Nevada is a ripe environment for the banking industry. With its rapidly growing population, active development sector and strong economy, the Silver State has developed into a robust growth market. While the economy, in terms of housing, has slowed, the overall market remains strong.
“Nevada continues to be a very dynamic market as far as growth opportunities,” said Jackie DeLaney, president and chief executive officer of Las Vegas-based Sun West Bank, a locally owned and independent financial institution. In response to these opportunities, banks are expanding throughout the state, all the while grappling with a handful of issues, from a diluted work force to intense competition.
Formations, Mergers and Acquisitions
Nevada’s banking industry is finishing a consolidation phase, or merger-and-acquisition cycle, as most of the banks available for sale have changed hands, said John Dedolph, chief executive officer of Service1st Bank of Nevada, a commercial and real estate bank in Las Vegas. In a typical cycle, small banks form over a period of five to 10 years. When they sell to larger institutions for either greater efficiency or for profit gain, a new group of banks springs up. Six new banks – Bank of George, Caliper Bank, First Asian Bank, Paramount Bank, Prime Bank and First International Bank – were proposed for Nevada by March’s end, according to Nevada’s Division of Financial Services.
Since the start of 2005, five Nevada banks have merged. Business Bank of Nevada, a primarily business-focused entity, was acquired by City National Corp. in a $167 million transaction that closed on Feb. 28. “It was one of those cases where the offer was too good to refuse,” said John Guedry, former chief executive officer of Business Bank and now executive vice president of City National. “We didn’t actively go out and solicit offers, but were approached by City National.”
At the time of the merger, Business Bank was in its 11th year of operation with seven branches. City National Bank, on the other hand, lacked a Nevada presence. The merger adds a number of new features to Business Banks’ offerings, including 56 branches (55 in California, one in New York), and provides a larger lending limit and new products and services. The bank’s clients can now take advantage of wealth management and investment services, private banking and products geared to professional, designated businesses. Business Bank plans to begin operating as City National Bank on June 1 once its system has been converted to City National’s, Guedry said.
In the late 1990s, Colonial Bank entered the Southern Nevada market by acquiring Commercial Bank of Nevada. A few months later it penetrated Northern Nevada with its purchase of Interwest Bank and Interwest Mortgage. In 2000, Nevada State Bank, which was more of a retail entity, merged with Pioneer Citizens Bank of Nevada, a commercial institution.
Expansions
While the cycle is playing out, Nevada banks are adding branches aggressively throughout the state, with plans to continue expanding over the next few years, at least. Colonial Bank which serves commercial and consumer clients in 15 Nevada locations, has about 10 sites in varying degrees of negotiation in both Northern and Southern Nevada, and plans to open five branches next year. It most recently added a branch in late 2006 in Southern Nevada’s Montecito community. “We’re going to want to commit the resources to expanding our franchise in the growth markets,” said Mark Daigle, chief executive officer of Colonial Bank.
Sun West Bank, which opened a branch in North Las Vegas in the fall of 2006, continues to scout the right locations and opportunities for new branches in the state’s northern and southern regions. “We’re here for the long term,” DeLaney said. “We want to continue to grow our bank.”
Service1st Bank, which opened in January in Henderson, plans to establish two additional branches, one in Reno and one in Las Vegas, by its third year of operation, Dedolph said. Business Bank of Nevada announced a new corporate location in Summerlin, which will open in the latter part of summer, and it already has sights set on another branch. “Unlike some mergers where you have the acquired bank cutting new staff, we’re actually hiring personnel to fill these departments and new branch locations,” Guedry said.
Some banks struggle to keep pace with the state’s geographic growth. “Branches are very expensive, land is very expensive,” said Bill Martin, president and chief executive officer of this 73-branch statewide bank. “You don’t dare fall behind, because in five to seven years, land won’t be available in the places where branches are needed.”
Nevada State Bank is making concerted efforts to stay ahead of Nevada’s growth. It has acquired land in areas mostly around Las Vegas and, as budget allows, will commence construction there. Plans are to add two to three freestanding branches a year in both the north and south. Earlier this year, the bank opened its newest branch in Las Vegas. The next is slated to come online in midsummer in Mesquite, followed by a relocation of the Carson City branch.
Labor Market
The explosion of new banks and branches has led to difficulty finding and retaining qualified employees. The labor market is tight, and the larger banks no longer offer broad-based training as in the past. “It’s a constant challenge to make sure we have good, quality staff,” Daigle said. “You invest the development of your employees, and once they are accomplished and successful, competitors want to talk to them about other opportunities.”
