This report contains research
prepared by the Office of Advocacy of the U.S. Small Business
Administration. The opinions and recommendations made herein
do not necessarily reflect official policies of the U.S. Small
Business Administration or any agency of the U.S. government.
For further information, contact the Office of Advocacy, U.S.
Small Business Administration, 409 Third Street S.W., Washington,
DC 20416. Published January 1996.
Foreword
The importance of small business to our national economy cannot
be overstated. America's small businesses, some 22 million
strong, employ about 54 percent of the private work force,
contribute 47 percent of all sales in the country, create
two out of every three new jobs and produce two and one-half
times as many innovations per employee as do large firms.
Small firms keep our market-based system efficient and successful;
they keep our nation competitive in global markets. Commercial
banks are important generators of credit to small business:
Bank credit (outstanding as of
June 1995):
Commercial and industrial loans $98 billion
Commercial mortgages $66 billion
Total bank credit $164 billion
(For example, finance company lending to small firms is estimated
at $91 billion. SBA guaranteed lending that is included in
bank and finance company lending is $24 billion. SBA guaranteed
loans in the secondary market are near $10 billion.)
Since commercial banks play such
a vital role in maintaining the health of the small business
sector and the nation's economy, the impact of the increasing
availability of credit and falling interest rates, or the
opposite, will have magnified effects on small firms, as opposed
to large firms. Large firms have options not available to
small businesses such as access to the stock, bond and commercial
paper markets. It is because of the importance of commercial
banks to small businesses' survival and growth that the Office
of Advocacy has undertaken this second study on the lending
behavior of the nation's commercial banks. As with the first
study, published in December 1994, the findings are being
released on a state-by-state basis. Every commercial bank
in each state has been rank-ordered to help depositors and
borrowers have a clearer picture of small business lenders
in their respective states. Two important objectives of this
project are (1) to provide information not otherwise available
in the marketplace to increase competition among lenders for
increased business with the engine that is driving the U.
S. economy small business; and (2) to give small businesses
information about where to shop for credit, as well as information
that may help them negotiate favorable credit terms In doing
this, the SBA's Office of Advocacy is relying on a basic rule
of economics that information rationalizes markets and makes
them more competitive; the more competitive the market, the
more efficient the market will become, providing more and
better quality services. The approach addresses both the demand
and supply sides of the credit market equation.
Numerous requests for the data
published in late 1994 provided significant evidence of the
need for and interest in this information. Bth borrowers and
lenders requested the data, and this interest was reinforced
by the business media. Following release of the study last
year, the Wall Street Journal, and Inc. and Entrepreneur magazines
all did stories on banking, using some of our ideas and concepts.
Entrepreneur magazine published two issues listing the top
banks from our studies. Numerous regional business and local
newspapers, like The Washington Post, also did articles listing
the top banks in their respective communities. It is clear
that the market has no other mechanism to provide this overview
of credit and bank lending patterns, yet such information
can be used profitably by both borrowers and lenders. Subsequent
analysis of the data showed that banks that were small-business-friendly
were more profitable than banks that made few small loans.
This insight casts doubt on the working assumption used by
many banks that loans to small businesses are less profitable.
Comparison of this year s data
with the first study indicates that credit to small firms
has increased by more than $8 billion. This is significant.
While it is too soon to tell how extensively borrowers and
lenders are using the data, it is clear that some large banks
have started providing extensive services to new firms, helping
them with development of business plans, and the gathering
of other necessary information required for loan approval.
This is a welcome innovation and is evidence of an increased
awareness in some banking sectors of a previously untapped
profitable lending market small business.
Some aspects of the credit environment
will need further scrutiny. For example, the Office of Advocacy
will be exploring whether bank merger activity this past year
is having an adverse impact on the availability of bank credit
to small businesses. I would like to thank all who commented
on our research efforts to improve the efficiency of the credit
markets for small loans, particularly the bankers and banking
associations, small business owners and organizations, bank
regulatory authorities, and the House and Senate Banking and
Small Business Committees. Your comments have contributed
to a better understanding of the complexities of the credit
markets.
Jere W. Glover
Chief Counsel for Advocacy
U.S. Small Business Administration
Introduction
New information from the National Survey of Small Business
Finances, jointly funded by the Federal Reserve Board and
the U.S. Small Business Administration s Office of Advocacy,
show how important the commercial banking system is to the
credit needs of small firms.1 For example, two-thirds of all
small businesses that borrow, get their funds from commercial
banks. Twenty-one percent go to finance companies for their
credit needs. Only 14 percent of small-firm borrowers get
their credit needs met by family and friends.
