We are still working on a few specific pieces of guidance for lenders as they process PPP forgiveness applications,  particularly with regard to minimizing the bank’s liability and with regard to EIDL advances. But in the meantime, I thought I would share some of the thought leadership that we’ve published from a PPP borrower perspective, since I suspect banks will also get a lot of questions from their borrowers as well.

In our view, the Paycheck Protection Program Loan Forgiveness Application answered many questions, but certainly not all of them.

The additional Loan Forgiveness And Loan Review regulations answered additional questions (but of course left more questions as well).

Another potential resource is the AICPA Loan Forgiveness Calculator available here. Given the continuing flow of ongoing guidance, the Calculator is updated regulatory. (Note: we have not verified any of the assumptions/calculations made by the AICPA calculator, but believe it can be a useful comparison tool regardless.)

As the editor of BankBCLP.com, I tend not to write a lot of posts for other blogs hosted by Bryan Cave Leighton Paisner LLP. However, the Paycheck Protection Program(PPP) has affected small business clients throughout the firm.

The shifting narratives around the government’s interpretations regarding eligibility for participation in the PPP has caused many borrowers to reconsider their own applications and to consider exiting the program by returning PPP funds by the government’s current safe harbor return deadline of May 14th.

In this post on the BCLP US Securities and Corporate Governance Blog, I describe the history and background of the PPP certification process, and suggest a three bucket risk framework for analyzing one’s certification. In discussions with corporate clients, we have found this framework to be useful for public and private companies.

As recognized in FAQ 31, this remains primarily a risk for PPP borrowers, and not PPP lenders, as “lenders may rely on a borrower’s certification regarding the necessity of the loan request.” In our experience, this has also made many lenders reasonably constrained from providing any further advice to borrowers regarding analysis of the borrower’s certification.

Based on news reporting, we understand that Congress and President have collectively agreed on $300 billion in additional funding for the Paycheck Protection Program. The circulated draft of the “Paycheck Protection Program and Health Care Enhance Act” makes no changes to the eligibility or terms of the PPP, but does authorize an additional $310 billion in funds, raising the total funding level for PPP loans to $659 billion.

The Paycheck Protection Program and Health Care Enhance Act would also increase the amount authorized for the SBA to ultimately forgive to $670 billion, presumably recognizing an intent to also be in position to forgive interest in additional to principal.

While the Paycheck Protection Program and Health Care Enhance Act does not alter the eligibility or terms for either borrowers or lenders, it does provide some protected classes of lenders who are ensured a set aside of a portion of the expanded PPP authorization. Specifically, depository institutions and credit unions with between $50 billion and $10 billion in consolidated assets will be ensured the ability to issue, in the aggregate, at least $30 billion in loans guaranteed by the SBA under the PPP. Depository institutions and credit unions with less than $10 billion in consolidated assets, as well as community development financial institutions (CDFIs), minority depository institutions (MDIs), and certain state development companies certified under Title V of the Small business Investment Act will be ensured the ability to issue, in the aggregate, at least $30 billion in loans guaranteed by the SBA under the PPP.

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Joining all the (far more) popular podcasts, The Bank Account is now recording from the host’s home. This episode features Partners Karen Fries and Mike Royle joining me in a presentation about the basic terms of the SBA’s small business forgivable loan program, the Paycheck Protection Program.

As the Paycheck Protection Program is changing rapidly, it’s important to note that guts of this presentation were recorded on April 9, 2020. While the funds have currently been exhausted for new PPP loans (pending Congress deciding when and how to allocate additional funds), the key terms of the loans and the forgiveness functions discussed in this podcast episode remain accurate, at the least as of the time of posting.

While our initial approach was going to be to engage in a debate on the merits of this practice, none of us ultimately wanted to take the side of justifying the practice; for different reasons, many of which are expressed on the podcast, we all believe that it is a bad idea for bank directors to personally approve loans.

For those interested in hearing more information about the Paycheck Protection Program in audio form, I highly recommend the Big Small Business Rescue from Planet Money. And if you’re craving more content, and prefer the last financial crisis, I’d also suggest the FDIC “podcast” on the 2008 financial crisis.

Community Banks should not only be permitted, they should be encouraged, to participate as borrowers in the CARES Act SBA Paycheck Protection Program (PPP). Both the Small Business Administration and each of the federal and state banking regulators should expressly acknowledge that community banks with less than 500 employees are both permitted and encouraged to participate, as borrowers, in the PPP. 

[Update, Evening of April 2, 2020. The SBA has now published the interim final rule for the PPP. Although the guidance published under either “2(a) Am I eligible?” or “2(b) Could I be ineligible even if I meet the eligibility requirements in (a) above?” make no mention of banks being ineligible, provision 2(c) provides that “Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10.” Banks are included as non-eligible borrowers under both provisions. As discussed below, this remains in apparent disagreement with the CARES Act, but unless the SBA changes its mind, it appears we’re missing an opportunity to further expand credit for small businesses.]

[Update #2, Still Evening of April 2, 2020. The Interim Final Rule clearly contemplates that the PPP is not otherwise subject to SBA rules as it provides “The program requirements of the PPP identified in this rule temporarily supersede any conflicting Loan Program Requirement.” So, to be clear, the SBA and Treasury chose not to allow community banks to participate.]

Without this encouragement, community banks risk regulatory criticism and reputational concerns that participating in the PPP represents a warning regarding the bank’s safety and soundness.   I would argue that the truth is far different.  Participating in the PPP would demonstrate that bank management, notwithstanding the economic uncertainty, wants to fortify the bank’s safety and soundness while extending its ability to provide credit to households and business throughout the United States.

