PPP is back ... and more complex than ever. In this episode of The Purposeful Banker, Dallas Wells walks us through the various programs and explains what's at stake this time around for commercial banks.
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Jim Young: Hi and welcome to the Purposeful Banker. The podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, director of content, PrecisionLender, and I'm joined again today by Dallas Wells, our EVP of strategy.
But for now, let's go back to today's show. And Dallas, I don't know if you're an NBA fan at all, since there hasn't been a pro team in your neck of the woods since, I don't know, like the Kansas City Kings maybe back in the day?
Dallas Wells: St. Louis Hawks, yeah, that would be the last team we had.
Jim Young: I can never know whether you want to identify with St. Louis or KC. But, when we decided on a topic for today's podcast, I was reminded of the famous Allen Iverson diatribe when he keeps saying, "Are we talking about practice?" Practice, as if he cannot believe that we're back on that topic. And that's how I feel today. Are we really talking about PPP again Dallas? Really? Are we going to talk about PPP again?
Dallas Wells: Yes we are. Yeah, there's no escaping it, Jim.
Jim Young: Yeah, that's true. There really isn't. I tried to do my background research on this and again, keeping in mind that I am but a simple marketer, but it seems incredibly confusing. There's PPP1. There's PPP1 amendments. There's the second round of PPP. There's forgiveness. Can you run me through everything that's going on right now, all the different programs that are running, and are they all running at the same time?
Dallas Wells: There are too many things probably running at the same time, especially considering they're all essentially brand new when you look at typical timing of bank stuff. I'll give the simplified and abridged version, of course, consult the latest SBA docs for whatever changes may come out overnight while you're prepping for such things.
Basically, there is still the first round under the original terms of PPP, where you can go get your very first PPP loan. And those are the ones that are based on a multiple of monthly expenses that I think the cap on those is still $10 million. There are still funds available for those. There then is also forgiveness for those first round loans that have already been booked. We're already past the timeframe when those were in place. You can go back in and apply for forgiveness for all or some portion of those, depending on how much was actually spent on payroll.
We also are looking now at, they call it the second round of PPP. I don't think that's actually the right count if you're keeping track of tranches and things like that. But this one is different enough where it is PPP two, I guess, would be one form of shorthand for it. So this one is where firms that already got a PPP loan can actually go back for another round of it. Again, it's a multiple of expenses. I think the cap on this one is $2 million bucks, a little lower employee count threshold. They're trying to actually target some of the smaller businesses with this one. I think the employee counts 300. You also have to show a 25% reduction in quarterly revenue at some point during the year. That was not a stipulation to the first one. So, that was some of the heartburn over the first round of PPP, there was a lot of businesses that, they never saw the impact of COVID and yet they could still go get PPP loans. This one, you actually do have to show a decline in revenue for your business to come back for round two.
And then there's slightly different variations depending on industry. So, basically restaurants and hotels, again, probably oversimplifying your industry codes there for the bankers actually implementing this stuff, but there's basically higher expense thresholds that you can apply for loans for.
So, to sum all that up, there's a whole bunch of different versions of PPP going. Tons of borrower confusion. And the federal government sitting right squarely in the middle of all of it. So that's why we are back to talking about PPP is it is an all-consuming process. Anytime we tried to talk to banks about anything else, they're like, "Sorry, nothing but PPP on the brain at the moment. And that's the only thing we have resources right now because tight deadlines and lots of moving parts."
Jim Young: Yeah, you mentioned the magic word of resources, and that was the thing that I thought about was I remember how frantic things were when it was in the simpler times when it was just the initial PPP and life was easier and simpler. But now you've got all these other things going on and even mentioned the whole amendments to the first round of PPP as well. And you got all that going and then, like I said, so many things happening simultaneously. How many banks actually have the resources to pull this off?
Well, I think maybe the scariest discussion of this I saw, was a really good article
that Chris Nichols from CenterState Bank put on LinkedIn, it's been shared pretty far and wide. He put their workflow they're using at CenterState Bank, to basically triage between all these different programs and the various sign-offs and systems that have to be involved. Here at PrecisionLender we see our fair share of ugly looking workflows and just trying to help banks navigate just the complexity that is commercial banking and commercial credit approval in particular. This is becoming a real spaghetti bowl to try to follow the loops through of all the different workflows that are now co-dependent on each other. And then brand new software with some of the inevitable bugs that just are going to be there. It's just the reality to also try to sort through it.
