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Sarah Ladley was approved for emergency funding in the second round of the Payroll Protection Program. But getting there was difficult. 

Ladley’s food truck, Ba-Nom-a-Nom, specializes in vegan soft-serve ice cream. The Denver, Colo., business suffered a loss in sales after events were canceled due to the coronavirus pandemic. The longer the lockdown lasted, the more she worried about paying her employees.

Ladley, 32, sought help during the first round from Wells Fargo, where she had been a customer for a decade, but couldn't get anyone to answer her calls. She finally got a $20,000 loan in the second round through the Bank of Colorado, a community bank with about $4 billion in assets.

“I was livid with Wells Fargo. It was really scary,” Ladley said. “I’m going to be leaving that bank. It feels like war times where you have to fend for yourself. I’m lucky that someone referred me to a smaller bank because many small businesses feel screwed right now.”

A Wells Fargo spokesperson said the company could not comment on specific interactions with customers, but said “we acknowledge that these last several weeks have been difficult for our small business customers.”

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Ladley’s experience, like that of many other small business owners, shows how federal rescue loans during the shutdown have given smaller, relationship-driven banks an unexpected opportunity to showcase their strengths — especially their ability to quickly respond to customer needs. 

Banks with less than $10 billion in assets issued about 60% of loans in the first round of the PPP, according to the Small Business Administration. Bigger banks have bounced back during the ongoing second round of the program, but weeks after many customers already had secured loans through small banks. 

“We went to one of our larger existing banks,” said Joe Dutra, president and CEO of Kimmie Candy, a candy manufacturer based in Reno, Nev., with about $6 million in annual sales. “They basically told us you should try to go to another bank because we are overwhelmed.” 

As the shutdown began and large retail customers began canceling orders, Dutra watched his cash flow plummet. He was seeking $350,000 to keep his business running. His financial consultant, Steve Trollope, suggested applying for the PPP through a smaller bank Dutra had worked with before — River Valley Community Bank in California. 

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Community banks seemed more 'adept' at processing PPP loans

“The community banks seemed to be more adept and able to move quicker than bigger banks,” Trollope said. “I have another business that applied for a PPP loan with Bank of America and it never got done. They just kept going around in circles.”  

A Bank of America spokesperson said the bank continues to accept and process applications and noted that “Bank of America secured approval for loans for more than 300,000 small business clients around the country, with about 80% of those clients having fewer than 10 employees.” 

Kimmie Candy received a PPP loan through River Valley in the first round and is using the money to keep about 20 people employed.  

“We had people coming to us because they just weren’t told anything, and that lack of any guidance from their own bank creates that sense of concern,” said Phil Tissier, who handled Dutra’s application for River Valley. “People just wanted to know that they could speak to somebody and at least know something.” 

James York and Jay Blood, the cofounders of Valley Bank of Nevada, said they were fielding calls nonstop to update customers on the status of loans. Bank employees worked weekends and late nights to process mountains of paperwork. 

“We go to church with these people and we go to school with these people and when they call they get us,” Blood said. “The big banks just don’t have that ability.” 

Six employees handled loan processing for 145 clients across both rounds, according to a statement by Valley Bank. The total -- about $36 million -- represented about 38 percent of the bank’s normal annual loan volume. More than a third of those loans went to new clients. 

“They couldn’t get applications done with their existing bank, so word got out pretty quick on the street,” York said. “Our clients are talking to their friends, saying, ‘Hey my bank can do it!’” 

Some of the biggest banks immediately ran into trouble during the first round as hundreds of thousands of applications flooded in. Wells Fargo had to temporarily stop accepting applications a few days into the round because it ran up against an asset cap put in place by regulators after its fake account scandal. Bank of America initially required that applicants already have multiple relationships with the bank, leaving angry customers out in the cold. 

Technical challenges with SBA portal

Big banks complained that technical challenges with the SBA loan portal, known as E-Tran, was to blame for delays in the program. The application system crashed in early April, temporarily preventing lenders from processing loans for small business owners. Newer technology, however, helped level the playing field for smaller banks, according to Chris Marinac, director of research at financial services firm Janney Montgomery Scott in Atlanta, Ga., who specializes in large, midsize and community banks. 

