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For many large banks, exposure to souring commercial real estate and construction loans began to reach alarming levels during the fourth quarter of 2008.

Moody's Investors Service announced Thursday it was reviewing $303 billion in commercial-mortgage backed-securities, saying commercial property prices were likely to decline over the next two years. But that outcome should not be at all surprising, considering that a commercial real estate swoon was a logical follow-up to the housing crisis and expected recession.

While every commercial construction loan is different, they typically have a term of 20 years, with an "interest-only" period of one or two years during construction, followed by an 18- or 19-year amortization with principal and interest payments. Over recent years, banks have commonly set aside reserves to cover the interest during the construction phase, so the borrower pays nothing to the bank during that period. Of course, the borrower will pay a higher rate or fee (or both) for this privilege.

Since so many commercial construction loans with interest reserves are reaching the end of the construction phase now -- facing the prospect of having no tenants in completed structures because of the weak economy -- lenders realize the borrowers (who often flew by the seats of their pants) are unlikely to make even the first fully-amortized loan payment and the loan is placed in nonaccrual status.

Combine this phenomenon with already-existing commercial buildings facing vacancies from retail bankruptcies, and you have a perfect storm for commercial real estate on the heels of the residential mortgage crisis.

Large Banks with Heavy Nonperforming CRE Exposure


reported in


on the ten large banks (over $10 billion in assets) with the highest exposure to nonperforming commercial real estate (CRE) and commercial construction loans (CCL) based on Sept. 30 data, the highest ratio of these loans to total assets was 5.07%, and three of the banks on our list had a ratio below 1.00%.

Using the same analysis for Dec. 31 preliminary call report data provided by Highline Financial, the highest ratio of nonperforming CRE and CCL to total assets was 7.86%, while the tenth on the list was 1.72%.

The table below lists the ten holding companies with more than $10 billion in total assets with the highest asset concentration in nonperforming commercial real estate and commercial construction loans as of Dec. 31. Loan charge-off ratios remain low for some on the list, since it can take many months for banks to work through loss mitigation efforts and foreclosure processes.

Please keep the following in mind:

The list is based on preliminary data

: Most banks have filed their call reports, which our data provider, Highline Financial, obtains from the FDIC. The data was not yet finalized when we downloaded it on Feb. 5, and there were at least 100 banks that had not filed yet. This data is often updated by banks before it is finalized.

The list only includes banks

: Data for the over 800 savings and loan institutions supervised by the Office of Thrift Supervision is not available.

The data is for the banks themselves, not holding companies.

A bank on the list may have raised capital since Dec. 31.

Westernbank Puerto Rico

Westernbank Puerto Rico

(held by

W Holding Company

( WHI)) again led the list, with nonperforming CRE and CCL comprising 7.86% of total assets, up from 5.07% in September. The ratio of total nonperforming assets was 10.17%, up from 9.44% in September. Looking at Westernbank's call report, it appears the bank shifted some nonperforming loans categorized as "residential construction" to "other construction and land development," which is included in our nonperforming CRE & CCL ratio above.

While the holding company has still not brought its

Securities and Exchange Commission

filings up to date, the bank's results for the fourth quarter were an improvement over the previous quarter, with net income of $3.8 million, compared to a net loss of $12.1 million in September. While charge-off activity increased, with $26.6 million in net charge-offs during the fourth quarter, up from $13.9 million in the third quarter, the ratio of net charge-offs for all of 2008 was just 0.87% of average loans.

Westernbank was also able to remain well capitalized per

regulatory guidelines

, with a tier-1 leverage ratio of 5.60% and a risk-based capital ratio of 10.37%. This was in part because of a 9% reduction in the bank's balance sheet during the quarter.

Since completing a 50-to-1 reverse share split to open at $12.20 on Dec. 2, W Holding Company's stock has performed well, especially considering the upheaval in the market. Shares closed at $12.75 Friday.

Sterling Savings Bank

Sterling Savings Bank

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of Spokane, Wash. (held by

Sterling Financial

(STSA) - Get Satsuma Pharmaceuticals, Inc. Report

) was second on the list, with nonperforming CRE and CCL comprising 3.43% of total assets. That's quite an increase from 1.48% the previous quarter, when the company didn't even appear on our list.

