More community banks are offering Small Business Administration loans far beyond their local markets, hoping that the income boost outweighs the long-term risk of lending in unfamiliar regions.
Robust demand for SBA loans and a strong secondary loan market have encouraged more banks to expand their SBA operations into far-flung territories. Among the banks that have announced national SBA programs in the last month are United Community Banks (UCBI) in Blairsville, Ga., Hanmi Financial (HAFC) in Los Angeles and Crestmark Bank in Troy, Mich.
For community banks, especially those in low-growth markets where lending opportunities are limited, a nationwide SBA program offers an attractive way to boost income without making a big investment in branches or personnel.
"In the past several months, a lot of small to midsize banks have come to us saying they want to expand their SBA lending to new markets," says Rohit Arora, the chief executive of Biz2Credit, an online loan marketplace. "The key is that they can originate the loans, sell them in the secondary market and get a pretty good fee-based income."
The pipeline of loans is strengthening, says Tony Wilkinson, the CEO of the National Association of Government Guaranteed Lenders. He forecasts SBA loan growth of 15% to 20% by yearend based on surveys of top lenders.
And with double-digit premiums in the resale market, along with expanded government guarantees and inducements, banks are sure to find a crowded field wherever they choose to expand their SBA lending.
This competition means that as they expand their SBA programs nationwide, community banks need to devise targeted strategies for breaking into new markets as well as plans for minimizing the risk of making loans in unfamiliar locales.
United Community's strategy is to lend in selected industries nationwide, rather than lending broadly across industries in prized geographic markets. The company identified a half dozen niches with strong demand and low default rates the veterinary business, for instance and has built specific underwriting guidelines for each industry that take local economic conditions into account. It then hired lenders that have relationships with borrowers in each industry, and who prospect for new loans through national gatherings like trade shows as well as through referrals from other borrowers.
United Community's chief risk officer, David Shearrow, acknowledges that the national strategy exposes the bank to greater risk, but feels that the historically low default rates of the industries the bank is targeting, along with the government guarantee and the detailed underwriting standards, provide adequate protection.
"If you look at the default risk in some of these [industries], and then you couple that with the SBA guarantee, we feel like it is very compelling from the risk-management side," Shearrow says.
The $7.4 billion-asset United Community hopes that its national expansion of its SBA program, along with its purchase of loans this month from the South Carolina commercial lender Business Carolina, will allow it to originate about $100 million of loans in the next year and a half, Shearrow says. That would mark a vast expansion from the $11.6 million in SBA loans United Community originated in the four quarters through last Sept. 30, the most recent data available.
Hanmi Financial's strategy involves targeting its traditional base of Korean-American clients in regions like the South and the Pacific Northwest that have growing populations of Korean-Americans.
The bank will also focus on entrepreneurs in other minority groups. Hanmi CEO C.G. Kum hopes to originate $25 million to $30 million per quarter in SBA loans, a substantial increase from the $15.5 million it originated in the first quarter.
SBA lending has traditionally been a strength of Korean-American banks, and Hanmi is following the lead of Wilshire Bancorp (WIBC) and BBCN Bancorp (BBCN), which are among the top SBA lenders each quarter. Hanmi poached its new SBA head, Anna Chung, from Wilshire last month; Wilshire responded by hiring Chris Kong away from BBCN to run its SBA program.
The $500 million-asset Crestmark has an even more niche-based strategy: it announced plans this month to offer equipment-financing loans to its existing customers across the country. For Crestmark, an asset-based lender with a national loan platform and clients in 42 states, the move represents a change not in geographic strategy but in its loan offerings.
"We're trying to broaden our value-add with our asset-based clients by being able to use SBA in limited situations for equipment financing," says Martin Blake, Crestmark executive vice president.
A pivotal question for lenders seeking to expand their SBA programs nationwide is how regulators view the out-of-market loans. Lenders say that, while national regulators have been taking a close look at their underwriting practices, they have not objected to geographical expansion.
"Our regulators are supportive, but they want good risk management in place," United Community's Shearrow says.
State regulators, however, can be a different story. "Some lenders have no trouble with their expansions, while others have found that their local regulators have had some concerns," says Wilkinson of the guaranteed lenders association.
On the other hand, a national expansion could offer much-needed geographic diversity for some banks, Biz2Credit's Arora says. SBA 7(a) loans generally performed well in the last crisis, even in regions that were the hardest hit. For banks in states like Georgia, Florida and California, out-of-market SBA loans could help balance their loan portfolios.
"The jury is still out" on whether far-flung SBA loans carries greater risk, Arora says. "If you look at the mortgage meltdown, regulators in 2003 and 2004 encouraged banks to lend in their local footprint, and that caused a lot of problems. But if you take just 7(a) loans, banks have been long able to lend outside their local territory, and those loans had relatively few losses."