In PrecisionLender's annual survey, commercial bankers gave their views about the impact of 2020 events and the outlook for 2021. In this episode of the Purposeful Banker, we compare those survey responses to real-life banker behaviors.
Questions? Comments? Email Jim Young at firstname.lastname@example.org
Jim Young: Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, director of content at PrecisionLender, joined again by Dallas Wells, our EVP of strategy.
A little housekeeping again before we start to help pay the bills. First, you can still access the on-demand recording of our February webinar
that unveiled two new products, Market Insights and Portfolio Insights. And as always, we'll have a link to that in the show notes. We will also have a link to our 2021 State of Commercial Banking report
. Or if you're on the homepage of PrecisionLender, you can just click on the banner ad at the top to access that report.
All right, now on to today's show. We're going to be talking about the results of a recent survey we conducted with US commercial bankers at the end of 2020/beginning of 2021. The results are compiled in an infographic titled, wait for it, 2021 Commercial Banking Survey Results
. Spent a lot of time coming up with that one.
Anyway, yes, we will have a link to that in the show notes as well. But for this show, what we're going to do is talk about some of the responses bankers gave, and Dallas Wells is going to act as sort of our interpreter here, telling us what he thinks bankers are really saying. So Dallas, welcome to the show.
Dallas Wells: Yeah, thanks, Jim.
Jim Young: Dallas, we did this sort of show about a year ago, after we put out a survey about prepping for a possible recession. I'll start you out with that same question that I started out on that show, which is generally speaking, when you looked at the survey responses, were they what you expected or did they catch you off guard in any way?
Dallas Wells: Based on most of the recent conversations we've been having, they were mostly in line. There wasn't a big surprise. I will say that that's also all about timing. I think if we'd done this survey over the summer, the answers would have been very, very different. So it's amazing kind of how quickly things have shifted through this whole pandemic and how much timing matters here.
But I think in the grand scheme of things, the big surprise, I guess, that I did take out of this is all things considered, bankers are surprisingly optimistic. When you look at what they've had to deal with over the last year and how much potential problems there were, and frankly, still are, the bankers are actually pretty cheery. More so than I would have expected coming into this. So I guess that's the big surprise is that all in all, the bankers have held up to this pretty well.
Jim Young: Yeah. But I will be curious to this, and this is just sort of a phenomenon of surveys in general, not picking on bankers, but people tend to respond with what they think they should say, not necessarily what they actually do. That's what I'll be kind of curious about with this when we look at the responses is sort of a asking you to play that role of okay, do you think that's what they really are doing, or is it what they think they say they should be doing?
Dallas Wells: Right.
Jim Young: All right, so first one on here, risk mitigation. About three-quarters of our respondents say their banks are taking at least some form of proactive risk mitigation measures, whether it's frequent credit reviews, moving up the timing of reviews, or using early warning indicators. And within that, 60% said they were using early warning indicators. So what do you think? Does that, again, reflect what you've been seeing and hearing, or is that, again, a case of replying with what bankers think they should be doing?
Dallas Wells: This one's a little tricky in that I feel like the responses are accurate in that there is more activity where the bankers are looking at things more often. But from what we can see, they're not necessarily taking more action based on that activity.
Typically when we go into a downturn, and especially one that frankly, the 2020 downturn and still lots of it has not recovered, it was pretty severe. Typically when we see a downturn like that, you can kind of see these waves of downgrades come as bankers review credits. And one of the interesting things we looked at kind of around the same concept is, "Are the bankers making downgrades kind of on the cycle dates?" So in other words, when a revolving line of credit matures and needs to be renewed, is that when a downgrade happens? Because it's typically either there, or it's when there's a performance issue. If they don't make payments on time, then that's probably a good reason to make a change out of cycle.
Well, there was so much forbearance, so much stimulus, so much PPP, performance things weren't necessarily going to trigger that. So based on this response, you would expect that, well, bankers were actually, even without that missed payment trigger, that they would still be making downgrades in cycle. They're out of the cycle to show that they're doing more risk mitigation, right? They're doing more monitoring. They're finding things, they're looking for early warning indicators, and therefore, they would do a downgrade before the maturity date.
We didn't see any evidence of that. So I think they are reviewing things. And from
conversations, they're asking for more stuff, they're checking in with their borrowers, they're trying to keep a pulse on what's going on. But we can't figure out really what action they're taking.
