Community banks have edge in small business lending

Despite a faltering economy, community banks still have tremendous opportunity serving small businesses. That was the message from John Barlow during a breakout session at the annual convention of the American Bankers Association Nov. 10 in San Francisco. Barlow, an Iowa bank owner, is president of Barlow Research Associates, Inc., in Minneapolis..Barlow said small business owners prefer to work with community banks, and he said that loans to small businesses are more profitable than other forms of credit typically made available by community banks. Barlow said his firm surveys thousands of small businesses quarterly to gauge attitudes about banking relationships..Citing data from the Small Business Administration and the Internal Revenue Service, Barlow said there are 25 million small businesses in the United States; only about 6 million of those companies have annual sales in excess of $100,000. Of those 6 million companies, 72 percent have annual sales between $100,000 and $500,000; fourteen percent have annual sales between $500,000 and $1 million; 9 percent have annual sales between $1 million and $2.5 million; 3 percent have annual sales between $2.5 million and $5 million, and 2 percent have annual sales between $5 million and $10 million..Among the businesses with more than $100,000 in annual revenue, 76 percent are owned by their founder. Such a companies are typically 23 years old with nine employees, and they have been with their bank for 15 years..Barlow said that in the next five years, one in four business owners plan to change company ownership. "Plans to sell the business to a family member or to merge with a third party will require a team of advisors," Barlow said. "Bankers are often left out of this inner circle." He encouraged bankers to build the relationships necessary to become an important part of the transition. He called this a "triple win," noting the bank benefits by participating in the transaction, and perhaps retains business with the seller and gains new business with the buyer..Barlow made the case that small business lending is particularly lucrative for community banks. FDIC statistics show that community banks have a higher yield on commercial and industrial loans than the overall market, and historically have had larger spreads between their C&I yield and cost of funds. Barlow encouraged community bankers to focus on this sector of their business. Furthermore, the performance of small bank commercial loan portfolios is less volatile than that of larger banks, Barlow said..Small banks have historically enjoyed the highest level of customer satisfaction, although medium-size banks are making gains, narrowing the gap with smaller banks. Barlow said surveys show 72 percent of small business customers who bank at small banks are very satisfied with their banking relationship; 64 percent who bank at medium-size banks are very satisfied, and 51 percent of people who bank at large banks are very satisfied. The most important factors in their satisfaction, customers say, are ease of doing business, sense that the bank appreciates the business, and responsiveness to questions or requests. Barlow said these factors are primarily related to the customer's interaction with the account officer at the branch where their business is conducted.."A greater percentage of small bank customers than large bank customers have an account officer assigned to their company," Barlow said. "A two class system has emerged at large banks. A declining percentage of large bank customers are assigned a relationship manager, while an increasing percentage struggle to find their own contacts.".The primary contact for small business customers of small banks is a senior officer, often the president of the bank. At large banks, the branch manager is the primary point of contact for small business customers..Barlow's survey work reveals that the average small bank visits small business clients 1.5 times per year, initiates 2.4 phone calls to the client per year, returns phone calls in 1.7 hours and needs 3.3 days to respond to a loan request. That compares to large banks which average 0.8 on-site visits per year to small business clients, 1.2 phones calls per year, 2.4 hours to return a phone call and 3.8 days to respond to a loan request..Barlow identified these trends as driving business banking:.• Profits from business banking will surge as lower interest rates create opportunities to correct the erosion in pricing power..• Community banks provide higher levels of "human" service to their customers..• Negative economic outlook is not related to a customer's intentions to switch banks..• People who plan to change banks make these decisions based on "soft" factors such as people and operations, not on "hard" factors such as products and credit..• Major banks will gain market share through mergers and acquisitions, but struggle to achieve the satisfaction of customers gained through those mergers..He made these recommendations:.• Calculate the yield on your C&I loan portfolio over time and set goals for your bankers to move toward margins achieved in 2003..• Capitalize on your strength in the personal channels to increase customer satisfaction..• Look for the prospect with a positive outlook on the future; they are more likely to switch primary banks than the pessimist..• Sticking to the basics and striving for operational excellence will lessen the customers' "itch" to change banks..• Bank mergers create opportunities to acquire customers stuck in the middle of an evolving institution.