Hundreds of community banks make Small Business Administration loans, but for the vast majority they are little more than a sideline.
That is not the case at Unity Bancorp Inc. in Clinton, N.J. The $600 million-asset company originates more SBA loans by dollar volume than it does conventional commercial loans, and SBA loans make up nearly 20% of its loan portfolio.
Now Unity is ready to test new waters. It plans to open an SBA loan production office on New York's Long Island - one of the nation's biggest small-business marketplaces - by yearend.
It would be Unity's first office outside the five central New Jersey counties in which it operates, and president and chief executive James A. Hughes said it might open several more SBA loan offices if the one on Long Island succeeds.
"This will be a test office to see if this makes strategic sense in the future," he said at an investor conference in Philadelphia this month.
Mr. Hughes joined Unity in 2001 as chief financial officer when it was losing millions of dollars as a result of a hasty and ill-conceived expansion. The clean-up effort included shedding a number of branches and selling Unity's mortgage company, but the SBA unit, one of the few bright spots at the time, was left alone.
The SBA unit has been run by Michael Downs, Unity's executive vice president and chief lending officer, since the late 1990s. Under his leadership Unity was one of just 14 banks with less than $1 billion of assets to make more than 100 7(a) loans during the government's 2005 fiscal year, which ended Sept. 30. The 7(a) program is the SBA's largest.
Of those 14 banks, only two had a higher dollar volume of 7(a) loans than Unity, which made $86 million worth - some of which it kept and others it sold on the secondary market.
The company retains the servicing rights on the loans it sells, and that has created another source of revenue. Alan J. Bedner, Unity's chief financial officer, said its servicing generated $1.1 million of revenue in the first nine months of the year.
SBA lending is growing markedly nationwide. The dollar volume of loans guaranteed by the SBA went from $16.9 billion in the government's 2004 fiscal year to $19 billion in fiscal 2005. It is expected to top $22 billion in the current fiscal year.
In New Jersey the SBA approved $706 million of loans in fiscal 2005, up 17% from fiscal 2004.
Robert Kafafian, the president and CEO of Kafafian Group Inc., a bank consulting firm in Parsippany, N.J., said SBA lending is a good fit for community banks because the variable pricing allows smaller lenders to compete on a level playing field with money-center banks. SBA loans cannot be commoditized like home mortgages and car and home equity loans.
"Community banks have all been chasing consumer customers, but one of the parts of the market that offers them the best opportunity" is SBA lending, Mr. Kafafian said.
But there is a downside: an inherent level of risk in lending to start-ups and rapidly expanding firms.
Unity's ratio of nonperforming loans to total loans at Sept. 30 was 1.27%, well above the average for banks its size.
Few of those loans end up as chargeoffs, though. Unity wrote off $968,000 in 2004, but SBA loans were only $320,000 of that total. Through the first three quarters of this year, the company said it charged off $244,000 of SBA credits.
Mr. Hughes said Unity is very conservative in its SBA underwriting. Loan officers have no independent lending authority, and executives, including the chief executive, cannot approve loans of more than $500,000. Any loans larger than that are referred to the company's loan committee.
Unity has made some out-of-market loans, but a good majority of its SBA borrowers are a short drive from Clinton, said Mr. Hughes, who was promoted to CEO last year. Mr. Bedner said that if the Long Island office does well, Unity will probably open additional offices in Connecticut and Pennsylvania.
Obviously, a wider-ranging operation would give Unity the opportunity to make more SBA loans and produce more revenue. Through the first nine months of the year, SBA-guaranteed loans generated $7.8 million of revenue, Mr. Bedner said - more than a quarter of Unity's overall revenue.
The company is also active in the SBA's 504 program, which guarantees large real-estate-based loans.
John Villios, the legal counsel for the New Jersey district's SBA office, said Unity has ranked among the top 10 SBA lenders in New Jersey for the past five years.
Allison B. Randolph 3d, the deputy director of the SBA's New Jersey district, said only a handful of community banks he works with make as many SBA loans as Unity.
"When we look at the numbers, we see that Unity is right up there with banks that are much larger," he said Monday.
