Kill the Monster While It’s Still Small – Don’t Wait Until It Becomes Godzilla

by David McSwain

A consistently scheduled external loan review program will help to do exactly that. Problems do frank-3not magically appear overnight, they grow without being noticed because the problem gets played off as an isolated situation. Then the creep sets in as motion and momentum begin. Once this process reaches maturity, it is very difficult to overcome, especially if it has gone unnoticed for an extended period of time.

For example, a loan or group of loans tied to a particular industry start to experience cash flow problems.  Those problems manifest in past due loans and/or overdrafts.  We take swift action to correct the situation without really understanding the true nature and severity of the real problem. We are able to get the past due loan resolved or the overdraft covered without asking the key question: WHY?  The problem reoccurs and now it has our undivided attention. Unfortunately, we still have not recognized the underlying loan portfolio credit quality deterioration that has been growing and evolving. We should recognize that a single troubled credit does not constitute a systemic problem. However, the weakest loans should be a wakeup call that there may be problems larger and more complex than one or two loans that are experiencing difficulty.

Finally, we look up one day and we have several problem loans. Now our laundry is aired and loans with similar characteristics from an underwriting or industry perspective start causing pain.

A consistent and regimented program of external loan review is an important line of defense against the monsters that may be lurking within the bank’s lending function. Waiting for the eve of the next exam is like waiting until Godzilla is at the door before action is taken.

Three signs that you may have Godzilla in your bank are 1) rapid loan growth in any one call report bucket 2) creep in past due loan over the past few quarters 3) an increase in TDR loans.

For more information about Loan Review, ALLL Review, CRE Stress-Test or to schedule a consulting meeting for 2019, contact McSwain Consulting at 405-880-1039 or email david@mcswainconsulting.net. McSwain has battled a lot of Godzillas and knows how to deal with them.

 

 

Lessons from the Road: On Change and Mindset

In general, people are good.  In general, people have good intentions and speak from the heart.  embracing changeUntil criticism takes place.  In its true nature, being a consultant is being critical.  Someone pays you for a service that is provided to be critical. The criticism isn’t meant to be rude, undermining, or even “bad.”  It’s meant to be helpful.  It’s meant to make my client better.  However, recently I learned a valuable lesson. The lesson: not all people want to get better.  

Through my “Thinking Time”, I couldn’t bring myself to believe someone such as a high-level bank employee doesn’t want to improve if they can. I pondered this for days. Finally, I went through several levels of why, trying to make myself better.  I pondered that perhaps it was the way I was presenting the information. Perhaps it’s embarrassment.  Oddly, I mentally replayed several of the conversations that took place over a few weeks.  Why were some people receptive to the criticism and why were some almost indignant?

A few days later, it hit me like a ton of bricks. The story I told myself that it wasn’t the delivery because I have been in the clients’ seat for over 20 years and I take pride in not being hard in the delivery.  I know what it is like to be criticized.  I know that it’s embarrassing to be criticized in front of your boss, your peers, and your friends.  I followed the “Golden Rule”.  The A-ha — it’s change itself.  People don’t like change!

Change can be paralyzing for some and some thrive in change.  If there is anything in the world that is certain, CHANGE is guaranteed.  This week, the U.S. House of Representatives passed S. 2155 and the President signed it. This bill gives community banks some very needed regulatory relief. This is going to be a CHANGE.

Additionally, this morning, I received a transcript of Chairman Martin J. Gruenberg’s quarterly update on the banking industry via email.  Change is in the air!  To me, Chairman Gruenberg’s message was that we are in the latter stage of the business cycle.  Change may be coming.

Now is the time to prepare for “Winter”, so your bank’s business model is sustainable for any type of downturn when it happens.  Interest Rates have been changing!  Loan maturities have extended and the business cycle is going through its processes to reach equilibrium.  When the cycle reverts to equilibrium, more change takes place.

If you are a bank in Oklahoma, Texas, or Kansas and want to prepare for “Winter”, please call on McSwain Consulting. I not only help my clients navigate change for the better but to look way ahead for what’s coming, even when it’s not so pretty. Is this a case of evolve or die? Why not embrace change and go for it for our banks…and our communities to not only survive but thrive.

