The trick to Lester Parker's longevity in banking isn't much of a trick.
"I act like the tortoise, but I am certain I'm going to get to the end of the race and my 500 stockholders are going to reach the end with me," says Parker, the chairman, president and chief executive of United Bank of El Paso del Norte.
"I've seen a lot of institutions act like the hare," adds the 50-year banking veteran. "They're blowing and going and doing wonderful things, but they trip before they hit the finish line."
United is fairing better than other banks its size. To some extent, it benefits from being in Texas, which weathered the recession better than other states. United's hometown of El Paso abuts Fort Bliss, which has seen a significant increase in troops in recent years.
Just because El Paso is doing relatively well doesn't mean all of its banks are going strong.
Capital Bank, among the city's three hometown banks, has lost money in recent years, selling a majority stake in itself for $13.5 million in late 2009. The $112 million-asset thrift gorged on real estate loans before the crash and had an 11.8% noncurrent loan ratio at March 31, according to the Federal Deposit Insurance Corp.
At the other end of the spectrum is the city's Bank of the West (unaffiliated with BNP Paribas' California bank). At March 31, it had a 30.4% return on equity, a 2.53% return on assets and a noncurrent loan ratio of less than 1%. United's performance falls somewhere between that of its hometown rivals.
El Paso offers a microcosm of the banking industry, showing how banks operating side by side can diverge dramatically based on daily choices. "The difference in banks in the same market always gets down to the people," says Randall James, a consultant and former commissioner with the Texas Department of Banking. "Some people are going to take [ROE] risk and think they can manage those risks. Others are going to say, 'We're fine. We don't need to go up like a rocket today.' "
Like much of the U.S., El Paso fared well in the mid-2000s. Housing boomed. Local banks booked more loans and made more money. A 2005 military initiative added 20,000 troops over six years.
Still, the recession has taken its toll. Home building came to a sudden stop, and high-end, speculative projects were unmovable. The city's economy also relies partly on U.S. automakers. When car sales plunged in the recession, automakers cut production.
El Paso is rebounding. The drug war in Juarez, Mexico, is a major factor, with wealthy Mexicans coming stateside to avoid violence. Exact numbers are unavailable, but bankers believe tens of thousands have sought refuge in El Paso. This has helped housing rebound faster than elsewhere in the U.S.
A sudden halt in home building put stress on loan portfolios. Capital, which bulked up on construction lending, suffered most. In June 2006, its construction loans amounted to $8.9 million, or 20.5% of the total loans. By June 2008, such loans had grown to $33.3 million, or 40.9% of the total, according to an analysis of FDIC data by Foresight Analytics. Nonperformers began to pile up as housing stalled.
Capital's construction loans have been whittled down, to $11 million at March 31, but more than a third were in nonaccrual.
Loan concentration can be deadly for banks. Even so, says Kelly Trammell, a managing director at Sheshunoff Consulting and Solutions, "most banks won't put the brakes on. It is difficult to have that kind of discipline. If the opportunity is there, the natural inclination is to go after it."
Community banks are geographically concentrated in their lending. So if a particular area suffers economically for an extended period it can be just about impossible for banks to avoid suffering.
Larry Patton, the president and CEO of Bank of the West, says managing the risks wisely sometimes means passing on potential deals, which is hard for a smaller bank. "You want to support your community," he says. "There's a need out there, but you can't get caught up in the euphoria."
Bank of the West has done well in the downturn, gaining clients as larger banks based elsewhere worked through issues and curtailed lending. Patton says prudent risk management primed the bank for strong earnings. He cites its loan-approval process as a factor helping protect from trouble. "We have always done it by committee," he says. "You have a lot of eyes looking at the deal." Being conservative does not have to mean missing out on growth. Bank of the West recently opted to increase the amount of apartment construction loans it makes. It limits concentration in that category to 125% of capital, up from 75%.
"There's a huge demand because of the military folks who can't get into homes," Patton says. "There is a lot of opportunity there."
Patton says the bank is choosy. "We're watching that line closely. You can get caught up in the opportunity and … end up with an overbuilt situation."
Slow growth was critical, Parker says. United is the third bank he has opened, and at 10 years old, it has weathered two recessions. "The last two banks I started reached profitability in six months and nine months," he says. "This one took almost 36 months." Parker says he did not try to rush growth by taking greater risks. "We opened our doors the day a recession was acknowledged to have started," he says. "Then we had 9/11. It was a rotten time. The low interest rate was killer. The growth of this one was slower, but we refused to deviate from our good principles."
United's profitability is decent. At March 31, its return on assets was 0.42%, compared with a 0.55% average for banks of its size nationally. Return on equity was 4.64%, versus 5.66% for peers. Nonperforming assets were less than 0.5% at March 31; the average for U.S. banks with assets of $100 million to $300 million was 3.21%. As far as factors contributing to its performance, Parker said he believes location is largely irrelevant. "I don't think it matters where you are … as long as you stick to very strong banking principles and you don't get greedy," he says.