TEXANS THINK BIG DIGITAL CI LENDING FOR SMALL
“TEXANS THINK BIG” DIGITAL C&I LENDING FOR SMALL AND MEDIUM SIZED BUSINESSES APRIL 2019 www. paynet. com
ABOUT PAYNET MORE KNOWLEDGE, CONFIDENT DECISIONS. 25 Million Businesses $1. 7 Trillion Founded 1995 2000 2005 2010 12 Million Businesses $500 Billion 2015 2019 30 Million Businesses $3. 0 Trillion © 2019 PAYNET, INC. 2
NATIONAL TREND © 2019 PAYNET, INC. 3
NATIONAL TRENDS © 2019 PAYNET, INC. 4
NATIONAL TRENDS DEFAULT FORECAST … RISING TO 2. 2% FROM 1. 9% © 2019 PAYNET, INC. 5
C&I IS EARNING ASSETS RICH ENVIRONMENT $4. 2 Trillion of total credit in small business economy © 2019 PAYNET, INC.
HOW SMALL BUSINESSES CHOOSE A LENDER © 2019 PAYNET, INC.
2019 C&I STRATEGY FOR TEXAS © 2019 PAYNET, INC.
BANKS OPERATING IN 4 METROPOLITAN STATISTICAL AREAS (MSAS) IN TEXAS © 2019 PAYNET, INC.
IN SEVERAL MSAS, BANK’S C&I LOAN GROWTH HAS NOT REFLECTED LOCAL ECONOMIC CONDITIONS, SUGGESTING THAT GEOGRAPHIC TARGETING COULD BE IMPROVED. Local GDP Growth vs. Bank’s C&I Loan Origination Growth By MSA, 2008 - 2017 Banks Growth Opportunity Local GDP Growth Over-Concentration 69% Austin-Round Rock, TX 1% 45% Dallas-Fort Worth. Arlington, TX 1% Houston-The Woodlands-Sugar Land, TX San Antonio-New Braunfels, TX -20% 31% -3% 52% -9% 20% 60% © 2019 PAYNET, INC. Source: Pay. Net; BEA; FFIEC; FDIC
BUSINESS BANKING CREDIT AND REVIEW PROCESS Challenger Bank Business Borrower Underwriting Metrics: Credit Review Metrics: 7 -30 days to complete 1 loan Analyst can produce 10 loans per month Relationship Manager • Collect F/S • Build Relationship via “Centers of Influence” Central Spreading Dept. • Conduct F/S spreads Data/Tools: • Moodys spreads • FICO personal score • Lexis Nexis Public Records 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 • $4 m deal used 52 pg. write -up • $500 k deal used 5 pg. write-up 2 days to complete 1 loan Analyst can produce 120 loans/mo. Credit Approval • GM $2 m • President $5 m • Credit Cmte $10 m 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 © 2019 PAYNET, INC.
BANKS COULD ALSO IMPROVE THEIR LENDING PORTFOLIO BY TARGETING INDUSTRIES WITH UNCAPTURED LOAN ORIGINATIONS GROWTH. . . Industry Opportunity Matrix Concentration and Growth of Bank Lending Portfolios by Industry High Relative Concentration Finance Retail Banks’ Relative Concentration Level (compared to average market) Accommodation & Food Entertainment Other Services Health Care Information Education Agriculture Administrative Services Transportation Professional Services Low Relative Concentration Wholesale Mining Construction Manufacturing Opportunities 800% 790% 780% 770% 760% 750% 740% 730% 720% 710% 700% 690% 680% 670% 660% 650% 640% 630% 620% 610% 600% 590% 580% 570% 560% 550% 540% 530% 520% 510% 500% 490% 480% 470% 460% 450% 440% 430% 420% 410% 400% 390% 380% 370% 360% 350% 340% 330% 320% 310% 300% 290% 280% 270% 260% 250% 240% 230% 220% 210% 200% 190% 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% -80% -90% -100% -110% -120% -130% -140% -150% -160% -170% -180% -190% -200% -210% -220% -230% -240% -250% -260% -270% -280% -290% -300% -310% -320% -330% -340% -350% -360% -370% -380% -390% -400% -410% -420% -430% -440% -450% -460% -470% -480% -490% -500% -510% -520% -530% -540% -550% -560% -570% -580% -590% -600% -610% -620% -630% -640% -650% -660% -670% -680% -690% -700% -710% -720% -730% -740% -750% -760% -770% -780% -790% -800% -8, 00 -7, 00 -6, 00 -5, 00 -4, 00 -3, 00 -2, 00 -1, 00 0, 00 1, 00 2, 00 3, 00 4, 00 5, 00 6, 00 7, 00 8, 00 Weakening Loan Originations Industry Loan Growth (SBLI Average Momentum Rank*) Growing Loan Originations Industry Loan Growth Bank Share Market Share Admin 7. 0 2. 61% 4. 86% Professional 2. 0 11. 88% 14. 76% Construction -0. 5 7. 09% 10. 98% Industry Over-Concentrations Industry Loan Growth Bank Share Market Share Finance -3. 0 18. 17% 10. 49% Entertainment -2. 5 2. 74% 1. 42% Other 0. 5 7. 91% 6. 09% Industry *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) Source: Pay. Net; Census Bureau; BEA; SBA © 2019 PAYNET, INC. Confidential and Proprietary: Do Not Distribute
