C&I Lending With Joel Pruis Short Cut // Cornerstone Hot Takes

Hey, GonzoBankers. Tony DeSanctis back with another hot take, talking with Joel Pruis about C&I lending. He just did a great report with some interesting tidbits.

He took the top banks in the country and broke them out based on percentage of C&I loans, and basically broke them into quintiles, or 20%.

So, top 20% C&I lending banks, Joel, what did you find with those banks?

Well, first of all, we saw that in the overall portfolio mix, they had 25% on average of their loans in C&I, whereas the next segment was less than half of that. It was about 12% of their total portfolio in C&I lending.

So, a big lead for that top 20% that have really focused on the C&I segment. Overall, what we’re seeing is that they’re getting higher yields across their portfolio. They actually have a lower efficiency ratio, and they’ve got stronger ROA and ROE across the board.

Interesting. The other thing I thought was interesting from the report was the inverse correlation between real estate and C&I. Can you tell us a little bit about that?

Yeah. It was really weird when you looked at it from the one-to-four-family residential portfolio versus the C&I portfolio. There was this inverse relationship between those two segments.

So if you were really strong in C&I lending, you had the lowest balances of your portfolio in one-to-four-family residential. Those that were really strong in one-to-four-family residential had the absolute lowest percentage of their portfolio in C&I.

So it looked to be kind of a strategy of either, “I’m heavy and focused on one-to-four-family residential,” or the C&I portfolio segment itself.

Gotcha. The other thing I thought was kind of unique, and this is something we always struggle with as bankers, is that whole risk-adjusted margin concept.

So with C&I, losses are a little bit higher and cost of funds is a little bit higher, at least in that top 20%. But what do the returns tell us?

Well, again, we take a look at it from the perspective of, all right, we’ve got higher yields, so that’s helping to compensate for the cost or the increased risk, perceived risk, in that segment.

The net reality is that if we take out cost of funds, so what they’re paying for their deposits and so forth, and we take out the net charge-offs that they’re experiencing, they still net out higher, almost 40 basis points higher than the rest of the population of banks out there.

Well, there you go, folks. If you’re not in the C&I space or want to understand it a little bit better, Joel’s your man.