The Economic Pandemic Meets the Hometown Banker

They call it the novel coronavirus. It will have existed for 142 days as of this publication. It’s called a “novel” virus because, while variations have existed before, this one is brand new. It’s unique in that it replicates quickly in asymptomatic people who are stealth carriers, then explodes in the population overwhelmingly, debilitating the populace and quickly maxing out the health system and hospitals. But for a moment consider how the virus is replicating itself in a similar way in our economy.

Healthy businesses are suddenly brought to a standstill, sending people into unemployment, threatening their livelihoods, increasing bankruptcies, unemployment claims, spinning our economic system into a negative trajectory.

Now consider the government’s economic response. Like the virus, the government’s $349 billion Paycheck Production Program, PPP for short, was rolled out last Friday through the banking system, with little preparation or warning to hundreds of thousands of FDIC insured banks and branches in association with the Small Business Association (SBA). Banks had to instantly organize to deliver emergency funds to the 30.2 million small businesses around the country that are in dire straits due to the virus shutdown, many verging on bankruptcy.

Have you ever applied for an SBA loan? Daunting would be sugarcoating it. Have you ever applied for bank loan? Not exactly rolling off a log. Have you ever been on the verge of bankruptcy? Not a pretty picture.

The PPP stimulus package, or rescue, or compensation, depending on how one looks at it, has been rolled out in such a way that, like the virus, it has maxed out bankers and borrowers all over America.

The Operative Term is Local

“Local” is paramount. Our local institutions are the most functional, valuable, and operative aspect of our lives during the crisis. These include hospitals, food providers, neighbors, and add to that, bankers.

Enter your friendly neighborhood banker, Jeff Devine, CEO and President of American Riviera Bank. Jeff, it’s hard to imagine calling him Mr. Devine, is a supremely local guy with twenty-five years of experience banking in Santa Barbara.

American Riviera is a small bank that knows every one of its customers. They all say hello when customers enter and goodbye when they leave. When the health crisis hit, the bank quickly put in place hygienic safety measures for customers and employees alike.

“We had a pandemic plan,” Jeff explains. “We actually had one in place from before, when the SARS thing happened. So, we just took it off the shelf and started implementing it.”

The bank and its customers adapted quickly to social distancing, limiting the amount of customers coming inside of the branch, sanitizing surfaces and implementing new procedures on money handling to put employees at rest.

They made sure customers understood they could put bills, deposits, and checks into the ATM and even the Night Drop box. They also restructured their work hours and locations.

“The executive team made a decision to actually separate all of our employees and their departments into Team A and Team B,” Jeff offers. The goal was to limit the amount of time employees were in any one particular office at the same time.

“Team A works on site on a Monday, Tuesday, while Team B works from home Monday, Tuesday, and then they flip flop,” he explains. “It means if someone gets sick on one team and the whole team has to quarantine, the other team can move forward with critical tasks at the bank.” The US Army organizes and trains its troops for contagion scenarios like this in exactly the same way.

“We all crave that human interaction which is a bummer,” Jeff adds, acknowledging the essence of small-town banking, “but we had to pivot to make those changes.”

A Banking Tsunami

Late last week the Department of Treasury rolled out the PPP for 330 million small businesses in the United States as part of the CARE (Coronavirus Aid, Relief, and Economic Security) ACT which includes $350 billion in forgivable loans that is contingent upon retaining employees. The effort is good for employment and good for the small businesses, the cornerstone of the American economy. Most American small businesses have no more than two months of liquidity.

That said, the rollout was unbelievably chaotic. The PPP process ripped through the entire banking system forcing local banks and branches across the country to handle and define these crucial life-saving transactions. Very few banks had their online portals up and running by that time. Once they did, they were quickly flooded with applications. Bank of America received 10,000 loan applications in the first hour.

It was overwhelmingly chaotic enough that even a tranquil bank CEO like Jeff Devine was astonished.

“So, this is crazy, I’ve never seen anything like it,” Jeff remarked. “I mean, not only is the severity of this downturn so dramatic, with the unemployment numbers sky high on top of it, but now there’s the chaos of this program rollout.”

The Treasury Department’s lack of proper language and clear guidance in the roll out plan added a massive additional complicated layer. Add to that, the dire circumstances for businesses, which translates into the confusion and jeopardy for employers and employees. These are people, remember, our neighbors and friends. The ripples are enormous.

“We would have been working hard anyway,” Jeff remarks, “but, now we’re just working literally around the clock. The amount of emails and phone calls and emergency meetings, it’s really something else.”

As community bankers they know the pain their customers are in. Having served the town so long the CEO can’t help contemplating how dire the situation has become.

