Recently, executives representing Nevada’s banking industry met at the law offices of Holland & Hart in Las Vegas to discuss the changed industry and their expectations for the future. Despite some signs of improvement, there continues to be a divide between banks looking to lend and businesses looking to borrow. Bankers hope to bridge that divide and find qualified lenders to get the economy moving again.
Connie Brennan, publisher of Nevada Business Magazine, served as moderator for the monthly event that brings leaders together to discuss issues pertinent to their professions. Following is a condensed version of the roundtable discussion.
What are banks looking for to qualify businesses for loans?
Larry Charlton: People that can pay it back. When you take loan applications, you look at credit and analyze it. When most people’s trends are down, you have to look at the strength, the fundamentals within the companies. Unfortunately, it’s hard to find companies that can pay it back, to be honest. We have toughened our underwriting standards, but we haven’t changed them. City National has always been a fairly conservative bank and it’s difficult to find companies to underwrite that can honestly pay it back. Banks are cash flow lenders, not collateral lenders.
George Smith: I think there’s a range of clients that want to borrow money. Companies that are well capitalized live through the challenging times. When you look at smaller companies, that are not well capitalized and on a shoestring budget, they survive, but barely. What’s left is not a strong company. It’s a range. The strong companies get loans all the time. Pricing is down. It’s an aggressive market. They survive but they’re not that strong.
Bob Martin: I think everyone wants the same type of client. If it’s the doctor group that everyone says has strong cash flow, everyone wants to do a loan with that doctor group. Then you have competition all competing for the same customer. In the olden days that wasn’t the case. There were ample customers out there that were good quality.
Reed Radosevich: Another challenge is the decline in real estate, both residential and commercial, which has made it very difficult to refinance or look for new opportunities out there.
Tim Rogers: We’ve seen, with some of our commercial customers, they’re able to find business now, which is good, but their receivables are stretched because not everybody is paying. That makes it a little more difficult. The companies that have weathered the storm still have a few dents and dings in them. If you can get them to work, then it’s just a function of monitoring their payables or receivables and making sure that they’re getting paid on time. It used to be that you could reasonably trust someone when they say, “I’m going to pay you in 30 days.” Now some of the best pays are 30, 60 or 90 [days]. They have unforeseen events that’s caused some of our customers concern.
Martin: We’ve had a pretty massive deleveraging of the economy. You can have a consumer that says they can weather the storm, they don’t have a lot of debt. Maybe they would have borrowed before but they’re going to try not to borrow now and get by without borrowing.
Smith: Bank’s deposit balances are running at an all-time high because people are storing cash, not borrowing what they need to.
Rogers: There’s not as much conspicuous consumption going on either. If people have a buck, they’re holding on to it with all they’ve got. They’re not out buying big screen TV’s or Maseratis.
How competitive is this industry?
Terry Shirey: I’d say it’s very competitive for those borrowers who are credit worthy, especially in the last six months with interest rates where they are. The banking industry has about $13 trillion of funding available and we’d like nothing more than to deploy that into loans. I field a lot of calls for longer-term, fixed rate funding. It’s very competitive and these borrowers will often have multiple options.
Smith: It’s competitive, but, in the same sense, it’s less competitive because half the banks are gone.
Radosevich: While it’s competitive in one sense, a lot of banks have different niches that they’re catering to. We’re looking more for the high net worth individuals that we can provide investment management and trust services and estate planning for, as well as financing. Whereas, other banks may be looking for retail clients or some may be looking for small businesses or large corporations. It depends really on what your focus is.
Are loan requirements today more stringent than before the economy fell?
Rogers: A lot of people feel like things are changed and it’s really hard to get a loan now. When you sit down and talk to them about the events that have transpired in their business life, a lot of people that we’ve talked to had great businesses, they just expanded for ten years in a row. They had vacation homes, RVs, planes, they had all this stuff and now all that’s gone, but they’re able to move forward. They feel like things haven’t been fair to them. They want all of that back immediately but it doesn’t happen overnight.
Martin: Where you get that attitude or that approach is from small and medium businesses that worked in the good times. The people that we were loaning to eight, five or six years ago are used to that environment of the banker saying yes. We could say yes to almost everything they asked. The structure might have been a little different than they wanted, the interest rates might have been different, but they’d get a loan. Now it’s very difficult. We went for a period of time where a lot of community bank’s portfolios were real estate loans. For years we kept hearing the stories about needing to diversify the portfolio. That would have been fine had the market continued. The market didn’t continue so those were the banks that, frankly, were here last year around the table that aren’t here this year. Regulators came back and said, we’re not going to let that happen again. They’ve limited that growth on the real estate side.
Charlton: Community banks provide excellent service in the niche to help communities grow. They lived off that growth and made real estate development loans. Those construction loans and the business loans are great returns because of the fees up front. It was nice to ride on that ride, but it stopped. Bankers back then would look at character first because you’ve dealt with them for so many years. Now, when the economy hit all of a sudden this is the change that they see. The capacity comes up now as the top factor of credit, rather than character. Even though you’ve loaned to somebody for 20 years, now you can’t because that capacity has shot to the top and taken over from the character.
Smith: The banks have to be running 9.5 percent off the top, and that’s the way you price your loans. If you’re lower than that you’re going to lose money, you’re out of business. Every loan has to have two sources of payment. The first can be cash flow from the project. It’s predictable. Then you have to have a secondary source. We have to have a way to get out of this transaction. Well, use a guarantor. Now the guarantor’s cash has been spent and that’s our last call. It’s an issue. So, you’re looking at the secondary source. A lot of times, these guys are strong, guarantors are liquid, the values of real estate they have are leveraged out. So, that’s the challenge.
