When First Union Corp. executives talked up the acquisition of First Fidelity Bancorp. in the summer of 1995, they bragged about an expanded midsize business market and opportunities to tap the wealth of the Washington area.

But no one at First Union described small-business banking in its new six-state Northeast territory as a high point. The region is hardly a hotbed of economic growth.

Despite this, First Union's rejuvenated Northeast small-business lending operation has become a lesson in finding opportunity in unexpected places.

After the acquisition, The Charlotte, N.C.-based bank consolidated First Fidelity's three small-business offices into a regional office in Philadelphia last spring and cut staff by 20%.

Since then, the average size of small-business-loans has increased from $46,000 to $84,000, applications have gone up from 525 a month to 587 a month, and the approval rate has climbed from 50% to 68%.

The growth in a lackluster region is especially sweet given the challenge of integrating employees from the two banks and adopting new standardized loan procedures.

"I'm impressed with how quickly they have come up," said Martha Hayes, First Union Corp.'s director of small-business banking.

William Dahms, who came from the First Fidelity side, was charged with creating the new division after the merger. As director of First Union's Philadelphia small-business banking office, Mr. Dahms hand-picked his staff of 57 employees from First Fidelity's consumer and commercial divisions.

The Philadelphia staff went through a two-week training session in new technology and lending procedures in which they were paired with employees in First Union's Charlotte and Tampa offices.

"That helped us feel like we weren't the lone ranger up here, trying to do everything on our own," Mr. Dahms said.

The division's 57 employees, who receive performance-based commission, now work in slacks and talk to customers using telephone headsets, similar to those worn by telemarketers.

Signs reading "Can they hear the smile in your voice?" paper the office. The screen saver on Mr. Dahms' computer scrolls "We are the premier small business solution." His office E-mail messages automatically carry his mantra "legendary customer service."

Competitors have taken notice. "They have been very aggressive," said Richard DiLorenzo, chief credit policy officer for $1.5 billion-asset Firstrust Bank in Philadelphia. Mr. DiLorenzo was previously executive vice president and chief credit officer at First Fidelity Bank, Philadelphia.

. "They are trying to penetrate the market by lowering the credit terms and the pricing," he said.

Nevertheless, Ms. Hayes said First Union's greatest competition in small business lending comes from the community banks that can cut prices to maintain business relationships.

"In the next few years, we will all compete on price and we are looking to be one of the cheapest providers," Ms. Hayes said.

While the First Union's northeast region is gaining ground, it still lags behind the areas served by the bank's offices in Charlotte and Tampa.

The average small-business loan size in First Union's nine-state Southeast territory is $96,205, up from $87,888 last year. Between them, the offices receive an average of 1,433 loan applications a month and approve 72%.

But Ms. Hayes said she is pleased with the progress in the northeast.

"The northeast has been though a downturn and they are on the upswing now," Ms. Hayes said.

That's phrasing it politely.

Companies in the Northeast have replaced workers with modern machinery, moved operations to warmer climates and curtailed their operations in the last decade.

"While the northeast economy has lagged, our objective is to reach harder and sell harder for the businesses that are here," Mr. Dahms said.

While the economic outlook does not bode well for the region, Ms. Hayes said small-business lenders can profit from the corporate woes.

"As large companies downsize, people want to start their own business and be their own boss," Ms. Hayes said.

Connecticut, home to Aetna Life Insurance Co., ITT Hartford Insurance, and United Technologies Corp., was hit by the double whammy of cutbacks in the defense and insurance industries.

As a result, more than 30,000 Connecticut residents became self-employed in 1993 and 1994. Many of them started their own businesses.

"Connecticut, which was almost completely written off a few years ago, is really poised to take off," Mr. Dahms said.

The expansion in small-business lending is not confined to First Union. More than 838 loans for $173.7 million were issued in Connecticut last year under the Small Business Administration's flagship 7(a) lending program.

By comparison, 347 loans for $64.8 million were issued under the SBA loan program in South Carolina, which has a slightly larger population than Connecticut.

Other Northeast banks have mirrored First Union's centralization and use of credit scoring, said Richard Nelson, senior vice president of Waterbury, Conn.-based Webster Financial Corp.

Webster, which has centralized lending and uses credit scoring, competes with First Union. But Mr. Nelson said Webster has an advantage in its market because it is locally owned.

"We're a little less impersonal than someone doing things 150 miles away," Mr. Nelson said. "The customers' preference is clearly to have a relationship with a person and a face."

What it might lack in face time First Union tries to make up for in convenience.

First Union obtains all the information needed from a potential borrower in a 35-minute telephone conversations and offers decisions within 24 hours.

Of course, other Northeast banks as well as Merrill Lynch, AT&T Capital Corp., and American Express are all jostling with First Union to lend to the Northeast's budding entrepreneurs.

"We look at ourselves as competing with all financial services companies, because otherwise they would eat our lunch," Ms. Hayes said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.