The New Normal: How to Achieve Profitable C&I Loan Growth in Today's Economy
1. Presented by:
Justin Barr | BankDATAWORKS.com
Michael Iannaccone | MDI Investments
Jon Winick | Clark Street Capital
2.
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3.
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4.
Justin Barr, President. Mr. Barr is widely recognized as an expert on
the community banking industry and is often quoted by leading
financial industry media outlets. Mr. Barr is a third generation
Chicago banker and second generation commercial lender and bank
turnaround expert. Mr. Barr also manages a C&I lending focused
bank partnership program for BankDATAWORKS’ parent company
Franklin Capital Network, a national commercial finance company.
Michael Iannaccone, Member-Advisory Committee. Mr. Iannaccone,
founder and President of MDI Investments, Inc., is a seasoned
investment banker who is widely recognized as an expert on the
community banking industry and is regularly quoted by leading
financial media outlets.
Jon Winick, Member-Advisory Committee. Mr. Winick, founder and
President of Clark Street Capital Management, LLC, is a nationally
recognized expert on the SBA 7(a) and 504 lending programs and
currently serves as Chairman of SomerCor 504, a leading originator
of SBA 504 loans in Chicago and Illinois.
5.
U.S. ECONOMIC OVERVIEW
U.S. BANKING SECTOR OVERVIEW
◦ REVENUE AND EARNINGS PERFORMANCE
◦ LENDING ENVIRONMENT
NICHE C&I LENDING STRATEGIES
◦ ACCOUNTS RECEIVABLE FACTORING
CASE STUDY: CRESTMARK BANK
◦ SBA 7(a) LENDING
CASE STUDY: LIVE OAK BANKING COMPANY
◦ BUY / BUILD / JOINT VENTURE ALTERNATIVES
6.
U.S. economy continues to grow, but at
a sluggish pace.
Nearly three years into the recovery,
gross domestic product (GDP) is about
7 percent above its recession trough
but barely above its pre-recession level.
Employment growth has been uneven in
2012 and remains below expectations.
7.
Economic outlook is uncertain due to:
◦
◦
◦
◦
Continued labor market weakness.
Ongoing Eurozone crisis.
Slowing in emerging markets.
U.S. fiscal situation.
• Consensus private sector forecast suggests
unemployment will remain above normal
through 2013.
• Slow recovery implies slow growth in
spending and loan activity.
8.
9.
10.
Revenues remain relatively flat.
◦ YTD Gross Revenue ↓0.9% YOY @ 9/30/2012
Net income improving, at same levels
as in 2005 and 2006, driven by lower
provisions and charge-offs.
◦ YTD Net Income ↑13.7% YOY @ 9/30/2012
◦ YTD ALLL Provision ↓23.2% YOY @ 9/30/2012
◦ YTD Net Income ↓25.6% YOY @ 9/30/2012
11.
ROA and ROE improving but well
below long-term averages.
Net interest margin remains under
pressure, but for larger banks is
higher today than in 2007.
◦ Low interest rate environment likely to persist.
◦ As older, higher margin assets mature or
default, they are replaced by lower yielding
instruments.
12.
13.
14.
15.
16.
17.
18.
19. Banking Sector Overview
Lending Environment
Loan to deposit ratios at historic lows.
Loan portfolios remain real estate heavy.
◦ 54% of total loans @ 9/30/2012
Real estate loan growth remains relatively weak.
◦ ↑1.1% YOY @ 9/30/2012
C&I loans showing strong growth.
◦ ↑14.7% YOY @ 9/30/2012
◦ Growth centered on loans over $1MM.
Loan demand from larger businesses is growing.
Loan demand from small businesses continues to lag.
20. Banking Sector Overview
Lending Environment (continued)
C&I loan competition intense and increasing.
C&I loan underwriting standards easing.
◦ Net easing for 8 consecutive quarters
C&I loan rate spreads decreasing.
◦ 60% of bankers surveyed report ↓ spreads for loans
to larger businesses.
◦ 46% of bankers surveyed report ↓ spreads for loans
to small businesses.
Regulatory authorities increasing exam
scrutiny of C&I lending practices.
21.
22. DEPOSITORY
GOVERNMENTS, 1.2%
ALL OTHER, 4.9%
LEASE FINANCING
RECEIVABLES, 1.4%
INSTITUTIONS, 1.4%
AGRICULTURAL
PRODUCTION,
0.9%
RESIDENTIAL REAL
ESTATE, 24.9%
CONSUMER, 17.1%
COMMERCIAL REAL
ESTATE, 14.0%
COMMERCIAL AND
CONSTRUCTION AND
INDUSTRIAL, 19.2%
DEVELOPMENT REAL
ESTATE, 2.8%
RESIDENTIAL REAL ESTATE
OTHER REAL ESTATE, 0.8%
MULTI-FAMILY REAL
FAMLAND, 0.9%
ESTATE, 3.0%
- HOME EQUITY LOANS,
7.5%
28. Niche C&I Lending Strategies
The Challenge
The real estate meltdown has made clear the
need for diversified credit risk and cash flows.
