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Distressed CRE Assets Jump 15% at Nation's Banks

CRE Assets Quality Continue To Be a Thorn in Banks' Side Even As Fewer Report Losses
February 24, 2010
The amount of distressed commercial real estate assets on the books of the nation's banks and thrifts approached $60 billion as of year-end 2009. That is up from $52 billion just three months earlier, a 15% increase.

The $59.9 billion includes loans on multifamily and nonresidential income producing-properties that were 90 or more days past due, or in nonaccrual or foreclosure status.

The year-end numbers are contained in the Federal Insurance Deposit Corporation's latest Quarterly Banking Profile, released this week. And they confirm that commercial real estate troubles are eroding the balance sheets of the nation's banks.

As the CRE distress numbers went up, so did the number of troubled institutions on the FDIC's "Problem List." At the end of December, there were 702 insured institutions on the Problem List, up from 552 on Sept. 30. In addition, the total assets of "problem" institutions increased during the quarter from $345.9 billion to $402.8 billion. Forty-five institutions failed during the fourth quarter, bringing the total number of failures for the year to 140, the highest annual total since 1992.

The FDIC does not release the identity of the banks on its Problem List.

Loans on nonresidential income-producing properties that had been foreclosed on increased from $5.84 billion to $7.05 billion - a 21% increase.

Loans on multifamily properties that had been foreclosed on increased from $1.44 billion to $1.75 billion - a 22% increase.

Loans on nonresidential income-producing properties that were 90 days or more past due or were in nonaccrual status increased from $37.05 billion to $41.74 billion - a 13% increase.

Loans on multifamily properties that were 90 days or more past due or were in nonaccrual status increased from $7.75 billion to $9.39 billion - a 21% increase.

Reserves for loan and lease losses increased by only $7 billion (3.2%) in the fourth quarter, as institutions added $8.1 billion more in loss provisions to their reserves than they took out in net charge-offs.

Total net charge-offs totaled $53 billion, an increase of $14.4 billion (37.2%) over the same period in 2008. The annualized net charge-off rate rose to 2.89%, up from 1.95% a year earlier and 2.72% in the third quarter of 2009. This is the highest quarterly net charge-off rate reported by the industry in the 26 years for which quarterly data is available. Banks charged off 0.77% of their loans on nonresidential income-producing properties, up from 0.62% in the previous quarter. Banks charged off 1.11% of their multifamily loans, up from 0.92% in the previous quarter. This was the sixth increase in as many quarters in both categories.

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The average coverage ratio of reserves to noncurrent loans and leases fell from 60.1% to 58.1%, ending the year at the lowest level since midyear 1991. In contrast, the industry’s ratio of reserves to total loans and leases rose from 2.97% to 3.12% during the quarter, and is now at its highest level since the creation of the FDIC.

Not surprisingly, the total amount of commercial real estate loans on bank books was flat. Banks posted only $2 billion more in CRE loans at $1.092 trillion. The total amount of multifamily loans decreased slightly from $216 million to $211 million.

Despite the troubles in their CRE portfolios, commercial banks and savings institutions reported an aggregate profit of $914 million in the fourth quarter compared to $37.8 billion net loss a year earlier. More than half of all institutions (50.3%) reported year-over-year improvements in their quarterly net income.

Almost one-third of all institutions (32.7%) reported net losses for the quarter, compared to 34.6% a year earlier. For the full year, banks reported net income totaling $12.5 billion - up from $4.5 billion in 2008.

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