Sobering Data and the Rising Importance of Main Street Lending

May 4, 2020 Jim Young

In this week's episode, we discuss the cratering middle market lending numbers and why banks need to be ready to participate in the Main Street Lending program.

NOTE: This podcast was recorded last week, the day before the Fed published revised term sheets for Main Street Lending - so some of our details will be slightly outdated. But our viewpoint on the importance of the program remains the same. 


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Jim Young: Hi and welcome to the Purposeful Banker, the podcast brought to you by Precision Lender, where we discuss the big topics on the minds of today's best bankers. I'm Jim Young, Director of Content at Precision Lender.
I'm joined again today by Dallas Wells, our EVP of strategy. and we're going to hit Main Street banking again this week as a topic. And if you're asking us through your headphones, why are we coming back to Main Street after we did it last week? Basically, we'll get into all that.
The really short version of it is what we've sort of found within our own data in the last few days is really upped the urgency, I guess I would say, for the need to talk about Main Street Lending. But Dallas, I guess also part of that, while we're feeling this urgency for Main Street Lending, what has still been the feedback you've gotten from bankers you've been speaking to for the last week?

Dallas Wells: Well, it's still all PPP all the time. So as we're recording this, banks are in the process of plowing quickly through round two of the PPP funding. It's been a replay of the first time through where there's all the systems crashes and long hours of people trying to find when the systems aren't busy to be able to process some loans. And especially now that it really feels like people understand how much of a ticking clock that program has on it. Given some of the media and political fallout from round one, I don't think we're going to see around three. So this feels like kind of it. And so banks are scrambling to get that done and basically, there's little time or brain space to deal with much else, including kind of whatever's going on that you might try to call business as usual or the next round of programs that will be kicking off soon, which is the Main Street Lending facilities.
Jim Young: Right. But you mentioned, and at the time of this recording, Main Street hasn't kicked off yet. We've been sort of in this holding pattern waiting for the final tweaks of it. And so I guess I'm curious, we talked about it, we basically said this is what it is and we know you're focused on PPP, but here's sort of the nuts and bolts of the program. What was it that sort of changed your mind a little bit and made you feel like we needed to really start addressing this again?
Dallas Wells: Yeah, so we had an interesting thing happened last week. So we have a product at Precision Lender that we call Market Insights. And essentially what it is, is it's market data that gets Fed into our negotiation pricing profitability system for commercial bankers. So it looks at the deal that your bankers are putting together, find similar deals out in the marketplace, and then we'll give some guidance on how the current structure compares to what's out there in the marketplace. So that requires us to take a whole lot of transaction data every week, do some fancy math to kind of sort it into the right buckets and et cetera, to be able to find a loan like this to compare things to.
So as we went through that weekly process, all the kind of built in circuit breakers started going off, which you know occasionally happens. Data is tricky, right? And we're dealing with data files from close to 200 banks and trillions of dollars of volume as you add it up. So not unusual for something to trip the wires there, but what kicked out was basically some really odd looking spreads. So the data team threw it over to some of the banking folks and said, "Hey this looks really strange. Are you all okay with what the update coming out looking like that?" And essentially what it said is spreads were way down in several different loan types.
So that as we started looking into that, we realized wait a second, all those are the triple P loans that are now showing up on books of banks. And so what happens if we start to exclude some of that PPP stuff? Because that doesn't feel like a natural market clearing. Those are dictated terms from the program and we don't want that to skew what we're telling bankers about business as usual kind of transactions. And when we remove triple P, there wasn't a whole lot left. So I'd say that's probably the details we can get into from here. But the market was pretty scarce once you removed triple P from everybody's volume.
Jim Young: Gotcha. All right. And yeah, I'm going to resist the temptation to say how scarce, Dallas? And then you can come in. But that's mostly what we are going to ask in a minute. But I want to actually go through, and we're going to reference a couple of blog posts that you wrote last week and we'll have links to those in the show notes. The first chart you got on there is a look at the Fed's balance sheet basically right now. So I'm curious, why did you want to include that one and what stood out to you on that?