In response, many banks have moved to
balance real estate loan concentrations
through C&I loan growth but face
considerable challenges, including:
◦ Intensifying competition, causing tightening
spreads and loosening structures.
◦ Weak loan demand from qualifying borrowers.
◦ Regulatory scrutiny of new C&I loan business,
especially for new market entrants.
33. Niche C&I Lending Strategies: A/R Factoring
Key Attributes to Lender
Ownership of and control over the A/R
portfolio and cash
◦ Account debtors notified to pay lender pursuant to UCC9-406(a).
◦ A/R payments sent directly to lender lockbox or P.O. box.
◦ A/R excluded from company’s estate in the context of bankruptcy.
Funding decisions predicated on in-depth,
real-time, verified A/R data
◦ Each individual invoice is ledgered in and tracked by specialized
MIS.
◦ Invoices with supporting documents evidencing delivery sent to
lender by borrower.
◦ 70-80% of invoices directly verified with account debtors.
◦ Lender creates real-time, verified eligibility schedules and
borrowing base certificates.
34. Niche C&I Lending Strategies: A/R Factoring
Key Attributes to Lender (continued)
Strong A/R liquidation outcomes due to
relationships with individual account debtors,
verifications and credit limits.
◦ Lender has outsourced A/R department and develops
relationships with account debtor A/P personnel.
◦ Hard to dispute an invoice that’s been verified as good.
◦ Initial and ongoing underwriting of individual account debtors.
Establishment of credit limits where appropriate.
Extraordinary insight into integrity of
operations of borrower.
Applicable to a significantly underserved
market segment with yields significantly in
excess of traditional C&I lending.
35. Niche C&I Lending Strategies: A/R Factoring
Key Attributes to ‘Borrower’
Immediate access to greater working capital.
Faster over-line decisions due to robust, real
time collateral information and insight into
operations of borrower.
Enhanced customer credit information and
decision making.
Enhanced monitoring and collection of A/R
portfolio resulting in declination of days sales
outstanding.
36.
Most asset based loans to small and midsize companies should be structured as
factoring accommodations.
• Traditional, company prepared borrowing base
certificate data is not real-time and is generally
inaccurate.
• If assets of most small to mid-size companies were
marked-to-market, companies would have a
negative tangible net worth.
• Current market pricing for bankable ABL deals is
not (at all) commensurate with risks.
37. Niche C&I Lending Strategies: A/R Factoring
Target Markets
Business-to-business companies that otherwise
do not qualify for traditional bank financing or
require financing in excess of what is available
through such financing.
◦ Early stage companies
◦ Companies outgrowing their capital base
◦ Companies in a turnaround mode
Small & midsize companies with unconditional
sales and verifiable invoices, except:
◦ Because of progress payments, construction industry not
eligible
◦ Medical receivables for services to patients not eligible
39.
Lending strategy exclusively focused on SBA 7(a).
In 2012, 4th largest 7(a) lender nationally having
originated 489 new 7(a) loans during the year
with an aggregate principal balance of $463MM.
Established in 2008. Privately held.
Headquartered in Wilmington, NC.
Financial Snapshot @ 9/30/2012:
◦ Single deposit taking location.
◦ Total Assets:
◦ Total Loans:
◦
◦
◦
◦
C&I Loans:
$320.7MM
$230.8MM (↑25.6% YOY)
$79.4MM (34.6%)
YTD Net Income:
$11.6MM
Annualized, YTD ROA:
5.3%
Annualized, YTD ROE:
44.1%
Well capitalized (all ratios)
42. Niche C&I Lending Strategies: SBA 7(a)
Overview
Largest SBA lending program.
Designed to finance businesses that otherwise
would not qualify for bank financing through 75%
SBA guaranty.
Loan volume statistics 2007 – 2011:
$60.0
B
I
L
L
I
$50.0
$40.0
$46.1
$47.7
$48.6
$50.8
$55.2
7(a) Loans Approved
$30.0
O
N
$10.0
7(a) Loans Outstanding
$20.0
S
$19.6
$14.3
$12.7
$2007
2008
$9.2
2009
$12.4
2010
2011
43. Niche C&I Lending Strategies: SBA 7(a)
Key Attributes to Bank
Reduce loan portfolio risk, while increasing
profitability.
◦ Reduce Risk. 75% guaranty of the outstanding
loan balance by the US Federal Government.
◦ Increase Profitability. The guaranteed portion of
an SBA loan (75%) can be sold into an active
secondary market at a substantial premium.
Improve capital ratios.
◦ Bank only needs to pledge reserves against the
unguaranteed portion of the loan (25%).
