Avoiding Frankenstein-ing Your Work

You are sitting in your office studying your bank’s third quarter financial statements and reports. frankWHAT the heck happened?  That empty feeling hits deep in the bottom of your stomach and indigestion sets in!  You are well below budget or vastly exceeded your budget. Past dues are higher over the past six months and your investment portfolio didn’t quite perform as well as you thought.  The loan renewals are coming in with tighter debt coverage ratios. It appears your customers’ margins are getting squeezed.  Dang, the bank’s margins are compressing due to rising rates in your deposits.

Now you need to start your budgeting process with your management team and it appears your team will need to budget down for 2019. You also have the responsibility to inform the board the bank isn’t going to make the budget.  WOW!  Maybe you feel the need to make some calls to your largest shareholders and let them know the bad news.  Dang, the annual shareholders meeting is going to be intense.  2019 sure is going to be a tough year because the Fed keeps raising rates.  The next exam is going to be tough!  The economy is very good, but my bank is experiencing things it shouldn’t be.  ALSO, this CECL thing!  WHY!

WRONG!  This is your story!  REALITY:  It’s the direct result of your systems + processes + disciplines.  It’s the outcome you were going to receive because actions and focus were not on your systems + process + discipline.  You reached a little here and a little there.  The creep set in, and because creep is slow, you didn’t recognize it.  Most likely you didn’t remember the OUTCOMES you were trying to achieve.  You didn’t ADAPT.

But now you get the opportunity to react. Reaction takes much more ENERGY, RESOURCES, CAPITAL, and STRESS.  MCSWAIN CONSULTING takes a deep dive into your systems + process + disciplines through our proven methods.  We will identify weaknesses so that you can be proactive.  We will get you the information to avoid major mistakes.

Three things you should benchmark:

1)Loan Growth Rate v Capital Growth Rate

2) Past Dues, TDR’s and Non-Performing Loans

3) Net Interest Margin

MCSWAIN CONSULTING can help.  We offer Loan Reviews, CRE-Stress Testing, System and Process Reviews, ALLL Reviews and General Consulting!  Our team of consultants has over 145 years of combined banking, consulting and business experience.  We have seen many different business cycles going back to the 1980s.  Contact us today to discuss a REALIGNMENT for 2019.

 

When a Bank Goes Bad

by David McSwain

IMG_3994Creep. 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. 

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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.