Community bankers adopt bunker mentality as pandemic drags on

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Community banks entered a holding pattern in the initial months of the pandemic, reflecting an abrupt shift in concerns from liquidity and growth opportunities to deteriorating economic conditions, according to a new survey.

Very few have been pursuing acquisitions or investing heavily in new technologies, and staffing has been reduced, according to this year’s poll of 396 bankers by the Conference of State Bank Supervisors.

The results of the survey, conducted between April and July, were presented Wednesday in conjunction with the annual community banking research and policy conference hosted by the Federal Reserve, the CSBS and the Federal Deposit Insurance Corp.

Only 13% of the respondents had tried to buy another bank over the prior 12 months.

While banks are expected to embrace technology over time, more than half have no plan to add online loan closings over the next year. Nearly 70% aren't looking at automated underwriting. Interactive teller machines remained unpopular; two-thirds of bankers said they have no interest in adding them over the next 12 months.

Community banks cut 9,900 full-time equivalent jobs during the second quarter, or roughly 2% of the staff they employed on March 31, according to data compiled by the FDIC. The CSBS survey found that about 5% of respondents reduced staff in response to the pandemic.

Community banks, defined by the survey as those with assets of $10 billion or less, are contending with uncertain operating conditions that have stunted loan growth and threatened credit quality.

More than a third of respondents said business conditions were their biggest challenge. Core deposit growth, bankers' greatest challenge a year earlier, was less of a concern after deposits surged once small businesses banked their Paycheck Protection Program proceeds.

"I anticipate that the path toward full recovery will be bumpy, and that our progress will likely be uneven," Federal Reserve Board Gov. Michelle Bowman said during the virtual conference.

"Asset prices in particular remain vulnerable to significant price declines should the pandemic seriously worsen," Bowman added. "Some hotels and other businesses are in arrears on rent and debt service payments, and we are watching the commercial real estate market closely for signs of further stress."

In some areas, the survey raised questions even as it provided answers. While nearly a quarter of respondents closed branches during the early days of the pandemic, it is unclear how many will be permanently shuttered.

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

“I believe the way we deliver our services will look totally different,” one unnamed banker said in the comments section. “But it is yet to be determined.”

Continued uncertainty figures to be the norm over the next year as banks make their way to the other side of the pandemic, said Michael Stevens, senior executive vice president of the CSBS.

“It seems like the industry kind of stood still” when it came to adopting new technology, Stevens said.

That might seem surprising given the increase in customer adoption of digital services amid social distancing. But “it makes sense since most of 2020 was tied to operational adjustments, and it seems like most had the technology they needed to adjust,” Stevens said. “But how will the pandemic inform their future plans? We don’t have all the visibility yet.”

Speaking at the virtual LendIt conference Wednesday, FDIC Chairman Jelena McWilliams warned bankers that reliance on outdated systems could cost them customers in the long run.

Community banks "are not going to survive ... if they do not modernize their technology,” she said.

Call report data included with the CSBS survey highlighted how the pandemic, and the federal government’s response, had drastically changed community banks’ balance sheets.

Small-business loans, which had been steadily declining at community banks since 2016, soared 40% in the second quarter from a year earlier to $394 billion. The increase was entirely because of $196 billion in PPP loans.

All other loan categories fell from a year earlier, with consumer loans, including mortgages, declining by 3.3% and commercial loans, excluding PPP, falling by 7.4%. Commercial real estate lending was down slightly.

While nearly 80% of the bankers surveyed said they had increased their commercial lending, largely reflecting PPP, only 13% made more consumer loans and lines of credit.

A number of community banks became Small Business Administration-approved lenders 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 making SBA loans in the next 12 months.

“Small-business lending at community banks had been declining … but very clearly these banks were serving more than their customer base” with the Paycheck program, Stevens said. “It will be fascinating to see if this is a renewal for community banks and whether they continue to provide service 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 queries on the business impact of the COVID-19 outbreak.

Beyond the data, bankers’ comments included blistering criticism of the SBA’s handling of the PPP, the emergency loan program for small businesses harmed by fallout from the pandemic.

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

Other bankers cited the PPP’s “horrific” rollout, its “ever-changing” rules and procedures and “nightmares” tied to accessing SBA websites that included lockouts, lost credentials and password problems.

Another banker who considered applying for approved-lender status gave up after struggling to get in touch with the SBA. “We had to refer our clients to a third party in order for them to participate,” the banker said.

One bright spot in the report involved regulatory costs.

The average annual compliance cost among the banks surveyed fell by 3% in the 2019 fiscal year from a year earlier to $130.5 million. The biggest declines were in personnel expense, which fell by 8.8%, and consulting fees, down by 5.7%.

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Community banks Paycheck Protection Program Coronavirus CSBS