In late October, former Goldman Sachs executive Gary Cohn made the comment that the future looked bleak for community banks. Cohn’s remarks were based on the ongoing need for continued technological evolution in our industry, and the possible struggle that community banks may face in keeping up with advances. I absolutely agree with ICBA CEO Rebecca Romero Rainey as she responded that, once again, the Wall Street experts have little understanding of the community banking industry. Community banks base their business models on relationships, evidenced by fact that 2.8 million PPP loans were extended by these local institutions. Also, community banks have developed third-party vendor relationships that allow them to offer the same technologies and services as their larger – and impersonal – competitors (typically at a more affordable price).
Upcoming Webinar
Please plan to join me and David Ruffin of IntelliCredit on Wednesday, December 9th at 2pm ET as we talk about preparing for business lending in 2021. I’m certain that you will pick up a few nuggets of wisdom that can contribute to your planning for the new year. REGISTER FOR WEBINAR
PPP Loan Forgiveness, Stimulus Package and the Future
We are now heavily involved in applications for PPP Loan Forgiveness, using SBA Form 3508S for loans of $50,000 or less, and either SBA Form 3508EZ or Form 3508 for larger loans. This process is not what members of over 100 trade groups (including the ICBA) had hoped for. These groups have advocated and continue to push for a very streamlined borrower certification process to forgive PPP loans of at least $150,000 or less. We are all hopeful of further legislative progress on this issue, under the leadership of Florida Senator Marco Rubio. At this time, the structure of a forthcoming stimulus package is unclear, but our hope is that this change in PPP Forgiveness will be included in any such provision.
It appears that we will have a new administration in 2021, and along with this transition, we can expect to have a new SBA Administrator. I have not heard any names being floated around yet, but we will keep you informed of any developments.
SBA Guidance on Commercial Credit Requests
Due to the pandemic, SBA has issued additional guidance for lenders entertaining commercial credit requests from borrowers adversely affected by revenue reductions and business closures. SBA lenders must now enhance their credit underwriting to include items such as:
- Does the borrower have PPP or other stimulus financing?
- Has the borrower’s staffing or personnel levels changed due to COVID-19?
- Will the requirements of protective gear or additional cleaning increase operating costs?
- Will there be a significant or long-lasting impact on the business from loss of customers?
This list is by no means exhaustive, and we encourage a discussion with your Holtmeyer & Monson Account Executive as you analyze SBA and/or USDA credit requests.
Remember to call on us with any SBA and USDA-related questions or issues you may have. As a qualified Lender Service Provider and ICBA Preferred Service Provider, we continue to proudly serve as the outsourced SBA loan department for community banks all over the country. Just reach out if you need our help.
Featured Article
Our Credit Lives on Main Street—Not Wall Street!
by David Ruffin, Principal, IntelliCredit
The banking industry, like most of us, is focused on signs of light at the end of the COVID-19 tunnel. With promising vaccines and therapeutics on the horizon, the quick return of the Dow to record territory, the massive federal stimulus, and the regulatory reliefs afforded bankers, it’s easy to miss the fact that our credit world is dominated by the economics of Main Street— not Wall Street. And the economic health of Main Street is far more precarious. How will this reality affect our loan portfolios in the coming months? And what steps can we take to stay on top of managing credit risk and ensuring any degree of reasonable loan growth?
Why we must be vigilant
Despite the economic shock of COVID-19, our loan quality indicators are relatively unaltered from prepandemic days. When we consider the interjection of PPP loans and regulatory relief in the form of liberalized provisions regarding extensions, modifications, TDR suspensions and the like, it can be argued that the underlying credit stress in our loans has simply been temporarily masked. Also adding to a false sense of reality is the COVID-high of this year’s nonorganic loan growth and deposit liquidity.
We cannot afford to ignore that we are in the midst of a recession and its historic adverse effect on credit quality. Statistically, no more than 50 percent of Americans have a 401(k) plan or are directly invested in the stock market. The other half makes up a good percentage of consumer banking borrowers and, at this point it’s unclear when or if Congressional consensus will extend economic relief to the sector. Additionally, no Wall Street bonds fund small business survival. In short, many of today’s bank borrowers are likely just trying to survive — not investing for future growth. That reality alone is a major risk factor in credit 101.
What we must do in the months ahead
First off, bankers need to accept the current challenges, embrace vigilance, and begin taking steps to reduce the uncertainties that lurk within each of our portfolios.
Self-analysis of our portfolios begins with:
- Recognizing the diverse COVID-19 impacts on industries and segmenting our portfolios accordingly
- Realizing that individual hotspots within our portfolios will have markedly different profiles — and require different risk mitigation strategies — than might appear appropriate for the portfolio as a whole
- Tediously identifying stressed borrowers who are being wholly masked by extensions and modifications
- Aggressively enhancing loan review coverages and effectiveness
- Creating a comprehensive credit risk profile unique to your bank — and describing and defending it before a regulator, sensing a vacuum does it for you!
Embrace government-guaranteed lending as never before
Recognizing that, for the foreseeable future, the qualified borrower pool for traditional organic loan growth will likely diminish, and as a hedge against the heightened credit-risk environment, there could never be a greater impetus for bankers to take advantage of government-guaranteed lending programs. No matter the fate of any one-off federal relief initiative, one would be safe to predict nothing but an expanding commitment to SBA and USDA loan programs.
The benefits of such a strategy can be:
- Greater organic loan growth under the patronage of an additional underwriter of the risk
- Continued goodwill garnered by the community banking industry during the exemplary delivery of PPP funds
- Profitability from the fees and secondary-market sales afforded by SBA and USDA lending programs
All of this is to say, regardless of a (hopefully) near-term conquest of COVID-19 and the deceptively benign appearance of current loan portfolios, most risk experts know that the so-called credit tails of economic shocks are ALWAYS longer than the events — and are often problematic. This can be especially true for community bankers who need to understand the true nature of their borrowers and who need to alter lending strategies going forward in order to both serve the borrowers and quantify their embedded risks.
David Ruffin (david.ruffin@intellicredit.com) is principal of IntelliCredit, a credit risk management solution that makes it efficient and affordable for banks of all sizes to proactively manage fluctuating credit risk, fuel game-changing mandatory loan reviews and curtail credit losses.
For more information on IntelliCredit, visit intellicredit.com or email info@intellicredit.com.Regulatory Corner
Updated SBA Forms 1919 and 1920
Effective 10-01-20, SBA has updated Form 1919 and introduced Form 1920 for immediate use. Our application software platform – SPARK – fully integrates these latest forms for Holtmeyer & Monson clients. Form 1919, the Borrower Information Form, includes changes to the Business Information, Individual Owner Information, and Entity Owner’s Information sections. Form 1920, the Lender’s Application for Loan Guaranty, has made changes to the Processing Method, Small Business Applicant Information, Loan Structure Information, Complete Project Information and General Eligibility sections. As always, we will keep all H&M clients advised and updated on all types of SOP changes to ensure that your SBA and USDA loan applications are fully compliant.
Penny’s
Hot Topic
Many of our PPP clients have received Forgiveness payments of principal and interest that show a very minor variance from the bank’s balance (generally a few dollars or less, and nearly always an overpayment of interest). To achieve agreement between the bank balance and amount SBA paid, we advise lenders to simply adjust the lender’s accrued interest.