John Heasley

John Heasley
TBA General Counsel

Community banking through the COVID crisis

Credit quality is expected to begin deteriorating later this year with notable losses likely to materialize in 2021.

Community banking through the COVID crisisAs I write my column in October, hospitals are filling up with coronavirus patients in different parts of the state after a stable September. Hospitalizations in El Paso have reached an all-time high and there is an upswing in admittances in West Texas, DFW and the Panhandle. There are other hotspots all over the country.

A scientist at Yale, Nicholas Christakis, writes that a potential vaccine will probably not be widely deployed until the U.S. population reaches herd immunity, a level of infection of about 40% of the population. He believes that we will reach that point in 2022. The social and economic impact of the pandemic will last through 2024, which he called the intermediate period. Many aspects of our personal and business lives will be dramatically changed in the post-pandemic period.

Fed Vice Chair Randal Quarles said in a recent speech that banks have been a source of strength during the pandemic because of the regulatory framework put in place after the crisis of 2008 and 2009. Banks have been working with customers and are involved in some forbearance measures with millions of borrowers while at the same time they have made “sizable provisions for expected loan losses.”

It is worth noting that the largest banks have enjoyed strong earnings on trading activities while community banks really stepped up to provide PPP loans: $40 billion for Texas borrowers.

Looking at data from S&P Global Intelligence on Texas community banks, our banks will not see credit losses rise in the near term, but profitability is under pressure because of net interest margins. Third quarter earnings show good credit quality mainly due to PPP and forbearance practices. Credit quality is expected to begin deteriorating later this year with notable losses likely to materialize in 2021.

There is still work that needs to be done in Washington. PPP loan forgiveness needs to be simplified. The provisions in the CARES act on troubled debt restructuring and small bank leverage ratios need to be renewed for at least another year.

If the pandemic takes an even greater toll on the economy, even more help may be needed for community banks with credit quality problems in order to give them more time to work with borrowers and more time to write off bad loans. An aggressive approach from regulators may lead to write-downs that will limit banks’ ability to provide the majority of the country’s small business loans.

Will Congress do anything? There is currently a standoff on another round of COVID spending. Most likely, it will depend on which party wins the presidency and which party controls the Senate. If Republicans maintain the Senate and the White House, action on pro-bank legislation is more likely. However, the view in October from most pundits is that there will be a Republican bloodbath, meaning that the country will be run by Biden, Schumer and Pelosi.

A Democratic sweep will result in trillions more in spending, most of it targeted for states and municipalities. The markets will enjoy a sugar high, but this year’s deficit is already over $3.1 trillion and the national debt is over $25 trillion.

Congressional Democrats will also act on a number of bills involving fair lending, CRA and diversity in hiring and governance. Changes in the leadership of the OCC and the CFPB will change the regulatory landscape.

Community bankers still have a good story to tell about how vital they are to their customers and their local economies. They will just have a harder audience to sell it to.