Delinquencies Down? Not So Fast… A Conversation with Bill Moreland from BankReg Data

Chris Nichols (00:10.479)
Bill, I’ve been wanting to have you on the podcast for some time. So thank you for being here. I’m excited to have on how are things going?

Bill Moreland (00:17.056)
Doing well. Thanks Chris. I appreciate the opportunity to get some time in front of your audience

Chris Nichols (00:21.679)
Bill, so we use a number of services, a long time fan of yours. think one, it’s the simplest, cleanest data that we see and we develop our own system. So that’s coming from someone that’s done this. But you also provide a level of analysis that’s often different than everyone else in the industry. So with that objective that we wanted to have, you want just a brief background on yourself and how you got into the data business, the bank data business.

Bill Moreland (00:52.29)
Yeah, so I’m a credit and collections guy, a risk manager by training. Essentially when I came out of grad school, was a telecheck, getting predictive modeling, building it with Fair Isaacs and the infrastructure. Then I transferred to Amex and then to Wells. So I’ve done a lot of front end.

predictive modeling, I’ve done a lot of backend collections modeling. I’ve done it in checks, debit, consumer credit, business credit, payday lending, you name it, I’ve probably done it. So I think in terms of risk, right? Portfolio risk, loan risk, because that’s my background. So I would say that’s both a blessing and a curse. Loan modifications, I did it at Wells for three and a half years, right? So I have really intimate understanding of it.

to almost to a fault sometimes. But essentially I got tired of the risk game. It was fun, it was challenging, but I was basically wanting to kind of go out on my own. So about 23, 24 years ago, I put out my shingle, did some work, did some consulting work, built a small business, sold that one, and then transitioned into bank write data about 18 years ago. So I’m growing old in the business, so to speak.

But essentially we focus on taking the call report data, the reg and bank reg data is regulatory and repackaging in a simple to use interface and then selling it back, that service, that data back to banks, asset managers.

government entities, regulators, private equity groups, consultants, vendors. So we see the world through a lot of different eyes, right? My background is gonna be credit risk, but we also have a good understanding of note-on-note financing. We have a good idea of what loan modifications are doing from the bank side, from the regulator side, right? So I’m fortunate that we have a lot of clients that spend a good time educating me as well.

Chris Nichols (02:48.943)
Well, excellent. Those are all topics that we want to get into. We use your service and others. We do a recap as soon as the data comes out, what’s happening with loans, deposits. We can go that next level down. So I’d love for this one. Next level down, what’s happening in, you know, what happened in 2025, fourth quarter end data. And then, you know, any thoughts you have on what’s going to happen with first quarter and then through the rest of the year. So with that, let’s start by a topic that’s on everyone’s mind, a credit topic that’s on everyone’s mind.

private credit, and FDIs. What are you seeing out there? And what are your thoughts on how, how much of a problem we should be concerned about in this industry?

Bill Moreland (03:25.612)
Yeah, so it’s hard to know real numbers. I’m often, yeah, especially on bank books, right? So, and what I mean by this is there’s a charitable explanation and then there’s a critical explanation of how data is reported. And the reality is going to be somewhere in between. But.

Chris Nichols (03:31.405)
Because of the classification. Right? Yeah.

Bill Moreland (03:51.448)
Currently we’re sitting about two and a half, $2.6 trillion of NDFI classification sitting on the bank balance sheet. That number’s up from 2.44 and Q3, but we really don’t know what the historical growth rate is. And the reason for that is up until 2024 Q4,

there was some opacity, it was opaque in terms of what was being reported. So for example, a lot of note-on-note financing deals to distressed commercial real estate off the balance sheet, but it really wasn’t off the balance sheet, it was just moving. So we take a commercial real estate loan that’s stressed and we sell it to a private equity group.

and we’re giving that private equity group 80, 90 cents on the dollar to buy it. So essentially what we’re doing is laundering that loan. That’s a Bill Morland phrase. That’s not a regulatory phrase, but that’s what we’re doing, right? We’re laundering a CRE note off of commercial real estate, off of a delinquency into CNI, commercial and industrial. So that happened for a while. Well, that’s an NDFI.

