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What credit crunch?

Indiana's ever-prudent bankers say their lending policies are about the same as they always have been.

The Bush administration points to bankers, claiming financial institutions have put the squeeze on business lending. Critics counter that Bush has to blame someone for the recession.

Who is right? Is a "credit crunch" prolonging the economic downturn? Or are banks conducting business as usual in an overly sensitive environment?

"Any creditworthy borrower would practically be mobbed," Dan Mitchell, chairman and chief executive officer of Old National Bank in Evansville, says of loan applicants. "There has been some retrenchment from a few years ago, but it is improper to judge a few years ago as standard. In the '80s, frankly, credit was much too loose."

Mitchell and other industry sources say "credit crunch" is an erroneous term for the current climate because it implies money is not available. "Banks have money to lend, but they are not going to go out and lend it to anyone who walks in the door," says Fred Barnard, an associate professor in Purdue University's agricultural economics department. "Really what we're seeing is prudent lending. This probably is a welcome change, but some people may not agree because they are not getting the credit they want."

Some view it as a chicken-or-egg question: business leaders and economists see banks dodging risky business in response to the recession, while bankers say weakness in the economy is reducing the demand for loans. What's more, lenders and borrowers alike believe closer scrutiny by federal regulators reacting to the savings-and-loan crisis is making this a tough environment in which to raise capital.

Regulators sometimes also have made it more difficult simply to go about the business of making loans, adds Vern Holzhall, president of Hammond-based Mercantile National Bank of Indiana. Banks, he says, have sometimes had to busy themselves generating what seem to be unnecessary documents at the request of regulators.

In any case, many bankers agree with Christopher Murphy, president of 1st Source Bank in South Bend, who says credit policies are the same as always. "Banking is nothing more than a reflection of the economy it serves. We have not changed our overall approach to the market. We don't tighten credit policies because of a recession." He and other bankers say there is plenty of money available to borrow, and the state's 300 commercial banks are competing to make quality loans to existing businesses with strong balance sheets.

"I can tell you that this bank is doing the same due diligence, the same investigation of character and capacity that we've been doing for years," agrees Holzhall. "We're just finding a scarcity of good commercial loans to make, and you've got a lot of competition for good loans."

"There's a lot of money for the asking," and not as many takers as Bruce Dahltorp would like. Says the chairman and CEO of Gainer Bank in Gary, "I'd love for more people to come in and ask for money. We've never tightened credit. We aren't loose with credit, but we're very aggressive."

"We are actively looking for loans," agrees Tom Linnemeier, senior vice president of Fort Wayne National Bank. "Refinancing of mortgages is big business now because of lower interest rates. But there has not been commensurate activity in commercial or retail lending."

The slump in the auto industry means consumer financing is down, and the absence of consumer activity means businesses are not expanding. As a result, financial institutions are not seeing the 6 percent to 10 percent growth in loan portfolios that is normal during an economic recovery, says Jim Massey, chairman of Merchants National Bank in Indianapolis.

"In low times, there always is some movement out of banks and into the stock market, mutual funds" and other investments, says Carl Erskine, president of Indianapolis-based STAR Financial Bank and chairman of the TABULAR DATA OMITTED Indiana Bankers Association. "Banks, because of restrictive laws and regulations, have not been able to offer a broad enough range of services to keep funds from siphoning out to brokers."

Erskine says when deposit rates improve, the flow of funds will come back to banks. "Even so," he adds, "I don't think this has put any restrictiveness on the flow of funds for lending. Banks try to put at least 70 percent of their deposits back into good loans. It's more a question of finding the qualifications to borrow than it is banks saying, 'Let's tighten the screws.'"

If credit is tight nationwide, Indiana sources said it's a response--a welcome one-- to the speculative practices of the 1970s and 1980s. During the last two decades, lenders believed inflation would always bail them out. They were aggressive, too aggressive, in many cases; they were stung by loans gone bad. And regulators have cracked down.

But in Indiana and throughout much of the Midwest, bankers remained conservative. "The national 'problem' is a return to good basics in lending," Murphy says. "In Indiana most people stuck to the basics. It's interesting that across the country the values of the Midwest are now being heralded."

Yet small businesses and borrowers in some industries--notably real estate, manufacturing and agriculture--feel certain that banks have pulled the reins on credit in response to the recession and increased regulation.

When Jean Wojtowicz is busy, she knows banks have taken a conservative turn. She is president of Cambridge Capital Management Corp. in Indianapolis, a privately owned group that pools money to lend to small companies seen by individual banks as risky candidates. She says Indiana businesses historically have not hit the peaks and valleys of their counterparts on the coasts, reflecting an approach that is "appropriately conservative."

"I think that conservative nature has been ticked up a bit to maintain shareholder earnings," Wojtowicz says. "I'm seeing this as more of a long-term trend than short-term pressure."

Pat Kiely, president of the Indiana Manufacturers Association, says small companies always have a harder time borrowing money than do larger firms, because their ratio of net worth to assets is not as strong. The current pressure has made it more difficult than ever for companies without deep pockets to raise capital. Kiely says the state should look at ways to fill the gaps in obtaining venture capital.

"I think our members are more worried about the economy and public policies. Credit will fix itself," Kiely says. "The thing that won't be fixed is start-up companies. It's hard to get anyone to give money up front."

Real-estate developers have found it particularly difficult to raise capital for commercial projects. "When the Bush administration finally admitted there was a recession, we had known six months earlier," says Keith Foxe, a national spokesman for the shopping-center industry. "Although interest rates were down, no one in the industry was able to secure credit. Granted, we were overbuilt in small strip centers, but when big developers are trying to build large regional malls, it takes months of effort. If you go through the trouble, chances are there is a need in the area."

