|Through mid-May, the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) has approved more than 4.3 million loans nationwide, representing well in excess of $500 billion. The PPP initiative, with Congressional authorization to commit approximately $670 billion in funding to small businesses as part of the $2+ trillion CARES Act stimulus plan, was largely designed to support the workforce by keeping American’s on the payroll. With GDP swiftly plummeting and jobless claims skyrocketing across the country in recent weeks, the national unemployment rate soared to nearly 15% in April. And, since nearly 40 million people have filed since mid-March, roughly 20% of the U.S. workforce is effectively idled and cautiously awaiting and anticipating the impact of the economy’s gradual re-opening. In Michigan, jobless claims over the past two months represent more than 25% of the state’s labor force, so efforts to ease current restrictions and get folks back to work are being anxiously eyed.
State level unemployment rates through April will be released in the coming days, but it is assumed that the numbers will be horrific (while not yet reflecting the full impact of claims filed through May). It is clear that both national and global healthcare considerations and economic policy are working in tandem to try to flatten TWO curves — the oft-publicized rate of infection of COVID-19, and the now-elevated unemployment rate.
The Fed and the Treasury have taken extraordinary steps in an effort to keep the economy running, while hopefully also blunting the swift and dramatic impact to our nation’s small businesses. Round 1 of the PPP effort quickly witnessed its entire approximate $350 billion authorization exhausted, as the SBA funded roughly 14 years of typical loan volume in less than 14 days. But with an average PPP loan measuring in excess of $200,000 in Round 1, and headlines questioning why funds were approved for operations like the L.A. Lakers and Shake Shack, a second round approximating $320 billion was put in place. After the first round, a survey by the National Federation of Independent Business found that three-quarters of small businesses had applied for the first-round PPP loans, but only 20% had received the money. Amidst a politically-charged atmosphere focused on providing relief to traditional small businesses, the second round appears to be addressing this gap. The initial optics reflect that loan count has more than doubled since the first round, while the average loan through this latest phase has measured approximately $70,000 (bringing the overall program’s average loan size down to just under $120,000). Amongst its Midwest brethren, Michigan banks have been formidable, to the tune of more than 110 thousand borrowers totaling nearly $16 billion, in processing requests and facilitating much-needed funding relief across the state:
As some of the larger, out-of-state institutions elicited derision and fueled frustration as they struggled to respond to demand, it was the state’s community banks that quickly and efficiently stepped into the void. While reinforcing the relationship-orientation, know-your-customer dynamics, and high-touch approach of traditional community banks, their PPP-related efforts should also ideally enable these organizations to prudently expand their businesses while being at the forefront of continuing to support their markets.
The “duration” of this pandemic continues to be the biggest unknown, making it virtually impossible to definitively assess the depth and breadth of the devastation (emotionally and financially) that may occur in the coming weeks and months. It has clearly become a case of epidemiology versus economics, with still too much uncertainty. The sudden and dramatic shock of the coronavirus pandemic has been crippling, with a resultant shutdown of broad swaths of our economy as non-essential businesses closed and at one point more than 90% of the country’s population was forced to effectively shelter-in-place. As mentioned last month, fortunately the banking sector entered this unprecedented challenge with a healthier foundation and a more robust risk management architecture. This sentiment was echoed by Fed Chairman Powell, during an appearance before the Senate Banking Committee earlier this week: “Unlike the 2008 financial crisis, banks entered this period with substantial capital and liquidity buffers and improved risk management and operational resiliency. As a result, they have been well positioned to cushion the financial shocks we are seeing. In contrast to the 2008 crisis when banks pulled back from lending and amplified the economic shock, in this instance they have greatly expanded loans to customers.”
As the market tries to assess when it expects both COVID-19 will be contained and when consumer confidence will return, stock prices were swiftly and indiscriminately battered before rebounding a bit over the past week or so. With bank stocks trading at depressed levels, the market appears to have deeply discounted valuations in anticipation of future credit losses and possible capital needs as the industry moves through the unknown. Coincidentally, I view the PPP lending effort as de-facto “equity raise” for community banks as they are able to book associated fees that can now be redirected toward reserves and/or bolstering capital.
I believe the emphasis has firmly shifted toward long-term strategic considerations as the next few quarters have already been effectively “written-off” by investors, and policymakers assess and implement that delicate balancing act between current social restrictions and prudent economic policy. On the latter, recently the House narrowly approved an additional $3 trillion spending bill. While the proposed legislation has been deemed “dead on arrival” in the Senate, consensus opinion appears to reflect that additional support will be needed in the coming months. Candidly, I take comfort in both sides of the debate – Congress (and the Fed) continue to be prepared and willing to “do whatever it takes” to implement constructive measures during this unprecedented time, but only if guided by fiscal responsibility in the execution of such measures.
The Fed has slashed interest rates close to zero and is overseeing a new quantitative easing program, but monetary policy isn’t meant to encourage people to go out and buy items, so the Fed is also tapping its lending power capabilities with an alphabet-soup collection of programs. The notion of a “snap-back” in the economy depends on the course of the virus itself, which dictates how long segments of the economy will remain in shutdown mode. Over this period, the economy needs to at the very least remain “functioning” and businesses need access to funding to survive the storm and re-open in the future. It appears obvious that no policy or set of policies can work unless the public health issue is resolved first, thereby enabling the U.S. economy to avoid an extended downturn. As we said last month, consumers aren’t unwilling to spend. They are unable to spend.
As recommended in recent writings, on the community banking front be a source of information, communication and comfort. These are the times when community banks will truly differentiate themselves from the industry’s larger brethren (as poignantly demonstrated with the PPP efforts). Be there for your customers in these difficult times by putting the resources and creativity of your organizations at the disposal of those now-struggling businesses that you recognize are the lifeblood of your communities.
In closing, attached please find our monthly summary of Michigan’s financial institutions. Enjoy the Holiday weekend, that this year has taken on a somewhat surreal context. And again, this simple but heartfelt counsel: Be careful. Be smart. Stay healthy. Take care of your family, your colleagues, your community. Most important, be sure to take care of yourself.