SBA Loans Help Sherman Oaks Bank’s Business : Profits: American Pacific, which seemed boring in the go-go 1980s, outperforms its local rivals thanks in part to conservative lending practices.
As banks go these days, American Pacific State Bank in Sherman Oaks is downright dull.
It’s not bogged down by speculative real estate loans. Its assets have grown less than 10% annually for the past six years. A typical loan might be $250,000 to a small aircraft parts manufacturer hoping to build a new warehouse or to a car-detailing business in need of better equipment.
But that’s just the way Frank J. Ures Jr., American Pacific’s founder, president and chief executive, likes it. The bank, which seemed old-fashioned in the go-go 1980s, now is outperforming its local rivals thanks to those conservative lending practices and big profits from making U. S. Small Business Administration loans, which account for a quarter of its business.
American Pacific, founded in 1971, lends almost exclusively to small and mid-sized businesses in the San Fernando Valley, and its five branches also provide standard banking services such as credit cards and car loans. With $220 million in assets, the bank ranks sixth in size among banks headquartered from Glendale to Ventura.
“I can look out of my window and see most of our borrowers,” Ures said from the bank’s 16th-floor headquarters. “I’m not really affected by what happens at Lockheed or other major companies. I don’t have that many small consumer loans that if people get laid off, I would feel it.”
As a result, American Pacific’s non-performing loans last year accounted for only 2.4% of its total loans, compared with an average of 4.4% at California banks overall as of Sept. 30, as calculated by Sheshunoff Information Services Inc., an Austin, Tex., banking industry research firm.
And American Pacific’s return on average assets, a key indicator of a bank’s performance, has consistently remained above 1%--which is considered an excellent showing. Among the nine largest banks and savings and loans in the Valley and Ventura County, American Pacific was the only bank in the third quarter of 1991 to have an ROA above 1%. (The ROA is calculated by dividing a bank’s profit by its average assets.)
“They run a pretty tight ship managing their non-interest costs” such as overhead expenses, said Gerry Findley, editor of Findley Reports Inc., an Anaheim banking research firm. Because of the bank’s experience with SBA loans, “they eliminate the problems upfront. They don’t go ahead and book something and have problems later on.”
American Pacific has not always been so cautious.
Beginning in 1978, the bank went on a growth binge, and its assets grew by an annual average of 48% for four years. “We got a bit carried away with success,” Ures recalled. “It was almost impossible to make a bad loan.”
But between 1983 and 1985, it had $4.7 million in loan losses because of a raft of risky small business and real estate loans, which contributed to a $1-million loss in 1984. That left Ures with no choice but to clean house, and the bank has been profitable ever since.
Last week, as banking giants Wells Fargo & Co., Security Pacific Corp. and Citicorp reported big losses, American Pacific announced modestly higher 1991 earnings--$2.15 million compared with $2.1 million the previous year. But its fourth-quarter profit dropped 18% to $535,021--due to a $300,000 allowance for loan losses--which ended the bank’s 27-quarter streak of higher earnings.
Ures said the higher loan-loss provisions were precautionary and did not reflect problems with specific loans.
But even if American Pacific ran into bigger loan troubles, it would be better off than other banks because its SBA loans are guaranteed by the federal government.
Indeed, American Pacific today is one of the nation’s biggest providers of SBA loans. It handled $32 million of such loans last year, making it the third-largest SBA lender in the SBA region that covers Los Angeles, Ventura and Santa Barbara counties, and it was the sixth biggest nationwide, according to the SBA. (The No. 1 SBA lender in the country last year was the Money Store, based in Union, N. J.)
SBA loans last year made up 25% of American Pacific’s total loans, Ures said, up from less than 5% in 1984. And they accounted for 43% of the bank’s 1991 earnings, up from 25% to 30% in past years.
“When we’re in a significant economic downturn, I just can’t stop feeling good about the numbers that the SBA department has put out,” Ures said. “We have this niche which is critical to independent banking.”
Under the SBA program, the government guarantees up to 90% of a loan for a maximum of $750,000.
Demand for such loans surged last year partly because banks’ tighter credit standards made it difficult for many small businesses to qualify for conventional loans. Also, many small businesses like the long terms of SBA loans--up to 25 years--which permit businesses to make smaller monthly payments.
In the government’s first fiscal quarter, which ended Dec. 31, total SBA loan guarantees surged nearly 27% to $1.1 billion from $863 million a year earlier, the SBA reported.
That has prompted efforts to expand the program, including legislation introduced in Congress on Friday by House Small Business Committee Chairman John LaFalce (D-N. Y.) to give the SBA an additional $1 billion in lending authority this fiscal year.
SBA Administrator Patricia Saiki has also asked the White House to seek additional SBA lending authority.
That’s sweet music to Ures’ ears. Because of its experience, American Pacific has a leg up on other banks scrambling to set up SBA lending departments of their own, he said.
Since 1985, American Pacific has been an SBA-designated “preferred lender,” meaning that it can make and liquidate SBA loans without going to the government for approval.
Thus American Pacific can process SBA loans in as little as 17 days compared with up to eight weeks at banks that aren’t preferred lenders, Ures said.
Ures and others credit the bank’s senior vice president, James E. Whitney, a former SBA senior loan officer, with turning American Pacific’s SBA loan department around.
In 1984, Whitney took a haphazard operation and turned it into a full-time department that now has 14 full-time employees.
“They have a good team of people there that work well together and probably the best underwriter that I know of in the state of California--Jim Whitney,” said Lisa Airhart, senior vice president of sales at Government Securities Group of Texas, a so-called “secondary market” player that buys and sells existing SBA loans and other government securities.
Once processed, the guaranteed portions of the loans are sold to brokers such as Government Securities Group, which in turn package them and sell them to investors, similar to how mortgages are bought and sold.
That’s where American Pacific makes its biggest profits because SBA loans on the secondary market are commanding high premiums thanks to increased demand.
Last year, American Pacific generated a record $1.5 million (before taxes) in the onetime premiums it charges buyers of SBA loans.
“On the 20-year loans, it used to be the best you could get was 4%” in premiums, Ures said. “It’s been building up to 10% over the last three years.”
American Pacific also makes money on the spread between the interest rate its borrowers pay on the loans and what the bank pays buyers of the loans on the secondary market.
Depending on the loan amount and a borrower’s credit history, SBA loans charge between 2 and 2.75 points above the prime rate, which stands at 6.5%.
But American Pacific pays buyers of the loans an interest rate of one point above the prime rate, so it pockets the one- to 1.75-point difference--which last year added up to $621,000 before taxes, Ures said. The money helps American Pacific pay the costs of servicing its SBA loans, he said.
Selling the SBA loans also helps American Pacific quickly refill its coffers to make new loans while avoiding runaway asset growth, a problem that has plagued other banks now paying the price for the easy credit they made available in the 1980s.
As a result, American Pacific has managed to keep its capital--the financial cushion against future loan losses--comfortably above the minimum levels set by banking regulators. (Its core capital as of Sept. 30 stood at 7.31% of total loans, more than twice the regulatory minimum of 3%.)
AMERICAN PACIFIC STATE BANK AT A GLANCE
American Pacific State Bank, headquartered in Sherman Oaks, has had a six-year streak of higher earnings thanks mainly to its Small Business Administration loan department, which has grown from less than 5% of the bank’s business in 1984 to 25% last year.
