Fall Market Check-In

Cheryl Brown

In this week's episode of The Purposeful Banker, Jim Young returns to welcome Tony Hernandez for a look at the latest market update based on Q2 PrecisionLender data.

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Jim Young

Hi, and welcome to The Purposeful Banker, the leading commercial banking podcast brought to you by Q2 PrecisionLender. I'm your host, Jim Young, as we tackle the topics on the minds of today's top bankers.

I picked a great episode to fill in for Alex Habet again, because I get to talk to the Deal Doctor himself, Tony Hernandez. Tony, as most of you know, is a regular on The Purposeful Banker, but it's actually been a little while since his last appearance. I think he came back in April. Quite the timing for an appearance on the show as we were really in the midst of some seismic shifts, really, in the banking industry from a few weeks earlier. Fast forward to now a little over half a year, Tony is back on the podcast to talk about the commercial lending market and what it looks like now as we head into the final stretch for 2023. Tony, welcome back.

Tony Hernandez

Thanks, Jim, and pleasure to be here with you. I know normally ... I started appearing here with Alex, but it's nice to be here with the OG and get a chance to talk to you and just catch up. So thanks for having me.

Jim Young

Alrighty. So, alright, before we dive into our source material, which really pulls a lot from some of our latest monthly Commercial Loan Pricing Market Updates that Anna-Fay Lohn produces. And if you haven't seen those, I encourage you to take a look at them on the precisionlender.com website, or hopefully you're receiving our emails that send those updates out each month.

But I want to revisit ... Let's go back to your last appearance. As I mentioned, again, when you were on then with Alex, we were in the midst of a lot of stress and uncertainty in the banking industry. What's your feeling about how things look now about seven months later?

Tony Hernandez

Yeah, and that's a great question, and I think, thinking back on what transpired earlier, this year has been going forward for the most part, right? And banking has kept on trucking. And if you also recall back to 2022, there were a lot of headlines about the big storm that was coming. And my thoughts earlier this year were around the operating friction that many banks may encounter. And anecdotally, I think we're starting to see some banks also start to right-size their operations or plan to do so over the coming year.

So all that to say that we are in an environmental rapid change that doesn't appear to be slowing down. I mean, we have Basel changes coming on the horizon. So not only do we have banks setting to do more with less, but likely also dealing with a little bit of change fatigue across their workforce, and navigating that well—executing on that well—is not easy. So I think that these big changes, these big impacts that we've seen, it almost feels like we're adding just more to that pile.

Jim Young

Yeah, I think it's got to be a tricky time to be a banker.

Tony Hernandez

Absolutely. So at the same time, my feelings have definitely ... They have shifted but stayed the same at the same time. It's just that I think that we have a little bit more clarity on what's at least coming in the next 12 months.

Jim Young

Gotcha. You mentioned Basel III. I think we will probably spare you from having to go deep into those weeds in this one. Probably will save that for someone like Steve Collum for a future podcast to dive into that one.

Tony Hernandez

Thank you for that. Thank you for that.

Jim Young

Yeah. I'll probably try to duck out on that one as well if I can.

So taking a look, and the way we did these, you might hear us use a certain month and it might differ from the name of the particular piece, because what we typically do is when Anna-Fay does an October update, she's using September data at that point. So that's why we always debated about how to name these things. But in this question here, so we looked at our September commercial pricing database information and it showed a dip in pricing volume, lowest activity since February. And that had been pretty consistently across the board. It ticked up in March and stayed that way, and then all of a sudden in September it came back down to really February levels. I've got some theories, but you're the smart guy on this podcast. What do you think is behind that shift?

Tony Hernandez

Yeah, I think what the data is showing us, and you alluded to it, is that there's a lot of that uncertainty that has continued to surface around just the interest rates, how they've been at an elevated level for quite some time now, and also how certain industries haven't fully recovered since the pandemic and what might be happening or how those industries might be evolving. I'm thinking real estate comes to mind and just the overall loan demand that exists there. So personally for me, I find it really hard to just point to three, five things. I think it's the combination of all those things happening, the disruption that we faced earlier in the year, what may or may not be happening in real estate, the fact that these elevated rates have been with us for a bit longer. Also, to me, probably point to why we might be seeing this initial dip in the overall volume that we see here in our data.

Jim Young

Yeah, I think the thing that I was curious about, I wasn't necessarily surprised to see it. I think I was a little surprised because it felt like we've been hearing bankers tell us for a while that this is what they were going to be doing. Like, "Hey, we're going to be more selective with the deals because we only have so much liquidity and we've got these ..." The concerns you mentioned about some ... Particularly in the real estate area and uncertainty with interest rates, that we're going to be being more selective. But it took a while before we started seeing that selectivity, at least in terms of pricing volume, and I guess I'm wondering if you've got a theory as to why. Maybe there's a delay between what they told us and what they actually did.