In the last week, the federal banking agencies have announced a number of regulatory actions intended to “increase banking organizations’ ability to provide credit to households and businesses,” including modifications to the supplementary leverage ratio.  These changes are both reasonable and appropriate, but only affect the largest banking institutions.  Like the aims of the Small Business Administration and the Paycheck Protection Program more broadly, efforts should also be taken to support community banks in their efforts to continue to provide credit to households and businesses as we all work through the impacts of the coronavirus.  Banking regulators could directly “increase community banking organizations’ ability to provide credit to households and businesses” by encouraging their participation in the PPP.  

The text of the CARES Act provides that “any business concern … shall be eligible to receive a covered loan” if the business concern meets the employee thresholds set forth in the CARES Act.  If law school taught me anything, it was that any should mean any. Neither the Borrower nor Lender Information Sheet on the program published by the U.S. Treasury Department discuss any additional limitations based on type of business.  In fact, the Borrowers Information sheet states that “All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply.”  If law school taught me anything else, it was that all should mean all. Similarly, the initial application provided by the U.S. Treasury does not contemplate or provide for any collection of the type of business engaged in by the borrower.

On March 18, 2020, the FDIC issued guidance in its Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 indicating the potential for relief from the Troubled Debt Restructuring (TDR) reporting requirements.

Financial institutions should determine whether loans with payment accommodations made to borrowers affected by COVID-19 should separately be reported as TDRs in separate memoranda items for such loans in regulatory reports. A TDR is a loan restructuring in which an institution, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. However, a loan deferred, extended, or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not reported as a TDR.

FDIC FAQ published March 18, 2020

While appreciated, that guidance left a lot of discretion to the regulators to second guess the interpretations by financial institutions and essentially just repeated existing guidance. On Sunday, March 22, 2020, the federal banking regulators collectively issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. This new Interagency Statement fortunately goes further.

As I have repeatedly written on this site, without regard to other benefits associated with the Troubled Asset Relief Program (such as avoiding a further collapse of the global financial system), the TARP program, and particularly the Capital Purchase Program, was profitable for the U.S. Taxpayer. As a banking lawyer and son and grandson of community bank presidents, I’ll concede that I’m biased. But the numbers speak for themselves.

Even ProPublica acknowledges that TARP was profitable.

Overall, the TARP remains in the black, though just barely.

What does ProPublica means by “barely” profitable? Apparently, “a narrow profit of about $1 billion.”

I hate it when I only have a billion dollars in profit. That’s $1,000,000,000.00 to put it in context.

Whenever discussing bank charter types, I’m reminded of a comparison made by Walt Moeling. Walt would always say that the bank charter choice is like choosing between a Ford and a Chevy truck. There are strong, die-hard advocates for the superiority of one over the other. But either one is functionally adequate, and will enable you to get from location a to b. Of course, neither is going to be confused for a Lamborghini or a Maserati either.

Looking at the breakdown of charters as of the beginning of 2019, while the majority of all U.S. banks are state, non-member banks (i.e. with primary federal supervision by the FDIC), each charter choice appears to continue to have its advocates.

The Office of the Comptroller of the Currency, the primary federal prudential regulator for national banks, has earned a reputation as the regulator of the largest banks, but the underlying data doesn’t necessarily support that viewpoint. While all of the four largest U.S. banks are national banks, in all asset classifications, there remains a variety of bank charter, showing that no one charter type is necessarily better based purely on asset size.

The increasing number of banks selling to a credit union has been a hot topic at investor conferences, within the trade press, amongst clients, at trade associations events, and in conversations with investment bankers. To that end, I’ll be on the main stage at BankDirector’s 2020 Acquire or Be Acquired Conference discussing the new players in the bank M&A game.

And the numbers would appear to support that conversation…

The landscape of the banking industry in the United States continues to be highly concentrated when looking at asset sizes, but with the vast majority of the depository institutions continuing to be smaller institutions. As of June 30, 2019, approximately 84% of the assets held by depository institutions are held by less than 3% of U.S. banks.

85% of the banks in the United States, or 4,511 institutions, have less than $1 billion in total assets. 73% (or 3,855 institutions) have less than $500 million in total assets. 53% (or 2,799 institutions) have less than $250 million in total assets. 23% (or 1,230 institutions) have less than $100 million in total assets.

The concepts reflected above aren’t new. We showed the same thing in our Landscapes as of the end of 2016 and the end of 2017. In both of those reports, we attempted to look at the historical trends of consolidation (and that trend certainly continues). But this year, we’re taking a different tack and trying to dig deeper into the FDIC data. All of the data presented is based on the underlying data in the FDIC’s Statistics on Depository Institutions as of June 30, 2019.

As with all statistical reports, I’m well aware that all statistics can be massaged, with relatively innocuous adjustments, to tell different stories. Certainly, extremes can disrupt averages and otherwise minimize the value of the outcomes (or suggest that median or modal outcomes are more important than mean outcomes). Even if you never took a statistics class or have blocked all statistics concepts from your mind, I encourage you to check out Planet Money’s Modal American episode. The modal U.S. bank would have total assets of between $100 million and $250 million, would be taxed as a C-corporation, have a holding company and be a state-chartered, non-member bank. By comparison, the “average” bank would be $3.4 billion and the media bank would be the $228 million Bank of the Lowcountry, in Walterboro, South Carolina.

I am also reminded that no bank desires to be “average,” nor are investors generally looking for an “average” return. That said, I believe there is value in understanding what average is, and recognizing that expectations should be different for different institutions.