Wasted opportunities and subversive elements provide the contents of this wrap up of CSB. Faith and politics over the years of BIMD will follow in the next chapter to provide a sample of what occurred in my life throughout American government, business and industry. I will post that one later this summer after the honey do season is over, which was pushed back by the communists setting Canada on fire, with associated smoke making its way into these hills for a few weeks at levels unhealthy for us old farts. Now we have the summer heat and humidity to deal with, so the old man is going at a much more measured pace. I want to be around to witness grandchild #3 coming into the world if the Lord allows.
Let’s finish off CSB – the deceased home of subversion and wasted opportunities from BIMD. This does get into the weeds a little bit, primarily to illustrate how little the financial industry dug into the details of small business finance BIMD. That should be a big warning bell to readers to never trust the system since about half of America’s working population is employed by small businesses.
I will not regurgitate the previous information. I want to first focus on the internal loan and servicing operations platform that was being developed while we were delivering above peer profitability. BIMD the entire industry employed a methodology that was similar throughout the country. It was time consuming, laborious, documentation heavy and trained manpower intensive. It had become established practice that SBA, USDA and examiners approved that had not kept pace with IT advances. Since it was a developing, cottage industry of small business finance; there was not an extensive trained workforce available for hire. Most hiring involved finding people with developable abilities and strong work ethics who were willing to be trained and progress in their understanding and proficiency over time. To entice talented people to do so required above peer compensation, incentive pay and good benefits. In the training process and subsequent entry into their roles, they would learn more about the industry from the industry’s trade association; which was provided primarily by fellow competitors, experienced consultants and any governmental agencies involved. They would learn what I learned, that they were actually employed by the industry and would be able to easily find employment elsewhere if the need occurred as long as they did their job well and stayed out of trouble.
Which is exactly what most of my former staff and managers did after leaving CSB. Even today I run into several frequently when out and about where we live. For the most part they continued working in the industry for other employers and some have worked their way up the ranks while others were able to recently retire with good nest eggs. One thing the industry did very well long before it became popular was permit quality employees to work from home in many roles. We were doing this thirty years ago. Productivity did not suffer, it actually increased with the better performing staff and sales force because we provided production incentive pay in many roles. The method was only used with positions and people who could handle the lack of a supervisor being present. They had lower personal expenses from not having to commute and enjoyed increased flexibility with their personal lives. For many this made them employees of the industry for life. All a leader and manager can ask for is a stable, productive workforce at a cost they can build into the business model and this method helped make it happen.
However, knowing and executing the system with the corresponding manpower development practices did not mean it was the right way to go about delivering the product.
Despite our futuristic views in areas such as approved staff working from home, BIMD it appeared nobody in the industry built and maintained a data base of financial and performance factors relating to their past and existing loan customers, much less used them for building their credit policy parameters in an analytics based way. Some relied on SBA for macro reported SIC code (business type codes) data for the purpose as well as SBA credit policy parameter recommendations, which were not all that current and at a competitive disadvantage versus conventional commercial lending programs.
There was access to global delinquency, loan default, foreclosure, etc. type servicing information from agencies. Even the international rating agencies of Moody’s, S & P ,and Fitch only used global when they also could have built their own data bases from the information of bank customers they reviewed. Which is ironic since the industry called itself financial analysts, but apparently not so much for small businesses. As a result the loan operations process had not changed in the nearly 15 years of my involvement in the industry, which began during the early growth stage of its foray into selling guaranteed loan portions into the secondary markets.
Spoiler alert: For the most part it still hasn’t some 15 years after I left CSB based on my contacts. There are a few notable exceptions with different business models that focus on internet delivery of their products. However, the traditional delivery systems that dominate the loan volume are still doing it in a similar manner as they did in the 1990s albeit with improved access to IT systems and software. Yet, the annual global loan volume has increased three-fold during the period to the $25 B per year range, primarily due to our negotiations between SBA, Congress and the industry back in 2004. We opened the door for guaranty fees paid by the borrowers to be adjusted annually so that the 7(a) program became totally self funding. This program loan appropriation stability encouraged more lenders to participate.
For the most part a service industry of small business finance does things the same way they did it thirty years ago, which makes it labor intensive, which makes it less efficient, which makes it more costly to operate, which makes it less successful than it could have been. Our Loan Officer Operations Program (LOOP), was designed and being programmed to counter those negative factors. The savings from the lower staffing requirements throughout the division would have reimbursed the cost of development in short order.
