Just before the COVID-19 pandemic swept in, OceanFirst Bank was wrapping up a deal with the owners of a large multifamily development in Pennsylvania. “They wanted to refinance a construction loan,” said OceanFirst Executive Vice President and Chief Operating Officer Joe Lebel. “We had approved the loan with a 35 percent down payment and were ready to close.”
Then the virus shut down society. Despite that, the deal went through. “We had a deep discussion with the borrower about their ability to get tenants during the crisis and determined that a higher down payment—45 percent instead of 35 percent—would be appropriate,” according to Lebel. “The deal went through, and the units are being rented.”
New Jersey banking professionals have seen their share of boom and bust cycles, including the 1990s dot-com bubble and the 2008 Great Recession, but many agree that the COVID-19 crisis landed an unprecedented economic body blow. In addition to the tragic health effects, mandated business shutdowns have starved companies of revenue, making it a challenge to determine their ability to repay loans and other obligations.
“Times like this illustrate the importance of maintaining a relationship with your banker,” Lebel added. “Some businesses, for example, may seek to defer or renegotiate existing loans. In that case we may ask for interim statements or reasonable projections, in addition to information about the borrower’s top customers. Say you’ve got a commercial real estate holding company that has tenants who can’t make payments. We would ask for a copy of their rent roll, and then talk about the condition of the underlying tenants and the expectations for future payments.”
Based on the percentage of nonpaying tenants, lenders like OceanFirst may accept a full deferral, a partial deferral, or interest-only payment for a period of time. “We’re flexible, and will consider the borrower’s cash flow,” said Lebel. “We recognize that this is a virtually unprecedented situation. Businesses that used to be bulletproof, like dry cleaners, convenience stores and gas stations, are getting hit, with some seeing a 70 percent drop in activity.”
Fortunately for borrowers and lenders, “banking regulators are working with us on this, and are being flexible about declaring loans to be nonperforming,” Lebel noted. “That enables us to be more flexible: we may offer a deferral of 90 days, and then have a follow-up conversation around day 65 to see if a further deferral makes sense. Everyone is trying to work together to minimize the downturn.”
Other bankers are also going out of their way to work with borrowers during the crisis.
“We encourage our business banking customers to be completely transparent with their [bank’s] relationship manager when discussing the deferral or modification of current loan payments, or even a new loan request,” said Tom Comiskey, M&T Bank senior vice president and New Jersey regional president.
As a first step, a would-be borrower should “Clearly rationalize why your business needs a loan or flexibility and what it will allow you to do,” he added.” It’s best if you approach your banking partner with data to support your viewpoint; even better if you can provide projections on how you expect cash flow to change over the next quarter to six months. It’s also important to have an established relationship with your business banker – think of them as a partner for your business. Having a partner that understands your business’ goals, and recent successes and struggles, better enables them to provide workable solutions that set you up for success.”
One borrower, a recycling company that picks up commercial waste— including plastics, metal, fabrics, and paper from other businesses — was slammed on multiple fronts. First, the company “normally sends the products to other countries, primarily India, but that nation banned incoming shipments of goods to mitigate effects of the pandemic,” Comiskey said. “Then stateside, businesses that relied on the company to control their commercial waste slowed payments to maintain liquidity.”
M&T’s commercial banking team swung into action, deferring principal payments on the company’s loans for six months. “The team also found ways for the company to access capital in the meantime,” he noted. “For example, we converted an equipment facility to a working capital facility for them. The company also secured funding through the Paycheck Protection Program, enabling them to keep their employees and maintain payroll.”
Previous catastrophes, like the Great Recession and Hurricane Sandy, pounded New Jersey’s economy, “But they were, to a degree, manageable,” pointed out John Duncan, Spencer Savings Bank executive vice president and chief lending officer. “In my 40-year banking career, this is the worst situation I’ve ever seen; the pandemic is different because it’s shut down all commerce.”
To help individual and business borrowers cope, Spencer Savings established a “hardship loan program,” or HLP. “If they certify that they’ve suffered a hardship related to COVID-19, we’ll send a deferral note that they can sign,” Duncan said. “Qualified individuals and businesses can get a 90- or 120-day reprieve, which will be tacked on to the back of the loan. We want to work with borrowers because foreclosure is not our first preference.”
The owners of a large retail strip center in South Jersey applied for forbearance when “their property went completely dark,” he noted. “We’ve known the owners for many years, so when we received their HLP we approved it for a 120-day forbearance. At the end of that period, we’ll review their situation again.”
When it comes to new loan applications, “we can’t follow the old lending model,” Duncan said. “For one thing, we can no longer rely on trailing cash flow. Loan-to-value ratios are also more conservative, at 75 percent instead of 80 percent. In many cases we’re asking new-loan borrowers to set aside a full year’s worth of principal and interest; and we’re not thrilled about doing a cash-out refinance of an existing loan. Every request is considered on its own merits, but the terms have to be good for the bank and the borrower.”
In tough times as well as boom ones, experienced bankers realize “there is no ‘one size fits all’ solution to meeting the needs of a business,” according to Ted Knauss, PNC Bank senior vice president and New Jersey market leader for commercial banking. “We look holistically at each relationship and work with customers to identify a solution that works best for their needs. These discussions are also about looking at both short and long-term goals and objectives.”
PNC professionals look at hard and soft data, he added. “There’s a variety of information that is considered, including a review of financial information that shows a history of steady performance and a strong balance sheet. Perhaps most important, though, is the relationship and depth of conversations the business owners have with their bankers. Demonstrating a history of consistent performance is certainly an essential component, but frequent communication with your banker and sharing an understanding of the business and specific goals—in both the best and most challenging times—is also critical.”
A customer in the food and beverage industry was recently approved for a $6 million commercial occupied real estate loan, Knauss recounted. “Of course, a business needs to demonstrate the ability to acquire debt and make loan payments, as in any operating environment. That depth of knowledge of the business and challenges they face—not just today but tomorrow and beyond—along with a history of consistent results are among the myriad factors that are a part of a lending conversation. Environments change, especially today, but the focus on relationship-based discussions remains a constant.”v