By Chuck Chiang / The Bulletin
Community banks should keep a closer eye on the quality of their commercial real estate loans, Federal Reserve Chairman Ben Bernanke said Wednesday.
Bernanke said the increasing number of commercial real estate loans could mean that banks are assuming additional risks because their loan application review process can't keep pace with market demand.
Bernanke's remarks resonate in high-growth markets like Central Oregon.
"Our examiners tell us that lending standards are generally sound and are not comparable to the standards that contributed to broad problems in the banking industry two decades ago," Bernanke said during a banking conference in Las Vegas. "However, more recently, there have been signs of some easing of underwriting standards."
Central Oregon's community banks said Bernanke's comments raise a legitimate concern in the local market. But most officials said they haven't seen signs that banks are being too risky in making commercial real estate loans.
"As new banks move in to the market, (more risky behavior) definitely could happen," said Robin Freeman, president and CEO of Prineville-based Community First Bank. "(A hot real estate scene) can bring inexperienced investors into the market, so there is a chance that banks, or any other lender, could get caught up in it (the hype). But I don't see that first hand in Central Oregon right now."
Banks making commercial real estate loans usually decide to lend based on two aspects of the application.
One is cash flow, or a steady stream of income from the project to support loan payments.
The second is collateral, or the property's market value the bank could claim if the applicant were to default on the loan.
Bernanke's comments reflect federal concerns that banks may be increasingly looking at collateral lending, basing loans on the current value of properties. In a soft real estate market, banks might not be able to unload the collateral property to recover its loan amount.
Frank Weis, executive vice president and credit administrator for Bend-based Bank of the Cascades, said that risk is very real - even in Central Oregon's real estate climate. Banks should take the market's volatility into account when making loans, he added.
"It's going to be that way until it isn't," Weis said. "Our underwriting process works in such a way that we're protected when it isn't."
But some banks aren't as careful, said Ryan Killgore, U.S. Bank's regional president for Central Oregon.
"What is banking all about? It's all about risk," Killgore said. "Some banks may be looking to grow by taking more risks and that may be trouble in the future. I do see significant differences between commercial real estate loan underwriting among different banks."
For making loans, national banks like U.S. Bank are under the supervision of federal bodies like the Office of the Comptroller of the Currency.
Community banks, under state charter, are supervised by state bodies, whose loan regulations vary.
Tom Bourdage, vice president of Lake Oswego-based West Coast Bank's commercial real estate division in Bend, understands Bernanke's concerns. But small banks have developed ways to prevent themselves from taking too much risk, he added.
"There are checks and balances along the way," Bourdage said of his bank's loan approval process. "My understanding is that (Bernanke) is worried that, as the interest rate goes up, cash flow may diminish for the lenders. But part of our risk analysis covers that aspect."
Both Cascades' Weis and Community First's Freeman said community banks benefit from knowing local markets intimately, sharpening their ability to identify risk.
"Community banks, because we have less geographical diversity than large national banks, have to be prepared to understand their local market more," Freeman said. "With underwriting, that knowledge results in a process that keeps us from being too risky and getting hurt by changes in the market." www.rebend.com
Weis said his company has seen Central Oregon's real estate boom from the start, and has fine-tuned its underwriting process long before Bernanke's comments.
"We haven't loosened or tightened our underwriting (recently)," Weis said. "It's business as usual because it's not a new thing for us. Even in areas we expanded to, we're using the same methods of loan monitoring we're using here."
He added, though, that any banks going to new markets should take Bernanke's heed.
"I think some banks are probably (taking more risks)," Weis said. "When you see an opportunity, you're going to see people trying to take advantage of it. I think the general concern we've heard from regulators is that you have to be careful. Control your underwriting process and control what's on your books."