. . . AND BY PURSUING INDUSTRIES WITH STRONG LOAN PERFORMANCE. Industry Opportunity Matrix Opportunities Banks’ Relative Concentration Level (compared to average market) High Relative Concentration and Performance of Bank Lending Portfolios by Industry Finance Retail Accommodation & Food Other Services Entertainment Health Care Information Agriculture Administrative Services Professional Services Low Relative Concentration Wholesale Mining Construction Manufacturing -8, 00 -7, 00 -6, 00 -5, 00 -4, 00 -3, 00 -2, 00 -1, 00 0, 00 1, 00 2, 00 3, 00 4, 00 5, 00 6, 00 7, 00 8, 00 Worsening Default Trends Industry Loan Performanc e Bank Share Market Share Manufacturing 6. 0 3. 11% 8. 01% Wholesale 4. 0 5. 40% 8. 38% 1. 5 0. 66% 4. 40% Mining Education Transportation 800% 790% 780% 770% 760% 750% 740% 730% 720% 710% 700% 690% 680% 670% 660% 650% 640% 630% 620% 610% 600% 590% 580% 570% 560% 550% 540% 530% 520% 510% 500% 490% 480% 470% 460% 450% 440% 430% 420% 410% 400% 390% 380% 370% 360% 350% 340% 330% 320% 310% 300% 290% 280% 270% 260% 250% 240% 230% 220% 210% 200% 190% 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% -80% -90% -100% -110% -120% -130% -140% -150% -160% -170% -180% -190% -200% -210% -220% -230% -240% -250% -260% -270% -280% -290% -300% -310% -320% -330% -340% -350% -360% -370% -380% -390% -400% -410% -420% -430% -440% -450% -460% -470% -480% -490% -500% -510% -520% -530% -540% -550% -560% -570% -580% -590% -600% -610% -620% -630% -640% -650% -660% -670% -680% -690% -700% -710% -720% -730% -740% -750% -760% -770% -780% -790% -800% Industry Loan Performance (SBDFI Average Momentum Rank*) Encouraging Default Trends Over-Concentrations Industry Loan Bank Share Performance Market Share Accommodation -6. 5 8. 89% 5. 54% Retail -5. 0 11. 81% 6. 59% Finance -0. 5 18. 17% 10. 49% *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) Source: Pay. Net; Census Bureau; BEA; SBA © 2019 PAYNET, INC. Confidential and Proprietary: Do Not Distribute
To take advantage of industry opportunities, Banks should target counties within its footprint where underutilized industries have a strong presence… Geographic Distribution of Opportunities Share and Number of Establishments in Texas Banks’ Top Opportunity Industries, by County* 19, 100 Establishmen ts 51, 600 25, 200 Establishments *Note: The top opportunity industries are determined via a composite score that accounts for the industry’s loan growth, loan performance, and typical bank’s relative concentration level in the industry. The counties listed are the bank’s top counties based on small business loan originations in the latest year. Source: Pay. Net; Census Bureau © 2019 PAYNET, INC. 14
SHORTEN RESPONSE TIMES TO COMMERCIAL CUSTOMERS Small Balance Credit Size Objective Risk Appetite Capabilities Large Balance Middle Balance $100, 000 - $1 million > $1 million Approve within 2 hours Approve within 7 days Approve within 3 weeks ≤ 2. 0% annual default rate 1. 2% annual default rate 1. 0% annual default rate • Automated collection of financial statements pre-populated into statement spreads. • Automated/Electronic collection of financial statements pre-populated into statement spreads • 1 -year financial statements • 3/year financial statements • Review rules for cases when borrower rejects personal guarantee • Debt Service Coverage 1. 2 x or better • Debt Service Coverage 1. 0 x or better • Conduct annual validation for model risk management to ensure the default rate remains within acceptable levels (2% or less) • Debt/Equity 40% or better • Debt/Equity 30% or better • Loan To Value ratio of 80% or better • Collateral <70% • No derogatory issues • General lien ≤ $100, 000 • Composite credit score of FICO® SBSS and commercial credit bureaus • Internal software system or use Excel spreadsheet to calculate the score • Standardize the credit application online RESULTS • Blanket lien on all assets • No derogatory issues 10 – 30 applications/analyst/month 7 – 30 days/application 60 – 120 applications/analyst/month ~5 days / application © 2019 PAYNET, INC. Confidential and Proprietary: Do Not Distribute
CREDIT REVIEW LOANS 4 TIMES PER YEAR BY ALLOCATING RESOURCES TO HIGHEST RISK LOANS High Risk Middle Risk Low Risk 95% Portfolio Mix Light review Review Type Review Frequency Annually • Eliminate collection and Proposed analysis of financial statements (step 1 of the Efficiencies review process) • Use Pay. Net’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 2. 5% Medium review Full review Semi-annually Quarterly • 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 • Conduct full review four times per year 100 - 200 reviews/analyst/year RESULTS 2, 000 reviews/analyst/year © 2019 PAYNET, INC. Confidential and Proprietary: Do Not Distribute
DIGITAL LENDING - BANK • • PORTAL DATA & ANALYSIS CREDIT POLICY BORROWER / GUARANTOR COMMERCIAL & CONSUMER CREDIT BUREAU UNDERWRITING Name, Address Years in Business Legal Structure TIN • • • History Business Description Management Team Automated Financial Collection (Borrower/Guarantor) • Balance sheet, P&L, Cash flow • Ratios • • WEEKS Industries Terms & conditions Credit structure, Facility purpose Pricing, Relationship models, Cross/sell strategies 1 DAY < $100 k • • $100 k = $1 M Commercial • Credit Scores • Consumer Credit Score • Compliance • Public Records DSC, D/E ratios Appraisal/Analysi s EL = LGD X PD Competitors APPROVE/DECLINE 5 DAYS © 2019 PAYNET, INC.
DIGITAL LENDING FUTURE © 2019 PAYNET, INC.
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