For Banks, 2020 ‘Better than Anyone Expected’

YOUNGSTOWN, Ohio – A year ago, banking leaders could never have imagined the coronavirus pandemic and all the effects that came with it. In late March and early April, as the early impact began to emerge, they never could have imagined that the year would turn out as well as it has.

“Back in March, when all this started happening and we were locking down, if you told me we had done as well as we have, I’d be pretty skeptical,” says Cortland Bank President and CEO James Gasior. “Looking at our peer banks across the Midwest, it looks like asset quality is performing better than anyone expected.”

Even with all the concerns and instability brought on by the pandemic, financial institutions in the area have weathered the storm well, their leaders say. Deposits are up, lending hasn’t faced as steep a cliff as many thought it would and the banks and credit unions are on solid footing as they wrap up a year that none could have predicted when budgets were put together in the fall of 2019.

“Our loan production in this calendar [year], which I’m surprised by, is the strongest we’ve had in at least the last three years, maybe even longer than that,” says Frank Hierro, executive vice president and Mahoning Valley regional president of Premier Bank. “Some customers are doing sizable projects. Health care is very strong and we’re seeing bigger projects. The low-rate environment has afforded many of our customers to refinance some debt. And we’ve also taken on a much larger role in regards to SBA lending.”

That boost from Small Business Administration loans, adds Premier Bank President Gary Small, is the result of the merger between Home Savings Bank and First Federal Bank of the Midwest, which he describes as the “elephant in the room” for 2020 at the bank.

“Even if there weren’t all these macroeconomic things going on, we would have plenty on our plate,” Small says. “It continues to be a wonderful residential mortgage year. Rates are still low. Refinance business, purchase business and new construction are good [and on pace for] a record year, by a mile. That was helpful in offsetting some of the anticipated credit problems that COVID was going to bring, for both commercial and consumer clients.”

Gasior says loan growth at Cortland Bank is about 1% if Paycheck Protection Program loans are excluded from the tally and, according to the bank’s third-quarter earnings statement, lending is up about 9% with their inclusion. For that program, the bank processed 419 loans that totaled $56.4 million. Overall, Cortland Bank reported $534.14 million in loans at the end of the third quarter.

Buoyed by strong mortgage lending, earnings for the bank remain on target “even with the unknowns we had to deal with,” Gasior says.

“Like most banks, when we had that uncertainty, we ramped up provisions for loan loss. But that’s been offset by fees on the PPP forgiveness and the mortgage arena,” he continues. “We’re seeing a lot of refinance and, in some geographic areas, new home construction. As we approach what would normally be a slow time of year, mortgages are keeping up pretty well.”

A similar picture has emerged at Farmers National Bank, says its president and CEO, Kevin Helmick. Early on, there were some “pretty dire forecasts,” he says. But loan growth is “essentially flat” when excluding PPP loans and in the “mid to upper single digits” when making them part of the tally.

“When you add them in, with $200 million in PPP loans, it looks like a 10% growth, which I think is where a lot of banks are situated,” he says. “At the end of the day, for both banking in general and Farmers specifically, it was a pretty strong year. People, businesses and communities should be encouraged because when banks are doing well, that’s a good sign.”

At 717 Credit Union, vice president of lending Bill Fulk says the institution’s loan volume has “doubled almost exactly,” even with the first two months of the year “being normal, if not lower.”

“That tells us that increase in volume happened in the six months of the pandemic. That’s pretty big,” he continues. “What goes along with that is every other business line, except for Visa cards, has moved up significantly. That’s equity loans for home improvements, car loans, recreational vehicle loans, business loans. They’re all up over 2019, which was the best lending year our credit union has had.”

Adds CEO Gary Soukenik, the credit union is outpacing its revised budget, issued in April after the toll of the pandemic started becoming visible.

“What we saw happening is people were spending in different areas. So interchange income wasn’t hit as hard as we thought it would be,” he says. “People were buying online instead of traveling. They weren’t going to restaurants. But they were spending money on home improvements.”

