Banks become a lifeline

How Iowa’s banks and credit unions transformed themselves to push out more than $5 billion in loans and millions more in modifications amid the coronavirus


By Adam Moore & Katharine Carlon

After a fast and furious two months, with employees ignoring “bankers’ hours” to hammer out federally backed loan applications and loan modifications, the full magnitude of efforts by Corridor bankers to get clients through the COVID-19 business disruption are coming into view.

“It was a big undertaking for our team, but in a lot of ways it was really healthy for all of us to have something to rally around as an organization, and to some extent, as individuals,” said Todd Wishman, market president with Bankers Trust in Cedar Rapids, reflecting on the surge of activity. “It was a huge team effort, and it was wonderful to see and be a part of.”

The race began with the $350-billion Paycheck Protection Program (PPP), signed into law on March 27 as part of the $2 trillion CARES Act. It allowed small businesses to secure forgivable loans through Small Business Administration-approved institutions equal to 2.5 times their monthly payroll.

Lenders were given just a week to interpret program rules and organize staffing for what would be crushing demand when the SBA officially began accepting applications April 3 on a first-come, first-served basis.

As of May 1, Iowa banks and credit unions had helped secure nearly 50,000 loans totaling $5.08 billion through two rounds of PPP funding – equivalent to roughly one for every five small businesses in the state, according to the SBA.

A Bloomberg analysis of the first round of PPP lending ranked Iowa sixth in the nation for the amount of loans secured as a percentage of eligible payroll in the state, at 73%.

“I’m really proud of our bankers and the way they’re supporting small businesses through the PPP,” Iowa Bankers Association CEO John Sorensen told the CBJ in late April – a sentiment echoed by Scott Wilson, chief lending officer at Bankers Trust.

Competition was cast aside in the early days of PPP lending as members of the local banking community consulted one another on interpreting regulations and other matters in order to get money flowing.

“Especially that first super-busy week of that first round of PPP, the SBA released interim guidance along the way [and] we were all left in the position of making sure we interpreted correctly and our interpretations matched each other,” Mr. Wilson said. “We were on the phone and through email asking each other questions and giving advice.”

That certainly doesn’t mean it was easy, judging by interviews and earnings reports. Corridor bank and credit union leaders described long hours, late nights and weekend shifts to handle and process the influx of applications from businesses – most of which had already been closed for at least two weeks and were desperately in need of cash. Issues with the SBA’s online loan portal, known as E-Tran, periodically slowed the process to a crawl.

At Iowa City-based MidWestOne Bank, many bankers were pulling 18-hour days in April to serve customers with PPP applications, CEO Charlie Funk said on a May 1 earnings call. Scott Frost, chief lending officer with Cedar Rapids-based Collins Community Credit Union (CCCU), said that its commercial services team put in 1,000 hours responding to the demand for PPP loans. Some bankers reported “self-isolating” in their offices, while others relied on digital signature technology and email to keep the paperwork moving.

“There were a lot of late nights. Either you were getting your arms around the program, to be an in-house expert, or you were processing or confirming payrolls, or you were having the conversations with clients,” said Nathan Koch, president and CEO of Central City-based NXT Bank. “About 50% of our employee base was working extra hours and days to be sure we could get all of our clients approved.”

West Bank CEO Dave Nelson recounted his bank’s experience with the first round of the PPP to ABC News, saying he repurposed the bank into a “SBA loan factory,” with its 175 employees working around the clock to process loans for small businesses throughout Iowa and Minnesota. When the bank found itself locked out of E-Tran on the very first day of PPP applications, he worked with U.S. Sen. Joni Ernst to get the SBA to unlock its password, and assembled a team of “E-Tran fighter pilots” to enter data into the SBA’s portal as quickly possible.

“Whoever has the fastest fingers gets the money,” he said.

That approach seemed to favor banks with the biggest staffs and abilities to bulk upload loan submissions to E-Tran, but community banks punched above their weight in terms of loan approvals, thanks to their tight relationships with customers.

Banks with less than $10 billion in assets approved nearly six in 10 loans in the PPP’s first round, according to the Treasury Department and the SBA, with the smallest banks – those with $1 billion or less in assets – accounting for almost 20% of all loan dollars.

In Iowa, a state with a tradition of community banking, a new National Federation of Independent Businesses survey found that just 14% of businesses submitted applications through a large bank, with about 70% going through small and medium-sized banks.

“We got everyone who qualified in,” said Steve Neighbor, executive vice president and chief credit officer with Farmers State Bank in Marion, which reported securing 409 approvals for loans valued at $50 million. “The approval, there wasn’t a lot of underwriting to it … [and] because of limited resources and the time frame, we focused on taking care of those people that had existing relationships with us.”

Click to enlarge

All told, Corridor lenders – many of them working from home – managed to push through more than their fair share of loans compared to national averages.

Publicly traded regional institutions like Great Western Bank and MidWestOne Bank processed thousands of applications worth hundreds of millions of dollars through late April, while West Bank handled nearly 600 loans worth $206 million. Bankers Trust, the state’s largest privately held bank, handled more than 900 loans totaling $317 million – nearly all of them approved, according to Mr. Wilson (see chart).

