Commercial Real Estate

FDIC Community Bank Advisory Committee
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Agenda

 Lessons Learned from the Crisis

 Current Trends in CRE Lending

 Guidance on Commercial Real Estate (CRE) 

Lending

 Summary

 Questions
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Lessons Learned from the Crisis

 FDIC Inspector General’s (IG’s) October 2012 Acquisition, 

Development and Construction Loan Concentration Study 

found many banks with a concentration in real estate 

loans successfully managed the risk in their portfolio by:

 Implementing more conservative growth strategies.

 Relying on core deposits and limited net non-core funding 

dependence.

 Implementing prudent risk management practices and limiting 

speculative lending, loan participations, and out-of-area lending.

 Maintaining stable capital levels and had access to additional 

capital if needed.

 Being responsive to supervisory recommendations, actions, and 

guidance. 
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Lessons Learned from the Crisis

 Many institutions that failed:

 Experienced rapid loan growth.

 Did not recognize the growing risk exposure from their 

concentration in real estate loans.

 Did not develop risk assessments that sufficiently 

considered economic conditions and likely 

performance under stress conditions. 

 Did not develop contingency planning that sufficiently 

reduced or mitigated concentration risk in the 

downturn.
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 The IG’s January 2013 Study on the Impact of 

Failure of Insured Depository Institutions found 

that high ADC or CRE concentrations or rapid 

asset growth contributed to failure in 95% and 

69%, respectively of the Material Loss Reviews.

Lessons Learned from the Crisis
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Lessons Learned from the Crisis

 Aggressive Growth Contributed to Failures

 Banks with a 3-year average yearly growth rate over 

20% entering 2008:

• 37% remained satisfactorily rated as of year-end 2011.

• 16% failed by year-end 2011.

 Banks with a 3-year average yearly growth rate 

between 0% and 10% entering 2008:

• 69% remained satisfactorily rated as of year-end 2011.

• 2% failed by year-end 2011.

Source: FDIC Call Reports. 
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Likelihood of Failure for Community Bank CRE Specialists 

Compared to the Average Community Bank

Source: FDIC Community Banking Study (2012).

Lessons Learned from the Crisis

Likelihood for All Community Banks = 1.0

2006-10 2011

1. All CRE Specialists 2.3 3.4

C&D < 10% 1.0 1.7

C&D > 10% 3.0 8.5
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Source: FDIC; aggregate ratios annualized as of 1Q 2014. 

Lessons Learned from the Crisis

Owner Occupied 

CRE 

Excluding

Owner Occupied

2007 2008 2009 2010 2011 2012 2013 2014

Past Due and Non-Accrual (PDNA) Rates Charge Off Rates 
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Comparing Past Due and Charge-off Rates on 

Owner Occupied and “Other” Loans Secured by 

Nonfarm Nonresidential Real Estate

 Data available since 2007 show past due and charge-off 

rates rose markedly for both loan types after the crisis, 

and have since receded.

 Past due and non-accrual rates have been consistently 

higher for loans secured by owner occupied CRE.

 Charge-off rates have tended to be higher for CRE loans 

secured by non-owner occupied properties, particularly 

in 2009 and 2010.

Lessons Learned from the Crisis
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Lessons Learned from the Crisis

Number of banks 

dropped from 

28% to 4%

Number of banks 

dropped from 

18% to 6%

NOTE: Failed institutions included. CRE is defined as sum of C&D, Multi-Family, Non Owner-Occupied Nonfarm 

Nonresidential and CRE included in C&I. Owner-Occupied Nonfarm Nonresidential loans are excluded.
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Current Trends in CRE Lending

Nation

Commercial Real Estate Price Indexes

4th Quarter 2001 = 100

80

100

120

140

160

180

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Retail

Office

Industrial

Apartment

Source: Real Capital Analytics (data through first quarter 2014).

Note: Prices indexed to 4-quarter moving-average prices for each property type. Based on average prices 

for U.S. major markets.

National Trends in CRE Prices

Source: Real Capital Analytics (data through first quarter 2014).

Note: Prices indexed to 4-quarter moving-average prices for each property type. Based on average 

prices for U.S. major markets.
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Current Trends in CRE Lending

 As of 1Q2014, 70% of all banks reported positive 

YOY loan growth, highest since 1Q2009. 

Source: FDIC.
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 Agencies issued 2006 Joint Guidance on CRE 

Lending guidance due to:

 Rising CRE concentrations could create S&S concerns 

in the event of a significant economic downturn.

 Relaxing of underwriting standards due to competition.

 Increasing number of banks lacked appropriate policies 

and procedures to manage risk in CRE concentrations. 

 Lack of adequate risk management framework for CRE.

 Excluded owner occupied CRE:

 Secondary repayment source or abundance of caution.

 Lower risk profile evidenced by lower charge-off rates.

Guidance on CRE Lending
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Guidance on CRE Lending

 2006 Joint Guidance on CRE Lending - thresholds 

are “preliminary step” to identify banks that may 

have concentration risk.

 Thresholds:

 Loans for C&D loans equal 100% or more of total 

capital.

 CRE loans (excluding loans secured by owner occupied 

properties) equal 300% or more of total capital AND the 

CRE portfolio grew 50% or more during prior 36 months. 

 Not viewed as a “safe harbor” if other risk indicators 

are present regardless of the ratios’ measurement. 
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Guidance on CRE Lending

 Appendix A to Part 364 - Interagency Guidelines 

Establishing Standards for Safety and Soundness

 Consider the size and potential risks of material asset 

concentrations.

 Asset Growth – should be prudent and consider:

• Source, volatility and use of the funds that support asset growth; 

• Any increase in credit risk as a result of growth; and 

• The effect of growth on the institution's capital.

 Part 365 – Institution’s policies and strategic plan 

should consider the need to avoid undue 

concentrations of risk.
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Summary

 FDIC has not established a new concentration 

threshold for owner occupied CRE loans.

 Institutions need strong corporate governance to:

 Manage concentration risk for all types of loans. 

 Maintain effective concentration risk management 

programs that:

• Identify and monitor all concentrations.

• Consider the trends in CRE portfolios.

 Institutions should remain diligent to prudently 

underwrite CRE and C&D loans. 
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References

 FIL-104-2006, “Concentrations in CRE Lending,” 

http://www.fdic.gov/regulations/laws/federal/2006/06notice1212.html

 FIL-22-2008, “Managing Commercial Real Estate Concentrations in a 

Challenging Environment,” 

http://www.fdic.gov/news/news/financial/2008/fil08022.html#body

 Appendix A to Part 364, http://www.fdic.gov/regulations/laws/rules/2000-

8630.html#fdic2000appendixatopart364

 Part 365 Subpart A Real Estate Lending Standards, 

http://www.fdic.gov/regulations/laws/rules/2000-

8700.html#fdic2000part365.1

 Supervisory Insights, Managing Commercial Real Estate Concentrations, 

http://www.fdic.gov/regulations/examinations/supervisory/insights/siwin07/

winter07.pdf

 Risk Weight for High Volatility ADC loans increases to 150% in 2015 

http://www.fdic.gov/regulations/resources/director/RegCapIntFinalRule.pdf 
Questions?