By SARA WIDNESS

It’s true that commercial and retail activities have slowed in Vermont, while the rate of foreclosures has increased. However, spokespeople for Vermont’s banks say they are upbeat about the ability of their lending institutions to reach into deep pockets to assist commercial borrowers despite the recession.

“The Vermont economy never collapses; it just slows,” said James Keyes, senior vice president and commercial regional executive for Vermont at Berkshire Bank. “It’s very slow and steady; not heavy with toxic, residential mortgage loans. Banks were careful and didn’t do them.

“I think in Vermont, all the good community banks know their customers and they are careful to protect the customer and the bank,” he said. “We’re in a geographically conservative region of the country; loan delinquencies remain modest. Out of the 4,000 loans we service, there was only one residential mortgage loan to auction in the annual ’08 report.”

Keyes also pointed out that Vermont has the lowest rate of residential foreclosures in the nation. He attributed this to the fact that “the Vermont economy never roars: it might end up going as low as the rest of the nation, but it doesn’t have so far to fall.”

Vermont banks may also be more amenable to preventing foreclosures, either residential or commercial, simply by talking things through in advance, he said.

“If someone is in foreclosure, a lot of bad things have happened; a lot of things by the borrower and lender would have been explored; but there’s probably not a remedy. But, before a foreclosure moves forward, there are opportunities for careful conversations between the bank and the borrower as regards how to solve the problem,” he said.

Geoffrey Hesslink, senior vice president and senior lender for Merchants Bank, said commercial loans increased 22 percent in 2008, underscoring the importance of commercial lending to the bank. In the past 18 months, the division has added lenders and support staff to keep up with that growth.

The stellar increase of a year ago hasn’t kept pace this year, although the division continues to grow.

“Loan demand is down; the economy is slower; there’s less business activity, and that is reflected in lower loan demand,” Hesslink said, adding the growth rate was about two percent from January through June 2009.

“Companies are borrowing less because they need less money,” he said.

Hesslink said rehabilitation loans are a core business in his commercial division, with most of the business coming from existing customers seeking to grow their businesses through bank financing.

His bank, he said, also works with foreclosure turn-around loans “if we believe the businesses are viable.” Lending extends to bridge loans as well, so long as proper criteria are met.

While some banks actively participate in the U.S. Small Business Administration’s (SBA) loan programs, noted Hesslink, “we’re pretty proud of our own underwriting. We do our best if it’s appropriate to do it (make loans) in-house.”

Keyes underscored Berkshire Bank’s favorable environment, with “plenty of money to lend and a balance sheet with very liquid, strong capital ratios. So, we are pretty much open to doing banking business the way it’s been done for a very long time at Berkshire Bank. We have not imposed any new restrictions or curtailments.”

Instead, in mid-2009 he added two commercial lenders and a commercial services calling officer to his Vermont staff to meet borrowing needs.

Keyes said he sees a mixed environment. Some projects, he said, are on hold because “a lot of people don’t have the confidence about going forward with new construction and projects until either consumer confidence levels come back or the general economy begins to show improvement. But, others observe that the costs of material and labor have been reduced because of lack of activity, and people who have very deep pockets and a belief in their project are going forward.” Others are taking advantage of current interest rates that are lower than those rates offered in early 2008.

“People had good loans with good banks and the rates were much higher. We get a lot of phone calls from people seeking to adjust their loan rates to current market rates that are lower than six months ago,” said Keyes. “They are looking for ways to save money in any way they can.

“Others are dealing with the downturn and how it has affected them. They are adjusting labor costs, making sure their income statements still show a profit and working to increase their business in the downturn. In this environment, there are more calls for people who need some kind of help, rather than calls from those doing new projects.”

His bank, like others, engages in various kinds of loans. Berkshire Bank sees “lots of” bridge loans, short-term loans that get a borrower from one point to another for a short period of time. These can be accessed, he said, depending on “how risky the project seems to be.”

A similar lending product called a mezzanine loan is considered an unsecured loan in the traditional sense of banking collateral, reflecting borrowing above and beyond what the collateral would normally suggest.

“In this time period, no one is asking for highly leveraged loan situations. Banks would generally be less than very willing to do this,” said Keyes.

End-of-construction loans work in tandem with a construction project. “If we like your plan, we’ll support your plan with our money, and we design a loan to play out along the lines of the plan,” said Keyes. “When the project is completed, the loan automatically converts to a longer-term, appropriate mortgage loan.

“We have half a dozen small-to-medium construction loans in Vermont ranging from $500,000 to $1 million, some as high as $4 million. Smart borrowers who have cash at the bottom of the cycle use this time to take advantage of opportunities,” Keyes said.

“We do make a lot of loans to help purchase property,” he said. “Purchase or acquisition loans come into play when there’s a borrower who has, for example, a building occupied by strong tenants who are bound by leases. We can do those loans with weaker borrowers but it comes back to the tenants and how they perform with their leases.”

Another example is a commercial refinance loan. He laid out a scenario: an owner is 17 years into the loan for a building worth $1 million; the loan is for $100,000. The owner sees an opportunity to buy another building and asks the bank to raise the mortgage on the old building to yield money for the new project.

“If I know that the next project is reasonably good and will not cause financial distress, I might say yes,” he said.

Like other banks, Berkshire Bank also deals with foreign investors. “There’s a lot of activity with Canadian manufacturing that’s happening now,” he said. “These companies want to expand into Vermont and have come to Vermont banks asking for construction, mortgage and working capital money.

“We also loan money to Vermonters doing projects out of state, if the projects aren’t too far away. Most Vermont banks, for example, wouldn’t lend to a sporting goods store in Arizona because it’s difficult to track their progress or lack thereof.”

Keyes added that green and sustainable projects, more than just being trendy, make sense in terms of the efficiency of buildings. “We have a lot of people calling to make their buildings more efficient, asking for renovation or rehab loans to do things more efficiently.”