How Community Banks Can Manage the 100-300 CRE Levels

Regulatory limits for commercial real estate lending levels are at high levels for many community banks. Sound risk management strategies are essential for managing concentrations and CRE growth. Roger G. Shumway, EVP & chief credit officer, Bank of Utah and Susan Davis Smith, SVP & credit risk manager, American National Bank of Texas shared their insights during the most recent Credit Risk Management Audio Conference.

The 2006 regulatory thresholds for CRE concentrations are defined as loans for construction, land development, and other land exposure of 100 percent of total risk-based capital; and loans for construction, land development, and other land and loans secured by non-farm, non-residential property, and multi-family loans exposure of 300% of total risk-based capital, and CRE portfolio growth by 50% or more in the prior 36 months. The 2006 interagency guidance stressed the importance of prudent risk management practices emphasizing board and management oversight, strong portfolio management, and the utilization of management information systems, market analysis, credit underwriting standards, portfolio stress testing, and credit risk review.

Shumway and Smith pointed out the cyclical nature of commercial real estate lending and that while we are currently at the crest of the cycle, preparing for the eventual downturn is critical. Future problems start during the good times, and employing sound practices now can be the key to survival.

The supervisory CRE focus has been on:

  • Underwriting standards with concerns over less-restrictive loan covenants.
  • Extended maturities.
  • Longer interest-only payment periods.
  • Limited guarantor requirements.
  • Insufficient analysis or monitoring of market conditions.
  • Stress testing and capital planning.
  • Strategies for new loan growth. 
  • Cap rates.
  • Collateral valuation and reviews. 
  • And the impact and exposure of market conditions.

Most importantly, concentration risk management and portfolio management must align with the institution’s strategic and business plans. Banks should avoid undue risk concentrations and activities that do not adhere to its risk appetite or present risks to its reputation.

Join us for the next installment of the Credit Risk Management Audio Conference Series on May 8, Talent Management, Training, and Retention Issues.

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