Focus on Survival

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Comp-WP-Report.pngThe pressures brought to bear upon the banking industry as a result of Covid-19 and the related economic downturn promise to exacerbate two long-term challenges facing bank boards and management teams: tying compensation to performance, and managing compensation and benefits costs.

In early July, the U.S. remained “knee deep in the first wave” of the Covid‑19 pandemic, according to Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases. States paused or began rolling back their efforts to reopen businesses and public areas. Tens of millions of Americans were unemployed. By September, newly reported cases remained above infection levels in March and April nationally. Many states were experimenting with school reopenings, and case counts were rising in the U.S.

“I’m really concerned about it,” said William Demchak, chairman and CEO of PNC Financial Services Group, who warned of an impending wave of loan defaults in a July interview. “I don’t know that it’s going to devastate us, but I think it’s going to put us into a period of really slow growth.”

Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, was conducted in March and April, just as Covid-19’s broad reach became clear, leading banks to embrace remote work and respond to the monumental task of issuing Paycheck Protection Program loans.

The survey highlights key concerns for bankers in this unusual environment, which will be explored in this white paper. How will bank boards evaluate CEO pay? What about director compensation and efforts to refresh the board? Finally, will banks be prepared for the impending turnover in the C-suite once baby boomers retire?

Forward-looking banks could emerge stronger from this crisis, says Flynt Gallagher, president of Compensation Advisors. “This environment is an opportunity for them, because it gives them the ability to make the changes they’ve been wanting to make,” he says. With so many Americans unemployed, more high-quality talent is available, and he believes institutions should find a way to bring them into the organization — even if a position isn’t open.

“You never go wrong when you get good people,” Gallagher says.

To read more about addressing board and CEO pay challenges, read the white paper.

To view the full results to the survey, click here.

Why Two Community Banks Raised Debt to Repurchase Shares

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The coronavirus pandemic has motivated some banks to raise capital and others to repurchase shares.

Two banks opted to do both.

These institutions recently paired subordinated debt raises to buy back discounted shares in immediately accretive transactions. Leadership of both banks attribute the pair of opportunities — and the pricing they were able to obtain — to the pandemic, and other community banks could make a similar trade.

“What had happened was a perfect storm of an opportunity to buy back at a pretty good discount because of the Covid-19 impact on financial stocks, and the popularity or the market that had developed for subordinated debt,” says Paul Brunkhorst, CEO of Crazy Woman Creek Bancorp in Buffalo, Wyoming.

The bank constructed a twofer trade that would leverage investors’ demand for yield while capitalizing on the persistent discount in its shares. Brunkhorst reached out to a larger in-state financial institution about a $2 million private placement of its subordinated debt at a 5% rate; he says the direct placement kept pricing low for the $138 million bank. Crazy Woman Creek then repurchased 15% of its outstanding common stock. The transactions were included in the same Aug. 18 release.

“It wasn’t taken lightly. We are affecting shareholder value in a positive manner. We’re also incurring this debt, so we better be darn sure of the capital position, the asset quality and the regional economy,” he says. “We were comfortable going after the subordinated debt with the primary reason of repurchasing those shares.”

Executives at Easton, Maryland-based Shore Bancshares decided to pad robust capital levels with an additional $25 million in subordinated debt as “safety capital” at the end of August.

So far, the safety capital hasn’t been needed. Second loan modification requests declined to about 10%, and the $1.7 billion bank has yet to experience defaults. Management decided to deploy $5.5 million of those newly raised funds toward restarting its halted share repurchase program at the beginning of September.

The repurchase, which required sign off from the Federal Reserve, was immediately accretive to tangible book value. If fully exercised, the buyback would reduce share count by 4.5%.

“When you can buy stock back at 60% or 70% of tangible book, that’s probably the best thing you could ever do for your shareholders,” says CEO Lloyd “Scott” Beatty Jr. “In terms of rewarding them, I can’t think of a better way to do it.”

Both executives say shareholders have been pleased with the buyback announcements. They also found the capital raise to be straightforward and relatively quick, with healthy demand and pricing. Brunkhorst says he’s surprised more banks haven’t cut out the middleman to solicit demand and conduct their own private placements. It was Shore’s first time raising sub debt; its offering carried a rating from Kroll Bond Rating Agency and a price of 5.38%.

