SONOMA COUNTY -- Sonoma County businesses and lenders are co-dependent in the region's economic recovery, with a first-ever countywide report showing that a financial sector that was hard-hit during the recession has been seeing opportunities for lending amid renewed activity in other industries.
Despite the continuing challenges of the recession, the first-ever Financial Sector Report by the Sonoma County Economic Development Board showed that lenders are increasing in their confidence and providing more financing to small businesses, particularly in the commercial real estate, manufacturing and agriculture sectors.
"Finance is what makes the world go round. It's the lubricant for business -- it's what makes the wheel turn," said Ben Stone, executive director of the EDB.
While the inaugural report specifically surveyed lenders, the EDB presented data for a number of industries that are considered part of the "financial sector" by the North American Industry Classification System. Those industries include not only lenders, but also insurance carriers, investment firms and real estate lending and leasing.
The report, which combines public data and local survey responses, illustrates the challenges faced by the financial sector during the recession. 34 percent of county jobs in the sector were eliminated between 2000 and 2010, with more than half of those losses seen between 2007 and 2009. 88 percent of the 1,550 jobs lost in that two-year period were among lenders and insurers, and the sector currently employs 7,350. The report attributes those losses both to the recession and a high rate of mergers and acquisitions.
In addition, the sector's share of the county's gross domestic product for private industries, which stood at 25 percent from 2001 to 2005, has declined since 2006. For lenders and insurers, that share declined by an average of 7 percent between 2006 and 2010.
However, business lending has increased recently. Helped by temporary incentives, small business lending backed by the U.S. Small Business Administration spiked in the 12-month period ended Sept. 30 2011, with $58.1 million granted to Sonoma County businesses. While those incentives expired last year, an increase in the average size of loans helped push that amount to $43.6 million in the first half of 2012. The volume peaked in 2007, at $62 million.
In concentrating on lenders, the economic development board asked executives to describe barriers to business lending. 60 percent cited "weak capitalization" as a common reason that businesses are not granted a loan, followed by more than 40 percent who indicated a lack of adequate financial support by owners as a strong concern. Approximately 30 percent indicated high leverage, lack of operating history and a two-year record of operating losses as additional barriers to the underwriting process.
In addition to underwriting challenges, credit unions participating in the survey also indicated that a regulatory cap on credit union business lending was complicating commercial loan operations. Credit unions are currently restricted to lending no more than 12.25 percent of total assets to businesses, requiring another layer of strategic planning when structuring commercial loan assets.
While the Santa Rosa's Redwood Credit Union launched its commercial division in 2008 amid those regulatory limits and does not anticipate an impact on its own operations in the foreseeable future, Brett Martinez, president and CEO, cautioned that the cap could have a suppressive effect for other institutions.
"The cap is keeping a lot of credit unions from getting into that lending," he said. "The people we're talking to in Washington understand that this is an issue."
Demand for business borrowing is currently strong, he said.
"We're not struggling to get business loans. People are walking in every day," he said.
To help serve that demand, the EDB recommended that lenders develop incentive programs to encourage business borrowing. Summit State Bank is among lenders who have developed such programs, pledging $50 million in financing to small business borrowers through its $50 Million Small Business Lending Program and implementing an incentive program for nonprofits.
Recently, the bank has seen an increase in the small business loans in its pipeline, said Tom Duryea, president and CEO of the Santa Rosa-based bank.
"Our performance as a small business bank is so tied to the economy," he said. "In general terms, business lending initiatives have been a big part of what we've been trying to do recently."
The survey combined the responses of 20 financial institution executives in July. Those responses indicated support in promoting new lending programs for small businesses, education concerning loan qualifications and cooperation with local education institutions to develop the financial sector workforce. A special task force will hold several meetings over the next few months to discuss implementation of those recommendations.
