Since the beginning of the recession, the banking and financial industry has been scrutinized and analyzed more than any other. The industry has been accused of everything from irresponsible lending to refusing to lend at all. With all of the misinformation available, executives representing Nevada’s banks recently met at the office of Holland & Hart in Las Vegas to share their side and give insights into the future of banking and finance in the Silver State.
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 pertinent to their industries. Following is a condensed version of the roundtable discussion.
What do you look for when you consider lending on a commerial real estate project?
Reed Radosevich, Northern Trust: I think the key factors are, one, you need to look at the buildings that are fully leased up and have long leases and aren’t just running month to month. Secondly, you need to look at the borrowers behind them to make sure they have some liquidity in the event they experience vacancies or a downturn in the cash flow of the property.
Larry Charlton, City National Bank: There’s also the appraisal factor. Banks aren’t collateral lenders, we are cash-flow lenders. It has to have cash-flow. We have to see liquidity and a flow of cash that we can count on. You’d have to look at the building’s tenants even stronger than you used to. The value of that building has dropped. It’s interesting, you could have a leased-up building and you still can’t make a loan because they’ve either made concessions in their leases or the appraisal value has dropped and it just doesn’t work anymore.
Bill Martin, Service 1st Bank of Nevada: As far as community banks are concerned, with the reduced guidelines by the FDIC, we are pretty much out of the commercial real estate business when it comes to spec loans or non-owner occupied. So, they aren’t going to get much relief from us. I would direct them to these other banks that have a lot of room. It’s a simple equation, it’s the value and the exisiting cash flow and the risk of that cash flow disappearing.
Bob Martin, BNY Mellon Wealth Management: A lot is determined by the regulators. It isn’t that the banks don’t have liquidity or that they don’t want to make loans. From dealing with regulators on what is and isn’t acceptable, there’s not much out there today that is acceptable. They are driving the business more so than the community bank board.
Bill Martin: The local banks are in trouble because of something we’ve always done for commercial real estate projects. We’d get them pre-leased, pre-sold and we’d get them to take out commitment loans and stabilization. Once the building is complete, the tenants are gone, the vacancy is one hundred percent, the buyer is gone and now we became different types of lenders. That’s really what got us into trouble from a regulator point of view. They’re not happy to see us go back into that line of business very heavily.
Charlton: When I was at Business Bank of Nevada, before the economy started turning, the regulators were banging on us. The federal reserve guys were just beating on us to no end on the percentage of capital of the commercial real estate and the real estate lending. The commercial real estate people yell at the banks, “Why don’t you lend?” It just goes back to if the collateral is not there, the cash flow is not there. People forget, we don’t loan our own money. This isn’t the bank’s money, this is depositors money.
Bob Martin: You wonder if they would be okay making the loan if they were using their money.
Bill Martin: Depends on what they were getting.
Bob Martin: Right. All we get is the spread of the spread, they get a return.
Charlton: As a businessman, we buy money and sell money. That’s what we do; you’ve got to have a spread.
Kathy Phillips, Nevada Commerce Bank: You might want to ask them to think about an SBA or USBA loan. Our bank is able to do that.
Bob Martin: I see one of the challenges, even from the community bank standpoint, is how to make money in today’s environment. Historically, you’d get deposits and in worse case scenarios, you’d turn around and invest those in federal funds. You’d spread that over federal funds and you’d be fine but you didn’t lend them out. Today, you don’t get to spread those over federal funds and you don’t lend them out. You just have a brewery. You have to wait until things change. Bigger banks have done a pretty good job with fee income and other things. With the smaller banks, it gets more difficult.
Gene Galloway, Plaza Bank: You make it the old fashioned way, by making loans.
How will the banking reform bill affect banks?
Galloway: It depends on the size of the bank. The bigger the bank, the more impact it will have on their investments. As a community bank, I’m not even going to worry about it. It’s business as usual for us. This whole business has been reinvented probably 20 times, but the margins are still the margins. You still need to know your customer, make smart loans and every time you sign a loan, you want a hundred more just like it because you get to make one mistake out of a hundred.
Radosevich: The intent of the bill was to police Wall Street as well as provide consumer protection. I think the affect is certainly going to be more cost for all of the banks. It’s going to impact banks that have significant locations and investment banking arms more significantly than a private bank, for example. But, it’s going to have a definite impact on all of us.
Bill Martin: I don’t think that when you have the most comprehensive overreaching regulatory bill ever to pass, in which committees are set up to define what the bill wants them to do, for instance, that it won’t affect every bank. I asked several people if this means that banks from other states can branch into Nevada and no one can give me answer. That consumer agency is going to be so unrestricted and powerful. I hate to think of the powers they will have that are yet to be defined by that agency. I think they got us all.
Phillips: I think there are some unintended consequences in that bill.
Charlton: Twenty-three hundred pages in the bill and it’s to be determined later by these agencies just how they define it. It could be very far reaching, we just don’t know. The thing that disappointed me is Freddie Mac and Fannie Mae weren’t even touched by this bill. If you want to track back on the housing market where it started, it lands right there, in that direction to make 42 percent loans to sub-prime borrowers. There’s your source of the products that created the issue right there.
When will banks feel the impact of this bill?
Galloway: Probably 2011.
Charlton: It will take three to seven years to flush out before they decide how it’s going to work.
Bill Martin: I think rather than a tidal wave, it will be a shock wave that will hit us. It will be more of a wave after wave for a long period of time.
