Experts suggest community banks face host of problems regardless of when economy improves

In this banking climate, some community banks just can't win, no matter when or how the economy improves, analysts say.

It won't be a total bloodbath for these banks in Southern Nevada, but it might come close.

Some will find themselves on the economic casualty list in a year or two, mostly due to lack of capitalization. Some may even be mortally injured from a lack of business due to newly tightened lending standards, overzealous bank examiners -- the ones making up for lost time -- and the higher interest rates that will undoubtedly show up should the economy improve too fast.

It's an almost unavoidable double-edged sword that cuts both ways.

Many community banks can withstand an economic slump of 12 to 18 months, said John Guedry, who recently resigned as executive vice president of City National Bank to consider a run for Congress.

"Those that are well-capitalized should come out of this in very good shape," he said, mentioning Service1st Bank and Meadows Bank as good examples.

But those that do survive will likely "have battle scars," he predicted.

"I'm sure some of the weaker banks will not weather through the next 12 to 18 months, especially if it (the economy) gets worse," Guedry said.

Timothy Coffey, vice president of research for FIG Partners, a stock brokerage specializing in banks, predicts the area will have fewer small, independent banks, regardless of whether the economy rebounds or remains mired in a downturn.

If Southern Nevada continues to suffer malaise, more banks will fail, Coffey concludes.

"But if we have a quick snapback in economic activity, we're going to have so much inflation, tempered by rising interest rates that slows down demand for bank loans," he said.

"What it means for the banking companies is there is going to be fewer whether (the economy) improves short term or long term," Coffey said.

A consensus of economists surveyed by the Western Blue Chip Economic Forecast at Arizona State University predicts an anemic recovery next year for Nevada, with 1.5 percent population growth and a 1.6 percent increase in gross gaming revenue. The consensus also predicts a 1.7 percent increase in personal income and 0.3 percent increase in single-family housing permits.

Dale Gibbons, chief financial officer of $5.7 billion-asset Western Alliance Bancorporation of Las Vegas, sees good and bad things ahead for community bankers.

"On the positive side, a lot of our irrational competitors have been taken out," he said.

Banks no longer find themselves competing with institutions with lax lending standards and low requirements for down payments for loans, he said.

"You had pressure to underwrite too loosely" to make loans, Gibbons said.

Three Southern Nevada banks have already disappeared in the past year.

First National Bank of Nevada failed a year ago with $3 billion in deposits, mostly in Nevada and Arizona. State and federal regulators seized $1.7 billion Silver State Bancorp in September. Regulators turned off the lights at $132 million-deposit Security Savings Bank in March.

Community bankers need not worry about those maverick institutions.

"The flip side of that," Gibbons said, "is we've got much lower economic activity and the outlook is going to be much lower for a long time to come."

Edward Jamison, chairman and chief executive officer of $1.7 billion-asset Community Bancorp, offered a sobering outlook.

"If we continue to see the economy free fall as we have since September 2008, banks will be under tremendous stress for profitability and potentially viability with enhanced capital requirements and regulatory oversight," Jamison said in a statement. "There may be fewer banks in the market to service the community as it moves out of this economic cycle."

Another analyst, who spoke anonymously, said: "In the long term, the survival of community banks in Southern Nevada is very good. But in the short term, there are going to be some banks that are going to wither.

"If this goes on for a long time, there will be a lot fewer community banks," the analyst added.

Observers point to two key problems facing the banking industry -- the recession and the revenge of the regulators.

Federal bank regulators drew criticism for lax oversight during the boom. So examiners are now getting overly strict, observers say.

Politicians, meanwhile, often take the opposite position of regulators.

"Bankers are being publicly urged by Washington to be cooperative, to assist borrowers and businesses to make it through these tough times," one insider said. "But the banking regulators who bought into the economic prosperity just like everyone else and never criticized lending practices are now correcting those errors in an attempt to restore their names through overzealous exams."

"Bankers are making loans with the major consideration being how the regulators will treat the loan, not whether it's a proper loan for borrower and bank."

Donald Worthington, first vice president of research at Howe Barnes Hoefer & Arnett, an investment adviser and brokerage services company with headquarters in Chicago, made a similar comment in the Wall Street Transcript of July 13.

"Anytime you've seen regulators be criticized for lax supervision," he said, "there is going to be an understandable reaction by regulators to become even tougher."

Bankers generally have not stopped lending, but the "shadow banking system" or nonbank institutions, has, Guedry said.

He referred to life insurance companies, mortgage bankers, leasing companies and Wall Street firms that arranged conduit loans, such as mortgage-backed securities.

"At the peak, they were doing 70 percent of the lending actually in Nevada," Guedry said.

He estimated that four or five dozen conduit lenders were making hundreds of millions, if not billions, of loans in Las Vegas during the boom days.

