“Overall, ’22 was a strong year for earnings for the banking industry,” said Terry Shirey, president and CEO of Nevada State Bank. “A lot of loan growth occurred, historic loan growth. We had very low interest rates when we started the year, very strong economic conditions and that really played out on bank balance sheets where we were able to do a lot of high-quality new loan volume. There was a lot of strong loan demand and that, combined with the higher interest rates that we started seeing last year, produced very strong earnings for banking.”
“Throughout the year we saw continuous change, whether that was interest rates or changes throughout the economy,” said Stacy Watkins, president and CEO, Lexicon Bank. Watkins expects changes to continue in 2023, with the Fed raising rates again and the possibility of a correction within the real estate market that could drop the economy into a deeper than expected recession.
It was notable in 2022 just how fast interest rates rose. “The Fed made several very large rate increases, and it was a bit of a shock to the system, especially on the loan side,” said David Navarro, Nevada regional president, Enterprise Bank & Trust. Increases in 2023 aren’t expected to be the same size or scope. “It’s a lot easier to work within that rather than something that’s changing very rapidly.”
Bankers and economists expect the Fed will increase rates in the first half of the year, “but not substantially,” said Shirey. “Where we were seeing the Fed do 75 basis points that will probably look more like 25 or 50 basis points. I think the market is expecting some kind of recession to really manifest and to see the Fed then start to reverse course, but very slowly.” Overall, the expectation is rates are going to finish 2023 about where they are in January.
Navarro’s optimistic that inflation will come under control in 2023. “Consumers and businesses are adapting to working with these higher price environments.”
One of the other drivers of inflation is high employment. Recent data indicates wage growth has been lower than expected. Even with so many unfilled jobs post-pandemic, unemployment will probably increase over the next 12 months, explained Stan Wilmoth, vice chairman, Heritage Bank of Nevada. He said, “A lot of high-tech companies are now seeing large layoffs; 18,000 people from Amazon alone. That’s going to take a toll over the near term. Consumer spending appears to be down, so I think it’s going to be a difficult year. I believe 2022 was difficult because we just hadn’t seen rates go up this quickly this high, and that is starting to curb inflation.”
But only just starting. Historically when the Fed moved, it took about 18 months to see effects in the economy. So far, Wilmoth said, we haven’t even seen an economic effect from the first rate hike.
“Looking ahead, 2023 is a legislative year, so we’ll be tracking any of the legislation, watching for things that just could impact how a bank delivers quality products and banking services to their customers,” said Phyllis Gurgevich, president, Nevada Bankers Association. “In Nevada, at the state level, we’re fortunate we can take a look at any legislation that isn’t directly calling out bankers to make sure there aren’t unintended consequences that would bring in bankers. Whenever possible, when it’s a legislator wanting to see some sort of change in the banking industry, we would ideally work with that legislator in advance to understand what it is they want to accomplish and then identify ways to make that happen that harmonize with the federal regulatory environment.”
Deposits
Banks saw large increases in deposits directly associated with stimulus monies during the pandemic. Regional banks focused on commercial banking saw dramatic increases in customer deposits, especially in relation to the Paycheck Protection Program (PPP). Numbers have fallen as those deposits are absorbed by higher interest rates and inflation.
Because deposits work both ways –customers earn the same interest rate on their deposits – clients are demanding higher interest rates on deposits.
“They’re trying to get the highest yield on what they have,” said Watkins. “So banks really have a lot of work to do with regard to navigating their strategies to carefully adapt quickly to changes.”
“It’s important to note that the growth in deposits that the industry saw through 2019 to about the middle of 2022 was incredible, a massive increase in deposits, so while we are seeing some decline happening in the deposit portfolio, we’re still well above where we were in 2019 and I’d say that’s the same for the entire industry,” said Shirey. “In the end we’re going to retain the higher deposit levels for some time, but certainly inflation is taking a toll. Routine operating expenses are higher right now and that’s depleting some deposit balances.”
Stimulus
For the most part, pandemic stimulus programs have played out, monies disbursed. One program still up and running is Nevada’s State Small Business Credit Initiative (SSBCI). In October 2022 the U.S. Treasury allocated $112.9 million to Nevada’s SSBCI. Funds are used to promote growth and various loan participation and support programs.
