Office Loan Woes: A Pain Point for Bank Investors
Despite the relatively steady credit quality across the banking industry, office loan problems persist, making it an area of concern for bank investors. For instance, Washington Trust Bancorp, a Westerly, Rhode Island-based company, recently experienced a significant increase in nonperforming assets. The total nonperforming assets rose from $12.9 million at the end of last year to a staggering $40.4 million on March 31. This hike in nonperforming assets primarily resulted from the company moving two office loans to nonaccrual status.
Investors’ reaction to this development was swift and severe. The shares of Washington Trust, a $6.5 billion-asset company, plummeted by 17% on a single day, finishing at $30.00. The company, however, did not disclose the size of the two loans. One of the nonaccrual borrowers is grappling with the loss of a tenant, while the other loan matured without being paid off, according to Washington Trust Chief Risk Officer William Wray.
The Office Commercial Real Estate Sector: A Pressure Point
Despite the fact that Washington Trust’s overall nonperforming assets ratio stood at a manageable 0.81% of total loans, the sell-off of the company’s shares indicates investors’ ongoing anxiety about the health of the office commercial real estate sector. The sector has been under considerable strain since the outbreak of the COVID-19 pandemic, which led to a surge in remote and hybrid work models. This shift in working patterns significantly reduced the demand for office spaces, thereby putting a strain on the office real estate sector.
Over the past few quarters, banks have been asked fewer questions about the office sector. This follows a period of intense scrutiny by Wall Street, which led banks to disclose a great deal of information about their office loan portfolios. Nevertheless, the addition of nonperforming loans at Washington Trust pushed its total nonperforming assets to $40.4 million on March 31, up from $12.9 million at year-end 2025.
Washington Trust: A Show-me Stock
Washington Trust has a history of resolving credit-quality issues without incurring losses. Wray does not rule out a similar outcome in this situation, stating: “We think they’re both solid properties with solid sponsors, and we expect that we will continue to drive resolution.” However, despite this optimism, Damon DelMonte, an analyst from Keefe, Bruyette & Woods, believes that investors’ skepticism may persist until the bank addresses its credit-quality issues. He notes, “Washington Trust has become a show-me stock. Valuation figures could be range-bound until greater clarity emerges on the bank’s ability to deliver positive operating results.”
Bank OZK Faces Similar Challenges
Washington Trust is not the only bank feeling the pinch in connection with office loans. Bank OZK, a $41.7 billion-asset bank based in Little Rock, Arkansas, also reported a slight decrease in shares after it moved a pair of commercial real estate loans, including one office credit, to nonaccrual status. The bank’s nonperforming loan ratio closed the quarter at 0.90% of total loans, up from 0.20% a year earlier, but down from 1.06% at the end of 2025.
The experiences of Washington Trust and Bank OZK serve as a stark reminder of the turbulence in the office commercial real estate sector and its impact on the banking industry. While the office loan woes persist, the broader resilience of the banking sector remains a positive sign. As banks continue to navigate through these challenges, it will be crucial for them to address these issues effectively to maintain investors’ trust.
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