The BAN Report: PPP Update / What Georgia Means for Banks / The Vaccine / Lumber Market / Moving In and Out / Webinar Tomorrow!-1/7/21
Happy New Year! Many bankers have mixed feelings about a new round of PPP loans but here we go. Last night, the SBA published its rulemaking for the stimulus bill. We will attempt to summarize:
- A big part of this is to make sure the initial funds go to smaller borrowers and smaller institutions. For the first two days, only community financial institutions will have access to the PPP loan portal. Community financial institutions are allocated $15 billion in aggregate PPP loans, and there is another $15 billion for banks, credit unions, and farm credit institutions with assets under $10 billion. $35 billion is just for new first draw PPP borrowers. $15 billion and $25 billion for first draw and second draw PPP loans for borrowers with a maximum of 10 employees or for loans less than $250K to borrowers in low-or-moderate-income neighborhoods.
- PPP borrowers can use either 2019 or 2020 payroll costs to determine their maximum loan amount.
- Eligibility is for small businesses that meet the SBA’s definition, or you can be eligible of you have no more than 500 employees. News organizations are eligible as well, some hospitals owned by government entities, and businesses that receive legal gaming revenue. They also added electric, telephone, and housing cooperatives. 501 (c) (6)s are eligible.
- Ineligible PPP borrowers include those engaged in illegal activity, a household employer, a 20% or more owner has criminal legal issues, prior default on government debt, you weren’t in operation on February 15, 2020, a security issuer, a senior government official has controlling interest in the business, or your business has closed. Businesses in bankruptcy are not eligible. Hedge funds or private equity funds are not eligible.
- Interest rate is 1% and the maturity is five years. You can only apply once for a First Draw PPP loan.
- While the loan amount formulas haven’t changed materially, the proceeds of the PPP loan can be used for broader uses, including now interest payments on other debt obligations, certain operation expenditures, property damage costs in 2020 not covered by insurance, certain supplier costs, and certain worker protection expenditures. However, at least 60 percent of the PPP loan proceeds must be for payroll costs.
- Second Draw PPP Loans are for borrowers that have already received a PPP loan. They must show at least a 25% revenue reduction from one quarter in 2020 compared to 2019, or for the entire year. The forgiveness amount of the First Draw PPP Loan is excluded from 2020 revenue. Loan amounts are based on the same formula for the prior PPP loan. This section is particularly problematic because they seem to suggest that only tax returns are acceptable documents, yet most borrowers will not file their 2020 tax returns for a while. Would a reviewed quarterly statement for a CPA suffice?
There is a lot to digest and we will have more for you next week. Here is all the relevant guidance released last night. SBA Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns , Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act and the Interim Final Rule on Second Draw Loans. We will also cover what else was in the stimulus bill that is relevant to banks and lenders next week.
What Georgia Means for Banks
While it was overshadowed by the terrible events that occurred yesterday in Washington, a Democratic-controlled US Senate has some important implications for banks. Bank stocks rallied yesterday as the prospect of more fiscal support from a Democratic congress. The American Banker discussed the implications about the change of the Senate.
“Banks were one of the primary beneficiaries of the Trump administration given the reduction in corporate taxes and the deregulatory agenda,” Isaac Boltansky, an analyst at Compass Point Research & Trading, said in a research note Wednesday. “Under a Democratic-sweep scenario, banks would face higher corporate taxes and a less hospitable regulatory environment, but the timing, prioritization and magnitude of these changes are relatively nuanced.”
Banks can expect more aggressive enforcement from the Consumer Financial Protection Bureau, as well as other regulatory agencies, as Biden will have more freedom to pick liberal policymakers to lead the agencies.
“Biden should have an easier time getting his choices confirmed to top jobs,” Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a note Wednesday. “It also means a crusading progressive should end up in charge of the CFPB, which means more enforcement and regulatory risk for auto lenders, servicers, mortgage originators, credit card lenders, payday lenders and debt collectors.”
