Indiana-based banks are socking away extra money in anticipation of COVID-19-related loan losses, but no one yet knows how big those losses might be.
Amid the widespread economic disruption caused by the pandemic, banks have already granted payment deferrals of up to six months to a significant number of commercial and individual borrowers. The big question now is how many will continue to struggle after that.
“Every bank in the world’s trying to figure that out. Nobody knows,” said Daryl Moore, the chief credit officer at the largest Indiana-based bank, Evansville-based Old National Bank. “It is just so hard to figure that out. It has a lot to do with the timing of when the economy’s going to reopen.”
In recent weeks, publicly held banks’ first-quarter earnings reports have provided some insight into what the banks anticipate.
During the first quarter, the country’s largest banks, including JPMorgan Chase, Fifth Third Bank and Bank of America, all beefed up their provisions for loan losses. Indiana banks did the same.
In the banking world, a provision for loan losses is money that’s set aside to cover potential bad loans. Banks can vary the amount they set aside from quarter to quarter, and the amount they set aside is based on factors including the size of their loan portfolio and how much they already have in reserve.
So when a bank starts setting aside a much bigger provision, it can mean the bank anticipates trouble ahead.
Old National set aside a provision of $17 million in the first quarter, up from just $1.3 million the previous quarter.
Some of that increase, Moore said, was because of a new rule about how banks must calculate expected loan losses. For publicly held companies, the Current Expected Credit Losses rule, or CECL, went into effect for fiscal years beginning Dec. 15, 2019. Because of COVID-19, companies could opt to delay implementation.
Old National opted to adopt the new methodology for its first-quarter report, Moore said. But he couldn’t say how much of its loan-loss provision increase was because of the new methodology and how much was because of COVID-19. “It’d be very hard for us to try and figure that out.”
As of April 17, the day that Old National reported its earnings, the bank had approved deferrals for $1.1 billion in commercial loans, representing 14% of its total commercial loan portfolio. Of those commercial deferrals, the vast majority—62%—were commercial real estate loans. The bank had also granted payment deferrals on 2% of its consumer loans and 3% of its mortgage loans.
Commercial loans, which are typically much larger than consumer loans, make up 66% of the bank’s total loan portfolio.
Moore said Friday that new commercial loan deferral requests have slowed considerably, though the bank continues to receive requests from its mortgage and auto-loan borrowers.
Fishers-based First Internet Bank did not implement CECL in its first-quarter earnings report, but it still upped its loan-loss provision. The bank set aside $1.5 million last quarter, as compared with $500,000 the quarter before.
Even so, First Internet President, Chairman and CEO David Becker said he’s optimistic. “The (loan) portfolios look really really solid.”
As of April 17, the bank had granted COVID-19-related payment deferrals for 15% of its commercial loan portfolio, or $344 million in loans. Deferral rates varied widely by sector.
Single-tenant lease financing—loans to finance a retail space that will house a chain restaurant or store—represent 34% of the bank’s total loan portfolio.
“Every one of those accounts made an April 1 payment,” Becker said, though he acknowledged on May 1 that it’s too early to know what will happen this month.
Only 1.2% of the bank’s single-tenant lease financing loans had been granted a deferral as of April 17, though Becker said he expects that will rise to 25% over time. The borrowers for those loans are typically real-estate investors rather than the owners of the retail establishments.
At the other extreme, 76% of First Internet’s health care finance loans had been granted a deferral as of mid-April. Most of those loans are to dental practices, and most dentists have been handling only emergency care because of the COVID-19 pandemic. Health care finance loans represented 13% of the bank’s total loan portfolio last quarter.
But Becker said he’s confident the dental borrowers will bounce back once their 60-day payment deferrals end because COVID-19 restrictions are beginning to ease. “My dentist has already reached out to me to reschedule the appointment that we missed,” he said.
First Internet also reported that it had granted payment deferrals to 3.1% of the loans in its consumer portfolio, or $17 million in loans.
Muncie-based First Merchants Corp. dramatically increased its loan-loss provision to $19.8 million last quarter, up from only $500,000 the previous quarter.
In its April 23 earnings release, the bank said it had elected not to implement the new CECL methodology but increased its loan-loss provision because of economic conditions.
As of March 31, the bank had offered modifications for about 3% of the bank’s commercial loan portfolio, or more than $200 million in total loans. Commercial loans make up about 79 percent of the bank’s total loan portfolio.
But by April 23, when the bank had its earnings call with analysts, First Merchants had granted modifications to more than $775 million worth of commercial loans. That included 63% of its loans to dental practices, 28% of its restaurant and food services loans and 35% of its hotel loans.
First Merchants’ Chief Credit Officer, John Martin, told analysts on that April 23 call that the bank offered 90-day payment deferrals, with the possibility for another 90-day deferral after that.
“So that as we get closer to the end of that six-month (deferral) period we will have a better understanding of what the borrowers and the bank’s strategy will be going forward,” Martin said.
According to regulatory guidance issued late last month in response to the COVID-19 pandemic, banks can grant deferrals for up to six months without having to categorize the loans as past due if the borrowers had been otherwise current on payments. This is important because regulators evaluate banks partly based on loan quality.
Warsaw-based Lakeland Financial Corp., the parent of Lake City Bank, recorded a $6.6 million provision for loan losses, compared with $1.2 million during the first quarter of 2019.
In the bank’s earnings release, President and CEO David Findlay described a “surreal business environment” created by the challenges of the COVID-19 pandemic.
By the end of the first quarter on March 31, Lake City said only 2% of its borrowers had requested loan deferrals. That percentage includes 77 total borrowers, with a combined $99.8 million in loans. But, by April 22, the bank had granted deferrals to 404 borrowers, representing $467 million in loans and 11% of the bank’s total loan portfolio. Most of those deferrals went to commercial borrowers, and most were three-month deferrals of principal only.
And more deferrals are likely ahead. The bank said it expects deferrals to increase through at least the second quarter.
Mike Renninger, principal at Carmel-based banking advisory firm Renninger & Associates LLC, said it’s hard to say at this point how many loans will fall into delinquency because of COVID-19.
“It’s so early in the game, and with the government stimulus being provided there’s a big question about how impactful that will be.”
The stimulus measures include payments to individuals, along with Paycheck Protection Program loans to help keep small businesses afloat. The PPP loans are forgivable if companies use the money for approved uses, which include payroll, rent, mortgage interest and utilities.
One big unknown, Renninger said, is how recipients will use that stimulus money. Will they put it toward loan payments, rent, groceries or something else?
“It’s too early to tell. It’s been my hope that government stimulus will help these companies survive, keep the wheels on the bus,” Renninger said. “But there will be losses. Those companies that were on the fringe of survival will just call it a day.”