Dallas Wells: Yeah. So the Fed has had a surprisingly heavy hand through the reaction to the pandemic and they've said loudly and publicly, this is what the Fed is for, is to make sure that liquidity and that these one off shocks that don't have anything to do necessarily with the underlying health of the economy, don't crater the system. We're going to make sure that things stay liquid and functioning. Included in that, and we've mentioned this in a few different posts, and I think on this podcast too, but included in that is a whole bunch of new facilities, kind of the usual Fed alphabet soup of support for paper markets, money market funds and municipal bonds and all kinds of stuff.
So when you look at how extensive has that stuff been, that's what that first chart shows is total assets of the Federal reserve bank, which have been actually kind of bleeding off over the last few years. Some of the remnants from the last time around. So in the financial crisis when the Fed stepped in and bought all kinds of stuff in quantitative easing, multiple rounds of that. That stuff has been slowly bleeding off the balance sheet. And we were below $4 trillion of assets way down, whether it's barely anything left. Just under $4 trillion. And the Fed has added two point $4 trillion in eight weeks.
And as you're listening to this, there'll be another week of data out and I'm sure that number's even bigger. Because that's an increase of $2.4 trillion, which is nearly 60%, and that's without all these programs being live yet. That's nothing to do with Main Street, which is another $600 billion. When Main Street was announced, there was multiple facilities announced alongside it for a total of $2.3 trillion there. And most of those are not up and functioning. So lots more to come. And basically the Fed has stepped into the void to provide liquidity to all comers. And you can see that in that first chart really how prevalent they are in the marketplace and how there's not a lot of markets that are untouched by Fed activities at this point.
Jim Young: Okay. So you basically pointed out the Fed is extremely active for understandable reasons for what's going on right now, but I guess let's drill down to the area that's that of particular interest to us, which is that commercial lending market, which is, again, an unprecedented area. This isn't like 2008. Correct me if I'm wrong here, this sort of stuff, activity, PPP sort of stuff was not occurring at definitely ... This is a new area, I guess a bold new frontier for the Fed. Is that right?
Dallas Wells: That it is. So the Fed was involved in all kinds of bond markets the last time around, but they never directly took, at least from the Fed's perspective, meaningful credit risk. So they never kind of stepped into your classic bilateral commercial loan transactions. Once the Main Street facilities are live, they will actually be holding those on their balance sheet through a special purpose vehicle. And they had to set up that vehicle as a middleman because there's actually language that forbids them from directly lending to citizens basically. So they've set up this kind of middleman vehicle where the banks can actually do the lending, but then the Fed takes 95% of the exposure.
So this is brand new, unprecedented because these, by their very definition are troubled debts, where part of the criteria of the loan is the borrower has to attest to the fact that we really need this to try to keep the doors open. So they are stepping into the breach here for troubled loans and it's basically no payments due for a year and to try to kick this beyond the pandemic issue that's right in front of us and hope that businesses are solvents on the other side.
Jim Young: Okay. So we've given that background. Let's get back in to sort of what you found when you took a look at essentially, I guess, for lack of a better word, when you look at our pricing database, which is 15% of all the commercial loan activities in the United States on there, what you found in terms of what was going on with PPP and what else, if anything, was going on in the commercial loan market. So first, take me through that and then I want to ask you why that matters, I guess for lack of a better term.
Dallas Wells: Yeah. So for starters, we've got two different kinds of data that we're looking at. So we've been doing weekly updates and we've been, to keep those fresh and real time, we're using Precision Lender opportunity data. So just to be clear what that is, those are deals that bankers are working on. They're actively negotiating those. So that gives us kind of real time view of the marketplace. How many of those conversations are happening. You can have a pretty good trend line of those because we've been at this for more than a decade and you can also see deal terms as they change and kind of what the trade offs are. The data that we're looking at here, because we're using this to give again, market guidance, we aim to give market guidance to bankers that is based on closed deals, so things that actually landed on somebody's books.
