Bankers across the region have been focused on working with small business clients to secure loans from the federal Paycheck Protection Program, as well providing payment deferrals and adjusting loans for business borrowers hit hard by the COVID-19 pandemic.
Banks also had to quickly adjust their operations as the pandemic hit Michigan, and now operate in a down economy.
MiBiz interviewed several commercial lenders in the West Michigan market to discuss how business is holding up and how the crisis has affected them. They were:
- Mike Chaffin, senior vice president and senior commercial banker in West Michigan for Fifth Third Bank
- Rick Dyer, president and CEO of Edgewater Bank in St. Joseph
- Jefra Groendyk, executive vice president, Grand Rapids market president and senior lender for Kalamazoo-based First National Bank of Michigan
- Dan McLean, vice president of commercial lending at Grand Rapids-based Lake Michigan Credit Union
- David Quade, Grand Rapids market president for Horizon Bank
- Sean Welsh, regional president for PNC Bank in Grand Rapids
Here are the highlights of what they had to say:
Other than the PPP, how has your lending volume been holding up during the crisis?
Chaffin: Up until COVID, it looked like we were off to a pretty good start (in 2020) and things would continue to hold out at least through this year, but obviously as COVID really moved into the United States, we know the story from there.
Dyer: From a volume point of view, we were on a pretty good roll. Our pipeline was good and we were pretty busy. All of a sudden, things just slowed right down to a stop. I still think it’s fairly temporary. I think we’ll get back to it. Everything that wasn’t in process or truly required or needed, like a new piece of equipment because one broke down or something, everybody put on hold. Everyone went into just kind of a holding pattern. We have a number of projects and a number of conversations we’ve had that we’ll get back to. I don’t think it died. I think it has just been postponed.
Groendyk: We continue to have a robust pipeline. There are a lot of financing opportunities that continue to move forward and continue to make a lot of sense right now. That’s been very surprising for me, and refreshing.
McLean: As expected, volume is down due to COVID-19, shutdowns and the stay-at-home order. Early indications are showing some good activity in certain sectors as we get closer to a full reopening of the economy.
Quade: We had a solid first quarter and had built a pretty robust pipeline for the second quarter, but obviously the PPP took a lot of energy out of the system. We’ve had good loan volume, but once the PPP hit, that became the priority.
What do you see ahead for the rest of 2020?
Dyer: This kind of holding pattern is going to continue at least through the third quarter. Some of my clients, as I talk to them, they are cautiously optimistic things will bounce back late in the year and early in ’21, but I think everyone’s expecting the third quarter to be still that recovery stage, just sit back and make sure because there’s still all of the talk about the second phase of the coronavirus. So, I think everyone’s just kind of (thinking), ‘Let’s make sure we’re in good shape, we have people back, let’s get organized, let’s get ready to roll, and the day that we’re 100-percent confident we’ll be able to take off.’
Groendyk: You can’t live through all of this and not expect some impact. There has to be some fallout. I just think it’s too soon to know with certainty. I don’t think we’re going to see the ramifications of this until probably the fourth quarter of this year and then the real impact will show up in 2021. It takes time for all of this to kind of fall out.
McLean: Assuming rates stay low like they are, I think the second half of the year should return to historical activity levels.
Welsh: It goes without saying that we are in unique and uncertain times. We are doing our best to assist our clients by providing information and solutions designed to help them negotiate that uncertainty. PNC Chief Economist Gus Faucher expects the economy to stabilize in the third quarter and then close with stronger growth at the end of the year. However, he stresses that the longer this disruption lasts, the greater structural damage to the economy and the weaker the recovery will be.
For companies that are borrowing right now, what are their main reasons or credit needs?
Chaffin: What I see is a lot of the market is not overly focused on borrowing money right now, in general. They’re more focused on shoring up their balance sheet and making sure they understand what their business needs to continue operating in the environment they’re in right now. They’re more focused on what we can help them on as far as their working capital and liquidity planning. Obviously, there was a lot of concern over the last 60 days about just making sure everyone got their PPP funds, and then there’s a lot of companies out there that are very focused on AR (accounts receivables) and AP (accounts payable) solutions so that they can further automate in this environment where it’s a little harder for everybody to be in the same place.
Where conversations are today, they’re thinking about, ‘How do I automate today so if this happens again, in the fall or whatever, then I’m not relying on being inside these four walls to be able to function appropriately.’
