44 MAY / JUNE 2021 Our Credit Lives on Main Street Not on Wall Street! David Ruffin Principal IntelliCredit david.ruffin@intellicredit.com IntelliCredit is a subsidiary of QwickRate, an associate member of the Indiana Bankers Association. LENDING / CREDIT The banking industry, like most industries, is focused on signs of light at the end of the COVID-19 tunnel. With promising vaccines and therapeutics on the horizon – as well as the quick return of the Dow Jones Industrial Average to record territory, the massive federal stimulus and the regulatory reliefs afforded bankers – it’s easy to miss the fact that our credit world is dominated by the economics of Main Street, not Wall Street. And the economic health of Main Street is far more precarious. How will this reality affect our loan portfolios in the coming months? What steps can we take to stay on top of managing credit risk and ensuring any degree of reasonable loan growth? Why we must be vigilant. Despite the economic shock of COVID-19, our loan quality indicators are relatively unaltered from pre-pandemic days. When we consider the interjection of Paycheck Protection Program loans and regulatory relief in the form of liberalized provisions regarding extensions, modifications, troubled debt restructuring suspensions and the like, arguably the underlying credit stress in our loans has simply been temporarily masked. Adding to a false sense of reality is the COVID-high of nonorganic loan growth and deposit liquidity. We cannot afford to ignore that we are in the midst of a recession and its historic adverse effect on credit quality. Statistically, no more than 50% of Americans have a 401(k) plan or are directly invested in the stock market. The other half makes up a good percentage of consumer banking borrowers and, at this point, it’s unclear when or if Congressional consensus will extend economic relief to the sector. Additionally, no Wall Street bonds fund small business survival. In short, many of today’s bank borrowers are likely just trying to survive, not investing for future growth. That reality alone is a major risk factor in credit 101. What we must do in the months ahead. First, bankers need to accept the current challenges, embrace vigilance and begin taking steps to reduce the uncertainties that lurk within each of our portfolios. Self-analysis of portfolios begins with: • Recognizing the diverse COVID-19 impacts on industries and segmenting our portfolios accordingly; • Realizing that individual hotspots within our portfolios will have markedly different profiles and require different risk mitigation strategies than might appear appropriate for the portfolio as a whole; • Tediously identifying stressed borrowers who are being wholly masked by extensions and modifications; • Aggressively enhancing loan review coverages and effectiveness; • Strategizing on how we replace the temporary loan growth afforded by the likes of the PPP program; • Creating a comprehensive credit risk profile unique to your bank – and describing and defending it before a regulator, sensing a vacuum, does it for you! Embrace government-guaranteed lending as never before. Recognizing that, for the foreseeable future, Continued on page 46.
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