As you begin planning for 2021 and beyond, it’s crucial to recognize the impact that COVID-19 and the resulting financial impact will have on lending and plan accordingly.
The recession period of 2008 – 2009 affected millions of people and its impacts were felt in many ways. By December 2009, the unemployment rate was 10% and median family net worth dropped 40% to $84,000. During this recession, we also saw 8 million foreclosures, more than 68,000 bankruptcies, small business loans drop 70%, and the number of credit unions and banks decline from 2006 – 2008 (5.3% and 9.3%, respectively).
If we learned anything from 2008, it’s that the ripples felt by these financial impacts can negatively affect profitability, people and organizations, customer experience, and reputation.
A well-considered credit management strategy can help minimize these impacts.
Continue support of and participation in government programs.
Unlike during the 2008 recession, perception of community financial institutions remains positive because of their participation in programs such as the Paycheck Protection Program (PPP) that served to provide relief to small businesses impacted by the COVID-19 pandemic. The efforts FIs made on behalf of their communities and the businesses within served as a lifeline for many. Community banks, especially, have been regarded as work horses during this time, delivering relief to many when the larger banks couldn’t or wouldn’t. Continuing to support these programs and providing those resources should remain a priority in the coming months and year ahead and serve to emphasize your commitment to being “part of the solution.”
Proactive outreach on loan modification
While many borrowers reached out early to learn about relief opportunities available, many businesses have not. In fact, many small businesses are still not sure of what’s available to them. Some may be confused about the program eligibility. As one client told Galapagos, while medium-sized businesses seem to be finding their way, they’re seeing sole proprietors/single owner businesses not researching their options or reaching out to their commercial lending team. How can you help? Reach out to your business customers, particularly those who might be at risk. Provide easy-to-follow insight on available programs. Regular communication will be meaningful to those who are feeling the weight of this health crisis – reach out with information and insight about available relief opportunities. Most FIs are offering customers payment deferrals, waived fees, and/or extended payment terms.
Such outreach is a cornerstone of Commercial Banking departments with smaller portfolios and modelling platforms available. But where community FIs will win will be in the degree of empathy and expertise you show in your willingness to find loan modifications that are workable for you and your clients.
Prepare for delinquencies
Community institutions need to brace for delinquency rates nearing those recorded during 2008-2009. In May 2020, the Risk Management Association reported findings from its research base of 2,000+ middle-market and commercial businesses. While C&I lending surged in Q1 it was driven by firms drawing down on available credit lines to stockpile cash reserves. Since, delinquencies have reached 0.86%. CRE lending grew in Q1, with Industrial (up 9.26%) and Multi Family loans (up 8.3%) leading the way. Increased Office lending was of concern, especially since the timing of a widescale return to work remains unclear. The rate of CRE delinquencies reached 0.6% in Q1.
Mortgage remains important, as does refinancing
With rates likely to stay where they are through the balance of 2020, continue to prioritize the push on mortgage and consumer debt refinancing. Purchase loans are up 22% and refi is up 84% year-to-date – but an estimated 19 million homeowners could still benefit from refinancing (Black Knight). With buyers seeking a lower monthly payment, the refinance opportunity remains strong.
There are still opportunities in home equity as well – an estimated 45 million homeowners have tappable equity, and 15 million are equity rich. While home equity lending is down 7% from 2019, there’s a huge market of qualified borrowers. With housing inventory low in many markets, homeowners may be choosing to remodel rather than invest in a new home. Unsurprisingly, remodeling sectors are up over 2019.
The booming mortgage market can potentially tax your internal employee resources, though it’s worth continuing to strike while the iron is hot. Promote as you can, without overextending your team’s bandwidth to process the loans effectively and efficiently.
Identify and target growth sectors
Not all sectors are hurting right now. And while your Commercial and business teams will be pulled toward their relationship management duties, continue to identify opportunities to focus new business efforts. Look for those that are doing well:
Cleaning
Delivery
Grocery and Food Prep
Hardware
Healthcare
Home improvement
Landscaping
Professional Services
Remote Learning
Technology
Many institutions are offering incentives for new loans and lines. Lower rates, such as US Bank’s “Quick Loan,” are common, as are interest-free periods on new lines, such as that offered by Washington Federal Bank. The majority of these products, which offer credit up to $250,000, target smaller businesses.
There is no doubt that the ripples felt as a result of these last several months will be felt throughout the lending environment, but opportunity does exist. Taking the historical insight we have available from the 2008-2009 recession can not only help community banks brace for impact, but grow and thrive in the coming year.