Financing in Nevada is on the move and, even experts agree, where it’s headed is anybody’s guess. With the Fed recently increasing interest rates and a noticeable spike in inflation, financial experts and Nevadans alike are paying close attention.
“Depending on what the two variables do – inflation and interest rates – it will have some impact on every industry. [That impact is] not all bad, but in many ways, it will be more challenging for most industries to maintain the kind of markets they have now,” said John Guedry, president and CEO of Bank of Nevada. With so much uncertainty in the world of finance, only one thing is certain – the way Nevada does business is about to change again.
Interest rates have already risen in 2022, for the first time since 2018. While no one has a crystal ball, financial experts have made it clear that consumers can expect additional increases.
“The federal reserve has already announced that they’re going to make several increases in 2022 and then potentially again in 2023,” said Thayne Shaffer, president and CEO of America First Credit Union. “It’s the fastest pace we’ve seen in decades, if they follow through with that. That affects the short-term part of the rate curve, but we would expect the entire rate curve, even the longer-term rates, to go up as a result. Our expectation of what we’re building in our models is that rates are going to go up significantly in the next couple of years.”
This upward trend in rising interest rates is not a new phenomenon for the financial industry which has seen rates rise and fall over the years. “In the historical perspective it’s more a normalization of interest rates,” said Tom Traficanti, executive vice president and chief credit officer of Heritage Bank. “We’re just used to such ultra-low rates that it may seem a bit of a shock for people.”
The Rate Effect
Despite raised interest rates and the expectation of additional increases, general demand for financing has not yet negatively been affected.
“The quarter percent rate increase on short term rates from the Fed recently has not had much of an impact in terms of demand,” said Guedry. “We see as much demand today as we did in the first part of the year. As we were coming out of the pandemic, we saw a spike in requests for financing. A lot of businesses were starting to gear back up, replenish inventory, acquire equipment or plan to grow. There was a demand for capital for various needs and then it kind of leveled off. It’s been that way for the last couple of months and we haven’t seen any impact recently.”
Although the demand has been steady, increased interest rates will have a significant impact on a borrowers’ ability to obtain debt.
“As rates go up, that obviously makes credit harder to afford,” said Shaffer. “[For] a business who might have a need to finance ongoing operations or is looking for expansion or growth opportunities, borrowing is going to be harder to come by. They’ll be able to afford less of those activities simply because they’ll be paying more interest.”
The uncertainty of rising rates for borrowers has led many businesses to rush to obtain financing while they still deem it affordable.
“Our customers are looking to get financing as quickly as possible,” explained David Navarro, Nevada regional president of Enterprise Bank and Trust. “And the longer it takes for them to find financing, perhaps it makes projects they’re working on less attractive. For example, we work with developers and real estate investors and sometimes the difference of 1 percent of an interest rate can make or break the project. We’re seeing some quick action and thoughtfulness with some of our borrowers that are very rate sensitive.”
The Inflation Effect
Increased prices are everywhere. From the cost of food to a tank of gas, Nevadans are experiencing inflation in their day-today lives. Consumers with businesses are doubly impacted as they consider the effect of interest rates on their businesses’ ability to expand, but also the increased cost of doing business.
“Interest rates and inflation are closely tied together,” said Traficanti. “The Fed, I think early on, had not anticipated inflation to be as rampant as it’s becoming. Some of that was caused by simply creating a lot of stimulus and a lot of excess liquidity that was needed for the pandemic. Also, the lag effect of people having a lot of money and [many] small businesses having a lot of grants, created demand for goods and services and it was definitely needed. When the supply chain and issues came into play and with the labor force also not jumping back into the labor market, [it] created some supply and demand imbalances. Now you have the prices of goods going up and oil prices in particular going up rapidly as well.”
The effects of inflation are numerous, but perhaps one of the most significant has been the delays in the supply chain. “Things are harder to get and a good example of that is vehicles,” said Shaffer. “There are things in our area of operations, where the value of used vehicles has gone up 40-, 50- and 60-percent [compared to] over a year ago. When you start adding up all those little things, we’ve really had a spike.”
Businesses that rely on imported materials are also suffering due to delays. “Not only is it more-costly for labor, but it’s also more-costly for [businesses] to get materials and shipping costs and that’s a direct result of the inflation we’re seeing,” said Navarro. “It’s more-costly for them to get the things they need to sell their products or provide their service.”
Home prices are also at an all-time high due to stark increases in inflation. While this seems to bode well for homeowners, the financial industry is noticing a sharp decline in mortgage loans.
“On the home loan side, it’s pretty much shut it down to a trickle of what it was a year ago,” said John Blackmon, owner and broker of Nevada Capital Corp., a brokerage specializing in trust deed investments and real estate lending. “If you didn’t get your house refinanced last year, you’re probably not going to do it now. We’re going to wait for rates to come back down. The residential refinance business is really slow right now. [The home] purchase business, while we would think it would be good in the residential world, isn’t all that great for mortgage companies because most sellers are opting to sell to buyers who come with cash. They don’t want to wait three weeks to make sure that their buyer gets a real mortgage to pay them at the closing, when a person with cash can pay them in ten days. It is pretty slow in our mortgage business right now.”