And so there was a lot and so in that instance, I don’t know that banks were trying to hide it.

but some work, right? Some work clearly. So what happens is we have clients that sell software to help banks automate CNI lending. Well, we’re giving them a bad advice when we’re saying, hey, look at this guy that’s growing. So in 2024 Q4, I think this problem kind of came to a head in the FDIC, the FFIC, the OCC, right? The regulatory bodies, the Fed came together and said, look, we’re to have a reclassification. Everything has to move in. So we saw big drops in CNI. We also saw the

Bill Moreland (05:39.872)
very similar thing in consumer lending other.

to purchase carry securities, speculation loans. So those are not NDFIs, but that was that same reclassification that took place. So NetNet, about 2010, we had about $100 billion of reported NDFIs. It was a tiny fraction of the portfolio. Today, we’re basically sitting at 2.6 trillion, and the numbers grow on $100, $130 billion a quarter. And it’s…

vague what it is. So there was additionally some breakdowns in 2024 Q4. And I understand the role and the difficulty that the FDIC, I say FDIC, I’m using that generically. I mean the regulators, right? The FFIEC, the call report. But we’re asking for intermediary lending, mortgage, consumer, business, private equity, other. Exactly. Exactly. But what goes into mortgage?

Chris Nichols (06:36.089)
We’re house when you talk more chat

Bill Moreland (06:42.028)
Right? So everyone thinks mortgage is just going to be fine. There’s going to be no problems in mortgage intermediary lending. Well, I’m skeptical. One is what are the yields on these loans? Because if you have an intermediary involved, there has to be a higher interest rate associated with that. Correct? If a bank’s going to lend it itself.

They’re not having to add a funding component unless they’re getting the funding from the FHLB, but the banks are going to get cheaper anyway. So, but what I’ve also heard is commercial real estate backed loans are considered residential. That’s mortgage lending. So is it in there? Is it in private equity? Is it another non insurable condo loans? That’s a mortgage intermediate, non insurable.

condo loans. I don’t know how big that is, but that’s the kind of complexity that’s in here, right? What is that? And there may be a market for it, there may be a need for it, but we can’t classify that the same as lending the rocket mortgage, right? Those are two different risk pools.

Chris Nichols (07:34.371)
condo loans.

Chris Nichols (07:51.011)
You you alerted me to the fact and let me see if I have this right that not only is there a general classification at the regulator level but also banks Because the definition sufficiently big Vague banks have been going back and forth reclassifying assets, right?

Bill Moreland (08:05.12)
correct. Anybody, there’s, and look, my bedside manner on explaining things is not always the best. So please understand, it’s not a, there’s not a intentional or an emotional component to it, but there’s a reality component to this. The NDFI numbers that we get aren’t good. They’re not good. And they’re not good at an aggregate level.

And the reason for that is we don’t have a historical norm across every single bank. And so the charitable explanation is it’s confusing. What is Bill’s used rig semi lending? What is that? Is that?

business credit intermediary, is that other? And that is legitimately an NDFI. Yes, because I have clients on the other side of these transactions and I do presentations in front of these groups and I look up who’s attending and that legitimately is someone who’s attended and hey, their business model is great, but you can’t get your used semi-rig funded from your local community bank? Come to Bills, no credit score needed, nobody declined.

So these things historically have been difficult to classify. So the global numbers for NDFIs are

Suspect it best. Are they getting better? Yeah, I think they are. Right? I think everyone’s heart’s going to now in the right place by hook or crook. Everyone’s trying to report the same. But the classifications on the mortgage intermediaries, the business intermediaries, the consumer intermediaries, look, one, I don’t think these are right variables or components to be asking for.

Bill Moreland (09:52.111)
It’s not a criticism on why we’re asking for them, but I don’t think we’re smart enough yet to really know. Subprime consumer lending. That should be a question that’s asked. you know, subprime business lending. That’s different than consumer intermediary or business intermediary, right? But basically those classifications that we are asking, the numbers that you’re going to see reported by anybody are just wrong.

