The banking industry plays a vital role in the success or failure of companies and individuals that rely on banks for their financial needs. Over the last few years, the industry has experienced a myriad of challenges including government regulations, foreclosures, finding qualified borrowers, low interest rates and image issues.
Connie Brennan, publisher of Nevada Business Magazine, served as moderator for the event. These monthly meetings are designed to bring leaders together to discuss issues relevant to their industries. Following is a condensed version of the roundtable discussion.
Is the banking industry in better shape than it was this time last year?
Alfred Alvarez: I think we are. Obviously the great recession has been pretty difficult for everyone, but we see light at the end of the tunnel. The commercial borrowers that we’re seeing are taking advantage of rates that are really pretty good right now. And, of course, with low rates come all kinds of sophisticated products that we’re offering our clients. We’re beginning to see more activity. Our pipelines are beginning to do better.
Reed Radosevich: Low interest rates certainly had a negative impact on most of the banks by compressing the interest from the banks and people who have to survive on a fixed income. That aspect has surely not helped us.
Will we see more community banks struggling and possibly closing this year?
Bill Uffelman: There is potential. There is also the potential for the sale of those that don’t go under. The overall climate when talking to all of the banks, some of the smaller ones, it’s really not getting worse for them. The trouble is, if it’s getting better, it’s only in the tiniest of increments. With the aggressiveness on low interest rates, if there is a qualified borrower out here in Las Vegas, there are about 10 bankers lined up ready to cut a deal. They have gotten smart and say, “Who is going to give me the best deal? Do I get four percent for 20 years or are you going to give me 3.75 percent for five years? Where am I better off?”
Bob Martin: I look at the community banking model and I think of the challenges. In the old days you used to generate money by taking in deposits and lending it out. Lending is a challenge. The other part of it is, if you couldn’t lend it out, you could put it in the market and park it on the sidelines. It’s hard to make money in this environment. The bigger banks have a variety of fees and credit cards that are out there and they can survive. For the smaller banks, I think it becomes more of an issue.
Uffelman: Absent SBA loans for community banks, I’m not sure there would be any loans. SBA lending is the active lending class of loans here.
Has the definition of qualified borrowers changed in the last few years?
Kirk Clausen: No, it hasn’t changed. The profile of the borrowers has changed. You can look at it different ways. One of the most common ways of looking at this is, five years ago, you would have a developer or small business owner with some real estate. They would walk into a bank and, maybe they didn’t have the strongest FICO scores, but they had something of value they put in front of you. If you were an asset based lender or believed in collateral, you might lend against that. It might have been real estate and that real estate might have been a million dollars an acre, pick a number. Today it’s just not there and it impacts their personal financial statement and their company’s financial statement. Practically overnight you saw values drop in real estate and other assets. Think about the impact to their balance sheet and how that corresponds to a bank in terms of being able or willing to lend. That’s what has changed. For most of us sitting around the table, the same lending standards are in place. In my company, we have not changed that much. There are just fewer qualified borrowers out there. A lot of us have taken it upon ourselves to try and strengthen borrowers, to work with them. It’s much more a part of my team’s activities to help customers repair their FICO scores so they can borrow six months or a year down the road. Five years ago, we did a little of that but not nearly as much as we’re doing today.
John Wilcox: One of the things we’re doing today is focusing on things people can borrow from us six to 12 months from now because they don’t have equity in their real estate. They don’t have a secondary source of payment. We’re spending a lot of time working with them to try to develop a strategy where they can be credit-worthy.
Wilcox: All of us around the table are looking for that good borrower. We’re doing it as aggressively as we possibly can. We’re adding people on the street to go out and find loan opportunities for us. It still gets back to it being difficult to find a borrower that can qualify based upon what has happened to him in the market.
Uffelman: There are qualified small businesses out there right now that are still sitting and saying, “What does the future hold? What is my environment going to look like six months from now?” There’s uncertainty that exists out there.
Clausen: It’s a bottom line game. There is a whole list of things that can go on between revenue and all the expenses and taxes and everything else. What that results in is bottom line, it’s what gets talked about in the banking circles as uncertainty. It’s the uncertainty on the part of the small, medium size business today that is a real wedge issue.
Radosevich: The borrower needs to realize that banks are only making one or two percent spread on loans. That means we have to get repaid at least 98 or 99 percent of the time, just to break even.
What role does the banking industry have in the economic recovery?
Uffelman: Banks and lending fund the dreams of these small and medium sized businesses. They are not stocks. You can only harass your relatives so long to put money into your enterprise. After that, you’ve got to figure out a business plan and how to fund that.
Martin: From an investment standpoint, the role bankers play is as a counselor. I think there has been some trust lost because, unfortunately, the conversations bankers have with their clients for the last couple of years have not been viable conversations. They lose trust. Now, as John [Wilcox] alluded to, working with the client six months before he’s really ready to borrow to help them, then you become that trusted advisor and you regain some of that trust. As a counselor, that’s what we do with most of our clients.
Wilcox: We’ve got to be investing our time in sitting down with clients and helping them realize what they need to do differently so they can make themselves credit-worthy. If we do our jobs, we become their partner, investing our time, products and services, then make them a loan for their business. They are going to become more productive and so will we. It’s good for the community. But, we have got to be investing a lot more time than we have in the last several years, sitting down talking to people about what is in the future. Banks [should] align with the clients and stick with them and advise them and help them get through this bump in the road. It’s a very large bump.