So that's what this data is. On regular frequency, our clients upload to us their entire commercial book. So we see it at the account level and that's what this is. So we can start to see with about a week delay once we process everything, what actually closed and was put on the books of banks. So as we look at the count of loans is where we started because that's kind of the, that's the headline number. That's why bankers are up all hours of the night is there's thousands, hundreds of thousands of these applications to process through. So we look at weekly loan volume going back to the beginning of the year. And it's actually really pretty steady. We have a chart that shows what the average was for January through February. The March numbers pretty much stay right on track with that.
You can see the only thing that sticks out is there's little spikes at the end of each month as everybody scrambles to get their deals in before the last day of the month. But then you see very clearly on the right side of that chart, you see the PPP program spin up. So for the two weeks that we've measured here in April, so the weekend of April 10, the weekend of April 17, that was the two full weeks where the first round of triple P was live. You see the volume go up by about close to two times the normal run rate in that first week, and then four times the run rate the weekend of April 17. So massive spike in volume. And again, that's just number of loans to process through.
Jim Young: Gotcha. And so then from there, the logical step was, "Okay, we got a lot of loans coming in." We understand this is PPP driven. So the question really is, well what's it like? What else is coming in besides PPP loans?
Dallas Wells: Yeah. So once we remove those, and again just looking at counts of loans, you can see again, things actually stay pretty steady through the month of March. You don't see the normal month end spike. So that last week of March is probably where things started to look a little different. But then it's just a steady and steep decline for each week in April. And so the very first few days of April, and again the program, triple P program, went live on April 3rd. That was the first day that they took applications, which was a Friday. Lots of systems issues. So not a ton of stuff got done, but bankers had been kind of prepping for it for the week leading up to that. And there's another big decline into the week ending the 10th and another big one to the week ending the 17th. So from the levels in early January, we're looking at volumes of around 30% of that level of just counts of loans.
So pretty drastic drop, but also largely expected. Everybody's busy with PPP, there's not a lot of time for kind of business as usual. And my suspicion, we didn't dig in this far, but my suspicion is a lot of the stuff that's actually happening is probably just renewals, things rolling over that matured and you just put the stamp on them, roll it over for three months, six months, 12 months, whatever. And that'll show as an originated loan there. But probably not a lot of brand new activity outside of maybe things that don't qualify for PPP for whatever reason.
Jim Young: Gotcha. All right. But then sort of the next thing is with PPP loans, by the nature, are smaller loans. Right? So then I guess the other part of this is there's the count which we expect to be up dramatically for PPP. Not a huge surprise that it's low for everything else. But I'm curious what you found when we looked at simply, from a dollar volume standpoint, what it looked like. Did it come back a little bit closer to whatever normal is these days?
Dallas Wells: So this is where the surprising finding showed up. So when we just look at dollar volume, again week by week, things really start to drop off at the beginning of March. So January was heavy, February was still within that range, but starting to come down a little bit and then a big drop starts in March and just continues down through April. And I think what's important is that to be super clear on this, that includes PPP, we're looking at just total dollar volume of loans. Even with all the scrambling activity over the last couple of weeks, for our close to 200 banks where this is squarely in their wheelhouse to do deals like that, volume was down, dollar volume was meaningfully down starting in March. And so then we go to the next step from there, which is okay from the dollar volume, let's remove PPP from that.
And this is the one where it gets kind of scary. So it's the final chart in our post. And again we'll link to that in the show notes here, but there's basically no activity happening. So the counts were up. Once we removed PPP, there was very little counts happening. And what was left was tiny stuff. So the week ended April 17, that volume was at about 3% of where we were at the beginning of January, 3%. I don't think it's too outlandish of the statement to say that ... And that's not just triple P. If you look to the week before triple P even started, we were down more than 60% from those January levels. Credit markets for big chunks of the market have effectively frozen and with PPP kind of stepping into that. So that's the SBA arm of the government, but effectively, the government has nationalized the loan market for the time being and those are the only transactions that are happening, which is scary on several different fronts.
