The COVID-19 pandemic has wreaked havoc with the economy and people’s lives. Consumers and businesses are defaulting on credit card payments and loans. One bright spot is that banks and credit unions across Colorado have bent over backward to help those who truly need it during these difficult times, either by deferring payments on loans for 90 days or more or accruing interest on the loans as usual but tacking the interest of the loan onto the end of the loan agreement.
So far, that has worked to minimize the number of accounts that have gone uncollected.
Colorado’s banking industry as a whole “appears to be doing quite well,” said Nathan Ewert, regional vice president for community banking at First National Bank of Omaha in Fort Collins. “There were a lot of lessons learned from the previous recession, now over a decade ago, that most banks and bankers haven’t forgotten. That has us more prepared than ever to handle and respond to any type of crisis, including what is now a pandemic.”
The industry is faring better than expected because its concentration of credit risk is more closely monitored, he said. When the risk level goes up, banks and credit unions start adding additional funds to their loan loss reserves to make sure they are covered during a crisis.
Many banks have beaten their pandemic forecasts. Many “provisioned a lot more money in the second and third quarter and haven’t seen those losses come to fruition. Earnings will be up because they haven’t seen the delinquency and credit quality deteriorate as they thought,” Ewert said.
Ray Lindley, chief operating officer for Elevations Credit Union, said that his organization took a conservative approach when it came to how it responded to the pandemic, determining the potential impact it could have and the loans that could potentially go bad or be foreclosed upon and started heavily reserving for those early on in the pandemic.
Around that time, many consumers and businesses began asking for various forms of forbearance.
“Fast forward to now, September and October, generally what we found is that it is not as bad as we thought it would be,” Lindley said. “Our portfolio and loans are performing much better than anticipated in March and April.”
He added that many of the consumers and businesses that asked for forbearance at the start of the pandemic ended up making their payments as scheduled. The only loans the credit union is concerned about are those that are still in forbearance. The longer they ask for extensions or deferrals of payments, the more likely it is those loans will default.
“As financial first responders, Colorado credit unions quickly mobilized when the pandemic hit, putting programs into place to help their members. Things like deferred payments, short-term loans, waived fees, and increased lines of credit all became options for the two million members of credit unions in the state,” said Patti Hazlett, a spokesperson for the Mountain West Credit Union Association. By the end of May, Colorado credit unions had provided more than $1 billion in mortgage deferments and more than $657 million in auto loan deferments.
Both banks and credit unions helped facilitate the Paycheck Protection Program loans offered through the CARES Act. Seventeen credit unions in Colorado were able to offer these loans to their clients.
Across the country, $525 billion in PPP loans were made to 5.2 million borrowers, and in Colorado, $10.4 billion was extended to 110,000 borrowers, according to the Colorado Bankers Association.
Shawn Osthoff, president of Bank of Colorado, said that the Paycheck Protection Program was a major success, helping 4,700 small businesses in the state.
First National Bank of Omaha facilitated 1,889 PPP loans totaling $218 million in Colorado. Companywide, the bank did upward of 8,000 PPP loans, Ewert said.
Money from the CARES Act also helped the situation early on by putting money back into the economy.
The PPP loans helped prop up the small businesses that took advantage of it, which is “how come things aren’t as bad as what we expected,” said Ewert. “Part of that may be government stimulus loans. Customers are just now dipping into their savings. That’s why we’re starting to say, ‘where is our second round of stimulus?’ Most people in financial circles are looking to lawmakers to get it out. I do believe it had a major impact given the unprecedented crisis we’re going through.”
Colorado banks are concerned about PPP loan forgiveness. “Technically they are not loans, they are grants. We want to make sure they are treated as such,” said Amanda Averch, director of communications for the Colorado Bankers Association. “What the industry has been focusing on is ensuring that the forgiveness process is as streamlined as possible and that borrowers can rely on the fact those grants are going to be forgiven.”
