PPP forgiveness is fraught with peril for bankers. Done the wrong way, and it will suck countless resources. Aside from having a good process and/or technology platform, having a marketing plan will be the difference between success and failure. If done correctly, an application can take 20 minutes to review and approve. If done incorrectly, that same application will take over three hours.
Banker To Banker
Loan growth is slowing for community banks, and credit spreads are widening. As is typical in economic cycles, recessions present an opportunity for healthy banks to thrive and for weaker banks to be whittled. Despite the flat and low yield curve, the current banking environment is a perfect recipe for healthy banks to win new, strong credit relationships, and increase loan profitability. However, healthy banks need to act prudently today in choosing the correct type of credit, appropriate structure, enforceable prepayment provisions, and long-term relationship customers.
It is around this time that many banks are trying to determine the amount of staff and effort that will be required to process all their PPP Forgiveness Applications that are now ready to be filed. Late last Friday, the SBA issued new Final Rules that further outlines what is expected from borrowers and banks that also helps in building this model. To help banks, we put together the below data and model to help answer the question – How many bankers will I need for this effort and for how long.
The future path of the economy is currently unpredictable. Still, the majority of banks have now eliminated two possible scenarios: 1) Best case scenario – that nothing will change from February 2020; and 2) Worst case scenario – that the pandemic will not end in the foreseeable future and banks should avoid loans and invest in riskless securities.
During the last ten years of economic expansion, prudent bankers were planning for the next downturn. Everyone knew that the economic expansion would end, but no one could be sure when or how. Smart bankers managed their business by accepting that all expansions do eventually reverse. None of us can predict the future, but enterprising bankers were conducting business to craft better results for their banks by understanding that an economic pivot would come.
While it is too soon to get the data on bank commercial real estate (CRE) portfolio delinquencies and forbearances, we take our benchmarks from the commercial mortgage-backed securities market as of May 14th. As any commercial banker can tell you, hospitality and retail remain under the most pressure, jumping up more than 5x and 3x, respectively. Office delinquencies are up 71%, month-over-month, industrial properties remain relatively unchanged while Other (self-storage, specialty, etc.) is up 3.5x.
Last Friday night, the SBA released the long-awaited Paycheck Protection Program (PPP) application, and while it clarified some aspects of the program, its complexity also surprised many bankers. In the SBA’s defense, it is hard to strike the right balance of speed to market, simplicity, and breadth of idea inclusion, so overall, we must give the SBA high marks for this effort. Despite those marks, we have identified 15 areas where banks will need to focus on providing further education, process, or technology to make the process as efficient as possible.
In past articles, we discussed a proposed Coronavirus stress test under CCAR (HERE) and provided our COVID-19 probabilities of default and loss given defaults for a model bank portfolio (HERE). In this article, we update our CRE modeling and take a deeper dive into loan-level analysis in order to help banks triage and manage both individual credits and their portfolio-level reserves.
As you wind down and clean up Round 2 of the Paycheck Protection Program (PPP) and before you produce your 1502 report to the SBA, it now merits thinking about how to best set up for the wave of forgiveness work that starts immediately after funding. Obtaining forgiveness is critical to both the bank and the borrower as it increases profitability, enhances cash flow, aids in liquidity and removes the risk for both parties. Unlike the origination process, banks now of the luxury of some time to get this process right.