LENDING WITH CARE

The number of banks nationwide reporting tightened commercial loan standards more than doubled from 25 percent in 2000 to 55 percent during the 12-month period ending March 31, 2001.

That trend, as reported in the seventh annual survey of Credit Underwriting Practices conducted by the Office of the Comptroller of the Currency (OCC), no doubt continued as the nation slipped into the recession that began the month that the 2001 survey was conducted.

"Underwriting standards are based on prudence. Different economies have different risk profiles and banks are responding to that reality," explains Michael Whitney, president of Fleet Bank. "In a downward cycle there is less predictability, so it is appropriate that lenders are more cautious."

In NH, however, the banking community says it is not the underwriting standards that have tightened. "It does not appear that standards are increasing, but there are increasing numbers of businesses that do not rise to that standard," says Gerald Little, executive director of the NH Banker's Association.

However, lenders acknowledge that they are looking at loans much more closely to make sure they meet lending criteria. "We certainly look harder, but that doesn't mean we stop lending," says Scott Bacon, president of Bank of New Hampshire.

COMPETITION FOR NEW LOANS

While bankers are keeping an eye on their existing portfolios, they are still competing aggressively for commercial loans. As institutions and individuals fled the turbulent stock market, money poured into banks. At the same time, businesses leery of the slowing economy tabled expansion plans, reduced inventory and began tightening their belts. The combination of plentiful cash and slower loan demand has led to what Little terms a "hyper-competitive" commercial lending market.

Since underwriting criteria and terms vary from bank to bank, businesses may find it worthwhile to shop around. According to Thomas Garfield, senior vice president and senior loan officer for Laconia Savings Bank, there is no one-sizefits-all approach to commercial credit. "Every request is a little bit different," he says.

Like most commercial loan officers, Garfield looks at a business's cash flow and ability to service the debt as key factors in a loan decision. Net worth statements, credit histories, financial statements, and business plans have always been necessary reading for bank loan officers. but now many are combing through the information to evaluate the company's prospects in a down market. "We're looking for trends, whether the company is keeping costs in line, how quickly they are adapting to changing markets, and whether growth projections are reasonable considering the industry," says Garfield.

Existing companies with an established banking relationship and a strong balance sheet may still find that a single meeting and a summary letter are sufficient to secure financing. New companies will probably have a tougher time obtaining credit. In today's cautious lending environment, banks will take a very close took at loan requests for start-up businesses.

Joe Reilly, president of Centrix Bank in Bedford, says that most institutions will want to see a business plan and projected financial statements, experienced management, credit records of the principals, and 30 percent of the principals' own money invested in the project. "Depending upon the bank's appetite and approach to risk, the customers may or may not need credit enhancements," he says.

HEDGING RISKS

Current statistics show that banks' appetites for risk are on the wane. Increasingly, commercial banks are seeking the added security of credit enhancements provided by the Small Business Administration (SBA), Business Finance Authority (BEA or local economic development organizations. The SBA reports that it guaranteeg 951 loans worth $96 million in NH in fiscal year 2001 (which ended in September), an increase of 293 loans and $17 million over the previous year. SBA guarantees are on their way to setting a record for fiscal year 2002 if October numbers held true for the remainder of the year (final numbers were not available at press time.) The BEA has also seen a sharp increase in inquiries but. according to Jack Donovan, executive director of NH's Business Finance Authority. "we're not at the level of eight years ago."

While banks are clearly taking a more cautious approach to risk, credit remains plentiful for qualified borrowers. "It's a great time to be moving forward to take advantage of low interest rates," Little says. The more desperately financing is needed, however, the less likely it is that credit will be available. "A company doesn't have a lot of options if it is having financial problems," Donovan says. "They fall in a gray area in which nobody is willing to take on the risk."

LESSONS FROM THE PAST

New Hampshire bankers say they haven't tightened underwriting standards because they never loosened them in the first place. While bankers can cite examples of some institutions foregoing personal guarantees and cash flow projections in boom times, according to NH Banking Commissioner Peter Hildreth, there was no widespread relaxation of underwriting standards. "Both regulators and banks have been more aware of potential problems having gone through the crisis a decade ago," he says.

The last major economic downturn forced 12 NH banks, holding more than a quarter of the state's total assets, out of business in a single year. Those memories are still quite fresh to NH's banking community and tend to creep into a conversation about underwriting standards. Fleet's Michael Whitney speaks for a broad cross section of bank presidents when he says that "even through the most robust part of the business cycle, banks have remained pretty disciplined" because of still-vivid memories of the banking disaster in 1991.

Bank self-discipline is reinforced by legislation passed to avoid a repeat performance of the banking crisis. The Financial Institutions Reform and Recovery Act (FIRREA) of 1989 and the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991 set forth sweeping regulations to improve the safety and soundness of America's banking industry.

The federal regulations were created to ensure that history did not repeat itself, but, in fact, there are few parallels that can be drawn between the banking debacle of a decade ago and today's banking environment. Fundamental structural problems within the banking industry itself - including excessive concentration in the real estate industry and escalating loan-to-assets ratios - combined with a prolonged recession that affected multiple sectors of the economy to create the environment in the early 1990s.

By contrast, Commissioner Hildreth reports that today NH banks are "quite healthy." Capital levels are at historic highs, asset quality is better than it was a decade ago, banks are diversifying risks, and risk management practices are greatly improved.

"The recession itself is also fundamentally different," says Little of the Bankers Association. "Before it was actually confirmed that we were in a recession, people were already saying that we were coming out of it."

This time around, the slowdown has been confined to certain segments of the economy. Timber, technology and telecommunications have been hard hit, but NH bankers are finding that businesses in most other sectors are holding their own. "New Hampshire doesn't have a lot of financial involvement in the hurting industries," says Scott Bacon of Bank of New Hampshire.

Jim Tibbetts, president of First Colebrook Bank, has a different perspective. A slowdown in the timber industry has been devastating in the North Country. He says that loggers are delaying upgrading equipment and that demand for start-up and expansion capital is practically non-existent. But, Tibbetts adds, "there's plenty of money to lend. We're actively looking for opportunities."

CAUTION WITH EXISTING LOANS

In comments made last June, Comptroller of the Currency John D. Hawke Jr. voiced concern about a rising number of problem loans in the nation. In NH, concern is muted. "Whenever there is a downturn in the economy, you'll see an increase in problem loans, but we are not greatly concerned," says Bob Fleury, chief bank examiner at the NH Banking Commission.

Jack Donovan of NH's Business Finance Authority sees both banks and businesses moving quickly to deal with problems if they arise.

"Banks are cautious with current loans in their portfolios and they are addressing problems quickly," he says. "If they see a problem, they'll go to the client and ask them what they are doing about it and force them to get into compliance by laying off people, cutting costs or whatever."

But Donovan says that businesses are also keeping a close eye on the bottom line and are much better off if they take the first step in dealing with loan problems.

"If a business knows that they have a problem, they should call the bank and let them know about it. Nobody likes surprises," he says.