c&i strategy for 2018 · ©2017 paynet inc. 2 c&i in the u.s. 1.3 million possibilities 28...
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1©2017 PayNet Inc.
Taking the Risk
Out of Small
Business Lending
www.paynet.com
© 2017 PayNet Inc.
PayNet and PayNet AbsolutePD are registered trademarks of PayNet, Inc.
PayNet AbsolutePD Outlook is a service mark of PayNet, Inc.
C&I Strategy for 2018
2©2017 PayNet Inc.
C&I in the U.S.
1.3 Million Possibilities
28 Million Business
400 NAICS
3,300 Counties
3©2017 PayNet Inc.
Thanks!
William Phelan, President, PayNet, Inc.
Adopting Financial Technology To Win At C&I
2018 C&I STRATEGY
4©2017 PayNet Inc.
Commercial & Industrial (C&I) LendingOne Of The Highest Return Businesses For Banks
2.5%
5.2%
6.3%7.4%
7.7%8.3%
8.8%
10.5%
0%
5%
10%
1-4 FamMulti-FamCREAutoCredit CardC&DC&IFarm
Confidential and Proprietary: Do Not Distribute
• CRE’s 6.3% ROE is below the industry’s cost of capital
• Many banks are not compensated for risk of heavy CRE exposure
• Banks with high CRE concentrations rarely deliver steady dividends or decent ROE
— RICK PARSONS, Author of “Investing in Banks” (2016)
Average 2014 Return on Equity (ROE)Average for Top 200 Banks with Greatest Exposure to Loan Type
5©2017 PayNet Inc.
6©2017 PayNet Inc.
NATIONAL VIEW
2018 C&I Strategy
7©2017 PayNet Inc.
Bank originations of less than $1M in selected metropolitan statistical areas
(MSAs) across the U.S.
8©2017 PayNet Inc.
In several MSAs, Bank’s C&I loan growth has not reflected local economic conditions,
suggesting that geographic targeting could be improved.
26%
28%
20%
40%
27%
30%
33%
26%
-31%
-21%
-24%
-9%
-29%
-16%
-19%
-28%-60% -40% -20% 0% 20% 40% 60%
Atlanta-Sandy Springs-Roswell, GA
Charlotte-Concord-Gastonia, NC-SC
Chicago-Naperville-Elgin, IL-IN-WI
Dallas-Fort Worth-Arlington, TX
Los Angeles-Long Beach-Anaheim, CA
Pittsburgh, PA
Salt Lake City, UT
United States
Local GDP Growth vs. Bank’s C&I Loan Origination GrowthBy MSA, 2008 - 2016
Banks Growth Local GDP GrowthOver-ConcentrationOpportunity
Source: PayNet; BEA; FFIEC; FDIC
9©2017 PayNet Inc.
Accommodation
& Food
Administrative
Services
Agriculture
Entertainment
Construction
Education
Finance
Health Care
Information
Manufacturing
Mining
Other
Services
Professional
Services
Retail
Transportation
Wholesale
Industry Loan Growth(SBLI Average Momentum Rank*)
Weakening Loan Originations
Growing Loan Originations
Ban
ks’ R
ela
tive
Co
nce
ntr
atio
n L
eve
l(c
om
par
ed t
o a
vera
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arke
t)Lo
w R
elat
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Co
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ntr
atio
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igh
Rel
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ion
Confidential and Proprietary: Do Not Distribute
Industry Opportunity MatrixConcentration and Growth of Bank Lending Portfolios by Industry
Opportunities
IndustryIndustry
Loan Growth
Bank Share
Market Share
Finance 6.5 7.94% 10.91%
Healthcare 5.5 11.07% 12.23%
Mining 1.0 0.39% 1.38%
Over-Concentrations
IndustryIndustry
Loan Growth
Bank Share
Market Share
Accom. & Food -5.0 5.33% 5.29%
Retail -3.0 9.28% 6.92%
Manufacturing -1.0 10.10% 9.85%
Source: PayNet; Census Bureau; BEA; SBA
*Note: SBLI Average Momentum Rank = Average of Difference Between 6 Mo (annualized) and year-over-year growth rank and Difference Between 3 Mo (annualized) and year-over-year growth rank in the local market (Centered)
Banks could also improve their lending portfolio by targeting industries with
uncaptured loan originations growth . . .
