FDIC Federal Register Citations

Exchange Bank

Robert E. Feldman

Executive Secretary

Federal Deposit Insurance Corporation

Washington, D.C.

Subject: Response to Proposed Guidance Governing Concentrations in Commercial Real Estate Lending, Issued January 13, 2006

Dear Mr. Feldman,

The proposed guidance outlines key risk management issues but establishing general concentration limits may impair a community bank’s ability to adequately service its market and/or compete against national or regional banks. As we are all aware commercial real estate has been a primary driver for bank loan growth over the last few years. The guidance outlines some of the potential risks but it ultimately will increase the regulatory burden for many community banks. The FDIC has already issued Real Estate Lending Standards captured within Part 365 of the FDIC Rules and Regulations. These standards require a bank to establish prudent underwriting standards including loan-to-value limits, diversification standards, credit administration standards, and reporting requirements. These various risk factors are clearly outlined within Part 365. Further, supervisory loan-to-value limits are established and loans in excess of said limits cannot in the aggregate exceed 100 percent of total capital. Concentration limits or concerns have always been addressed by the regulators relative to capital, asset quality, management and liquidity. I have never experienced a regulatory examination that did not address these issues.

The lack of board and management oversight, portfolio management, underwriting, and adequate capital is and should be addressed when evaluating the risk factors that comprise the bank’s composite rating. While the guidance is intended to reinforce previously issued regulations and guidelines, credit risk management practices already require financial institutions to assess loan concentrations and the potential impact said concentrations could have upon a financial institution. The impact and more importantly what management is doing to monitor and mitigate concentration levels needs to be assessed on a case-by-case basis. Regulatory examiners need to assess the portfolio mix, underwriting, market conditions and outlook, current delinquency trends, historical losses and management oversight in determining the potential risk exposure.

The proposed guidance stated that the risk management practices of some institutions are not keeping pace with their increasing CRE concentrations and that some institutions have expanded into new markets without establishing adequate control and report processes. In those cases where management has placed the proverbial cart in front of the horse the regulators can rate that bank accordingly and if required issue orders such as a Memorandum of Understanding or a Cease and Desist to address the bank’s specific risk issues. A sound process is already in place so issuing additional regulations or guidelines does not benefit the industry, will cause confusion in its attempt to define concentration thresholds and what loans comprise said concentrations, increase the regulatory burden, and may impair a community bank’s ability to compete and service its respective market.

Thank you for the opportunity to respond to the proposed guidance.

Sincerely,

Edgar M. Gomez
VP and Credit Administrator
Exchange Bank
Santa Rosa, CA