The Small Business Administration’s biggest lending programs continue to defy gravity.
That’s upbeat news for banks, which dominate both.
Loan volume under the agency’s flagship 7(a) working capital program rose by 5% in fiscal 2017 from a year earlier to $25.4 billion. Production under the 504 real estate lending program increased by 6.3% to $5 billion. The fiscal year ended Sept. 30.
It was the third straight record year for 7(a) lending. Since fiscal 2012, volume has increased by nearly 70%, including gains among women and minority borrowers.
More than a quarter of the SBA’s portfolio consists of loans to minorities, Bill Manger, the SBA’s associate administrator, said in an email. “Our lending partners and the strengthening economy have contributed to a healthy loan portfolio and one of the lowest loss rates in SBA’s history,” he said.
Chargeoffs as a percentage of unpaid principal balance was 0.62% for 7(a) loans in fiscal 2017, and 0.34% for the 504 program, according to the SBA.
A number of banks have been expanding aggressively in SBA lending, including Huntington Bancshares in Columbus, Ohio. The $101 billion-asset company cracked into the 7(a) program’s top three lenders after making 4,100 loans totaling $794 million.
“We’re really pleased with the numbers,” said Maggie Ference, Huntington’s SBA group manager. “As we continue to see the economy grow we’re definitely going to continue to see SBA be a very highly utilized tool.”
Michigan and Ohio were Huntington’s biggest markets, accounting for three-fourths of its 7(a) loans and two-thirds of its volume. The company also made $54 million in 7(a) loans in Illinois; it expanded into Chicago in 2016 through the purchase of FirstMerit.
“I think we’re going to see continued growth in [the Illinois] market for years to come,” she said. “For us to bring SBA the Huntington way to that marketplace was a huge opportunity in late 2016. It really started to gain traction in 2017.”
TD Bank also recorded a big increase in SBA lending following a surge of relatively small-dollar loans and a streamlined application process. The U.S. arm of TD Bank Group in Toronto also hired nearly 70 small-business bankers to work with firms that seek to borrow $100,000 or less.
TD Bank made 3,523 7(a) loans for $290 million. Its volume rose 39% from fiscal 2016. The average size of the bank’s 7(a) loans fell to $82,000 from roughly $200,000 a year earlier.
“TD made an effort in 2017 to streamline our loan application, which is designed to better meet the needs of businesses with lending needs up to $100,000, and to educate more business owners about the advantages of the SBA Express loan,” said Tom Pretty, the bank’s head of SBA lending.
Live Oak Bancshares in Wilmington, N.C. — perennially the biggest SBA lender among community banks — remained the nation’s second-biggest 7(a) participant after originating $1.4 billion in loans. That was a 5% increase from the $2.2 billion-asset company’s volume in fiscal 2016.
Other community banks are getting more involved with SBA lending.
SBA originations at Berkshire Hills Bancorp in Pittsfield, Mass., which closed a deal for a national SBA lender last year, rose 25% from the prior fiscal year, to $136 million. In fiscal 2013, the company made just 15 loans under the 7(a) program.
The acquired business, 44 Business Capital, “was a tremendous addition,” said Peter Rice, the $9.6 billion-asset Berkshire’s senior vice president for business banking.
“I certainly see SBA continuing to excel, particularly” at Berkshire, Rice said. “We’ve grown SBA every year since 2013 with 20% to 30% increases every year. … I’d go so far as to say that the product that we’re best known for is the 7(a). It attracts deeper relationships, stronger balances in deposit accounts, and local communities really embrace it.”
Fulton Financial in Lancaster, Pa., has also expanded its SBA lending operations since hiring a team of SBA lenders led by Lynn Ozer, a past chair of the National Association of Government Guaranteed lenders, in late 2015. Under her leadership, the $20 billion-asset company centralized an SBA operation that had been dispersed throughout its six banking units.
The company closed 84 loans under the 7(a) program totaling $72 million and broke into the ranks of the top 100 7(a) lenders.
“We interact with all of the other members of the bank, but we do the lending,” said Ozer, Fulton’s president for SBA lending. “It’s all handled and processed centrally and underwritten separately.”
Despite recent growth, Fulton has no plans to expand its SBA platform regionally or nationally.
“We haven’t taken the let’s-blanket-the-country-with-salespeople” approach, Ozer said. “We just really focus on the communities we serve.”
Not every bank posted stronger numbers.
Wells Fargo, which remained the nation’s biggest SBA lender, suffered a 37% decrease in loans to 5,446, and an 11% decline in volume to $1.8 billion.
Many community banks remain averse to the SBA’s programs.
A recent survey of about 600 community banks found that 30% avoid SBA lending; another 54% “rarely” participate in the agency’s programs. Respondents cited a long, cumbersome process; too much competition; and the Consumer Financial Protection Bureau’s proposed data-collection rule for small-business loans as reasons to avoid making SBA loans.
Ference said banks that pass on SBA lending may be overlooking a powerful tool.
"SBA is some of the most patient capital a small business can ever [access]," she said. "This is obviously a preferential product."
While volume has been trending upward, consolidation has taken a toll on the number of SBA lenders. In fiscal 2017, 1,978 institutions put at least one new 7(a) loan on their books. Five years ago, 2,344 lenders fit that description.
Banks, however, still make up the clear majority of 7(a) lenders, occupying 189 of the SBA’s top 200 slots for fiscal 2017. And bankers such as Ference and Ozer predict their institutions can continue to make more loans.
“The economy has been good,” Ozer said. “Our pipelines have been good. Indications are we will [continue] growing.”