Bill Reiners of Citizens Realty & Insurance in Evansville says unlimited funds are available at good rates for residential building and buying. But on the commercial side, he says, banks are "a little cautious." They have eased up a bit since mid-1991, but still are "very selective," he says. "I would say the bankers are pretty limited in their loan portfolios."

Bankers agree they are more careful about lending to commercial real-estate projects than many were during the "go-go '80s." Although Indiana's real estate market is far less volatile than conditions on the coasts, no one denies the oversupply of office and retail space around the state, and therefore, banks are less apt to lend money for speculative development.

"Credit may be more difficult for some to get because of economic challenges we're facing," says Joe Barnette, president of Banc One Indiana Corp. and Bank One Indianapolis. "In any credit situation you have to analyze how you will be repaid. If someone came in today to build a speculative building with no tenants lined up, they would have a hard time getting funding."

Bill Hall, senior vice president of operations at Valparaiso-based Indiana Federal Savings & Loan Association, says lenders now carry pre-lease requirements for commercial developments. Hall, who has been a broker and developer as well as lender during 23 years in commercial real estate, says overbuilding has been part of the problem in the economic downturn.

Barnette says with the exception of the commercial real-estate sector, "lending standards have not changed all that much, but in an economic cycle like this you certainly make sure you do your due diligence."

Indiana bankers say their lending standards include strict checks of the fundamentals of an applicant's business, collateral, debt-to-equity ratio--companies in the 1980s built up too much debt compared to their worth--the general direction of the economy, the industry in which the company competes, and even the owners' and managers' character and background. Hall says underwriters look more closely at personal financial statements. Now, underwriters want to see more liquidity.

Barnard says in agricultural lending, farms are competing aggressively and banks are competing to lend to creditworthy farmers. He says that in the 1970s, lenders often focused on asset-base lending, counting on the value of collateral--in farmers' case, land--to rise every year. But since the 1980s, lenders have learned to look at repayment capability and profitability.

"A good loan not only has to be well collateralized now but it has to demonstrate it has the cash flow to pay back the loan," Erskine says. "Even a customer who has not missed a payment could be questionable."

Lenders do not want to overexpose themselves to any particular market, because if that industry takes a dive, many loans could default at once. "Just prudent management would suggest diversification," says John Reed, president of Indianapolis-based David A. Noyes & Co./Capital Markets. "It doesn't make sense to put all your eggs in one basket."

Murphy puts it another way: "No matter how good you think you are, there are times you're going to be wrong. We want to protect ourselves."

To that end, Murphy says 1st Source has been building reserves and working with customers the last few years to prepare them for any negative local turns. That, he says, is one advantage Indiana's community banks have over some of the larger players.

"We're likely to know more about our customers. We're not purchasing short-term relationships," Murphy says. "When we say no to a loan because the debt-equity ratio is too high or too low, we tell them not just for our business. They can learn from us."

Regardless of size, banks are operating in a more heavily regulated environment than ever. Closer scrutiny can be beneficial to depositors, borrowers, shareholders and the banking industry as a whole, sources say.

"It has certainly caused everyone to take a step back and look hard at what they are doing as to whether or not their policies are in accordance with basic good practice," Murphy says.

But regulators also have been sending mixed signals. Bankers say the federal government has gone beyond merely mandating strong credit quality. Barnette say banks are being forced to lower the value of real estate assets on their books more often than in the 1970s simply because regulators evaluate properties like office buildings before the projects have time to succeed. "It becomes a self-fulfilling prophecy," he says.

"There have been dramatically increased costs in regulatory scrutiny, which is a negative," Murphy says. "There has been overreaction on the congressional level regarding laws under which we operate. Part of our problem was caused by Congress, and Congress may cause problems again. Congress tends to overreact to anecdotal problems rather than take an overall view of an industry."

Ironically, although good can be gleaned from watchful eyes, some borrowers--those whom regulation is intended to help--fear regulation has caused the continuation of the recession.

Foxe's group, the New York-based International Council of Shopping Centers, says the restriction of credit by federal bank regulators is a major reason that new shopping center construction starts dropped 61 percent in 1990 from the previous year.

"I believe credit tightening was started by the federal examiners, who really climbed on the bankers about real estate portfolios," Reiners says.

Kiely, of the IMA, in part blames poor tax policies passed in 1986 as well as the savings-and-loan debacle, which forced the government "to probably overregulate people who didn't need to be regulated. The bad apples are gone. The easy money is gone."

Reiners says he expects the credit that is tight to loosen up by fall. "There seems to be an increase in capital because savings rates are going up. It seems to me we will have more saved capital chasing less lending."

Reed says the financial industry is facing a new economic reality that pervades all markets.

"The go-go, highly leveraged, spend-today-pay-tomorrow attitude of the 1980s is in the past. With the advantage of hindsight, it should never have been," he says.

But is that a credit crunch? Reed doesn't think so. "Bankers are in business to make money. In all markets debt is not the favored medium," he says. The record numbers of initial public offerings prove that "debt is out, equity is in; leverage is out, solid permanent capital is in."

He concludes: "We're a product of our environment and history. A lot of people burned their fingers in the '80s. When you pick up a hot pan and burn yourself, you learn not to do it again."
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Title Annotation:includes list of top banks in Indiana
Author:Falzone, Kris
Publication:Indiana Business Magazine
Article Type:Industry Overview
Date:May 1, 1992
Previous Article:Fast track.
Next Article:The utility players: how Indiana utilities help area economic development efforts.

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