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Tag: commercial lending

  • Banker of the Year: PNC’s Bill Demchak

    Banker of the Year: PNC’s Bill Demchak

    Bill Demchak, chairman, president and CEO of PNC Financial Services Group.

    Gettyimages/Drew Angerer

    PNC Financial Services Group is far from the flashiest bank around. The Pittsburgh-based bank isn’t a megabank like JPMorgan Chase or Bank of America, nor is it engaged in the massive deals that those two arrange on Wall Street. It’s no laggard in technology, but it’s not the first bank that comes to mind in that regard either. 

    In fact, one could even say PNC is boring. But in a year of turmoil for the banking industry — which claimed the tech-obsessed Silicon Valley Bank and wealth-obsessed First Republic Bank — perhaps boring is a solid strategy. 

    PNC, which at $557 billion in assets is the eighth largest U.S. bank, calls itself a national Main Street bank. It focuses on middle-market businesses, ones that aren’t household names but still play a critical role in the U.S. economy. Its roots are in Pittsburgh, but it’s steadily expanded and now has a national, coast-to-coast footprint. 

    Leading the charge is Bill Demchak, who’s been PNC’s CEO since 2013 and has spent two decades at the bank. 

    Demchak, whom American Banker is naming Banker of the Year for 2023, declined an interview request. But analysts credit his steady hand for growing PNC into a strong national franchise — one that isn’t immune to industrywide pressures but often finds a way to the top of the pack. 

    “The investment community is willing to bet on Bill Demchak and bet on PNC, because of the track record that he and the company has had throughout multiple cycles,” said Terry McEvoy, an analyst at Stephens. “That reflects a high level of credibility. That doesn’t happen overnight within the banking sector.” 

    Few investors are buying bank stocks this year, but those who are often think PNC would be more resilient if a recession hits. 

    “Investors are looking for high-quality, defensive names … sleep-at-night stocks,” said Ebrahim Poonawala, an analyst at Bank of America. “PNC is one of those that comes up often.” 

    This year, as worries over regional banks popped up, PNC found itself in a stronger position than some competitors. 

    Dozens of banks reported deposit outflows after Silicon Valley Bank’s failure in March, but PNC registered a tiny increase as its depositors stuck with it. Its balance sheet was in decent shape too, even if its bond portfolio fell in value when a sharp rise in interest rates eroded the prices of low-yielding bonds. Critically, PNC made itself less vulnerable by buying securities with shorter durations than certain competitors — thus ensuring any pain was shorter-term — and it avoided putting too much cash into low-yielding assets. 

    To be sure, PNC isn’t impervious to the struggles facing the banking industry. Its profitability is down as depositors seek higher interest rates, prompting PNC to lay off 4% of its staff. Its stock price has fallen roughly 30% this year. Its capital markets business has underperformed. The regulators under the Biden administration are toughening up rules for PNC and other regional banks. 

    But other regional banks are facing bigger earnings pressures, or they’re needing to readjust more as regulations get tougher. PNC, in contrast, more skillfully prepared its balance sheet for whatever comes next, making sure it had more capital and thus flexibility. 

    “They continue to grind away one step at a time, with calculated risks, to show consistent progress,” said Wells Fargo analyst Mike Mayo. 

    He added that Demchak has proven to be one of the “most independent-thinking bank CEOs.” 

    The tougher environment has many regional banks actively looking to shrink, but PNC’s stronger position means it remains much more open for business. 

    Its balance sheet gave it ample room to buy a loan portfolio from Signature Bank after the crypto-heavy bank failed. The $16.6 billion in capital commitments isn’t all that large, but it helps PNC expand its work with private equity. 

    If the price is right, PNC may also gain valuable customers from competitors whose slimming-down campaigns are prompting them to exit some businesses. Doing so may be “pretty attractive” for PNC, Demchak told analysts Oct. 13 when asked about the possibility. 

    “We’re intelligent — hopefully, intelligent — takers of risk at the right price,” Demchak said. “We can evaluate what’s out there.”

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    Becoming a national Main Street bank

    Demchak came to PNC in 2002 as chief financial officer, marking his return to his hometown of Pittsburgh after a high-profile stint on Wall Street. Demchak helped lead JPMorgan’s development of credit derivatives products, the type of financial engineering that contributed to the 2008 financial crash. 

    The Financial Times once called him a “whizz-kid.” Commercial lenders at JPMorgan, wary of mathematical models upending their decades-old way of doing business, called him the “prince of darkness,” according to the book “Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe.” 

    The idea behind those derivatives was simple. Corporations and investors could already swap the risks tied to interest rates, currencies and commodity prices. If a company feared interest rates or the price of oil would rise, they could protect themselves by swapping that risk with another entity, which took the other side of that bet. 

    In the mid-1990s, Demchak and the JPMorgan team were on the forefront of applying that same idea to the chance that companies may default on their loans. If used correctly, the innovation could help spread the risk of a loan turning bad — with banks swapping the risk of borrowers defaulting on their loans to investors willing to take bets on those outcomes. 

    The usage of credit default swaps proliferated. Demchak and the JPMorgan team had focused on using them in the corporate world, where ample data on companies’ financial health made it easier to run statistical analyses. 

    But other banks and Wall Street firms soon created credit default swaps based on consumer mortgages — where historical data was more sparse and lenders were becoming far too lax. The JPMorgan team had long viewed mortgage derivatives with caution, which insulated the bank when the subprime mortgage crisis hit. 

    Demchak stuck to that more cautious view when he joined PNC in 2002. The bank took a more conservative approach in the years leading up to the 2008 crisis and limited its exposure to dicier sectors. 

    At a November 2007 presentation, Demchak noted the bank stayed away from subprime mortgages, had fewer real estate loans than its peers and was cautious on corporate credit conditions. The bank had been selling loans where it could and keeping its balance sheet slim, which reduced its profits but put it in better shape for a downturn that was already starting to brew.

    “We didn’t grow the balance sheet as quickly as we could because we were worried about the risk embedded in that, and it is pretty clear today that our position has been validated by the headlines and the real world outcomes,” Demchak said at the 2007 event, according to a FactSet transcript. 

    PNC’s healthier financial footing helped it acquire National City Corp. when the Cleveland-based bank ran into trouble in 2008. The crisis-era purchase gave PNC a strong presence in the Midwest and turned it into the country’s fifth biggest bank by deposits. 

    Then-CEO James Rohr, along with his heir-apparent Demchak, continued PNC’s expansion from there. The bank bought the Royal Bank of Canada’s fledgling U.S. retail operations in 2011, giving it hundreds of branches in the Southeast. 

    The deal-making slowed once Demchak became CEO in 2013. But he struck a major deal in November 2020, buying the U.S. bank of the Spanish giant Banco Bilbao Vizcaya Argentaria, including branches in Texas, California, Arizona and Colorado. 

    The BBVA USA deal finally accomplished PNC’s mission: taking the bank national. PNC branches now stretch from coast to coast, and the bank is in all 30 of the largest U.S. markets. 

    However, that deal followed a questionable move from PNC. In May 2020, as COVID-19 uncertainty continued to cloud the economy, PNC sold its stake in the asset-management giant BlackRock. The bank owned 22% of BlackRock, whose boom since PNC bought it in 1995 made it a stellar investment. 

    Had it waited a few more months, PNC would have reaped far more cash, and not prompted Barron’s to criticize the “folly” in the sale. 

    On the plus side, PNC was able to use the proceeds to buy BBVA’s U.S. operations a few months later. And since few banks were interested in acquisitions in 2020, PNC was able to get BBVA for fairly cheap, said Poonawala, the Bank of America analyst. 

    So far, the BBVA deal seems to be going well. Mayo, the Wells Fargo analyst, praised PNC for being able to integrate the two systems together quickly for customers. 

    Other banks, such as PNC’s North Carolina-based rival Truist Financial, have struggled with the technical side of mergers and gotten backlash from customers. 

    But the smooth integration of BBVA is partly thanks to PNC’s long efforts to improve its data infrastructure and make the company more efficient, Mayo said. Those efforts may not be all that exciting, but the integration showed how “10-plus years of back-office restructuring and tinkering pays off,” he said. It’s yet another reason why Mayo calls PNC the “bank of steel,” a nod to its Pittsburgh roots but also the resiliency of its technology and balance sheet. 

    “It got a bit rusty with the sale of BlackRock for a period, but then it took some of that rust off,” Mayo said, noting PNC “made victory out of defeat” by using the BlackRock sale proceeds to buy BBVA at a great price. 

    Blythe Masters, who worked for Demchak at JPMorgan and rose to other top roles at the megabank, said he is “one of, if not the, most talented individuals I have worked with or for. 

    “He is an exceptional judge of talent, an intuitive and detail-oriented risk manager, a deeply strategic thinker and capable of playing a long game,” said Masters, who’s now founding partner of the tech investment firm Motive Partners. 

    “I’m delighted, but not remotely surprised, that he and his team have made PNC such a great success,” Masters added.

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    Executives at PNC have said they will be watching how commercial real estate loans tied to office buildings continue to fare.

    Bloomberg News

    Preparing for a rainy day

    How PNC fares in a downturn — assuming the U.S. economy will eventually break its streak of outperforming expectations — remains to be seen. 

    Like any other bank, it would lose money as consumers fall behind on their payments and businesses struggle to pay back loans. But analysts point to PNC’s solid history of outperforming other banks on credit quality as a sign that its underwriting is solid. 

    And in the sector that’s currently the biggest source of worry — empty office buildings as some employers offer remote and hybrid work options — PNC’s exposure is relatively low. 

    Some 2.8% of PNC’s loans were in office-related commercial real estate as of last year, according to a Jefferies analysis of large and regional banks’ office CRE exposures. 

    While that was above the median of 1.7%, some competitors such as Citizens Financial Group, M&T Bank and Wells Fargo have about 4% of their total loans in office CRE. Several midsize banks that are significantly smaller than PNC have much larger exposures. 

    Whether office leases will be a major source of trouble in the coming months is unclear. Some argue the pain will be gradual, since office leases often stretch several years and the tenants won’t leave all at once. Others worry vacancy trends, high interest rates and other factors will lead to more stress — particularly at midsize banks that are more exposed. 

    PNC has been monitoring the situation closely and stashing away reserves to cover the potential souring of office loans. 

    “We’ll need those reserves because we do think there’s going to be problems in the office space,” Demchak told analysts in July. 

    For borrowers who do run into problems, PNC is working to figure out other options, such as selling buildings if needed or getting more equity from their investors. 

    The bank is also giving its own investors a detailed overview of its office loans — whether they’re in downtowns or suburban areas; whether they’re medical offices and thus less exposed to work-from-home trends; and whether any have seen stress thus far. 

    In some ways, Stephens’ McEvoy said, PNC’s moderate exposures to the office sector lines up with its history. It was less exposed to housing in 2008, but also to the energy sector when a slump there prompted charge-offs at banks around 2015. 

    “It just seems like PNC always ends up having less exposure to whatever problem lending category is out there,” McEvoy said. 

    The bank is “not immune to the operating environment,” Poonawala said. But, he added, Demchak’s leadership has instilled confidence that “PNC should be able to navigate whatever the cycle looks like.”

    Polo Rocha

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  • How a Wyoming credit union is doing more lending despite lower demand

    How a Wyoming credit union is doing more lending despite lower demand

    Jim Handley (left), chief credit officer for Sunlight Federal Credit Union and Shivan Perera (right), senior vice president of participations and debt for Avana Capital. “We’re a community credit union in a small, rural area, and the sheer number of deals and available business opportunities is not the same for me as it is for somebody in a bigger state or bigger market area,” Handley said.

