When the Corona virus closed businesses in Baltimore and its suburbs in the spring, Kevin Benson feared the worst for a small lender: widespread defaults, anemic credit growth.
Instead, federal savings and Rosedale loans exceeded $1 billion in May, years earlier, thanks to a government-backed credit boom. The vast majority of borrowers – consumers and businesses – are in a good position.
We’re all very surprised by our resilience, said Benson, the president of Federal Rosedale. It is not the time for a victory lap, but we are cautiously optimistic.
As we approach the year 2020, small lenders such as Rosedale are doing much more than expected at the start of the coronavirus recession, mainly thanks to public money flowing through the banks to households and businesses. The stimulus and unemployment tests stimulated deposits and prevented borrowers from defaulting on their loans. The Wage Earner Protection Program, a government program to support small businesses, brought them new customers and kept old customers afloat.
According to the Federal Deposit Insurance Corp, profits of municipal banks – small local creditors – increased in the third quarter. This represents an increase of 10% in the third quarter compared to the same period last year. In the third quarter, total loans increased by 13.4% compared to 4.9% for the sector. Deposits increased by 16.7%. Interest rates on long-term loans have risen slightly this year, but are still well below the level of the last financial crisis.
Small creditors have struggled for a long time with the competition of their big rivals. They lack commercial departments and business opportunities that support mega-banks when low interest rates limit the profitability of loans. And consumers depend on smartphone applications and digital services that many small banks cannot afford. The cost of the technology and reduced credit lines has prompted many small banks to consolidate.
When the pandemic hit and closed entire industries, many feared that small banks, tied to their small commercial borrowers, would also suffer.
However, they have benefited from these links with local companies. Small banks provided about 28% of loans through public-private partnerships, although according to the FDIC they held about 12% of industrial assets at the end of last year. These economic pioneers helped to quickly provide hundreds of billions of dollars in forgivable loans, FDIC President Jelena McWilliams said in a web conference earlier this month.
The PPP brought new customers and their deposits to many small creditors who were struggling to attract both for the pandemic. The lenders also receive a commission of 1 to 5% for each loan.
This income contributes to offsetting the tight margins in its core lending activities. The net interest margin, the difference between what the bank earns on its loans and what it pays to its depositors, fell to record lows for commercial banks in the third quarter.
PPPs have been a huge shock in terms of balance sheet growth, revenues and liquidity, said Sandy Brown, a lawyer at Alston & Bird LLP, which advises public banks.
According to Benson, Rosedale has provided more than 500 public-private partnership loans worth more than $50 million to Rosedale, all of which have gone to new small businesses. It expects Rosedale to generate about $1.7 million in P3 price income, more than double its non-interest income of $730,000 by 2019.
Before the pandemic, the lender focused exclusively on mortgages and commercial real estate loans, but with its PPP clients it saw an opportunity to switch to small-scale corporate lending. The P3 is something that certainly catapulted us forward, he said.
The delivery of PPP funds to customers of small commercial banks has helped to reduce losses. Moreover, the distressing predictions that the pandemic would destroy a large number of companies have not come true. In many banks, problem loans are still concentrated in a handful of severely affected sectors: Hotels and restaurants and tourism, brick and port retail trade, energy.
Customer uses Federal Savings and Credit Rosedale in Maryland.
The assets of the Cache Valley Bank in Logan, Utah, amounted to about $2.8 billion at the end of September, almost double last year. Net lending and leasing increased by more than 91%. Deposits increased by more than 40%.
This is partly due to the more than 9,000 public-private partnership (PPP) loans managed by the Bank. But an important part of it is organic, said George Danes, the bank’s CEO. Some companies in the region flourished during the pandemic, he said.
From a financial point of view, it was probably the best year, according to the Danes.
However, the increase in coronavirus cases across the country and the phasing out of federal support are creating new risks for small banks and the communities they serve.
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The number of U.S. job seekers has recently reached its highest level since September and millions of people will lose their benefits by the end of the year. Many companies have a long history of lending to public-private partnerships (PPPs), and the programme was closed to new applicants in August. Legislators are still negotiating a new round of incentive payments.
So far, however, the bankers say they can survive the recession. This is partly due to the historically high level of capital, which could cause them to incur more losses than they would have done during the last recession.
In March, Paul Kohler and his team at Charter Bank in Eau Claire, Wis. looked back on events after the 2008 crisis, when long-term loans reached 2.72%, to understand how much money has to be set aside for credit losses.
It was scary because we didn’t know how it would affect our customers, says Kohler, the bank’s CEO. It was like, oh, my God, this could be bad. ”
He now thinks the charter has more than enough money to cover potential credit losses. Long-term loans are at the level of 0.33%, which is the lowest indicator in the history of the bank, which had more than USD 1 billion in assets this year.
This is absolutely insane, Mr. Kohler said.
Many small lenders, such as Rosedale Federal Savings and Loan in Maryland, are doing better than expected this year.
Write to Orla McCaffrey at [email protected].
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