At Cullen/Frost Bankers in San Antonio, Paycheck Protection Program forgiveness has been a labor-intensive process.
The $41 billion-asset company committed more than 500 bankers to help borrowers adjust to changes in the Small Business Administration’s policies and procedures. A rotating staff has worked on PPP seven days a week for the past six months.
Those efforts are paying off at Cullen/Frost. About half of its $3.3 billion in PPP loans have been forgiven by the SBA, including $800 million in the fourth quarter. That translated into $19 million of net interest income in the fourth quarter, with another $39 million expected this year.
“We have tried to be very nimble,” said Bobby Berman, the company’s group executive vice president of research and strategy.
Cullen/Frost isn’t the only lender taking advantage of a faster-than-expected forgiveness process. Through Jan. 12, the SBA had forgiven more than $100 billion in PPP loans, triggering fee payments to the lenders.
Expedited forgiveness bolstered the bottom lines at hundreds of banks during the fourth quarter, providing a bright spot at a time of anemic core loan growth and uncertain credit quality resulting from the pandemic.
The fees, which ranged from 1% to 5%, are accounted for as net interest income. As they find their way to lenders’ bottom lines, the revenue will provide a lift to capital as banks weigh strategic options and mull charge-offs for troubled credits.
"Accelerated PPP forgiveness fees seem to be the only real driver of outperformance,” said Scott Siefers, an analyst at Piper Sandler.
“It’s income at a time when income is hard to come by,” Siefers added. “It gives banks dry powder for other opportunities that may come up. To the extent that they can take a temporary gain and turn it into something more permanent, I think investors would look favorably on that.”
The net interest margin at Level One Bancorp in Farmington Hills, Mich., widened by 47 basis points from a quarter earlier to 3.27%. The $2.4 billion-asset company said its margin would have been relatively flat absent the forgiveness of $102 million of PPP loans.
At the $6.6 billion-asset Heritage Financial, fees from $159 million of PPP loans turned what would have been 6 basis points of margin compression into 15 basis points of expansion, Chief Financial Officer Donald Hinson said during the Olympia, Wash., company’s earnings call.
The decision by legislators to increase the cutoff for streamlined forgiveness to $150,000 could fast-track more fees. About 28% of the PPP volume from 2020 mets that threshold, along with 38% of the volume from this year, according to the SBA.
The SBA released a one-page application last month that simply requires borrowers to certify they were eligible to receive a PPP loan, spent it on permissible expenses and correctly calculated the requested forgiveness. PPP lenders insist the changes will produce even bigger forgiveness numbers in the first quarter.
Steamlined forgiveness will “tremendously benefit” Customers Bancorp in Wyomissing, Pa., Chief Operating Officer Sam Sidhu said.
“The borrower essentially has the ability to self-certify or create a process that leads to full forgiveness,” Sidhu added. “That will accelerate loans off our balance sheet, accelerate capital and leave a very happy customer on the other end with a grant as opposed to a loan.”
While generally pleased with the fees’ contribution to banks’ bottom lines, industry observers noted that PPP revenue will be unpredictable each quarter, based on the pace of forgiveness, and, despite a new round that began last month, will go away when the program concludes.
That view was shared by Michael Perito, an analyst at Keefe, Bruyette & Woods, in a Jan. 29 client note about Customers. The $18.4 billion-asset company, which has focused heavily on PPP in recent months, had $453 million of loans forgiven in the fourth quarter.
“Going forward, PPP loans are likely to make quarter-to-quarter earnings in 2021 volatile … although we give Customers credit for acting quickly on this program, as they are generating internal capital that should help support future growth aspirations,” Perito said in his note.
Investors also place premiums on steady, reliable revenue streams, which wouldn't include PPP fees, Siefers said.
“We believe investors will likely consider PPP fees as low-quality, akin to the way they have come to view purchase accounting adjustments as lumpy, difficult-to-predict and ultimately transitory,” Siefers added. “As such, a margin story that looks okay on the surface is actually a story still being written."
Regardless of the perceived quality, some banks are finding ways to put PPP gains to work.
United Community Banks in Blairsville, Ga., allocated $8.5 million of the $19.5 million in fourth-quarter PPP fees to its charitable foundation. About half of the company’s $1.3 billion in PPP originations have been forgiven.
The fees were a big reason the $18 billion-asset company’s net interest margin expanded by 28 basis points from a quarter earlier to 3.55%. Absent them, the margin would have narrowed by 10 basis points, executives said.
United Community had wanted “for some time” to take a more strategic approach to charitable giving, Chairman and CEO Lynn Harton said during a recent conference call. “Having the one-time gain from PPP fees … seemed like the perfect opportunity to launch that initiative.”
Paul Davis contributed to this report.