Now are they wrong because the analyst is doing an incorrect analysis? No, they’re not they’re doing the best they can but they’re incorrect in the sense that you can look at banks and you expected a 2024 q4 a 25 q1 a 25 q2 You expected some movement, right? I don’t know what that is. I put it here. We talked to our regulator It gets moved somewhere else But we’re still seeing in 25 q4 We’re seeing you know

$10 billion swings amongst the biggest banks from business intermediary to private equity. And then it disappears and goes from private equity to consumer intermediary. And so you can track these movements. And when you look at an individual bank, and I look at lot of banks, when you look at individual banks, it’s easy to see,

They clearly marked it X last quarter and they moved it this quarter into Y. And then you see that movement. But if all you’re looking at is the aggregate numbers, then you’re just seeing kind of these growth numbers going up and you’re not seeing that movement in between. What surprises me is we’re still getting movement. I would have expected five quarters in by now that we would have had some of this sorting out, but to be charitable,

These loans are, these loans aren’t, they’re not traditional, right? We don’t, some of these things are difficult to classify. Maybe that’s by design, maybe that’s as a result, but net net, what’s happening is these NDFIs are eating the call report. I mean, some banks now are upwards of 40, 45 % of their book, loan book, is NDFIs. And we really don’t know what they are, right?

Chris Nichols (12:09.773)
Right. And part of the problem here, as you pointed out, is that there really is no relationship. Some of these banks are just buying paper. One. And two, as you pointed out, the yield is questionable. Is the yield correct for the return? Is there a good risk adjusted return on this paper? And I think the answer is resoundably no in many cases. So.

Bill Moreland (12:32.459)
Yeah, I mean, so look, are these things, so I, the problems that we’re experiencing.

In 2023 with securities and 2024 and 2025 with credit, with delinquencies, all can be traced back to we’re, working our way through the credit barrel. Right? So I, I, I’m a risk guy and coming out of 2012, 2013, 2014 banks had not been lending for a couple of years. So your barrel of prospects to lend to was pretty rich. You had some cream, right? So think of a curve of credit scores. You got 730.

700s, 670s, and you work your way down, well as you get into 2014 and 2015, collectively the industry is working their way through the barrel. And then you get into 2017, 2018 and you’re getting into…

deeper into the barrel. So by the time that 2019 came around, we were starting to have credit problems. We were headed towards a recession. It was clear as day. All the delinquencies were up across all the portfolios and whenever that’s happened, you enter a recession, right? When you start having commercial real estate, residential and commercial industrial and consumer all start to invert on their delinquencies and get worse, you end up. The problem is we had scraped down into the bottom of the barrel.

And so where do you lend? Well, lo and behold, $5 trillion of new money gets dumped into the system in 2020, 21, and 22. So to give you a reference point, we had 14.5 trillion of deposits in the US banking system at the end of 2019. 14.5 trillion. So all the money that comes in, whether it’s earnings or it’s inheritance or just all the money that flows, flows into a bank.

Bill Moreland (14:20.556)
Well, within two and a half years, the number climbed to $20 trillion. So if you wonder why everything’s 35 % more expensive, it’s monetary. And we want to call it supply chains. And I’m not saying supply chains weren’t part of it during that time, but it’s money.

Chris Nichols (14:29.679)
That’s right.

Bill Moreland (14:37.164)
Right? We printed 35 % more money and 38 % more money and dumped into the system. So my wife keeps saying is housing going to come down so we can get a second house in our retirement? I’m like, no, because it’s already in the system. Unless you have value destruction and we start destroying that money, it’s not going to, it’s in the system, right? Everything’s going to be elevated. The problem for banks is they now had to do something with that money. So the ones that didn’t have a history and we kept interest rates at zero for a mighty long time, which means

We raised a whole generation of people who were 34 or 35 years old that had never lived in non-zero, right, or non-one. So at the time that we threw a bunch of money in the system and depressed risk, we basically threw a bunch of money and said, you gotta go do something with it. So what ended up happening was a huge amount of lending that took place. But banks aren’t stupid. They knew that they were already at the bottom of the barrel. But what happens when you…

Get rid of, you don’t have to make student loan payments. Is student loan payments a political issue? No, it’s an economic issue. When everybody fills up their cup of debt, their ability to service debt, right? They pay their minimum payments. When you fill that up, economic growth stalls. So what do we do? We empty people’s cup of debt, right? And you do it by suspending mortgage payments, suspending rent, suspending student loan. So you emptied out everybody’s cup of

Chris Nichols (15:59.299)
Good luck paying it sure.

Bill Moreland (16:03.364)
debt. But what you also did is you wiped out all the negative credit events on the marginal buyer. You no longer had delinquencies, you no longer had charge-offs. So just at the time we printed all this money and said, banks got to do something with it, everybody’s credit scores, businesses and consumers started to get better. Great, we can go lend to them.

