No one is singing Ding-Dong, the Wicked Witch is Dead just yet, but a great many bankers across Nevada are already hailing the end of the recession – or something that looks a lot like it – and searching for ways to chart a better course through 2012 and beyond.
Many banks statewide have gone by the wayside, and more may still follow. But for those willing and able to innovate – which for some may mean anything from leaning less on the real estate industry to simply going back to the basics of customer service – the months ahead promise to be better ones.
A bump in the road of as-yet-undetermined proportions and consequence is the Dodd-Frank Act, which like so many solutions that come out of Washington solves some problems while creating all new ones, beginning with its whopping cost.
So, how are Nevada’s banks doing?
Jason Awad, no stranger to the banking industry, last year acquired First Security Bank of Nevada and serves as its chairman of the board. Having lost $7.7 million in the first half of 2011, the bank posted a net profit for the last five months of last year. In addition, the bank has loaned $23 million to local businesses in the seven months ending in March 2012. Awad is a staunch believer in the conomic viability of the area.
“Honestly, banks across the country and specifically here have suffered tremendously with the economic recession,” says Awad. “However, I believe the recession is over across the country, and for sure here in Nevada.” Last year and this, he adds, indicated a better direction for the economy. “We have started the recovery; we have concrete signs of recovery, especially locally.”
Indeed, Awad believes Nevada will experience a faster rate of recovery than the rest of the nation. “Our tourism volume is up, our sales volume is up, real occupancy is up, and the belief in the people that a recovery is around the corner is there.” The coming of what Awad calls “foreign investors,” which he defines as “anyone who is not a local” scooping up distressed housing properties for rock bottom prices will serve to speed the recovery.
“To put it in medical terms, here in Nevada, banking in stable,” declares Bill Uffelman, President and CEO of the Nevada Bankers Association in Las Vegas. “If you follow the FDIC reporting for end of year, several of the community banks have actually had net positive earnings. Some others are still losing but not losing as much as they were, so they can see their way out of the woods.” At the national level, he continues, positive earnings have been shown by several of the banks. “So we’re recovering, but we’ll still be in the hospital for some time, I guess. Or in rehab; I’m not sure which.”
Uffelman points out that the government’s definition of recession is two negative quarters in a row, and that two consecutive positive quarters means the recession has ended. “Supposedly, that happened a year and a half ago. The problem here is that we still have the continuing issue that there really isn’t a dramatic turnaround; it’s just that we’ve turned around, and we’re still on this kind of bumpy bottom.” There are, he explains, no big construction projects to help get construction workers back to work. “Housing is a long ways from resolutions here. We’ve still got a lot of foreclosures to be done.”
On the commercial side, he has seen a movement from what many refer to as Class B space to Class A space, so at least the better commercial properties are renting. “But they’re renting at lower rates,” Uffelman says, “so a firm may have moved from a Class B space to a Class A space, but perhaps may have not taken as much square footage and gotten it at another rate so they’ve cut their costs. But that means that there is lots of vacant Class B space.”
On the Mend
Dallas Haun, CEO of Nevada State Bank (NSB), sees the state’s banking industry as being on the mend. “The ones that were not able to survive the severe recession are out of business. The ones that remain have restored and are in the process of restoring their balance sheets and moving forward.” They are doing that by working out problem loans and finding new sources of revenue.
“I think most of the banks here in Southern Nevada rode the real estate cycle, and were primarily real estate lenders,” suggests Haun. “Over the last two or three years we’ve opened half a dozen business centers here in the south, and one in the north to handle our small business clients.” NSB has also spent time and effort in developing different types of consumer products, such as a 100% LTV (Loan to Value) mortgage on homes. “We’ve also run a number of campaigns on 7-, 10- and 15-year mortgages — no cost, no fees, no payments for the first 90 days.”
It’s working. Last year, NSB funded $65 million in small business loans, most of which were deals of no more than $100,000 to $300,000. “I think our average loan was $130,000,” Haun says. “To do $65 million you have to get out a lot of new dollars to small businesses.”
“A lot of the focus over the last few years has been around problem loans,” says Erich Boellinger, Executive Vice President and Chief Banking Officer for Plaza Bank, “bad real estate loans and banks working through their challenges assets. There is still some of that out there, some residual. We’ve still got a few that we’re working through, and many of our competitors do, as well.”
The majority of those problems however have been identified, he feels, and the appropriate structures put in place, “and so that’s all kind of coming to an end.” Boellinger views last year and the first few months of 2012 as having been transitional for banks, and an opportunity to “revisit their core competencies and how they do business and (decide) what they want to do going forward.”
There are, though, still businesses that are on the verge of failure, Boellinger points out, “so there still are a handful of new deals that are challenged.” That aside, he believes banks across the state are going back to taking a look at their core businesses. “Does a bank have the right cost structure in place? The right staffing? You’re seeing that around town, with some of the banks doing some restructuring and some cuts.”