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David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions, bank loan review services, and bank consulting services to community banks in Oklahoma, Texas, and Kansas. 

Book of the Month: Bluefishing: The Art of Making Things Happen

51jcryTcsoLSteve Sims, the man who created Bluefish, the internationally famous company that makes once in a lifetime events happen for the rich and famous, reveals to the rest of us his trade secrets for making things happen.

The core of his philosophy focuses on simple, yet effective ways to sharpen the mind and gain practical skills that can help you learn a new perspective and accomplish anything. Whether it’s climbing Mount Everest, launching a business, or applying for a dream job, you can make incredible things happen for yourself by applying his insightful advice such as:

-Ask Why Three Times

-Never be the First Call

-Don’t be Easy to Understand, be Impossible to Misunderstand

Asking why three times: “The first why is what they think they think, the second why is what they think you want to hear, the third why is what they feel.”  The third why is the most important part of connecting to the real want or need.  We are in such an instant society that most people you are doing business with aren’t really connecting. You know what I am talking about. When you do business with people that are just performing their jobs for a paycheck, but you really know when they “Give a Damn”.  The three why’s give you a chance to sift through the “vampires” that will suck all your time and energy.Sims is adamant about creating your community which he refers to as your brand.  Then protect your brand through personal relationships that are getting lost today because it’s easy to hide behind technology.  I discovered Bluefishing is taking a business to a whole new level through experiences.

At McSwain Consulting, we’ve had the experiences – all the nitty gritty and huge roller coaster rides through risk assessment and management – so that you don’t have to.  We do our very best to keep you from having to go through them – to keep an eye out for what’s ahead and the storms that could be headed your way.

If you’re an entrepreneur or leader in your organization, I highly recommend Bluefishing to see how you could make more happen in your life and what could be getting in the way. Find out more about the book here or wherever books are sold.

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David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions, bank loan review services, and bank consulting services to community banks in Oklahoma, Texas, and Kansas. 

The One Where I Guest on a Podcast to talk Money and Motivation

Brand strategist Malena Putnam recently asked me to be on her podcast to discuss something I at least try to know a lot about (money) and another thing we should strive to be better at (motivation.) I also discuss meeting Tony Robbins and share some favorite books. If that sounds interesting to you, here it is! Thanks for listening!

 

David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions, bank loan review services, and bank consulting services to community banks in Oklahoma, Texas, and Kansas. 

The Road Less Stupid as it Relates to Loans, Loan Review, Annual Reviews and Credit Analysis

51zPw8uoRqL._SX260_“Smart people do dumb things.”

Here’s the proof: How much money would you have right now if I gave you the ability to unwind any three financial decisions you have ever made? Years ago, after suffering a humiliatingly large dumb tax, it dawned on me that I have a seemingly unlimited ability to hit unforced errors and sabotage my business and financial success. I suspect you do, too. It turns out that the key to getting rich (and staying that way) is to avoid doing stupid things. I don’t need to do more smart things. I just need to make fewer dumb mistakes. The vast majority of our dumb tax is a direct result of emotional, overly optimistic, and poorly thought-out decisions. Every one of those three decisions you would love to unwind was an avoidable mistake.

Thinking is critical to sustainable success in business; said another way, business is an intellectual sport. The principles and structure suggested in The Road Less Stupid by Keith J. Cunningham will enable anyone, (regardless of the size of the business, the currency, or the industry) to run their business more effectively, make more money, and dramatically increase the likelihood of keeping that money. It all hinges on Thinking Time. This is a business book for business readers who want to learn the principles and strategies of making great decisions and minimizing risk. The structure of Thinking Time will enable you to minimize reacting emotionally and defaulting to the most obvious “best idea” available in the moment. The series of short chapters and subsequent Thinking Time questions are designed to maximize clarity and create better choices… either of which will result in fewer stupid mistakes. This is the real “secret”: The chance of success goes up when you think, plan, consistently execute the right things and worry about the possibility of loss. Here it is on a bumper sticker: Operators react and sweat. Owners think and plan.”