They do seem to be routing some of them to help. Basically helping them navigate PPP and kind of doing some triage there and figuring out who's eligible for how much and who should go to the front of the line and those sorts of things. But they're not restructuring a lot of credits. They're not adding collateral. They're not extending a lot of terms.It's sort of like, "Hey, this is a weird thing. Let's just put it on forbearance or let's get them a PPP loan, and then we'll wait and see." We're pretty far into it for that to still be the case, but it is.
So that's a long way of answering that, but I think there is more activity, they are looking at some new sorts of indicators. I don't think the bankers are real sure what to do with it when they do see something indicated. Okay, this business is clearly severely impacted by the pandemic. Their revenue is down 80%. We can see from an early indicator, they're in real trouble. Now what? And the response for the most part so far has been, "Well, let's wait and see. Let's see if they can bounce back whenever things return to normal." And so far, that hasn't happened yet and it doesn't seem to be right around the corner just yet.
So I think the real question will be, "How long do they sit on these early indicators before doing something about it?" Nobody has a real clear answer for that yet.
Jim Young: Got you. All right, so once again... Now I'm painfully recalling this memory now of what happened last time when we went through this, and I decided, "This is great. We're going to pick on bankers about how they answered it." And inevitably, it turned back on me and I realized, "You know what? It's probably at least as much about how I ask the questions." So great. Once again, I'm looking at that one. Now that probably should have been called risk monitoring, right, instead of risk mitigating, right? Because it implies, it assumes an action that... What you're saying is it essentially hasn't happened here. They are checking on things, they haven't taken the actions. And it's hard to know right now whether that's something you should say they should be doing, or whether it's... Again, we had so much forbearance, all this other stuff, whether it's they wanted to be alerted to a problem and it wasn't there maybe?
Dallas Wells: My phrasing will be maybe unpleasant to the bankers' ears here, but what we hear is that there's essentially two sets of books going. So that's an unfortunate way to describe it.
Jim Young: Okay. All right, going to mark the time on this one in case we need to edit the podcast. All right. Go ahead.
Dallas Wells: So an official downgrade, right? That has implications for your next exam, who got downgraded, how much capital are you holding for that deal. It changes the view of that loan to everyone involved.
So what a lot of banks seem to be doing is they're saying, "Hey, we found an issue with this loan, but we don't want to officially downgrade them because we don't necessarily know if it's a permanent issue yet, or if it is, it's just this weird temporary blip." So they're going on this separate watch list, right?
That's what I think a lot of this is turning into is there is action, but it's like, "Let's set them aside. Let's watch them closer. Let's see what help we can give them. Let's see if they need additional forbearance." So it's like this sort of special care list that they go on to, without having to do what would normally happen, right?
If this was not pandemic-induced, if a business ran into those sort of issues, it would be, "Let's downgrade them. Let's restructure. Let's possibly start trying to work this out." The bankers don't want to trigger or start those official movements yet because sometimes it's a little hard to come back from that. And there's some big implications to that, both for the bank and for the borrower. It's just a question of, again, how long can a temporary list suffice, and how long before the examiners are coming and saying like, "Okay, let us see the real watch list. Not the one that's officially driven by your credit downgrades, but instead, the one that you've identified that you're worried about. I want to see that list."? And then the two will reconcile at some point, and that's the TBD.
Jim Young: All right. Wow, you managed to weave in second set of books and watch list into that answer. Woof, okay. Those minefields.
All right, this next one actually surprised me a little bit, and this may go to what you were talking about with the optimism aspect of it. Which was we asked bankers, "What's your approach right now, new customers versus focusing on what you've got?" 60% said they're going after new customers as aggressively as they did pre-pandemic. And a subset of that group actually said, "You know what? We think we've got a unique opportunity right now to carve out market share. So if anything, we're more motivated to go after new customers." Does that match with reality for you? And is that a case maybe again of timing? Like if we'd asked these questions in September, would we have gotten something fundamentally different?
Dallas Wells: This is the survey response, and then the other thing to look at is the indicator here is credit spreads, right? Is at least the simple indicator of how aggressively are bankers kind of chasing deals and chasing each other's customers. Is there pricing pressure, especially for those really solid credits?
It is timing, right? If you checked last summer, you would see that those spreads have widened out. And they kind of blew out pretty wide and then they've basically been slowly coming back ever since, even as we've had waves two and three and whatever wave we're on at this point. And these different regional waves of pandemic issues and closures, you can see a little bit of that noise in the data, but for the most part, credit spreads have been back to tightening. We're not quite where we were, so I think that 60% number probably feels roughly right of there's a good chunk of banks that are, again, for the right credits, they're getting aggressive.
