Bank Does Big Business With Small Businesses : Times Are Good for Leading SBA Lender in County
Small business loans are proving to be a big business for San Diego-based Bank of Commerce, a relatively small institution that was the county’s largest--and the nation’s 21st largest--Small Business Administration lender during 1988.
Bank of Commerce, whose assets total $86.1 million, handled a record 66 SBA loans totaling $14.7 million during 1988 in San Diego County. The San Diego County Certified Development Commission, a governmental agency, arranged 46 SBA loans totaling $13 million for local companies during 1988, and ITT’s Small Business Finance subsidiary handled 31 loans valued at $7.7 million.
Twelve other banks and non-bank institutions in the county also handled at least $1 million in SBA-guaranteed loans. Bank of La Costa, Torrey Pines Bank, Southwest Bank and Bank of Southern California are among the local banks showing increased interest in SBA lending.
Guaranteed Up to 90%
The SBA, a federal agency, guarantees loans made to small businesses that have been turned down by traditional lending sources. Private lenders make the loans, which are guaranteed up to 90% by the SBA. Loans are used for working capital or to purchase new equipment and plant.
Nationally, “there’s been an explosion of interest,” according to Tony Wilkerson, a Stillwater, Okla. bank executive who is president of the National Assn. of Government Guaranteed Lenders.
Previously, “many lenders weren’t interested in the program because, during the early Reagan years, there was an attempt to kill the SBA,” Wilkerson said. And, up until the early 1980s, SBA lending had a well-deserved reputation as “a loan of last resort, something that was not very attractive,” Wilkerson said. “Only now are they seeing SBA lending in a positive light.”
Nationally, SBA lending’s newly polished image has led the NAGGL to predict that customer demand for loans will--for the first time this decade--eclipse the agency’s loan-guarantee allocation. “Last (fiscal) year lenders used 99.9% of the loan guarantees,” Wilkerson said. “This year we’re betting that (SBA loan demand) will be $500 million to $700 million beyond the $2.4-billion loan guarantee allocation.”
SBA now boasts that more than 80% of the program’s loans are current. In San Diego, the currency rate is 88.1%, according to SBA District Director George P. Chandler Jr.
There are several reasons why banks and non-bank institutions find SBA loans to be attractive.
To start, a relatively small--but well-trained--SBA lending staff can generate a hefty chunk of an institution’s income, Wilkerson said.
Bank of Commerce, for example, dedicates a third of its financial assets and staff to SBA lending--but the SBA department generates half of the bank’s gross income, according to Bank of Commerce President Peter Davis.
Bank of Commerce last month reported $1 million in net income during 1988, which was up from $319,000 during 1987. Davis credited the bank’s SBA lending program for a hefty portion of that record net profit.
Smaller institutions seem to be especially attracted to SBA lending programs, in part because the federal government’s guarantees “help expand your lending capacity,” Davis said.
But not all small institutions are guaranteed to find profitability. “We’ve been in this for 10 years, and we’re finally an overnight success,” Davis remarked. “It takes a particular talent and knowledge of the regulations--along with a commitment from the president and board of directors to be successful.”
Leading Department in Bank
Bank of La Costa, which began making SBA loans three years ago, did so because “we’re primarily a small-business lending institution and (SBA lending) was a great way for us to enhance our capability,” according to Bank of La Costa Vice President Teri Bilyea Hudson.
The SBA department is the smallest department at the bank, “but we produced more loans than any other department,” Hudson said, adding that, of the total loans made by the bank last year, 17% were SBA loans. About 8% of the bank’s gross income was generated by the SBA loan program.
Loan servicing charges contribute to SBA lending’s appeal. But the growing secondary market for government-backed SBA loans is the most attractive feature, Davis said. “We can sell these loans for a premium in the secondary market because of the federal government’s guarantee,” Davis said.
According to figures supplied by the NAGGL, more than 6,000 loans totaling more than $1.2 billion were sold on the secondary market during 1988, a 16% increase over the 5,300 loans totaling $994 million that were sold during 1987.
But not all SBA loans are sold in the secondary market. When the economy recently soured in Oklahoma, Wilkerson’s bank held onto its SBA portfolio because “it provides you with a tremendous bit of liquidity,” Wilkerson said.
A handful of non-bank lenders--including ITT’s Small Business Finance Corp. and the Sacramento-based Money Store Investment Corp. also are involved in SBA lending. Those institutions entered the market during the early 1980s when Congress allowed 16 non-bank institutions to make SBA loans.
“We see ITT Small Business Finance as a growing entity with a bright future,” said Ken Newton, a St. Louis-based spokesman for ITT.
ITT Small Business Finance makes non-SBA loans, but the federally guaranteed program is by far the largest business for the ITT subsidiary, Newton said.
SBA lending, however, is not for everyone: Bank of America’s 18 branches in San Diego County made only eight SBA loans totaling $2 million during 1988. Overall, Bank of America’s 1,000 branches made only 82 SBA loans totaling $21 million.
“You have to have a high tolerance for documentation and regulation,” said Hudson, who spent 10 years with the SBA before joining Bank of La Costa. “Just giving a customer a brochure won’t work because you have to handle things for them within definite time constraints.”
