
You Should Read This: Bank 3.0 by Brett King

by David McSwain
Creep. 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.
by David McSwain
Risk 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:
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.
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.
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.