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Planning to Win: Lending Strategies for an Uncertain Economy · Leaders in Lending

0:00
Speaker 1: The unknown. It depends on the month, it depends on
0:02
Speaker 1: the week, it depends on the quarterer. It's kind of
0:04
Speaker 1: been the whole theme through twenty twenty five.
0:08
Speaker 2: Some progressive lenders out there right now that I'm seen
0:10
Speaker 2: actually ramping up, so where some start to wind down
0:13
Speaker 2: into the fourth quarter and say, oh no, we're all good.
0:15
Speaker 2: We're kind of closing up shop about Thanksgiving or early December.
0:19
Speaker 2: Some are going, no, let's hit the gas.
0:20
Speaker 1: You can go on Amazon. You can go on to
0:22
Speaker 1: Walmart's website and buy TVs and things of that nature
0:25
Speaker 1: and make four monthly install the payments of fifty dollars.
0:29
Speaker 2: This is like navigating your sale boat across choppy seas
0:32
Speaker 2: or rough wards or calm seats. I don't think anyone
0:34
Speaker 2: sees calm seas. No one is saying, oh yeah, twenty
0:36
Speaker 2: six is going to be a layup. Welcome back to
0:43
Speaker 2: upstarts leaders in lending. I'm Barry Roach, and I'm here
0:45
Speaker 2: with our co host Drew Megriy. Today we're tackling one
0:48
Speaker 2: of the biggest challenges executives are facing right now, navigating
0:51
Speaker 2: an economy that's constantly shifting from high rates and regulatory
0:55
Speaker 2: changes to evolving consumer behavior. We'll walk through the key
0:58
Speaker 2: shifts that are shaping lending today and the practical playbook
1:01
Speaker 2: leaders are using to stay resilient. Let's get started. How
1:04
Speaker 2: are you doing today, Drew?
1:05
Speaker 1: I'm doing well. Thanks, very good.
1:07
Speaker 2: Good So, Drew, You and I are out there talking
1:10
Speaker 2: to CEOs chief lending officers CFOs all the time. It's
1:15
Speaker 2: the fourth quarter of twenty twenty five, we're getting into
1:18
Speaker 2: business planning. A lot of them are trying to sort
1:20
Speaker 2: of figure out what the rest of the year looks
1:23
Speaker 2: like and gets some momentum going into twenty twenty six.
1:26
Speaker 2: So what are you hearing from the executives out there
1:29
Speaker 2: today in terms of what their biggest concerns are, not
1:32
Speaker 2: just as we're getting into the end of the year,
1:35
Speaker 2: but into the beginning of next year as.
1:36
Speaker 1: Well, first off, fourth quarter during peak football season. Love
1:41
Speaker 1: love the analogy. I would say it's almost the unknown, right.
1:46
Speaker 1: It depends on the month, it depends on the week,
1:49
Speaker 1: it depends on the quarter. It's kind of been the
1:51
Speaker 1: whole kind of theme through twenty twenty five, and then
1:55
Speaker 1: we've talked about this on prior podcasts. With market volatility,
1:59
Speaker 1: interest rate risk, global unrest, I mean potential recession. We've
2:04
Speaker 1: heard that time and time again, and that's still kind
2:06
Speaker 1: of the same theme going into next year. But what
2:10
Speaker 1: I do feel that a lot of the executives that
2:12
Speaker 1: we've talked to they've kind of mitigated their businesses going
2:15
Speaker 1: into twenty twenty six with assumptions as all that stuff relates.
2:20
Speaker 1: What I would say though, that I have been hearing
2:22
Speaker 1: an increasing kind of unknown is as it relates to
2:26
Speaker 1: like cybersecurity and tech risk. The use of AI has
2:30
Speaker 1: definitely taken off, the leveraging of partners that use AI
2:33
Speaker 1: and just AI and tech in general. I mean it's
2:36
Speaker 1: a very antiquated system with all the technology kind of
2:39
Speaker 1: things in the background that run cybersecurity and so on
2:42
Speaker 1: and so forth. So I think kind of to sum
2:44
Speaker 1: it up, it's still unknown. But all of the other
2:47
Speaker 1: stuff that I outlined as it relates to kind of
2:49
Speaker 1: the economy things have been mitigated. But there's other stuff
2:51
Speaker 1: on the forefront as it relates to cybersecurity, use of AI,
2:55
Speaker 1: regulatory stuff around around all that. What are your thoughts
2:58
Speaker 1: on that, Barry?
