Fixations in Commercial Real Estate Lending .

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2. CRE Trends. Business Real Estate loaning (CRE) fixations have risen essentially at group banks in late yearsSmall Banks versus Large Banks1991 CRE-to-resources underneath 15% for all banks2009 CRE-to-resources 31.5% for Small Banks, however verging on unaltered from 1991 level for Large Banks. 3. CRE Concentrations
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Fixations in Commercial Real Estate Lending

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CRE Trends Commercial Real Estate loaning (CRE) focuses have risen fundamentally at group banks as of late Small Banks versus Large Banks 1991 CRE-to-resources beneath 15% for all banks 2009 CRE-to-resources 31.5% for Small Banks, yet practically unaltered from 1991 level for Large Banks

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CRE Concentrations – Small Banks versus Large Banks 1991 to 2009

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SR 07-1 Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices Purpose of Guidance Ability to withstand advertise interruption will depend intensely on level of administration oversight and capital levels Does NOT Define CRE Concentration Establish CRE loaning limits

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SR 07-1 CRE Concentration Assessments Institutions effectively included in CRE loaning ought to: Perform continuous hazard evaluations Identify potential fixations Establish focus limits Report fixations to governing body

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Risk Management Board and Senior Management Oversight Portfolio Management MIS Market Analysis Policy & Underwriting Stress Testing Credit Risk Review Effective hazard administration forms can\'t be executed without reasonable and hearty CRE Concentration Assessments.

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Board & Senior Management Oversight Director Involvement in CRE Strategic Process Establish Policy Guidelines in Support of Strategy Identifies and Quantifies Nature and Level of Risk Presented by CRE Concentrations Review and Approve CRE Risk Exposure Limits and Appropriate Sub-limits Conform to Changes in Strategy Respond to Changes in Market Conditions

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Prudent Underwriting of Individual Loans is NOT Enough Cyclical Changes can Equal Unacceptable Risk Establish Internal Lending Guidelines and Concentration Limits Evaluate the Degree of Adherence to Internal Guidelines Develop Strategies for Managing CRE Concentrations Contingency Plan – Participations, Sales, or Securitizations Assess Marketability Access to the Secondary Market Comparison of Underwriting Standards Portfolio Management

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Management Information Systems Key to Effective Portfolio Management Ability to catch helpful data that permits portfolio division and stratification Information with respect to changing economic situations and coming about market values Sufficient Borrower Information to Perform Stress Test Analysis Not Focused Solely on "Reports", But On The Culture of Thought

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Market Analysis Are CRE Lending Strategy and Policies Appropriate? Changes in CRE Market Conditions Property Types Geographic Markets Represented New Markets, New Lending Activities, Expanding Existing Markets Sources of Information Research Data, Appraisers, Local Authorities, Builders, Investors, Community Development Groups Sophistication of Analysis Depends on Market Share and Exposure

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Maximum advance sum by kind of property Loan terms Pricing structures Collateral valuation Loan as far as possible by property sort Requirements for attainability examines & affectability investigation & stretch testing Minimum necessities for beginning venture and upkeep of hard value by the borrower Minimum gauges for borrower total assets, property income, and obligation benefit scope for the property Exceptions – constrained, endorsed, observed, and revealed Credit Analysis & Underwriting

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Stress Testing Susceptibility to weakening financial, market, and business conditions Debt benefit scope (DSC) and advance to-esteem (LTV) proportions Conservative Ultra-refinement not required "Stun" testing: Increase in financing costs Overall changes in property estimation Changes in property opening rates Declines in NOI Changes in capitalization rates Focus ought to be helpless sections of the portfolio.

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Strong Credit Risk Review

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Capital Adequacy Examiner ought to consider: Inherent hazard Management mastery Historical execution Underwriting measures Risk administration hones Market conditions Loan misfortune holds designated for CRE focus chance Capital levels ought to be similar with the hazard profile of the CRE portfolio.

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What are inspectors finding in 5 th District State Member Banks?

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Nonaccrual advances have expanded altogether in the course of recent years, and are at a ten year record abnormal state. Normal nonaccruals in 5 th District State Member Banks surpass those of other 5 th District banks and the national normal.

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Construction and Land Development advances have demonstrated the most keen increment, with a normal of 11.6% revealed as nonaccrual.

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Not just have noncurrent CLD credits expanded, yet so have net chargeoffs.

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Nonfarm/Nonresidential properties have encountered an indistinguishable patterns from those in the CLD portfolios.

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Despite sharp increments in nonaccrual and nonperforming advances, ALLL equalizations have not been directionally predictable.

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There gives off an impression of being an immediate relationship in the nature of a bank\'s CRE portfolio and the conservativeness of guaranteeing guidelines and procedures.

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Steven L. Wilson Supervisory Examiner – Credit Risk 804-697-4045

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