CHAIRMAN’S C O LU M N
Sleeping Better Jon Harrell
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Chairman
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Arkansas Bankers Association
A
s bankers, I am confident that we are all sleeping better than we were one year ago as the COVID -19 pandemic was launched into our lives. We all started having flashbacks of
a decade ago and the angst of the recession and the impact it had that lasted several years. At this point, this current crisis has been much different in how it impacted us compared to the previous one. The initial phases of the pandemic caused great concern as we harkened back 10 years ago and as banks we all immediately anticipated the worst. The first six months of 2020 saw a dramatic increase in loan loss provisions as we prepared to absorb potential losses brought on by the tremendous fear of the unknown. Provisions lightened up slightly in the last half of the year as we started to get a feel for the impact and the government stimulus programs kicked into gear. Overall, the banking industry’s net income decreased approximately 36% in 2020 compared to 2019. This is primarily due to additional provisions and I am confident that the new CECL guidelines also played its part in this. Asset quality concerns were at the forefront of our minds a year ago and thus far have predominately remained at bay. Industry 2020 year end non-current ratio of 1.18% was a far cry from the FYE 2009 ratio of approximately 5%. Obviously, we continue to work with affected industries such as travel and retail and CRE monitoring will continue as no one knows what the future holds for commercial office space. Industry net interest margins (NIMs) are at an historic low and may be there for a while. The dramatic Fed drop last March plunged us into this low rate environment
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SPRING 2021
“Combine the low rates, the influx of deposits into the banking system and slowing loan demand and we are all sitting on cash. Loan to asset ratios are declining and it is difficult, if not impossible, to find yield in the bond market and fed funds are the new non-accrual.” and the Fed has consistently indicated that no rate hikes are on the horizon. Combine the low rates, the influx of deposits into the banking system and slowing loan demand and we are all sitting on cash. Loan to asset ratios are declining and it is difficult, if not impossible, to find yield in the bond market and fed funds are the new non-accrual. Basically, our balance sheet mix has changed and thus the impact on the NIM. Overall banking industry loans declined in the 4th quarter of 2020. Banks have tightened their underwriting standards and commercial and consumer demand has decreased. How grateful we are for a strong residential real estate market. The influx of stimulus and PPP funds to the economy has allowed businesses and consumers the chance to reduce overall debt and spending is obviously down due to lockdowns and overall anxiety in regard to the pandemic. Industry wide bank deposits dramatically increased during 2020. The aforementioned PPP program (round 2 is upon us) and round one and two of stimulus checks (round 3 is coming) primarily ended up on our balance sheets. Additional proposed
government programs to combat the virus will also more than likely end up there also. The major challenge over the next several quarters will be to estimate out-flow of these deposits and the impact that will have on our liquidity, earnings and capital ratios. Factor all of these changes and challenges with remote working, COVID quarantines, figuring out PPP originations and forgiveness applications, not to mention off-site regulatory examinations and we can reflect on a most unusual year. Hopefully, reflecting back on what we have been through will help us in whatever is coming our way. We have to assume we will operate in an increased regulatory environment, competitors are not just the ones across the street anymore and technology is advancing at a rapid pace. The banking industry will continue to change; fewer banks will remain as regulatory and technology frustrations prevail. Also, succession issues continue to be a challenge for some of our rural markets. Those that remain will continue to serve our state well. We have proven over history that the banking system is resilient and that bankers are resilient also.