CSB’s owners never really understood the value of what a handful of us attempted to do for them and our own division’s operations. We had adopted FiServe’s bank loan operations and servicing platform, the biggest and best in the business at that time. We did so because the bank’s proprietary system that was owned and controlled by the CSB owners was incapable of handling our volume and requirements, so they approved our contracting FiServe. We had also installed scanned document processing to eventually eliminate the use of physical loan files in the approval and loan closing process. Each file would be 4-8″ thick with documents, so you can imagine how ridiculous it would be for each staff person to work multiple files at the same time with some underwriters maintaining shadow file copies to be able to more easily approve modifications for when their loans transferred into the closing department. We contracted offsite secured storage of the physical files to store them out of our way post closing.
What was needed was to develop a system that pushed the loan applications from the sales force through underwriting into closing without dependence on personal initiative and extensive management oversight. We could also pull loan servicing data post closing into our related data base to fine tune credit parameters, while automating the process. This would enable us to more quickly determine a loan applicant’s ability to meet our credit parameters, a huge benefit to the sales force as well as potential customers. A fast yes or no is highly desired by business borrowers. It would have reduced our staffing requirements for well compensated underwriters as well as identify under performing production (sales) officers quicker. The chaff would have been removed from the system long before it entered and slowed everything else down.
The physical system used then and now was prone to operator error. As just one example, if a quality loan request hit the desk of an inexperienced or less competent underwriter, the timing could be delayed and the interactions between the customer, production officer and underwriter could become slow and strained. Nothing is more frustrating or counterproductive than to work on a quality, profitable loan request only to lose it by being too slow.
Another troublesome part was related to the human element. Many credit officers and underwriters enjoy their ability to influence an approval or a decline a little too much; it became a power trip with occasional personality conflicts. LOOP would remove much of the ability to conduct arbitrary actions. Sales would receive a loan request, enter the required data, and the data would be compared to policy. The loan request would receive a green light to proceed, a red light to decline, or a yellow light to proceed with caution while providing acceptable responses to credit policy exceptions. If acceptable responses could not be achieved, the red light would be issued and the loan declined. If a credit officer attempted to override an approval or decline the system would flag an exception that the SCO would be forced to review and make the decision.
We could even red light entire business types by SIC code if our loan concentration in specific industries, such as lodging or restaurants, had approached regulatory concentration or loan pool buyer limits. The production officers, referral sources and their prospects would suffer no embarrassing surprises. We could have stopped there with LOOP’s development and it would have been worth every penny spent to develop.
The underwriters would receive only prequalified loan requests to work and serve much more as auditors seeking answers to questions and verifying the customer representations while completing bank and agency documentation requirements. The loan closing area would receive approved loans with signed borrower commitment letters with a much reduced number of documentation contingencies to chase down. We determined the entire process would speed delivery from loan application submission through closing by a minimum of 50% in addition to the loan pre-qualification benefits. It would have removed unqualified applicants from submission into the system entirely. It would have focused the underwriters with less opportunity for power trips and more focus on the actual credit and documentation gathering that mattered. It would have added to the data base of information with each entry from the point of application through eventual payoffs of loans, providing us important information to head off potential credit parameter and closing issues well in advance. The variables addressed and removed to go with the benefits were obvious.
Scarcity Versus Abundance
The first bit of subversion was by the SCO who embraced it at first. When he saw the scope was greater than he anticipated he quietly obstructed and postponed his contributions as long as possible as he was “too busy” to get to it immediately. He was clearly concerned that his authority and influence over “his” department would diminish if more of the process became automated, which was really short sighted and wrong headed. He was also concerned that his underwriting staff would be exposed. He and some his underwriters were beginning to bring to mind the following scene from Office Space.
The sad part is he would have made the same or even more money while working less hard and spending less hours at work. He could have had abundance, instead he chose scarcity and fear. There would have been less bad loans to administer as well as far less time spent with bank examiners and auditors explaining their decisions when it all fell apart.
Some may wonder why I did not replace the SCO. In banking, credit officers have a degree of autonomy for good reasons. They need to stand apart from the action, pressures and influences to make sound loan decisions. The SCO reported to me in most areas, however, with loan decisions and loan servicing related duties he reported directly to the CEO, the Chairman. This is the proper regulatory approved methodology for a bank that size. Once his undermining of division operations began with Judas, he influenced the owners to believe LOOP was unnecessary. This was toward the end of my employment there. I had already identified his replacement from within had the owners sided with me, the NSM and the division’s CPA/Controller. That potential replacement now leads a large operation of a similar type out of FL that employs several of our former staff.
