Industry FocusBankers

 

There is a lot happening on the global stage that impacts the banking industry. From tariffs to rising costs, the world and local economy is changing, and many businesses are not sure if it is prudent to move forward or to wait and see what happens. In addition to an unsure economic forecast, bankers are grappling with a talent shortage as baby boomers are expected to retire in the next five to 10 years. Artificial intelligence is also changing the game with new cybersecurity systems to address rising threats.

Recently, a group of banking executives met at a roundtable sponsored by Nevada State Bank to discuss banking in Nevada. Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for the event. These monthly roundtables bring together different industries to discuss issues and solutions.

How Is This Industry Navigating The Economy?

Robert Sandhu: My day begins with either hearing facts or rumors about tariffs and what they are causing the market to do, whether that is the stock market, bond market, or their effect on interest rates. It has been a roller coaster ride on a macro basis.

Terry Shirey: Even before tariffs dominated the conversation, we were starting to see consumer confidence slipping. I saw a statistic that said 39% of consumers were planning to do less travel in 2025 and that was before all the tariffs.

Philip Potamitis: The biggest challenge to our industry is rising costs for our customers. It is inflation, not just tariffs, that are the issue. The gaming industry saw a big rise in their labor costs. The larger customers can absorb this and can pass that cost along because they are planning on a higher end. But the smaller customers cannot pass that cost along.

Michael Pizzi: There is more concern about the uncertainty in the economy than the tariff themselves. If we knew this was the new playing field, then we could adapt and make decisions around it.

Shirey: The biggest challenge right now is economic uncertainty. We have been on a good run as an industry since coming out of COVID with all the liquidity in the market. There were a lot of transactions occurring. But right now, people are trying to ascertain what is going to happen with the economy. And in our business, where transactions and activity drive our growth, everybody is on the sidelines right now.

Bruce Ford: I agree that there is economic uncertainty, even nationally. Even the Fed chairman is saying to wait and see. It makes you curious as to where this is going to end up, not just for clients, but for bankers.

Stacy Watkins: When I talk to business clients, they plan for a six-month period regarding supplies and the supply chain. But the challenge is that it is not a long enough strategy behind their businesses with regards to the uncertainty in the economy. There needs to be more diversity in their strategies and in their business plan and more oversight in the management of expenses.

Shirey: In the last five years it seems like we have lurched from one crisis to another. I have found our clients, despite their hesitancy to start a project because they are waiting for more certainty, to be calm. Everybody has become accustomed to the fact that our world changes quickly, and we seem to get through the crisis every time. We figure out a way and we adjust course. Our community does that, and our industry does that as well.

What Is Happening With Interest Rates?

James York: The interest rate environment has been healthy for all of the banks. We can make a little bit of money on our deposits for a change, and we should be making money deposits instead of costing us to take deposits. That is healthy.

Shirey: In some ways, the economy got addicted to extremely low interest rates, which distorted asset values. Now we are contending with that. We have to work through that.
Ford: Historically, this is not high and it is not a bad place for banks on interest rates. We are making money on deposits.

York: People have to get used to the interest rate environment. They keep asking if they are going to see 3 percent rates. If you want to see 3 percent rates again, then pick a pandemic because it is going to require a major crisis to get those kinds of rates. That is not a healthy environment.

David Navarro: Two years ago, when rates were rising so quickly, we saw a lot of people pause on projects, and some abandoned certain ideas altogether. Many customers wanted some sense of where we were going to land on interest rates and once we did, we saw some activity renewed. That may have meant they had to get some additional equity to fund their project or had to get more creative and not be as extravagant. But they made those pivots. That is related to what we may see with the tariffs happening or maybe even not happening. If there is enough time, borrowers will then find alternatives. They will create plan A, plan B, and plan C for a variety of outcomes. They will have their path forward, which will result in us helping on a loan.

Sandhu: The tariff talk is not helping to reduce interest rates. We are still receiving phone calls for potential new loans on real estate projects, but they are exploratory. They want to know how much it is going to cost as far as their injection into the property, what the rate is, terms, and amortizations. And they call back in ten minutes saying it does not make sense, and they do not want to move forward. Until there is a reduction in interest rates, I think loan demand on the real estate side is going to be very low compared to years past.

Pizzi: In the real estate world, specifically, there are projects that do not pencil with the higher debt. In more traditional commercial loans, when you compare the cost of debt to the cost of equity, it is still significantly cheaper to borrow even if the rates are up a little bit.

Denette Suddeth: While line utilization has been low for a while, some clients have chosen to draw that line up and to hold inventory. Because when they are looking at the cost of inventory versus the cost of debt at the current interest rate environment, it makes more sense. In the commercial space we are seeing more line utilization, primarily for inventory build so it does depend on specific examples, whether it is real estate or a different type of industry.

Pizzi: It is important to differentiate interest rates for consumer use, business use, or real estate. For a commercial business, the cost of debt is still significantly cheaper than the cost of equity. If it is 7 percent and you are using your own business equity, just buy it. You could leverage that and put that money back into the business, and should earn more than 7% return on your cash. That is putting your cash to work for you versus a consumer who pays 7 percent or higher on a home loan, for example. That is just a straight cost to them. But for a business, it is different because you are bringing up cash flow that can then be deployed and you are growing your business. And it is still relatively a lot cheaper than doing equity.

Navarro: There is always a battle between short-term goals and long-term objectives at the banks and with our customers. And if you are mainly focused on the long-term objectives, without completely discounting short term goals or results, that tends to lead to the best outcomes. If someone focuses on all the short term noise and decides not to invest yet in real estate that may be prudent, or it may not if it does not fit in with those long term objectives.

