Automobile lending at Connecticut’s largest credit union has sputtered into the slow lane, as statewide car sales plummet amid the coronavirus pandemic.
East Hartford’s American Eagle Financial Credit Union saw a 50% drop in its consumer-lending portfolio during the first five weeks of the economic slowdown, one of many signs that COVID-19 is taking an economic toll on the state.
But it’s not all bad news.
The $2.1-billion credit union has also seen its residential mortgage lending pipeline double this year, thanks to a spike in home-loan refinancing activity.
“Will it equalize the impacts overall? We’re still trying to determine that,” said American Eagle CEO Dean Marchessault.
American Eagle’s ups and downs amid the coronavirus pandemic reflect the experience of many in-state lenders. Banks and credit unions across the state have seen big business from the federal government’s Paycheck Protection Program, but other areas of lending have slowed, while borrower credit quality has deteriorated, forcing lenders to set aside more money to cover potential bad bets.
That raises questions about what the lending environment might look like in the months ahead. Bankers say they remain well capitalized, so a lot depends on what demand looks like, particularly among business borrowers, and how long the coronavirus-fueled economic downturn lasts.
After the gold rush
Connecticut lenders have been plenty busy writing federally-guaranteed loans through the Paycheck Protection Program, which recently received another $310-billion infusion from Congress.
During the initial $350-billion round of funding, Connecticut banks helped process more than 18,000 loans worth $4.1 billion.
However, as evidenced by American Eagle’s drop-off in auto lending, borrower demand for some types of more conventional loans is on the decline.
That’s true at Guilford Savings Bank, said CEO Timothy Geelan, whose team had processed nearly $40 million worth of PPP loans heading into the second round of funding last month.
“No new projects are coming in, as far as people looking to start a new project or a new business or expansions,” Geelan said. “That’s gone. Right now, all you’re getting is the PPP and loan modifications, and all of our lenders who would be out hunting right now, are doing that [instead].”
Geelan will be watching the coming quarter or two to see how bank financials are impacted.
So far it’s been mostly lower profits and setting aside more reserves to prepare for potential loan losses in the future.
But he worries that the federal stimulus won’t be a long enough bridge to an eventual recovery for many businesses, and there are serious concerns about how quickly consumers will go back to restaurants and other venues.
“That could be pretty darn ugly,” Geelan said. “We’ll weather it, but we’re really just dealing with the help part right now.”
In a recent credit note, Moody’s Analytics agreed the recovery for many small and medium-sized businesses (which Moody’s calls “SMEs”) will take longer than the PPP funds are projected to last.
“A wave of SME closures would exacerbate the U.S. economic downturn and hold back the recovery, given that SMEs play a crucial role in economic activity and job creation,” Moody’s analysts wrote.
Geelan said Guilford Savings, which has $838 million in assets, has not made any significant changes to lending standards and remains well capitalized, with plenty of assets to cover a downswing. In the first quarter, he said Guilford’s key capital ratios that measure fiscal strength dipped only slightly.
“We carry a robust capital buffer to address times like these,” he said. “At the end of the day, capital is your ultimate fortress.”
For some of the state’s largest banks, lending continued in the first quarter.
At Waterbury-based Webster Bank, CEO John Ciulla told stock analysts that strong lending volumes helped drive an increase in interest income during the January-to-March period, despite interest rates being down from a year ago.
“While we are appropriately cautious with new underwriting activities, I can tell you that we closed meaningful, high-quality new business in the quarter in segments that are not experiencing a material adverse impact from the pandemic, … such as software and technology infrastructure,” Ciulla said.
Mortgage boost
American Eagle’s boost in mortgage lending isn’t because people are panic-buying houses like toilet paper.
Connecticut home sales were up in the first quarter, but are expected to fall in the current quarter and possibly beyond.
Instead, American Eagle is seeing soaring demand for refinancing and home-equity lending, said Howard Brady, chief lending officer at the 18-branch institution.
Though banks have pledged a temporary moratorium on foreclosures, and are modifying loans for some who ask, many consumers are scared.
“People are really worried about expenses and cash flow,” Brady said. “They’re trying to shore up their personal financial situations as best they can to try to address that uncertainty and create cash flow from their house.”
It’s a potential silver lining for homeowners and lenders alike, he said.
Refinance activity had already been surging heading into 2020, thanks to several interest-rate cuts by the Federal Reserve, which made it less costly to cash in some home equity. The Fed cut rates again to near zero in mid-March, citing COVID-19’s global economic devastation.
Since the March rate cut, homeowner demand for refinancing has grown at least fourfold from a year prior, the Financial Times reported, citing data from the Mortgage Bankers Association (MBA).
The MBA says its refinancing activity index is close to highs not seen since 2013.
That’s kept American Eagle’s 323 full-time equivalent employees, none of whom have been furloughed, plenty busy, Marchessault said.
“We need every soul,” he said.
In addition to the refinance boom, American Eagle has been accepting and managing loan-modification requests — 2,000 and counting as of mid-April — and handling other tasks.
“The drop in rates has created a real [refi] market, even amidst all this chaos,” Brady said.
Though there’s booming demand for refis, some U.S. lenders have begun to tighten their credit standards, and JPMorgan Chase temporarily halted home equity loans, American Banker reported last month.
Howard says American Eagle has not made any significant changes, but is monitoring the situation.
“We are certainly watching that very closely, based on the environment, to see if we need to make any material changes,” he said.
