The pandemic changed banking, but what will stick?

Seven months after COVID-19 was declared a global pandemic and eight months after a recession was declared, Iowa’s financial institutions continue to adapt.

“I feel optimism among my banking peers,” Community Savings Bank President and CEO Steve Brady said. “We are starting to see light at the end of the tunnel.”

Record-low interest rates have stimulated demand for mortgages and other loans, and the wave of Paycheck Protection Program loans that provided banks with strong fee income in the second quarter have also helped many small businesses stay afloat. Lenders have also restructured many loans.

“I will say we are more optimistic today then we were four to five months ago as our local economies seem to be weathering the storms,” F&M Bank CEO Nate Dunn said.

It’s still a time fraught with uncertainty, but with second-quarter bank earnings just coming out, we thought it would be a good time to look at the big changes the COVID-19 pandemic and recession have brought about in banking, and ask Corridor bankers which changes might be here to stay. Here’s what they said:

More mobile banking

The closure of bank lobbies during the pandemic resulted in a boom of mobile banking app usage. “It pulled the technology adoption of the next three or four years forward into just a few months,” said James Klein, president of Cedar Rapids Bank & Trust, which made a big investment in technology in the preceding year, and is now glad it did. Mobile check deposit capabilities, for instance, “made a huge difference during the pandemic.”

The number of U.S. consumers registering for mobile banking nationally rose about 200%, according to’s Digital Payments Tracker, while mobile banking traffic has leapt by 85% since March.

“If a branch was convenient, maybe someone was going to use the branch,” said Tom Chalstrom, president and CEO of First Federal Credit Union. “Now, [the pandemic] is forcing them to use the mobile banking app or online banking. We offer online account opening, online loan documents and a lot more. It’s just a broader willingness to try those products out of necessity.”

Many bankers think the expanded adoption will last because consumers tend to like the convenience and time savings of not driving to a branch once they master the app or website. Even if they’re going to a branch or ATM, some mobile apps can allow them to perform transactions from their phone so they can, for instance, dispense cash without touching ATM buttons.

Accelerated branch closings

During the temporary branch closings ordered by the state during the spring wave of the COVID-19 pandemic, many financial institutions reevaluated their branch systems in light of the long-term trend toward reduced in-bank transactions. A significant number won’t reopen.

Wells Fargo said it would not reopen its longtime branch at 1800 First Ave. NE Cedar Rapids, and U.S. Bank confirmed that temporarily closed branches at 1117 William St., Iowa City, and 129 16th Ave. SW, Cedar Rapids, will be permanently closed Nov. 1.

In addition, U.S. Bank said it will close branches at 408 Court St., Williamsburg; 27 Main St., West Branch; and 300 S. Iowa Ave., Washington, effective Jan. 2, 2021.

Alliant Credit Union said it would not reopen its branch off the lobby of the Alliant Tower in downtown Cedar Rapids.

The U.S. Bank branch closings are part of U.S. Bancorp plans to close an additional 400 branches, or 15% of its branch network, by early 2021. That will bring its total closings to about a quarter of its network of nearly 2,800 branches. The closings are expected to save about $150 million annually, Chairman, President and CEO Andy Cecere said on an Oct. 14 earnings call with analysts.

“The great majority of these additional closures were branches that were impacted by COVID-19 and they will remain closed,” Mr. Cecere said. “While physical branches and personal interactions will always be important, we need fewer branches today than we did even a few years ago, and the branches of the future need to be more advice centers and locations where transactions take place.”

“I see less lobby traffic in the future. That may impact thinking about branching going forward,” said Steve Brady, president of Edgewood-based Community Savings Bank, which did not close any branches.

Mr. Brady believes branch closings will be more limited in Iowa than in many parts of the country, because there are not a lot of large metro centers in which banks have multiple branches.

“There is still a very important role for the branch locations, especially in the Midwest and the Cedar Rapids region where [banking] relationships really matter,” said Mr. Klein, of CRBT. “But some routine transactions, like deposits and electronic payments, will continue to move toward mobile banking and leverage technology for the future.”

In an earnings call, MidWestOne CEO Charles Funk said he expects MidWestOne’s branch closings to be limited because most of the communities the bank serves have only one branch, and MidWestOne doesn’t want to limit access to its banking relationships. Some banks still haven’t reopened lobbies, but are meeting with customers by appointment and drive-up window.

Mr. Klein believes the long-term impact will be more in the style of branch than the number of branches.

“I think the branch network is still important if you have the right number,” he said. “They will be smaller and leverage technology more going forward.”

Less use of cash

With consumers ordering more products online because of store closings and concerns about COVID-19 transmission, they’ve relied more heavily on credit and debit cards to pay for things during the pandemic.

During the second quarter, Wells Fargo customers withdrew 20% less cash than a year ago. While cash withdrawals at branches were down, cash withdrawals at ATMs increased.

“It’s just the new normal,” said Mr. Chalstrom, of First Federal Credit Union. “Over the course of time, we can say it [the pandemic] drove people there, but it was going to get there anyway.”

