Being ‘better’ … once again

Dwight Larsen

Pandemic, civil riots, contentious (and contested) elections — and this wasn’t a dystopian movie script. This describes the year 2020. And because of this, the phrase “Hindsight is 2020” has been permanently removed from usage by many people; we don’t want to see this with clarity again. 

There are a lot of adjectives that describe the year 2020, some of them even repeatable and printable. 

Yet despite all that occurred during the past year, community bankers once again rose to the occasion to help meet the needs of individuals and businesses in their respective trade areas. I’ve heard so many great stories of these acts during the past nine months; community banks have once again shown up the big banks in service provided. It’s really not a surprise, as we’ve seen this from community bankers many times over past decades for a variety of reasons; and I know I’ll see it happen again. Given all that we witnessed in 2020, what are the near-term challenges facing community banks?  

Let’s start with liquidity. The Federal Reserve and the U.S. Treasury Department learned from the mistakes they made during the Great Depression and Great Recession and sent a tsunami of cash via various targeted programs into the economy starting in the second quarter of 2020. This certainly cushioned the blow from the economic shock of the pandemic to many industries. The Paycheck Protection Program loan forgiveness process, crop sales, and expected future stimulus programs will continue to add liquidity to the entire industry. 

At this time, however, there aren’t a lot of attractive places to put all this cash. Extremely low interest rates have made many people cautious about investing excess liquidity in anything but overnight until some clarity occurs. 

The Federal Reserve has stated it has no plans to raise interest rates for at least another two years, meaning low rates are here to stay for the foreseeable future. The financial impact of all this is falling net interest margins and Tier 1 Capital ratios. And because many banks were fortunate to exceed their 2020 budgeted income figures well before year-end, there has not been a rush to do something with all these funds. This will not be the case in 2021. 

 In his book “The Infinite Game,” author Simon Sinek describes business as a game without the defined rules, boundaries and time frames found in sporting events. How do you “win” at business given this?  Sinek notes that one strategy is to strive for “better,” and as that relates to handling excess liquidity, we all are going to need to become better cash managers. Many banks won’t have the income benefit of PPP origination fees in 2021 (unless there is an additional round), so with no good loan opportunities, we’re going to need to put this cash to work and build out our investment portfolios again. 

I’m not promoting rapid, unbridled investing, but rather disciplined, thoughtful purchases to add bottom-line dollars despite the fall in net interest margins. It’s best to hit singles and doubles that provide incremental income and not swing for the fences. Taking what the current market offers in rates, building a ladder (or maybe a stepladder) of maturities over the next several years, as simple as that seems, will push more dollars to our respective bottom lines until loan demand once again appears. 

Another issue lurking on the horizon is asset quality. Today that may be fine, but given the financial pain certain sectors are experiencing due to shutdowns, job losses, and reduced travel, loan quality problems will likely arise in 2021 and beyond. Trying to gauge the depth of the problems in the hospitality, certain retail, and other sectors is difficult at this time, but it could be quite painful. Monthly and quarterly analyses of the adequacy of the allowance for loan and lease losses remains challenging. I believe community banking could use some help here. 

For the record, I’m a fiscal conservative. As the late, great Milton Friedman used to say, nothing is so permanent as a temporary government program. But given the current circumstances, being “better” here might mean we need something else. A “better” way to deal with this could include a government program in which the Small Business Administration provides guarantees (say 80 percent?) on existing loans to borrowers impacted in these sectors. This would provide community banks and the affected borrowers the time they need to work through restructured payment and workout plans. This type of program was successfully used in the 1980s by the Farmers Home Administration in the agriculture sector, and a similar SBA program could be very helpful during these unprecedented times. 

There will be more uncertainty and challenges for the community banking industry over the next few years, this time arising from a situation we have no historical precedent to rely on for clarity. We don’t know how long shutdowns will last, how long people will be uncomfortable with travel, or how fast a majority of the population will get the COVID-19 vaccine. We do know that liquidity and asset quality will change, and as community bankers, we will once again strive to be “better” to deal with these changes before and as they occur. Because that’s just what community bankers do. 

 I recently saw a T-shirt that read “Underestimate Me, That’ll Be Fun.”  Seems like an appropriate motto for community bankers, wouldn’t you agree?


Dwight Larsen is president and CEO of United Bankers’ Bank, Bloomington, Minn.