The troubled commercial real estate market continued to ravage the community banking sector last month as federal banking regulators closed 23 banks, the highest monthly toll in nearly a year.

In total, the April bank closings cost the Federal Deposit Insurance Corporation nearly $9 billion as banks loaded with commercial real estate and construction loans continued to falter at a record pace.

“Judging by what we’ve seen so far we think the size of the problem is going to increase,” said Matt Anderson, managing director of real estate analysis firm Foresight Analytics. Foresight’s bank watch list, which at the end of 2009 totaled 590 banks, is now at 645, Anderson said.

In February, commercial real estate prices slipped again after four months of increases, bringing the peak to current drop in prices to a whopping 41%. With so much value flushed away, it is unlikely that loans written during the peak years of 2006 and 2007 will ever recover, Anderson said.

The April carnage brings the total in 2010 to 64 failed banks totaling $61 billion in assets. That is more than double the pace set through the first four months of 2009, a year in which 140 banks were shuttered.

Last month, FOXBusiness.com reported on the toll the commercial real estate market was taking on community banks nationwide, profiling the 25 remaining banks with the most CRE exposure. Since then, 12 of those banks have failed.

Indeed, commercial real estate exposure has become a frighteningly accurate predictor of bank health. Of the 100 banks that had the highest ratio of commercial real estate loans to total capital on January 1, 42 have already failed.

Illinois banks continued to shoulder a large portion of the burden as an additional 7 banks closed in that state in April, bringing the total since 2008 to 32. But regulators also stepped in to close banks in two new locales in April, shuttering three in Puerto Rico and one in Massachusetts, the first banks in either place to close.

“In terms of capital, there were more banks whose status was downgraded in the first quarter than upgrades,” Anderson said. “That and the expansion in the size of the watch list are two indicators that point to no real let up in the pace of bank closures.”

SLIDESHOW





Ten Real-Estate Projects the Recession Put on Hold

Topping the list of banks with the highest concentration of commercial real estate loans is Putnam State Bank in Palatka, Fla. As of December 31 Putnam held $5.9 million in capital but over $106 million in commercial loans on its books. As is the case in much of Florida, Putnam’s loans are not faring well. As of the end of 2009, more than 20% were at least 30 days past due, more than double the national average.

Palatka, a small town of less than 11,000 residents in Northeast Florida, has already seen its share of commercial real estate woes. Last month, another Palatka bank, First Federal Bank of North Florida, was shuttered by regulators when its capital slipped into negative territory from the pummeling it received at the hands of the commercial real estate market.

Anderson warns that commercial real estate exposure alone is not enough to predict a bank’s failure and some banks, including Saehan Bank in Los Angeles, which earlier this year raised more than $60 million from private investors, have managed to step back from the brink by raising wads of capital to cover their exposure.

Still, both regulators and analysts expect the rate of bank failures to increase through 2010 and slow in 2011. Most say the number of failures likely will top 200 this year, bringing the total number of banks that have fallen victim to the recession to over 400, or about 5% of the nations’ 8,000 banks.

And while that number concerns analysts and regulators who fear a spate of bank closings will worsen already sluggish credit markets, the number pales when compared to the last great banking crisis.  In the 1930s, at the height of the Great Depression, an average of 1,000 banks per year closed their doors, 4,000 in 1933 alone.