Community bankers adopt the bunker mentality as the pandemic drags on

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In the early months of the pandemic, community banks reached a holding pattern that reflected an abrupt shift in concerns from liquidity and growth opportunities to deteriorating economic conditions, according to a new survey.

According to this year’s survey of 396 bankers by the Conference of State Banking Supervisors, very few acquisitions or major investments in new technology have been made and staff numbers have been reduced.

The results of the survey, conducted between April and July, were presented on Wednesday in conjunction with the annual Community Banking Research and Policy Conference sponsored by the Federal Reserve, CSBS, and Federal Deposit Insurance Corp. was organized.

Only 13% of respondents had tried to buy another bank in the past 12 months.

While banks are expected to move to technology over time, more than half have no plans to add online loan closings in the next year. Almost 70% do not deal with automated underwriting. Interactive ATMs remained unpopular; Two-thirds of bankers said they had no interest in adding them in the next 12 months.

According to the FDIC, the community banks cut 9,900 full-time positions, or around 2% of the workforce as of March 31, in the second quarter. The CSBS survey found that around 5% of respondents cut headcounts in response to the pandemic.

Community banks, defined in the survey as having assets of $ 10 billion or less, are grappling with uncertain operating conditions that have slowed credit growth and jeopardized credit quality.

More than a third of respondents said that business conditions were their biggest challenge. Core deposit growth, bankers’ biggest challenge the previous year, was less of a concern after deposits rose after small businesses transferred their paycheck protection program income.

“I expect the road to full recovery will be bumpy and our progress will likely be inconsistent,” said Michelle Bowman, governor of the Federal Reserve Board, during the virtual conference.

“Asset prices, in particular, remain vulnerable to significant price declines should the pandemic worsen,” Bowman added. “Some hotels and other businesses are behind on rental and debt service payments, and we are closely monitoring the commercial property market for signs of further stress.”

In some areas, the survey raised questions in spite of providing answers. While nearly a quarter of respondents closed stores in the early days of the pandemic, it is unclear how many will close permanently.

About 98% of respondents said they had restricted use of the lobby due to the pandemic, and nearly 70% implemented work-from-home policies for unnecessary staff.

“I believe the way we deliver our services will be completely different,” one unnamed banker said in the comment section. “But it has yet to be determined.”

The lingering uncertainty numbers will be the norm for next year as banks find their way to the other side of the pandemic, said Michael Stevens, CSBS senior executive vice president.

“It seems like the industry has somehow stopped,” said Stevens when it came to introducing new technologies.

This may seem surprising given the increasing adoption of digital services by customers due to social distancing. “It makes sense, however, since most of 2020 was tied to operational customization and most apparently had the technology to adapt,” Stevens said. “But how will the pandemic inform your future plans? We don’t all have visibility yet. “

At the LendIt virtual conference on Wednesday, FDIC chairman Jelena McWilliams warned bankers that trusting outdated systems could cost them long-term customers.

Community banks “will not survive … if they don’t modernize their technology,” she said.

Call report data included in the CSBS survey showed how the pandemic and the federal government‘s response had dramatically changed the balance sheets of community banks.

Small business loans, which had declined steadily since 2016, rose 40% year over year to $ 394 billion in the second quarter. The increase was entirely due to $ 196 billion in PPP loans.

All other categories of credit declined year over year, with consumer loans, including mortgages, down 3.3% and non-PPP commercial loans down 7.4%. Commercial real estate loans fell slightly.

While nearly 80% of the bankers surveyed said they had increased their commercial loans, mainly due to PPP, only 13% extended consumer loans and credit lines.

A number of community banks have been approved by the Small Business Administration to participate in the PPP. It remains to be seen how many will continue to offer the agency’s traditional products. 8.4% of respondents said they plan to stop issuing SBA loans in the next 12 months.

“Small business lending to community banks has been in decline … but these banks have clearly served more than their customer base,” Stevens said of the Paycheck program. “It will be fascinating to see if this is a refresh for community banks and if they continue to provide services beyond their normal footprint.”

The CSBS had originally planned to make a series of questions about core technology providers the cornerstone of this year’s report before adding a series of last-minute questions about the business implications of the COVID-19 outbreak.

Beyond the data, the bankers’ comments included fierce criticism of the SBA’s handling of the PPP, the small business emergency loan program that has been hurt by the aftermath of the pandemic.

“The challenges that we experienced [in PPP] are too numerous to list, ”said one banker. “It was and is the most frustrating, poorly planned, misdirected, and misunderstood program the federal government could possibly have created.”

Other bankers cited the “terrible” rollout of the PPP, its “ever-changing” rules and procedures, and “nightmares” associated with accessing SBA websites that included bans, lost credentials, and password problems.

Another banker who was considering applying for approved lender status gave up after struggling to get in touch with the SBA. “We had to refer our customers to third parties so that they could participate,” said the banker.

One bright spot in the report was regulatory costs.

The average annual compliance costs of the banks surveyed decreased 3% year-over-year to USD 130.5 million in the 2019 fiscal year. The largest decreases were in staff costs, which decreased by 8.8%, and in consulting fees, which decreased by 5.7%.


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