Nevada’s Financial Institutions Division (FID) maintains and supervises Nevada’s banking industry. According to FID, the industry is growing stronger.
Some of the positive indicators include loan concentrations – those concentrations that indicate what loan growth is, what loan activity is actually taking place, and whether individual banks have too large a concentration in one area – are at 41 percent. Commercial real estate loan concentrations averaging 700 and 800 percent of capital caused the majority of failures in Nevada during the financial crisis, said George Burns, commissioner, FID. The Financial Institutions Division doesn’t like to see institutions exceed 300 percent; 41 percent is good.
“That doesn’t mean that we’re not making commercial loans. Loan growth in the State of Nevada has been good,” said Burns. The first quarter of 2017 saw 32 percent growth, primarily in commercial real estate. Residential real estate, the other major consumer lending category, was up 21 percent in the third quarter. “Our banks are lending, they’re just doing it a whole lot more conservatively.”
That’s a good thing. So is the fact that bank earnings continue to increase. Pre-tax return on assets is up 1.46 percent as of the third quarter of 2017, above national level. And the fact that the past due ratio, that measure of loans more than 90 days past due in a bank’s portfolio, which shouldn’t exceed 3 percent, is currently at 0.61 percent in Nevada.
Nevada banks are well capitalized. “We have had one of the highest capital levels here in Nevada since the financial crisis,” said Burns. “Right now the average capital level in our institutions is 10.79 percent, which is more than 2.75 above what is considered well capitalized.”
All good things. But, not everything in Nevada’s banking industry is robust, and some things are contradictory. While Nevada’s House Price Index went up 9.8 percent to the third highest in the Western U.S. in October, the state ranks fourth in the same region for foreclosure starts.
So, just how solid is Nevada’s banking industry? Mostly, it’s on its way back.
“Specific to Nevada in 2017, [the banking industry] saw a significant increase in borrowing activity,” said John Guedry, CEO, Bank of Nevada. “Up until then, since about the time the recession ended in 2008, there’s been a lot of deposit gathering, companies building their balance sheet and staying liquid, but not a whole lot of traditional growth and acquisition.”
Borrowing/lending activity has been down for eight or nine years, Guedry said; over the last three years it’s steadily improved. “But it’s been a long, slow crawl out of a very deep hole.”
The latter half of 2017 saw Nevada’s banking industry start to change, with more activity from businesses investing, real estate growth and projects with companies hiring and using credit, all of which is expected to continue in 2018.
New Numbers Interest Rates
Jerome Powell takes the chair of the Federal Reserve in February. He’s expected to raise the 4.25 percent interest rate by a quarter point three times in 2018.
Though raising interest rates increases the cost of borrowing for business owners, it more ties in to their working capital, lines of credit and other financial dealings that are tied to floating interest rates and prime interest rates than they are in types of financing like real estate.
“But certainly they’ll have an impact, and also continue to push up the interest rates that depositors are receiving on their deposits,” said John Zaby, Nevada area president, Mutual of Omaha Bank, noting that interest rates on deposits increased in 2017 and he expects them to continue to do so in 2018.
“We haven’t seen a big impact on long-term interest rates. The Fed has increased those short-term rates, hasn’t really pushed up mortgage rates or some of those long-term rates, so we haven’t seen a major impact on either our clients or to the banking industry,” said Terry Shirey, president/CEO, Nevada State Bank. “Usually when rates go up, bank’s margins increase. We haven’t seen that yet because those long-term rates have yet to rise.”
“They didn’t have a lot of effect on pricing,” said BJ North, executive vice president, chief banking officer, Plumas Bank. “We’re not seeing interest rates going up on commercial loans, fixed rates, and it’s because the banks have so much money they’ve got to lend, and they want to get it out there. The hike is minimal, and doesn’t have a huge impact on the dollar perspective on the client because a quarter point isn’t that significant as far as seeing it spread across 10 or 20 years.”
