Federal Deposit
Insurance Corporation

MCNB Bank

From: Lee Ellis
Sent: Friday, February 24, 2006 1:09 PM
To: Comments
Subject: Commercial Real Estate Lending

Attn: Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D.C. 20429

Dear Mr. Feldman:

I am writing this because i believe that it is important to comment on the Guidance being proposed with respect to Commercial Real Estate Lending. Commercial real estate lending is an extremely important part of the economy in the regions in which we operate and a significant activity with respect to bank lending.

I understand the need for sound lending practices and loan portfolios. My concern is that the Guidance in its current form will negatively effect my institution, our local competitors, and the local economy as a whole.

My concerns are not so much with the individual practices set out in the Guidance. More vexing is the way with which the Guidance will be imposed and the potential for inconsistency. The proposed Guidance contains certain thresholds and a laundry list of practices and requirements. My concern is that - given my own personal experience with examiners evaluating and imposing existing regulations differently from examination to examination - the proposed Guidance introduces a whole new set of dynamics with additional potential to effect regulatory expectations.

Specifically, the Guidance defines commercial real estate loans as "exposures secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of the repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property." At the same time, the Guidance relies on Call Report Schedule RC-C loan distributions and classifications to identify institutions with CRE concentrations and quantify that concentration. These Call Report loan classification totals include CRE loans as defined in the Guidance and loans not addressed in the Guidance. For instance, lines 1d and 1e in Schedule RC-C include loans on office buildings and apartments where rental income from tenants is a significant source of the repayment capacity. It also includes loans on business properties that house the business itself wherein the operation is the source of repayment capacity - a factory for instance owned and operated by the borrower. Similarly, a locally owned and operated convenience store would not be subject to inclusion in CRE loan totals per the Guidance. A convenience store owned by the borrower but leased to an operator would. But both would be in the same Schedule RC-C subtotal. An apartment building (a CRE loan) and a loan secured by the real property of a going-concern business (not meeting the definition of a CRE) would be in the same Call Report category. It is my fear that the net effect of using Schedule RC-C distributions to measure and monitor CRE concentrations would result in vastly overstating both an institution's CRE levels and its sensitivity to having to comply with many of the more onerous provisions of the Guidance.

In addition, any final Guidance should make it clear that exceeding any concentration threshold does not automatically trigger the required capital increase. Such increases should be expected in the context of the particular circumstances of the effected institutions.

Finally, any final Guidance should expressly indicate that its purpose is not to discourage commercial real estate lending.

Secured real estate lending has been the historic foundation for lending of West Virginia banks. It represents some of the more attractive and safe credits available for banks in the region. Mechanical or arbitrary implementation of any Guidance that has the effect of turning into a policy shift against commercial real estate lending would have a devastating effect on the lending capabilities of banks in the area. Banks might be forced to look to other riskier credits to maintain loan volumes.

In the broader picture, such a shift in policy that creates the perception that commercial real estate lending carries greater regulatory risk will reduce the availability of credit for commercial development. Such reduced availability would have dire consequences for the local economy. Such consequences would produce systematic problems for banks far in excess of any risk attendant to commercial real estate loans.

I thank you for your consideration of these concerns and appreciate the opportunity to express them. Hopefully, the final Guidance will address them in a meaningful way.

Sincerely

Lee M. Ellis
President and Chief Executive Officer
MCNB Bank & Trust Co.