2:59
Speaker 2: Yeah, I mean, think of of the the the I budget,
3:02
Speaker 2: the traditional I budget, You've got some allocated for development work,
3:06
Speaker 2: you know, some allocated for how you're going to move
3:08
Speaker 2: your business forward, whether it's productivity for your employees or
3:12
Speaker 2: a better value proposition, very digital value proposition for your
3:16
Speaker 2: for your members, for your customers out there. But then
3:18
Speaker 2: cybersecurity is out there as well, and it seems to
3:21
Speaker 2: be an area of business that is becoming more and
3:26
Speaker 2: more uncertain and you need to have more and more
3:29
Speaker 2: protections and more barriers up against that. So, you know,
3:32
Speaker 2: I think of it as as you and I have
3:35
Speaker 2: both been previous CEOs, what's what's the right balance of
3:41
Speaker 2: spend on that, because cybersecurity can shut down your business,
3:44
Speaker 2: as we've seen in financial services, banks and credit unis
3:48
Speaker 2: have both had some pretty significant and notorious cybersecurity incidents
3:53
Speaker 2: in the past couple of years or so. So it's
3:55
Speaker 2: it's how do you waste or of that that spend
3:59
Speaker 2: against secure versus moving your business forward using AI and technology.
4:04
Speaker 1: Yeah, it's it's kind of a reoccurring theme. I don't
4:07
Speaker 1: know how many pieces of mail I get anymore, not
4:09
Speaker 1: in financial services, but oh, you may have been a
4:12
Speaker 1: part of a data breach as it relates to I
4:14
Speaker 1: went to the doctor for my annual exam and they
4:17
Speaker 1: have my social and all that fun stuff. Yeah. So
4:20
Speaker 1: as it relates kind of to the key themes that
4:22
Speaker 1: we've been hearing for I'd say the past twenty four months,
4:26
Speaker 1: market volatility fed like just juicing up rates over the
4:31
Speaker 1: past two years. What are your thoughts like going into
4:36
Speaker 1: twenty twenty six, Right, we've got a consensus here that
4:38
Speaker 1: they're going to reduce, but there's still a lot of
4:40
Speaker 1: pressure on the consumer because in aggregate the rates are
4:44
Speaker 1: still fairly high across most assets. Like, do you think
4:47
Speaker 1: the American consumer is going to remain resilient? Are they
4:51
Speaker 1: going to still be able to have affordability? As it
4:53
Speaker 1: relates to those rate cuts, are we still going to
4:54
Speaker 1: see some type of compression there or what are your
4:57
Speaker 1: what are your thoughts or what have you been hearing
4:59
Speaker 1: from the executives?
5:00
Speaker 2: Yeah, I think we're still waiting for all those ray cuts, right,
5:04
Speaker 2: three different ray cuts of one hundred base points last year,
5:06
Speaker 2: one rate cut so far this year, perhaps another coming
5:08
Speaker 2: at the end of October, but none of those have
5:11
Speaker 2: made their way into the broader interest rate market. The
5:14
Speaker 2: ten year is still roughly about the same as it
5:17
Speaker 2: was two years ago. Thirty year, mortgages have come down
5:21
Speaker 2: a little bit, but still in the mid sixes or so.
5:25
Speaker 2: So you know, I don't think we're going to see
5:27
Speaker 2: any sort of huge correction or a positive correction in
5:31
Speaker 2: housing until we get that thirty year down below six.
5:34
Speaker 2: That's kind of what I'm hearing from executives out there
5:36
Speaker 2: right now.
5:37
Speaker 1: Now.
5:37
Speaker 2: Having said that, fourth quarter is always a tome of optimism,
5:42
Speaker 2: So okay, you know, and you know how these things are.
5:45
Speaker 2: You bring out your magic crystal ball in October and
5:49
Speaker 2: you try and predict what's going to happen over the
5:51
Speaker 2: next fifteen months, and nine times out of ten those
5:54
Speaker 2: predictions are wrong or somewhat flawed, or they never really
5:57
Speaker 2: came to pass. So your budget, this is playing, has
6:01
Speaker 2: to be very much a fluid process even throughout the year.
6:04
Speaker 2: As conditions change, you need to course correct. This is
6:07
Speaker 2: like navigating your sailboat across choppy seas or rough wars
6:11
Speaker 2: or calm seas. And I don't think anyone sees calm seas.
6:13
Speaker 2: No one is saying, oh yeah, twenty six is going
6:15
Speaker 2: to be a layup. This is going to be easy.