While existing banks are talking about what’s new, Burns is talking about new banks. Last session, the Nevada Legislature updated Nevada Revised Statute 673, Savings and Loans (S&L) Associations. The law hadn’t changed since the S&L crisis in the 90s collapsed the majority of S&Ls. The reason for the overhaul was to entice Federal Savings Banks to Nevada. Federal Savings Banks are smaller specialty banks that were tired of being subjected to the same regulations used for mega banks.
One specialty institution is already on its way to Nevada under the new legislation, bringing its substantial asset portfolio.
“That’s probably one of the major initiatives we’ve done here at FID from a business development point of view. We’re trying to open as many doors to entrepreneurial types of opportunity that we can in order to bring business into the state of Nevada,” said Burns.
Inevitable Numbers: Taxes
Zaby doesn’t expect the new federal tax plan to have a direct effect on banking or on Mutual of Omaha Bank’s balancing financial statement, but from a standpoint of the small and mid-size businesses the bank works with, he expects to see a huge impact.
“It’s going to put money back into their pockets for growth and expansion and for growing their companies, which I think will have a positive impact on the bank’s balance sheets, as far as our own growth.”
“What I’m excited about is the impact to the business community,” said Shirey. “They’re going to have more cash as a result of the reduction in the tax rate, which will allow businesses to invest in growth. That’s a good thing for the business industry, because banks are generally lending into growth, that’s how banks grow.”
That’s how communities grow, too. Once it became clear the Federal tax plan would pass, Bank of Nevada rolled out raises to employees making less than $75,000 annually, increased contributions to 401K plans, increased its minimum wage, and expanded maternity leave.
Global Marketplace Local Banks
Even the smallest Nevada bank may work on a global scale if its clients do. While the Nevada banking industry may seem insulated, there’s a potential for world events such as uncertainty over relations between U.S. and North Korea to have an effect.
“Global affairs always have an impact, because it affects the stock market and the economy, trickling down if things happen,” said North. “From a community bank perspective, I think we are not as vulnerable, but everybody has to be aware of global activity. That’s the difference between a smaller bank and a larger bank: We have more of a hands on [approach]. We really, really know the client’s business, and it’s easier to get our arms wrapped around.”
It makes more sense to concentrate on daily challenges like cybersecurity and regulatory compliance, Guedry said; those are things banks have some control over. “It’s not to say we bury our head in the sand, but we have very little control over those issues, so we try to monitor and watch what’s going on,” he added. “Beyond that, you prepare for the worst and hope for the best.”
“The banking business is seeing solid growth and opportunities as the economy and markets, especially the markets Mutual of Omaha Bank is in – high growth markets – continue to grow,” said Zaby.
Local Banks Local Numbers
So do those high growth markets include Nevada? Maybe. “We’ve seen a lot of growth here in Southern Nevada and a tremendous amount of growth opportunity in Northern Nevada,” said Zaby. There’s strong growth in commercial real estate, especially multi-family projects, residential is picking up, and where medical groups are consolidating, banks are there lending.
“People are looking at new equipment and they’re looking at expansion and property improvement, more lines of credit because of larger contracts. So as far as the market requests, that’s what we’re seeing from industry and business,” said North.
They also saw a stall in 2017, where businesses that had been picking up steam and looking for financing put the brakes on and said they thought they’d wait a while longer. Whatever caused the lull, business has picked back up again. “The Nevada market is hot,” said North.
Manufacturing is growing statewide, and, in Northern Nevada, the transportation industry is heating up. Businesses are moving from California into Nevada, especially in the north, and while Southern Nevada may not be seeing as much diversity as desired, still there’s a sizeable increase in the number of manufacturers, indicated Zaby.
With the influx of new businesses using commercial industrial buildings, banks are lending on commercial real estate loans.
“That’s been stable for us since our inception 10 years ago and continues to be something we’re focused on and want to pursue,” said Zaby. “In the space of multi-family housing and industrial and hospital space, absolutely we are still doing quite a bit of commercial real estate [loans].”
