The Federal Deposit Insurance Corp. is advising the Midwest's fastest- growing community banks to boost loan-loss reserves or reduce their volume of construction and commercial real estate loans.

Otherwise, those banks "may be especially vulnerable to a downturn in the national business cycle," the FDIC said in its Regional Outlook for the June 30 quarter of 1997, released this March.

The report, published by the agency's division of insurance, analyzed the loan portfolios of 2,171 banks and thrifts with assets of less than $250 million in Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

At the fastest-growing 20%-434 institutions-the FDIC found 1.1 percentage-point increases since June 30, 1994, in loans for construction and commercial real estate, which are considered risky categories. Construction loans made up 5.3% of these banks' total loan portfolios last June; commercial realty credits, 14.4%

More significantly, 28 banks quintupled their volume of these loans during the three years, and 110 banks tripled their number of construction loans, the report said.

Roger Denesia, the division's Kansas City regional director, said the increase in exposure to risky loan types is a concern that he discusses with bankers regularly. He said he wants to be sure that the banks have adequate risk-management plans.

"This is not to mean that growth is bad," he said. "But some of these banks have taken on considerably more risk."

Regulators are also concerned that the same booming banks are operating with less capital, liquidity, and loan-loss reserves than banks growing more slowly.

The study found that while equity capital ratios have increased at most midwestern community banks, these ratios had decreased at the fastest- growing institutions. From June 1994 to June 1997, the average community bank boosted its equity capital ratio to 10.45% from 10.08% In the same period, the fastest-growing banks' average ratio fell to 8.92% from 9.42%.

Those same fast-growing banks have also set aside smaller reserves-1.2% of total loans on average, compared to 1.43% for all community banks.

Some industry experts and bankers believe the lending trend is not cause for alarm.

Wayne Bopp, a bank analyst at Robert W. Baird & Co. in Milwaukee, said financial data indicate that small banks are sound and that there is no major economic downturn on the horizon.

"These are very good times," Mr. Bopp said. "I'm sure the FDIC just wants to remind us that things may not stay this way."

Norlan L. Hinke, president and chief executive officer at First Central State Bank, DeWitt, Iowa, said his bank's double-digit loan growth and 34% asset growth are rewards for meeting local economic demand-not the result of relaxed lending requirements.

"We're in a period of extremely low interest rates and extremely low unemployment, so this is a typical supply and-demand cycle," he said.

Still, to be on the safe side, Mr. Hinke said that $103 million-asset First Central tightened its lending requirements during the last 12 months to maintain its chargeoff rate at 0.04% of total loans.

"The economy has been strong, but we're doing more due diligence," he said. "We don't want any chargeoffs."

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