SBA Lending After PPP

Intro: Welcome to “The community Bank Podcast.” I’m Eric Bagwell, Director of Sales and marketing for the correspondent division of “South State Bank” joining me as always, Tom Fitzgerald, Director of Strategy and Research at the corresponding division Tom, how’s it going, man?

Tom Fitzgerald: It’s going well. I hope you’re doing well also.

Erik Bagwell: I’m good, except traffic is back again a little bit more, because school started at a couple of counties around here this week and it’s not fun.

Tom Fitzgerald: I know and where we record our show, we’re style side 285 and if you’re hearing traffic noise, you can believe what Eric is saying.

Erik Bagwell: No doubt you’re probably not but it’s out there we’re sitting there looking at it now. But we’ve got a great show for you today, Mark Bryant, he’s the Director of Government Lending for our bank, and Marks have wealth of knowledge when it comes to SBA lending. And Mark spends about probably 20 30 minutes with us just kind of going over all aspects of SBA lending, there’s a lot of folks listening, I know that already into it, you might pick up something new from Mark, in this podcast.

And if you’re thinking about getting into it, Mark is he’s got a lot of great knowledge so that you can make a probably a more informed decision on whether you want to do it or not but I know a lot of our customers are doing that a lot of banks are. So, we think this will be a great program before we get to the interview real quick, though, Tom, your bond report is out again and we tried to direct folks to go out and pull that report, tell them where they can go look for it and talk a little bit about it real fast.

Tom Fitzgerald: Sure. It is a quarterly report that we bond to account for about 130 140 banks, about 14 billion in par give or take. And what I tried to do is kind of in a succinct two-page report, just show what that portfolio is doing. So, a lot of community bankers want to know what the other is guy doing and this is kind of a good way to take a look at what the portfolios are for the typical community bank. So, we look at the trends for a book yield for the duration for unrealized gain or loss; take a look at how they’re investing those monies, what’s sort of the breakup between mortgages, and Muniz, and so on. So it’s really good, as I said, really brief, a real quick look at kind of how community bankers are handling their investment portfolios, as we work through 21, where they can find it is at southstatecorrespondent.com/bondreport. And so that’s where they can pick up that report and we’d love for all the listeners to do that.

Erik Bagwell: Yes, and we, as we’ve talked about this on a couple of other episodes, we get a lot of requests for the report. So please, if you think that’s something you want to read, reach out to us go out, and to where Tom said and request it, we’ll send it to you but without further ado, let’s get to Mark Bryant, and thanks for listening as always.

Mark Bryant, Director of Government Lending at “South State Bank.” How are you today, man? Thanks for joining us.

Mark Bryant: I’m doing great. Thank you for having me.

Erik Bagwell: Awesome. I know you’ve been at the bank here for a while, I guess around five years.

Mark Bryant: Yes.

Erik Bagwell: Tell us a little bit about your work background and what you’re doing at the bank.

Mark Bryant: Sure, be glad to 30 years or so in SBA lending. This is the fifth place that I’ve started up in the SBA government lending shop baton, been a lot of fun, but a great experience, came on board with “CenterState Bank”, and then with the merger and conversion, change the name to South State. It’s been a great run, we have about 40 people in the SBA department at the bank now and pretty much a self-contained group in the sense that we’ve got credit approvers, we’ve got loan officers out in the field, we’ve got loan closers, loan servicing, so probably 98% of the things that need to be done, we take care of ourselves within the SBA department. And so, that’s great that we get team cohesion and the group that kind of pulls together.

Tom Fitzgerald: So, from the front end to the back end, you got to get it covered.

Mark Bryant: Yes, sir. A to Z.

Tom Fitzgerald: So, tell us mark, what is going on right now on SBA lending? What’s kind of the hot topic or hot subject?

Mark Bryant: The hot topic at this particular second is the SBA enhancements that Congress approved that are in place through the end of September on a loan approved through the end of September. No SBA guarantee fee, which is by itself, the largest individual closing costs on an SBA loan, instead of the normal 75% SBA guarantee, banks get 90%. And then some other fee waivers are a part of those three monthly payments that customers get after they’re fully dispersed on their loan. And so the hot news is with the infrastructure bill, there’s a proposal that they take some of the money for the infrastructure and take it from the SBA enhancements program.

