LOCAL BANKS NOT SO SAFE

Like a great earthquake, the real estate bust and credit crunch have shaken, buckled and driven huge cracks in the foundation of Southern Nevada's banking sector.

Stunned bankers, investors and depositors can only wonder what will come with the aftershock -- and who will be left standing.

In the past four months, Silver State Bank and First National Bank joined a list of 15 banks that have failed around the country.

Nationally, the number of busted banks totaled three last year, according to the Federal Deposit Insurance Corp. By comparison, the FDIC shuttered 534 institutions in 1989.

The FDIC reported that 117 banks and thrifts around the country were in trouble in the second quarter, the highest level since 2003.

The number of banks and savings institutions in the United States is declining, too. The FDIC counts 8,451 banks and savings institutions now, down from 15,158 in 1990.

Things have gotten so dire that the Treasury Department has decided to buy ownership stakes in financially weak commercial banks. The move would strengthen balance sheets and persuade banks to start making loans again, officials hope.

The two remaining big, independent Nevada-based bank holding companies, Western Alliance Bancorporation and Community Bancorp, have been struggling to stem a tide of bad loans and watching their stock-market values shrink like a punctured balloon.

The problems of other community banks in the Las Vegas area are less visible, only because they are privately held.

At the same time, giant regional banks are starting to encounter new and larger competitors that have swallowed up struggling financial institutions in whole or in part.

"It looks like we're going to see a lot of behemoth banks in this country and a lot of small ones," said Joey Warmenhoven, senior vice president of small bank market-making at McAdams Wright Ragen, a regional brokerage.

Some analysts believe the industry's giants will acquire weak, midsize regional banking companies, while leaving numerous small independent banks. The result would be a barbell-shaped industry of giant and tiny banks and little in between.

JPMorgan Chase on Sept. 25 established a beachhead in Southern Nevada when it took over 36 former Washington Mutual branches.

Morgan Stanley, which has four locations in Las Vegas, and Goldman Sachs, which already is prominent among lenders to the casino sector, obtained commercial bank charters, making them potential competitors to the biggest regional banks operating in Nevada.

"Bring it on because we'll compete with anybody," said Ken Ladd, U.S. Bank's western regional president for commercial banking for six Western states.

U.S. Bank already competes with some of the Nevada banking newcomers in other Western states, Ladd said.

Yet, Ladd said: "We're going to have to sharpen our skills."

Kirk Clausen, regional president of Wells Fargo Bank, also acknowledged the coming challenge.

"There will be very good competition," he said. "I'm not afraid of any competition."

The new giants in banking are good news for business, Ladd said. The new banks can inject additional capital into the Nevada economy, which has been underserved by banks, he added.

"As a Nevadan, that's good, because it gives us more choices," he said.

While the industry's giants prepare to battle for a wide range of business and consumer customers, independent community banks face challenges of their own. These financial institutions typically focus on providing personalized service to small businesses and professional firms, such as those of lawyers, doctors and dentists. They lack the branch networks needed to reach many consumers, and they lack the capital needed to make giant loans to Strip casino operators and other big businesses.

New community banks popped up in Southern Nevada after the real estate debacle began unfolding and avoided problem loans that plague some of their older peers.

The newest of the independent banks probably will do well because they will have few problem loans and cash in the form of capital, said Barry Hulin, former chief executive of Valley Bancorp, which Community Bancorp acquired in late 2006.

"At times like this, cash is king," Hulin said. "It's a cushion that lets you survive."

Wells Fargo's Clausen added: "If somebody is saying community banks are going the way of the dinosaur, I don't believe it. These are good people. They're smart bankers. They know what they're doing."

Arvind Menon, chief executive of 7-month-old Meadows Bank, agreed with Clausen.

"Community banks are supposed to have died a thousand deaths since the 1980s," Menon said. "Bank failures are making depositors nervous. There's a tendency to think that money is safer with Bank of America or Wells Fargo Bank."

He doesn't believe large banks are necessarily more secure than small, pointing out that IndyMac and Washington Mutual, both large, failed.

"We would not want to see any other bank in this market fail. It just raises the level of concern of the general public," Menon said. "I don't believe you are going to see a big change in the marketplace. I'm sure we'll come out of it OK."

Warmenhoven, however, predicts mergers and acquisitions will change local banking.

"When we get through this cycle, there will be banks that want to sell," Warmenhoven said. "It's not fun going to board meetings when you're talking about loan losses."

Dale Gibbons, chief financial officer of Western Bancorporation, holding company for Bank of Nevada, agreed with Warmenhoven.

"As the market stabilizes, I believe you're going to see the greatest consolidation in financial industry history," Gibbons said.

With the $700 billion bailout bill, the Treasury Department will be able to take over more of the dubious loans, making it even easier for banks to merge, Gibbons said.

Western Alliance has obtained $50 million from a private placement of stock so it can acquire stressed banks looking for a partner and bid on assets and deposits from failed banks.

"We certainly see the strong acquiring the weak, and the big (banks) getting bigger," Paramount Bank Chief Executive Paul Kadavy said.

As that happens, Kadavy hopes to attract customers who are disconcerted with changes after bank mergers. At the same time, Kadavy believes it will be harder to raise capital to start new banks, reducing the number of new small competitors.

In the past, many businesspeople have started independent banks, run them for a few years and sold out to bigger banks for fat premiums.

"Those days are over," Kadavy said. "The world has changed. To the extent that sales do occur, they are probably not going to be for the wide premiums over (accounting) book values as in the past."

He also expects fewer sales.

Hulin, meanwhile, wondered how patient community bank investors will be.

Community bank shareholders, who became accustomed to 30 percent compound growth rates in assets and income a couple of years ago, now must be more conservative and be satisfied with making slimmer profits on loans.

Bankers say they are finding few strong businesses that need loans to grow. Instead, they are encountering businesses that need money to make payroll or pay bills. They are reluctant to lend to these struggling ventures.

Bankers will need to cut expenses and improve efficiency to stay competitive, Hulin said.

"Most commercial banks that survive this cycle are going to thrive on the other end (of the cycle)," Warmenhoven said. "(But first) we've got a lot more pain to come."

Hulin said most of the problems in Southern Nevada real estate stemmed from speculation driven by cheap interest rates while the nation's economy continued growing.

"All of the problems we've had now have happened before we went into a recession," he said.

Consumers, the driver of economic growth, must start living within their means and can't easily borrow to make purchases, he said.

"Now, we're going to go into a classic, consumer-led recession," he said. "It could be a very tough several years."

This story first appeared in the Business Press. Contact reporter John G. Edwards at jedwards @reviewjournal.com or 702-383-0420.