As firms grow, their reliance on the commercial banking system
increases. Of the firms that borrow, the following percentages
obtain their financing from commercial banks:
60 percent of the 0 to 1 employee
firms,
64 percent of the 2 to 4 employee firms,
71 percent of the 10 to 19 employee firms,
87 percent of the 100 to 499 employee firms.
It is crucially important for the health and growth of small
businesses to understand which banks are willing to meet the
credit needs of small firms and which banks invest their resources
elsewhere. Such information will help small businesses shop
for credit and save valuable time.
The total amount of small business
loans (loans under $250,000) outstanding as of June 30, 1995
was $164 billion: $98 billion in commercial and industrial
(C&I) loans and $65 billion in real estate loans. Small
business loans were 20 percent of total loans, 19 percent
of C&I loans and 22 percent of real estate loans. From
1994 to 1995, the number of small business loans increased
by 8.9 percent or 442,441 loans; the dollar amount increased
by 5.4 percent or $8.3 billion. Clearly, the credit market
was expanding. That is good news for all borrowers.
Why are some commercial banks
more small-business-friendly than others? That is a question
for additional research. But what the 1994 research did indicate
is that small-business-friendly independent banks are more
profitable than banks making few loans to small firms. Another
significant finding was that investing in small loans can
be as profitable as investing in any other assets after adjustments
for differences in risk.2
Background to the 1995 Analysis
The United States Congress has mandated that, as part of a
lending institution s call report to federal banking authorities,
information be reported by loan size for loans under $1 million.3
The Congress also mandated that the data be available for
public use and analysis.
Various small loan data the number and dollar value of small
business loans outstanding, the dollar value of small business
loans relative to a bank s total assets, the dollar value
of small business loans relative to total deposits and total
business loans enable researchers to rank commercial banks'
small business lending activities by bank size within each
state. Banks of different sizes rank high in different categories.
For example, smaller banks make a larger percentage of small
business loans, but larger banks outrank smaller banks in
the sheer number and value of small loans (see Table 1).
It is important to note that
the call report data tell only part, albeit an important part,
of the story about lending to small business. For example,
call reports do not contain separate information on SBA-guaranteed
lending activity. Banks that are very active SBA lenders but
sell the guaranteed portion of their loans in the secondary
market are likely to be underrepresented in the rankings since
their call reports contain only information on the unguaranteed
portion of their SBA loans to small business. It is hoped
that future data will provide specific information on SBA-guaranteed
lending activities.4 Also, some banks may be making small
business loans through credit cards, second mortgages, or
other forms of consumer credit. These banks, too, may not
rank high in the listings. Finally, call reports do not reflect
demand conditions; that is, no amount of small business friendliness
on a bank s part will make up for lack of demand or low demand
for small business loans. (A bank without branches may limit
the geographic area of its lending activities to only one
community or part of the state. This appears to be the case
for many top-rated banks.)
Thus, it is difficult to say
categorically which banks are best in lending to small business.
What can be said is which banks are best according to information
presented in the call reports as analyzed in this report.
A major goal of this project
is to provide information for users of banking services to
help them make better-informed market decisions. Entrepreneurs
will see which banks in their communities make small loans;
depositors will be able to determine if their banks provide
small loans to businesses.
Moreover, if banks recognize
that their lending behavior is being monitored by advocates
of small business, their lending attitudes may change and
competition to meet the credit needs of small firms may increase.
Small business owners may find they have greater access to
traditional business loans and can avoid using more expensive
credit card debt or mortgaging their home. The hoped-for result
is that more credit will be available overall to the nation
s small businesses, enabling them to contribute more to the
nation s economic growth.
Attached is a table listing all
the banks in one state and their lending activities to small
business. (For the purposes of this study, a small business
loan is defined as a loan of less than $250,000.) The data
used in developing the table come from the June 1995 call
reports compiled by all federally insured commercial banks
and submitted to the federal regulatory banking authorities.5
Explanation of the Data
In this study, the overall performance of each commercial
bank is based on the sum of the decile value of five variables:
the dollar value of small business loans relative to total
bank assets;
the dollar value of small business loans relative to total
business loans;
the dollar value of small business loans relative to total
deposits;
the dollar value of small business loans; and
the total number of small business loans.
