Lessons (re)Learned Part 2

by David McSwain

2As we are in tunnel vision with round two of PPP, I believe it necessary to maintain discipline inside the existing portfolio.  Personally, one of my 2021 goals is to slow down the thought train and attempt to ask better questions.  Many people have and will, for their reasons, apply for PPP.  In my opinion, windows allow us to see where clients are exposed, maybe.  A crisis is not to be wasted.  This is a great time for customer contact, possible solutions that better protect existing loans, or in some cases, we have seen, for growth opportunity.  Without this crisis, exposure could have been camouflaged.

Our people are valuable.  Many experienced and as we witnessed,  a positive Covid test can be a disruptor itself for the entire office.  Technology advancements rapidly appeared and thrust us forward to the point it has caused a new normal.  What technology do we not have today that is needed for a post-Covid world?  What skills are we missing, do we have enough employees trained in the proper areas, or perhaps do we need to look to see if we can advance into this new world and what does that look like for the industry and more particularly your bank?  McSwain Consulting has been doing remote work for more than four years now and we are more than prepared to work in the digital world.

This hasn’t been felt by all yet, but the number of competitors that surfaced through this pandemic in the form of fintech was massive.  As most of you are on some form of social media, the fintech companies surfaced rapidly over the past 12 months, in my opinion.  Typically, these companies don’t steal your worst customer, either.  So, how do we operate in this ever-evolving digital world?

Does a real estate boom in the middle of a pandemic make perfect sense?  Housing typically wasn’t built for the remote working world where children aren’t in school or they are and then they are not. People’s needs and priorities also changed. Those changes will be lasting.  Also, some businesses have experienced what they said couldn’t be done and that is a collaborative work environment where no one is in the same building.  Banks even experienced this and continue to experience based on their Covid protocol. Regulators have now been doing remote exams, as we know it, coming up on a year.

So, the real questions.  How do we continue to do business and grow in this new ever dependent digital world?  What resources will we need that we don’t have today to operate in this new world that no one knows what it looks, tastes, or smells like?  What vendors do we need, and do they have the capabilities to operate in this world?  What we measure today, is it appropriate for the times?  Has the cheese or needle moved?  Are our systems and processes adequate for today’s environment?  Some of you may already be there and that is awesome.  Some are not even close.  Either way, McSwain Consulting can and is willing to serve you well!

Going forward, what critical changes are needed in this new world?  As with a new administration in Washington, a pandemic, most of us have never experienced that has caused some severe economic damage to some industries and caused an exponential acceleration in others.  McSwain Consulting is prepared to go on this journey with you as a strategic partner in loan reviews, ALLL analysis, and testing, planning, and loan risk management.  We are here to serve.

Questions, comments? Would you like to discuss a remote loan review? Reach out to David@mcswainconsulting.net.

Lessons Learned & Re-Learned During the Pandemic

by David McSwain

As you know Covid-19 has changed everything.  It has forced every industry that can rethink how 1
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