Is This Industry Still Experiencing a Talent Shortage?

Sandhu: There is a big drain that is going to happen in the next 5 to 10 years in our industry at the C-suite level with some of our senior employees. Talent acquisition, talent retention, and secession planning are all hot topics right now because they are leaving and we need to replace them.

Pizzi: When you are coming up as a banker, one of the best ways to come up as a credit analyst is as an underwriter. Many banks have moved to central underwriting models and we do not have a central underwriting shop in southern Nevada. There are a handful of smaller banks that do it in-house, but a lot of the big banks have shops in Phoenix, Oregon, or somewhere else. Many times, the bankers that are starting do not get that fundamental experience to truly understand credit. That is a challenge, especially in a market like ours.

Watkins: Another challenge is that some of the local fast-food restaurants will pay $25 an hour and that is not an hourly rate for a teller. It makes it challenging to get people engaged.
York: We are combating this issue with training programs. A lot of the banks have great training programs. We are actually training them out of college to be bankers now and credit analysts. It is probably not enough for the attrition we are going to get from us baby boomers, but we are doing some things that are positive for the industry.

Potamitis: Bank of Nevada and Western Alliance have a summer internship program and we have a credit analyst training program which we invest heavily in. I personally have hired two analysts off that program that are amazing.

Suddeth: I have the advantage because we have training programs nationally that I can recruit to locally. My newest employee has been with the bank seven years and moved here from San Diego. We can bring in talent that are being trained out of market.

Pizzi: Despite all of the programs, we all universally agree that there is still a talent shortage. We have good programs, we just need a lot more of them.

What Approach Is This Industry Taking Towards AI?

Suddeth: We use AI to enhance human processes, not replace them. At this time, we take a conservative approach because there are still state and local laws that are being passed on how AI is to be used. We always want to be in compliance with those laws.

Watkins: If we are not adapting to AI and technology, we have missed the boat terribly in the banking industry. And as banks become robotic, customers will want the luxuries of AI and all that it offers, but they will then push back. And that goes back to the basics of service. Clients are going to want the best of both worlds.

Spencer Hafen: My concern with AI on the consumer side is the lack of education for how to use AI and how to identify if something is from the bank or if it is fraud. The fraudsters are using AI, probably at a faster rate than we are using AI.

Shirey: There is always going to be fraud regardless of the technology or form of payment. It is something banks have to constantly be thinking about.

Navarro: From a cybersecurity standpoint, there are great uses for AI for fraud detection. There are also probably areas of redundancies that AI could help with. The sky is the limit.

Watkins: We want to make sure that there is enough human interaction with clients. Because although AI is great by being fast, sophisticated and efficient, interfacing clients for business planning and the organic conversation that happens with helping them run their businesses, can’t be replaced.

What Is Your Best Advice for Business Executives to Protect Themselves From Fraud and Cyber Threats?

Phyllis Gurgevich: Cybersecurity is an ever-present issue. We will go through economic cycles and there will be ups and downs. But trying to protect our customers’ money and data, is an ever present challenge, and it is not one that the banks can solve alone. We need customers, lawmakers, law enforcement, and technology stakeholders. We need the whole community to come to the table to be effective at mitigating that.

Watkins: Even if a business has a controller or an office manager, executives need to inspect what they expect. They need to have access to their account and watch what is actually clearing. Having more engagement and ownership in their account, even though they have that second layer management on their business is still necessary. There is internal fraud that occurs with people who have worked for a business for over 20 years.

York: It happens. Business owners trust the wrong people. Or they were trustworthy, and they are not now. The new Positive Pay system helps scrub checks as they come through, but somebody in the office daily has to decision all these checks and confirm they are okay to pay.

Pizzi: There are fraud prevention tools, like Positive Pay and we try to get people to use those, but they are still resistant. We have also had situations, where if something does not match, it will go to the business owner to make an exception approval and they approve it because they are busy and it was a bad check. They did not look closely enough at it.

Suddeth: Executives need to take advantage of all the resources that the banks offer in terms of Positive Pay, ACH, all the blocks and filters, and educate their employees continuously. Human error at the commercial level continues to be a major contributor.

Hafen: As long as there are checks being written, there is going to be fraud.

York: We recommend our businesses make ACH payments and not use paper checks. The problem businesses have is the ones they want to make ACH payments to, have vendors that will not take it. They want a check. There is a resistance to adapt.

Suddeth: There are different levels to Positive Pay. You can have it verify the check number to the dollar amount, and there is also payee Positive Pay where the system will automatically match what the client tells the bank, such as the check was cut on this date, for this amount, and to this entity. That is an advantage for the bank because we do not have the losses and to the customer because they have less exposure to fraud.

York: And the system learns. It has a little bit of AI in it, and it learns what is a normal payment for that vendor every month. If it is somebody that it does not recognize, then the business has to decision the check and determine if it is legitimate or not.

Suddeth: We do relationship reviews with our clients and review all of the fraud prevention tools. We show them the ones they are using and the ones they are not using. And if they are not using them then they are accepting the responsibility. It is a process we follow.

Pizzi: It is more widely accepted today than it was 10 years ago. It used to be viewed as a headache to go into the computer and enter all the checks you wrote. Today it is the minority that does not want to use fraud prevention tools. You can’t force anybody to use them, but we strongly encourage it and 90% or more of our clients want to.

Shirey: Over the last two years, the acceptance of Positive Pay has gone up dramatically. The business community has heard enough horror stories from their peers that they are much more open to the extra processes.