Banking & Finance and Economy and Environment and Real Estate & Retail

BEHIND THE NEWS: News from the front lines: More tough times ahead

August 4, 2008

The past 12 months have been hard to take, with all the gloom-anddoom headlines about the weak housing market, subprime credit crisis and softening economy. We're all ready for some good news. Unfortunately, I can't provide it here.

That's because executives on the front lines of Indiana business-those most tuned in to the twists and turns of the state's economy-aren't ready to call a turnaround yet.

In second-quarter conference calls with analysts, the executives are trumpeting their firms' ability to weather tumultuous times-which they believe will be around a while.

"In our view, we are quarters, not months, away from seeing a recovery," Bob Jones, CEO of Evansville-based Old National Bancorp, said in a July 28 conference call.

"We do believe that the housing challenges are moving into other sectors. ... We also believe that the effects of inflation will be felt by the consumer, which is dealing with record gas and food prices-the combination of which will affect their disposable income."

In a conference call the same day, Simon Property Group Inc. CEO David Simon added: "These are clearly challenging times, but we are positioned to succeed in this environment."

As CEO of Indiana's largest Indiana-based banking company, Jones has a unique perspective. And it's a sobering one.

It's true that Indiana is faring better than adjacent rust-belt states Ohio and Illinois, where declines in housing markets have been more severe, Jones said in an interview with IBJ.

But he said this is no time to start breathing easier.

Until the second quarter of this year, most of the challenges facing banks were "synthetic," as Jones put it. The housing slump triggered the subprime crisis, which caused credit markets to freeze up. The result: Many banks were saddled with subprime loans they couldn't move off their balance sheets.

Bad news, to be sure, but not a traditional economic slowdown. It wasn't until recently that the telltale signs of economic malaise surfaced-such as consumers struggling to pay their credit cards and first mortgages, and commercial real estate developers struggling to find tenants for strip malls.

"Historically, these kinds of economic challenges last three to nine quarters," Jones said. "That's why we are just entering a traditional economic slowdown."

Here's a bit of a silver lining: For individual companies, tough times aren't all bad. They spawn shakeouts industry by industry, with weaker firms selling out to rivals or shutting down altogether.

Take the Indianapolis home-building industry, which has become strikingly less competitive in recent months. The latest casualty was Davis Homes, which folded in July.

Calabasas, Calif.-based builder Ryland Group Inc. is one of the beneficiaries. Second-quarter closings in Indianapolis were up compared with a year earlier, according to the company, which says it now ranks as the region's largest home builder.

"We actually have a pretty good business there, and [the market is] actually doing reasonably well," CEO R. Chad Dreier said in singling out Indianapolis on a July 24 conference call with analysts.

Old National this year has fared far better than most banks-in part because it didn't play the subprime game-and thus may have opportunities to snap up weaker rivals.

But caution is the watchword in this environment. This is no time to swing for the fence.

"We are going to be very disciplined in anything we look at," Jones said on the call. "I am not willing to take on anything that's going to give me indigestion at this time."

Finish Line execs sell stock

A trio of Finish Line Inc. insiders are taking advantage of the recent runup in the stock to cash in millions of dollars in shares.

In a recent regulatory filing, CEO Alan Cohen said he plans to sell as many as 373,000 shares by late October, Senior Executive Vice President David Klapper plans to sell as many as 301,000 shares, and Senior Executive Vice President Larry Sablosky plans to sell as many as 196,000 shares.

After zooming higher in recent months, Finish Line shares now fetch about $10.50 apiece, up 338 percent for the year. If the stock stays at current levels, Cohen would reap more than $3.9 million. Klapper would collect $3.1 million, and Sablosky $2 million.

All three are founders of the 32-yearold company. They've periodically sold stakes through the years, but remain major shareholders.
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