Executives representing banking institutions recently met at the law offices of Holland & Hart in Las Vegas to discuss issues facing banking in Nevada. In light of the turmoil surrounding the industry, banking has been a hot topic for the past couple of years.
Connie Brennan, publisher of Nevada Business Magazine, served as moderator for the monthly event designed to bring leaders together to discuss issues pertinent to their organizations. Following is a condensed version of the roundtable discussion.
Has society changed its perception of banks?
Larry Charlton: The public, unfortunately, can’t get into all the details and we don’t expect them to understand how a bank works or how the financial system works. And you can’t do it in a few sound bytes. And unfortunately, we have wrongly been painted as the bad guys in all of this. It really bothered me when it first started with Lehman Brothers. And they are banks. But, they’re a different type of a bank.
Kirk Clausen: They’re an investment bank. It’s important to make the distinction.
Charlton: I think the media started off just labeling everybody a bank. And they would be talking about investment banks when they got into the Lehman Brothers and those issues and problems on Wall Street, and it just kind of spilled over to commercial banks. There’s different kinds of banks, and it’s not something the public needs to understand, the vernaculars and how that gets defined, but it’s important that the media gets it right. And many times they haven’t gotten it right and led the public in the wrong direction.
Reed Radosevich: Everybody can share in the blame of what’s happened in this financial meltdown; obviously, the consumer, the banks, Wall Street, appraisers, mortgage brokers. There isn’t one villain out there, it’s certainly a combination of catastrophic economic pullback meltdown and a combination of everybody overextending themselves and loose underwriting. You can point the finger any number of directions, but unfortunately, that’s what’s happened. Now we need to come together to find solutions, and that’s going to be the tough task ahead.
Patrick Wisman: Unfortunately, we’re the ones holding the bag at the end of the day. That’s the problem.
Has the media misrepresented the industry?
Wisman: I think that it’s easier to report something bad than something good. It doesn’t read well when something is going good. I’ve not seen one piece in the paper that says you ought to support your local bank. I have not seen that. In fact, I think all the community bankers ought to get together and have a full page ad, and all of us standing there and saying, “Support your local bank, because soon you won’t have one.”
Charlton: Most of the public reads the headline, which our headlines are atrocious. I don’t care what business you’re in, if you read some of the headlines in the papers, you go, “What?” And then you read the first three sentences and say, “That’s not what that’s about,” and people going on, and they don’t really read the depth and continued on page 2A or 5B or whatever. And I’ve read good things over in page 5B in several articles that I have read but, it’s not on the first page, and it’s not in the headline, and it tends to point people in the wrong directions in their thinking about where banks are.
Patrick Thomas: The thing that’s untouched by the media, especially here in Vegas, and in almost every city I’ve been in, is that community banks and banking as a whole does more for the community than almost any other industry I can think of. If you look at any community bank in the area, Chase included, Wells included, or smaller institutions, they’re with Junior Achievement, they’re with the public education foundation, and they’re in every public fundraising event that normally goes on here. And to the extent that they help the local community, I don’t ever see that portrayed in any way, shape or form, except perhaps on some back page. So it’s true, there is a little bit to blame for the banking industry but all sides of the story are not regularly given.
Radosevich: Well, I think that it certainly would be positive if there were some articles run, not only just discussing banks that are in dire straits, but also discussing healthy banks, but more importantly discussing what banks — community, large, regional, national – are doing to help the consumer.
How have regulations changed?
Charlton: There are three regulatory bodies, depending on what type of bank you are; there’s the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. One of the challenges through the years has been to get the three thinking the same, because many times they don’t. They enforce things a little bit differently, especially, large banks and small banks.
Wisman: The FDIC is the one that ensures the deposits and funds are sound. I heard a comment of somebody that was taking their money out of our bank and putting it in another bank because they thought the FDIC was going to fail too. Community banks have a challenge ahead of educating the community that we are just as insured as anybody else.
Radosevich: The FDIC has a monumental task that nobody foresaw or that they weren’t prepared for between all the bank takeovers or closings, as well as having to insure the deposits. They’re sound because we continue to get the assessments raised to ensure that they have the coffers to cover a bank failing. So one way or another they will remain in full force.
Diane Fearon: I don’t know that the regulations have changed so much. It’s the fact that the marketplace has changed so much that those regulations aren’t for this game, and the FDIC doesn’t have a new play book. We have to respond to those situations with good faith borrowers who, 12 and 24 months ago, were responsible and made what, at the time, was a reasonable decision that the banks underwriting analysis validated. Circumstances have now changed beyond the control or influence of that borrower or the bank. And to just say, “You now have a problem, go fix it”, when the fixing is not available in a dysfunctional marketplace, which is what we have in Southern Nevada right now. We need to have grace periods built in for the regulators to give a bank that’s acting responsibly with borrowers who are acting responsibly to get through what nobody anticipated.
Wisman: I was talking with someone in Washington, D.C. and she said, “You have to remember, the regulations aren’t written for good times or bad times. They’re meant for this time.” So timing has never been a regulator’s friend. Regulations don’t fit going up and they don’t fit going down, they fit what would be normal. And they’re trying to apply normal to the situation we’re in and they can’t. They’re having a problem with it. In ‘88, they made the determination which banks would live and which banks would die based upon the area they were in. They thought that area would recover, they worked with those banks. They thought that area wasn’t going to recover, they closed that bank. It was as simple as that.
Wisman: A lot of things have caused this problem, and it’s going to take out-of-the-box thinking to get it solved.