I think this is where banks... We've been at this long enough now where they are starting to figure out which sectors, which industries are okay to lend in to and are going to be pretty safe, given what we're facing, and which ones are just going to be off limits and we're going to leave them be. So for those that are safe and for credits that are strong and have weathered this pretty well, there is a ton of competition for those.
So it's kind of a tale of two markets. It's the stuff that's almost toxic, off limits, we don't want any part of it. And then there's... What that leaves then is the available credits to chase. That pool actually gets a little shallower. And everybody's flush with liquidity. All the banks are pretty strong. There's not a whole lot of wounded banks out there that are reeling from this like we saw last time around. So banks that are strong and liquid and now chasing a shallower pool of potential business to try to grow from, there's real competition out there. And as usual, those borrowers that are in that position have figured it out pretty quickly, and there's a lot of them shopping deals and taking advantage of low rates and aggressive competition.
Jim Young: Yeah, it's interesting because we had the previous podcast. We basically went through all the reasons why it's going to be really hard to get commercial loan growth, and then we had this number that says 60% of them are going for it. So yeah, you can kind of see how that's going to probably play itself out.
All right, so when we did... Again, timing. Another timing thing. This question, we put out this survey, it was just as the vaccines... News had come out about a successful vaccine and it was going to be rolling out. So what we asked here was, "Okay, given that news, that we got a vaccine right around the corner, how do you expect that to affect credit pricing in the next coming weeks and months?"
So this is a little bit interesting, Dallas, because now as I'm sort of looking at the responses here, I'm wondering how this meshes with what we just said, actually, because only about 4% said, "Yeah, I feel like I can loosen things up." Three-quarters of them said, "Not changing a thing here. I'm going with what I've been doing." Is this one of those cases now where it's you can say that, but when you're faced with the option, you'll do something different?
Dallas Wells: Yeah, and the question was sort of a sliding scale. So 4% are like, "I feel great," and then there was lots of in-between of like, "We'll see." I think this is one of timing where I'm guessing if you ask the same question now, just a few weeks later, that 4% number probably goes up a little. That's kind of the trend line, right? Is that I think generally, it feels like things are getting a little better.
And again, it's a little tough to reconcile those because it is that tale of two markets, right? So are we across the board going to loosen things back up and just, "Hey, back in business."? No, I don't think we're there yet. But it is at least better enough to where more and more of those borrowers and industries are going to kind of make it to the safe list. So it's getting better, but still not, "Hey, problem solved."
And I think it's also starting to sink in that this issue will be here for a good long while. I hate how much the phrase, "the new normal," how much that's become the new normal is saying that phrase. I think you hear it so often because it is true. People are adjusting to, "This is reality now, and we just have to figure out how to function within it." So again, these feel about right, and probably trending a little more positive.
Jim Young: All right. Now, this one, I feel like, may be the most straightforward one we've got here, but maybe I'm wrong, because this is what respondents... We asked again about, "Hey, the pandemic, did it spark investment in digital tools at your bank?" Three-quarters of our respondents said, "Yes, it did." And I'm starting to feel jaded at this point, asking this question again, but are we finding... We definitely have heard bankers say this. Yeah, yeah, we're definitely investing in digital. At this point now, almost a year in, have we seen that the actions are backing up those words?
Dallas Wells: The curious part about this one to me is that banks have spent a lot on digital out of necessity over the last year. If anything, that three-quarters may feel a little low. They've all had to make some sort of investments or upgrades or adjustments to those digital tools.
I think the hope was, and still is, that this would transition from temporary relief valves and things like, "Hey, we have to spin up a digital application for PPP loans." That that would turn into, "Hey, now we have some infrastructure on which we can build, and let's do digital small business loans all the time, and not just for PPP."
The struggle has been that there's been so many changes to that, that every time banks feel like, "Okay, now we can start to work on this permanent solution," there's another round, there's another tweak, there's another adjustment.
So as an example, we're right in the middle of the latest round of triple P, and then the Biden administration comes out and says, "Hey, by the way, we're going to give this two-week window where only really tiny businesses can apply," so it's like 20 or fewer employees, "So if you're mid-application and we haven't pushed the fund button yet, stop and wait two weeks." Well, there's all sorts of digital implications for that, right? So now there has to be adjustments to what stuff shows on the screen, and you have to tell people who are above that threshold when they're applying, "Hey, you're outside of the window. You're going to have to wait until they reopen it."
