Federal Deposit
Insurance Corporation

Bay Bank and Trust

From: Bay Bank and Trust Co., Panama City, Florida

Subject: Comments on FIL-4-2006; Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (Guidance).

The capital limitations as proposed in the Guidance appear overly restrictive and the definition of a commercial real estate (CRE) loan appears excessively broad.  The proposed limitations based on capital would result in many small community banks, well capitalized by all other measures to be deemed as undercapitalized relative to CRE loans.   The adherence to the capital measurements as proposed in the Guidance would ultimately result in a sharp curtailment in CRE lending by small community banks.  CRE lending is a valuable niche that is well served by small community banks.  The banks and the communities they serve depend heavily on the availability of CRE loans.  Such a substantial contraction (credit crunch) in CRE lending would have an immediate detrimental impact in the real estate market.  In addition, an imposed limitation on the amount of CRE loans that is based on a bank’s level of capital would have a disparate impact on small community banks. The proposed capital thresholds will place small banks at a distinct competitive disadvantage with large regional banks.  The Guidance as proposed would ultimately result in a major shift of commercial loan and deposit volume from small community banks to large regional banks.   

The scope of the definition of a CRE loan should not include real estate typically considered to be owner occupied even when the primary source of repayment is rental or lease income.  This would include, among others, loans secured by motels/hotels, mini- storage warehouse facilities, and apartment complexes.  Residential construction loans to builders for the construction of individual housing units should also be excluded from the definition of a CRE loan. 

It appears that potential credit problems that may result from an anticipated cyclical downturn in the real estate market would be more equitably addressed by an overall tightening in CRE loan underwriting standards, such as a downward adjustment of the supervisory loan/value limits imposed by Regulation H.  The implementation of the Guidance as presented would result in a significant shift in commercial loan and deposit volume from small community banks to large regional banks, would result in a substantially less competitive banking system, and would create a credit crunch in the real estate industry.  An equitable method to accomplish the aims of the Guidance should be found that can be implemented without threatening the continued viability of small community banks.    

Wade Spears