Banks, credit unions scramble to help clients in wake of pandemic closures

Healthy Start Child Care has been providing much-needed day care for families in the Traverse City area for a quarter of a century.

But the coronavirus epidemic, which prompted Gov. Gretchen Whitmer to order the temporary closure of most day care operations, threatened to shut the doors of owner Alison Burns’ business for good.

Alison Burns, who employs three child-care workers, obtained a $13,000 SBA Paycheck Protection Program loan through Honor Bank.

“It wasn’t a dire situation, but it was definitely a concern,” she said about the impact on her business, which employs three child-care workers and is licensed to care for 12 children.

Burns missed qualifying for a loan in the first round of the Small Business Administration’s Paycheck Protection Program (PPP) in early April. But she succeeded in getting a $13,000 loan within days after applying in the second round through Honor Bank in Traverse City.

“It definitely keeps me in the black,” she said. “I can keep my employees rather than start from scratch. I was really thrilled to get the loan so quickly.”

The unprecedented SBA program, which has funneled nearly $16 billion in loans to almost 112,000 businesses in Michigan as of May 16, has been the major tool that local banks and credit unions have used to keep their business customers afloat in the worst economic crisis since the Great Depression.

But they’re also aiding business customers by restructuring loans, including deferring payment and lowering interest rates.

“We’ve been drinking from a fire house for a month now,” Honor Bank President Mike Worden said in mid-May.

Honor Bank processed 380 PPP loans totaling $31.9 million, helping to retain 4,030 jobs as of May 5.

It’s unclear how many loans in total were awarded to Traverse City area businesses because the SBA has not released loan data by localities within states. Many larger banks have not broken out data in the individual markets where they operate.

But based on interviews with local bank and credit union executives, it appears businesses in the Grand Traverse region were awarded well more than $100 million in PPP loans.

“We’ve saved thousands of jobs in northern Michigan and Grand Traverse County,” said Chemical Bank NorthEast Region President Scot Zimmerman.

Chemical processed 9,000 Paycheck Protection loans in Michigan totaling $1.3 billion, he said. Local figures weren’t available.

Tom Ranville, Traverse City market president at Independent Bank, estimated that about 20% of the nearly $270 million in PPP loans from his bank statewide – roughly $55 million – went to Traverse City area business customers.

Much of the SBA money loaned by local banks went to tourism-related businesses, including restaurants, retail shops and wineries, bankers said. Some was disbursed to local nonprofits and churches that were made eligible for the loans.

Nationwide, 83.5% of food service and accommodation businesses have been hurt by the COVID-19 pandemic, the most of any business sector, according to a May survey by the U.S. Census Bureau.

In Michigan, 64.5% of all businesses reported a “large negative effect” on their businesses from the pandemic. That was the highest rate in the country and 13.1 percentage points above the national average.

“There are not many people who can say, ‘I haven’t been affected by this,’” Worden said.

Local banks and credit unions scrambled to submit thousands of loan applications from local businesses that were shuttered as a result of stay-at-home orders issued by Gov. Gretchen Whitmer to slow the spread of the COVID-19 pandemic.

Independent Bank, for example, put on a temporary night shift of workers to process loan applications.

“I remember having pizza at 2 a.m. at the bank,” Ranville said. “And I was not alone. Many others were working from home during the night.”

Financial institutions also have been given wide latitude in restructuring trouble loans in the pandemic without running afoul of regulators.

Normally, changing the terms of a loan to aid a borrower would be considered a “troubled debt restructuring” that could trigger a variety regulatory actions, including a demand to increase capital or being sanctioned for engaging in unsafe and unsound banking practices.

But regulators are refraining from slapping the troubled debt restructuring label on problem loans if they’re in arrears as a result of the pandemic.

Local bankers say that’s the situation with most of their problem loans.

“I think regulators understand that under normal circumstances these loans wouldn’t be troubled,” said Heather Carey, senior vice president of lending at 4Front Credit Union in Traverse City.

David Shooltz, senior vice president and head of commercial lending at Fifth Third Bank in Traverse City, said loan workouts in its western and northern Michigan regions have been “quite modest.”

“Some clients have opted to simply request increases in their (revolving loans) to make sure they would have the availability that they would need to cover their working capital needs at this time,” Shooltz said.

The SBA also has other programs that banks and credit unions can use to help small businesses struggling in the pandemic. For instance, the SBA will make up to six months of principal and interest payments on current loans and on new microloans issued before Sept. 27.

Carey said 4Front used the program to fund a loan for an unspecified customer that was scheduled to open a new business March 20 but was forced to close under Gov. Whitmer’s executive orders.

“In every new loan we’re working on a deferred payment,” Carey said. “We don’t want to send someone into trouble right out of the gate.”

Ranville said Independent Bank made a PPP loan to a local winery to pay about 50 workers needed to prune vines that will produce grapes later in the season, as well an “accommodation loan” of interest-only payments for 90 days.

“He had to make sure those employees got paid,” Ranville said.

While PPP loans and forbearance by lenders are helping local businesses survive over the next few months, bankers say the future is uncertain.

Most banks have increased provisions for potential loan losses, fearing the worst is to come. Worden said Honor Bank, which had $200 million in loans at the end of March, planned to add $16,000 to loan loss reserves in March.

But the bank boosted that amount to $230,000 because of uncertain business conditions associated with the pandemic.

Some fear their customers may end up having to repay PPP loans they thought would be forgiven because of unclear regulations and loan applications the SBA might later rule didn’t qualify for forgiveness.

Loans are forgiven if 75% of the proceeds are used to keep workers on the payroll for eight weeks. The remaining 25% can be used to pay for mortgage interest, rent and utilities. But forgiveness is reduced if workers are later laid off or salaries are reduced.

“The process has been confusing,” Carey said. “There’s a lot of concern about how the loans will be forgiven.”

And no one knows what will happen when loan forbearance programs run out after the next 90 days or so. Many experts say it could be a year or more before the economy is fully operating again.

Ranville said many reopening businesses will be loaded with debt and will have run out of receivable payments from customers.

“It’s going to be a big issue,” he said. “They’re going to have to build working capital. That will take time and money. All these companies will be stressed mentally, as well as economically. It’s almost like they will be starting up all over again.”

Bankers and credit union officials said one bright spot for them is a renewed relationship with customers they’ve helped to weather the pandemic-related financial storm.

“People don’t contact us unless they’re in a panic,” Carey said. “We’re talking to customers more now. It’s strengthened our relationships.”