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Loan Danger

The Recession Poses Challenges to Commercial Lenders, but Also Opportunities
Allen Miles

Allen Miles says the recent troubles of many large lenders have opened the door to community banks to meet business-loan needs.

The banking industry isn’t exactly coming off a banner year, but the bad news nationally might be creating some opportunities locally.

“The big banks have given the community banks an opportunity to deal with some customers and companies in the area that we wouldn’t have had the chance to deal with in the past,” said Allen Miles, executive vice president and senior lender at Westfield Bank.

By that, he was referring to a general seizing-up of credit at many large institutions that are awash in toxic debt — a situation that has not been the case at regionally based banks in the Pioneer Valley.

“The large banks are having liquidity issues and are in the process of deleveraging themselves,” said Miles. “They’re pushing on borrowers, and that tends to push them out of the bank. We’ve become a good alternative to them — and we’re actually seeing an increase in loans as well as deposits.”

That’s no fortunate accident, but rather the result of planning ahead, said Alice Babcock, vice president at Westfield Bank.

“We continued to call on these companies over the past five years, so we’re a known entity to them,” she explained. “And even though we didn’t get a piece of their business at the time, that helped position us as the alternative choice for them today.”

Kenneth Boutin, senior vice president in charge of lending at PeoplesBank, has seen a similar phenomenon.

“Not only are the local banks healthy,” he said, “but when it comes to deals with good cash flow and strong secondary sources of repayment, this continues to be one of the most competitive areas in the whole country.

“All the local banks have money to lend,” Boutin continued. “The biggest question is, are the borrowers qualified? Again, having a good history of payments, adequate cash flow to service the loan they’re requesting, and a secondary source of repayment are the primary factors driving whether they get approved. If they have those elements and a good business plan, multiple banks will be chasing their business.”

That’s not hyperbole; Boutin cited one area company that recently interviewed five banks — all of which were interested — and took the best deal. “The money is out there,” he said.

At the same time, however, the recession is taking its toll on business owners’ willingness to invest in their companies and their ability to pursue commercial loans. It adds up to both challenge and opportunity for lenders, if some anxiety as well.

Closer Look

What has changed over the past year or so, said Boutin, is bank scrutiny of marginal borrowers — but responsible lenders should be looking carefully at the strength of a customer’s qualifications anyway, and Western Mass.-based banks have developed a reputation for prudence.

“They understand the marketplace and the type of borrowers we see in Western Mass.,” he said. “They underwrite based on experience and responsible lending, and that hasn’t changed here.”

That said, Boutin added, banks are looking more closely at certain projects deemed risky right now, such as retail properties, hotels, and housing.

“There’s plenty of available housing stock, so that would probably be a riskier situation now, and maybe you’re going to be more conservative,” he said. “And there have been a lot of hotels built up in the past seven to 10 years. If someone comes in with a hotel project, he might find that banks are being more cautious. It’s industry by industry, but that’s just prudent lending, which is what bankers here have always done.”

Timothy Crimmins, president of the Bank of Western Mass., said he noticed a slowdown in activity starting last fall, before ticking off a litany of issues all-too-common to bankers today.

“There has been an increase in troubled loans, and asset quality has declined a little bit from where it was last year,” he said. “I’m very concerned about the economy and the effect it’s having on customers.”

That includes retail woes — which directly impact the owners of strip malls and similar properties — order cancellations for manufacturers, and alarming jobless rates across the board, he said, adding that two especially hard-hit industries in the current downturn, housing and automotive, together impact a large swath of the overall economy.

“As far as we and other local banks are concerned, none of us have a liquidity crisis, and we have plenty to lend,” he noted. “But as things get worse and worse, we have to take a more conservative look at how we’ll extend credit.

“The economy has far-reaching ramifications for the financial sector, primarily initiated by the housing crisis, but it crosses all industries, from retail to aircraft to suppliers of the medical industry,” Crimmins added.

Part of the problem has been a tectonic shift in the economic factors underpinning existing loans, he explained. “Loans for shopping centers were based on strong, national tenants signing leases. But look what has happened to the retail sector.”

One example involves the franchising industry, in which defaults on loans guaranteed by the U.S. Small Business Administration increased by 52% from 2007 to 2008, according to a recent report in the Wall Street Journal, which also noted that the figures could give pause to banks with money to lend.

SBA-guaranteed loans are made through commercial banks and other lenders, and provide capital to small businesses that are often unable to qualify for conventional credit. The SBA insures a significant part of the loan to encourage both lending and small-business entrepreneurship, and the recently passed federal stimulus package raises that guarantee amount from 75% to 90%.

Wide-ranging Effects

No one expects that stimulus to work wonders on the economy overnight, and that causes concern in every bank, said Miles.

“It hits everyone now,” he noted. “The past recessions we’ve had, 1992 and 2003, were isolated to particular industries, but this one is far-reaching, hitting every sector.”

And the business world has seen it coming for some time, he added, noting that area manufacturers were pulling back on or delaying capital investments last summer and fall. He doesn’t see a quick end to the pain, either, due to the region’s tendency to lag behind national economic trends. “We won’t feel the full effects until later this year, and maybe well into 2010.”

Crimmins has talked about how, when his bank was in its relative infancy during the recession of the early 1990s, it never closed its lending window to customers. He doesn’t expect to do so this time either, but it might be a tougher slog.

“I don’t see taking action to get out of certain industries, because this recession crosses all industries,” he said. “But I think these circumstances are more severe than the ’90s. I think this will be longer-lasting than it was then.”

It helps, he said, that the Western Mass. economy traditionally hues to a more even keel than other regions, avoiding extreme highs and lows. But the recession has already cut severely into individuals’ and businesses’ purchasing power and confidence, which is understandable at a time when so much wealth has suddenly disappeared.

“It’s going to take time,” said Crimmins. “We didn’t get in this situation overnight, and we won’t get out of it overnight.”

Joseph Bednar can be reached at

[email protected]

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