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Story updated to include additonal information.



) -- Some of the largest U.S. banks may face similar questions that are now being posed to

Regions Financial


as regulators crack down on so-called extend and pretend loan practices.

But the practice is only a symptom of a much larger problem that eventually will force banks to digest billions in losses on commercial real estate loans that could eventually drown some bank balance sheets.

"At the moment it's a game of musical chairs," said Dan Gorczycki, managing director of commercial real estate broker Savills. "It just depends who will be left without a place to sit."

The board of Regions is investigating whether bank management delayed the disclosure of loans that were losing value, according to an article in the

The Wall Street Journal

. The


cited court documents and people familiar with the matter, adding that the banks audit committee began the investigation after the

Federal Reserve

expressed concern.

At issue is the practice of


a maturing loan while


its underlying book value hasn't declined. The practice artificially deflates nonperforming loans and credit costs in the current reporting period since the loan doesn't mature and losses aren't realized.

But the practice also allows problem loans to build up over time until they can ultimately collapse a bank's balance sheet.

Extend and pretend is "neither trivial nor rampant" in the banking industry, but banks with high concentrations in commercial real estate are most likely to fall into its trap, according to a report issued last month by ratings agency Fitch.


Banks with decentralized credit functions, and concentrations in

commercial real estate (CRE) loans, especially in areas with relatively weak CRE values, may be more prone to extending such high-risk loans without addressing inherent credit weaknesses," the report stated.

In fact, commercial real estate may turn out to be the next Achilles heel of the banking industry following the subprime residential mortgage crisis since so many loans have lost value but the losses have yet to be booked, Fitch said.

"Various industry reports suggest that roughly half of the $1 trillion of CRE loans maturing over the next three years are underwater, with as much as $200 billion to $300 billion being more than 20% underwater at maturity," Fitch said.

Although commercial real estate has been able to keep its head above water over the past several years as occupancy rates remained stable, industry watchers are already seeing signs of weakness.

"Our detailed research through earnings reports and call report filings from smaller banks indicates that the recovery in delinquency rates that began in the second quarter of 2010 appears to have stalled," said Matt Anderson, managing director of real estate research firm Trepp, in an April report. "This underscores the fact that markets have not yet truly recovered and also reflects anemic growth for both residential and commercial real estate."

Trepp estimates that over $1.7 trillion in commercial real estate loans will mature between now and 2015, with over $300 billion each year between now and 2013.

Gorczycki said underperforming commercial real estate deals are rising just as billions in loans are set to renew over the next 18 months, forcing many banks to either find a way to refinance or face the losses.

"Rolling has worked as values rebounded and many cases banks were able to kick the can down the road," Gorczycki says. "But all that has meant is there will be just more rollovers in 2012 and 2013. At some point there is no doubt that clock will stop."

While there is no definitive list of which banks have the most to lose if commercial real estate rollovers cease, Fitch said banks with the highest non-owner occupied commercial real estate concentrations include

Cathay General Bancorp



CVB Financial



AmeriServe Financial



Sterling Bankshares



First Midwest Bancorp



In addition, Fitch said banks with the highest percentage of restructured loans (both residential and commercial) include




JPMorgan Chase



Bank of America



Wells Fargo



SunTrust Banks



The banking industry's reliance on extend and pretend has some merit, Gorczycki said, adding that if there is no reason to sell a property there is no reason to take a loss on the loan.

However, the buildup of billions in loans with little liquidity to extend the maturities going forward means that some banks will be taking "monstrous losses," Gorczycki said.

"Part of our whole business model was to rollover the loans," he added. "Low rates and rising value cure all. The problem is that it doesn't last forever."

-- By Christopher Westfall