Gambling on a Recovery

ICBA National Convention and Techworld 2013

Hard hit by the downturn, community banks continue to roll the dice in Las Vegas

By Elizabeth Judd

Veterans of the notoriously roller-coaster Las Vegas economy are usually unfazed by booms and busts, but the most recent severe financial downturn has hit the area harder and longer than even the most stalwart community bank can shrug off.

“The community banking landscape here for the last two or three years has been pretty grim,” offers Arvind Menon, CEO of Meadows Bank, a Las Vegas-based community bank with four branches and $300 million in assets. “It’s no secret—Las Vegas has been ground zero when it comes to community banking, real estate and finance.”

For those operating here at the epicenter of the financial crisis, staying afloat has been a huge challenge. “Many new community banks were chartered in ’06 and ’07, and they were chartered at the worst possible time,” says John Sullivan, president and CEO of First Security Bank of Nevada, which has $115 million in assets.

Sullivan estimates that 17 community banks operating charters in Las Vegas in 2008 no longer exist today. Nevertheless, the worst of Sin City’s recent economic troubles appears to be over and several community bankers serving this gambler’s mega-marketplace agree. Casino activity and tourism are beginning to pick up again, and local home prices—the sector worst hit by the real estate collapse—are on a strong upswing, with a 24 percent increase in the median sales price for existing home sales in 2012.

That said, the six or seven community banks survivors still find the going tough in this so-called Capital of Second Chances.

Recovery ahead?

It’s no secret that the Las Vegas economy revolves almost exclusively around the gaming and hospitality industries. But construction, which feeds off those industries, follows relatively close behind. Richard Robinson, president of Kirkwood Bank of Nevada, which has $60 million in assets, notes that community bankers in Las Vegas tend to target commercial real estate loans and small businesses with sales under $30 million.

Community banks are generally too small to loan to today’s mega-resort casinos, which typically obtain financing through the money-center banks or Wall Street, Menon says. Even so, “the gaming business drives almost everything in this town,” he notes.

When disposable household income around the country dropped during the recession, many people stopped going on vacation—and visiting Las Vegas and gambling. “The change was abrupt and had a significant impact on the local economy and community banks as well,” Menon says.

Menon points out that while Las Vegas, the heart of Nevada’s economy, had a record-setting 40 million visitors in 2012, the economic forecast remains uncertain. Although the casinos and hotels are fuller, they slashed rates and so margins are lower, too.

Robinson says the city has tried to break out of its historic boom-and-bust pattern by diversifying into the medical and other service industries. Although some retired seniors have flocked to Vegas because of its relatively warm and dry climate and Nevada’s lack of personal income tax, the economy remains tied to the highly cyclical gaming and tourism industries.

“For a long time, Vegas has talked about diversifying its economy, but we haven’t done a good job of it,” Menon offers. “We’ve remained a one-trick pony, if you will.”

When the Las Vegas bubble was building between 2003 and 2007, some community banks became very aggressive in chasing loans, Sullivan says. He recalls a real estate developer with a paper net worth of $100 million obtaining a $5 million, unsecured loan. “His paper net worth dissipated to zero within 18 months, and the banks lost their shirts,” he says.

Community banking in Las Vegas today operates by a completely different set of rules. The successful ones have tightened their requirements and are making far more conservative loans. And outside glitzy Vegas, community banking looks altogether different.

The First National Bank of Ely, a rural community bank located 240 miles north of Vegas, has been in operation since 1907 and is benefiting from the local dependence on mining, says John Gianoli, president of this unit community bank with roughly $90 million in assets. “I’d characterize the economy where we are as stable and good,” he says. “That’s clearly not the case in Reno or Las Vegas. They’re still struggling.”

A whole new world

As other lenders have left Las Vegas, community banks began to spot new opportunities to shine.

“Because we’re so heavily regulated, the bankers I see that are successful today are true finance professionals who are able to create solutions for customers that balance the regulatory complexities and the economic needs of a business customer,” Sullivan says.

Sullivan attributes his community bank’s recent growth to a number of factors, including fewer community banks with which to compete, a talented lending staff and a board of directors that has extensive ties to the local business community. Another factor, he says, is that his bank has remained focused on lending while its competitors have struggled with boosting capital and addressing problem loans made prior to the Great Recession.

Although the recovery for Las Vegas has just begun, community bankers there and in other areas of the country are indulging in some cautious optimism. “I’m not exactly in the catbird’s seat, but we’re able to get good loans—far better than what I see in other areas of the country,” Sullivan says. endmark

Elizabeth Judd is a financial writer in Washington, D.C.