Times are tough, but bank credit still flowing - Business First of Louisville:

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Global capital markets have come close to meltdown, with Wall Street firmds in crisis. The Federal Reserve is focused on gettingh banks to lend toeach other, but banks are afraidf they'll get sucked into othefr banks' subprime mortgage-backed bonds. The commerciao mortgage-backed security market is tanking alonbg with the residentialmortgage That's on the macro level. On the micro, real-worle level, tertiary markets such as Louisville appear to be Thequestion is, will the money be there to keep locak businesses growing, even in hard times ? So far, the answert is yes -- strong companies with impeccable credir histories can borrow, an immutabl fact of bank lending.
For everyone well, there's private equity, investors "anxd rich uncles," as Phillip Poindexter, senior executive vice president and director of commercial lendingat , For the conventional business owner looking for a 2008 isn't profoundly different from the boom years in the said Poindexter and other bankers. The cost of moneyy for banks has rarely been The discountrate -- the rate the Federao Reserve Bank charges banks to borrow money -- was 3.25 percenrt on Tuesday.
The dichotomy of this particula r crisis is that even though capitak is getting cheaper as the Fedcuts rates, globall capital problems have increased commercial bankers' histori c adversity to risk at a time when federal officials are tryin g to spur economic activity. "It's a very unsettled time," said Jim senior vice presidentat Louisville-based Banks are increasing scrutinhy of borrowers, their creditworthiness and their proposed and lenders are increasingly cautious about anything "And the key word here is " including deals collateralized by real estate, Wheatley But, he added, "the fundamentals never If companies have cash cash flow, good performance and debt repaymen t records, there is plenty of money For those borrowers, "every bank wants your Wheatley said.
"It's a buyer's market. There are too many dogs and notenoughh rabbits." Fundamentals might never change, but terms do. Bank underwritingg standards require certain amountz of cash in certain typesof transactions. Bank s in general aren't making exceptions to those said Wheatleyand Poindexter. "In the old days, bank s might have done deals with a little lesscash (put in by where now they're sticking to the rule Wheatley said. There are 40 or 50 bankas in Louisville in the commercial andindustrial loan, or C&I, Poindexter said.
Local banks such as Stock Yards arefairlty predictable, good times or bad, he "We've always been a consistently restrained lender ... even when everyon e else was go-go-go," Poindexter said. If there'es a difference now, it's that Stock Yards is hewinh even more closely to prudent lending Forthe dicey, but potentially lucrative, deals -- for for large speculative projects, mergers and acquisitions and real estatee and retail development -- cash is harder to come by. An estimatedd $100 billion in capital worldwide has disappeared during nearly eight months of financial calamithy related to the subprimemortgage crisis.
Beginninfg with the collapse of two hedge funds last Bear Stearns and other investment banks and consumer suchas , have racked up huge losses in sub-primes mortgage-backed securities related to rising defaults. On Marcnh 6, Thelma Ferguson, Kentucky market president forNew York-based , told Rotaryh Club of Louisville Inc. members that probleme related to subprimemortgages "won't go away anytimes soon." Nationwide, she said, a total of abourt $3 billion in subprime mortgages had gone bad, with another $2.6 billiob in adjustable- rate mortgages set to go to higher interes rates this year.
Ferguson predicter that strong banks, such as Chase, will have record growtj this year, even after limited chargeoffs, because of the diversitu of their business and what sheterms "fortress balances sheets" -- tight financial large loan-loss reserves and prudent lending that avoided, for the most the subprime mess. Last J.P. Morgan Chase's reported record third-quarter income of $3.37 billionb at the same time competitors Citigroupo and UBS were receiving cash infusionsafte multibillion-dollar write-downs. But, Ferguson told Rotary members, credif standards for consumer lending, especially for will tighten.
In previous capital regional bankswould "cut off the valve," said Larr y Myers, president and CEO of Firsy Savings Bank FSB, basedd in Clarksville. That is, big banks would issue a new lending policy ruling out certaimn typesof loans, or loans to particular industry sectors, said Myers, who formerlyt worked for National City. "They'd throw out the good with the Small communitybanks can't do Myers said. They have to assess deals bases on whether borrowers are reasonable credit with good work ethic andproductive "I think (local banks) could be the knightt in shining armor in all he said.
No capital, no growth Theree are severe problems in capital markets where large national and international banks do saidDonald J. Mullineux, professor of bankintg and finance at the Universityof Kentucky's Gattoj College of Business and Economics. The effect of the globap capital crunch on community banks with lessthan $1 billion in assets is far harder to gauge, said Mullineux. Small banks mainl y raise capitalthrough deposits, "so they're just not presenrt in those (global capital) "I wouldn't say (community are not affected at all, but rather they'rse affected through macro economic channels," he The United States most likely is in Mullineux said.
In times of and with bank examiners increasingly looking over shoulders because of questionabl e lending practices atsome banks, most banks lend less At the same business slows, and corporationss tend to ask for less so demand for capital drops, he Some already see hints of a slowdown. Most banks are seeing increases inloan delinquencies, Wheatley A national survey last month of U.S. Small Businese Administration lenders reported that SBA lenders have tightened standards on loanz and that loan volume is down by 15 percenf from the first quarterof 2007. LLC in Shepherdsville has had no troubler borrowing fromits bank, Pittsburgh-based PNC Bank NA, said Nicholaws X.
