Commercial Real Estate Hurting Small Banks

The delinquency rate on commercial mortgage-backed securities hit
a record 9.62% in April, according to a report by Trepp, a firm
that tracks commercial real estate and banking data. Analysts
expect that to rise above 10% by year end. On the bright side,
that forecast marks a slight improvement over prior estimates
that cmaxalled for defaults to top 12%. The bulk of the rising
delinquencies are falling squarely on the shoulders of small and
regional banks, forcing dozens to close. Thirteen banks failed
in April, with nearly all them heavily exposed to commercial real
estate. It's a familiar pattern that U.S. regulators say they've
been observing for several months.

Small to regional banks -- defined as banks holding less than
$100 billion in assets -- have $784 billion in commercial real
estate loans on their books, according to the Independent
Community Bankers Association of America. That's about 71% of the
total market. At the height of the bubble, small-to-midsized
banks underwrote more than $200 billion in risky land and
construction loans, where the collateral on the loan wasn't
office space but vacant land or incomplete construction sites.
Among the 13 banks shut down last month, commercial real estate
loans made up 79% of their non-performing loans, defined as loans
in default or close to default. Non-performing residential real
estate loans made up only 15% of those loan portfolios. For
example, Cortez Community Bank in Florida, which was shuttered by
the FDIC on April 29, had 76% of its loans in commercial real
estate. Another failed bank, Nexity Bank of Alabama, had a loan
portfolio that was 87% commercial real estate loans.

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