The federal government’s Paycheck Protection Program was designed to keep small businesses and their millions of employees afloat as COVID-19 battered the country’s economy into recession. And to say that it’s been popular would be a gross understatement.
Shortly after the PPP application deadline for “forgivable” loans was extended last month until Aug. 8, the U.S. Small Business Administration (SBA) reported it had made some 4.9 million loans for more than $521 billion, with an average loan size of a little less than $107,000.
That money was provided by 5,460 lenders, primarily banks that handled nearly 80% percent of every PPP loan in the country, the SBA said.
Of those totals, about 100 Kentucky-based banks, as well as other national banks with a presence in the state, handled 48,354 loans for just over $5.2 billion, with an average loan of less than $108,000, according to data from the SBA in Washington, D.C., and the agency’s district office in Louisville.
By comparison, the SBA over the last 10 years in Kentucky made about 7,300 loans worth some $1.8 billion, a spokesman for the Louisville office said.
The vast majority of the PPP loans will never be repaid as long as small-business borrowers use the money for its intended purpose, spending at least 60% of the loan on payroll so employees don’t become unemployment statistics. The balance of the money can be used for mortgage payments, rent and utilities, the SBA said.
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Although there’s some disagreement about whether banks and other lending institutions are themselves also eligible for PPP loans, it seems clear the program has generated revenue that protected thousands of jobs in the banking industry as a result of the loan application fees loan-makers collect and the modest 1% interest rate that’s being charged on these short-term (two- and five-year) loans.
Right after the first round of funding—$349 billion—had been exhausted in mid-April, National Public Radio reported banks had been paid about $10 billion in fees to handle PPP loan applications.
And in an analysis released in July, S&P Global Market Intelligence calculated that the 30 smaller U.S. banks it looked at could earn more on PPP loans in a few months than they made during the 12 months of 2019. The largest single lender, JPMorgan Chase, with $28.8 billion in loans in mid-July, would earn nearly $864 million in fees if its loans generate a 3% processing fee, S&P Global estimated.
Closer to home, a small community bank in western Kentucky said it earned about $600,000 in “origination fees” for handling 281 loans that totaled about $13.2 million. For a variety of reasons, bankers in Kentucky who were interviewed didn’t provide much information about the fee income generated through the PPP.
Processing fees are 1-5%
But using the S&P Global formula that was used in the JPMorgan Chase example, Kentucky banks would have received about $156 million—or 3%—of the $5.2 billion in loans in Kentucky.
“They (in Congress) knew it had to be attractive enough for the lenders to take on such a massive project,” said Michael Ashcraft, senior area manager for the SBA’s Kentucky district office in Louisville.
“Staffs were working around the clock, especially for the first round of financing,” said Ashcraft, referring to the loan application period that ended in mid-April when the loan program ran out of money after two weeks. “The ROI (return on investment) on it should be pretty respectable for the lender.”
Ashcraft said data is not available on how much each Kentucky bank earned in PPP fees.
The program pays banks a processing fee of 1% for loans of at least $2 million; 3% for loans between $350,000 and $2 million, and 5% for loans up to $350,000.
Ashcraft said the process has been simplified so that the Treasury Department money flows through the banks to the businesses as quickly as possible.
“They (lenders) process the paperwork, but it’s up to the borrower to be truthful and honest to the pledge they signed when they applied. … The bank does have to do some due diligence, but not as much as what normally would be expected of an SBA loan,” Ashcraft said.
Bankers stressed that they earned every penny they received and that the fees, generally speaking, at least covered their costs and, in some cases, provided an unexpected income source that no one envisioned before the pandemic.
Keeping up with change
However, there is still one huge variable that may transform a moneymaker into a financial headache.
Several bank executives said regulations seem to fluctuate from day to day and that they haven’t received clear instructions on how much more work they need to do on loans they approved.
“They’re (the SBA) out with about their 20th ‘interim final rule.’ They keep changing the details on it,” said Bob Hargrove, president and CEO of The Murray Bank in Murray.
