New survey reveals lenders bracing for economic downturn.

Lenders across the nation are beginning to brace for a possible economic downturn, with 59% predicting their financial institutions will see a softening in their loan portfolios in the next six to 12 months, and an additional 27% anticipating a portfolio deterioration in 12 to 24 months, according to the results of this quarter's Phoenix Management "Lending Climate in America" Survey.

In anticipation, 43% of lenders said their lending institutions would likely allocate additional resources to distressed portfolio management in the coming 18 months. However, 56% predicted no change in their financial institutions' allocation of resources for loan workout efforts.

"This quarter, a number of indicators that we track through lender surveys are beginning to trend downward, most notably lenders' predictions about softening loan portfolios," said Michael E. Jacoby, managing director and shareholder of Phoenix Management Services. "Lenders are telling us they are on the alert for a coming economic downturn, perhaps as soon as 12 months from now."

After two quartets of relative optimism, lenders this quarter downgraded their expectations for the economy's performance. For the second half of 2006, lenders said the economy would perform at a "C+" level, down from the "B-" they predicted last quarter.

Lenders were equally gloomy about the economy's performance during the first half of 2007. Most said it would perform at a low "C" level, down from the solid "C" they assigned it three months ago.

Loan losses, bankruptcies and unemployment are all expected to rise, according to lenders surveyed. More lenders this quarter than last predicted that small business and international lending would decline in the next six months.

Lenders also lowered their predictions of their customers' growth plans in the next six to 12 months. Only 11% of lenders said their customers had "strong" or "very strong" growth expectations, contrasted with 21% who said the same last quarter. Eighty-eight percent said their customers had "moderate" growth expectations, versus 76% who said the same three months ago.

In further evidence of concern about a possible downturn, an increased percentage of lenders said they planned to tighten their current loan structures in all loan size segments. This quarter, an average of 17% of lenders said their financial institutions planned to tighten their loan structures for loans ranging from under $1 million to loans in excess of $10 million. That percentage climbed from eight percent a quarter ago.

The most dramatic tightening is predicted in the loan category of under $1 million, where 22% of lenders said their financial institutions planned to tighten their structures, up from 12% who said the same last quarter.

"Lenders are signaling that they are taking preparatory steps to protect themselves, anticipating that many of their customers may find themselves in difficult circumstances over the next year or two," Jacoby said.

The lowest percentage of lenders in 10 quarters--10%--reported plans to reduce their current interest rate spread and fee structures on similar credit quality loans in all loan size categories.

The Phoenix Management Services "Lending Climate in America" survey is conducted quarterly to gauge shifts in lenders' attitudes toward the economy. Eighty-eight lenders from commercial banks, commercial finance companies and factors across the country were surveyed this quarter. Respondents completed an online questionnaire during July.