In 2017, Nevada State Bank originated over $100 million in construction loans, focusing on each project’s quality, sponsors and cash flow.
City National Bank is aggressive in the owner occupied commercial real estate arena. Lending to robust investors on a select basis made 2017 a good year and 2018 is expected to be the same.
Economic forecasts show that, “Generally, what’s happening in Las Vegas, there’s just a lot of money and infrastructure committed over the next 10 years,” said Scott Aney, senior vice president, commercial banking services, City National Bank.
The good news, said Aney, is that most projects are economically diverse rather than all in gaming and tourism. “[Projects are] in the sports arenas, in general entertainment. So the health of Las Vegas and Nevada overall over the next couple years continues to be very strong and it’s good growth,” he added.
Which isn’t to say there aren’t areas of commercial real estate that are still experiencing challenges. Retail, for one.
“We call it the ‘Amazon Effect’,” said Guedry, referring to retail businesses determining how much business to have online versus traditional, and what the retail center of the future will look like.
Not every business located in Nevada is looking for commercial real estate loans. Some bring cash.
“We saw a lot of that last year in Nevada and Northern California, people coming in from the Bay Area just paying cash,” said North. The bank saw clients with substantial amounts of cash using it to pay for investments, buildings, homes, cars and equipment. “There’s not a lot of interest being paid, because interest rates are low, so why pay interest on your money when it’s not earning you anything if you can just pay cash?”
A lot of those investors were also coming into the state and using existing relationships with banks back in the city they’re moving from.
“That created a lot of competition,” said North. “Normally you have the opportunity in your neighborhood or your market if someone is selling their building. Typically, you have the opportunity to meet with the new buyer. In this case, they already have their relationships established and are working with their bank in another area. The localization of the market activity and who’s playing in the market, that demographic has changed.”
By the Rules
Most regulations governing the banking industry are federal requirements, overseen by Nevada Financial Institutions Division. There’s been a fairly significant increase in regulatory requirements dating back to the financial collapse, stemming from the Dodd-Frank Act, which placed regulation of the financial industry into the hands of the government. Most of those regulations haven’t changed much in the last eight or nine years.
Now the Senate Banking Committee wants to deregulate parts of Dodd-Frank, like the Consumer Financial Protection Bureau.
“[It will] also try to take some of the onerous requirements under Dodd-Frank and right-size legislation based on the actual size and complexity of an institution, rather than sweeping everybody up under the onerous roles meant for too-big-to-fail banks,” said Burns.
Among changes bankers are looking forward to is a reduction of the Call Report, a quarterly report submitted to Federal and state regulators on the condition and all the numbers regarding that institution. The current version runs 123 pages; the revised version will run 23 pages for community banks and those institutions below $10 billion.
“Some of the regulations are very good, an example being that all banks now, commercial and investment banks, have more stringent capital requirements. That’s good for the solvency of the banking industry and the confidence of the market,” said Guedry.
According to North, the state regulatory agency is in communication with the banks, entering into discussions about requirements and regulations. The federal regulations are a different matter.
“The hope is that some of the onus of the regulatory requirements and bills that have been passed by past administrations, that they are actually reviewing them and looking at total impact from a size perspective,” said North. Because one size fits all is hard for a community bank when it’s working under regulations meant for a giant like Bank of America.
“The compliance regulatory rules that have come down in the past have caused many community banks to get out of offering services to client base, because the regulatory restrictions would cost too much money for us to continue marketing,” said North. That impacts what services banks can offer. It’s not a huge change bankers want, just a resizing of regulations in comparison with institution size – and they may get it.
“We’re very positive about the status of our financial institutions here in Nevada,” said Burns. “They’ve stabilized since the crisis, they have good capital levels, they are making loans and are maintaining good capital levels and past due rates are very low. This means [banks] are making very good loans and underwriting them very well. So it’s working the way regulators like to see it work and we watch, because we want the economic engine to go as fast as it can but in as safe and sound a manner as possible.”