Unprecedented times. How many of our borrowers on forbearance can begin making payments? What provision do we make this quarter? How do we justify it? What will our constituencies think when we have to foreclose on borrowers?
For most of us, the onset of a recession means a time to assess the risk on our balance sheet, to tighten underwriting standards, and ramp up workout teams. It's what we did in 2008-10. And we were successful. We lived to fight another day.
But is it the right strategy for this pandemic recession?
I delivered this talk on a recent bank trade association webinar. And I'd like to share it with you.
At the end of 2019 everything seemed like sunshine and rainbows. Over a decade of economic expansion. Record earnings. Pristine asset quality. Capital aplenty.
Unlike 2008, banks were not the bane of our problems. In 2008, we were in the eye of the storm. Sure, community banks had little to do with liar loans or what was otherwise termed sub-prime. But many banks were, including the nation's largest. And "bank" is what's on our marquee. So community banks were grouped with the wrong-doers, even though the wrong-doers were a small percentage of our industry. They represented an outsized percentage of banking assets. So into the valley sank our collective reputations.
But today, we were not part of the problem. And through the Paycheck Protection Program, we actually became part of the solution. Community banks in particular. Banks with less than $10 billion in total assets accounted for 51% of PPP loans and 44% of PPP loan balances. We punched well above our weight.
What's more, the very large banks that participated (Wells Fargo did not initially) largely ignored their small to mid-sized customers. When PPP opened, businesses flooded the gates. Like the Pamplona running of the bulls. Most of them banked with the very largest. And many of their calls to their "banker" went unanswered. So they called around to their community bank. Call-answered. Loan request-submitted. Approval-recieved. Funding-deposited.
Steve Busby, CEO of Greenwich Associates, a financial services analytics firm, said this about PPP borrowers: "If business owners did not know what it meant to be a borrowing customer or have loyalty from their bank, they do now."
So, a win.
But now reality. The below chart shows S&P Global Market Intelligence estimates for the rise in bank non-performing assets.
And according to multiple bankers I spoke with today, the leaning is to wait it out. Feeling like Patrick Swayze described in Next of Kin.
But do we want to pass up on the opportunity to slay the gladiator (i.e. big bank) while they're down? Do we want to pass on the opportunity to operate with fewer, yet more capable (and therefore higher compensated) employees? Do we want to retrain our once branch-centric customers that were forced onto online and mobile platforms to be branch-centric again? All the while tending to our balance sheet?
Do we want to hunker?
This is our moment. What strategic initiatives will bust our 2020 budget? It's already busted! And our collective capital position is much stronger than 2008.
This is our moment to prove we can walk and chew gum at the same time.
This is our moment to invest in our employees to develop the human element, so critical in a "relationship".
This is our moment to invest where investing needs to be done, and pull the plug on inefficient uses of our capital.
This is our moment to prove that anything the big bank can do, we can do better.
Or, we could hunker, and wait it out. And let the moment pass.