Live Oak Bank, for instance, created a software called nCino in 2012 to eliminate their dependence on paper forms, technology that smaller banks used to fast-track PPP applications. The Wilmington, N.C., based bank was the top SBA lender by loan volume in 2019 and is a subsidiary of Live Oak Bancshares, which has about $5 billion in assets.

“We think of the large national banks as being somewhat clumsy on any given day,” Marinac says. “They may have all the bells and whistles and the best technology, but the relationship isn’t always there. People want to do business with bankers, not just a bank.”

To be sure, bigger banks still pushed through hundreds of thousands of applications in the first round, including those from small businesses. 

Umpqua Bank, a mid-sized bank with nearly $30 billion in assets, was the bank that was unable to help Dutra at Kimmie Candy, but it did come through for Darren Marshall, chief executive at Smith Teamaker in Portland, Ore.

Marshall was confronted with having to cut pay by 30% for 60 employees after the pandemic dented sales of the company’s artisanal teas, and he said Umpqua quickly approved his application. Umpqua staff expected to see 5,000 applications in the first two weeks of the PPP -- instead it received 6,700 applications on the first day, according to a spokesperson.The bank confirmed that it had to put a temporary pause on new applications after that, but ended up processing 14 years of SBA loans in a single month.

“Getting a PPP loan was essential to our existence. It’s kept us alive,” said Marshall, 52, who received just under $1 million in funding that will help cover about two months of pay for his hourly employees.

In some parts of the country, smaller banks are hard to come by. In Nevada, two out of every three bank offices are run by the five biggest banks and only seven percent of branches belong to community banks, according to FDIC data.

That reliance on big banks appeared to have stark consequences in the first PPP round. Nevada received only 42 cents for every eligible dollar, or about half what states like North Dakota and Nebraska received, according to a Newsy analysis. 

Even states that have a greater community bank presence have seen the number of small banks shrink in recent decades, especially since the Great Recession. A wave of tighter financial regulations such as the Dodd-Frank Wall Street Reform Act drove consolidation among community banks and deterred new banks from opening, according to Marshall Lux, a fellow at the Mossavar-Rahmani Center for Business and Government at Harvard University.  

The number of banks with less than $10 billion in assets fell by 37 percent between the global financial crisis in 2008 and late 2019, according to the Federal Reserve Bank of St. Louis. States such as Oregon, Colorado, Nevada, Georgia, Florida, Virginia and South Carolina saw a significant drop in smaller banks during that period -- sometimes by more than 50 percent.  

Still, community banks have certainly picked up customers during PPP. 

“We had a huge influx of new customers coming to us from the bigger banks, especially in round one,” said Jim Engel, president and CEO of Aquesta Bank in Charlotte, N.C. “Many of them were told — we were very blunt — we can’t promise you anything because there’s a line, but we’re willing to try.”

Aquesta Bank funded its first loan on the first day of round one and employees worked extra hours to ensure that applications went through, Engel said. The bank ended up being the biggest lender in the state over both rounds with under $5 billion in assets, according to reporting by the American Banker.

By the first week of May — about a month after the first PPP loan was made — roughly half of the second round had been dispersed, and lending by big banks had picked up. States like North Carolina that had fared poorly in the first round began to see more federal dollars in businesses’ bank accounts. 

But recipients said that timing mattered. The average small business has only 27 days of cash reserves, and labor-intensive businesses like restaurants tend to have much less. By the time the second round was open, it had been well over a month since the first states started shutting down businesses. 

“We would have maybe been able to survive a month without that PPP loan, and then we would have had to probably shut down,” said Dutra of Kimmie Candy. “We would’ve been dead in the water.” 

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Dutra said the experience has left him eager to work with smaller banks in the future. And community bankers said they hope all their new customers will stick around when the crisis is over. 

“You want to actually know your banker,” said Engel. “To some people that was just marketing or lip service and I think that’s changed now -- I think people truly understand that if you’re a small business owner you really need to know your banker.”

Mark Fahey is a data reporter with Newsy. Contact him at Mark.Fahey@scripps.com or follow him on Twitter at @marktfahey. Jessica Menton is a personal finance and markets reporter at USA TODAY. Contact her at JMenton@usatoday.com or follow her on Twitter at @JessicaMenton.