Local banks escape worst of financial crisis by Joseph Santangelo
The financial industry on the South Shore and Cape Cod largely has avoided the worldwide financial turmoil that has roiled stock markets and dragged economies into the worst recession since the 1930s.
Liquidity is not a problem locally, as community and regional banks actively offer credit to small businesses, although loan standards often are tighter and loan volume is down. Local banks are picking up new lending business, mostly at the expense of the bigger banks that still are struggling through an 18-month international credit crunch.
“From the banks’ perspective, a financial institution with strong capital that understands its marketplace and has a local presence and local management should be positioned to look at this as a business development opportunity,” said Joseph Riley, executive vice president for retail and business banking at Eastern Bank.
Area banks report little to no exposure to subprime mortgages, mortgage-backed securities, credit default swaps or other toxic assets that have plummeted in value after the housing boom collapsed and overleveraged consumers could not meet mortgage payments. Community and regional banks also see an influx of deposits as people increase their savings and shy away from volatile stocks.
Local bankers are suffering few of the problems from speculative home buying and resulting foreclosures that rocked Florida, California and other regions. Cape Cod Five, the Cape’s largest bank with $1.77 billion in assets, was forced to foreclose on only one home mortgage during 2008 and just three in the past two years. Others were renegotiated.
Joel Crowell, president and CEO of Cape Cod Cooperative Bank, was one of several bankers to report increased loan volumes for 2008. He said, “My customers are not GE and not GM. We continue to work with borrowers with good management, who are showing discretion, who have a sound business plan and cash flow.”
Bruce Hammatt, chief lending officer for Cape Cod Five Cents Savings Bank, said, “The availability of commercial loans is not a problem. Certainly our bank has money to lend. The required down payment on commercial real estate has tightened up for particular businesses. We used to do loans with 80 percent down. Now it’s 75 percent down.”
Hammatt added, “Commercial real estate hasn’t had the dramatic drop in value that residential property has had. The basis is principally cash flow. If cash flow is still there, the value is still there.”
Chris Richards, vice president/senior commercial lender at The Community Bank, added, “Economic conditions are particularly critical right now. A potential customer recently came in to see me with $1 million in revenue in 2007; but he can anticipate only $300,000 next year. Another business owner (a retailer) I was speaking with said that in his 20 years of experience, September was his worst month that he has ever had, but October was his best month. The economy and consumers are very unpredictable right now.”
Eastern Bank’s Riley said credit standards remain prudent, though borrowers sometimes have a harder time meeting them. “Meeting the required credit scores becomes more and more difficult.” He also says the ability to obtain backing from the U.S. Small Business Administration for commercial loans is important to help keep business credit flowing.
Nationally, about 85 percent of senior loan officers reported they tightened standards for large and mid-sized firms, and about 75 percent said so for small businesses. About 20 percent of U.S. banks reported reducing credit limits on existing credit card accounts to prime borrowers.
Lenders urge borrowers to contact their banks as soon as possible if they see business conditions deteriorate and they need to work out new terms for their loans. “If business is down 10 percent, we want to see how you’re prepared to handle it,” said Hammatt of Cape Cod Five. “What’s most impressive is if the business recognizes the risk. The business has to be on top of it, recognize that things are not perfect and look at ways to adapt.”
The U.S. Small Business Administration in Boston also has set up a hotline for businesses trying to wrestle with financial problems, at (617) 565-5627. For example, the SBA can help a restaurant owner find a bank that is currently lending to restaurants.
Overall loan volume in the region is down significantly. Sanford Blitz, regional administrator of the SBA, said banks and businesses are arranging fewer SBA-backed loans, though more banks are seeking SBA guarantees for those loans.
Blitz said, “The figures for the fiscal year that ended September 30 were down 23 percent in total dollars and the number of loans down 36 percent. The new fiscal year continues to be down about 30 percent.”
“On the positive side, at the end of the fiscal year in September, 70 more banks in Massachusetts had done more SBA loans than in the past fiscal year. So, a whole bunch of banks were doing more business with us than in the past.”
Particularly as the economy weakened in the last half of 2008, many businesses were sitting on the sidelines, preferring to pare down debt, reduce expenses and avoid new borrowing in the face of declining sales and revenues.
In addition to the SBA, noted Richards of The Community Bank, “There are plenty of sources to get help. On the Cape, SCORE has many excellent retired professionals who have relocated here. The key is to find the right person with the right experience for your business. The Massachusetts Small Business Development Center is headquartered out of Fall River and has a local representative who always visits local chambers. Coastal Community Capital and the SEED Corporation are other valuable resources.”