When Covid-19 emerged and the New Jersey economy was principally shut down, Spencer Savings Bank remained open as an essential business for our customers and communities. Whether a consumer loan or commercial loan, we recognized that many borrowers would not be able to make their loan payments. We quickly reassigned staff and formed a “COVID-19 team” to deal with all these new issues we were now facing. We received payment deferral requests from our borrowers and worked with each one individually to understand the difficulties they were facing.
We came up with a two-phase plan with programs to help borrowers through this: Hardship Loan Programs 1 and 2. With HLP 1, we gave customers who were facing hardship specifically due to COVID-19 an immediate 90-120 days to get stabilized, alleviating the fear of a bank foreclosure. Subsequently, we offered HLP 2, which is a program that provides customers in dire financial condition with a much broader restructuring plan. Five months later, we are pleased to see that the amount of remaining deferrals has dropped considerably, with many people now back to work.
What business sector was affected most?
Customers with commercial space (i.e., retail) have been hit the hardest. We have met with these borrowers to identify their issues and figure out how, when and if they are going to repurpose their facility to bring in new tenants. If there is a big retail box tenant, for example, and that tenant is leaving, then the space could be divided to provide for multiple smaller tenants. It doesn’t do the borrower, or us, any good frankly to foreclose on a loan — which is a long and protracted process. What we are saying to borrowers is for them to have some good faith here. We are asking them to work together with us, as a strong team, to come up with a financial structure that can help them get through this very difficult and challenging time. At the end of the day, if we both work together and come up with a logical solution to a problem, it will be a great success.
Do you feel the lending industry may be permanently changed?
In the commercial real estate world, there’s now a glut of office space with so many working from home, which may be permanent. I think that will cut a new wave in the real estate market going forward. What we also see is a big hit to the retail space sector (i.e., retail malls and small retail strip centers). There was little to no retail activity for months. Now, retailers are trying to reopen in an environment with a limit of only 25% occupancy and online shopping at an all-time high, which presents many challenges. As businesses continue to close, you will see a whole new reconfiguration of retail space and changing structure in terms of how buildings will be repurposed. Perhaps they will be converted into micro-offices. I believe you’re going to see a lot less retail and office space than you have in the past, and a big repurposing.
Multi-family housing values dropped in New York City by 10% and may eventually drop here in New Jersey. Those with more affordable rents, appealing to a broader range of tenants, are less susceptible to the variabilities that are shutting down the economy. Many of the people in high-end apartments can no longer afford the rent, or now wish to distance themselves from the crowds of New York City. They have been moving to the New Jersey suburbs, where they can buy a home with some land. We have seen an uptick in residential purchase financing as a result of this recent trend. The moderate multifamily space, however, has remained stable. People are still paying rent like they used to, even throughout COVID-19.
On the commercial side of the bank, there are some things that are also different. Many of the small businesses that had shut down are now reopened, but we can’t rely on any of the old historical trailing financial results. If that company, for example, pre-COVID-19, had 25 customers that they sold product to, but only 15 survived, we don’t know if those sales are going to be there going forward. There are no guarantees. We have no idea how they are going to get trade credit from suppliers. You have a lot of different elements on their balance sheet that are different today in a post-COVID-19 world than before. And that’s the big challenge, particularly for small companies.
What is surprising to you?
We had an economy that was shut down for three months, with millions of people unemployed. Being in this business for 40 years, I’ve never seen anything like this. However, now I am also shocked that you still see highly functioning equity markets. You see record equity levels because of the expectation of value. Unemployment is still high, but, when you’re out on the road, you see a lot of cars, like it is all normal again.
Despite all the disruption arising from COVID-19, demand for credit remains surprisingly strong. I believe banks have now become modestly more conservative in how they make loans, given all the uncertainty that surrounds a potential virus resurgence. Having said that, what is happening now on the residential side is property values have all increased, so it makes it easier, assuming people are employed and many have not had a COVID-19 hardship (such as being furloughed or laid off). The majority of our residential customers either work from home and continue to receive salary or had savings and were able to continue to make their payments because they were getting paid.
What is most important in servicing lending customers now?
Banking products, for the most part, are very homogeneous and commodity-like. What makes our bank different is how we conduct our business and the type of people we choose to be on our team. What we bring to the table is that our entire team is committed to the notion of being “your private bank.”
If you expect that level of service from a big bank, you will surely be disappointed. I know, because I’ve worked at them. It’s just a different philosophy here, a different way of doing business, and our customers love it. Much of the business we have taken from big banks is because of this and the stories are always the same from our customers. People want to know that you are there — they want answers, they want speed, they want execution. I recently met with one of our larger borrowers and he told us he feels like we understand him. You can’t put a price on valuable things like this – peace of mind.
John C. Duncan is executive vice president and chief lending officer with Spencer Savings Bank, headquartered in Elmwood Park.