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

Optimization vs. Growth

by David McSwain

When it comes to management, we are always looking for ways to increase the bottom line.  My MLK jr McSwain-2observation is that most CEOs or Managers automatically go to the obvious, GROWTH, right? 

STOP! 

While cooking breakfast this morning, I was listening to the podcast “Smart Passive Income”.  The podcast host, Pat Flynn, was hosting Paul Jarvis, author of Company of One (which is a very misleading title) but that’s for another day.  Listening to the podcast gave me the idea for this blog and how I could use it to relate to Community Banking and in doing so, how  I could provide added value to my current clients and readers.

So…why not concentrate exclusively on Growth?  The new buzz word for businesses as it relates to Banking is Scalability but I believe we may be missing a step.  After listening to the podcast, I asked myself, “What if, in most cases, we have it all wrong, or at least we have it in the wrong order”?  I turned to an indirect mentor and book I often refer to when thinking about a subject.  That would be The Road Less Stupid: Advice from the Chairman of the Board, by Keith Cunningham.  So I re-read a couple of related chapters on Growth.

I realized we are missing the boat by focusing solely on GROWTH!  Banks think they need to grow their loan portfolio in order to achieve the desired level of compound earnings.  Time and time again when we are in Community Banks performing Loan Reviews and other related services for our clients the subject of strategy comes up.  And inevitably, the number one strategic subject that arises is GROWTH.  After Thinking about Loan Reviews, Credit Analysis, ALLL Reviews and Analysis, I realized as an industry, we are NOT OPTIMIZING the assets we already have.  As Mr. Cunningham describes it, “we just build another machine.”

Suppose that you are the CEO of a mining company.  You operate one mine at a time until the lode plays out and then you move on to the next site.  Sometimes you might get to thinking that you need to move on to the next site more quickly and maybe increase your production.  Maybe, maybe not!  After all, you already have the mining equipment in place.  You have already done the site work and you have built the tunnels, shafts and transportation infrastructure necessary for production. So why be so anxious to move on when you haven’t fully leveraged the assets you already have in place?

In Banking, it appears we look for the next new mousetrap that will create external GROWTH, but it appears we absolutely avoid OPTIMIZING the systems and/or processes that we already have in place.  Long-term growth is not sustainable for any business, including Community Banks, without also OPTIMIZING their existing systems and processes.  Part of OPTIMIZING systems and processes is instilling disciplines inside those systems and processes before Strategic Growth should occur, but it doesn’t seem to work that way.

What we should be doing is OPTIMIZING Credit Analysis on new or renewed loans, OPTIMIZING our servicing processes and credit administration systems.  And we should be utilizing Data Mining on our current customer base to create internal GROWTH.  I would guess there is so much more opportunity inside your own loan portfolio to hit your growth strategies for the next several years, but we miss OPTIMIZING what we already have, and we go search for the next best mousetrap, GROWTH!

Community banks, if you are interested in OPTIMIZING your loan portfolio and your customer relationships, MCSWAIN CONSULTING can help.

 

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You Should Read This: Bank 3.0 by Brett King

41AzJecTO+LAs I’ve written about here in my personal journey through banking from my childhood in the 70’s to present day, banking has done more than “change” or “evolve” – it’s practically morphed from a noun to a verb. As Brett King says in his book, Bank 3.0, banking is quickly becoming something we “do” not somewhere we go.
From online transactions to apps to stand-alone ATMs, the days of standing in line and getting a sucker or gum at the counter are becoming a thing of the past. My role as a banking consultant is to look for what’s ahead to help prepare banks for success, not just survival.
Find out more about Bank 3.0 here. 
From the Publisher:
In BANK 3.0, Brett King brings the story up to date with the latest trends redefining financial services and payments—from the global scramble for dominance of the mobile wallet and the expectations created by tablet computing to the operationalising of the cloud, the explosion of social media, and the rise of the de-banked consumer, who doesn’t need a bank at all.
BANK 3.0 shows that the gap between customers and financial services players is rapidly widening, leaving massive opportunities for new, non-bank competitors to totally disrupt the industry.
“On the Web and on Mobile, the customer isn’t king—he’s dictator. Highly impatient, skeptical, cynical. Brett King understands deeply what drives this new hard-nosed customer. Banking professionals would do well to heed his advice.”
Gerry McGovern, author of Killer Web Content
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David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions, loan reviews, and bank consulting services to community banks in Oklahoma, Texas, and Kansas.