An Overview of a GSBC Cares Webinar
On November 19, GSBC offered a webinar that addressed the current banking and economic environment. The panelists included Cindy Blankenship (Bank of the West, Texas), Don Musso (FinPro, Inc.) and Michael Stevens (CSBS) who discussed issues that were ‘top of mind’ and strategic opportunities for community banks. Below are key takeaways from the discussion. You can request the recording here: Community Banking in a COVID & Post-Election Environment.
- The banking industry is in excellent shape as most banks have fortress balance sheets. Banks are better capitalized than before earlier crises; loan loss reserves are substantial in the event that charge-offs rise; there is better credit underwriting; they have paid off wholesale funding and are flushed with liquidity.
- Community banks excelled in serving their communities in terms of the Paycheck Protection Program (PPP). The industry should make a greater effort to recognize their contributions to serving small businesses throughout the COVID crisis. Note: a recent FDIC podcast with Diane Ellis and Angela Hinton examines how community banks punched “well above their weight” in extending credit to small businesses.
Listen: Community Banks and the Paycheck Protection Program.
Regarding the recent election results:
- The current regulatory environment should be relatively stable. Jelena McWilliams at the FDIC will be in office through June 2023; Jay Powell will be Federal Reserve Chair through June 2022 and most of the Fed Governors have extended terms. The CFPB will be the agency that likely changes the most with increased emphasis on consumer compliance.
- The President’s appointees (Treasury Secretary, etc.) will implement the President’s agenda, which should be relatively moderate given a split House and Senate.
- Future tax policy is uncertain as are the likely impacts on individuals and businesses. The House will likely attempt to increase individual and corporate income tax rates along with increases in estate taxes. How this affects Sub S firms, businesses and individuals will depend on what changes are implemented.
- The ultimate impact of COVID will depend on the successful introduction of effective vaccines. Operation Warp Speed appears to have accelerated the availability of vaccines, which should slowly remove COVID as an issue. Moderna and Pfizer are close to obtaining approval under emergency authorization to offer vaccines.
- There continue to remain issues surrounding the PPP with regard to loan forgiveness and some form of ‘needs testing.’ The federal government seems to be focused on identifying fraud among PPP borrowers. Much of this fraud appears to be linked to fintechs. As long as bankers have documented the data underlying PPP loan applications, there should be no issues.
- There are issues related to EIDL forgiveness. Community bankers are seeing borrowers with small balances outstanding and need better guidance on how to handle payments versus forgiveness.
- Community bankers should review the June 2020 Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions. This guidance summarizes how examiners will consider an institution’s size (assets), risk profile, overall complexity and the business and industry focus of its customers in their examination of how management responded to the COVID crisis.
- Community banks should be actively stress testing their loan portfolios in preparation for regulatory exams. The stress tests should focus on specific borrowers in areas hard hit by the pandemic and across distressed industries. Such testing should be done on individual loans to fully understand the bank’s risk exposures.
- For most community banks, loan deferrals are less than 10% of loan portfolios.
What to expect through 2021:
- Loan demand remains relatively weak so there will be downward pressure on rates; 3% loan yields will look attractive
- Spreads and net interest margins will fall; there is a greater need for noninterest income
- Many banks should consider extending maturities on invested funds out 5-7 years
- With regard to the regulatory environment, the Federal Reserve will be attempting to incorporate diversity and inclusion initiatives to monetary policy. For affirmation of this, look to recent speeches of various Federal Reserve Bank Presidents. The Federal Reserve will also encourage banks to incorporate climate risk in their risk management practices, particularly how banks might prepare and respond to damage from hurricanes, storms, flooding, etc.
- With many community banks holding excess liquidity:
- They should price deposits lower, below 10 basis points
- Conduct loyalty studies to discern which customer relationships are truly core; price deposits according to the strength of the relationship
- Deposit will remain strong as there are few, if any, ‘surge deposits’
- Subordinated debt, if properly vetted, may be good investment with current yields in excess of 4 percent
Community bankers should be pragmatic and operate within traditional norms over the next few years given the political environment should be relatively stable. They should make a greater effort in telling their story of how they assisted local businesses and individuals in support of their communities.