Banking on NevadaA New Decade is Dawning

 

The economy and the banking industry mirror each other, and both are doing well in Nevada as the new decade begins.

“We have one of the best economies in the country as measured by employment growth and in-migration, all those key metrics that we watch so closely, those are really strong right now. That generally means that the banking industry’s going to do well. That’s right where we are,” said Terry Shirey, president, Nevada State Bank.

The banking industry in Nevada is experiencing good loan and deposit growth. Interest rates are somewhat challenging not just for the state, but throughout the U.S., said Shirey, but that’s a manageable challenge and not a factor inhibiting growth of the industry. “It’s just something we all need to work hard on, but the industry overall is very healthy.”

Southern Nevada’s economy is flourishing with in-migration of families and businesses. “We’ve seen an influx of households moving in, we’ve seen success from a depository perspective, and confidence in our small business customers continues to rise,” said Brian Formisano, Nevada southern region president, Wells Fargo.

“Northern Nevada has arrived,” said BJ North, executive vice president, Plumas Bank. “Northern Nevada, and Nevada as a state, is being recognized for diversification, for the types of businesses coming here, for our friendly environment in northern Nevada.”

The Danger of Success

With success in banking comes competition for customers. That competition can be good but, at some point, it has some dangers, as Nevadans saw at the beginning of the Great Recession. Too much competition can sometimes result in loans that aren’t necessarily prudent for banks or the economy. But, bankers in Nevada are aware of those dangers and cautious to avoid them.

“All banks have to [balance] becoming overly competitive with remaining prudent in our decision making,” said David Navarro, senior vice president, director of commercial banking, Pacific Premier Bank. That means not being so aggressively competitive on terms that, for example, if the economy staggered, might become deals that failed because the bank had stretched too thin in order to get them.

Aggressively competitive terms can include anything from very low pricing or interest rates to making loans that aren’t secured by assets. “It can be giving a higher loan of value against a property than what a bank typically would do, or a loan without guarantors,” said Navarro. “We’re seeing some of those terms offered out there in the marketplace and that can be a questionable thing to do if you ever experience an economy that’s not on the rise.”

Technology – The Good and The Bad

One of the challenges banks face is being able to adopt and adapt to new technology. Technology can be beneficial and there’s demand for it, but that same technology can allow data hacks and fraud to happen.

For commercial banks versus consumer or retail banking, customer’s biggest request is to be able to more easily use technology. “That’s something every bank is trying to address,” said Navarro.

In the third quarter of 2019, Wells Fargo had more than 30 million online and mobile customers. “According to the number of consumer and small business customers that have bought into either one of those services in the last 90 days through the end of third quarter, you can see that pattern of customer usage in digital space is only continuing to grow,” said Formisano.

Giving banks a run for their technology money are Fintechs, or financial technology companies that integrate technology and financial services, competing with traditional financial methods. Rather than going to a brick and mortar bank to open an account and hand over required documents, customers e-sign policy documents with online businesses that have reduced the amount of human interaction necessary. Fintechs may offer lower priced products or very quick approvals, but they can be unproven. In addition, many of them are not banks, and most of them aren’t federally regulated.

“A lot of these companies have been created in an economy that is growing, so they haven’t experienced a downshift,” said Navarro. “Who knows what their credit standards are for those that are lending to individuals and companies, if their decision making and algorithms or whatever they use or however they make decisions to lend will hold up during a recession.”

Technology paves the way for local community banks to be local community banks even if customers never set foot in them. Emerging technology can change how customers manage their money, but that’s just the relationship between banker and customer.

“What doesn’t change is the bank-ness of banking,” said Phyllis Gurgevich, president, Nevada Bankers Association. “At its very basic level, when a person deposits money into their bank account, the bank can then lend that money to other people. Today we have social investing and causedriven decision making. [Community banking is] an area where people can help local communities and it’s as simple as keeping deposits at a local branch, an FDIC insured bank,” said Gurgevich.

According to Gurgevich, there are two advantages to doing so. First, the funds are insured by FDIC. Second, local deposits are reinvested locally. “You may never step into that branch because customers are still afforded all of the conveniences of mobile and online banking. However, having those funds deposited locally can make a difference,” she added.

Cyber Security

One of the biggest challenges facing banks today is protecting customers from fraud. Cyber security is about protecting computer hardware and software, and keeping private data private, whether for multi-national corporations or individuals.

“Every bank, like every person who is online, is a target,” said Gurgevich. “Threats don’t discriminate. Banks, other financial institutions and financial services companies, have to make cyber security their top priority. When you look at the regulatory requirements by industry, banks have the most stringent regulatory requirements and they have higher levels of security than any of the other critical U.S. industries like energy or telecom. Protecting the financial institutions system is critical.”

“How big of an issue is it?” asked Shirey. “It is and should be a top issue for every company and especially for banks. We formally recognize cyber here at Nevada State Bank as a top level risk up there with credit risk, liquidity and other measures of bank safety and soundness that we track.”

Cyber risks continue to grow year-over-year, said Brian Fricke, chief information security officer, City National Bank. “As the bad guys get smarter they adapt to our defenses, so we have to continue to adapt as well, and continue to invest [in cyber security].”

“The investment is commensurate with our threats and our regulatory environment continues to insure we’re always going to know where the investments should be made, typically represented as a percentage of our overall IT (information technology) spend,” said Fricke.

Small and medium sized businesses that don’t consider themselves at risk can become prime targets for criminal hackers.

“It’s a problem that’s not going away any time soon,” said Fricke. “It’s a cyber arms race going on across all industries, but especially in the financial sector.”

