Feature Stories - April 2010

The Road Ahead

Banking in Nevada

by Adam Candee

    Nearing the end of a long, tough road is never easy.  The banking industry in Nevada is crossing its proverbial fingers that the road Nevada’s economy has been on will soon get easier.  The hope that the tough parts of the journey are almost over is what’s keeping bankers driving forward.

    Politicians beg bankers to lend more and to do it right this moment while regulators insist on reducing risk in who receives a loan. Nervous business leaders want them to free up capital to get the economy moving, but no room exists for further error when banks still hold a significant amount of bad assets threatening to blow down the house. Angry Nevadans blame bankers for causing a big part of the economic mess, yet some struggling banks never made the types of bad decisions that others did to bring on today’s crisis.

    Bankers want to help fix a situation that jeopardizes at best their profitability and at worst their existence. Sometimes they can, other times they can’t. Despite the perils of navigating these challenges, Nevada’s bankers remain hopeful about their future.

    “We are guardedly optimistic that we are nearing the end of this cycle,” said Kathy Phillips, President and CEO of Nevada Commerce Bank. “We would love to help businesses grow and prosper, and therefore create job opportunities.”

    Stretching back roughly two years to the present day, this cycle places enormous stress upon banks as more consumers and businesses struggle to pay on loans, particularly residential real estate loans to the major lenders, commercial real estate loans to community banks and consumer loans to the credit unions.

    In this time, Nevada’s banks have slashed dozens of jobs. Seven banks and four credit unions have failed, the most recent occurring at the end of February when the Nevada Financial Institutions Division closed Carson River Community Bank in Carson City. That failure cost the Federal Deposit Insurance Corporation (FDIC) about $7.9 million, and Heritage Bank of Nevada in Reno took over the bulk of Carson River’s deposits.

    The other six bank failures include: Silver State Bank; Washington Mutual; Community Bank of Nevada and Security Savings Bank in Southern Nevada; First National Bank of Nevada in Reno; and Great Basin Bank of Nevada in Elko. Cumorah Credit Union, Clearstar Financial Credit Union, Ensign Federal Credit Union and Community One Federal Credit Union were shuttered over the past two years by the National Credit Union Administration (NCUA).

    “No Southern Nevada banks were profitable in 2009,” said Bill Martin, vice chairman and CEO of Service 1st Bank of Nevada.  “Obviously, some are in a more weakended condition than others and, for the most part, lent funds on the same terms that have been considered prudent as long as I’ve been banking, only to see real estate values now plummet far below those acceptable lending criteria of prior years.”

    The closed banks shared some problems, said Greg Hernandez of the FDIC.

    “Commercial real estate and acquisition development and construction loan portfolios have been weighing down a lot of these banks,” Hernandez said, calling those reasons a “general string as a common reason for failure.”

    That witches’ brew ails every industry in Nevada, but some feel the chilling effect it creates within the banking world is unique.

    “The banking industry is not like any other industry,” said Jeremy Aguero, principal analyst with Applied Analysis, a Las Vegas-based advisory services firm. “They’re very pensive.”

    Some bankers disagree with that characterization, pointing to efforts in rewriting mortgages, backing government projects, supporting community development efforts and seeking out new loan applications as proof that they remain aggressive.

    “The lending landscape is positive for us as our new loan production has increased, albeit at a slower pace,” said Larry Charlton, Nevada regional executive for City National Bank.  “We expect the return to normalcy for Nevada to lag behind the rest of the national economy.  The crisis here was created by the residential market initially and normalcy won’t return until that issue is resolved.”

    “We’re bullish on Nevada,” said Kirk Clausen, Regional President in Nevada for Wells Fargo. “I’ve been here since 1996.  This is my adopted home and I just love it here. I see it in the community, in business leaders – it’s a resilient group. We’ve got it better than sometimes what the chitchat in the marketplace would lead you to believe.”

    Dallas Haun, President and CEO of Nevada State Bank, noted that his institution funded 4,256 new loans – an increase of more than 600 over the previous year – totaling $223 million in 2009, nearly half of which went to consumers and small businesses. That compares with 3,654 loans worth $514 million in 2008 and 5,027 loans worth $774 million in 2007.

    “Those are new fundings and it’s not easy,” Haun said. “We’re spending more time, money and focus than ever to generate more applications, but it’s difficult. There’s a high percentage of declination because of the position people find themselves in. All banks are keenly motivated to generate loan growth.”