Many chapters can also help those in bank management as it relates to loans, loan reviews, annual reviews and the initial credit analysis.  In one bumper sticker (which is Mr. Cunningham’s way of pointing out an obvious point), he says “Emotions and intellect work inversely. When emotions go up, intellect goes down.  Optimism is a deadly emotion in the business world.”  This is particularly true when there is a new request on the table and it’s a large transaction.  Everyone is excited about the opportunity to the newest and greatest customer.  Look at us grow!  We do the normal analysis and possibly stress-test the individual credit, but we forget look at the 2nd, 3rd, and 4th order consequences.  In loans, this could be the complexity of the loan, global analysis, and determining if we have the proper information and expertise to one, make a great loan decision; two, are we capable of servicing the complexities after the loan is made and is the borrower truly willing to open up their financial life so that we can get a true financial picture? In the ongoing servicing aspect, are we in a hurry to get the annual review completed and forget or don’t get all the information for the global analysis and therefore skip the 2nd, 3rd or 4th order consequences that ultimately could place last year’s biggest and best customer on the classified loan list? Are we analyzing the collateral properly along with the cash flow in the annual review to make sure both aren’t deteriorating?  It is prudent to take some advice from Mr. Cunningham on his 5 core disciplines of thinking time and all 5 must be present.

One of my favorite chapters in this book is Chapter 44, “Cause and Effect”. In this chapter, he distinguished the difference between cause and effect. Again, in analysis and annual reviews, we look at the effect and not the cause. He describes the cause as the problem or issue and should be measured with critical drivers. He describes critical drivers as an early warning system that illuminates where the loan might be veering slightly off course and gives you enough information, so you can do something about it before the situation becomes a problem. This is different than a K.P.I., key point indicators.  In loans, a K.P.I. may be a debt-to-income ratio.  It is an effect of the most recent financial information which is already stale and historical.  A critical driver may be the average collected balance in the operating account as it relates to a month-over-month trend. You may ask yourself, what if the operating account isn’t at our bank?  Well, that may be a 2nd, 3rd, or 4th order consequence we didn’t think about in the beginning.

The first four chapters of The Road Less Stupid set up the discipline, which is really thinking about things and giving an order and disciplines to achieve. The next 44 chapters are short and can easily be read in 10 or 15 minutes, and each chapter ends with Thinking Time questions.  Bankers are smart people and easily relate all these topics to banking.  I highly recommend this book and if you enjoy it, Cunningham has another book, The Ultimate Blueprint for an Insanely Successful Business.” It’s about optics and measuring the correct optics and can easily be translated into your bank.

David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions, bank loan review services, and bank consulting services to community banks in Oklahoma, Texas, and Kansas. 

Saving the Sinking Bank

by David McSwain

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Rural populations continue to decline, so what does that do to a local bank? How does a community bank survive when its bread and butter – the people and the businesses owned by the townspeople, are moving away or dying out? The pool of customers gets thinner each year. What’s feeding the local economy?

Technology — and especially mobile tech — is increasing at an increasing rate. It’s the “me, me, me/now, now, now” age. People want their money zipped through their phone not only to retailers but to each other. The time that customers could only choose from the local banks to do business is long gone, making the choices open for them, and the competition tighter for the banks. Cash apps and mobile-friendly banking seem to be the norm rather than an outlier these days and growing…

Customers continue to highly rely on credit to get by, maxing out credit cards not only around the holidays, but getting one too many credit cards without the ability to pay them all off. Credit scores plummet. When it comes time to get the loan, yeah, thanks, no, thanks. It becomes a bigger risk for the bank. Johnny’s burger fry shack can’t get the loan because he financed the boat, the house, and Jim and Jill’s college education.

Times are tough on banks, yes. So, what is a sinking bank to do? Can they not only survive but thrive?

Saving Tactic 1: Be innovative. 

