Lenders banking on optimism — for now

A virtually unprecedented shutdown of the nation’s economy because of the COVID-19 pandemic should have been a nervous time for lenders, given that so many borrowers went months with little to no revenue coming in.

But from the largest to the smallest dealers in mortgages and commercial loans in the Boulder Valley and Northern Colorado, most financial institutions say they’re riding out the pandemic well — at least for now.

One of the largest is Boulder-based Elevations Credit Union, which is the top mortgage lender in Boulder County and near the top in Larimer and Broomfield counties. One of the smallest is Bank of Estes Park, whose total loan portfolio includes only about 300 borrowers. But officials from both institutions say they’re confident they’ll survive.

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If the coronavirus has proved one thing, it’s that the future is unpredictable.

“If any of this stuff that’s happened would have been mentioned in the past, you›d have been laughed out of the room,” said Scott Applegate, chief credit officer for Bank of Estes Park. “No one could have predicted this — at least no rational person. We›re all kind of in the fog of war, doing the best we can do for each other.”

Both Applegate and Elevations chief financial officer Michael Calcote said preparation for whatever crisis might occur has paid dividends.

“We’ve taken financial stability seriously,” Calcote said. “We’ve taken capital stress tests. We feel confident we›re not going to have to spend a lot of time putting out fires. We’re blessed to come into this very strong.”

In terms of commercial loans, he said, “nearly all of our borrowers are paying consistently. There’s only a handful we’ve worked with to let them pay interest only.”

On the mortgage front, he added, “we have about $65 million in loans where borrowers have asked for forbearance — and interestingly, even a lot of those borrowers are continuing to make payments out of an abundance of caution.

“On the consumer end, we have about $43 million in forbearance. We work with them on a case-by-case basis depending on what the situation is. So we have about $108 million in some form of forbearance — that’s about 6% of our total loan portfolio.”

Bank of Estes Park also acted early, Applegate said.

“We acted early and quickly because we›re small enough to do it,” he said. “We started preparing in late February or early March, right when we realized this was here and coming. We went to the board and asked for special powers and got them.

“A lot of banks waited for customers to call them. We didn’t wait.”

That’s not that big a job when your bank has borrowers you can count on 30 people’s hands. And it also — with that green light from the board — meant his bank was able to work out some creative or even unorthodox ways to help borrowers that didn’t involve forbearance

“Anybody who wanted a deferment, we were able to work out some combination of deferred payments or interest-only payments for up to six months,” Applegate said. “We worked with people who felt they knew what they needed. We did modifications instead of forbearance because forbearance has longer-term effects — it means you›re in default.

“At the end of the month we had zero past dues,” he said. “About 25% of our portfolio did do modification; that’s 45% by dollar. We do have a lot of people doing interest only for three months, but that’s considered ‘performing’ and allowable under the CARES Act.”

Loans usually are considered nonperforming if the borrower is 90 days past due. So if banks are extending grace periods, they might not know for six to nine months what shape they’re in — or if they’re in danger of nearing a problem with what bankers call the “Texas ratio,” the dollar value of nonperforming loans over the bank’s cash reserves. If that ratio is 1 or above, the bank is in financial trouble.

“We aren’t feeling that Texas ratio pressure. We don’t have past dues that are occurring — yet,” Applegate said. “We will see those effects, but they won›t be until after summer. There’s an old banking expression: ‘A rolling loan gathers no loss.’ You don›t know the status of your portfolio if you don’t make people pay on it. But our whole industry — and all consumers — are going to be in that situation.

“There will be a reassessment in August or September to see where everybody’s at.”

Calcote said he believed banks would face a bigger challenge from low interest rates set by the Federal Reserve. “That’s more detrimental to bank earnings than credit concerns,” he said.

Even so, Calcote sees a glass that’s half full.

“This type of environment can also provide opportunities,” he said. “Some parties may not be able to survive — but that might lighten up the competitive environment to some degree.”

“I wouldn›t say we›re not worried,” Applegate admitted, “but we›re prepared. Our theory is that to the extent we›re willing to work with people, it becomes less of a challenge for both of us.

“We›re in the same state of no one really knows what’s going to happen, and that’s from the highest level of government on down,” he said. “If things continue to improve, the vast majority of banks will be OK. It›s hard to predict six months or even 60 days from now.”