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Problem loans force closure of six banks during August.

Six banks failed in September, down slightly from the seven that failed in August, and brining the total for the year to 74 failures, according to Trepp, the real estate finance analysts.

Commercial real estate exposure was the main driver behind problem loans for the banks that failed in September.

CRE loans comprised $365 million (82%) of the total $445 million in nonperforming loans at the failed banks. Commercial mortgages made up $199 million (45%) of the total, while construction and land loans comprised $166 million (37%) of the total nonperforming pool.

The residential real estate loan category was a secondary source of distress, with $61 million in nonperforming loans, or 14% of the total nonperforming balance.

The remainder was comprised of C&I loans ($18 million, 4% of the total) and consumer and other loans ($2 million, <1% of the total).

The failures occurred mainly in the Southeast, with two in Georgia and one each in Florida and Virginia. There were also failures in California and Texas.

The September failures had all been on the Trepp Watchlist for a considerable amount of time prior to failure. The median length on the Watchlist was 10.5 quarters, ranging from 6 to 12 quarters. For the year-to-date failures, the median length on the Watchlist prior to failure has stretched out to 7 quarters, up from 5 quarters during 2010.

The September failures featured very high Trepp Fail Risk scores; all but one were at 10, the highest possible score. The exception, Citizens Bank of Northern California, was at 9.6--very close to 10. We consider any score above 8 to represent a high probability of imminent failure.

The loss severity rose in September, with the estimated costs to resolve the failed banks rising to 23% of failed bank assets--up from 20% in August. The September figure is still below the 25% and 26% figures seen in May and June. The loss severity in September ranged from 13% (Citizens Bank of Northern California) to 29% (Patriot Bank of Georgia).

Loss-sharing was featured in 4 of the 6 failures in September, covering 59% of the failed banks' assets. The proportion of loss-share assets is up from 44% in August, but down from 60% to 73% during April to June.

The use of loss-sharing had seemed to be waning, but we expect that the uncertain economic outlook will lead acquiring banks to seek out added protections against potential losses in the months ahead.

The pace of closures in September was somewhat below the year-to-date average of 8.2 per month). Trepp maintains its estimate of a total failure count of approximately 100 banks for 2011, with failures likely extending into 2012.

After accounting for the recent failures, there are still 238 banks on the Trepp Watchlist that feature high Failure Risk scores (as of 2Q 2011).

The remaining banks on the Watchlist are predominantly smaller, with an average asset size of $310 million. Only 12 of the highest risk banks have total assets in excess of $1 billion.

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Title Annotation:Insiders Outlook
Comment:Problem loans force closure of six banks during August.(Insiders Outlook)
Publication:Real Estate Weekly
Date:Oct 12, 2011
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