Those little tweaks are all a drain on those bank resources. And I know there's some fatigue around this, the constant adjustments and constant updates. And now they have to connect to a new SBA system because the last one crashed so much. It's a daunting thing and it all feels very temporary, right?
So it's almost like the cities that have to do all the building for the Olympics. You spend five years of this frantic construction to build a new soccer stadium, and then closing ceremony and now we have this useless stadium that I guess we'll bulldoze. That's kind of what some of this feels like is I guess we have some of these digital platforms that are so specific to these programs. We've spent a lot of time and effort and money on them, and maybe that's all they're ever good for.
I'm hoping that's not the case. I hope there is still a good foundation there. And I hope if nothing else, the banks are building some muscles here to where they realize, "We can quickly roll out new stuff here. And let's keep doing that once the whack-a-mole thing with triple P and all the other stuff is done."
Jim Young: Promise me that the next time you go out in a sales conversation, that you do not at all ever group PrecisionLender in with Olympic stadium building.
Dallas Wells: That's fair. Yeah.
Jim Young: Because yeah, as a former sports writer, I can tell you the horror stories about various cities that have hosted the Olympics and the debt they were left with. But of course that is not PrecisionLender at all.
Okay. Again, just to reiterate, what we're talking about are results that can be found in an infographic that again, we'll have the link in the show notes. Almost all of the... And there are going to be some questions and results on there that we're not going to touch on here. We're kind of hitting some of the most interesting responses at least to us. So definitely encourage you to check that out.
Almost all the questions really had a pandemic connection to it. The last one I want to ask you about is one that it does have some pan... Everything has a pandemic connection, but this one felt a little more timeless to me. We could ask this same question in the exact same form five years ago on this. That is, we asked bankers about you're having cross-sale conversations. How do you follow up on them? In other words, you work out a deal with a customer. As part of that deal, you know the drill, they agree to bring over some accounts to the bank. How does your bank ensure that what's been promised is actually eventually delivered to the bank?
The answer, and I promise I'm not being glib here, is they really don't. Only about 25% said they actively track this. 39% said they don't track it at all. But to be fair, I have been cynical about positive responses so far. Is there any chance here that bankers are being too tough on themselves with this response?
Dallas Wells: No.
Jim Young: Okay. I was afraid of that.
Dallas Wells: Sorry. This one's a struggle. I'll start by saying I get why it's hard. And especially, the larger the institution, the taller the walls are between business units and between products, and it is hard for those banks to not become siloed around product lines, right? So it's great that you wanted to win the loan and get aggressive and you said that we were going to win all this treasury cash management business, but now we've got to go do that, and that's an easier thing to say than to actually do.
This is part of what we've been getting deeper and deeper in the weeds with with a few of our larger clients that are still struggling with this. They solved the problem upfront, getting bankers to cross-sell those products. So they do what frankly should be the hard part, which is as they're selling relationship banking and they say, "Sure, we'll do the revolving line of credit and we'll do the new real estate project. And I'll tell you what, we'll even give you a little price break if you bring over all the deposit business and all this fee-generating stuff." And the customer says, "Great, I'll take that deal. I'll do that."
And then it kind of gets handed off and it goes into the systems. And what happens is is it gets plugged into the assembly line, right? So the banks put it into their loan origination system and they start ordering appraisals, and they start creating loan documents, and they start tracking all the covenants and restrictions and getting it loaded into the systems. All that stuff is happening on an account by account basis.
The other business that was promised, what the bankers are saying here is, "That just sort of goes into the ether," right? It just sort of evaporates that we ever had that agreement. So banks are saying, "margins are at all time lows. We see no relief on the horizon from that. So fee of business is more important to us than ever." So we say, "Great, what are you doing to actually execute on that?" And the actions here say, "Nothing. We're not doing anything."
Sometimes we've seen banks where the incentive is paid when the banker just makes the introduction, but then there's no follow through to actually get that business closed. Talk about low-hanging fruit. There's no extra marketing expense, there's no cost of acquisition of a new account. You don't have to put up a new billboard or you don't have to do any of that stuff. You have this business in hand, you just actually have to go get it.