Change is tough, and most people only feel comfortable doing what they’ve done in the past. Yet with changing dynamics in how and where people are doing business, banks must also change. Being innovative can mean reaching out to new markets, including other towns and even types of industries, and even becoming an online bank. Banks that never had to market or advertise in the past must now decide who they really are, how to position themselves to stand out, who they want to attract and then go after that business aggressively. No more just opening the doors and hoping people will walk in, or even drive though! This means employing people who are not simply paper pushers, but who are good people-people and salespeople. People who understand banking is a business that needs to attract business, not a commodity. Diversify. Own a niche for lending. Go for what the other guys aren’t. Become an expert in one area. What’s your specialty? I know of banks who have niches as an airplane lender, one that focuses on SBA loans and another that specializes in loans for vets across the country.

Unfortunately, a lot of community banks are behind on this front, but it’s not too late.

Saving Tactic 2: Exit Strategy

Can’t go it alone? Nothing wrong with that. Maybe it’s time to talk merger or being acquired, or your bank buying another! Join up with others who are doing what you’d like to be doing. There is great power in numbers, especially if it’s the right fit. Explore it. When I drive through a small town, I know if a community has a good bank because it’s thriving. That’s right. Just the opposite of what you might think. The town is not deteriorating. Streets are clean. The school looks good. In most cases, if you support your community, it will support you. Back in the ‘80s in Oklahoma, Gene Rainbolt bought many banks at a discount and made Banc First into one of the largest and most successful state banks in Oklahoma.

Whether it’s innovation, a fresh workforce, a new market or a merger or acquisition, the time is now for banks to look at not only surviving but thriving.

David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions, bank loan review services, and bank consulting services to community banks in Oklahoma, Texas, and Kansas. 

When a Bank Goes Bad

by David McSwain

IMG_3994Creep. Not as is the guy in the scary movie, but how the creep factor turns a good bank bad over time. See, policies are put in place for a reason and, yet the lure of risk means a bank sometimes thinks it’s okay to go on the edge a little bit, to ignore the policies, to turn their backs on discipline and take a risky loan.

Let’s say Banker Bob knows Jane in the community and she’s a nice person, but doesn’t have much capital and has a lot of charisma and passion but not a good handle on her financials. But Banker Bob trusts Jane and gives her the loan. Banker Sue sees Banker Bob make that loan that didn’t meet the criteria of the bank, and thinks, “Hey, I know Tom was wanting a loan to expand his fitness center.” Like Jane, Tom also doesn’t have the capital or good cash flow, but goes on the edge and gives him the loan anyway.

Score for the bank and the banker, right? The bankers get bonuses and praise all around. At least for a little while.

That Domino Effect is what happens when a bank goes bad. The creep factor means it’s building up like the sands of time and eventually can bury a bank. Unfortunately, banks don’t see it coming until it’s too late. Because life happens: Jane ends up getting a divorce and can’t make her payments, or a new fitness chain moves to town and lures all of Tom’s fitness clients away and he’s in default of his loan because he doesn’t have enough revenue to keep the lights on let alone the bank.

Both are still good people, but it was a bad business decision on the part of the bank because neither client had the necessary benchmarks for a good loan.

What’s even tougher than saying now to a neighbor is that as a culture, we live out on the edge. Living on credit. New house, new mobile phones, braces. It’s the customers that create this culture that the banks feel they must bend over backward to meet. Humans find it difficult to say no and never believe “Winter” is coming.

When everything is approved on the edge, it can seem like earnings are up…at least for a little while. Things rarely go bad with liquidity problems — they go bad with lending discipline. Earnings plummet. Classifieds escalate, Charge-offs are hyper, cash flow goes down, clients don’t pay, then liquidity and capital problems begin bleeding through the entire bank.

That’s how a bank fails. Greed gets in the way, however unintentionally, and no one recognizes it. It can go fast or slow.

How to fix it? Do what we are supposed to do in the beginning within the loan policy adherence. We come in and hold accountable the disciplines. Ask more questions. Dig in. Be an advocate for sound financial management. A banker in this century must be a service provider, a mentor in some ways, not a handout or a tight-rope walker.

The banking team may be the best and brightest, but it can be tough to color within the lines and find the clients who do meet the requirements, so the bank can safely make the loan request and help the client succeed in business and in life.

A bank doesn’t have to go bad. It is possible to not only survive in this culture but to thrive with the right policies and discipline in place to see it through.

David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions, bank loan review services, and bank consulting services to community banks in Oklahoma, Texas, and Kansas. 