44.
Increase Eligible Loan Size
◦ Only the unguaranteed portion of the loan (25%)
needs to be counted against the Bank’s legal
lending limit to one borrower rule.
Reduce Concentration Exposure and/or
Exposure to Stressed C&I Credits
◦ Existing performing C&I loans that meet certain
criteria can be refinanced and 75% guaranteed
portion sold at a substantial premium, regardless of
collateral coverage.
45. Niche C&I Lending Strategies: SBA 7(a)
Key Attributes to Borrower
Longer terms with lower payments.
Fully amortizing: no calls or
balloons.
Full collateral coverage is not
required.
Lower equity contributions.
No prepayment penalty for loans
with a maturity of <15 years.
46. Niche C&I Lending Strategies: SBA 7(a)
Loan Terms
Guarantee Percentage:
◦ 75% guarantee on loans over $150,000
Rate:
◦ Max. floating rate of P+ 2.75% on loans <$150,000
Maturity:
◦ Intangibles (working capital, goodwill) – 10 yrs.
◦ Equipment – 10 yrs. (can be longer given useful life
appraisal)
◦ Real Estate – 25 years
Amortization:
◦ Fully amortizing, no calls or balloons
47. Niche C&I Lending Strategies: SBA 7(a)
Loan Terms
Prepayment Penalty (retained by SBA):
Collateral Advance Rates:
Personal Guarantees:
◦ Term <15 years – None
◦ Term >15 years – 5/3/1
◦ N/A. But lender must take all ‘available’ collateral using
advance rates at the bank from similar sized
conventional loans.
◦ An assignment of life insurance is required on all loans
that are not fully collateralized by commercial real estate
(M&E under some circumstances)
◦ Junior lien on personal residence required on all loans
that are not fully collateralized and where the residence
has equity.
◦ Full and unlimited personal guarantees from all owners
of 20%+.
48.
Business Acquisition:
Real Estate: Purchase, Refinance or
Construction:
◦ Requires 3rd party valuation.
◦ Generally requires 25% equity. Equity can be in the form of cash
from the buyer (funds may not be borrowed) or seller financing. If
seller note is being used as equity, then it must be on full standby
for at least 2-years (i.e. subordinated w/ PIK interest).
◦ All transactions with CRE taken as collateral require 3rd party
appraisal and applicable environmental study.
Refinance:
Equipment: Purchase or Refinance
Working Capital
◦ Any business related debt, other than shareholder notes
◦ Term can exceed 10-yrs. if supported by 3rd party appraisal.
49. Must be a legal, for profit entity .
Based in the U.S.
A Small Business (<$3.5 million income
and <$15 million net worth) .
Commercial real estate must be 51%
owner occupied (60% for new
construction).
Principals must be of “good character”
and legal U.S. citizens or residents.
50.
Per the SBA, ‘prudent’ lending standards govern
SBA 7(a) loan underwriting. The guarantee
cannot be used to replace the reasonable credit
judgment and prudent underwriting policies that
would be used on similar size conventional loans
by the bank.
◦ No minimum debt service coverage ratios, but the
primary source of repayment on the loan must be the
cash flow of the business and not liquidation of
collateral or personal resources of guarantor.
◦ Financial covenants and reporting requirements should
be included as necessary. However, a loan may generally
only be accelerated for payment default.
◦ No required minimums on FICO scores. However, it is
imperative that the bank follow prudent lending
standards.
51.
BUY
◦ Benefits:
Immediate market impact.
Predictable performance metrics.
Meets regulatory mandates regarding control
processes, systems and human resource talent.
◦ Risks:
Significant up-front cost, including likely goodwill.
Permanent.
Potential for culture clash.
52.
BUILD
◦ Benefits:
Control.
Ability to ensure cultural consistency.
◦ Risks:
Delayed and uncertain market impact.
Significant up-front cost to acquire systems and
human resource talent.
Potential regulatory issues regarding lack institutional
business line experience.
53.
JOINT VENTURE
◦ Benefits:
Immediate market impact.
Variable cost.
Improves efficiency ratio.
Ability to test effectiveness of business model.
Bridge to building in-house capability.
Meets regulatory mandates regarding control
processes, systems and human resource talent.
◦ Risks:
Reputation of J/V partner has potential to taint that of
bank.
Exclusivity not necessarily ensured.
54.
Justin Barr, BankDATAWORKS.com
◦ (888) 701-1500 | Jbarr@BankDATAWORKS.com
Michael Iannaccone, MDI Investments
◦ (708) 445-7238 | Michael@MDIinvestments.com
Jon Winick, Clark Street Capital
◦ (312) 662-1500 | Jon.Winick@ClarkStCapital.com
Sageworks, Inc.
◦ (919) 851-7474 x619 | Billy.Burnet@SageworksInc.com