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    Small banks hope relief efforts lead to big gains in market share

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    Community banks that have used the Small Business Administration’s emergency loan program to help businesses ride out the coronavirus outbreak are counting on the goodwill they have built with existing and new clients to help them gain market share in the long term.

    Capital Bancorp in Rockville, Md., for instance, authorized and funded $173 million during phase one of the Paycheck Protection Program earlier this month.

    That amounts to about 14% of the $1.4 billion-asset company’s total loans and nearly matched its 2019 full-year loan growth of $180 million, CEO Edward Barry estimated. About one-third of those loans were made to businesses that were not already customers. Barry said his team lured much of the new business from larger banks, some of which were slow to start accepting PPP loan applications.

    Capital Bancorp CEO Edward Barry said demand for loans from new and existing customers "is as much as we can handle, but just through brute force, we’re doing everything we can."
    Capital Bancorp CEO Edward Berry said that demand for loans from existing and new customers "is as much as we can handle, but just through brute force, we’re doing everything we can."

    Ahead of a second round of funding that opened Monday, Capital Bancorp had prepared to process a similar level in coming days — and he expects new customers to account for an even greater share this time around.

    “We’ve been getting lots and lots of calls,” Barry said. “The demand is as much as we can handle, but just through brute force, we’re doing everything we can. I definitely think this will all result in a lot of new business when we get to the other side of this crisis.”

    To be sure, Capital Bancorp and other community lenders say they engaged in PPP to help small-business clients — the lifeblood of many small banks — bridge the gulf between the sudden economic freeze and an eventual recovery.

    The Paycheck Protection Program was created to provide small businesses with loans of up to $10 million. Banks originate and service the PPP loans, but the government will forgive a loan if 75% of the money is used for payroll and 25% on rent, utilities or mortgage interest.

    While many lenders struggled to launch the emergency loan program in a matter of days, those banks that made the transition swiftly say prospective new clients are flocking their way. The hope is that new clients will shift their deposit accounts to their PPP lender and, when the economy comes back, become borrowers of conventional commercial loans as well.

    “I think these banks are not only picking up new clients but showing how valuable they can be,” said Robert Bolton, a bank investor and the president of Iron Bay Capital. “They say this all the time, but it is true: Community banks have the local market expertise, as well as the small-business lending expertise needed to serve commercial clients in good and bad times.”

    Executives at American River Bankshares in Sacramento said during a recent earnings call that the $716 million-asset company in April secured 150 loan approvals in the program’s first round, totaling $37 million. By comparison, the company funded $18 million in new loans during the entire first quarter. It entered the second round of the Paycheck Protection Program this week with a pipeline of 250 requests — and many of them from potential new clients.

    “Our desires are, obviously, to take care of our clients first,” Chief Financial Officer Mitchell Derenzo said on the earnings call. “But we've also had a lot of calling efforts going on,” with bankers reaching out to prospects. “There's some good opportunities there … on the deposit side as well as on the loan side.”

    By most accounts, demand exceeds PPP funding. The program exhausted its initially allotted $349 billion on April 16, less than two weeks after it opened. Congress approved another $310 billion last week — $60 billion for SBA disaster loans and $250 billion for the Paycheck Protection Program. Of the $250 billion, $30 billion has been set aside for lenders with less than $10 billion of assets.

    Several big banks have been active in PPP. The nation’s largest bank, JPMorgan Chase in New York, originated $14 billion the initial round — more than any other company but only about 1.5% if its total loan book. Other large lenders — including Truist Financial in Charlotte, N.C., and M&T Bank in Buffalo, N.Y. — have disclosed origination levels well into the billions of dollars. But relative to their size, the most active community banks are shouldering the greatest level of PPP work, Bolton said.

    The Federal Reserve’s latest H.8 data show that total loans across the banking industry increased in the second week of April by nearly 11% from a year earlier. The advance was driven by small-bank commercial loan growth, which offset declines in consumer lending and other lines at bigger banks.

    “We believe there are two issues — the start of PPP program funding and a decline in large corporate line draws at the large/foreign banks,” Keefe, Bruyette & Woods analysts said in a note to clients.

    Washington Trust Bank in Spokane, for one, said it took in more than $1.1 billion in applications in the program’s first round. The bank’s entire loan portfolio on Dec. 31 was $4.6 billion.

    “We made more loans in [a] week than we did in all of the prior two years,” said Jack Heath, the $7.2 billion-asset bank’s president and chief operating officer.

    Washington Trust reassigned staff to increase the size of its SBA team from four people to 30 in a matter of days to manage the volume. The bank continues to cross-train more employees to handle ongoing demand, including from new clients.

    “We think we are building up tremendous goodwill,” Heath said.

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