Bigger doesn't always mean better.
That is the lesson learned by Unity Bancorp in Clinton, N.J., which has no plans for a large out-of-market expansion of its small-business lending operations.
To be clear, Small Business Administration lending has been very good to the $1.1 billion-asset Unity. The company earned $1.1 million in the second quarter from the $80 million of SBA loans on its books, on top of another $637,000 from $7.2 million in 7(a) loans it sold on the secondary market.
While the business has been a huge asset, James Hughes, Unity's president and chief executive, said he has no plans to advance beyond central and northern New Jersey and New York City. Unity ended 2015 as New Jersey biggest SBA lender, originating $41 million in 7(a) loans during the agency's fiscal year, which ended Sept. 30.
"We're finding all the opportunities we might want" close to home, Hughes said. "We're happy where we are. We have the right team and the right level of expertise."
Unity's self-limiting strategy stands in sharp contrast to the expansive course a growing number of banks are charting.
Cascade Bancorp, already a significant SBA lender in Oregon and Idaho, recently announced plans to enter the Seattle area. Huntington Banchshares in Columbus, Ohio, is eager to make a similar move into Chicago once its acquisition of FirstMerit in Akron, Ohio, closes.
Hughes, however, knows firsthand how an out-of-market expansion can backfire.
Starting in 2007, Unity rapidly extended its reach with SBA products, opening loan-production offices in Florida, North Carolina, Chicago and suburban Washington, D.C. It was forced to switch gears abruptly about a year later, when the financial crisis triggered sharp deterioration in the performance of Unity's SBA portfolio.
By late 2010, nearly 11% of the 7(a) loans on Unity's books were nonperforming, according to regulatory filings. Those levels had fallen to 4.5% by the end of 2015.
Unity is by no means the only bank to have struggled with out-of-market lending during the financial crisis.
RBC Bank in Raleigh, N.C., was stung during the housing bust by loans it made to home builders in California and Atlanta. Royal Bank of Canada eventually sold its U.S. unit to PNC Financial Services Group in Pittsburgh in 2012.
Just before the financial crisis, Reliance Bancshares in Frontenac, Mo., opened loan production offices in Phoenix and Houston, as well as a thrift in Fort Myers, Fla. When the economy turned sour, the expansion strategy blew up, leading to significant losses and a change in management.
The $1.2 billion Reliance, now led by Chairman Thomas Brouster, has long since regained its footing, earning $3.8 million through the first half of 2016. Reliance now markets itself as "Proudly to Be Local."
Unity also prefers to keep it local so it can work with clients — and communities — that it knows well. "There's no substitute for meeting borrowers, being familiar with markets and seeing properties in person," Hughes said.
That mentality makes perfect sense to Ted Peters, chairman and chief executive of Bluestone Financial Institutions Fund and a former longtime chairman and CEO of Bryn Mawr Bank in Pennsylvania.
The 7(a) program's exploding popularity might obscure the risks involved, Peters said. In addition to potentially losing nonguaranteed portions if loans go bad, banks also stand to lose their entire investment if loans facing liquidation were poorly documented or serviced improperly.
"There's an old line from the musical 'The Music Man':'You've got to know the territory,' " Peters said. "Countless banks have expanded outside theirs and gotten hurt."
Hughes said that, at the end of the day, he is reluctant to consider major changes in strategy, particularly while Unity's current blueprint is doing so well.
"The bank is as strong as it ever was," he said. "I don't see anything knocking us off track."