“I would say probably if you’re thinking about [raising capital], I’d get out there as soon as possible. There’s a lot of activity in this,” Beatty says. “I’d be inclined to pick your investment banker and get out and enter the market as quickly as you can.”

Coronavirus Makes Community Count in Banking

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In the face of an economic shutdown triggered by the coronavirus pandemic, small banks stepped up in a big way to ensure local businesses received government aid.

Over the past 50 years, the American community bank has become a threatened species. Yet these institutions rose to the occasion amid the coronavirus-induced economic shutdown. The Small Business Administration reported that 20% of loans made in the first round of the Paycheck Protection Program, were funded by banks with less than $1 billion in assets, and 60% were funded by banks with less than $10 billion in assets. In total, the first round of lending delivered $300 billion to 1.7 million businesses.

There were just 5,177 bank or savings institutions insured by the Federal Deposit Insurance Corp at the end of 2019 —a fraction of the 24,000 commercial banks in the U.S. in 1966. The majority of these institutions were local, community banks, some with only a single branch serving their market. But over the past 25 years, the banking industry has increasingly become the domain of large conglomerates that combine commercial banking, retail banking, investment banking, insurance, and securities trading under one roof.

Technology has accelerated this consolidation further as consumers select the institutions they can most easily access through their smartphone. Deposit market share tells this story most starkly: in 2019, over 40% of total assets were held by the four largest banks alone. From 2013 to 2017, total deposits at banks with assets of less than $1 billion fell by 7.5%.

Despite that erosion, small banks were willing and able to help hurting businesses. After the dust settled from the initial round of PPP loans, many of the nation’s largest banks faced lawsuits alleging they prioritized larger, more lucrative loans over those to small businesses with acute need.

Community banks filled in the gaps. USA Today reported that a food truck business with a long relationship with Wells Fargo & Co., but couldn’t get a banker on the phone during the second round of PPP. Instead, Bank of Colorado, a community bank in Fort Collins, Colorado, with about $5 billion in assets, funded their loan.

Another one of those banks, Evolve Bank & Trust, an institution with about $600 million in assets based in Memphis, Tennessee, answered the calls of customers and non-customers alike. Architecture firm Breland-Harper secured a loan through Evolve; firm principal Michael Breland the called the funds “crucial in meeting payroll.” Special education program The Center for Learning Unlimited was turned away at 15 banks for a PPP loan. Evolve funded their loan within days.

The coronavirus pandemic has proven two things for small financial institutions. First, community still counts — and it may expand beyond a bank’s local community. A bank’s willingness to work with small businesses and organizations proved to be the most important factor for many businesses seeking loans. Small banks were willing and able to serve these groups even as the nation’s biggest bank by assets, JPMorgan Chase & Co., reportedly advised many PPP loan applicants to look elsewhere at some points.

As big banks grow bigger, their interest in and ability to serve small businesses may fade further. The yoga studio, the restaurant and the small business accounting firm, may be best served by a community bank.

Second, community banks were empowered by technology. Technology is a lever with which big banks pried away small bank customers, but it was also crucial to small banks’ success amid the PPP program. Because of the pandemic many small banks accelerated innovation and digital solutions. During the crisis, Midwest BankCentre, a community bank in St. Louis with $2.3 billion in assets, fast-tracked the implementation of digital account openings for businesses, something they did not have in place previously.

By tapping tools created by fintech companies, small banks can use technology to support their efforts to assist the nation’s small businesses during and beyond these uncertain times.

Evaluating Executives’ 2020 Performance

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Bank boards know that the world has shifted dramatically since January, when they drafted  individual executives’ performance expectations. Using those outdated evaluations now may be a fruitless exercise.

As the impact of the pandemic and the social justice movements continue to unfold across the United States, boards may not feel that they have much more clarity on performance expectations currently than they did back in March. At many banks, credit quality has replaced loan volume as the key operating priority. Unprecedented interest rate cuts have further deteriorated earnings power.

Many boards of directors are revisiting how to evaluate the executive team’s individual performance for fiscal year 2020, considering these new realities for their businesses. Individual performance evaluations are a tool for evaluating leadership behaviors and abilities; as such, it sends a clear indication of what the board values from their leaders. After a year like this, all stakeholders will be interested to know what the board prioritized for their bank’s leadership. 

