PPP fee income will go straight to loan-loss reserves at many banks

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Processing fees from the Paycheck Protection Program should provide a much-needed offset for higher loan-loss provisions tied to the coronavirus outbreak.

Small and midsize banks are expected to glean millions of dollars in fees, ranging from 1% to 5% of a loan’s value, for their intermediary role in the government’s effort to help small businesses harmed by the pandemic.

The timing of the fees, which should flow into banks in coming quarters, is fortuitous, especially for lenders that delayed compliance with the Current Expected Credit Losses standard and for CECL adopters that may need to be even more aggressive with reserves in the future.

Banks that delayed CECL, which requires lenders to set aside funds for potential credit losses when loans are made, will have to comply when the national emergency ends or Dec. 31, whichever happens first.

“The provisions, that’s the big story, and if you have a way to make up some of that with [fees from] these emergency loans, that’s a pretty big plus when the outlook for everything is really unclear,” said Bert Ely, president of Ely & Co., a consulting firm in Alexandria, Va.

While many banks proceeded with CECL, some held off, preferring to wait to see if they could get more clarity on the economy and the financial fortunes of their clients.

“You’re essentially delaying the inevitable but, in fairness, trying to do a real economic forecast in these current conditions is all but impossible,” said Damon DelMonte, an analyst at Keefe, Bruyette & Woods.

And the delay may have helped those banks allocate the time and resources necessary to process more PPP applications.

“The benefit of waiting to implement [CECL] is that we will have a better view of the impact of this pandemic, the government stimulus programs, and the impact of our own initiatives … which should minimize volatility in earnings,” Michele Kaiwecki, finance director at First Merchants, said during the Muncie, Ind., company’s earnings call.

The $12.7 billion-asset First Merchants received approval for $750 million in loans during the PPP’s initial run. Based on an estimated 3% average rate for processing, the company could bring in $22.5 million in fees. Its first-quarter provision, in comparison, was $19.8 million.

Fees from Paycheck Protection loans will also help ServisFirst Bancshares in Birmingham, Ala., offset higher credit costs, Chairman and CEO Tom Broughton said during the company’s earnings call. The $9.4 billion-asset company also delayed CECL compliance.

ServisFirst secured approval for more than 3,000 loans totaling $914 million before initial PPP funding ran out. That could translate into more than $27 million in fees, compared with a $13.6 million provision in the first quarter.

“We do expect that the program will be profitable,” Broughton said. “And we think it will make a nice addition to our loan-loss reserve in the second quarter.”

Paycheck Protection fees could also benefit banks that incorporated CECL but could feel the need to meaningfully increase their loan-loss allowance in the face of increasingly negative economic forecasts.

The Commerce Department said Wednesday that gross domestic product fell at a 4.8% annual rate in the first quarter, marking the first decline since 2014 and the steepest contraction since the 2008 financial crisis.

Pinnacle Financial Partners in Nashville, Tenn., is bracing for more reserve building this year after recording a nearly $100 million provision after implementing CECL in the first quarter.

The $29.3 billion-asset company was able to get $1.8 billion in PPP loans approved in the program’s first phase, generating an estimated $50 million in fees. Pinnacle is participating in the program’s current installment.

The fees will be “a meaningful” offset for the first-quarter provision, Pinnacle President and CEO Terry Turner said during the company’s quarterly call.

Wintrust Financial in Rosemont, Ill., has similar expectations.

Its provision, accounting for CECL and the pandemic, was $53 million. The $38.8 billion-asset company was approved to make 8,900 PPP loans valued at $3.3 billion in the program’s first iteration, good for nearly $100 million in fee revenue.

Paycheck Protection income “will act as a reserve for us – a cushion, we believe, for any eventuality that may come along,” says Wintrust CEO Ed Wehmer.

That will cover the first-quarter provision and potentially necessary additions, CEO Ed Wehmer told analysts during his company’s call.

Paycheck Protection income “will act as a reserve for us — a cushion, we believe, for any eventuality that may come along,” Wehmer said.

Not all banks can rely on hefty PPP fees to offset higher provisions, industry observers said.

The smallest banks, despite concessions by lawmakers and the agencies in charge of PPP, are generating light volume, said Joseph Bonner, founder of Community Bank Advocates.

“I think most of the smaller banks who tried to play in PPP did so to help small businesses in their communities to the extent they could, not to earn extra fees,” Bonner said.

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Credit quality Paycheck Protection Program Loan-loss provisions CECL Earnings