An explanation of the data follows. Readers may find it beneficial
to refer to the sample table on page 9.
Column 1. The summary statistic
found in the first column is an aggregate measure of small
business lending activity, the sum of the decile rankings
found in columns 2 through 6. (A decile ranking is a measure
of where the individual bank falls in the distribution of
the statistic defined by the column. Decile rankings range
from 1 to 10, with 10 meaning the individual bank is in the
top 10 percent of all banks within the state.) A summary statistic
value of 50 indicates that the bank is in the top decile in
each of the five categories. A value of 5 indicates that the
bank is in the bottom decile in each of the categories. The
average value for all states for this statistic is 27 out
of a possible 50.
Column 2. This column measures
the ratio of small business loans to total bank assets. A
ranking of 10 means that the bank is in the top decile of
the state loan-to- asset distribution. The bank has an outstanding
record in lending to small business; it is willing to risk
a larger portion of its assets in small business lending.
If the number is a 2, it means the bank falls in the next
to the lowest decile for this variable, that is, among the
lowest 20 percent of all banks in the state. The conclusion
to be drawn is that this bank has not committed much of its
capital to small loans. The average small business loan-to-asset
ratio for all states is 11 percent (see Table 1).
The highest loan-to-asset ratio
for any bank in 1995 was 66 percent, clearly an outstanding
record in supporting smaller firms. At the opposite end of
the distribution, 75 percent of the banks had loan-to-asset
ratios of less than 1 percent.
Column 3. The third column measures
the decile ranking of the ratio of small business loans to
total business loans. The sample table entry 9 means this
bank falls within the second highest decile. Between 80 and
90 percent of the bank s lending is in small loans. The maximum
value of this ratio is one, meaning that all loans are small
loans of less than $250,000, and this is the case for many
small banks. The average small business loan to total business
loan ratio for all states is 66 percent (Table 1).
Column 4. This column gives the
decile ranking of the ratio of small business loans to bank
deposits. If the number is close to 10, it means that the
bank ranks near the top in reinvesting its deposits in the
community s small firms. Technically, there is no geographical
information about the borrower, but most researchers accept
that if the loan is small, it is more likely to be invested
locally.
The maximum small business loan
to deposit ratio is 75 percent; however, the average is only
13 percent (Table 1).
Column 5. This column shows the
decile ranking of a bank's dollar value of small business
loans outstanding.
Column 6. This column measures
the bank s decile ranking for the total number of small business
loans.
To repeat, the summary statistic
is the sum of the decile rankings found in columns 2 through
6. A summary statistic value of 50 indicates that the bank
ranks in the top 10 percent in all categories of small business
lending (where small business lending is defined as all commercial,
industrial, and commercial real estate loans of less than
$250,000). A value of 5 indicates the bank ranks in the bottom
10 percent in all categories.
Additional Data
Information provided in columns 7 through 12, though not figured
into the summary statistic in column 1, offers additional
data about an individual bank's small business lending attitude
or activities.
Column 7. Here the asset size class of the bank is defined.
The classes are:
Under $100 million
$100 million to under $300 million
$300 million to under $500 million
$500 million to under $3 billion
$3 billion and over
The average decile values of the summary statistic for the
different bank size categories are:
Under $100 million26.8
$100 million to $300 million29.4
$300 million to $500 million28.5
$3 billion and over24.5
Column 8. This column measures how well a bank is doing in
its own asset size class relative to the summary ranking found
in column 1. Thus, a 1 in this column means that the bank
ranks first in its asset size class. A 10 means that it ranks
10th in its asset size class. The number of banks in each
asset size class can be found at the end of this report. The
total includes all commercial banks filing call reports.
Columns 9 and 10. These two columns
list measures of the dollar amount of small business loans
in thousands (column 9) and the number of small business loans
made by the bank (column 10) for loans of less than $100,000.
Columns 11 and 12. Displayed
here are two additional decile rankings of loan-to- asset
ratios: column 11 shows the ratio of loans under $100,000
to the bank s assets; and column 12 displays the ratio of
loans under $1 million to the bank s assets.6 This information
allows a small business to find a bank that ranks high in
the desired loan size category. A firm looking for a $50,000
loan might be better served by banks making more loans under
$100,000 than a bank concentrating on $1 million loans.
