Between the bank accounts of individuals filling with stimulus dollars and relief programs bolstering business balance sheets, loan growth has been lackluster for financial institutions over the past year.
But bank leaders say that could change — and sooner than anticipated.
Banks are already posting record earnings in the first quarter of this year, coinciding with the recessionary environment that was expected to weigh down the economy not fully materializing. At the same time, the loan demand that banks see — which often goes hand-in-hand with a growing economy — appears to be headed for an upswing.
At one of the state’s largest lenders, Bank of America, there are already signs of a rebound, said Alberto Garofalo, the organization’s New Jersey market president.
“We’re seeing record levels of engagements with clients wanting to speak with us (about lending and other opportunities),” he said. “And if you look at the most recent trends, in March, consumer spending is up, and obviously that’s a leading economic indicator.”
This interest and activity are not quite back to what they were before the pandemic, Garofalo admits.
“But, when you factor everything in, we are optimistic that there’s clear indications that the best is hopefully yet to come,” he said.
In the later part of the year, businesses could be forced to seek alternative sources of liquidity — stimulating new demand for banking services — once there’s nothing left to find in the current stockpile of government-supplied funding.
Bank of America tapped its global resources and capabilities to supply more than 22,000 Paycheck Protection Program loans from all its iterations and phases, totaling more than $1.8 billion.
Banks involved in that program, which was established by the CARES Act last year to provide small businesses with potentially entirely forgivable loans, distributed more than 250,000 loans overall, for about $25 billion, in New Jersey.
“It’s still a mind-boggling number,” said John McWeeney Jr., CEO and president of the New Jersey Bankers Association. “But it is starting to wind down. With the latest round of funding, which was supposed to run until June — I’m hearing estimates it may run out by the end of April.”
After an extension in the $1.9 trillion American Rescue Plan, nearly $292 billion has been made available through the ongoing PPP process. But the Small Business Administration warned recently that there was only $66 billion of that trove remaining.
With that funding no longer being available to businesses, and, as the vaccination drive allows more sectors of the economy to reopen, there is potential for renewed interest in conventional bank lending.
McWeeney has heard the hypothesis. He’s not fully convinced.
“I do think some banks will see this new loan demand, but there’s reasons it might not be a big surge, including that a lot of customers are pretty flush with cash and in a good position already,” he said. “Essentially, they don’t really need to borrow at the point they’re at.”
McWeeney knows from his bank association members that deposits are strong — really strong. That’s partly because people and businesses cashed checks for coronavirus relief and have remained relatively conservative about that money.
Joseph Lebel III, president and chief operating officer of OceanFirst Bank, said the cautious behavior brought on by the pandemic’s uncertainty slowed lending down significantly last year.
But, in the first quarter of this year, the bank is hitting all-time records for loan originations.
“There’s a pent-up demand from customers who believe we’re moving in the right direction,” he said. “It’s good to see.”
In the banking sector, things are moving toward — dare he use the word — normalcy. Lebel said one of the easiest ways to see that is the loans under forbearance for pandemic-damaged businesses that have been resolved. About 97% of their clients are back to normal payment plans.
Rebuilding sense of community
After a year of global health crisis-inspired frightful worst-case hypotheticals, bank leader Patrick Ryan is taking 2021 with a healthy dose of optimism.
In fact, the First Bank CEO and president said he’s more hopeful about the prospect of the banking industry today than in the past several years. When the economy does well, banks generally do, too. And, during the recovery period from the unchecked spread of COVID-19, Ryan said, it appears the economy is doing well.
However, he added that there’s still a key question for community banks before it can be said that things are shaping up perfectly for them as well.
“How do we safely get folks back connected?” he said. “A lot of banks have been living off of some relationship capital we’ve built up over many years. Over time, that capital gets depleted.”
Smaller, community banking institutions have always prided themselves on the close-knit relationships they form with local residents and businesses.
“And, if a customer doesn’t feel like they have a strong relationship with us, they’re much more likely, I believe, to go with the big banks,” Ryan said. “That’s why figuring out how to reengage folks and reestablish bonds is so important.”
The odds of that happening in branches might be reduced in a post-pandemic environment. As traffic in bank branches dropped precipitously, many banks have decided to shave the amount of physical locations they’re maintaining — after years of already doing so at a steady pace.
The Hamilton-based First Bank is part of that trend. Earlier this year, the institution consolidated its Mercerville and Hamilton Square branches into other nearby locations.
Ryan said it’s no secret that a bank’s relationship with its clients involve more of a digital touch.
“So, I don’t suspect we’ll go back to doing things how we did before,” he said. “It will take a different balance of investments and outreach than in the past.”
As McWeeney confirmed, most banks have seen the businesses that took loan deferments return to paying their loans as usual. Loan loss reserves have been recalibrated as a result, with banks that set aside rainy-day funds believing they possibly overprepared — contributing to the boosts in bank earnings in the first quarter.
“There’s still some people waiting to find a light at the end of the tunnel, but we see a lot of momentum and positive energy in the market from clients,” Lebel said. “We expect, for those waiting on the sidelines — restaurants, hospitality and travel businesses in particular — the summer might bring renewed consumer demand.”
The uneven economic recovery trajectory that different industries are expected to follow has weighed down prospects for more than a sluggish loan demand rebound this year.
To that end, Lebel said something like the American Rescue Plan’s $28.6 billion Restaurant Revitalization Fund, a grant of up to $10 million available to restaurants and other food businesses that have experienced sales declines, will provide a needed lifeline to those companies.
“I believe a fund like that will be a difference-maker for many,” Lebel said. “And these businesses who would benefit are long-standing clients of ours, who we have good relationships with. We understand that what happened to them isn’t necessarily their fault.”
For the first three weeks after the April 30 introduction of applications for that grant, the SBA is prioritizing businesses owned by women, veterans or socially and economically disadvantaged individuals.
That goes to another point that Garofalo hopes doesn’t get lost in discussions about lending: Not enough of it goes to communities of color and underrepresented entrepreneurs.
Bank of America has recently expanded its own racial justice initiative, devoting $1.25 billion to the cause — with $188 million of investments already distributed to address the gap in access to growth capital for minority-led businesses
“Frankly, we’re leading the way with this and we’re hoping, through this leadership, that others will join,” he said. “Those commitments have never been stronger and more steadfast.”