Economic Conditions Concern Community Banks

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 banks have been pursuing acquisitions or investing heavily in new technologies, and staffing has been reduced, according to this year’s poll by the Conference of State Bank Supervisors. The survey found that 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, according to FDIC data while the CSBS survey found that about 5% of respondents reduced staff in response to the pandemic.

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.

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.

“I anticipate that the path toward full recovery will be bumpy, and that our progress will likely be uneven,” said Federal Reserve Board Gov. Michelle Bowman. “We are watching the commercial real estate market closely for signs of further stress.”

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.

Continued uncertainty figures to be the norm over the next year as banks make their way to the other side of the pandemic.  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.

Source: American Banker