6:17
Speaker 2: We know exactly what's going to happen. But I do
6:20
Speaker 2: hear a lot more optimism now than I did maybe
6:24
Speaker 2: six months ago about the impact of FED funds reductions
6:28
Speaker 2: actually making their way into the marketplace, that it might
6:31
Speaker 2: create a little more demand for lending across the board,
6:34
Speaker 2: across all asset classes, including on the commercial side as well.
6:38
Speaker 2: But then you know, now there's some credit quality concerns
6:41
Speaker 2: out there. Perhaps you know, we've seen that delinquencies and
6:44
Speaker 2: credit cards have started to increase a little bit. Unemployment
6:48
Speaker 2: still remains low relative to where it had been over
6:54
Speaker 2: say the past decade or the past two decades or so,
6:56
Speaker 2: but there's been a little more It's not as it's
7:00
Speaker 2: softened a little bit. I would say from where it
7:02
Speaker 2: was maybe a year ago. The number of job openings
7:05
Speaker 2: are less now than they were a year ago. So
7:08
Speaker 2: there may be some stress on the American consumer that way,
7:12
Speaker 2: that perhaps if they're not really feeling all that confident
7:15
Speaker 2: about their long term or even short term prognosis of
7:19
Speaker 2: their employment, that they may put off on some spending,
7:24
Speaker 2: which which would then certainly have some impact on the
7:28
Speaker 2: demand for loans.
7:29
Speaker 1: What do you think, and Drew I would echo all
7:32
Speaker 1: of that, but going back to kind of a topic
7:35
Speaker 1: that you brought a hand. Credit quality remains to be
7:38
Speaker 1: kind of an unknown. Things have definitely elevated over the
7:41
Speaker 1: last eighteen twenty four months. But if you remember, I
7:44
Speaker 1: don't know, maybe a few episodes ago, we were talking
7:46
Speaker 1: about financial services in general, whether they be credit unions
7:50
Speaker 1: and or banks have kind of already tightened, right, and
7:53
Speaker 1: they started tightening two years ago. Is this the new norm?
7:57
Speaker 1: And what I've heard from talking to executives and just
8:00
Speaker 1: even looking at stuff within our own kind of rails
8:02
Speaker 1: is things are starting to normalize again with appetite across auto,
8:07
Speaker 1: the appetite for taking personal loans on at the higher
8:11
Speaker 1: yields as kind of rates are subject to go down.
8:15
Speaker 1: So what I find very interesting is like this has
8:18
Speaker 1: been mitigated maybe right from a risk perspective, and there
8:21
Speaker 1: is that crystal ball if we want to grow, we
8:23
Speaker 1: want to grow. Where I think this plays into kind
8:28
Speaker 1: of the growth perspective going into twenty twenty six is
8:32
Speaker 1: if we do start to decrease rates. One, if you're
8:34
Speaker 1: borrowing from the FHLB, that's beneficial to you from an
8:37
Speaker 1: expense standpoint, so you're able to go back out and lend,
8:41
Speaker 1: maybe not to the thresholds that lending was going on
8:44
Speaker 1: in twenty twenty one and twenty twenty two. But then
8:47
Speaker 1: on another kind of subset is your cost of funds
8:51
Speaker 1: is going to reduce. And I don't know what that
8:52
Speaker 1: lag time is based on the FED reducing, but as
8:58
Speaker 1: your deposit products from an API perspective are going to reduce,
9:02
Speaker 1: your borrowings are going to reduce. That sets you up
9:04
Speaker 1: for success from a growth perspective. And we're already starting
9:06
Speaker 1: to see some of that, you know, planning going into
9:08
Speaker 1: twenty twenty six of let's start bringing back all asset
9:10
Speaker 1: classes as part of our growth plans.
9:13
Speaker 2: Right, I mean there is a I think there's a
9:15
Speaker 2: there's a really good formula out there if you're willing
9:18
Speaker 2: to take a little bit of risk right now. And
9:21
Speaker 2: to your point about your your cost of funds, so
9:24
Speaker 2: your deposit products that you probably overpaid for two years
9:27
Speaker 2: ago and then probably still overpaid a year later PONM renewal,
9:32
Speaker 2: you know we are I'm certainly seen across the country
9:35
Speaker 2: that those those great twelve months CD rates, those eighteen
9:38
Speaker 2: months CD aren't necessarily as good as they were two
9:40
Speaker 2: years ago. For a good reason. Right, part of it
9:43
Speaker 2: is is less need for that supply. And the other
9:46
Speaker 2: part is that we have seen FED funds reduced rates
9:48
Speaker 2: and so on, so there's less pressure on the deposit
9:51
Speaker 2: side and less need to sort of try and step
9:56
Speaker 2: up your your amount deposits in order to cover your
9:58
Speaker 2: loan demand. But you've also still have high loan yields.