Jim Young: Okay, so I'm going to keep going back to 2008 sort of as my closest reference to that sort of thing. And my memory of this caveat that I was not in the banking industry at this time, didn't have someone like Dallas to clarify these things for me. But my memory of that was that there was a reluctance on the part of the banks to lend at that point when there wasn't much going on. And that at least from a mainstream media point of view, that the gist of it was banks need to be kind of prodded to lend. What's the reluctance this time around? Or is this a bank-driven thing or is this basically nobody's coming in the doors to ask for a loan and then if that's the case, why not?
Dallas Wells: Yeah, well they're definitely not coming in the doors. But this has been really interesting. And I think what should scare bankers a little bit, is that this is not just bank saying, "We don't want to loan you money." This is also borrower saying, "I might not actually have to pay you this." So some really unprecedented times and some really unprecedented steps taken by the government. Lots of talk about rent forbearance, mortgage forbearance that's dictated by the government. And those things get really complicated. The logistics get really complex to actually put in motion out in the marketplace. But that seems to be kind of the feeling from a lot of borrowers is:
"My business stopped and I was told to shelter in place, so I'm going to do that. But that means I'm also holding on to all cash and I'm not going to go add debt to my balance sheet that I might have to pay back to solve this problem right now. So my employees are not going to get paid. There's unprecedented help for unemployment right now. They can go do that."
That's why you've seen so far, 26 million new unemployment claims over the last five weeks. So we're not going to pay employees, we're not going to pay our suppliers. If you look at the commercial real estate markets, the percentage of tenants who have skipped lease payments is pretty staggering. The number of hotels that are late on their mortgage payments in their commercial mortgage backed securities is north of 25%. Forbearance requests are basically north of a quarter in just about any kind of loan you want to look at. Credit card loans, mortgage loans, auto loans, commercial loans, everybody's saying just hit pause and this is a weird temporary event, we'll deal with it on the other side.
So I think borrowers are not wanting to add debt. Bankers are saying, "Well, we'll wait because there's PPP, there's Main Street. There's ways for us to not have to take on all this risk ourselves." So things have just kind of frozen up. And I think that's really what's scarier than the last time around. Last time, there was lots of Fed support, but it wasn't this direct thing and it wasn't seen as such a temporary issue. It was a true credit crisis and we all had to figure out how to function on the other side of it. So the demand for credit and bank's willingness to lend went down. But it was until the fundamentals got right. And I'm not sure what the impetus is that changes this. When do we decide to go back to normal and that there's no next Fed program and it's not okay to just hold onto your cash anymore. That's what's going to be really weird, is kind of how the whole system has to come back online and we all have to agree when that happens.
Jim Young: Okay, so try not to freak out right now. So is there a possibility about simply ... Let's take this back to Main Street I guess at this point, the Main Street lending and is there the possibility that again, the people that were not going to be part of the, as I've called it, kind of Oklahoma land grab, sort of PPP, sort of everybody getting in the pool as fast as possible and get what you can for the bigger businesses out there that weren't wanting to be part of that, Main Street has been in conversation and topics and the next step has been out there.
Is it possible that simply, what we're seeing is a waiting period and that once Main Street starts up, the next time we take a look at these charts that are going to be, I'm not saying getting to January levels, but they're going to be trending back the other direction simply because it's been people saying, why would I, and I think I might've mentioned this last time, why would I go and get a deal kind of on the bank's terms when I can get a much more favorable deal with all that Federal backing?
Dallas Wells: Yeah, so the thing about PPP, first of all, obviously since it's forgivable, it is kind of the land grab situation out there is chaos, basically. Main street does have to be repaid but also triple P is, by its very nature, very short term and temporary. So the way you decide how much a business can actually borrow, it's capped and it's 2.5 times their monthly payroll amount. So they're looking at 75 days where the payroll and that was, "Let's get through the worst of this. Keep as many people employed as we can." That's why they're called paycheck protection loans. This does not solve the core underlying issues for a lot of businesses. So having gotten a triple P loan does not preclude you from getting a Main Street lending facility loan. You can do both. You can double dip, so to speak, in these programs.
