Pub. 1 2021 Issue 6

16 | The Show-Me Banker Magazine In a long career focused on credit risk, I’ve never foundmyself saying that the industry’s biggest lending challenge is finding loans tomake. But no one can ignore the lackluster and even declining demand for new loans pervading most of the industry, a phenomenon recently confirmed by the QwickAnalytics®National Performance Report, a quarterly report of performance metrics and trends based on the QwickAnalytics Community Bank Index. For its second quarter 2021 report, QwickAnalytics computed call report data from commercial banks $10 billion in assets and below. The analysis put the banks’ average 12-month loan growth at negative -0.43 basis points nationally, with many states showing declines of more than 100 basis points. If not reversed soon, this situation will bring more troubling implications to already thin net interest margins and stressed growth strategies. The question is: How will banks put their pandemic-induced liquidity to work in the typical, most optimal way —which, of course, is making loans? Before we look for solutions, let’s take an inventory of some unique and numerous challenges to what we typically regard as opportunities for loan growth. • Due to the massive government largess and 2020s regulatory relief, the coronavirus pandemic has given the industry a complacent sense of comfort regarding credit quality. Most bankers agree with regulators that there is pervasive uncertainty surrounding the pandemic’s ultimate effects on credit. COVID-19’s impact on the economy is not over yet. • We may be experiencing the greatest economic churn since the advent of the internet itself. The pandemic heavily exacerbated issues including the e-commerce effect, the office space paradigm, struggles of nonprofits (already punished by the tax code’s charitable-giving disincentives), plus the setbacks of every company in the in-person services and the hospitality sectors. As Riverside, California-based The Bank of Hemet CEO Kevin Farrenkopf asks his lenders, “Is it Amazonable?” If so, that’s a market hurdle bankers now must consider. • The commercial banking industry is approaching the tipping point where most of the U.S. economy’s credit needs are being met by nonbank lenders or other, much-less regulated entities offering attractive alternative financing. So how do banks grow their portfolios in this environment without taking on inordinate risk? • Let go of any reluctance to embrace government-guaranteed lending programs from agencies, including the Small Business Administration or Farmers Home Administration. While lenders must adhere to their respective protocols, these programs ensure loan growth and fee generation. But perhaps most appealing? When properly documented and serviced, the guaranties offer credit mitigants to loan prospects who, because of COVID-19, are at approval levels below banks’ traditional standards. • Given the ever-present perils of concentrations, choose a lending niche where your bank has both a firm grasp of the market and the talent and reserves required to manage the risks. Some banks develop these capabilities in disparate industries, ranging from hospitality venues to veterinarian practices. One of the growing challenges for community banks is the impulse to be all things to all prospective borrowers. Know your own bank’s strengths – and weaknesses. • Actively pursue purchased loan participations through resources such as correspondent bank networks for bankers, state trade groups and trusted peers. SMART WAYS TO FIND LOAN GROWTH By David Ruffin, Principal, IntelliCredit