North Bay ticks down in dollars, up for long-term
The volume of lending backed by the U.S. Small Business Administration set another record in the Bay Area during the last fiscal year, with North Bay financial institutions seeing a historically high level of activity during the same period, according to data from the SBA.
The administration guaranteed a total of $865 million in loans throughout the Bay Area in the fiscal year ended Sept. 30, up 7 percent from fiscal year 2012. That borrowing exceeding previous records set in the Bay Area in the prior year for the most popular loan programs backed by the SBA — “7(a)” and “504.”
Total dollar volume decreased 14.3 percent in the broader North Bay compared to the prior year, with a combined $127.5 million in loans across Sonoma, Marin, Napa, Solano, Mendocino and Lake counties. Lenders completed 234 7(a) and 504 loans in fiscal year 2013, compared to 229 loans in fiscal year 2012.
While ticking downward in the North Bay versus the prior year, the dollar volume of lending continues a longer-term trend in defying a previous expectation that the expiration of temporary economic stimulus perks though the SBA would cause a surge in loan activity to retract. Annual guaranteed loan dollars have risen 50 percent in the Bay Area and 145 percent in the North Bay counties of Sonoma, Marin and Napa compared to fiscal year 2010, according to the SBA.
At a time when businesses that survived the recession are turning an eye toward growth, those numbers point towards greater confidence for borrowers that are refinancing debt, purchasing property, growing inventory and launching businesses in the receding wake of the recent economic downturn.
“In general, the San Francisco district has set an all-time record,” said Mark Quinn, director of the Bay Area district with headquarters in San Francisco. “The North Bay has been fairly constant.”
There were around $23 billion in guaranteed SBA loans nationally during the fiscal year, second only to the prior year when certain stimulus provisions remained in effect.
Wells Fargo heads 7(a) push
Most active among the SBA lenders in the North Bay has been San Francisco-based Wells Fargo, which completed $20.3 million in 43 7(a) loans across the broader region during the fiscal year. The bank was also the most active SBA lender in California and nationally, with $739 million in loans made throughout the U.S.
“The overall increase in the business economy locally has certainly helped, along with Wells Fargo’s push on the SBA front to get these loans out to businesses,” said Tracy Sheppard, who heads SBA lending for Wells Fargo in the North Bay.
Like others under the SBA, the flagship 7(a) program takes on a portion of the loan risk and allows lenders to extend more favorable terms to borrowers than might otherwise be prudent under typical business financing. Temporary stimulus funding boosted that government guarantee to 90 percent through the first three months of 2011, and has since reverted to 75 percent for loans above $150,000.
Mr. Sheppard cited commercial real estate loans as a strong driver of demand, along with financing for business acquisition that has accelerated as an improving economy has pushed more entrepreneurial baby boomers to sell their business and enter retirement.
Also among the most active SBA lenders in the North Bay has been Santa Rosa-based First Community Bank, which completed more than $16 million in loans during the last fiscal year. It is the third year in a row that the bank has loaned the largest volume of dollars among North Bay-based financial institutions.
“Each bank is going to focus on the things they do well,” said Brian Reed, chief credit officer.
Mr. Reed noted that the current low interest-rate environment has made SBA lending attractive for both lenders and borrowers alike, helping to fuel the current activity.
“Right now we’re in a low-interest-rate environment. The secondary market is excellent. The SBA is promoting itself. It’s kind of a perfect storm,” he said.
Completing the greatest number of loans in the North Bay among lenders based in the region was Santa Rosa-based Redwood Credit Union, which completed 27 loans valued at over $15 million. The credit union also completed the largest number of North Bay loans in the prior fiscal year.
“The number of loans we do really translates into people,” said Michael Downey, senior vice president of business services. “We spent the last couple of years working with business to provide financing as those businesses began to recover. Now, we’re financing growth.”
“I think it’s keeping with the spirit of the program. Whatever that number is, quite frankly, we just want it to grow,” he added.
Also active in North Bay SBA lending was Santa Rosa’s Exchange Bank, with 16 loans and nearly $9 million in lending in Sonoma County.
End of refi slows 504 activity
Lending through the 504 program, which includes a portion secured by a certified development company plus a mortgage from a traditional lender, accounted for around 20 percent of the dollar volume in the North Bay and 42 percent of volume in the district during the last fiscal year.
Those loans are typically used to provide long-term, fixed-rate financing for the purchase of large, tangible assets. Yet last year also included a popular temporary provision to allow the refinancing of existing debt under the 504 structure, requiring as little as 10 percent down and allowing significant extraction of equity for reinvestment into business operations.
The provision helped make 504 dollar volume account for nearly half of lending nationally in fiscal year 2012, and has inspired talk of making the program permanent at some point next year.
“The 504 industry is clamoring to get it reinstated,” said Bob Thompson, vice president at Walnut Creek-based Bay Area Development Co., which once again led all other certified development companies in North Bay 504 lending in both dollar volume and number of loans.
The refi program accounted for around 25 percent of the company’s activity before expiring in September 2012. Yet Mr. Thompson noted a “reasonable and consistent level of activity” that continues in the North Bay, driven in part by vineyard property purchases.
Barriers lowered for smaller loans
The SBA permanently increased the size limit for both its 7(a) and 504 programs to $5 million at the beginning of the 2011 fiscal year, with $5.5 million possible in some cases under the 504 program.
While only a handful of North Bay loans approached that limit, the decision has caused average loan sizes to trend towards the more-profitable higher end of the spectrum and highlighted the enduring need for programs that serve smaller borrowers.
The SBA announced that it would set its “guarantee fee” to zero for loans under $150,000 in the 2014 fiscal year, its latest effort to address that trend.
“In the end, there needs to be a financial incentive for lenders. That’s part of the reason why we’ve reduced the fee,” said Mr. Quinn of the SBA. “We’re looking at smaller lenders, nonprofit lenders — that’s important to me, to make sure we’re reaching all borrowers.”
That decision creates a compelling message for banks to communicate to those borrowers, with fees also reduced to zero for veterans borrowing up to $350,000, said Sherill Stockton, senior vice president and SBA manager at Exchange Bank and chair of the technical issues committee of the National Association of Government Guaranteed Lenders
“This is a mission-based program,” she said. “Their mission — it has never changed — is to get capital into the hands of all small businesses.”
Ms. Stockton noted that the SBA has ramped up its communication with lenders in recent years, with annual adjustments to its standard operating procedures to simplify the underwriting process and provide greater confidence in its guarantee in the case of a default.
While fees to support the SBA guarantee on a national scale do add costs for lenders, Ms. Stockton said that the lending possible through the administration can have a significant impact for small businesses emerging from the recession.
“There are times that the SBA loan is the last piece,” she said, describing long-term efforts for businesses to consolidate their recession-related debts. “We’re really able to provide that last piece of support as they recover.”
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