Bad office debt grows at M&T

M&T Bank on Monday reported a growing crop of bad debt — loans backed by troubled office buildings, among other assets. But the shaky debt still represents a small fraction of the bank’s loan portfolio.

In its first quarter earnings, the Buffalo-based bank, an important regional lender to commercial real estate owners, posted $70 million in net charge-offs — a measure of debt unlikely to be paid back — for the first three months of 2023.

That’s up from just $7 million in the same quarter last year, and 75 percent more than last quarter.

That bad debt comprised only 0.2 percent of the bank’s $132 billion in outstanding loans, up from 0.03 percent in the same period a year ago.

An undisclosed portion of that distressed debt covered office buildings.

“We did take some partial charge-offs on a couple of office properties, as we did get new appraisals on things that were troubled,” chief financial officer Darren King said in a Monday earnings call.

King said about 5 percent of M&T’s $5 billion office portfolio remains in danger of default, the same percentage reported last quarter.

“It’s up slightly, but not dramatically,” he said.

However, the executive acknowledged the bank doesn’t have a clear sense of how much distress may crop up, as it has yet to reappraise much of its office portfolio.

Because few investment sales have closed, King said, it has been hard to gauge the impact that higher rates, expiring leases and weak occupancy have had on valuations.

The investment sales market has slowed to a crawl in recent quarters as bid-ask gaps, exacerbated by rising rates, stymie deals.

The dollar volume of office sales plummeted to $470 million in the first quarter, down 55 percent from the fourth quarter and 85 percent from the same period last year, according to Ariel Property Advisors.

“That’s not a lot of activity to get a market price,” King said. “It’s a bit tricky to estimate right now.”

Of the loans the bank did reappraise, it found valuations had dropped 15 percent to 20 percent, likely sending loan-to-value ratios toward an uncomfortable 70 percent to 80 percent.

Over each of the next two quarters, the bank has about $200 million in office loans coming due, maturities that will expose owners to higher rates on top of declining valuations.

“It’s a concern,” King said of M&T’s office portfolio. “We’re watching it.”

On the heels of the Silicon Valley Bank and Signature Bank debacles, analysts are closely watching M&T’s deposit base. Investors responded to the banking turmoil by pulling funds from regional lenders and depositing them in bigger banks.

M&T weathered the storm, as its deposits slipped only 2.4 percent to $159 billion in the first quarter from $163.5 billion in the previous quarter.

King said 40 percent of the outflows happened amid March’s banking fiasco, but said the decline may have been driven by seasonal factors.

“I would just caution [against] drawing cause and effect,” King said, noting that clients typically pull money in the first quarter to pay taxes. Others may have moved funds to accounts paying higher interest in response to rising rates, he said.

Once the dust cleared, the executive said, the bank gained nearly as many accounts as it lost.

“We didn’t lose a ton to the larger organizations,” King said. “We were a recipient of balances as much as we saw an outflow.”

In all, the bank reported year-over-year growth in the first quarter. Net income hit $702 million, nearly twice the $362 million posted in the same period last year. Diluted earnings, a measure of profit, clocked in at $4.01 per share, 53 percent above the $2.62 per share reported in the year-ago quarter.