Over the last five years, the banking industry has seen significant changes, including the use of technology, client behavior and economic downturns.

“The pandemic played the biggest role [in changing the industry], but some of the changes were already beginning to transpire,” said David Navarro, Nevada regional president, Enterprise Bank & Trust. Flexible work arrangements for employees – hybrid and remote work for many – happened almost overnight.

Rapid adoption of technology by consumer and business clients happened just as fast. Early in 2020, far fewer bank customers were using all the technological conveniences; by year’s end, they were asking for more. Clients became adept at using online platforms for meetings, said Bruce Ford, Nevada regional banking manager, City National Bank.

“Technological advancement is an added benefit, but we need to be careful. Technology is great, but we can’t take the community out of community banking,” said BJ North, executive vice president, Plumas Bank. “People still want to talk to their banker.”

Banking’s changing landscape

The pandemic accelerated changes already happening within the industry. “It quickened the shift to online and mobile banking, that’s probably the largest impact,” said Phyllis Gurgevich, president, Nevada Banker’s Association. “That shift brings convenience and efficiency and also brings challenges, so it keeps bankers on their toes.” Bankers continue to remind customers when it comes to banking technology, customers themselves are the first, best line of defense of their accounts. “The best piece of advice for a customer is to deploy any security features that their bank offers and also check their bank account activity regularly.” All of which is made easier with those online tools.

“Fewer people are coming into the branch. [They are], just in general, engaging with technology at a much higher level. That’s spurred banks to continue to deliver new technology,” said Terry Shirey, president and CEO, Nevada State Bank. “Clients are expecting it more. They want to be able to do things like use DocuSign to sign loan documents. They want to be able to open and fully service their accounts online.”

“The landscape of banking and financial services in aggregate has changed with the introduction of private capital in the marketplace, another competitor of traditional banks in the marketplace that we have to manage and be competitive with from a customer service standpoint,” said Bob Cerminaro, CEO, Bank of Nevada and First Independent Bank.

Another rapid change was the surge from a very likely economic downturn to federal stimulus monies flooding the economy.

“We heard a lot of the excess savings from the stimulus programs,” said Gurgevich. “At this point we’re seeing now that spending has resumed, most of the surplus funds have been used, and reports are actually showing that credit balances are returning to the pre-pandemic rate. So I guess it stands to reason that with the surplus savings being depleted and credit limits being reached, we might see a slow in spending.”

“Federal stimulus funds definitely changed things in the industry, particularly from 2022 to roughly first quarter 2023,” said Shirey. “There was a massive influx of low cost deposits into the banking system, starting in 2020.” Those deposits, in part, helped banks fund loans throughout the market.

A related industry shift in the spring of 2023 meant banks needed to focus on full deposit relationships. “They started to understand that lending was not to be the primary driver of bank profitability, it was really on the deposit side of the balance sheet,” said Shirey.

At the same time, the higher rate environment changed client perception of their bank accounts. If deposits were important to banks, and if interest rates were so high, then clients wanted to see yield from those accounts.

So banks started offering higher interest rates on deposits, and while they weren’t necessarily flooded with cash, there was ample cash on hand in terms of deposits, largely from the stimulus monies pumped into the economy. The infusion of stimulus funds meant banks could continue to lend and grow their loan balances.

“Another thing that changed pretty quickly was the inflation and interest rate environment,” said Navarro. “The interest rate environment was pretty low heading up to COVID, even though it had started rising slowly. But when COVID hit the Fed brought rates back down to very low, essentially zero percent, as low as they could go. And when inflation started happening, because of the amount of government stimulus and there were still high levels of spending, low levels of unemployment—we saw inflation rise rapidly. Because of that, the Fed had to start raising interest rates at a very rapid pace and we saw some banks that really struggled to absorb that interest rate movement.”

Most notably, two sizeable banks, Signature Bank and Silicon Valley Bank, failed in March of 2023. Though it was obvious the failures were self-contained, people were concerned for the safety of their deposits.

