State of S.C. Banking
By Kevin Dietrich
Bankers across South Carolina agree the rapid spread of Covid-19 across the globe has created the most challenging economic environment they have ever faced.
Since its emergence late last year, the virus has had a cascading effect on businesses around the world. In the Palmetto State, a statewide stay-at-home order went into effect April 7, resulting in the temporary closure of nonessential businesses ranging from hair salons and gyms to department stores and bars, and resulting in nearly 350,000 individuals being thrown out of work.
Over the past few weeks the state’s economy has been slumped to a degree that likely exceeds even that of the Great Depression and the end of the Civil War. What sets the current situation apart from those two calamitous periods is the rapidity with which it occurred.
“This is absolutely the most challenging event I’ve seen in my career, and I’ve been through disasters such as Hurricane Hugo, the savings and loan crisis, and the Great Recession,” said Fred Green, president and chief executive officer of the South Carolina Bankers Association. “It’s the most challenging because it happened so quickly and has impacted just about everybody.”
Nearly 342,000 individuals filed initial claims for unemployment benefits between March 14 and April 18, according to the S.C. Department of Employment and Workforce. Among industries hardest hit have been tourism, food service and retail.
“The downturn of 2008 through 2010 was nothing like this,” said David Morrow, chief executive officer of Charleston-based CresCom Bank. “When you have millions of people around the nation going on unemployment in a very short period, it really changes the dynamics of our industry.”
The downturn has left bankers scrambling for several reasons:
With significant numbers of businesses closed due to Gov. McMaster’s stay-at-home order, bank clients are confronting loan obligations that will only become increasingly difficult to meet the longer the pandemic continues;
The jump in unemployment means a substantial number of consumers are now facing mortgage and loan payments they may not be able to make. Smaller banks with high concentrations of loans to the most affected sectors, such as real estate and retail, are going to be especially vulnerable; and
A Small Business Administration program hastily implemented in April to help businesses has sharply ramped up banks’ workload.
“I anticipate consolidation in banking and acquisitions of smaller banks to accelerate due the economic impact of the coronavirus,” said Ozgur Ince, a clinical assistant professor of finance at the University of South Carolina’s Darla Moore School of Business.
“So far banks are trying to weather the storm by deferring loan payments, hoping that their customers will eventually be able to make the payments once the crisis is over,” Ince added. “But if businesses remain closed and unemployment continues to rise, a combination of increases in deposit withdrawals and loan losses will begin to hurt banks.”
South Carolina’s economic future depends on what form recovery takes, according to Green.
“If we have a steep, quick recovery there will be some additional issues, but they won’t be as critical as what would happen in a longer, slower recovery,” he said. “With the latter, there will be higher exposure to credit losses and defaults.”
While many businesses are closed or struggling, banks have been overwhelmed with work, thanks in large part to a government program rolled out recently. The Paycheck Protection Program, a $350 billion lending program designed to expand the access and availability of loans to struggling small businesses, went into effect in early April.
Banks participating in the program, including 65 institutions in South Carolina, acted as a conduit for program loans to the small-business community. That meant banks had to reallocate and rededicate specific resources to handle thousands of applications.
Typically, the SBA processes about $2 billion in loan applications per month nationwide. With the Paycheck Protection Program, applications for $350 billion in loans were received in just two weeks.
Sam Erwin, Carolinas market president for IberiaBank, said as of mid-April he and his team had been working for 19 days straight.
The crisis has forced bankers to step up efforts in other areas, as well. As often happens in times of crisis, swindlers seek out opportunities, meaning bankers are being even more diligent in rooting out fraud.
“We have seen a rise in attempted scams resulting from this situation, unfortunately,” said Greg Lapointe, president of Columbia-based South State Bank. “So, we have encouraged our customers to remain vigilant during this time and to consult us if they notice anything suspicious.”
With so many bank employees and executives having to work from home, banks are being forced to re-evaluate not only technology, but how they operate.
“This situation has emphasized the need for really robust technology to handle the challenges we’re facing, and that’s not going to change once this is over,” said Erwin, who is headquartered in Greenville.
One factor favoring financial services customers is that South Carolina has been an attractive market for out-of-state banks, leading to increased competition for deposit market share, according to Ince.
First Horizon in Memphis, Tenn., and Iberiabank in Lafayette, La., announced last year they were merging. And CresCom Bank is merging with West Virginia-based United Bankshares, and South State Bank is combining with Florida-based CenterState Bank.
Community banks can keep a competitive edge if they maintain a focus on their local communities and customer bases with personal service and attention, Ince said. Larger banks, however, can take advantage of their economies of scale and scope for technology and online banking, he said.
But with Covid-19, “I anticipate consolidation in banking and acquisitions of smaller banks to accelerate due the economic impact of the coronavirus,” Ince said.
And while bankers at institutions big and small believe that South Carolina will continue to be a strong and robust market for banks once the pandemic is over, many believe Covid-19 is going to forever alter the landscape for banking and business in general.
This will fundamentally change the American workplace, Morrow said.
“We’re not going to go back to the old normal way of doing things,” he said. “I anticipate businesses are going to rely more and more on people working from home and on more technology, even after this over. And that includes banks.”