Federal regulators are worried about banks like First National Bank of Artesia in New Mexico.
First National's loan portfolio is heavily weighted toward commercial real estate and regulators, mindful of past real estate downturns, have proposed guidelines that ask banks with high concentrations of commercial real estate loans to hold more capital against them.
But W. Everett Crawford, the $392 million-asset First National's chairman and chief executive officer, said the guidelines unfairly target banks with assets below $1 billion.
Commercial real estate loans are these banks' bread and butter. Mr. Crawford said the capital requirements would eat into their profits and make it harder for them to compete against larger lenders - most of which have more diverse loan portfolios and would be exempt from the guidelines.
The guidelines, proposed in January, would only add to small banks' regulatory burden and could be the last straw for some that might be considering selling themselves, Mr. Crawford added. "More and more community banks are being forced to be sold because of stricter regulations," he said.
Many others share his anxiety.
As of March 2 about two dozen community bankers had submitted comment letters protesting the guidelines, and America's Community Bankers has requested that the comment deadline be extended for another 30 days to give its members more time to respond.
The comment period is set to end March 14, but regulators have hinted that it could be extended.
The four federal banking regulators drafted the guidelines in response to steadily rising commercial real estate concentrations - especially at banks in fast-growing markets in the West and the South East. In a speech at the Financial Services Institute in Washington last month Susan Bies, a Federal Reserve governor, said that concentrations are now at record levels and that regulators fear risk management at banks and thrifts is not keeping pace.
"Banks, in order to attract new business and sustain loan volume, may be inclined to occasionally make some compromises and concessions to borrowers," Ms. Bies said.
According to recent reports from Moody's Investors Service Inc. and Standard & Poor's Corp., commercial loans outstanding now account for 15% of the U.S. gross domestic product. The amount has not been that high since the last peak of the last commercial real estate cycle, in 1988.
It was around then that the commercial real estate market crashed, leading to the collapse of hundreds of banks and thrifts and a massive government bailout. The concern is that there could be another large downturn or that a large number of commercial real estate borrowers could go bust when balloon payments on interest-only loans come due.
The proposed guidelines would consider a bank or thrift at risk if: its total loans in construction, land development or other land represent 100% or more its capital; or if total loans secured by multifamily and nonresidential properties and loans for construction, land development, and other land exceed 300% of capital.
Observers have said that as many as one-third of all banks and thrifts would meet one of the two criteria and have to comply with new guidelines. But regulators have said the actual number would be much lower because the guidelines would exclude loans on properties occupied by their owners.
The vast majority of these at-risk banks have less than $1 billion of assets and many are in vibrant areas of the Southeast and the West with booming commercial real estate markets.
First National's ratio of commercial real estate loans to capital was 431% at the end of the fourth quarter, according to Federal Deposit Insurance Corp. statistics. Many banks in fast-growing states such as Arizona and Nevada have ratios well above 500%.
If a bank or thrift exceeds one of these thresholds, then the regulators would want it to have formal risk management plans and capital beyond normal regulatory requirements.
"Minimum levels of regulatory capital do not provide institutions with sufficient buffer to absorb unexpected losses arising from loan concentrations," the proposed guidelines say. They do not specify how much additional capital a bank would have to hold.
Also, directors would need to explicitly approve the institution's commercial real estate strategy, periodically review the portfolio and justify high concentration levels; and management would need to establish formal procedures to identify and control commercial real estate risks and prove it has systems in place for risk management, market analysis, and stress-testing the loan portfolio.
John S. Poelker, the managing director of Poelker Consultancy Inc. in Atlanta, said commercial real estate lending is especially important to start-ups because it is hard for them to get loan business from companies with established banking relationships. Larger banks have more branches and technology, which means more convenience for commercial customers, he said.
On the other hand, he said, commercial real estate developers in fast-growing markets are always looking for financing on projects that are often too small for bigger banks. "In Denver, Tampa, Atlanta, there is so much development going on you can make $2 million, $3 million, or $4 million loans that are very safe in the sense that they are well collateralized," Mr. Poelker said.
Many banks would probably fall below the 300% threshold if owner-occupied real estate were excluded. But the guidelines do not say what percentage of a building would have to be owner-occupied in order for the loan to be excluded.
Moreover, current regulatory reporting does not require them to separate out owner-occupied from other types of real estate. Under the new guidelines the onus would be on banks to show that the amount of owner-occupied real estate in their portfolio brings their ratios below the regulatory thresholds.
Dennis P. Angner, the president and CEO of the $706 million-asset IBT Bancorp Inc. in Mount Pleasant, Mich., said he is concerned the examiners would expect all banks to adopt the same formal controls and policies regardless of whether they exceed the 300% threshold.
"The examiners all go to the same training classes," Mr. Angner said. (IBT's ratio of commercial real estate loans to capital is 225%.)
Jim Randall, the chairman of the $526 million-asset Northside Community Bank of Gurnee, Ill., said complying with the guidelines would disadvantage Northside because commercial real estate loans would require more documentation, which would lengthen loan approval times. The guidelines are another example of regulation distracting bankers from their primary business, Mr. Randall said.
Some, however, say the guidelines would not force much of a change because they already do most of the things that would be required.
Robert Disotell, the chief credit officer at the $1.2 billion-asset Cascade Bank in Everett, Wash., said that as long as long as examiners do not take the guidelines to extreme, most of the proposal is palatable.
"The things they are asking banks to do in terms of risk management, oversight, and stress-testing are not onerous," Mr. Disotell said. Cascade had a 508% ratio of commercial real estate loans to capital on Dec. 31.
Still, he said he does not like the vague language about banks' possibly needing to hold more capital. There is no objective standard on how much capital would be required, and the costs of raising additional capital could prevent banks from pricing loans competitively, he said.
"Those that don't have the ability to raise more capital would have to stop lending and, in some cases, sell off portfolios to get back in line, if regulators take a very firm stance on what would require more capital," Mr. Disotell said.
Ray D. Tooker, the senior vice president for loan administration at the $1.9 billion-asset Macatawa Bank Corp. in Holland, Mich., said the additional capital requirements seem to ignore that institutions also manage risk with their loan-loss provisions.
"They talk about capital levels, but loan-loss reserve is the first line of defense in protecting shareholders and depositors as well," Mr. Tooker said. Macatawa's ratio of commercial real estate loan to capital was 450% at Dec. 31; its loan-loss reserves were 3% of its commercial real estate loans.
First National's Mr. Crawford said the regulators seem to be targeting banks in high-growth areas. He would like banks and trade groups to send in enough comment letters that the regulators abandon the industrywide guidelines and focus on banks that may have flaws, he said. "If you have a problem, instead of coming after the industry, why not go after the banks that are doing things wrong?" Mr. Crawford said.