And that's not bugs in your own systems or in vendor systems, but in the SBA systems as well. So as we're recording this, they opened up basically the second round of PPP to all banks. They removed a lot of the restrictions. Opened it up, and about five minutes later had to shut it back down because the system was immediately crashing. So they had to recalibrate it a bit. So there's all those things happening at the same time.
The answer is no. Banks don't really have the resources for this. And so what's happening is, is that they're making it happen by basically borrowing resources from all over the place. So you've got a whole lot of folks who don't typically do loan origination and loan processing. It's an all hands on deck approach to it. For the largest banks in the country, they're pulling together teams of like 5-6,000 people to handle some of the back-office pieces of this. In your community banks, you got a whole lot of teams forming in the conference rooms, sorting stacks of paper and scanning things and entering things into systems. And it's chaotic and messy and incredibly expensive and incredibly distracting. So they don't really have resources to do it. They also are doing it anyway for lots of reasons. Maybe we can get into that a little bit.
Jim Young: Just to clarify, when I chuckled when you mentioned Chris Nichols' article, it's very well done. I remember just the initial flow chart of, let me just explain to you which programs are running and what timeframes they are. And my head just did the ...
Dallas Wells: It's scary. Yeah.
Jim Young: Nothing really captured the complexity better than that, and we'll have a link to that article in the episode notes as well.
You talked about that. You certainly didn't sell me, if I bank on this. And I remember last time some banks basically looked at the complexity of it. There's not real huge returns, et cetera. And there was a ton of bad publicity. And I remember when some universities with endowments to size of small countries were getting PPP loans and people said, "Wait a second, what's going on here?" And we talked about the difficult position that banks were in of when your big customers come to you and say, "I would like a loan, but by the way I qualify for," how can you say no?
So given all of that, a lot of banks said, "I'm going to pass on it." Is that an option this time around? I know I'd seen some cases where the federal government was really trying to make sure, particularly some of the big banks participate in this, if I look at this and they go, "I don't have the resources and I don't see the upside," am I allowed to pass?
Dallas Wells: Well, I think if you're a small bank, you're technically allowed to pass. Pragmatically can you pass? I don't think you can. The very largest banks are getting pressure from their regulators and from the SBA to participate and to participate heavily and in a timely fashion. So if you are the Bank of America, JPMorgan's of the world, not only will you participate, but you need to be there when the bell rings on the opening of this. I think a big part of that is just the nature of the industry, they make up such a huge portion of the total asset base that as they go, so goes the industry. And so that's their way to say ... you can't have customers out there saying, "Look, Congress approved this money and we can't get access to it. We can't find anyone who's participating." If the biggest banks are participating, the others will we'll have to follow along.
I don't know that that pressure is necessary though. I think just the reality of the marketplace, again, is just that you don't have a choice. Now there are some banks that, now that we are a little deeper into this and some vendors in particular I've had some time to come up with some real products here, you can essentially participate or outsource some of this if you want to. Where you can service your customers. If they want to apply for a PPP loan, you can route them through the right place and you can be the face of it for them. But somebody else actually does the legwork for you and maybe even keeps the exposure. So that's a possibility.
And I think there are some small banks that just plain don't have the resources, that's what they are doing, they don't feel like they have a choice. There's also lots of small banks that are saying, "Yes, we're going to do it, but we're just still going to manually process all these. So we're not going to try to put in a bunch of systems for what is, at least by design, a very temporary program." But given the nature of the pandemic, the stress that has put, in particular on a few problematic industries, and the fact that we are not out of the woods yet, I think if you are going to support your community and support your customers, support your borrowers, which also makes good credit sense, you got to do this. It's the only game in town and there's not really an option to just sit on the sidelines here.
Jim Young: Yeah. And, because it's my nature, painted this as a glass half full scenario. But, I do remember last year we talked about in particular, a bank that went really all in on this because they saw it as a way to grab a foothold with some new clients. Not making money off of the PPP, but hey if we do this and we provide them with a good experience and we're faster and more efficient than other people during a time of need, this bodes well for us in the future. Is that a viable option this time around? And I also thinking about, when we talked with Greenwich Associates about what they found and said that people lost business and lost customers because they did this poorly. So I guess on the flip side, do you look at it and say, man, if we can get this right, we could really make some headway?
I think the example we talked about with Citizens Bank of Edmond in Edmond, Oklahoma, Jill Castilla's bank. Check out her Twitter feed
if you want to see what kind of going all in on this stuff looks like. In the earlier rounds, her bank actually partnered with Mark Cuban to put together a program for this. So they're advertising far and wide. They are very much a community bank and they're trying to serve their local community, but they're also just offering to be a resource for anybody who wants to pick up the phone and call them. I think they view it both as the right thing to do and an opportunity to just be the bank that is there to serve through these tough times. So, it's absolutely a viable strategy.