What he and the owners missed by not embracing and doing the right thing with their roles in the bank is still very sad to me today. We had two quality programmers and one exceptional one working on it. The exceptional one was committed to leaving in six months as a future classified employee of the DOD and slotted to work on the supercomputer development at Oak Ridge National Laboratory that is still in use today. His expertise laid the framework for what the other two would complete for us. Our division CPA/Controller was highly computer literate and would lead the integration of the accounting and audit functions. It was all teed up and on the path to implementation. Which scared the SCO.
The owners fell victim to their own short term greed, which was made far worse by Judas, who circumvented the entire process. He was the primary subversive element preying on the fears of the SCO. When he saw Bear Stearns was in trouble and found his new home with us, he took advantage of the personal and business flaws of the owners and the SCO. That I supported his hire still bothers me. I never envisioned him basically manipulating them into doing what they did; I thought they were smarter and more accomplished than that. They also had him take over the bank’s investment portfolio. He sold all of the bonds right before the markets tanked, after which the bonds would have been the most valuable. He was behind the push to grow the loan volume even higher in 2007 and 2008 as the selling of the bonds provided more funding for loans. These were the same loans that he ended up no longer being able to sell as the debt markets collapsed. When they could not be sold for a reasonable premium, he told the owners to hold them until the debt markets were more favorable within a year, which did not happen either. He secured higher cost brokered deposits to cover the lack of liquidity. It was dumb for the owners to believe any of it as they later learned; especially doing so despite the NSM, Division CPA/Controller and me telling them it was not the right things to do.
It turns out the compensation of Judas at the bank was partially based on commission he earned in his activities. Clearly self serving, yet not realized by the owners. When the bank disintegrated, he moved back to his former employer of Morgan Keegan. The same Morgan Keegan that lied to us and had tried to fleece us in the original 504 loan pool sale that we sold to Bear Stearns instead. It was also who transacted the sale of the bank’s bonds that Judas authorized. It was the same Morgan Keegan that the owners continued to associate with and value for personal financial investment reasons long after I had moved our division on to better buyers and relationships. The same Morgan Keegan that The Rich Man also used in his banking operation. The same Morgan Keegan that later went on to sell out to Raymond James Financial where Judas ended up.
When the CSB owners bought out The Rich Man, they bragged to him often about CSB’s profitability and growing prominence in our industry while also opening competing branches in The Rich Man’s branch bank’s locations. Apparently that was a bridge too far for The Rich Man. Our using other loan buyers was a bridge too far for Morgan Keegan. The owners swallowed the bait.
My primary regret was not over the bank losing its way. I had seen that happen far too many times by more accomplished bankers than them. My consternation was over the lack of understanding and foresight as to the value of LOOP. It was this blown opportunity that bugged me most. When completed, which was scheduled for late 2008, it would have been operated on its maiden voyage and the kinks all ironed out. By 2010, the system could have been marketed to bankers nationwide as a proprietary product and over time the owners would have been rolling in cash they never dreamed possible along with the division employees enjoying bonuses. The marketing would be occurring when all bankers were looking for ways to decrease expenses and increase profitability to recover from The Great Recession. It would have been a perpetual annuity, the gift that would have kept on giving for years. It was going to be far more valuable than the bank would ever be even if it survived.
Other lenders understood, but lacked the expertise. We had the expertise, but no commitment to the delivery from the owners. For example, I toyed with an opportunity to join Capital One through the connections of my marketing director, who had formerly worked there and had reached out to them. However, they would have plugged it into their credit card type business model and that simply did not fit the nuances of our industry and our expertise. Much would be lost in the transition as well as harming the employees. In my opinion at that time it would be better to allow them time to make their own moves as needed.
Which leads to the implications for America. If all banks used a similar system to what we had in development for small business finance while also using an agency of the federal government to guarantee 80% of the total loan amount; what impact would that have on business innovation, growth, employment, income taxation and bank solvency in America today? Competition is a bedrock value in a capitalistic society. However, competition is also what the establishment and globalists hate. They will do anything to suppress it as we are seeing playing out in the public eye today.
The borrowers pay the costs of the loan program that provides them capital at a reasonable borrowing cost with better than conventional loan program terms. Why would any bank not use a LOOP type system to lower operating costs, gain faster turn around times and use less manpower that could bring them annual returns far in excess of 25% per transaction with government guarantees of the majority of the loan?
Over time some small businesses become big businesses. Some even become industry leaders, which changes the balance of power. Some create new industries. Those occurrences are not acceptable with some wealthy, powerful people.
Oh well. Shiz happens, right brother Forrest? Or in this case, doesn’t happen. Hopefully somebody with an innovative mind and sufficient wherewithal can make it happen someday.
Enjoy your summers. Take time to do as Clay suggests because you never know when you will be called.