Community banks and credit unions are adapting quickly amid a resurgence in coronavirus cases. They’re toughening credit underwriting and focusing growth plans on markets or industries that are holding up better against the fast-spreading delta variant – and are even considering further belt-tightening.
Bankers are beginning to think the virus could affect credit decisions for years to come – a shift from earlier in 2021, when vaccines galvanized hopes for a swift end to the pandemic.
“The biggest impact we expect from delta – or other variants yet to come – is that it sends a big message that the pandemic is not over and that we’re likely to be living with some form of this for a long time,” said Chris Nichols, a strategist and head of capital markets at the $ 40 billion-asset South State Bank. “For a bank, that means a changed mindset about credit. “
Nichols said South State, in Winter Haven, Florida, is adding levels of scrutiny to its underwriting and trying to assess industries and regions most likely to be hit by virus outbreaks – as well as those least likely. Markets with higher levels of vaccination rates, for example, could hold more appeal while businesses dependent on foot traffic may pose greater risk.
“But it is more complicated than that,” he said. Theaters, gyms and retail centers are all more vulnerable in the pandemic era because they rely on in-person business. But some companies in these sectors may find ways to adapt or diversity – or they may operate in markets with high inoculation rates.
“The big takeaway is that we are paying a lot more attention at an industry level,” Nichols said. “And we are mindful that geographic impacts are likely to vary.”
In the first half of August, the seven-day average of US coronavirus cases doubled, and hospitalizations increased nearly 60% from the start of the month, according to Johns Hopkins University analyzes.
Even before that, cases had begun to climb, and consumers had turned more cautious.
The US Commerce Department said July retail sales – in-store and online – fell 1.1% from June. A University of Michigan survey of consumer sentiment, meanwhile, dropped 13.5% in the first half of August from July – a decline that spanned all income levels and knocked consumers’ collective mood to its lowest level since February.
Business owners are also concerned.
Small-business confidence dipped last month, as rising cases and festering supply chain bottlenecks darkened sentiment. The National Federation of Independent Business Optimism Index fell 2.8 points to a reading of 99.7 in July. A majority of business owners surveyed anticipated sales declines over the next three months.
“Small-business owners are losing confidence in the strength of the economy and expect a slowdown in job creation,” NFIB Chief Economist Bill Dunkelberg said in a report.
Shan Hanes, president and CEO of the $ 133 million-asset Heartland Tri-State Bank in Elkhart, Kansas, said local business owners are worried largely because of the delta variant’s spread at a time when 48% of eligible Americans are not yet fully inoculated.
“It’s got most people at least a little concerned,” he said. “The area hospitals are filling up again with COVID patients. If you break an arm, you might have to wait a couple days to get in. “
Hanes does not expect widespread lockdowns in Kansas or most other states. But he said virus outbreaks could quickly necessitate new mask mandates and social distancing measures that would likely slow commercial activity and inject a big dose of uncertainty into the economic outlook.
That real possibility makes it difficult to gauge loan demand and increases the likelihood that interest rates could remain low well into next year or longer – a development that would further constrain lenders’ margins after years of low rates.
All of that means banks will have to vet more thoroughly borrowers’ ability to repay and whether interest rates are high enough to justify the risk a bank takes with any loan, Hanes said.
“I don’t have a vision yet, really, of what things are going to look like next year,” he said. “That’s bothersome to me. You never have a crystal ball, but normally you have a pretty good feel about how things are going to go in the months ahead. So you have to be cautious. “
For now, he said, the bank plans to offer employees incentives to get vaccinated – likely a bonus – to ensure it’s fully staffed and to serve as an example for the community. Less than 60% of the bank’s staff was vaccinated by mid-August.
“It’s not political for me,” Hanes said. “I just want us all to get past this.”
Matt Selke, CEO of the $ 89 million-asset Pinnacle Credit Union in Atlanta, does not expect a recession provided the current surge is relatively brief. But he said it is hard to predict whether the pandemic’s damaging effects will fade before government stimulus – including direct government payments to households and an eviction moratorium for renters and homeowners – ends.
“There’s still no evictions or foreclosures allowed, so what is everyone’s real delinquency?” Selke said. How long can stimulus money last? “CEOs are asking these exact questions with no definite answers.”
Pinnacle and other credit unions are generally confident in their abilities to navigate the pandemic, but they are increasingly mindful they may need to adjust to work through variant-induced virus outbreaks.
John Buckley Jr., president and CEO of the $ 216 million-asset Gerber Federal Credit Union in Fremont, Michigan, does not have a specific plan in case of further lockdowns. But he said executives are carefully monitoring market demand and borrower vulnerability and will pivot if needed.
“Rightsizing staffing levels and additional expense control are always available in case of” a downturn, Buckley said.
Geoff Bacino, a consultant and former National Credit Union Administration board member, said lenders should all be carefully studying potential impacts on borrowers and their ability to repay.
It is “a different world than it was two years ago,” he said. The economic recovery from the pandemic may ultimately prove much different than past cycles. “Yes, history is something that we must learn from, but it can’t be the only factor that we use. “