Not the three months payments that will stay at two separate funding from Congress and so, the SBA world’s kind of trying to figure out if that is going to happen and if it does if the enhancements come to an end quicker than what we had anticipated. So that’s kind of the hot thing if the second going on, just been a busy period, busy time, a lot of things going on your economy seems to be picking back up and heating up. And now that some of the other government loan programs, PPP and Eidl are either done or kind of winding down, SBA loans, they’re taken off in the last few months, just tracked the weekly approvals at SBA, and that numbers continued to go up quite a bit both for SBA 78 lending and 504 lending, which is two main programs of SBA.

Tom Fitzgerald: Right. And we’ve talked to before that, PPP lending was kind of the story in 2020. Can you give us an update on what the bank’s efforts are and the kind of final results if those are in for PPP?

Mark Bryant: Sure, be glad to. So, nationally, I’ll start with that there were those 12 million loans done PPP, the total between 2020 and 2021 $800 billion. And probably the most impressive of all the numbers of Gad is roughly 5500 lenders, you had a normal year, from what I understand there are about 17 1800 lenders that do SBA loans. And so PPP brought that out, from our side at “South State Bank” all total, because when PPP started, it was two separate banks, “South State Bank” and “CenterState Bank”, and along the way, we merged and converted, and but between the two, almost 30,000, PPP loans for roughly $3.2 billion.

And so something we’re all proud of some things that I that I’ve talked about before that, I think are pretty neat and something that says a lot about the bank is just the number of loans that we did to people who were not customers to start with, I would guess somewhere around 20% 25% of our loans were not customers of the bank, their customers now, and I think we came through and people needed that, and you think about that, they didn’t come to us first, they’d probably went to their bank, and their bank couldn’t do it, or wouldn’t do it for whatever reason, maybe went to bank B, maybe to bank C, and then they ended up with us. And that’s something we’re proud of that we got a lot of people loans that they may not have got.

Another thing that we’re proud of is we engaged, the bank did and paid for a regional CPA firm, to help our customers deal with the application, they’re still in there now, helping the customers with forgiveness, and kind of the technical, in-depth, complex, convoluted type questions, banks paying for that. And so, I don’t know, I’m sure other banks have done that but I don’t know of any other banks that have done that, where they pay for the service for their customers. I think, looking back at the PPP process is just a marvelous job by SBA and the Treasury to come together with the program, crafted and it’s kind of built on the chassis of the SBA 78 loan program, but in a lot of ways, it’s, it’s nothing like the 78 programs. And so just, you know, for SBA and Treasury, and just the banking nation out there to come together and do all the loans they did at a time where all of us were scared about COVID and the impact on us and family and friends and the businesses closed down and so just a great job, I thought by everybody pulling together and helping that come together.

Tom Fitzgerald: And I think you said there were 5500 lenders in that program so that’s correct. I mean, that’s just about every bank in the country I would think that’s, and so talk about almost 100% adoption by the industry to a program that’s it was for the success of it.

Mark Bryant: Yes, I think it’s more than what there are banks in the country that includes some of the non-bank lenders, some of the FinTech companies, and some of the others that got in the loop, Credit Unions and some of those writers.

Erik Bagwell: Mark talk about how 2021 is shaping up as far as loan demand and SBA and volume talk about that for a minute.

Mark Bryant: Okay, great. It’s been an interesting year for production on our side going by the calendar year SBA goes by the fiscal year so if you look at SBA statistics, it’s from October 1 through September 30 but focus in on our calendar year is started slow, you had PPP and Eidl and other ways that support morosky get money and, like we’re still hunkered down at the house and no new back saying that that that point out to the mass public. And so, started slow that first quarter, but it’s ramped up since then you can see that not only in our numbers, for example, our pipeline right now is at 80%, higher than what it was back in January, that the volume of loans coming through. And I think if you look at SBAs numbers, that weekly tracking I do, it’s on [inaudible10:23] website, where they list the weekly approvals that have gone up quite a bit, it’s kind of been a steady climb over the last several months so, I think for us, it’s got to be a fantastic year. These enhancements have helped that and something that, Congress approved that borrower and benefited from and banks have benefited from that and so, I think it’s going to be our best year ever.

Erik Bagwell: Good deal. And there are probably some folks listening that are in SBA already. Maybe folks that are thinking about getting into it talk a little bit, and you did this in your first or your intro. Talk a little bit about our business model, what we’re doing here at the bank, and specifically, well, maybe a little more detail for those folks.

