Comptroller of the Currency Administrator of National Banks

Small Business Banking Issues

A National Forum Sponsored by the Office of the Comptroller of the Currency

Renaissance Washington Hotel Washington, D.C. February 5, 1998

Acknowledgments

The Office of the Comptroller would like to express its appreciation to the speakers at the Small Business Banking Issues Forum, whose presentations are summarized here. Appreciation is also extended to the forum attendees, listed in Appendix A of this publication, for their questions, comments, and experiences shared about small business banking.

The project was developed to enable bankers and small busi- ness owners to learn about successful programs, techniques, and strategies relevant to small business banking that could be replicated in their own communities. OCC staff contributing to the planning and conduct of the forum included: Janice A. Booker, director, Community Devel- opment Division (CDD); Yvonne McIntire, senior attorney, Community and Consumer Law; Denise Kirk-Murray, commu- nity reinvestment and development specialist, Community and Consumer Policy Division; Alfred T. Mitchell, community development specialist, CDD; Glenda Cross, director, Minority and Urban Affairs; John Turner, national bank examiner, Credit Risk; and Jacquelyn C. Allen, community development specialist, CDD. Lillian M. Long, program coordinator, CD Investments Program, CDD, served as project leader. Adminis- trative assistance was provided by Tawanda Hudge and Lisa Hemphill, CDD. The Communications Division, particularly Amy A. Millen, senior editor, and Rick Progar, publications liaison officer, helped to bring this publication to fruition. The OCC welcomes your comments or questions about this publication. Please write to the Community Development Division, Office of the Comptroller of the Currency, 250 E Street, SW, Washington, DC 20219, or call (202) 874-4940. You are encouraged to visit the OCC Web site at .

i

Table of Contents

Acknowledgments ...... i

Table of Contents ...... iii

1 Introduction ...... 1

2 Opening Session ...... 3

Keynote Address Eugene A. Ludwig, former Comptroller of the Currency, OCC (1993-1998) ...... 3 Ludwig discusses federal initiatives of the past five years to foster small business lending. Those initiatives are: revisions to the Community Reinvestment Act (CRA) regulations; innovative programs to encourage financial institutions to lend to small businesses; research into problems that interfere with small business lending; and steps to strengthen the national banking system. He also discusses the OCC’s Banking on Minority Business Program.

Special Guest Speaker Richard C. Hartnack, Vice Chairman, Union Bank of California ...... 6 Hartnack defines small business market characteristics and how they are understood by lending institutions. He explains that this awareness is critical to retaining and improving market share in an increasingly competitive landscape.

Q and A Summary ...... 10

3 Forum Topics ...... 11

The Changing Structure of the Banking Industry and Its Effect on Small Business Lending Bankers from community banks and larger financial institutions discuss the numerous benefits that accrue to them from active small business lending programs and how those institutions now serve the needs of the small business market.

Session Presentations William Gene Payne, President and CEO, Gateway National Bank ...... 11 Payne points out that an active SBA partnership benefits Gateway National Bank by increasing economic development and employ- ment in the community through more loans to small businesses; improving competitiveness of Gateway with larger banks and nonbank lenders; liquidity and the loan-to-deposit ratio through access to the secondary market; and increasing lending limits in the amount loaned to any individual borrower. Payne comments that the SBA is the most significant private-public partnership created by Congress.

iii Robert K. Kottler, Senior Vice President, Small Business Banking, Hibernia National Bank ...... 13 Kottler describes changes instituted by Hibernia National Bank to increase lending to small business customers. They include: expediting the loan application process; moving business bank- ers from downtown to the branches; targeting small business customers through direct mail campaigns; using outbound and inbound telebanking groups and inbound fax servers; placing loan applications on the Internet; and training and counseling small business entrepreneurs.

Howie Hodges, Bank of America ...... 15 Hodges proposes initiatives to save money and leverage capital through the programs of the SBA, the U. S. Department of Hous- ing and Urban Development, and the U. S. Department of Agricul- ture. Those initiatives are: a stronger partnership between gov- ernment district offices and participating lenders to tie lending goals to local credit needs; steering borrowers to appropriate and cost-effective products that present less interest risk and tax- payer subsidies; the more creative application of guarantees by government agencies; the disclosure by SBA of all loan referral payments made to third parties; and the application of many of the same principles behind the nation’s low-income housing tax credit to small business lending and economic development.

Q and A Summary ...... 18

Bank Small Business Investing Issues and Opportunities Experts from a financial institution, community development corporations (CDC), and the public sector discuss how financial institutions provide equity capital creatively to help small busi- nesses expand.

Session Presentations Jean L. Wojtowicz, President, The Cambridge Capital Management Corporation...... 19 Wojtowicz describes five Cambridge funds, which include an SBA 504 lender; two mezzanine funds (multibank community develop- ment corporations), and two venture funds, one of which provides subordinated debt and equity financing to companies owned by racial minorities in the community; and a small business invest- ment company fund.