Most of Sterling Financial's $356 million fourth-quarter loss was mainly attributed to a non-cash goodwill impairment charge of $224 million, but the quarterly provision for loan loss reserves increased to $229 million from $37 million in the third quarter.

Sterling Savings Bank's net loan charge-offs for 2008 totaled $220 million, or 2.49% of average loans. The ratio of loan loss reserves to total loans was 2.33% as of Dec. 31. Loans entering nonperforming status in the fourth quarter were spread throughout Sterling's market area, including Seattle, Northern California and Northern Idaho.

The holding company raised $303 million in capital on Dec. 5, selling preferred stock and warrants to the Treasury through the Troubled Asset Relief Program (TARP). Sterling Financial suspended its dividend in January, estimating the move would preserve an annualized $21 million in capital.

Shares recovered most of what they lost in the days following the fourth quarter earnings release, closing at $2.39 Friday, for a whopping return of 45% on what was a great day for bank stocks.

First Bank

First Bank

of Creve Coeur, Mo. was also new to the list. The privately held institution had a ratio of nonperforming CRE and CCL to total assets of 2.74% and its total nonperforming assets ratio was 4.78% as of Dec. 31. First Bank's 2008 net loss of $241 million was more than offset by a $295 million TARP infusion on Dec. 31.

The institution's net loan charge-offs for 2008 totaled $316 million, or 3.56% of average loans, and its year-end ratio of loan loss reserves to total loans was 2.56%. If we just look at the fourth quarter, net charge-offs totaled $130 million, or 5.92% of average loans.

With the acceleration of charge-offs, First Bank is likely to quickly blow through the TARP money with continued elevated loan-loss provisions, unless credit quality suddenly improves.

First Tennessee

First Tennessee Bank NA

is the main subsidiary of

First Horizon National

(FHN) - Get First Horizon National Corporation Report

, which reported a net loss of $134 million in the fourth quarter. First Tennessee's tier-1 leverage and risk-based capital ratios of 11.64% and 19.21% were the highest on the list, following the holding company's $867 million capital infusion via TARP on Nov. 14.

Carolina First

Carolina First Bank

of Greenville, S.C. (the main subsidiary of

The South Financial Group

( TSFG)), is new to the list, with a ratio of nonperforming CRE and CCL to total assets of 2.30% and a total nonperforming assets ratio of 3.38% as of Dec. 31. The bank lost $542 million during 2008, mainly from $426 million in goodwill writedowns.

The holding company said "completed income property and commercial development accounted for approximately half of the increase in nonperforming loans" during the fourth quarter.

Carolina First Bank reported $223 million in total net charge-offs for 2008, or 1.73% of average loans, and the institution's reserves kept well ahead of this pace, with loan loss reserves covering 2.41% of total loans as of Dec. 31. The holding company's TARP infusion of $347 million on Dec. 5 helped bring the bank's capital ratios to their highest levels in many years, despite the continued losses.

Fifth Third Bank of Grand Rapids

Fifth Third Bank of Grand Rapids, Mich.

had a ratio of nonperforming CRE and CCL to total assets of 2.01%, which is an improvement from 2.15% in September. This institution, with $54 billion in total assets as of Dec. 30, and Fifth Third of Cincinnati, Ohio, with total assets of $69 billion, are the two main subsidiaries of

Fifth Third Bancorp

(FITB) - Get Fifth Third Bancorp Report


While the quarter-end ratio of nonperforming CRE and CCL to total assets improved, this was because Fifth Third of Grand Rapids charged-off $797 million of these loans during the quarter, taking loans off the books at a faster pace than loans entering nonperforming status.

Colonial Bank

Colonial Bank

of Montgomery, Ala. (held by

Colonial BancGroup

( CNB)) made the list again, with a ratio of nonperforming CRE and CCL to total assets of 2.30%, up from the previous quarter.

Colonial Bancorp

on Jan. 27 reported a fourth-quarter loss of $825 million, which included a non-cash goodwill charge of $575 million. The company has received preliminary approval from the government for a $553 million TARP investment, but that is contingent on first raising private capital.

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.