M&T Bank Resolves $1B in Shaky CRE Loans, No Office Debt

M&T Bank has made headway on its stack of at-risk commercial real estate loans.

The regional bank reported workouts or payoffs of $987 million in debt in the second quarter. Mortgages backed by multifamily, retail, hotel and health-services properties drove the decline.

Office, though, proved a harder nut to crack. The dollar volume of criticized loans, meaning those at risk of default, that are backed by office properties increased 5 percent from the previous quarter, offsetting the progress made in other asset classes.

For all the Buffalo-based bank’s workouts and payoffs, M&T reported less than a 1 percentage point quarterly decline in criticized CRE loans as a share of the total CRE debt pie.

Over one quarter of the bank’s commercial real estate loan book remains criticized.

Chief financial officer Daryl Bible acknowledged M&T had more work to do.

“We do have elevated criticized loan balances,” Bible said. “Our teams are working their butts off to basically bring those balances down.”

The bank is also laboring to shrink its CRE exposure as a whole.

In March, S&P Global Ratings cut its outlook on M&T and four other lenders to negative from stable, given their heightened exposure to CRE, particularly office properties, as values tumble and challenging refinancings loom.

The action noted the banks’ share of CRE loans “well exceeded” Tier 1 capital levels or reserve funds, meaning the lenders had little cash on hand compared to exposure to questionable collateral.

Bible said the bank is continuing to grow its overall loan book while reducing its CRE.

In the second quarter, it reported $134 billion in loans, a 1 percent increase from the same period last year. It shrunk its CRE portfolio by 10 percent in the same period.

The CFO said with that reduction in concentration, CRE loans now comprise 151 percent of its Tier 1 capital and allowance for loan and lease losses — money set aside for nonrecoverable debt.

Regulators like to see CRE concentrations below 300 percent, signaling M&T is in a good spot. But that’s only if its loans are valued accurately.

Industry observers are exploring what CRE concentrations look like when recognizing mark-to-market losses from the rise in interest rates. One recent paper by an American Enterprise Institute senior fellow estimated the number of at-risk banks swells by 65 percent when accounting for those unrecognized losses.

But unless owners default, banks don’t need to air that dirty laundry.

An analyst during the Thursday morning earnings call asked to what degree M&T is “kicking the can down the road, and we, a year from now, see these pressures again?”

Bible acknowledged that modifications were “going up” but insisted the workouts were benefitting the bank.

“We’re giving them extensions on time and they’re giving us more capital, liquidity, recourse for that time,” he said. “So, we’re actually in a better spot.”

M&T reported profits, measured in diluted earnings per share, of $3.73, or 26 percent below the number from the same period last year. Revenue clocked in at $2.3 billion, down 11 percent from a year ago.