Dyer: I have a couple of hotels that were in process and they’re still borrowing because they’re finishing up things. I have a couple of manufacturers that had plants and equipment expansions and it still makes sense, intermediate and long term, because the automation they’re introducing to their process is going to cut costs. Even though there’s a little uncertainty right now, in the long run it’s still a good move. Most of the borrowing right now is a continuation of programs and projects that were planned for the year, and after thinking it through and working through all of the numbers, they decided it still makes sense to continue on that road.
Groendyk: It’s across the board. Obviously, we have been very active in the PPP process. That is the obvious thing that’s going on right now. In addition, we’ve had a few companies that have asked for increases in their availability in their lines, just given the uncertainty in the world right now, that we’ve been able to accommodate. We also have companies that are growing. Although it sounds a little strange, they have a need to purchase equipment or have more availability on their lines to support receivables. We are seeing some bright spots here.
McLean: We are seeing two types of need for credit right now. First, companies that have growth opportunities are taking advantage of low rates to invest in new or additional real estate and equipment. Second, companies that have had a ‘delay’ in revenue have needed to lean a bit more into their lines of credit for temporary funding through the slowdown.
Quade: What we’ve seen from people that are still actively borrowing, obviously PPP and working capital is high. But there are people that are looking for new banking relationships out there and we’ve seen a boost from some of that volume as well.
What sectors are still busy?
Chaffin: Anyone that obviously provides any type of supplies, whether medical supplies or cleaning supplies, or those types of services. We continue to see a lot of activity in those sectors. In general, I would tell you if you look at things from 50,000 feet, no one’s really busy right now as far as generation of new business. There are a lot of people busy because the world has changed, but I wouldn’t say there’s just any one industry that’s flowing and going right now because if it’s not impacting them specifically, it’s impacting their clients and sometimes it’s impacting their supply chain.
Dyer: We have a couple grocery stores that are having great volume because even though they have a little challenge with getting enough supplies and product, no one’s going out to eat. Everyone’s eating at home.
Groendyk: Anyone that is supporting the need for PPE. Those companies that could pivot and start manufacturing PPE are seeing a lot of activity right now.
McLean: Certain spots in the real estate sector are still very busy, while non-essential manufacturing has seen slowing at this time.
Quade: Anything that’s medical supply related, logistical, and people who support retail that is grocery based or pharmacy based. That’s still strong.
Welsh: As the economy has begun to bounce back, a number of sectors are busy, including manufacturing.
Who’s hurting the most?
Dyer: We’re in a tourist town with our small downtown businesses and our hospitality, restaurants, bars and hotels.
Groendyk: The obvious ones: Restaurants, hospitality, retail, and the landlords for those segments are hurting as well. The others that are hurting are companies that support large gatherings. Think about any large gathering — whether it’s Tulip Time (in Holland) or Festival of the Arts (in Grand Rapids), or anything like that — and all of the printed material that is typically prepared for those gatherings, or banners and things like that.
Quade: Hotels, restaurants, venues for conferences or concerts, and things along those lines, and that’s pretty much driven by the restrictions.
Welsh: Any business that had to temporarily close during the pandemic is likely struggling.
How are you preparing for the down economy over the next year or two, and for potential loan losses?
Dyer: We’re just watching things really closely. We’re one of those banks that went through some really tough times (following the 2008 financial crisis) and we remember that. We’re positioned pretty well to withstand even tough economic times. Part of it is just being close to our customers, understanding what’s going on and working with them. You just have to stay on top of things and work with people and try to be more proactive in working with clients, instead of just making some assumptions. And we’re making sure we’re taking extra caution as we look at our loan portfolio. We’re probably stress testing a little bit more than we would.
Groendyk: Our bank is very well positioned. We have an incredibly strong balance sheet, we’re well capitalized and we have significant liquidity. We have increased funding for loan-loss provision in anticipation of difficulty in the coming months. We’re not sticking our head in the sand. We certainly expect some impact. We’re prepared for that.
McLean: Thankfully, our credit metrics continue to hold with minimal credit issues to date. We are continuing to remain disciplined in managing our credit metrics, which includes monitoring both individual loan and aggregate portfolio loan-to-values, reviewing financial performance of borrowers more frequently, and maintaining a fluid risk rating system of the portfolio. We have been able to quickly identify potential risks, which in turn allows us to better determine and calculate the proper reserve amount taken per loan. Now more than ever, the ability to maintain credit quality within a loan portfolio means we respond quickly, not only to identify potential loan losses, but to better assist our members through economic challenges.
Quade: We have strategically looked at specific industries that are challenged that we are just keeping a much closer eye on and increasing our communication with those specific industries.
