“CONCENTRATIONS ARE BANK KILLERS”

At the national RMA conference in Lake Buena Vista, Florida, on November 10, 2009, FDIC Associate Director Steven D. Fritts said that “concentrations are bank killers.” He went on to say that many of the banks that have failed have higher CRE concentrations. Virginia M. Gibbs of the Federal Reserve advised banks that they should invest in MIS systems to improve their risk management. "Without this capability," she asked, “how can you stress test?”

Regulators told the audience that over 2,000 banks in the country still have CRE exposure in excess of the 100% and 300% thresholds outlined in the interagency CRE guidance from 2006. Although FDIC Chairman Sheila Bair’s “problem bank list” is not public information, an informed individual can identify these institutions using pertinent ratios that are publicly available from the FFIEC’s website, which contains quarterly Reports of Condition and Income. A significant majority of the institutions with high CRE exposure will be on that “problem bank” list.

Now, more than ever, it is essential that bank management take steps to monitor and manage asset concentrations. The peak of CRE property values was in mid 2007 and the decline has been steady and severe ever since. Many banks still have loans on the books originated during the value peak. If these loans are still classified as “pass credits,” you need to update the value for these properties.

Obtaining new appraisals are expensive and due to the lack of “arm's length” transactions in the marketplace, arriving at a market value is a difficult assignment for any appraiser. However, collateral value is an important element of stress testing. When conducting this exercise consider the date of collateral value when determining your stress factors. If a majority of your loans were originated during the value peak, assigning a 30% or even a 40% stress factor would only bring this value current. This scenario will not project the impact to your capital base should the recession be prolonged with continuing negative economic factors. If your institution needs some help with this exercise email me.