Feb. 12 (Bloomberg) -- C.R. “Rusty” Cloutier of MidSouth Bank wants to heed President Barack Obama’s call to lend money. It’s his customers who aren’t paying attention.

Cloutier, chief executive officer of MidSouth Bancorp Inc. in Lafayette, Louisiana, received a $20 million cash infusion from the U.S. government on Jan. 9 and instructed loan officers to line up borrowers. Then he went on the road to make personal appeals at 14 town hall meetings.

“What we want to do is make people aware we have $250 million to lend,” Cloutier said Jan. 28 at the branch in downtown Lafayette. The 20 or so in the audience were outnumbered by bank employees handing out cookies and bottled water. Nobody asked for an application.

Lending nationwide slowed after the Treasury Department began giving 389 banks $236 billion in Troubled Asset Relief Program money on Oct. 28. CEOS of eight of the largest U.S. banks that accepted TARP injections were chided by Congress yesterday for not opening loan spigots.

“I urge you strongly to cooperate with us, not grudgingly, not doing the minimum,” said Barney Frank of Massachusetts, a Democrat and chairman of the House Financial Services Committee.

Outstanding loans and credits at commercial banks fell to $7.057 trillion in the week ending Jan. 28 from $7.266 trillion in October, according to the Federal Reserve.

“If people thought the government would give banks money and they would turn around and leverage that and lend it, that’s not the way it works,” said Robert E. Litan, a senior fellow in economic studies at the Brookings Institution in Washington.

Thaw Frozen Markets

MidSouth, which has $937 million in assets and 34 branches in southern Louisiana and southeast Texas, is struggling to put its TARP money to work, Cloutier said.

While he has some fresh borrowers, people are “very, very nervous” about taking on significant new debt, the 61-year-old banker said.

The TARP was designed to thaw frozen credit markets, then- Treasury Secretary Henry Paulson told Congress on Nov. 24. The program under the Obama administration will mandate lending, Treasury Secretary Timothy Geithner said on Feb. 10.

“The capital will come with conditions to help ensure that every dollar of assistance is used to generate a level of lending greater than what would have been possible in the absence of government support,” Geithner said.

For now, many customers are sitting tight, said Curtis Hage, CEO of closely held Home Federal Bank of Sioux Falls, South Dakota, which received $25 million of TARP money.

‘Special’ Rate

“If there was a greater demand out there for loans, we’d be out there after them like a dog after a bone,” Hage said.

At the MidSouth meeting in Lafayette, the only lending- related questions were from a man who complained he had been rejected for a $200,000 advance two years ago and a woman who planned to open a Japanese restaurant if she could borrow at a “special” rate.

“Rates can’t get any lower than they are now,” Cloutier told her.

MidSouth charges about 5.25 percent for a 30-year conventional mortgage, depending on the applicant’s credit score. Rates on small-business loans run from about 5.25 percent to 6 percent, depending on the size of the compensating balances the borrower keeps with the bank, said Donnie Landry, MidSouth’s chief lending officer.

Small-business loan rates are as much as two percentage points lower than they were a year ago, Landry said.

Creditworthy Borrowers

The spread over the prime rate had widened to more than 2 percentage points from three-quarters of a point or less in response to the greater risks in the market, Landry said.

“Credit hasn’t tightened, but the ability to find creditworthy borrowers has tightened,” he said. MidSouth hopes to increase lending by attracting new clients in Texas, he said.

Cloutier said he had expected to find eager borrowers in Lafayette Parish, where the unemployment rate is 3.5 percent, compared with 7.6 percent in the U.S.

While the S&P/Case-Shiller Composite-20 Home Price Index showed that national prices plummeted 18.2 percent in November from a year earlier, the median in Lafayette slipped to $170,000 from $171,000, according to local realtor Van Eaton & Romero.

Expectations the economy may deteriorate make borrowing look risky, said Andy C. Simon, president of Crown Drilling Fluids LLC, a drilling and services company that has taken out loans from MidSouth Bank and keeps deposits there.

‘Expecting a Downturn’

“We’re hunkering down,” Simon said. “That’s not to say we’re not planning some growth -- but we’re just planning.”

Residential and commercial construction in Lafayette has slowed, said contractor Timothy Lemoine, a MidSouth director.

“People are now expecting a downturn, so the market has tightened up considerably just in the last few months,” Lemoine said.

Some MidSouth officials wonder if the bank did the right thing in accepting TARP assistance, said Will G. Charbonnet Sr., MidSouth’s chairman.

The $20 million was in exchange for 20,000 preferred MidSouth shares, which the Treasury Department bought for $1,000 each, according to the bank. MidSouth pays a 5 percent annual dividend. In addition, the Treasury received 208,768 warrants for common shares.

MidSouth rose 54 cents to $9.26 at 4 p.m. yesterday in New York Stock Exchange composite trading. The shares underperformed the Standard & Poor’s SmallCap Financials Index by 18 percentage points over the past 12 months.

“Look, short term this is not a good decision,” Charbonnet said of taking TARP aid. “It costs us money.”

Nonperforming Assets

MidSouth accepted the capital as “an insurance policy” to provide a more substantial capital cushion in case credit conditions worsen, Charbonnet said.

The $20 million pushed the capital-to-assets ratio to about 10.5 from 8.38, according to the bank. The average in the S&P SmallCap Banks Index is 8.69.

Before the recession, regulators generally wanted banks to maintain capital ratios of at least 8, said Nicholas Ketcha, former director of supervision at the Federal Deposit Insurance Corp. He’s now a managing director at Liberty Corner, New Jersey-based FinPro Inc., a bank consulting firm.

In this environment, a ratio of 10 or more is considered sound, Ketcha said.

Net income at MidSouth fell to $1 million in the fourth quarter from $1.9 million a year earlier. Nonperforming assets, or loans whose payments are at least 90 days overdue, climbed to 1.17 percent of the total from 0.35 percent. The increase was largely the result of a commercial real estate loan in Baton Rouge, Louisiana, that stopped accruing interest, the bank said.

Balance Sheet Risk

The average rate of nonperforming assets for companies in the S&P SmallCap Banks Index was 1.93 percent.

While one way to boost borrowing is to lower standards, bank examiners are insisting that loan officers be more prudent than ever, Cloutier said. Bankers are wary of increasing bad loans in any event, said Hage, the South Dakota banker.

“We’re not going to put our balance sheet more at risk for the sake of public policy,” Hage said.

Federal regulators are stressing both prudence and increased lending, not one or the other, said Steve Fritts, associate director of the FDIC’s risk management policy and examination oversight branch in Washington.

“We don’t believe they’re mutually exclusive,” Fritts said. “They go hand in hand.”

To Cloutier, that sounds like a mixed message.

“If the regulators want me to wash a car, I’ll do it,” he said. “I’ll go out to the parking lot and get to work. Just don’t let me guess which car I have to wash and how I have to do it.”

To contact the reporter on this story: James Sterngold in Los Angeles at Jsterngold2@bloomberg.net

Last Updated: February 12, 2009 00:01 EST