10:01
Speaker 2: So to your point, if if you've already sort of
10:04
Speaker 2: accounted for the increased risk credit risks out there and
10:09
Speaker 2: that's in your pricing, you can get some pretty good
10:11
Speaker 2: yields right now across asset classes before and almost almost
10:16
Speaker 2: get ahead of the reduction in rates. So there are
10:19
Speaker 2: some progressive lenders out there right now that I'm seeing
10:22
Speaker 2: actually ramping up. So where some start to wind down
10:25
Speaker 2: into the fourth quarter and say, oh, no, we're all good.
10:27
Speaker 2: We're kind of closing up shop about Thanksgiving or early December.
10:31
Speaker 2: Some are going, no, let's hit the gas and let's
10:33
Speaker 2: let's go out and get some real good loan income
10:36
Speaker 2: momentum going into twenty twenty six. So then that first quarter,
10:40
Speaker 2: you know you're actually at or ahead of what your
10:43
Speaker 2: expectations are, and it would help to mitigate any other
10:46
Speaker 2: choppy waters that we do have through the rest of
10:49
Speaker 2: twenty twenty six, if DQ goes up, if credit quality declines,
10:53
Speaker 2: if rates don't actually reduce as expected, if inflation starts
10:58
Speaker 2: to tick up a little bit. That's something else we
10:59
Speaker 2: have been talked about. I mean, what are your what
11:03
Speaker 2: are your lenders hearing about inflation or where are they
11:05
Speaker 2: thinking about it?
11:06
Speaker 1: I was gonna go back like on all of that, Like,
11:08
Speaker 1: I don't think the formula is ever going to change though, right,
11:12
Speaker 1: You're going to diversify your portfolio based on risk adjustive returns.
11:14
Speaker 1: It's what everybody does going into each quarter each year,
11:18
Speaker 1: just a matter of where are you going to put
11:20
Speaker 1: your eggs in each basket. Then going back to inflation,
11:24
Speaker 1: like it's been something that's been discussed of the unknown
11:27
Speaker 1: again for quite some time. Nothing's really come of it.
11:30
Speaker 1: I mean there's a been volatility, there's a spike here
11:34
Speaker 1: and then it goes down. It depends on, you know,
11:36
Speaker 1: what's going on in the economy. But I think that
11:39
Speaker 1: of the executives that I talk to in the lending space,
11:42
Speaker 1: they're they're they're kind of okay with where everything sits
11:44
Speaker 1: right now, and and don't think much is going to
11:47
Speaker 1: change or and or impact I mean current state. The
11:50
Speaker 1: only kind of with government shutdown, right is the unknown
11:53
Speaker 1: there and how that's going to impact what's the longevity
11:55
Speaker 1: outside of that. I don't think inflation is really a concern.
11:59
Speaker 1: It's just something that's kind of in the forefront that
12:02
Speaker 1: will continue to monitor. But again, no real concern from
12:05
Speaker 1: who I'm talking to right now.
12:06
Speaker 2: We're only nine or ten months into this administration. There's
12:09
Speaker 2: been tariff concerns that I don't know, have they come
12:12
Speaker 2: to pass or not drew. Like I don't necessarily feel
12:15
Speaker 2: it as a consumer, but then I may not be
12:17
Speaker 2: representative of the sort of average consumer. But people are
12:22
Speaker 2: still buying TVs and and still buying imported vehicles, and
12:28
Speaker 2: and I don't really see that changing a whole lot.
12:30
Speaker 2: What do you see?
12:31
Speaker 1: Yeah, that's a great point, Like, let's kind of shift
12:34
Speaker 1: here consumer behavior, right, the American consumer. We've seen data
12:39
Speaker 1: in the past, you know, a few years where still
12:42
Speaker 1: coming out of the COVID boom, they're purchasing to your point, TVs, hospitalities,
12:48
Speaker 1: maybe stuff that they don't really need. But in like
12:52
Speaker 1: recent findings, households are starting to tighten their spending. The
12:56
Speaker 1: consumer savings rate is kind of remain relatively flatt You
13:00
Speaker 1: don't see as much, you know, spending as it relates
13:03
Speaker 1: to durables. But then I kind of often think as
13:06
Speaker 1: it relates to all of that, like we're at airports
13:09
Speaker 1: quite often and they are packed. We go on vacation
13:12
Speaker 1: and the hotels are packed anytime that we're traveling for
13:15
Speaker 1: pleasure or work. I don't understand the whole like the
13:18
Speaker 1: tightening and non spending when we're seeing it. So I
13:21
Speaker 1: really don't know what the consumer behavior looks like in
13:24
Speaker 1: that aspect. Maybe it's different. Cohorts are you know, still
13:28
Speaker 1: from from a uh from having a more more funds
13:31
Speaker 1: and things of that nature. Are ones that sat on
13:33
Speaker 1: savings longer than others are starting to kind of come
13:35
Speaker 1: out of the woodwork as it relates. But I can't
13:38
Speaker 1: pinpoint the consumer behavior as it relates to what's going
13:41
Speaker 1: on in the macro right now.