Biden, in wide-ranging policy documents published over the summer, also suggested increasing corporate income taxes and potentially imposing a financial crisis responsibility fee for banks.
Arguably, banks have gotten everything they have wanted from Washington the last few years, although much of that was bipartisan, such as Dodd/Frank reform and regulatory relief. Placating the liberal win by giving them banking oversight seems to be good politics for President-Elect Biden. But a 50/50 Senate means any nominee needs to be get past Jon Tester and Joe Manchin, and Senator Tester helped pass banking reform in 2017.
If you are a banker, please fill out our Regulatory Pendulum Survey – as this would be a good time to see how the regulatory environment has changed as of late, and what the outlook is for 2021. It only takes three minutes!
As the vaccine rollout is the worst debut since the Arch Deluxe, its hard not to echo Judge Smails. Well? We’re waiting! There is no single more important national priority than getting this vaccine out as fast as possible and to as many people as possible. The goal is to get to herd immunity, whether that’s 60-85%. Any person who takes the vaccine is a step in that direction. Instead, we are holding back doses senselessly and are obsessed with making sure the wrong people don’t get the vaccine. Sure, we should prioritize the right groups, but fiddling around is not the answer. Late last month, the Commissioner of the Texas Department of State Health Services sent a letter, admonishing health care providers to get the vaccine out.
The time to vaccinate willing individuals is now. Once all readily available and willing members of the primary Phase 1A priority populations have been served – including 1A persons outside your facility – we urge you to pivot quickly and begin providing vaccine to as many readily available and willing Phase 1B persons as possible. There is no need to ensure all of your 1A group has been vaccinated before starting 1B vaccinations. If, in a given situation, all readily available and willing 1A and 1B persons have been served, we urge you to pivot again and provide vaccine to any additional available and willing persons, regardless of their priority designation. Every shot administered matters.
Amen. So, what’s the problem?
Months of work anticipating the vaccine rollout have been squandered because of a lack of coordination and gaps in planning. Bloomberg’s reporting shows missed opportunities at every level of government, from a laissez-faire approach in Washington to local hospitals where harried health-care workers were left trying to make last-minute decisions without guidance.
Among the issues that have contributed to the rollout’s jumbled start, according to interviews with state, federal and hospital officials:
- Reductions in the number of shots states were told they would receive, along with limited notice as to how many doses would arrive, and when
- Complicated logistics of storing and administering the vaccines
- Lack of uniform messaging and education to encourage vaccination
- A disjointed approach across states and counties
- Little transparency with providers and the public on what to expect
The good news is we have two tremendously effective vaccines, each with over 90% effectiveness and no known harmful effects. Sure, especially the Pfizer vaccine, they are a bit of a pain in the rear, and not many people have negative 112-degree freezers lying around. It’s become clear that lockdowns, social distancing, and other measures have limitations, so the vaccine is the only way out of this mess. Why not only give the additional stimulus checks to those who take the vaccine? Nevertheless, we can’t get this vaccine out fast enough.
A friend of mine, a doctor in the western Chicago suburbs, asked me last night if he should delay building his home. As he contemplates building a new home, he wondered if it would be better to wait for elevated lumber and labor costs to subside. It is an interesting question, as the price of lumber has skyrocketed in the past year. The one year-chart is pretty compelling, as lumber futures bottomed out at $259 and finished the year at $748. Paul Quinn of RBC Capital Markets published last month his 2021 outlook for wood products. A few highlights from his report:
Get ready for another year of record prices: The bottom line is that prices are already at record levels in what is usually the seasonally slowest time of the year. With dealer inventories at a low level and overall demand likely to be higher y/y due to very strong new residential construction markets, we think 2021 could be another record year.