Chris Nichols (16:23.459)
Lend him some more money.

Bill Moreland (16:25.1)
And it’s what we call the artificial consumer. It was fake. And so what ended up and happened is that gave us two and a half, three years of great growth. But once again, we’re back to the bottom of the barrel. So why am I bringing this little history lesson up? NDFIs are a way for us to continue to have banks lend to people they wouldn’t normally lend to.

So, you you go into tri-color, seriously? We can allow JP Morgan Chase and Fifth Third to lend hundreds of millions of dollars to a sub-prime auto lender that… So could these people go into their local branch and borrow that money? No, hell no, right? So I think there was a desire to get growth at all costs and I kind of, I’m under the impression maybe some of these banks had to get out of jail card.

Chris Nichols (17:06.157)
No, yeah, but if you package it up.

Bill Moreland (17:17.452)
to go out and lend and push money into buckets and areas of risk that traditionally we wouldn’t want to see or we wouldn’t allow on bank balance sheets. But it’s still there. We just don’t know about it anymore, right?

Chris Nichols (17:32.249)
So another canary in the coal mine that I credit you for is alerting the industry to loan modifications as they work through the system. one of the things that I think you tip me off personally about is what are the national banks doing and how that filters down? What are the trends in loan modifications that you’re seeing that may come down to the community bank level over time?

Bill Moreland (17:58.796)
Yeah, so first of all, we like to blame the community banks for problems.

Because they’re easy and they don’t lobby and they’re anonymous, right? So we always hear this. The community bank CRE concentration ratio, which is the amount of commercial real estate to their capital and their allowance. That’s where all the risk is. That’s nonsense. not saying there’s not risk there, but as a pool. So view the world as a set of buckets, right? A buckets of risk. The largest banks always lead the problems and it’s the community banks a

or two later that start to experience the problems. And part of this is sometimes these borrowers, need $75 million. They can’t go get it from their community bank. By default, they have to go to the larger banks. So they take on bigger credits, right? And if the bigger credits are the ones that are more sophisticated and likely just to hand in keys and walk away, that accelerates. But part of it is the tyranny of numbers. Big banks have to grow and it’s much more difficult to grow at

trillion dollar organization than it is a 200 million dollar organization. So to get 10 % loan growth on a trillion dollar bank you have to add a hundred billion dollars of loans every year and then it’s 110 and it’s hundred and twenty you know 18 it just keeps going up. So the biggest banks are the ones that always have the issues first and that’s what we saw.

Chris Nichols (19:19.04)
It’s problem with growth.

Bill Moreland (19:28.366)
So starting in 23, 24 commercial real estate delinquencies and consumer delinquency started to take off.

Big shock, right? Cause that’s the areas that had the higher credits and things only ever get better. We suppressed risk. We PPP loans, so small business loans, know, CRE loans, all those things got better. But what happened is the delinquencies, for example, like Bank of America and Wells went from 80, 90 basis points to like 600, 650 basis points. So we’re talking 6.5 % delinquency rates over an 18 month period.

And so you saw these delinquencies lockstep on every Wells is the largest commercial real estate lender in America by far Bank of America was number two JP Morgan is now number two But basically those are the three big dogs, right? And so essentially they all had the same patterns So one advantage to having consolidation is you only have to make four phone calls

Chris Nichols (20:31.474)
That’s right. That’s most of the market.

Bill Moreland (20:32.898)
And I’ve seen this before and it’s not skepticism. Hey, you want to shut down housing REO in 2012 and an election cycle? Make four phone calls and say, hey, you don’t need to have those delinquencies on government guaranteed Fannie, Jenny, first time home buyers charge off anymore. And then magically you cut off the inventory of the biggest ones and all of a sudden housing puts a bottom and starts to go back up. Delinquencies start to go down. So that…

is never stopped, right? That’s never stopped. But you see these patterns. Well, one of the recent patterns in the manipulation is we just said, look, we can’t start taking these charge-offs in commercial real estate. We’re taking some, but people are starting to get freaked out by it. So magically in 2024, they all, at the exact same time, completely coincidental, started jacking their loan modifications through the roof.

So you can’t make your payment on your $60,000 a month commercial real estate loan, we’ll drop it to $45,000. And so this is where my history.