13:42
Speaker 2: Yeah, that's a good point. It's it's it's it's befuddling
13:46
Speaker 2: a little bit.
13:47
Speaker 1: Right.
13:47
Speaker 2: We all expected that the consumer would stop spending, and
13:50
Speaker 2: the consumer hasn't necessarily stopped spending, maybe at the rate
13:53
Speaker 2: that we expected. Uh, But you talk about going to
13:59
Speaker 2: airports and hotel and so on spending on experiences. We
14:02
Speaker 2: saw that spike up after COVID, where people were stuck
14:05
Speaker 2: in their homes for a year and a half or
14:06
Speaker 2: two years, and then finally we're able to go out
14:08
Speaker 2: and said, well, yeah, I've already bought my TVs, I've
14:10
Speaker 2: bought my durable goods. Let's go out and let's experience
14:14
Speaker 2: some things. And that has not slowed down at all.
14:17
Speaker 2: Cruise ships are still packed and more and more of
14:20
Speaker 2: that happening. So you know, if you think of that
14:23
Speaker 2: from a macro perspective of what that's going to mean
14:25
Speaker 2: for our lenders going forward, it's probably a good sign.
14:29
Speaker 2: We still haven't seen sort of the typical interruptions of
14:33
Speaker 2: the economy that you would see before a recession. You
14:38
Speaker 2: and I were both in the industry with a great
14:41
Speaker 2: financial recession. I mean we felt it probably a good
14:44
Speaker 2: twelve to eighteen months before everything kind of burned down
14:48
Speaker 2: as it happened, But we were starting to see it
14:52
Speaker 2: in our delinquency. We started to see it talking to
14:55
Speaker 2: our collectors. They're the ones, they are the canaries in
14:58
Speaker 2: the coal mine, they are the ones who is saying, yeah,
15:00
Speaker 2: we're hearing a lot of stress out there, and those
15:02
Speaker 2: conditions just don't really exist right now, And from talking
15:05
Speaker 2: to blinding partners across the country, they're not really seeing
15:10
Speaker 2: that either at all. So the consumer has been resilient,
15:14
Speaker 2: continues to spend, and should continue to spend unless there's
15:17
Speaker 2: some sort of a massive economic disruption, which is so far,
15:21
Speaker 2: so good, We thankfully haven't seen anything like that.
15:23
Speaker 1: Or how much of this is the American consumer buying
15:27
Speaker 1: said durables at an elevated rate as it attributes to
15:31
Speaker 1: buy now, pay later. You can go on Amazon, you
15:34
Speaker 1: can go on to Walmart's website and buy TVs and
15:37
Speaker 1: things of that nature and make four monthly installment payments
15:41
Speaker 1: of fifty dollars. I wonder if the American consumer is
15:44
Speaker 1: leveraging buy now, pay later more than the traditional credit
15:47
Speaker 1: card or unsecured person alone or things of that nature
15:49
Speaker 1: to finance some of that stuff.
15:51
Speaker 2: Which is opaque to most lenders because it doesn't show
15:54
Speaker 2: up in credit reports and will eventually catch up with you, you
15:58
Speaker 2: would think, right, but so far, so good. Have you
16:04
Speaker 2: used that yourself. I'm just curious because I didn't use
16:07
Speaker 2: it a couple of years ago. It just kind of
16:10
Speaker 2: made sense and the opportunity came up and I thought, well,
16:12
Speaker 2: why spend six hundred dollars on this item that I
16:16
Speaker 2: was purchasing when I could do it one fifty over
16:17
Speaker 2: four months. This kind of kind of made sense coming
16:20
Speaker 2: from the same credit card which I pay off every
16:21
Speaker 2: month anyhow, so why not as a consumer. It just
16:26
Speaker 2: kind of ticked those boxes and felt like something that
16:30
Speaker 2: I could use right now. Now did it really sort
16:33
Speaker 2: of change my financial picture? Probably not all that much,
16:37
Speaker 2: but actually made me feel a little bit better about
16:39
Speaker 2: that purchase, and I had to lay out the whole
16:41
Speaker 2: six under myself at that time.
