A host of the US banks with the largest exposure to office real estate shrunk their portfolios in the property sector in the third quarter.
Of the 26 select banks that reported outstanding office exposure of more than $1 billion as of Sept. 30, 22 reduced those portfolios, with a group median decrease of 1.8% quarter over quarter. All of the top 10 banks by reported office exposure tightened office balances sequentially, including those with the three largest reported balances: Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc.
The recently renamed Flagstar Financial Inc., previously called New York Community Bancorp, shaved 8.0% off of its office portfolio quarter over quarter, the largest decline in the analysis again.
Some banks raised office exposure in the quarter, including Webster Financial Corp., up 2.1% to $1.8 billion; Wintrust Financial Corp., up 5.7% to $1.7 billion; and Ameris Bancorp, up 0.5% to $1.4 billion. Ameris' office portfolio represented 6.8% of gross loans held for investment, and 19% of its office term loans greater than $1 million were in the medical office subsector.
CVB Financial Corp. reported the highest proportion of gross loans held for investment at 12.3%, while the median proportion for the analysis was 4.0%.
Credit quality
Nonperforming office loans trended down at several major office lenders but rose sharply for others in the third quarter
Wells Fargo reported $29.0 billion in office loans, 3.2% of its gross loans held for investment. Its office portfolio was 12.2% nonperforming, down slightly from the second quarter's 12.3%. The company raised reserves against the portfolio to 8.3% from 8.0%.
PNC's office loans of $7.2 billion, or 2.2% of loans held for investment, rose to 12.5% nonperforming from 11.0% the prior quarter. In tandem, reserves against them rose a percentage point to 11.3% from 10.3%.
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Citizens Financial Group Inc. had the highest reserve ratio in the analysis at 12.1% of its general office portfolio.
Nonperforming loans (NPLs) at Regions Financial Corp. accounted for 14.5% of total office loans, the largest proportion of the 13 banks with available data. However, that ratio dropped from 15.1% in the prior quarter, and office reserves rose to 6.8% from 6.4%. The company's office loans of $1.6 billion account for only 1.6% of gross loans held for investment.
First Citizens BancShares Inc. recorded the second-highest nonperforming ratio, with NPLs accounting for 13.6% of its general office segment, a decrease of 2.4 percentage points from the prior quarter.
Independent Bank Corp.'s NPLs as a proportion of total office loans rose 5.2 percentage points quarter over quarter to 7.1%.
Wintrust, which grew office loans in the quarter, reported an increase in accruing loans that are 30 to 89 days past due to 1.66% of the office portfolio from 0.07% at June 30. But executives said they are unconcerned by the change.
The increase shows "how the sausage is made," Vice Chairman and Chief Lending Officer Richard Murphy said in an earnings call. "Periodically, that will happen as we work with customers to try to make sure we get a good outcome."
The bank's office NPLs fell to 1.57% from 2.05%.
Maturities
At Bank of America, 22% of its $15.8 billion office portfolio is set to mature in the fourth quarter. A further 25% is due to mature in 2025 and 27% in 2026. First Citizens has 21% of its $2.5 billion general office portfolio scheduled to mature in the fourth quarter. Western Alliance Bancorp., in contrast, expects only 7% of its office loans to mature in the fourth quarter.
Only 5% of Independent Bank Corp.'s office portfolio, excluding loans classified as past due, is set to mature in the fourth quarter. The majority of the bank's office loans have a maturity date beyond 2026.
