With cash accumulating as customers save more and forbearances reliving pressure on balance sheets, banks are trying – but not always succeeding – to find investment opportunities.

As another wave of COVID-19 cases threatens to deepen the nation’s twin public health and economic crises, Massachusetts community banks and credit unions continue to face uncertainties about how the coronavirus could affect their institutions. 

Nine months into the pandemic, community banks and credit unions have yet to see the full impact of the virus on their loan portfolios and balance sheets. As the country awaits perhaps the only solution to controlling the pandemic – the rollout of vaccines to a wide segment of the population – lenders are looking at how their customers will fare in the coming months and whether there are new lending opportunities out there.  

“When I talk to many banks and boards, I think in general everybody is pretty confident that they’ve got their arms around what [loans] they’re writing today, and they’re looking at it prudently and through the lens of being in a recession, this COVID recession,” said Jeffrey Reynolds, a managing director at the Newburyport-based Darling Consulting Group. “But there’s still this overhanging, gnawing feeling that credit could be an issue, and I think that that has probably picked up because of this third wave of infections.” 

Problems Next Year?  

At the start of the pandemic, financial regulators let lenders modify loans for customers affected by the pandemic without having to account for them as troubled–debt restructuring, which let community banks and credit unions assist customers without worrying about accounting implications or consequences with bank examiners. 

“Forbearance provided banks a get-out-of-jail-free card on having to classify loans that needed some assistance in the early stages of the pandemic,” Reynolds said. “I think it worked in allowing a lot of borrowers some time to find their way in the COVID economy, and the regulatory community and accounting profession deserve a lot of credit for putting that tool in the community banker’s tool box.” 

Financial institutions have accounted for the potential that more customers will end up defaulting on loans by adding to their allowance for loan losses each quarter this year.  

For now, forbearance and other loan modifications, as well as cash businesses received from the Paycheck Protection Program, have helped mask problems lenders could experience with their portfolios, said Tom O’Connor, a partner with GT Reilly and Co., a Milton-based firm offering audit and tax services to community banks and credit unions. 

“Most of the executives that you talk to think that the issue is going to be out into 2021, and even maybe beyond that, certainly later into 2021,” O’Connor said. “The fact that they haven’t seen substantial write–offs yet doesn’t mean that they’re not convinced that they’re coming.” 

The loans causing lenders the most concerns are in the hospitality and restaurant industries, O’Connor said. Another segment potentially at risk involves nonprofit organizations, which often finance their office space through community banks. 

In a speech at Harvard University’s Kennedy School on Nov. 10, Federal Reserve Bank of Boston President Eric Rosengren pointed out the disproportionate effect that the recession has had on industries providing services rather than goods. 

“In the United States, consumption of goods now exceeds what was consumed at the beginning of the year, while services consumption remains depressed,” Rosengren said, according to the text of his speech. “Americans have continued remodeling houses and buying durable goods, but things like traveling and recreational activities outside of the home are taking place at a lower rate. Thus, the virus is a disproportionate shock for those countries that are more services dependent, such as the U.S., and most developed countries.” 

Few Loan Opportunities  

Despite the ongoing recession, banks do see some new lending opportunities, Reynolds said, including construction loans.  

“Three, four months ago, it was difficult to find banks that were overly enthused about doing construction lending, but you’re starting to see a little bit more appetite in construction lending again,” Reynold said. “Part of that is a search for yield, but the other part is that some of the credit loss expectations that were evident early in the pandemic have probably eased up, at least temporarily.” 

But other types of lending have seen few opportunities during the pandemic, Reynolds said. Commercial and industrial loan demand has been off, in part because PPP has provided businesses with enough cash for now. Lending rates for commercial real estate have in turn experienced pressure, as refinances have diminished the earnings potential in this category, he added. 

This weak environment for lending comes at a time when banks and credit unions have plenty of cash for lending. 

Since the start of the pandemic, financial institutions have seen an influx of deposits, and those deposits have continued into the fourth quarter, though at a slower pace, according to Darling Consulting Group’s deposit analytics platform, based on approximately 235 community-sized institutions in the U.S.  

Cash Likely to Stay Stable 

The concern for banks in the coming months will be how to use these deposits. The amount of cash on balance sheets is not likely to recede soon, Reynolds said, as the increased supply of money injected into the system by the government has corresponded to the deposit surge. 

Even the booming residential lending and refinance markets are not depleting cash, Reynolds said, as banks have been making gains by selling mortgage portfolios on the secondary market, gains that would take around 18 months to make by holding the loans on their balance sheets. 

Buying loan portfolios or entering new lines of lending are some options banks are considering. 

“Neither is a bad strategy, but banks need to move on these subjects with eyes wide open even in the best of times,” Reynolds said. “The importance of understanding new risks during a pandemic induced recession is that much greater.” 

Diane McLauglin

The cash position will likely continue to grow as PPP loans are forgiven in the coming months, Reynolds said, giving banks more cash accruing 10 basis points or less instead of a loan earning 1 percent interest. 

O’Connor with GT Reilly said that while the community bank and credit union executives he has spoken to are considering how PPP forgiveness will affect balance sheets, they want to see the loans forgiven to benefit their customers.  

PPP loans have affected lending opportunities, O’Connor said, because many banks and credit unions remain focused on getting through the forgiveness process. Many of these small businesses that lenders helped during the spring have led to new banking relationships, he added, which in turn could lead to future lending opportunities – after the pandemic.