“We saw a lot of deposits leave the banking system and go into treasuries and other investments out of concern for the safety and soundness of the bank,” said Navarro. This meant banks saw less deposits, which impacted funding sources for loans and slowed loan growth. Banks began offering competitive interest rates on the deposit side and customers realized their deposits had value, and wanted to be compensated for depositing.

“I wouldn’t say the stimulus monies and the events of March of this year changed the industry. I think what they did was brought the industry back to where it was probably 10 or 15 years ago, where banking really starts at the fundamental level with deposit accounts. That [has been] the primary driver of who would be lent to—those who have their deposits with the bank. That’s where we’re focusing our efforts on lending,” said Shirey.

A matter of balance

Loans and deposits are both important to banks. Prioritizing one over the other is generally part of a cycle, dependent on what’s happening in the economy and the banking industry, according to Ford. In the current higher rate environment, deposits are more important though most banks are switching their attention to balance sheets and giving attention to both. Banks are also still offering competitive products to attract clients, trying to bring in deposits, indicating deposits might still be more important.

“But as rates come down as they are expected to do, loans will probably become more important. Banks go through the cycle oftentimes depending on demand, and demand is usually fueled by whether the forecast is that rates are expected to go up or down,” said Ford.

Many economists are expecting both long-term and short-term interest rates to come down in 2024. Will that affect loan demand? Of course. But most banks saw steady demand for business loans even as rates went up; they’re simply anticipating loan demand to increase.

“I would say banks are going back to a more normal time where we had to be very conscientious about bringing in adequate deposits to fund our loan growth,” said Navarro. “We had to be thoughtful about pricing our deposits and thoughtful about pricing our loans.”

Back to business

As interest rates rose, businesses put projects on hold because they weren’t penciling. Market uncertainty meant businesses with strong projects found those projects suddenly weren’t strong enough. Projects got put in stasis. Loan demand decreased.

When rates drop, demand for some loan types should increase. Homeowners who locked in mortgages when rates were low often sat tight through the high rate environment rather than purchasing a new house at a much higher mortgage rate. Borrowers who took loans when rates were high are expected to refinance when rates drop.

“Businesses, real estate investors and developers now have a better pulse on what interest rates are going to do and can plan accordingly to find the right level of loan for them,” said Navarro.

As rates drop and loan demand increases, bankers are looking ahead at what to expect. At the same time, sidelined projects start up again, and stalled projects start to make financial sense, more real estate activity is expected in Nevada.

“I think we’re probably going to see more commercial real estate, owner-occupied, and also some investors coming back into the market. They kind of sat on the sidelines because of the uncertainty. Office space is always on the news but we’re not feeling that in our market. Investors like to have commercial real estate and I think we’ll see them coming back into the market,” said North.

Also anticipated is movement with mergers and acquisitions as smaller businesses decide to sell or franchises move into the market from other states. There may be expansion and equipment purchases by existing businesses, and new businesses may enter the market.

“Given a decreasing interest rate environment which should promote more consolidation capital market activity, I would expect loan demand for acquisition financing, project financing, to pick up. Traditional work capital financing [should] also pick up,” said Cerminaro.

Regulatory environment

All industries are regulated. Banking, compared to other industries, is highly regulated. While most bankers would be apprehensive to state the industry is overregulated, there are times that regulations may overreach.

Something that can happen in any industry is when challenges occur, regulators make reactive moves. When something happens in the banking industry, say the failure of two sizeable banks in the same season, the instant reaction is to create more regulation.

“Most of the activity that we’re seeing is on the federal [side], the regulatory and legislative front. [We’re] still seeing some regulatory fallout over the spring’s banking issues. [However], I think even casual observers recognize those failures were idiosyncratic — they were not systemic, not anything outside of those specific banks, their models and their customer relationships. [Even so], there’s still a tendency for regulators to maybe overcorrect,” said Gurgevich.

