Q&A talks with William J. McGurk, president and CEO of Rockville Bank, about the changing landscape that consumers and community banks are facing.
Q: What is the banking industry, especially local community banks, doing to help businesses and individuals to weather the current economic crisis?
A: Community banks are making more credit available to qualified businesses and individuals. Rockville Bank is well-capitalized, said no to TARP money, and has money to lend. Like most community banks, we work closely with borrowers who may be experiencing difficulties by modifying loan payment terms when it is appropriate.
Q: Everything I hear in the media seems to indicate that credit has dried up for small businesses and is virtually non-existent. Is that true?
A: No, it is not true. Community banks have money available to lend to credit worthy small businesses. In fact, Rockville Bank has expanded and grown its commercial loan portfolio throughout the economic downturn.
Q: How has the President’s Economic Stimulus Act of 2009 provided benefit to the Connecticut economy and to any of your business customers? Can you provide specific examples?
A: Rockville Bank has business customers who have obtained paving and construction contracts on projects funded by the stimulus program which allowed them to maintain and grow their work force. Many of these businesses are, however, concerned with obtaining private sector projects once the publicly funded projects are completed.
Q: For companies struggling to collect receivables in this slowed economy, what kind of financing options are available and what kind of options are available to strengthen the likelihood of collecting the receivables?
A: It is not uncommon for the collection of accounts receivable to slow in this economic cycle. A working capital line of credit to support accounts receivable may be needed. Businesses will need to expand their collection activities and the business owner may need to become personally involved or they may need to engage an outside collection firm. It is very important for businesses to perform a high level of due diligence on the credit worthiness of its new customers before it extends payment terms.
Q: Many banks book commercial real estate loans with 20- or 25-year amortizations but with five-year “balloon” terms. What will banks do with the loans that were booked five years ago and are now coming to maturity but still have balances due to the amortization schedule?
A: If a loan is maturing with a balance outstanding, there is a benefit to the borrower to refinance the loan because interest rates are at historically low levels and the borrower’s monthly loan payment may decline. Rockville Bank will underwrite the loan and make it easy to refinance.
Q: The majority of these loans were probably for 75 to 80 percent of the appraised value. With new appraisals required to rewrite these loans, a good percentage of them may not meet loan-to-value standards. These customers will probably not be able to find other ways of paying down the loan in order to meet loan-to-value standards, so what will their current lenders do with CRE loans that do not meet their loan-to-value standards?
A: Most community banks like Rockville Bank are relationship-focused and will work with borrowers to provide flexibility in loan payments and terms in a manner that supports the credit requirements of the borrower and the bank. If borrowers have concerns, they should initiate contact with their bank as soon as possible so that an acceptable arrangement can be made.
Q: Was the Fed’s whole stress test exercise a valuable one for community banks?
A: The Fed’s stress test applied to large banks with high concentrations of risk, the failure of which could threaten the solvency of other banks due to the inter-connectedness of the financial industry. The Fed employed a broad brush test to quantify the exposure and, in some cases, required banks to raise additional capital. The stress test reinforced the culture of solid underwriting and risk management at community banks. Rockville Bank routinely does its own stress test to determine capital exposure under all economic scenarios and continues to be well-capitalized.
Q: How will the latest financial reform bill affect your bank and your customers?
A: The Dodd-Frank Wall Street Reform and Consumer Protection Act is intended to restructure the regulatory framework for the U.S. financial system. The legislation has numerous provisions that address many issues including systemic risk, derivatives, hedge funds, Insurance, consumer protection, and mortgage reform. Because Rockville Bank does not engage in high risk activities and did not make high cost sub prime loans, most of these provisions will not impact Rockville Bank or its customers. However, there will be an increase in expenses associated with compliance and regulatory review that has yet to be determined.
