First Republic Bank’s stock fell almost by half after the regional bank said it lost $72 billion in deposits this year amid investor concerns about recent bank failures, while other regional banks expressed caution over their real estate lending.
Shares of First Republic fell 49% to close at $8.10 Tuesday after reporting earnings late Monday.
“First Republic needs to pull off the mother of all pivots to survive,” Tim Coffey, an analyst at Janney Montgomery Scott, said in a Tuesday research report.
BankUnited, a regional bank that largely operates in Florida and New York, said Tuesday that it’s reducing exposure to commercial real estate by tapping the brakes on new loan originations, while Old National Bank said it’s not looking to expand its office lending and PacWest said its loan portfolio shrank after it had moved away from some lending last year. The announcements in reports on first quarter earnings reflect concern around regional banks after the collapse of Silicon Valley Bank and Signature Bank this year.
First Republic said during its first-quarter earnings report on Monday that it is “condensing corporate office space” to cut costs. The bank did not provide additional details on which offices it will vacate or how much money the move will save. A company spokesperson declined to comment.
First Republic occupies about 158,000 square feet at 111 Pine St. in San Francisco, the location of its headquarters, according to CoStar data.
First Republic will not close any of its 93 retail branches, the spokesperson said. Its branches are located primarily in California and New York.
BankUnited, headquartered in Miami, said that it has not seen a spike in delinquencies in its large portfolio of office loans in New York.
But with the New York office market’s vacancy rate at 13%, according to CoStar data, there is concern that many office buildings are losing value. Thomas Cornish, chief operating officer, said he expects many of BankUnited’s landlords will be willing to refinance to counteract a drop in value.
“These are predominantly generational assets that they have owned over a long period of time,” Cornish said during a conference call. “I think they will stand behind the properties and inject equity if that’s what’s needed.”
About 9% of BankUnited’s $1.8 billion office loan portfolio is tied to buildings in Manhattan. About 23% of its office loans are for properties in the five boroughs of New York City, Long Island and New Jersey.
Some banks across the country are likely to face the same scenario, Rebecca Rockey, deputy chief economist at Cushman & Wakefield, wrote in an April 19 report.
Owners of offices and older retail buildings will be “faced with a confluence of factors impacting their asset values and property cash flows,” Rockey said.
“It will be painful for some borrowers and lenders and it will create dislocations in the marketplace whereby certain equity or debt sources may need to step in,” she said.
Due to those concerns, BankUnited is likely to take a pass on future opportunities to make new commercial real estate loans, at least in the short term, CEO Rajinder Singh said during the call.
“We’re not yet jumping with excitement” on the opportunity to grow commercial real estate lending, Singh said. “We worked very hard to shrink our CRE portfolio by $2 billion since the pandemic and we’ve de-risked that portfolio very nicely.”
Old National Bank, an Evansville, Indiana-based regional bank with a $12.9 commercial real estate loan book, said Tuesday that it has low-risk exposure to the office sector.
Most of Old National’s office loans are for medical offices or suburban properties, Chief Financial Officer Brendon Falconer said during a Tuesday conference call. Both segments have lower risk profiles than other types of office loans, he said.
In addition, less than 1% of Old National’s office loans are backed by office towers in central business districts, an area where high vacancy rates have persisted. Old National has only $50 million of office loans in downtown Chicago and Minneapolis, Falconer said.
Mark Sander, chief operating officer at Old National, said the bank is originating commercial real estate loans in the multifamily and industrial categories. But it’s staying away from office loans, partly because landlords are not able to raise rents.
Office loans “certainly, volumes are down,” Sander said during the call.
PacWest, parent company of Pacific Western Bank in Beverly Hills, California, had reported a rapid 20% drop in deposits as Silicon Valley Bank was experiencing a massive 36-hour bank run and then collapsed March 10. Signature Bank failed two days later. Deposits at Pacific Western fell to $27.1 billion by March 20 but rebounded by $1.1 billion a week later, the bank said Tuesday.
At the end of the first quarter, Pacific Western deposits were down about 17% from year-end 2022 as the bank holding company bolstered the number through the acquisition of $2.2 billion more deposits in the first quarter over the previous quarter. Deposit balances further increased another $700 million through Monday of this week, the bank said.
On the lending side, PacWest reported a smaller commercial real estate loan portfolio in the first quarter compared to year-end 2022. Total commercial, multifamily and commercial construction and developments at the end of the first quarter stood at $6.4 billion, down from $10.4 billion three months earlier.
PacWest closed down its multifamily lending groups in the fourth quarter of last year to help improve its profitability and risk profile, the company said in January.
The struggle to maintain liquidity was costly to PacWest, however. The company reported a net loss of $1.2 billion for the quarter. Financial results were impacted by a noncash goodwill impairment charge of $1.38 billion and branch consolidation costs of $8.5 million.
PacWest’s stock was trading at just below $27 per share March 8 and fell under $10 by March 13. It closed out trading Tuesday at $10.31 per share.
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