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Saturday, Sep 30, 2023

Banks Debate ‘Lending into a Pandemic’

If a company’s revenue falls in half to say $25 million from $50 million the preceding year, most banks would be reluctant to issue a new loan, citing regulatory and audit issues.

“That’s not a typical loan you’d do,” CommerceWest Bank Chief Executive Ivo Tjan said. “We would never do that loan when you see all these negative trends.”

This is where the government’s Main Street Lending Program kicks in—to help mid-size companies adversely affected by the pandemic.

“The Main Street Program is a product that allows you to lend into a pandemic,” Tjan said. “You cannot do that on a normal loan.”

While there was a mad rush last April by small businesses and local banks in Orange County to participate in the Paycheck Protection Program (PPP), the Main Street Lending Program has taken longer to get off the ground, finance execs told the Business Journal.

“It’s a very complex program,” said Hamid Hussain, president of real estate and commercial banking for Banc of California. “The program can fit and work well with [a] company, but there is a lot of work to get it done.”

The $600 billion Main Street program fills a gap between the Paycheck Protection Program for small businesses and a separate Fed program to buy debt issued by large corporations. It’s an effort by the Federal Reserve for banks to underwrite loans to small and midsize businesses that aren’t large enough to access corporate funding markets.

Businesses with revenue up to $5 billion or fewer than 15,000 employees can apply for loans of at least $250,000.

The loans have five-year terms; borrowers can delay principal payments for two years and interest payments for one year.

Nationwide, the program, which expires on Dec. 31, hasn’t generated many loans. Through Sept. 16, banks have extended slightly more than $1.5 billion in loans under the program, the Wall Street Journal recently reported.

Some local banks aren’t participating. Pacific Premier Bank (Nasdaq: PPBI), the largest bank by assets based in Orange County, said it has “the size, strength and capital to make these loans on our own.”

Other banks are just now in the process of completing these loans for the program that is set to expire at the end of the year.

Here are what local bankers told the Business Journal about Main Street:


Irvine-based Sunwest Bank has thus far completed only one loan and has another 20 in the pipeline, ranging from $1 million to $40 million.

“They’re very complex to get through the whole system,” President Carson Lappetito said.

Sunwest decided to offer the program as a service to its clients, he said.

“The banks have been asked to be the conduits to provide needed capital to the American economy. As a result, some of the business lines aren’t as profitable as other types of loans. However, it’s the right thing to do.”


Irvine-based Commercial Bank of California is examining about four to five possible loans for this program.

“It’s a much more complex process than PPP,” Chief Executive Ash Patel said. “Underwriting a $30 million loan is more complex than a $300,000 SBA loan.”

The underwriting isn’t as simple because the bank is responsible for 5% of the loan while the federal government has guaranteed the other 95%, he said. Among its drawbacks are onerous compensation process and a “strict repayment” that includes paying off the remaining 70% in the final year of the five year loan, Patel said.

Furthermore, Orange County doesn’t have many borrowers who need loans of this size, he said.

“It’s a very interesting program that addresses the upper middle market customer who weren’t eligible for PPP program,” he said.


Irvine-based CommerceWest (OTC: CWBK) was one of the first banks in California to receive approval for Main Street Lending, a program that hits the bank’s “sweet spot” among its clients, Tjan said.

“A lot of banks are confused” by the program, Tjan said. “We spent a lot of time trying to understand it.”

While many executives think Main Street is like the PPP, there are significant differences such as these loans must be repaid and the bank must do a full underwriting analysis before issuing the loan, he said.

“I view Main Street as offensive capital, not defensive capital.

“With the idea of offensive capital, if you’re doing $20 million normally in annual sales and you’re now down to $10 million because of the pandemic and you can go back to $20 million, you’re a perfect candidate.”

The bank expects to issue $300 million to $400 million in such loans by the end of the year.

“We’re looking for companies that have strong business models and then COVID kicked in and caused havoc.

“I don’t believe a lot of banks are participating in it so we’re getting a lot of referrals from CPAs, the Fed and even other banks,” he said.

Banc of California

Santa Ana-based Banc of California (NYSE: BANC) received about two dozen inquiries about the program, Hussain said.

“For us, the program has been looking at our existing clients and working with them.”

The bank has decided to issue the loans to about five companies; the loans may go up to $50 million.

“Most have decided it wasn’t the right fit,” he said.

Customers were turned off by restrictions on executive compensation during the time of the loan and not being able to use the money to pay off other debt, he said. Another problem was putting together a five year projection plan.

“Trying to do projection in a pandemic and have them be meaningful is difficult,” he said. “The complexities of putting together the loan packages and the amount of information required is pretty onerous.”

Some banks are reluctant to participate because the Fed is only buying 95% of the loan.

“If the government is willing to take on 100%, that would be great,” Hussain said. “The problem is you create false incentives. The banks would only be interested in collecting the fees. The government wanted the banks to be interested in the loans and collect them.

“Banks wouldn’t apply their credit standards if they could sell the loans at 100%. The Feds want the banks to have skin in the game.

“5% is a decent amount. Take a $50 million loan, we would still be responsible for $2.5 million. Trust me, I don’t want to lose $2.5 million.”

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Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.

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