Small commercial lenders - wary of loan losses and bankruptcies - expect to become increasingly tightfisted with credit in coming months, according to a survey taken in the third quarter.

Of the 73 banks and other lenders surveyed by Phoenix Management Services Inc., 49% predicted that loans to small companies - those with up to $50 million of revenue - would drop in the next six months, compared with 39% that gave the same answer in the second-quarter survey. Fifty-one percent expected lending to middle-market companies ($50 million to $250 million of revenue) to drop, up from 40% in the second quarter. For companies with more than $250 million of revenue, 43% of respondents predicted a decline in lending, compared with 32% the previous quarter.

"Our impression is that it's more of a supply issue, as opposed to a demand issue," said Michael Jacoby, executive vice president of the Philadelphia consulting firm. "Lending will be down because the banks will be holding the cards and will be more selective in the loans that they give," he said. They "will be pricing things differently or asking for more collateral or tighter structures."

Nonperforming loans are gaining a higher profile as regulators worry about the risk to bank profitability. Wachovia Corp. of Winston-Salem, N.C.; Unionbancal of San Francisco, which is mostly owned by Bank of Tokyo-Mitsubishi Ltd.; and Pacific Century Financial Corp. of Honolulu have blamed problem loans for lower-than-expected second-quarter earnings.

The federal banking agencies are working on guidelines to govern the large leveraged loans that are shared among groups of lenders. Movie theater companies have been among the most troubled borrowers in the third quarter; several have filed for bankruptcy.

The survey participants, smaller lenders, are similarly growing more credit-conscious. Ninety-three percent predicted that loan losses would rise, up from 82% foreseeing this in the second quarter. Eighty-two percent expected an increase in bankruptcies, up from 80% the previous quarter.

Lenders said borrowers still expect their businesses to grow, though not quite so strongly as in the previous quarter. Sixty-seven percent said their customers expect "moderate" growth, up from 56% who gave that answer in the previous quarter. Twenty-five percent said customers anticipated "strong" growth, down from 30% in the second quarter.

Health care still led the list of least attractive industries but was named by only 61% of the lenders, as opposed to the roughly 85% who had identified the industry as least attractive during the preceding year. Eighty-two percent of respondents reported an average loan size of $10 million or less.

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