Uffelman: Is there damage? Yes. Then look at the customer and what is going on there. There is a perception of when banks take a hit. Well, are we talking about one or two, or we talking about all 7,000 banks in the United States? The reality is, people hear “banks” and we all get painted with that brush that we’re not lending, we’re not doing something. Nobody goes behind the details when a businessman says, “I can’t get a loan.” You want to sit down and ask, “What is it you’re trying to borrow? What are you trying to fund?” We offered a set-up in Senator Reid’s office in Reno where they were talking about getting calls from constituents who can’t get a loan. Stan [Wilmoth] was with me, from Heritage Bank and Stan said, “You read back the application, send me the application. I’ll either make them the loan or tell you exactly why that person didn’t get the loan.” Here we are, over a year later and we haven’t gotten a single piece of paper. People that aren’t getting loans know why they aren’t getting loans.
Is the industry over regulated?
Radosevich: Certainly, some regulation is needed to protect the consumer, but regulations need to be well thought out to ensure it accomplishes what it sets out to rather than just being ran through the system for the sake of getting it done, getting it on the table.
Arvind Menon: That is what separates big banks and small banks. We don’t have the manpower or resources to be able to do all the compliance issues you’re talking about here. We already have a full-time compliance office and we’re looking at maybe adding a second one. At the last separation, we were half a billion dollar bank and we didn’t have a full time compliance department. So things have changed to that extent when overhead expenses go up. Not only that, today you can be put on a Cease and Desist Order. If you have a compliance issue, they can close you down. They literally shut you down for a compliance issue. In the old days, I’m talking 10, 15 years ago, it was important but not that significant, not life and death, now it is.
Clausen: It’s hard to argue with its disproportion on small banks, no question about that. But, all of us know that there is never going to be a day that is regulatory free. It’s not going to happen because there does need to be some level of government out there regulating. In spite of what happens out there or what has yet to be determined, I think it’s still about how you start with your customer every day.
Menon: There are good regulations and bad. Lately there have been bad regulations just for the sake of things. Congress seems to want to do things and decided this is the best way to protect the consumer.
George Burns: For state chartered banks, it’s relatively benign I would say. There are some items that had to be addressed through this crisis that we had on the books and were archaic. We got that changed in the last legislature. We’re here to enforce federal as well as our state’s regulations. That’s why all of our examinations are done jointly with our federal counterparts and our state institutions.
Do you think regulations will drive out all the community banks?
Menon: I’m not sure that will happen but, I feel a lot of them are threatened on top of the economic environment where your returns on investments is very low. You add this kind of burden to it and people throw their hands up and say, “I’m done.” They look at merging or selling out. Now, will it go from 7,000 [community banks] to five in the country? I don’t think that will ever happen. There is a place for community banks.
Burns: Regulation is the biggest struggle we have in achieving a balance between reacting to what caused the crisis and what we need to do going forward in order to prevent this from occurring again. There have been some things that are being done differently this time around. We’re trying to establish minimum thresholds with who has to comply with all of these regulations coming out. Unfortunately, as some of the community bankers will point out, it still has a trickle-down effect for them in that it still affects them. It really is a struggle for both regulators and banks to find that balance going forward in order to try to learn from history. There is a great expectation for what we’re going to do moving forward.
What is the status of foreclosures?
Clausen: There are homes in process, going down the path of foreclosure. The various levels of government, federal, state, local and everybody is well-intentioned. I believe that. If I believed otherwise, it would be a very sad day, but you have new legislation, new ordinances being created that aren’t always in sync with local, with federal or state. And you’re not always in sync with contract law or the Uniform Commercial Code for that matter. I want to go on record and say there is no such thing as a shadow inventory. What’s getting referred to as some kind of inventory out there is simply the fact that it’s taking longer to move than it used to. That is all that’s going on.
Uffelman: Look at the numbers since October of last year. Basically the financial institutions have not filled notice of defaults (NOD). The NOD is the trigger to begin the real process of foreclosure in the State of Nevada. Then the borrower is entitled to request mediation. The mediation process takes time and may or may not have a satisfactory conclusion. The question is what is satisfactory? If the person stays and gets a modification you know what happens. Experience has shown us over the last several years that half of those re-default over a period of time or they don’t meet the federal standards. Resolving residential foreclosure is what is going to move things ahead.
Radosevich: I venture to say that the prolonged foreclosure process is probably hindering the real estate recovery locally.
Is the banking industry getting healthier?
Wilcox: There is no question we’re seeing improvement. I always have to catch myself when I say improvement. People want to see the graph go straight up. Our loan volume is up. Our demand is up. We’re looking at a whole lot more businesses this year in terms of lending than we did last year. We’re getting calls about investors wanting to come in and buy multiple properties. That is positive. It’s better but it’s going to be a very slow climb out of this hole that we’ve been in, and we’d all like for it to be quicker than that, but the reality, it’s going to take a while.
Greg Gilbert: The banks and the current state of our financial institutions in Nevada and elsewhere are suffering from the same types of things that businesses are suffering from all over the country. The reality of the Nevada population is that when we have revenue being driven through our state, everybody is going to be happier, the small person, the business owner, the resort community. No matter how that is being driven, people feel more comfortable about lending, borrowing when there’s a foundation of business and activity that is consistent.
