FDIC Federal Register Citations

From: tbeach@theabcbank.com [mailto:tbeach@theabcbank.com]
Sent: Thursday, April 13, 2006 4:40 PM
To: Comments
Subject: Concentrations in Commercial Real Estate Lending

Re: Commercial Real Estate Lending Guidance Docket No. 06-1

Thank you for the opportunity to comment on the aforementioned guidance.

American Bank of Commerce (ABC) is a $550 million financial institution operating branches in Texas and Colorado. We are extremely aware of the importance of good commercial real estate underwriting guidelines and prudent practices with regard to concentrations in different types of real estate lending. In the late 1980’s, Texas lenders were particularly hard hit by the real estate crisis precipitated by the Tax Reform Act of 1986. Institutions with concentrations in commercial real estate found their portfolios suddenly and unexpectedly devalued.  ABC suggests that the real estate guidance put into effect in response to the lending crisis of the late 1980’s provides an appropriate framework for today's real estate lending. The proposed guidance is duplicative at best. More significantly, the proposals, with their emphasis on an arbitrary classification of “concentration,” have the effect of significantly adversely affecting community banks, such as ABC, while leaving mega institutions free to engage in much more significant commercial real estate activities. Accordingly, we suggest that the proposed definition of “concentration” should not be used. Rather, our management should evaluate whether our portfolio presents an unacceptable risk taking into consideration the local market conditions, diversification in the bank’s total loan portfolio, and other relevant factors. As a prudent real estate lender, we have adopted sound underwriting guidelines and carefully monitor our loan portfolio to watch for areas of weakness and risk.

Next, we believe strongly that the emphasis on additional capital is misplaced. Community banks in particular are already adequately or even over capitalized under existing capital ratio rules. Thus, the requirement for additional capital is misplaced with regard to such community institutions such as ABC. More significantly, however, capital is not a very satisfactory solution to a concentration problem. Rather, sound underwriting standards and appropriate monitoring provide better cushions and protections than additional capital.

ABC would emphasize that a single standard or set of guidelines is not appropriate for the widely diverse financial industry. The management information system reporting required by this guidance may be appropriate for a large bank. It is unwieldy and unworkable for a community bank and will add to our reporting costs and regulatory burdens. At the same time, it will not materially reduce risk in an effective manner. Our bank board and advisory lending boards are drawn from our local communities. More so than large bank boards, we are very attuned to local market events and are aware of changes without a requirement for a “formal process through which management reviews and evaluates concentration and management reports . . .” MIS reports that stratify the portfolio by property type, geographic area, tenant concentrations, tenant industries, developer concentrations and risk rating would result in a significant cost to ABC without a commensurate benefit.

Increasing concentrations of commercial real estate are certainly worth regulatory awareness and review. That is why “concentrations” are already covered by loan policies. However, the proposed guidance should be re-evaluated with appropriate distinctions drawn between community-based lending and large bank activities. The real macro economic risk is in the mega institutions. This proposal will not adequately address those risks while at the same time it has the potential to thwart community development lending in smaller institutions such as ours.

Thank you for this opportunity to comment.

Tracy A Riddle
SVP - Risk Manager
American Bank of Commerce
PO Box 9
Wolfforth, TX 79382
(806) 775-5139