Big Band-Aid, but a bigger wound? Banks weigh in on the benefits, challenges of PPP loans

Talk to regional bank lending managers about the Small Business Administration’s Payroll Protection Program loans, and the words “Band-Aids” and “wounds” frequently pop up.

“It’s a Band-Aid on some of the wounds that have been caused,” said Steve Burgess, CEO of National Bank of Commerce (NBC), based in Superior. 

The real healing for community businesses will not be the PPP loans or other stop-the-bleed programs, he noted. 

“In order to get the healing – shop local. Support your local business or small business, your shops up and down Main Street. … We’ve got to pick each other up. That’s going to be the next round as we open up for business again.”

Meanwhile, regional banks have handed out a lot of PPP Band-Aids and are proud to have infused ailing local economies with millions of dollars, helped thousands of employees and their families, and kept many small businesses economically alive during the shutdown.

NBC has approved about $125 million in PPP loans to more than 800 businesses. 

“We’re estimating that 30,000 families in the Twin Ports will be affected by what we have done with the PPP program,” Burgess said. “There is a $125 million shot in the arm to our community, just from our bank.”

PPP loans, a temporary expansion of the Small Business Administration’s 7(a) loan program, were intended to keep workers employed and to bring cash into halted or hurting work places. The program promises full or partial loan forgiveness for businesses meeting certain criteria, including the rehiring of full staff by a set date – currently June 30.

Keeping abreast of loan application and forgiveness requirements has been hard to pin down, area bankers say. 

The first challenge came with the swift, and shifting, original application process. After CARES – Coronavirus Aid, Relief and Economic Security – Act funding was approved by Congress and signed by the president, a tentative PPP application form was sent to banks. 

At North Shore Bank in Duluth, which has processed $26 million in PPP loans for 276 businesses, the lending staff helped potential recipients begin the application process immediately. The applications were to go live on a Friday morning, said one of the bank’s commercial lenders, Jaron Larson. “The night before, they changed the application.”

Bankers worked throughout that weekend to process applications. 

At the family-owned Woodland Bank based in Deer River, a core group from its four branches managed the initial applications. So far, the bank has gotten approval for 136 loans totaling more than $6.2 million with loans ranging from a few thousand to $700,000.

“We’re set up for SBA,” said CEO and President Brian Nicklason. “We had some experience with it; we knew our way around the system.”

Frantic calls came in from clients. “Everyone was panicking at first. It was a finite amount of money, and we needed to get customers to the table,” he said. “As it went along, we got more guidance. … We feel that we assisted our businesses who really need this.”

That first weekend, for example, Woodland’s  SBA specialist discovered it was easier to upload applications between 7 p.m. and midnight when SBA’s system was less clogged. The bank also aided clients from other banks. For example, because of earlier misdeeds, Wells Fargo was initially limited under a Federal Reserve Board assets cap. That cap no longer applies to PPP and other SBA stimulus loans. 

When the initial PPP funding dried up, Nicklason said, Woodland “had 20 to 30 applications in waiting, hoping that there would be a second tier.” 

More funding was approved and those applications, among others, were successfully processed. 

“I’ve never been more proud,” Nicklason said, pointing out that the family’s 100-year-old bank has survived the Great Depression, the Great Recession and now a pandemic.

As of the end of May, Forbes reported more than 4.42 million PPP loans totaling nearly $511 billion have been granted nationally with an additional $100 billion still available. 

At North Shore Bank, CEO and President Ken Johnson also was pleased with his staff and the loans. “I think the banking industry stepped up to the challenge. It has been challenging, but rewarding at the same time.” 

North Shore’s $26 million in PPP loans is approximately the dollar amount of commercial  loans the bank handles in a whole year. “And we did the work in two-and-a-half weeks,” Johnson said. “It was amazing how quickly the banking industry was able to deploy this program.” 

Banks had 10 days to give out approved loans. Jeanne Nicklason, Woodland’s vice president of marketing and Human Resources, recalls setting up a “drive-through” signature system with a bank employee handing a clipboard through an applicant’s vehicle window and a “keep the pen” suggestion. “It truly was all-hands on deck. (The staff) got the gravity of the situation, and they couldn’t do enough to help out. … It was really crazy days. It really felt good.”

Challenges also came after the loans were approved. Forgiveness requirements call for spending of the money within eight weeks of receiving the loan with 75 percent going toward employee payroll, including bonuses or hazard pay up to the $100,000 salary cap guidelines. The remaining 25 percent can go for rent, utilities or interest – not principal – on a mortgage loan.

Because of the urgency of processing  the loans, banks are being held harmless for information certified by customers, Larson said. “Banks are using their own liquidity and their own capital, trusting that the federal government is paying us back.” 

Banks got fees from the federal government (not from clients) for processing the loans – 5 percent for loans of less than $350,000; 3 percent for loans from $350,000 to $2 million; 1 percent for loans over $2 million.

Payback through loan forgiveness is the next challenge for banks and their clients. The bank should be reimbursed for whatever portion of a PPP loan the SBA forgives with the use criteria. Any unforgiven remainder is carried as a two-year loan by the bank with 1 percent interest, a much lower rate than banks’ other loans. Payments, though, are deferred for six months.

Bankers did express some frustrations with PPP loan planning and shifting rules, forcing businesses to sign on without knowing specifics for forgiveness or pay back. The eight-week-use restriction made PPP loans unusable for businesses that couldn’t open their doors and, thererore, didn’t need employees immediately. One hair salon owner who got a loan right away, Brian Nicklason said, ended up just paying back the money because she couldn’t reopen in time to use it. At press time, the U.S. House is considering a bill to extend the program duration and forgiveness period and to reduced use limitations.

At NBC, Burgess said he regretted the loans did not treatall business customers equally. “The PPP program was not designed to help some of our larger customers,” he said, adding, “There has been a lot of COVID-19 related hardships in our community that the PPP program does not help.”

Burgess’ team works daily on loan application and forgiveness rules with the SBA, the Wisconsin and Minnesota banker associations “trying to keep abreast of it, and we’re in pretty constant contact with our customers.” It’s been hard to inform clients, though, he added. “As fast the ink dries on the paper, they change it.” 

At North Shore, Larson agreed the forgiveness rules remain in flux and sometimes clients find updates on the SBA website before the bankers are notified of changes. “Be patient with your lenders,” he suggested, adding this is a  rare time when “banks are privy (to changes) at the same time the clients are.”

Like all those contacted, Larson was proud to help struggling businesses.

“We were their lifeline. I’m proud to be working for an institution that allowed us to help… that’s been by far the most rewarding thing.”

The next question for bankers and their business clients is what the full impact will be of the coronavirus shutdowns. 

Unlike the Great Recession, which was caused by weakness in financial institutions, the current economic downturn comes from a health crisis and the economy may be poised to rebound when full business activity returns. “We can be frustrated about the program, but it had to happen,” Johnson said of PPP loans and keeping companies alive. He noted banks are stronger and better capitalized today than they’ve ever been. But, he warned, “The longer this goes on, and if more businesses fail, this could transition from a health problem to a financial industry problem.”  

In other words, if too many businesses default on their loans, healthy lenders might run out of money.

“From an economic standpoint,” Larson added, “the PPP loans were putting a Band-Aid on a wound, and nobody knows how large that wound is until the Band-Aid comes off. When the federal government rips off that Band-Aid, we’ll see the economic impacts.”