Key Lessons About the Payroll Protection Program for Financial Institutions

Mainstream headlines have badmouthed banking's performance in the Paycheck Protection Program. Often it is major institutions they criticize. But the fate of smaller business lenders is inextricably tied to their customers' survival beyond the coronavirus pandemic. So they took on the CARES Act program quickly and ran with it. These ambitious banks can now pounce on PPP round 2.

The first round of the PPP, as a limited time and limited funding effort, combined the worst elements of a land rush with a game of financial musical chairs. Adding to that frenzy were the frequent changes to rules and procedures as the Treasury Department and the Small Business Administration shifted gears on the fly as questions and issues came up.

“It’s been a real balancing act, building the bridge as you go,” says Jeff Gallery, EVP and Chief Credit Officer at Missouri’s Lead Bank, with nearly $400 million in assets. “We’ve been tweaking the process on a continuing basis. At the outset, we didn’t try to make it perfect, but to make it work.”

Now that the second round of the Paycheck Protection Program is out of the gate, community and midsize financial institutions are ready to go at it again.

As opposed to the criticism leveled at the nation’s larger banks over the handling of the government’s program, introduced virtually overnight, these institutions have earned the applause of small firms in a highly unusual period.

“I’ve received videos of people singing me PPP songs,” out of gratitude that they had obtained funds in round one of the program, says Rich Bradshaw, Chief Banking Officer at United Community Bank. The Georgia company, with $12.9 billion in assets, processed over $960 million in PPP applications, serving close to 7,000 firms in round one. The bank was out of the gate as soon as it had information to share with customers, holding a Webex meeting for 3,000 companies three days after the law passed on March 27.

“That seems like six months ago,” says Bradshaw. “It’s been an eight-day workweek since.”

That kind of remark is common among the banks interviewed. Working weekends to set up systems and then to process applications, often working into the wee hours, was the norm. Driving many was the realization that the nation’s small businesses were facing a rare kind of disaster. The decision to shut down the economy at many levels had the impact of instantly stopping a merry-go-round — while it was turning at top speed.

‘Congratulations! You’re Part of the Lending Team Now’

For many institutions PPP has been an all-hands effort at times. At Customers Bank, with $11.5 billion in assets, besides the relationship managers who routinely work with business customers, “we were pulling people from everywhere” to get 1,216 loans approved for a total of $384 million in PPP funding, says spokesman David Patti. At United Community Bank, a team of 60 SBA specialists was augmented with 500 draftees from other parts of the company.

“At United Community Bank, a team of 60 SBA specialists was augmented with 500 draftees from other parts of the company.”

Across the country, owners of smaller companies, without access to capital markets, meanwhile were on tenterhooks waiting for answers, and, finally, proceeds, assuming they could get their application in at all.

“Some of them have been very anxious, some almost in a panic,” reports John Lindley, VP of Business Operations for First Reliance Bank, a $659 million-assets bank based in Florence, S.C. Lindley describes the city, at the height of the state’s lockdown, as “pretty much a ghost town.” It was hard to be optimistic about business when coronavirus had cleared the streets.

“It’s been the full gamut of local businesses, everything you can imagine from florists to small insurance companies,” says Lindley. As the second round was poised to begin, the bank’s home page reported results thus far: “380 applications, $38.9 million, 13,000 jobs saved!”

Small Business Needs All the Help Lenders Can Muster

Something perhaps not fully appreciated in all quarters is that many small businesses were not simply waiting for the government to come up with a way to bail them out. While the PPP was portrayed initially by some as a bonanza of free federal money, just bring your bucket, on Main Street owners were already trying to apply their own resources.

Often owners resorted to tapping business credit card lines, personal card lines, and both business and personal lines of credit to keep their businesses operating, even if they couldn’t literally keep the doors open, says Jill Castilla, President, CEO and Vice Chairman at Citizens Bank of Edmond, Okla., which has $301.9 million in assets. Even with the first and second rounds of PPP fully deployed, she says, the economic impact on small business will require additional aid in spite of self-help efforts.

Castilla compares the steps taken to contain the disease, and the government’s efforts to aid business affected by the shutdowns thus far, to applying a tourniquet to stop otherwise unstaunchable bleeding.

The Oklahoma banker says that the drive to get PPP funds as the pandemic spread was so strong that her very small bank was receiving applications from out-of-state companies desperate to find an institution that could help. She heard stories about firms whose own business banks couldn’t serve them. Hard as it was to turn them away, the bank couldn’t help, needing to address local needs.

Round Two Begins. How Long the $$$ Last is Anyone’s Guess

The new round of funding, extended under the Paycheck Protection Program and Health Care Enhancement Act, totals $310 billion more for PPP, with $60 billion set aside specifically for small, midsize and community lenders. The latest package also includes $50 billion more for the SBA Disaster Loans Program and $10 billion more for its Emergency Economic Injury Disaster Loan grants.

It’s hard to conceive of $660 billion, in total, not being sufficient to meet an economic challenge, but small businesses are a huge swath of the American economy.

“The Consumer Bankers Association estimates total demand at $1 trillion.”

“We think PPP is very important to keep people on the payroll with healthcare so that as the economic recovery begins firms aren’t ramping up with a need to bring back workers who were laid off or, worse, hire and train new team members,” says Jay Sidhu, Executive Chairman and CEO of Customers Bancorp. “It’s hard to find good people who know and understand a job — keeping good teams together through the crisis will be a real benefit for the recovery.”

