C&I Strategy for 2018 · ©2017 PayNet Inc. 2 C&I in the U.S. 1.3 Million Possibilities 28 Million...

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

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

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elat

ive

Co

nce

ntr

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igh

Rel

ativ

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trat

ion


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

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arke

t)Lo

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elat

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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.


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


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


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


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


Approve/

DeclineApprove/

Decline

NEW UNDERWRITING PROCESS

Data Gathering &

Automatic AdjudicationApplicationAutomated

ReviewManual

Review

-T

erm

s a

nd

Co

nd

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ns

-C

red

it S

tru

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urp

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it F

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-P

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els

, C

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Str

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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


Small Balance


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


Low Risk


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



• 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.


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


SBInsights.paynetonline.com

William Phelan(866) 825-3400

THANK YOU

C&I Strategy for 2018 · ©2017 PayNet Inc. 2 C&I in the U.S. 1.3 Million Possibilities 28 Million...

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