The Ballad of the Small Banker: An SBA Lender’s Experience with PPP Loans

The media has been giving banks a lot of bad press for how the Paycheck Protection Program (PPP) was handled. While small businesses are scrambling to obtain emergency funding, the COVID-19 crisis has exposed some of the shortcomings of the big bank system.

Undoubtedly the PPP has its problems, but there are nuggets of success. This is the story and timeline of a small banker’s experience with PPP loans. This is how the manual process beat the automated process and reawakened the legend of John Henry.

Wednesday, March 11 – The Coronavirus Outbreak Becomes a Pandemic

On March 11, the COVID-19 outbreak was officially characterized as a pandemic by the World Health Organization (WHO). By this time, the U.S. economy has already started to experience the downturn. Small businesses are losing money fast and worried about being able to pay their employees. Because of all this, banks and financial institutions are bracing for mass delinquencies.

Greg Tyre is a small business banker who underwrites loans at The Piedmont Bank in Georgia and is an SBA-preferred lender. It’s a small bank that caters to the local community, and they are preparing for the PPP (nicknamed the “Triple P”) to launch.

A week or two before the PPP is created by the CARES Act, most of the bank’s small business customers are already shutting down various business activities. Lots of small business owners are calling Greg in a panic and asking how to manage their enterprise since cash flow has dwindled. This leads to a lot of loan deferments. Business owners are trying to determine the optimal time to layoff employees without harming what little business is still coming through the door. Then at some point, Greg’s phone stops ringing, as if people have begun to lose hope.

Greg knew the PPP would be coming soon, and his team is trying to sort through the loan deferments before the program is launched. Meanwhile, the Federal Reserve drops the interest rate a full point in mid-March, which means that the bank’s income drops accordingly for both new and adjustable loans. The bank was not profiting on interest anyway due to the deferments, and now that the interest rate is lower, they are losing money just by standing still. This is obviously a bad situation for community lenders like The Piedmont Bank, knowing what’s on the horizon.

Friday, March 27 – The CARES Act Is Signed Into Law

President Trump signs the CARES Act on Friday, and the Paycheck Protection Program is created. Small bankers like Greg have been waiting anxiously because he knows that the “Triple P” will be a saving grace for his clients.

The Piedmont Bank reviews some automation solutions, but they decide to process the loan applications manually. Everyone who works there is preparing to put in long hours and a lot of elbow grease. They know they’re going up against big banks and their automated systems. It’s reminiscent of the folklore of John Henry, the “steel-driving man” who competed against a machine with manual labor.

Big banks are taking the automated route instead. Their digital systems are not designed to handle the PPP loan program, and they do not immediately have the regulatory processes in place to detect risk and fraud for these circumstances. It would be easier and faster to only serve people they had already vetted, so they tell customers that an existing loan or credit card account is required to get a PPP loan. Otherwise, since their automated system isn’t set up to onboard new PPP clients, they can’t help.

The Piedmont Bank’s policy is “first come, first serve.” They don’t prioritize any particular customers – they’re just going to help as many people as they can. We will soon see who wins this race between community banks and big banks. John Henry has an advantage, but he doesn’t know it yet.

Tuesday, March 31 – The PPP Application Is Released Online

Greg and the lending team at The Piedmont Bank are watching an SBA educational webinar when the host announces that the PPP application is available online. Greg and his coworkers look at each other for a few seconds, and then it’s a race to the Internet to get the application. Once it’s downloaded, they begin sending it out to their small business customers immediately.

Over the next few days, customers are calling with questions about the PPP application and how to fill it out. How do I calculate salary? Do I include 1099 employees? How do I calculate commission for my sales team? No one at the bank has definitive answers because the law is not clear.

Thursday, April 2 – Some PPP Clarifications Are Announced

The Treasury Department and the SBA clarify the rules regarding PPP applications on Thursday afternoon. Now some loan applications have to be revised, recalculated, and resubmitted to the banks as soon as possible. Greg and his team are using phone, email, and fax to reach out to customers. There is a mix of educated guessing and chaos.

With clarifications released so close to the program deadline, it’s a major stress test for these financial institutions. Although, it’s a bit easier for small banks to adjust their sails and educate their staff, since they do not have technology to reconfigure.

Friday, April 3 – E-Tran Opens for PPP Application Submissions

On Friday morning, E-Tran opens up and the PPP application submission process begins. E-Tran is the SBA’s application entry and authorization tool used by banks to determine if an application qualifies for an SBA loan. The E-Tran portal opens at 8AM and closes at midnight each day.

