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December 21, 2014

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Loans weigh down Nevada banks

Nevada banks have loaned out more than they have taken in, and the higher the number, the more concern banking regulators have, state Financial Institutions Commissioner George Burns said.

The Federal Deposit Insurance Corp. report, released last week, is based on a bank’s loans and deposits made as late as June 30, 2008. Only North Dakota’s 172 percent loan-to-deposit ratio is higher than Nevada’s 128 percent.

The purpose of the rating is to make sure that banks with headquarters outside of Nevada aren’t using deposits made in the state for loans elsewhere. Closely watched are the big national banks such as Bank of America, Wells Fargo and US Bank, Burns said.

But the ratio gives state and federal regulators some insight into banks’ lending practices. Burns said during normal times “which we are not in,” a safe range would be 60 percent to 80 percent. The list reveals that few states are in the safe range, with most exceeding that range. Utah actually falls just below at 59 percent.

When banks hit 100 percent and beyond, it affects their liquidity, forcing them to seek money from secondary sources, such as brokered deposits, the Federal Reserve and even Treasury bailout money.

Nevada’s high ratio, when compared with states such as Alaska and New Mexico, both 79 percent, is a reflection of the state’s economic crisis last year. The recession began in December 2007.

“Businesses and people have less money to put into deposit accounts,” Burns said. As long as the jobless rate maintains its historic highs and businesses continue to lose clients, that trend will continue. If companies start getting more business and stop laying off people and begin hiring, the trend should reverse itself, he said.

Another factor influencing the ratio was Nevada’s propensity to lend, lend, lend during the heyday of the real estate boom, said John Restrepo, economist and principal of Restrepo Consulting Group.

“A lot of banks were taking on risks, under the assumption that they had nowhere to go but up,” he said. There was also a fair amount of loan competition and as land prices and construction costs went up, so did the loan amounts.

“Obviously our loans exceed our deposits,” Nevada Bankers Association CEO Bill Uffelman said.

The annual report, released this month, compared total loans in a state to total deposits for all banks that use the state as their home base. Banks that are used primarily for loan production, credit cards or special purposes were excluded.

Since data were compiled a year ago, the financial situation has gotten worse in Nevada.

Every quarter, the Investigative Reporting Workshop compiles key figures from a bank’s financial report that it must submit to the federal government, including total deposits and assets, loans, net income, provision for loan losses and loans that are 90-plus days overdue among other factors. Using those numbers it compiles what it calls the troubled asset ratio.

The higher the ratio, the more stress the bank is under. If the ratio is over 100 percent, then the bank had more bad loans on its books than it had in capital and loan-loss reserves. Two highly stressed banks, Community Bank of Nevada and SouthwestUSA Bank, both based in Las Vegas, saw an increase in bad loans.

Community Bank had a troubled asset ratio of 233.3 percent as of March, up from 113.9 percent in the quarter that ended Dec. 31, according to the workshop’s calculations. The bank has so far not filed its annual report for 2008 or its first two quarterly reports with the Securities and Exchange Commission, well beyond the deadline.

The Las Vegas-based bank with the second highest ratio is SouthwestUSA Bank, with a 128.1 percent ratio as of March, up from 82.2 percent the previous quarter.

Other banks with high troubled asset ratios were Sun West Bank at 98.6 percent, Wachovia Mortgage at 97.5 percent and Bank of Las Vegas at 83.3 percent.

The banks were heavy in commercial and real estate lending, Restrepo said.

“It appears those in the top five were less conservative or more aggressive with lending,” Restrepo said. “They were ignoring the economic tea leaves at the time.”

As the recession continues, bankers are hoping for the best, Uffelman said. But with the potential to make good, solid loans down, and that being a bank’s primary source of income, times will be tough.

“(Bankers) have ideas, they have dreams,” he said. “(But) things are so bad and appearing to get worse, no one can get their hands around it ... My sense is, we may have found the bottom, plus or minus five (percentage points).”

In the FDIC report, states with high ratios included Wisconsin and Maine (111 percent), Arizona (110 percent), Washington (109 percent), Tennessee (108 percent), Oregon (105 percent), Connecticut and Idaho (104 percent), California and South Dakota (101 percent) and Rhode Island (100 percent).

The states with the lowest ratios included New York (70 percent), Wyoming (77 percent) and Hawaii (78 percent).

Uffelman said it’s difficult to assess a bank by any one measure.

“If a bank is healthy or unhealthy, you don’t want to hone in on one thing,” he said. “You’ve got to look at the totality of an enterprise.”

Nicole Lucht covers health care, workplace, energy and banking issues for In Business Las Vegas and its sister publication, the Las Vegas Sun. She can be reached at 259-8832 or at [email protected]

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