The Business Journal Q&A:
As chairman-elect of the Virginia Bankers Association (VBA) for 2020-2021, Leton Harding, president, chairman and CEO of Powell Valley National Bank, is acutely aware of the issues facing both the banking community and the customers and clients of banks. After hearing Harding discussing the plight of small businesspeople who feel they’re being punished for following the rules regarding Small Business Administration economic injury disaster loans (EIDLs), the Business Journal invited Harding to sit down and talk about the issues he and his colleagues at the VBA will be dealing with in the coming year.
The Business Journal: So, you shared with us the case of a restaurateur who is a loan customer. He had applied for and received a SBA EIDL loan of $10,000, then you worked on a $25,000 PPP loan. Now the customer will only be forgiven $15,000.00. If they had waited for PPP and not taken EDIL they would have the full $25,000.00 forgiven (or borrowed $35,000.00 in forgivable PPP funds). Indications to many early on was that the EIDL would be forgiven also thus less interest in full PPP application amounts.
So now the small business is obligated to begin this month to start making a monthly payment of $601.56 for 17 months. This is a slow time of the year for this restaurateur, and that fact is compounded by the continued drag of COVID-19 on his business. As you pointed out, $601.56 may not be much to many larger business owners – but to a small business it could be the difference in staying open or closing.
You also mentioned the increased workload on the Bank – new loan forms, calculations, and the bank being paid now a fee only for the $15,000.00 – not the $25,000.00 PPP loan amount.
Yet I could share with you an email I received from the SBA on Oct. 28 touting the fact that it has done more for small businesses this year than ever before. In fact, the SBA in that email congratulates itself for, in its own words, “putting the small business sector on the road to recovery.” Give us a 30,000-foot view of how the process of small businesses and their banks dealing with the SBA now is actually going.
Leton Harding: Think, if you will, of the EIDL being that spare tire in your car that has the instructions that say, “Drive no more than 50 miles.” Within 50 miles, you’re going to need to stop and get something more permanent. I think the EIDL initiative was taken with the idea, “Let’s do this so we’ll at least be able to get some funds out.” But then later came – and I use this word extremely loosely because I don’t know of anything that’s literally permanent in all this – we pulled over to the tire store to get a more permanent fix which was the new tire that was PPP.
At that time, the SBA was trying to put together forms and documents. So, they’d say, “well, Scott already has this EIDL money, so what do we do?” And they decided you had to deduct it from the amount of PPP that he might otherwise be qualified for. So, let’s say Scott calculated his payroll and related expenses to be $25,000. The SBA said, “Wait a minute. He’s already gotten $10,000 in EIDL money, so maybe we should only give him $15,000 in PPP.” So, there was this time when you sort of backed off what you thought the customer would otherwise get.
So, if we’d had Scott Sr., and Scott Jr., both come to the bank, Scott Sr., might have said, just get me $15,000 in PPP because I already have $10,000 in EIDL. Okay, cool. But Scott Jr., hadn’t gotten any EIDL funds and said, “well, my payroll and associated expenses are also $25,000 just like dad.” So we get him $25,000 in PPP money. Now, we come to the end and things have to be repaid. They’re telling Scott Sr., “You have to net it out.” That’s creating all kinds of confusion. Does it mean you only get $5,000 in forgiveness so you have to repay the other $10,000? At the same time, Scott Jr., who went all-PPP, submitted $25,000 in payroll and related expenses, and he doesn’t owe anybody anything.
So, it’s a bit of a trap the SBA created on their own. Yes, on the SBA PPP forms it talks about netting out any kind of EIDL advances to keep anyone from double-dipping, but I don’t think that anyone among the bankers and probably the businesses would think at the end of the day, not only would you not double-dip EIDL funds with PPP, but that you wouldn’t get any dips. I think that’s where the issue has arisen.
So, the scenario that we have tried to lay out for the SBA and also for the legislators shows how Scott Sr. – who played by the rules at the time, who needed money, who wanted to keep his staff working, and who followed all the rules for EIDL – is being punished for taking advantage of the early program before Congress and the SBA could get their act together to create that longer-term solution.
It’s one of those technical glitches that all Congress has to do is basically say, “Look, if you got EIDL, we’re going to treat it the same as if it were PPP funds. So, as long as you can document that you used the proceeds in the way we wanted you to – primarily for salaries and benefits – it’s forgivable.”
The question is whether, just because I let the funds come through the EIDL back door for Scott Sr., versus the PPP front door for Scott Jr., do you really want to punish Scott Sr.? Because once they got inside the house, Scott Sr., did what everybody agreed was good for the community, his employees and his customers.
BJ: Most everyone was disappointed there was no stimulus package forthcoming from Washington before the election. What is the industry expecting in that regard between now and the end of the year?*
LH: I think we are expecting not to have another package until after the first of the year. We’re expecting that because of the mail-in and absentee ballots, especially with states like North Carolina where I believe they allow ballots to be counted up to 9 days after the polls close, the election might not be over until the middle of November. And if it’s that close a race, then the likelihood of legal actions increases, and that complicates things further. To me, I do not think any action takes place until after the election is finalized. That’s my concern right now, that the election might take several days, and then there might be a residual period of legal action. But, I do think we need it for some industry groups.
