“All’s Well that Ends Well” – Shakespeare“All’s Not Well” - Hamlet

Small Business Credit Outlook

2015 Q3

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SBDI 91-180 Day Delinquency Index

PayNet Small Business Cycle

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CONTRACTION

RECOVERY1Q09

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Business CycleAs 2015 ends, it is easy to say all is

well going into 2016. Lending activity

stands strong, and credit risk remains

low so we naturally believe these

conditions will continue. The PayNet

Small Business Credit Cycle shows

strong expansion over the past year

and credit risk did not budge.

The immediate outlook for borrowing

and defaults remains positive so all

is well. We see very low credit risk,

and the cycle is expected to remain

firmly in expansion mode through Q1

2016. The U.S. small business financials

continue to look good.

The longer-term view is that all may

not be well. Given external factors such

as geopolitical instability, the coming

presidential election, and Federal

Reserve actions, the environment for

small business seems to be moving

into uncertainty. This means small

businesses are likely to hunker down.

The impact on lenders will be slower

use of credit and continued above-

average credit quality.

2016 will look more like 2012–2013

which provided lower investment,

borrowings, and below average

defaults for small business credit. Post-

presidential election policies should

provide more clarity and direction

around which small businesses can

plan and adjust their business models.

Recent Investment ActivitySmall business credit took a surprise

fall in October shifting back to the

era of less risk taking following the

Great Recession. Borrowing and

investment by small businesses fell

abruptly last month, and at the same

time, the percentage of loans past due

fell. Taken together, these conditions

appear like the uncertainty of 2012

when small businesses held back on

bold investments and undertook a de-

risking of their financial position.

While October could be an outlier,

it stands in stark contrast to the

faster trend line for borrowing and

investment over the past year. Many

factors causing uncertainty have

been cited above. Uncertainty is

enemy number one for business and

particularly virulent for the small

business owner. Whatever the cause,

this release marks a sharp pause in the

expansion by small businesses, and this

pause will bring slower GDP over the

next quarter.

The Thomson Reuters/PayNet

Small Business Lending Index,

which measures seasonally adjusted

originations, decreased 5% from 137.9

in September 2015 to 131.7 in October

2015. Compared to the same month

one year ago, the index is flat. This

release marks only the second time the

index has failed to increase over the

prior year since February 2010.

Furthermore, this release shows the

rolling three-month index decreased

3% from September 2015, the second

consecutive month of decline since

March 2014, while the trend line year-

over-year change slowed from 10% to

7% as compared to the same period

one year ago.

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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2006 2007 2008 2009 2010 2011 2012 2013 2014 20152005

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Thomson Reuters/PayNet SBLI Year-Over-Year Change(January 2006 - October 2015)

Thomson Reuters/PayNet Small Business Lending Index (SBLI)(January 2005 - October 2015)

Credit RiskSmall business financial health

remained strong with the Thomson

Reuters/PayNet SBDI 31-90 days past

due constant at 1.19% in October 2015.

However, loans past due remain muted

and almost too much so. As compared

to one year ago, delinquency stands 6

bps lower. This release represents the

fifth consecutive month of year-over-

year decreases after 12 straight months

of increases.

Several industries showed slight rises

in delinquencies such as Transportation

which increased 6 bps to 1.04% for the

eighth consecutive monthly increase

and its highest level since March

2014. Construction and Health Care

delinquencies are both up 4 bps, to

1.67% and 1.21%, respectively.

Loans severely past due show no

signs of presenting immediate risk

to bank’s credit books. The Thomson

Reuters/PayNet SBDI 91-180 days past

due remained unchanged at 0.25% in

October 2015 from September 2015

which is at the level of last month’s all-

time low for the time series.

As compared to one year ago,

delinquency is down 17% (5 bps), the

sixth consecutive month of year-over-

year decline after 12 months without

a decrease. Every industry segment

was within 1 bp of its September 2015

delinquency except Transportation,

which increased 2 bps to 0.24%, its

highest level since February 2015.

2006 2007 2008 2009 2010 2011 2012 2013 2014 20152005

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Thomson Reuters/PayNet Small Business Delinquency Index (SBDI)(31 - 90 Days Past Due)

(January 2005 - October 2015)

Thomson Reuters/PayNet SBDI Change vs. Year Prior (31 - 90 Days Past Due)

(January 2006 - October 2015)

1.50%1.00-1.50%0.50-0.99%< 0.50% >

PayNet Small Business Delinquency Index by State (31-90 Day)

HI

WA

OR

CA

NV

ID

MT

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Regional Credit Risk Regional credit risk reflects the

same conditions as the past year –

lowest in the Midwest and highest

in the Southeast. The Big 10 States

by population display rising loan

delinquencies but still much lower than

all-time maximum rates. Ohio, Texas,

and Michigan show loans 30 – 90

days past due, up 8 to 20 basis points

or approximately 11% over the same

month of the prior year.

These increases are segment

driven. Ohio retailers exhibit rising

delinquencies as do farmers in Texas

and health care providers in Michigan.

Retailers in Ohio show a surprising

jump in past dues to 2.54%, about

25 basis points below the maximum

for this region and sector. No other

industry sector in the Big 10 States

reports delinquencies within 50% of

their maximum value which means

strong finances for these states.

Credit Risk ForecastCredit quality will remain above

average into 2016 based on PayNet

AbsolutePD® forecast default rates.

The historical default rate for all small

businesses combined registered an

all-time low of 1.5% in 2014. AbsolutePD

forecasts a slight increase to 1.6% by

year-end 2015 then through 2016.

