Most PPP loans going to repeat customers

The lion’s share of Paycheck Protection Program loans is going to previous borrowers, providing more evidence that sectors that have been hard-hit by the coronavirus pandemic are still struggling to regain their footing.

More than $93 billion of the roughly $101 billion of PPP funds approved by the Small Business Administration since the program reopened on Jan. 12 have involved second draws.

The SBA data punctuates the challenges many industries still face. Loans to borrowers in the hospitality and food service sectors have accounted for nearly a fifth of PPP loans approved this year, while construction comprises about 14%.

While willing to handle requests from first- and second-draw borrowers, many bankers said their lenders are largely receiving applications from small businesses that already have PPP loans.

“The businesses that seem to need the stimulus are the ones most impacted by the COVID pandemic, mainly entertainment, hospitality, food services,” said Chris Giamo, head of commercial banking at the $388 billion-asset TD Bank. “Those seem to be the industries where we’re seeing the most demand during PPP2.”

About 86% of the roughly 28,000 loans TD Bank has handled in the last month have involved second draws, Giamo said.

Second-draw loans have comprised about 93% of the applications at Valley National Bancorp in New York, said Rick Kraemer, the $40.7 billion-asset company’s chief financial services officer.

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“It’s probably a little bit more than I expected, but not by much,” Kraemer said. “I figured the industries hardest hit, like restaurants and retail, would come back for the second round. Predominantly, all of them have.”

The wide divide between second- and first-draw PPP loans also holds true at smaller banks.

At Axiom Bank in Maitland, Fla., second draws have outnumbered new requests by a 10-to-1 margin, said Ted Sheppe, the $654 million-asset bank’s executive vice president for commercial lending.

Another factor behind the dominance of second-draw loans involves the number of lenders focusing on each type of borrower. More than 5,000 lenders have submitted second-draw loans, compared to about 4,700 for first draws, based on data released by the SBA.

While the application process is labor-intensive regardless of the type of borrower, second-draw loans, which have averaged $100,000 so far this year, are four times bigger than first draws, based on SBA data.

To be sure, some lenders are devoting more resources into finding new PPP borrowers by placing a greater emphasis on first-draw loans. The view is that doing so will create long-term relationships with more borrowers.

A sizable majority of the PPP loans handled by Customers Bancorp in West Reading, Pa., have involved new program borrowers, said Sam Sidhu, the $18.4 billion-asset company’s vice chairman and chief operating officer.

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Customers said last month that it had more than 50,000 PPP loans in its pipeline. In addition to working with its own clients, Customers is processing loans for other lenders under white-label arrangements.

Biz2Credit, a fintech lender in New York, is also handling an elevated level of first-draw applications. The company is currently the third-biggest PPP lenders, with 69,290 loans totaling $2 billion since the program resumed.

“It’s a uniform story where these businesses are very small, many minority-owned,” said Rohit Arora, Biz2Credit’s CEO. “The loans they’re seeking are small, $3,000 to $25,000. They’re sole proprietorships with no strong banking relationships. Many of them don’t even know how to approach a bank.”

Customers’ first-draw clients are also requesting smaller amounts, though Sidhu said he expects many of those relationships to mature into something bigger.

“Someone who has taken out a $25,000 PPP loan doesn’t have a ton of deposits, but they can generate some fee income,” Sidhu said. “Eventually, they’ll grow into valuable customers for us.”

Though the goal is to do more business with PPP clients, Sidhu said Customers isn’t requiring borrowers to deposit their funds at the bank.

“We’ll send the money wherever,” Sidhu said. “The objective is to touch as many borrowers as possible.”

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A number of lenders that have locked in on previous PPP borrowers have also been able to coax more of those businesses to bring their deposits over compared to similar efforts during the PPP’s initial iteration, which ran from April 3 to Aug. 8.

“Relationship-banking core deposits have more than doubled” despite a paucity of first-draw loans, Sheppe said. “We have more than 200 new relationships. It’s been somewhat game changing.”

PPP has resulted in thousands of new customers at TD Bank, Giamo said.

“Two-thirds of all businesses realize the importance of a banking relationship” because of the pandemic, Giamo added. “We focus on having our relationship managers act as trusted advisers to our customers. That relationship model really proved important.”

The first phase of PPP, created by the $2.2 trillion stimulus package Congress approved last March, approved $525 billion of loans. Congress allocated another $284 billion as part of a new stimulus package enacted in December, with lending authority scheduled to expire on March 31.

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