On the other hand, we have some customers who, like for instance a small business who sells lumber, who are having one of the better years they have ever had because people are building things at home. So, they don’t need it. We have some restaurants who bank with us who have drive-ups. They’re saying, “We’re having our best year.” But there are certain industries – the hotel industry, traditional sit-down restaurants, buffet-style restaurants and anything that deals with entertainment – they desperately need this support. But, I just have a feeling – I would be somewhat surprised if it happens this year. I do expect it to happen sometime in January.
BJ: Aside from a stimulus package, what do you see as possible near-term motivators for economic growth, and what can the government do for you, or what might it do to you in the meantime?
LH: The vaccine is the most important thing. We are like everyone else in that regard.
But having said that, with the universality of the vaccine being the most important thing, I think right now the stress that has been created in the small business community because of the complexity and the differences between the EIDL programs and PPP programs is huge. So now, the government, even if they haven’t settled yet some of these other things related to stimulus, if they pass legislation that says, “Anybody under $150,000 can sign a sworn statement that they’ve used it right (rather than having to go through all the bureaucracy), that would, both mentally and time-wise, help all these small businesses. It would also help our industry because all-said, instead of having to have someone trying to vet all these documents, community banks and even larger banks could spend more time helping their customers.
We’re being asked if the small businesses have everything they need to withstand an audit. Well, for a small business that only got a $50,000 PPP loan, frankly, you don’t know. So, if there were one thing we would love to see, even if it doesn’t do a great deal to put money into businesses’pockets, just providing some stress relief would be huge. It would help the banking community. It would help the business community. Anything that allows businesspeople to take a worry off the table would be great. They have to worry about their businesses. They have to worry about their employees. They have to worry about their suppliers. It would be great if they could say, “Well, at least I don’t have to worry about this SBA thing.”
Aside from that, I do believe most bankers believe some sort of stimulus program would be good. Unemployment support would be good – anything that helps consumers and small businesspeople right now would be helpful. In terms of our industry, we just hope that once the election is over, the folks in Washington will be able to think more in terms of what they can do to help the country and not so much about playing politics.
BJ: How do you view the amount of debt that’s been created by the government over the last year with stimulus and other COVID response? What can you say about the long-term implications of that for the economy in general and for your own industry?
LH: Well, having lived through Mr. Volker’s Federal Reserve in the late 1970s, when we saw 21 percent inflation, a 21 percent prime rate and 30-year treasuries in the mid-teens in terms of rates – all that is etched in my mind and probably some places on my body. But at the time that Volker did that, the banks were not deregulated. When I first started in banking, the Fed said, “Thou shalt pay 3 percent on savings, and thou shalt pay X on a 12-month certificate. So, part of the crisis back in ’79 was not only the inflation, but also the fact that our industry moved from being regulated regarding interest rates to being deregulated, and some folks thought they were smarter than the market, so over time you had the S&L crisis where people were making 30-year mortgage loans with a six-month CD.
I do have a concern with how much lower rate assets, which of course is a liability for the customer and the business, that our industry will take on. There is a tremendous amount of cash right now in the industry.
It’s interesting, FifthThird is the 20th largest bank in America. They’re headquartered in Cincinnati. They’re a $200 billion bank. JP Morgan grew $205 billion in deposits in the first six months of this year. So, JP Morgan, the largest bank in the country, grew more than the 20th largest bank in the country is. So, if we’re all flush with cash, at some point people will start wanting to put that cash to work. That could lead to loans that maybe aren’t so good and investments that aren’t so good. Then, all of a sudden, you don’t have the cash.
It seems to me that good things generally happen slowly while bad things happen quickly. It’s great that we have all this cash and interest rates are so low, but I do have concerns about the deficit and about the global economy. That global economy is starting to pick back up now in non-American, non-European places. It can change in a heartbeat and that does worry me.
BJ: That segues into the next question. Obviously, what the global economy is coming back from is the COVID crisis. But going from the 50,000-foot worldview to getting down into the weeds locally, it’s obvious that COVID has changed the way banks do business, with all the new safety measures that have been put in place. You know, we’ve seen hour-long lines at the drive-through window for people depositing paychecks. What kinds of things that have happened because of COVID do you see as continuing even after the crisis ends?
LH: Well, one thing is that we’ll keep working to communicate what services we do offer. Banks have night drops, for instance. The people in those hour-long lines to deposit a paycheck can drop that paycheck off there anytime they want to, and the bank will work it up and mail a receipt. I’ve told customers about that and they told me they thought the night drop was just for business customers. So, I think this has taught us that sometimes in our industry the things we thought our customers knew, they didn’t know.
Another thing: since April, our lobbies have been available basically by appointment only. You know, I had an appointment Wednesday for a haircut. I have an appointment next week to get my driver’s license renewed as Real ID. I have a dental appointment on the second of December. What we’re finding is that our customers actually like having appointments with us. They know that when they come down to the bank, the loan officer will see them without making them sit in the lobby for an extended period of time. Also, since we know they’re coming, we’re generally better-prepared in terms of having documents ready and all those kinds of things. So, we’re getting things done quicker. So, I think customers are going to want us to keep doing appointments because it’s been effective and efficient, plus it affords customers a certain degree of privacy as well.
*This interview was conducted prior to the Nov. 3 elections.