The Coming Buyback Frenzy

Capital planning is examined as part of Bank Director’s Inspired By Acquire or Be Acquired. Click here to access the content on BankDirector.com.

The banking industry hasn’t been this well capitalized in a long time. In fact, you have to go back to the 1940s — almost 80 years ago — before you find a time in history when the tangible common equity ratio was this high, says Tom Michaud, president and CEO of investment bank Keefe, Bruyette & Woods, during a presentation for Bank Director’s Inspired By Acquire or Be Acquired platform.

That ratio for FDIC-insured banks has nearly doubled since 2008, he says, reaching 8.5% as of Sept. 30, 2020, says Michaud.

A big part of the industry’s high levels of capital goes back to the passage of the Dodd-Frank Act in 2010, the Congressional response to the financial crisis of 2008-09. Because of that law, banks must maintain new regulatory capital and liquidity ratios that vary based on their size and complexity.

During the pandemic, banks were in much better shape. You can see the impact by looking at the capital ratios of just a handful of big banks. Citigroup, for example, had a tangible common equity ratio in the third quarter of 2020 that was nearly four times what it was in 2008, Michaud says.

With a deluge of government aid and loans such as the Paycheck Protection Program, the industry’s losses during the pandemic have been minimal so far. The Federal Deposit Insurance Corp. has closed just four banks, far fewer than the deluge of failures that took place during the financial crisis. So far, financial institutions have maintained their profitability. Almost no banks that pay a dividend cut theirs last year.

Meanwhile, regulators required many of the large banks, which face extra scrutiny and stress testing compared to smaller banks, to halt share repurchases and cap dividends last year, further pumping up capital levels.

That means that banks have a lot of capital on their books. Analysts predict a wave of share repurchases in the months ahead as banks return capital to shareholders.

“The banking industry continues to make money,” said Al Laufenberg, a managing director at KBW, during another Bank Director session. “The large, publicly traded companies are coming out with statements saying, ‘We have too much capital.’”

Investors have begun to ask more questions about what banks are doing with their capital. “We see investors getting a little bit more aggressive in terms of questions,” he says. “‘What are you going to do for me?”

Bank of America Corp. already has announced a $2.9 billion share repurchase in the first quarter of 2021. In fact, KBW expects all of the nation’s universal and large regional banks to repurchase shares this year, according to research by analysts Christopher McGratty and Kelly Motta. They estimate the universal banks will buy back 7.3% of shares in 2021, while large regionals will buy back 3.5% of shares on average. On Dec. 18, 2020, the Federal Reserve announced those banks would again be allowed to buy back shares after easing earlier restrictions.

Regulators didn’t place as many restrictions during the pandemic on small- and medium-sized banks, so about one-third of them already bought their own stock in the fourth quarter of 2020, according to McGratty.

In terms of planning, banks that announce share repurchases don’t have to do them all at once, Laufenberg says. They can announce a program and then buy back stock when they determine the pricing is right.

Shareholders can benefit when banks buy back stock because that can reduce outstanding shares, increasing the value of individual shares, as long as banks don’t buy back stock when the stock is overvalued. Although bank stock prices compared to tangible book value and earnings have returned to pre-Covid levels, the KBW Regional Banking Index (KRX) has underperformed broader market indices during the past year, making an argument in favor of more repurchases.

Robert Fleetwood, a partner and co-chair of the financial institutions group at the law firm Barack Ferrazzano Kirschbaum & Nagelberg LLP, who spoke on the Bank Director session with Laufenberg, cautions bank executives to find out if their regulators require pre-approval. Every Federal Reserve region is different. Regulators want banks to have as much capital as possible, but Fleetwood says they understand that banks may be overcapitalized at the moment.

High levels of capital will help banks grow in the future, invest in technology, add loans and consolidate. For the short term, though, investors in bank stocks may be the immediate winners.

How Banks Kept Customers During the Pandemic, Even Commercial Ones

Digital transformation and strategy are examined as part of Bank Director’s Inspired By Acquire or Be Acquired. Click here to access the content on BankDirector.com.

Despite closed branches and masked interactions, the coronavirus pandemic may have actually improved customers’ relationships with their banks. They have digital channels to thank.

That’s a shift from the mentality pervading the industry before the pandemic. Business lines like commercial lending seemed firmly set in the physical world: a relationship-driven process with high-touch customer service. The Paycheck Protection Program from the U.S. Small Business Administration completely uprooted that approach. Banks needed to deliver loans “as fast as possible” to their small commercial customers, says Dan O’Malley, CEO of data and loan origination platform Numerated during Bank Director’s Inspired By Acquire or Be Acquired. More than 100 banks are currently using the platform either for PPP applications or forgiveness.

