Bad-loan percentages climb

Community banks in Southern Nevada are starting to report higher percentages of bad loans as the real estate boom turns to a bust.

Analysts don't expect Las Vegas-area banks to fail because of the real estate decline. But some analysts do wonder whether the bad loans that popped up in the fourth quarter of 2006 will spread like a cold in a kindergarten classroom in the next few quarters.

Dawn McLaren, research economist with the W.P. Carey School of Business at Arizona State University, compared the problem to the bursting of the housing "bubble" in Las Vegas. While community banks generally do not make loans for single-family residences, they do lend money to developers and homebuilders, which benefited from the housing boom.

"This will affect builders, too," she said.

Gary Dorris, CEO of First National Bank of Nevada and two related out-of-state banks, said there is some weakness in the market. However, Patrick Lamb, president of First National's mortgage lending operations, said his bank maintained conservative loan underwriting standards and didn't get involved in development loans for many high-rise condominiums as some banks did.

Bankers say real estate lending looms large in Southern Nevada because banks make so many development, construction and other real-estate loans.

"Most of your banks in Southern Nevada are concentrated in real estate," said Ed Jamison, chairman and CEO of Community Bancorp. "That's where the growth is."

Problem loan totals may be tightening credit availability for small businesses, said Lanis O'Steen, chairman of the Profit Group and president of the Turnaround Management Association in Nevada.

"There was a tremendous amount of easy business credit for small businesses (previously)," O'Steen said. "I think we're in for some moderating growth or maybe some flattening of growth."

An increasing number of loans gone bad also is eating into bank profits. The Federal Deposit Insurance Corp.'s fourth-quarter 2006 financial report on Nevada shows an overall increase in problem loans. Past-due and nonaccrual or bad loans as a percent of total loans doubled to 0.71 percent in the final period of 2006 from 0.35 percent in the year-earlier fourth quarter.

Banks put loans in the nonaccrual category if the borrower's financial condition has deteriorate, such as when; the bank no longer expects full payment of principal; or principal or interest has not been paid for 90 days.

So far, net loan losses remained too small to measure, the FDIC said.

"We're coming off a historic low (for bad loans)," Jamison of Community Bank said.

Therefore, he said, any uptick looks bad.

Jamison said he believes Community Bank's numbers look good. Net loan losses at Community Bank ran 0.06 percent in the fourth quarter, compared with 0.01 percent a year earlier.

Nonaccrual loans at Community Bank fell to 0.05 percent in the fourth quarter from 0.14 percent a year earlier.

Loan problems took a bigger toll at other community banks.

Sun West Bank, a $388 million-asset Las Vegas community bank, reported that its net loan losses were 0.22 percent of total loans, or $735,900, at the end of 2006. The median, or midpoint, number for Sun West's peer group was 0.01 percent.

Sun West also had one of the higher numbers for nonaccrual loans at 2.55 percent, or $8.53 million. Attempts to reach Sun West CEO Jackie DeLaney for comment failed.

Beal Bank Nevada disclosed that nonaccrual loans represent 2.97 percent of total loans, or about $16.7 million in nonaccrual loans, but the Las Vegas financial institution is unusually well capitalized. Its capital or net worth is about 80 percent of its total assets, compared with 10 percent for a typical well-capitalized bank. The bank has about $500 million in commercial real estate loans.

The bank did not report any net loan losses.

Beal Bank previously has said that it makes loans all over the country, but the bank declined to comment on its nonperforming loans for this story.

Southwest USA Bank of Las Vegas also reported higher than average net loan losses and nonaccrual loans. The bank, cited by the Federal Deposit Insurance Corp. late last year for "unsafe and unsound banking practices," reported a net loan loss of 0.34 percent, or $509,000. Nonaccrual loans represented 0.71 percent of total loans, or about $1.06 million.

Southwest USA has one nonaccrual loan secured by prime real estate that is involved in a bankruptcy case, CEO and Chairman Patrick Wisman said. He said he expects the bank to recover the full amount owed.

First National Bank of Nevada's nonaccrual loans also ticked up in the fourth quarter, to 0.66 percent from 0.41 percent a year ago. The biggest part of the nonaccrual loans stemmed from a property in Northern Nevada where the partners were arguing with each other, First National officers said, but that loan is now current and the total for the category dropped below one-hundredth of 1 percent in the first quarter.

First National participated in the boom in residential mortgage loan originations over the past few years, Lamb said, and that business has slowed dramatically. He estimated that 1 percent of First National's residential mortgage loans were below prime, the top level of credit quality. Most of the loans were sold, too, he said.

"Anybody who tells you they are happy with the performance of the residential mortgage business is lying to you," Lamb said.

It's unclear whether large regional banks also are seeing an increase in problem loans in Nevada because they either combine their results for commercial banks with other financial operations or only report their financial results nationally.