Hargrove said his bank will receive about $600,000 in fees for 281 loans that average a little less than $47,000.
“It’s (the PPP) adding about $21,000 or $22,000 a month to our bottom line,” he said. “It’s been a good boost for us. My folks worked very, very hard. And, like I say, I’ve still got that big ‘asterisk’ hanging out there. … For a small community bank, that’s a big amount and it’s really helped us.”
That “asterisk” refers to the unknown amount of work that bankers still have to do on loans they approved.
The way the program is set up, banks loan out their money for the program with the understanding that it is guaranteed by the federal government, which will cover the loan and the loan fees once the government has decided that the money was spent properly. Businesses and banks must prove compliance with PPP rules to receive federal forgiveness and loan payoff by the U.S. Treasury.
“They (the SBA) know that if they stick to their original plan, there’s going to be a whole lot of work still to be done,” said Hargrove, whose bank made 17 loans of $150,000 or more.
Ashcraft and bank executives said they didn’t have any numbers available as to how many people were turned down for loans. But all of them insisted that the number was miniscule.
“It was a very small percentage,” said Terry L. Spears, vice president and small business banking officer for Community Trust Bank in Pikeville, which made 2,848 loans for about $276 million in Kentucky, Tennessee and West Virginia. “They were either not eligible or they didn’t provide all of the information that was necessary to calculate the loan amount.”
Loans ranged from $400 to $8.2 million and many of the smaller loans—often around $5,000—typically went to independent contractors or sole proprietors who were, in effect, covering their own salaries, Spears said.
Better relationships and new business
James A. Hillebrand, CEO of Louisville-based Stock Yards Bank & Trust—one of the top PPP lenders in the state—said Securities and Exchange Commission regulations prevented him from commenting to the media about income derived from the program in advance of an upcoming earnings call for investors later in July.
But he was upbeat about the program, which was welded together quickly by the government when the economy began to slide downhill because of the pandemic.
“As someone said, it’s like building an airplane while you’re in flight,” said Hillebrand, whose bank processed 4,175 loans for $754 million in Kentucky, Indianapolis and Cincinnati. Approximately 70% of those loans were made in Kentucky.
“From an economic standpoint, it (PPP) will not have the margins we typically have in a relationship, but it’s fine. Here’s what we get out of it: We get to take care of our business customers, and that is huge,” said Hillebrand.
Stock Yards initially worked with existing customers and then opened it up for others.
“We’ve added a lot of new business from this as well. … We weren’t doing PPP loans for non-customers just to do them; we wanted full relationships and then moving deposit accounts and other loans to us.”
Like other banks in the program, Stock Yards’ $754 million in loans were all over the financial spectrum, ranging from $900 up to three loans for $10 million apiece, Hillebrand said.
“I think we’ve covered our costs. There was a three-week period where we had people working all hours of the day … and overtime was built in there,” he said. “Every one of these loans represented a job saved, a business potentially saved, individuals being able to make payments on their homes or to live.”
Hillebrand noted that the Independent Community Bankers of America, a Washington, D.C., advocacy group for small and mid-size banks, is backing legislation that would allow borrowers to use a one-page form that depends on their “attestation” to have loans forgiven.
“The bill also would expand the ‘hold-harmless’ provision for lenders that rely on borrower attestations to encompass all aspects of the loan process, not just forgiveness,” the organization said in a media statement.
Hargrove said there are now 10 to 12 pages of required documentation, which could be time-consuming for bankers and SBA staffers who would have to review everything that’s filed.
Still a lot of unknowns
Jeff Koonce, WesBanco’s market president for all of Kentucky aside from the Louisville market, also is convinced that there are plenty of unknown variables in how the PPP will finally play out in a state where his bank has 47 branches.
“That’s the challenge, and we do take some risk in not knowing that,” Koonce said when asked about other PPP obligations WesBanco may have in the near future. “We’re kind of taking a leap of faith by jumping into this program, like the other banks did.”