    Sunlight Federal Credit Union is working to grow its portfolio of commercial real estate loans by expanding the scope of available deals and mitigating the risks associated with entering new markets.

    The size of the $200 million-asset credit union based in Cody, Wyoming, works against these efforts.

    “We’re a community credit union in a small, rural area, and the sheer number of deals and available business opportunities is not the same for me as it is for somebody in a bigger state or bigger market area,” said Jim Handley, the credit union’s chief credit officer.

    To address this shortcoming, Sunlight is working with Avana Capital, a lending subsidiary of the Peoria, Arizona-based Aana Companies, to gain insight into the pricing levels of potential deals relevant to the market and help broker both the sale and purchase of CRE loan participations across the U.S.

    Avana’s network of in-house credit analysts review the terms of a loan before it is offered to the member and recommends concessions such as additional guarantors to reduce the likelihood of any delinquency. After being approved by Sunlight’s underwriters, Avana helps sell the remaining portions of the deal to other interested financial institutions. It has worked with Sunlight since 2021.

    Sunlight has more than $18 million in commercial loans secured by real estate to members and just under $34.5 million in purchased participations for similar loans at other institutions, according to Third-quarter call report data from the National Credit Union Administration. The average value of each participation was just under $1 million.

    “A larger bank isn’t gonna necessarily mess with a smaller credit because their minimum size for a deal might be $10 million or something along those lines. … But for a deal, say $5 million in size, that investment size split among numerous smaller institutions is attractive to organizations that don’t have just an endless supply of money to do deals,” Handley said.

    Consumer lending appetites continue to pull back in the face of record interest rate levels and continuing uncertainty regarding future Federal Reserve hikes, forcing lenders to seek out more diverse opportunities while adding measures to vet borrowers.

    But for others that don’t sufficiently monitor the risks associated with areas such as CRE, which include commercial mortgages and construction loans, unrealized losses could prove troublesome.

    Shivan Perera, senior vice president of participations and debt for Avana Capital, said the firm’s continual portfolio servicing, when combined with ample diversification, is a crucial method for lessening the impact of any one market segment’s poor performance.

    “Risk is not always just at the loan level, there’s also portfolio risk as well. … There are a lot of shops out there that are more concerned with production, but we always emphasize credit first and production second,” Perera said. “Credit union consolidation is a growing trend, so we’re very focused on preserving the industry however we can.”

    Delinquencies and charge-offs at credit unions nationwide rose in the second quarter, while community banking leaders expressed concerns that proposed capital reforms could further constrain lending activity for smaller institutions.

    To streamline the process, turning to fintechs that specialize in aggregating data and structuring it into a more digestible format can free up resources for more involved cases.

    By offloading the document gathering process, “the work is much easier since it’s now a credit risk decision, minus all the hours and hours of people’s time to gather and assess” financial statements, said Tim Scholten, founder and president of the community bank and credit union consultancy Visible Progress.

    Small-business owners in the Western U.S. remain positive about growth opportunities for the remainder of 2023, despite worries of a looming recession.

    The best way to weather market shifts involves proper management of the “existing book of business’ credit quality” and diligence when reviewing outstanding agreements should be top of mind for wary leaders, said Joel Pruis, senior director at Cornerstone Advisors.

    Frank Gargano

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  • Big banks like Bank of America and TD capitalize on SBA loan growth

    Big banks like Bank of America and TD capitalize on SBA loan growth

    Bank of America has made 1,000 loans totaling $394.2 million through the Small Business Administration 7(a) program so far in fiscal 2023. It is aiming to increase that to $1 billion of 7(a) loan volume for the next fiscal year, which starts Oct. 1.

    Stephanie Keith/Bloomberg

    With a week remaining in the Small Business Administration’s 2023 fiscal year, Bank of America has notched sizable increases in 7(a) loans and loan volume. Steve Turner, the Charlotte, North Carolina-based money center’s national SBA executive, is determined to see the momentum carry over into fiscal 2024.

    Bank of America has produced 1,000 7(a) loans totaling $394.2 million so far in fiscal 2023, up from 505 loans for $201.1 million in fiscal 2022. For fiscal 2024, which starts Oct. 1, Turner is setting his sights on $1 billion of 7(a) loan volume. 

    It’s a lofty goal. Though about 1,500 lenders made 7(a) loans in fiscal 2023, only three — Huntington Bancshares, Live Oak Bank and NewtekOne — have reached $1 billion in originations.

    “Every day, every week, every month we’re continuing to invest in this business to grow it,” Turner said in an interview. 

    Turner, who took over as head of SBA lending in January 2022, said Bank of America has added staff and overhauled its SBA lending process. The most important upgrade may have come from reaching out to the company’s thousands of small-business bankers to ensure SBA lending is at the top of their minds. “Educating that army of bankers out there has helped us capture more business,” Turner said.  

    Turner’s ultimate goal is for Bank of America to become the nation’s largest 7(a) lender. “If we’re going to be in SBA, we want to be the best,” Turner said. “There’s so much more we can do. We don’t even have 2% market share.”

    But the megabank is likely to face stiff competition. Indeed, Huntington Bancshares in Columbus, Ohio, is not standing pat and is poised to retain its title as the No. 1 lender in 7(a) by number of loans for a sixth straight year. Through Sept. 21, Huntington originated a bank-record 6,875 7(a) loans, nearly 3,300 more than its closest rival, TD Bank. Huntington’s 7(a) dollar volume also surpassed $1 billion for the first time, at $1.3 billion. 

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    The $10.8 billion-asset Live Oak, based in Wilmington, North Carolina, remains the nation’s largest 7(a) lender by dollar volume, with originations totaling $1.7 billion through Sept. 21. The 7(a) program, SBA’s flagship, offers guarantees ranging from 50% to 85% on loans originated by participating lenders. Since the end of 2019, SBA has approved more than 195,000 7(a) loans totaling $110 billion. 

    While its branch footprint focuses on the Midwest, the $189 billion-asset Huntington has evolved into a national SBA lender, in large part by following its business customers as they’ve expanded, according to Brant Standridge, the company’s senior executive vice president for consumer and regional banking. Wider geography notwithstanding, Huntington’s SBA business model continues to emphasize the advice and support its hundreds of small-business bankers provide borrowers.

    “We’ve taken this exact model on the road,” SBA Director Maggie Ference said in an interview. “As we head into [markets] where we don’t have that same brand presence, we’re still seeing the small-business applicants really take on that entire relationship with us…We’re not simply making loans and moving on.”

    At the same time, Huntington is investing in technology to accelerate decision making. “In the non-SBA space, where we can move a little faster, we’re on a path that in the next 12 months we’ll decision 70% of business banking applications in under four hours,” Standridge said. “Over the next couple of years, we’ll be able to fund those loans the next day, so decision the same day, fund next day.”

    Huntington is working to extend the same capabilities to SBA lending. “We’re making significant investments in the digital space that provide the ease of doing business,” Ference said. 

    “We believe we can continue to improve the cycle time and the customer experience in SBA and stay ahead of the game,” Standridge said. 

    Program-wide, SBA is reporting 53,619 7(a) loans through Sept. 21 for $25.4 billion. The dollar volume is relatively level with fiscal 2022 but total 7(a) loans are up 12%, with much of the added volume being generated by the program’s biggest lenders. The dollar-volume share captured by the 10 biggest 7(a) lenders totals 29% so far in fiscal 2023, up from 26% from fiscal 2022. The consolidation trend becomes even starker by number of loans, with the top 10 accounting for 43% of loan volume. 

    The 7(a) program has been top-heavy for years, despite efforts by SBA to boost participation, James Ballentine, retired executive vice president for congressional relations and political affairs at the American Bankers Association and a former associate deputy administrator at SBA, said in an interview. “It’s not unusual in the SBA program that the top 10 or 15 lenders dominate the marketplace both in loan volume and number of loans as well, that’s been historical.”

    “From SBA’s perspective, they want as many lenders involved in the program making as many loans as possible,” Ballentine added. 

    In a statement to American Banker, SBA highlighted several areas of “notable progress” as fiscal 2023 comes to an end, including increases in the number of loans under $150,000, as well as loans to Black, Latino and women business owners, though “significant work remains to be done,” it added.

    In a press release Thursday, Administrator Isabella Casillas Guzman noted Black businesses have received just under 4,400 loans in fiscal 2023, about 7.5% of total loans and double the share from 2017. “Black businesses are helping to power a nationwide small business boom that is creating jobs, advancing equity in communities across America, and uplifting our economy,” Guzman said in the press release.

    Still, in fiscal 2023, the story has largely been about big, established lenders adding to their 7(a) market shares.   

    TD in Cherry Hill, New Jersey, the American arm of the Toronto-based TD Bank Group, was able to move into the ranks of the top-10 7(a) lenders in fiscal 2023 from the No. 14 slot in 2022. TD has originated 3,586 loans for $440 million thus far in fiscal 2023 compared to 2,043 loans for $243.5 million in fiscal 2022. 

    According to Head of SBA Lending Tom Pretty, the $374.3 billion-asset TD has increased the number of small-business specialists on its SBA team. Another primary driver behind TD’s 7(a) gains was its decision to increase the threshold for loan scoring by $100,000 to $250,000. “In previous years, we used to score up to $150,000 and underwrite everything after that,” Pretty said. 

    “We’ve had a lot of success with [the increased scoring threshold],” Pretty said. “It speaks to TD’s goals. If we can do the right thing for our colleagues, do the right thing for our communities and do the right thing for our customers, everything else is going to be successful from there. This fits right into the middle of that vein. It makes things simpler for our colleagues, we’re able to help more customers, and obviously the more we empower small business the better it is for our communities.”

    At $122,700, TD’s average loan size is among the lowest of any large-scale 7(a) lenders. “We feel it’s really important to serve the entire SBA community, not just focus on the big loans,” Pretty said. “We feel like by helping with these small loans, getting more specialists, raising the [scoring threshold], it really helps impact our customers and ultimately our communities.”  

    To be sure, not all of the institutions that have produced big 7(a) gains in fiscal 2023 are industry giants on the scale of Bank of America, TD and Huntington. The $1.1 billion-asset BayFirst Financial in St. Petersburg, Florida, has originated 2,526 7(a) loans for $455.9 billion, up from 974 loans and $328.1 million a year ago.  

    The $4.9 billion-asset First Internet Bancorp in Fishers, Indiana, has doubled both its 7(a) loan originations and dollar volume, recording 327 loans for $426.5 million compared to 158 loans for $158.8 million in fiscal 2022.

    According to President and Chief Operating Officer Nicole Lorch, First Internet entered the SBA lending business in November 2019 by acquiring First Colorado National Bank’s small-business lending portfolio. A few months later, when the pandemic hit, First Internet made a critical decision to keep its new SBA team focused on their core duties. “We used other commercial lenders to make Paycheck Protection Program loans,” Lorch said. “That first year helped us get a foothold in the industry. Over time, we’ve continued to add tremendous talent to the organization.”

    While First Internet’s current SBA team is keeping up with its current, increased volume, the company will likely add staff as it “leans in” to its SBA strategy, Lorch said. “We will obviously have to add people in servicing, because the portfolio has gotten so big,” Lorch said. 

    “It’s been a tremendous four years,” Lorch added. “I can confidently say we have exceeded my expectations.”

    John Reosti

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  • ‘Economically invisible’: A banker’s push for better data on Native Americans

    ‘Economically invisible’: A banker’s push for better data on Native Americans

    “If banks and financial institutions and asset managers don’t see the opportunity here, if they don’t understand how tribes are structured and the industries that they operate in, we’re going to be economically invisible,” says Dawson Her Many Horses (right), who grew up on the Rosebud reservation in South Dakota and is now a Wells Fargo managing director.