“The stimulus relief efforts here in Nevada that really have our banker’s attention would be those that are helping renters or homeowners stay in their homes,” said Gurgevich. “One member, Wells Fargo, provided $1.25 million to establish the Las Vegas Justice Court-based Eviction Diversion Program.”
One CARES Act program still running is the Employee Retention Credit. “It’s a payroll tax refund from the U.S. Treasury for businesses that kept employees on payroll during the pandemic,” said Watkins. The U.S. Department of the Treasury’s COVID Relief page lists programs available to businesses.
Today stimulus funds are more targeted. There’s the Shuttered Venue Operators Grant through SBA, and a grant specifically for restaurants, said Bruce Ford, senior vice president, regional banking manager, City National Bank.
Loans
Lending started out strong in 2022, but slowed midyear as the Fed raised rates. “Toward the latter part of 2022 we did see borrowers and investors still find ways to get deals done, but there was still a very evident slowdown in lending demand,” Watkins said. She anticipates a continuous increase for lending in 2023.
When loan volumes drop, banks need to increase interest rates and operating costs to facilitate credit. “There are also higher defaults on existing loans especially on loans that have repricing on the books, so that creates a higher payment for some. You’ll see borrowers try to refinance, so there is still some lending demand out there, especially if they’re revolving [rates] and trying to lock theirs in,” said Watkins.
Something to note, added Navarro, is that while rates are higher, they’re not high in historical context. “We are in a rate environment where a 6 percent interest rate on a piece of real estate or a 6.5 percent is not uncommon. That’s the going rate. Compare that to 4 percent maybe a year ago, that might seem high, but when you look at the totality of history you realize 6 percent, 6.5 percent is not an egregiously high rate comparatively.”
So what are banks seeing? Construction loans for new developments. Businesses interested in buying real estate to get out of leasing. Businesses looking for lines of credit, making sure they have access to cash if they need it. “So, we still see a healthy amount of lending activity for those different purposes,” said Navarro.
The mix of borrowing has changed. “This is more long-term interest rates versus short-term interest rates, but they’re interconnected. When long-term rates were lower, all banks, all financial institutions in the industry were doing mortgages. So now you’re not doing as many mortgages, because the long-term mortgage interest rates have doubled. But businesses are still doing business loans,” said Ford.
“Historically, what I’ve seen during a time of contraction, businesses typically aren’t going out and trying to expand and do the kind of things that need cash; they’re contracting to some degree,” said Wilmoth. He expects to see a year of contraction without a lot of loan demand, but if the economy comes out with a soft landing, businesses will consider expansion and large purchases. He added, “I think asset values will have probably peaked and may be coming down as they want to expand–-own buildings and do those sorts of things. That will enable [banks] to go in and finance those buildings.”
Post-pandemic shifts
Banking changed during the pandemic. Some of the changes are here to stay.
“The pandemic led to reliance on mobile and internet banking for so many customers. I don’t anticipate that trend is going to reverse now. Consumers realize the convenience they have of all banking services that can be conducted through their mobile and desktop devices,” said Watkins.
For City National, pandemic practices meant relying on online platforms to meet with clients. The bank likes to be hands on and in person, taking teams of bankers and subject matter experts to meet with clients. “That had to stop during the pandemic, but for the last eight or nine months we’ve resumed that, and it’s gone very well,” said Ford.
One pandemic-driven shift centers around employee access to paychecks. “Rather than the traditional payroll cycle, employees want to be able to access that payroll already earned,” said Denette Suddeth, regional president, head of commercial banking, Nevada PNC Bank.
It doesn’t matter where the company or employee bank; PNC uses their systems to make payroll available on a schedule that makes sense for the employee.
“That’s important when 40 percent of full-time workers have a hard time meeting household expenses on time every month,” said Suddeth. PNC also offers a low cash mode product that gives consumers 24 hours to cure their account and puts the decision in their hands whether to be overdrawn and correct that versus being late and incurring penalties and negative reporting for things like rent and car payments.