In our own client base, we saw a few clients that had substantial changes in their portfolio balances. And when we're like, "Hey, what's going on?" "Oh, that was PPP." And it's like, "Wow, you guys did a bunch of those." They really leaned into it, not just to support their own customers but, it's so hard to get a new customer. Those leads are not cheap. Account acquisition costs are really high. This is a way to, without having to take on a bunch of credit risks to do it, get a whole bunch of new potential customers under your roof and having all kinds of warm, fuzzy feelings about you.
I think it's at least worth considering, although, at this point, if you're not well down that road, you might be too late, at least for this round. We don't see any sign of yet this being done. So it's not that it's too late entirely, just this round is up and running and they all have new systems requirements and processes to figure out.
Jim Young: Yeah. Along those lines, another thing we talked about that was a silver lining from the first time around, was a lot of banks, it was a forcing function to, hey, get this stuff out of paper. Get it digital. Start thinking along those lines. And for our survey that we do, and along with our state of commercial banking webinar, some banks told us basically, "Yep." I think about three quarters of them said, "This is really upped our investment in digital. That sounds great, but I'm still left wondering if, okay, have we had enough time between what happened before and now for that to have any impact? Or is this, again, you start rebuilding your sand castle after the water is washed away, and then before you can get halfway through, another huge wave comes and knocks it all down again?
Dallas Wells: Of course though, a bunch of those happen at the end of the year of a year in review, and then what's next for the industry in '21. A whole lot of those had similar surveys to that of not just tech spending, but where are you spending it and what are the big priorities?
And what was interesting is that, digital account opening has been, I think, number one on most of those surveys for the last couple of years, but it was like one with a bullet this time around. And the focus is shifting from consumer accounts to commercial accounts. And commercial accounts was like the last dark corner of banking, where if you wanted to go open something online, not only might not your current or existing bank do that, but you might not be able to find another one who would. You were probably going to have to load up a big old pile of paperwork and go sit in a lobby for a couple hours.
That's not the case anymore. And there are big investments in digital account opening, and that is both deposits and loans and treasury stuff. That's a lot of what Q2 is investing in and has seen a ton of traction with. Bankers are seeing that. I think it's twofold. Number one, we're not sure that consumers or businesses will ever go back to the way it was before. Now that they've been able to do some of this digital, it feels like table stakes all of a sudden, instead of a differentiator.
But also, I think financial institutions have realized that this is doable. This is not outlandish to be able to pull this off. The regulators used to, from the top of the house, the press releases would say, "Oh yeah. Banks should be innovating. Go do all this digital account opening." And then when you actually had your examiners come onsite, they were pretty grumpy about a lot of that stuff. "Did you really do the know your customer stuff?" And it ended up being more painful than if you'd just had the customer come in the lobby in the first place.
I think what banks are seeing now is that the regulators are also seeing this is the reality. There's no going back. As much as you would like for maybe it to work like it did 20 years ago, Mr. Examiner, it's not going to. So all those forces are working together to make the say, so much of this something that sticks. And big investments in technology are making things easy for your customers and also making things easy for your employees to service those customers in this new digital world. In this new, at least at the time being, remote-centric world, where that's what's turned banks upside down and they're investing to make those things work.
Now, they're still fighting fires. So those things are on the roadmap. In some cases they've maybe even signed some contracts. But they're like, "Wait, we're not going to actually go live with this yet because we don't have anybody left to actually implement that who's not already doing PPP. And we have all the weird nuance of this particular program to deal with first. We'll get to business as usual stuff later." So I think it's on the radar. I think it'll stick. But, we're not seeing tangible stuff far and wide just yet.
Jim Young: Finally, you mentioned about, "Hey, if you didn't get on this round, there'll be the next round." And I guess I'm wondering, when we first talked about this, I think some of that reluctance was, "Am I just giving somebody a lifeline?" It's the whole thing of kicking the can down the road. Because at that point we didn't really have a timeline for coming out of COVID and return to, air quotes here, normalcy. Now this time PPP is taking place within the context of, "Hey, we do have a vaccine. It may not be rolling out as fast as we like it to. But you can foresee a point in 2021 in which things look fairly close to 2019 in terms of the way of the world." Does that change at all any of that decision-making dynamics with PPP?