    Native American Finance Officers Association

    Dawson Her Many Horses, Wells Fargo’s head of Native American banking, is on a mission to improve the availability of economic data across Indian Country.

    The gaps in data are staggering, hampering the ability of tribes and the U.S. government to track economic outcomes and making it tougher for investors to drive capital into tribal communities.

    Native leaders, the federal government and private sector leaders are all discussing ways to improve data collection and sharing, while recognizing tribes’ sovereignty and ownership over their communities’ data. Her Many Horses, a commercial banker who works with tribes, is playing a central role in thinking through those solutions.

    “If banks and financial institutions and asset managers don’t see the opportunity here, if they don’t understand how tribes are structured and the industries that they operate in, we’re going to be economically invisible,” Her Many Horses said in an interview. “We’re not going to get the capital that we need in our communities.”

    Her Many Horses, who grew up on the Rosebud reservation in South Dakota, has spent roughly two decades working with tribal governments and businesses. He’s helped them issue bonds, get loans to expand their casino operations, diversify their revenue streams and manage their day-to-day cash.

    His role in conversations about tribal data accelerated in 2018, when he joined Wells Fargo and asked for more resources to build the company’s Native American banking business. Executives asked him to put together data outlining the business case.

    “I thought it was a fair question, but I was also a little daunted by it,” Her Many Horses said, pointing to the scant publicly available data and market analyses.

    Her Many Horses and his team tracked down the available data and were ultimately able to paint a picture of Native communities. But the bigger lesson was about how difficult it was to do so — and the fact that it would be even tougher for investors with far less familiarity with tribal communities.

    “How would they even go about it? They probably wouldn’t, right? So that’s where data comes in,” Her Many Horses said.

    A report last year by Wells Fargo and the Boston Consulting Group highlighted the size of the “data desert.” It noted that the country lacks measurements of Native American gross domestic product, wealth and other critical metrics. 

    The report, released in the wake of a pandemic that hit Native communities particularly hard, focused on opportunities to make economies in Indian Country more resilient to downturns. But it also focused on the challenges those communities face, including a “fragmented” capital landscape, subpar broadband access, fewer bank branches and gaps in data.

    While tribal governments can easily track data on their business operations, they aren’t required to share that information, which the report said makes it hard for investors to identify opportunities. In 2020, the lack of publicly available data hampered federal officials’ ability to target aid, according to the report.

    The desire to keep financial information private is understandable, the report said, but a trusted entity could publish aggregate data while respecting tribes’ confidentiality. One example is the annual revenue report from the National Indian Gaming Commission, which regulates tribally owned casinos.

    ‘Open and honest dialogue’

    In the months since the report’s release, “open and honest dialogue” has taken place among tribal leaders, policymakers, researchers and private sector leaders, Her Many Horses said.

    At a November 2022 discussion, participants raised past instances of the federal government and researchers misusing tribal data, according to a summary of the discussion. The Havasupai Indians, for example, won a settlement in 2010 after Arizona State University researchers used DNA samples from tribe members for research that went beyond their original purpose: explaining the prevalence of diabetes within their community.

    But the discussion also found widespread agreement that, when it’s done right, data-sharing can benefit tribal communities. It can help tribes qualify for more federal programs, track economic outcomes and outline the economic impact their communities have on each region of the country.

    “What had begun as a tentative conversation about leveraging tribal data to attract private investment quickly evolved into a deeper, richer and more heartfelt discussion about the ways tribal data can be weaponized by non-Indian stakeholders — or leveraged by tribal citizens to strengthen tribal operations and showcase tribal economic power,” reads a summary of the meeting, which was convened by Wells Fargo and the Aspen Institute Financial Security Program.

    Similar work is taking place at the Federal Reserve Bank of Minneapolis’ Center for Indian Country Development, which analyzes tribal economic data and researches the topic. Native people have analyzed data on the natural world, health and trade “since time immemorial,” Casey Lozar, the center’s director, wrote this year.

    Some tribal data now lives on complex spreadsheets; other data is in stories passed on over generations. But data collection has expanded both within tribes and outside of them — shedding more light on Native businesses, investment opportunities, the availability of credit, housing and other key issues.

    “High-quality intertribal data would complement the lived experience of Indian Country and allow us to pen our own accurate economic narrative,” wrote Lozar, an enrolled member of the Confederated Salish and Kootenai Tribes.

    A ‘fairly unique’ position

    Her Many Horses will continue playing a role in those conversations both at Wells Fargo and at the Aspen Institute, a global think tank where he was recently named a finance leader fellow. Wells recently promoted him to a managing director, which the $1.9 trillion-asset bank said made him one of the first enrolled tribal members in that role at a major U.S. bank.

    Robert Maxim, a senior research associate at the Brookings Institution and a citizen of the Mashpee Wampanoag Tribe, credited Wells Fargo for elevating Her Many Horses to a position that he said appears to be “fairly unique” among big banks.

    “It is still relatively rare for banks to be thinking about Native communities and Indigenous communities,” Maxim said, adding that having Native people in key roles can help lenders understand the nuances of working in those communities.

    “The fact that he’s in the position he’s in, I think, really matters,” added Maxim, whose research has focused on the need for changes to the U.S. census and on labor trend data that shows that Native Americans’ recovery from COVID-19 is far from complete.

    Her Many Horses didn’t intend to work in banking early on. As a child, he said he was often told to “get a law degree so that you can become a better advocate for tribal communities.”

    At Columbia University, he majored in political science. Then, in order to bolster his law school application, he got an internship in Merrill Lynch’s office of the general counsel.

    The internship translated into a permanent job at Merrill Lynch, where he led efforts to develop a companywide Native American market strategy. He’d soon focus specifically on investment banking, helping underwrite Native American casino-related bond issuances.

    “There weren’t any other Native Americans in investment banking” at the time, just before the 2008 financial crisis hit, Her Many Horses said.

    He recalled one pitch meeting where higher-ups at Merrill presented to an East Coast tribe. Her Many Horses had put together the meeting presentation, but he didn’t expect to have to speak up.

    “The treasurer of the tribe who we’re presenting to just looked at me and said, ‘Hey Dawson, what do you think about this deal?’” he recounted.

    Her Many Horses got an M.B.A. from Dartmouth and soon returned to Merrill Lynch — which had by then been folded into Bank of America in a crisis-era deal. He was a senior relationship manager on the casino team, where he continued his prior work and gained more perspective on tribal economic development.

    Wells Fargo hired him in 2018 and promoted him to head of Native American banking in 2021. According to his LinkedIn page, the unit’s revenues have risen considerably in recent years despite two controversies that hurt Wells’ reputation in the Native American market: the bank’s sales practices scandal and its financing of a controversial oil pipeline.

    The bank was facing significant pushback from shareholders, activists and civic leaders over the Dakota Access Pipeline project, while it was also grappling with the fallout of revelations that its employees had opened millions of unauthorized accounts for consumers.

    Dawson said he joined the bank because it’s “important that tribes have banking options.” Most large banks only work with tribal casinos, but Wells Fargo also works with clients such as tribal governments, Alaska Native regional corporations and Alaska Native villages.

    “You can’t say you’re committed to a community if you only do business with a small segment of it,” Her Many Horses said. “I wanted to build a business that our clients and Wells Fargo employees could be proud of.”

    Polo Rocha

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  • CIBC expects its pullback in office lending will slow down U.S. growth

    CIBC expects its pullback in office lending will slow down U.S. growth

    By the end of the year, CIBC will have reviewed its entire U.S. office loan portfolio, Chief Risk Officer Frank Guse says. “We are doing so on a very, very granular and very intense basis,” he says.

    Della Rollins/Bloomberg

    The Canadian bank CIBC is deemphasizing U.S. office lending amid sluggish return-to-office trends and rising loss provisions.

    Because of the pullback in office loans, executives at the Toronto-based company said they expect slower U.S. growth than the bank has enjoyed in recent years. CIBC is projecting mid-single-digit loan growth in its U.S. business, driven primarily by commercial and industrial loans and the wealth management segment.

    CIBC reported Thursday that its allowance coverage ratio for U.S. office loans nearly doubled from 4.1% in the previous quarter to 7.6% during the three-month period that ended July 31. CIBC has relatively large concentrations of office loans in the Chicago, Boston, Washington, D.C., and Miami metropolitan areas.

    By the end of the year, the bank will have reviewed its entire U.S. office loan portfolio, Chief Risk Officer Frank Guse said Thursday. “We are doing so on a very, very granular and very intense basis, and we have a dedicated team doing that,” he said during the company’s quarterly earnings call.

    “Overall, our credit portfolio is performing very well in the U.S., so it is isolated to the office sector,” Guse said.

    CIBC, which acquired Chicago-based Private Bancorp for $5 billion in 2017, has been focusing on growth in the U.S. market in recent years. Immediately after buying Private Bancorp, CIBC’s American operations accounted for a tenth of its profits, but CEO Victor Dodig said that he wanted to boost that share to 25%.

    By the fourth quarter of last year, CIBC’s U.S. operations accounted for 20% of the company’s net income. That number was 15% in the most recent quarter, as the rising loss provision eroded U.S. profits.

    Office loans have been an area of concern across the U.S. banking sector in recent quarters as the pandemic-era rise of remote work has shown staying power, hurting property values. Wells Fargo and JPMorgan Chase were among the banks that increased their office-loan reserves last quarter.

    At CIBC, which is one of Canada’s big six banks, executives noted Thursday that U.S. office loans represent less than 1% of the company’s total loan portfolio. Similarly, the net charge-off ratio on U.S. office loans is currently less than 1%.

    “We expect to see losses in and around the current level for the portfolio for the next few quarters,” Guse said.

    Still, as a result of the pullback in office loans, the commercial real estate segment will become a smaller percentage of CIBC’s total U.S. business, according to Shawn Beber, CIBC’s group head for the U.S. region.

    Mario Mendonca, an analyst at TD Securities, asked CIBC executives if deemphasizing U.S. office loans would lead to slower growth in the U.S., and Beber responded that it will.

    “Part of that is environment,” Beber explained, “and part of that is going to be strategic choices.”

    During the most recent quarter, CIBC’s U.S. commercial banking and wealth management segment reported net income of $55 million USD, which was down 64% from the same period a year earlier. The bank attributed the decline primarily to the higher provision for credit losses, lower fee income and higher employee-related costs, though those factors were partially offset by a bigger net interest margin and loan volume growth.

    CIBC’s capital markets unit, which includes some U.S. operations, reported an 11% increase in net income, as higher revenue more than outweighed an increase in noninterest expenses.

    Kevin Wack

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  • Does the commercial lending slump hint at a looming recession?

    Does the commercial lending slump hint at a looming recession?

    Markets are optimistic that the Federal Reserve will achieve a “soft landing,” but recent softness in commercial lending trends raises the risk that the country will slip into a recession, according to economists and analysts.

    Bank lending to commercial clients — businesses big and small — has fallen from January highs as companies’ wariness over the economic outlook persists. The outlook for loan growth isn’t particularly strong either, thanks to a combination of reduced demand from commercial clients and tighter standards from banks. 

    That mix can damage the economy as businesses slow their expansions, hire fewer people and ultimately set off dominoes that will result in layoffs. The U.S. economy has proved to be surprisingly resilient over the past year, but the slowdown in commercial borrowing will be the latest test.

    “This actually points to a deep recession, yet we’re not actually seeing it on the surface yet,” said Derek Tang, an economist and the CEO of Monetary Policy Analytics. “This is what is making everyone a little bit nervous.”

