Community bankers are busy serving their customers and protecting their balance sheets as we respond to the Coronavirus pandemic and the resulting economic havoc. Just as prudent bankers were strategically planning for the next recession before any signs of this downturn, forward-thinking community bankers will very soon be contemplating their strategy for doing business after the current recession. We cannot pretend to know precisely how the medical development of
If you are in the military or public safety and have participated in a tactical operation center, you are likely familiar with the "Planning P." The Planning P is a national framework that helps quickly assimilate information and drive to decisions. This is exactly what is needed in any fast-moving event, such as if your bank has been involved in the production of Paycheck Protection Program (PPP) loans. It is also a great tool for any leader or manager to have, as many of these concepts are applicable to everyday business activity.
We have often characterized banks as being “manufacturers of credit.” Like any manufacturing process, banks need to produce a product, in our case loans, to meet the customer’s demand. Loan production takes inputs such as capital, analysis, and documents and combines them in a standardized process to produce an end product. The Paycheck Protection Program (PPP) has presented a tremendous challenge for banks. After three days of manufacturing credit, we have honed ten essential concepts that may help your bank do more than its fair share of getting America going again.
We have been writing on the various strategies available to community banks when structuring commercial loans in this current challenging business and credit environment. With the flat and low yield curve, we have discussed how banks may offer commercial loans through the ARC hedge program using two different strategies: 1) embedded floors, and 2) forward starting floaters.
Go to any Trader Joe's market and then go to a competing market, and you will be likely to find a significant difference. Trader Joe's has produced a COVID-19 response that is thoughtful, practical, relatively inexpensive, and caring.
The impact of coronavirus on community banks will be widespread, and, with some borrowers, the restructuring efforts may take a long time and will sap substantial bank resources. Even as bankers are exerting time and effort to help some borrowers stay in business and continue to service their bank debt, other borrowers are looking for new funding, and existing customers, who are creditworthy, are being solicited by competitors. The question for community bankers is how to retain existing strong customers and appropriate ways to structure new debt given the current challenges.
The economic implications of coronavirus are expected to be widespread and are already causing some borrowers to be concerned about their ability to make loan payments. Many of our bank customers have used the ARC program to fix rates for borrowers while retaining a variable rate. Some of these borrowers in profoundly affected sectors, such as restaurants, hotels, and theaters, are now approaching the lending banks to discuss loan payment relief.
The Fed did more than cut rates on Sunday; they pumped a massive amount of liquidity in the system, sending a signal to banks to level up. Far behind the health of employees and customers in the COVID-19 pandemic, comes the economic impact. Unlike the recession of 2008, where the economic impact came over many months, this pandemic impacted businesses in weeks providing much less time to prepare and adjust. The result is likely to be bad for the economy and bad for banks. If your bank is treating this as businesses as usual, then you are putting your survival at risk.
There is now little doubt that the coronavirus will spread globally and will cause more supply and demand shocks in the market. While economic activity will slow, the amount and duration of the slowdown are big unknowns. Community banks may not have exposure to Chinese markets and may not have significant exposure to the energy sector.
