by David McSwain
As you know Covid-19 has changed everything. It has forced every industry that can rethink how 
work is done and where it can be performed. Also, it has given pause to every business owner, banker, investor, employee, board of directors, and bank customer. The lessons learned were many and they keep coming. Not only have we been maneuvering through a worldwide pandemic, but we also experienced a very turbulent change in power in Washington, D.C.
Not since I began my banking career in the early 1990s, have the regulatory agencies moved with lightning speed, common sense, and an approach I have never witnessed before. This time for the betterment of the whole. Some things you may not agree with, but most, in my opinion, are completely necessary and missed in the financial crisis of 2008 and crisis of the past. Maybe they learned a few lessons as well. For that I am grateful.
Cash, cash flow, and liquidity are still very critical components. No amount of cash reserve could have been saved by most main street businesses to combat the length of time this pandemic plagued us and continues to disrupt. These three very critical components were very exposed by the amount and number of PPP loan participants. As we have a glimmer of hope getting to the new normal, going forward, maybe banks get back to the basics of cash reserves for their borrowers or compensating balances?
Another important diagnostic that was exposed was the very quick and important indicator, current assets/current liabilities on the borrowers’ financial statements. If you made one or more commercial loans and you collected regular financial statements and trended appropriately the benchmarks, you saw how fast the entity’s ratios flipped upside down. Additionally, you saw how fast cash, cash flow, and liquidity evaporated. Again, benchmarks or speed bumps as we like to call them were not utilized in some cases that we experienced in loan reviews.
The importance of collecting financial information on borrowers at regular intervals based on the business became more highlighted during the past year. Trending the data was even more important on many different levels. Working with customers to get them to understand the importance was even more challenging for some. Every business owner was nervous. The obvious was everything became disrupted for a moment for some and still exists today for others. We saw cash flow cycles disrupted and accounts receivables became more questionable than in great times.
Lines of credit are a very important and very useful tool if used properly. We recommend that if a line of credit goes on the books, you mandate a borrowing base at a predetermined level. A borrowing base is the closest document to real-time information you can collect as long as you are collecting it frequently enough. Also, a very important factor we experienced throughout 2020 was the lines of credits were being used for purposes other than originally intended. The discipline to stay the course on purpose is vital. A request outside the original purpose should give pause, in my opinion, as to a problem arising or not?
Maintain discipline in underwriting and be brutally honest with yourself on annual reviews. Also, annual reviews are a great time to review cash positions, cash flow trends, and liquidity with your customers, particularly in the ag sector. Annual reviews are extremely important because we don’t know what the economy will do at any given point and I believe Covid-19 has allowed us to relearn this lesson. The economy is cyclical and changes daily, but it seems to me, the lessons of the past get easily forgotten.
…to be continued…
Thoughts? Drop them in comments or email David@mcswainconsulting.net