    Banks have been rapidly tightening their underwriting standards over the past year, according to a Fed survey of senior loan officers at banks. They’re raising the bar for commercial borrowers seeking loans, turning more often to only those borrowers whose profits can deliver. And banks are charging higher interest rates to make up for what they see as a slightly riskier environment.

    Those steps are a “credit positive” for individual banks, as they appear to be “getting ahead of the curve” and avoiding future losses by taking less risk, said Allen Tischler, senior vice president at the ratings firm Moody’s Investors Service. But the combined effects of businesses having a harder time getting credit can lead to pain later.

    “That might not impact employment negatively tomorrow, or the following week, or the following month,” Tischler said. “But at some point, you would see it show up in employment.”

    So far, the job market remains mostly solid, with employers adding 187,000 jobs last month and the unemployment rate at 3.5%. The economy’s resilience has made some analysts less gloomy. Goldman Sachs trimmed its recession probability to 20%, and Bank of America scrapped its recession forecast. Other economists still see a mild downturn ahead.

    Credit quality remains benign among banks’ commercial clients, which are staying current on their loan payments even with interest rates at 22-year highs. Some sectors like trucking are undergoing more pain, but banks aren’t being forced to charge off many loans from borrowers that have run into trouble.

    The rate of commercial and industrial loan net charge-offs across the industry was just 0.26% in the first quarter, compared with an average of 0.84% since 1984, according to Truist Securities analyst Brandon King, who focuses on regional and community banks.

    But the risk of those figures climbing “remains overlooked” compared with investors’ constant worries over commercial real estate, King wrote in a note to clients. Credit conditions haven’t been this tight since the start of the pandemic, when the government minimized loan losses by flooding consumers and businesses with cash, he wrote. 

    That level of help is unlikely this time around, and charge-off rates could hit 1% if the U.S. economy slips into a recession, King wrote. Such distress would not be as severe as during prior recessions, but the tougher outlook means that banks may soon have to set aside more money to cover potential losses, he added.

    Commercial bankers acknowledge that some indicators are trending negative, but say they’re cautiously optimistic — and still open for business even as they tighten around the margins.

    Mary Katherine DuBose, the head of Wells Fargo Credit Solutions at the company’s commercial bank, said in an interview that her team still has “great appetite to lend to quality borrowers.” The team is also running analyses to ensure that its portfolio stays in good shape no matter what comes next, DuBose said.

    “We are building in more aggressive rate shocks and rate analysis and cash-flow analysis to make sure that borrowers can absorb that, as well as … weaker margins because that’s a theme and a trend that we’re seeing,” she added.

    Stephanie Novosel, head of commercial banking at PNC Financial Services Group, said the $558 billion-asset bank is also not seeing much “stress and strain” in its portfolio. She said some clients are in a “wait-and-see” mode as they wait for the economic outlook to clear up.

    And rather than borrowing, some business customers are using the cash they built up in recent years to pay for their expansions, Novosel said.

    Companies are “doing the math” and opting against saddling themselves with loans that carry rates of 7% or higher, Truist’s King said. Since that cash is coming out of banks’ deposit coffers, the outflows are a headache for smaller regional banks that are paying up to retain depositors, he added. 

    The more tepid pace of loan growth — a mix of borrower and lender caution — lines up with broader signs that the U.S. economy may grow by less than 1% in the coming quarters, said Richard Moody, chief economist at Regions Financial. 

    Even if the country ultimately steers clear of a recession, the coming months may still feel a bit like one.

    “The outlook is for a period of very slow growth,” Moody said. 

    And that, ultimately, may be a good enough outcome for the Fed, said Danielle Marceau, a principal economist at the data and forecasting firm Prevedere. The central bank has sought to raise rates “just enough to cool the economy” without completely choking off growth.

    “If banks become more conservative, if they continue to tighten their lending standards, if they reduce loan availability a little bit, that can help curb that spending, which is exactly what the Fed needs to navigate a soft landing,” Marceau said.

    Sabrina Lee

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  • Wall Street banks rush to reclaim edge in market for buyout debt

    Wall Street banks rush to reclaim edge in market for buyout debt

    Wall Street’s top banks are rushing back into the lucrative market for leveraged buyouts to reclaim business from private creditors.

    Banks are committing financing for a slew of new deals — from the $1 billion loan for the purchase of book publisher Simon & Schuster to the roughly $1.7 billion of debt for the acquisition of packaging firm Veritiv. They can win this business, in part, because they’ve cleared out so much of the older debt stuck on their books that made it harder to compete for new offerings.

    Investors, meanwhile, are eager to buy syndicated loans, which gives banks more confidence in bidding for deals. Competition is fierce: There’s been just $13.3 billion of leveraged buyout loans issued so far this year in syndicated markets, versus $65 billion in the same period of 2022, according to JPMorgan Chase.

    “Money is coming flying into credit,” said Richard Zogheb, head of global debt capital markets at Citigroup. “The real challenge is creating supply.”

    Demand for high-yielding assets has been soaring as the US economy proves resilient in the face of the Federal Reserve’s most aggressive monetary tightening in decades. 

    “There’s a face-off between private lenders and the syndicated market for leveraged buyout transactions,” said Kim Harris, a partner and portfolio manager in liquid and structured credit based at Bain Capital Credit. In the end, private equity sponsors are “going to go with whoever has the best execution.”

    Banks, though, have gotten a boost in confidence in the wake of deals like Apollo Global Management’s acquisitions of aluminum products maker Arconic and chemical company Univar Solutions. Both deals were met with strong demand from investors.

    Chris Blum, head of corporate finance at BNP Paribas, said banks have been able to use the success of recent transactions as a way to credibly propose other deals to their risk committees. 

    That, and the Fed’s current fight against inflation, means investors are more willing to support transactions with lower leverage and more lender-friendly documentation — especially to firms with a credit rating equivalent to a B2 or above from Moody’s Investors Service.

    But not every transaction is ready to rely on bank lending. While banks can often offer more-attractive initial pricing than private creditors, they’ll sometimes rely on step-up clauses that increase costs if transactions take longer to close.

    “You could get stuck in transactions for some time,” said Zogheb of Citigroup. “Especially given the current regulatory environment.”

    Private creditors, meanwhile, can offer a firmer guarantee on pricing. Banks lost out on a recent €1.5 billion ($1.65 billion) loan package to help fund the buyout of Constantia Flexibles GmbH, with financing instead coming from private lender HPS Investment Partners.

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  • Banks, usually hungry for growth, are now looking to shrink

    Banks, usually hungry for growth, are now looking to shrink

    Citizens Financial, Capital One Financial and Synovus Financial are among the banks that have recently announced steps to shrink specific parts of their lending businesses.

    Bankers that long focused on growth have a new goal: getting smaller.

    The goal isn’t universal, as some banks still see opportunities and are picking up the pieces their competitors are leaving behind. But much of the industry is slimming down.

    Bankers are tightening their underwriting. They’re cutting back or calling it quits on riskier or less profitable businesses. And they’re selling loans they no longer want, which helps them shrink their balance sheets and raise cash.

    “Growing in today’s environment, at the same rate as what you’re used to, is less profitable,” said Chris McGratty, head of U.S. bank research at Keefe, Bruyette & Woods, pointing to rising deposit costs that are narrowing the profits banks make on loans. “So banks are being more selective on what they put on their balance sheets.”

    The slimming down is particularly prominent at banks with more than $100 billion of assets, which are preparing to comply with tougher capital rules from the Federal Reserve. Trimming risk-weighted assets improves a bank’s capital ratios at a time when some banks will likely have to start holding bigger cushions to guard against losses.

    Capital One Financial in McLean, Virginia, put $900 million of its commercial office loans up for sale. Citizens Financial in Providence, Rhode Island, said it would stop offering loans to car buyers in collaboration with auto dealers. Truist Financial in Charlotte, North Carolina, sold a $5 billion student loan portfolio.

    At Cincinnati, Ohio-based Fifth Third Bancorp, executives said they’re on an “RWA diet.” In other words, they’re reducing the company’s risk-weighted assets as they bolster capital ratios ahead of the new Fed rules.

    Regional banks aren’t the only ones looking to get smaller. Banks “of all shapes and sizes” are seeing opportunities to exit certain businesses or sell some loans, said Terry McEvoy, a bank analyst at Stephens.

    Banks may take a loss by selling loans below their original value, but getting rid of them earlier may also have benefits. For example, if a glut of office loans becomes available for sale, the properties’ values may plummet, causing bigger losses among banks that waited to sell, McEvoy said.

    “Those that are the first to exit may get the best price when it’s all said and done, and we’re not going to know that for quite some time,” McEvoy said.

    Banks are not retreating from all sectors equally. Big banks reported strong growth last quarter in their consumer credit card portfolios, even as some took a more cautious tone on auto lending. 

    Bank OZK, in Little Rock, Arkansas, is “cautiously optimistic about our continued growth prospects,” CEO George Gleason said. Many of the bank’s competitors “are shrinking and laying off some really good people,” Gleason told analysts, giving the $30.8 billion-asset OZK a chance to pick up talent and gain new customers. Most of the bank’s loans are in the real estate sector, particularly construction.

    “We’re putting on really great quality new assets and getting paid well for it,” Gleason said. “So we view it as a very opportunistic time for growth.”

    Advisers who help banks buy and sell loans are busy.

    “The market for selling loans is very vibrant,” said Jon Winick, CEO of the bank advisory firm Clark Street Capital. He predicted there will be “a lot more selling” in the coming months.

    In consumer banking, auto loan sales have been popular, and sales of home equity lines of credit are “on fire,” said John Toohig, head of whole loan trading at Raymond James. 

    Banks that are selling their HELOC originations can do so “at a premium, which is hard to do these days,” Toohig said. HELOCs are fetching good prices because other banks want the short-term, floating-rate loans. Those features balance out the 30-year mortgages sitting on banks’ balance sheets, particularly mortgages they made during the pandemic boom when interest rates were at historic lows.

    “It’s very balance sheet-friendly for banks and credit unions,” Toohig said. “They love to own it as a way to offset some of that 30-year fixed rate that’s killing their margin.” 

    There’s also plenty of interest from banks in reducing their exposure to office buildings, whose values vary depending on their location, age and occupancy rate, as remote work becomes more popular.

    Within the office sector, the main properties being sold right now are either “trophies” or “trash,” Toohig said. Loans backed by newer properties with healthy occupancy trends can fetch good prices. Other loans are clearly “in the ditch,” and banks are scrambling to figure out how to get them off their balance sheets, Toohig said.

    Some lenders are also taking the opportunity to sell certain performing loans, as it gives them cash to pay off any borrowings they took on during this spring’s banking turmoil. 

    Columbus, Georgia-based Synovus Financial, for example, sold $1.3 billion in medical office loans. The credit quality of those loans “was so pristine that we were able to get what we believe was a very fair price,” Chief Financial Officer Andrew Gregory told analysts. 

    Hedge funds and private equity firms are willing to scoop up less attractive commercial real estate loans. But they’ll only buy them at a steep discount, and some banks haven’t yet accepted that their portfolios will fetch far less money than they’d like.

    Banks may be willing to accept, say, 90 cents on the dollar for tarnished commercial real estate loans. The problem is that buyers are sometimes looking to buy riskier loans at just 60 or 70 cents, or even less.

    “In a lot of cases, sellers just aren’t there yet,” Clark Street Capital’s Winick said. “They have the desire to sell at some level, but they don’t have the desire to sell at the market level.”

