Banks and mortgage lenders weren’t front and center in this year’s economic downturn as they were in the Great Recession, but that doesn’t mean 2020 hasn’t been a tumultuous year for them.
Colorado banks and community lenders faced a crush of requests under the U.S. Small Business Administration’s Paycheck Protection Program, processing 109,170 loans worth $10.4 billion in a few short weeks. Mortgage lending also exploded after the Federal Reserve’s low rate policies set off a rush to obtain 30-year loans at under 3%.
The pandemic has resulted in far fewer people walking into bank locations this year, raising a question in the industry of whether all those branches were truly needed. And it has forced banks to up their efforts to deliver services digitally.
“Branch lobby traffic has not returned to pre-pandemic levels,” said Kelly Kaminskas, president of retail and branch strategy at Lakewood-based FirstBank, during the “Banking on a Better Future” webinar hosted by the South Metro Denver Chamber.
As in many other areas, the pandemic accelerated the acceptance and use of digital channels. About 95% of households have a banking relationship, and branches remain important for many customers. Brick and mortar is here to stay, but bankers are asking themselves how many branches they really need, Kaminskas said.
FirstBank closed six locations in 2020 and dropped its last two grocery store branches at area King Soopers. U.S. Bank, one of the largest banks operating in the state, closed more than two dozen locations or about a fifth of its Colorado branches at the start of the month. Nationally, the number of bank branches has been falling since 2009, and the trend accelerated this year.
Bankers, long focused on convenience, have come to realize during the pandemic that consumers don’t need branches two or three miles apart. But they also won’t tolerate driving 20 miles to receive subpar service, she said.
FirstBank didn’t see a jump in new accounts set up digitally but did see a surge in customers using their smartphones to deposit their checks. The bank also saw a big increase in the use of Zell, a digital app that allows people to transfer funds to each other. Digital log-ins also spiked as customers constantly checked their devices to see if their federal stimulus payments had arrived, taxing the servers at some banks.
Colorado bank assets reached $69.3 billion as of June 30, up from $58.3 billion a year earlier, according to the Federal Deposit Insurance Corporation. That’s not normally what would be expected during a recession. But in banking, a loan is an asset, and the government called on banks to make lots and lots of loans.
The next heavy workload coming down on banks is reviewing applications for forgiveness on all the PPP loans that were made. The SBA has granted near-blanket forgiveness for loans under $50,000, but bankers are pushing to have that cap raised to $150,000, which would cover 85% of loans, said Don Childears, CEO of the Colorado Bankers Association.
And there will be the issue of dealing with all the fraud that got through in the rush to get assistance out quickly. The U.S. Inspector General found that of $192 billion approved by the SBA under its Economic Injury Disaster Loan program, $58 billion was traced to businesses that had the same internet address. And about $13.4 billion went into bank accounts with names that differed from what was listed on the initial application.
“We will be hearing about fraud in all of the federal lending program. It has had a rough rollout,” Childears said during the webinar.
Loan defaults are likely to become a more pressing concern next year, especially in the industries that require a high degree of human contact, including restaurants, retailers and tourism operations. With another wave of COVID-19 infections hitting the state, the pressure on them will only intensify.
So far this year, the share of bank loans that are past due in Colorado has actually fallen to 0.75% of the total on June 30, down from 0.84% a year earlier, according to the FDIC. But that isn’t expected to remain the case.
Jerry Foster, founder of Resolute Commercial Services, said Colorado is leading the mountain west region for the number of bankruptcies among medium-sized businesses in the third quarter. He expects the more severe reckoning will come down after borrowers complete and submit their 2020 financial statements.
“Regulators have been reasonable so far, but in every one of these cycles there comes a time when they say we can no longer be tolerant. That time will come,” Childears said.
Richard Morgan, a senior vice president with Academy Bank, estimates that through the first three quarters of the year, metro Denver has had 500,000 square feet of retail space come back onto the market, largely because of business failures and lease defaults. As the market tries to digest that, another 1 million square feet of retail space is under construction.
“The retail sector will continue to contract. The impact is not fully realized yet,” Morgan warned during the webinar.
Likewise, metro Denver has about 3.3 million square feet of office space under construction, of which 80% was started on a speculative basis, meaning no tenant had signed up to occupy it, Morgan said. Forced to send their workers home, many businesses are realizing they can probably get by with much less space than they thought necessary before the pandemic.
In their favor, financial institutions entered this downturn in a much stronger financial position than they did in the prior one, when excessive risk-taking and laxer regulations contributed to a financial crisis. But that doesn’t mean they won’t take a hit and become more risk-averse going forward.
“One of the last things the bank wants to do is strike out on new customers. We are really looking to our (existing) customer base to grow our business,” Morgan said.
Besides the surge in PPP and other emergency loans, banks have had to cope with a huge surge in demand for mortgage loans, both refinancings and loans to purchase a home.
“Lenders found their pipeline for mortgages doubling, tripling, even quadrupling in size overnight,” said Mike Jacobs, vice president of mortgage origination with Alpine Bank Mortgage. They simply weren’t able to staff up enough to handle the crush.
The mortgage industry also faced an existential crisis during the early days of the outbreak. The CARES Act included a federal program that allowed mortgage borrowers struggling because of the pandemic to skip up to a year of payments. By the first week of June, 8.55% of all U.S. mortgages were in forbearance, according to the Mortgage Bankers Association.
“Unfortunately, huge numbers of borrowers took advantage of that program that didn’t need to, who weren’t experiencing hardships,” Jacobs said.
Mortage servicers, the firms that collect payments, are required to cover any missing money and submit it to the holders of mortgage securities. So many people asked for forbearance that servicers couldn’t cover the missing payments, which required the U.S. Treasury Department and the Federal Reserve to step in and provide liquidity.
Just under 5.5% of U.S. residential mortgages were still under a forbearance plan as of last week, representing 2.7 million loans. Although most borrowers have equity in their homes, a big difference from the Great Recession, the clock will eventually run out on the grace period and they will have to start making payments again, whether they are in a position to do so or not.