Bankers, like many other businesspeople, value certainty. When interest rates, loan demand, and the overall economy are relatively predictable, they have a good idea what’s ahead and can plan accordingly. Of course when a year like 2020 comes along, when a global health crisis that sparked multiple economic and societal disruptions, you can kiss certainty goodbye.
But as they’ve proved before, New Jersey bankers are resilient and even before 2020 closed out they were panning ahead for the next year. NJBIZ asked a cross-section of bankers to share their thoughts about what’s coming up — if there’s one common theme it’s this: change is ahead but we’re ready for it.
For some time now, consumers have embraced mobile and other online banking, and the onset of the COVID-19 pandemic accelerated that trend, noted NJBankers President and CEO John McWeeney. “According to a recent [American Bankers Association] survey, only about 10% of respondents prefer branch banking,” he said. “The younger age brackets tend to adopt it more, but the trend does include the baby boomers and older generations, too.”
Not surprisingly, there’s also been a decline in the number of brick-and-mortar branches in the state. “As of June 30, 2020, there were 2,713 branches in the state,” he noted. “That’s down 625 since 2010, and 99 fewer than we had on June 30, 2019. A big reason is that banks are consolidating in order to achieve economies of scale — they can spread regulatory costs over a wider base, and also realize more opportunities to invest in technology and human talent. This trend also won’t slow down, and bankers are prepared for it.”
OPPORTUNITY OR PIPE DREAM?
Another disruptor — and potential opportunity for the banking industry — is marijuana. Recent state-level moves to loosen cannabis restrictions could open up a whole new business segment for the banking industry. “But at the federal level, cannabis is still a felony,” McWeeney said. “So, until Congress enacts legislation, cannabis-related businesses can’t easily interact with the banking system. Perhaps the new presidential administration will change that situation.”
Even as bankers grapple with multiple changes, one staple of the banking sector — loan activity — has remained strong in New Jersey. “The state’s residential real estate market has been very active during the pandemic as more people leave big cities for the suburbs,” McWeeney said. “Low interest rates are also helping to drive the demand — and the Federal Reserve has communicated that low interest rates are likely to be around for the foreseeable future, at least until the economy fully recovers from the pandemic. That’s good for borrowers.”
Commercial and industrial loan activity is also up, “although to some degree that’s been inflated by [Paycheck Protection Program] loans,” he added. “At the end of July, more than 150,000 PPP loans had been closed in New Jersey, totaling more than $17 billion or a little over $100,000 per loan. New Jersey banks are continuing to service customers despite many changes.”
With so many people working remotely — and some projections that this dynamic will continue even after COVID-19 is brought under
control — “there’s a chance that companies will require less space, which could lead to a reduction in the demand for commercial real estate and related loans,” said Walter Sierotko, Provident Bank’s executive vice president and chief commercial lending officer. “But that may be counterbalanced as more people move to New Jersey and suburban Philadelphia, and businesses follow with full- or satellite-office space.
Either way, industrial and warehouse demand will likely remain strong as more people shop online. Multifamily construction loan demand continues to stay strong, along with residential loans, thanks to the influx of people who are leaving New York City and other urban areas.”
As multiple COVID-19 vaccines get distributed, he thinks the economy is likely to stage a slow recovery, and “there may be an increase in business borrowing, but I don’t see a surge. Some companies may close for good, although the survivors will continue to have borrowing needs as they keep up with demand.”
For a while, at least, businesses will probably continue to benefit from low interest rates, Sierotko added. “The question is, how long will they stay down? To protect our position, we’re keeping a number of floating rate loans on the books in case they do go up, and a certain number of fixed-rate loans on the books in case they fall again. I never thought they’d drop this low, so who can be sure about what will happen?”
Overall, loan demand has remained “robust,” according to Tom Comiskey, senior vice president and regional president of M&T Bank’s New Jersey region. “Credit demand has remained healthy despite the pandemic,” he said.
Will it surge after a vaccine is widely distributed and the economy improves? “I’m hoping companies will be more optimistic in the second half 2021, and they may prepare accordingly.”
He’s on firmer ground when it comes to the pace of banking consolidation. “Across the industry, trends like high regulatory costs, some credit quality issues and the low interest rate environment [which can put the squeeze on banks’ earnings, since it effectively reduces the difference between their wholesale cost of funds and what they can lend them out for] will likely continue to spur consolidation into 2021,” he observed.
The industry’s embrace of technology will also continue, according to Comiskey. But that doesn’t mean that brick-and-mortar locations will disappear. “The pandemic may have accelerated the adoption of technology [and remote activity] by banks and their customers,” he said. “But we still need a branch presence to support the communities we serve. It’s one piece of how we service and interact with customers.”
New Jersey banks are adept at adapting to changed circumstances, noted Valley Bank Chief Banking Officer Tom Iadanza. “When the pandemic restricted in-person activity, our previous investments in technology enabled us to handle the surge of online and mobile activity in a seamless manner,” he said. “As a lending institution serving the middle market [companies with revenues from $10 million to $150 million], with a significant volume of real estate activity, we value face-to-face meetings, but we’re committed to working with customers in ways that are convenient and safe for them.”
Some COVID-spurred changes will probably remain even when the pandemic is in the rearview mirror, he added. “We’re seeing that certain back-office operations are able to function very efficiently on a remote-work basis, so we may maintain that model, at least in some cases” Iadanza said. “Additionally, the social distancing requirements meant that even more people have been exposed to mobile and online banking, and it’s likely that many will continue to utilize remote banking even after the pandemic is behind us.”
As the action shifted to remote, Valley, like many other financial institutions, had to make some adjustments to connect with new customers and maintain relations with existing ones. “We created a new position to contact clients every two weeks, by Zoom, phone or, if it’s safe, in a face-to-face meeting,” Iadanza noted. “New business is more of a challenge, but we’re still getting referrals, and we’re doing a limited number of in-person meetings. It’s definitely a different environment, though. It used to be that if someone walked into a bank wearing a mask, then [security] buttons would be pressed. Now, if someone walks in and they’re not wearing a mask, someone will press a button.”