Although recent economic data have been encouraging, the United States suffered the sharpest drop in economic activity in its history when the coronavirus pandemic hit in April 2020. Even with a sizable rebound, many economists believe full economic recovery is a few years away.
Unsurprisingly, every industry has been impacted by the pandemic, and banking is no exception. In our previous blog post, we outlined the pressures community banks are facing, including:
- profits tied to interest income;
- the big marketing dollars of big banks;
- rising costs for compliance, technology and customer experience; and
- an accelerating wave of consolidations.
The recent coronavirus pandemic has only amplified these pressures.
In part two of our three-part series, let’s dive into the positive impact community banks have on local businesses and economies, and the implications of the pandemic on community banks and the communities they support moving forward.
How Community Banks Responded in the Immediate Aftermath of Covid-19
In March 2020, as the Covid-19 pandemic accelerated across the world, senators in the United States unanimously passed a $2.2 trillion coronavirus relief bill. As part of this Coronavirus Aid, Relief, and Economic Security (CARES) Act, nearly $350 billion was allocated to help keep small business owners afloat as part of the Paycheck Protection Program (PPP) —an amount sixty times what the SBA would ordinarily process in the same time period.
For the local banks and non-bank lenders who would help deliver these loans to small businesses, the challenge was a formidable one. In short, they were “being asked to make loans over the course of days that would equal 15% of their entire previous C&I loan portfolio”— and all without any warning, preparation or precedents.
Community banks were critical to the success of the PPP, with many joining forces with fintechs to deploy the technologies required. In addition to tackling the challenge of originating and disbursing loans at unprecedented volumes and speed, these same banks had to process stimulus checks and ACH payments, while accommodating an immediate shift to remote work for their staff and management teams.
Source: Forbes, “PPP Loans: Who Got What and How Well Did the Loans Perform,” July 13 2020
Since April 2020:
- Banks with less than $10 billion in assets have issued nearly three million loans under the PPP, delivering nearly $233 billion in relief to their customersopens PDF file . That amount clocks into nearly 45% of the total loan amount available under the program;
- Banks with less than $1 billion in assets have made over one million loans under the PPP, delivering nearly $85 billion in reliefopens PDF file to their customers; and
- According to Governor Michelle W. Bowman of the Federal Reserve System, the smallest banks had the smallest average PPP loan size, illustrating that they played a key role in serving smaller businesses outside the focus of larger banks.
Despite a heroic response, winter is coming
Before the pandemic began, and despite the pressures of years past, community banks started 2020 off strong. Over 95% of community banks in the United States were profitable, with non-performing assets near historic lows. The same percentage of banks were rated as 1 or 2 under the international CAMELS rating system which rates the strength of financial institutions. Many of these banks had ample liquidity going into the pandemic. That liquidity has been augmented by deposit inflows from pandemic-related stimulus programs.
Changes ushered in by Covid-19 are here to stay. There are four primary changes that community banks will need to contend with:
Lower demand for financial services
The COVID-19 pandemic has boosted unemployment for every U.S. state, industry and demographic. According to recent dataopens PDF file from the Congressional Research Service, the country’s unemployment rate peaked at an unprecedented high never before seen since data collection started in 1948, in April 2020 (14.7%). Although the rate has since declined (to 7.9% in September), it is still classified as high.
High rates of unemployment have undermined demand for financial services
Strong, upward trends for online banking
Although many banks have re-opened branches, others have accelerated branch rationalization programs resulting in permanent branch closures.
Consumers who had not adopted online and mobile channels previously were forced to finally make the move. Some recent research suggests they won’t return to the branches soon if ever.
The volume of PPP lending has driven meaningful asset growth, especially for smaller banks. For some of these institutions, this asset growth has resulted in exceeding asset thresholds contained in statutes, regulations, and reporting requirements. Understanding how to address regulatory requirements associated with outsize asset growth is a challenge, piling on top of a situation in which the smallest US banks are already carrying a disproportionate regulatory burden, when compliance expense is measured as a percentage of an institution’s total revenues.
Limited opportunities for relationship-building
As more bank employees work from home and there are fewer opportunities for face-to-face interaction with customers, community banks will need to come up with alternative strategies to retain their personal touch and relationship advantage. Community banks were forced to pivot to digital platforms overnight to support their customers when branch banking was not an option. Although community banks have risen to the occasion, the long-term challenge of fostering and strengthening relationships “offline’ remains. As Andrew Silsby, Kennebec Savings Bank president and CEO, notes:
“Community banking has taken an enormous amount of pride in providing face-to-face relationships and good customer service..and it’s harder to do that over video or a screen.”
Banks need to re-evaluate whether they are operationally prepared to support a more remote workforce and devise strategies to help strengthen customer relationships in a more digital environment.
In our next and final post of this series, we will discuss how community banks can pave a path forward despite the bumpy road ahead.