Bill changes rules on mandatory bank write-downs

Property values are dropping fast enough in Nevada, but a decades-old law also requires state banks to write down the value of foreclosed real estate each year, no matter what the property was actually worth.

That's about to change because of the Nevada Legislature's passage of Senate Bill 136. State-chartered banks will no longer be required to annually write down a fixed 10 percent of the value of property acquired as a result of bad loans.

SB136 would revise the state law, which often results in banks taking a chunk off their income -- a practice some say has especially hurt struggling institutions.

"This makes banks look less profitable, so this is a big deal," said Bill Uffelman, president of the Nevada Bankers Association.

Under current Nevada law, state-charted banks must write down 10 percent of the value of what is called other real estate owned, or OREO holdings. These holdings are typically houses, stores, commercial projects and undeveloped land. The write-down can give the public a distorted view of the bank's health, said Tim Rogers Sr., president of Town & Country Bank.

"Even if the value goes up, we are still required to write down," Rogers said, explaining that the new law will "level the playing field" with big banks by making Nevada's law consistent with federal regulations.

Nevada law also requires state-
chartered banks to dispose of the real estate after 10 years. Federal regulations only require appraised market values set for bank-owned property. While banks with federal charters can hold property for no more than five years, lenders typically get a five-year extension.

State law will soon mirror federal banking law, Uffelman said.

Bankers cheered the legislation, which is awaiting Gov. Brian Sandoval's signature.

Bill Martin, vice chairman and CEO of Service1st Bank, called the existing law "idiotic," and noted that it contradicts general accounting principals.

The state requirement was designed to keep banks from getting into the real estate business by devaluing the properties the longer the lender held onto them, he explained.

But Uffelman argued the existing write-down law is so damaging to community banks that one small lender, Southwest USA Bank, unsuccessfully requested a waiver or suspension of the Nevada law before it failed last July.

"People are walking away and leaving the banks holding the bag," Uffelman said. "One banker told me he was writing down $300,000 on loans."

Uffelman thinks the state's burdensome requirement may have contributed to at least one bank failure.

"I'm sure it didn't help (CEO) Kathy Phillips at Nevada Commerce Bank," he said.

Regulators seized Nevada Commerce Bank in April. It was the 10th Nevada bank to fail since 2008. A December 2010 FDIC bank call report showed Nevada Commerce Bank had $3.4 million in capital at the end of 2010, and $24 million in foreclosed-upon real estate holdings.

While Uffelman said the remaining state-chartered banks are strong enough to survive, the change in the law will help them recover.

"It's a big deal for community banks,'' he said, "especially since there are so few left."

Contact reporter Valerie Miller at
vmiller@lvbusinesspress.com or 702-387-5286.