Small, large banks vie for business loan share

Bank consolidations and mergers in the last five years have brought many new large banking corporations to the northern Front Range and forced banks to compete vigorously for customers.

Industry consolidations have also caused the entire picture of banking to change, and there is some concern in the industry that the credit flow to small businesses may be squeezed too tightly.

Free checking accounts and competitive rates on certificates of deposit or money-market accounts are a few of the ways banks vie for individual accounts, but with businesses, banks have to compete with service and technology.

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“One of the things you do is spend a lot of time developing contacts,´ said Rick Johnson, associate professor of finance and real estate at Colorado State University. “They call on businesses, and they do a lot on a personal-call basis. Banks are looking for prospects who offer reasonable return for the risks, so they offer loan services as well as financial management.”

Mark Driscoll, president of First National Bank in Fort Collins, said most of his business loans are to small and medium-sized businesses.

First National is part of a holding company, First National of Nebraska Inc., based in Omaha, Neb.

“`We have fewer and fewer of the mom-and-pop shops and more national chain retailers, so we focus on their employees,” he said, adding that local banks act only as a conduit for chain retailers, who use the banks for short-term transactions.

Typically, banks don’t advertise for business customers the way they do for individual accounts.

“We don’t do a lot of advertising, but we are actively seeking business customers, and we have a weekly sales meeting to address getting new business customers,” Driscoll said.

He added that bank representatives call on businesses and try to offer them better service and more options. First National operates two banks in Fort Collins and two new banks in Loveland. Driscoll said that about 50 percent of the loans at First National are consumer-related, 25 percent are small business, and 25 percent are real estate/construction-related. Total assets for the banks stand at $523 million, and net loans total $373 million.

Large banks such as First National and Norwest Bank in Fort Collins offer some businesses electronic software packages so they can check their balance each day and see what checks have cleared. They can transfer funds from one account to another and make photo copies.

This allows for less paperwork on both sides and less employee time spent. Banks also offer automatic payroll deposits even to other banks, and some do automatic bill paying. These items and others have become competitive resources to attract businesses.

At Norwest Bank in Fort Collins, Dave Miller, senior vice president and business-banking manager, said even with big retail chains moving in, “there are still a lot of good loan opportunities.

“We see it as a strong market. Our primary business loans are for expansions, not new businesses, so the loans are tied to growth and expansion in the area.”

Miller said commercial loans increased about 10 percent in 1995 over the previous year, which does not include agriculture or real estate/construction loans.

“Most of our advertising for business is in promoting our people (service), not our products,” Miller said.

The bank does not have a scoring system to rank businesses by size, so, theoretically, small and large businesses get the same treatment. Also, the bank keeps the loans at the bank rather than sending the loans to large facilities in Denver or out of state.

“We handle our loans here,” he said, “and we depend heavily on referrals for new business customers.”

Norwest and other banks owned by large holding companies outside of the region are trying hard to promote themselves as local banks because Colorado has been a tough nut to crack for the banking industry. The state has a long history and tradition with locally owned banks and has held the huge banking institutions at bay, outside the state, for many years.

“Colorado was the 50th state to allow branch banking,” said Ronnie Phillips, professor of economics at CSU. “The people in Colorado and other Western states wanted to limit branch banking to protect locally owned banks and prevent monopolies.”

People in the West like doing business at locally owed banks, so big corporate players have tried hard to fit that image.

Norwest purchased United Banks of Colorado in 1991. Norwest is owned by Norwest Corp. in Minneapolis but strongly promotes itself as a local bank.

“We are given a lot of leeway from Minneapolis,” he said. “We are very strong in cash management, and we are very much a local bank even though we are owned by a holding company in Minneapolis.”

The two Norwest banks in Fort Collins have combined total assets of $300 million and about $125 million in loans, of which about $65 million is in business loans.

While competition is growing for individual and corporate dollars, small-business loans remain in a gray area.

“Banks have a problem with small-business loans, because banks can’t sell them like they can mortgage loans,” Phillips said, “so banks must hold on to the loans. If they were able to package them and sell them, it would make them more liquid.”

Another issue for banks is that small loans cost the bank the same amount of money and paperwork as large loans. But because large loans are more lucrative for banks, small-business owners could suffer.

Historically, large banks loan to large businesses, with fewer loans to small businesses. Consolidation and mergers in the banking industry indicate that small and medium-sized businesses could find themselves in a credit crunch.

A recent article in the Brookings Papers on Economic Activity called “The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It’s been,” states that fact clearly. In comments at the end of the article, Mark Gertler says, “The most controversial claim is that consolidation stemming from deregulation will likely reduce the flow of credit to small borrowers.”

In the same article, Benjamin Friedman says, “First the record is clear that small banks lend disproportionately to small firms, while large banks lend disproportionately to large firms. Second, the consolidation of the U.S. banking industry that has taken place over the last decade and a half has pushed banks away from lending to small firms and toward lending to large ones.”

Although that may sound bleak for small businesses, many factors help level the playing field. The Community Reinvestment Act was passed by Congress in 1977 to encourage banks to meet the credit needs of its community, especially the lower socio-economic sectors. It has gone through may revisions and transformations, but more recently has changed to encourage banks to loan to small businesses.

Beginning in January 1996, banks are required to report the origination of business loans.

“I would say it is designed to measure what the patterns are in lending, to show the entire picture,´ said Susan Neighbors of First National Bank in Fort Collins.

“We are required to report the dollar amounts of loans, and there is a rating system for each bank’s performance. Loans are just one part of that rating, but a bank could receive a lower rating if it only loaned to large businesses.”

And even though large holding companies are gobbling up smaller banks, there are still many local banks in the area, and they cater to small and medium-sized businesses because it’s their only business market.

“A bigger bank does not want to offer a $20,000 to $50,000 business loan,´ said Roy Bischoff, senior vice president at The Home State Bank in Loveland. “In 1991, we had $29.5 million in loans, and this month we just reached $47.5 million in loans, so that’s how much we have grown in five years. Over the last year, we grew 10 percent in loans and 11 percent in deposits.”

The majority of Home State’s business loans are to small retailers and small manufacturers, and for real estate/construction.