Considerations for Updated Individual Performance Evaluations
This year has been defined by unprecedented developments that broadly and deeply impact all stakeholders. More than any other industry, banks have been called on to support the country using every tool in their toolkit. Reflecting this broad impact, bank boards may find it useful to establish a revised framework for evaluating leadership performance using six “Critical Cs” for 2020:

  • Continuity of Business: How quickly and effectively was the bank able to transition to a new operating model (including remote work arrangements, staffing essential workers in office or branch, etc.) and minimize business disruption?
  • Customer Satisfaction: How were customers impacted by the change in the operating model? If measured, how did the scores vary from a normal year?
  • Credit Quality: Where are the trends moving and how are executives responding? Did the institution face legacy issues that took some time to address and may be compounding current issues?
  • Capital Management: What balance sheet actions did executives take to strengthen the bank’s position for the future?
  • Coworker Wellbeing: What was the “tone at the top”? How did executives respond to the needs of employees? If measured, how did the bank’s engagement scores vary from other years?
  • Community Support: What did the bank do to lead in our communities? How effective was the bank in delivering government stimulus programs like the Small Business Administration’s Paycheck Protection Program?

For publicly-traded banks, the compensation discussion and analysis section of the proxy statement should provide a thorough description of the rationale and process used for realigning these criteria and the evaluation approach used to assess performance. Operating results are likely to be well below early-year expectations for most banks; as a result, shareholders will be keenly interested in how leadership responded to the current environment and how that informed pay decisions by the board.

This year has created an unprecedented opportunity to test the leadership abilities of the executive team. Using the six “Critical Cs” will help boards assess the performance of their leadership teams in crises, craft a descriptive rationale for compensation decisions for fiscal year 2020, as well as evaluate leadership abilities for the future.

Community Banks Are Buying Back Stock. Should You?

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Banks are making lemonade out of investors’ lemons — in the form of buybacks.

Fears about how the coronavirus will impact financial institutions has depressed bank valuations. A number of community banks have responded by announcing that they’ll buy back stock.

Bank Director reached out to Eric Corrigan, senior managing director at Commerce Street Capital, to talk about why this is happening.

The Community Bank Bidder
Much of the current buyback activity is driven by community banks with small market capitalizations. The median market cap of banks announcing new buybacks now is $64 million, compared to a median of $377 million for 2019, according to an Aug. 27 report from Janney Montgomery Scott.

One reason community banks might be buying back stock now is that their illiquid shares lack a natural bidder — a situation exacerbated by widespread selling pressure, Corrigan says. By stepping in to buy its own stock, a bank can help offset the absence of demand.

“You can help support it or at least mitigate some of the downward pressure, and it doesn’t take a lot of dollars to do that,” he says.

Buybacks Are Accretive to Tangible Book Value
Many bank stocks are still trading below tangible book value. That makes share buybacks immediately accretive in terms of both earnings per share and tangible book value.

“If you can buy your stock below book value, it’s a really attractive financial trade. You are doing the right thing for shareholders, you’re supporting the price of the stock, and financially it’s a good move,” Corrigan says.

Buying Flexibility
Share buyback announcements are a statement of intention, not a promise chiseled in stone. Compared to dividends, buybacks offer executives the flexibility to stop repurchasing stock without raising concerns in the market.

“If you announce a buyback, you can end up two years later with exactly zero shares bought,” Corrigan says. “But you signaled that you’re willing, at a certain price under certain circumstances, to go out there and support the stock.”

Buybacks Follow Balance Sheet Bulk-Up
Many of the nation’s largest banks are under buyback moratoriums intended to preserve capital, following the results of a special stress test run by the Federal Reserve. Banks considering buybacks should first ensure their balance sheets are resilient and loan loss provisions are robust before committing their capital.

“I think a rule around dividends or buybacks that’s tied to some trailing four-quarter performance is not the worst thing in the world,” he says. “The last thing you want to do is buy stock at $40 and have to issue it at $20 because you’re in a pinch and need the equity back.”

Many of the banks announcing repurchase authorizations tend to have higher capital levels than the rest of the industry, Janney found. The median total common equity ratio for banks initiating buybacks in 2020 is about 9.5%, compared to 9.1% for all banks.

Why a Buyback at All?
A stock price that’s below the tangible book value can have wide-ranging implications for a bank, impacting everything from a bank’s ability to participate in mergers and acquisitions to attracting and retaining talent, Corrigan says.

