Smaller Banks Face Growing Commercial Real Estate Risk: Report

While subprime-related write-downs have been — and will likely continue to be — prevalent among many banks’ earnings releases, the subprime and related mortgage mess has been mostly an issue for larger banks. National banks including the likes of Washington Mutual, Wachovia, Bank of America, Wells Fargo and others have had to absorb the effects of the industry downturn to a greater extent than mid-size and community banks.

A new report released Monday by credit rating agency A.M Best, however, found that credit risk may quickly be beating a path to the door of smaller regional and community banks. In particular, with the exception of some states — notably Texas — the agency warned that “a pattern of distinct regional credit issues is emerging that is reminiscent of the real estate crisis in the mid-1980s.”

“Smaller banks are directly or indirectly facing credit problems with consumer mortgages, similar to the largest 200 banks,” the report said. But when disregarding the largest 200 banks, commercial real estate risk becomes the leading contributing factor to credit risk for mid-size and small banks, A.M. Best said.

Construction & land development loans, corporate & industrial loans, credit cards, multi-family residential loans and commercial real estate loans are all high-risk areas in smaller banks’ credit portfolios, according to the report.

For the smaller banks below the top 200 institutions, high nonperforming asset rates are concentrated in the Midwestern, Central, Southeastern and West Coast regions; Alaska, Arizona and Arkansas rank as the worst three states on overall asset quality.

For more information, visit http://www.bestweek.com.