Gail Snowden, Group Executive, Community Banking Group, BankBoston, NA ...... 22 Snowden describes how BankBoston’s First Community Bank provides services to inner city markets, helps in city revitaliza- tion, and delivers shareholder value. From First Community Bank, BankBoston launched the first urban investment bank in the nation chartered by a commercial bank, BankBoston Devel- opment Company (BBDC). BBDC’s success can be attributed to innovative partnerships, SBA guarantees, and small business seminars through BankBoston’s Open for Business Program.

iv Jerrold B. Carrington, General Partner, INROADS, Inc. . . 26 Carrington discusses the mission of INROADS, a private equity fund; why it targets small businesses; how banks have devel- oped INROADS-funded businesses since 1985; and why banks can access the small business market profitably through partnering with private equity firms. The reasons include: high returns on investments through capital gains; a safer and more efficiently deployed loan portfolio; and the ability to focus on lending money and receiving CRA credit, subject to regulatory approval.

Saunders Miller, Senior Policy Advisory, SBIC, SBA . . . . . 28 Miller discusses the successes and benefits of the Small Business Investment Company (SBIC) Program. He emphasizes that all banks can now obtain CRA credit by investing in SBICs and that they can expect high returns with acceptable risk if the SBIC is managed properly. A difficult decision for bankers is what amount to invest in SBICs.

Q and A Summary ...... 30

The State of Small Business in America

Aida Alvarez, Administrator, SBA ...... 31 Alvarez states that the SBA and OCC are moving in the same direction. The SBA is advancing its ability to serve underserved communities and deliver services in a cost-effective way. The SBA is preparing itself and its small business customers for the economy in the 21st century, which will be diverse, technologi- cally driven, and global in scope.

Q and A Summary ...... 35

What Are the Future Issues of Small Business and Banking and How Should They Be Addressed? Leaders from banking, small business, academia/research, and securities share their innovations and visions for the small business and banking arena.

Session Presentations Dr. Emma C. Chappell, Chairman, President and CEO, United Bank of Philadelphia ...... 36 Chappell describes how a community bank continues to serve its customers in a competitive marketplace. In her presentation, innovative strategies are recommended including tax incentives, low-interest government loans, earnings credits, and expanded CRA.

Michael R. James, Executive Vice President, Wells Fargo Bank, NA ...... 38 James discusses the concept and need for a national capital access lending program. Capital access can help the market in a downturn and reach businesses that are nearly bankable.

v William J. Dennis, Senior Research Fellow, National Federation of Independent Business Foundation ...... 40 Dennis reveals, from the small business perspective, six gaps in lending and borrowing. He also identifies current problems, including: the continuing restructuring of the industry and the constant turnover of personnel; the need for personalized ser- vices; the learning curve for technology; lack of collateral; the need for change in the bankruptcy laws; and the continuing review of subsidy programs.

Dr. Margaret C. Simms, Vice President for Research, Joint Center for Political and Economic Studies ...... 42 Simms points out that demographic changes will result in an increasingly diverse U.S. population, that will affect employ- ment, product markets, and businesses. She states that under- standing the minority small business market will be necessary to make effective investments for the community.

Paul L. Pryde, Jr., President, Capital Access Group ...... 44 Pryde explains that in a well-organized market, the credit delivery system is divided into eight major functions: marketing, developing products, loan origination, underwriting, loan funding, loan servicing, credit enhancement, and liquidity. Those functions are not performed well in poorly-organized markets, inner cities, and small and minority businesses. Pryde describes the structure of the Capital Access Group partnership, which is based on solving the organizational problems that inhibit the delivery of credit to small business.

Q and A Summary...... 45

Appendixes, 49 Appendix A: Forum Attendees List, 51 Appendix B: Small Business References, 71

