2021’s lending outlook: cautious optimism

Daniel Epstein of Mission Valley Bank

Daniel M. Epstein of Mission Valley Bank says community banks’ close customer service during the Paycheck Protection Program will have a lasting impact with business owners.

Many community bankers are cautiously optimistic that this year will bring the same, if not more, demand for loans. They also describe a year that may bring opportunities to gain market share from big banks amid continued uncertainty.

By Beth Mattson-Teig


Despite the unpredictable path this year has taken due to COVID-19, many community banks anticipate that loan origination volumes should be steady—if not moderately better—in 2021.

The pandemic will create both challenges in managing credit risk and opportunities to gain market share for community banks in the coming year. Most bankers are erring on the side of caution and are being conservative in their estimates for 2021 lending volumes. At the same time, forecasts are understandably mixed given the varied impact of the pandemic across different regions and industries.

“We’re cautiously optimistic on the outlook, but at the same time there is still a lot of uncertainty driven by the pandemic,” says Daniel M. Epstein, executive vice president and chief credit officer at $450 million-asset Mission Valley Bank in Sun Valley, Calif., which serves greater Los Angeles.

Small business customers are the bread and butter of Mission Valley Bank, which is a Small Business Administration (SBA) preferred lender. Although a number of businesses are still struggling in the downturn, others have benefited from demand and need capital to finance expansion.

“Some of these 7(a) loans are acquisition oriented,” Epstein says. “People are getting comfortable with finding a good opportunity to buy another business right now.”

Robert Kunisch, president and chief operating officer at $2.5 billion-asset Howard Bank in Baltimore, agrees.

“There are pockets of really strong metrics,” he says. “If you own a boat or RV dealership right now, it’s hard for those guys to keep inventory on their lots, because things are selling so quick, which also is driving some of our consumer lending activity.”

Low rates keep demand high

One thing that appears fairly certain for 2021 is a continuation of the incredibly low-rate environment. In its September meeting, the Federal Reserve said that it would keep short-term rates low at 0% to 0.25% until inflation increases, and individual board members indicated that rates could stay near zero through 2023. Those low rates will continue to drive business in 2021.

“For those businesses that have been doing well, they have a unique opportunity right now to take advantage of these low rates,” says Travis Rouse, senior vice president and chief sales and lending officer at $310 million-asset M&F Bank in Durham, N.C.

That said, Rouse expects loans to grow at a slower pace in 2021 compared with recent years.

M&F Bank was founded more than a century ago with a mission to help businesses access capital. “We know that moving forward in 2021, that’s going to be a little bit tougher to do,” Rouse says. “So, we want to make sure we are positioned to leverage our expertise in SBA lending. We believe that is an area where we can expand and also put working capital in the hands of small businesses in the markets that we serve.”

The PPP factor

Many community banks saw a surge in lending volume this year from Paycheck Protection Program (PPP) loans, and lending teams are keeping an eye out for another potential round of PPP funding. The relief program ended in August last year with more than $100 billion in unused funds. As of mid-December, Congress was still working to pass an additional stimulus package that would bring a second round of funding for PPP loans in late 2020 or the first quarter of 2021.

“There are a lot of pieces up in the air, but we’re expecting overall commercial lending conditions in 2021 to be a lot like 2020 for us,” says Mitch Joyce, community banking director of Fargo, N.D.-based Bell Bank’s east region. The $8.5 billion-asset community bank generated core loan growth of about 10% through the third quarter of 2020, and when factoring in PPP loan volume, that growth doubled to 20%. Bell Bank plans to approach 2021 with much the same strategy as it has in the past, going out and talking to commercial customers and looking at opportunities that might come with their expansion, as well as prospecting for new business.

“We have a lot of customers who did really well this past year,” Joyce says, pointing to customers that were in a more resilient business or sector, had strong management and a good balance sheet going into the pandemic. “We continue to focus on diversifying the loan portfolio and generating more [commercial and industrial] loans,” he adds.

“At least in our market, new housing sales have continued to be exceptionally strong. Those home sales will help to maintain some of the volume in residential mortgages that banks saw in 2020.”
—Mitch Joyce, Bell Bank

Steady appetite for mortgages

Many community banks saw record residential mortgage activity in 2020 thanks to low interest rates that drove new home purchases and refinancings. “What I hear from our mortgage loan officers is that the pipeline that’s currently there is strong enough that they don’t see it subsiding anytime soon,” Joyce says.

People can only refinance their mortgage so many times to get a better rate. “The big piece for us is that, at least in our market, new housing sales have continued to be exceptionally strong,” he says. “Those home sales will help to maintain some of the volume in residential mortgages that banks saw in 2020.”

According to the September Fannie Mae Housing Forecast, single-family mortgage originations were expected to jump 17% in 2020 to $3.9 trillion. The forecast calls for mortgage originations to drop back to $2.6 trillion in 2021, which is more on par with the $2.5 trillion in mortgage originations generated in 2019. Another trend that looks promising for steady mortgage activity is that single-family home constructions are expected to increase in the coming year by 17.5% to total 1.1 million, according to Fannie Mae.

“[Community banks] are looking for ways to find new customers, take care of the customers they have and really manage risk in the best way they can.”
—Travis Rouse, M&F Bank

Another key task for community banks in the coming year is keeping a close eye on exposure risk in what remains a very fluid economic downturn. Part of the ongoing job for banks is reviewing and stress testing existing loan portfolios, while credit officers and lending teams are working to better understand potential risks for new loan applicants.

As Rouse says, “I think all of the community banks out there are looking for ways to find new customers, take care of the customers they have and really manage risk in the best way they can.”

An opportunity to gain market share

The 2020 economic crisis has pushed a number of banks into defense mode. For community banks with strong balance sheets, the current environment creates an opportunity to challenge big banks.

“What we’re not seeing is what I would call organic growth from our existing customers,” says Robert Kunisch, president and chief operating officer at Howard Bank in Baltimore, “but what we are seeing is a real opportunity to take away market share from other banks in our market.”

Howard Bank had good lending momentum at the end of 2020 that it hopes to carry over into 2021. As of mid-October, the community bank’s pipeline of loans was larger than it was prior to COVID-19. A key part of that growth is coming from new customers.

Larger banks tend to be more internally focused during times of uncertainty. Some of the big national and even large regional banks are busy trying to get their arms around risk assessments for potential distressed loans. “For us, we just have to know what’s going on within our 89-square-mile footprint,” Kunisch says.

The surge in PPP loans also has opened the door wide to new relationships and potential new customers. Small businesses that banked with a big national brand frequently voiced frustrations with not being able to find someone to help guide them through the PPP loan process, says Daniel M. Epstein, executive vice president and chief credit officer at Mission Valley Bank in Sun Valley, Calif. “They weren’t getting that from a 1-800 number,” he adds, “and I think there was a real shift that is going to stick for community banks.”

Hear from small businesses that leaned on community banks at banklocally.org


Beth Mattson-Teig is a writer in Minnesota.

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