The big banks are using automated systems to enter applications into E-Tran. However, the community banks have a limited number of active logins and sessions they can have open at once. This means that the bank employees have to work in shifts and take turns processing loan applications.

While The Piedmont Bank considered some automated, online solutions, they ultimately decide to process the applications manually. Greg and his colleagues soon realize that the paper PPP application is less specific than the E-Tran online application, so bank employees are tasked to obtain the additional information. (For example, E-Tran requires a NAICS code, a 9-digit ZIP, and the date of origin for the business.)

Friday is the first of nine straight days, working sixteen hours per day, for everyone at The Piedmont Bank. Business owners are calling Greg “freaking out” and asking if he can “help save their jobs.” Greg is concerned that if they slow down at all, their customers may lose out on this opportunity. He’s worried that the manual process will let them down. He does not want to fail his customers in this time of need because he knows how important it is to those businesses, their employees, and the community. When asked, he wants to be able to say he did everything he could to obtain these loans.

It’s a true team effort. Every bank employee is involved and doing what they can to secure these loans for their customers. The CEO is there in the trenches too, helping with application research, follow-up phone calls, coffee runs, and more. Pizza and fast food are enough to keep them going for the first few days, but they lose their luster after a while. What takes over is a sense of purpose and accomplishment. The office has an energy and a buzz to it because they know they are helping people. Greg is humbled that he and his team can help businesses get the funding they need.

Wednesday, April 15 – The Legend of John Henry

By Wednesday, they have reached their limits. They literally cannot process any more PPP loans. Greg says to one of his younger coworkers, “Don’t die with your hammer in your hand, John Henry.” He then explained who John Henry is.

According to folklore, John Henry’s ability as a steel-driver was judged in a competition against a steam-powered drilling machine. John Henry defeated the machine, but he died in victory with his hammer in his hand. His tale demonstrated that the manual process could triumph over the automated process.

The Piedmont Bank expected to lend $60 million in PPP loans. They started to stress at $90 million, and they ended up lending $120 million. It got to the point where they had to borrow from the Federal Reserve to make more loans because they ran out of money.

Now that they are no longer taking additional PPP applications, when small business owners contact them, Greg uses his network of community bankers to find a lender who can support that applicant. This close, yet extensive network of bankers is helping save companies and jobs. This goodwill leads to an overflow of positive feedback. Customers make comments such as, “You guys called me back. I simply sent you a text, and you helped me out.” And, “My bank didn’t help me at all. I’m looking at moving my accounts, and you’re at the top of the list.”

Whereas big banks serve a legitimate purpose in the financial world, many small businesses felt caught up in the wash when dealing with big banks during Round One of PPP. Many of these customers felt like they were not getting personal treatment from their bank. Many did not have a banker to contact directly to ask questions. The big banks relied too heavily on automated systems and didn’t adjust in time to accommodate customers. In trying to satisfy lending regulations, they turned away a lot of business owners and gave the impression that they just didn’t care or didn’t have the time.

Personal Service Made All of the Difference

Personal service won the day. This is something that has always set community banks apart from big banks. The PPP loan rush demonstrated that the manual route, the old-fashioned idea of providing good customer service, is a solid approach in some cases.

For Greg, it’s been a humbling experience. It was amazing to witness the bank team working together so tirelessly and helping so many people. The employees and customers created a sense of “We got through this together,” much like a foxhole mentality. For Round One of the PPP, John Henry beat the steam engine.

Friday, May 1 – Looking Ahead

As we assess Round Two of the PPP, the big banks have had time to get their solutions coded and are proving a more worthy adversary to the community banks. As of May 1, big banks are approving about 53% of the total PPP Round Two dollars lent and 46% of the loans authorized – compared to 32% of dollars lent and 38% of loans approved by ‘small banks’*. Given time to breathe and adjust, the big banks came out of the gate with a full head of steam in Round Two. We’ll see if John Henry wins in the end.

Here’s my take: John Henry and the steam engine are both needed. The steam engine (i.e. digitization and ‘bionic banking’) is necessary to operate in today’s technical world, but the PPP has demonstrated the value of personal service provided by community bankers. Perhaps John Henry won’t have to die with a hammer in his hand next time.

https://www.sba.gov/document/report-ppp-2020-data-reports