Chris Nichols (21:36.396)
And to be fair, though, they’re also extending amortizations, extending maturity levels, doing whatever they can to bring it back current.

Bill Moreland (21:41.614)
Sir? Of course. Yeah, but we’re not the first ones to invent this, right? Loan modifications probably go back to Greece or Egypt, right? So there’s a reason we don’t encourage this.

It’s because really what it does is just an extended issue. So if we go back to the oil fracking issues in 2016 and C &I. So at that time, drill baby drill, we started drilling like crazy, price of oil went down and all of a sudden the frackers became a problem. Everybody calls Bank Reg Data, I wanna see oil loans and what bet, I’m like, so do I dude, but it doesn’t exist. But here’s the proxies, here’s what we can look at. But everybody was worried about commercial industrial loans in 2016.

If we did a bunch of loan modifications in that world, I would say it would be more successful than what it would be now. And the reason for that is we had a uniquely narrow problem with delinquencies. It was in one segment of the economy, which is fracking. The rest of the economy, commercial real estate, consumer lending, multifamily, construction, was just chugging and chugging and chugging. Correct.

Chris Nichols (22:51.449)
All pretty strong,

Bill Moreland (22:53.612)
This time around, we have delinquencies up in everything. CRE and consumer were the ones that were hit hardest, earliest, because they’re the ones that had the most excess. But everything is up. what we’re doing with, and I see the phrase amend and extend. Like that sounds better. And it’s funny that you see everybody kind of using the phrase at the same time. And it’s not. It’s extend.

Chris Nichols (23:12.879)
I’m in to pretend,

Bill Moreland (23:23.446)
what I found at Wells, when I was doing it, I managed a portfolio for Wells to the point where I got called in by investor relations and the central risk group saying, you got to stop because Wall Street doesn’t like it. And this is back in the late 1990s, right? So I have a unique understanding of why publicly traded banks don’t want to show this behavior. But basically, if you take a pool of loans,

You have a curve. You have the riskiest. You cannot modify the riskiest. Can’t do it. If you modify a loan that charges off or goes delinquent within 12 months, your internal risk group will slap you.

Your regulator will slap you. That’s just flat out avoiding charge-offs. But we bend those rules in times of stress. So we all understand that. But let’s say we don’t bend those rules. But you take that next group of people and you say this group, then that next score, that next tier has an 18 to 20 % two-year charge-off rate. And your models can get pretty good and accurate. mean, going back a long time, banks have had these skills. You modify them. And it’s what I call a

modification Ferris wheel. You work with bank rank data, you say your commercial real estate loan is not getting paid, we got a lower, you know, what do you need? It was like dude I’m gonna charge off, you’re gonna go bankrupt. So what you do is you lower the payment and you negotiate that payment and you negotiate that payment to a level that you can commit to pay. Understand that. It’s not

we’re just arbitrarily lowering your payment and you’re being great about paying it. You and I negotiate and we go back and forth, back and forth and we settle on a number that I can commit to. You get on the Ferris wheel and you work your way. It’s the loan modification, TDR, Trouble Debt Restructuring. That’s the first sign that you knew something was funky. For five decades, it’s been TDR, Trouble Debt Restructuring. Very clear, very harsh.

Chris Nichols (25:13.807)
That’s right.

Bill Moreland (25:21.634)
Then the wording got to be loan modifications to borrowers experiencing financial difficulty. So it goes back to George Carlin. The longer the words, the more they’re hiding what it is, right? Shellshock, TDR. You get on the TDR’s Ferris wheel and you make your payments and you work your way around. Every month you make a payment. The way it historically has always been is you cannot get off the Ferris wheel. Once you’re on the Ferris wheel, the only way to get off is to pay off your loan.

Chris Nichols (25:29.743)
Ha

Bill Moreland (25:51.232)
charge off the loan or get it sold. They sell it to someone else. Otherwise, the Ferris wheel only gets bigger. And so the more I push as a risk manager on the bigger the Ferris wheel gets to the point where it becomes noticeable. so everyone understands Texas ratio, the predictor going back to SNL, right? Resolution trust, loan modifications left off non-accrual.

Chris Nichols (26:16.227)
Yeah, going back to the 80s.