Depressed share prices can make acquisitions more expensive and dilutive, and make potential acquirers less attractive to sellers. A low price can demoralize employees receiving stock compensation who use price as a performance benchmark, and it can make share issuances to fund compensation plans more expensive. It can even result in a bank taking a goodwill impairment charge, which can result in an earnings loss.

Selected Recent Share Repurchase Announcements

Bank Name Location, Size Date, Program Type Allocation Details
Crazy Woman Creek Bancorp Buffalo, Wyoming
$138 million		 Aug. 18, 2020
Authorization		 3,000 outstanding shares,
or ~15% of common stock
PCSB Financial Corp. Yorktown Heights, New York
$1.8 billion		 Aug. 20, 2020
Authorization		 Up to 844,907 shares, or
5% of outstanding common stock
First Interstate BancSystem Billings, Montana
$16.5 billion		 Aug. 21, 2020
Lifted suspended program		 Purchase up to the remaining
~1.45 million shares
Red River Bancshares Alexandria, Louisiana
$2.4 billion		 Aug. 27, 2020
Authorization		 Up to $3 million of outstanding shares
Investar Holding Corp. Baton Rouge, Louisiana
$2.6 billion		 Aug. 27, 2020
Additional allocation		 An additional 300,000 shares,
or ~3% of outstanding stock
Eagle Bancorp Montana Helena, Montana
$9.8 billion		 Aug. 28, 2020
Authorization		 100,000 shares,
~1.47% of outstanding stock
Home Bancorp Lafayette, Louisiana
$2.6 billion		 Aug. 31, 2020
Authorization		 Up to 444,000 shares,
or ~5% of outstanding stock
Mid-Southern Bancorp Salem, Indiana
$217 million		 Aug. 31, 2020
Additional allocation		 Additional 162,000 shares,
~5% of the outstanding stock
Shore Bancshares Eston, Maryland
$1.7 billion		 Sept. 1, 2020
Restatement of program		 Has ~$5.5 million remaining
of original authorization
HarborOne Bancorp Brockton, Massachusetts
$4.5 billion		 Sept. 3, 2020
Authorization		 Up to 2.9 million  shares,
~5% of outstanding shares

Source: Company releases

Banks Tap Capital Markets to Raise Pandemic Capital

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Capital markets are open — for now — and community banks have taken note.

The coronavirus pandemic and recession have created an attractive environment for banks to raise certain types of capital. Executives bracing for a potentially years-long recession are asking themselves how much capital their bank will need to guard against low earnings prospects, higher credit costs and unforeseen strategic opportunities. For a number of banks, their response has been to raise capital.

A number of banks are taking advantage of interested investors and relatively low pricing to pad existing capital levels with new funds. Other banks may want to consider striking the markets with their own offerings while the iron is hot. Most of the raises to-date have been subordinated debt or preferred equity, as executives try to avoid diluting shareholders and tangible book value with common equity raises while they can.

“I think a lot of this capital raising is done because they can: The markets are open, the pricing is attractive and investors are open to the concept, so do it,” says Christopher Marinac, director of research at Janney Montgomery Scott. “Banks are in survival mode right now. Having more capital is preferred over less. Hoarding capital is most likely going to be the norm — even if it’s not stated expressly — that’s de facto what they’re doing.”

Shore Bancshares’ CEO Lloyd “Scott” Beatty, Jr. said the bank is “cautiously optimistic” that credit issues will not be as dire as predicted. But because no one knows how the recession will play out, the bank decided to raise “safety capital” — $25 million in subordinated debt. The raise will grow the bank’s Tier 2 capital and boost overall risk-based capital from 14.1% to about 16%, according to analysts.

“If credit issues do not develop, we will be in a position to use this capital offensively in a number of ways to improve shareholder value,” Beatty said in the Aug. 8 release.

That mindset resonates with Rick Weiss, managing director at PNC’s Financial Institutions Group, who started his career as a regulator at the U.S. Securities and Exchange Commission.

“I’ve never seen capital I haven’t liked,” he says. “I feel safer [when banks have higher] capital — in addition to avoiding any regulatory problems, especially in a bad economy, it gives you more flexibility with M&A, expanding your business, developing new lines, paying dividends, doing buybacks. It allows you to keep the door open.”

Raising capital is especially important for banks with thinner cushions. Republic First Bancorp raised $50 million in convertible preferred equity on Aug. 27 — a move that Frank Schiraldi, managing director at Piper Sandler & Co., called a “positive, and necessary, development.” The bank had capital levels that were “well below peers” and was on a significant growth trajectory prior to the pandemic. This raise boosts tangible common equity and Tier 1 capital by 100 basis points, assuming the conversion.

