De novo started by gamblers rolls dice on banking them

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Lexicon Bank in Las Vegas, founded nearly a year ago by poker enthusiasts, is betting big on the professional gamblers who help make the de novo’s hometown a major gaming destination.

Bigger banks have been pulling back from poker because of elevated compliance demands. Large transactions such as wire transfers conducted by poker players who frequently participate in tournaments are more susceptible to money-laundering scrutiny.

Players face delays that jeopardize tournament entry and their accounts are often closed when regulators take notice because larger banks would rather avoid being hassled for what they see as small sums of money.

But for a young bank like Lexicon, which began 2020 with less than $100 million in assets, the six-figure deposits — and sometimes more — that prominent players park in their accounts is a substantial funding source, said Russell Rosenblum, the bank’s chairman.

“There’s a very big gap” between a player’s needs and the availability of reliable banking services, Rosenblum said.

A recent case in point: Six-time World Series of Poker winner Daniel Negreanu moved his poker winnings to Lexicon after another financial institution closed his account in July.

Poker winnings are posted publicly, said Rosenblum, who has competed professionally as a poker player, including in several World Series of Poker events. That makes it easier for banks with gaming expertise and a willingness to track tournament participation and winnings, to verify the legitimacy of deposits.

“If you know poker, you know a pro player is actually easier to vet than your typical retail business,” said Rosenblum, who also owns several Five Guys burger restaurants in Las Vegas. “We can see all of a player’s cash winnings — ever — and we can get their full tournament schedule and align that with winning to verify deposits.”

Lexicon also has extensive conversations with the players, who tend to welcome the oversight, Rosenblum said.

“We ask a lot of questions,” he said. Experienced players “know they are legitimate. They just want to make sure their account won’t get closed on them, leaving them stuck without a bank.”

Lexicon also offers a private concierge service for professional poker clients, managing their full-year tournament schedules and finding out what is needed to transfer entry funds. This helps to minimize issues concerning wires into and out of the bank from major tournament sites, while decreasing risk by giving Lexicon direct knowledge of tournament dates and locations.

While professional poker player winnings tend to collectively account for no more than 5% of Lexicon’s total deposits, Rosenblum said it can climb to as high as 20%. Lexicon had $40.5 million in deposits on March 31.

The $249 million-asset bank more than tripled in size during the second quarter because of its participation in the Paycheck Protection Program, originating more than $100 million in loans as part of the effort. Roughly 90% of Lexicon’s PPP loans were to new customers.

While most PPP loans are expected to be forgiven by the federal government, Rosenblum said he expects Lexicon will keep many of its new clients. The bank wants to keep adding deposits to fund more loans to those small businesses.

As Lexicon grows, it is focusing on building a robust Bank Secrecy Act and anti-money-laundering compliance program so that, over time, it can gather deposits and enter other niche businesses.

While Rosenblum declined to discuss specific opportunities, Nevada’s rapidly growing cannabis industry could be a possibility for banks that figure out how to serve the industry without excess regulatory complications.

Such specialty areas could prove important since the coronavirus pandemic has rocked the travel industry and, by extension, Las Vegas’s hospitality and casino industry.

Community banks nationwide will likely be on the hunt for profitable niches because of the economic malaise imposed by the virus, said Piper Sandler analyst Stephen Scouten. Those that can successfully enter new business lines will likely have an advantage, at least in the near term.

“For now, the overall top line outlook looks pretty bleak” for banks, Scouten said.

Virtually all of Lexicon’s borrowers are current on their loans heading into August, Rosenblum said. Many received deferrals, while others have been helped by government stimulus programs, including the PPP.

The concern is that the benefits from those efforts may not be enough for some businesses to survive a second wave of virus outbreaks that have jolted several parts of the country, including Las Vegas.

The city is particularly vulnerable to the virus, Rosenblum said. While officials can implement smart practices to contain the disease, Las Vegas still relies heavily on tourists. With them comes the risk of spreading the virus. Without them, the local economy becomes listless.

Las Vegas’s unemployment rate swelled from 3.9% in February to 29% in May, higher than any other major metropolitan market. Nevada’s jobless rate, while down in June after casinos reopened, remains high at 18%.

The city’s economy has lost 145,600 private payroll jobs since June 2019, said John Restrepo, principal of Las Vegas-based RCG Economics. “Vulnerable low-wage workers were hit hardest,” he said.

Las Vegas is resilient, but Rosenblum said the city’s recovery will be bumpy.

“I personally have some concerns about softness in the economy,” he said. “I think there could be some more pain ahead.”

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