10©2017 PayNet Inc.
Industry Loan Performance(SBDFI Average Momentum Rank*)
Worsening Default Trends
Encouraging Default Trends
Accommodation
& Food
Administrative
Services
Agriculture
Entertainment
Construction
Education
Finance
Health Care
Information
Manufacturing
Mining
Other
Services
Professional
Services
Retail
Transportation
Wholesale
Ban
ks’ R
ela
tive
Co
nce
ntr
atio
n L
eve
l(c
om
par
ed t
o a
vera
ge m
arke
t)Lo
w R
elat
ive
Co
nce
ntr
atio
nH
igh
Rel
ativ
e C
on
cen
trat
ion
Confidential and Proprietary: Do Not Distribute
Opportunities
IndustryIndustry Loan Performance
Bank ShareMarket Share
Prof. Services 4.0 11.10% 14.85%
Wholesale 1.5 6.99% 7.95%
Mining 0.5 0.39% 1.38%
Over-Concentrations
IndustryIndustry Loan Performance
Bank ShareMarket Share
Agriculture -0.5 7.89% 1.55%
Transportation 0.0 6.12% 3.08%
Other Services 0.0 7.04% 6.65%
Source: PayNet; Census Bureau; BEA; SBA
Industry Opportunity MatrixConcentration and Performance of Bank Lending Portfolios by Industry
*Note: SBDFI Average Momentum Rank = Average of Change in Default Rate Over Last Three Months rank and Current SBDFI Level rank in the local market (Centered)
. . . and by pursuing industries with strong loan performance.
11©2017 PayNet Inc.
0.80%(494)
0.75%(294)
0.44%(89)
0.27%(89)
0.18%(53)
0.07%(10)
0.05%(125)
0.05%(13)
0.04%(40)
0.02%(23)
0.02%(3)
0.02%(3)
0.02%(5)
0.01%(5)
0.01%(3)
Dallas County, TX
Tarrant County, TX
Collin County, TX
Allegheny County, PA
Salt Lake County, UT
Will County, IL
Los Angeles County, CA
Mecklenburg County, NC
Orange County, CA
Cook County, IL
Cobb County, GA
Lake County, IL
DuPage County, IL
Fulton County, GA
Gwinnett County, GA
To take advantage of industry opportunities, banks should target counties in the
U.S. where underutilized industries have a strong presence . . .
11.5%(7,164)
12.4%(4,834)
14.9%(2,996)
13.7%(4,505)
10.0%(2,968)
10.0%(1,447)
12.0%(30,708)
9.4%(2,673)
12.6%(11,303)
11.4%(14,771)
10.0%(1,893)
10.3%(1,984)
10.0%(3,303)
10.9%(3,667)
9.0%(1,956)
15.0%(9,301)
11.5%(4,487)
17.3%(3,485)
11.8%(3,876)
14.5%(4,323)
11.5%(1,660)
13.1%(33,577)
14.2%(4,055)
16.4%(14,707)
14.9%(19,185)
17.6%(3,340)
15.8%(3,047)
15.8%(5,219)
21.2%(7,160)
14.9%(3,232)
Geographic Distribution of OpportunitiesShare and Number of Establishments in Top Opportunity Industries*, by County
*Note: The top opportunity industries are determined via a composite score that accounts for the industry’s loan growth, loan performance, and banks’ relative concentration level in the industry.
Mining
#1 Opportunity #2 Opportunity #3 Opportunity
Healthcare Professional Services
Chicago
21,505
businesses
ATL, CHAR,
LA 51,364
businesses
Dallas, SLC,
Pittsburgh
1,020
businesses
12©2017 PayNet Inc.
9.9%(3,249)
9.4%(3,663)
9.2%(3,117)
9.0%(11,644)
8.9%(1,793)
8.6%(2,459)
8.6%(5,330)
8.4%(7,501)
8.3%(21,277)
7.8%(1,480)
7.8%(1,119)
7.7%(1,676)
7.7%(1,485)
7.4%(2,197)
6.8%(2,259)
Allegheny County, PA
Tarrant County, TX
Fulton County, GA
Cook County, IL
Collin County, TX
Mecklenburg County, NC
Dallas County, TX
Orange County, CA
Los Angeles County, CA
Cobb County, GA
Will County, IL
Gwinnett County, GA
Lake County, IL
Salt Lake County, UT
DuPage County, IL
. . . and be wary of counties in the U.S. where over-concentrated industries
comprise a large share.
