Federal Deposit
Insurance Corporation

State Bank of Southern Utah

From: LaNor Warby
Sent: Thursday, February 16, 2006 5:02 PM
To: Comments
Subject: 2006-01 - Commercial Real Estate Lending, Sound Risk MgtPractices--01/13/06

Response for Request for Comments on Proposed Concentrations in Commercial Real Estate Lending

These comments are in response to the proposed definitions and thresholds for determining elevated concentration risks in certain types of real estate lending. In the proposal the agencies are concerned with commercial real estate where repayment is primarily dependent on rental income, or from the proceeds of the sale, refinancing or permanent financing of the property. In the proposal the definition of commercial real estate (CRE) is, 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, or the proceeds of the sale refinancing, or permanent financing. This definition is so broad that it also includes loans that are not primarily dependant on the income or sale of the property to repay the loan. To meet the concerns of the agencies and to manage risk in CRE lending, the CRE definition should identify loans with risk from the sale or income of the property or identify loans that do not have permanent financing approved. As not all construction and land loans are dependent on the income or sale of the property for repayment, and have pre-approved financing from lenders with access to secondary market funding sources certain types of construction and land loans should be excluded from the CRE classification. These are listed below:

1. 1-4 family dwellings where the property is pre-sold under contract, is to be built by a  licensed contractor, is owner occupied, and where the buyer has qualified and is approved for long term financing.

2. Land loans such as lot loans made to a consumer purchasing the property as a long term investment and the loan is to be repaid from the income of the consumer, from sources which do not rely on income from, or the sale of the property.

3. Commercial projects where the property is to be owner occupied by the business and the source of repayment is from the operations of the business and long term financing has been pre-approved.

The interagency proposal excludes loans secured by owner occupied properties, because their risk profiles are less influenced by the condition of the general CRE market. As each of the above loan types have similar risk characteristics to owner occupied properties and have substantial differences in the risk characteristics from loans dependent on the income or sale of the property, they should be excluded from the CRE classification. Our experience from the late 1980’s and early 1990’s would indicate these types of loans do not exhibit the same CRE market risk factors. To include these types of loans as CRE loans undermines the goals of the agencies and of financial institutions to quantify and identify risk on loans dependant on the income or sale of the property. As the three types of loans do not rely on the income from the property or the sale of the property and are not vulnerable to the same cyclical factors when the source of repayment is from the sale or income of the property they should be excluded. To measure risk call report data should be adjusted to report information required to identify and separate loans in the proposal as outlined above.

H. LaNor Warby
Executive Vice President / CCO
State Bank of Southern Utah