    In figures like those cited by Haun, Aguero sees a shift in focus for banks.

    “I think it’s a holding pattern because financial institutions are not in the business of lending to projects that are risky and today, in Southern Nevada, every project is risky,” Aguero said.

    “It’s not about investment anymore. Now, the conversations are largely around restructuring - how do we build the expectation that tomorrow is better than today?”

    The ensuing questions might be: how far off is tomorrow and what will ‘better’ look like when tomorrow arrives? There appears to still be some pain left to endure.

    Seventeen banks registered in Nevada showed troubled-asset ratios of at least double the national median of 14.5 – and in many cases, much more than that – in December 2009. Troubled-asset ratio measures a bank’s capital and loan-loss reserves against the amount of loans it holds that are more than 90 days past due, those loans not generating interest for the bank and bank-owned real estate.

    Community banks comprise the majority of Nevada’s chartered institutions, and their largest burden comes from bad commercial real estate loans. While residential foreclosures finally slowed in February, the commercial real estate market still searches for a bottom. Aguero said there is a seven-year inventory of unoccupied office space in Southern Nevada.

    “I don’t know how many times I’ve heard it from financial clients, even stuff where we thought there’s no way there’d be a problem, it’s a problem,” Aguero said.

    The other side of the loan presents major challenges for banks, though, as potential borrowers struggle with credit wrecked by past-due mortgages, unpaid bills and various other factors. Nevadans hold the lowest average credit score of any state in the country at 668 on the FICO scale, according to a November 2009 report by credit reporting agency Experian.

    “The ability to borrow today is about the same as last year,” said Bruce Hendricks, President and CEO of Bank of Nevada. “The key issue is that the financial condition of many borrowers – their cash flow and their assets’ value, primarily real estate – has declined, in some cases significantly.”

    Bankers feel the growing legend of the impossibility of getting a loan far outpaces the reality of the situation, though. Part of the problem is a weakened demand for credit from the best potential borrowers, who are wary of taking on debt in an unsettled economy.

    “One of these myths that a lot of people had out there is that banks stopped lending,” said Gary Kishner of JP Morgan Chase, which took over Washington Mutual’s presence in Nevada.  “It really is a myth. Banks didn’t stop lending. They tightened up what they were doing. They’re taking closer looks at loans and making smart decisions when they lend.”

    For those trying to save their homes or start a new business, though, it appears difficult to see the difference in slowing the pace of loans rather than stopping them altogether. The days of easy – and for less responsible banks and lenders, unsound – credit that Nevadans and their companies once enjoyed vanished in the crisis that stormed financial institutions.

    It’s no surprise, then, that resentment follows, especially for people who made sound decisions and still watched their credit scores plummet through no fault of their own.  Nevada’s bankers sense that frustration. In fact, many feel it just as strongly.

    “It is more difficult for businesses to go through the underwriting process,” Phillips said. “It is a much more time-consuming and sometime tedious process for both the bank and the client.

    “No one can possibly think this is fun. We apologize for having to be such a pain. The regulatory environment is difficult to navigate and sadly, clients are feeling pain. I can’t begin to express our gratitude for our clients’ loyalty. We know that we are very lucky to be able to do business with people who show such great fortitude and integrity.”

    Levels of frustration about the intrusion of regulation vary among Nevada bankers, from exhaustion with the process to grudging acceptance of its necessity.

    “I think the regulatory environment today is no different in Nevada than pretty much the rest of the country,” Hendricks said. “Given the banking industry and the economy, it’s more demanding everywhere. Regulators have a lot of pressure too. It’s a difficult job.”

    Nevada Financial Institutions Commissioner George Burns runs the division regulating the state’s banks, credit unions and payday loan outfits, and he acknowledges just how difficult the job became as more banks have found themselves in serious trouble over the past couple of years. Bankers feeling like they receive more scrutiny than in the past are exactly right, as Burns’ division stepped up oversight in conjunction with the Federal Reserve and FDIC.

    “It used to be every 18 to 24 months for our normal examination cycles,” Burns said. “Now, the typical cycles here are six to 12 months. That’s stretched our resources extremely.”

    State legislators responded to Burns’ request for help by adding 10 examiners during the last session, bringing the total to 30 on staff, but the division lost the equivalent of two of those employees to the furlough plan for state employees implemented during February’s special session.

