Tag: banking

Lessons (re)Learned Part 2

by David McSwain

2As we are in tunnel vision with round two of PPP, I believe it necessary to maintain discipline inside the existing portfolio.  Personally, one of my 2021 goals is to slow down the thought train and attempt to ask better questions.  Many people have and will, for their reasons, apply for PPP.  In my opinion, windows allow us to see where clients are exposed, maybe.  A crisis is not to be wasted.  This is a great time for customer contact, possible solutions that better protect existing loans, or in some cases, we have seen, for growth opportunity.  Without this crisis, exposure could have been camouflaged.

Our people are valuable.  Many experienced and as we witnessed,  a positive Covid test can be a disruptor itself for the entire office.  Technology advancements rapidly appeared and thrust us forward to the point it has caused a new normal.  What technology do we not have today that is needed for a post-Covid world?  What skills are we missing, do we have enough employees trained in the proper areas, or perhaps do we need to look to see if we can advance into this new world and what does that look like for the industry and more particularly your bank?  McSwain Consulting has been doing remote work for more than four years now and we are more than prepared to work in the digital world.

This hasn’t been felt by all yet, but the number of competitors that surfaced through this pandemic in the form of fintech was massive.  As most of you are on some form of social media, the fintech companies surfaced rapidly over the past 12 months, in my opinion.  Typically, these companies don’t steal your worst customer, either.  So, how do we operate in this ever-evolving digital world?

Does a real estate boom in the middle of a pandemic make perfect sense?  Housing typically wasn’t built for the remote working world where children aren’t in school or they are and then they are not. People’s needs and priorities also changed. Those changes will be lasting.  Also, some businesses have experienced what they said couldn’t be done and that is a collaborative work environment where no one is in the same building.  Banks even experienced this and continue to experience based on their Covid protocol. Regulators have now been doing remote exams, as we know it, coming up on a year.

So, the real questions.  How do we continue to do business and grow in this new ever dependent digital world?  What resources will we need that we don’t have today to operate in this new world that no one knows what it looks, tastes, or smells like?  What vendors do we need, and do they have the capabilities to operate in this world?  What we measure today, is it appropriate for the times?  Has the cheese or needle moved?  Are our systems and processes adequate for today’s environment?  Some of you may already be there and that is awesome.  Some are not even close.  Either way, McSwain Consulting can and is willing to serve you well!

Going forward, what critical changes are needed in this new world?  As with a new administration in Washington, a pandemic, most of us have never experienced that has caused some severe economic damage to some industries and caused an exponential acceleration in others.  McSwain Consulting is prepared to go on this journey with you as a strategic partner in loan reviews, ALLL analysis, and testing, planning, and loan risk management.  We are here to serve.

Questions, comments? Would you like to discuss a remote loan review? Reach out to David@mcswainconsulting.net.

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

Should I Be Asking Better Questions?

by David McSwain, McSwain Consulting

IMG_7735As this blog is being written, the world appears to be more volatile.  The trade talks, the government shut down, geopolitics, Brexit, and the volatility of the stock market.  World leaders are meeting in Davos, Switzerland, and someone I follow closely, Ray Dalio, is warning world leaders of a global slowdown.  Now and every day, there is a headline about a company losing money because of domestic politics and the trickle-down effect hasn’t been absorbed into the markets or Main Street.

Enough doom and gloom. In my opinion, its time to shut off the noise. It’s time to reflect on your loan portfolio and look out to the horizon. It’s time to ask yourself, “Should I Be Asking Better Questions”?

One thing is for certain, the landscape is changing.  Rates have increased +/- 200 basis points and too few loan customers have re-priced into rising rates.  In the loan review world, we are seeing borrowers’ margin begin to compress for many reasons.

So, that P&L you didn’t ask for last year, should you be asking for it? 

The inspections you do once a year, do you now need it twice a year? 

The inventory report you received, do you need it more often? 

Is it time to review your loan policy to see if its adequate in today’s economic cycle? 

Did I stress-test my portfolio? 

Are my quantitative factors in my ALLL analysis still valid today?  

Is the narrative in my credit memos enough for the complexity of the credits? 

Are my projections in line with the historical trends or am I being too optimistic in the projections? 

A good loan review will reveal an answer to all these questions. It’s time to start asking.

At McSwain Consulting, we think its time to up your game.  We can help through a variety of services.  If you are interested in a discussion about your bank, please contact us at 405-880-1039 or david@mcswainconsulting.net or through our website at www.mcswainconsulting.net.

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

Leave a comment

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

Leave a comment

by David McSwain

IMG_3995

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. 

Hallmarks of a Risky Loan

Leave a comment

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

Leave a comment

… 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. 
photo-2

Saving the Mom Business

Leave a comment

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.