Banks are also taking advantage of current investor interest to raise capital at attractive interest rates. At least three banks were able to raise $100 million or more in subordinated offers in August at rates under 5%.

Lower pricing can also mean refinancing opportunities for banks carrying higher-cost debt; effortlessly shaving off basis points of interest can translate into crucial cost savings at a time when all institutions are trying to control costs. Atlantic Capital Bancshares stands to recoup an extra $25 million after refinancing existing debt that was about to reset to a more-expensive rate, according to a note from Stephen Scouten, a managing director at Piper Sandler. The bank raised $75 million of sub debt that carried a fixed-to-floating rate of 5.5% on Aug. 20.

Selected Capital Raises in August

Name Location, size Date, Type Amount, Rate
WesBanco Wheeling, West Virginia $16.8 billion Aug. 4, 2020
Preferred equity		 $150 million 6.75%
Crazy Woman Creek  Bancorp Buffalo, Wyoming
$138 million		 Aug. 18, 2020 Subordinated debt $2 million 5% fixed to floating
Republic First Bancorp Philadelphia, Pennsylvania
$4.4 billion		 Aug. 19, 2020 Preferred equity $50 million 7% convertible
Atlantic Capital Bancshares Atlanta, Georgia
$2.9 billion		 Aug. 20, 2020 Subordinated debt $75 million 5.5% fixed to floating
CNB Financial Clearfield, Pennsylvania
$4.5 billion		 Aug. 20, 2020 Preferred equity $60.4 million* 7.125%
Park National Co.       Newark, Ohio
$9.7 billion		 Aug. 20, 2020 Subordinated debt $175 million 4.5% fixed to floating
Southern National Bancorp of Virginia McLean, Virginia
$3.1 billion 		 Aug. 25, 2020** Subordinated debt $60 million 5.4% fixed to floating
Shore Bancshares Easton, Maryland
$1.7 billion		 Aug. 25, 2020 Subordinated debt $25 million 5.375% fixed to floating
Citizens Community Bancorp Eau Claire, Wisconsin $1.6 billion Aug. 27, 2020 Subordinated debt $15 million 6% fixed to floating
FB Financial Nashville, Tennessee $7.3 billion Aug. 31, 2020 Subordinated debt $100 million 4.5% fixed to floating
Renasant Corp. Tupelo, Mississippi
$14.9 billion		 Aug. 31, 2020 Subordinated debt $100 million 4.5% fixed to floating

*Company specified this figure is gross and includes the full allotment exercised by the underwriters.
**Date offering closed
Source: company press releases

When it Comes to Loan Quality, Who Knows?

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Seven months into the Covid-19 pandemic, which has flipped the U.S. economy into a deep recession, it’s still difficult to make an accurate assessment of the banking industry’s loan quality.

When states locked down their economies and imposed shelter-in-place restrictions last spring, the impact on a wide range of companies and businesses was both immediate and profound. Federal bank regulators encouraged banks to offer troubled borrowers temporary loan forbearance deferring payments for 90 days or more.

The water was further muddied by passage of the $2.2 trillion CARES Act, which included the Paycheck Protection Program – aimed at a broad range of small business borrowers – as well as weekly $600 supplemental unemployment payments, which enabled individuals to continuing making their consumer loan repayments. The stimulus made it hard to discriminate between borrowers capable of weathering the storm on their own and those kept afloat by the federal government.

The CARES Act undoubtedly kept the recession from being even worse, but most of its benefits have expired, including the PPP and supplemental unemployment payments. Neither Congress nor President Donald Trump’s administration have been able to agree on another aid package, despite statements by Federal Reserve Chairman Jerome Powell and many economists that the economy will suffer even more damage without additional relief. And with the presidential election just two months away, it may be expecting too much for such a contentious issue to be resolved by then.

“We expect charge-offs to increase rapidly as borrowers leave forbearance and government stimulus programs [end],” says Andrea Usai, associate managing director at Moody’s Investors Service and co-author of the recent report, “High Volume of Payment Deferrals Clouds a True Assessment of Credit Quality.”