The need for rapid adoption forced a number of community banks to aggressively dedicate enough resources to stand up online commercial loan applications. Sixty-five percent of respondents to Bank Director’s 2020 Technology Survey said their bank implemented or upgraded technology due to the coronavirus. Of those, 70% say their bank adopted technology to issue PPP loans. This experiment produced an important result: Business customers were all too happy to self-service their loan applications online, especially if it came from their bank of choice.

“Self-service changes in business banking will be driven by customer demand and efficiency,” O’Malley says, later adding: “Customers are willing to do the work themselves if banks provide them the tools.”

Digital capabilities like self-service platforms are one way for banks to meaningfully deepen existing relationships with commercial borrowers. Numerated found that borrowers, rather than bankers, completed 84% of PPP loan applications that were done using the company’s platform, and 94% of forgiveness applications. That is no small feat, given the complexity of the application and required calculations.

Those capabilities can carve out efficiencies by saving on data entry and input, requesting and receiving documentation, the occasional phone call and the elimination of other time-consuming processes. One regional bank that is “well known for being very relationship driven” was able to process 3,000 “self-service” PPP loan applications in a morning, O’Malley says. Standing up these systems helped community banks avoid customer attrition, or better yet, attract new customers, a topic that Bank Director magazine explored last year. Already, banks like St. Louis-based Midwest BankCentre are reaping the gains from digital investments. The $2.3 billion bank launched Rising Bank, an online-only bank, in February 2019, using fintech MANTL to open accounts online.

The impetus and inception for the online brand dates back more than three years, says President and CFO Dale Oberkfell during an Inspired By session. Midwest didn’t have a way to open accounts online, and it wanted to expand its customer base and grow deposits. It also didn’t want to replicate the branch experience of opening an account — Midwest wanted to compress the total time to three minutes or less, he says.

Creating the brand was quite an investment and undertaking. Still, Rising Bank has raised $160 million in deposits — as many deposits as 10 branches could — with only two additional employees.

“We didn’t spend the dollars we anticipated spending because of that efficiency,” Oberkfell says.

Midwest BankCentre is exploring other fintech partnerships to build out Rising Bank’s functionality and product lines. The bank is slated to add online loan portals for mortgages and home equity lines of credit — creating the potential for further growth and efficiencies while strengthening customer relationships. He adds that the bank is looking to improve efficiencies and add more tools and functionality for both customers and employees. And how are they going to fund all those technology investments?

Why, with the fees generated from PPP loans.

Tackling Credit Risk Uncertainty Head On

I’ve spoken to many bankers lately who know, intuitively, that “the other credit-quality shoe” will inevitably drop.

Despite federal stimulus initiatives, including the latest round of Paycheck Protection Program loans from the Small Business Administration, temporary regulatory relief and the advent of coronavirus vaccines and therapies, bankers realize that so-called credit tails always extend longer than the economic shocks that precipitate changing credit cycles. Although the Wall Street rebound has dominated U.S. business news, commercial bank credit lives on Main Street — and Main Street is in a recession.

During the Great Recession, the damaging impact on bank portfolios was largely focused on one sector of the housing industry: one-to-four family mortgages. Unlike that scenario, coronavirus’ most vexing legacy to bankers might be its effect throughout multiple, disparate businesses in loan portfolios. Bankers must now emphasize dealing with borrowers’ survivability than on growing their investment potential. Government actions during the pandemic averted an economic calamity. But they’ve also masked the true nature of credit quality within our portfolios. These moves created unmatched uncertainty among bank stakeholders — anathema to anyone managing credit risk.

Even amid the industry’s talk of renewed merger and acquisition activity this year, seasoned investment bankers bemoan this level of ambiguity. The temptation to use 2020’s defense that “it’s beyond our control” likely won’t cut it in 2021. All stakeholders — particularly regulators — will expect and demand that banks write their own credible narrative quantifying its unique credit risk profile. They expect bankers to be captain of their ships.

Effectively reducing uncertainty — if not eliminating it — will be priority one this year in response to those expectations. The key to accomplishing this goal will lie largely with your bank’s idiosyncratic, non-public loan data. Only you are privy to this internal information; external stakeholders and peers see your bank through the lens of public data such as call reports. In order to address this concern, I advise bankers to take five steps.