Bill Moreland (26:19.414)
TDR loan mods is a predictor of risk. It is the single best predictor of risk. I can show you numbers. I’ll spare the audience, but it is the single best proactive indicator going into 2009 Q1 about how many banks would fail. The higher your loan modifications were, the much higher.

We’re talking 40, 30 % failures once you get above 300, 400 basis points of loan modifications. And the reason is banks only keep about 120 basis points of allowance. So once you start modifying more than what you have as allowance, that’s a tipping point. And that doesn’t even include delinquencies. So what happened is we started just cramming.

commercial real estate and consumer loans onto their Ferris wheel to the point where Bank of America was upwards of 8.5 % of their commercial real estate book had been modified.

We’ve never had these levels of loan modifications. They’re unprecedented. So when the delinquency skyrocket and then start to cap is right when they just started modifying, modifying, modifying, modifying. It’s all coordinated. You live in a Potemkin village. You just don’t know it. We just keep adding blocks to the neighborhood, right? And then magically they start to come back down.

Well, what happens is guys like me say, look, this is smoking beers. Now I’m not saying that you take 100 loan mods and they have a two year charge off rate of 20 % and you put them in a bucket, I think in terms of buckets. Will everybody in that bucket still have a 20 % charge off rate in two years? No, you’re going to salvage some of these guys. But our experience was you typically salvage about a third. Two thirds of those guys come back as a second wave.

Bill Moreland (28:08.886)
All we’re doing is buying us some time, but that’s fine. It gets us through the next election. gets us through the next midterms, right? And that’s what this is all about. We don’t want to take pain. And so basically what ends up happening in this environment is people start to notice. So what they did in 2020 for Q1 was we changed the rules around what we call a loan modification.

the big bank lobby, the BPI, the bank policy Institute, lobbied FASB to change the rules in FASB. And I’m old enough to remember gap only. I’m old enough to remember back in the early 90s, we weren’t taught non-gap, right? So if we think FASB is the arbiter of honesty and truth, I think those boundaries get pushed because of lobby. So FASB changed the rules and said,

there’s no longer a life-to-date Ferris wheel. You get on, you make 12 payments, you get off. Well, that’s pretty clever. Bill Morland at Wells Fargo in the 90s would have loved that rule. Almost like Bill Morland in the 90s would have designed the rule that way. Because now what’s happening is you’re lowering payments, but no one ever knows it. And if you do it the right way, for everybody that gets off the Ferris wheel, you add another group.

So your modifications look like they’re one and a half, two, 3%, but in reality, they upwards of six, 7 % cumulative. So I think Bank of America is, and I can make a pretty convincing case, not eight and a half. They’re close to 11 to 12. And that’s a completely different perspective. But here’s the problem. If you look at the rules, it sure looks like the rules allow for serial loan modifications.

Chris Nichols (29:59.405)
Which is what we’re seeing now. So to your point, it makes sense game theory that if you have room, you recognize your problems early. Hopefully they’ll go away. You said two thirds. I think our data says, you know, we’re about a half right now and we’ll probably get to two thirds of these remods or re problems. And now, I mean, I think that’s a true test of what you’re kind of implying here of, you know, what the future holds for us. So talk a little bit about as we wrap up here.

you know, what is this peak do you think and what does a community banker need to know about what to pay attention to in their credit portfolio?

Bill Moreland (30:36.194)
Yeah. So the community bank delinquencies compared to in commercial real estate. Now don’t get me wrong. You’re going to have banks that spike everywhere, right? But the majority in the bulk, if you look at them by asset size categories.

It’s following the pattern in 2009 and 10 and 11, which is the big banks lead the delinquency wave and charge off rate, and then the smaller banks buy asset size follow a long step, but there’s still a shadow. But understand, community banks have been modifying too, right? mean, and they’re doing, it’s everybody’s doing this. And so where does this go? I don’t know. I, part of me says there’s no way in the world this works.