Mark Bryant: Okay, great. The way we’re set up here, and this is, I guess, maybe the big bank model is, we’ve got 300 or so branches, and out there within the footprint, and so six-state footprint, and so each of those courts has conventional lenders in the market. And so what we try to do is put an SBA loan officer within the local markets, and so they work on loans that they generate about half the loans that we do, our SBA lenders bring in themselves from CPAs, or lawyers or Business Brokers, Real Estate brokers, different sources. The other half they get from the internal referral sources of the bank so generally the conventional lenders, but that program is open to anybody in the bank, anybody, and somebody meets somebody at church or neighborhood or something, and they talk about an SBA or USDA loan.

And they refer that over if it closes, they get an internal referral fee, we pay external referral fees, which is pretty standard in the SBA world and I don’t know many high volume SBA lenders, the individual loan officers out there that do significant volume that doesn’t have some paid referral sources and sending them deals it’s kind of the model itself. But as I said, we’re set up is kind of an autonomous department that takes care of most things ourselves and you got the processes going pretty smooth. But I think that model is pretty standard do for some of our competitors and the SBA world, last I saw in the top 50, in terms of seven-eight lenders and top 20 or so and 504 lenders.

Tom Fitzgerald: I would imagine the last year, year and a half has been kind of a whirlwind with the PPP program, and then moving into 21, as you talked about, we’ve got vaccines now we’re sort of the economy’s moving into a different place than it was a year ago. What do you see as some of the challenges now in the SBA program?

Mark Bryant: Probably the biggest challenge is just employees, there are so many more loans being done by some banks that maybe weren’t doing SBA loans before PPP. And you think about it, PPP required to be in the program, banks had to set up certain things, they had to get systems in place, and monthly reporting to SBA and a lot of those things. And so, in that process, some of the barriers to entry that are kind of fearful to some banks, I don’t want to do SBA because you got to do this and you got to do that well, they had to do it for PPP.

So, now that we’re sitting after PPP, a lot of banks have thought well, we’re already into it that seemed to go pretty good the SBA get on a national level, a lot more exposure and visibility from PPP and so that they get that builds excitement itself, but anyways, from that you got, it’s hard to recruit top-notch people, it’s hard to retain top-notch people and so we, do the best we can there. We got a great staff, but it’s getting employees I’d say the toughest part, your competition itself now that you got more lenders out there, the competition itself is tougher.

Tom Fitzgerald: Right. And I would say with interest rates right now, so tight and a lot of the banks that did get into the SBA program the past few years, the fee income from the sale of the loans, it’s been kind of a tremendous source of additional revenue for them. What are some of the other main benefits of an SBA lending program as it relates to the kind of bottom line of a bank and trying to help generate additional revenue?

Mark Bryant: I think the financial benefit of the fee income you mentioned, that’s the biggest advantage I guess, to a bank, just the premiums are high but a great market the last several year’s matters of fact, looking back 30 years and SBA lending the only time I can think of that premiums were low, or for a while non-existent was at the start of the Great Recession. That world kind of fell apart and a lot of aspects of the financial realm and so other than that premiums have always been pretty high to where there’s good money in it from the bank side, I think one aspect of SBA lending that’s beneficial, it’s a look at it kind of like an incubator, we’re loaning money to borrowers that by SBA is rules, you cannot get a conventional loan.

There are certain requirements on that some specifics to that I call it credit elsewhere, where we have to certify that on our end, and our credit department does a great job of that. And so what we do is we think about it, we get these customers that aren’t qualified for a conventional loan, we bring them in, give them some money, get them going. And then the goal and hope are that they grow out of that, that they expand, that they’re successful, they use that as relatively cheap startup money, or expansion, money or transition money, as compared to hard money lenders, and some of those other sources that are a lot more expensive money for them so, the SBA program itself is a great incubator.

Tom Fitzgerald: Let’s kind of stay on that subject of fee income. How would you assess right now the secondary market activity for the 78 program and loan sales in there? And I guess that’s a piece of that is the type of premiums that you’re saying, in that business?

Mark Bryant: Well, for the secondary market for 78 loans, the big determinant on the premium is the term of the loan and the interest rate. And to fit into a pool, the loans need to float, generally quarterly, some of them I believe, are monthly float, we do typically, quarterly float, but I’d say probably 80% of our loans, we do offer some fixed-rate loans and other options from time to time, going along with our art department of the bank, some interest rate swap, so we do a lot of a real estate loans that do have an interest rate swap to them. So, that’s always good, something a little different do for South state having that internal ability to do, but for the premiums, if you look at the bid sheets that come out, some of them are for real estate loan at prime plus two and a half or higher, and prime plus two and three quarters is the highest SBA rate the ball allow for a loan, like over 25,000, or 50,000.

