Friday, April 10, 2009 | 2 a.m.
Banks across the country have been battered by plummeting real estate values and skyrocketing foreclosures, and Southern Nevada-based banks have had it worse than most.
With commercial real estate loans looming as foreclosure candidates, industry experts warn Southern Nevada-based banks are about to be hit with the second of a tough one-two punch.
The most recent numbers show that Southern Nevada-based banks have reported exponential increases in foreclosures and substantial increases in loans they are no longer collecting on — primarily residential real estate loans, but also commercial and industrial loans and individual loans, such as credit cards, according to banks’ year-end 2008 Federal Deposit Insurance Corp. filings.
In Business Las Vegas analyzed Southern Nevada banks’ financial reports from 2006 to 2008, using information gathered by the FDIC. In Business focused on bad loans, otherwise known as troubled assets — that banks are no longer accruing interest on and don’t think they’ll be able to collect on — and real estate that the banks foreclosed on and carried on their books.
Because Las Vegas- or Nevada-specific numbers are not available, the financial reports of national banks, such as Wells Fargo and Bank of America, were not analyzed despite their significant presence in Las Vegas. Private banks that don’t report to the FDIC also were not analyzed.
The 19 Southern Nevada banks that In Business analyzed had only $56,000 in foreclosed property at the end of 2006. A year later the total value of foreclosed property banks had taken over had multiplied 80 times, to $4.5 million, and that number multiplied by another 30 times in 2008 to $134.7 million.
Two banks had the lion’s share of foreclosed properties at the end of 2008: Community Bank of Nevada with $79 million and Nevada State Bank with $39.2 million.
Foreclosed properties represent loans that have been charged off, with the banks now owning the collateral, Nevada Financial Institutions Commissioner George Burns said.
“A bank can’t make any money when it owns property,” he said. “If the current foreclosure trend continues, that figure is likely to climb.”
The troubled asset loans of Southern Nevada-based banks have increased 5.4 times from Dec. 31, 2007, to Dec. 31, 2008, from $83.8 million to $455.2 million. During the year that ended on Dec. 31, 2007, those loans increased 4.7 times, from $18 million to $83.8 million.
When borrowers are no longer paying back loans, the banks are hit hard because they are no longer collecting interest — the primary income for a bank.
Nevada has moved through the majority of problem residential real estate loans, Burns said, but spillover from commercial real estate and foreclosures in that market are likely.
That could pose a problem for Southern Nevada-based banks, most of which specialized in commercial real estate.
One of the primary ways the state keeps an eye on banks is through banks’ troubled asset-to-capital ratios, Burns said. The ratio compares a bank’s loans that borrowers are not paying on time and foreclosed properties on its books to the bank’s capital and allowance for loan losses.
Although the state doesn’t publicly release the troubled asset ratios, BankTracker, a project developed by the Investigative Reporting Workshop and American University, computes the numbers and posts them on its Web site.
The Southern Nevada-based bank with the highest ratio is Community Bank of Nevada, with a ratio of 113.9 percent.
Other area-based banks with higher-than-average troubled asset ratios: SouthwestUSA Bank, 82.2 percent; Bank of Las Vegas, 62.6 percent; Nevada Commerce Bank, 61.7 percent; Sun West Bank, 54 percent; and Red Rock Community Bank, 53.3 percent.
The national median is 9.9 percent, according to BankTracker.
“This is one of the things that is a measure of how severe the financial crisis is right now,” Burns said. “Most institutions previously in the healthy economy were averaging below the 3 percent level. The average within the state of Nevada is probably running closer to 35 (percent) to 40 percent level on that average right now. That has been a huge increase in the last 18 months.
“It is indicative of the declining economy and the collateral impact of the mortgage crisis, which has now begun to spill over into the commercial real estate market. All of these are the types of loans that our institutions hold. It’s also, because of the economy, begun to spill over into their consumer lending portfolios, which are the car loans, commercial lines of credit, credit cards and so forth.”
The looming trouble with commercial lending portfolios stems from a decreased demand for office and retail space, analyst Brian Gordon of Applied Analysis said. That, he said, has the potential to force many owners to lose properties to the banks.
“There is an increasing incidence of bank foreclosure activity or restructuring of loans on commercial mortgages,” he said.
In the southwest valley, for instance, where projects such as ManhattanWest (a condo-and-retail development) have stalled, Gordon said office vacancies are up 20 percent and many could default.
He expects commercial vacancies to rise through 2009, although the local job market and what happens with the national economy will affect the trend.
“The situation is not likely to correct itself in the near-term,” Gordon said.
SouthwestUSA Bank CEO Patrick Wisman said focusing on one ratio of any given bank to determine its health is unfair.
“There’s only one agency that has a right to rate banks and that’s the FDIC,” he said. “Banks have varying amounts of problem assets, but unless you know what’s underneath those then you really can’t say whether a bank is good or bad ...”
But Community Bank of Nevada CEO Larry Scott said that considering a bank’s troubled asset ratio is “not an unfair measure” of a bank’s health.
“It is a reasonable approach to evaluate the bank’s current performance of its portfolio,” he said. But the kind of collateral the bank holds should also be considered.
For example, Community Bank holds a 113.9 percent ratio, but is heavy in real estate that is in prime locations, which increases the chance the bank will be able to sell it off, Scott said. The bank is in negotiations to sell off $60 million in foreclosed property, which would normally help its situation, but it is likely that it will be reporting more foreclosures to the FDIC for its first quarter, he said.
“The future prospects of these properties are bright,” he said, but he doesn’t expect the ratio to change for several quarters.
Burns said that as a bank accumulates more loan losses, it undermines its capital. That’s where the concern begins.
When a bank hits 60 percent, regulators make their first visit to assist it, Burns said.
“As regulators, what we look at is what the percentage of adverse classified assets are,” he said. “That’s really the figure that we track on our radar screen most closely. And if those begin to rise, it obviously gets to a point where they’re at 100 percent of adversely classified assets-to-capital, we know the institution is in peril. That the possibility of them no longer being an ongoing concern becomes evident.”
For consumers who are concerned about a bank’s health, Burns said, “it would be the same as ours, to be aware of what those adversely classified assets to total capital are.”
But even Burns said that while the ratio is scrutinized by regulators, there are other factors that influence a bank’s health, such as mortgage-backed securities.
“Even that portion is a very limited snapshot,” he said.
He said business decisions have to be made by the institution, as to whether they are able to gain capital.
“And probably the biggest problem that institutions are facing right now is that the capital markets have dried up with regard to banking,” Burns said. “There aren’t investors out there that are really interested in throwing more capital investment into financial institutions.”
Nevada Commerce Bank CEO Kathy Phillips said the bank took a “very conservative look” at its real estate portfolio in the last half of 2008.
“We really scrubbed our portfolio to make certain that going forward for ’09, that we had identified any potential issues or problems in that portfolio,” she said. “So if we erred, we may have erred on maybe being a bit too conservative. Our purpose was so that going forward in ’09, we had gotten any issues behind us — to start with a clean slate, if you will.”
The bank is also raising capital through a private placement offering that hasn’t closed yet, Phillips said.
Wisman said his bank, SouthwestUSA, prepared for the downturn in 2007 by ridding itself of all its highly speculative loans, shrinking the bank from $180 million in assets to $140 million.
“Yes, we have problem assets, but those problem assets are highly liquid for us,” he said. “Back in October 2008, we saw that some of the commercial land loans were starting to show some slowness, so we foreclosed on them. That drove our nonperforming assets ratio up during the foreclosure period.”