Sometimes you get a second chance.
First Savings Financial Group in Clarksville, Ind., found that out when it hired a team of Small Business Administration lenders it had passed on a few years earlier.
The $840 million-asset company is starting to generate strong returns from the hiring. It is the top 7(a) lender in Indiana after just two years in the business. From October to March, its bank generated $1.8 million in revenue from selling the guaranteed portions of 7(a) loans — the driving force behind a 38% surge in first-quarter earnings from a year earlier.
SBA lending is gaining traction with more thrifts, such as First Savings, that want to diversify revenue and earn more fee income. The $6.1 billion-asset Dime Community Bancshares in Brooklyn, N.Y., became the latest to jump in by hiring a veteran banker to create an SBA lending division.
First Savings in many ways got lucky. Management demurred in 2011 when Quadrant Financial, run by John Handmaker and George Vredeveld, was looking to sell the firm and its $350 million-asset loan book. First Savings determined that the business was too risky; Quadrant sold itself to CertusBank in Greenville, S.C., less than a year later.
As the former Quadrant's legacy loans continued to perform well, Larry Myers, First Savings' CEO, and Tony Schoen, the company's chief financial officer, began to second-guess the decision to pass.
“We talked about it a number of times and we definitely felt some heartburn,” Schoen said.
Then fate intervened.
Certus imploded in 2015 for reasons unrelated to its SBA operation, which was sold to BankUnited in Miami Lakes, Fla. Handmaker and Vredeveld, unsatisfied with the turn of events, approached First Savings and hammered out a deal to form a joint venture called Q2 Business Capital.
So far it has worked out at First Savings, which aims to transform itself from a consumer-oriented thrift to a commercial lender.
Michael Diana, an analyst at Maxim Group, says the SBA operation’s earnings potential is a main reason he is bullish on First Savings. The company should benefit this year from a "continued material contribution" from SBA loan sales, he wrote in a recent note to clients.
First Savings has eight business development officers who seek out opportunities across the Midwest and Southeast. The effort has helped the institution diversify fee income beyond its mainstays of mortgage sales, charges tied to deposit accounts and bank-owned life insurance.
“We’ve always considered ourselves an entrepreneurial bank, but our noninterest income was pretty anemic,” Schoen said. “We strategically decided to seek additional sources.”
SBA lending has become an increasingly popular business even though industry consolidation reduced the number of bank participants last year by about 3%, to 1,791 institutions. Overall volume, however, is on pace to meet or exceed last year’s activity, when a record $24.1 billion in 7(a) loans were originated.
Several other banks, including State Bank Financial in Atlanta, Radius Bank in Boston and Gulf Coast Bank & Trust in New Orleans, have also made significant investments in their SBA operations in the last year.
Dime, SBA's latest entrant, is eager to start lending in New York, which BizCredit recently named the nation’s best city for small businesses. Dime, which plans to seek preferred-lender status, just hired Robert Dwyer as its head of SBA lending.
Brooklyn and Queens are “really kind of ripe” for SBA lending, said Kenneth Mahon, Dime’s president and CEO. Dime could eventually expand beyond New York, but now its focus is on getting Dwyer's operation up and running as soon as possible.
“I was in a meeting with about two dozen of our branch managers recently,” Mahon said. “When I spoke to them about the fact that we were getting into SBA lending … the heads were nodding. I realized these people have been getting asked this [product] for a while and we haven’t had the ability to service those customers.”