Column 13. This column is the
decile ranking for the ratio of total small business and small
agricultural loans (under $250,000) to the bank s total assets.
Limitations of the Study
Call reports tell only part, albeit an important part, of
the story about bank loans to small business. For example:
-- Banks may provide lines of credit to small firms in their
region. If the line of credit is not drawn upon, a small loan
would not show up in the call reports
-- A bank may issue consumer
credit cards to small firms with the idea that the cards should
be used for working capital, to buy office equipment, or as
lines of credit.
-- A larger bank may send the
small business owner to its consumer loan division; then the
loan would not be recorded as a business loan.
-- A larger bank may send the
business person to a subsidiary finance company. In that case,
the loan would not be recorded in the bank s call report.
SBA loans that are sold in the
secondary market will be recorded in the number of loans.
However, only the non-guaranteed amount of these loans will
be included in the dollar value of small loans in the call
report.
Loans to small businesses are
often made in the form of a second mortgage on the business
owner's home. Many business owners use personal credit or
home equity loans for business purposes. Again, these would
not necessarily show up as small business loans in the call
reports.
The call report data used in
the attached tables are all that is available to the public
at this time but provide useful information for both lenders
and borrowers. As more precise information is available, it
will be released so that depositors and borrowers can make
more informed decisions about which local banks are small-business-friendly.
Discussion
There are debates among researchers on how best to measure
which banks meet the needs of small business. One debate revolves
around whether to use a single statistic like that found in
column 2 or in column 4. A ranking of banks according to the
small business loan-to-asset ratio (column 2) will show small
or medium-sized banks dominating the listings. If the ratio
of loans to total loans (column 3) or the ratio of loans to
deposits (column 4) is used, a different set of smaller banks
is likely to dominate the ranking. A rank order of the banks
by either the value of small business loans (column 5), or
the number of small business loans (column 6), will tend to
be dominated by large banks.
What is clear from various bank studies is that all banks,
regardless of size, are important in satisfying the lending
needs of small firms. In adding up the decile rankings of
all five categories it is assumed that all are equally important
in meeting the lending needs of small firms. And indeed a
bank s rank may well change if additional statistical data
are added or deleted.
To help analysts, a broad range
of data has been included so that users of the tables can
create a set of rankings that suit their individual needs.
For example, if a small business needs the services of a large
bank, the rankings in columns 5, 6, or 8 may be the most appropriate
ones to consider.
In addition, there is a debate
over whether national rankings should be used, as opposed
to the state rankings found here. While it is true that large
business borrowing and large bank lending take place in national
or regional markets, small business borrowing is normally
in a local marketplace. It therefore seemed appropriate and
more useful to users of the information to use rankings within
states.
Future Activities
Future research will explore how bank mergers and acquisitions
are changing the availability of loans to small business.
The bank profitability study of 1995 (see note 2) will be
updated. In March 1996, the Office of Advocacy will release
information on the banks that most improved their rankings
between the call reports of 1994 and 1995.
Suggestions on how to improve the analysis are welcome. Send
comments to the study director, Dr. Robert E. Berney, Chief
Economic Advisor, U.S. Small Business Administration, Washington,
DC 20416; telephone (202) 205-6926; fax (202) 205- 6928.
Conclusion
For the second year, the Office of Advocacy is releasing its
analysis of call report data on the lending activity of some
10,000 individual commercial banks. The information is catalogued
on a state-by-state basis to enable depositors and borrowers
to make better decisions about banking services in their respective
states. The goal of the study is twofold: (1) to improve the
efficiency of the commercial banking credit markets, which
will make more credit available to small business borrowers.
Knowing that some successful banks are actively making small
loans to small businesses should encourage other banks to
compete for the small loan customer; and (2) to give small
businesses information they can use to find a bank willing
to meet their credit needs. The study provides information
in a composite format that allows both lenders and borrowers
to compare bank performance a comparison that is not otherwise
available in the marketplace.
Reactions to the Banking Study
We appreciate your planned press release for banks such as
ours. A joint effort utilizing our resources, and yours only
helps ensure that we reach our targeted market.
First National Bank of Bar Harbor, Bar Harbor, Maine
All too often, the bad news receives the attention in the
media. We appreciate your agency's efforts in seeking to identify
means by which the positive news can be recognized. Thank
you for your observations of our efforts to lend to the small
business community in our area.