But anyway, our minimum 350,000 that we use as kind of our benchmark, but your premiums about 20% and so anything over 10%, you have to split with SBA, so if it’s something that the investor pays 20%, the bank would get 15. So, your 10 year premiums are strong and so it’s just a bit a good market for that and as I said, other than a short one-year period or so back around 2008, I’ve always considered premiums to be pretty strong. There are times like right now, which are other than 30 years ago, the highest that I remember right now the premiums right now.

Tom Fitzgerald: Well, that’s pretty impressive that double-digit premium. I’m sure it’s got our listener’s attention as you said that.

Erik Bagwell: Mark, go ahead, Tom I’m sorry.

Tom Fitzgerald: No, you’re good.

Erik Bagwell: Mark, tell us why USDA lending’s increased over the past few years. So you hear more and more about that as well in banks we hear banks talking about it.

Mark Bryant: I think part of its visibility, and there are groups out there that their service providers and the LSP world that kind of help you understand that process. We’ve got 12, USDA loans 12 or 13 on the books but I wouldn’t consider ourselves USDA experts by any stretch of the imagination is a different program very similar to the 78 programs and we have a consultant that we use that we bring in early couple bring them in early and they help prescreen these loans, structuring them through eligibility and make sure that they’re going to work it can be a lot longer process to get an approval for especially for a larger USDA loan, but it’s a great program, a lot of similarities to the 78 but something that we feel to seek and look for and some of our more rural markets we’ve had some luck in this.

Erik Bagwell: Alright, Mark, any predictions on SBA lending over the coming years, look into your crystal ball and let us know what to expect?

Mark Bryant: Okay. I don’t know what’s going on tomorrow nevertheless, in the coming years, but I would say SBA lending and USDA lending will continue to expand I think the exposure that the SBA programs have received from PPP whether it’s with lenders or with Small business owners that are more aware of the program. I think it’s just going to continue to grow and grow in the coming years. Another thing I think that’s going to happen is you’ll see a more dedicated SBA lending team. So, banks that are doing SBA lending, instead of having somebody that does mortgage loans and he locked loans, and also does our SBA loans, I think you’re going to see more people that are focused and dedicated SBA lending to include in a lot of cases, these lender service providers, which are outside groups that are vendors of the bank that you get approved by SBA to do work with you they help you out that give you that assistance.

The standard operating procedure booklet of the SBA is now 590 pages and there’s a lot of gotchas in there that you got to be aware of, and we use the four set of eyes approach at the bank in terms of screening loans and making sure that we eligibility in a structured right, get the loan officer to start who should know everything related to their job, the underwriters that the bank, who are experts on exposure and structuring the loan, credit elsewhere, some of these other aspects, the loan closers and that’s all they do close SBA loans. And then finally, the closing attorney that we engage outside counsel, we’ve got 12 or 13 of them scattered throughout our footprint and that’s all they do, SBA loan closings, they’re the ones that when you go to these conferences, they’re not only at the conference, they’re generally the ones that are given the classes on legal aspects of SBA lending. And so we had a lot of good resources there from outside of the bank to help us but I think you get to see more and more that specialization.

Tom Fitzgerald: Let me ask you, because you talked about, again, these banks that a year ago didn’t do SBA lending, but they got into the PPP loans when they sort of learned the ropes, so to speak. I can just imagine a small business owner out there, it’s just being inundated with SBA lenders now coming through the door, trying to say, hey, let’s keep this going. Is that the way it is out there, or is it not kind of how I envisioned it right now?

Mark Bryant: Yes, I think there’s now that PPP is over from a new loan perspective, still working on forgiveness course but the new loans people who got an Eidl loan, who want to Eidl a loan to qualify for it had probably already got that some of the other programs are winding down. Hear different things in different markets in terms of the conventional lending appetite, some places are still a little tight. Some places are more open and I don’t know if that relates to when they kind of came out of hibernation mode and opened up businesses and people started getting out, which seems like it kind of phased-in different places in the country that might be a part of that. I don’t know but I think you get more opportunities for SBA lending now than you ever did just because of exposure from PPP.

Erik Bagwell: Mark, this has been great. We truly appreciate you coming on with us today. Thanks for all you do for the bank and more importantly, Mark is a 26 year Air Force Veteran and

Tom Fitzgerald: 24.

Erik Bagwell: Thank you so much for your service to our country. So thanks, man.

Mark Bryant: Both fun jobs, joy them both, so.

Erik Bagwell: Thank you, Mark.

Mark Bryant: Thank you.