Recognize the trap of focusing on the credit metrics of the portfolio in its entirety.
While tempting, an overall credit perspective can miss the divergent economic forces at work within subsets of the portfolio. For every reassurance indicating that your bank’s credit is  performing well on the whole, there’s the caveat of focusing on the forest while the trees may show patches of trouble.

Create portfolio subsets to identify, isolate credit hotspots.
Employ practical and affordable tools that allow your credit team to identify potential credit hotspots with the same analytical representations you’d use in evaluating the total portfolio. For instance, where do bankers see the most problematic migrations within pass-rated risk grades? What danger signs are emerging in particular industries? Concentrated assessments of portfolio subsets are far more informative and predictive compared to the bluntness of the regulatory guidance on commercial real estate lending.

Drill down into suspect or troubled borrowers.
Any tool or analysis that provides aggregated trends, even within portfolio subsets, should produce an inventory of loans that make up those trends. Instantly peeling the onion down to the borrowers of most potential concern connects the quantitative data to qualitative issues that may need urgent attention and management.

Adopt an alternative servicing process for targeted loans.
These are not ordinary times. Redirecting credit servicing strategies to risk hotspots will prove beneficial. Regulators rightfully hold banks accountable for their policies; I recommend nuanced and enhanced servicing, stress testing and loan review protocols. And accordingly, banks should consider appropriate adjustments to their written procedures, as needed.

Write your own script for all of the above — the good and bad.
All outside stakeholders, especially regulators, must perceive banks as the experts on their credit risk profile. The above steps should enable banks, credibly, to write these scripts.

There is a proven correlation between the early detection of credit problems and two desired outcomes: reduced levels of loss and nonperformance, and greater flexibility to manage the problems out of the bank. Time is of the essence when ferreting out stressed credits. The magnitude of today’s credit uncertainties adds to the challenge of realizing this maxim — but they can be overcome.

IntelliCredit will present as part of Bank Director’s Inspired By Acquired or Be Acquired, an online board-level intelligence package for members of the board or C-suite. This live session is titled “How Best To Deal With 2021 Credit Uncertainties” and is February 9 at 2:00pm EDT. Click here to review program description.

E-signatures Move from Nice to New Normal

The coronavirus pandemic has been a pivotal catalyst within the financial services industry, as banks of all sizes adopt and launch digital tools and services at an unprecedented pace. While not a new initiative, e-signatures suddenly became a top priority for banks, as customer sought ways to complete their financial transactions and certify documents remotely. According to BAI’s August Banking Outlook research on digital banking trends during Covid-19, half of consumers use digital products more since the pandemic, and 87% indicate they plan to continue after the pandemic. Banks now realize they must implement a digital transformation strategy in order to navigate these challenging times and new consumer expectations.

However, some financial institutions still view e-signatures as a luxury — a solution that holds benefit and value but is not at the top of their list of digital priorities. To defend their market share and ensure future success, banks must embrace digital transformation and provide customers with a more personalized, engaging experience. The crucial link is e-signatures.

The coronavirus means banking customers need to be able to conduct banking business, open new accounts, obtain new loans or modify or extend existing loans while avoiding traditional in-person contact and interaction with bank staff. It has never been more important to transmute traditional, paper-based processes to the digital realm. Declines in branch visits and ATM transactions, an increased focus on touchless interactions and payments and the rapid operational migration to remote operations moved e-signatures from a nice-to-have, convenient solution to a critical tool every bank must offer to empower their customers to process daily transactions.

Adoption rates for e-signatures were on the rise prior to the pandemic, but have now taken on an even larger and more significant role, enabling banks to move transactions forward in an era of social distancing. E-signatures allow the continuation of normal banking activities in a secure environment while protecting the safety of both the customer as well as the bank employee. It’s apparent that other unexpected conditions could arise in the future that would force the same technological need. They’ve moved from a convenience offering to a banking infrastructure necessity.

Basic banking services like opening an account, arranging a line of credit and applying for a mortgage all require an exchange of documents. In the age of Covid-19, the ability to do that electronically has become mandatory. The most frequent use for of e-signatures has been with new account opening and new loan origination and closing processes. The Small Business Administration’s Paycheck Protection Program also drove a dramatic rise in e-signature requirements. Banks are leveraging e-signatures to enable daily account service and maintenance transactions such as address changes, name changes, stop payment requests, wire transfer requests and credit card disputes. E-signatures provide service convenience to customers as they move through the stages of the lending process or digital account opening.