There is some optimism that the latest round of funding will be enough to meet remaining demand for PPP money. Yet some commentators think the new money will be spoken for before the end of the first week. The Consumer Bankers Association estimates total demand at $1 trillion.

Some of the optimism comes from bankers’ observation that much of the demand will come from smaller companies, especially the 1099 contractors and single proprietors who were not among the first prospects that the program was opened to.

The thinking is that many of these businesses are much, much smaller than those that applied during round one, and $310 billion will serve more takers. United Community’s Rich Bradshaw says the average loan size in round one for his institution was $140,000 and he expects the round two average to be lower.

It’s highly likely more aid will be created down the road, barring a dramatically strong and rapid recovery.

Lessons learned during round one, then, will reverberate through financial institutions as they proceed through the pandemic period and the post-pandemic period. The following is distilled from interviews with six active players in PPP.

1. Agility Works … and Comes in Multiple Flavors

Much as some think of community lenders as dinosaurs, they are not among the banking institutions that have taken a reputational hit nor been sued. Each of the institutions interviewed made participation in the PPP its top priority, got out there early with a program, and worked the phones, their websites, email and social media to tell small businesses that they were ready for them.

Most of those spoken to set up one or more partnerships with fintech companies that brought them turnkey solutions or worked with them to get existing systems ready and capable of such features as online applications.

“It’s as if big-government policy and agile software development had a baby and called it PPP,” wrote David O’Connell, Senior Analyst at Aite Group in a blog. “The vendors of PPP systems really stepped up to the plate.”

Some examples:

  • The Provident Bank, a $1.1 billion institution in Massachusetts, initially partnered with Kabbage and then partnered with Lendio to provide businesses with an online channel for PPP. Even after round one wrapped up as funding ran out, “we kept the funnel open and Lendio kept taking applications,” says Carie Kelly, Vice President, Marketing.
  • First Reliance stood up its program quickly with tech from FINSYNC.
  • Customers Bank tapped OakNorth to develop an advanced online application using algorithms and big data.
  • Citizens Bank of Edmond worked with Teslar Software to develop an online application and update system and brought in MX to develop an improved portal for round two.

A common issue throughout round one was the crashing of overwhelmed application systems. Rich Bradshaw says that United Community solved this by creating a buffer between the would-be PPP borrower and the online application system. Initial links take business owners to a page that asks, “Want to get in line for your application link?” The user then gives some basic information. This enables United Community to queue up applicants into the application process at a pace that prevents crashes.

2. Business-Side Financial Literacy Is Less Common than You Think — Help Fix It!

Ideally everyone interested in a PPP loan would have been starting from the same place, but that wasn’t and couldn’t be the case. Lenders interviewed pointed out that some companies, by virtue of their size or prosperity, tended to have more outside professional advisors like CPA or law firms working with them.

“One lender noted that a great deal of hand-holding was needed with smaller firms, whose documentation often seemed ‘like it had been prepared on the back of a napkin’.”

However, many small businesses don’t have a shelf-full of experts at their beck and call. One lender noted that a great deal of hand-holding was needed with smaller firms, whose documentation often seemed “like it had been prepared on the back of a napkin.”

For after America gets reopened: The PPP experience suggests that financial literacy for small businesses is an area that savvy lenders can help with in the future. Training in key business practices can help cement bonds between a small firm and its lender. This could take the form of seminars or, in this era, webinars or Zoom gatherings.

Even if it’s a conversation between a commercial banking officer and a customer, it’s more help than some large organizations rendered to small players. One major New York City bank not only failed to notify some business customers about PPP, but couldn’t accommodate them all for an explanatory webinar. Even the archived version of the presentation was unavailable later, such was the volume of demand.

3. Bankers Need to Exercise Judgment — Sometimes Triage

Business loans always have to meet certain standards. But Oklahoma’s Jill Castilla says her bank found that current circumstances called for a different type of judgment.

Some firms clearly couldn’t make a good case that they would be impacted sufficiently by COVID-19 to warrant a PPP loan. On the other hand, some would-be borrowers clearly needed to get into the queue as soon as possible if they were to survive. For others aid wasn’t an immediate survival issue.

So, triage became necessary.

“We felt that we had a duty to do that,” says Castilla. “We felt we had to get help to those in most need. You cannot serve everyone. But that is hard to explain to a customer, because the pain is certainly real today on Main Street.”

4. Communicate Fully But Communicate Carefully.

Some of the lenders interviewed stressed the need to reach out early, frequently and appropriately to people interested in these programs.

But time and again they also said that they found it is equally important to communicate precisely so that the institution doesn’t end up inadvertently over-promising. Especially in a time when official information is coming through in a piecemeal fashion, a lender can’t take the chance of going beyond the facts it has, no matter how much it genuinely wants to serve its community.

The Federal Reserve’s Main Street Lending Program

While the PPP has occupied center stage, it is not the only credit program Washington has devised to address today’s extraordinary times. Another is a set of programs out of the Federal Reserve, under the overall “Main Street Program” banner.

Bankers are still studying this option, such has been the urgency of PPP. While the name of the program, and its description, speak to the needs of small and medium-sized businesses, one potential sticking point is that the minimum size loan is $1 million.

“It’s a little early to tell if we can use it,” says United Community’s Bradshaw. “As a larger community bank we have some larger clients, really, middle-market borrowers who might be able to use this.”

Castilla, with a much smaller bank, says the Fed’s program “has a lot of potential,” but for the customers of institutions like hers, “the Fed has to reduce that loan amount.”

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