Ironically, as home prices increase so does the money consumers spend in gaming. “In southern Nevada, gaming and tourism is still the largest industry and has the greatest impact overall in the economy, gaming in particular,” said Guedry. “If you break the two out and look at gaming separate and apart from tourism, gaming tends to do well in environments where people have increased equity in their homes. And there’s a direct correlation. I can’t tell you exactly why that is. But I can tell you that there is a direct correlation; increased equity translates to more perceived disposable income. Gaming tends to do better in that environment.”
With rising rates and inflation, financial experts are digging into the relationships they have with their clients to help them weather the storm. “Sometimes it does pay to have a relationship with a bank, especially on the commercial side. The economy will go through cycles and I would expect it will continue to go through cycles,” said Traficanti. “Having a relationship with a bank, if things aren’t always going as well as they are, can pay off.”
Fostering that relationship also opens the doors for financial experts to determine loan eligibility and build trust with their clients.
“I think Nevada business owners are very shrewd, very smart, and they’ll do the best thing for their own individual company,” said Blackmon. “I do know that right now everyone has money to lend. It’s just a matter if you can figure out how to get the bank to give it to you, because every bank I deal with has way more cash than they have loans, meaning more cash available than they want. They’re motivated to put that cash out, but I don’t know whether they’re willing to do it.” This hesitancy has resulted in some banks tightening their qualifications and underwriting procedures.
“In good times, we might say to a home builder that’s constructing new homes, we would lend 50 percent of the land development cost, up to say 75 to 85 percent of their construction costs,” said Guedry. “The vertical cost today, those numbers have probably been squeezed down five to ten percent. Maybe it’s still around 50 percent on land development, but more like 65 to 75 percent on vertical construction. We don’t want them to over leverage and have to get a certain sale price to be able to pay the loan off and not be able to get it. Now they’re stuck.”
Despite the hesitancy of some lenders, there is an emphasis on creating dialogue that has not always existed between bankers and their clients.
“We’re having more deep discussions and it’s really productive. One thing most of us bankers have found is, our customers are incredibly intelligent and very nimble in many cases,” said Navarro. “That’s what we look for, the people that are anticipating these challenges and more formally taking them head on with the proactive approach.”
Included in that dialogue is a focus on the borrower’s history in times of hardship. “That is a great way to see if someone can weather a storm,” Navarro added. “When we work with businesses who have managers or owners that have been through multiple business cycles, recessions and rising economies, it’s great to see how they handle that historically and currently. It gives us confidence in their ability to manage in a variety of economic cycles and a variety of supply chain challenges. That management and ownership is becoming a more and more critical piece to our total evaluation of lending.”
Even during these unprecedented times, there are a wide array of borrowers obtaining loans.
“There’s very few industries that are singled out as high risk,” said Guedry. “Obviously, inflation affects different industries differently. It’s fairly early in the cycle. It’s hard for us to say which industries would potentially suffer the most.”
In general, financial experts are optimistic about the options they can offer their clients. “We are evaluating a wider array of opportunities in various industries, various sizes of the businesses, small, large and all the above,” said Navarro. “I think most banks are very active in trying to help businesses, real estate investors and developers of all sizes to accommodate their credit needs. I’m really loving what I’m seeing in our industry and what banks are doing for our customers right now.”
Credit unions have adapted to reach more clients. “We do all kinds of things,” said Shaffer. “We do land development loans. We finance multifamily residential housing builds. We lend for private schools and churches, not a lot, but sometimes we do that. Hotel, travel and lodging, purchase of office space, [those are] all kinds of things [we finance]. So, we do a lot of things now. The contrast between [now] and 30 years ago is stark, but I think it’s basically just been an evolution and mirrored the sophistication of the businesses that our members have between then and now.”
Hope for Nevada
Despite the uncertainty in the market, businesses are growing and that means hope for Nevada. “Most of the businesses are doing well right now,” said Traficanti. “They’re growing and looking for lines of credit to help them acquire inventory and curve loans to buy additional equipment. As long as the economy continues to be strong and businesses do well, they’re going to be wanting to borrow money and certainly have money to deposit into banks. There’s certainly going to be some potential challenges for a lot of businesses with higher labor costs, higher costs for supplies and oil, gas obviously. We’re probably going to see different businesses perform differently depending upon how much they can pass on those costs to increase their own prices and keep up the margins they’re looking for. But generally, demand for loans has continued to be pretty strong. It’s still a little early to tell with rising interest rates but it looks like there’s still going to be demand. The economy is still going to be strong for a little while.”
As Nevadans evaluate the changing financial market, and the challenges it presents, change is clearly on the horizon for businesses in Nevada. From the great recession in 2008, to the recent COVID-19 pandemic, keeping watch for what comes next will serve Nevada businesses well.