The industry also wants to make sure that the PPP funds businesses accessed won’t be taxed as part of their income. “We don’t want them incurring additional challenges when they are already facing economic hardship,” she said.
Bank of Colorado’s Osthoff said he was surprised that more customers didn’t take advantage of the various deferral programs his bank offered. “On the consumer side, 30% to 40% of people took the deferral program for up to 90 days, and on the small business side, we were talking 90 days to six months for loan deferrals.
“I think that is working out great,” he said. “Deferments helped and payments from the CARES Act helped. There is a lot of liquidity in our economy right now, which is why when we look at deposits, we see tremendous growth in deposits across Colorado and in most markets,” he said.
The majority of banks serving Boulder, Broomfield, Larimer and Weld counties saw growth in deposits year-over-year. Bank of Colorado saw its deposits increase by 27.8% from June 2019 to June 2020. Its market share also increased from 5.25% in June 2019 to 5.63% in June 2020. Companywide, Bank of Colorado increased its allowance for loan and lease losses from $38.9 million in June 2019 to $41 million in June 2020.
Bank of Colorado “continues to build our reserve. We do it in slow and good times and continue to do that and analyze our needs as we go,” Osthoff said. “We continue to keep our loan loss reserves strong regardless of the environment we are in. Most banks are adding additional reserves because of the unknown and uncertainty of the economy in the next year or two.”
First National Bank of Omaha, the third-largest bank in the area with 26 offices, saw its deposits increase 19.9% from $2.8 billion in June 2019 to $3.3 billion in June 2020. Its market share in the four-county area rose from 11.30% to 11.36% in that same time frame. Nationally, its allowance for loan and lease losses rose from $370.3 million to $507.9 million year-over-year.
Large national banks in the area have pumped up their loan loss reserves in the past year, sometimes by more than double what was allocated in 2019. Wells Fargo Bank, the largest bank in the area with 27 offices, nationally boosted its allowance for loan and lease losses from $9.4 billion in June of last year to $18.6 billion in June 2020. JP Morgan Chase Bank, with 30 offices in the area, nationally upped its reserves from $13.1 billion last year to $32.1 billion in 2020.
Certain industries were hit harder by the pandemic than others, including commercial real estate, hospitality, restaurants, bars and retailers because people aren’t traveling, shopping or dining out as often as they did pre-pandemic. That hurts the commercial real estate industry because tenants aren’t able to make their rent payments.
“Residential construction and the mortgage group inside our bank are doing absolutely phenomenal,” said Ewert. Much of that is driven by the low rate environment. Many health care and transportation businesses are also doing well, and many retail establishments are “doing quite well,” he said. It depends on the sector you are in. Landscaping and hardware businesses are booming because people are home more because of COVID so they are working on home improvement projects.
“Mortgages are performing well right now, so far,” said Averch. “They are performing better than many of us expected so the news hasn’t been all bad. Obviously, it has been quite challenging for many many people and the good news is that banks entered this pandemic from a position of unprecedented strength.”
Lindley said that Elevations’ mortgage lending division is performing the best it ever has.
“We will exceed our pre-year goal by over 100% with what we thought we would do with mortgages this year. It is a nice buoy to counteract some of the challenges we have,” he said. “Financially our mortgage business will help offset a lot of losses, but it is still a rough time for our members, employees and communities.”
Lindley said that what his credit union has learned from this experience is that it is best to have a well-balanced portfolio and not be overly reliant on one source of income, whether it be commercial, consumer or mortgage income. The other bright spot of an otherwise bleak year has been the investments many financial institutions made the last few years on improving online and mobile banking.
“The whole industry predicted we would move more to that model over the next several years, but this pandemic sped that up some. Some weren’t digitally active before this but were forced to be digitally active now. What we are hearing from a lot of people is they are actually enjoying it and are glad we have it,” Lindley said.
See related story: COVID slows market share change, PPP helps deposits