CEO Roundtable: Strong residential demand, lower revenues from interest pose mixed bag for NoCo bankers

The ongoing pandemic has profoundly shifted the operating landscape for local bankers in the past few months and into possibly the next several years, according to a group of local banking leaders.

The group of 10 executives gathered for a video chat discussion on the state of Northern Colorado’s banking scene Tuesday morning for BizWest’s CEO Roundtable.

Commercial loan troubles segmented by industry

On the commercial side, the roundtable painted a tale of two types of businesses: those that were able to continue operating during the heaviest shutdown periods in the spring and those that weren’t.

Cody Fullmer, a regional president at Bank of Colorado, said hard-hit industries such as hospitality and restaurants will require a lot of attention from lenders over the next several months.

In particular, restaurants and bars that have been able to shift much of their seating outdoors where the virus is less likely to spread may find it difficult to get foot traffic indoors during the winter.

“If you’re lending in those industries and you’re a heavy lender, you’re going to have your hands full,” he said. “I don’t think they’re going to crawl back next year. Like the hotel industry, that’s not going to get back to normal immediately.”

Points West Community Bank president Mark Brase said it remains an open question if hard-hit businesses will need help getting back on their feet even if COVID can be defeated with a widely deployed vaccine or treatment.

“We need to see once we get through some of this with a vaccine, whether or not we need further assistance through (U.S. Small Business Administration)-type lending, or if there’s further reprieve from the regulators for another period of time to help some of these industries ramp up,” he said.

John Berkhausen, a senior vice president for commercial banking at Adams Bank & Trust, said his bank has already begun to stress-test loans, implement deferment agreements and take on other efforts to monitor and support businesses in struggling sectors.

“If you’re in the retail, the restaurant space, we’re a little scared, and we’re putting some higher scrutiny on those types of companies,” he said.

Several bankers said their loan-loss provisions, or accounts used to offset the losses from a defaulted or renegotiated loan, have increased in the past two quarters.

Tom Behr, Northern Colorado market president for First Western Trust, said a key aspect within the commercial space is managing loans from both businesses themselves and commercial landlords who may have the property under mortgage.

“It’s staying in touch with both of these borrowers to understand how they’re doing and to be as proactive as we can with them,” he said.

Those with particular exposure to COVID-damaged commercial sectors could struggle to the point where they’d look to consolidate, said Community Banks of Colorado senior vice president Larry Costello.

While he caveated that by saying every financial crisis brings some banks to the bargaining table, the current crisis caused by the pandemic instead of a flaw in the financial system shouldn’t cause widespread issues.

“As an industry, I think we’re poised to move forward through this process as long as it doesn’t turn into a true depression,” he said.

A boom in housing loans offsets the commercial gloom

The industry-level turmoil on the commercial side isn’t seen in the residential mortgage market, which the roundtable said was hot despite the broader economic downturn.

That trend is being fueled in part by the Federal Reserve’s unprecedented programs earlier in the year to keep the financial markets liquid during the beginning of the pandemic, along with a broad switch from residents wanting to move from confined spaces in densely packed cities to areas with more space to roam in the midst of the pandemic.

Gerry Agnes, president and CEO of Elevations Credit Union, said while his institution had a sharp increase in loan-loss reserves and a drop in net-interest-margin revenue, it is looking at potentially close to record earnings this year due to deep demand for new mortgages and refinancing.

“Largely, it’ll be because (the demand) will generate a little over $2.5 billion worth of mortgages,” he said.

The U.S. Centers for Disease Control and Prevention issued guidance last week for implementing a federal moratorium on evictions through the end of the year, arguing that the spread of the virus would accelerate if people had to move into shelters or with friends and family after losing their homes.

However, mortgages and rent amounts will still accrue through the end of the year and could be due in full in January when the moratorium expires.

Holding off on Paycheck Protection Program conversions

Although businesses across the U.S. are now able to apply to get their Paycheck Protection Program dollars converted from a loan to a grant, many of the institutions represented on the roundtable are either not processing many of those applications, or aren’t processing them at all.

Mike Martin, the chief lending officer at Blue Federal Credit Union, said the institution is encouraging clients to hold off on applying for the loan conversion as the banking industry waits for more federal guidance on what exactly a recipient needs to show to qualify for forgiveness.

“We’re just hoping for the best and not sure what the politics of this fall are going to bring to identifying where the real needs are for small businesses,” he said.

Others proposed an option to simplify a large portion of the PPP: automatically turn every loan of $150,000 or less into a grant.

Charlie Pepin, a commercial banking manager at First National Bank of Omaha, estimated that about 85% of the PPP loans the institution underwrote were under that $150,000 threshold, and a mass conversion would save a lot of administrative time 

“The forgiveness piece of the application is taking significantly longer than the original applications, so I think (automatic forgiveness) would be huge in the banking sector,” he said.

Fed action and net interest

Although the banking industry has been bracing pre-pandemic for smaller net interest margins, further action in the past two weeks from the Federal Reserve is forcing the roundtable to lower their expectations further.

Net interest margins measure the difference between income generated by banks collecting interest through loans versus the interest they pay out in savings accounts, certificates of deposit and other similar assets.

That margin was expected to fall industrywide because the Federal Reserve had targeted low benchmark interest rates in previous years to spur the hot economy on, which in turn brought down the interest rate a bank could command to service a loan.

But last week, Fed chairman Jerome Powell announced that the Reserve would change its main mission toward spurring job creation. In particular, it said it would not raise rates to avoid inflation in keeping with its historical mission to keep long-run inflation at or below 2%.

David Fritzler, Northern Colorado market president for BBVA Compass Bank, described the shift as entering a sort of “brave new world” where one of the world economy’s largest monetary levers is openly inviting inflation. However, he argues that the Fed has wanted inflation to come for years.

“They’re tried to create inflation, and we had the same kind of low, prolonged interest rate environment coming out of the recession where for five or six years, every time I met with a customer I was wrong, because I said interest rates were going to go up for five or six years,” he said.

Points West’s Brase said the current environment is going to force institutions to reconsider their revenue models within a vastly uncertain operating environment.

“There may be some products and services that have been loss leaders for years, and we may just have to take a harder look at some of them,” he said.

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The CEO Roundtable is sponsored by Flood & Peterson, Plante Moran and Elevations Credit Union.

© 2020 BizWest Media LLC

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