One other pandemic shift in banking involves increases in the number of individuals utilizing banking. Data shows that pre-pandemic Nevada typically hovered around 10 percent of the population being unbanked. Post-pandemic, the latest data shows Nevada’s unbanked households have dropped to 6.1 percent against the national average of 6.5 percent.
“So Nevada has actually brought more households into the banking system and some of that could be attributed to groups that serve clients with a higher rate of being unbanked, who reached out to us during the pandemic because they recognized their clients would have better access to pandemic relief funds if they had an established bank account,” said Gurgevich. “So, we created a resource to help these agencies and groups work with their clients to open accounts. Often those could even be opened online and directed them to BankOn accounts, which are certified by cities for financial empowerment.”
Cybersecurity
Banks pour enormous resources of time and money into protecting their customer’s data and money from cyberattacks. Cybersecurity revolves around technology and people. Banks are working to advance firewall technology, create new encryption technologies, and everything they need to adopt and deploy is expensive, leading to an overall increase in bank budgets to support the increase.
“Cyberattacks are not slowing down,” said Shirey. “The banking industry is well-positioned to react. We’ve always been in this position of trust, protecting our client’s money and the industry has always invested heavily in its defenses. We’re also heavily regulated around that, constantly assessed and reviewed on our capabilities. I feel good about how the industry has prepared itself for this, but it’s ever evolving. The cyber attackers are always looking for new weaknesses and new ways to penetrate.”
Bank personnel are trained extensively to combat cyberattacks. Banks also offer education to customers. Training evolves because attackers evolve. Attacks are becoming more sophisticated, said Navarro. It’s no longer ‘Click here to claim your prize’. Today it looks much more legitimate. Attackers may use social media to track employees in businesses they’re targeting. They connect the dots between colleagues and hack emails so requests for wire transfers and the like look legitimate. Rather than question an email from the CEO directing a wire transfer, the employee sends it. But once the request from a hacked email account is out there, it may be impossible to recover the funds.
“Cybersecurity is an up-and-coming field but even as we develop software to protect ourselves, it’s just a battle every day. The attackers do one thing, and we do another to protect ourselves. It just keeps going,” said Wilmoth. “Business owners need to be aware in their businesses that they’re open every day to cyberattack and try their very best to protect themselves just like the bank does.”
“Cyberattacks continue to increase,” said Suddeth. “It’s important that we have Treasury management products to help clients combat that and minimize fraud.”
“Nevada Bankers Association teamed up with the attorney general and the FBI to provide consumer training and will continue to provide those types of resources and training using any opportunities we can to get the word out to consumers who, without that information, might fall prey to a scammer or fraudster,” said Gurgevich.
Regulations
“Banks went through a significant change in how we were regulated following the Great Recession and since then it’s been a lot more stable. The industry has adapted to the new regulatory regime, and a lot of those regulations ended up being very healthy for the industry,” said Shirey.
Banks often create internal policies more stringent than regulatory requirements demand to ensure their institution is in compliance.
“One thing is apparent, if regulators catch that you are not complying and hopefully not willfully not complying with regulations but just missing it, the penalties are more hefty than if the bank itself identifies it and shares it with the regulators,” said Navarro.
What is the metaverse?
One online definition for the metaverse is an immersive digital environment where humans can live lives digitally. In banking the metaverse can refer to either online banking in general or completely virtual banks. So far, the banking industry’s not sure of the exact definition, and not particularly worried about it.
“I’m only familiar with metaverse banking from what I’ve read,” said Ford. “It’s fairly new within the digital age. From everything I’ve read on the subject, companies like Facebook and Google and Amazon are trying to get into banking and do it digitally as opposed to with brick and mortar.” Some of what Ford read suggests some banks have such strong digital platforms it might be possible for metaverse banks to penetrate the industry.
Metaverse or not, there remains a need for brick-and-mortar branches and actual relationships with human bankers.
“You don’t need a good banker in good times,” said Wilmoth. “You need a good banker when things aren’t going so good. You need a banker who understands your business and wants to be involved in sustaining it during a downturn or growing it during an upturn.”
