Banking on Nevada: Stronger + in Recovery Mode

For City National Bank, 2016 was one of its best years since the economic downturn. Today, with $47 billion in assets, its financials are more robust overall, profitability is improved, topline revenues are increasing and its number of clients is up, said Scott Aney, Nevada regional executive. In fact, in December, executives signed a 10-year lease extension for City National’s Las Vegas Regional Center in Summerlin. The bank, which has 73 offices and 16 regional service centers nationwide, provides services in three areas: commercial, for mid-sized businesses; private, for higher net worth individuals; and business and personal, for small business owners and their personal needs.

Like City National, the banking industry as a whole in the Silver State continues to recover and is strong and competitive, experts said.

“Earnings are not where they were in 2007, but in terms of capital, liquidity and risk management, the industry here in Nevada is very well positioned for 2017,” said Terry Shirey, president and CEO, Nevada State Bank, a 56-year institution with a presence throughout the state.

This incremental year-over-year improvement in banking since the recession is due to healthier market fundamentals, Aney said. More businesses are expanding, residential and commercial development activity has restarted and is increasing, consumers have more home equity and loan opportunities are getting better. Additionally, Nevada has more jobs today and boasts a more diversified economy, Shirey added.

New and Continuing Trends

Increasing numbers of bank customers are conducting their banking on mobile devices and online, which means financial institutions must continue to offer higher and higher levels of technology. This proposition requires significant investment to remain competitive and relevant. As such, online and mobile banking offerings are becoming more mainstream, explained Phyllis Gurgevich, president and CEO, Nevada Bankers Association (NBA).

First Security Bank of Nevada, for example, plans to debut its first mobile banking platform in the first half of this year, said Patricia Ochal, executive vice president, chief operating officer and chief financial officer. With assets of $155 million and one location in Las Vegas, First Security serves both businesses and individuals in Nevada.

This year, Nevada State Bank aims to launch person-to-person money transfers through its mobile app, said Shirey. With 50 branches throughout Nevada and 4.4 billion in assets, it provides banking services for the retail consumer, professional, private and business segments. In October 2016, the bank opened a high-tech branch in Sparks with iPads at each teller station. The bank intends to use the branch as a testing ground and will equip other branches in a similar way if it proves beneficial.

Banks also continue ongoing efforts to prevent cyberfraud, implementing additional security measures or enhancing existing ones to protect customers’ information, Shirey added.

First Independent Bank, for instance, is expanding its technology to enhance security and compliance, said Bob Francl, executive vice president and regional manager. A division of Western Alliance Bank and solely a business bank, First Independent has $1 billion in assets and seven Northern Nevada locations.

Customers also want representatives to be available to talk with them when needed, which leaves banks struggling with providing the ideal balance of technology and relationship that will satisfy customers, Shirey said.

To help strike that balance, Bank of America recently hired 300 individuals to field customer calls at its Summerlin contact center, said Al Welch, market president for Las Vegas. Those employees handle more than 20,000 calls from around the world per month. Bank of America provides financial, business and wealth management services, among others.

Whereas most banks offer resources to help businesses and consumers meet their financial goals, more and more are making consultative services available as well, Gurgevich said. City National Bank, for example, leverages its affiliation with the Royal Bank of Canada and its brokerage arm, RBC Wealth Management, to provide additional offerings such as mergers and acquisitions assistance and investment banking, Aney said.

This correlates to banks that continue to create specialty groups to serve specific industries, Aney said. His bank has groups that specialize in the food and beverage industry, franchise finance, entertainment, equipment finance and leasing. Likewise, Nevada State Bank has specialty groups for gaming, convenience stores, doctors, lawyers and certified public accountants, Shirey said.

New on the regulatory front, by May 2018, financial institutions must comply with enhanced due diligence standards born out of the Financial Crimes Enforcement Network’s Beneficial Ownership and Risk-Based Customer Due Diligence rules, Ochal said. Under the new standards, banks must now identify and verify the beneficial owner(s) of a legal entity customer when a new account is opened.

In addition, the industry continues to await final guidance on the Current Expected Credit Loss model, a new accounting standard for estimating potential losses inside a financial institution’s loan portfolio, Ochal added. The compliance deadline keeps being pushed into the future.

Favorable Lending Climate

Business and consumer loan demand is up in Nevada compared to two years ago, Ochal said, due to a healthier economy. Yet, according to Gurgevich, growth in this segment has been slower to recover than in other states.

Banks want to lend money. First Independent Bank, for instance, lends in all commercial sectors, and to owner-occupied companies and commercial investors, Francl said. It also provides construction finance for subdivisions sold to a third party.

“Our philosophy has been that we want to try to find a way to get deals done,” he added. “We’re hungry.”

Officials at First Security Bank, to meet loan demand, assembled a team of lenders to manage all loan types, commercial and industrial, commercial real estate, Small Business Administration (SBA) and others, Ochal said. Going into 2017, the institution had a loan pipeline of $25-plus million.

In 2016, Bank of America provided more than $80 million in new credit to Nevada small businesses, a 49 percent year-over-year increase, Welch said. Similarly, its new loans to commercial businesses statewide jumped 17 percent in the same period.

Activity seems to be consistent across the various types of loans. For instance, Nevada State Bank originated an estimated $600 million in loans in 2016, which were evenly split in the three categories of consumer, commercial real estate and business lending, Shirey said.