    That hesitancy could cost banks if property values fall further, or if an office building suddenly runs out of tenants, Winick said. While absorbing a big loss early is costly, so is waiting and taking a bigger charge-off later.

    “Your first loss is always your best loss, or usually your best loss,” Winick said. “I can give you a million examples where banks waited too long to move on a credit that was going sideways.”

    Polo Rocha

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  • Credit conditions expected to remain poor this year, bank economists say

    Credit conditions expected to remain poor this year, bank economists say

    The American Bankers Association’s headline credit index came in more than almost 43 points below the 50-point threshold that marks the line between improving and deteriorating credit conditions.

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    Bank economists predict that lenders will remain quite cautious in the coming six months amid soaring interest rates and ongoing worries over the economic outlook.

    The American Bankers Association’s headline credit index, which measures sentiment about both consumer lending and commercial lending, remained near an all-time low despite a slight improvement in the most recent quarter.

    The index, which is based on a survey of chief economists at 15 of the nation’s largest banks, came in more than almost 43 points below the 50-point threshold that marks the line between improving and deteriorating credit conditions.

    The economists expressed greater pessimism about business credit availability than consumer credit availability, but they expect both to keep worsening. 

    The consumer credit index rose by 2.6 points in the third quarter to 8.3, but none of the surveyed economists expected consumer credit quality and availability to improve later this year. The business credit index ticked up by 0.5 points but remained quite low at 6.3. 

    Bank credit availability has been strong over the past few years, but the Federal Reserve’s rate hikes over the past 15 months have contributed to lower demand for credit. 

    The recent turmoil in the banking industry has also led banks to adopt tighter lending standards. That has been especially true among midsize banks, which have expressed more concern about liquidity and funding costs. 

    “This is more or less in the context of what was expected to be a challenging economy,” said Richard Moody, who is the chief economist at Regions Financial and was one of the economists surveyed by the ABA. “We’re all this kind of bracing for some normalization — getting back to where we were prior to the pandemic.”

    Tighter lending standards are generally expected to follow worsening credit market conditions, but household financial household conditions remain healthy, and delinquency rates are still relatively low.

    During the first quarter of 2023, delinquency rates on credit cards and auto loans ticked up, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit in May. But those numbers had previously been near historic lows.

    Consumers still appear capable of meeting their debt obligations. Debt made up roughly 5% of disposable income in the first quarter, more than three-tenths of a percentage point below pre-pandemic levels, according to the ABA report. 

    Businesses also appear prepared to manage their debt. Commercial and industrial loan delinquencies fell to a near-historic low of below 1% in the first quarter, while charge-off rates rose slightly but remained below pre-pandemic levels, according to the ABA report.

    But with slower growth now expected, businesses may need to grapple with weakened consumer demand and fewer prospects for investment, which figures to hurt commercial loan demand.

    Banks have also begun to tighten their standards.

    In the Federal Reserve’s most recent senior loan officer survey, the net percentage of banks that raised standards for commercial and industrial loans was 46%. That survey, conducted between late March and early April, included responses from 84 banks.

    Similar to the ABA’s findings, the Fed’s survey of bankers showed that the industry expects further tightening across all loan categories for the remainder of the year.

    “Banks are going to be really mindful of what’s happening in a particular market,” said ABA Chief Economist Sayee Srinivasan.

    Starting in 2022, the Fed hiked interest rates several times to counter rising inflation. On Wednesday, it held its key interest rate steady –– at roughly 5% –– for the first time in more than a year.

    “Even if rates don’t change, the cumulative effect of everything that the Fed has done will slow economic activity,” Srinivasan said.

    The U.S. job market has remained strong, with the unemployment rate increasing only slightly in May to 3.7%, according to the U.S. Bureau of Labor Statistics. Meanwhile, wages have risen roughly 4% over the past year, with pay growth highest among lower-wage workers.

    Maintaining a strong labor market will be critical to how loan demand and credit quality evolve as lenders become more guarded, Srinivasan said.

    “If the labor market remains strong, that means people will be spending, so demand will remain strong,” he said. “Even if households continue to borrow money… they will continue to make payments on their loans. Credit quality will remain good.”

    Srinivasan said that Wall Street appears to be betting on a soft landing for the U.S. economy, but he noted that there has been a recent uptick in unemployment and a downtick in gross domestic product.

    “The question is: How bad is it going to be?” Srinivasan said.

    Charles Gorrivan

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  • Bank CFOs shrug off credit concerns

    Bank CFOs shrug off credit concerns

    Piper Sandler found that 62% of the chief financial officers surveyed viewed funding costs as the biggest challenge in 2023.

    lev dolgachov/Syda Productions – stock.adobe.c

    The rapidly rising cost of deposits following prominent regional bank failures was by far the most commonly cited concern for chief financial officers, according to a new report.

    Piper Sandler surveyed 82 bank CFOs in the wake of the March downfalls of Silicon Valley Bank and Signature Bank. The results, released on Friday, showed that 62% viewed funding costs as their most pressing challenge this year.

    The failures were hastened by runs on the banks’ deposits. This intensified competition for funding across the sector and compounded already elevated upward pressure on costs amid increasing interest rates. The collapse of First Republic Bank in early May amplified competitive pressures.

    Another 16% surveyed by Piper Sandler said liquidity worried them most, followed by the 15% who noted increased regulation. Only 7% cited the potential for higher loan losses as their biggest source of apprehension.

    “We were quite surprised that only 7% of the CFOs indicated that their greatest concern was asset quality,” said Mark Fitzgibbon, Piper Sandler’s research director. “Given how late we are in the economic cycle and the rapid move up in interest rates, we would have expected this to account for a much higher percentage of responses.”

    With the specter of recession looming large following 10 Federal Reserve rate hikes since spring 2022, the CFOs were asked if they saw early cracks in credit quality. Loan losses tend to mount during recessions, but 65% said they saw no signs of deterioration. Some 12% said they spotted some early issues in consumer lending and 10% were concerned about commercial real estate vulnerability. Another 2% cited construction loan weakness and 2% indicated that credit was beginning to deteriorate across all segments.

    Fitzgibbon said that, while loan portfolios appear healthy overall, the fact that a third of finance chiefs were at least concerned about pockets of credit suggests some weakness lies ahead. “It sounds like we could see some softening” with second-quarter earnings, he said.

    With the cost to fund loans rising and threats to credit quality increasing, loan growth is expected to slow throughout 2023. Piper Sandler’s survey found that 38% of CFOs indicated that they expect loan growth of 3% to 6% for 2023. Another 35% expect up to 3% growth, while 5% expect their loan portfolios to contract. Only 2% expect double-digit loan growth this year.

    During the first quarter, community banks’ collective loan growth rate fell to 1.3% from 3% in the previous quarter and 3.4% in the third quarter of 2022, according to S&P Global Market Intelligence data. Growth slowed across all loan types for banks under $10 billion of assets. Executives cautioned throughout the earnings season in April that lending activity was slowing further.

    Old Second Bancorp, for one, increased its first-quarter loans 3.5% from the prior quarter. But James Eccher, chairman and CEO of the $5.9 billion-asset company, said that pace of growth “is not sustainable.” He anticipates the Aurora, Illinois-based bank’s loan portfolio will expand this year, but the rate of growth could get cut in half.

    “I think if you step back and look at the macro environment, there’s certainly recession fears out there,” Eccher told analysts on the bank’s first-quarter earnings call. “Our borrowers are being very cautious.”

    After hosting a bank conference in May, D.A. Davidson analysts said executives who spoke at the event reported loan pipelines were “down meaningfully, given reduced demand (on account of economic uncertainty and the impact of rising rates),” as well as more conservative underwriting.

    “We suspect the latter stems from the increased cost to fund that growth — and likely tighter credit standards, including a number of banks citing a higher bar for putting new CRE loans on the books,” the Davidson analysts said in a report.

    Jim Dobbs

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  • Lawmakers urge SBA to delay new rules that could let fintechs into 7(a)

    Lawmakers urge SBA to delay new rules that could let fintechs into 7(a)

    “It is clear [SBA] Administrator [Isabela Casillas] Guzman (pictured) is dedicated to the notion of spurring lending to underserved communities, and people of color,” an SBA loan servicer says.  “This may be a noble notion, but where do lenders making a prudent credit decision come into play?”

    Stefani Reynolds/Bloomberg

    Following the departure of a pivotal Small Business Administration official, lawmakers from both parties are calling on the agency to suspend implementation of controversial rules that could let fintech lenders make 7(a) loans.

    Associate Administrator Patrick Kelley — who had headed SBA’s Office of Capital Access since March 2021 and has been overseeing adoption of the changes — left the SBA May 11. The leadership of the House and Senate Small Business committees wrote SBA Administrator Isabela Casillas Guzman Wednesday, urging her to “pause”  the two new rules until Kelley’s successor is installed.

    Kelley’s exit, which appeared to catch lawmakers off guard, “leaves a void in leadership at a time when such leadership will be key,” Sen. Ben Cardin, D-Maryland, Sen. Joni Ernst, D-Iowa, Rep. Roger Williams, R-Texas, and Rep. Nydia Velazquez, D-N.Y., wrote.

    SBA had not responded to a request for comment at deadline Thursday.

    The SBA in April finalized the rules, which overhauled lending standards and ended a 40-year cap on the number of nondepository small-business lending companies at 14. Typically, publication of a final rule by an agency signals an end to debate and the start of moves by government and private-sector players to convert what had been proposals into operational reality. That has not been the case with SBA’s rules governing nondepository SBLCs and affiliation. For the past month, lawmakers, along with advocates for banks and credit unions, have urged SBA to delay putting the rules into practice.

    Those pleas grew stronger this week as Tony Wilkinson, longtime president and CEO of the National Association of Government Guaranteed Lenders, called on lawmakers to “act quickly to reverse these rule changes through a bipartisan legislative approach” in testimony Wednesday before the House Small Business Committee.

    “Otherwise, SBA is inviting in the exact kind of behavior and risk that could erode the 7(a) loan program’s performance and reputation, and even harm the very borrowers they are intending to help,” Wilkinson added.

    Critics of the new rules, including Wilkinson, believe they will inject more risk and ultimately a higher level of loan losses into 7(a) lending. More losses could result in the need for a subsidy from Congress. Currently, fees paid by lenders and borrowers are more than sufficient to cover 7(a)’s credit costs.

    Critics have also focused on numerous reports, from SBA’s inspector general and from a House select subcommittee, that pointed to fintech lenders as the source of a significant amount of the fraud uncovered in the Paycheck Protection Program. For their part, SBA and advocates for fintechs argue that PPP bad actors have been identified and blocked from future 7(a) participation and that the nondepository lenders that are interested in SBA have technology policies and procedures in place to combat fraud.   

    Testifying at the same hearing on behalf of the Independent Community Bankers of America, Alice Frasier, president and CEO of the $792 million-asset Potomac Bancshares in Charles Town, West Virginia, said the rules, which she claimed were “rushed through the process without input by Congress or the industry,” would undermine SBA’s stated purpose of boosting capital access to underserved groups. Rather than calling for a legislative fix, Frazier suggested SBA should “hit the pause button” and convene a working group of current 7(a) lenders to brainstorm new ways of reaching “the smallest businesses and entrepreneurs.”

    Republican lawmakers have emerged as some of the toughest critics of the rules. At a House Small Business Committee hearing last week, Kelley engaged in contentious exchanges with Rep. Blaine Luetkemeyer, R-Mo., and Rep. Tony Meuser, R-Pa. However, Democrats, too, have questioned the wisdom of the course the SBA has set. Velazquez said she was “especially concerned” by the agency’s ending the moratorium and permitting more nondepository lenders into 7(a).

