Woes may bring bank failures

Continuing financial problems brought about by the recession could lead to more Nevada bank failures or mergers, leading to further industry consolidation, according to a new analysis.

The Invictus Consulting Group LLC, a New York-based research group, recently released the results of stress tests it performed on each of the nation's 7,695 regional and community banks.

The report found six of the 31 Nevada banks it examined, or 19.4 percent, could become undercapitalized based on the loans now on their spreadsheet.

Invictus predicts that many Nevada senior residential real estate and consumer loans could sour, driving up the need for new capital to cover the bad loans.

"It's a very interesting loan distribution model for banks in Nevada," Kamal Mustafa, chairman and CEO of Invictus, said in a phone interview Monday. "For the most part, they have worked through their construction loans. Now, they are grappling more with problems from credit cards and other consumer loans tied to high unemployment."

Mustafa said that for the weaker banks in Nevada it could mean "serious capital issues." Of the $37.6 billion in assets held by Nevada regional and community banks, 3.2 percent, or $1.2 billion, are held by banks that could become undercapitalized.

The analysis excludes Chase, Wells Fargo, Bank of America and most other major banks that operate in Nevada but are headquartered elsewhere. Invictus doesn't publicize details about individual banks.

The most recent Nevada bank to fail was Nevada Commerce Bank, which was seized on April 8 by the Federal Deposit Insurance Corp. The Las Vegas-based bank was sold to City National Bank at a cost to the Deposit Insurance Fund of $31.9 million.

Since Jan. 1, 2008, eight Nevada banks have failed.

Even so, two of Nevada's largest regional banks have made progress. Combined, Nevada State Bank and Bank of Nevada earned $21.9 million in the second quarter.

This is the first time Invictus publicly released its data, which it has been compiling for several years. The research firm conducts stress tests on banks using financial statements and other research.

Invictus defines a bank as undercapitalized if it has less than 8 percent risk-based Tier 1 capital, which describes the capital adequacy of a bank and includes equity capital and disclosed reserves.

Bill Uffelman, president and CEO of the Nevada Bankers Association, called the report a "cautionary note."

He said that with the exception of some of the larger regional banks, most community banks didn't do a lot of senior residential lending. Instead, Uffelman said Nevada banks continue to be hurt by a lack of carpet installers and electricians to lend to.

"They are not doing any business," Uffelman said.

Nationally, 25.8 percent, or 1,983, of regional and community banks were considered undercapitalized, which equals $1.19 trillion of total assets, according to Invictus.

"This analysis points to massive consolidation needing to occur in the banking sector over the next several years, " Mustafa said. "It also shows that while the U.S. bank industry had been thought to be stabilized for the most part, another big issue lies ahead, especially for banks in slow-growing communities."

Contact reporter Chris Sieroty at csieroty@reviewjournal.com or 702-477-3893.