Tony Hernandez

Yeah, I put myself back a little bit in my credit officer days and while it was different times, there's echoes or ripples that you see that hold true today. And I think perhaps a lot of the pipeline, a lot of the deal volume that we had seen had stuff ... It's stuff that had been in play for quite some time. So as we're crunching through that, we're closing deals or they're morphing, etc., I think we're at a very crucial point for where not only the financial institutions, but their clients are looking as to, is this the right time that we want to do this? So I think that healthier pipeline of activity is coming to its conclusion. And this might be that churn of do we do that next big project, the next big financing right now amongst all this uncertainty, or do we delay it after the next three, four months, test the waters and see if it's still an opportune time for us to do that big project, etc.

Jim Young

OK. Alright.

Tony Hernandez

But again, that's just my conjecture. If I take myself back, I'm not going to say how long, but to that share of having that, call it the five, six deals that I'm looking to close the quarter with, and only one is going to materialize because of the client’s deferring that decision to finance.

Jim Young

Yeah, I can see that. So I mentioned liquidity being one of the things from the banking side that would tamp down volume. So that obviously goes to the herd that's been on everyone's mind pretty much all year long: deposits. And of course deposits are an element of cross-sell. So Anna-Fay took a look at cross-sell numbers and she took a look at them by banking segment, found that the bigger banks, the ones above $50 billion in assets, are adding cross-sell to their loans a bit more frequently.

But what really caught my eye in numbers was the amount of each expected cross-sell, and I should say amount as a ratio. Obviously a lot of the bigger banks are doing bigger deals, but in this case what we're talking about is when a deposit was added to a priced opportunity at a big bank, the ratio of that deposit to the loan was 76% in Q3, for regional and community banks was 14%. That's got to be ...

Tony Hernandez

That's quite a delta.

Jim Young

Yeah, that's a better way of saying that. I was going to say that's got to be a concern for those segments, but your way is a better general thing. That is quite the delta between the two. So maybe I'll ask that. If I am a regional or community bank looking at that, should I be concerned?

Tony Hernandez

Perhaps somewhat, and it's really going to depend on that financial institution's strategy, but it is perplexing, because whenever there is a conversation about commercial banking and the different venues that are available to achieve higher revenue, primacy is always one of the topics that comes up and everyone agrees just how important it is. I think the challenge is the execution of a primacy-focused strategy. It is a lot easier than just agreeing, and that goes without saying.

Jim Young

Right.

Tony Hernandez

But I'm going to go back to something that I mentioned just earlier. We've talked about change fatigue and everything that's going on in our industry. These banks are tasking the bankers with not only everything that's going on, but also now getting that plus one.

Jim Young

Mm-hmm.

Tony Hernandez

How are they monitoring to ensure that we're attaining that and also not burning out the banker or perhaps the client, because every time you're now perhaps breaking the mold or how your client is used to interacting with you. So I think that what we all agree—premise is important. It requires careful execution, especially if it's a change in the wholesale strategy of that institution where previously it was just a volume shop. How do you change that behavior to start asking for the deposit or whatever other fee business might be there? And it's one of those things that I think it requires just practice, right? To develop that muscle memory, how to bake it, how to bring it into the conversation without making it feel unnatural and truly deliver the bank as a whole institution and not just solely as a lender.

Jim Young

I had one theory on this one. I'll test this out, feel free to completely shoot it down, but I wondered if, because the ratio was so low, I wondered if there was a little bit of ticking a box there in terms of, "Listen, I'm having a loan conversation with you. I know this is the price you're looking for. I’ve got to have some deposit. Just give me something." Rather than ... So I can say, "I cross-sold this, I added another ... The number of products per account is this or products per relationship is this," and not, "Hey, this is something that's actually going to move the needle for us."

Tony Hernandez

It's interesting. I think it's possible. I think it's possible for sure. One of the things that I always advocated for in prior roles and maybe when I've chatted about this topic with Alex on this podcast, is this notion of having options whenever we're bringing, whether it's a loan agreement or whatever it is that we're putting in front of our clients. Particularly with interest rates being so high and just having rates and sensitivity all over the place. Some of those options could just be, let's call it credit-centric, where we're looking perhaps at different tenors, different combinations of coupon spread and/or fees within the loan. But also, how do we change this dynamic if we introduce deposits or we get that plus-one that I mentioned elsewhere?

And I think that that's a good exercise whether it materializes or not. I think it's a good exercise for the banker to plan how do they go to market, how do they make their relationships less transactional and a little bit more sticky? And in doing so, I think that there is a learning exercise that you go through where you stand with that client and also how you convert it from being a little more transactional to perhaps more ... advisory is not the right word that I'm looking for, but more focused on how do we serve this client better.

Jim Young

Mm-hmm. Gotcha.

