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Community and regional banks continue to face increased scrutiny by the Securities and Exchange Commission regarding their exposure to maturing commercial real estate debt held in their loan portfolios. In January, the SEC released four letters questioning smaller financial firms about their potential risks of default resulting from the commercial real estate credit crunch, according to a Wall Street Journal article published Jan. 25.
The recent SEC letters are a followup to the letters it sent last year requesting more detailed disclosures following the failures of First Republic Bank, Silicon Valley Bank and Signature Bank. Regulators publicly warned commercial real estate lenders to carefully assess any large exposures to debt on office buildings, retail storefronts and other commercial properties.
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Alerus Financial and the holding companies for Mid Penn Bank, Ohio Valley Bank and MainStreet Bank received the letters recently made public by the SEC, according to the WSJ. The Federal Reserve defines community banks as those holding under $10 billion in assets, whereas regional banks hold between $10 billion and $100 billion. Any major losses or commercial loan defaults would significantly impact these smaller entities.
According to the Federal Reserve, the $20 trillion commercial and multifamily real estate market is financed with $5.8 trillion of debt, 50% of which is provided by commercial banks. Of that outstanding debt, $2.81 trillion will be maturing over the next four years, based on Q3 2023 data analyzed by Trepp, which projects that $544 billion in total commercial mortgage loans will come due this year.
The National Association of REALTORS® and several industry partners have voiced concerns to legislators that regulatory agencies should grant reasonable latitude to banks and allow them to work constructively with borrowers to restructure debt and correct any defaults.