LV banks called at risk in slowing economy

David Strow

Thursday, Nov. 16, 2000 | 11:06 a.m.

The Federal Deposit Insurance Corp. is concerned that America's community banks are putting too many of their financial eggs in the commercial real estate basket -- and Las Vegas is near the top of their list.

In a speech delivered at a Nashville real estate industry conference Tuesday, FDIC Chairwoman Donna Tanoue issued what she likened to a "tornado watch" -- conditions in the commercial real estate market that make Las Vegas banks vulnerable to damage if an economic storm hits.

"Conditions are indeed favorable for damage in the event of an economic downturn," Tanoue said. "High demand and growing demand that may exist when projects are started can sometimes turn into little demand and no growth by the time projects are completed. This can cause large decreases in the value of properties and subsequent loan defaults and loan losses for the project's developer."

Tanoue then identified Las Vegas as one of six markets at risk of overbuilding, as well as a high concentration of "high-risk" banks. Other markets Tanoue singled out were Atlanta, Phoenix, Portland, Ore., Salt Lake City and Seattle.

Las Vegas community bankers agree that more caution may be in order as commercial real estate lending rises -- but they insist measures are being taken to prevent a bust if the Las Vegas real estate market turns cold. But for now, they say, all indicators show that the city's real estate market remains strong.

"Because of the exponential growth in Las Vegas over the past 12 years, we're always going to be a target (of overbuilding concerns)," said David Moody, executive vice president of Community Bank of Nevada. "But as long as developers and bankers all understand what the risks are ... we just have to keep it in check. Just like any business, we have to watch all of the economic indicators."

The indicators that concern the FDIC are the amounts of new commercial real estate being developed in Las Vegas, and the ratio of commercial real estate loans to the total assets of community banks. If loans are too concentrated in commercial real estate, that makes a bank particularly vulnerable if there's a downturn in the real estate market, the agency argues.

As of March 1998, commercial real estate loans represented 33 percent of total community bank assets in Las Vegas, the FDIC reported -- higher than the levels seen across the West. The FDIC also ranked Las Vegas first in the nation in retail construction activity, second in industrial development and ninth in office development.

"Some banks (nationally) have responded to the warnings by slowing their real estate lending growth," Tanoue said. "Still others believe that their markets are healthy and see no reason to change their business strategy. I, too, hope that the economic expansion will continue unabated and that local real estate markets remain healthy and stable. However ... hope is not a risk mitigation technique."

But John Guedry, president and chief executive of Business Bank of Nevada, said local bankers are taking steps to protect themselves. Business Bank, for example, has increased its capital reserves by 25 percent this year, and plans to increase it another 8 percent next year, Guedry said.

"What we look for at our bank is quality of portfolio, where we have weaknesses, and reserves available for those weaknesses," Guedry said.

One particular issue for Las Vegas, Guedry said, is that building, labor and land costs are rising in the area, but rapid new building is keeping sale prices under control. That's starting to cut into developers' profit margins, he said.

But that doesn't mean he's pessimistic about the Las Vegas market.

"We have to be a little more cautious, but quite frankly, we're still very comfortable with the need for space in this market," Guedry said. "We're just watching it a little more closely in the past.

"I think most of the banks in our market have recognized the issues and are starting to prepare for (possible downturns)."

Moody said Community Bank is also taking steps to reduce its risk, by requiring builders to take equity positions and provide secondary sources of payments. Among Wall Street bankers, he said, there's demand to buy commercial loans from local bankers, allowing banks to reduce their exposure if necessary.

"We want to make sure our borrowers are strong financially and can withstand a downturn in this market," Moody said. "Now is the time you have to be careful, no two ways about it."

But ultimately, Las Vegas bankers will continue to lend because commercial real estate is where the business is, said Tod Little, chairman and chief executive of Silver State Bancorp.

"We certainly have a higher percentage of bank loans in real estate because, let's face it, that's the business to be done here," Little said. "Look at all the houses being built, all the construction ... someone has to finance all that.

"We try to manage it to a certain percentage of loans. We don't want too ignore the FDIC's warnings ... we're cognizant of it."