Accelerated PPP Delivery Led to Unexpected Increase in Profits

At Cullen / Frost Bankers in San Antonio, forgiveness of the Paycheck Protection Program has been a laborious process.

The company with $ 41 billion in assets has hired more than 500 bankers to help borrowers adjust to changes in Small Business Administration policies and procedures. A rotating team has been working on PPP seven days a week for the past six months.

These efforts are paying off at Cullen / Frost. About half of its $ 3.3 billion in PPP loans were canceled by the SBA, including $ 800 million in the fourth quarter. That translated into net interest income of $ 19 million in the fourth quarter, with an additional $ 39 million expected this year.

“We’ve tried to be very nimble,” said Bobby Berman, executive vice president of research and group strategy.

Cullen / Frost isn’t the only lender to benefit from a faster-than-expected forgiveness process. Until January 12, the SBA had canceled more than $ 100 billion in PPP loans, triggering the payment of fees to lenders.

The accelerated remission bolstered results for hundreds of banks in the fourth quarter, providing a bright spot at a time of sluggish core loan growth and uncertain credit quality resulting from the pandemic.

Commissions, which ranged from 1% to 5%, are recognized in net interest income. As they find their way to lender bottom lines, the income will provide a boost to capital as banks assess policy options and consider write-offs for distressed loans.

“The accelerated PPP forgiveness fee appears to be the only real driver of outperformance,” said Scott Siefers, analyst at Piper Sandler.

“It’s income at a time when income is hard to come by,” Siefers added. “This gives the banks dry powder for other opportunities that might arise. To the extent that they can take a temporary gain and turn it into something more permanent, I think investors would take a positive view. “

Level One Bancorp’s net interest margin in Farmington Hills, Michigan, widened 47 basis points from the prior quarter to 3.27%. The company with $ 2.4 billion in assets said its margin would have been relatively stable without the cancellation of $ 102 million in PPP loans.

For Heritage Financial, with $ 6.6 billion in assets, the $ 159 million PPP loan fee turned what would have been a 6 basis point squeeze in margin into 15 basis points of expansion, a CFO Donald Hinson said during the company’s earnings call in Olympia, Washington. .

The decision of lawmakers to increase the threshold for simplified pardon to $ 150,000 could further accelerate the costs. About 28% of 2020 PPP volume reaches that threshold, along with 38% of this year’s volume, according to the SBA.

The SBA last month released a one-page request that simply requires borrowers to certify that they were eligible to receive a PPP loan, spent it for the authorized expenses, and correctly calculated the requested discount. PPP lenders insist the changes will produce even bigger forgiveness numbers in the first quarter.

The Steam Forgiveness “will benefit tremendously” Bancorp customers in Wyomissing, Pa., COO Sam Sidhu said.

“The borrower basically has the ability to self-certify or create a process that leads to full forgiveness,” Sidhu added. “This will speed up lending off our balance sheet, speed up capital, and leave a very satisfied customer on the other end with a grant as opposed to a loan.”

While generally pleased with the contribution of fees to banks’ financial results, industry watchers have noted that PPP revenues will be unpredictable each quarter, depending on the pace of remittances, and despite a new cycle that began last month , will disappear when the program ends.

This view was shared by Michael Perito, analyst at Keefe, Bruyette & Woods, in a January 29 client note on clients. The $ 18.4 billion asset company, which has focused heavily on P3s in recent months, had $ 453 million in canceled loans in the fourth quarter.

“Going forward, PPP loans are likely to make quarter-over-quarter earnings volatile in 2021 … although we give clients credit for moving quickly on this program because they generate internal capital. which should help support future growth aspirations, ”Perito said in his memo.

Investors are also awarding bonuses on stable and reliable income streams, which would not include PPP fees, Siefers said.

“We believe investors are likely to view PPP fees as shoddy, just as they have come to view purchase accounting adjustments as lumpy, difficult to predict and ultimately transient,” Siefers added. “As such, a sideline story that looks correct on the surface is actually a story still being written.”

Regardless of the perceived quality, some banks are finding ways to leverage the gains from PPPs.

United Community Banks in Blairsville, Ga., Allocated $ 8.5 million of the $ 19.5 million in Q4 P3 fees to its charitable foundation. About half of the company’s $ 1.3 billion P3 has been canceled.

Fees were one of the main reasons the company’s net interest margin on assets of $ 18 billion rose 28 basis points from the previous quarter to 3.55%. Without them, the margin would have shrunk by 10 basis points, executives said.

United Community has “been keen to take a more strategic approach to charitable giving” for some time, President and CEO Lynn Harton said on a recent conference call. “Having the one-time gain in PPP fees… seemed like the perfect opportunity to launch this initiative. “

Paul Davis contributed to this report.

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