Usai reasons that if there’s not a CARES Act II in the offing, banks will become more selective in granting loan forbearance to their business borrowers. Initially, banks were strongly encouraged by their regulators to offer these temporary accommodations to soften the blow to the economy. “And the impression that we have is that the lenders were quite generous in granting some short-term relief because of the very, very acute challenges that households and other borrowers were facing,” Usai says.

But without another fiscal relief package to help keep some of these businesses from failing, banks may start cutting their losses. That doesn’t necessarily mean the end of loan forbearance. “They will continue to do that, but will be a little more careful about which clients they are going to further grant this type of concessions to,” he says.

For analysts like Usai, getting a true fix on a bank’s asset quality is complicated by the differences in disclosure and forbearance activity from one institution to another.  “Disclosure varies widely, further limiting direct comparisons of practices and risk,” the report explains. “Disclosure of consumer forbearance levels was more comprehensive than that of commercial forbearance levels, but some banks reported by number of accounts and others by balance. Also, some lenders reported cumulative levels versus the current level as of the end of the quarter.”

Usai cites Ally Financial, which reported that 21% of its auto loans were in forbearance in the second quarter, compared to 12.7% for PNC Financial Services Group and 10% for Wells Fargo & Co. Usai says that Ally was very proactive in reaching out to its borrowers and offering them forbearance, which could partially explain its higher percentage.

“The difference could reflect a different credit quality of the loan book,” he says. “But also, this approach might have helped them materially increase the percentage of loans in forbearance.” Without being able to compare how aggressively the other banks offered their borrowers loan forbearance, it’s impossible to know whether you’re comparing apples to apples — or apples to oranges.

If loan charge-offs do begin to rise in the third and fourth quarters of this year, it doesn’t necessarily mean that bank profits will decline as a result. The impact to profitability occurs when a bank establishes a loss reserve. When a charge-off occurs, a debit is made against that reserve.

But a change in accounting for loss reserves has further clouded the asset quality picture for banks. Many larger institutions opted to adopt the new current expected credit losses (CECL) methodology at the beginning of the year. Under the previous approach, banks would establish a reserve after a loan had become non-performing and there was a reasonable expectation that a loss would occur. Under CECL, banks must establish a reserve when a loan is first made. This forces them to estimate ahead of time the likelihood of a loss based on a reasonable and supportable future forecast and historical data.

Unfortunately, banks that implemented CECL this year made their estimates just when the U.S. economy was experiencing its sharpest decline since the Great Depression and there was little historical data on loan performance to rely upon. “If their assumptions about the future are much more pessimistic then they were in the previous quarter, you might have additional [loan loss] provisions being taken,” Usai says.

And that could mean that bank profitability will take additional hits in coming quarters.

Banks Have Started Recording Goodwill Impairments, Is More to Come?

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A growing number of banks may need to record goodwill impairment charges once the coronavirus crisis finally shows up in their credit quality.

A handful of banks have already announced impairment charges, doing so in the first and second quarter of this year. Some have written off as much as $1 billion of goodwill, dragging down their earnings and, in some cases, dividends. Volatility in the stock market could make this worse in the second half of the year.

“It was a very hot topic for all of our financial institutions,” says Ashley Ensley, a partner in DHG’s financial services practice. “Everyone was talking about it. Everybody was looking at it. Whether you determined you did … or didn’t have a triggering event, I expect that everyone that had goodwill on their books likely took a hard look at that amount this quarter.”

Goodwill at U.S. banks totaled $342 billion in the first quarter, up from $283 billion a decade ago, according to the Federal Deposit Insurance Corp.

Goodwill is an intangible asset that reconciles the premium paid for acquired assets and liabilities to their fair value. It’s recorded after an acquisition, and can only be written down if the subsequent carrying value of the deal exceeds its book value. Although goodwill is an intangible asset excluded from tangible common equity, the non-cash charge can have tangible consequences for acquisitive banks. It immediately hits the bottom line, reducing income and, potentially, even capital.

Several banks have announced charges this year. PacWest Bancorp, a $27.4 billion bank based in Beverly Hills, California, took a charge of $1.47 billion. Great Western, a $12.9 billion bank based in Sioux Falls, South Dakota, took a charge of $741 million. And Cadence Bancorp., an $18.9 billion bank based in Houston, Texas, recorded an after-tax impairment charge of $413 million.

