A year ago when the pandemic first hit, Tom Kelley, chairman and CEO of Five Points Bank, the fifth largest Nebraska-based bank with $1.5 billion in assets, and his colleagues were nervous that the world was going to end.
Today, the impact of the pandemic on banks-- and Nebraskans--is a much rosier picture than Kelley could have dreamed, he told a virtual audience on Wednesday, February 24, during a presentation hosted by the Nebraska chapter of DBIA-MAR. Mitch Klein, P.E., chapter president and project manager at JEO Consulting Group, Inc., moderated.
Because of all the stimulus money going into the economy, banks are holding larger levels of cash than pre-pandemic, thereby lowering capital thresholds.
“And the real world impact of that is that banks are not fighting over deposits like we used to,” said Kelley.
However, Kelley said this may not be good news for savers since banks will be paying little or no interest on deposits.
Banks are facing compressed margins, generally making it tough for banks to make money, Kelley said. But, even though margins are declining, those banks that make mortgage loans or participate in the Paycheck Protection Program (PPP) are earning significant fee income.
“Even though we’ve got declining margins, the increase in fee income was beneficial and so that’s obviously a pretty darn good deal for banks in the short term, but over time, the declining margins are going to make it really tough,” Kelley said.
Kelley said it’s a very advantageous time to borrow money and will continue to be as banks hold onto excess cash.
When the pandemic started and before the Federal government responded to the economic crisis, banks dramatically increased their loan loss provisions out of an abundance of caution. And, although the banks saw problem loans through 2020, the loan losses have not been as dramatic as anticipated, Kelley said.
Kelley said banks are now in the process of administering the second round of PPP loans. This second round expanded the universe of eligible borrowers, making it easier for farmers and ranchers to get loans.
“Agriculture was really struggling before the pandemic. During the pandemic, it was incredibly dire in all components of agriculture. There has been an amazing amount of stimulus that has gone to farmers and ranchers and commodities rallied. So, the farm economy has actually gotten quite strong, and I think that benefits the whole state,” said Kelley.
Kelley said that Nebraskans are faring better than most other parts of the nation in terms of unemployment and labor force participation. As of November 2020, Nebraska’s unemployment rate was 3%.
The pandemic economy has been good to Nebraska’s homeowners and its home construction industry. More building permits were pulled in 2020 than in 2019.
“When everyone was shuttered up in their house, they realized all the things they hated about their house, and so they went and bought new ones. So it was just amazing to see the amount of people moving in the midst of a pandemic. And then obviously the low interest rates really helped that,” said Kelley.
Kelley said that although his bank’s branches were closed only for about two months at the start of the pandemic, customers are not coming into the bank as frequently as they used to, and the bank has seen tangibly less in bank transactions.
Kelley said banks have seen a significantly higher incidence of electronic fraud attempts during the pandemic.
“Bad guys recognize that everybody is operating virtually and they know that people have technical difficulties, so they’re trying to take advantage of it,” he said.
Kelley said that Nebraska has seen a spike in bank robberies in the last five to six years, so banks have had to make operational adjustments just to let customers wearing masks into the bank. Those who design future bank facilities will need to address potential robbery issues, including wearing of masks during pandemics.
Kelley said Nebraska currently has an overabundance of banks. With banks seeing declining margins, Kelley anticipates an acceleration of bank consolidations. He said the smaller banks in rural areas likely will have the toughest time surviving.