3.2%(1,057)
4.0%(1,548)
1.8%(604)
3.8%(4,950)
2.2%(435)
2.7%(764)
3.6%(2,239)
5.1%(4,613)
4.9%(12,423)
2.4%(452)
3.9%(567)
3.3%(714)
4.3%(826)
4.5%(1,352)
5.0%(1,638)
7.9%(2,610)
7.1%(2,773)
3.5%(1,176)
7.7%(9,931)
6.2%(1,241)
7.4%(2,111)
5.9%(3,689)
7.2%(6,413)
5.2%(13,251)
7.8%(1,487)
12.6%(1,814)
9.3%(2,028)
9.5%(1,839)
9.9%(2,963)
8.6%(2,830)
Geographic Distribution of Over-ConcentrationsShare and Number of Establishments in the Most Over-Concentrated Industries*, by County
*Note: The most over-concentration industries are determined via a composite score that accounts for the industry’s loan growth, loan performance, and banks’ relative concentration level in the industry.
Accommodation & Food
#1 Over-Concentration #2 Over-Concentration #3 Over-Concentration
Manufacturing Construction
13©2017 PayNet Inc.
CURRENT Underwriting and Review Process
Business
Borrower
Relationship
Manager
•Collect F/S
•Build Relationship
via “Centers of
Influence”
Central
Spreading
Dept.
• Conduct
F/S spreads
Credit
Approval
•GM $2m
•President
$5m
•Credit Cmte
$10m
Business Banking
Credit Dept.
•Underwrite
•Credit Write-Up
Underwriting:
• Uses spreads to do Cash
Flow Analysis
• Add PN and DNB to
analysis
• Get Behind the Numbers
to Tell the Story
• $4m deal used 52 pg.
write-up
• $500k deal used 5 pg.
write-up
Credit Review
•Same Underwriting
Process
•All credits
Quarterly
•All Credits Annually
Monitoring:
• Re-spread F/S
• Re-calc cash flows
• Conduct UW again
• Suggest revised Risk
Rating
Data/Tools:
• Moodys
spreads
• FICO personal
score
• Lexis Nexis
Public Records
Commercial Underwriting Process
Challenger BankCredit Review Metrics:2 days to complete 1 loan
Analyst can produce 120 loans/mo.
30 Days10 loans/Month
$5,000/application
14©2017 PayNet Inc.
CURRENT Underwriting and Review Process
Business
Borrower
Relationship
Manager
•Collect F/S
•Build Relationship
via “Centers of
Influence”
Central
Spreading
Dept.
• Conduct
F/S spreads
Credit
Approval
•GM $2m
•President
$5m
•Credit Cmte
$10m
Business Banking
Credit Dept.
•Underwrite
•Credit Write-Up
Underwriting:
• Uses spreads to do Cash
Flow Analysis
• Add PN and DNB to
analysis
• Get Behind the Numbers
to Tell the Story
• $4m deal used 52 pg.
write-up
• $500k deal used 5 pg.
write-up
Credit Review
•Same Underwriting
Process
•All credits
Quarterly
•All Credits Annually
Monitoring:
• Re-spread F/S
• Re-calc cash flows
• Conduct UW again
• Suggest revised Risk
Rating
Data/Tools:
• Moodys
spreads
• FICO personal
score
• Lexis Nexis
Public Records
Underwriting Metrics:7-30 days to complete 1 loan
Analyst can produce 10 loans per month
Challenger BankCredit Review:
2 Days120 loans/Analyst
$1,000/Review
15©2017 PayNet Inc.