Rogers: About the two sources of repayment, the value of guarantees, personal guarantees have been substantially diminished, if not eliminated entirely, by virtue of AB273. My feeling is, it’s going to substantially shift the risk paradigm. I know banks consider that, and, if you don’t have the value of the guarantee and you can’t be assured of the value of the property, then the only thing you can do, if you’re in a lending environment, is to loan less dollars to a borrower. We can’t continue as we did in the past, knowing that there’s no value to a guarantee. If we don’t get repaid, we have to go to a legal action. That’s a lengthy and expensive process.
Justin Jones: What Tim [Rogers] is referring to is the provision under AB273 that adds a section with regards to the deficiencies. Previously, you could obtain a deficiency judgment against a borrower or a guarantor for the amount that was over, the difference between the indebtedness and the value of the collateral. What it says now is that guarantors are entitled to the same benefits as the one actual. If you sue a guarantor, they are entitled to a hearing with regards to the deficiency without pursing the entirety of the collateral.
Is the worst over in regards to the economy?
Rogers: It seems to depend on what day it is. We’ve some stability in our client base. We don’t have nearly as many people calling and saying that I can’t pay or this is bad. There’s a lot of cautious optimism. I think the real estate market is still in a state of flux to some degree. The current appraisal condition doesn’t help that any. Appraisers, I don’t believe have had a realistic sale to go by, at least in commercial real estate, for some time. Their values are based primarily on discounts they apply.
Smith: It all comes down to jobs. Our primary employment is gaming. If you look at the numbers the companies came out with, gaming is recovering. If you remember over the past couple of years, they’ve had hard times, but their cash flow is up, probably 10 to 12 percent, doing better. There are still people that are under-employed. But, our major employment source, gaming, is doing better. That will trickle out in the economy over time.
How big an issue is people walking away from their loan obligations?
Radosevich: The big concern these days is strategic foreclosures where borrowers have the ability to pay but choose not to because the value of their real estate had dropped so far. I think banks need to send a clear message to those who want to walk away but have the ability to pay that we’re going to go after them to make ourselves whole.
Jones: But, is anybody pursuing deficiencies against residential borrowers? I haven’t seen a single lawsuit. I don’t agree with that.
Radosevich: I think that’s the problem. Somebody needs to send a loud a message.
Rogers: I think a lot of it is the cost associated with that. On commercial credits, foreclosures are a tool of last resort but we’ll pursue a deficiency. We’ve been successful in getting resolution because we don’t let up. It’s not an inexpensive event, but at the end of the day we end up with some pretty good-sized judgments. On a residential property, unless you’re really upside down on it, what I’ve seen is you can pursue them. You can take them to court, you can get right down to the final hour and then they take a chapter and everything is done. So the $30- or $40,000 dollars that you’ve spent pursuing them is extinguished by a personal bankruptcy and they ride off in their fancy car and fancy suit and you’re left holding the bag. What makes it even worse is the appearance in the community because once one person gets away with it, everybody feels entitled. People are almost encouraged to walk away from an obligation, there’s no moral obligation to repay anymore.
Jones: The perception that banks are being unfair to residential borrowers resulted in legislation like AB273 that, in the mix, brought in all of the commercial lenders that were justified by supposedly inappropriate behavior with regards to residential borrowers.
What’s the image of the banking industry today?
Rogers: It depends on how much somebody owes you, unfortunately. If they’re a good depositor, they like us. Everything is all well and good. But, if they’re a debtor that we’re pursuing, then we’re the worst people in the world. That’s unfortunate because we’ve always done exactly what we said. We’ve always been held to a higher standard. If the risk paradigm is adjusted correctly you’ll have so much cash in the deal you can’t walk away from it and that’s what has helped us.
Martin: You’ve got to be realistic. If you’re going to say you’ve got a lot of capital; you’ve got to have a capitalized company. You’re not going to be able to borrow the loan to value you did in the past, but here are a couple of options because in our business, reputation is everything. My single biggest asset is reputation because it’s a relatively small community and people know who you are.
Charlton: Unfortunately, there is harm to some relationships that occur, I just don’t think it’s because the banker is being a “you know what” to them, no matter where they bank.
Smith: It’s often good when they shop your deal at different banks because the banks are pretty rational. They all look at things in a similar fashion, cash flow, whatever. They get mad at you and they shop somewhere else then come back and they understand a little bit because they have shopped. People think we make money on deposits or loans. We make almost no money today on deposits, you can’t live on deposits. You want to make loans. The only option we have today is loans and fees and other business, but, we need the loan business to make money.
How do banks give back to the community?
Radosevich: I think virtually everyone at this table sits on one or two or more boards in the community, not-for-profit boards. Certainly we’re trying to lend our business acumen to help those boards succeed and navigate the difficult environment. Not only do we contribute financially to not-for-profit organizations, but we donate many of our hours.
Martin: I think all of us encourage our employees to participate as well. Sometimes these boards take up a life of their own. We kind of figure it’s another job, but it’s also through these organizations that we encourage employees to get active in the community for a variety of events.
Shirey: I’d say the entire industry is very dedicated to reinvesting in the community, especially if you’re a community bank. The community makes us and we believe in giving back. What really impresses me when I go to an event is not that the bank is sponsoring or involved, it’s the number of our colleagues that are there. There are people that work in the branches and are giving up a Saturday to participate at one of these events.