Nevada State Bank employees receive phone calls from other banks wanting to poach them “literally every day,” Martin said. Lending positions are particularly hard to fill, and have been for the last several years, because it takes a while for those employees to acquire a level of expertise to do the job well, Guedry said. “As far as recruiting from within the industry, it’s become very cutthroat out there,” he added. “There has been a lot of back and forth movement within the industry between companies.”
Some banks, such as Sun West and Business Bank of Nevada, are “home-growing” employees. In other words, they’re bringing in youngsters from local colleges and universities for internships, hiring, training and then, promoting them from within. Business Bank has had success retaining several of the people they’ve helped cultivate. In one case, an individual served an internship and in about five years, worked up to a loan officer position, Guedry said. “It’s a little slower process to go that route,” he added. “It takes us longer, and not as many available candidates are available to fill needs, but we have had some success with it, so we’ll continue to do that.”
Bank of Nevada is offering incentive plans to employees, as well as ownership opportunities through 401(k) programs to help retain employees. “We are proactive in hiring,” said Bruce Hendricks, president of Bank of Nevada. “We anticipate our needs and are always out looking for bankers that will help us grow,” he said. The bank has increased its corporate training capabilities to help keep up with growth. “It’s very important to promote from within,” said Hendricks. “We always try to look within our organization before hiring out,” he said.
Competition
Banks also are vying for customers, and the fight is intense. Nevada’s banks compete with the 50-plus other banks operating in the state, along with credit unions, international banks and non-bank providers, such as leasing companies, brokerage firms, loan production business and insurance companies, all of which offer some competitive products and services.
“While bank officers typically view competition as positive, they believe the credit unions compete with an unfair advantage because of their tax-free status,” Martin said. “Congress never intended for there to be two financial institutions, one that pays taxes and one that doesn’t,” he added. Further frustrating bankers is a loosening of restrictions on Nevada credit unions in terms of size, membership makeup and services offered. Once only offering basic financial services, they’ve now moved into areas such as a title company and insurance brokerage work.
“They originally were intended to be finite in terms of commonality,” Daigle said. “But with the advent of community credit unions, now everybody can belong. If you breathe oxygen, you can be in a credit union. If that’s not a bank, I don’t know what is. If you’re going to be a bank, you need to be regulated and pay taxes like a bank. I don’t mind competition. I just don’t think it should be tax subsidized.”
However, credit unions disagree. Congress granted credit unions a federal tax exemption because they are non-profit, member-owned cooperatives whose earnings are returned to their members by higher interest rates on savings and lower fees. “Service to the member within a credit union reigns priority,” said Bruce Rodela, president and chief executive officer of Frontier Financial Credit Union. Rodela also noted that credit unions do pay property taxes and payroll taxes, and their member-owners pay federal income tax on the interest they receive. According to Dan Paulson, president of Weststar Credit Union, credit unions have a non-profit status because they have a different structure than banks. “A credit union can’t offer stock – a bank can offer stock and immediately open a branch,” Paulson said. Credit unions are limited in their ability to expand and have a volunteer board of directors.
To stand out above the competition, banks are taking any of a number of approaches. Colonial Bank is relying on a community bank-style philosophy, trying to earn business on its ability to evaluate and respond to a customer’s request rather than fit it into an existing specific service. It also regularly reviews and, as is possible, enhances its offerings. A recent branding campaign revolves around the concept of “You’ll like it here.”
“It’s a continual evaluation of trying to make sure we’re providing a competitive level of service and pricing, and staying on top of what’s happening and what the competition is offering,” Daigle said. Similarly, Sun West Bank customizes its products and services to meet customers’ needs. It, too, advertises via billboards, radio, print – primarily in business publications – and in some targeted markets, such as Summerlin, DeLaney said. “It’s really about service and speaking to a live person,” she added. “Our phones are answered. We make that a top priority.”
As Business Bank of Nevada moves into its conversion to City National Bank, it plans to execute an aggressive, 30-day name-change campaign, said Paul Stowell, senior vice president. Subsequently, advertising will highlight new products and services, such as remote deposit – the ability to deposit checks electronically from a remote location, such as a company’s office. “Our primary focus on all of these campaigns will still be the fact that people bank with people and that our personnel have stayed with us through this transition,” Guedry said.
Service1st Bank employed an altogether different strategy, from the get-go. “We started on a different premise,” Dedolph said. “It’s a new concept for Nevada – super startup or super community banks.”
