Bankers and lenders are now facing the post-Payroll Protection Program (PPP) lending environment as the stimulus winds down for both consumers and small businesses. The pandemic created a unique and uncommon business cycle and recovery. The level and extent of U.S. federal government stimulus was unprecedented. The Small Business Administration (SBA) provided 11.5 million loans totaling $792.8 billion dollars to small businesses from 2020 to 2021. These PPP loans were provided through SBA lenders, which included banks, credit unions and other small business lenders. They were from funds approved by Congress and not directly from the banks’ balance sheets. They were a lifeline to small businesses when traditional loans or liquidity was scarce or not available. As the PPP has now ended, where does this leave the borrowers and lenders?
During the extended pandemic many banks and lenders found that certain industries were significantly impacted, such as restaurants, retail, live venues and real estate (apartments, retail, office). These borrowers continue to be affected. What does all this mean for existing loan portfolios, risk ratings, workouts and a lender’s risk appetite for the remainder of this year and into 2022? Can lenders provide the needed credit as we work our way out of this mess?
Maybe it depends on your client base, location and focus.
"I can't remember a time when we have come out of a recession this quickly. We are experiencing our lowest delinquency and past due numbers in years. Commercial credit and residential purchase markets are strong, and bank liquidity is the best it's been in years,” says Lars B. Eller, President & CEO at Farmers & Merchants State Bank in Archbold, Ohio.
Has the economic recovery begun or has it merely been temporarily delayed with billions of dollars in governmental stimulus? How will you adapt to the current environment? Are you lending into an overheated residential real estate market? Are your borrowers reliant on a broken or unstable supply chain? What borrowers do you pursue and which ones do you avoid?
We are dealing with a global economic crisis that was caused by a global health crisis. The lender’s playbook doesn’t have a chapter on this topic, and we haven’t had to deal with this type of issue for over a century. Banks and lenders need to figure this out now and make sure they have considered the various scenarios of how this will all play out. The government stimulus carried us through the crisis and the recovery may be real or there may be a second or even third act to come.
What tools are at your disposal?
As you have likely concluded, one of your best options is diversification. In this environment, that means lending to multiple industries, geographies, time horizons and asset classes. If you are heavy into any particular loan types, it may make sense to reduce your exposure to that particular loan segment or decrease your normal hold levels until there is more clarity. You may also want to revisit your risk appetite and risk tolerance levels. Part of this can be done by adjusting your loan approval criteria and changing what defines an acceptable borrower, collateral or loan structure. At some point, this will all be in the rearview mirror, but until then you’ll want to avoid any potholes and stay on the road to your destination.
We invite a conversation.
Should you have questions, suggestions or comments relative to post-PPP lending, we invite you to connect with Jake McDonald, who, as a Director in our Credit Risk Group, has monitored and reported on the government loan programs for CBIZ clients and our colleagues in the industry during this very unique pandemic-impacted environment.