MARK GRIFFITHS, Adjunct Professor, University of Southern California
MIKE MAULDIN, Director of the Excellence In Banking Program, Texas Tech University
DREW WINTERS, Pickering Chair in Finance, Texas Tech University

The Paycheck Protection Program allowed various business entities to apply for low-interest private loans to pay for their payroll and certain other costs. The amount of the loan was approximately equal to 2.5 times the applicant’s average monthly payroll costs. The funds were to be used to cover payroll costs, rent, interest and utilities, and could be partially or fully forgiven if the business kept its employee counts and employee wages stable. The program is administered by the Small Business Administration (SBA), which is an independent agency in the U.S. Department of the Treasury. The initial idea of the program was that any business—for-profit or nonprofit, veterans’ organization or tribal concern—with 500 or fewer employees was eligible for a government-backed loan equal to eight weeks of its prior average payroll, plus an additional 25 percent of that sum to cover various other non-payroll operating expenses, such as interest rent and utilities. The payroll amount was capped at a maximum of $100,000 (annualized) for each employee unless the total amounted to more than $10 million, which was the maximum for any individual firm. The Paycheck Protection Program was reopened on January 11, 2021. The total amount of the program was estimated at $953 billion. ^[1]

The House Select Subcommittee on the Coronavirus Crisis launched an investigation into the implementation of the PPP in June 2020 to determine whether larger companies were receiving loans intended for small businesses. ^[2] The report goes on to state:

“Although PPP has enabled many small businesses to weather the pandemic, the program would be more effective if Treasury and the SBA implemented it consistent with congressional intent. In the CARES Act, Congress specifically encouraged the administration to issue guidance ‘to ensure that the processing and disbursement of covered loans prioritize small-business concerns and entities in underserved and rural markets,’ including businesses owned by veterans, members of the military, socially and economically disadvantaged individuals and women. ^[3] On May 8, 2020, the SBA’s inspector general reported, ‘We did not find any evidence that the SBA issued guidance to lenders to prioritize the markets indicated in the act.’ ^[4] The inspector general also found that the SBA failed to provide a demographic questionnaire with the PPP loan application, undermining the SBA’s ability to determine whether lenders appropriately prioritized loans to underserved communities.” ^[5]

The SBA was created in 1952 to help Americans start, build and grow businesses. It offers small businesses a variety of programs that have been specifically designed to meet key financing needs. Such benefits may include the ability to secure long-term financing (no balloon payments), flexible program requirements, longer amortization, lower down payment and easy accessibility to financing through the backing of a guarantee by the SBA.

Small businesses are defined by the SBA as independently owned for-profit enterprises that employ 500 or fewer persons. But there are exceptions to what constitutes a small business in specific industries. For example, a family clothing store can have up to $41.5 million in average annual receipts (net income plus the cost of goods sold averaged over the past three years) while a crude petroleum extraction firm can have up to 1,250 employees (including full-time, part-time and temporary employees averaged over the past 12 month’s pay periods). The SBA includes affiliated businesses in their calculation.

The other major players in this space are the community banks. The Federal Deposit Insurance Corporation (FDIC) states:

“Community banks are known for their focus on traditional banking activities. Community banks mainly conduct lending and deposit gathering activities within a fairly limited market area. They are said to be relationship lenders, which rely to a significant degree on specialized knowledge gained through long-term business relationships. They are likely to be owned privately or have public shares that are not widely traded and therefore tend to place the long-term interest of their local communities high relative to the demands of the capital markets. Since these attributes are generally—but not always—associated with smaller banking organizations…” ^[6]

In this article, we examine the roles of the SBA and community banks in addressing the economic uncertainty for small businesses in Texas. We begin by examining two “heat maps” of loans made. Figure 1 is for SBA 7(a) loans—loans for working capital—made in 2017. Figure 2 is for the first round of PPP loans (PPP1) under $150,000 issued through community banks. In both cases, the loans are arranged by ZIP code. We chose to use SBA data from 2017 because it was a fairly average year economically between the financial crisis and the COVID pandemic and is the first year of a presidential term. We also drew, but do not include here, heat maps for 2018 and 2019 SBA 7(a) loans and they are qualitatively similar.