OK. Anna-Fay also took a look, staying on the deposits track, she took a look at deposit NIM versus loan NIM in the October update. I would imagine that that overall story—that deposit NIM is expanding and generating more of overall bank NIM than loan NIM—it is not necessarily earth-shattering information, but are you struck at all by the degree of difference right now between deposit NIM and loan NIM?

Tony Hernandez

Yeah, that's a great observation and I wish I had a magic ball that told me exactly what was going on there, but I'm going to piggyback off the point that I was making of bringing options and bringing the whole bank. And what I think there, is that when we start bringing multiple products or trying to expand into multiple product options, depending on the size of institution that you might be dealing with, sometimes there might be different teams that are involved with that. And even sometimes if it's just the individual, I think it still holds the same that we have to have a view and be very cognizant that we're not discounting three times. If we're presenting three different products, ensuring that we're not applying the discount at the loan, giving away the fee, discounting at the deposit level or waiving some sort of transactional fee.

And I think, at least from my experience when I was, again, in that credit share was that it was always me, the credit officer, that had to eat that discount so that we could get everything else. So I don't have the data or whatnot, but just my conjecture, how I feel about it there is that besides just a little bit of delay in everything right-sizing itself, there might be also a little bit of play. Particularly we go back and talk about the decline in volumes and how do we ensure that we're getting good healthy credits. I just imagine there might be concessions that are being granted to not only either retain or get that volume, but then also to expand the relationship and make it a little bit more sticky.

Jim Young

Got you. Alright. Standing up for your lending guys there I see.

Tony Hernandez

I have to. You have to.

Jim Young

So last thing I wanted to talk to you about is you mentioned, and I noticed you used the term change fatigue a couple of times in here, and we're talking here about a difficult market to begin with and now we're talking really about ... I know you said every bank always talks about being a relationship bank, but relationship pricing in practice is hard and it's involving other ... You mentioned the whole discounts across three different people. You're breaking down silos, you're now working with people you hadn't worked with in the past. You're having to do this, you're negotiating with a customer and you're probably also negotiating within your bank about who's going to do what, etc. And in most cases, we're doing it with less. I mean, it's not a massive expansion of either ... And we hear at banks say, "It's hard. It's hard to hire more relationship managers that can do this." So what's your feeling about that? I mean, how difficult is it to be a commercial RM these days?

Tony Hernandez

I think it's really challenging. Anecdotally, we also know that when there are new bankers that enter the space, a lot of times there is such a big gap from bankers that have been doing it for 15, 20 years to those that are just entering for the new time or for the first time. And while they may be more savvy when it comes to, perhaps, navigating technology, the thing to me, and sorry if it's a little nerdy, but I think that banking at its really core, it's a people business. And how do you go about navigating and making sure that across that network internally or externally when you're working on a deal and you're trying to make something happen, that everybody feels good about that transaction? And now if you had five things to do, per se, just for conversation, and now you're having to do eight and now it's 10 and now you're having to do 12 different things, how do you maintain that people aspect and everyone feeling good? So I think it is more challenging.

And then on the other piece, for those, when you do get a new banker, how are you catching them up with your best bankers? What strategies are you deploying to try to extract or instill a lot of that knowledge that exists in pockets? Because there's just no way that you can capture everything in training and policy sites or whatever. So it has to happen through conversation and through repetition and just going out there and doing the job.

Jim Young

Yeah, yeah. It is a tricky thing to do, and I think a little bit ... At the risk of being a little bit self-serving, I think you really do have to have the technology when possible because as you said it is a human thing, but impossible to augment it. So at least making the non-human aspects of it as easy as possible, I guess, because the human part's going to always be part of that, and it is always going to be challenging part of this.

Tony Hernandez

I'll tell you what, something that I also, in my teams, we said, "Hey, it takes a village to really make this work." And we used to say, "You have to ruthlessly prioritize," but that sometimes could be a little strong because when you're ruthlessly prioritizing, it means, "Well, does that mean that five out of the 20 things that we have to do are not going to get done?" So you have to come at it with intention at being purpose-driven to do the job at hand. So just an observation.

Jim Young

Yeah. Yeah. No, well, thanks. I think it's a good way. We started off looking at the cold hard numbers, but I think it's good to add that human element with the rest of it. So Tony, thanks again so much for coming on and hope you and I can do this again soon.

Tony Hernandez

Absolutely. Thanks for having me.

Jim Young

Alright, and that'll do it for this week's Purposeful Banker. If you want to catch more episodes of the show, please subscribe where you listen to your podcasts, including Apple Podcast, Spotify, Stitcher, iHeartRadio, and more. You can also find a video version of today's episode. Sorry, Tony. Yeah, we had to put this out there, but on our YouTube channel. If you have a minute to spare, let us know what you think in the comments. You can also head over to Q2.com to learn more about the company behind the content. Until next time, this is Jim Young. You've been listening to The Purposeful Banker.