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Banks With Highest Real Estate Loans

Commerical real estate may be the next shoe to drop. Here's a review of banks with the largest concentrations in commercial real estate.

(The following story is the second in a two-part series discussing the Congressional Oversight Panel's report on banks at risk from high concentrations in commercial real estate loans. The first group of bank stocks was featured last Tuesday.)



) -- The U.S. government says community banks are imperiled because, unlike


(C) - Get Free Report


Bank of America

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, they issued a higher share of commercial real estate loans.

The Congressional Oversight Panel said Feb. 11 that almost 3,000 of the country's 8,100 banks and thrifts had "problematic exposure" to commercial real estate and related loans. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairman of the committee, the group created by Congress to monitor the financial industry's bailout.

Since the report came out,

reviewed the largest U.S. publicly traded banks with high concentrations in commercial real estate, or CRE, loans. Three of the second group of five banks that meet the Congressional Oversight Panel's criteria for "CRE-concentrated" show significant weakness.

These are banks with loans for construction, land, commercial real estate and multifamily residences exceeding 300% of total capital, or construction loans exceeding 100% of total capital.

Of the 10 banks reviewed this week and last, seven have decent or better loan quality, and five remained profitable through 2009. Along with the committee's criteria and outlook,

discussed these profitable five


last Tuesday.

Compass Bank

Compass Bank

of Birmingham, Ala., is the second-largest bank meeting the "CRE-concentrated" criteria, with $65 billion in total assets as of Dec. 31 and a 313% ratio of commercial real estate, multifamily and construction loans to total risk-based capital. The bank was acquired by

Banco Bilbao Vizcaya Argentaria SA

(BBVA) - Get Free Report

in 2007.

Compass didn't participate in the Troubled Asset Relief Program, or TARP. The bank's ratio of nonperforming assets -- including repossessed real estate and loans past due 90 days or in nonaccrual status -- comprised 3.96% as of Dec. 31, up from 2.12% a year earlier, and exceeding the national aggregate noncurrent assets ratio provided by the Federal Deposit Insurance Corp., which was 3.07% as of Sept. 30.

While the bank was profitable for the first three quarters of last year, a fourth-quarter goodwill impairment charge of $1.6 billion and a $1.1 billion provision for loan-loss reserves led to a $1.9 billion net loss for the full year.

Compass is an example of a CRE-concentrated bank that is already feeling the pain. However, it represents less than a 10th of Banco Bilbao's total assets, with the holding company's business spread across South America, Mexico, Europe and the U.S.

Deutsche Bank

(DB) - Get Free Report

analyst Carlos Berastain Gonzalez has a "buy" rating on BBVA, saying the shares could rise by a third over the next year.

The holding company reported net attributable profit of 4.2 billion euros for 2009 (roughly $5.8 billion), down from 5 billion euros in 2008.

BBVA's American depositary receipts closed at $13.89 on Thursday, down 23% this year.

Societe Generale

analyst Patrick Lee also has a "buy" rating on the shares.

RBC Bank (USA)

RBC Bank (USA)

of Raleigh, N.C., is a subsidiary of

Royal Bank of Canada

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, the country's largest bank. The U.S. subsidiary had $27 billion in total assets as of Dec. 31, while the holding company had roughly $639 billion in assets as of Oct. 31, its fiscal year-end.

RBC Bank (USA) is another prime example of a CRE-concentrated bank that worries the Congressional Oversight Committee, as its asset quality weakened considerably during 2009, with 6% of its loans past due 90 days or more, or in nonaccrual, as of Dec. 31. The nonperforming-asset ratio was 5.08%, and the bank's net loss for 2009 was $848 million, which translates to a return on equity of negative 24.7%.

Despite the losses, a combination of a reduction in the bank's loan portfolio and some capital from the holding company increased the bank's tier 1 leverage ratio to 8.94% and its total risk-based capital ratio to 13.13% as of Dec. 31, up considerably from 5.96% and 10.55% a year earlier. Those ratios need to be at least 5% and 10% for most banks to be considered well-capitalized. RBC Bank (USA) didn't participate in TARP.

