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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.