Investors are right to be worried about declining values for office buildings. We appear to be at the start of a long transition for many cities, after the COVID-19 pandemic made clear that for many types of work, people don’t need to suffer through long daily commutes to be effective in their jobs.
Below is a list of 17 U.S. banks that analysts at Keefe, Bruyette & Woods estimate have exposure to loans secured by office buildings of 10% or more of total loans.
Owners of office buildings face declines in rental income as companies right-size their space. Banks with commercial real-estate loans secured by office buildings face difficult times as loans mature. KBW analyst Jade Rahmani estimates that close to $ 1 trillion in commercial real estate (CRE) loans will mature in 2023 or 2024, with loans by banks making up about half of that total. He cited data from the Mortgage Banker’s Association and KBW’s own research in a May 9 update to his March 7 report, entitled “No Soft Landing for CRE, Especially Office.”
In the update, Rhamani wrote that trends in first-quarter earnings reports were “in line” with the firm’s March 7 call for a “10-20% correction” for CRE values, with declines of 30% or more for office properties.
On March 7, he said KBW expected a 30% to 40% decline in CRE lending volume during a five-quarter period through the end of 2023. In the update, he cited comments from four CRE loan brokers, who “reported capital markets declines of 47% (ranging from 39% to 53%).”
To illustrate how banks have been reacting, Rhamani cited PNC Financial Services Group Inc. PNC, -0.99%, which said in its first-quarter 10-Q report that nonperforming loans secured by office properties made up 3.5% of loans in this category as of March 31 and that “criticized loans” made up 20%. The bank had set aside loan loss reserves to cover 7.1% of its office loan portfolio as of March 31 according to Rahmani. To keep things in perspective, PNC’s loans secured by office properties totaled $ 8.9 billion, or 2.7% of the bank’s total loans.
Wells Fargo & Co. WFC, -2.19% said in the supplement to its first-quarter earnings press release that non-accruing loans on office buildings made up 4% of this loan category as of March 31 — the same rate as the previous quarter and a year earlier. Rahamani wrote in his May 9 report that Well’s Fargo’s “reserves on office loan portfolio total 5.7%, which KBW increased to 9% in its 2023 estimates.”
Keeping in mind that commercial real-estate loans may not have been originated with very high loan-to-value ratios, and that there is considerable value left in the collateral in the event of foreclosure, one cannot assume that ultimate losses will come close to the collateral value declines or to the percentage of problem loans.
Rahamani worked through a hypothetical example of a commercial mortgage loan originated at an initial interest rate of 5.5%. In the example, the office property was valued at $ 100,000 and the loan was for $ 65,000. In a circumstance in which the property value were to drop to $ 59,400, the borrower would be in a negative equity position. Then, in the event of foreclosure, and if costs of funds were factored in, the lender would lose $ 8,600, or 8.6% of the original loan amount.
Banks with high exposure to office real estate
KBW’s maturity estimates include all CRE loans, not only those secured by offices. Banks don’t break out their exposure to office real estate in their financial reports in a uniform manner. To dig in further for estimates of this exposure, Rahmani and colleagues at KBW compiled data from all available sources, including earnings releases, presentations and conference calls, and banks’ responses to KBW’s questions.
These 17 banks had exposure to office real estate for 10% or more of total loans as of Dec. 31. Rahmani said that KBW was working on a March 31 update.
Here are the KBW estimates and total returns for the banks’ stocks through May 9.
| Bank | Ticker | City | Total assets ($ mil) – March 31 | Office exposure/ total loans – Dec. 31 | Office exposure/ Tangible common equity – Dec. 31 | 2023 total return through May 9 |
| Community Financial Corp. | TCFC, -2.35% | Waldorf, Md. | $ 2,429 | 21% | 219% | -34% |
| Bank of Marin Bancorp | BMRC, +2.63% | Novato, Calif. | $ 4,135 | 22% | 135% | -55% |
| Bank OZK | OZK, +1.05% | Little Rock, Arkansas | $ 28,971 | 12% | 134% | -18% |
| Central Valley Community Bancorp | CVCY, -2.52% | Fresno, Calif. | $ 2,464 | 13% | 131% | -37% |
| Bankwell Financial Group Inc. | BWFG, +1.74% | New Canaan, Conn. | $ 3,252 | 11% | 130% | -25% |
| Independent Bank Group Inc. | IBTX, -0.64% | McKinney, Texas | $ 18,798 | 12% | 128% | -48% |
| Southern States Bancshares Inc. | SSBK, -0.69% | Anniston, Ala. | $ 2,134 | 11% | 108% | -29% |
| Orrstown Financial Services Inc. | ORRF, +2.23% | Shippensburg, Pa. | $ 3,012 | 10% | 106% | -27% |
| Heritage Financial Corp. | HFWA, -1.10% | Olympia, Wash. | $ 7,237 | 14% | 106% | -48% |
| CVB Financial Corp. | CVBF, +2.39% | Ontario, Calif. | $ 16,274 | 13% | 101% | -54% |
| Columbia Banking System Inc. | COLB, -0.05% | Tacoma, Washington | $ 53,994 | 11% | 95% | -35% |
| American National Bankshares Inc. | AMNB, +0.50% | Danville, Va. | $ 3,076 | 10% | 90% | -28% |
| Heritage Commerce Corp | HTBK, +3.05% | San Jose, Calif. | $ 5,537 | 12% | 88% | -44% |
| Independent Bank Corp. | INDB, +0.71% | Rockland, Mass. | $ 19,442 | 11% | 80% | -43% |
| Cullen/Frost Bankers Inc. | CFR, +1.77% | San Antonio | $ 51,246 | 11% | 80% | -28% |
| Hilltop Holdings Inc. | HTH, +0.46% | Dallas | $ 17,029 | 11% | 49% | 3% |
| Eagle Bancorp Inc. | EGBN, -3.03% | Bethesda, Md. | $ 11,089 | 12% | 29% | -56% |
| Sources: Keefe, Bruyette & Woods for office loan exposure; FactSet. | ||||||
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The first bank on the list, Community Financial Corp. of Waldorf, Md., agreed in December to be merged into Shore Bancshares, Inc. SHBI, -0.28% of Easton, Md.
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