So this one surprises me that it hasn't had more investment, because it's dollars of revenue sitting there just waiting to be grabbed. It's cross-functional, it's hard, but the outcome is really worth some effort here. And I think this needs some digital help, it needs some process help, it needs some culture help. This is one that we're digging into a little bit, because I think it's really, really important.
Jim Young: Yeah, absolutely. Just out of curiosity with that one, is there a case of... Again, I'm seeing the psychological aspect to this, but does leverage, I guess, sort of shift to the customer on this after they've essentially gotten the loan that they wanted, if you haven't gotten the deposit by then?
And again, I don't know because I don't know to what extent it's really a big ask for that customer to bring over the stuff. But is there a point where you go, "Well, gosh, we want to keep these people. We want to win more loans from them. We don't want them to churn. So we don't really want to aggravate them by asking them for this stuff even though they told us they would bring it over at some point."? And is the other person sitting there saying, "You know what? What are they going to do," I guess, "if I don't bring it over right now?"?
Dallas Wells: There is some element to that. I think the banks that do this well, I've seen a couple of different approaches... By the way, it is a big ask, right? This stuff, it's a pain. When you think about moving your personal checking account, that's a big endeavor. Now increase that by a couple of orders of magnitude for business deposits and all the ancillary cash management stuff. It's a big ask.
Yes, the dynamic does change, right? You kind of promise what you need to to get the deal done. Also, there's the dynamic of a lot of times you have either a business owner or at least an executive sort of negotiating this stuff, and then it gets handed off within both organizations, right? So within the bank, it gets handed off to a different department, "Hey, here's some deposit business you need to get." And for the business owner or the executive, it's a, "Here's my accounts payable person," right, "who handles this stuff and reconciles our bank account. That's who's going to actually do this." So it gets handed off and there's very little accountability and follow through to force that to happen.
So the banks that do this well, you can write this right into the loan documents, right? Your rate is 2% with all this stuff that's kind of outlined in this schedule. If that business does not show up within an X number of days, the rate's 2.5%. You can create that as a condition, a covenant, some sort of restriction where basically, you can go back to that.
Now, again, you have to decide that you're going to enforce that. But at least it shows that you're serious and when you follow up, you can say, "Hey, we got this deadline out there. Let's get that beat so we don't have to mess with that stuff." It gives you some point on the horizon to aim at.
The other thing is is that even if you don't have that, the nature of these sort of accounts, they almost always have revolvers and renewals of lines of credit, and so there's this chance to sort of redo things.
When Gita Thollesson looked at some of this data, you see spikes in this business being realized at about the one year mark. So it's like you go along for 12 months and nothing happens, and then it's time to roll over that line of credit. And what happens is is all the humans get together and they're like, "You were supposed to bring that deposit account. We better get that in here now that it's time to renew this." Otherwise, that sweetheart pricing that you got can't stay intact, right? We actually have to price this the way it should be.
But the other thing that Gita has found is that most institutions are actually really bad at that renewal process also. So those things compound on each other. If you're not good at how to handle those renewals, if it's just like you stamp them as they go by and you don't even look, you're not going to catch it there either.
So what ends up happening is the averages are really bad. As an industry, banks are not good at this. But there are a few banks that are exceptionally good, and it shows in their results. They have really profitable relationships, they have deep, sticky relationships, and it's because they put these tedious steps in here to make sure that they happen. They have a real process. They create real sales opportunities that get followed up on, the management team holds people accountable, they hold their borrowers accountable. All that stuff is work, but it's paying work.
Again, that's a long answer, but it's because I think it's a really complicated and important problem that some banks have solved and some haven't. That's the difference between your high and low performers in a lot of cases.
Jim Young: All right. On that note, we will wrap it up for this week show. Dallas, thanks again for coming on.
Dallas Wells: Yeah, thank you, Jim.
Jim Young: Again, just a reminder that this show, what we were talking about was answers from a survey that we put out. It's the 2021 commercial banking market survey, and that infographic is available. We'll have a link in the show notes, and you can find it on our site very easily as well.
Again, so thank you so much for listening this week. For a few more friendly reminders, if you want to listen to more podcasts, check out more of our content, visit the resource page at precisionlender.com, or head over to our homepage to learn more about the company behind the content.
If you like what you've been hearing, please make sure to subscribe to the feed in Apple podcasts, Google Play, or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this is Jim Young and Dallas Wells, and you've been listening to The Purposeful Banker.
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