June 29, 2020
As the June 30 Paycheck Protection Program application deadline creeps closer, Philadelphia-area lenders say they have not exactly been flooded with renewedinterest from potential borrowers. Instead, the focus has been on preparing customers for the forgiveness process while looking at what their loan portfolios might look like as the economy continues reopening.
Executives at Huntingdon Valley Bank and OceanFirst Bank said their PPP lending came to a halt in late May or early June due to lack of demand. After a fast-paced 13-day first round that exhausted $349 billion, the $320 billion second round also got off to a fast start in late April. According to data from the U.S. Small Business Administration as of June 20, however, there was still more than $128 billion in funding available with just 10 days remaining to apply. There have been less than $4 billion in loans processed over the past two weeks.
When President Trump signed the Paycheck Protection Program Flexibility Act into law on June 5, it created some perks that many thought would entice previously reluctant business owners to apply. The loan period was extended from eight to 24 weeks and the amount required to be spent on payroll to earn forgiveness was decreased from 75% to 60%.
Another change might have been good for the borrower, but bankers say it scared off many lenders — extending the term for any loan processed after June 5 from two to five years at the same 1% interest rate. “I don’t think any banker would want to do a loan at 1% for five years,” Huntingdon Valley Chief Lending Officer Hugh Connelly said. “That was a big mistake. It was essentially shooting a bullet through the program.
Other bankers I talked to said 'I’m done' after that.” Connelly said customers affected by the coronavirus pandemic were largely grateful for the program at the start but, as the economic shutdown lingered, they wondered if it would be enough to help them survive. The extension from eight to 24 weeks was well received but business is bound to be slow for most during the initial reopening phase.
That’s where Connelly thought the Main Street Lending Program would fill a void as PPP money expired. But since details of the program came out earlier this month, he said there has been little to no interest. “Many businesses are now asking, 'Now what?,'” Connelly said. “'Did I merely prolong the death of my business or did it actually help me survive?' The jury is still out and the next few months will give us the answer. We are at a critical time.
There are no programs out there and that’s the scary part. A lot of businesses that we have known for decades will be no longer.” Connelly looked at his own community in Shamong, New Jersey, for an example. He said there are two independent hair business due to the inefficiencies created by social distancing rules. He sees such situations leading to an explosion in independent contractors.
“In this case, stylists will create their own mobile salons,” Connelly said. “You could have an Uber for stylists. You already have Uber Eats. Restaurants could move to having more carts, catering, pickup or delivery, and fewer tables. Shopify has seen a 90% increase in activity as more businesses move their products and services online. Several industries will become further Amazon-ified. Anyone that does business face to face is thinking about how to reimagine their business. You can’t stand still if you want to stay relevant.”
Toms River, New Jersey-based OceanFirst completed 3,001 PPP loans for $503.8 million — but virtually none of that has come over the past month. CEO Christopher Maher said the top three industries securing PPP loans were construction ($80 million), health care ($68 million) and hospitality/restaurants ($53 million). For the first two, the loan process has been pretty straightforward, but restaurants and hospitality businesses that were forced to close for months had the much-discussed issue of being forced to pay employees not to work. Maher said that issue was somewhat resolved by the extension of the loan period from eight to 24 weeks.
Maher believes the industries that are most uncertain about whether they will recover are group-based activities such as theaters and fitness clubs — where customers have been more reluctant to return until there is a Covid-19 vaccine. He said business was already becoming more difficult for fitness clubs before the pandemic with the heightened competition from discount chains such as Planet Fitness, niche workout facilities such as CrossFit and yoga studios, and home offerings like Peloton.
There are some concerns about how three months of remote working will cause businesses to re-evaluate their real estate needs. Maher says there will most likely be a softening in demand in urban centers. Connelly said the commercial real estate market will take a hit, though it will be gradual as current commercial leases expire in the coming years. He sees a switch in emphasis toward residential construction.
But not everything is doom and gloom. OceanFirst has been offering 90-day loan forbearance to customers since the pandemic began in mid-March. As that period expires, Maher said most businesses have returned to normal payment plans — a sign that they feel they will have enough liquidity for the short-term future as the economy reopens this summer.
OceanFirst’s footprint covers much of the Jersey Shore. Despite worries over the pandemic, Maher said people have flocked to the beach towns. Restaurants there cannot meet the demand because they had to cut back on seating due to social distancing guidelines, he said, but they have responded by greatly increasing takeout.
Residential home sale prices are up 10% to 15% from last year as bidding wars have erupted after inventory was snapped up due to pent-up demand from the normally busy spring season. That has created some bidding wars.
“April and May were our best back-to-back months for mortgages,” Maher said. “Since March 1, we have done $1 billion in new loans — half of which came from PPP but much of the rest can be attributed to mortgages.”
Both Connelly and Maher believe the next few months will be critical in determining the future of the local and national economy.
“We are in the second chapter,” Maher said. “Things will move forward depending on how reopening goes. I don’t think we will know until September if things are going to be OK or if there will be a long-term struggle.”