16:42
Speaker 1: Maybe I need to become one with the times and
16:44
Speaker 1: test out the buy now, pay later, I've not I've
16:47
Speaker 1: not done that yet.
16:48
Speaker 2: Well, you know you can DoorDash something at lunch and
16:50
Speaker 2: probably buy now and pay that one later too.
16:52
Speaker 1: So they all try that out tomorrow.
16:55
Speaker 2: So let's shift a little bit back into Upstart a
16:58
Speaker 2: little bit, so you know, Upstarted employees a lot of tools,
17:01
Speaker 2: predictive sort of tools to try and help our lenders
17:04
Speaker 2: understand sort of what the macroeconomy is and perhaps what
17:09
Speaker 2: that means for their own portfolio of loans that they've
17:12
Speaker 2: originate today and then the ones that they're going to
17:14
Speaker 2: originate down the road. And I'm talking across all asset classes,
17:17
Speaker 2: because it's not just personal loans now, it's auto loans,
17:19
Speaker 2: it's helock that sort of thing. So as you talk
17:23
Speaker 2: to your lending partners out there, you know, what's her
17:25
Speaker 2: confidence are they getting from understanding that these tools are
17:29
Speaker 2: available for them, and it's just giving them a lot
17:31
Speaker 2: more transparency into the decision making that they have to
17:34
Speaker 2: do for their business.
17:35
Speaker 1: I think in my conversations it's it's not for lack
17:39
Speaker 1: of a better term, with rising delinquency, rising defaults, and things
17:44
Speaker 1: of that nature, that there's a scaredness associated with it.
17:48
Speaker 1: I think with leveraging these tools, it allows them to
17:50
Speaker 1: better re forecast across all assets, whether it relates to
17:54
Speaker 1: unsecured or asset backed type of loans, as well as
17:59
Speaker 1: it relates to CECIL and the overall impact that it
18:01
Speaker 1: has towards their expense and in their bottom line at
18:04
Speaker 1: the end of the day. Whereas if you if you rewind,
18:06
Speaker 1: you know three years ago, three years or so ago,
18:09
Speaker 1: one CECIL had to be adopted. There was a lot
18:11
Speaker 1: of unknowns. We didn't know how to refecast and using
18:15
Speaker 1: these tools, it allows for here's the current state of origination,
18:18
Speaker 1: whether it be month one or quarter one, and then
18:21
Speaker 1: what does it look like from a loss projection standpoint
18:24
Speaker 1: on that six, nine, twelve months down the line, And
18:26
Speaker 1: how can I reallocate my reserves into my A triple
18:31
Speaker 1: L account and go from there. So I think having
18:33
Speaker 1: those tools has helped better define the refecasting methodologies across
18:36
Speaker 1: all assets to help be set up for success as
18:39
Speaker 1: it relates to expenses and an overall net income.
18:42
Speaker 2: Yeah, I mean, what a massive change that technology has
18:45
Speaker 2: given for CFOs and executives trying to sort of forecast
18:49
Speaker 2: things out. You can always you could have always looked
18:53
Speaker 2: at a point in time of sort of the overall
18:55
Speaker 2: quality of your portfolio, both from from from a credit
18:59
Speaker 2: risk perspective, but then also sort of forward the forward
19:02
Speaker 2: income that should be getting from it. But now you've
19:05
Speaker 2: got so much modeling ability at your fingertips to be
19:09
Speaker 2: able to sort of look at different scenarios. And again,
19:12
Speaker 2: you know, if you think the economy is going to
19:13
Speaker 2: be good, great, or poor, you could forecast all those
19:16
Speaker 2: three scenarios with really just just a click of a
19:19
Speaker 2: couple of buttons where that would have been such a
19:21
Speaker 2: massive job for me to do back in my day
19:24
Speaker 2: when I was running credit Union for you as well, Drew,
19:27
Speaker 2: it's just that much easier now to sort of model
19:30
Speaker 2: that out and and and determine well from those models,
19:34
Speaker 2: what directions should we take and do we need to
19:36
Speaker 2: course correct things with our business? Do we need to
19:38
Speaker 2: tighten or loosen thats the case may be. So it's
19:42
Speaker 2: it's fascinating just and enlightening to see how this has
19:45
Speaker 2: happened over time, with the with the quality of of
19:49
Speaker 2: of the tools that are out there for you.
