Loans to bank insiders often arouse negative feelings to bank outsiders. Those people often hear news of inordinate salaries or bonuses paid to bank CEOs. So we were not surprised when there was pushback to the idea of forgiving certain insider loans under the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). Reading the comments on the proposal proved there was indeed.
Loans to insiders, whether they be executives, shareholders, board members, or other related parties can cause problems if they are not subject to the same—arm’s length—underwriting standards as other loans. However, if handled properly (which they are supposed to be), especially in a situation as we have today, loans to insiders can help save entire towns. This is precisely why, in spite of certain objections, some SBA PPP loans have been exempted from previous limitations.
For example: 5-Star Bank of Bridger, N.A. is the only bank that operates in the small town of Bridger, Montana. With a population of about 750 and 169 businesses to support, it is entirely possible that one or more of the bank’s insiders is involved with another business.
Perhaps a director is an owner at a local diner or the president and his wife theoretically could operate a crop preparation service. Whatever the circumstances may be, under the guidelines set-forth in regulation O, such businesses would not have been eligible to apply for a PPP loan, and likely would not survive the pandemic.
However, under a recently extended COVID exemption (Federal Register Feb. 17, 2021) these companies are now eligible to apply for, and receive, this much-needed lifeline.
You can find Bank of Bridger on page 7 along with 54 other banks that each had more than a 1000% increase in insider loans during the third quarter of 2020. The first 43 reported no insider loans at June 30th but did at the end of September; they are listed alphabetically by state. The rest are listed by insider loan growth percent (descending).
You will notice that not all of these banks offered PPP loans, so the loans extended to their insiders are presumably not attached to any government guarantees. Although, we can be fairly certain that these loans provided a much needed source of funding. The chart below clearly shows that insiders are not seeking new loans as much as they are paying down outstanding loans.
Loans to bank insiders totaled $35.2 billion at the end of 2019. They rose 2.5% in the first quarter of 2020, where they peaked at $36.1 billion. Interestingly, that was before the exemption went into effect.
The exemption for PPP loans went into effect in April, and was not applicable until the second quarter 2020. Loans to insiders dropped 4.6% in the second quarter and another 0.6% in the third quarter. They stood at $34.2 billion.
This decrease in loans to insiders of more than 5% in a six month period would indicate that bank insiders, much like the rest of us, are tightening their collective belts and trying to adjust to today’s new normal.