Banks may be starting to see some improvements from the economic hit that the covid-19 pandemic delivered in the first quarter of 2020.
Stephens Inc. reports that banks in its southwest coverage region -- which includes Arkansas -- are starting to receive fewer requests for loan deferments, an encouraging sign of a potential economic turnaround.
An industry note from Stephens analyst Matt Olney reports that loan deferments in the region increased from 15% to 19% of loan balances from mid-April to early May. Despite the rise, Olney found a bright spot.
"While still increasing, we view this recent activity as a deceleration compared to early April when deferments increased from 4% on March 31," Olney wrote in the note.
[CORONAVIRUS: Click here for our complete coverage » arkansasonline.com/coronavirus]
The report tracks loan modifications for public banks over three periods: March 31, mid-April and late April-early May. The median level of modifications was 4% for the region at the end of the first quarter, March 31. That jumped to 15% by mid-April and stands at 19% now.
Home BancShares Inc. of Conway has the third-highest percentage of deferrals in the region at 25% of its total loans, according to the report.
Simmons First National Corp. of Pine Bluff is close behind at 22%. Bank OZK of Little Rock has kept the reins tight on deferrals, with Stephens reporting that just 3% of the bank's loans have been modified.
Those figures represent outstanding balances of $2.86 billion at Home BancShares as of April 30. Deferrals at Simmons represented an outstanding loan balance of $3.2 billion, while Bank OZK had a loan balance of $477 million. Both Simmons and OZK financials were as of May 5.
[RELATED » Interactive: Economic impacts of covid-19 » arkansasonline.com/economy/]
The Stephens report is based on voluntary information provided by the banks, so the financial data may not be a clean comparison from bank to bank, Olney said.
The report, however, does reveal the deep-seated financial distress that has followed the pandemic. All three Arkansas banks operate in multiple states from Texas to Florida and have substantial stakes in the success of the hospitality, restaurant and retail sectors, all of which have been ravaged by forced closures to prevent the spread of covid-19.
Home BancShares Inc., through its Centennial Bank operations, automatically extended loan deferral options to customers as the pandemic hit in March, Chairman John Allison said.
The bank went into "hurricane-mode operation," Allison said, noting that Centennial has experience offering deferments to businesses in the Florida Keys and Panhandle after hurricanes.
"When hurricanes hit we immediately defer our customers," Allison said. "We don't ask for any money, we just put them in deferrals to help them recover. We did the same thing in this situation."
By sector, the hospitality industry has the highest deferment rate at 65%. The restaurant industry was at 44.3%, while the retail industry was at 27.8%, according to the Stephens report.
That information tracks with job losses the U.S. economy suffered in April. The leisure and hospitality industry lost 7.6 million net jobs, or 47% of the sector, during the month. Labor Department statistics show about 5.5 million jobs were lost in restaurant-related employment. The retail sector dropped 2.1 million net jobs.
Loan deferments allow borrowers to delay payments and tack the monthly charge to the end of a loan. Businesses can pivot and use the money that has been going toward debt and devote capital to payroll and other essential expenses.
Generally, banks are offering 90-day deferred payments to provide economic relief during the pandemic.
Simmons, however, is providing customers with two options for a six-month deferral: one option is to pay interest only and the other is to defer payments for three months and then interest-only payments for an additional three months.
"Initially, we work with those customers one-on-one to ensure we understand their game plan going forward," said Steve Massanelli, chief administrative and investor relations officer at Simmons.
Simmons looks at several factors when considering a modification: current compliance with the loan, payment history, available liquidity and financial performance before the pandemic. Simmons also evaluates the borrower's emergency business plan along with projections for when the company expects to emerge from the current economic crunch.
"We feel our customers should be all-in before we modify their loan agreement, and we feel that's a generally accepted good business practice and our good customers certainly understand the requirements," Massanelli added.
At 3% of loans deferred through May 5, Bank OZK has the lowest median rate in the southwest region. "We believe the strong credit profile of our borrowers and the composition of our loan portfolio, with an emphasis on commercial real estate, has resulted in the lower level of deferrals than many of our peer banks," said Tim Hicks, chief operating officer at OZK.
As initial deferment requests end, Allison said Centennial will probably extend repayment. "I'm confident that we'll defer our customers for another 90 days to make sure they're comfortable and until business picks up and takes off again," he added.
He also noted that new requests for modifications have slowed.
"We're just really seeing a trickle now, there's been a big improvement," Allison said. "We think pretty much everyone who needed a deferral has either asked for or received one. The requests are really drying up."
At the same time, as state economies crack open, Allison feels there is a glimpse of an economic turnaround.
"Recovery in that hospitality market is going to be, especially in Florida, a V-shape, not a U-shape," he said. "It's going to shoot back up, and we think we're already starting to see some improvement."
SundayMonday Business on 05/24/2020