By Craig Young, CCIM, Partner, The Boulos Company
Article originally published November 17, 2020 – https://boulos.com/how-covid-19-affected-commercial-lending/
In many ways, the beginning of 2020 was the best of times for commercial lenders – stable rates, lots of deal flow and few loan delinquencies. That would quickly deteriorate by March/April due to the worldwide Coronavirus pandemic, to one of the worst public health and economic crises in modern history. “Coming into the pandemic, the bank was busier than it had ever been,” said Kim Twitchell, Maine Regional President for NBT Bank. “Once the pandemic hit, the bank made a concerted effort to put the health and wellbeing of all of its clients and employees first.” Like most businesses, commercial banks closed their doors and sent their people home on or about Friday the 13th of March 2020. But while the doors were locked, business would need to continue.
As busy as lenders were in the first quarter completing existing deal flow, the second quarter would be consumed with processing PPP loans as a result of the government sponsored Cares Act. Lenders offered clients the right to defer two months mortgage payments or to pay interest only on their loans for up to six months. Bankers were busy servicing their business clients’ needs, and new loan closings were often delayed. Nationally, commercial loan closings between Q1 and Q2 decreased by 29.3%. As part of the Cares Act, if you had a loan with SBA that closed on or before April 2020, and funded by September 2020, then SBA automatically forgave (not just deferred) 100% of all payments for 6 months on all 504 and 7A loans – not the commercial banking part of the loan, but just the SBA portion. Reportedly, the Hero’s Act, the second stimulus package which is still in negotiations in Congress, will include another six months of loan forgiveness to all SBA loans covered in the 504 and 7A programs.
According to the Conference of State Bank Supervisors, by June 2020 79% of community banks increased lending to small business and farms – a 40% year-on-year increase. Commercial loan growth was accompanied by a 33% surge in banking deposits. “While deposits are generally seen as good for banks”, said Matt Early of Gorham Savings Bank, “this also created an issue for us to put the new deposits to work. Banks could either lend more money to the community, which historically provides a better return for the bank, but today is seen as riskier, or take a lesser return and invest in U.S. Treasuries. We choose to lend more.”
Today, many bankers have returned to their physical offices, and conventional and SBA loan volume has increased substantially. Interest rates have decreased by approximately 100 basis points (or roughly 1%). Commercial lending rates are harder to gauge, due to the varying types of loans, terms, size, etc., but loans through SBA all have the same interest rate regardless of industry or size and are only dependent on loan term. For example, in January 2020, a 20-year fixed SBA loan was 3.78%. By August, rates dropped to a low of 2.33%, and today, SBA’s rate is 2.65%. Comparatively, that same SBA loan in November 2018 was 5.39%. That’s more than a 50% reduction in the rate in two years. According to Paul Collins, VP at Granite State Development Corp, loan volume with his company has increased 25% in Maine and 14% in New England. “The market is ultra-competitive”, says Collins. “Any deal that is deemed strong is shopped between several banks, and banks are winning deals by including the lower rates of SBA 504 program while also reducing the bank risk. It’s a deal.”
So, what can you expect from your friendly neighborhood banker today? In addition to lower interest rates, there are more Zoom calls and less in person meetings; you’ll complete more banking transactions virtually through DocuSign and email and there are many more questions and scrutiny of how the COVID-19 pandemic is currently affecting your business or potentially how will it will impact your business in the future, particularly in the Hospitality sector. But, the banks have money to lend and are actively looking for good deals with good business plans.