Many top office lenders continue to dial back exposure

Many top US bank lenders shrank their office real estate portfolios again in the second quarter.

Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. each lowered their exposure to the property sector on a sequential basis during the quarter, according to company filings. The three reported the largest office exposure in an S&P Global Market Intelligence analysis of US banks that disclosed their quarterly office lending as of July 26. Citizens Financial Group Inc. and Truist Financial Corp., other top office lenders, also backed off in the quarter.

The biggest step back among banks that reported office exposure belonged to New York Community Bancorp Inc., which reduced its office book by 12.6% from the previous quarter to $2.8 billion in office loans. New York Community shed a significant portion of its office portfolio in the prior quarter as the sector showed signs of credit cracks.

While most banks in the analysis lowered office lending balances quarter over quarter, some major lenders did not. TowneBank reported a 2.6% increase to $1.2 billion, or 10.8% of gross loans held for investment. Regions Financial Corp. reported a 4.7% sequential increase in office exposure to $1.6 billion, primarily as a result of three existing credits totaling roughly $70 million being reclassified as office loans. Without the reclassification, there was no change.

Eagle Bancorp Inc. had the highest proportionate exposure on the list, with office accounting for 12.9% of loans held for investment.

Credit quality

Signs of stress in credit lingered and worsened quarter over quarter for some of the top office portfolios, as multiple banks raised reserves against them.

Wells Fargo's $30.0 billion in office loans represents 3.3% of its gross loans held for investment. Of those, 12.3% were classified as nonperforming, up from the first quarter's 10.3%. The company raised office reserves to 8.0% from 7.9% during the quarter.

PNC and Truist also reported increases in the percent of nonperforming office loans on a quarterly basis. PNC's 11.0% was up from 10.5%, and Truist's 6.3% rose from 5.5% in the prior quarter. PNC's percentage of criticized loans rose to 29.3% from 26.4%. Both banks raised their office reserve ratios in the quarter.

Bank of America had the highest percent of criticized office loans in the analysis. Of its $16.3 billion in office loans, accounting for 1.5% of loans held for investment, 31% were criticized. The ratio fell slightly from the prior quarter's 32%.

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First Citizens BancShares Inc. had the highest percent of office nonperformers in the analysis, at 16.0% of its $2.7 billion general office loan portfolio, excluding medical office loans.

Regions Financial's nonperforming office loans came to 15.1% of total office loans, up from the prior quarter's 10.7%.

Of the company's total nonperforming loans, 72% were represented by 20 credits, of which five were office-related, Chairman, President and CEO John Turner Jr. said on an earnings call.

"Office, we're still working through, really credit by credit," he said.

Citizens Financial's office reserves rose in the quarter to 11.1% from 10.6% in the first quarter, as part of a conservative strategy toward uncertainty in the space, Chairman and CEO Bruce Van Saun said on an earnings call.

"We're prepared for a slog here," he said.