How do you see low interest rates playing into things?
Chaffin: It could be zero percent interest right now and there’s not a lot of people who want to take on leverage. Our clients are good operating businesses and, as a general rule, they’re not looking at debt as a way to do things. They’re looking at, ‘How do I operate my business more efficiently? What can I do to make sure that I’m cutting out any costs that are unnecessary?’ You would think in a low interest rate environment, everyone’s going to go borrow money, but the lack of certainty on what’s next for them is actually prohibitive for them in a lot of ways for them to want to go out and borrow.
Groendyk: The interest rates being low right now, that will keep the financing burden for borrowers low and will certainly help them a lot during this time. I will say that the low interest rates have a negative impact on banks for their earnings. It’s kind of a double-sided coin. It will help the borrowers for sure, but it certainly doesn’t help the banks at all.
McLean: Lower interest rates definitely are one of the deciding factors for companies to acquire additional real estate and equipment.
Quade: It can be an advantage for companies that are a little more leveraged at higher rates right now, but bigger picture, rates have been low for the last 10 years, so I don’t think it’s going to be that big of a benefit for people.
Has the pandemic changed how you approach the market or how you underwrite credit?
Chaffin: Our underwriting has always been what I consider to be strong, safe and sound practices from a banking perspective, and we really haven’t changed our underwriting standards, but we have to look at where things are today and what companies are forecasting for the rest of the year. Now there’s more focus on how do they continue to function through a down economy when revenue for that company may be somewhat or significantly depressed.
Dyer: It’s another good reminder of why we stress test and why we always look at worst-case scenarios when we underwrite all along. One of the interesting things is I have some young lenders. They weren’t lending in 2008 (and) ’09. They just got into the lending world in the last 10 years. This is the first time they’ve really been through this type of challenge, and so it’s a wonderful learning opportunity for them. I’d rather just be able to sit and talk to them about, ‘Hey, this is what happened back then.’ But having to go through times like this makes good lenders, and in the long run we’ll have better lenders as a result. They’ll understand why we stress test loans and why we look at worst-case scenarios.
Groendyk: We have always been a very conservative and diligent underwriter. We don’t grow just for growth’s sake. We’re very careful in our approach to lending, so our approach really hasn’t changed. We continue to operate in the same manner. The customers that we work with, they know what to expect from us, and because we have a pandemic doesn’t mean we’re going to change our spots and do something differently. We may ask more questions and want to know how they’re being impacted by all of this, but we’ve not really changed our approach as of yet. I would expect, as we get close to the end of the year and some of this pans out a little bit, maybe beginning in the third or fourth quarter, as we see stress in the portfolio, we may choose to review specific segments more frequently. We review all of our credits annually and maybe we’ll go to a more frequent review just to keep an eye on companies as they make their way out of the pandemic and into recovery.
Quade: We do have the conversation as far as how they are prepared and what they’re doing for COVID. That’s a conversation that we have now that no one had (pre-COVID), just kind of how they’re set up and their contingencies.
What best practices or lessons from the last recession might apply in this crisis?
Chaffin: We’re more proactive this time than perhaps the entire industry was. It was somewhat of an overnight crash to real estate that started the dominoes falling the last time. We’re much more closely in touch with our clients and really working with them much more holistically, going back to working capital and liquidity planning and understanding their business needs and making sure we’re there to help them as they need support on predicting what the impact of anything that’s going be, whether it’s new business, reduced business, and that their balance sheet is properly positioned to manage through any cycle, whether it’s up or down.
Dyer: I’ll go back to that proactiveness. What we learned last time was to get more proactive earlier on with situations and not just assume that they were going to work their way out, that maybe in some cases we needed to help work them out. It may have just taken a little tweak in a payment, a little tweak in a rate, a little tweak in some terms that could have gotten someone through some tough times quite a bit faster. Don’t just assume and let things happen, let things work out. Do what you can to get them worked out faster for your client.
McLean: Maintaining proper loan structure as part of consistent underwriting and not ‘stretching’ our credit standards to make a deal work.
Quade: As long and you’re dealing with proven, successful clients that have navigated these situations before, everything’s going to just be fine. The lesson learned is make sure you’re dealing with companies that have been through this before and have been successful.
Welsh: PNC’s strategies for maintaining strong capital levels and liquidity have allowed us to serve our clients in both good and challenging times. In addition, our disciplined risk management principles served us well in the last recession and are a major factor in our ability to be there for our clients during the pandemic.