Would-be bankers also are encountering problems. It's hard to raise capital and regulators are setting tougher requirements for starting new banks, analysts said.

A few years ago, it was relatively easy to start a new or so-called de novo bank in Southern Nevada with a few million dollars in capital from local business leaders, analysts said. Las Vegas was the fastest-growing market in the country, Gibbons said. Credit risks were low.

After a few years of operation, community bank investors could sell banks for three times the book value (net worth as reflected on accounting books) and pocket big gains.

"I think those days are gone," Gibbons said. "The de novo process of banks is going to be much more muted than in the past."

Jamison summarized: "The appearance of new banks will likely not occur, since the price of admission will more than likely be prohibitive, with increased capital levels and regulatory oversight."

At the same time, it's hard to make good loans when the economic engine of Southern Nevada, casino gambling, is sputtering on a dwindling supply of visitors with tight vacation budgets.

Southern Nevada's recovery depends on a bounce-back at the national level and even globally, said Bill Uffelman, chief executive officer of the Nevada Bankers Association. Consumers tend to cut back on vacations and gambling when they are worried about losing their jobs.

"Other people have to be coming out of the recession for Nevada to be coming out of the recession," Uffelman said.

In other words, improved consumer confidence nationally would translate into more slot machine music on the Strip.

At least for now, fewer retirees are willing to pull up their roots in other states and move to sunny Nevada. Housing prices are falling around the nation, leaving many homeowners with no equity to finance their move to Las Vegas, Gibbons said.

"The mobility of Americans is going to be much less for a number of years," Gibbons said. "People are going to be tethered to where they reside."

However, some real estate investors are betting that retirees will grow tired of waiting for housing prices to appreciate and will rent a home in Southern Nevada.

Bankers have devised varied strategies for coping with current woes while preparing for a brighter tomorrow.

One key is maintaining enough capital to absorb losses and remain financially strong. Service1st Bank began operations with $50 million in capital in February 2007, about five times the amount for a typical startup bank. Meadows Bank started with $40 million in capital in March 2008. Bank of George opened in September 2007 with $23 million but sold $2.7 million in preferred stock and warrants this year to boost its capital. That put risk-based capital at 23 percent.

In economic times like this, "I don't believe anybody could have too much capital," Bank of George board Chairman Edward Nigro said.

Global Consumer Acquisition Corp. underlined that point when it announced an agreement in July to acquire assets and deposits of 1st Commerce Bank and Colonial Bank in Nevada. The combined bank will have risk-based capital equal to 52 percent of assets, compared with the 10 percent minimum that regulators require for a bank to be well capitalized.

In papers filed with the Securities and Exchange Commission, Global Consumer said it hoped to use its capital to make acquisitions and to buy assets and deposits from failed banks.

"There will be some consolidation," Uffelman said, predicting smaller banks will merge with nearby competitors to reduce overhead costs.

Analysts doubt big institutions will snap up small banks, however, because of concerns about hidden problem loans. It's cheaper to buy deposits from failed banks and let the Federal Deposit Insurance Corp. deal with the bad loans.

Many bankers are reluctant to make new loans, because fewer companies have the financial strength to qualify for loans and continued economic decline can make even good loans go bad.

"We have more, for lack of better word, pain ahead of us in this commercial real estate market," Guedry said.

Las Vegas already has gone through five bad quarters for commercial real estate, however, and Guedry believes the area is closer to a commercial realty recovery than other areas of the country.

"I think (commercial real estate loans are) going to be a problem for the banks," Guedry said. "But I don't think it's going to be a problem that will be too difficult for them to overcome."

At the end of March, Southern Nevada banks had between 62 percent and 95 percent of their loans in real estate paper, one banker said.

"It's not too difficult to conclude that those (real estate) markets just have to be restored and stabilized, and not just for banks' sake, but for everyone's," he said.

Community banks that survive the recession will emerge stronger and with fewer competitors, Guedry said. The survivors can be more selective in their lending.

"That will make them a stronger organization," he said.

Nigro agreed, saying community banks will continue to be a key source of loans for small businesses and professionals.

"Coming out the other end (of the recession)," Nigro said, "community banks will be able to do very well."

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.

SOUTHERN NEVADA ECONOMIC FORECAST

Annual Percent Change in 2010 from 2009

Personal Gross gaming Wage/salary Population Single-family

income revenue employment growth housing permits

Dept. of Employment, Training and Rehabilitation 0.0 -3.0 -3.0 1.0 N/A

Restrepo Consulting Group 1.0 0.0 0.0 1.5 -30.0

Southwest Gas Corp. 3.0 2.5 4.5 2.0 2.3

UNLV Center for Business and Economic Research 2.4 3.3 1.2 1.4 26.0