Among the Corridor’s credit unions, GreenState Credit Union called on a third-party service, Kabbage, to help it process 327 applications for an approval amount of $16 million, while CCCU reported a 90% approval rate on the 135 PPP loans it has processed to date, worth about $8.6 million.

While the SBA’s E-Tran platform earned some bad press in the early days of the PPP process due to crashes and technical glitches, most of the bankers interviewed by the CBJ were complimentary of the administration’s effort to smooth things out and get money to the businesses that needed it most.

“I’m incredibly impressed with what the SBA did in the timeframe they had and the resources they had, relative to what they had done historically,” said Mr. Koch of NXT Bank, which processed more than 100 PPP loans worth approximately $9 million. “If you step back from it, it’s pretty darn impressive.”

Mr. Wilson agreed, saying that the SBA “quickly came to realize the community banking environment as the quickest way to get those dollars out the door and into people’s hands.”

“Maybe it wasn’t perfect, but I think they did a remarkable job.”

Loan modifications & costs

Another avenue of assistance offered by banks and credit unions have been loan modifications, and customers are clearly not hesitating to ask.

Most institutions are temporarily converting loans to interest-only, and deferring both principal and interest payments for businesses in hard-hit industries like hospitality.

Regional institutions have taken the lead, with QCR Holdings reporting adding nearly 2,000 clients to its Loan Relief Program as of April 24, covering loans totaling $439 million, and MidWestOne approving some $346 million in deferred loan payments as of April 28.

CCCU’s Chief Lending Officer Scott Frost said about a third of the credit union’s commercial and small business clients had requested extensions or modifications to existing loans so far, while GreenState Chief Marketing Officer Jim Kelly said the credit union has deferred more than 8,000 mortgage, personal and equity loans worth $189 million, and waived $416,000 in fees.

Along with that generosity are expensive precautions.

“We are setting aside funds each month anticipating a larger spike in loan losses in the second half of the year,” said Mr. Kelly, whose institution is far from alone in preparing for tough economic times ahead.

U.S. Bank and Wells Fargo made headlines last month after increasing their loan loss reserves by $600 million and $3 billion, respectively. Mr. Funk said MidWestOne is gearing up for loan losses, implementing a current expected credit loss standard of $21.7 million, related “to the worsening forecast for the U.S. and our regional economy due to the significant slowing we’re seeing in the current and forecasted economic activity.”

Great Western Bank’s second quarter provision for loan and lease losses was $71.8 million, an increase of $63.7 million, while QCR increased its provisions by $7.4 million.

“It is very appropriate to ask and reflect upon questions such as what happens if people don’t pay or are unable to pay their rent or home mortgage payments?” West Bank’s Mr. Nelson said in an April earnings call. “What happens if businesses don’t pay their rent or mortgage payments? What impact would there be on office building occupancy across America if people continue working from home permanently or semi-permanently? How long will the shutdown last? Will Americans not have the confidence to reengage with normal activity until herd immunity is achieved or a vaccine is available?”

Those unanswered questions make it too soon to predict how lending strategies might change over the long-term, Mr. Frost said, although CCCU plans to make an adjustment to its short-term reserves.

“The uncertainty is enough to warrant this action,” he said, adding, “the PPP was a survival tool. Over the next few months we will need to move into the stage of recovery. I believe the lending landscape, as well as consumer focus, will move back toward the small business/locally-owned enterprises. The shutdown has shown just how important this sector of our economy is from a city, state and national perspective.”

What’s next?

Corridor banks remain well capitalized, and most institutions reported funding PPP loans through their own deposits, rather than accessing the Federal Reserve’s PPP liquidity pool. In addition, they say they are prepared to keep lending, albeit in a radically changed economic and social environment.

“Loan demand has still been very strong for commercial, real estate, and retail despite branches being appointment-only,” said Mr. Kelly, adding that GreenState had a record April for mortgage, equity, personal and auto loans thanks to a staff effort to reach out to members to proactively help them restructure debt. “We expect the demand to increase once the economy comes back, particularly with members that have put off some larger purchases.”

When that will happen is still anyone’s guess even with the state moving to reopen parts of the economy, but Mr. Koch of NXT Bank agreed that “even now, as we’re in the middle of it, there are still pockets of lending opportunities, depending on the industry.”

What is sure is that the post-pandemic banking world will be a changed one for both employees and customers.

Mr. Neighbor said Farmers State Bank is planning for that right now, working through how to set up stations and protect workers and customers after a 60-day shutdown of all bank branches. He is interested to see how the closings will impact customer habits, noting that many of them had already begun the shift to mobile banking before the pandemic hit.

Like a growing number of financial institutions, Farmers State Bank already had online solutions for basic daily activities like checking balances, transferring funds, paying bills and mobile deposit as well as live chat. Now it may explore new no-contact services like video banking.

“We’re all hopeful that we’ll find our way back to some version of normal as soon as we can, but we realize it has to be about the safely of our team members and customers first,” Mr. Wilson said. “Time will tell how quickly or slowly we come back from this, but it’s most important we come back from this in the right way, and as a business community, in the most responsible way.”   CBJ

Senior Business Reporter Dave DeWitte contributed to this report.