“At some point, this converts from an economic tragedy to a personal tragedy when you actually know somebody who perishes,” Jeff remarks. “We haven’t even gotten there yet, but we all feel the pressure, the weight of wanting to help because we’re community bankers. That’s what we do.”

Why is the PPP so Chaotic?

Let’s drill down into the facts of the PPP roll out in order to understand how and why a program that is absolutely necessary can pose such an enormous problem for bankers. The intent of the program is laudable and clear – to keep people working and to keep small business going. No one wants them to fail. The Treasury Department announced that businesses could start submitting applications last Friday, April 3.

“Did Treasury check with the banks to see if they would be ready?” Jeff asks. “No, of course not.” Hence the tsunami. Everyone in the banking system was hit with customers’ urgent needs without time to prepare.

That said there are essentially five concerns with the program itself.

LANGUAGE. The first issue is that the government sent money to banks without the language the banks needed to lend that money. That may sound trivial, but it is not. Banks are highly regulated businesses that have to take their lead from the Treasury Department and the FDIC. If the language doesn’t specifically enable the banks to make the loans, they could lose their license when they are evaluated for review.

“Banks had significant concerns,” Jeff remarks, “as the program rolled out, the Treasury and SBA had still not filled in the blanks on how it was all to work.”

DUE DILIGENCE. Banks cannot lend money to people they do not know. This is not allowed in banking systems.

“American Riviera and banks across the country have been scrambling to create loan procedures and an efficient automated platform to accept loan applications with all the supporting documents,” Jeff explains. It’s a massive undertaking under normal circumstances.

FIRST COME FIRST SERVED. The funding is limited and delivered in the order for which it is applied. If business do not move instantly, the money will run out. Every small business has to try to get into their bank as soon as possible. Furthermore, with the social distancing and shelter at home restrictions, customers can’t walk into their bank, talk to a banker, look him or her in the eye and ask questions to get reassurance. Pandemonium has ensued.

“We had to make a decision on Wednesday, as many banks did around the country,” Jeff remarks, “that we could only handle requests from existing loan and deposit customers.”

The fourth issue is a doozy.

THE SPIRIT AND INTENT OF THE DEAL. The head of the Treasury Department, Steve Mnuchin, spoke publicly to the nation shortly after the PPP was released and said, “I encourage all small businesses that have 500 or fewer people. Please contact your lenders. You will get the money; you’ll get it the same day.” Mnuchin’s statement was rife with concerns and unrealistic expectations that placed still more burdens on the banks.

The spirit and intent of the program is to help small businesses in need retain employees and not close down altogether – those businesses are supposed to be businesses such as gyms, restaurants, nail salons, stores, dog walkers, and the like, all of which fit the 500 and under criteria. But also fitting that criteria are hedge fund owners, lobbyists, money managers, law firms, and more, all with tax consultants and lawyers ready to pounce on an opportunity like this. As for same day – who is kidding who?

The spirit and intent of the loan is to help businesses based on need. Not on simple employee numbers. The possibility for abuse is so extremely high, that it seems almost deliberate. If a banker lends the money to a hedge fund instead of a small local business, that hurts the banks, the businesses, and the community. It will also lead to the $349 billion running out very quickly, meaning small businesses in need might not get any.

“What is sad is that certain affluent business owners with significant personal wealth can qualify for the program,” Jeff remarked. “This has added a free-for-all aspect.”

OVERSUBSCRIBED AND UNDERFUNDED LEADS TO DANGEROUS DELAYS. Every indication from bankers, especially community bankers like American Riviera, is that there simply aren’t enough funds to go around. Furthermore, it’s not a stagnant situation. The economy is in free fall. Once a business goes off the rails employees and employers have to make emergency life decisions for themselves, their businesses, their families. Employees are equally in jeopardy, if not more so. How long can they hold on, not working, without help?

Community Bankers are Pillars of Strength

The American Riviera CEO feels strongly that the government has to dedicate the funds to make the program work.

“When the government created this program, the idea was this is for all of the businesses hardest hit. They need to make sure that there’s enough dollars here for everyone that applies and qualifies. 349 billion is a lot of dollars, but apparently, it’s not enough.”

If anyone can help small businesses in Santa Barbara navigate this situation it’s Jeff Devine at American Riviera Bank. He’s good at translating bank-speak to people. In this regard he has a social function as well as a fiduciary function. American Riviera also has a team that backs him up. But make no mistake, his job at the moment is a tough one.

“I have been so inspired by the team at the bank that have been willing to do whatever it takes to get this done,” he remarked.

The effects of the virus continue to replicate itself throughout our medical system, economy, culture, and more, maxing out systems in ways that are far reaching and paradigm shifting for ages to come. Seeking information and support locally has become the most powerful antidote to the chaos swirling around us.