20% of M&T’s office loans in danger of default

Bank discloses short-term refinancing risk as rates continue to rise

M&T Bank's Darren King (M&T, Getty)
M&T Bank's Darren King (M&T, Getty)

As rising rates bear down on commercial landlords with loans coming due, M&T Bank reported early signs of distress in the fourth quarter, particularly among its office building loans.

About 20 percent of its $5 billion office lending portfolio is criticized, meaning those mortgages are in danger of default, chief financial officer Darren King said on an earnings call Thursday.

Those office mortgages, which comprise about 10 percent of the bank’s commercial real estate lending, are concentrated in the Northeast. About 15 percent cover office buildings in New York, King said.

“If we talk about our expectations for charge-offs as we go into this year, that’s the place where we’d have the most concern,” the CFO said, referring to loans written off as losses when a bank believes it can no longer collect on the debt.

M&T is known for multifamily more than office lending. The bank said the vast majority of its real estate loans, which totaled $45.7 billion in the fourth quarter, are due in 2024 or later, meaning deeper signs of distress are not imminent.

Still, King said the bank was stress-testing vacancy and leasing rates among its office portfolio to “make sure we’ve got adequate coverage.”

In addition to that short-term refinancing risk, King said a long-term concern is the increasing number of baby boomers reaching retirement age, which could deliver another blow to office occupancy.

Across its total lending portfolio, which includes consumer loans and residential mortgages, the bank reported a 3 percent uptick in serious delinquencies — loans 90 days past due — to $491 million from the third quarter to the fourth.

Though modest, the increase is a swift reversal from previous quarters.

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For more than a year, the bank had managed to drive down delinquencies from the more than $1 billion in the second quarter of 2021 as borrowers struggled through the pandemic.

More delinquencies are likely the result of higher financing costs as loans come due.

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The bank said its commercial real estate lending portfolio decreased by $592 million or 1 percent in the fourth quarter from the third. King blamed fewer construction loans.

“Within the commercial real estate portfolio, the biggest trend that we’ve had going on for probably the last four quarters is just the reduction in the construction portfolio,” King said.

Though many construction projects started in late 2018 into 2019, fewer originated during the pandemic, the executive said.

As construction has wrapped on projects financed before the pandemic, their loans have turned into “permanent mortgage financing, oftentimes, not on our balance sheet,” the executive said.

Meanwhile, the increased cost of building materials and labor has weighed on new project filings and loan originations.

Despite those headwinds, the bank reported diluted earnings per common share of $4.29, a 27 percent jump from the same quarter in 2021 and 21 percent above the third quarter.

That earnings power was ushered in by rising rates. The bank saw net-interest income — the difference between interest paid and interest earned —jump $150 million or 9 percent in the fourth quarter compared with the same period in 2021.