Real estate troubles hit banking

As the ones who so often hold the purse strings, bankers have a unique perspective on the economic downturn. Whether it's actually a recession is still up for discussion, but they were generally optimistic that Las Vegas would not only pull through, but also come out of it sooner than the rest of the country .
Bankers are the ones making loans to builders, home buyers and construction companies. They are also the ones who, when the economy sours, are faced with declining deposits and increased defaults.
The bankers and economist I spoke with pointed out the obvious: The economic hit on residential real estate is trickling down to nearly all aspects of the economy, including banks.
"It affects us," said Dallas Haun, president and chief executive of Nevada State Bank, the fourth largest bank in Nevada in terms of deposits. "We'll probably see a decline in credit applications and an increase in delinquencies."
"It's going to take this economy a year to digest," he said. "The economy is catching its breath a little bit. During the next 18 months, things are going to slow down."
Keith Schwer, director of UNLV's Center for Business and Economic Research, said via e-mail that the risk of a recession is higher than usual and remains a possibility.
"Credit markets will remain uncertain for at least the first half of 2008 and be a drag on overall investment activity."
John Guedry, executive vice president and manager of City National Bank's Nevada division, said City National's approach during the economic downturn is to remain fairly bullish on the rental market.
Already, the bank has seen the ripple effect on some of its clients, including reduced cash and revenue flows. It has started meeting with clients to discuss the economy's effect on business in an effort to work with them through the downward cycle.
It's important for bankers to remember that although the economy is in a downward cycle, it will come back up, he said.
"I'm not hearing anything different from my counterparts," Guedry said.
It's also important bankers remember their fiduciary responsibilities and follow prudent practices, he said, adding bankers should remain disciplined and make sure they don't add to the problem that already exists, he said.
During this slowdown, industry professionals, he cautioned, "should not do something that bucks the trend."
But, he added, "I'm pretty bullish on where we're headed."
Although the commercial real estate market has remained strong, Guedry said it, too, could be starting to deteriorate.
Of the declining real estate market, Nevada Bankers Association President Bill Uffelman said of mortgage companies and real estate agents, "So many things went wrong in the whole process. There was fraud going on. There is plenty of blame to go around."
That said, Uffelman added, many banks didn't offer residential real estate loans, but ventured into commercial real estate with many loans that are turning out to be "shaky."
"There are big hits some banks are taking," he said.
Schwer said although "community banks may have been originators of mortgages ... they sold these mortgages in the conduit market ... It remains to be seen how the coming slowdown in commercial real estate activity might have on Southern Nevada. I have the impression that some of the community banks have more loans outstanding in this area."
Upstart community banks identified a niche (commercial real estate) they thought they could fill, Uffelman said.
"Hopefully, they came in with their eyes open. Hopefully, they've got the wherewithal to stick it out for the next 12 months. There's a huge resiliency here. Give it a year and a half. Business will be back."
Guedry said he believes the housing crunch is deeper than expected.
"If we don't have the large number of people moving in, there's not a need for retailers to expand," he said. "Yet, we still haven't seen a decline in costs" such as those for construction materials.
What all this means for banks, he said, is some contraction in the industry, including fewer new banks opening and not as much expansion of branches.
Investors "are really going to see stocks and earnings suffer," he said. "A slowing of growth and a decline in earnings are norms to expect for the next year and a half."
Talk of an economic recession feeds into interest rates, said Paul Kadavy, president and chief executive of Paramount Bank Nevada.
"The first thing I think of is, 'What's going to happen to interest rates?' " he said. "I think one of the challenges for banks, as well as our customers, is what's going to happen to interest rates, because it looks like there is a very strong chance that the (Federal Reserve) may cut as much as half a point at their upcoming meeting at the end of January.
This poses challenges, especially for consumers, Kadavy said, because interest rates keep coming down on certificates of deposits and money market accounts.
"It's a greater challenge for them to get a reasonable return on their money," he said. "We try to be at the top of the market on that, and yet, as rates continue to come down, we all have to lower those rates because it probably means the rates on our loans and other investments are coming down as well.
"I see that as a challenge. If in fact we are approaching even a soft landing or a soft recession, it will undoubtedly mean that rates will continue to come down."
From the customer's perspective, the problem is, "How do I get a reasonable return on my money?"
From the bank's perspective, the challenge will continue to be attracting deposits, and to increase the deposit base, Kadavy said.
"The problem over the decades, at least in Las Vegas, has not been how do we attract good quality loans, the problem really is how do we attract good core deposits," Kadavy said.
In so many ways, though, the market will take care of itself, Uffelman said.
"Let the market work through it," he said. "Will there be pain in between? Absolutely ... It's hard to make a buck in the valley, but bankers are resourceful."
Small- and medium-sized banks are "hungry" for business and compete aggressively for deposits and loans. Technology just three years ago thought cutting-edge (such as desktop deposits) is now expected by consumers, Uffelman said.
Consumers are also looking to alternatives such as CDs and money markets to handle their wealth, Haun said.
"The long-term challenge in the banking industry is growing deposits. Consumers have become too sophisticated. The average Joe Blow off the street wants to do his banking online. He doesn't want that extra $5,000 sitting in his account."
And technology is by far the most important aspect to banking this year, he said, such as the development of more online cash products.
"It causes banks to be that more efficient," he said.
The economic dip could also lead to fewer job openings, and even a "hiring chill" among banks, Haun said.
Then there's the possibility of future mergers.
"I won't say no, but at the same time then say I saw this coming," Uffelman said. "It's cyclical ... With depressed stock, it might be a good time to buy."
Still, optimism abounds.
"Slow growth or no growth may seem like a recession compared with the past record of growth" Schwer said. "All in all, Southern Nevada enters 2008 with a lot of economic momentum that will be a big help and growth prospects of the longer run remain bright."