Hallmarks of a Risky Loan

by David McSwain

IMG_3996Risk assessment can be life or death for a bank. Do it right, it’s a win-win for the bank and the customer. Getting it wrong is like hitting an iceberg you didn’t see coming. Hit enough of them and the ship sinks. The key, then, is finding the sweet spot when it comes to risk v. reward by identifying the risk in the first place and knowing what to look out for. Fewer icebergs. More smooth sailing.

Here are the hallmarks I’ve identified in my thirty years of loan risk assessment and reviews:

  1.   The customer doesn’t provide adequate information. Current financials are a must and strict adherence to the list of what’s needed is important. In fact, if the customer cannot get you what you need in a timely manner, then most likely they are a ship without a GPS.  It can be because it’s an inconvenience and it takes time out of their day to find what’s needed, but that doesn’t mean the bank should slide on obtaining the information. Dig in. Get it, or leave it. Assumptions are a bad thing and any laziness on the part of the customer or the bank can provide trouble down the road. Trouble spelled S.I.N.K.
  2. Not enough collateral coverage. Generally, you need more than you think you need. When a loan goes bad and you must sell the collateral and most of the time at discount prices, it’s rarely enough, so you’re not covered. Get more if possible.
  3. The borrower doesn’t understand their business cycles. Perhaps neither does the analyst. This is a cousin to #1, but this one plays out over time, because they may not be accounting for the seasonal or market changes. When a post-mortem occurs on a loan, and you go back to the initial underwriting, that loan shouldn’t have been made because policy disciplines were not held in place. It could be based on information for that industry, too.  Consider oil and gas loans. You must understand that the industry is volatile over time. It can be risky in the short-term or long-term because it’s a volatile industry.  Stress-testing the customer and industry is important.  Real estate can have large swings, and it does go up and down but over a long period of time it has historically normalized.

A lot of banks don’t have an accurate assessment of cash flow until the deal goes bad. Even those who know their cash flow doesn’t mean they won’t fail.  Remember, everything a bank does is leveraged, using someone else’s money. So how do we avoid the three big hallmarks of a risky loan?

Tick off these musts and you’re more likely to avoid rough waters ahead.

  • Know what you are doing. Have the right loan policy for that loan, which means having a variety of loan options based on the industry and proper speed bumps.
  • Be aware of that industry. If you don’t know it, research it and even get to know it in person.
  • People loaning the money should understand cash flows to stay abreast of how the borrower is doing. Stop in. Read up. Stay engaged.
  • Have adequate cash flow and collateral. Some bankers don’t understand that even if they get principal back, they still lost money on loan. How? Look at the principal and interest in its entirety. If you don’t collect it, you have opportunity cost. Most bankers don’t count that as a loss, but it’s an impairment that can come back to bump you like that iceberg.  Know the cost of carry for a bad loan. Add in legal expenses, lack of collecting interest, liquidation expenses. It adds up in a hurry.

David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions, bank loan review services, and bank consulting services to community banks in Oklahoma, Texas, and Kansas. 

The Ghost of Banking’s Future

… How Tech Killed The Community Bank  – “Not Predicting, Just Sayin’”

by David McSwain, McSwain ConsultingIMG_3993

We all know the story of Scrooge. How the miserly old man was shown three ghosts during one night: the ghost of Christmas Past, the ghost of Christmas Present, and the ghost of Christmas Future. The moral of the story was that dear old Scrooge needed to change his ways to avoid a tragic future. The same could be said for the future of banking, particularly community banks.

A quick look at the past, which I was a part of since I was a teen working at a community bank in a small town in the ‘80s, is almost watching in slow motion because compared to today, that’s how slow-paced banking was back then. Accounts were under someone’s name, not a bank account. Account statements and canceled checks were hand-delivered. If you were born before 1985, you likely remember going to the bank with one or both of your parents. Lobby traffic was busy back then. You’d look forward to that free sucker or piece of gum for waiting patiently with your mom or dad during the transaction.

Then with technology – particularly computers and the Internet, the speed picked up. Drive-throughs weren’t just a big deal for fast food anymore; banking saw their drive-thru traffic increase in the ‘90s, which not only affects face-to-face communication and customer service, but the need for such a big bank to begin with.

