Pandemic Uncertainty Leaves Wisconsin Bankers Ready To Reserve

When the coronavirus pandemic took center stage this spring, many banks looked at their loan portfolios and wondered what impact such an unprecedented and unpredictable event was likely to have.

Among banks poring over its loans was Johnson Bank. Leaders at the Racine-based bank tried to gauge how much they might have to add to loan-loss provisions to absorb credits that could go sour as businesses shut down and people lost their jobs.

“By mid-April we had done a really deep, deep dive on our borrowers.,” said Jim Popp, chief executive officer of Johnson Financial Group. “I think we looked at every borrower with more than $1 million in exposure with us. We looked at all the metrics, we looked at all the industries, we spent a lot of time with our customers asking a bunch of predetermined questions on a number of different fronts, to really evaluate our provision.” '

What the bank found was a huge amount of uncertainty about the business impact and possible effect on loans from the virus’ powerful gut punch to the economy. The near-term future seemed ominous.

By summer, however, the quality of Johnson Bank’s loan portfolio hadn’t seen enough trouble to warrant an addition to reserves, which Popp said already were on the high side compared with some banks. The wave of federal stimulus to keep the economy going – the Paycheck Protection Program, extra money for the unemployed and other measures – along with mortgage fees from a hot housing market, helped supply income.

Now, however, as banks head toward the fourth quarter with the novel coronavirus still spreading and many businesses far from their pre-pandemic operating levels, Wisconsin lenders are likely to start beefing up reserves for loan defaults, Popp and other bankers said.

“There was a huge amount stimulus that was pumped into the economy, and that seems to have kept this not as bad as we all kind of feared,” Popp said. “Do I think it’s going to get worse? Yeah, probably.”

Figures from the Federal Deposit Insurance Corp. show banks based in Wisconsin already have been adding bigger amounts to loan-loss provisions. In the first half of this year, $245.1 million had been added to provisions for credit losses, up from $82.6 million in the first half of 2019.

Roughly a third of the total amount added to loan-loss reserves among state-based banks this year is from Associated Bank, which is allocating more under the new Current Credit Expected Losses accounting methodology being used by big banks. FDIC data indicates almost $164 million was added to reserves in the second quarter alone, with $52.5 million of that coming from Associated, which is by far the largest bank headquartered in Wisconsin.

In its quarterly report, the FDIC noted that a combination of weak economic activity and recent implementation by many banks to the CCEL accounting method caused a big jump in provisions for loan-loss reserves in the second quarter in the U.S. Provisions for credit losses in the quarter nationwide increased to $61.9 billion from $12.8 billion in the second quarter of 2019. Almost two out of every three banks in the country reported yearly increases in provision for credit losses, the FDIC reported.

“Most bankers are looking at higher provision levels this year and next year,” said Ken Thompson, WBA chair-elect and president and CEO of Capitol Bank in Madison. “We are seeing past due levels increase within the industry. We haven’t seen much of a change at our bank yet – but it’s a big ‘yet.’ I would say we do anticipate more loan losses for sure.”

While Wisconsin banks generally entered the downturn well capitalized, they had varying degrees of funds in loan-loss reserves, depending on how they had been feeling about their portfolios and the economic outlook.

“Those who were at the lower end probably started providing, started adding to provision, a little sooner,” Popp said.

Christopher J. Del Moral-Niles, executive vice president and chief financial officer for Green Bay-based Associated Banc-Corp, also said the enormous federal stimulus put into the U.S. economy has helped bank customers stay current on their loan payments.

“As bankers we believe the stimulus – whether it was to the businesses through PPP or to consumers in the form of direct payments of $1,200 or to those that perhaps were furloughed during this process and got the extra $600 – all of that clearly helped,” Del Moral-Niles said. “It helped our customers and therefore indirectly helped the banking industry, their lenders.”

Some industries – and loan customers – have taken a beating in the pandemic-driven downturn. Their misfortunes could have a ripple effect on suppliers and others related to those businesses. Companies in the travel, hospitality, restaurant and entertainment sectors are feeling the pain more than many others.

“It’s areas where you’ve got large groups of people gathering, especially indoor gathering,” said Patrick E. Ahern, executive vice president and chief credit officer for Associated Banc-Corp. “Hotels are going to be an area that’s going to take a while. Other areas you think about would be the traditional large enclosed shopping mall. “

Ahern said retail is starting to recover, but the retailers faring best “are going to be the ones where you walk from your car straight in and you walk out.”

“Hospitality and anything airline related or travel related obviously is a challenge. Oil and gas related. And anything that is downstream from oil and gas related,” said Johnson Financial’s Popp.

There are too many unknowns at this point to say how long the downturn will drag on, but bankers expect to be adding to loan-loss provisions. If there’s good news, it’s that banks entered this recession better prepared than last time, Popp said.

“I think we all went into this in pretty good shape,” Popp said. “This isn’t a banking crisis. The last crisis was a banking crisis, and was a finance crisis. This one is a different crisis, and I think actually the banks are going to hold up – knock on wood – reasonably well through this because we’ve done the right things over the last 10 years to put ourselves in the spot to be there when we need to be during the next crisis. And this is it.”

As seen in Wisconsin Bankers Association