Financial institutions are experiencing a boom in digital-first relationships with new and existing customers. Customers are requesting new account openings and loan applications online, and perhaps modifying or extending existing loans. It all must be done electronically. Additionally, the day-to-day demand of account service and maintenance transactions have only increased, and require a new solution to those daily operational activities. E-signatures are one way to place electronically fillable forms on an bank’s website or online banking center so allow customers can complete and sign the appropriate documents and submit directly to the bank. Now more than ever, e-signatures and digital transaction management are critical technologies for financial institutions.

Designing an Experience that Empowers Businesses to Succeed

With more businesses choosing fintechs and neo-banks to address their financial needs, banks must innovate quickly and stay up-to-date with the latest business banking trends to get ahead of the competition.

In fact, 62% of businesses say that their business banking accounts offer no more features or benefits than their personal accounts. Fintechs have seized on this opportunity. Banks are struggling to keep up with the more than 140 firms competing to help business customers like yours manage their finances.

Narmi interviewed businesses to identify what their current business banking experience is like, and what additional features they would like to have. To help banks better understand what makes a great business banking experience, we’ve put together Designing a Banking Experience that Empowers Businesses to Succeed, a free online resource free for bank executives.

A banking platform built with business owners in mind will help them focus on what matters most — running a successful company. In turn, banks will be able to grow accounts, drive business deposits and get ahead of fintech competitors encroaching on their market share.

Understanding How Businesses Bank
No business is the same. Each has different financial needs and a way of operating. Narmi chose to talk with a range of business owners via video chat, including an early-stage startup, a dog-walking service, a bakery, a design agency and a CPA firm.

Each business used a variety of banks, including Wells Fargo & Co., JPMorgan Chase & Co., SVB Financial Group, Bank of America Corp. and more.

A few of the questions we asked:

  1. How is your current business banking experience?
  2. Which tools do you most frequently use to help your business run smoothly?
  3. How often do you log in?
  4. What are the permissions like on your business banking platform?
  5. What features do you wish your business banking platform could provide?

We conducted more than 20 hour-long interviews with the goal of better understanding how business owners use their bank: what they liked and disliked about their banking experience, how they would want to assign access to other employees, and explore possible new features.

We learned that businesses tended to choose a financial institution on three factors: familiarity and ease, an understanding of what they do and competitive loan offers. Business owners shared with us how their experience with the Small Business Administration’s Paycheck Protection Program factored into their decision about where they currently bank.

They tended to log into their accounts between once a day and once a week and oscillated between their phone and computers; the more transactions they had, the more frequently they checked their accounts. They appreciated when their institution offered a clean and intuitive user experience.

We also uncovered:

  • How do businesses handle their payments.
  • What do businesses think of their current banking features.
  • How do business owners want to manage permissions.

Want to read more? Download a free copy of Designing a Banking Experience that Empowers Businesses to Succeed.

Revisiting Growth, Strategy in the Face of Banking’s Known Unknowns

It’s time to hunker down.

For the last several quarters, the banking industry has been whipsawed by rapid changes in the economy due to the coronavirus pandemic, as well as the response required to keep the fallout at bay. They worked with borrowers to offer widespread deferments, rolled out the Small Business Administration’s Paycheck Protection Program loans and regraded their loan portfolios. With much of that activity winding down, institutions are getting back to the basics of block-and-tackling banking, and bracing for a prolonged period of muted loan growth and sustained low interest rates.

In this environment, the risks can sometimes seem more numerous than the opportunities. In response, banking experts weighed in on how institutions can craft a resilient and flexible strategy while planning for future growth during the first day of Bank Director’s 2020 BankBEYOND experience. Net interest margin compression, keeping up with customer demand for digital offerings and continued industry consolidation topped the list of long-term viability concerns for the CEOs and board members responding to Bank Director’s 2020 Governance Best Practices Survey; organic growth was not far behind. Notably, that survey was conducted in February and March, before Covid-19 spread through the U.S.

While loans deferrals have declined, Hovde Group Chairman and CEO Steve Hovde says he still expects to see “credit quality issues, reserve issues” emerging in the fourth quarter and into 2021, depending on whether lawmakers allocate more stimulus. He also touches on the forces compressing NIMs and what banks can do to address it.

One way that bank leaders can address these concerns is by revisiting the fundamentals of operational excellence as they craft strategies to grow and maneuver safely in this challenging landscape. People, processes and vision are the building blocks of an effective board, says Jim McAlpin, a partner and global leader of Bryan Cave Leighton Paisner’s banking practice group — but these are also the building blocks of an effective bank. Directors should be vigilant in the role they play of engaging in risk oversight and management, McAlpin says, given that they can have a “significant impact” on the bank’s risk appetite.