Banks got smaller and kiosks popped up. “Go where the people are” was the philosophy so stand-alone drive-thru for ATMs and deposits became a big deal in the ‘90s along with kiosks in grocery stores. When I had a bank in ’94, we had $37M and 37 employees in one office. Fast forward to 2012 and we had 21 employees, 3 offices in 3 locations, 15 minutes apart from each other but $80M in the bank with 1/3 fewer employees. Do the math. Fewer people. Less square footage. More money. The kiosk idea came and went in the span of twenty years. Physical is out. Digital is in.

Then, dun, dun, dun: e-checks. Mobile phones and apps continued to grow into the 2000s and here we sit in 2017 with the ability to do all our banking right from our desktop or mobile device. Log in and password? Check. Mobile app for the bank? Check. Ah, but wait. If you no longer have a relationship with your local banker or go in to get that free sucker – if they are just a faceless click on the screen – why not shop around for loans? Why not invest in the hottest new app that all yur friends are using? You can even – gulp! – get approved with just a few clicks with NO IDEA where or who is handling your loan. And, you know what? Most folks don’t care. Especially not the Millennials. They want the latest, greatest, easiest, and they want it now.

Whew. And that’s just the ghost of the Present! What of the ghost of the future?

Where banking is going can either be exciting or downright scary, depending on how prepared we (as community banks) are to deal with the changes.

If digital is in, what does that mean for the community bank? Embracing tech sounds like a pretty smart strategy. Let’s take financialtown.com software company, for example, It’s a video app where one can push documents out to the customer while on a video conference. Convenient? Absolutely. That’s where banking is going.

Will human interaction go away? Maybe not for a couple more decades, but it will certainly evolve. But what this does or the community bank who already has loans with the good ones and has run off the bad ones – now you have, dun, dun, dun: the world! That’s right. With the Internet and apps and a niche, a community bank can survive and thrive. Sure, federal regulators must be up to speed and get the regulation going that allows companies like FinTech to lead innovations for bankers, but that’s the direction our society – and banking – is going. The trends are happening so fast something may have changed by the time I finish this think piece. But you see the new baby pictures your friends put up on Facebook? That baby may never step into a bank when he or she’s of age. It could be right there, on
phone, which might even his be smaller than the iWatch his mother is wearing. He or she might just have to blink three times to get a loan secured through the phone in the chip in his head.

I only wish I were kidding.

 David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions and bank consulting services to community banks in Oklahoma, Texas, and Kansas. 

Why Banks Fear Change

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“There are two things people don’t like.  First is change and the second is the way things are.”

I know this can be applied to almost anything, but people will change only when they need to in order to survive.  In my opinion, banks are in survival mode.  You can’t find the experienced help for the right money and you are facing a work force of a generation you don’t understand and in some cases, the experience is non-existent.

Technology is disrupting anything and everything, and banking is one of them.  Let me pose several questions:

1) How many people walk into your lobby today versus three years ago to transact business?

2) How many of your customers use technology to transact business versus five or even ten years ago?

3)  What are you doing today to attract the next generation of customers?

4)  How many more competitors are you competing with for consumer and commercial loans that are not banks compared to five years ago?  Fifth and final question, what are you doing about it?

Technology is not going to go away.  If you are not embracing it, how are you delivering your services and transaction?  The same goes for running your business.  How are you embracing technology to cut costs because you don’t need the same number of employees in the office?  It’s not an absolute, but how many banks are seeing a decline in your efficiency ratio because you are over-staffed because technology has disrupted the entire industry in a period of heightened regulation and heightened expectation from regulators.

This is why McSwain Consulting is here to perform your credit analysis and internal or external loan review. It is an area regulated in loan risk management through several different regulatory requirements. We bridge the gap using technology to give you a complete risk management solution so that you spend your time building relationships with your customers.  Given your customers no longer come into the bank, you have to spend more time out of the bank.  McSwain Consulting allows the bank to be bankers and take care of their customers and building relationships for the next generation of customers.  We do the rest.

We are a bridge that facilitates the survival for your bank.