    “We will be doing a disservice to American small-business owners by moving forward with changes that weaken and destabilize a highly successful program that has helped millions of entrepreneurs,” Velazquez said during the hearing last week. 

    “I’ve heard from financial institutions again and again just how concerned they are about the implementation of these rules,” Rep. Hillary Scholten, D-Mich, said.

    For Velazquez and colleagues on both sides of the aisle in the House and Senate, adding small business lending companies — many of which could be fintechs — is a particular concern because SBA has traditionally said it lacked capacity to underwrite large numbers of nondepository lenders. Indeed, that was the reason the cap was put in place in January 1982.

    SBA’s ultimate aim in proposing the new rules is improving access to capital for underserved groups. Agency officials have said SBLCs are more likely than banks to make small-dollar loans of $150,000 or less, whose number has declined in recent years, Kelley testified last week. But banking advocates, including Wilkinson, have noted small-dollar loans have increased significantly in the current fiscal year.

    “The numbers don’t show the market failure SBA describes,” Ami Kassar, CEO of Multifunding LLC, a Philadelphia-based loan brokerage and consulting firm, said Wednesday in testimony before the House Small Business Committee.

    In addition to canceling the longstanding moratorium, the rules also did away with a number of underwriting  guidelines, including a requirement for a loan authorization document detailing loan terms and conditions. The new affiliation rule pared back the number of credit criteria that lenders — including nondepository SBLCs — are required to consider from nine to three. The affiliation rule also stated that lenders could use their standards for similarly sized conventional loans in underwriting 7(a) credits. According to Wilkinson, SBA has described this policy as allowing lenders to “do what you do.”

    “This is not streamlining,” Wilkinson said Wednesday. “Every principle included in the now-deleted list of underwriting criteria was put there to address a specific concern. … I believe that removing these guardrails could create a race to the bottom in terms of the conditions that individual lenders will impose on individual loans.”

    In an email to American Banker, Arne Monson, president of Holtmeyer and Monson, an SBA servicing firm based in Memphis, stated that few if any of his clients support the new rules. “They think this proposal is not well thought through,” Monson wrote. “It is clear Administrator Guzman is dedicated to the notion of spurring lending to underserved communities, and people of color.  This may be a noble notion, but where do lenders making a prudent credit decision come into play?”

    In a statement Wednesday, the American Bankers Association warned the new rules “may negatively impact the performance of loans made under the 7(a) program, threaten the integrity of the program, and lead to increased borrower and lender fees.” 

    John Reosti

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  • This Florida community bank took a hit when Signature failed

    This Florida community bank took a hit when Signature failed

    Signature Bank’s collapse served as a painful reminder for a community bank in St. Petersburg, Florida, that no deal is done until the cash is in the seller’s hand.

    President Thomas Zernick, who is set to become CEO of BayFirst early next year, said that the company is looking to make more commercial and consumer loans in the Tampa area to decrease its reliance on gain-on-sale income.

    The $1 billion-asset BayFirst Financial reported Thursday that its first-quarter net income dipped 43% on a linked-quarter basis. The decline was due in large part to a $60 million loan sale that was “canceled without cause” when regulators closed New York-based Signature, BayFirst CEO Anthony Leo said Friday on a conference call with analysts.

    BayFirst made a company-record $121 million in government-guaranteed loans during the three months ended March 31 — including $61 million in March — selling much of that production to Signature before the Federal Deposit Insurance Corp. placed it in receivership, Leo said.

    Though BayFirst, the holding company for BayFirst National Bank, quickly found a buyer for the $60 million in Small Business Administration 7(a) loans it failed to sell to Signature, market conditions had turned markedly less favorable. That resulted in $1.6 million in reduced income.

    BayFirst, which has emerged as one of the nation’s most prolific SBA 7(a) lenders in recent years, is in the process of filing a breach-of-contract claim against the FDIC, according to Leo. “We have put the FDIC as receiver on notice of our claim for the differential in the gain,” Leo said. “While we cannot assess the likelihood of our claim being fully honored, we have received no indication to doubt that it will be.”

    The FDIC declined to comment. As things stand, the agency expects Signature’s failure to cost the Deposit Insurance Fund $2.5 billion.

    The loss of Signature as a buyer for its 7(a) loans should have little impact on BayFirst’s loan-sale prospects going forward, Chief Financial Officer Robin Oliver said on the conference call. 

    “We do bid our SBA-guaranteed loans to seven or eight investors each quarter, so there are multiple other players in the market we already have relationships with and sell to on a regular basis.”

    In the first quarter, BayFirst gained $4.4 million on the sale of its government-guaranteed loans, down from $5.8 million during the quarter ending Dec. 31.

    BayFirst, which has originated more than $252 million in 7(a) loans since Oct. 1, the start of the agency’s fiscal year, has no plans to scale back its SBA lending operation in the wake of the Signature loan-sale disruption. At the same time, the company intends to fund more commercial and consumer loans in the Tampa-area marketplace, boosting net interest income and lessening reliance on gain-on-sale, Leo said.  

    President Thomas Zernick said BayFirst originated $49 million of local consumer, mortgage and conventional business loans in the first quarter. BayFirst reported $933 million in deposits on March 31, up 17% since the end of 2022. Zernick is set to become CEO when Leo retires early next year.

    BayFirst opened its ninth branch, in Tampa, in March and plans to open a tenth, in Sarasota, in June. “We are clearly in a growth mode,” Leo said.

    For now, BayFirst has no plans to add branches outside of the fast-growing Tampa region, which has surpassed 4 million in population, according to Leo. “Frankly, we’ve just scratched the surface there,” he said. “We do not believe it would make sense for us to move outside the Tampa region, at least on an organic basis. …We’ve got a lot of work to do here, and we’ve got a lot of opportunity here.”

    But Leo did not rule out a “strategic transaction” or a “significant lift-out” of a banking team to expand BayView’s presence in an adjacent or nearby market.

    John Reosti

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  • BOK Financial says energy book fuels strength

    BOK Financial says energy book fuels strength

    “Energy continues to be pretty strong and the outlook’s good in that market,” Marc Maun, executive vice president, said during BOK’s earnings call on Wednesday.

    pdm – stock.adobe.com

    BOK Financial in Tulsa, Oklahoma, said its bread-and-butter oil-and-gas loan portfolio shrunk slightly in the first quarter, a period in which commodity prices came under pressure. 

    But the book grew from a year earlier, credit quality remained strong and energy clients proved an important source of stability as the industry grappled with deposit outflows following regional bank failures in March.

    The $46 billion-asset bank said Wednesday that energy loan balances — primarily loans to oil-and-natural gas producers — decreased by $27 million, or 1%, from the fourth quarter to $3.4 billion. Still, energy loans made up 15% of total loans for the first quarter, and these loans increased 13% from a year earlier. 

    Total loans increased 1% from the prior quarter.

    Executive Vice President Marc Maun said BOK expects energy to prove a strength through 2023, given strong global oil and gas needs.

    “Energy continues to be pretty strong and the outlook’s good in that market,” Maun said on the company’s earnings call with analysts Wednesday.

    Loan losses in energy are rare in the current era, he said. “I mean energy credit quality is about as good as it could possibly be,” Maun added. “With oil prices, even with gas prices where they are, we have a strong borrowing base.”

    Benchmark West Texas Intermediate oil prices hovered in the $70s per barrel during the first quarter — and continued to in April. This marked a notable decrease from the $90s per barrel in the fourth quarter of last year. Oil demand decreased early this year amid recession worries and lighter consumption of travel fuels, according to Rystad Energy, an energy research and data firm. Still, most producers can turn healthy profits with oil around $50 per barrel or higher, and profitability across the U.S. oil-and-gas sector proved strong over the past year and into the first quarter, Rystad noted.

    Henry Hub natural gas prices, the U.S. standard, slumped during the first quarter to less than half the level of the prior quarter. This developed as demand for the heating fuel tapered off amid mostly mild weather conditions in the eastern half of the country, a region that typically consumes a large share of the nation’s gas during the winter.

    The price declines contributed to some modest pullback in borrowing to invest in new drilling during the first quarter. But overall oil-and-gas production remains elevated, and Rystad projects that will remain the case through at least the summer.

    Global demand for oil is projected to rise this summer as China’s post-pandemic economy accelerates, and natural gas is in high demand across Asia as well as Europe. Asian countries want U.S. exports of gas to displace coal, while Europe needs American energy sources to fill a void created by Russia’s war in Ukraine. A combination of sanctions against Russia in protest of the war and the Kremlin’s retaliations against those penalties resulted in a sharp decrease in Russian gas sent to Europe over the past year. This is expected to endure, Rystad analysts say, fueling ongoing demand for U.S. exports.

    All of this has supported robust production activity. U.S. oil production early in 2023 has held near two-year highs, and natural gas production has been close to record levels, according to the U.S. Energy Information Administration.

    BOK Financial said its unfunded energy loan commitments totaled $4.1 billion at the close of the first quarter, an increase of $246 million from the end 2022. This, the bank said, points to growth ahead.

    Strength on the loan side in energy can translate into deposit stability, as oil-and-gas companies often park their money at the same banks at which they have lending lines. For BOK, energy loans slightly trailed health care, at 17%, in terms of the bank’s overall lending pie for the first quarter. But on the funding side, energy banking is the largest industry concentration at 7% of total deposits, though BOK said its deposit base is diversified across multiple industries.

    Following the failures of Silicon Valley Bank and Signature Bank in March, hastened by runs on their deposits, much of the industry lost deposits in the first quarter. BOK was not an exception; however, its executives characterized deposit outflows as largely due to customers putting excess pandemic-era cash to work in new investments or by making purchases.

    BOK’s average deposits fell 6% during the first quarter, but the bank said this brought balances closer to historic norms relative to loans.

    BOK’s loan-to-deposit ratio for the first quarter was just under 70%. This compared with a pre-pandemic loan-to-deposit mean around 80%, indicating the bank has a healthy level of deposits relative to its historic needs.

    “The net result of the disruptive March events to our deposit portfolio was not significant,” Chief Financial Officer Martin Grunst said on the earnings call. Total deposit attrition in the first quarter “was the same amount as in” in the prior quarter “and generally consistent with our guidance provided in January.”

    BOK reported first quarter net income of $162.4 million, or $2.43 per share. That compared with net income of $62.5 million, or 91 cents, a year earlier. The company recorded about $50 million of pretax trading losses in the year earlier quarter.

    Jim Dobbs

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  • M&T braces for office-related commercial real estate stress

    M&T braces for office-related commercial real estate stress

    M&T reported a $30 million increase in net charge-offs from the fourth quarter, which Chief Financial Officer Darren King said was partially related to two troubled office properties.

    Joe Buglewicz/Bloomberg

    M&T Bank reassured investors Monday that certain portions of its commercial real estate portfolio are improving, but it warned that changes in work culture may put the office sector under stress for years to come.

    Hotel loans are becoming safer as consumer travel normalizes, and retail buildings are getting a boost from a rebound in brick-and-mortar shopping, said Darren King, chief financial officer at the $202.9 billion-asset bank. He also noted that multifamily residential loans are showing strength.

    But stress in the office sector “will play itself out over multiple quarters, if not multiple years,” King said during a call with analysts after the Buffalo, New York-based bank reported its first-quarter earnings.

    M&T’s latest updates about its commercial real estate exposure included both good news and bad news, said Brian Foran, an analyst at Autonomous Research.

    Improvements in the hotel, multifamily and retail sectors are helping M&T, he said, but the regional bank also has relatively large exposure to the office sector.

