RENO - Eastbound Interstate 80 drops out of the Sierra Nevada like a stone. And at the point where the driver can finally stop leaning on the brakes, Reno lurches out of the desert - casinos blinking and high-rise construction cranes twirling.

This town - "The Biggest Little City in the World" - is one of the most coveted banking markets in the country, a key battleground for any bank with nationwide ambitions.

And, no matter who wins, American Federal Savings Bank comes out on top. The $1.5 billion-asset thrift is sitting on a mound of capital, has a brand-new statewide franchise, and runs a mortgage origination machine that hums like a slot machine on a Friday night.

American Federal is a lesson in how to seize opportunities, and management has grasped theirs with a ferocity and luck unusual in small- town thrifts - which is exactly what the company was just three years ago.

"All the nationwide banks will want to be there because of how dynamic the economy is," said James Bradshaw, a bank analyst with Pacific Crest Securities. "American Federal has a statewide franchise and a good market presence in both the major cities. If you want to enter Nevada running, they're the only game in town."

For E.R. Houston, American Federal's chief executive, it's all a far cry from the post-World War II Reno he fell in love with 45 years ago.

"So much has happened," said E.R. "Ed" Houston, American Federal's CEO and a longtime Reno banker. "It's pretty amazing to see what's happened in this city since I came here in 1949."

In Reno, which began life as a ramshackle silver mining town, banks today are finding gold in the subdivisions sprouting in hills and riches in the rising incomes of their occupants. Housing construction has grown faster here - 20% in the last five years - than the vaunted gaming industry.

Reno's economy is the fifth-fastest-growing of any metropolitan area in the nation, and is set in the fastest-growing region. Boise, Idaho, to the north and Las Vegas to the south are the fastest and second-fastest- growing areas, respectively.

According to Regional Financial Associates, Reno's gross metro product will grow 5.2% in 1995 and its employment will grow 4.2%.

What's going on in Reno? To begin with, about 4,000 people moved here from California in 1992, 1,900 more than moved out of the area, according to RFA most recent numbers. It's a trend that most businesspeople here say only accelerated in 1993 and 1994 as more Californians fled the recession and series of natural disasters.

In addition, Reno and Las Vegas have become one of the country's biggest beneficiaries of corporate relocations as companies seek to take advantage of the unbelievably attractive state tax structure. The cost of doing business here is 10% below the national average. The state has no personal income tax.

The one blot on the economic picture is the gaming and resort industry, which, unlike that of Las Vegas, has had flat growth in the last two years. Even here, though, there's a silver lining. The city's gaming industry, which accounts for 20% of total employment and 11% of total economic output, is convinced that its proximity to Northern California and the scenic resort area of Lake Tahoe means a bonanza down the road.

Cranes are everywhere on the skyline. Most of the major casinos are undergoing huge renovations. And "Project C" a gargantuan hotel/casino complex right downtown, is under construction. In addition, Reno is making a bid to become the bowling capital of the world, and is constructing the National Bowling Stadium, complete with a humongous bowling ball that, if let loose, would knock down much of downtown's bank buildings like so many pins.

In the midst of all this, it is the community banks, not the regionals, that have benefited the most. While the state's biggest banks - Bank of America, First Interstate Bank, and U.S. Bank - have each grown less than 4% in the last year, the small banks in Reno and Las Vegas are lagging if they haven't grown 10% or more.

And it's American Federal, a thrift, that has staked its claim to this market like no other. While still dwarfed by the big boys, American Federal has doubled in size in the last year through acquisition and internal growth. It now has key strongholds in both Reno and Las Vegas and, if another out-of-state holding company were to ever dream of establishing a stronghold to compete with First Interstate or BofA, American Federal would be the first door to knock on.

But the three men who run American Federal, Mr. Houston, chief financial officer John Kerr, and president David Downs, are sitting on a pile of capital and firmly believe they can build a far more valuable franchise by themselves than, say, Norwest or Keycorp can.

"The two questions we get are: when are you going to sell or when are you going to buy another bank," said Mr. Downs.

Three years ago, it was a little-noticed midsize mutual. Today, it is one of the hottest banking properties on the West Coast. Mr. Downs wants to catch his breath. With two acquisitions in one year, it's easy to imagine management feeling a bit unglued by the whole experience.

"I think we'll slow down a bit now," he said.

Mr. Downs, Mr. Kerr, Mr. and Houston present probably one of the most unprepossessing troikas of any financial institution with more than $1 billion in assets west of the Mississippi.

Mr. Houston, 67, who spent 25 years at First Interstate Nevada, eventually running its entire northern Nevada operation before he jumped ship to the then tiny American Federal in 1986, isn't above dealing with the minor headaches of running a thrift. One of the few pieces of paper on his desk is a list of repossessed assets, three of which are automobiles.

"That's too many cars this month," he says in his gravelly voice. "This one here we wish we didn't have to take back, but . . ."

Which leads to a discussion about nonperforming assets, prompting Mr. Kerr to pull a bunch of dog-eared notecards out of his shirt pocket. On each card is some vital piece of information, ranging from interest margin to the yield and maturity of the securities portfolio. This is how the ever-smiling 65-year-old veteran of financial accounting keeps his numbers.

And his stack of cards has been growing because the numbers have been growing.

American Federal switched from a mutual to stock form and went public in late 1992, raising $40.6 million through a new holding company called Amfed Financial Inc. That boosted the thrift's core capital ratio to a whopping 8.8%. Today, it stands at 9.04%.

Mr. Houston waited a year before putting that capital to work. In the first half of 1993, Amfed announced acquisition deals with Home Federal Savings Bank of Reno and First Western Financial Corp., a bank holding company in Las Vegas.

The deals added 22 branches to Amfed's existing 26, doubled its footings, and gave it the third-highest deposit market share in the state. It also made it the only locally owned financial institution in Reno.

Going out at $8 a share, Amfed's stock now hovers at $22 a share.

Pacific Crest's Mr. Bradshaw said Amfed could stay independent if it wanted. He said it needs to bring return on equity up from the current 9.82% and wring the expected efficiencies out of its two recent mergers.

"With the management team they have I have every confidence they can do it," Mr. Bradshaw said. "I don't think they will stay independent, though. They can survive alone, but I don't think they will. The attraction to the state will be too strong."

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