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“The best year ever”: 2020 was surprisingly good for small banks

When the coronavirus closed its business in Baltimore and its suburbs in the spring, Kevin Benson feared the worst for his small lenders: widespread defaults, an increase in anemic loans.

Instead, the Rosedale Federal Savings and Loan Association, backed by a government-backed lending boom, surpassed $ 1 billion in assets in May, years earlier than planned. The majority of borrowers (consumers and businesses) are in good shape.

“We are all pretty surprised at our resilience,” said Benson, CEO of Rosedale Federal. “It’s not time for a winning lap yet, but we’re cautiously optimistic.”

As 2020 approaches the end, small lenders like Rosedale are doing much better than expected at the beginning of the coronavirus recession. This is largely due to government funding that passed through banks on the way to households and businesses. Stimulation and unemployment checks pushed up deposits and prevented borrowers from lagging behind their loans. The Paycheck Protection Program, a government bailout for small businesses, has brought them new customers and highlighted old ones.

According to the Federal Deposit Insurance Corporation, profits from community banks (small local lenders) in the third quarter increased 10% from the same period last year. Total lending in the third quarter increased by 13.4% from 4.9% in the industry. Deposits surged 16.7%. Fixed lending rates have risen slightly this year, but are still well below the levels seen in the last financial crisis.

Small lenders have long struggled to compete with their larger rivals. They lack the trading desks and trading businesses that underpin Mega Bank when low interest rates weigh on lending profitability. And consumers have become dependent on smartphone apps and digital services that many small banks can’t offer. Technology costs and thin wafer lending margins have forced many small banks to consolidate.

When the pandemic struck the entire industry and closed, many feared that small businesses would also suffer.

But relationships with local companies have benefited them. Despite holding about 12% of industry assets at the end of last year, small banks executed about 28% of PPP loans, according to FDIC data. These “economic first responders” helped quickly deploy hundreds of billions of dollars in allowed loans, FDIC Chairman Elena McWilliams said at an online conference earlier this month.

PPP has brought new customers and their deposits to many small lenders who have struggled to attract both pre-pandemics. Lenders also earn a 1% to 5% commission on each loan.

That revenue helps offset the tight margins of the core lending business. The net interest margin, the difference between what banks earn on loans and what they pay to depositors, hit a record low for commercial banks in the third quarter.

“PPP was a huge shock in terms of balance sheet growth, earnings and liquidity,” said Sandy Brown, an Attorney at Alston & Bird LLP, who advises community banks.

According to Benson, Rosedale has issued more than $ 500 worth of PPP loans to new small business customers. He expects Rosedale to generate approximately $ 1.7 million in commission income from PPP. That’s more than double the $ 730,000 non-interest income in 2019.

Prior to the pandemic, lenders focused on mortgages and commercial mortgages, but PPP customers had the opportunity to expand into small business lending. “It’s certainly a step forward for us,” he said.

The delivery of PPP cash to small business customers at banks helped limit losses. Moreover, the disastrous prediction that a pandemic would devastate a wide range of companies did not come true. At many banks, problematic loans continue to focus on the few industries that have been hit, such as hospitality and tourism. Retail in-store; and energy.

Customers use the drive-through window of the Rhodesdale Federal Savings and Loan Association in Maryland.

Cash Valley Bank, Utah’s assets reached nearly $ 2.8 billion at the end of September, almost doubling the same period last year. Net lending and leasing increased by more than 91%. Deposits have increased by more than 40%.

Part of the boost comes from over 9,000 PPP loans processed by banks. However, a significant share is organic, says bank CEO George Daines. He said some companies in the area prospered during the pandemic.

“From a financial perspective, it was probably the best year ever,” said Danes.

Nevertheless, the nationwide surge in coronavirus cases and the expiration of federal aid poses new risks to small banks and the communities in which they serve.

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The number of Americans applying for unemployment has reached its highest level since September, with millions of people losing their profits by the end of the year. Many companies used PPP loans long ago and the program was closed to new applicants in August. Lawmakers are still fighting for a new round of inspiration.

But for now, bankers say they are in a position to survive the recession. This is partly due to historically high capital levels and can absorb more losses than during the last recession.

In March, Paul Kohler and his team at Charter Bank in Eau Claire, Wisconsin looked back on what happened when fixed lending rose to 2.72% after the 2008 crisis and how much due to bad debt losses. I thought about securing funds. ..

“I was scared because I didn’t know how this would affect my customers,” said Bank CEO Kohler. “It was like,’Oh, this might just be a bad thing.'”

He now believes that charters are well funded to cover potential bad debt losses. Fixed lending was 0.33%, the lowest ever for a bank, with more than $ 1 billion in assets this year.

“It’s absolutely crazy,” Kohler said.

Many small lenders, such as the Rhodesdale Federal Savings and Loan Association in Maryland, are doing better than expected this year.

Write to Orla McCaffrey (orla.mccaffrey@wsj.com)

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“The best year ever”: 2020 was surprisingly good for small banks

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