And, adding to the challenges, cyber security isn’t easily affordable for any size business. “It’s a really big issue for the industry and for every company. But, given that banks are the guardians of so many financial assets for companies and individuals, it’s something that we spend a lot of time, money and effort on,” said Shirey.

The cost can run in the mid-six figures, and that’s not necessarily for a huge bank. Smaller banks usually have to pay for third party vendors because they can’t afford their own cyber security experts on staff.

Even with internal experts, “We get smart and the bad guys get smarter and we have to add new systems and then update and improve hardware,” said North.

“Every financial institution is dealing with cyber security,” said North. “When we speak with our regulators, and when we go to Washington and speak with our congressional and senatorial representatives, this is number one on their radar in security.”

That’s partly because the nation’s financial institutions are directly tied to national security. The official mission of the Department of Treasury is to strengthen national security by managing the nation’s money.

“Risk is not just on our side,” said North. “We have prevention systems in place to catch anything incoming because our clients may not even know. A lot of people get hacked and don’t even know. We’ve had that happen and thank goodness we’ve been able to prevent major damage to our clients and to the bank from losses. We’re one step ahead, it’s a constant dance.”

Tips for Business Owners

Many of the tips bankers offer to customers for cyber security are also common sense and can be enacted in a variety of ways at a company. For example, one top cyber security tip from bankers is vigilance. Company leadership should know what’s in financial accounts. Passwords should be sufficiently long and unique, and the same password shouldn’t be used for every account. If one account is hacked, others could be too. Also, change passwords regularly.

Businesses need to have well-defined, strong authentication procedures in place. “If your employees receive an email from you, asking them to wire funds, do you have checks and balances in place to make certain that’s a valid email? A phone call or other authorization [should be] required before they can do that,” said Shirey.

The consensus from banking executives is, if there’s a multi-factor authentication process available for an account, use it. Multifactor authentication is a process where a user is only granted access to a computer if they possess a fact (something only the user knows), a possession (something only the user would possess, like a token, which can be a text message with a temporary authorization), or inherence (what the user is).

When traveling, opt to use a VPN or Virtual Private Network, which uses encryption to provide secure access to a remote computer, rather than unsecured wi-fi.

“I’d start with ensuring a good understanding of what devices they have and are using day-to-day – computers, laptops, mobile devices – make sure they have the most recent patches,” said Fricke.

Another tip, when receiving an email or phone call requesting personal information, rather than giving it during that call or in that email, disconnect and then initiate contact through official channels, making certain that’s where the request came from.

“Everybody thinks it’s not going to happen to them, so they’re a little lax,” said North. “They need to push cyber security to the front of high risk, just as they would with any other high risk part of their business. They should talk about it and bring people in to train. We have training on this all the time. I think especially in communities like Reno, people know each other and it’s a great community, but we’re not just doing business with ourselves anymore. We’re doing business with the world.”

Regulations

After the last economic recession, Federal regulations on banks increased significantly. For some smaller, community banks, the increased regulatory environment made day-to-day operations and the ability to offer products difficult. As the economy has improved, regulations on the banking industry have settled in as banks adjust.

“I’d say the industry has adapted to the regulations put in place after the recession, but I think a lot of it is, we’ve adapted our business models accordingly,” said Shirey. “But there has been some change in the way those regulations are applied under the current administration and I’m of the opinion that our current regulatory environment is much better than the one we had pre-recession.”

“There have been far more new regulations since the recession than there has been lessened regulations,” said Navarro. “Obviously being in banking, which in general is probably the lifeblood of the economy, it’s the expectation that we would be regulated to a very large extent. Regulations continue to come about and because of that it becomes harder and harder to land and open up new accounts. Our thresholds for opening up accounts and doing credit transactions increases.”

For several years after the recession community banks were regulated at the same level as major banks. Through dialog with Nevada Bankers Association and Independent Community Bankers of America, community banks effected change.

“We’ve been able to say there is a difference. The things you need this regulation for, we don’t even play in those arenas. So we’ve been able to restructure and lessen some of the restrictive regulatory requirements on community banks and smaller banks,” said North.

In turn, that allows smaller banks to provide services needed in their communities. Because, for a while, community banks didn’t provide products just because it was so cumbersome from the regulatory standpoint.

“We couldn’t do it,” said North. “It wasn’t cost effective for us or for the client. We don’t shy away from regulations, but when they become overbearing to where you cannot service the community, then nobody is getting what was the intent.”

“Regulations are still stringent. I haven’t seen them ease off as much as regulations that are right sized and meaningful,” said Gurgevich. “The reform that has taken place is helpful to allow banks to better serve their customers and communities, helpful to promote economic growth without compromising safety in the process. The effort is to see that the regulations are actually supporting safety and soundness and aren’t just a regulatory exercise that doesn’t have any meaning to that particular model of bank.”

Looking Ahead

One challenge bankers hope will be resolved in 2020 is the marijuana industry. The issue pits states against federal laws and puts bankers and business owners in the middle. Because marijuana is still classified as a Schedule 1 of the Controlled Substances Act, federally insured banks can’t bank cannabis.

“It’s highly dangerous the way the law is now,” said North. “There’s a lot of cash moving around and the banking industry would like to see that get resolved. It’s becoming more prevalent and it needs to have a resolution. It’s very unsafe the way it is now.”

“We continue to share the message that no legal business should be forced to operate outside the banking system,” said Gurgevich. “All cash businesses bring huge public safety concerns as well as a lack of transparency for taxing agencies.”

At the end of 2019, the House passed the SAFE Banking Act and the hope is the Senate will in 2020, to resolve the conflict between state and federal laws so banks can accept funds from cannabis and related enterprises in states where it’s legal.