Dallas Wells: Well, I think the first time around we were maybe using the collective we. Maybe we were a little naive about thinking that this was going to be a one-off thing, and that wasn't really going to make much of a difference for those customers that got it? So, it was twofold. It was, does it really solve the credit issue there? And also, am I spending a bunch effort on systems and processes and stuff for this one-time thing that once it's gone, I'll never do this again. It feels like lighting some money on fire to maybe or maybe not solve the problem. So at this point, we're closing in on a solid year into this, in most parts of the country. And if the businesses are still around and asking for a second PPP, they are maybe struggling, but they're making it. The doors are open. Maybe that's the wrong way to phrase it. Maybe the doors aren't open, but the business hasn't gone completely poof yet.
I think you do have to dig a little deeper and make sure that you're not putting good money after bad. That you're not prolonging something inevitable there. But for the most part if they're around, that's a good sign, a year into this. And also, vaccine or no, this thing doesn't end next month. It doesn't end next quarter even. This is still going to be with us for a while. And when you look at all the programs that have happened, not just the PPP ones, but the Main Street Lending stuff that spun up and marginally got used by a handful of banks, a lot of the other support, the stuff that was a part of the original Cares Act, the new administration coming in with big promises about new stimulus and new programs, this stuff is part of the business now.
I don't know for how long, but for long enough that you need some people dedicated to it. You need some teams where you're not just always putting out fires and panic-reacting to it, but you have some sort of proactive approach to it and you have somebody who, this is their job. For right now, they get up all day every day and live and breathe this stuff, including the systems and the vomit-inducing flowcharts of workflows, somebody's got to own that stuff, because it's an important part of the business for the foreseeable future. So yes, there's a light at the end of the tunnel, but it still looks like a very long tunnel.
Jim Young: I lied. One more question because-
Dallas Wells: You can't end on that one either, right? I see Jim scrambling to come up with something else.
Jim Young: ... No, but I am curious. When we talk about this, and honestly it's not something that gives me a warm fuzzies, but we talk about that growing divide between the big banks and small banks in a lot of areas, and usually when it comes to digital and that sort of thing. But at the same time, PPP, at least in people's way they view it, has almost a Main Street mom and pop feel to it. At least what people thought it was going to be. Maybe put that in there. So, do you look at this and say, "When we come out of these PPP things, this is going to be yet another example of how the big banks are just in a position of strength that's growing only stronger?" Or do we look at this and say, "Hey, this is actually an area where small banks, where that niche expertise and relatability that they have, shines through?"
Dallas Wells: This is maybe a weakling answer, but I think it is a little bit of both. I think this is absolutely an opportunity for the small banks to shine. Compared to the share of the rest of the industry assets that they have, the other types of business, small local businesses, they have an outsized, punch above their weight there already. And so, they are an important and necessary part of the help here, part of the solution. And also you see real effort or at least some real lobbying. You see some real outcomes of small banks. They're trying to give them a fair chance at this. So this PPP two, or whatever we're calling this one, opened first for small banks. And that was below $1 billion in assets. They got basically a Friday and a weekend head start over everyone else. Although the skeptic in me looks at that and says, "That's a marketing ploy and y'all are nothing but guinea pigs." They wanted to work the first round of bugs out of the system before Bank of America showed up with their giant file to process.
For all the wonderful headlines, and for all the good work and good help that small banks did through the first, well heck, through the first 10 months of this that we've been at it, you look at the volume that the top four or five banks did, and they once again have a massive outsized role in this. And I think it's nothing to do with PPP. It is just an indicator of what's happening. We are below 5,000 insured banks now. The number of credit unions is also shrinking. So just the number of those small FIs, that's not news to anybody. That's a multi-decade trend that, if anything, I think is picking up a little bit of speed now that this thing is, and I say this thing, I mean this industry, now that this industry is becoming so digital-centric and having a branch on Main Street is a heck of a lot less of a differentiator than it used to be. It's going to be difficult for a lot of those smaller institutions to stick around, PPP or not.
So, there's this massive, again, long-term trend across multiple different parts of the business. PPP is not going to turn that around. So it is a chance for you to make some strategic decisions, to make some technology investments, to do some good with it. At the end of PPP, you still have a massive fight on your hands to stay relevant. So, I think you need to think of it as not something that's going to turn the tide for you, but a jumping off point for you to continue fighting the good fight to stay relevant to your customer base.
Jim Young: All right. Is this our last PPP podcast, or am I going to be coming out with another one?
Dallas Wells: I wouldn't make any promises on that, Jim.
Jim Young: All right. All right. Okay. Well that will do it for this week's show, Dallas thanks again again for coming on.
Dallas Wells: You bet. Thanks Jim.
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Until next time, this is Jim Young, Dallas Wells. You've been listening to Purposeful Banker
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