FDIC: Loss Reserves Too Low At Banks in 5 Western Cities

Community banks in five fast-growing western cities should boost loan- loss reserves to protect themselves against an economic downturn, according to the Federal Deposit Insurance Corp.

In a report released this month, the FDIC said reserves held by banks with less than $1 billion of assets have fallen below the national average in Seattle; Reno; Olympia, Wash.; and Eugene and Salem, Ore.

The report also found that these banks are carrying higher-than-average volumes of construction loans.

These banks "are some of the most heavily exposed to construction and commercial real estate lending, yet have lower loan-loss reserves than other community banks in either the nation or the region," said the FDIC. The agency's division of insurance issues reports quarterly on banking in regions nationwide.

Catherine I. Phillips-Olsen, the division's San Francisco regional manager, said that third-quarter loan-loss reserves at banks in the five western markets ranged from 0.99% to 1.3% of total outstanding loans, compared with 1.68% for the region overall and 1.41% nationwide.

By comparison, in 1992, reserves averaged just under 3% of total loans at western banks and about 2.6% nationwide.

On average, about 30% of the assets of banks in those markets are commercial real estate loans, which is more than twice the national average, the Regional Outlook report stated.

Ms. Phillips-Olsen said it is not unusual for banks in growing markets to have a large portion of assets in construction loans. Nevertheless, she urged those banks to beef up their loan-loss reserves.

"The reserve levels need to be commensurate with the risks," she said.

Bank analyst James R. Bradshaw said he was surprised that the FDIC report focused on loan-loss reserves.

Mr. Bradshaw of Pacific Crest Securities in Portland, Ore., said that of all the community banks he follows, only one-Eugene's Centennial Bank, at 0.99%-had reserves of less than 1%. And he quickly added that Centennial had no nonperforming assets in 1997.

Ted Winnowski, president and chief executive officer of $500 million- asset Centennial, agreed, suggesting that the FDIC's loan-loss threshold may be too high.

With banks writing off so few loans, he said, "people consider 1% in reserves to be good and 1.25% to be very good."

But one western banker said there's nothing wrong with regulators' "raising the caution flag." William E. Martin, president and chief executive officer at Pioneer Citizens Bank of Nevada in Reno, said loan standards have slipped, in Nevada at least, as competition has increased.

"There are a lot of people chasing too few deals," said Mr. Martin, a former regulator in the Office of the Comptroller of the Currency. u

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