Kirk Clausen: There is a lot of interpretation going on out there because everybody’s in a hurry to try and figure this out and solve it early. And that’s the good news. People really do want to solve it. But there are a number of markets — and I would count Las Vegas as one of those — Arizona, Southern California, and Florida to some extent — where things are just haywire right now. And it’s going to take cooler heads to prevail.
Fearon: To their credit, the FDIC I think has done a very good job with increasing the deposit limits, extending the timeframes, allowing banks to participate in the unlimited insurance for noninterest bearing. They’ve really provided a calm and a very forceful foundation to not feel as insecure as they did before those changes over the last several months, and that has been helpful. I think we’re all seeing a very big difference in a positive way when there is an event locally. An example was in mid-August with two banks that aren’t with us any longer who had had capital issues for some time. The response and fallout from that was not nearly the degree of uncertainty, or panic, or alarm that it had been when banks had failed many months before. The FDIC, and hopefully banking to some degree, has helped with calming businesses and consumers to not be panicked about the strength of the financial system.
Is it reality or perception that banks aren’t lending?
Charlton: Well, banks want to lend. For most banks, the majority of income is interest income from lending. We want to lend because that’s the way we make the majority of our money. We’re cash flow lenders, we aren’t collateral lenders, which means you have to underwrite and the people have to have the revenue flowing through. So, when the public says banks aren’t lending, it’s not because we don’t want to. We definitely want to loan.
Thomas: When you look at this problem, you can’t change the regulation significantly to fix it or you’re right back where you were, and then right back in the situation that got you into this. What is still unregulated and still not really touched as much on this side, especially in Nevada, is the loan modification process, which I think is extremely necessary to get consumers back into feeling like they can spend and start moving the economy. We’ve got a homeownership center here, and we are seeing so many clients we can’t keep up with it. Until you wrap your hands around that and can take their existing loan and get them to a point where they feel comfortable with what they’re going to pay, they know they’re not going to lose their house, you’ve modified it by either extending the term, working with them on rate or moving a portion of the principal to a balloon payment at the end. Once you do that, the economy moves a little better with consumer spending. I don’t see how the FDIC has the ability to fix where we are right now because you can’t really change the basics of lending that much, according to loan to value, according to income ratios. They just don’t have that much legal room to fix the problem right now.
Radosevich: I think you really have three factors that are limiting the amount of loans you can do. I mean, certainly the first one is businesses and individuals are not necessarily in a financial position they were in, so there’s a smaller pool of financially viable or creditworthy borrowers out there. Secondly, for most institutions, the underwriting has tightened up. Whether at the bequest of the regulators or not, that’s just the simple fact. And then finally, some banks are in worse shape than others, and they are trying to preserve capital for future write-downs, so therefore, they don’t want to go out there and take big bets on new loans by making a lot of new loans. So those three factors are certainly impacting the amount of credit that’s being issued in the market.
What are some positive perspectives?
Clausen: I believe very much in the consumer, and I have great faith in the consumer, because from a banker’s perspective, at our core, there are two things that we do. One of them is we manage risk. And when you think about the consumer and what’s important about the consumer is that spreads your risk over, I don’t know, in our case 350,000 household’s right here in Nevada. So having said that, we just think about what is going on in other parts of the country that will continue to attract folks to Nevada. And we have this group called Baby Boomers that are extending their working lives a little bit longer right now because of the economy, but they’re going to retire. We continue to have 4,000 to 5,000 people a month moving into Nevada, at least when you read the newspaper and see the latest stats. Given that, and given the fact that there are a lot of Baby Boomers who are sitting in California thinking I’ve got to get out of this state, for whatever reasons, high tax or whatever. There are folks in the Midwest who are looking for “sunbelt” opportunities. I just like our chances in the Valley here. I really do. I think it slowed down a little bit, and a lot of people kept talking about the bubble that was coming for Vegas. I guess you could call this a bubble, and it burst a little bit, but I think it’s going to be back a lot sooner than a lot of folks think. So I would say, if we were sitting here 12 months from now, we’ll have started to turn the corner.
Charlton: I will echo, having been here quite a while and seen that turndown in the early ‘80s when the prime was that high, everybody was predicting back then that Nevada was going to have some trouble coming out of it. And we came out of it faster than anyone else at that time. And business started booming up and down the Strip. And there’s really two Vegas’. There’s the Strip traffic, and then you’ve got the gaming market that’s off the Strip. So you’ve really got two things that are impacting Nevada right now. The number one industry is gaming, number two is construction, and look at both of those industries, then everything else is kind of just a third. That’s just our market. But I am optimistic, as well. And this is not an economist talking, this is just from having lived here as long as I have. There’s resilience here.
Clausen: Absolutely. We have a can do attitude in this community like none other.
Charlton: It’s interesting that everybody is positive. And that is just amazing to me that the hope is there. It’s real.
Fearon: And a belief in the future prosperity of Las Vegas.
Radosevich: From an economic standpoint, there are a lot of positives. Especially for those with investment management capabilities within their institution with the markets forecast to go higher. That’s additional fee revenue. As rates change, that’s going to be additional help on the interest rate spread. So there’s a lot of things that are going to impact, on a positive basis, the balance sheets and income statements of banks in general.
Thomas: And I have a supreme confidence in the consumer’s ability to spot a deal. When you look at Vegas now for young folks, young families that haven’t yet purchased a house, all of a sudden Vegas is extremely affordable. For people that are retiring that can still retire on time, Vegas is a fantastic spot to take a look at.
Clausen: To that point, our mortgage company is having a record year. And it’s not just refinances, it’s FHA and it’s first-time home buyers and others.
Thomas: So this economy is a very large raft of people that were already homeowners. But for some people that haven’t yet bought a house, it’s a dream for them.