Galloway: They’ll start sending out interpretations and opinions and that has a lot of weigh in. Whenever the FDIC or anybody weighs in with an opinion, all of a sudden it starts trickling down to one person’s view is one examiner’s gospel. That’s how you’ll see the early impact of it all.
Do you think the upcoming legislative session will target banks?
Charlton: I think they’ll look at everything. They’ve targeted us before. They opened the door and we warned other industries that when they target an industry and raise a tax, everyone needs to be concerned. I’m naïve enough to say that they may raise everyone else (to what the banks pay) and not take us potentially even higher, we just don’t know. I’d hate to be a legislator in this state during the next session. It’s not going to be fun. We had two industries that fueled our growth and we don’t have one of them anymore, the construction industry. Everyone says our way out of this is diversification. You just don’t snap your fingers and do it overnight.
Bill Martin: It can’t happen. The Nevada Development Authority has worked so hard and they would bring in 50 or 70 or however many businesses a year, those business would employ an average of the population and then we’d open a new hotel and go hire 6,000 people. When you look at the percent of our economy, diversification never has a chance of growth within that. In regards to the legislature, I think that depending on some of the election results, there’s a chance the entire business tax will be reduced slightly.
Bob Martin: We tend, historically, to target industries that are doing good at the time of the session. That was the banker’s issue and why the banks got picked on. If you look at the mining industry, they’ve been relatively smart. They’ve been proactive.
Charlton: What bothers me about the mining industry is that it moves on the metal trading and it’s not a stable staple. It’s not a stable broad-based tax and that’s a problem when targeting any industry.
Bill Martin: That all started with the gross receipts tax and the anger towards the Wal-Marts and big banks that weren’t contributing if you look at the corporate income tax. They needed something that reached everyone regardless of their incorporation. When they came up with the idea of taxing an expense, I don’t get that. The result is whether you’re profitable, not profitable, big or small, you have a big burden. They were after someone different than us but everyone got hit. When that tax went away, the anger came back into play.
What is happening with interest rates?
Charlton: They’re not going anywhere for a few years.
Bill Martin: The federal funds rate, which is targeted at 25 basis points is really targeted at zero. I recently saw something that said federal funds rates are as low as 12 basis points which is half and means the fed is continuing to push liquidity out there. Wasn’t too much liquidity what got us into this mess?
Radosevich: While low interest rates are great for the consumer, I think it’s really compressed our interest rate margin and profit margins and demoted our profitability. It makes it difficult on the positive side for a lot of banks, in the short term anyway.
Bob Martin: A rising interest rate environment is better for the stock market, which is better for consumers, which kind of equates that liquidity. It’s kind of an oxymoron. We are in this situation because we as Americans spent more than we saved. Well, the thing that perpetuates the problem is if we save more.
Galloway: The question is, why are people saving more?
Phillips: There is a lack of confidence.
Charlton: They are scared.
Has there been any decrease in distressed assets having to be reclaimed by banks?
Charlton: Every week I get this list of the NOD’s (notice of defaults) and you can see it, it’s public record and it’s not getting smaller. I haven’t seen the number shrinking at all.
Bill Martin: If a building doesn’t get built or you have to take it to a ten-year amortization to a five year, you then do an appraisal every six months to see if it’s changed. An awful lot of the losses you see in banks are writing down that impairment and it’s all because the financial accountants and the board want market value accounting. They want everything on the balance sheet to be tracking and bankers resist it because that means you go in and if you had a loan around for years at five percent and they determine the market rate should be six percent, then you would have to write some of that down to a market value.
Galloway: The appraisals are changing so quickly. There are investors out there who want to bottom fish and are willing to hold on to property for three or four years and when he sells an REO on raw land that impacts mine. All of a sudden there’s a hiccup in the cash flow. I have to get a new appraisal. It depends on when they write them down. If that deal is performing, unless the regulator comes in and says get a new appraisal, they aren’t getting them.
Charlton: The part of this that really impacts everyone and we should talk about is appraising. I really feel for the appraisers right now. It used to be appraisers would do comparables and run formulas and now I think appraising is an art form rather than a science. What they are looking at is not what this property is worth today but what it’s going to be worth six months from now, a year from now, 18 months or two years from now.
Radosevich: It went from being over optimistic euphoria appraisals to how conservative can you be in order to cover yourself and future discounts.
What will the catalyst be to turn the economy around?
Bob Martin: I think it will be employment from our local market. The challenge is, where will that employment come from?
Charlton: I would go back further to consumer confidence in the country. We are only down visitor volume wise by about ten percent but the visitors spend is off, way off. We’ve got them coming here, we need to get them spending more.
Radosevich: It’s a domino effect. The national economy needs to heal in order to drive more tourists and spending which will then create more jobs which will then create more homes.
Charlton: It creates jobs in the leisure industry when we need to diversify.
Bill Martin: There are a number of well-documented stories where people bought 25 to 50 homes from large builders. As soon as those loans closed, the builder would build 25 more homes. There wasn’t a demand for the first 25 and now you have 50 on the market. We need people to move in the state either as a tax haven or to fill the jobs. People have to start coming back here both as tourists and as buyers.
Do you think we’ll see any more banks go under?
Charlton: We certainly hope not. No one wants to see it. We hate it. They are all our friends too, it’s a small banking community. It could happen, there could be something you didn’t realize was there and something else goes bad, all the banks are working on it. Small banks all the way up to big banks, there’s a lot of things that have been happening and adjustment making and capital is king. You’ve got to have your capital ratios right or the feds come in and drop it on your head.
Phillips: We hate to see any of the customers get hurt or the shareholders and it really impacts the community. It’s a terrible loss.