So PPP is forgivable, that's to keep your employees whole for 75 days. And then the Main street loans are meant to be a little longer term. So they have four year terms. And again, under the current structure, this could have changed by the time you hear this, but four year terms and one year of no principal and no interest payments and loan amounts that are much larger. So I think it's a more permanent solution for some of the more viable small businesses. There are actually some EBITDA cashflow requirements to be able to service the debt. And also, it's for larger borrowers, which really makes up the largest chunk of volume at the larger banks. And so once you get above, I don't know, $5 billion or so in assets, you start to move into more, typically lending to more middle market borrowers.
So not the small mom and pops that are getting the $60,000 PPP loan, but borrowers that probably carry $5, $10, $20, $30 million worth of debt and are above the employee cap of triple P. So right now they're kind of in no man's land. They're too big for triple P but they're too small to access the public markets. They don't have these giant, syndicated revolvers that they can draw down in times of crisis like some of the biggest corporations have. And so those are the companies that are really kind of sitting and waiting. And I think those are the ones that we will start to see volume pickup where there's this missing gap and a huge part of the credit markets that's kind of on a wait and see mode. So banks are going to have to decide how are they going to approach Main Street.
Borrowers have to decide if they're okay with the public disclosure element of this, which is a new wrinkle that got thrown in over the last several days, given again some of the media and political attention, that that part will be interesting. So all that to be said, I think this is a meaningful program. I think there's going to be another rush for some of this funding. The banks that are going to make good use of this for both the protection of their own balance sheet and for the health of their customers are going to be the ones that are right now being proactive about it. So while everyone's distracted with triple P and dealing with that chaos, you should have teams at your bank combing through that portfolio saying, "Who else is in trouble and doesn't qualify? What are our other options?"
And this is the next best option that you have is to have the Fed take 95% of the exposure, extend beyond what should be the worst of the economic fallout a year down the road before they have to start making payments and inject a whole bunch of liquidity, including the ability to keep some of the current debt current. So it'll be a little more subdued, but there will be another rush for this funding. And the sooner you can help these businesses, the better. This is going to make a real difference in who performs well through this credit cycle and who doesn't.
Jim Young: Yeah. And so I guess again, that lesson then is if I am the banker that tells you, "Dallas, I'm on PPP all the time. I can't." And you say, "Hey, but what about Main Street? Had no PPP all the time." What is sort of the grab the person again, virtually, by the lapels and basically say this is what you've got to, I understand PPP is important, but this is what you need to be doing next. Is it a systems thing? Is it number crunching? Or, as you were kind of talking about it, is it a matter of kind of combing through the portfolio?
Dallas Wells: Yeah, so I think it's being smart in how you target who the right candidates are for Main Street and being able to triage those, make sure they qualify, make sure you're ready to be able to book those. And again I get it right, the final terms are not set and there's a fire currently in front of you. But if I'm a banker, I just look at the simple exposure that you have. If you're a regional bank, you've got a whole lot more dollars probably exposed to middle market customers than you do to small business. So this is an opportunity and probably an obligation for banks to help these small businesses and use triple P to help save a few or at least give them a lifeline. I think that same obligation is there for Main Street and what you can do now is be aware of who needs it, make sure they're at the front of the line. And it's not just to make sure they get funding, but also that they get it in time for it to be useful and helpful to them.
So you can be proactive. There's going to be some system set up required, but it's not going to be the same kind of thing. There's no SBA involvement. It is basically you book alone under the terms given and then you will sell a portion of that to the Fed. But you're going to service it yourself. You're going to book it yourself. Details still to come. But it should be pretty close to doing a typical transaction for you. The new Main Street loan facilities unsecured so that you don't have to perfect liens or anything like that. You should be able to be pretty nimble with that part of it. The part that you need to be preparing for is finding those borrowers, starting to have those conversations with them, figure out who needs what and who qualifies or doesn't qualify. That should be happening right now.