Approve/
DeclineApprove/
Decline
NEW UNDERWRITING PROCESS
Data Gathering &
Automatic AdjudicationApplicationAutomated
ReviewManual
Review
-T
erm
s a
nd
Co
nd
itio
ns
-C
red
it S
tru
ctu
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red
it F
acil
ity
-P
ricin
g, R
ela
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ip M
od
els
, C
ross S
ell
Str
ate
gie
s
-C
red
it S
co
re
-In
du
str
ies
Composite Credit Model
Credit Bureau
Financial Info Balance Sheet, P&L, Cash Flow Model, Ratios
Compliance Checks
Decision EnginePortal Credit Policy/Process
Credit
Analysis
($100k-$1M)•DSC, D/E Ratios
•Appraisal / Analysis
•EL = LGD x PD
•Competitors
•Collateral
•Industry Analysis
•Significant Events
Credit ApplicationBorrower/Guarantor:- Name, Address, - Years In Biz, - Legal Structure- TIN - History, - Business Description, - Management Team
Credit Analyst
Review
(<$100k)•Commercial Credit
Scores
•Consumer Credit
Score
Terms and Conditions
Credit Structure
16©2017 PayNet Inc.
Small Balance
Confidential and Proprietary: Do Not Distribute
Middle Balance Large Balance
Credit Size ≤ $100,000 $100,000 - $1 million > $1 million
Objective Approve within 2 hours Approve within 7 days Approve within 3 weeks
Risk Appetite ≤ 2.0% annual default rate 1.0% annual default rate1.2% annual default rate
Capabilities • Composite credit score of MasterScore FICO and
commercial credit bureaus
• Internal software system or use Excel spreadsheet
to calculate the score
• Review rules for cases when borrower rejects
personal guarantee
• Conduct annual validation for model risk
management to ensure the default rate remains
within acceptable levels (2% or less)
• Standardize the credit application online
• Automated collection of financial
statements pre-populated into statement
spreads.
• 1 -year financial statements
• Debt Service Coverage 1.2x or better
• Debt/Equity 40% or better
• Loan To Value ratio of 80% or better
• No derogatory issues
• Blanket lien on all assets
• Automated/Electronic collection of financial
statements pre-populated into statement
spreads
• 3/year financial statements
• Debt Service Coverage 1.0x or better
• Debt/Equity 30% or better
• Collateral <70%
• No derogatory issues
• General lien
Underwriting - Shorten Response Times To Commercial Customers
RESULTS
10 applications/analyst/month 30 days/application
60 – 120 applications/
analyst/month
~5 days /
application
17©2017 PayNet Inc.
Low Risk
Confidential and Proprietary: Do Not Distribute
Middle Risk High Risk
Portfolio Mix 95% 2.5% 2.5%
Review Type Light review Medium review Full review
Review Frequency Annually QuarterlySemi-annually
Proposed
Efficiencies
• Eliminate collection and
analysis of financial
statements (step 1 of the
review process)
• Use PayNet’s Borrower
Profile Report to collect and
analyze credit information
(step 2 of the review process)
• Abbreviate the credit
committee review with batch
processing and walkaround
signatures
• Use automated/electronic
collection of financial
statements pre-populated into
statement spreads
• Conduct full review (i.e.,
collect and analyze financial
statements and credit
information, hold credit
committee review), but review
only twice per year instead of
quarterly
• Use automated/electronic
collection of financial
statements pre-populated into
statement spreads
• Conduct full review four times
per year
Credit Review Loans 4 Times Per YearBy Allocating Resources To Highest Risk Loans
RESULTS
100 – 200 reviews/analysts/year
2,000 reviews/analysts/year
18©2017 PayNet Inc.
Confidential and Proprietary: Do Not Distribute
• Through geographic and industry targeting, C&I earning assets by $110 Million from 2007 – 2015 while also managing risk effectively.
• $3.4 million extra interest each year.
Confidential and Proprietary: Do Not Distribute
Increased profits via opportunity analyses
• Incorporating industry-leading risk analysis tools (e.g., PayNet’s Credit Review Express, PayNet’s C&I Express) into banks’ credit processes adds scale:
• Increase application handling from 10 applications/month to 60;
• Increase annual reviews from 100 – 200 reviews per year to 2,000.
• Typical $2B bank saves $680,000 in underwriting costs and $570,000 in review costs each year while also managing risk effectively.
Credit process efficiencies through automation
Source: FDIC; PayNet
Note: Assumes 230 loan applications and 920 borrower reviews per year
PAYNET CAN HELP IDENTIFY GROWTH OPPORTUNITIES AND AUTOMATION
19©2017 PayNet Inc.
SBInsights.paynetonline.com
William Phelan(866) 825-3400
THANK YOU
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