Federal Deposit
Insurance Corporation

Subject: 2006-01 - Commercial Real Estate Lending, Sound Risk Mgt Practices--01/13/06

From: Kathryn L. Sommer, SVP & CCO
America California Bank, San Francisco

There are three points I would like to make.

First, if banks are already following the "best practices" for commercial real estate already published by the agencies, then complying with the guidance is not difficult. The one area that is problematical for smaller banks would be the stress testing of the portfolio. Lacking sophisticated data bases on the portfolio, much gathering of data will be required to stress test accurately. Conversely, if a generic stress test is done (e.g. assume 20% of CRE loans move to Substandard, etc.), it doesn't add any value beyond telling the Board/Management what the effect would be on capital/earnings. It doesn't highlight specific loans that could be at risk. We shock every rate we use in underwriting by 3%, so we can see on a borrower by borrower basis what a run up in rates would do to the specific property's ability to continue to service debt. This practice and portfolio monitoring should be sufficient for small banks as management tends to know each credit individually.

Second, as to capital adequacy, the guidance in a footnote states that it depends on both the level and the nature of the CRE concentration when determining if an institution has adequate capital. I believe that prudent Boards will be able to determine what additional capital may be required when supplied with sufficient portfolio information. I aplaud the lack of specific guidance on this issue.

Third, the guidance states: "Management should also compare the institution's underwriting standards for individual property types with those that exist in the secondary market. When an institution's standards are substantially more lenient, management should justify the reasons why the institution's risk criteria deviate from those of the secondary market and should document their long-term plans for these credits." ( Note that "substantially" is not defined.) I'm sorry, but if community banks had underwriting standards like the secondary market, we wouldn't have any CRE exposure at all. Those loans that fit the secondary market criteria are being funded by the WAMUs of the world at ridiculously low fixed rates that we can't meet. Community banks continue to make sense in the financial community because they don't have small, rigid boxes that borrowers and their properties must fit into. We continue to underwrite each loan thoroughly, and any weakness in a credit needs to be mitigated by other areas. An example would be debt service coverage. In San Francisco, many multi-family or mixed use properties do not have decent debt service because the market relies on appreciation not income streams. We would make these loans if other sources of cash are available to the borrower to meet the debt service.

I would consider it a waste of my time to find out what the secondary market standards are and justify my policies if they deviate. In addition, establishing long term plans for credits that deviate sounds a lot like the reporting we do for criticized and classified assets. Another waste of time and paper for good, performing assets. I feel that banks with good asset quality should be judged on credit performance not deviation from standards that are too rigid for the communities we serve. I think delinquency and charge off experiences in community banks speaks most clearly to underwriting standards.

I'll now get off my soapbox and get back to work. Thank you for the opportunity to comment.

Regards, Kathryn Sommer