Jim Young: And one final question. I guess I'm curious whether this is a scenario with Main Street in which it's possible for banks to stand out from each other a little bit more. And what I mean by that is triple P happened so fast, so furious that essentially, it's only in the reporting after the fact that you go, "Hey, that bank really didn't do very well," and that sort of thing and it's bad for the brand, it's bad going forward, but it doesn't necessarily cost you maybe a potential customer in the moment. And I'm wondering if with Main Street, because it's going to still be fast, but it's going to play itself out over a longer period of time, if it's possible that if you get off to a slow start on this, then you may eventually be losing customers off of this. And conversely, if word gets out that this bank really knows how to process this stuff and get it going fast, that you might be able to grab market share or honestly, is that a ghost thing to be mentioning in this particular time period?
Dallas Wells: I think banks do need to be prepared and ready and willing to take care of their own customers. So the Main Street facilities, again the bank will have 5% of the exposure and as we stand right now, the minimum loan size is a million dollars. So a million dollars unsecured, you own 5% of that. This isn't like triple P where there's literally no credit exposure for the bank and you're just processing it and clipping a fee. This is a different animal. And so your customers are going to come to you and I don't think there's going to be the same kind of, I would hope, not the same kind of media nastiness about banks only handling this for their own customers. It's just a different setup. But your customers are going to come to you and say, "Hey, I need a lifeline and I know that there's a way for you to do it. The Main Street stuff is out in the press, so I know you can do this."
If you can't make that happen for them, they don't have a ton of viable options. It's difficult to go down the street, start up a brand new relationship with a bank you don't know. And again, you're doing that virtually, at least for the time being. To make that happen is going to be ... You're putting your customers in a very, very bad situation. That's not the kind of reputation you want to have in the marketplace. You want to be known as, especially in the middle market, as the bank that handles this the right way. So some banks were criticized through triple P for having this sort of concierge approach to triple P for some of their bigger borrowers and really what it was is it was the different divisions of the bank.
You've got the business banking group that typically is high volume, low touch, crank stuff through in an efficient of a way as possible. But there were some that were a part of the commercial bank and so they have a relationship manager and they went out and were seeking those borrowers that might qualify and making sure they knew and that they had the paperwork. And I think the press meant that as a criticism, and I'm guessing every bank that was criticized like that was like, "It's actually probably a really good advertisement for us. We took care of our customers and made sure that they were aware and that the paperwork was done and that they got their money."
I think that's going to be a similar thing with Main Street. You're talking about the commercial and middle market, maybe some of the corporate divisions of the bank. That's the way they do these relationships, as this more concierge approach. And so that's what your customers will expect. And I think what banks need to be able to do and those that can't, even if it's not right now that you lose that relationship, you're going to do real damage to it. And when things do get back to normal someday, that relationship is very much in jeopardy.
Jim Young: Right. Got it. Okay. Whew. This was a heavy for us. Fun stuff, huh?
Dallas Wells: Yeah.
Jim Young: Fun stuff. But important stuff and eye opening, but also not fatalistic. I mean what we're talking about here is this is what's happening right now and this is a clear sign that ... You know what's coming next. So this is more of an urge to get moving on it as quickly as you can.
Well, Dallas, thanks for coming on again on the podcast. Thanks for doing the research on those two pieces. Again, we'll have links to those in our show notes. The two blog posts, one about basically middle market as we detailed it all that has essentially disappeared, middle market lending and then the other one basically again our look on what you need to be doing with Main Street as we transition from PPP to Main Street.
And again, this is one of those things. This is the hot topic. We've gotten questions from bankers and conversations with them and want to urge you as listeners, that if you've got something that's really kind of ... You're curious what we're seeing in our data to please reach out to us and feel free to ask us questions. You can reach me again. My email is the initial J, Y-O-U-N-G, and that's in the show notes.
In addition to that, just the usual friendly reminders. If you want to listen to more of our podcast, check out more of our content, you can find it at that resource page at You can head over to our homepage to learn more about the company behind the content.
If you like what you've been hearing, just please subscribe to the feed in iTunes, Google Play, Stitcher. We'd love to get ratings and feedback on any of those platforms. Until next time, this is Jim Young for Dallas Wells, and you've been listening to the Purposeful Banker.

About the Author

Jim Young

Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships. Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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