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.

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.