Like Compass Bank, RBC Bank (USA) is relying on its holding company as a source of strength through the crisis. In a report supporting his firm's "neutral" rating for Royal Bank of Canada, Bank of America Merrill Lynch analyst Steve Theriault said significant declines in fourth-quarter trading revenue for

JPMorgan Chase

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indicated a similar decline would be reported by Canada's largest bank for its fiscal first quarter, which ends Feb. 28.

The shares closed at $54.42 on Thursday, up 3% this year. Theriault's one-year target for the shares is $56.

East West Bank

East West Bank

of Pasadena, Calif., is held by

East West Bancorp

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. In addition to its branches in southern California, the company operates several offices in China.

The bank's nonperforming-asset ratio was a relatively low 1.16% as of Dec. 31. However, its ratio of net charge-offs (actual loan losses) to average loans was a high 5.16% for 2009.

Fourth-quarter earnings were boosted by a pre-tax gain from the acquisition of the failed United Commercial Bank of San Francisco, illustrating how lucrative it can be to take over a failed bank with a loss-sharing guarantee from the FDIC.

East West Bancorp was strongly capitalized, with a tier 1 leverage ratio of 10.24% and a total risk-based capital ratio of 17.65% as of Dec. 31, although it owes the government $306.5 million in TARP money. In the holding company's fourth-quarter conference call, Chief Economic Officer Dominic Ng said the company was aiming to repay TARP this year, but wasn't sure if it would need to raise common equity to do so.

While East West Bank has had significant commercial loan losses through the crisis, it has weathered the storm and nearly doubled in size with the United Commercial acquisition, which expanded its potential to profit from trade financing for U.S. importers doing business in China.

The shares closed at $16.21 on Thursday, up 3% this year.

Zions First National Bank

Zions First National Bank

of Salt Lake City is the main subsidiary of

Zions Bancorp

(ZION) - Get Free Report

. The holding company owes $1.4 billion in TARP money.

Zions Bancorp raised about $1 billion in tier 1 capital during 2009 by issuing new common shares and other moves, including modifying subordinated debt and heavily discounted redemption and conversion of preferred shares. While a tier 1 leverage ratio for Dec. 31 isn't yet available, the company's tier 1 risk-based capital ratio was 10.37%, well ahead of the 6% required for most banks to be considered well-capitalized, despite a net loss of $1.2 billion for 2009.

The holding company's nonperforming-asset ratio was 5.17% as of Dec. 31, having risen steadily from 2.31% at the end of 2008, but the shares have recovered from fourth-quarter fears that Zions wasn't sufficiently writing-down distressed securities. The stock closed at $17.72 on Thursday, up 38% this year.

CEO Harris Simmons said during the bank's fourth-quarter earnings call that Zions "saw very little increase" in credits categorized as special mention, substandard or doubtful, meaning it identified few additional commercial loans with problems.

The shares are likely to remain volatile, with the possible continued rise in nonperforming loans and potential share sales, before the bank repays TARP.

Susquehanna Bank

Susquehanna Bank

of Lititz, Pa., is held by

Susquehanna Bancshares


, which owes $300 million in TARP money.

While Susquehanna qualifies as a CRE-concentrated bank, its home market hasn't felt the pain of the boom-and-bust cycle in states like California, Florida and Georgia. Asset quality has been decent, with a nonperforming-asset ratio of 2.32% as of Dec. 31 and a 2009 net charge-off ratio of 1.32%, much better than the third-quarter national aggregate of 2.38%.

The bank's net income for 2009 was $12.7 million, down from $82.6 million in the previous year, as elevated provisions for loan-loss reserves took their toll. Reserves covered 1.75% of total loans as of Dec. 31, ahead of the pace of charge-offs.

For investors, Susquehanna is an interesting pick. On the one hand, the stock is cheap despite rising 37% this year. It closed at $8.04 on Thursday, giving it a price-to-tangible-book ratio of 1.1, compared with over 2 at the end of 2006, 2007 and 2008. On the other hand, a dilutive secondary offering seems likely so the company can repay TARP. For that reason, Susquehanna is appropriate only for long-term investors.

-- Reported by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.