I want to extend appreciation to Tim Monahan and Patrick McQueen of BBK Banking Group. Their guest column appears in the April issue of Michigan Banker and I am also posting on our blog, too.
Tim Monahan has over 20 years of senior level experience in financial management and commercial banking. He has expertise in several areas including loan work out negotiations, restructuring and liquidation plans, and various types of financing arrangements.
Monahan has a bachelor’s degree from Michigan State University; and an MBA from the University of Notre Dame.
Patrick McQueen has over 40 years of senior level experience in financial management. He has expertise in several areas including commercial and consumer lending, bank management, bank oversight and regulation. He has also advised stakeholders on banking issues including senior management teams, investors and boards of directors.
McQueen has a MBA from Michigan State University, a bachelor’s degree from the University of Michigan – Dearborn, and certificate from the University of Virginia’s Graduate School of Banking
Changes are coming at Michigan businesses at the speed of a Justin Verlander fast ball. But lenders trying to cope with fast-paced change should take this advice from batting coaches: be ready and swing at the problems early.
Just about any business can be hurt by the sudden departure of a key executive or a change in the regulatory environment. News of a large warranty claim or the cancellation of a major contract can arrive like a bolt out of the blue. Many businesses are also affected by rapid fluctuations in consumer confidence, gasoline prices and order levels.
In 1970, author Alvin Toffler wrote in Future Shock that the rate of change in society was accelerating, and he wasn’t sure the human psyche could cope with it. But the speed of business back then—before the advent of smart phones, wireless technologies, IT networks and globalization—was slow motion compared to now.
The upshot is that lenders must work harder and stay more focused today to keep up with trends and their borrowers’ situations. Even the improving economy may pose challenges for borrowers, who downsized and survived the last downturn, to come back up and support customer orders. Fortunately, one thing hasn’t changed over the years: If they look for and see the warning signs of trouble, loan officers can intervene early. With prompt action, they may be able to help guide their clients to stronger positions.
The first step is to see the fastball coming. The lender should watch for changes in key management (especially in the sales or financial departments) or changes in the lifestyles of individuals. The departures of board members or change in key vendors can also be a sign that the condition of your borrower is deteriorating before it shows up on financial reports.
Other negative early warning signs might include: delays in submission of required reports, erosion in operating margin, and growth in inventory levels without an increase in business.
When problems arise, the lender must take steps to understand and address the underlying business issues with its customer. It is usually at this point that there is an opportunity to deal with the issues and the relationship can be maintained, or the customer is still positioned for moving to a new lender.
Once aware of the problems, the lender needs to initiate quick action. Consider a tale of two companies. We helped one respond to its problems early, while the other waited until it was too late.
The first company was in the building supply business and was hit hard in the last recession. The company had failed to adjust its operations to the reduced level of activity in its sector. The company’s financial performance deteriorated slowly at first and then with increasing speed, until it fell out of compliance with its loan agreements. The lender recognized that the company needed outside help to address its situation.
Our solution was to reduce staff and curtail operations in certain areas, along with selling off excess assets that had built up due to the lack of adjustments in operations. These actions allowed the company to reverse the negative operating performance and generate sufficient cash to stabilize the situation. With the turnaround measures carried out, our client was able to re-establish a stabilized borrowing relationship with the lender that introduced us to this company.
In the other case, a transportation company faced a change in its regulatory environment which ultimately caused a significant negative impact to its operating performance. The nature of these regulatory changes took some time to impact the company which concealed that fact, negating the effectiveness of responses. Ultimately, these circumstances led to the company being significantly out of compliance with its loan agreements and in a precarious financial position.
We worked with this company to develop strategies to address the situation, however, the delay in confronting the problems ultimately proved to be too much to overcome. The company ended up going through a liquidation process, the outcome of which resulted in a loss to its lender.
The lessons are clear: While problems may be hard to spot in advance, it is possible to see at least some of them early if the lender looks for telltale signs. When true problems exist, the passage of time rarely—if ever—fixes them. When confronted with a problem loan situation, it is imperative that the lender recognize the situation and take action to see that the issues are addressed—including bringing in experienced outside help where needed. A proactive approach can help avoid problem assets (and potential loss) as well as maintain a profitable borrowing relationship for the lender.