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The COVID-19 pandemic and several trends it accelerated in the banking and lending world will likely continue to dominate the industry in 2021.
Even as 2020 came to an end, many of the storylines that dominated the year in banking and lending continued to evolve, likely shaping the industry for months and years to come.
From the pandemic’s effects on business customers and digital acceleration to conversations about racial inequalities in the industry, the year 2020 saw banking and lending confronting possibly long-lasting changes to the industry.
Amid this upheaval, two of the largest state-chartered banks – Eastern Bank and Berkshire Bank – dropped surprises on the industry, too.
Financial First Responders
With only one week from when the CARES Act created the Paycheck Protection Program to its rollout, lenders confronted multiple challenges throughout the early days of the multi-billion-dollar small business lending program.
When the program went live on April 3, guidelines had just been released the prior evening, with some differing from what the U.S. Small Business Administration and Treasury Department had communicated earlier in the week. Within days, the SBA platform was experiencing significant problems.
Despite these and other challenges, community banks saw the benefits of participating in the program, including helping the community and boosting their reputation with small businesses. Some of those businesses struggled at the outset to get loans from big banks.
“As crazy and as hectic as this process has been, I think we’ve reaffirmed to our customers our commitment to them,” Joseph Baptista, president and CEO of Taunton-based Mechanics Cooperative Bank, said in late April. “And to those who haven’t been able to get anywhere with other financial institutions, we’ve been able to showcase what we do on a daily basis.”
When the PPP ended in August, Massachusetts lenders had processed more than 118,000 loans for $14.3 billion.
But as COVID-19 continues to surge, the PPP has been revived. Even as lenders continue to work through the forgiveness process for the first round of loans, the latest COVID relief legislation authorized another round of PPP funding, including second–draw loans for the hardest–hit small businesses.
Refi, Purchase Loans Surge
Amid all the changes the industry has seen during the pandemic, the ongoing drop in mortgage rates has provided a bright spot for lenders. While the interest rate environment continues to squeeze bank margins – another issue that will continue to shape the industry in 2021 and beyond – mortgage rates kept the refinance boom going throughout 2020, a trend that looks to continue.
The state’s overall residential refinance activity stood at $116.8 billion year-to-date through November, a 20.9 percent increase compared to the same period last year. Owners of single-family homes and condominiums created even more year-over-year growth for refinance volumes, with single-family refinances year-to-date at $61.7 billion through November, up 104 percent compared to the same time period last year, and condominium refinancing at nearly $12 billion, a 126 percent year-over-year increase.
Lenders are likely to continue to see homeowners looking to refinance in 2021. Mortgage rates hit record lows throughout 2020, continuing into December. The Federal Housing Finance Agency announced in November that conforming loan limits would increase by almost 7.5 percent in 2021, possibly giving more homeowners opportunities to refinance.
With rates so low, not even the 0.5 percent adverse market refinance fee Fannie Mae and Freddie Mac started assessing on lenders in December should deter consumers from refinancing.
Lenders also benefited from a surge in homebuying this year, driven in by interest rates, demographics and the pandemic.
“The home, in my mind, has gotten much more important than it was in the past – even in just the last seven or eight months,” Guaranteed Rate Senior Vice President Shant Banosian said in November. “People are definitely buying bigger homes and reevaluating what they want in their homes.”
Lenders are benefitting from a surge of demand for new homes and for refinances as demographics, low interest rates and the pandemic change perceptions of the home.
Inequality Comes to Fore
For all the help PPP provided to small businesses, it also brought to light the effects of systemic racism on banking and lending. As Black and Latino populations experienced disproportionately high rates of COVID-19 infections and deaths, small business owners of color struggled to access the PPP. Households with limited or no banking relationships also faced delays in receiving government aid and higher costs to use alternative services to banking.
When George Floyd died in the custody of Minneapolis police, bringing more attention to systemic racism, many in the banking industry stepped forward with support for Black Lives Matter and commitments to address racism and issues of diversity and equity.
Some banks joined the CEO Action for Diversity and Inclusion pledge, a nationwide initiative that requires CEOs to support open dialogue around diversity and inclusion, implement unconscious bias training in the organization and share diversity and inclusion plans with the board of directors.
Webster Five President and CEO Donald Doyle had signed the pledge back in February. When the protests against racism started, Doyle said in August, the bank shifted its diversity and inclusion initiatives to include a focus on equity, recognizing the effects of systemic racism.
“It’s a centuries–old problem, so it’s going to take a long time to get to a point where we’re all in a position to say that it’s eliminated,” Doyle said. “At this point the goal is to reduce racism, and if I can play a part in that, then I’m really pleased to do it.”
State Bank Surprises
Two of the banks that talked about the effects of racism in banking even before 2020 – Eastern Bank and Berkshire Bank – also dropped surprises in 2020.
Long touting itself as the country’s oldest and largest mutual bank, Eastern Bank announced plans to go public in June, completing the transaction in October.
Then Berkshire Bank announced in July it had taken a $554 million goodwill impairment charge in the second quarter, creating a $549 million loss for the bank in the second quarter. The next month, CEO Richard Marotta abruptly resigned.
Berkshire Bank has said it remains committed to Marotta’s strategy for growing the bank, including diversity and equity initiatives, but the bank has yet to name a new permanent leader.
Eastern Bank cited raising capital for technology initiatives and acquisitions as reasons for going public. The few years could reveal the effects of the decision on the bank – and the Massachusetts banking landscape.
Digital Strategies Accelerated
While the goal of the PPP was to help small businesses, the process also had a role in accelerating banks’ digital strategies, as most institutions turned to technology to get through hundreds or even thousands of applications.
The branch lobbies closed due to COVID-19 also led more customers to adopt online, mobile and other banking options.
“Banks are used to moving quickly to protect their balance sheet,” Dan O’Malley, CEO of the Boston-based financial technology firm Numerated, said over the summer. “What I think banks just learned is that the same ability to move quickly – and manage the risk around moving quickly – can be applied to technological change, too.”
This accelerated adoption of technology could have other long–lasting effects, including on the role of branches. Berkshire Bank and Webster Bank have already announced plans to reduce their branch footprints substantially.
Diane McLauglin
But studies have shown that branches remain important to customers. Throughout the pandemic, banks have continued to open new branches, including East Boston Savings Bank, HarborOne and Rockland Trust.
If more branches do close in the coming months and years, banks could find themselves adapting to how they approach and staff their remaining offices.
“If you look at retail customers and small business customers, still a very high proportion of them say having a branch nearby is important to them,” said Jeff Marsico, an executive vice president with Pennsylvania-based consulting firm The Kafafian Group. “But what they want the branch for is problem–solving, is advice, is loan opportunities, and what financial institutions have been slow to react to is changing the skill set of the staff within the branch to be responsive to the new demands on branch personnel by branch customers.”
