Small banks see a boost from PPP loan activity
Good customer service, expertise seen as positives in attracting customers
Mariam Haddad had given up on getting a Paycheck Protection Program loan this spring, even though her business was suffering. She found the loan process confusing and said she couldn’t get answers from her bank, one of the largest in the country.
“I felt disappointed with the bank I was doing business with, the way I was left twisting in the wind,” said Haddad, founder and CEO of Performance Communication Co., a small consulting firm in Houston.
Frustration boiled over in early April when small businesses struggled to get loans as part of Congress’ pandemic relief package. Big business benefited from the very program that was intended to help the small. The restaurant chain Luby’s and Houston-based Gulf Island Fabrication are among companies that received $10 million each in low-interest PPP loans, which is forgivable if 60 percent is spent on payroll. (Luby’s has since said it would sell its restaurant businesses and assets, including its real estate, to pay off $35 million in debt, distributing the balance of the proceeds to shareholders.)
Meanwhile, several small-business owners said they struggled to get the attention of big banks at all. Small banks, in turn, took advantage of the moment to grab hundreds of new customers each.
“I’m not the richest customer,” Haddad said. “I don’t have the biggest accounts.”
After giving up on PPP, Haddad talked to a friend, Jody Lee, who happened to be chairman of Southwestern National Bank. Southwestern is based in Houston and has a handful of branches in Texas. The bank’s employees walked Haddad through the loan application process and approved her loan.
“During challenging times you find out who is really interested in caring about you and your business and who is just interested in your dollars,” Haddad said.
Now that Congress has passed a second wave of funding and ap
“During challenging times you find out who is really interested in … your business.”
— Mariam Haddad, small-business owner
proved changes designed to help small businesses, close to half of the 4.48 million loans as of May 30 were handled by banks with less than $10 billion in assets, according to the U.S. Small Business Administration. Big banks with more than $50 billion in assets handled a sizable share as well, about one-third.
Small businesses usually use big banks, especially for deposit accounts, said Ron Shevlin, research director at Cornerstone Advisors, a bank consulting firm in Scottsdale, Ariz. His firm surveyed 1,200 businesses in April and found that 80 percent of small businesses identify a big bank as their primary bank.
With a deluge of customers scrambling for what looked like limited dollars in April, big banks in some cases failed their smallest customers.
Sometimes, big banks prioritized customers with a pre-existing lending relationship, said Chris Williston, president and CEO of the Independent Bankers Association of Texas, which represents community banks. “That left a lot of small-business customers to feel like they weren’t serviced by their big banks,” he said. The New York Times found that big banks also prioritized wealthy private-client customers and big corporations.
Bill Balke, whose wife, Valerie, runs a Houstonarea insurance agency, rushed to get a loan early in April when he thought the funds would run out. Although insurance agents can work remotely and generate renewals of existing policies, new business almost ground to a halt.
He called someone at JPMorgan Chase & Co. but said the person answering the phone didn’t know whom he should call. He couldn’t find information on the bank’s website on how to apply. He called BBVA USA, where the couple has a business loan, but was told the bank was only doing PPP loans for customers with business checking accounts.
Getting desperate, he emailed his mortgage banker at Regions Financial Corp. He immediately got a call back close to midnight and was told to call a vice president of personal banking. The banker worked all weekend and Balke finalized the application on Monday, he said.
A week later, the first tranche of PPP allocations had run out of money and his banker wasn’t sure his application had even been submitted to the SBA.
So Balke called a friend who knew some bankers for advice and was referred to the CEOs of four local community banks. All four of them responded personally. He ended up getting a partially forgivable $69,000 loan from Bank of Houston, keeping staff of 12 people fully employed throughout the early months of the crisis.
“We maintained all of them at the same salary,” Balke said. “We didn’t lay anybody off.” Now, he said sales are picking up again, so the loan hit right when it was needed.
A spokesperson for BBVA USA confirmed the bank required PPP customers to open a checking account to help the bank comply with the Bank Secrecy Act and mitigate fraud and said the bank funded $3.3 billion in PPP loans in less than 60 days.
Chase, which is also Haddad’s bank, and Regions declined to discuss individual cases, but both said they funded billions of dollars in loans to small business. Chase said half of its more than 250,000 PPP small business customers had fewer than five employees. Birmingham, Ala.based Regions said it provided 40,000 PPP loans totaling $4.8 billion as of May 27.
Still, the fallout from those early days meant small banks in the Houston area were able to attract new customers, some of whom moved their checking and savings accounts to their new banks.
Houston-based Allegiance Bank reported on its first quarter earnings call April 30 that it funded more than 3,500 PPP loans. Twenty percent of those were new customers and many of them opened new deposit accounts, said CEO Ramon “Ray” Vitulli III. “We didn’t care if you were an Allegiance Bank customer or not,” he said.
Bank of Houston, which has one branch in Houston and one in Dublin, got hundreds of new customers, James Stein, its chairman and CEO, said.
Banks generate fees associated with the PPP loans, which vary based on the size of the loan. Bank of Houston, for example, probably earned non-interest income in the seven figures based on aggregate loans of $62 million, Stein said. That helps make up for the low-interest rate on the non-forgivable portion of the loans—1 percent.
The question facing Bank of Houston and other smaller banks is whether these new customers will stick around.
Lee, the chairman of Southwestern National
Bank in Houston, said the bank likely will keep most of the 200 new customers it got as a result of PPP. She noted that her bank has a variety of services useful to small business: payroll and treasury management, ACH and lockboxes. Plus, “when you call us, you get a person,” she said.
Her staff scrambled to accommodate new and existing customers during the crisis, working late or early in the morning and on weekends to try to access SBA’s overloaded and slow computer program.
Shevlin of Cornerstone Advisors explained that several factors influence whether small banks keep customers: whether the institution has a lending relationship with the customer, whether it understands the business’ particular industry and whether the bank is convenient and offers good technological services.
“Generally speaking, big banks provide better technology and probably better business expertise,” he said.
In the past, people have pledged themselves to small banks that didn’t survive.
After the financial meltdown of 2007 and 2008 and the subsequent Occupy Wall Street movement, many people fed up with the big banks opened accounts with small banks and credit unions. But in the following years, many small banks sold their franchises or failed. There were 8,132 banks with less than $10 billion in assets at the start of 2009. Ten years later, that number fell by more than a third.
Some of them struggled under the weight of bad loans made before the last recession and others combined with larger and more successful institutions to improve profits for shareholders.
Small banks may be kind to their customers, but history hasn’t been kind to small banks.