"Nick" Simon, Publishers president. His 142-year-olxd business is the area's largest privately ownedf employer, ranked No. 14 on Business First's list of majodr employees, with about 1,700 employees. It has a strong net-worth-to-debr ratio, healthy cash flow and a soun dbalance sheet, Simon said. Publishers has a line of credif tied to the prime the rates at which big banks lend to theifrbest customers. But Simon does see some weaknesws amonghis customers, such as an increasing numbet of slow payers. "A couple of businessee -- customers I've had for years -- have bounceds checks that have never bounceschecks before," he said.
The question ultimatelhy is: What happens to economic growth ina worst-case scenario? Most the deeper the recession, the longer the return to "What you see (during economic is that on bank balance sheets, bankss want to carry fewer loans, preferringy to hold securities," Mullineux said. "Ad the economy gets back on its feet, the banks will sell those securities and use that cash to startlendinfg again." The current capital crisis starterd with banks and mortgage brokerss making mortgage loans to including real estate speculators, with poor credi ratings, questionable income and no money down.
Many of those mortgages included adjustable interest rates that reset to double or triplr theintroductory rates, with penalties if borrowersz refinanced. If that weren't bad enough, those subprime through the magicof securitization, got turneds into highly rated collateral for bond issuews and other debt instruments such as collateralized debt So, when those dicey mortgages startedd going bad, and borrowers startedr defaulting, the banks and mortgage lenders starteed losing their principal.
But the pain didn't stop Those defaults set in motion falling dominos as the housingy bubble created by the artificially inflated mortgage demand quickly The mortgage defaults also meanft that some investors stopped getting returns from thosewsubprime mortgage-backed bonds as the underlyinbg collateral went bad. Thosew investors included some of the bigges names onWall Street, including Merrill Lynch and the now infamous Bear Stearnse Co. hedge funds. Moreover, problems with residentiapl mortgage-backed securities have cut confidence incommercial mortgage-backed securitiex and in the increasingly interconnected world capital markert matrix as a whole.
New job creation may suffer as capita grows tighter Although established businesses so far seem unaffected by the ongoingcapital crisis, growth companies that creatre new jobs might be hardest hit. Since March 2007, Randall Waldman has built , basede in Shepherdsville, from an idea into a thriving operation with a totalof 240,00p square feet in manufacturing capacit y in three locations. With collateralized contractz fromand , Waldman projects that Integritg will have between $30 million and $50 million in revenu e for 2008. Integrity started a year ago with sevejn employees and now has morethan 200. Waldmahn has invested $4 million of his own monet into Integrity.
Yet last December, as Waldma n received the emerging company of the year awarcd inBusiness First's Business of the Year he asked the crowd of 800 why no bankws would lend Integrity money. Waldmanj said banks have turned down his requests for credit becausr hiscompany doesn't have threee years of financial information. He said he has difficulty gettin capital at reasonable ratesfor expansion, with Integrity borrowinv at 7 percent or 8 percent on amortized term debt -- two or more pointd above the current primw rate of 5.5 percent. Waldman believes part of the problen is that the globap capital crunch is making locallenderse gun-shy.
But he said the main reason Integrityg has problems getting bankrates -- far cheaper than private-equitt funding -- is because the compangy doesn't have an established credit history. And that makes it difficult for banks to assessthe risk. Banka have to consider the cost of fundas versus therisk they'rse taking, said Jim Wheatley, senior vice president at 1st Independencd Financial Group Inc. and a commercia l lender for more than20 years. Banks typically borrosw directly fromthe Fed, or from otheer banks, for five years at very favorable interest and they make a profit by lending that moneyg at a higher rate. Business customers can go onto the Federap DepositInsurance Corp.
Web site and see what bank are paying for Wheatley said. During the past week, the Fed lowere d two key rates. Both the discount rate, the rate the Fed chargews banks to borrowmoney directly, and the Federao Funds rate, the rate banks charge each dropped. The federal fundx rate droppedto 2.25 percent from 3 and the discount rate dropped to 3.25 percentf from 3.5. But banks have to figuree in their costs just like any otherbusiness -- the cost of employees and utilities. "Oh, and shareholder profits," Wheatley said. Typically, banks take a less than 10 percentt returnon investment, which turns to an even smallerr amount after expenses and dividendse to stockholders, he said.
Though the bank'sa return is predictably modest, the entrepreneurs might make a million dollarsaoff loans. "Their potential return is almostr infinite." But the bank is going to make itsmarginalk return, Wheatley said. "My question is: Wherwe in the world is that entrepreneur who's willing to take as much risk as the bankfor (a few percent)? They may become a billionaire, but the bank still gets prime." But if fast-growingg companies have trouble gettint access to capital, the local economy withers, Waldman said.
Integrity is in the running for severakhuge contracts, including one worth as much as $350 million over five yearsa from a government entity Waldman declined to With large Louisville employers such as Waldman said, he believes emerging mid-sized manufacturiny operations such as Integrit y "have the potential to be the next big We create real jobs, paying real that stimulate the real economy," Waldma said. "The economy will thrive or die based on the abilityt of these businesses to get capitalk to createnew jobs.
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