If you are here reading this blog article then you’ve likely taken your bank through some unprecedented times. Thankfully, for most lenders, you were in a decent place in terms of capital levels when the pandemic occurred. However, there are many new considerations as a result of these difficult times to help guide how things proceed.
Those of you still riding capital levels of yesterday, along with everyone else, should now turn to watch dividends and working to build reserves. To no one’s surprise, problem credits are already on the rise and risk identification will be key navigating these waters.
In the short-term, the main areas for focus and potential concern as a lending institution have involved remote work, access to systems, and equipment. Of course all of these being at play while still maintaining security. Even though all of these will need to continue to a degree, they should now be more long-term considerations. The Board, along with Management should be in agreement regarding what this looks like for the group and how it will be a stable and sustainable model before implementing from top to bottom.
As is usually the case in times of volatility, certain portfolio concentrations will need some extra evaluation and restructuring. Currently those hardest hit include restaurants, bars, and hotels (a.k.a. the hospitality industry) in addition to the other suffering sectors of Agriculture and Energy. Oh, and don’t forget the malls that depend on a physical retail presence. These could all have the potential to involve work-outs and/or extra attention. No one’s portfolio is completely diverse across the board all of the time so the best course of action is to try to aim for that while mitigating risk as you go. Stress testing is key, but no one could have predicted this amount of stress.
Something of this magnitude brings about the need for different models and contingency plans. If implementing new models or other considerations ensure you have the team and the training to properly support those initiatives. Also, not all data is good data. Take it with a grain of salt. Identify outliers and avoid generalizations as well as bad assumptions. Accuracy is essential to make decisions with confidence going forward.
For the majority of lenders that collected PPP loan fees, it is likely time to consider adding those to your reserve if you haven’t already done so. Also, focus on your niche and differentiation. What do you continue to do really well for those you serve? Can you be smarter about your resources? Can you reduce your footprint and/or other overhead and still grow? These are all things to consider for your strategic planning efforts that are likely in the works already. Your clients in addition to many in the lending industry should also expect to see increases in the number of mergers and acquisitions resulting from these times. It only makes sense that sellers are going to be motivated. For any of these transactions you may be involved in, make sure you know the good, bad, and ugly of each other party and where you can best align.
Other risks involve vendor management, competition, and cybersecurity. How well do you know your vendors? Are they still well situated to handle your needs? Can you depend on their accuracy? Here at Capitol Lien, we pride ourselves on doing just that. We are still thriving in these times and going above and beyond as a dependable resource for our clients. As far as competition goes that is not going away so again know your niche and who you serve. Then we have the word we hear more than any these days, “cybersecurity”. It is sad to say that the attacks on those in your industry have only escalated exponentially in these difficult times. Consult with the experts and position yourself to fend off this risk the best you can as well.
In summary, the short-term is all about your operational aspects and long-term is all about your loan quality aspects. Find the strategy that works for you and communicate it clearly. We are here to support and bring clarity with our due diligence solutions. Stay well and calm. You got this!
Depend on Capitol Lien when diligence is due.
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.