Somewhere Over The Rainbow
In the 1939 movie the “Wizard of Oz,” our heroine, Dorothy, discovers that she always had the power to leave Oz and get back home to Kansas. The only thing she needed to do was, wearing her ruby slippers, click her heels together three times and repeat “There’s no place like home.” Interestingly, her “return” home is really awakening from a bad dream. (Yes, thankfully those flying monkeys that gave me nightmares for years afterward were not real!) After two years of COVID restrictions and mandates and wild government spending, I feel like we are just awakening from our own version of a trip to Oz.
Somewhere Over The Rainbow
The message of “no place like home,” however, is just as relevant today as it was for Dorothy. The difference is how home has changed (if at all?) after two years in Oz. Year-end financials arrive carrying a variety of messages related to the past (stimulus money, loan forgiveness, forced closures, supply chain disruption, etc.). Credit analysis will be challenged to sort through the noise of the past and attempt to look into the future. This is going to be clouded with interest rate increases, historic levels of inflation, and potential recession.
One way to avoid being surprised by loan losses will be to remain “close to home.” As community-based financial and lending institutions, the focus must remain on local markets where you know the businesses and, more importantly the business owners, and what factors will drive their success. More communication with your clients will be better than less during this time. This is certainly easier when they are in your neighborhood.
A “local focus” means you are focused on what you know best. My mother would frequently chide us as kids to “stick to our knitting”. Which was odd, as none of us children knew how to knit. However, it is a good reminder to stick to our own business. To not be side-tracked with things outside our control or concern.
That probably means that as a community banker, I should not be getting involved with investing in a mixed-use real estate development project in Chicago (or pick a city). Chasing deals and loan volume outside your market area can have some surprises. Not unlike Dorothy’s challenges in getting the broom of the Wicked Witch of the West!
What to Expect
Admittedly, 2022 and 2023 will be filled with some serious challenges. Many credit professionals today have not lived through inflation pressures that we see today and/or such a serious about-face on monetary policy and interest rates. Understanding the impacts on your commercial loan portfolio will be a challenge for every institution. It will also require diligent efforts in monitoring the portfolio on an ongoing basis. AND responding quickly to deteriorating situations as they arise. If you ignore the problem, it will not go away — except as a charge-off.
If your organization finds itself in a position where it could benefit from help identifying potential blind spots in commercial underwriting, industry issues, or risk rating approaches, Enlighten Financial is able to help through full or focused loan reviews, supplemental credit underwriting and/or industry studies and training. Together we can help get a glimpse over the rainbow.
Richard Rudolph is Senior Consultant at Enlighten Financial, a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape. We lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.445.8133.Tags: Enlighten Financial, Somewhere Over The Rainbow