Feature Stories - January 2002

Weathering Economic Storms

Financial Industry Review and Preview

by Tina Allen

Despite a steep downward turn in the national and state economies in 2001, Nevada’s banking and financial industry managed to hold its own for the year. While casino giants and small retailers were facing massive budget cuts and widespread layoffs following the terrorist attacks on September 11, many banking executives reported 2001 was a solid year for the financials. Nevada’s financial institutions are predicting the same cautious optimism for 2002.

"Business has continued to grow at a healthy pace, and overall, 2001 was a very positive year for Wells Fargo in Nevada," said Laura Schulte, president of Wells Fargo Nevada. Schulte said, despite the economy stalling, Wells Fargo saw both business and consumer growth expand. The same can be said for Bank of America, according to its Nevada president, George Smith, although he said the bank felt a short-term crunch following September 11. The problems were minor, however, with a slight increase in past-due loan payments from borrowers. "We are the largest gaming lender by far, and with our major clientele being the casinos, we were obviously impacted right away," Smith said. "But they’ve all performed fine. They just had a hiccup, I would say."

Brad Beal, president and chief executive officer of Nevada Federal Credit Union, said it was one of the best years the credit union has ever had. "We’ve had extremely strong deposit growth, particularly during the first half of the year, which can probably be attributed to people taking their money out of the investment markets and moving it into safer financial institution accounts," Beal said.

The smaller banks were among those in the industry hardest hit by the aftermath of September 11. "Most of their income comes from loan interest versus fees and deposits and so on, so some of those banks had a poorer performance year," Smith said of Bank of America’s smaller competitors. "They don’t have a mix of revenue and are relying heavily on loan income."

One of those smaller-sized banks, Silver State Bank, reported that community banks have felt the pressure on earnings because of the many decreases in interest rates mandated by the Federal Reserve, which brought rates to levels not seen since the 1960s. "It’s something we’ve never really seen before and we cannot re-price our liabilities fast enough to keep up with those rate reductions," said Tod Little, chief executive officer of Silver State Bank. "What happens is, our margins get compressed and our earnings go down." Little said Silver State has weathered the economic storm well, and he expects net interest margins will fully recover in about six months. "We were hoping to have a really, really good year in 2001, but we are going to have a mediocre year because of the rate reductions," he said. Silver State remains in as strong a position as it has in years past largely because the unstable economy has not had any detrimental effects on its loan portfolio. The bank’s primary focus is on small business loans, and those customers are paying on time, said Little.

Remarkably, the choppy financial climate has not impacted the ability of consumers to pay their debt statewide, Nevada’s financial institutions reported. "We have not experienced a material increase in loan delinquencies to date," Schulte said. "However, it would not be surprising to see these numbers increase over the next several months." Nationwide, however, the numbers speak for themselves. According to the Federal Deposit Insurance Corporation (FDIC), banks in the United States wrote off $9.3 billion in bad loans during the July-September 2001 quarter. That is nearly two-thirds more than the previous year. The FDIC also stated preliminary earnings for commercial banks in the third quarter of 2001 were down for the first time in 10 years. Earnings for the industry fell almost 10 percent, from $19.3 billion in the third quarter of 2000 to $17.4 billion in the third quarter of 2001.

One reason for the dramatic drop is that banks increased their loan loss provisions by almost 70 percent in the third quarter, and it was large banks that accounted for most of the increase. However, the figures aren’t as bad as they appear. Despite the decline, more than half of all banks in the country reported an increase in earnings for 2001.

Another positive contributor to Nevada’s banking balance sheets has been a increase in refinancing on mortgage loans. As the year progressed, homeowners flocked to Nevada’s banks and mortgage companies to lower their high mortgage rates. Beal attributes much of Nevada Federal Credit Union’s success to a flood of mortgage loans. He said the organization’s first-mortgage business was expected to more than double its 2000 total. A large portion of this activity came from new customers refinancing existing high interest loans. In addition, automobile lending was up significantly due to attractive loan rates.

There has been a stiff demand for commercial mortgage lending as well. For example, revenues for Vestin Mortgage, a publicly traded company that specializes in commercial lending, rose 29 percent in the first nine months of 2001 compared to the same period of the previous year.

Whether this positive outlook in the banking industry will continue depends in large part on whether interest rates rise in the near future. Sung Won Sohn, chief economist at Wells Fargo, believes the Federal Reserve will begin to raise interest rates later this year following some dramatic rate slashing in 2001. "Economic stimuli in the pipeline, including lower interest rates and tax cuts, as well as government spending, should kickstart the economy," said Sohn. He said some bond yields have already risen in anticipation of economic rebound and tighter monetary policy. Steve Byrne, chief executive officer at Vestin Mortgage, said he does not expect any increases in federal fund rates until the economy turns the corner. "Other rates may increase independent of the monetary policy decisions the Federal Reserve may make," Byrne said.

First Republic Bank saw one other positive that bucked the national trend – its stock price went up. "The falloff in equity prices has dampened investment management growth, yet we continue to acquire investment management clients," said Katherine August-deWilde, chief operating officer of First Republic Bank. "Our stock has risen approximately 15 percent over the past year, outperforming the S&P 500 nicely." August-deWilde said because of the uncertain economy, First Republic Bank’s customers have demonstrated a renewed interest in investment advisory services. "Our clients want advice on asset allocation," she said. "Our broad selection of best-of-breed investment products is even more attractive to clients who now more clearly understand the value of diversification."

At Wells Fargo, Schulte said customers are looking for alternatives to low-yielding investment and deposit accounts. Brokerage accounts and annuities have been the product of choice for individuals with long-term objectives and a higher tolerance for risk.

So what does all this mean for 2002?

"The issue for me for 2002 is really the national economy," said Smith, of Bank of America. "That affects Las Vegas and tourism." Little said if the expected economic turnaround arrives, Silver State is already prepared to further stimulate its profit margins. "Things should start to recover and we can be a little bit more aggressive," Little said. "But I think the key right now is to be cautious and patient." Beal said, given the financial turmoil of last year, he is in no position to predict the future. "We have undergone something we’ve never seen before and we are very much in a wait-and-see posture," he said. "We are trying to build in as much flexibility for the future as we can. We really don’t know what to expect. We are trying to be ready for just about anything, frankly."

Tina Allen