It’s an unprecedented amount of money pumped into the economy very quickly, and bankers are hoping it keeps people employed and with money in their wallets.
More than $1.3 billion has been lent by local banks through the Paycheck Protection Program (PPP), which is facilitated by the U.S. Small Business Administration.
The PPP was established as part of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in a bipartisan effort to encourage businesses to keep payroll stable and retain employees, even if those businesses were hurt financially during the COVID-19 pandemic. The program isn’t perfect, but local bankers are touting it as a gesture of goodwill to area businesses.
“Desperate times require all of us to buck up,” said Joseph Riley, executive vice president for Salem Five. “I was there night after night getting this money in peoples’ hands, and every single one of these loans we did, we knew represented peoples’ jobs and money in their pockets.”
The program allows businesses to apply for and receive low-interest loans to cover certain costs — payroll, rent, interest, and utilities. If a business receiving a PPP loan meets certain thresholds, such as spending at least 75 percent of the loan on payroll costs, much of the loan — up to 100 percent — may be forgiven by the SBA. If a business does not meet the spending thresholds outlined in the PPP, they will have to pay the loan back with a 1 percent interest rate.
Loans are approximately 2.5 times the size of a business’ average monthly payroll costs, with that average monthly cost determined using a business’ numbers from last year.
Eastern Bank has been the largest lender in the program in the area, having
done approximately 8,000 loans at a total of approximately $1.1 billion, according to Quincy Miller, Eastern Bank vice chair and president.
“To give you some perspective, before this we did roughly $500 million in SBA loans in 10 years. So, in less than two months, we’ve done 8,000 loans for $1.1 billion,” Miller said.
“We have had over 130 people involved helping to deliver this program, with just the sheer amount of volume,” he said. “Our approach has been, ‘Every loan we get done is helping keep people getting paid and keeping food on the table.’”
Miller said he’s received extremely positive feedback about the program, with businesses appreciative they are able to cover costs during an unprecedented situation.
There is some uncertainty surrounding the forgiveness portion of the PPP program. With businesses having to spend 75 percent of the loan on payroll expenses to get the loan fully forgiven, it’s too early to tell how many businesses will meet that threshold, and what proportion of PPP loans will be forgiven rather than need to be paid back. However, Miller said, banks are “prepared” for much of the PPP loans to be forgiven, and Eastern Bank expects the majority of what it has lent will be forgiven and not paid back to the SBA.
The PPP program isn’t perfect, however, and Miller said either reducing the 75 percent threshold for payroll costs, or expanding what businesses are allowed to spend PPP money on, would be beneficial for most small businesses.
According to Riley, Salem Five has lent approximately $250 million in PPP money during the COVID-19 pandemic. He said it is too early to tell how the program will affect banks over the long term, but the program will most likely be “a wash” for Salem Five, and the bank is prepared to deal with a high level of forgiveness for their customers.
It is certain, however, that PPP loans are not nearly as profitable as typical loans, even when they are paid back at the 1 percent interest rate.
The profit margin of a 1 percent loan is a tiny fraction of that of a typical loan, Riley said. But, in any case, supporting the PPP was the right thing to do for the banking community, Riley said.
“It’s not trite to say this is an unprecedented situation. I’m 61 and I’ve never seen anything like this,” he said. “We are in more of the position of, ‘You have to do what’s right for the country.’ My feeling is this was an effort of good will that turned out to be bipartisan, and it’s one of the few things you can say that about.”
Riley said one potential problem with the PPP is that the amount of money a business is lent is calculated using its payroll costs from last year. Some businesses, like restaurants, for example, may have had to lay off employees during the pandemic, and now have lower payroll costs, but are still lent an amount of money based on their payroll costs when they were fully staffed. Those businesses will find it difficult to meet the 75 percent threshold for payroll forgiveness, and will end up having to pay back some money, he said.
Smaller financial institutions, such as River Works Credit Union, have also been lending money through the PPP. According to CEO Jim Donahue, River Works has lent about $2 million in PPP loans.
“It’s been very, very successful for us,” Donahue said.
Donahue said almost every applicant who has applied for a PPP loan with River Works has been approved, even some who were rejected by larger banks, and River Works has been allowing both members and non-members to apply for PPP money.
“We’re hoping to get a lot of people’s loyalty with it,” he said. “We’re hoping they know we came through for them.”
Miller said Eastern Bank, as the largest SBA lender in New England over the past 10 years, is proud to help businesses make it through the COVID-19 pandemic financially, especially businesses that face the challenge of having “less resources to begin with.”
“There are still businesses that come to us and say, ‘What’s the PPP program?’ Most of those businesses are small businesses or minority-owned businesses,” Miller said. “The program was designed two-and-a-half months ago, when everyone didn’t know how long (the pandemic) was going to last.”
To read more about the PPP, visit www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.