Service1st Bank launched with $50 million in capital, 215 shareholders and 36 employees. In less than three months of operation, it accrued an additional $40 million in deposits. Its financial position upon opening allowed it to develop business more intensely, as it had more employees to solicit new customers, Dedolph said. It also provided the ability to immediately offer a $12.5 million lending limit. Since opening, Service1st has formed alliances with some out-of-area banks allowing it to offer loans in excess of $20 million. It also contracted with a major national bank to allow clients in the Reno area to make deposits at its branches. By year’s end, Service1st Bank plans to provide a service that allows clients, without leaving their offices, to open accounts and apply for and secure loans, all during one on-site visit from a loan officer.
“Instead of competing with credit unions, we’re competing with Bank of America, CitiCorp and Wells Fargo,” Dedolph said.
Protecting Customers
Preventing and dealing with fraud continues to be expensive, time-consuming endeavors for all banks. “I would say in terms of attempts at fraud, there’s no abatement,” Martin said. “It’s a constant attack, for us, for everybody.”
Credit card fraud and counterfeit checks are frequent. Banks also see phishing schemes, identity theft and doctored loan applications. They experience people trying to hack into their systems, run programs that probe account numbers, open accounts with the idea of withdrawing money from them on insufficient funds later on. Sometimes situations arise in which customers’ data has been compromised elsewhere, say at a big retailer. Robberies also are common. The volume of attempted fraud is so great that prosecutors don’t have time to make minor cases a priority.
“They’re just overwhelmed,” Martin said. “They’ll just interview the perpetrators, give them probation, and order them to pay restitution to get the case resolved. They deal with the criminals but won’t pursue them all the way through court.”
To protect their clients, banks are educating and training their employees and customers. They’re using fraud detection software, encryption systems, two-tier security systems, auditing and other internal security measures. For increased safety, Nevada State Bank has begun installing in all its branches “bandit barriers,” large, steel-reinforced Plexiglas walls at the teller stations, which span from the counters to the ceiling.
“It’s a balancing act between being customer-friendly and protecting our customers,” Guedry said. “It’s a big challenge. I think the long-term solution is going to be consumer education.”
Legislative Issues
Also weighing heavily on bankers’ minds are the lopsided branch and payroll taxes that the Nevada Legislature imposed on banks in 2003. This year, banking lobbyists are working in Carson City to repeal the $7,000 branch tax (for a $3 million a year reduction), said Bill Uffelman, president and chief executive officer of the Nevada Bankers Association. In addition, they aim to reduce the 2 percent financial institutions payroll tax to the amount other employers pay (for an $18 million a year reduction). “We are approaching it strictly on the basis that it’s inequitable and unfair, and we need to right that wrong,” Martin said.
Bankers argue that the tax is not only unjust, but it also puts all types of businesses at risk, increasing the potential for legislators to impose taxes on any one industry at any time to counteract a budget shortfall. “It’s a dangerous path when you start to talk about segregating any business independently for disparate treatment from a tax standpoint,” Daigle said.
Legislators have expressed some willingness to eliminate the franchise tax, the smaller of the two tax levies being protested, said Guedry, chairman of the Nevada Bankers Association. What might happen, he added, is that legislators will remove the franchise tax this year and agree to repeal the payroll tax in 2009.
Future Outlook
Nevada’s financial institutions will continue to do well over the next five years, bankers predict, and will continue to see more of the same. It’s likely a few additional acquisitions will occur, as some banks are organizing right now to be sold, Guedry said. Internal consolidations may also take place. In addition, new small banks will be formed despite the fact it’s harder now for them to succeed because of market saturation and the decreasing multiples buyers are paying to acquire them. The process of getting to the point where a small bank becomes attractive to potential buyers will now take 10 to 20 years versus the five to 10 years it used to take, he added. Even the addition of three to four new banks represents a significant market increase. Along with its resident corporate banking institutions – Bank of America, Wells Fargo, CitiBank and US Bank – Nevada will see at least one or two more major national or super-regional banks operating in the state, Martin predicted.
Undoubtedly, new and improved electronic services will be delivered to the market. Furthermore, short term rates might start to decline, Guedry said. He also predicted the current slowdown in housing market values and sales won’t worsen but will remain somewhat flat over the next 18 months.
All in all, however, Nevada’s banking industry is expected to remain healthy.
“I think we’re going to see good, solid growth in Nevada, particularly in the Las Vegas and Reno markets,” DeLaney said. “We’re seeing nothing that says that’s going to stop.”