    “There’s fairly broad-based challenges in commercial real estate right now, and office is at the epicenter of it,” Foran said during an interview. “By definition, this is a slow-moving market with slow-moving problems. This is something that’s going to bleed through quarter after quarter.”

    M&T is one of the regional banks that has come under a microscope as concerns have grown about the impact of rising interest rates and changing work patterns on the commercial real estate market.

    While estimating office-related commercial real estate losses is “a little bit tricky” due to the lack of sales and market pricing, the portion of the bank’s portfolio that’s criticized is around 20%, which is “up slightly but not dramatically” from what M&T reported last quarter, King said.

    King also said that “half to two-thirds” of the $120 million in credit-loss provisions that the bank recorded during the most recent quarter were tied to the bank’s CRE portfolio. Approximately $200 million in office loans will be maturing at M&T in each of the next two quarters before that number drops by the end of the year, according to the bank.

    Between January and March, the bank recorded a $30 million increase in net charge-offs from the previous quarter, which King said was partially related to two troubled office properties.

    “It’s a concern, we’re watching it,” King said. “Our portfolio is pretty broadly spread across our footprint.”

    King also indicated that in the coming quarters, M&T plans to reduce its focus on commercial real estate loans.

    The bank’s $132.9 billion loan portfolio is split by around one-third each between commercial and industrial loans, consumer loans and CRE loans. M&T expects this mix to “shift slightly” toward commercial and industrial loans in the near term, King said.

    “There’s not a lot of activity that’s really happening” in commercial real estate, King said. “There’s not a lot of new construction.”

    On the other hand, in the commercial and industrial sector, he said: “We’ve seen fairly broad-based growth, whether it’s by geography or by industry type.”

    M&T is not the only bank sending warning signs about CRE. On Friday, Wells Fargo CFO Michael Santomassimo said that the office sector “continues to show signs of weakness.”

    M&T also reported shifts in its deposit mix that are similar to those disclosed by other banks. The bank’s total interest-bearing deposits rose 1% to $99.1 billion from last year’s fourth quarter, while noninterest-bearing deposits declined by 8.5% to $59.9 billion.

    Year-over-year comparisons were skewed by M&T’s purchase of People’s United Financial, which closed in early April 2022.

    M&T reported $702 million in net income for the first quarter, an 8% decline from the fourth quarter of last year. Net interest income remained unchanged from the fourth quarter at $1.8 billion.

    Noninterest income fell 14% quarter over quarter to $587 million, driven by lower revenue following the sale of M&T’s insurance agency, reduced distributions from the bank’s mortgage financing company BayView Lending Group and a decline in mortgage banking and servicing income.

    Jordan Stutts

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  • What markets are watching after digesting the US jobs data | CNN Business

    What markets are watching after digesting the US jobs data | CNN Business

    A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.


    New York
    CNN
     — 

    In an unusual coincidence, the US jobs report was released on a holiday Friday — meaning stock markets were closed when the closely-watched economic data came out.

    It was the first monthly payroll report since Silicon Valley Bank and Signature Bank collapsed. It also marked a full year of jobs data since the Federal Reserve began hiking interest rates in March 2022.

    While inflation has come down and other economic data point to a cooling economy, the labor market has remained remarkably resilient.

    Investors have had a long weekend to chew over the details of the report and will likely skip the typical gut-reaction to headline numbers.

    What happened: The US economy added 236,000 jobs in March, showing that hiring remained robust though the pace was slower than in previous months. The unemployment rate currently stands at 3.5%.

    Wages increased by 0.3% on the month and 4.2% from a year ago. The three-month wage growth average has dropped to 3.8%. That’s moving closer to what Fed policymakers “believe to be in line with stable wage and inflation expectations,” wrote Joseph Brusuelas, chief economist at RSM in a note.

    “That wage data tends to suggest that the risk of a wage price spiral is easing and that will create space in the near term for the Federal Reserve to engage in a strategic pause in its efforts to restore price stability,” he added.

    The March jobs report was the last before the Fed’s next policy meeting and announcement in early May. The labor market is cooling but not rapidly or significantly, and further rate hikes can’t be ruled out.

    At the same time Wall Street is beginning to see bad news as bad news. A slowing economy could mean a recession is forthcoming.

    Markets are still largely expecting the Fed to raise rates by another quarter point. So how will they react to Friday’s report?

    Before the Bell spoke with Michael Arone, State Street Global Advisors chief investment strategist, to find out.

    This interview has been edited for length and clarity.

    Before the Bell: How do you expect markets to react to this report on Monday?

    Michael Arone: I think that this has been a nice counterbalance to the weaker labor data earlier last week and all the recession fears. This data suggests that the economy is still in pretty good shape, 10-year Treasury yields increased on Friday indicating there’s less fear about an imminent recession.

    There’s this delicate balance between slower job growth and a weaker labor market without economic devastation. I think this report helps that.

    As it relates to the stock market, I would expect the cyclical sectors to do well — your industrials, your materials, your energy companies. If interest rates are rising, that’s going to weigh on growth stocks — technology and communication services sectors, for example. Less recession fears will mean investors won’t be as defensively positioned in classic staples like healthcare and utilities.

    Could this lead to a reverse in the current trend where tech companies are bolstering markets?

    Yes, exactly. It’s difficult to make too much out of any singular data point, but I think this report will hopefully lead to broader participation in the stock market. If those recession fears begin to abate somewhat, and investors recognize that recession isn’t imminent, there will be more investment.

    What else are investors looking at in this report?

    We’ve seen weakness in the interest rate sensitive parts of the market — areas that are typically the first to weaken as the economy slows down. So things like manufacturing, things like construction. That’s where the weakness in this jobs report is. And the services areas continue to remain strong. That’s where the shortage of qualified skilled workers remains. I think that you’re seeing continued job strength in those areas.

    What does this mean for this week’s inflation reports? It seems like the jobs report just pushed the tension forward.

    it did. I expect that inflation figures will continue to decelerate — or grow at a slower rate. But I do think that the sticky part of inflation continues to be on the wage front. And so I think, if anything, this helps alleviate some of those inflation pressures, but we’ll see how it flows through into the CPI report next week. And also the PPI report.

    Is the Federal Reserve addressing real structural changes to the labor market?

    The Fed was confused in February 2020 when we were in full employment and there was no inflation. They’re equally confused today, after raising rates from zero to 5%, that we haven’t had more job losses.

    I’m not sure why, but from my perspective, the Fed hasn’t taken into consideration the structural changes in the labor force, and they’re still confused by it. I think the risk here is that they’ll continue to focus on raising rates to stabilize prices, perhaps underestimating the kind of structural changes in the labor economy that haven’t resulted in the type of weakness that they’ve been anticipating. I think that’s a risk for the economy and markets.

    A few weeks ago, Before the Bell wrote about big problems brewing in the $20 trillion commercial real estate industry.

    After decades of thriving growth bolstered by low interest rates and easy credit, commercial real estate has hit a wall. Office and retail property valuations have been falling since the pandemic brought about lower occupancy rates and changes in where people work and how they shop. The Fed’s efforts to fight inflation by raising interest rates have also hurt the credit-dependent industry.

    Recent banking stress will likely add to those woes. Lending to commercial real estate developers and managers largely comes from small and mid-sized banks, where the pressure on liquidity has been most severe. About 80% of all bank loans for commercial properties come from regional banks, according to Goldman Sachs economists.

    Since then, things have gotten worse, CNN’s Julia Horowitz reports.

    In a worst-case scenario, anxiety about bank lending to commercial real estate could spiral, prompting customers to yank their deposits. A bank run is what toppled Silicon Valley Bank last month, roiling financial markets and raising fears of a recession.

    “We’re watching it pretty closely,” said Michael Reynolds, vice president of investment strategy at Glenmede, a wealth manager. While he doesn’t expect office loans to become a problem for all banks, “one or two” institutions could find themselves “caught offside.”

    Signs of strain are increasing. The proportion of commercial office mortgages where borrowers are behind with payments is rising, according to Trepp, which provides data on commercial real estate.

    High-profile defaults are making headlines. Earlier this year, a landlord owned by asset manager PIMCO defaulted on nearly $2 billion in debt for seven office buildings in San Francisco, New York City, Boston and Jersey City.

    Dig into Julia’s story here.

    Tech stocks led market losses in 2022, but seemed to rebound quickly at the start of this year. So as we enter earnings season, what should we expect from Big Tech?

    Daniel Ives, an analyst at Wedbush Securities, says that he has high hopes.

    “Tech stocks have held up very well so far in 2023 and comfortably outpaced the overall market as we believe the tech sector has become the new ‘safety trade’ in this overall uncertain market,” he wrote in a note on Sunday evening.

    Even the recent spate of layoffs in Big Tech has upside, he wrote.

    “Significant cost cutting underway in the Valley led by Meta, Microsoft, Amazon, Google and others, conservative guidance already given in the January earnings season ‘rip the band- aid off moment’, and tech fundamentals that are holding up in a shaky macro [environment] are setting up for a green light for tech stocks.”

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  • Bank lending slumps by most on record in final weeks of March

    Bank lending slumps by most on record in final weeks of March

    The Federal Reserve’s H.8 report released Friday indicated that bank lending declined at the end of March by the largest margin since the central bank began tracking lending data in 1973.

    Bloomberg

    (Bloomberg) — U.S. bank lending contracted by the most on record in the last two weeks of March, indicating a tightening of credit conditions in the wake of several high-profile bank collapses that risks damaging the economy.

    Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a a drop in loans by small banks.

    The pullback in total lending in the last half of March was broad and included fewer real estate loans, as well as commercial and industrial loans. Friday’s report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms.

    The slide in lending follows the collapse of several firms, including Silicon Valley Bank and Signature Bank.

    Economists are closely monitoring the Fed’s so-called H.8 report, which provides an estimated weekly aggregate balance sheet for all commercial banks in the U.S., to gauge credit conditions. The recent bank failures have complicated the central bank’s efforts to reduce inflation without sending the economy into a recession.

    On Thursday, the American Bankers Association index of credit conditions fell to the lowest level since the onset of the pandemic, indicating bank economists see credit conditions weakening over the next six months. As a result, banks are likely to become more cautious about extending credit.

    The banking crisis has made a recession more likely, according to JPMorgan Chase & Co.’s Jamie Dimon. The bank’s chief executive officer said in an annual letter that the failures have “provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative.”

    The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks, and plunged $73.6 billion at smaller commercial banks over the same period. Lending by foreign institutions in the US fell $7.5 billion.

    The biggest 25 domestic banks account for almost three-fifths of lending, although in some key areas — including commercial real estate — smaller banks are the most important providers of credit.

    In a note on the report, the Fed said domestically chartered banks made divestments to nonbank institutions that affected $60 billion in loans in the week ended March 22, meaning those loans are no longer held by commercial lenders.

    Meanwhile, so-called “other” deposits, which exclude large time deposits, have fallen $260.8 billion at commercial banks since the week ended March 15. At domestically chartered banks, they declined $236 billion, mostly reflecting a drop at the 25 largest institutions. Deposits at small banks fell $58.1 billion.

    Commercial and industrial lending — considered a closely followed gauge of economic activity — fell $68 billion. Commercial real estate loans dropped $35.3 billion. Total assets, which includes vault cash, as well as balances due from depository institutions and the Fed, decreased nearly $220 billion, while total liabilities declined more than $188 billion.

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  • California’s AG defends small-business disclosure law opposed by merchant cash advance lenders

    California’s AG defends small-business disclosure law opposed by merchant cash advance lenders

    California’s Attorney General Rob Bonta is defending the state’s newly enacted small-business disclosure law that requires merchant cash advance lenders, factoring firms and some fintechs to divulge annual percentage rates to borrowers.