Competition among the banks to lend is great and pricing is competitive as a result, a trend that’s favorable for borrowers. The more that banks lend, the better it is for them because they survive on lending and investing, Aney said.

“We like the fact that it’s controlled, at a pace that’s more sustainable than before the recession,” he added.

In general, entities and individuals seeking loans and lines of credit are much more qualified for those today than they were, say, five years ago, Francl said. Businesses are performing much better, many of them now profitable with some capital for a down payment. As a result, they can demonstrate a record of profitability and ample cash flow to repay a loan, which is the main criteria.

“It is certainly easier to underwrite businesses today,” Francl added.

Interest Rate Changes

The Federal Reserve Board’s Federal Open Market Committee members raised interest rates in December by a quarter point to 0.75 percent and anticipate three additional raises in 2017, which would help continue to fight inflation, Aney said. Nevada’s bank executives expect additional increases, but even with those, the rates still would be “exceptionally low historically,” Shirey added.

“On the heels of such a long period of low rates this should have mostly a normalizing effect for the market,” Gurgevich said.

For banks, slow, steady rate increases will further increase their profitability, Aney said. Those entities that were hedged favorably going into the hikes will end up with higher gross revenues.

For customers, it means better interest rates on depository accounts, or greater return on their money, Francl said. As of 2016’s end, though, rates of return on accounts hadn’t increased yet, Shirey said, but banks want to offer competitive rates on those products.

“Community deposits and customer relationships are truly the lifeblood of every community bank,” Ochal said.

Rising interest rates also mean borrowing will become more expensive, which could impact the amount customers could borrow or what they could do, Francl said. Clients with a fixed-rate mortgage won’t be affected much, Shirey said. Those, however, with a product where the interest rate resets relative to the Fed’s rate hikes will see some small bumps up in the interest they’ll pay.

Looming Legislation

A number of bills affecting the banking industry will potentially be addressed in this year’s legislative session, Gurgevich said, which the NBA is tracking. The NBA represents and advocates for small, regional and large financial institutions, including industrial lending corporations with branches in the Silver State.

One proposed bill supported by the NBA, SB62, would require instruction on financial literacy in public middle and junior high schools.

The NBA is also in favor of two bills the Division of Financial Institutions of the Department of Business and Industry drafted, which would convert savings and loan associations to savings banks (SB81) and revises provisions relating to foreign trust companies (AB61), as they’re in concert with the trade organization’s goal of boosting economic growth.

Key Industry Challenges

The Dodd-Frank Wall Street Reform and Consumer Protection Act, known as “Dodd-Frank”, was enacted in 2010 and caused the most significant changes to financial regulation in the U.S. since the reform that followed the depression, Ochal said. Dealing with Dodd-Frank and all of the other regulatory industry mandates remains challenging and resource intensive in terms of staff and expense. Aney said it’s common for banks to have tenfold the staffing in regulatory departments than they did before the recession.

“Regulation has been difficult,” Francl said. “It certainly creates a headwind for banks. It increases the cost of doing business.”

Additionally, regulations have forced some banks to stop offering certain products. This leads to diminished competition and increased costs and, sometimes, unmet financial needs for customers, Gurgevich said.

“We hope to see changes that allow customers to fit into the banking system and banks to be able to provide products and services they need,” she added. “Without change, it forces some customers into perhaps less safe options.”

The NBA’s members support revision of parts of Dodd-Frank as opposed to a total repeal of the act. As such, they’re in favor of the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs (CHOICE) Act, an introduced federal bill that would roll back significant portions of Dodd-Frank. However, what will happen this year at the federal level concerning not just Dodd-Frank, but also Sarbanes-Oxley and other legislation and policies, is yet to be seen.

“We are all waiting to learn what the new administration might bring to the conversation on banking regulation,” Gurgevich said.

With more banks in the Silver State today than two years ago, competition is fiercer. In 2015, the NBA had 28 members, as of the end of 2016, the association had 31, Gurgevich said.

New nontraditional funding sources in the market, particularly in the northern part of the state, further exacerbate competition, Francl said.

“We’re getting inquiries on funds coming out of places like New York or San Francisco that are looking to deploy all kinds of dollars here, whether it be on the equity or debt side,” he explained. “Everybody is trying to get a piece of that pie. The good news is there’s more activity so the pie is getting a little bit bigger.”

A final challenge is finding qualified bankers in Nevada because many took jobs in other industries or left the state during the economic downturn.

“As we grow and need bodies, for us, finding the right people isn’t as easy as it used to be,” Aney said.

Recruiting top talent, specifically in financial tech, must be a priority in banking, Welch said. In this regard, Bank of America continues to hire local talent through programs at universities, community job fairs and from the local pool of military veterans.

What’s to Come

For customers, banks and bankers will continue to offer increased and upgraded technical capabilities for transactions and will provide more encounters for education regarding sound financial practices, Gurgevich said.

For financial institutions, regulatory compliance likely will remain a significant component, both expensive and challenging, she added. However, due to the prospect for higher interest rates and an improving economy, Nevada’s banks should see more opportunities for lending and depository activity, Shirey said. This would result in greater earnings and growth, or in other words, continued recovery.

“Overall, I’m pretty optimistic about the prospects for banking here in 2017,” Shirey concluded.

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