President Trump signed the $2.2 trillion CARES Act on March 27, 2020
The Paycheck Protection Program—the emergency small business loan program established by the CARES Act—has provided a much-needed safety net for businesses struggling as a result of the coronavirus pandemic. However it hasn’t been an entirely smooth ride for those involved.
The first tranche of funding—roughly $349 billion in loans—ran out in just 13 days. A number of larger publicly traded companies also made use of the program, prompting public backlash and the Small Business Administration to ask for the money back.
There have also been complaints from some businesses that the loans have been hard to get and come with too many strings, as well as complaints from banks who say that the SBA has been inconsistent with its guidance. Not to mention the technical issues that have arisen.
Despite all that, the program has provided roughly $660 million to businesses since the first funds became available at the beginning of April. On May 28, the House of Representatives voted to give borrowers more time to use the loans, as well as lowering the percentage required to spend on payroll in order to be eligible for loan forgiveness.
According to the Federal Reserve, data through April showed that the vast majority of PPP loans had been provided through smaller community banks, as opposed to the nation’s biggest banks. Jason Paltrowitz, executive vice president of corporate services at OTC Markets, said he’s heard from a number of community banks that the program has been massively successful for them.
“With approximately 100 community banks on our OTCQX Market, we continue to see the vital role these banks play in serving their communities. This has been proven again during the current crisis, as these community and regional banks step to the forefront of securing lending to ensure the survival of local businesses.”
Benzinga asked executives from four community banks around the country why that’s been the case, and how the Payroll Protection Program has worked for them.
Many Loan Applicants Needed Handholding
Exton, Pennsylvania-based First Resource Bank (OTCQX: FRSB) announced it had approved over $50 million in PPP loans as of May 5, slightly above what they had expected.
President and CFO Lauren Ranalli said her bank has primarily worked with small businesses that required a little more handholding than larger banks can typically provide. She thinks that’s a big reason why they’ve provided as many loans as they have.
“A lot of our small businesses, they don’t have a CFO. They’ve got a bookkeeper and they’ve got the business owner,” she said. “When you’re working with a smaller bank, you’re working with a lender who is talking to you and is walking you through the documents, and it’s a lot more hand-holding and a lot more of a comfortable experience. We were able to explain the rules, help them understand what they were getting into.”
Tamara Gurney, CEO of Mission Valley Bank (OTCQX: MVLY), which had given out around $68 million in loans at the time of our conversation said giving clients individual attention was critical.
“This is when people are realizing electronics are fine. But when you need a human being to talk to, and this is when everybody needs one because there’s sheer panic out there, having the ability to talk to somebody is huge.”
Big Banks Simply Could Not Service All Of Their Clients
Joe Thomas, CEO of Freedom Bank of Virginia (OTCQX: FDVA), said that larger banks likely had a harder time giving out loans by nature of their size.
“It did seem like the larger institutions were jealous [of smaller banks] of how much time, effort, and resources they dedicated to the PPP program. We got 60-70% of loans approved in round one. We hear from some of the megabanks that they only got 5-10% of the loans approved. So it is a stark contrast, diseconomies of scale that enabled the community banks to go one application at a time and key it in.”
“The bigger banks seemed to have had more of a challenge trying to get a process down,” said Mission Valley’s Gurney. “Word on the street, and what clients of bigger banks are telling me, is larger banks went to their larger clients first. So they were looking for their larger clients who were probably their best clients and wanted to help them first. Bigger banks have never had a reputation for being communicating with small business clients. That’s just my experience.”
Leonard Szwajkowski, CEO of Chicago-based Royal Financial (OTCQX: RYFL), said his bank ended up getting a decent number of new clients from Wells Fargo (NYSE: WFC), JP Morgan Chase (NYSE: JPM), and a mid-sized bank in Central Indiana as a result.
“I think we all know what occurred here,” he said. “The large banks used filters, and looked at it from the perspective of do they have an account? And do they have the corporate credit card? And do they have money on their line of credit? I don’t think the program was designed that way. And I think a lot of the large banks ended up having egg on their face because of the filters that they ended up putting on there.”
Technology May Have Played A Big Role
Thomas, from Freedom Bank of Virginia, said he suspects technological challenges initially played a role in making the program difficult for larger banks. His bank, which had given out roughly $263 million via over 500 loans at the time of our conversation, tried working with a fintech company, but changing rules from the SBA made that hard.
“In the first round it was very difficult for any of the large banks or fintech providers to batch submit files of PPP applications to get approvals,” he said. “Because the SBA’s E-Tran system was not conducive to receiving batch loans through APIs, it made it very difficult for the larger players and the fintech guys to gain any traction and be able to submit those loans efficiently.”
“[The big banks] have the technology to do far more loans, but I think it has to fit the cookie-cutter mold,” said First Resource’s Ranalli. “Anything that needed a little bit of attention, if it wasn’t cookie-cutter—the big banks were using technology that’s kind of black and white.”
Mix Reviews For The Small Business Administration
The four executives we spoke to had mixed things to say about the SBA’s handling of the PPP program.
Gurney, from California-based Mission Valley Bank, said there’s been frustration with the SBA’s frequent changes to the program. For example, the SBA originally guided that contract employees were to be included in payroll counts, only to reverse that decision.
“There’s a lot of frustration because the SBA has not been very forthcoming with guidance. The guidance we had on the night of April 2 changed on the morning of the 5th, and it’s been doing that, where every 24-48 hours we’ve been getting some updates that change what we were telling folks from the beginning. We had applications going that in effect had to be unwound and redone. And it’s been like that kind of the whole time.”
“I honestly have to tell you from my perspective, even though it was frustrating and time-consuming in certain circumstances trying to get through, I think it was a good experience,” said Royal Financial’s Szwajkowski. “Considering the heavy lifting that had to happen in a very short amount of time. There were long days for us, but I will tell you that all of our phone calls were returned from the SBA. They worked through the night, they worked on Sundays. One person spent three hours on the phone with us, they never let up.”
Freedom Bank of Virginia’s Thomas echoed that sentiment.
“The SBA’s been maligned through this whole thing. But we had a tremendous amount of cooperation from the SBA when we had questions.”
Community Banks See This Moment As A Victory
The fact that many community banks were able to give out as many loans as they did was seen as a major victory for the four executives we spoke to.
“That’s one of the beauties of being a smaller bank, is we can be more nimble,” said Gurney. “I’ve spoken to my peers in banks around the area and we were all doing the same thing. We were in on nights and weekends, and it was an all hands on deck effort to get it done.”
“We’re really pumped about all the help we’ve been able to give to the community,” said Ranalli. “This is right in our wheelhouse.”
“Everyone’s been talking for the last 20 years or so about how there will only be large banks in this country,” said Szwajkowski. “For me, what this says is there really is a purpose for the small ones. In this case, the large ones couldn’t handle the volumes. In my estimation the community banks did a tremendous job.”
Image source: The White House
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