Why It’s Hard to Get a Loan

Defaults on commercial real estate loans loom, threatening the stability of U.S. banks.

Wonder why your bank doesn’t have room for you on its balance sheet? Check its exposure to commercial real estate lending. Distressed CRE loans continue to choke banks’ balance sheets, and their poor performance could force some U.S. banks to raise more capital, or even cause them to fail.

Midsize banks in particular are highly exposed. In an analysis of data provided by Capital IQ, CFO found 44 U.S. banks with assets greater than $1 billion (the recognized ceiling for a small bank) that had more than 50% of their total loans secured by CRE. The largest was First Citizens Bancshares of Raleigh, North Carolina ($21.1 billion in assets), which had 57.5% of its total loan book in CRE as of the first quarter. In total, the 44 banks held $86.9 billion in CRE loans.

Dime Community Bancshares of Brooklyn, New York, had close to 100% of its loan portfolio in CRE at the end of the first quarter. (Dime’s loan portfolio is collateralized primarily by multifamily apartment buildings in New York City, widely considered the least-risky type of CRE, says the bank.) Rounding out the top five were Wilshire Bancorp, Nara Bancorp, Intervest Bancshares Corp., and Dearborn Bancorp Inc., according to Capital IQ data. Fifteen of the 44 banks had more than 60% of total loans in CRE.

The average bank in the population had 5.3% of its loans classified as nonperforming, meaning a loan is currently not accruing interest. At 5 of the 44 banks, nonperforming loans represented more than 10% of the total loan books. Naples, Florida-based bank-holding company Bank of Florida had the highest nonperforming loan ratio, at 14.9%. The FDIC closed three affiliated banks owned by Bank of Florida in late May, and the holding company was delisted from Nasdaq on June 3.


CRE also looms as a big threat for the biggest banks. In a report released Friday, the International Monetary Fund said it conducted “stress tests” of the 53 largest banks in the United States. The IMF found that in a baseline economic scenario of moderate GDP growth this year and next, 12 of the 53 banks would need to raise as much as $14.2 billion in the next four years to maintain minimum regulatory capital ratios.

In particular, the IMF highlighted problems with CRE loans: nonfarm nonresidential loans for properties such as shopping centers, motels, office buildings, and automobile dealerships. They are a big threat to banks’ capital situations, the fund says.

Delinquency rates on CRE loans fell slightly to 8.6% in the first quarter, according to the Federal Reserve, but that was off a 17-year high of 8.71% in 2009′s fourth quarter.

“Given the employment situation, which tends to be a good indicator for CRE, commercial property prices are not expected to recover soon,” says the report. (CRE prices are down 41% from where they were in 2007.) “Around $1.4 trillion of CRE loans are expected to mature by 2014, and almost half of these are underwater or seriously delinquent. [In addition], the market for commercial mortgage-backed securities remains depressed.”


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