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Considerations for retaining or selling your bank’s PPP loans
Tom Cobb and Richard Hastings | FIS Business Consulting, Joselyn Strohm | HORIZON Product Management, FIS
September 01, 2020
Many businesses were rescued as banks rallied to support U.S. small businesses with enthusiastic participation in the CARES Act’s Payroll Protection Program (PPP). With over five million loans disbursed in record time, financial institutions were able to secure an average fee of around $5,000 per SBA loan. With this rapid wave of accelerated lending over, the question becomes: What to do with these loans?
Many community bankers are faced with the decision to service these loans while managing a new forgiveness process. Alternatively, bankers could sell the loans to a third party or another financial institution. Banks that do not have a strong forgiveness execution strategy in place may quickly become overwhelmed, creating inefficiencies for the institution and a frustrating experience for their business customers.
With decades of experience working with financial institutions to improve lending processes, FIS Consulting is in a position to clearly articulate the pros and cons for bankers considering whether to keep these new small business loans on their books.
Retain the PPP loans
A push to expand your bank’s small business lending portfolio will likely come from your small business lending officers, as borrowers provide a base of customers from which to build-out relationships.
Your bank has the added advantage of learning more about these small business borrowers in a relatively low-risk environment – provided the forgiveness of the loan comes off relatively easily. This group of small businesses also offer a specialty niche for selling specific commercial products. Moreover, small business customers can be a new source of stable business deposits, while concurrently identifying potential new prospects for your wealth management team.
Deepening your bank’s relationship with these small businesses generates opportunities to sell a range of cash management, fee-generating services that include:
- Accounts receivables
- Asset-based lending
- ACH origination
- Deposit concentration
- Check reconciliation with positive pay
- B2B payments
- Business eBanking
- Wire transfer
- Payroll services
- Corporate credit cards
- Sweep accounts
- Package accounts
Some drawbacks to keeping PPP loans on a community bank’s books are the short-time limit for the governmental guarantee on these types of loans, the low interest margin (short term) on these credits, and a variety of other cost considerations that must be addressed.
Key among these considerations are:
- The forgiveness process – are you prepared for high volume in a short timeframe?
- Collections – how automated are your bank’s collection efforts for small business loans?
- Loan modifications – is workflow automation in place to process the loans?
- Is credit scoring in place?
- Charge offs – what are the level of loan loss reserves?
- Is workflow automation in place to process these situations?
- Recovery – is your bank structured to handle high-volume low-dollar recovery efforts?
- Is your bank able to manage any shadow accounting needed in this environment?
- How will your bank manage CECL requirements with this portfolio?
- How well can your bank handle troubled debt restructuring?
- How will your bank assess the potential for fraud within these loans?
Sell all or a portion of the loan portfolio
Selling your recently acquired PPP loans would reduce administrative costs from your small business lending portfolio in the areas of collections, work-outs, charge offs, and recoveries. Branch staff could also be deployed to focus on growing more profitable lines of business.
During these challenging economic times, your bank may want to try and limit the types of business and customers you seek, to keep margins and costs in line.
Certain types of loans can be “cherry picked” for their resiliency, market attractiveness, and future growth potential as your bank seeks to preserve net interest margin by removing low-yield assets from the loan portfolio.
Establishing a price to sell these loans could be difficult as these are unusual portfolios. This could lead to uncertainty in projecting future income streams. In addition, your costs in originating the loans may not be recovered.
Small business borrowers could get a negative impression of your bank if you pass along their loan too quickly to another servicer. Future opportunities for loan growth in your small business market could be affected and the short-term gain from a sale may negate revenue opportunities when the business climate returns to normal.
Another con for selling these assets is the loans don’t count against your bank’s capital requirements, so you don’t have to include them in your yielding assets for your NIM calculation.
Beyond the PPP loan environment, banks will continue to play a critical role both in keeping the economy moving and providing the foundation for economic recovery. In the short term, Accenture predicts,
In preparation for the coming wave of credit impairment we are already seeing a ramping up of special situation workouts and recovery teams with deep industry expertise—skilled bankers who will be in very high demand going forward.”
The role technology can play in your decision
The effectiveness of these skilled bankers will be dictated by the core banking technology they rely on to help them service, collect, or sell these PPP loans.
Capabilities your core provider should offer community banks relative to this small business loan portfolio include:
- A foundational collections module integrated with comprehensive loan servicing capabilities
- The responsiveness of your core vendor partner, as evidenced by how they were able to respond to help your bank address the small business lending PPP opportunity
- The availability of specific files to create management reporting specific to PPP loans
- Reporting on small business loans (as a sub type of 7A loans) to meet regulatory requirements
- Automation for selling the loans relative to supporting participations and any necessary reporting
- A roadmap indicating future investments in small business lending capabilities
PPP loans can be a win-win for banks. They are low-risk, guaranteed assets, but they require a certain level of administrative and operational support. Clearly, the key to success is to achieve a sufficient volume (scale) of these loans to more than compensate for the overhead of maintaining them.