What’s ahead for community banking?

Business owners and executives should have learned a number of lessons from the turmoil of the last several years. Don’t ignore technological advances. Be prepared to deal with challenges that might have seemed unimaginable in the past. And continually try to foster good relationships with the institutions that you rely on most.

For many in the business community, the latter lesson means getting to know a community banker and keeping that person – or several people – close at hand.

“[F]or years, I felt community bankers were pounding the table saying, ‘Hey, we’re not necessarily like the big guys, we do things differently and we’re there for the business community.’ And I felt like it was falling on deaf ears to a degree,” said Patrick Ryan, president and CEO of First Bank and second vice chairman of the board at the New Jersey Bankers Association.

Ryan and Michael Affuso, the president and CEO of NJ Bankers – along with several staff members – met recently with NJBIZ editors and reporters for a wide-ranging discussion about the economic challenges facing New Jersey businesses and the role community banks have played and will continue to play as leaders switch to growth mode following the recovery from COVID-19.

The pandemic, during which community banks allocated 4.9 million forgivable loans worth more than $521 billion under the Paycheck Protection Program, helped to shine a light on the benefits of knowing a banker, and a banker knowing the businesses they serve.

“[A]ll of a sudden, it was not just the broader public perception, but like the customer’s perception, where it was like, oh wait, actually it really does matter to have a relationship with your banker and it really is important to be able to pick up the phone and talk to somebody and get things done quickly,” Ryan said.

But that’s the work community banks have always been doing—their name says it all.

“We were sort of like impact investing before that became a buzz word,” Ryan said. “We take local dollars, we reinvest it back into the market, we work with our customers when they have struggles, we donate a lot of money to local nonprofits, we serve on their boards.”

It may seem basic, or even corny, as he put it, “but that’s all stuff that we’ve always done,” Ryan said.

Affuso described community banks as “the ones that carry the ball over the goal line for all sort of industries,” citing Wildwood-based Crest Savings Bank as an example, which he said “essentially lends to the entire Wildwood boardwalk” in addition to area motels.

“These industries could not happen without the community bank,” he said.

Ryan agreed.

“We’re in a market that’s dynamic enough where there’s multiple community banks, but there’s a lot of markets where there’s like, one community bank, and if that community bank wasn’t there it’d be a real problem in terms of small- and medium-sized businesses and where they’re going to get their financing,” he said.

Affuso noted that NJ Bankers, in its current form, dates to the period around the financial crisis of 2008, when the New Jersey Bankers Association combined with the New Jersey League of Community Bankers. At the time, the banking industry was reeling and the public was angry.

“We weren’t doing subprime loans,” Ryan said. “We weren’t doing esoteric derivatives and credit default swaps,” said Ryan. “We were doing home mortgages and small business loans. And why are we the bad guys? And that was particularly frustrating because, while the economy was suffering, we’re trying to help solve the problem but are being vilified.”

The outlook

While the financial crisis and the pandemic have passed, new challenges are emerging, particularly as the Federal Reserve fights to tame inflation by raising interest rates.

“I think we’re going to be moving away from a period of zero credit issues,” said Ryan. “I don’t foresee a doomsday scenario. I think the banks are very well-positioned. I think the economy is going to hold up fine. But credit cards can’t be zero forever.

“I think the answer is it’s a return to normal but a healthy normal,” said Ryan. “I think the industry is in very good shape.”

But that new normal may require an attitudinal recalibration by borrowers.

“I think we are going through a re-establishment of a more normal view of interest rates,” said Ryan. “We’re quickly seeing inflation’s not going away, rates aren’t going back down again. I think people are going to level-set on a new situation, which candidly … is more of a normal environment. And I think people will get back to borrowing.”

“I think people are relatively confident that either there will be a soft landing or mild recession,” Affuso said. “And I think the soft landing versus mild recession question is a matter of feeling more than fact.”

Ryan said that the difference for the banking sector between a 1% move up or down in gross domestic product is negligible, adding that the banks run into trouble in the event of a 5% or 10% contraction.

“I don’t think anybody’s predicting that. I don’t know how that could happen in the face of 3.5% unemployment,” Ryan said. “To me, that doomsday scenario is off the table.”

Homebuyers and sellers are also facing an adjustment, as the once white-hot residential real estate market cools. “A lot of that is a function of the buyers are sitting on the sidelines. But the sellers are holding on to those inflated views of value,” Ryan explained. “And, ultimately, it’s the life events, which are continuing to happen, that are going to force transactions to happen.”

Affuso said his main concerns are government budget deficits and the application of major new initiatives from Washington such as the CHIPS and Science Act and the Inflation Reduction Act.

“And it’s not because I have my eye off the ball with banking. I’m trying to think about where our challenges really are going to be,” Affuso said, alluding to the war in Ukraine and a potential move by China on Taiwan. “I’m not a conspiracy theorist. But it troubles me that we lack focus on areas of really big importance and we go down these other rabbit holes into all these different areas.”

Ryan bemoaned the fact that COVID relief funds were not used to pay down any state debt and instead fueled more spending. “So, all we’ve done is shifted it from one pocket to another,” said Ryan, noting that New Jersey basically had $10 billion fall from the sky.

“And instead of fixing everything, we’re just spending more on stuff to the point where it’s not going to take too many years where we’re just going to be right back where we were,” said Ryan. “And, oh, by the way, the wealthy are leaving and the people that could have paid the bills are leaving.”

Talent pipeline

Given the challenges, keeping community banks well-staffed is of paramount importance. Historically, community banks benefited from the desire of refugees from big banks looking for more rewarding work. Ryan said that “feeder system” will continue to exist, but the real work is in getting younger people interested.

That’s where NJBankers can help, supporting efforts to both introduce people to the industry and help them transition to different chapters of their careers.

John Mangini, vice president and director of marketing & communications for NJBankers, said the organization is starting to focus more on attraction and retention to assist member banks. Toward that end, NJBankers will host its inaugural Mid-Career Banker Conference on March 23.

Mangini said the event aims to build affinity to the industry and the banks themselves. “So, if we’re giving them opportunities to advance and show them how they can do that … it’s going to solidify them within the industry,” he said.

NJBankers also runs the Emerging Leaders Network, comprising hundreds of bankers under the age of 40. The program offers members special educational and networking opportunities and more.

“I think there’s this perception out there that trade associations are all about government influence … but in the community bank world it’s really a lot about services that we’re not big enough to provide on our own,” Ryan said.