Boston-based Berkshire Hills Bancorp announced a $554 million charge during its second-quarter earnings that wiped out all its goodwill. The charge, combined with higher loan loss provisions, led to a loss of $10.93 a share. Without the goodwill charge, the bank would’ve reported a loss of only 13 cents a share.

“The primary causes of the goodwill impairment were economic and industry conditions resulting from the COVID-19 pandemic that caused volatility and reductions in the market capitalization of the Company and its peer banks, increased loan provision estimates, increased discount rates and other changes in variables driven by the uncertain macro-environment,” the bank said in its quarterly filing.

Goodwill impairment assessments begin by evaluating qualitative factors for positive and negative evidence — both internally and in the macroeconomic environment — that could cause a bank’s fair value to diverge from its book value.

“It really is not a one-size-fits-all analysis,” says Robert Bondy, a partner in Plante Moran’s financial services group. “Just because a bank — even in the same marketplace — has an impairment, it’s hard to cast that shadow over everybody.”

One reason banks may need to consider impairing their goodwill is that bank stock prices are meaningfully down for the year. The KBW Regional Banking Index, a collection of 50 banks with between $9 billion and $63 billion in assets, is off by 33%. This is especially important given the deceleration in bank deals, which makes it hard to evaluate what premiums banks could fetch in a sale.

“[It’s been] one or two quarters and overall markets have rebounded but bank stocks haven’t,” says Jay Wilson, Jr., vice president at Mercer Capital. “You can certainly presume that the annual impairment test, when it comes up in 2020, is going to be a more robust exercise than it was previously.”

Banks could also write off more goodwill if asset quality declines. That has yet to happen, despite higher loan loss provisions — and in some cases, banks saw credit quality improve in the second quarter.

The calendar could influence this as well. Wilson says the budgeting process and cyclical cadence of accounting means that annual tests often occur near year-end — though, if a triggering event happens before then, a company can conduct an interim test.

That’s why more banks could record impairment charges if bank stocks don’t rally before the end of the year, Wilson says. In this way, goodwill accumulation and impairment mirror the broader economy.

“Whenever the cycle turns, banks are inevitably in the middle of it,” he says. “There’s no way, if you’re a bank to escape the economic or the business cycle.”

How Digital Tools Can Create Consumer Confidence

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The coronavirus’ challenges offer banks an opportunity to reassure shaken consumers and help them reestablish a sense of control.  

Consumers are concerned about protecting the health of themselves and their families and, increasingly, the impact Covid-19 could have on their financial well-being. Unemployment is at its highest level since the Great Depression; approximately 50 million U.S. workers have filed for unemployment since March. One survey found that 38% of individuals report checking their account balances more frequently than before the pandemic — a clear sign of anxiety around finances.

Banks are uniquely situated, as already-trusted partners, to provide the peace of mind and assurances that consumers desperately seek during these anxious times. Consumers will build loyalty toward those institutions that help them feel aware and in control of what’s happening with their money, even in virtual spaces.

A few ways that banks can increase confidence as consumers increasingly rely on digital payments include transaction alerts, increasing contactless payment limits and giving spending insights, including recurring transactions.

Alerts and insights help consumers feel more in control of their financial situation. Consumers have shifted their spend toward debit cards and checking accounts as they seek to limit accidental overspending and avoid debt. Monthly insights can give them a quick view of their spending by merchant type and location. Making it easy to see where card data is stored online, and with which merchants, allows consumer to review their recurring transactions and easily remove cards from accounts and merchants they are no longer using. 

Increased credit limits help consumers feel like they have more options for safe and contactless payments. With rising infections, lockdown and social distancing causing a drop-off in travel, social events and eating out, online commerce and contactless transactions are increasingly replacing cash transactions.

While Covid-19 accelerated the uptick in the use of these digital payment methods, many Americans may continue these new habits post-pandemic. As many consumers remain reticent to venturing out of their homes for errands, visits to branches for service requests have migrated to bank contact centers. To manage this increase in the number of requests to call centers, banks should encourage consumers to handle everyday requests themselves through online and mobile self-service tools. Doing so will allow phone support to prioritize in-depth items that require personal support.

For example, providing precise and detailed transaction information to consumers on their mobile apps will reduce the numbers of queries and false disputes raised with contact center staff through misunderstandings or confusing transaction details. Other digital capabilities that banks can offer range from simple card controls — like turning a card on and off, or resetting a PIN — to more advanced features, such as disputing a transaction or applying for a new account.

