Several banks are recognizing millions in fees and avoiding a potentially fraught government process by taking advantage of a developing secondary market for Paycheck Protection Program loans.
Northeast Bank sold $457.6 million of its PPP loans, and Bryn Mawr Bank Corp. sold substantially all of its $300 million of PPP loans. Both banks sold to a partnership between nonbank The Loan Source Inc. and ACAP SME LLC, a servicing partner. Including sales from private banks, the nonbank group has closed on $1.3 billion of PPP loans and expects to purchase similar amounts in July and August, said Luke LaHaie, chief investment officer for ACAP Fund.
"Some banks weren't ready for a June close because they had quarter- or year-end [results], so they wanted to circle back in July and August, so we're expecting as much, if not even more, for the closings in July and August," LaHaie said in an interview. He said banks considering a sale should make the decision in the near term since PPP borrowers will soon request forgiveness, and there are significant up-front costs in developing the process to handle a forgiveness request.
LaHaie's investment group is working with Commerce Street Capital to identify banks open to a PPP loan sale. Eric Corrigan, managing director for Commerce Street, said there has been significant interest in the second round to the point that July's close could reach as high as $2 billion or more.
The loan sale allows banks to recognize as revenue the fees earned from originating the PPP loan while off-loading the servicing and forgiveness process. In exchange, banks have to sell the loans at a discount. LaHaie said the market has generally priced the loans at 98.5 cents on the dollar.
Kingsley Greenland, CEO of DebtX, a secondary loan market exchange, said he has been in conversation about PPP loan sales and expects a "relatively active market." He also said the PPP loans will sell near par, citing the Small Business Administration's guarantee, liquidity available from the Federal Reserve and the ability for banks to hold the loans at zero risk weighting. PPP loan buyers, including nonbanks, are able to access the Fed's PPP Liquidity Facility for funding.
"The margins are wicked, wicked thin. If you walk through all that, it's a lot of work to make 25 basis points for six months or whatever the number may be," Greenland said in an interview.
LaHaie said his company's experience as an SBA lender has helped, adding that the company has spent significant time and money building out the technology to service the loans in an efficient and profitable manner. He said the universe of sellers includes small and large lenders. Corrigan said the first round included a portfolio sale as small as $7 million.
"It's across the spectrum. You have ones that are much smaller like credit unions, and then there are some very large lenders with 10-figure portfolios," he said. On competition, some banks are looking at buying PPP loans, LaHaie said.
Northeast Bank CEO Rick Wayne said he decided to sell the bank's PPP loans out of concern about the requirements to properly service the loans and handle the forgiveness process, pointing to the government's ever-changing rules. He said the bank has a deep relationship with The Loan Source group, providing comfort that its PPP borrowers will continue to receive solid customer service. He said the bank considered a technology purchase to handle the process but ultimately thought the risks of keeping the process in-house outweighed the benefits.
"This had to get done quickly and correctly. We had execution risk, technology risk, and then we had to reallocate human resources in the bank to this servicing program," Wayne said in an interview. He called the acceleration of recognizing the fees as revenue a benefit but not the primary reason for the sale.
From an internal-rate-of-return perspective, being able to recognize the fees immediately makes a significant difference. Most of the PPP loans have two-year terms, so borrowers that fail to qualify for forgiveness could force banks to delay the revenue recognition for a meaningful amount of fees. In Northeast Bank's case, the lender recognized a gain of $9.7 million after selling its loans.
"We were modeling IRRs, and if the loan goes out to 18 months, your IRR collapses. Your best IRR is to sell it now and recognize the fee income," Corrigan said.
But there is a cost. For Northeast Bank, the loan sale played a role in reducing the realized fee to about 2% when the bank earned approximately 4% from the government for originating the loan, Wayne said. In addition to the discount at sale, the bank paid a lead-generation company to originate some of the PPP loans, an expense included in the reduction to 2%.
Despite the benefits, larger national or regional banks are unlikely to sell PPP loans, said Christopher Marinac, an analyst for Janney Montgomery Scott. The banks are likely to prioritize ownership of the customer and might find political backlash from offloading the loans in the current political environment, he said.
"The banks that are selling tend to be companies that don't have an SBA department. They are doing this more as an accommodation," Marinac said in an interview. "They are being heavily distracted, and I think they want to go back to their day job of being community bankers."