Relief Or Real Life

“Plop, Plop, Fizz, Fizz…Oh what a relief it is!” was the tagline for a well-known antacid medication. This over-the-counter product was available to treat the symptoms of excess stomach acid including heartburn, upset stomach and indigestion. In this time of COVID recovery, it is hard not to make analogies to medical treatments. Especially when we think about finding “relief” for the social, political, and economic circumstances we face. Is it Relief Or Real Life?

But what is “relief”?

The two most common definitions would be as follows:

1) Reassurance, consolation, comfort. A feeling of reassurance and relaxation following release from anxiety or distress; and

2) Assistance especially in the form of food, clothing or money given to those in special need or difficulty; help, care, subsidy.

Definition #2 would appear to be the most relevant to our commercial clients, while definition #1 may be more relevant to commercial lenders. However, one thing that’s common to both parties is that a proverbial medication may provide temporary relief, but healing only happens if you change something about your circumstances. Otherwise you return to the original ailment.

How to View Borrowers?

The parallel to how lending institutions view borrowers (their “patients”) is notable. If lenders insist upon looking at their “patients” through the lens of medication, the patient may appear healthy (with relief). Since relief is temporary, what is the circumstance post relief? The challenge for lenders and credit professionals is the question. Are we still making COVID concessions or excuses for poor performance? Is government stimulus, whether in the form of grants, loans, debt relief, etc., hiding real performance issues? On a macro basis, is the Federal Reserve policy of accommodation and low interest rates accommodating “relaxed” performance? If a borrower had credit issues going into COVID, what actions did the borrower take to address the issues for a post-COVID economy?

Buggy whips are no more useful post-COVID than they were pre-COVID. Also, if the COVID economy negatively impacted the borrower, what changes did management take to address the issues? Looking at myself, for example; if I am weak, flabby, and slow-going prior to COVID. Did I use my relief and stimulus time and money to exercise and change my diet or follow the program that got me there? (I am going to plead the Fifth Amendment.)

Time For A Thorough Analysis

The answer to these and related questions involves more than just an adjustment for government loans or grants. A thorough analysis of the borrower and the industry is critical to a proactive identification of current and future credit issues. Short-term government programs will do nothing to address long-term fundamental changes to some industries. These include travel, hospitality, entertainment, medical, CRE and residential housing (single and multi-family). Impacts from supply-chain disruptions and lack of people returning to the workforce also deserve consideration.

One of the temptations we have seen among lending institutions is to take a somewhat lenient view on poor performance. This is in the belief that the regulatory agencies have issued a “green light” to accommodate struggling borrowers. This attitude appears to be fostered by regulatory guidance dating back to March 2020 and Section 4013 of the CARES Act which addressed “Temporary Relief from Troubled Debt Restructuring.” The purpose of the guidance was to “provide banks the option to temporarily suspend certain requirements under U.S. GAAP rules related to troubled debt restructure (TDR) for a limited time period to account for effects of COVID 19.” This was further amplified in April 2020 in a regulatory statement “to encourage banks to work prudently with customers affected by Coronavirus.”

Relief Or Real Life

The mistake a number of lending organizations are making is interpreting this to mean it is appropriate and acceptable to take a lax (or at least slow) approach to adjusting risk ratings consistent with underlying borrower performance. It is important to note that the regulatory guidance was developed to address accounting issues for lenders as it relates to Allowance for Loans and Lease Losses (ALLL). It was not designed to discourage proactive adjustments of risk ratings to watch or substandard (or worse). Those institutions that have taken a more relaxed view on risk rating adjustments are in jeopardy of “discovering” several risk-rating surprises. These may have multi-level downgrades at the conclusion of government provided financial stimulus and grants. They may also have earnings surprises with the expiration of accounting accommodations.

So how can Enlighten Financial help you? Let Enlighten Financial’s team be your medication (the plop, plop, fizz, fizz) through targeted or broad-based portfolio review. We can assist you in identifying potential risks in your portfolio that allow your institution the opportunity to develop appropriate remedial plans and strategies. While we cannot guarantee a “bright sun-shiny day,” we can certainly assist you in singing along with Johnny Nash to the 1972 song “I can see clearly now the rain is gone/I can see all obstacles in my way/ gone are the dark clouds that had me blind…” It is possible to miss the obvious when over-medicated, but we will help you determine whether it’s Relief Or Real Life.

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.