Just as uncertainty has marked each stage of the Paycheck Protection Program – from features changing right before launch to system problems in the second round – community banks face another unknown with the program: its effect on bank finances in the coming months. 

Lenders spent much of April putting staff and resources toward an initiative that saw the U.S. Small Business Administration approve as many loans in two weeks as it had in the previous 14 years. 

While its effect on the balance sheet remains unknown, community banks see benefits from participating in the program, including helping the community and possibly boosting their reputation with small businesses. 

“As crazy and as hectic as this process has been, I think we’ve reaffirmed, to our customers, our commitment to them,” said Joseph Baptista, president and CEO of Taunton-based Mechanics Cooperative Bank. “And to those who haven’t been able to get anywhere with other financial institutions, we’ve been able to showcase what we do on a daily basis.” 

Well-Capitalized, but Pressured 

Community banks and credit unions across Massachusetts reported entering the coronavirus pandemic as well-capitalized institutions.  

But even before the current crisis, community banks had started to see downward trends with finances and margins, said Keith Reagan, a managing director at the Newburyport-based Darling Consulting Group. Seeing pressures on both sides of the balance sheet, community banks had tight credit spreads on loans and significant competition for funding, leading to higher interest rates on deposits. 

The crisis has highlighted the need for robust liquidity planning and stress testing, Reagan said, adding that banks will need to focus on the short- and long-term effects that PPP loans and other economic aid programs will have on their liquidity positions. Other considerations facing community banks include deposit pricing, loan pricing, balance sheet strategy, capital planning and the credit problems that will affect both businesses and consumers, Reagan said. 

While community banks have focused much of their resources on the PPP initiative, the effects remain unknown. Reagan said answers will become clearer as banks learn which loans are forgiven, what percentage of the balances remain on the balance sheet and for how long, both of which impact the way lenders account for fees received from the SBA. 

“I think the PPP has much more probability to help the customers of the bank than it does the bank itself, which is what it was intended to do,” Reagan said. “I’ve had a number of banks tell me, ‘Even if we don’t make a penny on the entire program, we’re happy because we feel like we’re here for our customers, we’re here for our community.’” 

The SBA did not issue guidance on how lenders would request fees until almost four weeks after the PPP launched, and as of publication time the agency still had not released the form lenders will use. 

The fees could help offset some costs that community banks have incurred during the PPP process, where staff worked long hours in an “all hands on deck” environment, said Tom O’Connor, a partner with GT Reilly and Co., a Milton-based firm offering audit and tax services to community banks and credit unions. 

While lenders’ fee income from helping administer the Paycheck Protection Program is uncertain, the relationships forged in the process could help grow new business.

Helpful Side-Effects 

Community banks and credit unions could also see indirect benefits from the program. For banks with small business customers that were struggling even before the pandemic, the PPP loan could give these businesses a cushion of liquidity if the loan is forgiven, O’Connor said.  

A bank’s reputation could also receive a boost from the program. Several community banks O’Connor works with were not previously involved with SBA lending but joined to be part of the PPP. Along with wanting to help small businesses, some community banks considered the move a defensive stance that could guard them against losing customers if they did not participate, O’Connor said. 

“Some institutions decided not to get into the program, for whatever reason,” O’Connor said. “We think that they could see some downside from that decision, and the ones that have jumped into it are going to see some upside.” 

Most of Swansea-based BayCoast Bank’s small business customers submitted applications during or just after the first round of funding, said Carl Taber, BayCoast’s executive vice president and chief lending officer.  

For the second round, BayCoast is working with non-customers as well, including small business owners who reached out after becoming frustrated with larger banks. Taber is hoping these business owners become lifelong clients. 

A Chance to Help, and Win 

BayCoast is also working with another group of firms: minority-, women- and veteran-owned businesses that have been underserved by the PPP. The bank has partnered with the Foundation for Business Equity to help businesses in southeastern Massachusetts that had been left out of the first round of PPP funding because they did not have long-standing relationships with a bank or credit union, or staff knowledgeable enough to complete the application.  

Diane McLauglin

“It’s additional business for us, which typically has been very, very good business,” Taber said. “But also, it fulfills our mission as a mutual community bank to give back to the community and be able to assist those businesses and consumers fulfilling their financial needs.” 

Baptista, with Mechanics Cooperative Bank, said he would prefer that the pandemic had never happened. But given the situation, he said he was excited about the opportunity to offer PPP loans to non-customers and gain new customers.  

“It has allowed us to show customers of other institutions what we do,” Baptista said. “Hopefully we’ll get the opportunity to earn their business.”