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Real Estate Pain on Tap for Smaller Banks

Commercial real estate delinquency rates are spiking hard for some smaller regional banks. The second in a two-part look at a burgeoning trouble spot for banks. By Philip Van Doorn from

This is the second of a two-part look at banks that could suffer from their exposure to nonperforming commercial real estate and construction loans. Part I looked at larger banks.

Commercial real estate delinquency rates are spiking hard for some smaller regional banks.

Worsening commercial real estate loan quality is a rising trouble spot for larger banks too, as we pointed out on Wednesday. While delinquencies in commercial real estate loans are still historically low, they are rapidly rising.

The table below ranks banks with between $5 billion and $10 billion in assets by the ratio of nonperforming domestic commercial real estate loans (CRE) and commercial construction loans (CCL) as of Sept. 30. The way bank call reports break down nonperforming loan numbers, some nonperforming multifamily mortgages (usually condominium projects) are mixed into the numbers.

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The banks on this list were all considered well-capitalized under regulatory guidelines, as of Sept. 30, with leverage ratios of at least 5% and risk-based capital ratios of at least 10%.

One significantly undercapitalized bank that would have made the list was Franklin Bank SSB of Houston, which had $5.1 billion in total assets when it failed on Nov. 7 , with branches and deposits taken over by Prosperity Bank of El Campo, Texas (held by Prosperity Bancshares ).

Corus Bank

Out of all the banks with at least $5 billion in assets as of Sept. 30, the one with the highest ratio of nonperforming CRE and CCL to total assets was Corus Bank of Chicago, a subsidiary of Corus Bankshares . The ratio was 8.10% as of Sept. 30, and the total nonperforming assets ratio was 11.96%.

After avoiding significant charge-offs for over a year despite its high level of nonperformers, Corus Bank reported net charge-offs of $128 million and posted a net loss of $121 million for the third quarter as it set aside $177 million for loan loss reserves.

Of course, Corus and its concentration on condominium construction and rehab loans have received wide coverage throughout the real estate crisis, since the institution came to the fore when March 2007 financial results were announced. At that time, Corus Bank, with less than 1% of the nation's bank assets, had 17% of nonperforming multifamily mortgages for the entire industry on its balance sheet.

As reported in August 2007, despite the alarming rise in nonperforming loans, Corus's management felt at that time it was in a strong enough capital position to pay a special $1 dividend to shareholders -- a $56 million hit to its capital. This came despite the fact that the bank appeared under-reserved by traditional measures.

As time went on and loan quality worsened, and Corus finally eliminated its dividend in April, when announcing its first-quarter results.

While Corus Bank's leverage ratio of 10.28% and risk-based capital ratio of 15.09% would be high for a bank with strong asset quality, capital is the institution's number one concern. The holding company recently announced further efforts to conserve capital, this time deferring interest on $405 million in trust-preferred securities. Corus said the trust indentures allowed interest payments to be deferred up to 20 quarters.

National Bank of Arizona

Second on the list is National Bank of Arizona, a subsidiary of Zions Bancorp , a multibank holding company with $54 billion in assets and seven bank charters in the Southwest.

National Bank of Arizona's ratio of nonperforming CRE and CCL to total assets was 3.53% as of Sept. 30, and its total nonperforming assets ratio was 5.99% -- an alarming increase from 3.62% in June and 2.32% in March. The necessary increase in the quarterly provision for loan loss reserves led to a third quarter loss of $16.7 million. Despite the loss, a reduction in assets kept the bank's capital ratios from dropping significantly.

While the loan loss reserve ratio of 2.55% kept National Bank of Arizona well ahead of its 1.59% annualized year-to-date charge-off ratio as of Sept. 30, the pace of charge-offs for the third quarter alone was 2.44%. Since CRE and CCL comprised 60% of total assets as of Sept. 30, it seems reasonable to expect greater stress in the portfolio over the next few quarters and a significant capital infusion from the holding company.

Zions Bancorp expressed similar concerns when it filed its 2008 Fall Investor Conference presentation with the Securities and Exchange Commission Tuesday. In the presentation, the holding company said it expected further increases in nonperforming assets and net losses for the next several quarters.

The holding company recently received a $1.4 billion capital infusion through the Treasury's Troubled Assets Relief Program, or TARP.

R-G Premier Bank

R-G Premier Bank (held by R&G Financial Corp.) is similar to Westernbank Puerto Rico (a subsidiary of W Holding Co.), in that the San Juan, Puerto Rico bank had low charge-offs through the first three quarters, even though nonperforming loans doubled over the past year.

R-G's ratio of nonperforming CRE and CCL to total assets was 2.81% and its total nonperforming assets ratio was 7.19% as of Sept. 30. The annualized ratio of net charge-offs to average loans for the first three quarters was 0.38%. Loan loss reserves covered 1.91% of total loans.

Because charge-offs and net losses have remained relatively low, while the bank reduced its balance sheet by 7%, R-G has remained well capitalized, with ratios increasing over the past year.

In another similarity with W Holding Company, R&G Financial has been unable to file a timely quarterly or annual financial statement in over four years. The company restated its financial statements for 2002, 2003 and 2004 in November 2007, and is working now to restate subsequent results. The restatements resulted from a reassessment of accounting related to transfers of loans and participations, mortgage securitizations and loan sales.

Back in April, R&G Financial suspended preferred stock dividends and deferred dividends on trust preferred securities.

While WHI effected a reverse stock split on Tuesday, which enabled the company to avoid being delisted from having its shares trade below a dollar for an extended period, R&G's shares were trading on the Pink Sheets, closing at ten cents.

R&G Financial did not comment for this article.

Bank of North Georgia

The past year hasn't been good for banks headquartered in Alpharetta, Ga. Integrity Bank, with $1.1 billion in total assets, was closed by state regulators on Aug. 29 and all deposits were taken over by Regions Bank (held by Regions Financial ). Alpha Bank, with $354 million in assets, was shuttered on Oct. 24, with deposits taken over by Stearns Bank NA. These followed NetBank, which was the first major failure resulting from the mortgage crisis, in late September 2007.

While it is the fourth institution on the list, Bank of North Georgia (a subsidiary of Synovus Financial Corp. ) seems unlikely to follow suit, considering its holding company's relatively deep pockets.

Synovus, with $34 billion in total assets and (at last count) 36 banking subsidiaries in the Southeast, received preliminary approval for $973 million in TARP money on Nov. 14.

Bank of North Georgia's ratio of nonperforming CRE and CCL to total assets was 2.65% as of Sept. 30, and its total nonperforming assets ratio was 6.03%. Loan loss reserves covered 1.53% of total loans, keeping ahead of the year-to-date net charge-off ratio, however, the annualized pace of charge-offs for the third quarter was 2.37%.

With a high concentration of CRE and CCL and considering its location, it's reasonable to expect continued increases in nonperforming loans and elevated charge-offs. With the bank losing $25 million in the third quarter mainly from a $24 million provision for loan loss reserves, the risk-based capital ratio fell to 10.11%. Synovus will be expected to do whatever's necessary to keep Bank of North Georgia well-capitalized. has the best mortgage rates .

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