Conrad Hanson, the president and chief executive of City Bank in Lynnwood, Wash., is one community banker who is not worried about how proposed federal guidelines on commercial real estate lending would the affect his bank's bottom line.
The guidelines, proposed in January, would likely require banks with high concentrations of commercial real estate loans to boost capital levels. Many community bankers have said the requirement would eat into their profits.
But the $900 million-asset City Bank already holds significantly more capital than most banks - and more than double what regulators require - and still makes lots of money from commercial and construction lending.
City Bank said last week that its first-quarter earnings jumped 64% from a year earlier, to $8.2 million, mainly because of strong growth in its niche business of lending to home builders north of Seattle.
At a time when many banks are reporting compressed margins, City Bank said its net interest margin expanded 153 basis points from a year earlier, to 7.61%.
It did all this while maintaining a 21.23% ratio of Tier 1 capital to total capital, compared with an average of 12.19% for banks its size, according to Federal Deposit Insurance Corp. data.
City Bank's secret: Make short-term construction loans with higher-than-average yields, and operate the bank with as few employees as possible.
"Our efficiency ratio is 26.4% - less than half of the industry average - and that, combined with our quick turnover on inventory, allows us to bring in very attractive results," Mr. Hanson said. City Bank consistently has some of the highest returns in the country; at the end of the first quarter its return on average assets was 3.79% and its return on average equity was 18.16%.
With such a model, Mr. Hanson said, he has no qualms about the January proposal by the four federal banking regulators that would require banks with high concentrations of commercial real estate to have stricter underwriting policies, enhance risk management, and - in some cases - hold more capital against its commercial real estate loans.
A bank with commercial real estate loans equal to 300% or more of its capital would be considered highly concentrated in commercial real estate, according to the proposed guidelines. So would a bank whose loans for land, land development, and construction equaled 100% or more of capital.
City Bank's ratios would fall squarely within those parameters. Its ratio of CRE loans to Tier 1 capital was 385% at yearend, and its construction and land development loan ratio was 246%.
"But since we already hold more than double the amount of capital than we need to, I'm sure we'd already be in full compliance in any scenario that could happen," Mr. Hanson said.
Still, Karen Thomas, the executive vice president for government relations at the Independent Community Bankers of America, said the hundreds of community bankers who have submitted comment letters to regulators have a legitimate right to worry that the proposal could hurt their bottom lines. (The deadline for comments was April 13.)
"There's just such a wide variety of loans out there that banks can make - office buildings, single-family construction, multifamily - and banks have different measures for managing those risks," Ms. Thomas said. "We're concerned that the regulators' guidance is a 'one-size-fits-all' approach that would inappropriately tar a lot of banks that exceed the arbitrary threshold."
City Bank also operates in an area where demand for home construction loans remains high, she said, but banks in area where demand is slowing could have their bottom lines squeezed if they have to tie up more in capital.
According to the FDIC's Spring 2006 State Profiles report, released this month, housing demand in parts of the Southeast appears to be slowing - while home construction loans are driving commercial real estate concentrations to "unprecedented levels" at banks throughout the region.
On the other hand, the FDIC said in its Washington state report that the home construction market there remains solid. Boeing Co. of Chicago, for example, has pumped up commercial aviation production in its Washington plants, creating more jobs - and more homeowners.
James Bradshaw, an analyst with D.A. Davidson & Co. in Portland, Ore., said City Bank actually posted better results than he had expected, because of its stronger-than-expected loan growth, so he raised his full-year earnings estimate by 7 cents, to $3.12 a share.
"City Bank is one of the most concentrated construction lenders in our universe, but north of Seattle is a pretty hot market right now," he said.