Lumber markets have clearly been on a wild ride in 2020, with COVID-19 putting a temporary halt to construction, only to come roaring back as lockdown restrictions eased. While new residential construction has been supported by record-low interest rates, the story of 2020 was the record level of repair & remodel demand, which strained supply to home centers and left the market short of more consumer-oriented products such as treated lumber.
As we head into 2021, we have seen unprecedented pricing levels to close out 2020 with both SYP and W. SPF prices moving higher following a pullback in October/November. With demand likely to get stronger as dealers get ready for what should be a very strong spring building season, we expect that prices will remain at a high level during the first half of the year.
With record pricing in North America and ample supply in Europe due to the spruce bark beetle infestation1, we expect that some additional production will make its way into North American markets. This could add up to ~1 bbf of supply over the next year. In addition, much of the low-grade lumber is likely to be shipped to China, which will likely result in reduced exports from North America. In our view, this volume is not enough to impact prices.
Over the next two years, we expect that there will be limited capacity additions, with the two largest coming from the re-start of former Klausner Lumber mills by Binderholz in 2021. In 2022, Idaho Forest Products is expected to start-up a greenfield mill in Alabama, while Japer Forest Products (in a JV with Tolko), will add 130 mmfbm to an existing mill. Finally, Hampton Lumber is expected to start up a brownfield mill in Fort St. John, BC.
Higher lumber prices mean the cost of an average new home goes up some $15K or so. Perhaps, the best thing our friend could do is to go long lumber or lumber stocks, exit later this summer, and start building next year. But it does appear that higher lumber prices are here to stay and there doesn’t seem to be any relief coming, except for a further reduction in lumber tariffs, which were reduced already in December from 20 to 9%. So, if you’re going to wait for lower lumber prices, you may need to wait until 2023 or so, and of course there are no guarantees.
Moving in and Out
United Van Lines this week released its annual National Migration Study, in which it showed where people are migrating from and to.
According to the study, which tracks the company’s exclusive data for customers’ 2020 state-to-state migration patterns, Idaho was the state with the highest percentage of inbound migration (70%) among states experiencing more than 250 moves* with United Van Lines for the second consecutive year. Topping the list of outbound locations was New Jersey (70% outbound), which has held the spot for the past three years.
Among the top inbound states were South Carolina (64%), Oregon (63%), South Dakota (62%) and Arizona (62%), while New York (67%), Illinois (67%), Connecticut (63%) and California (59%) were among the states experiencing the largest exoduses.
United Van Lines also conducts a survey examining the reasons behind Americans’ migration patterns as a companion to the study’s findings. This year’s survey results indicated 40% of Americans who moved did so for a new job or job transfer (down from prior years), and more than one in four (27%) moved to be closer to family (which is significantly up over prior years).
Data from March to October 2020 also revealed the COVID-19 pandemic influenced Americans’ decisions to move. For customers who cited COVID-19 as an influence on their move in 2020, the top reasons associated with COVID-19 were concerns for personal and family health and wellbeing (60%); desires to be closer to family (59%); 57% moved due to changes in employment status or work arrangement (including the ability to work remotely); and 53% desired a lifestyle change or improvement of quality of life.
Metro areas that saw the biggest inflows were Wilmington, NC (79%), Sarasota-Bradenton, FL, Boise, ID, Huntsville, AL, Fort Meyers-Cape Coral, FL, Knoxville, TN, Melbourne-Titusville-Palm Bay, FL, Austin-San Marcos, TX, Nashville, TN, and Fort Collins-Loveland, CO. Metro areas that saw the biggest outflows were almost all in the northeast and California. Nassau-Suffolk, NY, Bergen, Passaic, NJ, Trenton, NJ, New York, NY, and Newark, NJ were the top five.
Many of these moves may be temporary, as people move to be closer to family that they can’t as easily travel to visit. But, at least in 2020, people seemed to be moving to lower density suburban markets. The largest NFL city with inflows was Nashville, but every other top ten city was a secondary or tertiary market.
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