[Massachusetts] Economy Gets $1.3 Billion Boost From Paycheck Protection Program

01 JUN 2020

An unprecedented $1.3 billion has already been lent through the Paycheck Protection Program (PPP), by local banks. The PPP is facilitated by the U.S. Small Business Administration, The Daily Item details how the program works and how banks and recipients are reacting to it.

The PPP was established as part of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) as a bipartisan effort to encourage businesses potentially struggling during the COVID-19 pandemic to keep payroll stable and hang onto employees. 

The program has its flaws but The Daily Item says bankers in Massachusetts are offering it as a gesture of goodwill to their local businesses.

“Desperate times require all of us to buck up,” Joseph Riley - executive vice president for Salem Five - said. “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 PPP lets businesses to apply for and receive low-interest loans to cover costs like payroll, interest, rent and utilities. Additionally, if a business receiving a PPP loan meets certain thresholds - such as spending a minimum of 75 per cent of the loan on its payroll costs - the SBA may forgive up to 100 per cent of the loan. 

Businesses not meeting the spending thresholds outlined in the PPP will have to repay the loan at a 1 per cent interest rate.

Loans are approximately 2.5 times a business’ average monthly payroll costs. The average monthly cost is calculated from the business’ numbers the previous year.

Eastern Bank has been the largest lender in the program in the area with approximately 8,000 loans at a total of around $1.1 billion, Quincy Miller - Eastern Bank vice chair and president - said.

“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,” Mr Miller explained.

“We have had over 130 people involved helping to deliver this program, with just the sheer amount of volume,” he continued. “Our approach has been, ‘Every loan we get done is helping keep people getting paid and keeping food on the table.’”

Mr Miller reportedly said he has received very positive feedback about the program, with businesses grateful they are able to cover costs in these difficult times.

The forgiveness portion of the PPP program remains somewhat uncertain. Businesses must spend 75 per cent of the loan on payroll expenses to have their loan fully forgiven and it is too early to know how many businesses will meet that threshold and therefore the proportion of the PPP loans that will be forgiven rather than repaid. 

However, Mr Miller said, banks are “prepared” for the majority of the PPP loans to be forgiven and Eastern Bank expects that most of the funds it has lent will be forgiven rather than paid back to the SBA.

The PPP program has its imperfections. Mr Miller said either reducing the 75 per cent threshold for payroll costs or expanding the criteria for what businesses are permitted to spend PPP money on would be a help for most small businesses.

Joseph Riley said that during the COVID-19 pandemic Salem Five has lent approximately $250 million in PPP money. He said it is too early to tell how the program will affect banks in the long term but that the program is likely to be “a wash” for Salem Five. The bank is prepared to deal with a high level of forgiveness for their customers.

PPP loans, even when they are paid back at the 1 per cent interest rate, are certainly nowhere near as profitable as typical loans. The profit margin of a 1 per cent loan is a tiny fraction of the margin on a typical loan, Mr Riley said. But, regardless, he said he believes that supporting the PPP was the right thing to do for the banking community.

“It’s not trite to say this is an unprecedented situation. I’m 61 and I’ve never seen anything like this,” Mr Riley 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 goodwill that turned out to be bipartisan, and it’s one of the few things you can say that about.”

Mr Riley explained that one potential problem with the PPP is that the amount of money a business is lent is calculated by using its payroll costs from the previous year. Some businesses, like restaurants, might have had to let employees go during the pandemic, and now have lower payroll costs yet they are still lent an amount based on payroll costs when they were fully staffed. Such businesses will find it difficult to meet the 75 per cent threshold for payroll forgiveness and will have to repay some of the money, he said.

Smaller financial institutions, like River Works Credit Union, have also been lending money through the PPP. Jim Donahue - River Works’ CEO - says the credit union has lent around $2 million in PPP loans.

“It’s been very, very successful for us,” Mr Donahue said.

Mr Donahue added that nearly every applicant who has applied for a PPP loan with River Works has been approved, even applicants who had been rejected by larger banks. River Works has been allowing both members and non-members to apply for PPP loans.

“We’re hoping to get a lot of people’s loyalty with it,” Mr Donahue said. “We’re hoping they know we came through for them.”

Quincy Miller said Eastern Bank - the largest SBA lender in New England for the past 10 years - is proud to help businesses financially survive the COVID-19 pandemic, especially those companies with 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,” Mr 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.”

More information about the PPP can be found here. (Link via original reporting) 

Source: The Daily Item


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