Year of the Bank

When worried depositors showed up at the door of First State Bank, they were greeted by a nervous guard holding a shotgun and pacing the floor. Bank President Ed Clark was smiling, though, sitting behind a counter that was groaning with the weight of coins and paper money.

Clark allowed customers to withdraw money for day-to-day expenses, such as rent and groceries, but he refused to let them empty their accounts.

"This bank is sound, and you're not going to break it," Las Vegas pioneer Harley E. Harmon recalled Clark telling customers, in a profile of Clark published in "The First 100: Portraits of the Men and Women Who Shaped Las Vegas."

First State survived the bank scare in 1932, but others did not.

A lot has changed in 77 years, but analysts see parallels between today and then.

It's tough to make money at a community bank when the community's economy is crumbling. Analysts expect the number of independent banks to dwindle in Southern Nevada if the recession continues. Some will fail. Some may merge with larger competitors. Some will raise capital to continue in business, but bankers generally will remain reluctant to lend until the economy revives and they start posting profits again.

During the third quarter of last year, all of the 19 community banks in Southern Nevada lost money.

For the first time in decades, consumers lost confidence in the country's banking system when the financial system collapsed 18 months ago.

Customers of $32 billion-asset IndyMac Bank of Pasadena, Calif., made headlines when they lined up to withdraw their money in the summer of 2008.

Depositors in Las Vegas also were going wild with fear. Black Rock Community Bank in September 2008 managed to persuade a retired customer that it was best not to withdraw his $65,000. Black Rock remains in business, but the government has shut down five Nevada banks since the IndyMac debacle.

Some community bank customers moved deposits to giant banks that were deemed "too large to fail" by government officials. The government boosted deposit insurance to $250,000 for interest-bearing accounts and unlimited sums in noninterest bearing accounts such as those most businesses have.

Since then, deposits have been returning to Southern Nevada community banks, but bank executives have plenty of reasons to worry.

In the third quarter, deposits at 19 Southern Nevada banks increased 6 percent to $8.1 billion, according to SNL Financial. However, loans outstanding decreased 4.6 percent to $6.8 billion.

While President Barack Obama is urging banks to lend more money, federal bank regulators are scrutinizing loans with a magnifying glass and making bankers even more reluctant to make new loans.

Bankers worry that even the best-run businesses may default on loans if Las Vegas remains mired in a recession.

Waves of borrowers already have defaulted on residential mortgage loans and construction and development loans. Some analysts think commercial real estate loan losses will increase because of high vacancies in office and retail buildings.

On the other hand, there's no long-term future in putting all the bank's money in fed funds that pay zero to one-quarter of a percent while banks are having to pay more than that on deposits just to keep their customers loyal. Yet some bankers figure it's better to tread water for a while than to drown trying to swim too far in an economic storm.

"If you're in a community bank, you've got to survive," said Barry Hulin, chief executive officer of Valley Bancorp, which was sold to Community Bancorp in 2006. Many banks are trying to hold down expenses and remain viable until the economy finally turns up, he said, adding that "It's virtually impossible to make loans. You can't do anything."

In addition to this reality, there is the difficulty of dealing with misplaced consumer perceptions about the state of banking.

"There is this misconception that any bank, not just community banks, somehow 'don't want' to lend to small businesses," Bill Martin, chief executive of Service1st Bank, said in an e-mail. "But community banks in particular have been chartered over the years having business plans that were focused on small business. That hasn't changed. Finding qualified borrowers in this economic morass, aye, there's the rub. Every community bank will make every effort to expand their lending to small business."

Brad Tope, executive vice president and chief lending officer at Meadows Bank, commented: "Banks need to be involved in lending for the economy to recover."

The 2-year-old start-up bank increased its loans by 14.6 percent to $78.6 million during the three months ending Sept. 30.

Meadows Bank, however, enjoyed good timing. It didn't start operations until after the economy fell off the cliff, turning good loans into bad loans at other institutions.

Meadows has no nonperforming loans or foreclosed real estate.

Tope acknowledged that some competitors are focused on problem loans.

"For those in need of additional capital to strengthen their balance sheets, investors appear to have become more interested in the opportunities available in the financial institution industry in Las Vegas," Kathy Phillips, chief executive officer of Nevada Commerce Bank, said in an e-mail.

"My feeling is that things are getting better," Tope said. "I don't think they are going to get better as quickly as they used to. I do see positive signs." Tope believes positive attitudes are essential to restoring the area's economic health.

"Financial losses will probably continue into early 2010 for most banks in Las Vegas as commercial real estate values are under some pressure," Phillips said. "We anticipate a slow recovery to take hold locally in the second half of 2010."

David Ehlers, chairman of Las Vegas Investment Advisors, said he is pessimistic, because the economy drives bank financial performance at community banks.

"I don't see forces of change that are going to make things much different in the next year than they were in the last two," Ehlers said.

Others point to continuing consolidation in the banking segment. Some banks will merge or fail. Meanwhile, regulators and entrepreneurs are reluctant to start new banks.

"The problem going forward is how do you make money in this kind of environment," Hulin said.

Maybe the past holds a clue about the future.

John Detra, 85, grew up in Depression-era Las Vegas, population 4,500. He believes most of the bank runs happened in larger cities. "There was a little panic (in Las Vegas) but not a great deal," Detra said.

Detra's father, Frank, told him about asking for a bank loan during the Great Depression.

The Las Vegas banker asked what kind of collateral he had. Frank Detra said: Two strong hands, two strong arms and a strong back. The elder Detra, a friend of Al Capone, got a $10,000 loan. Frank Detra later owned the Pair 'O Dice Club.

Las Vegans "took care of each other," John Detra recalled.

"Today, it's save your ass and screw your fellow man as much as you can to secure your future."

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