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.

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Why Loan Reviews Fail Internally

Let’s talk loan reviews. I know, drumroll, please. This may not be as exciting as reading about heritage field pic smthe presidential campaign or the Kardashians’ latest shenanigans, but hopefully this is a heckuva lot more useful.

Loan reviews are performed to determine proper identification of credit quality.  An assigned number generally is given to a particular loan and a legend with description describes each defined category of pass, watch, criticized or classified.  Typically, we see a number system 1-5 with one or two numbers for pass grade credits.

The biggest problem with not having a third party or unbiased review is the bankers have already made a decision to make the loan.  The banker develops a personal and business relationship with the customer.  In a lot of cases, the customer runs in the same social circles and in many cases become close friends of the banker or someone in the bank. The relationship in itself cause conflict in judgement of proper grading particularly when a credit is beginning to deteriorate.

Many things are identified in loan reviews other than just credit weakness.  We look for trends in deficiencies among loan officers, trends among homogenous loans, concentrations, loans made outside of the expertise inside the bank and several other critical analyses in managing the risk inside the loan portfolio.

In most cases, bank management is too close to the decision in the beginning, too close to the customer and the indirect consequence is conflict in decision begins to creep.  Having a third party unbiased opinion creates proper grading of your loan portfolio. You may be feeling an “ouch, I’ve been there” upon reading that. Believe me, you aren’t the only one.

The loan grade directly affects your Allowance for Loan and Lease Loss calculations and analysis.  Previous experiences have shown us time and time again, loan grades are not accurately reflected in the portfolio, therefore, the ALLL is incorrect.  This is a domino effect into income, capital and a whole host of other very costly mistakes.

When you hire McSwain Consulting, we give you the best opinion of the entire risk inside your portfolio.  My company will provide you with the deficiencies identified.  What we do different is we will follow up with you to determine if things are corrected or if you have chosen another approach.  We will even provide training for the deficiencies identified.  We review your ALLL calculations and analysis along with the review loan grades to determine adequacy of your ALLL.

Why take the expensive risk?  Our work will keep you compliant with regulations and best practices while identifying deficiencies so the problems can be resolved before they become very expensive experiences.

 

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Why I Do What I Do

Bankers.  I have been one since 1986 and it’s not all pretty. I believe in telling the truth and getting real so here we go. I have worked in most positions in a bank except for President.  Hell, I even owned a portion of a bank on two different occasions.  Although I didn’t have the title, I ran three banks for a period of two years.  I managed two banks for a period of four years and experienced things no one should experience in a bank. I had to take lending authority from family members, fire board of directors, lose friendships, and everything in between.  My expertise is instilling a disciplined credit culture that is efficient, very profitable and excruciatingly effective.  Only if you have the discipline to follow.

Here’s the thing: bankers are notorious for taking the most inexperienced person and shoving them into a position. This person unfairly gets the opportunity to check off a box from a strategic plan or from being written up from an examiner.  Bankers, really!  It’s a traditional practice from teller all the way to the top management.  We then think we have accomplished something because it didn’t materially affect the bottom line.

If you haven’t done it, you  probably know someone who has because it runs rampant.  It’s a mirror mentality.

Every time a new best practice comes out or a new regulation comes out, we hire Janie or Johnnie and put them in a position or we move Johnnie or Janie into a position they have never heard of much less have a clue of what the hell they are doing.  And neither do you!  But it makes us feel good!  We beat the system.  Nope.

That’s why I’m here. I hold up the  mirror.  We take a look at what we’re doing, why we’re doing it, and how to do it better. The truth hurts sometimes, but it leads us where we need to go.

Question:  How many of your credit analyst or loan review specialist can see a loan going bad two years out?  Answer:  Very few:  They don’t have the experience.  More precisely, they haven’t enough bad experiences to see it coming!   That’s why community banks hire McSwain Consulting.  You don’t pay us benefits, sick leave, vacation days, 401k.  We save you the x factor and generationally, our work ethic is beyond belief.

We have seen, done and walked in your shoes.  We have dealt with regulators in extreme situations, loan review companies and auditors.

Our mission:  We strive to develop the culture of discipline in loan risk management that is proven time and time again.  It is profitable, efficient and creates opportunity beyond belief.

Give us the opportunity to prove to you, but you have to follow our direction.  We will make your bank effective, efficient and more profitable.

If you are interested in taking your bank into the next generation, I’d love to get your call.

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. 

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Saving the Mom Business

As a commercial lender in Oklahoma, a young person and single mother came to the bank with a mutual friend.  They approached me about starting a business.  We had several discussions over the next couple of weeks as she was gathering information.  The projections and market research was adequate to make the loan request to start the business.  It was more of a venture capital loan than a commercial loan, but the information was solid.  Now it came down to the experience of the individual and management experience.

We set the loan up for five years on monthly payments.  The loan paid perfectly and as agreed.  After the loan was paid off as agreed, the business owner requested a meeting.  We met. The meeting was to expand the business with an additional location. At the time my biggest concerns were that she was going to increase her overhead two fold and cannibalize her existing business.

After much projections on my part and cash flow analysis, I softly turned down the expansion loan.  In my opinion, most bankers would have made this loan because of her track record of payment. The owner was obviously upset.  So she set out to prove me and the world wrong.  She sought individual funding.

Fast forward two year’s later and the small business owner called me and requested a meeting.  She was bringing her attorney, who was a friend of mine, and her accountant.  After a quick conversation, the attorney removed himself from the meeting and the owner and accountant asked me to help them solve their problem.  After having received the advice not to expand, she did it anyway and now she needed help from going broke. She was headed into bankruptcy.

Fundamentally, the business had great cash flow.  She needed to expand, but not to locations, just adding space.  Her original lease was up for renewal and had an idea of what to do, but didn’t have the capital to move locations.

I gave them a list of documentation I needed.  It consisted of a financial statement over the past two years, income information and cash flow statements along with tax returns and many other documents.  After spending an enormous amount of time analyzing the information, I called the accountant and owner.  We had a meeting.  Based on the information provided, I found a formula for success.

At the meeting, I gave a presentation to the owner and the accountant of all the shortfalls I found inside the financials.  The shortfalls were inventory controls, payroll controls, measured benchmarks and numerous of other things that were fundamentally wrong with running a business.  After the negative, I presented a proposal for them.  Under very certain covenants, the bank would be willing to make a capital loan to save the business.  The main reason, the cash flow was there.

Five years later, the loan paid as agreed.  The entrepreneur established a retirement account, increased her take-home pay, established a retirement account for each of her employees, increased her income by 50% and her profitability increased dramatically.

The moral of the story: your self-employed customers know how to do the work well.  Most of them don’t know the financial side of the business.  Over the past 20 plus years, I have seen this happen in all sizes of businesses.  As Bankers, we are own worst enemies.  We have blinders on when it comes to our customers.  We are too close to the decision in many ways from loan growth to profitability inside our portfolios.  But we won’t separate ourselves.

That is where McSwain Consulting comes in.  We have over 20-years’ experience in cash flow analysis and loan review in Oklahoma, Kansas, and Texas.  We understand main street and beyond.

A good friend and business partner’s definition of a good banker, “A good banker is one that will get you in trouble by loaning you more money than you can pay back”. Let’s not be that banker.

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.