Bank Mergers a Mixed Bag for Entrepreneurs

Can small-business owners find happiness--and a fat credit line--in the coming age of the mega-banks?

That’s what entrepreneurs like Fernando Rosales are contemplating in the wake of this week’s announcement that BankAmerica Corp. and NationsBank Corp. plan to merge to form a coast-to-coast banking leviathan.

The Huntington Park businessman has kept an account for 24 years with BofA, where he says he has obtained several loans to boost his business of providing legal and professional services to recent immigrants.

“If they change the management, maybe it will be more difficult to obtain a loan,” the 64-year-old Rosales said. “They might have new requirements.”

Industry watchers say people like Rosales have good reason to be hesitant. While small-business lending has become one of the fastest-growing segments in the banking industry, mergers have proven a mixed bag when it comes to expanding credit opportunities for small fry.

“On the one hand, we’re seeing more and more large banks actively engaged in lending to small businesses,” said Charles Ou, senior economist for the U.S. Small Business Administration’s Office of Advocacy. “But for small borrowers who rely more on relationship banking . . . some mergers have proven troublesome.”

The good news for California’s entrepreneurs is that small-business lending has never been hotter, thanks to a strong economy and increased demand by the nation’s credit-hungry small firms. The most recent data compiled by the Office of Advocacy reveals that U.S. banks had a record $184 billion in small-business loans on their books as of June 1997. That’s a 7% increase over 1996, despite a 3.9% decline in the number of banks in the same period due to mergers and acquisitions.

Of the nearly 9,300 financial institutions represented in the data, the 57 largest bank holding companies accounted for 37% of the loans. The number of loans outstanding jumped 25% from the previous year, driven mostly by loans under $100,000.

Economists attribute much of that growth to new computerized lending techniques that have allowed big banks to make small loans whose administrative costs would have proved prohibitive just a few years ago. The process, known as “credit scoring,” is patterned on consumer lending and uses factors such as credit history to determine if a borrower is a good risk. Both BofA and NationsBank use the technique.

Experts say the ratio of small-business loans as a percentage of the entire loan portfolio typically declines as banks merge and grow larger. Still, cost efficiencies gleaned through credit scoring will likely encourage big banks such as BofA and NationsBank to keep increasing those loans--at least in absolute dollar terms, according to Joe Peek, an economics professor at Boston College who has studied the effects of mergers on small-business lending.

“There is no reason for them to pull back in that area,” Peek said. “In fact, they may be able to ramp up their operations and make it even more cost-effective.”

The problem, says Peek and others, is that small businesses that don’t fit the computerized criteria may find it tougher to get credit as banks consolidate. That’s particularly worrisome for minority-owned businesses whose track records may differ from the norm, says George Bivins, chairman of the Black Business Assn. of Los Angeles.

“If your application doesn’t fit the profile, it’s thrown out,” Bivins said. “You don’t have a relationship with a person who can override the decision of a computer.”

California’s small community banks are hoping to capitalize on that kind of angst in a bid to win new customers following the latest mega-merger. Indeed, a Federal Reserve Board study shows that bank mergers tend to stimulate lending activity among competing institutions eager to pick up good borrowers who have been turned down--or turned off--by the big guys.

“This merger is good news for our members,” said Nancy Sheppard, executive director of Western Independent Bankers, a trade group representing 250 community banks in California and eight other Western states. “As the big get bigger, there are certain segments of the marketplace that decide they don’t want to deal with that kind of environment anymore.”

But activists say small banks and other financial service competitors can’t replicate the community reinvestment clout of a big shot like BofA.

Robert Gnaizda, policy director for the San Francisco-based Greenlining Institute, says BofA “has generally been a leader in investing in the community in California.” Just last year, the bank announced a 10-year, $140-billion community reinvestment initiative, $80 billion of which is earmarked for California’s small businesses.

With the headquarters of the merged institution set to move to NationsBank’s North Carolina home, Gnaizda fears that community focus also will move east.

Other small-business advocates predict just the opposite, noting that banks such as BofA and Wells Fargo have rolled out new small-business initiatives in order to curry favor with regulators in previous mergers.

“I think we could see millions in additional funds made available for [California’s] small businesses,” said Scott Hauge, chairman of the California Small Business Assn. “We’ll likely see more money, not less.”

BofA spokeswoman Lisa Margolin-Feher said it’s too soon to tell whether the merged bank’s small-business lending unit will remain headquartered in Pasadena or be relocated to North Carolina. But she didn’t waver in affirming the bank’s commitment to small-business lending. SBA Office of Advocacy data show that BofA had $2.3 billion in small-business loans on its books as of June 1997.

“It’s safe to say that we’ll still have a huge commitment to lending to small businesses,” she said. “I don’t see that priority changing.”

Local entrepreneurs such as Manuel Aguilera will be watching intently to see.

Aguilera is co-owner of Musica Caliente with his wife, Lilia. The Bell-based music shop sells everything from banda CDs to electronic keyboards. Aguilera is no fan of the proposed merger. He fears the union with NationsBank will bring unwelcome changes to his BofA branch next door to his shop, where he has had a business account for two years.

“I’m concerned they’re going to bring in new people, new regulations, new requirements,” he said.

Still, he says, he’s so pleased with the service and convenience of banking at BofA that he’s reluctant to shop for a new bank just now.

“I’m going to wait and see what happens first,” he said.

Freelance writer Stephen Gregory contributed to this report.