Beyond that, Boellinger continues, banks are taking a look at the model itself. His own, Plaza, is a community business bank, and so is focused on businesses. “Is it the products I have, and how we bundle them together, how we deliver them? Is it still appropriate compared to four years ago? Or do we need to change things up to deliver a better experience?”
Dodd-Frank – officially The Dodd– Frank Wall Street Reform and Consumer Protection Act, signed into law by President Barack Obama on July 21, 2010 – puts forth financial regulatory reform. It was passed as a response to the recession, bringing with it what some have called the most significant changes to financial regulation in the United States since the aftermath of the Great Depression.
One of the most fundamental concerns about Dodd-Frank, Awad suggests, is its cost. “Jamie Dimon (Chairman, President and Chief Executive of JPMorgan Chase) said that the cost for a large bank, on an annual basis, will be between $400 to $600 million just to implement these rules and regulations, so it’s going to be costly. But I believe that we need consumer protection, and I believe that we need good and healthy regulation.”
Awad feels the verdict is not in yet. Though the sweeping legislation came about due to issues relating to large banks, he notes that “small banking situations got affected in the process because of the burdensome regulations and the cost.” He also points out that only a portion of the bill has thus far been enacted. “For a substantial amount of it the regulation has not been written yet.”
Awad cites an article by Robert Lenzer in Forbes that noted, “… only 93 of the 400 rule-making requirements have been finalized. Litigation on the whole mess is beginning as the backroom lobbying of special interests tries to water everything down.”
“A big portion of (Dodd-Frank) was really consumer protection,” Boellinger points out. “We’re not a retail bank, per se, we’re a business bank, so some of the things don’t really apply. Some of the things like swaps and derivatives, mortgage reform, securitization (pooling varieties of contractual debt — residential mortgages, commercial mortgages, auto loans or credit card debt obligations – for sale as bonds, pass-through securities, or collateralized mortgage obligations), things like that really don’t come into play for a community bank.”
Where the legislation will impact Plaza and banks like it, he continues, is in its more stringent capital requirements. “Many of us have raised the capital, or banks have new owners who have the proper capital behind them, so there is a lot more strength behind financial services in the market.”
Dodd-Frank has also emphasized stress tests; specifically, is there enough capital and liquidity, and if interest rates were to move or other factors come into play can the bank survive. Generally, Boellinger feels, this is a good thing. “We don’t want to have to do bailouts again; I think everyone agrees we don’t want to end up going down that path. It is expensive to have the additional capital, and the extra oversight by the regulators is also expensive. There are a lot of resources that go into it.”
The biggest issue with Dodd-Frank, according to Uffelman, is the Durbin Amendment, which deals with what can be charged on interchange fees. The banking industry has seen what Uffelman labels a “dramatic” reduction in the interchange fee income that they receive, leaving bankers to deal with that loss of income.
“When you see stories that say, ‘Well, they’re going to impose fees for checking or do these other things,’ that’s an effort to recover costs,” Uffelman notes. “When a bank gave free checking it was never free. But what they were doing, for example, was this: a small percentage of customers write overdrafts, and so the overdraft fees paid willingly by those small customers who wanted the privilege to overdraft helped cover the expenses of checking for other people. They were subsidizing other customers.” Now that banks can’t charge – when the whole overdraft formula has been changed – they’ve got to recover those costs somewhere.”
Uffelman says he finds it interesting that when Bank of America suggested it was going to charge $5 a month for using a debit card “everybody went berserk. Well guess what: if you’re using a store value card from Walmart you’re paying a monthly fee. People are already paying fees; they just don’t think about it in those terms. If you’ve got a bank that you love to hate you think ‘Those greedy SOBs!’ but the reality is a bank is supposed to be a for-profit entity. A credit union is supposed to make a profit. We all have to earn a living somehow, and when you take away the means to earn the living then at some point those institutions have problems.”
Banking on Hope
What does the future look like for Nevada’s banking industry?
The banks that are able to properly capitalize and find niches to generate revenue, Haun says, are the ones that are going to prosper going forward. “Clearly, what I think has happened with this recession is that banks have been forced in many ways to reinvent themselves, particularly here in Southern Nevada, where so many of the banks relied primarily on real estate loans.”
The banks that have survived have had to work closely with customers. “They do all the things that they need to because they are not trying to put their customer out of business,” Uffelman explains. “He’s been a customer for a long time, so you work with him every way you can, constrained by banking rules as imposed by the regulators.”
“The future is very bright,” Awad concludes. “We are banking on hope. I believe – specifically I’m talking about the local economy in Nevada – you are going to see that the consumers will be demanding personal service. They have experienced substantial letdown during the financial crisis because the large banks, in general, are not lending. And now the only way back is to provide that service and personal relationship, and to provide capital for the small business individual to borrow so he can expand and hire. The only way we’re going to see a reduction in unemployment is if you have an expansion of our business community. The only way that can happen, though, is through lending by community banks. That’s the bottom line.”