Most Banks in Indiana report they haven’t witnessed any significant losses due to the multiple federal Coronavirus incentive & relief programs introduced to reinforce the United States economy.
Nevertheless, as the future remains a mystery—and while some banks show reasons for hopefulness—they get ready now for the dangers of bad credit.
Better Safe than Sorry
“It will take some time to learn the impact of the unprecedented shutdowns on the economy,” says John Martin of First Merchants Corp. “As we speak, the economy is being kept afloat by the relief funds that will ultimately end.”
Q1 and Q2 saw First Merchants (Munice-headquartered), and other Indiana banks significantly increase the amount allocated for possible debt losses.
The move shows the financial firms are following the steps of the giant banking sectors like JPMorgan, Bank of America and Fifth Third Bancorp.
In both quarters, banks reserved some funding in preparation for debt losses—a lump sum to cover possible bad debts.
Lending firms can determine how much they allocate for loan losses quarterly depending on factors such as;
- Total loan cap
- Expectations of personal loans & business funding,
- Existing reserves.
Intensely raising debt loss reserves can mean preparing for future risks.
Cases in Point
In Q2, First Merchants retained a bad debt reserve of $21.9 million, after storing a $19.8 million kitty in Q1. These figures show the Bank predicted a higher risk in 2020, given that it reserved only $500,000 in Q2 of 2019.
“The increased reserve shows we predict a heightened debt risk tied to the coronavirus pandemic,” said the Bank.
But First Merchant is not alone.
Old National Bancorp, Indiana’s top financial firm allotted $22.6 million in Q2, increased from $17 million and $1 million in Q1 and Q2, respectively.
“Our credit-performance got better in the quarter, but we anticipate that losses will begin as soon as the stimulus funds max out,” said Jim Ryan, CEO of Old National.
Banks like Lakeland Financial Corp and First internet Bancorp have also not been left behind. Both banks have reserved more finances in preparation for bad credit losses in the past two quarters than in Q2 of 2019.
Even though banks want to believe that bad and non-performing loans will reduce moving forward, it helps to take a cautious approach and a capable reserve is the best way to go about it.
Author Bio: Michael Hollis is a Detroit native who now lives in Los Angeles. He is an account executive who has helped hundreds of business owners get Business Funding. He’s experimented with various occupations: computer programming, dog-training, scientificating… But his favorite job is the one he’s now doing full time — providing business funding for hard-working business owners across the country.