What she’s seeing is a regulatory environment that’s currently a minefield, with thousands of pages of new and proposed regulations and laws. “It can be pretty overwhelming for banks to navigate. Even when a regulation is supposed to only be applicable to large banks, it never really stays that way. Any regulation that’s put into place pretty quickly becomes a best practice that regulators would like to see out of all banks. So with that type of spillover these regulations typically have a broader impact than what is initially stated.”

The need to respond to every incident with regulations may or may not be the case. “I think it’s important that those in the capacity of regulator, or those in leadership in terms of Congress, be thoughtful of that.

Certainly, our industry has had major issues in 2023. Some of the solutions that are on the table, it’s important they go through a critical review before anything is solidified,” said Navarro.

It’s important to have banks of all sizes in the economy, from hyper local to regional to national, said Shirey. Each has unique value propositions to specific types of clients. Each is important to economic growth. Regulators should understand that the smaller the bank, the less economies of scale they have to absorb those regulations.

One regulation causing problems for small business loans is the small business lending data requirement, Rule 1071, which dates back to Dodd Frank legislation that came out of the 2008 recession. It was meant to ensure loan applications are processed fairly for all applicants and started with the request for 25 datapoints to be collected. Then 25 datapoints became 88 datapoints banks are required to collect from small businesses, much of it considered invasive. “The concern is that these very personal questions could have a chilling effect on small businesses wanting to complete those applications,” said Gurgevich.

“I don’t think banks should be in a position to be the implementor of oversight for the federal government,” said North of the small business data collection. “When you regulate a bank to do that, we’re really becoming their arm and we’re a private industry.”

That’s not the only regulatory change threatening to make doing business harder. There’s also S. 1838, proposed Credit Card Competition Act of 2023. “It’s a misnomer at best,” Gurgevich said. “Competition is driven by free market. Government controls on bank products and services is not fostering competition.”

Instead, there’s talk in the industry that the act could effectively eliminate credit card reward programs, which would affect tourism in Nevada, particularly in southern Nevada.

Threats, and threat actors

Entering 2024, it’s not that there are necessarily more types of cyberattacks against banks and their client accounts. It’s that there are more people and groups attacking. Fallout isn’t always strictly monetary. An attack on a national title company at the end of 2023 resulted in the company losing access to their own systems, and to real estate closings not happening by the end of the year.

Social engineering, fake emails and false links directing employees to reset passwords, many attacks remain the same. It’s the numbers that are increasing. Navarro compares it to cold calling, maybe only 10 percent will pick up, but when numbers change from 10 calls to 2,000, that’s a game changer.

“AI is going to become mainstream and do some wonderful things, but it will also be in the hands of bad actors,” said North. “So banks are always focused on cybersecurity, protecting and educating our clients.”
Financial fraud isn’t just about cyberattacks. Some threat actors are going old school with check washing schemes and more mail is being stolen daily as perpetrators search for checks to steal and deposit.

At the state level, Nevada Banker’s Association worked through the interim and into the 2023 legislative session on a bill to increase banks’ ability to protect customers. “Specifically, existing law allows for banks to report suspected fraud against a vulnerable person to an agency for investigation,” said Gurgevich. While that can be important, often the reporting is too late. If a banker couldn’t talk a client out of a fraudulent transaction in time, there’s simply no way to retrieve funds.

“With the passage of SB 355, bankers can now put a hold on a transaction when they report it, so that will give investigators ample time to review it and stop it completely if it’s likely fraud,” said Gurgevich. This can result in angry clients who don’t realize the hold on their transaction is for their own protection. “It’s a tough balance to let someone know that the transaction was maybe fraudulent, and they might want to rethink it.”

“Our industry built a lot of good will during 2020 and really restored our stature among the business community, which had fallen off from the recession when people were very agitated and concerned about banks,” said Navarro. The industry has worked to improve perception of banks as community leaders in business and show how important it is to have a good bank in the community. “It elevates everyone to have a bank that can provide a loan to a small business, a large business that can hire and bring on people, etcetera. It elevates us when we can get affordable rates and adequate service.”