    Burns recognizes the irritation of bankers who are not used a higher level of examination or pressure to minimize risk in lending, but feels his examiners are finally being allowed to do their job the right way because of the well-publicized struggles of financial institutions from Wall Street to Main Street.

    “From a regulatory point of view, we were sort of caught in the middle of that previously, there was not the political will to allow regulators to insist upon the funding of banking,” Burns said. “Now there is, to a certain degree, the political will to do that. It is a standard that most of our bankers in Nevada have never had to meet before. It’s like trying to be the responsible parent.”

    Burns detailed what his examiners are asking of financial institutions.

    “We are asking them to lower their risk profile,” Burns said. “Under the current circumstances, that risk has to be reduced to something that is more reasonable. Their underwriting standards, reasonable concern to the types of loans they carry – they find that contradictory to politically being asked to make more loans.”

    From President Barack Obama on down, politicians publicly press banks to loan more. Many stand in a financial position to do so – Bank of America, Wells Fargo and JP Morgan Chase had a combined $246 billion in unused home equity lines of credit at the end of the year, according to one recent national study – but face pressure from regulators to be cautious in how they lend, as well as softened public demand from creditworthy borrowers.

    “The government says, ‘lend more, lend more,” Clausen said. “And the regulators say, ‘be careful, be careful.’ Oftentimes, the banker is caught in the middle.”

    No painless answers exist to an overall situation Haun said “is going to take a couple of years to clear up. That said, I do think the industry in general will survive functioning more efficiently, functioning smarter,” he added. “History has shown that these times cause us all to think of ways to run our businesses smarter and take better care of our clients.”

    Aguero cited his client, Nevada State Bank, as an example of a bank taking appropriate steps to return to normalcy. He said the bank took a proactive approach to addressing potential problems on the horizon in commercial real estate and accepted the realities of the falling Nevada real estate market for what it was.

    “That is the model that needs to be followed,” Aguero said. “The faster that we accept reality, the faster we accept that what we see today probably looks a lot more like normal than what we saw in 2007.  We sort of have to take our lumps. We still see a lot of not only owners of properties, but financial institutions, that are not ready to accept the pricing.”

    That approach looks more plausible for Nevada State Bank, which operates with the resources of its parent, Zions. Community banks – many of which Burns cautions are only beginning to see the rotten fruit of bad commercial real estate loans falling from the tree – do not always operate from a similar position of opportunity.

    “Banks in Southern Nevada are struggling with declining real estate values, which affect our loan portfolios and ultimately profitability,” Phillips said. “Bankers are community-minded and are frustrated that our hands are tied when it comes to making real estate loans. It is difficult to underwrite a loan when real estate values could and have been declining drastically.”

    “Clearly the slower pace for Nevada’s recovery hampers the financial segment’s recovery as interest income is what most banks depend on for the majority of their revenue,” adds Charlton.

    “It’s an old expression that is true - banks are the economic engine of communities,” adds Martin. “Banks lend to all industries, and when problems hit those industries, and the local economy, they are reflected in the banks’ portfolio.”

    Hope remains high, though, that bankers will do their part to contribute to a turnaround. Many feel a responsibility to their community to do just that.

    “I know all the bankers feel that way,” Haun said. “You can talk to any of the CEOs of the banks around town and they all feel the responsibility to help their customers.”

    “I think our role is to be as engaged as possible, and use our experience to find solutions, not make decisions that are overly reactive or short-sighted,” Hendricks said. “As bankers, I believe we have a corporate responsibility to assist to the fullest extent possible in contributing to moving the economy forward.”

    “Local banks want to be part of the solution,” Phillips said. “We want to help businesses and consumers by being able to respond with solutions that make sense in the short term and the long term. Nevadans have been very loyal to us and we would like to reciprocate by helping our community.”

    Clausen sums up the situation, “Despite all the palpable and quite understandable anger that exists over why we all have suffered as long and deeply as we have, a solution must start somewhere and local banks can play a major role.

    “In the end, in spite of all the finger pointing that goes on, everyone needs to share some of the blame on this,” Clausen added. “Lender accountability, issues with what went on on Wall Street, politics – everyone has their finger on this one a little bit. Let’s forget about who’s to blame and let’s just fix the darn thing.”