The Winds: They Have Shifted
By Stephen M. Klein
April 10, 2008
The Economy
To date, it’s almost like a tornado hitting certain pockets of the West and barely leaving a trace in other locales. What is most disconcerting is that in addition to the anomaly of West Sound Bank, well-regarded community banks have announced significant loan loss provisions and increases in nonperforming loans. These are tied to the softening real estate market in the Northwest. How deep and broad this will go is still an unknown, but it is safe to assume there are more storm warnings to come. To some degree, all community banks in the West will be hit since real estate lending is at the core of what they do.
The Regulators
The other wild card out there is the regulators. We are starting to see an up-tick in regulatory enforcement actions. The FDIC sent out a not so gentle reminder about its concern over CRE loan concentrations. We are also told that the regulators are accelerating safety and soundness examination cycles for banks with high CRE loan concentrations. The feedback we are receiving is that exams are longer, harder and more contentious, with the FDIC leading the charge.
Where Do We Go From Here?
The phrase “it is what it is” is applicable here. Your loan portfolio is what it is. However, being proactive in identifying and shoring up weaknesses in your loan portfolio is a good thing. You certainly don’t want the regulators to be the first ones to identify your loan problems. Building strong reserves, enhancing your capital position and actively working with your borrowers appears to be the best recipe to survive the storm. Don’t forget, the regulators believe that capital cures most ills.
Conclusion
A number of factors, some of which are not directly in the control of banks, will determine the depth and breadth of the current economic downturn and its effect on banks and their customers. We suspect that the old adage “the best defense is your best offense” applies here. Being proactive would seem to be your best offense.
For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.