Figure 1: 2017 Texas SBA 7(a) loans by ZIP code

Figure 2: PPP1 loans under $150,000 in Texas: Community banks only

As is apparent, the SBA issued the majority of its loans in major urban centers. Meanwhile, the community banks covered the great expanse of the state of Texas, including the Panhandle. The lack of coverage in Southwestern Texas is easily explained as this area is home to large acres of ranch land with few residential areas and small businesses.

However, when one digs a little deeper into the data, a much more telling story appears. We took the data from the SBA loan accounts and from the PPP1 loan applications and assigned them to whichever of the 254 counties in Texas in which they were located. The first startling finding is that there were 98 counties in which the SBA made no loans at all. ^[7] There are only five counties that did not receive a PPP1 loan under $150,000 (Borden, Kenedy, King, Loving and McMullen counties). ^[8] The total 2019 population of these five counties is 2,290. These are five of the six most sparsely populated counties in Texas.

Next, we sorted the data by county population in 2019. Table 1 provides loan counts for different slices of the Texas population. It also provides an estimate of jobs saved for SBA and PPP1 loans. Across Texas, the SBA made 8,843 loans in 2017 that saved an estimated 46,477 jobs, while community banks made 56,639 PPP1 loans under $150,000 that saved 179,381 jobs.

The SBA is a federal agency and, judging from the dispersion of its loan portfolio, is more likely to make loans in larger urban areas where there is more economic activity and it can easily promote its programs. The 12 most populous counties total 17,866,900 persons, which is 63.2 percent of the total Texas population. ^[9] The SBA made 3,811 loans in these counties, amounting to 75.7 percent of its total loans made in Texas. These loans saved an estimated 19,391 jobs. Community banks issued 16,183 PPP1 loans in these counties, which saved an estimated 45,543 jobs.

However, community banks, by generally being locally owned and operated, can readily address the needs of smaller, remote and/or rural communities consistent with the social relationship they have with their customers. Table 1 shows the 26 Texas counties with populations between 50,000 and 100,000. The SBA made 196 7(a) loans that saved 1,453 jobs, while community banks made 3,261 PPP1 loans that saved 12,194 jobs. Additionally, Texas has 189 counties with populations below 50,000. In these counties, the SBA made 276 loans that saved 2,114 jobs, while community banks made 8,929 loans that saved 31,177 positions.

Table 1: Loans and jobs saved across Texas

We are not attempting to suggest that the number of SBA loans made during a “normal” year and the number of PPP1 loans made during the COVID pandemic are directly comparable—because they are not. Instead, we are suggesting that the coverage of small businesses is very different with SBA loan activity focused in major urban areas, while community banks reach the entire state.

In conclusion, if federal public policy continues to promote the access of loans for small businesses, then our results suggest that community banks should be viewed as an important part of the solution. This suggests a role in banking regulations to allow community banks more flexibility in making small-business loans. It also suggests that regulators and supervisors keep an eye on the important role of community banks in serving their local communities as the consolidation process continues.

^[1] See Wikipedia (accessed August 30, 2021).

^[2] Among other problems related to oversight, the analysis identified 10,856 loans totaling more than $1 billion granted to borrowers who received more than one loan and more than 600 loans totaling over $96 million that went to companies forbidden from doing business with the federal government. See Memorandum on Preliminary Analysis of Paycheck Protection Program Data, September 1, 2020.

^[3] Coronavirus Aid, Relief and Economic Security Act, Pub. L. No. 116-136, §§ 1102, 1106 (2020).

^[4] Small Business Administration, Office of Inspector General, Flash Report: Small Business Administration’s Implementation of the Paycheck Protection Program Requirements (May 8, 2020).

^[5] See Memorandum on Preliminary Analysis of Paycheck Protection Program Data, September 1, 2020, op. cit.

^[6]  See FDIC’s Community Banking Study (accessed August 30, 2021).

^[7] A list of these counties is available upon request.

^[8] In the 2020 census, Loving County is the least populous county in the U.S.

^[9] Texas counties in order from the largest to smallest population: Harris, Dallas, Tarrant, Bexar, Travis, Collin, Hidalgo, El Paso, Denton, Fort Bend, Montgomery and Williamson.