As consumers have adjusted to using different payment systems such as debit cards, Apple Pay and Google Pay, many experts believe they’ll embrace these changes permanently, meaning less cash handling with its inherent security and health risks for financial institutions.

The derecho that left much of the Corridor without power for weeks in August provided a reminder that society may never be able to go entirely cash-less, however. Mr. Chalstrom said most cash registers were unable to take credit cards, and many ATMs weren’t operating. Customers were lined up out the credit union’s door to withdraw cash, so they could pay for needed supplies and other transactions.

Consumers have not only reduced use of cash during the pandemic, but have also reduced their use of checks, according to Mr. Klein, of CRBT. He said both trends had already begun, but were accelerated by the pandemic.

More interactive teller machines

The interactive teller machine, like mobile banking, has been a favored technology during the pandemic. With ITMs, customers can view and speak to a live teller at a remote location, ask questions and receive assistance with minimal risk of COVID-19 transmission. They also make staffing easier for financial institutions, allowing them to provide customer service at branch locations from a pool of customer service center staff at a time when smaller branch staffs can easily be depleted by child care issues or illnesses.

Community Savings Bank added ITMs during the past year at locations in Cedar Rapids, Guttenberg and Manchester. All of them have proven a boon during the pandemic, and are probably here to stay.

“Our lobby hours have stayed the same, but our drive-through hours have been extended because of the ITMs,” said CEO Steve Brady.

Larger loan-loss reserves

As in most recessions, many banks are beefing up their loan-loss reserves for the eventuality that a significant number of loans could go into default and those defaults could result in deficiencies when the collateral is sold.

“We’re setting a lot of money aside in our loan loss reserve,” said Mr. Klein, of CRBT. He said the impact of economic shifts on banks has a tendency to lag the actual economy, and the banking world probably won’t feel the full impact of the pandemic and recession until the first part of 2021.

QCR Holdings, CRBT’s parent company, said it would book a loan loss provision of $20 million in the second quarter. U.S. Bank announced in July that it is setting aside $1.7 billion in loan loss reserves for the second quarter of this year, up $700 million from Q1.

Putting more into loan-loss reserves when borrowing demand is high can take discipline, and lead to lower short-term returns. But in the long-term, it can protect a financial institution from regulatory and solvency issues that at some point could prove existential. That can make strong reserves a wise investment at certain times in the economy.

At F & M Bank, President Nate Dunn says the balance sheet is as liquid as it’s ever been. Even though mortgage demand is extremely high, “We have basically doubled our monthly allocation to the Loan Loss Reserve, and we will likely move some of our fee income from the Paycheck Protection Program lending into the reserve as well,” Mr. Dunn said in an email.

At least one big bank has also cut its dividend, a step that was not uncommon in past recessions. Wells Fargo slashed its Sept. 1 dividend payment to 10 cents per share from 51 cents per share to help conserve cash.

More flexibility

The pandemic response demonstrated that financial institutions, long associated with “bankers’ hours” and inflexible rules, could go the extra mile to meet customers where they live.

“In my 25 years of banking I have never seen so many key decisions made in such a short period of time and flexibility, which has caused a ton of efficiency and new ways of doing business,” said Mr. Klein, of CRBT.

During the rollout of the Paycheck Protection Program, bankers worked early morning,  evening and weekend hours to get loan applications submitted for their business clients, funds from which could be key to their survival.

“We were on the bleeding edge of PPP lending and helped out over 700 small businesses in acquiring those funds,” Mr. Dunn said. Banks have also cooperated with government forbearance requirements and voluntarily restructured thousands of loans to help borrowers stay in compliance when their businesses were forced to close or their job was eliminated.

F&M Bank hasn’t so much tightened up its lending standards as it has increased monitoring of loans in sectors placed at high risk by the pandemic, Mr. Dunn said, in order to be able to work with the borrower and avoid a default.

Several bankers mentioned the hotel and restaurant sector as two sectors requiring more monitoring and flexibility than most.

The flexibility has paid off for banks like CRBT. Mr. Klein said all the hard work on PPP loans for non-customer businesses has made many of them into loyal clients.

Less pushing credit cards

The credit card business is good for financial institutions, but during a pandemic-rooted recession, too much credit card debt can be a bad thing.

A study by the Federal Reserve Bank of Philadelphia found that financial institutions are spending considerably less on marketing credit cards through digital channels at mid-year, and are approving significantly fewer credit card applications. In April, the report said, the percentage of accounts granted credit limit increases fell sharply.

Consumers, meanwhile, were making less use of credit cards. U.S. Bank reported in the second quarter that credit and debit card revenue was down 22.2% from the second quarter of 2019, and merchant processing services revenue was down 34.2%.

When new cards are issued, “contactless cards are really the next wave,” said Mr. Brady. The new contactless cards can simply be waved in front of many ATMs and point-of-sale systems, eliminating the need for contact or handling by a clerk.