Home construction loans are driving commercial real estate concentrations to "unprecedented levels" at banks throughout the Southeast - at a time when housing demand appears to be slowing, a Federal Deposit Insurance Corp. report said.
Though a slowdown in the housing market would not trigger a crisis, FDIC officials said, it could lead to lower profits for the hundreds of banks in the region that rely heavily on commercial real estate — and specifically construction and development — lending.
Jack Phelps, the Atlanta regional manager of the FDIC's Division of Insurance and Research, said in an interview last week that regulators are closely monitoring market conditions in Florida, Georgia, North Carolina, and other places in the region.
"We're heading into the peak home-buying season," Mr. Phelps said. "Over the next 120 days we will get an indication if the soft patches that were emerging in late 2005 are continuing or worsening."
Bankers and industry trade groups say heavy concentration of construction and development loans is not a problem, so long as the loans are underwritten properly. According to the FDIC's Spring 2006 State Profiles report, released this month, banks in the Southeast had some of the country's lowest ratios of past-due loans.
Furthermore, bankers say they are simply responding to demand. Many markets in the Southeast — such as Charlotte, Orlando, Atlanta, and northern Virginia — rank among the fastest-growing in the country in terms of jobs and population.
"Georgia has had over 1 million people come to our state in the past 10 years," said Joe Brannen, the president and chief executive officer of the Georgia Bankers Association. "Those people need housing, a place to work, and a place to shop."
The FDIC data highlighted in the state-profile report is further evidence of regulators' overall concern about the level commercial real estate loans in community banks' portfolios.
Interagency guidance regulators proposed in January would require banks and thrifts with high concentrations of commercial real estate loans to bolster risk management practices, tighten underwriting policies, and potentially hold more capital against commercial real estate loans.
Under the proposed guidelines, a bank would be considered highly concentrated in commercial real estate if its loans secured by nonresidential and multifamily properties and loans for construction, land, and land development exceeded 300% of its capital, or if its loans for construction, land, and land development equaled 100% or more of its capital.
Regulators had set a March 14 deadline for comment but postponed it by a month to give community banks in particular more time to respond. Community bankers have said the proposed guidelines would hit banks with $1 billion of assets or less particularly hard, because they rely more heavily on commercial real estate lending than larger banks do.
As of April 13 regulators had received more than 800 comment letters, the majority from small banks that oppose the proposed guidelines.
In the state-profile report, the FDIC said that commercial real estate concentrations had risen to unprecedented levels at banks in seven states in the Southeast — Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, and West Virginia.
Within that sector, construction and development lending, primarily lending on housing developments, is driving the trend, Mr. Phelps said.
The high concentration of construction and development lending is not limited to banks in the Southeast. Community banks in some western states are also reporting levels well above 100%.
Still, the ratios are highest in the Southeast. Community banks there — those with $1 billion of assets or less — have reported nine consecutive years of double-digit growth in the sector, Mr. Phelps said.
At yearend community banks reported an average ratio of construction and development loans to Tier 1 capital of 156%. To put that in historical context, Mr. Phelps said that in 1988, the ratio for community banks was below 50%.
Nationwide, the ratio for community banks was 94% at yearend.
The state-profile report also showed a deceleration in home sales, as well as rising inventories of unsold homes, in markets throughout the Southeast — a possible indication that the housing market is cooling.
Community bankers in the region are downplaying regulators' concerns.
Bernard H. Clineburg the chairman, president, and CEO of the $1.4 billion-asset Cardinal Financial Corp. in McLean, Va., said that having a high level of construction and development loans on a bank's books is not inherently risky, as long as the loans were "conservatively underwritten and you know the customer."
Last year Cardinal had no net chargeoffs, though its construction and development loans doubled from the previous year, to $180 million. At yearend its ratio of construction and development loans to Tier 1 capital was 149%.
Robert T. Braswell, the president and CEO of the $363 million-asset Carolina Bank in Greensboro, N.C., said that commercial real estate lending has served the bank well since it opened for business a decade ago, and that it is not going to change its strategy in reaction to regulators' concerns.
Construction and development loans at all banks in North Carolina rose 51% last year. At yearend 63% of the state's community banks had construction and development loan exposures of more than 100% of capital, while only 14% of the community banks there had such a high exposure in 1989, according to the FDIC.
Paul Stock, the executive vice president and counsel of the North Carolina Bankers Association, said that the rapid growth is simply a reflection of the regional economy.
"If commercial development is where the best loans are, … [community banks] want to be able to make them," he said.
