Banks Troubled CRE Assets Double to $34 Billion

Rising Nonperforming CRE Loans, Foreclosures Dull Otherwise Good Quarter for Nation's Banks

By Mark Heschmeyer
June 3, 2009
The amount of troubled loans on income producing commercial real estate property is rising rapidly at the nation's bank and thrift institutions. The total is now more than double what it was a year ago with the bulk of the increase coming in the first quarter of this year.

The nation's FDIC-insured banks reported carrying $22.3 billion in nonperforming office, industrial and retail property loans on their books at the end of the first quarter and another $4.3 billion in multifamily loans. That is up from $15.7 billion and $3 billion respectively from three months ago - increases of more than 40% in both cases.

The nation's FDIC-insured thrifts reported carrying $2 billion in nonperforming office, industrial and retail property loans on their books at the end of the first quarter and another $842 million in multifamily loans. That is up from $1.5 billion and $591 million respectively from three months ago - increases of more than 33% and 42% respectively.

In addition to those nonperforming assets, U.S. banks were carrying $3.3 billion in foreclosed office, industrial and retail properties on their books and $1.3 billion in foreclosed apartment properties. Thrifts carried $327 million and $142 million respectively.

The FDIC (Federal Deposit Insurance Corp.) also noted that other asset-quality indicators continue to decline. Insured institutions charged off $37.8 billion in bad loans in the first quarter, almost twice the $19.6 billion of a year earlier. The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) rose by $59.2 billion during the quarter, and are $154.3 billion higher than a year ago.

"Troubled loans continue to accumulate, and the costs associated with impaired assets are weighing heavily on the industry's performance," said FDIC Chairman Sheila C. Bair. "Nevertheless, compared to a year ago, we see some positives. Net interest income is higher, and noninterest revenue is up at larger banks, particularly trading revenues. Realized gains on securities and other assets improved, too. But these positive factors were outweighed by higher expenses for bad loans and for goodwill impairment."

The commercial real estate numbers blighted what otherwise was a positive quarter for commercial banks and savings institutions that rebounded from losing money in the fourth quarter of last year. Banks and thrifts reported net income of $7.6 billion in the first quarter of 2009, a decline of $11.7 billion (60.8%) from the $19.3 billion that the industry earned in the first quarter of 2008.

Higher loan-loss provisions, increased goodwill write-downs, and reduced income from securitization activities all contributed to the year-over-year earnings decline. Three out of five insured institutions reported lower net income in the first quarter and one in five was unprofitable.

In fact, the FDIC's list of problem institutions continued to grow during the quarter from 252 to 305 institutions, and the total assets of problem institutions increased from $159 billion to $220 billion.

The number of problem thrifts was 31, up from 26 in the previous quarter.

The number of FDIC-insured commercial banks and savings institutions reporting financial results declined from 8,305 to 8,246 in the first quarter. Mergers absorbed 50 institutions, while 21 insured institutions failed.

This is the largest number of failed institutions in a quarter since the fourth quarter of 1992. Thirteen new charters were added in the first quarter, the fewest since the first quarter of 1994.

"The first quarter results are telling us that the banking industry still faces tremendous challenges, and that going forward, asset quality remains a major concern," Chairman Bair noted. "Banks are making good efforts to deal with the challenges they're facing, but today's report says that we're not out of the woods yet."

"As I see it, we're now in the cleanup phase for the banking industry," Bair added. "It will take some more time. But in the end, we'll have a stronger banking industry that's better able to meet the demand for credit as the economy recovers."

Insured institutions set aside $60.9 billion in provisions for loan losses in the first quarter, an increase of $23.7 billion (63.6%) over the first quarter of 2008.

The U.S. thrift industry rebounded too in the first quarter of 2009, but still reported losses of $47 million. That is still their best performance since September 2007, the Office of Thrift Supervision (OTS) reported.

"We are seeing encouraging signs in the performance of the thrift industry," said Acting Director John E. Bowman. "Although it's too early to say we've hit bottom or that the industry's troubles are behind us, fundamentals such as solid capital, strong levels of loan loss reserves and improving operating income give the industry a solid platform for the future."

During the quarter, 74% of thrifts were profitable, up from 65% in the fourth quarter of 2008. The improved profitability reflected lower loan-loss provisions of $5.8 billion in the quarter, down from $9.3 billion in the previous quarter. Although loan loss provisions declined, they remained elevated and were the fifth highest on record.