Bankers stay positive
Banks take hit, but remain stable

Talking to some executives at Lake Havasu City's community banks, you get the feeling they're in the business of lending optimism as well as money.

"People, business, really need some good news," Ralph Tapscott, president and chief executive officer of Mohave State Bank, said.

He thinks he has some. Housing inventories are down, and sales are up in the hard-hit Las Vegas market, and the Independent Community Bankers of America is predicting gross national product will rise and inflation will top out by the fourth quarter of this year, Tapscott said.

"Everybody's waiting for the bottom of the market. The problem is you don't know the bottom of the market until prices start going up. If they do, people will be spurred to buy," he said.

In the meantime, Tapscott has built a marketing campaign on making sure people know that his bank — in fact the vast majority of banks in general — are "rock solid."

Tapscott pointed out that out of the five banks that had failed by mid-July, none was a commercial bank, as are both of Lake Havasu City's locally owned banks. (Four more have failed since then, including First National Bank of Nevada, which owned First National Bank of Arizona.)

Tapscott also wants people to keep in mind that, no matter where they bank, their deposits are protected by the $63 billion insurance fund of the Federal Deposit Insurance Corporation. Even if their bank gets into trouble, it's likely their deposits would be bought by another bank.

That's what happened with First National Bank of Arizona after it closed July 25; all its deposit accounts were acquired by Mutual of Omaha Bank.

"Today, depositors hold almost more value than borrowers," Tapscott said.

Trade organizations like the ICBA and the Arizona Bankers Association are also encouraging their members to accentuate the positive. They've recently provided collections of talking points to members to help them communicate to customers that banks are still the safest place for people to keep their money.

"The good news is most of the community banks are well-capitalized and are still making money … and they have money to lend," said Tanya Wheeless, president and chief executive officer of the Arizona Bankers Association.

Making adjustments

Most Arizona community banks didn't get heavily involved in the sub-prime mortgage market, so they weren't directly hurt by it, Wheeless said.

But the fallout from the mortgage crisis caused both residential and commercial construction to slow, or in some cases come to a halt, and that has been a hit to the community banks, which did a lot of construction lending.

"They were probably financing the strip mall or the restaurant that was going along with (the booming housing market). That's pretty much across the state," Wheeless said.

Mohave State Bank and locally owned Horizon Community Bank were no exception. At the end of June 2007, both banks showed construction and development loans as constituting more than a third of their loan mix, according to Uniform Bank Performance Reports filed with the FDIC.

Until August 2007, Horizon Community Bank, then in business for five years, had never held a loan that was 30 days or more past due, said President and CEO Dennis Van. By November, more delinquencies began to crop up, he said.

The FDIC was advising banks that they should expect no growth and shrinking interest rate margins in 2008. In February, Horizon's leadership made the decision to set aside $1.1 million in reserves for potential losses, Van said.

It was a prudent measure that impacted the bank's first quarter income statement. The bank saw income begin to rebound in the second quarter.

"We're by far not hurting. We've changed our focus. We've changed our focus from bucking and kicking to maybe working out more loans," Van said.

Tapscott said prior to this year his bank went through a period of 18- to 20-percent annual growth, a level he called "unsustainable."

"We've lowered our expectations about growth," he said. "Now we're looking at about 10 percent, which is totally acceptable."

Economic conditions have prompted the bank's management to focus on raising longer-term core deposits, keeping an eye on credit quality and cutting expenses, Tapscott said.

"Our employees have come up with some great ideas for cutting expenses," he said.

Its second quarter earnings were down 13.4 percent from the same quarter in 2007 but up 17 percent from first quarter 2008.

Both Tapscott and Van emphasized the importance of adequate capital to their institutions' financial wellness.

"In up times the true indicator (of a bank's strength) is earnings. The true indicator in down times is, what is your capital," Van said.

Banks that report capital as 5 percent or more of average assets are considered "well-capitalized" by the FDIC, Van said. Horizon's capital ratio is more than double the minimum, 13.71 percent, according to Van.

"There's nobody more thrilled than me to have all that capital. If something popped up, we're covered," Van said.

In its June 30 financial results, Mohave State Bank reported a risk-based capital ratio of 12.81 percent.

"The biggest thing that can protect people during hard times is having capital," Tapscott said.

Playing to their strengths

Horizon Community Bank was started in 2002 by 20 "pillars of the community," Van said, who are still the eyes and ears of the bank. That local presence allows the bank to react quickly if a customer gets into trouble.

"We can hear and see and react to things. If we get in quickly, we can help," Van said.

In that way, too, Horizon is typical of the community bank model, Wheeless said.

"(Community banks') strength, one, is that their leadership and management is located in the community. They know their customers from seeing them at Rotary or at church. So (problems) don't have to get to a formal level before they know there are issues," Wheeless said.

Such inside knowledge of the community also gives locally owned banks the advantage in knowing a good investment when they see one.

"They know what drives local economies," Wheeless said. That level of expertise is invaluable."

Van said sometimes that expertise means knowing when to discourage a customer.

"We don't want to help our customers hurt themselves. For our perspective, saying 'no' is a good thing in this environment," he said.

Of course, even community banks are a part of the modern financial services industry — one of the most regulated in the country, Tapscott pointed out — and can't just rely on the strength of a man's handshake to assess risk.

Tapscott said greatly enhanced risk management practices, developed since the savings and loan crisis of the late 1980s and early 1990s — when 900 institutions failed — have led to much greater stability in the banking industry as a whole.

Banks now use a variety of sophisticated tools to track loan health. Van said Horizon regularly conducts credit stress testing, which applies certain economic scenarios – such as a downturn in a particular industry — to the loan portfolio to see where stresses might occur and which customers could get into trouble.

"So we're on top of it," Van said. "We have tools now that are so far advanced (from what we had in the past) that can accurately tell us where we're at."

In spite of the obvious challenges the current economy has posed for local banks, their top executives convey a sense of groundedness, almost as if they're relieved the high-flying days over.

"I think everybody needed to catch their breath," Van said. "I think prices needed to adjust. This is our own catch-our-breath period."