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Banks making record levels of commercial estate loans { July 17 2005 } Original Source Link: (May no longer be active)
http://www.nwanews.com/story.php?paper=adg§ion=Business&storyid=122385http://www.nwanews.com/story.php?paper=adg§ion=Business&storyid=122385
As real estate loans rise, so does the uneasiness
BY DAVID SMITH
Posted on Sunday, July 17, 2005
Banks nationally are making record levels of commercial real estate loans, worrying some regulators that losses could follow if bankers are not careful.
Community banks, which by some definitions would include all Arkansas-based banks, had an average of 28 percent of their assets focused in commercial real estate loans in the first quarter this year, according to a recent article in the American Banker.
Arkansasbased banks are well below that, with commercial real estate loans averaging 17 percent of assets for the first three months of the year, according to information provided by BauerFinancial Inc. of Coral Gables, Fla.
Only five banks in Arkansas have more than the national average of 28 percent of their assets dedicated to commercial real estate loans.
The highest is Chambers Bank of North Arkansas in Fayetteville at 37 percent, followed by its affiliate, Chambers Bank of Danville at 36.4 percent.
Arvest Bank in Fayetteville, the largest Arkansas-based bank, has the highest value of commercial real estate loans, with more than $1.4 billion. That’s about 20 percent of Arvest’s assets.
The Northwest Arkansas commercial real estate market is probably the most competitive, said Robert "Bunny" Adcock Jr., commissioner of the Arkansas State Bank Department.
The inventory of commercial real estate space in the area has grown more than the demand, according to a report released last month and funded by Arvest. From December through February, there was more than $57 million in commercial building permits issued in Benton and Washington counties.
Almost 80,000 square feet of office space and more than 18,000 square feet of retail space were added just in Bentonville during that three months, according to the report. "There has been a lot of commercial real estate activity up here over the last several years as the population continues to grow," said Bob Boehmler, an executive vice president and loan manager for Arvest in Bentonville. "You’re seeing more of a demand for retail services, medical services, and office and warehouse space. I think for the next several years we should still see a healthy activity of commercial real estate development in Northwest Arkansas."
There is no bank in Arkansas with such a high concentration of loans in commercial real estate that it has alarmed the Bank Department, Adcock said. "My concern is that we don’t go back to the early 1980s," he said, referring to risky real estate lending that led to the collapse of many savings and loans across the country. "Obviously there are signs that there is increased lending going on in commercial real estate. My concern is that we don’t drop our [underwriting] standards. There can be a temptation to do so because maybe a competitor is doing that. But I don’t know of any bank in the state that has done that."
Adcock was a young banker in Faulkner County in the late 1970s and early 1980s when interest rates were as high as 15 percent to 20 percent. "A lot of projects that looked good at the time, by the time they were near completion, rates had gone up so much that they weren’t viable projects anymore," he said. "And they weren’t able to be worked out, so consequently they were sold on the courthouse steps."
The Bank Department monitors large concentrations of loans made by a bank to one industry.
But out of necessity, many Arkansas banks do have high concentrations of their loans in one industry, Adcock said, such as agriculture for banks in east Arkansas, timber for banks in south Arkansas, and commercial real estate for banks in Northwest and central Arkansas.
About 60 of the 167 Arkansasbased banks have more than 25 percent of their loans concentrated in commercial real estate, according to BauerFinancial.
Adcock said he tells bankers, especially in fast-growing Northwest Arkansas and in central Arkansas, to be cautious with commercial real estate loans. "I tell them be careful, be careful, be careful," he said. "Make sure that you know the people you’re lending to and that they are Realtors and not speculators who don’t have the wherewithal to stay with the project."
He is concerned that bankers new to Northwest Arkansas might not know their customers very well, Adcock said. "They may not know values as well or the traditional lending practices up there," he said. "So they could come into the market and in trying to gain a foothold in the market, make some loans that are a little speculative or a little risky. That’s why I keep telling them to be cautious."
Most bankers in Northwest Arkansas have told Adcock that the commercial real estate loans in that area have been to "solid businesspeople who are there to develop a project" and not to speculators, Adcock said.
Susan Schmidt Bies, a Federal Reserve governor, told North Carolina bankers last month that the Federal Reserve is worried that "borrowers could become increasingly speculative, buying beyond their means and hoping for asset price appreciation, whether they are buying for their own use or strictly for the sake of investment." "We worry that competitive pressures could drive banks to lower their underwriting standards, implicitly encouraging such speculation," Bies said. "And we worry that, in the inevitable downturn, credit quality could deteriorate to the extent that some banks could experience significant losses."
There is not as much concern with residential real estate loans in Arkansas, Adcock said. "People tend to make that house payment, so it tends to be one of your better loans, especially if it is properly underwritten," he said.
Most banks in the state do not get involved in making no-money down home loans or zero-percent interest home loans, he said. Those loans are more often offered by mortgage companies. "That gives me heartburn," Adcock said. "That’s playing with fire."
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