NEW YORK CITY-Commercial real estate exposure was the main driver behind five bank failures in November, according to a new report from Trepp Inc. The shutdowns reflect a decrease from 11 failures in October and 13 in July, but the continuous spike in shuttered banks from quarter-to-quarter is beginning to show a pattern.
“We are seeing a seasonality or cyclicality to the pace of failures,” Trepp’s managing director Matthew Anderson tells GlobeSt.com. “There is a sharp uptick in the number of failures in the month immediately following quarter end. We saw spikes in April, July and October, and then the rate drops down a bit in the next two months and then picks back up again.”
While November showed a slowdown in the pace of closures, problematic CRE loans are still the source behind the problem. According to the report, CRE loans comprised 80.8% of the total $160 million in nonperforming loans at the failed banks. Out of that, the biggest problem for distressed banks is construction lending. Construction and land loans made up 64.4% of the total failures, while commercial mortgages comprised 16.5% of the total nonperforming pool.
Many of these loans, Anderson says, are not new. The entire cycle goes back to late 2007s, and the delinquency rate on commercial construction projects is still in the double-digits. “The recession and the slow pace of recovery has hit all these projects, both residential and commercial, that got going in better times,” he says. “They were underwritten to higher values in stronger market conditions.”
In addition, the residential real estate loan category was a secondary source of distress, with 10.1% of the total nonperforming pool says Trepp. Overall, the total bank failure count through November is now 90 failures year-to-date, putting the pace just under 100 by the end of 2011.
Anderson observes that banks are still experiencing elevated delinquency rates for commercial mortgages, which are not quite as high as the CMBS market, but much higher than the historical average and pre-recession levels. “Those are causing problems for the banks, and cumulative impact is of course that the failed banks capital gets wiped out because of the losses that they have to incur on these problem loans,” he says. Trepp predicts more closures will extend into 2012, and 227 banks are on the firm’s “high risk” watch-list.
According to the Federal Deposit Insurance Corp., the failed banks this month are: the Central Progressive Bank, Lacombe, LA; the Polk County Bank, Johnston, IA; Community Bank of Rockmart, Rockmart, GA; SunFirst Bank, Saint George, UT; and Mid City Bank, Inc., Omaha, NE.
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