We didn’t just discover something new, right? We didn’t do that. And the fact that we’re having to change rules and we’re changing definitions and we’re allowing multiple modifications. Hey, you can’t make your 2 % payment on your credit card. No sweat. We’ll drop you to one and a half. You can’t. And then you make it for 12 months or don’t make it for 12 months. Doesn’t matter. You come off the Ferris wheel. Can’t make one and a half. We’ll make one. You can’t make one. We’ll make it 20 bucks. Hey, our delinquencies look fantastic. So

Will that work? No, I don’t think so. Will it buy us more time? Maybe, but what happens to those people is two things. They refill their cup of debt, right? It isn’t like these people live in a vacuum and they don’t go out and borrow more. When they basically are getting a payment reduction on something or multiple loan types, they’re going out and borrowing more money from other people and they’re just now wrecking the same situation. People

tend to live, businesses and consumers, a big chunk of them tend to live on kind of that 10 % of the edge. But the bigger problem is you’re conditioning them to not make payments. And this is why it fails.

Chris Nichols (32:27.533)
Right? You’re saying it’s okay that we’re going to solve your problems. And so one of the things we worry about with, you know, buy now pay later too, is that that just get that bucket just gets more active, as consumers said, and to your point, you know, we all have a certain risk tolerance. And if you lower the risk on one side, I’ll take it somewhere else to always maintain my same risk tolerance. So that’s what we’re seeing is not only is it a shell game, but it’s also a show game that banks are often enabling, the regulation is often enabling accounting often enabling

Bill Moreland (32:38.862)
Correct.

Bill Moreland (32:55.692)
Right. Every collection matter manager wants to be at the top of the collect of the payment stack. Right. So a borrower’s got whether it’s consumer business, doesn’t matter. They’ve got.

Chris Nichols (32:57.162)
And it’s gonna end badly.

Bill Moreland (33:06.978)
five different loans or five different payments they have to make, rent, utilities, bank loan, right? So what you end up doing is you try to make yourself at the top of that stack so that you always get paid. The problem with it is when you modify loans, what you’re doing is you’re conditioning that payer to push you down lower. And so I’ve got, I’ve got NDFI clients, right? I got people on all sides of this and you know, Hey, you keep talking about how Wells Fargo and Bank of America modifying tons of loans.

I got three hotels each one of them six seven million dollars and loans and they’re not they’re not working with me I keep telling them this thing working and I’m like stop making payments. You’re like what?

The reason they’re not working with you is because you’re paying. But what happens is, and I’m not an advisor, but I’m like, that’s why. so sure enough, a couple of months later, they call back up. I’m like, ah, you can’t ask a question. I want to hear the story. They’re like, oh yeah, all we did was threaten to stop not making the payments. And they automatically lowered our payment. So I ask them, hey, is those hotels going to work now with your lower payment? No.

Chris Nichols (33:53.327)
That’s right.

Bill Moreland (34:16.814)
They need about a 35 to 40 % reduction on the loan for it to work. So eventually, but we’re trying to sell them and so I think what’s happening is a lot of engineering is engineering is taking place to try to buy time out of this.

But unlike 2016, you have the rest of the industry, the rest of the portfolio, CNI’s up, commercial owner occupied is up, construction delinquencies are up. So one to four mortgages, delinquencies are higher than they’ve been in four years. They skyrocketed in Q4, that mortgage delinquencies. So what’s happening is you’re trying to do things

in the face of multiple hurricanes hitting you. And I don’t think you’re going to be able to thread the needle as much as people want to. But let’s just put it for what it is. Never underestimate the ability of policymakers and regulators to change the rules to avoid the problems. So is it going to work? No way in hell. Maybe. I don’t know. But I know they’ll just change the rules again.

Chris Nichols (35:25.977)
So we’re also on top of everything you said, we’re now facing higher rates driven by inflation. We have less regulatory oversight or at least looser regulatory oversight. All this just seems like it doesn’t end well. I would say, you know, two year type timeframe, would you, you know, say it sooner rather than later? What’s you guess?

Bill Moreland (35:48.622)
So what I’ve come, yeah, so look, I’ve got kids, right? And if you got kids, you think of the world differently. And I don’t know how on one hand you solve an overvaluation problem without value destruction. And that’s really what we’re talking about here. It’s okay to have.

Chris Nichols (36:05.539)
The bubble bursted.

Bill Moreland (36:07.054)
Correct. And everything, right? mean, every, every asset class is over and you can say, it’s not overvalued, dude, paying 38, 40 % or PE on Microsoft. That seems rich to me, but basically on one hand, you, you, we need value destruction. We do, we, do, but we don’t want to take that. But on the other hand,

We all want our kids to be able to buy a house. We all want our kids to be able to get married. We all want our kids to be able to get a job. And so I can flat out tell you, I see the world through my lens. Kids are having a much harder time finding jobs. And I’m talking computer science kids. I mean, we have a ton of them in our house always. I’m talking aerospace engineers coming out of Purdue. I mean, these are pretty high level kids, right?

