The trick to Lester Parker's longevity in banking-he's been at it for 50 years and counting-isn't really much of a trick.
"I act like the tortoise, but I am certain I am going to get to the end of the race and my 500 stockholders are going to reach the end with me," says the chairman, president and chief executive of United Bank of El Paso del Norte. "I have seen a lot of institutions act like the hare. They are blowing and going and doing wonderful things, but they trip before they hit the finish line."
United is fairing better than peers its size nationally. To some extent, the bank benefits from being in Texas, which has weathered the economic crisis much better than other sunny states. And United's hometown of El Paso abuts Fort Bliss, which more than tripled the number of troops stationed there in recent years.
But just because El Paso is doing relatively well doesn't mean all of its banks are. Capital Bank, another of the three financial institutions based in this city of 620,000 people, has lost money in recent years, compelling it to sell a majority share to investors for $13.5 million at the end of 2009. The $112 million-asset thrift engorged on real estate loans before the crash and, according to Federal Deposit Insurance Corp. data, had a noncurrent loan ratio of 11.8 percent at March 31.
On the other end of the spectrum is El Paso's Bank of the West (not affiliated with the BNP Paribas-owned institution in California). One of the top-performing community banks in the country, Bank of the West had a 30.4 percent return on equity, a 2.53 percent return on assets and a noncurrent loan ratio of less than 1 percent, first-quarter data from the FDIC shows.
United's performance falls somewhere between that of its two hometown rivals.
As such, El Paso offers a microcosm of the banking industry across the country, illustrating how institutions operating side by side can diverge dramatically based on the decisions made every day about how to run them.
"The difference in banks in the same market always gets down to the people," says Randall James, a banking consultant and a former commissioner with the Texas Department of Banking. "Some people are going to take return-on-equity risk and think they can manage those risks. Others are going to say, 'We are fine. We don't need to go up like a rocket today. We will continue to make loans, but we don't have to take every loan.'"
Like much of the country, El Paso did well economically in the mid-2000s. The housing market boomed. Local banks booked more loans and made more money.
The city benefited from the 2005 Defense Base Realignment and Closure initiative, which, in the ensuing six years, would add roughly 20,000 troops to the 9,300 already based at Fort Bliss. By the end of this summer, all but a few thousand of those additional troops are expected to be in place.
The influx-an estimated 60 percent of the troops live off the base-has increased the demand for housing, infrastructure and schools.
Nevertheless, the recession has had an impact on El Paso. Homebuilding came to a sudden stop, and high-end, speculative developments were unmovable.
Plus, the city's economy relies partly on U.S. automakers. When car sales plunged in the recession, automakers cut production, hurting the maquiladora industry in nearby Juarez, Mexico, and causing ripple effects in El Paso. (Under the maquiladora system, raw materials or parts are transported tariff-free across the border to Mexico, assembled, and brought back into this country with taxes charged only on improvements.)
El Paso is picking up again quickly, though. The drug war across the border in Juarez has been one major factor, with wealthy Mexicans coming stateside to avoid the violence. Though exact numbers are unavailable, area bankers estimate that tens of thousands have sought safety in El Paso, buying houses and starting new businesses as they settle.
This has helped the housing market rebound faster than elsewhere in the country. El Paso has a manageable six-month supply of homes for sale, down from a 12-month supply at it worst. Nationally, the housing supply is at nine months, the National Association of Realtors reported in May.
Still, the sudden halt in homebuilding put stress on local banks' loan portfolios. Capital Bank, which had bulked up on construction lending, suffered most.
In June 2006, its construction loans amounted to $8.9 million, or 20.5 percent of the total loan portfolio. By June 2008, its construction loans had grown to $33.3 million, or 40.9 percent of the total, according to an analysis of FDIC data by Foresight Analytics in Oakland, Calif. That's about when nonperformers suddenly began to pile up as the housing market stalled.
Capital Bank's construction loans have been whittled down since, to $11 million at March 31, but more than a third were in nonaccrual.
As so many recent bank failures illustrate, loan concentration can be deadly for banks. Even so, says Kelly Trammell, a managing director with Sheshunoff Consulting and Solutions in Austin, "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, by definition, are geographically concentrated in their lending. So if a particular area suffers economically for an extended period-think Michigan-it can be just about impossible for banks there to keep from suffering too.
But ultimately a thriving economy can be just as dangerous as a sputtering one.
Larry Patton, the president and CEO of Bank of the West, says managing the risks wisely sometimes means passing on potential deals-which is particularly hard for a community bank. "You want to support your community," he says. "There is a need out there, but you can't get caught up in the euphoria. You have to stick to your lending guidelines."
His bank has done exceptionally well through the downturn, picking up customers as larger banks headquartered elsewhere worked through problems and curtailed new loans.
In all, 18 banks have offices in El Paso, including industry goliaths like Bank of America, of Charlotte, N.C.
Patton says Bank of the West was primed for strong earnings because of its prudent risk management. He cites the bank's process for approving loans as one of the factors that helps to protect it from trouble. "We have always done it by committee," he says. "You have a lot of eyes looking at the deal."
But being conservative does not have to mean missing out entirely on a hot growth area. Bank of the West recently decided to increase the amount of apartment construction loans it makes. It now limits concentration in that loan category to 125 percent percent of its capital, up from 75 percent.
"There is a huge demand because of the military folks who can't get into homes," Patton says. "There is a lot of opportunity there."
Still, he says, the bank is being choosy. "We are watching that line closely. You can get caught up in the opportunity and you can end up with an overbuilt situation. We are very careful who we support in that area because there are a lot of people who want to build apartments."
Not getting caught up in the economic highs and lows of a community is important, United's Parker agrees.
United is the third bank Parker has opened, and at 10 years old it already 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, opting instead for patience over the potential for faster profits. "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 principals."
United's profitability is respectable, if more reflective of a tortoise's pace than a hare's. As of the first quarter, the return on assets was 0.42 percent, compared with an average of 0.55 percent for peers of its size nationally, while return on equity was 4.64 percent, versus 5.66 percent for peers.
Nonperforming assets were less than half of 1 percent at March 31, while the national average for banks with assets between $100 million and $300 million was 3.21 percent.
As far as the factors contributing to its performance, Parker is of the opinion that location is largely irrelevant.
"I don't think it matters where you are," he says, "as long as you stick to very strong banking principals and you don't get greedy."