On the funding side, banks should reconsider how they will amass and defend their core deposit base efficiently, given the decline in branch traffic and increasing digital channel activity. Community banks need to keep their customers engaged as they continually strengthen their digital experience. They should focus on existing customers, listen to what they want, leverage data to identify and understand clients, and maintain their service cultures by personalizing interactions.

“Shut the back door, rather than worry about what’s coming in the front door,” says Bob Reggiannini, a senior manager at Crowe.

But in positioning themselves for growth, McAlpin adds that banks should ensure they have the right type of people at their institutions and on their boards. Diversity in this environment is a strength, given the perspectives and approaches that can come from individuals representing a variety of demographics, identities and backgrounds. In our recent Governance Best Practices Survey, 52% of respondents agreed that greater diversity, defined by race, gender and ethnicity, improves the performance of a corporate board; only 8% said no. Nearly 40% of respondents said they had several members who fit that definition of diversity, and another 30% said they had one or two but wanted to recruit more.

Four Traits That Will Define Successful Lenders in the Future

Covid-19 and the Paycheck Protection Program have fundamentally changed the banking industry.

In just a few months, lenders were forced to learn how to process a year’s worth of loans in six weeks. Numerated worked with lenders to process nearly a quarter of a million PPP loans on our platform. We had a front-row seat to how the pandemic transformed lending and drove a technological reckoning (which we shared with Bank Director).

We’ve identified a number of strategies, perspectives and traits that contributed to lenders’ success during the crisis. Working with banks to shift their focus to a post-PPP world, we’re seeing how incorporating these key learnings from the program will separate the winners from the losers going forward.

As banks and credit unions pivot to the new normal, the most successful lenders will be those who accomplish these four things:

Successful lenders will lean in on digital. It goes without saying that in the middle of a pandemic, every bank needed to figure out how to serve customers with closed branches. Digital capabilities were put to the test — everyone quickly figured out where their digital footprint fell short. A lot of sensitive documents were emailed, workflow was lost and most processes wouldn’t have passed audits in normal times. Digitally-mature lenders and those who successfully adopted technology for PPP had efficient, secure processes that didn’t burn out their customers or employees. Technology will be key to keeping customers satisfied and employees happy during inevitable future crises or unexpected shifts in the industry.

Successful lenders will prioritize speed to market. When Congress first announced the PPP, lenders had to make a quick decision: lean in and figure out how to help their businesses or sit it out. One of the biggest differences in PPP performance we’ve identified was how quickly lenders got into the market.

Two client banks in California both did the same number of PPP loans — despite one being 10 times larger than the other. The smaller bank identified their needs, adopted our platform and rapidly rolled it out to their borrowers faster than their larger counterpart. This gave the smaller bank a foot up in the market. Some banks think committees and consensus mean they can’t move quickly. In 2021, successful banks will understand speed matters, crisis or not.

Successful lenders will achieve efficiency ratios not previously thought possible. The workflow on Small Business Administration loans is complicated; despite the SBA’s best efforts, this was true for PPP as well. The best lenders leveraged technology to get PPP loans done the same day as applications. They pre-filled applications, automated decisions, automatically generated and digitally executed loan documents, and used APIs to board to the SBA. Loans that would have taken a banker five to six hours were done in less than an hour.

At the height of PPP, we saw lenders processing nearly two loans a second — the equivalent of $250 million of PPP loans per hour. Banks will need to find radical efficiencies like these to grow earnings in a challenging 2021 budget season. The most successful lenders are already using PPP learnings to reengineer their normal loan operations.

Using data is key. In 2021 and beyond, it will no longer be enough for lenders to digitize their processes. Going beyond these commonplace efficiency gains will require using reliable, actionable data that can automate and eliminate work. Unfortunately, as anyone who’s worked with financial technology knows, bank data is a mess.

During PPP, we worked with the SBA to create a connection to their systems that let us detect errors in our banks’ data. There were many, many errors; enabling our banks to fix these data issues saved countless hours of rework. Successful lenders are finding ways to clean their data so that software can automate more of their normal lending processes. These conversations are integral to their 2021 plans.

As the pandemic still grips the nation and without further government assistance in the immediate future, banks find themselves in uncharted waters as they set their budgets for the new year.

