Merriam-webster defines the phrase light at the end of the tunnel as “a reason to believe that a bad situation will end soon or that a long and difficult job will be finished soon.” In recent conversations with many of my community bank clients, I tend to hear that exact phrase. In fact, an article recently published by S&P Global Market Intelligence confirms what I am hearing from my clients. The article published January 25th by Nathan Stovall reports that community banks may experience pain in the near-term, but brighter days may be ahead. As the pandemic first began, credit quality predictions were quite dire, yet as we review year-end 2020 results, it is evident that credit quality at community banks has significantly outperformed those initial predictions.  2021 expectations indicate that credit quality will continue to improve as the vaccine rollout is ramped up, additional stimulus is provided, and the second round of PPP is utilized to support those borrowers that may continue to struggle. Community banks should continue to prepare for some level of increased credit losses and continued pressure on margins in 2021, but “returns should be higher than previously expected as more dire economic scenarios are now less likely” as compiled projections from S&P Market Intelligence indicate below:

In fact, the SNL Small Cap U.S. Bank & Thrift Index is now trading at 134% of tangible book value, a significant increase from the lows in March, when the index traded below tangible book value. According to Stovall, “the rebound in recent months has come as the worst-case scenario predicted by some in the investment community has moved off the table. While a number of investors in the spring of 2020 feared that credit losses could reach the same level witnessed in the Great Recession, it seems most now expect losses to be less than half that level.”

Many analysts now predict most expected credit losses to be less than half the level of losses incurred during the Great Recession and S&P Global Market Intelligence’s updated outlook seems to concur with net charge-offs to average loans projected to rise from 0.22% in 2020 to 0.75% in 2021 and hold fairly steady in 2022, far below initial projections of over 1%. The total impact to returns and reserves remains a question mark as most community Bank institutions have not yet fully converted to the Current Expected Credit Loss model, or CECL, which requires institutions to reserve for expected losses over the life of their portfolios.

While the light can be seen at the end of the tunnel, real questions remain as to just how long the tunnel is and what can you do now to prepare for it. Daily conversations with our clients indicate that credit quality has stabilized, deferrals are minimal, and loss projections are declining. ProBank’s complete team of risk management professionals can assist in preparing your institution with professional and confidential credit risk reviews, CECL and loan pricing services, and ALM and liquidity modeling.

Written by: Brad Snider, Vice President, ProBank Austin (

S&P subscribers can read the full article here.