Bankers look at a wider range of borrower behaviors to determine the level of stress in their loan portfolios.
Overdue loan payments, a sign of distress for everything from small business ready to mortgages, are largely held in check by postponements and other changes. But the problems persist, as evidenced by the still high unemployment rate and the cloudy economic outlook linked to the coronavirus pandemic.
Government programs have created more blind spots for bankers. But requests for postponement are declining, the absence of any new stimulus prompts more bankers to warn that credit quality may start to erode in the coming months.
The extent of the exposure remains in question.
“It’s unknown,” said Laurie Stewart, president and CEO of Sound Financial Bancorp in Seattle, of the pandemic’s credit toll. “Here we are in October and our portfolio is resilient with only modest default rates. But we just don’t know how much is being sustained by the stimulus. When we talk to our customers, they’re not really sure either.
A number of commercial bank executives told a virtual forum hosted by PrecisionLender last week that they were spending more time examining warning signs or that they had stepped up their efforts to create such systems.
More and more banks are increasing the frequency of official credit reviews. They also monitor things like sudden large drawdowns on lines of credit or deposit accounts – viewing sudden cash needs as a potential sign of distress.
The late Peter Tourtellot, who was a director of the Anderson, Bauman, Tourtellot & Vos turnaround firm in Charlotte, North Carolina, advised lenders to make observations when visiting borrowers. For Tourtellot, a poorly maintained property or outdated magazines in the waiting room were potential signs of trouble.
Gita Thollesson, senior vice president at PrecisionLender, said these initiatives made sense. Credit quality, by traditional measures, remains excellent, but underlying concerns have led lenders to look globally at account activity for signs of liquidity depletion or other unusual behavior that may suggest creditors. problems.
A PrecisionLender survey in August of 50 bankers found that 60% of them had stepped up their surveillance to identify warning signs. Thollesson said the percentage would likely be higher if another survey is conducted today.
“Bankers want to focus on all the early indicators and be ready to take action as soon as they can,” Thollesson said.
While credit measures have held up well so far, the government’s estimate that second-quarter GDP fell by more than 30% – the biggest drop since the Great Depression – is sure to put bankers down. uncomfortable, Thollesson said.
“Overall things are going really well and it’s a little weird,” said Matthew Deines, president of First Northwest Bancorp in Port Angeles, Wash.
“We are waiting for the first shoe to drop,” Deines said. “As an industry, we have to be pragmatic and understand that there will be pain here with this thing.”
First Northwest’s assets of $ 1.5 billion are on solid footing. The paycheck protection program increased fee income and added new customers and an abundance of deposits. Its mortgage business is booming and “clients don’t seem to be looking for cash at all,” Deines said.
Still, First Northwest is watching closely for any signs of change, knowing that a resurgence of the virus, or the absence of further government stimulus, could inflict a financial setback on the economy and the bank’s borrowers.
“I think we need some extra stimulus to do this,” Deines said.
“We are monitoring anything” that could point to credit problems in the Sound, with assets of $ 872 million, Stewart said.
“We talk to our borrowers all the time because as the stimulus ends, it looks like we are starting to see cracks,” she added. “That’s what worries me right now – if the cracks are all happening at the same time. Our bankers are more focused on portfolio management than new loans. “
Paul Davis contributed to this article.