overall criticized commercial exposure is lower than it was before the pandemic.

Some banks are also increasing their CRE lending, though not uniformly.

Bank of America’s CRE loans grew nearly 6% from the second quarter to $75.2B. JPMorgan, whose $148.7B CRE portfolio is larger than Wells Fargo’s or Bank of America’s, grew its CRE loans about 1%.

Wells Fargo continued to shrink its CRE exposure, particularly in office. Its office loans fell 7% from the second quarter to $18.6B, down more than 21% from a year earlier, and its total CRE portfolio declined by about $1B to $132B.

Citigroup grew its average loans 3% from the second quarter but doesn’t report CRE lending separately.

Citigroup CEO Jane Fraser said on the company’s earnings call that the bank wants to support clients through the growth cycle but also be “that port in a storm if things do turn a different direction.”

Interest rates remain the chief risk. JPMorgan Chief Financial Officer Jeremy Barnum said higher rates, along with energy and fuel costs, are straining parts of the economy, including CRE, although he described the bank’s overall credit outlook as relatively stable.

Higher interest rates are adding pressure on CRE borrowers facing refinancing. The Federal Reserve raised its benchmark rate in September to a range of 3.75% to 4%, and the 10-year Treasury yield topped 5.1% Monday.

Borthwick said Bank of America’s commercial losses are already low enough that he doesn’t expect much further improvement.

“We feel good about 2027,” Borthwick said. “We don’t necessarily see any change right now to the underlying credit quality, but it’s a really low number at this point.”