    Bonta sent a letter last week to Rohit Chopra, the director of the Consumer Financial Protection Bureau, supporting the agency’s view that California’s law — which went into effect on Dec. 9 — is not preempted by the federal Truth in Lending Act.

    The California law mandates that nonbanks disclose the APR, total interest and fees on financings of $500,000 or less.

    Rob Bonta, California’s attorney general, is defending the state’s lending disclosure law for commercial loans in court.

    Bloomberg News

    Bonta submitted the letter in response to a preliminary determination by the CFPB last month that small- business disclosure laws in four states — California, New York, Utah and Virginia — do not run afoul of TILA, the seminal consumer protection law that created the current consumer disclosure regime. But TILA only governs consumer disclosures; there currently are no federal disclosure requirements for commercial loans.

    State disclosure laws that protect small businesses are a relatively new concept and only California and New York require that lenders calculate and disclose key terms. The issue is further complicated by the proliferation of short-term, high-cost financing options online, made primarily by nonbanks to small-business borrowers with bad credit. As states have become more proactive in seeking to regulate small-business lending, the lenders have filed lawsuits and floated novel legal theories to gut the state laws.

    Bonta wrote in the comment letter to the CFPB that California’s disclosure law “was enacted in 2018 to help small businesses navigate a complicated commercial financing market by mandating uniform disclosures of certain credit terms in a manner similar to TILA’s requirements, but for commercial transactions that are unregulated by TILA.”

    He noted that the law went through four years of public notice-and-comment with extensive input from industry. Nevertheless, last month a trade group group of merchant cash advance firms sued California’s Department of Financial Protection and Innovation in what many see as a Hail Mary pass to gut the new law. The Small Business Finance Association, based in New York, sued California’s DFPI Commissioner Clothilde Hewlett alleging that the disclosure law violates nonbank lenders’ free speech rights by forcing them to describe their products to borrowers “in ways that are false and misleading,” according to the lawsuit. 

    “The reason for the lawsuit is there are a lot of reasons why APR disclosure doesn’t work for commercial finance products,” said Steve Denis, CEO and executive director of the Small Business Finance Association. “What’s confusing to customers is they don’t understand what APR is and with products with shorter terms it skews the calculation.”

    Asset-based lenders and factoring firms allege that calculating an APR is challenging for businesses that pledge receivables for working capital.  They also allege that the state disclosure laws will raise the cost of credit for short-term financing particularly one- or two-week bridge loans for commercial borrowers. Some experts also contend the state are mandating yet another disclosure regime with reams and reams of fine print that borrowers never read.

    Bonta is urging the CFPB to further articulate that state laws that require more disclosures than federal law are not preempted. He also said state law should be preempted only where there is an actual conflict with federal law.

    “It is vital that businesses and entrepreneurs have the information they need to understand the risks and benefits of borrowing and to have the tools available to find the solution that best meets their needs,” Bonta said in a press release.

    California’s DFPI said it tailored the regulations to cover a wide range of financing, from closed-end loans to open-end credit plans, merchant cash advances, asset-based lending, lease financing and factoring transactions. When an offer of commercial financing is made, the funder must disclose the total dollar cost of the financing, and the total cost of the financing expressed as an annualized rate, which means lenders must disclose any finance charge, or estimated finance charge, the annual percentage rate, or estimated APR, depending on the specific commercial financing arrangement.

    Lenders allege the regulations will require that they provide information that does not accurately describe the costs of financing. They also claim that the new law prevents lenders from giving prospective customers additional information without the risk of fines, penalties and further liability. 

    “The disclosures required under the Regulations, far from providing accurate information that would allow businesses to compare the terms and costs of different financing options, actually require providers to give inaccurate disclosures,” the lawsuit states. 

    Kate Berry

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  • Credit unions put training over hiring to boost loan results

    Credit unions put training over hiring to boost loan results

    Though they face serious challenges in bringing in business-lending experts, U.S. credit unions continue to fill their portfolios with commercial loans. 

    Historically, one major obstacle for some credit unions trying to grow their commercial book has been a regulatory restriction. Under current law, credit unions are restricted from lending more than 12.25% of total assets to member businesses. 

    The other large challenge has been finding the right personnel, and that may be a bigger issue than ever. Some credit unions are finding that it’s better to promote from within than to hire an experienced lender, even if it means spending more time on training. 

    Members 1st Federal Credit Union in Pennsylvania had $741.3 million in commercial loans on its books at the end of the third quarter, a 20% increase compared to a year earlier.

    “Trying to place a commercial lender over the course of last year has been like pulling teeth,” said B.J. Berrettini, executive director for the search firm AJ Consultants.

    Nevertheless, commercial loans at federally insured credit unions increased $26.4 billion, or 25%, on a year-over-year basis, to $132.2 billion in the third quarter of 2022, according to new data from the National Credit Union Administration. 

    Chief lending officers said their success hinges on talent retention and training.

    Wright-Patt Credit Union in Beavercreek, Ohio, had $521.8 million in commercial loans on its books at the end of the third quarter, a 35% year-over-year increase, according to call report data.

    Eric Bugger, chief lending officer for the $7.6 billion-asset Wright-Patt, said it has been difficult to attract outside talent, especially solid performers. The credit union has found much more value in taking some of its current employees who are high-potential candidates and teaching them about commercial services, he said.

    “We have a few recent success stories like this in our commercial lending area and first mortgage area,” he said. “What we’ve found is that the training cycle is a little longer, but we don’t have to teach them things like culture and how much we value exceptional member service. If we pick the right person, they hit the ground running right after training and they quickly start building the relationships that are so important in commercial lending.”

    That strategy might be the only option for some institutions.

    Cameron Boyd, managing partner of the financial services practice at recruitment firm Smith & Wilkinson, said entrenched and successful commercial bankers who feel fairly compensated are unlikely to change companies for a small bump in pay.  

    “The good ones won’t,” he said. “They’re hitting their goal by June and playing a lot of golf.”

    The lenders willing to move are usually those that didn’t hit their goals and are on performance improvement plans, Boyd said.  

    He added that many companies are looking for lenders with an established book of business — but the candidates’ employers often take steps to prevent clients from following them to a new job. 

    “I’ve had many chief lenders or presidents tell me that when a lender leaves, they go into his or her portfolio and reprice everything so low that those customers won’t walk,” he said. “So the best path for attracting commercial bankers is for community institutions to grow their own.”

    Jeff Ernst, chief lending officer for Members 1st Federal Credit Union in Enola, Pennsylvania, agrees.

    The $6.8 billion-asset institution has spent a lot of time and resources in the past year working hard on retaining talent so that it doesn’t have to enter the “challenging world” of commercial hiring, Ernst said. 

    “So far, we have been either lucky or good, as we have held on to our lenders,” he said. 

    Members 1st did add one new lender in 2022 as part of its expansion into Pennsylvania’s Lehigh Valley. Such a move often seems to make it a bit easier to attract quality candidates, as people are often attracted to a new company in the market allowing them to make a fresh start, he said.

    Members 1st had $741.3 million in commercial loans on its books at the end of the third quarter, a 20% increase compared to a year earlier.

    “We have attracted talent in the past by being a good competitor, and lenders for other banks want to be part of our company,” Ernst said. “We have been lucky to hold onto our folks so far.  We will see how things go as we enter an expected challenging 2023.”

    Bruce Kershner, president of Kershner & Co., an executive search firm focused on financial institutions, said his theory has always been that banks should take a lesson from financial advisors when it comes to poaching lenders. 

    When a broker is recruited away, the new firm will pay him or her as much as one to one-and-a-half times their annual production up front, he said. The broker then has to sign a multiple-year contract or must pay the advance back. 

    “I realize banks won’t or can’t pay that amount, but there has to be something creative they can do,” he said. 

    Berrettini from AJ Consultants said that, regardless of the strategy, the search for commercial lenders is as challenging as ever.

    “I’m paid to look for a needle in a haystack of needles. However, it’s almost as if they’re looking for a needle that doesn’t exist in some cases,” he said.

    Ken McCarthy

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  • Decipher Credit and First Corporate Solutions Announce Integration Partnership

    Decipher Credit and First Corporate Solutions Announce Integration Partnership

    The integration partnership between Decipher Credit and First Corporate Solutions will provide shared users with access to increased due diligence automation and faster approval in commercial lending.

    Press Release
    –


    updated: May 3, 2022


    BETHESDA, Md., May 3, 2022 (Newswire.com)
    –
    Decipher Credit, the leading automation platform for specialty commercial lenders, announced its integration partnership with First Corporate Solutions to help its users accelerate the capture and onboarding of new clients and perform due diligence instantly. Shared users will be able to perform UCC search and filing automatically directly from the Decipher origination and underwriting platform and benefit from trusted First Corporate Solutions services.

    “We are pleased to partner with Decipher Credit to offer a turn-key solution for commercial lenders that are looking to streamline their lending approval workflow and close deals faster,” said Samuel Hon, CEO of First Corporate Solutions. “Decipher Credit is highly experienced and trusted within the factoring community and their on-the-go portal automates the processing of loan applications to mere seconds. We share a desire to build cutting-edge solutions that optimally serve the specialty lenders we have both worked with for numerous years.”

    “We are excited to partner with First Corporate Solutions,” said Raul Velarde, CEO of Decipher Credit. “It’s clear that our customers are looking for increased automation and to be able to accelerate UCC search and filing enables them to approve prospects faster and win more clients in a very competitive lending environment. First Corporate Solutions is also a leader in the factoring, asset-based lending, and commercial lending industry and we share many commonalities, including partnering with our clients to help them increase lending efficiencies and make better lending decisions.”

    “The need for integration of existing environments with a platform like Decipher is increasing so that lenders can cut down on manual tasks and quickly onboard new clients. The shared expertise in specialty lending and commitment to technology also make our partnership a clear win for both companies and their clients,” Mr. Velarde added.

    About Decipher Credit

    Decipher Credit is a financial technology company that empowers traditional lenders to offer the latest digital tools to streamline origination, accelerate underwriting and approval, and win more clients. The Decipher cloud-based platform gives commercial lenders access to sophisticated loan origination and risk management technology, with an easy and secure application portal, underwriting automation, risk scoring, and auto approval as well as document management with digital signature. A preferred vendor of the International Factoring Association, Decipher also provides credit and background reports, bank account data verification and monitoring as well as connections to accounting systems for instant financial spreading and accounts receivable and payables analysis. Its newest product, Fast Lane Freight, helps transportation factors automate every step of the origination and approval process, including UCC search and file and allows them to take on new carriers in seconds. For more information or to schedule a software demo, visit https://deciphercredit.com/. For more information on the Decipher Fast Lane Freight product, visit https://deciphercredit.com/freight-factoring-origination/. 

    About First Corporate Solutions
    First Corporate Solutions is a leader in global UCC and corporate risk management with 30 years of experience in the industry. FCS is committed to building robust solutions that streamline business transactions through the intuitive FICOSO Online platform and flexible API options. FCS delivers public records search, retrieval, filing, monitoring and portfolio management solutions with a commitment to accuracy and personalized customer service unmatched in the industry. As a preferred vendor of the International Factoring Association for the past 14 years, FCS has established itself as a trusted partner of legal and financial professionals to rely upon when perfecting and maintaining their security interests. For additional information, please visit https://ficoso.com/factoring/.

    Media Contact:
    Paula Claro 
    Marketing Director
    (301) 798-9778
    paula@deciphercredit.com
    https://deciphercredit.com/ 

    Source: Decipher Credit

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