One of Numerated’s investors is Patriot Financial Partners’ Kirk Wycoff — one of the most successful community bank investors in the United States. In a recent Numerated webinar, he shared his perspective that this year’s budget conversations will be more focused on technology than ever before. “We need to get that message across to senior leadership teams that for investment in technology, there needs to be a realization that the building’s on fire.”

The ability to put out that fire effectively will determine much of lenders’ success in 2021 and beyond.

What Employers Need to Know about Coronavirus, Paid Leave

From lobby closures to Paycheck Protection Program loans, the COVID-19 pandemic has thrown a lot at banks and other financial services providers during this pandemic. One more item to add to the list is the Families First Coronavirus Response Act (FFCRA).

The FFCRA is not one law but a suite of laws targeted at lessening the effects of the pandemic, including two laws that establish paid leave requirements on covered employers: the Emergency Family and Medical Leave Expansion Act (EFMLEA) and the Emergency Paid Sick Leave Act (EPSLA). As is the case with many employment laws and rules, a bank that fails to comply with the FFCRA paid leave requirements does so at its peril.

Who are covered employers?
The paid leave requirements generally apply to all private employers with fewer than 500 employees. There are limited exceptions to the Emergency Family and Medical Leave Expansion Act leave requirements for employers with fewer than 50 employees relating to leave for school and child care closures. A bank looking to take advantage of the EFMLEA exceptions should closely study the circumstances and the exception criteria. Further, while the federal rules apply only to small (under 500 employee) employers, some states’ paid leave laws cover large employers as well.

Who are eligible employees?
Employee eligibility is one area where Emergency Family and Medical Leave Expansion Act and Emergency Paid Sick Leave Act diverge. Paid leave under the EFMLEA is available to employees who have been employed for a minimum of 30 calendar days. For EPSLA related leave, all employees qualify, regardless of their length of employment. EFMLEA and EPSLA each apply to part-time as well as full-time employees and neither require an employer to provide paid leave to furloughed employees.

When can employees utilize paid leave benefits?
This is another area where the two statutes diverge. The EPSLA provides for paid leave if the employee is unable to work (or telework) because the employee:

  1. Is subject to a federal, state or local quarantine or isolation order.
  2. Has been advised by a health care provider to self-quarantine.
  3. Is experiencing symptoms of COVID-19 and is seeking a diagnosis.
  4. Is caring for an individual covered by (1) or (2) above.
  5. Is caring for a son or daughter whose school or place of care is closed or whose child care provider is unavailable due to COVID-19 precautions.
  6. Is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

The Emergency Family and Medical Leave Expansion Act, as its name implies, is an expansion of the Family and Medical Leave Act and is triggered by the need for the employee to care for someone else, in this case the employee’s child. Specifically, EFMLEA provides for paid leave to employees who must care for a minor child because of a coronavirus-related school closure or childcare provider loss. EFMLEA benefits only are available if the employee is unable to work from home or telework. We should note, however, that employees who become ill with COVID-19 or are caring for family members who have COVID-19 may still be covered by the FMLA original unpaid “serious health condition” provision.

What are the paid leave benefits?
Under the Emergency Paid Sick Leave Act, full-time employees are entitled to 80 hours (i.e., 10 days) of emergency paid sick leave at either full-rate (reasons 1, 2 and 3 above) or two-thirds rate (reasons 4, 5 and 6 above). The benefit is capped at $511 per day when the employee is absent for reasons 1, 2 or 3, and $200 per day for reasons 4, 5 and 6. Part-time employees are entitled to receive a proportionately similar amount of leave based on their average hours worked in a two-week period.
For 10 weeks an eligible employee is entitled to receive up to two-thirds of their regular rate of pay, capped $200 per day under the EFMLEA. We should note here, that an employee can take advantage of the EPSLA benefit of up to $200 per day for the first 10 days of leave to care for a child due to school or childcare closing, bringing the maximum paid leave benefit to $12,000 for child care reasons.

How does a bank pay for this new requirement?
To soften the blow on banks and other employers of the mandatory paid leave under the FFCRA, the law provides for a dollar-for-dollar refundable tax credit for amounts paid by eligible employers. The refundable tax credit applies to all EPSLA and EFMLEA wages paid during the period from April 1 to Dec. 31, 2020. Compliance with the eligibility and record-keeping requirements of the law will be critical to the bank qualifying for the tax credit.

Coronavirus Makes Community Count in Banking

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.

When it Comes to Loan Quality, Who Knows?

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.