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Commercial Real Estate Loans Contribute to Bank Failures

The Federal Deposit Insurance Corp. (FDIC) has confirmed that commercial real estate loans played a significant role in the failure of five banks closed by the Comptroller of the Currency and state agencies over the Memorial Day holiday.

Three Florida banks, along with a California and a Nevada lender were shut down. All five institutions reopened on Tuesday after other banks assumed their deposits.

To date this year, 78 banks have failed, and the number of failures for 2010 is expected to exceed last year’s total of 140, says FDIC spokesman Greg Hernandez, in Washington, D.C.

“So far, in the failures this year of community banks, commercial real estate loans have been playing a large role,” says Hernandez. “It looks like all three Florida banks did experience significant losses in their acquisition, development and construction loan portfolios, as well as their commercial real estate portfolios,” he notes.

That coupled with weak real estate market conditions, contributed to the lenders’ collapse. The other two failed banks also had troubled commercial real estate loans, he says.

The price of bank failures is steep. The 140 bank failures that occurred in 2009 cost the nation’s Deposit Insurance Fund $37.4 billion, says Hernandez. Although the FDIC doesn’t make official projections, the cost is expected to be even larger this year. But the FDIC anticipates that bank failures will peak in 2010, and begin to diminish next year.

‘Problem’ list grows

The number of institutions on FDIC’s confidential list of “problem” institutions with troubled loans rose to 775 in the first quarter of 2010, up from 702 in the fourth quarter of 2009. “It’s a similar thing to what we saw during the [savings and loan] crisis,” says Hernandez. However, not all the institutions on the problem list are expected to fail. Only about 14% have failed in the past.

According to commercial real estate data and analytics firm Trepp, non-performing commercial real estate loans constituted 80% of the total non-performing loans for the five newest failed banks. That percentage was split almost evenly between construction and land loans (40.9%) and commercial mortgages (39.1%).

The Bank of Florida, Southeast, in Ft. Lauderdale, the Bank of Florida, Southwest, in Naples, and the Bank of Florida, Tampa Bay, were all closed by the Florida Office of Financial Regulation. The FDIC was appointed receiver for the three banks, whose deposits were acquired by EverBank of Jacksonville, Fla. The three were owned by the same holding company, Bank of Florida Corp., which was not part of the past week’s transaction, according to the FDIC.

The Florida banks had assets of nearly $1.5 billion, and deposits totaling $1.3 billion. “Commercial real estate loans accounted for a very large proportion of losses, which diminished the banks’ capital,” says Hernandez. The three lenders resumed business operations on Tuesday under the EverBank name, the FDIC reports.

The failed institutions also include Sun West Bank in Las Vegas, whose seven branches reopened Tuesday after City National Bank of Los Angeles agreed to assume Sun West’s deposits. Sun West was put on FDIC’s list of problem institutions back in October 2009, says Hernandez.

The remaining lender was the Granite Community Bank in Granite Bay, Calif. It had been placed on FDIC’s problem list in June 2009.

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