Everyone will be impacted one way or another by COVID-19 (also referred to as the Coronavirus). Sales, which had already plateaued at most businesses, will go down and cash flow will become further strained. This will test the viability of almost all small businesses. Brick and mortar retail stores and accommodation/food services (hotels, motels, and restaurants) industries will take the brunt of the force. Delinquencies and losses at banks will go up over the next several quarters if the environment does not stabilize. Here are some strategies to consider in managing credit risk to help minimize the impact of COVID-19 at your bank:
- Start increasing your ALLL provision using applicable qualitative factors.
- Have more frequent workout meetings to review delinquencies and establish plans for high-risk borrowers. Require Loan Officers to provide weekly updates on customers more than 30 days past due. Any new loan that goes more than 30 days past due will give you an indication the borrower is struggling with cash flow.
- Meet with all large borrowers that are risk rated Pass/Watch or worse in high-risk industries. If you don't have a list of high-risk industries, we can provide them to you. Document the borrower’s plan to reduce expenses in order to match the reduction in sales during this environment.
- Look at lines of credit that are maxed out. Provide additional availability on LOCs for seasoned customers (those that have weathered downturns before and the odds are they will come through this).
- Monitor current construction projects weekly. We would not recommend you do any new construction loans until the environment stabilizes.
- CREMs with tight cash flow (DSCR around or less than 1.00) also need to be monitored as tenants may have difficulty paying rent. Determine owner’s/guarantor’s ability to support loans through personal income and liquidity.
- Consumers will delay payments on their residential mortgages and retail loans if they are told to stay home without paychecks coming in. ALLL should be increased for these loans as well.
- Monitor Special Mention, Substandard, and Doubtful loans as a percent of Total Capital. If this environment does not stabilize and these loans go above 50% of Total Capital, more than likely additional capital will need to be raised. This is especially true if your Weighted Average Risk Rating (WARR) is high. Remember, ALLL is part of Capital so adding more to the ALLL does not hurt the Bank’s capital ratios.
If you would like to discuss the above strategies in more detail, please don't hesitate to
We hope everyone stays safe and healthy during this time.
Bo Singh, President
T. Gschwender & Associates, Inc.