The Twentieth Street Bank, Huntington, West Virginia
It has been the continuing vision
of our bank that we return deposits to their sources . . .
in the form of loans in our community. It is gratifying to
have others recognize that we have had some success in attaining
our goal.
Douglas County Bank,Lawrence, Kansas
ENDNOTES
1. Rebel A. Cole and John D. Wolken, Financial Services Used
by Small Businesses: Evidence from the 1993 National Survey
of Small Business Finan-ces, Federal Reserve Bulletin (July
1995), 629 667.
2. James Kolari, Robert Berney, and Charles Ou, The Effects
of Small Business Lending on Bank Profits and Risk, report
no. PB95-255691 (Springfield, Va.: National Technical Information
Service, 1995).
3. Call reports, officially known
as Consolidated Reports of Condition and Income, are quarterly
reports filed by financial institutions with their appropriate
bank regulator. The call reports provide detailed information
on the current status of a financial institution. Beginning
in June 1993, financial institutions were required to report
the number and amount of small business loans. Loan size information
was mandated by Section 122 of the Federal Deposit Insurance
Corporation Improvement Act of 1991. Initially, the banking
regulators had proposed to collect the data by size of business
and by size of loan. To lessen the reporting burdens on financial
institutions, the final requirements mandate the reporting
of small business lending data by loan size only for loans
under $1 million. The SBA s Office of Advocacy purchased the
June 1994 and 1995 call report data from the National Technical
Information Service.
4. Lists of banks that have preferred
and certified lending status are available on request from
the SBA s Office of Advocacy. Preferred lending status means
that the bank has been given the full authority to guarantee
SBA loans to qualified business owners without SBA review.
Some 350 banks have this status. Certified lending status
means that an SBA loan officer will rely primarily on the
bank s analysis. Some 1,350 banks have this status.
5. Loans under $250,000 were
selected as a measure of small business lending activity in
preference to loans of less than $1 million because the size
of the borrower generally increases with the size of the loan.
Local subsidiaries of large businesses are more likely to
borrow $1 million than $250,000. To minimize white noise in
the loan size data, a loan size was selected that may be small
for many small businesses. (For example, the maximum loan
size for an SBA-guaranteed business loan is $750,000.) But
most of the borrowers in the $250,000 loan size will be small.
In addition, there is an 80-percent correlation between the
$250,000 and $1 million loan size series; thus most of the
information in one series will be included in the other series.
6. These two loan-to-asset ratios
are correlated with the loan-to-asset ratio in column 2; therefore
the results are not dependent upon the assumption that small
business lending is less than $250,000. For example, a preliminary
regression using the 1994 data shows an 80-percent correlation
between the less-than-$250,000 loan size and the less-than-$1
million loan size.
TABLES
Table 1. Average Data on Small Business Lending by U.S. Banks for 1995
Small Business Loans to: a
Total Small Business
Size Category Business Loans
of Bank Assets Deposits Loans Valueb Number c
_____________________________________________________________________
< $100 million 13.1 15.3 77.6 $6.5 191
$100-$300 million 11.113 .0 56.5 $17.5 479
$300-$500 million 8.510 .2 39.1 $31.3 849
$500 mill-$3 billion 6.3 8.0 30.1 $66.7 4,222
> $3 billion 3.2 4.8 17.8 $247.4 8,602
All banksd 11.4 13.5 65.8 $24.2 947
_____________________________________________________________________
a. Ratio expressed as a percent
b. In millions of dollars.
c. Thousands of loans.
d. Averages for all states.
Source: U.S. Small Business Administration, Office of Advocacy
from
the June 1995 Call Reports.
Sample table entry
[not available in text format]
Key to Tables
Primary Data:
(1) Summary statistic: the sum of columns 2 through 6.
(2) The decile value of ratio of small business loans (of
less that $250,000) to assets.
(3) The decile value of the ratio of small business loans
to total business loans.
(4) The decile value of the ratio of small business loans
to total deposits.
(5) The decile value of the total amount of small business
loans.
(6) The decile value of the total number of small business
loans.
Additional Data:
(7) Asset size class.
(8) Ranking in asset size class (1 is the highest).
(9) Value of small business loans (less than $100,000) in
thousands of dollars.
(10) Number of small business loans (less than $100,000).
(11) Decile ranking of $100,000 loans to assets.
(12) Decile ranking of $1 million loans to assets.
(13) Decile ranking of small (less than $250,000) business
and agricultural loans to assets.
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