ABA Banking Journal - January 2008 - (Page 26) COVER STORY ence in the commercial real estate sector. “Commercial’s holding up fairly well,” says West Virginia’s Charles Maddy. “It’s a little slower, no doubt about that, but it’s not seen a dramatic change.” About half of the bank’s loan portfolio is tied in some way to commercial real estate, either financing construction or owneroccupied purchase of existing buildings and properties. Among the property types that Summit Community finances are commercial condos, strip malls, smaller business centers, and purchases of units in professional buildings and condo complexes by doctors, dentists, and others. “Commercial’s great,” says Mike Crapps of South Carolina. “We are seeing a lot of opportunities in our markets.” Performance has been good in this area, too. Crapps says that his staff completed a yearend review of its commercial real estate portfolio, an internal “checkup,” and “we still feel pretty good about that .” He adds that the two leaders are office space, especially in the state’s capital district in Columbia, and some owner-occupied retail space. In Perham, Charles Cavanagh says local commercial real estate remains decent. Properties continue to change hands, though a bit more slowly than had been the case. At Butler Bank, actually, management is looking to diversify a bit into more commercial real estate. Jock Pearson says Butler has been looking very seriously at taking part in a package of financing on a hospital facility. The $9 million total package includes both a line of credit and a cashflow loan to enable the hospital’s board to avoid drawing down its endowment. Loan portfolio composition by asset size Sept. 30, 2007 • Assets < $1 billion Other consumer 5% Agriculture* 3% Leases 0% Nonfarm nonresidential loans25% Construction 15% Credit card 0% All other loans 11% Residential mortgages 26% Commercial & industrial 13% *OTS - supervised Savings Associations do not identify agriculture loans. Source: FDIC Quarterly Banking Profile National plateau, local boom What these bankers are seeing jibes with a late-November report by the National Association of Realtors regarding the group’s Commercial Leading Indicator for Brokerage Activity. This index indicates that commercial real estate market activity is leveling out “at a high plateau,” according to a statement by Lawrence Yun, NAR chief economist. “Commercial real estate has been performing quite well over the past few years, and the flattening index means that new absorption of space in the industrial and office sectors is likely to contract modestly, or hold even over the next six to nine months,” Yun reported. Virginia’s Peter Clements has been watching the performance of his own institution compared to other area banks’, and says that while nonperformers are up somewhat in the region—“nothing that good management and capital can’t handle”—his institution hasn’t seen significant increases itself. The explanation for this, he says, is The Bank of Southside Virginia’s conservative lending policy. “We’re maybe a bit retro,” says Clements, “in that we never did give up on the idea of 80% LTVs” being the maximum exposure the bank would tolerate. In addition, the bank strictly writes “A paper,” he says, “with the exception of local stuff where you know the people.” ABA’s Seiwert says he’s been observing a tightening up of credit standards in the commercial real estate sector, over the course of 2007’s final quarter. He says he’s found that banks are beginning to distinguish more, when they price, between various types of commercial properties. Increasing conservatism will stand the industry in good stead. He points out, for instance, that even a bank with a higher-than-peer noncurrent level could still perform decently so long as its LTVs and other standards were conservative enough to give it some cushion. Handling exams under guidelines “I wouldn’t say we had a pleasant exam,” says Jock Pearson, “but I would say it was an OK exam. They could have done a lot more damage than they did.” Pearson’s Butler Bank had had an FDIC examination—about four months before the roundtable discussion was held. As a construction lending specialist, Butler Bank clearly was of interest to examiners still relatively new to the CRE guidelines issued in December 2006. Indeed, the agency brought in a large crew of examiners and wound up going through about 60% of Butler’s portfolio. “We have about 1,300% of our capital COVER STORY: HARD HAT continues on page 44 26 JANUARY 2008/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.realtor.org/ http://www.realtor.org/ http://www.ababj.com/subscribe.html
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