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.
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:
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:
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 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:
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.