19:50
Speaker 1: Yeah, the old school Excel spreadsheet forecasting methodology, when you
19:55
Speaker 1: plug six numbers in you get an outputs as a
19:58
Speaker 1: thing of the past, right. I think Another thing though,
20:01
Speaker 1: as it relates to these these types of tools, is
20:04
Speaker 1: it allows for to your point you said, Q four
20:07
Speaker 1: is the crystal ball, We're going into twenty six and
20:09
Speaker 1: we want to do X, y Z from a lending perspective,
20:12
Speaker 1: and then things shifting Q one, Are they shifting? Q two?
20:15
Speaker 1: Being able to have these tools at your fingertips allows
20:17
Speaker 1: you to reallocate your portfolio. Let's say you were heavily
20:20
Speaker 1: weighted in helock maybe second weighted in the auto and
20:23
Speaker 1: then personal loans, credit cards, on and so forth, and
20:26
Speaker 1: as things changed in the macro, as delinquencies rise, if
20:30
Speaker 1: there's margin compression and you know, the asset backed type
20:33
Speaker 1: of loans, you can reallocate your your strategy because you
20:37
Speaker 1: kind of know what's going on in real time or
20:39
Speaker 1: maybe with a three month lag. So I think it
20:40
Speaker 1: definitely helps in doing that because I remember back in
20:44
Speaker 1: my day, we would set budget and we would manage
20:45
Speaker 1: to budget for that full year, and we really didn't
20:47
Speaker 1: know what was going to change right away. So you
20:52
Speaker 1: got to the end of the year and you're like, up,
20:53
Speaker 1: we either hit budget or we were a little bit off,
20:55
Speaker 1: and the board's wondering why were we off or why
20:57
Speaker 1: were we over? So I think having those tools definitely
20:59
Speaker 1: help kind of the real time decisions that the executives
21:02
Speaker 1: were making across the lending ecosystem.
21:04
Speaker 2: Yeah, Like think back Q one of twenty three when
21:06
Speaker 2: there was a liquidity crunch. You know, think of your
21:11
Speaker 2: lending partners, the credit unions and banks you talked to
21:13
Speaker 2: across the country, those that had the ability to sort
21:18
Speaker 2: of course correct quickly or had already had the foresight
21:21
Speaker 2: to think of those sort of scenarios where you may
21:26
Speaker 2: need course correct. I mean, they were able to move
21:28
Speaker 2: pretty fast, and they were able to get deposit products
21:32
Speaker 2: out there and rates out there that would quickly allow
21:35
Speaker 2: them to get a little more liquidity. And I did
21:37
Speaker 2: talk unfortunately some lending partners who were sort of stuck
21:40
Speaker 2: with well, now what you know, where do we go
21:43
Speaker 2: from here? And and almost some inertia because of that,
21:47
Speaker 2: maybe because they they didn't take the time to sort
21:50
Speaker 2: of run those alternate scenarios where they didn't have the
21:52
Speaker 2: tools at their disposal or didn't know how to use
21:54
Speaker 2: those tools. So those executives on the sharper edge of
21:58
Speaker 2: the curve, with those tools available and the ability to
22:00
Speaker 2: use them, I think we're able to sort of to
22:03
Speaker 2: manipulate their balance sheet and their offerings out to their
22:07
Speaker 2: consumers faster and be able to sort of mitigate any
22:11
Speaker 2: any sort of risks of that liquated crunch that others
22:15
Speaker 2: had to experience.
22:17
Speaker 1: Maybe it's kind of a blessing in disguise. I mean,
22:19
Speaker 1: no one really is going to rewind back and say
22:22
Speaker 1: I enjoyed lending from twenty twenty two to twenty twenty four. Right,
22:27
Speaker 1: But I remember sitting with examiners and they're wanting you
22:32
Speaker 1: to do a three hundred basis point rake shock. This
22:34
Speaker 1: is never going to happen. It's never going to happen.
22:36
Speaker 1: And here it happened.
22:37
Speaker 2: It happened.
22:38
Speaker 1: A lot of credit unions. They had to plan for
22:40
Speaker 1: scenarios like this because it happened. And while they were
22:42
Speaker 1: planning in you know, prior years in case there was
22:46
Speaker 1: a three hundred basis point shock. Now what's happened. There's
22:49
Speaker 1: risk assessments put in place, there's policies and procedures if
22:53
Speaker 1: scenario X, Y and Z happens. They know how they're
22:55
Speaker 1: going to kind of translate their business and be more
22:58
Speaker 1: resilient as it relates to any type of unrest. So
23:01
Speaker 1: as much as again is like I wouldn't want to
23:02
Speaker 1: go back to that, like maybe it was a blessing disguise.
