Small and regional banks will begin reporting their second-quarter earnings in coming weeks, and the industry is bracing for problems in a sector that has been relatively strong up to now: commercial real estate loans.
“With everything that’s going on in the market, certainly there is concern related to commercial real estate,” said Richard Fulkerson, commissioner for the Colorado Division of Banking, which regulates state-chartered banks. “Do we expect failures in Colorado? No. We’re not seeing the types of problems in Colorado, at least at this point, that a lot of the rest of the country has experienced.”
On July 11, federal regulators seized IndyMac Bank, a Pasadena, Calif.-based bank that did a lot of consumer mortgage lending. It was the fifth bank to fail this year, according to the Federal Deposit Insurance Corp (FDIC).
Colorado’s community banks keep few, if any, consumer mortgage loans on their books, and so weren’t directly affected by the subprime mortgage meltdown.
But commercial real estate (CRE) loans — a category that includes construction and land development loans to homebuilders — are a major source of revenue for most Colorado banks.
If builders can’t sell the homes because of the housing market downturn, they may default on the loans.
Other types of loans also are lumped under commercial real estate, including loans to buy office towers or shopping centers, or loans to construct owner-occupied office buildings. These aren’t considered as risky right now.
“In Colorado, most banks do have a concentration of real estate loans,” said Fred Eller, vice chairman of Colorado Capital Bank. “Real estate has driven Colorado, and Colorado is still a very good marketplace compared with other states.”
Bad real estate loans were almost entirely responsible for a 24 percent rise nationwide in nonperforming loans during the first quarter, the latest data available from the FDIC. Nationwide, banks’ past-due and nonaccrual loans equaled a median 1.7 percent of their total loans. In Colorado, that figure was 2.1 percent.
Two years ago, federal regulators began advising closer scrutiny of banks that have lent more than 300 percent of their risk-based capital on CRE deals, or 100 percent for construction projects.
Many Colorado banks were well above those guidelines in the first quarter, according to Bank Strategies LLC, a Denver-based banking consultancy.
Colorado Capital Bank, for instance, was holding construction and land development loans equal to 578 percent of its capital, and total commercial real estate loans equal to 681 percent.
That’s a lot, Eller acknowledged, but it doesn’t necessarily mean the bank is in any danger.
“We are primarily a business bank ... so we’re likely to have a little higher ratio of corporate, industrial and real estate loans to our capital than some other banks, which are also making a lot of consumer loans,” Eller said.
And Colorado Capital Bank’s level of nonperforming loans is below the state average, at 1.7 percent of all loans, he pointed out.
“I think you’ll find that the majority of banks across Colorado had a ratio that was quite a bit above that,” Eller said.
A concentration in CRE lending isn’t necessarily a problem, said Larry Martin, president of Bank Strategies.
“If they are well-structured, well-underwritten and well-conceived projects, we shouldn’t have to care,” Martin said. “I think the concern that the regulators have is that many banks may have been caught up in the exuberance of real estate lending and compromised some underwriting standards.”
Many of the banks with the highest ratio of bad loans to total loans in the first quarter — including Premier Bank, Fowler State Bank and Pueblo Bank & Trust Co. — didn’t have heavy CRE exposure. Premier’s CRE loans amounted to only 154 percent of capital, well under the 300 percent guideline; Fowler’s is a mere 10 percent, and Pueblo’s only a bit above guidelines at 352 percent.
Fulkerson said that regulators do pay closer attention to banks with a heavy concentration in real estate loans.
“When we come in to do the examination, we’re going to make sure that they have X,Y,Z — pretty much what’s spelled out in interagency guidance — in place,” he said.
But a simple concentration in real estate isn’t necessarily bad, he said.
“Banks in Colorado, particularly community banks, have done extremely well with commercial real estate lending,” Fulkerson said. “It has become a bread-and-butter source of revenue for the majority of Colorado community banks. There’s some slippage here and there, but overall performance still continues to be strong.”
source:
http://www.bizjournals.com/denver/stories/2008/07/21/story2.html
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