The current pandemic has hit many sectors hard, reducing revenue for many businesses to a fraction of their normal levels. For some businesses, especially in travel, hospitality, and food service industries, cash flow is almost nil.

In addition to participating in the Small Business Administration’s Paycheck Protection Program (PPP), many of WBA’s member banks have implemented relief options for their customers, including deferment plans for their commercial clients. The majority of those deferment agreements are for 60, 90, or 120 days. Banks have also been encouraged by federal regulators to “work constructively” with borrowers impacted by COVID-19. Loan modifications and deferral agreements are part of that effort.

WBA estimates, based on a brief membership survey and anecdotal conversations, that roughly half of WBA member banks have less than 10% of their commercial assets in deferment. However, approximately 10-15% of member banks have 20% or more in deferment. Results from a survey yesterday (May 7) showed 45% of banks indicate 0-5% of their commercial loans are in deferment and 16.7% report 5-10% in deferment.

What happens when those deferral periods end?

If a business signed a deferment agreement for 60 days when the state of emergency was declared (March 25, in Wisconsin), payments are due again beginning May 25, the same day Wisconsin’s extended Safer At Home order is set to expire, allowing most businesses to begin reopening. Depending on the specifics of the agreement, many businesses will likely lack the cash flow to make the higher payments required under the “catch up” period.

Economic recovery from COVID-19 is unpredictable; how quickly regional and local economies return to “normal” may vary greatly. The key for banks will be to monitor which of their loans in deferral are most likely to struggle to restart their cash flow after the pandemic and therefore might need to be reclassified as nonperforming assets. Those projections will help the bank model its current and anticipated risk levels and managing pricing and terms of future loans toward those levels or limit the bank’s exposure to certain sectors or markets.

Some of these adjustments are happening already, according to the latest Federal Reserve quarterly survey of senior loan officers. The survey indicates over half of banks have either “somewhat” or “considerably” tightened lending standards for commercial construction (52.4%), multifamily (49.2%), and nonfarm nonresidential loans (52.3%). And additional 41.5% of banks reported tightening standards for large and medium C&I loans.

FIPCO has four deferral agreements available:

  • (TL) 4S Simple Interest Deferral Agreement
  • (TL) 4 Deferral Agreement
  • (TL) 4B Payment Deferral Agreement
  • (TL) 4B 4G Reaffirmation of Guaranty (to be used with WBA TL4B)

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