Consumers now tend to expect similar easy-to-use experiences across all of their apps. With tech companies like Amazon.com and Google setting the bar high, it is essential that financial institutions also offer robust features and intuitive design. The past six months have brought with them a dramatic acceleration in digital payments, and financial institutions should grasp the opportunities to continue to be the trusted and reliable pillar on which their account holders lean.

Are We Headed for a Depression, or Are We Just Depressed?

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Is the U.S. economy headed for another Great Depression?

A variety of publications and pundits have been speculating since May that we might be standing at the edge of an economic abyss reminiscent of 1929.

Here’s a short sampling of their journalistic angst:

However, not everyone is so clear. As a counterbalance here, I will add that the Harvard Business Review didn’t buy this idea about a depression, which it outlined in “The U.S. is Not Headed Toward a New Great Depression” in its May 2020 issue.

The economic picture in mid-August – while mixed – does not offer a strong argument in support of a depression redux. U.S. gross domestic product declined at an annual rate of 32.9% in the second quarter, but the situation seems to have gradually improved since then.

Unemployment in July stood at 10.2%  — down from the scary heights of 14.7% in April, which was largely the result of a nationwide lockdown.

The Federal Reserve Bank of Atlanta keeps track of economic growth through its GDPNow tracker, which is not an official forecast but instead a real-time estimate based on current data. Through Aug. 7, the model was indicating that U.S. gross domestic product would grow at a seasonally adjusted annual rate of 20.5% in the third quarter.

That brighter outlook reflects the economic rebound that began in June when a number of states began reopening their economies by relaxing social distancing requirements.

But will that modest rebound last? A surge in coronavirus cases in June and July forced hard-hit states, including Texas, Arizona and California, to re-impose restrictions on certain businesses.

There is growing concern that the nascent economic rebound has begun to falter. The $600 weekly unemployment subsidy from the federal government expired on July 31; Republicans and Democrats in Congress have been unable to agree on another comprehensive relief package. Initial jobless claims have gradually declined since peaking in May, but states and municipalities that have been hurt by lower tax revenue may be forced to begin laying off public employees if they don’t receive aid from Washington.

The driving factor behind the economy’s ups and down is, of course, the Covid-19 pandemic. There were over 5 million reported cases in the U.S. through August 14, although the rolling seven-day national average has declined for the last several weeks. Few economists believe the economy will fully recover until an effective vaccine has been widely distributed.

To this non-economist, it seems we could be in for a recession even worse than the Great Recession more than a decade ago (would we call this one the Greater Recession?), but not necessarily another Great Depression. At least not yet.

In May, I interviewed former Federal Reserve Vice Chairman Alan Blinder, who now teaches economics at Princeton University. The problem with trying to predict a depression, according to Blinder, is the lack of an agreed-upon definition.

He thinks a depression would be “something like an economy that is in decline for at least a year and a half, probably two, and then climbs out of the hole relatively slowly. That is a worst case scenario for what’s going on now. I don’t believe that will happen, but the more important codicil to the sentence is, I don’t know what’s going to happen.”

I think one reason for this growing obsession with the idea of an oncoming depression is that the Great Depression left a deep emotional scar on the American psyche that remains fresh 90 years later.

We’ve all seen the grainy black and white photos of desperate people — including Dorothea Lange’s iconic shot of Florence Owens Thompson, known as “Migrant Mother.” But there are so many others: bread lines, soup kitchens and empty stares.

On Oct. 19, 1987 — what would become known as Black Monday — the Dow Jones Industrial Average dropped 22.6% and the Nasdaq market essentially froze. I was writing for a financial magazine in New York at the time and the following day, all the writers and editors met for a regularly scheduled story conference. This was the biggest market collapse since the crash of 1929, which we all recognized was the harbinger of the Great Depression. We sat around the table, slack-jawed and numb.

There was a lot of black humor, but it had an edge. Everyone was a little unsettled.

Five months into the pandemic, I think we’re all depressed — which partly explains our morbid fascination with the idea of another Great Depression. I’m not saying it’s going to happen, but the thought of it is so frightening that we can’t get it out of our heads.

Let me end this on a (hopefully) funny note. When I searched “Are we in a depression?” I found a long list of articles including, at the very end, this one: “The 10 Worst Foods for Depression.”

So here’s my advice. Lay off the potato chips and have an apple instead. And maybe an apple a day will keep another Depression away.