23:05
Speaker 2: Yeah, I mean it actually took some of the theory
23:08
Speaker 2: and put into practice. It's the one hundred year flood
23:11
Speaker 2: sort of thing. Right, Oh, this will never happen, Well
23:13
Speaker 2: every hundred years it does, right, So this is why
23:15
Speaker 2: you need to sort of protect to protect things that way,
23:18
Speaker 2: all right, Drew that was a good conversation today. Thanks
23:20
Speaker 2: for taking the time to sort of go through things
23:23
Speaker 2: on the economy and where we think things will be going.
23:26
Speaker 2: You know, if I'm a CEO watching this today and
23:28
Speaker 2: listening today, what would be a key takeaway for me
23:33
Speaker 2: to take to my team and to my board going forward.
23:36
Speaker 1: I think if I put my CEO hat back on,
23:39
Speaker 1: the number one theme from today would be scenario analysis.
23:42
Speaker 1: And reason being is you never know what's going to
23:44
Speaker 1: get thrown at you, whether it's in quarter and month
23:47
Speaker 1: and year. Setting yourself up for success in the twenty
23:51
Speaker 1: twenty six and beyond through either capital and funding models,
23:55
Speaker 1: risk mitigation, cecil methodologies, regulatory environment changes, so on and
24:00
Speaker 1: so forth. I think that is the number one scope
24:03
Speaker 1: of what I would recommend as part of our conversation today.
24:06
Speaker 2: Yeah, so just trying to get ahead of potential scenarios
24:09
Speaker 2: that that could happen in twenty six. So you're going
24:11
Speaker 2: to have your baseline expectation and this is how we're
24:14
Speaker 2: going to perform, and these are the activities that we're
24:17
Speaker 2: going to do to get to that performance. But here's
24:19
Speaker 2: what happens. If things go sideways, that things go north,
24:22
Speaker 2: that things go south right. And you know, we always
24:25
Speaker 2: tend to think about about scenario analysis of the bad.
24:29
Speaker 2: You know what happens with the bad, But what if
24:31
Speaker 2: it's good? You know, what if what if unemployment gets better?
24:34
Speaker 2: What if inflation is fully tamed? What if rates do decline?
24:38
Speaker 2: That we see an abundance now of consumer spending going out,
24:41
Speaker 2: housing comes back, and so how are we going to
24:43
Speaker 2: be on top of that and make sure our teams
24:45
Speaker 2: are ready to leverage that. And part of that could
24:47
Speaker 2: be insert of diversification, not just of your portfolio, but
24:51
Speaker 2: also of your funny mechanisms as well. You reference before
24:54
Speaker 2: with FHLB potentially lowering rates, which is going to decrease
24:58
Speaker 2: my cost of funds. Well, maybe a reduction in interest
25:01
Speaker 2: rates on a broader term is also going to decrease
25:04
Speaker 2: my deposit costs. And as there's a race for deposits,
25:07
Speaker 2: as it's going downward, maybe there's opportunities for me to
25:10
Speaker 2: take that up as well. Okay, and one bonus last
25:14
Speaker 2: prediction then, drew college football playoff. We're in the fourth quarter,
25:19
Speaker 2: We're coming up against it. Who do you have?
25:22
Speaker 1: I would have to say, as much as it pains
25:23
Speaker 1: me that I wish I could say the Clemson Tigers.
25:26
Speaker 1: As much as I like them, I'm gonna have to
25:28
Speaker 1: go with after watching this past week's game, the Indiana Hoosiers.
25:32
Speaker 2: Wait, I'm not talking March Madness.
25:33
Speaker 1: I'm talking college football national champions Indiana Hoosiers.
25:37
Speaker 2: Okay, well, that's a very bold prediction, and let's time
25:41
Speaker 2: stamp this and make sure that we come back to
25:43
Speaker 2: Drew later in the year to see where that's at.
25:45
Speaker 2: I'm going to front run and say Ohio State, partly
25:48
Speaker 2: because their rank number one right now and partly because
25:51
Speaker 2: I know it really irks Drew to pick Ohio State
25:53
Speaker 2: because he's not an Ohio State fans. So anyhow, there
25:57
Speaker 2: you go. That's all for this episode of Leers and lending.
26:00
Speaker 2: The economy will keep moving, but what matters most is
26:02
Speaker 2: how leaders adapt. Thanks for listening, and don't forget to
26:05
Speaker 2: subscribe so you never miss a conversation that helps you
26:07
Speaker 2: stay ahead. We'll see you next.
26:09
Speaker 1: Thank you,