Rising interest rates, continued GDP

expansion, and reversion to more

normal defaults account for higher

projected defaults. Credit quality still

remains low relative to more normal

times, and if you believe the next 12

months will dispel uncertainty, the

corollary is that credit risk will remain

low as well.

Stress Scenarios reinforce the outlook

for below-average credit risk in 2016.

The Federal Reserve Board’s Adverse

Scenario reveals 2.1% defaults based on

8% unemployment and 1.5% GDP. FRB’s

Severely Adverse Scenario projects

2.6% defaults based on unemployment

at 9.7% and GDP 3.9%.

Historical And AbsolutePD® Forecast Default Rates

IndustrySegment

Actual Historical Default Rates (1) Forecast Default Rates (2)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 2016

Transportation 4.3% 6.4% 10.1% 12.4% 7.8% 4.2% 2.8% 2.7% 2.5% 2.3% 2.4%

Information 3.5% 4.4% 4.9% 6.7% 3.6% 3.5% 2.9% 2.4% 2.2% 2.3% 1.8%

Retail 2.5% 3.2% 4.4% 6.3% 4.3% 2.5% 1.9% 1.7% 2.1% 1.7% 1.7%

Administrative Services 2.4% 3.1% 4.3% 6.1% 4.5% 2.7% 2.1% 1.9% 1.8% 1.5% 1.6%

Health Care 2.5% 3.0% 3.7% 4.2% 3.5% 2.1% 2.0% 1.9% 1.8% 1.8% 1.7%

Construction 2.7% 4.3% 6.7% 10.5% 7.5% 3.7% 2.2% 1.7% 1.6% 1.8% 1.9%

Accommodation and Food 4.0% 5.1% 6.8% 7.7% 6.0% 3.2% 1.7% 2.0% 1.6% 1.9% 2.1%

Professional Services 2.7% 3.5% 4.3% 5.3% 3.5% 2.4% 1.9% 1.7% 1.6% 1.7% 1.5%

Manufacturing 2.1% 2.4% 3.3% 5.8% 4.1% 2.3% 1.6% 1.3% 1.5% 1.5% 1.4%

Mining 1.0% 2.6% 3.5% 6.8% 4.8% 2.1% 1.8% 1.2% 1.3% 2.2% 1.8%

Other Services 2.4% 2.7% 3.9% 4.8% 3.1% 2.1% 1.6% 1.3% 1.2% 1.3% 1.6%

Wholesale 1.9% 2.1% 3.0% 4.2% 3.2% 1.9% 1.2% 1.1% 1.2% 1.2% 1.4%

Real Estate 2.1% 3.2% 5.0% 6.6% 4.1% 2.5% 1.4% 1.3% 1.2% 1.1% 1.6%

Finance 3.5% 7.5% 7.1% 5.8% 3.5% 2.0% 2.0% 1.4% 1.1% 1.3% 1.4%

Entertainment 3.3% 3.7% 4.2% 4.2% 2.7% 2.3% 1.7% 1.3% 1.1% 1.0% 1.7%

Education 2.4% 2.5% 2.8% 2.9% 2.0% 1.4% 1.4% 0.9% 1.1% 1.2% 1.8%

Public Administration 2.5% 2.8% 1.9% 2.4% 1.6% 1.5% 2.0% 1.2% 0.9% 0.8% 1.6%

Agriculture 2.0% 1.8% 1.8% 2.7% 2.3% 1.5% 0.9% 0.8% 0.9% 1.4% 1.4%

ALL INDUSTRIES 2.6% 3.6% 4.8% 6.2% 4.2% 2.5% 1.8% 1.6% 1.5% 1.6% 1.6%

$1.0mm or Less in Total Lease/Loan Exposure *2015 Forecasts Include 3 Quarters of Actual Defaults

Source: (1) PayNet Small Business Default Index

(2) PayNet AbsolutePD®

SummaryAll’s well that ends well applies to the

small business credit market today, but

all is not well over the next 12 months.

Rising uncertainty will cast a pall over

the U.S. economy and small businesses,

which are even more susceptible and

tend to hunker down in uncertain

times.

Uncertainty means tepid growth

due to less risk taking and the desire

to maintain strong financial health.

October does not a trend make, but

this release surprised on the low side,

and it provides the sense that small

businesses are either seeing less

demand for their goods and services or

becoming cautious about their future.

For only the second time in the last 5

years, small businesses have failed to

borrow and invest more over the prior

year. We can blame a slowdown on any

number of factors, but the bottom line

is slower borrowing and investment by

small business means slower GDP for

the next quarter.

About PayNet, Inc.PayNet is the leading provider of credit ratings on small businesses enabling lenders to achieve optimal risk management,

growth, and operational efficiencies. PayNet maintains the largest proprietary database of small business loans, leases, and

lines of credit encompassing over 23 Million contracts worth more than $1.3 Trillion.

Using state-of-the-art analytics, PayNet converts raw data into real-time marketing intelligence and predictive information that

subscribing lenders use to make informed small business financial decisions and improve their business strategy.

PayNet’s small business capabilities range from historic credit-reporting and automated credit-scoring to detailed strategic

business reviews that include portfolio risk measurement, default forecasting, peer benchmarking, and critical industry trend

analysis.

PayNet Contact InformationPayNet, Inc.

5750 Old Orchard Rd., Suite 300

Skokie, IL 60077

866-825-3400

www.paynetonline.com

William Phelan

President

866-825-3400

bphelan@paynetonline.com

Taking the Risk Out of Small Business Lending

For more information please call (866) 825-3400

or visit sbinsights.net

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