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The Commercial Loan Nightmare Facing U.S. Banks

Posted by: Mara Der Hovanesian on November 05

Banks are in for another ugly year in 2010. But this time the problem will be the big batch of deteriorating commercial real estate loans on their books. That’s because the big banks were operating with the same loose standards—and aggressive behavoir—as the investment banks in order to compete in the real estate market during the boom years. (Read our cover story about why this real estate bust is different.) Commercial real estate loans that banks underwrote and held on their books skyrocketed to approximately $190 billion in 2007, up from $11 billion in a single year, a decade earlier. In all, banks hold some $1.8 trillion of commercial real estate debt on their books.

Trouble is, nobody knows just what the values of the loans on bank books’ are since they are not required to mark them to market prices. Since the stress tests conducted by the Feds never looked far enough into the future, the ability to “fully grapple with the prospect of massive future commercial real estate (CRE) loan defaults is uncertain,” admitted Jon D. Greenlee, associate director at the Division of Banking Supervision and Regulation in congressional testimony on July 9 and again on Nov. 2.

Of particular concern, says Greenlee: Almost $500 billion of commercial real estate loans that will mature during each of the next few years. “In addition to losses caused by declining property cash flows and deteriorating conditions for construction loans, losses will also be boosted by the depreciating collateral value underlying those maturing loans. The losses will place continued pressure on banks' earnings, especially those of smaller regional and community banks that have high concentrations of CRE loans,” says Greenlee.

The good news: The Fed is now undertaking a review of commercial real estate loans held by hundreds of small and regional banks. In July, the Fed allowed investors participating in its Term Asset-Backed Securities Loan Facility (TALF) to purchase existing securities backed by loans the government will cover for apartment complexes, office buildings, retail shopping centers and other commercial property.

In the meantime, many banks have been forestalling the day of reckoning. The latest strategy, called “extend and pretend,” appears to be in full swing—a head-in-the-sand approach that provides temporary extensions to troubled borrowers on maturing commercial loans to give them, and the bank, some breathing room.

But surging delinquencies and defaults will eventually catch up with them. So who is most at risk? The biggest exposures are in the regional banks which have much closer ties with their local communities and developers. Some banks, have concentrations of CRE loans equal to several multiples of their capital; many of those loans are in speculative new properties, the Feds say.

Kamal Mustafa, chairman of Invictus Consulting Group and former head of Citigroup's Global M&A and corporate finance departments, says many of these banks will fail as a result. “Right now there are a lot of banks that are showing no charge offs but when the CRE market dives, we’ll see a lot of banks going down.”

KBW Research, a boutique investment bank and research shop in New York, crunched the numbers. Here’s a look at some of the U.S. banks and thrifts they believe have the most commercial real estate exposure based on a percentage of their total loans (from 50% to 71%) as of the second quarter. This doesn't necessariy mean they are buried under bad loans, but just have more exposure to the commercial real estate sector. Keep in mind, that prices in that market have dropped some 40% since the beginning of 2007 through October (more than the housing market) so the value of these assets has most certainly diminished.

Name, Ticker, Percent of Loans in CRE
Nara Bancorp, NARA, 71%
Center Financial, CLFC, 71%
Cass Information Systems, CASS, 69%
Hanmi Financial, HAFC, 69%
Dearborn Bancorp, DEAR, 66%
Wilshire Bancorp, WIBC, 66%
Intervest Bancshares, IBCA, 65%
MetroCorp Bancshares, MCBI, 64%
Unity Bancorp, UNTY, 62%
Oak Valley Bancorp, OVLY, 60%
PacWest Bancorp, PACW, 59%
CommerceFirst Bancorp, CMFB, 59%
Jacksonville Bancorp, JAXB, 58%
American River Bankshares, AMRB, 58%
FPB Bancorp, FPBI, 57%
W Holding Company, WHI, 56%
Bank Holdings, TBHS, 55%
Sussex Bancorp, SBBX, 54%
Sun Bancorp, SNBC, 54%
Southern Connecticut Bancorp, SSE, 54%
Cape Bancorp, CBNJ, 54%
Community Central Bank, CCBD, 53%
Umpqua Holdings, UMPQ, 53%
Parke Bancorp, PKBK, 52%
Mackinac Financial, MFNC, 52%
Tamalpais Bancorp, TAMB, 51%
Mercantile Bank, MBWM, 50%
Sterling Bancshares, SBIB, 50%
Bank of Marin Bancorp, BMRC, 50%
Old Line Bancshares, OLBK, 50%

Reader Comments


November 6, 2009 02:53 AM

The commercial real estate (CRE) market is NOT like the residential market. These are major investments between savvy players. The banks will NOT foreclose on major projects in the same way they would a poor slob they tricked into a deceptive home loan. These loans will most often be re-negotiated into a new "equilibrium" (can you say voluntary cramdown). Not pleasant but not doomsday either.


November 6, 2009 03:18 PM

The only way this gets messy is if the government forces the banks to foreclose and then dump the properties on the market. This is what the FDIC did during the early 1990s and prices spiraled down.

The best is to let the banks work it out on their own. They are the best equipted to handle the issues.

There is plenty of money waiting for purchase these properties.


November 8, 2009 09:35 PM

These are NOT "savvy" players, these were greedy players who thought that heaven had come to Earth and they could not lose.

Surprise! Reality is a ....!

As to foreclosure...don't bet that it won't happen. I don't see a turn-around for the next 20-30 years. The economy will stagnate for at least 10 years.


November 9, 2009 03:03 PM

Tis true that the commercial loans are not like the residential ones. They are worse. There is no comparative market analysis that estabilishes any real value. The borrowers have nothing to lose other than a piece of paper that says they used to own a piece of commercial property. Let's be real. The banksters have orchestrated a perfect storm and they have robbed the American people of their jobs, their savings and their investments. In cahoots with our traiterous politicians they have conspired to turn the USA into another peoples republic. The issues are much deeper than "let the banksters work it out" hell let's just re-finance them. The underlying problem is the socialist/marxist takeover of the coutry. The outsourcing of industry. The horrendos loss of good jobs. The lack of consumer confidence and the overwhelming new debt that is being incurred every day. The goverment and the banks are equally at fault as they conspired to rip off the American People. Now they are in the process of socializing medicine on top of all that. I expect hyper- inflation, the continuing devaluation of the us dollar and it's eventual collapse. As the traitors sell of every piece of america they can get their hands on we can also expect the impoverishing of the people.


November 12, 2009 03:38 PM

1)The Gov't never "conspired to rip off the American people"... that's one nice thing about government - its purpose is for the people, not for profit.
2) Nobody has proposed socialized medicine (where the gov't provides the care, pays the doctors, etc -- as in Britain). Current proposals discuss socialized insurance.

Hannah Marion

November 12, 2009 10:26 PM

While Max' point is perhaps overstated, he is far more on target than folks like Rob and Sam understand.

The CRE market is in dire straits.

As Bill says, the folks who have driven the CRE market into the ground have done so using the same means as those in residential real estate.

To simply assume that "business as usual" will allow recovery, when it was highly unusual business practices that drove the market into the ground is (at best) wishful thinking.

Thank you for your interest. This blog is no longer active.



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