WesBanco, which does business in six states, processed about 6,800 applications for about $850 million and 80% of those loans were destined for small businesses that requested less than $150,000, said Koonce, whose primary office is in Lexington.
Koonce said the bank did not break down its loans by state, although “a pretty significant number” were in the commonwealth. Companywide, the WesBanco staff invested around 60,000 hours in loan processing.
“I can’t tell you the number of customers that have reached out to say ‘thank you….we would not be here if you had not provided this service and helped us get these loans,’” Koonce said.
Although none of the bankers were sharply critical of the SBA and the federal government, several noted that the rules and regulations seemed to change every couple of minutes.
“I would wake up at four in the morning and there was a new rule from the night before—and some rules would get rid of previous rules and you had to cross examine and see the last one on a particular topic, which is exactly what I’m working on right now…,” said Debra K. Stamper, executive vice president and general counsel for the Kentucky Bankers Association, which has its office in Louisville. “I’m trying to make sense of which rules still exist, which rules have been amended and which rules are gone. Sometimes I think I post more than the SBA does.”
Stamper, whose organization advocates for banking interests, wasn’t convinced in mid-July that the program will be a moneymaker.
“The bank has to do as much work for a $300 loan as they do for a million-dollar loan,” Stamper said. “This was not and still may not be a moneymaker for the banks. … Banks were doing this because of the importance to their communities. The economy was in such a terrible, terrible place that they stepped up and decided they had to take the risk.”
She pointed out that the interest rate on the loans is only 1%, well below the rate that businesses usually pay.
“I don’t know that I would say they are just covering their costs. Some banks made money, some lost money, some just hit their costs. But these are not the kind of loans—certainly not in this quantity—that are considered moneymakers,” she said.
Truist Bank, created last December when BB&T and SunTrust banks merged, is the country’s sixth largest bank and ranked fourth in terms of its PPP participation by handling more than 74,000 loans that totaled about $12.8 billion. Of that total, about $196 million went to borrowers in Kentucky, where the company has about 75 branches, a spokesman said. The average loan was for a little over $176,000 and 92% of the loans went to companies that had fewer than 50 employees.
One reason for Truist’s success may be attributed to being an early adopter.
“Truist was one of only a handful of banks to open an application portal on April 3, the day the SBA officially opened the program,” Truist spokesman Michael McCoy said.
As might be expected, many borrowers who received loans were enthusiastic about a program that provided thousands of dollars with few strings attached.
Tony Kreutzjans, who owns Orleans Development in Covington, said Republic Bank Vice President of Business Banking Tom Tilmes called him on a Sunday to begin work on a loan application for the first round of funding in early April.
The real estate development and construction company, which has eight employees, worked closely with Tilmes to file an application early for the first come-first served program.
“We knew we would keep the doors open, but didn’t know how busy we would be and I didn’t want to lay anybody off. I figured we would take an economic hit and that this program would help offset that,” said Kreutzjans, who received a $67,000 loan.
Kreutzjans and project manager Chelsey O’Connell said the government money decreased some of the uncertainty that swirled around the pandemic in April. Once the loan money was assured, O’Connell said the company felt confident enough to offer some “COVID rent credits” to some of their small-business tenants.
Timely stress relief
While many small businesses saw sales evaporate during the pandemic, Debra Dudley used a PPP loan to retain and expand her workforce at Oscarware in Bonnieville, which is about 65 miles south of Louisville.
Dudley, president and owner of a company that makes cooking accessories for backyard grills, said demand for her products increased dramatically at a time when Americans were encouraged to stay home and avoid crowded restaurants. She now has 31 employees, 11 more than she had earlier this year.
Dudley didn’t want to say how much she received in a loan through German American Bank in Hart County, but she had high praise for the bank, the SBA and the PPP.
“Knowing we had that money gave us that much more ability to not worry about things. We just kept making grill toppers,” she said. ■
Greg Paeth is a correspondent for The Lane Report. He can be reached at [email protected]