They’re struggling. And so what, what is happening is I think we’re going to avoid a 2008 nine. They will do everything they can to avoid this. cannot have value destruction. We’ll stop over value, stop inflating everything and this won’t happen, but they don’t want to do that. But the other flip to this is they won’t let that happen. But

we’re gonna have an economic malaise. So my thing is I don’t, I used to say, hold on 2024 it’s gonna happen. Hold on 2025 is gonna happen. Now I’m pretty much gonna say, look, I think we’re gonna have a economic malaise of not a lot of economic growth while we grow into these valuations. And it could take five years or seven years, right? But if jobs fall, all that goes away.

Chris Nichols (37:42.712)
Okay.

Chris Nichols (37:47.887)
So let’s go through as we exit here some of the steps that if you were a community banker, you’d be thinking about up in credit quality, controlling growth, increasing reserves, increasing the amount of resources that you spent on monitoring credit because now we know we’re somewhere near the precipice or at least, you know, I think you just presented the best case. We go into a five-year area of malaise and we kind of stagnate. anything else you’d add to that or modify what I just said?

Bill Moreland (38:17.902)
So look, I think community banks are, they know their markets very well. And I think they’re much safer generally across all asset sizes. But I would always say a couple things. One,

You can’t grow fast. Anything that grows from, you know, 100 million to 300 million or 400 million and grow portfolio wise in a short timeframe is subject to risk. So growing portfolios extremely, extremely quickly is much more problematic than not. Right. You want to have normal kind of growth and you see that. Correct.

Chris Nichols (38:53.391)
particularly now, particularly now when other banks are tightening credit, giving you the illusion that you’re growing even faster, you can grow faster, you may even get the pricing that you want, but you’re being adversely selected.

Bill Moreland (39:02.434)
Right. Yeah. Yeah, but I think they can grow. I’m just skeptical of fast growth. So I would tell the community bank segment, hey, grow. I think you’re fine. Your balance sheets look good. You got plenty of reserves. Your income statement can generate enough provision to cover a few reasonable. Hey, you’re in the business of risk. Don’t be afraid to take some risk, But.

Don’t make those decisions based upon anything you read in the Wall Street Journal or CNBC or American Banker or Bloomberg that, hey, delinquencies are magically getting better in consumer commercial real estate, go land and commercial. It’s what I call the wealth effect for chief risk officers and chief lending officers. There’s a coordinated effort to give the perception that things are getting better and they’re much better. And they’re using data.

manipulated data from the largest banks to make the case. So I get 10, 12, $15 billion asset banks that call me up and say, man, you’re the pied piper of doom. I’m like, I don’t want to be a pied piper of doom. I hate that. But they’re like, you’re so negative, not in a bad way. You’re cautioning us, but you’re skeptical of what’s going on in commercial real estate. But we look at the national numbers, the delinquencies look like they’re getting better. We look at our local market. We look at our book. I think we want to lend more.

Chris Nichols (40:08.367)
Yeah.

Bill Moreland (40:25.294)
And what I’m saying is, is if two of those numbers are manipulated, be careful, right? That’s it. Is not saying don’t, but if you’re hearing things that are trying to reinforce what you’re kind of wanting to do, understand that somewhat of the story is very much a manipulated story. If we’re modifying 38 % of mortgages a second or third time,

Chris Nichols (40:55.116)
That’s problem.

Bill Moreland (40:55.374)
Housing is not as great as we think it is, right?

Chris Nichols (40:59.501)
And finally, know, exposing your borrowers to interest rate risk is also another problem that should rates go up, you’re just exacerbating our problem. you know, banks that are putting more fixed rates on their books or floating rates to their borrowers and exposing them to interest rate risk is just going to exacerbate the

Bill, thank you. You’ve given up some good act actionable ideas here. I appreciate you. You’ve been fantastic. Hopefully, we will grow ourselves out with quality growth in the industry. And you know, we’d love to have you back on. let’s stay in touch.

Bill Moreland (41:36.63)
I appreciate it. Thank you.