A Small Problem

Local banks are being gobbled up at a fast clip, but there's still time to grab credit.

Adds Dr. Michael Lesser, who owns a $6 million specialty veterinary practice in Los Angeles: “I know [large banks] don’t really care. I just want someone who will pretend to care.” He has grown frustrated with Citibank after banking with them for 9 or 10 years, in part because they held up the sale of his wife’s business by forcing him to come up with more than $400,000 in less than a week to replace collateral for a property loan he has with the bank. As soon as a third-party lawsuit involving his real estate is resolved, Lesser plans to roll over his loan to a smaller, more local bank.

Now for Some Good News

Amid the doom and gloom, there is some good news. For starters, banks are jumping on the small-business-loan bandwagon. One measure of that: Small Business Administration lending was up 30% in fiscal 2010, to $22 billion, and the signing of the Small Business Jobs Act in September catalyzed an additional $10.3 billion in loan guarantees (equating to $12 billion in loans) — the largest volume in that quarter on record, according to the SBA.

Banks say the SBA has streamlined the process of applying for the funds, turning around some loans in as little as a week. It has also expanded the definition of “small business” to allow more companies to qualify. The new definition is based on a company’s net income or net worth, rather than revenues. “A company we’re just about to close an SBA loan with does $230 million a year in revenue, and they can still be considered a small business,” says Access National’s Clarke, whose bank closed 55 SBA loans worth $35 million in 2010.

That momentum is likely to continue, thanks to the Small Business Lending Fund that was part of September’s Jobs Act extension. The fund allows qualified community banks with assets under $10 billion to borrow money from the U.S. Treasury at very attractive rates — but rates that rise if the bank does not increase its small-business lending by a sufficient amount. Some of the glow that surrounded the program may have faded, however. The size of the fund was originally announced at $30 billion, but in February, Treasury projected that the total amount disbursed would be $17.4 billion.

While Access National was still deciding in February whether it wanted to apply for the program (applications were due the end of March), Clarke expected many to take advantage of it. As a result, he predicts, “we’ll see community banks heavily promoting loans to businesses in the near-term.”

So what can CFOs of smaller companies do in the current banking landscape? Take the money and run is one answer, meaning that companies could accelerate growth plans to take advantage of the current lending window. They can also look for banks that are structured to fend off unwanted takeovers, such as mutual banks that are “owned” by customers.

In the end, though, the best that finance chiefs may be able to hope for is that big banks get smarter about how they gobble up little ones. “Larger banks have more bureaucracy, but if they really empower leadership of local banks and let them keep that brand identity,” while offering more services and perhaps a stronger balance sheet from which to lend, says Manninen, the combinations “would possibly be a good thing.”

One large recent acquirer, TD Bank, has $175 billion in assets, but prides itself on being organized like a regional bank. The business is divided into eight geographic regions, according to Bill Fink, executive vice president and senior lender, commercial banking, and loan requests generally go through no more than two people before a final answer. “We know there is nothing more painful than a long, long yes,” says Fink.

TD Bank acquired a group of banks in South Carolina and Florida last year and is still in the process of integrating them. Fink says that the takeovers, some of which occurred through FDIC-assisted transactions, are a plus for the region.

“People immediately think of [a takeover as], ‘What does this mean to me in terms of fees?’” says Fink. “But you need to ask, ‘Why is this bank being acquired? Those banks were obviously troubled, and we brought access to new forms of credit [by acquiring them].’”

Alix Stuart is senior editor for private enterprise at CFO.


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