Banks are positioning themselves to tap into a wave of small-business optimism.

Surveys of small-business owners show an increasing level of confidence and commercial-and-industrial lending is up. The Small Business Administration’s 7(a) loan guarantee program seems poised for a fourth consecutive record year.

To capitalize, banks are investing in technology to make faster loan decisions. They are also hiring more lenders to better serve this segment. Now, bankers and other industry observers are hoping it all leads to increased earnings.

Small-business lending “is up across the board,” Maggie Ference, Huntington Bancshares’ Small Business Administration program director, said in an interview this month. “We’re seeing growth. We’re seeing expansion. We’re seeing second locations and third locations being opened.”

The SBA’s 7(a) program has guaranteed $18.2 billion of loans so far this fiscal year. Though that is up a modest 1.2% from a year earlier, the program appears to be gaining momentum recently. Through the first three weeks of June, 7(a) guaranteed $2 billion of loans, a 25% increase from the same period a year earlier.

“We don’t see the underlying demand slowing down in this space at all,” said Jim Fliss, national SBA manager at the $138 billion-asset KeyCorp. “When we look at the overall 7(a) volume, we’ve seen record levels for three straight years and 2018 is on pace for another solid year. Our pipelines are good, our applications are strong, and businesses are moving through the process.

The National Federation of Independent Businesses Small Business Optimism Index reached 107.8 in May, the second-highest level in the survey’s 45-year history behind July 1983. TD Bank said that nearly half of the 578 small businesses it surveyed planned to seek credit in the next 12 months, up from 21% last year.

Federal Reserve data on C&I loans also points to more lending, according to a June 15 research note published by Hovde Group. C&I loans for all commercial banks were up 1.3% for the quarter through May.

“This is the second highest quarterly growth rate over the past two years and nearly double the average quarterly increase of 0.7%,” the Hovde research note said.

While the industry will have to wait a few more weeks for banks to begin reporting second-quarter earnings, analysts and many bankers say the early signs are encouraging.

“It generally seems like C&I has rebounded,” said Brian Zabora, an analyst at Hovde.

Looking ahead at second-quarter results, Zabora pointed to unused lines of credit as bellwether for future growth. If utilization rates begin to tick up, “it could be an indication that optimism is translating into growth.”

Jay DesMarteau, who heads commercial specialty segments at the $313 billion-asset TD, said that businesses “are seeking to grow.”

“They want to take advantage of what they see as an opportunity,” DesMarteau added.

The TD and Huntington SBA 7(a) lending operations have grown significantly over the past two years. The $104 billion-asset Huntington, of Columbus, Ohio, has been hiring small-business relationship managers and SBA development officers, Ference said. TD hired more than 70 small-business bankers throughout its East Coast franchise last year and is planning to add another 25 this summer.

TD is also investing heavily in its digital capabilities, including a new streamlined application for loans of $100,000 or less. TD small-business specialists are making “hundreds of thousands of outgoing calls” to business owners, DesMarteau said. Customers should get at least one call per quarter with the goal of starting a conversation that could lead to a branch visit.

"That gives us more time to have high-level conversations,” DesMarteau said. “If you can be there as a trusted adviser, I think you differentiate yourself. If we’re advising them, at the right point in time, they’ll apply for a loan.”

The strategy appears to be working. TD, which is based in Toronto, closed roughly 2,200 loans totaling $155 million through the 7(a) program from October to March, the first six months of the agency’s 2018 fiscal year, according to the SBA. Huntington, which is the nation’s No. 1 SBA lender, had about 2,300 deals totaling $447 million.

Those numbers put both banks on pace to surpass the record numbers of 7(a) loans they approved in fiscal year 2017.

“Consumer optimism is continuing to translate into additional lending and additional business solutions,” Ference said. “Customers are bullish. We’re definitely seeing things like expansion and acquisition and growth, a lot of construction.”

Like TD and Huntington, Key is adding to its 7(a) headcount while improving its online capabilities. Earlier this month, the Cleveland company bought Bolstr, an 8-year-old digital lending platform it believes will allow it to streamline its application process and deliver credit decisions more quickly.

“Ten years ago, even five years ago, things like rate and fees and terms and conditions were the most important things to get right," said Jamie Warder, Key's head of business banking. "I still think it’s very important that you get those right. But now, we just see more and more clients choosing who to do business with based on ease and speed.”

While quicker turnarounds should make its SBA division more competitive, Key’s goals for Bolstr are more ambitious. It expects the new technology to help it make more small-dollar 7(a) loans.

"We are really looking to leverage Bolstr so we can extend our great SBA capability into smaller loans more," Warder said. "As you move into smaller loans you want to make sure you’re making it easy. I think making it easy and fast is even more important the more down-market in size you go."

Big banks are by no means the only ones looking to benefit from small-business optimism. The $1.1 billion-asset Sunwest Bank in Irvine, Calif., says it expects to hit its target of originating $45 million in SBA-backed loans in calendar-year 2018. Sunwest entered SBA-lending earlier this year.

“We’re seeing good volume,” said Thomas Chavez, Sunwest's SBA sales manager. “Every month is better than the last.”

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