At most financial institutions, deposits have surged – Farmers’ Helmick says his institution has seen deposits rise 30% year-over-year – which most attribute to a combination of the $1,200 stimulus payments sent out by the federal government in mid-April and people reducing big-ticket purchases during the pandemic. But, Associated School Employees Credit Union’s CEO Mike Kurish cautions, whether that line of business remains strong into 2021 remains to be seen.

“The question has become if they’re going to stay. It’s been some time since the relief program was put in place and people may need those [deposited] funds to survive,” he says. “Then, we may find that deposits trail off in 2021. It depends on whether Congress comes out with another relief package.”

The coming year brings with it a vaccine for the coronavirus and new presidential administration, although whether the Democratic Party controls the White House, Senate and House of Representatives remains to be seen. Combined with the highlights of 2020 from a financial perspective, banks and credit unions expect the year to be good one.

“Some of the uncertainty that we faced throughout 2020 feels like it is beginning to sort itself out,” says Frank Kreider, First National Bank’s vice president of commercial banking and president of its northwest region. “When the unknowns are out of the way, we can anticipate continued economic growth. You can see the promise of that already with the manufacturing activity taking place in the Youngstown area. Companies will continue to invest in themselves and opportunities to improve or expand,” he observes.

“That said, I also think you will see that companies are going to be more in tune with being risk-averse moving forward. Businesses are going to take a good look at how they control their leverage and liquidity levels.”

Usually in an election year, the biggest concern for business leaders is who will take office, says PNC Bank’s Youngstown regional president, Ted Schmidt. Not so this year, he says, citing an “informal survey” of clients in the Mahoning Valley. Most are more concerned with being prepared for more impacts from the pandemic and their employees.

“As we talked to our clients, one of the primary concerns is what happens if there’s a significant spike and another shutdown. A lot of them, through the PPP loans, increased their liquidity and used that to keep employees in place,” Schmidt says. “Our clients’ employees are more concerned about their finances. We’ve got some studies that show 49% of employees admitting to spending at least three hours a week thinking about financial stressors while they work. That can be a huge distraction.”

To ease some of that stress, PNC uses its Organizational Financial Wellness program to offer, for free, businesses customized financial education programs.

With President-elect Joe Biden preparing to begin his administration Jan. 20, questions remain as to how quickly, if at all, his tax plan could be effected. What bankers are watching, they say, is the pair of runoff elections for Georgia’s two Senate seats. Should both seats be won by Democrats, the party would hold both chambers of Congress, creating an easier path for turning the tax plan into law.

“All the discussion about an aggressive political plan to increase taxes and minimum wage, probably because the economy is still on somewhat shaky ground, I think the administration will be somewhat cautious while we’re still seeing GDP down and unemployment up. It’ll probably happen over time, not automatically,” says Cortland Bank’s Gasior.

The bigger event on the horizon is mass distribution of a vaccine for the coronavirus, which would spell the beginning of the end for the pandemic. On Nov. 17, Moderna announced its vaccine was 94.5% effective, days after Pfizer and BioNTech announced preliminary results from their vaccines showed 90% efficacy, a figure revised Nov. 18 to 95%. While the largest hurdle, the drugmakers say, is logistics of distribution rather than production, the news is certainly welcomed in the banking sector.

“As the vaccine kicks in, that will help confidence and as people get confident, that will be good for the economy. If there’s a stimulus, that’s a multiplier to that positive feeling,” 717’s Soukenik says. “My best assumption is the first quarter is a little rocky. Then things will look pretty good. It all comes back to consumer confidence, which today has 90% to do with the virus.”

The biggest challenge the financial institutions face is likely to be the effect of how long interest rates have stayed low. Nearly all banks are reporting huge amounts of refinance business. With new mortgage business surging, they’re seeing compression on their interest margin. Eventually, higher-rate loans are either going to be refinanced or paid down, leaving tighter margins for the institutions.

“All in all, I think in 2021 we’ll be cautious on the rate side but we’ll find ways to offset that depression, like noninterest income such as mortgage activity, and watch our expenses,” offers Gasior.