vi 1. Introduction

ing secured and unsecured lines of credit and flexible credit terms. New or expanding small The National Forum on Small Business businesses, in particular, may require equity Banking Issues, convened by the Office of the capital and technical assistance on financial Comptroller of the Currency on February 5, management issues. An increasing trend 1998, provided a look at substantive and inno- exists among banks to establish community vative issues affecting today’s small business partnerships to make credit more available to banking market. Forum participants shared small businesses, even though many financial valuable information and engaged in lively discussions about successful small business banking initiatives. The forum reflected the The OCC is optimistic that continuing demand and interest in small business lending and emphasized many di- financial institutions will verse ways to ensure the realization and continue to make small continuation of entrepreneurship in the new business banking an integral millennium. This publication summarizes the part of their business strategy. forum for the benefit of bankers, bank examin- ers, and others interested in small business banking opportunities. institutions continue to pursue small business lending without external partners. Banks A recent survey revealed that 87 percent of all participate with government agencies, such as small business owners have developed a rela- the Small Business Administration, community tionship with a commercial bank. By the end of organizations, national intermediaries, and 1997, those banks were responsible for more other banks to create efficiencies and to miti- than 60 percent of all small business credit and gate risks associated with small business more than half of all loans used to finance the lending. purchase and lease of equipment and vehicles The OCC is optimistic that financial institu- by small firms. Commercial banks hold most tions will continue to make small business small business checking accounts and perform banking an integral part of their business a variety of critical financial functions — strategy. Banks know that small businesses managing cash, providing accounting services, can be excellent bank customers. Entrepre- issuing letters of credit, safekeeping valuables, neurs place a premium on convenience and and conducting many other financial and are more likely to conduct all of their banking fiduciary services — for small business firms. business with their primary lender and to In recent years, many large banks have targeted purchase ancillary financial products and the small business market aggressively and services where they bank. Despite the rela- developed innovative ways to serve its needs. tively high small business failure rates, small Some banks introduced small business resource business loans tend to be better collateralized centers, which offer one-stop shopping for a wide than many other kinds of loans and their range of products and services. Banks also cre- repayment histories compare favorably with ated innovations in lending that have reduced other classes of borrowers. paperwork and costs for both lenders and small The Community Development Division develops business borrowers. For example, small business policies and procedures for national banks’ loans of nearly $1 million are offered through economic and community development activities direct mail. Credit report data is linked directly to and approves bank investments in community a computer model that establishes a maximum development corporations, projects, and financial loan amount and interest rate. No business plan institutions. The division also works with na- or other financial data is required. tional community and economic development Banks recognize that small businesses often groups and monitors banks’ innovative commu- need diverse credit types or structures, includ- nity development lending and investing activities.

1 We put most of the emphasis on local commu- loans. The city will place the money in the nity development loan funds, community devel- special purpose corporation. It is “found” money opment banks, and similar organizations for them. Once again, it will use the capital to carrying out the program. Those organizations purchase loans from the originating community originate and underwrite loans and advance development bank. The special purpose corpora- funds to borrowers. They can act as tion or conduit will package those loans into subservices, but they do not have the money to securities and sell them to local banks. act as credit supporters or to provide liquidity in the marketplace. Essentially, they find the As long as the pricing of loans is appropriate borrowers, package the loans, make the loans and the losses are not too severe, this pro- in accordance with agreed upon underwriting gram can replenish continually the amount of standards, and fund the loans. lending in that community. We call it our perpetual credit machine, because you re- My favorite part of this partnership is loan plenish continually the amount of capital securitization. We have asked a couple of flowing through the system. There is plenty of cities to create a “secondary market” organi- liquidity in the system. The bankers I know zation, using existing loan assets. This corpo- do not have problems with funding loans. They ration essentially buys loans from the origina- have excess liquidity. They are looking for tors, packages them into securities, and earning assets. That is their big problem. resells the senior piece of the securities to Investors come to us all the time since the the banks. Resolution Trust Corporation closed. There is a huge appetite for new types of assets and no one to supply them. There is a huge amount of money looking for deals. With respect to CRA, they can meet the investment test or the The partnership that seems to work has a lending test, whichever test structure that places the city or government in they wish to meet. the credit support role, assigning the origina- tion responsibility to competent organizations that exist in profusion in cities to originate and service loans, and putting the banks in the Securitization transactions involve putting the position of investor that funds credit lines to the loans in a pool or in a trust and dividing them originator. We have tested this in conceptual into two pieces. You have $10 million in loans. form, given banks in a few cities term sheets, You divide the loans into two pieces, a senior and said, “Will you do this?” So far, we have had piece and a junior piece. The senior piece has a a good response. priority on the cash flows of a pool of loans, and the junior piece has subordinate interest. We Paul Pryde, Jr., is president of Capital Access want the banks to invest in the senior piece, Group, a limited liability company, a financial and the conduit or someone else to hold the advisory and consulting firm, specializing in subordinate interest. The result is a system financial innovation for lenders in underserved that places the banks in three roles with which markets. He has more than 25 years of economic they may be comfortable: originating loans, development and finance experience. He is the funding loans, and investing in senior securi- author of several publications, including “Black ties. With respect to CRA, they can meet the Entrepreneurs in America.” He also is a consult- investment test or the lending test, whichever ant to and a board member of several national test they wish to meet. policy development organizations. Most recently, Mr. Pryde has focused his energies on small In Miami and Atlanta, we are looking at exist- business loan securitization. ing community development block grant loans to capitalize the secondary market vehicle. The Q and A Summary cities admit that some loans have not been Mike James provided additional detail on well-managed. We are trying to improve their capital access programs, which exist in 20 management, and we are going to sell those states. The program in Michigan was begun

45 2 2. Opening Session

work force and, combined, generate 51 percent of our private gross domestic product. Today The National Forum on Small Business they produce almost two-thirds of all new jobs. Banking opened with a discussion of the state of small business today and the role of the The small business community is largely the lending community in ensuring its continued reason why we have enjoyed an unparalleled success. Eugene A. Ludwig, former Comptroller economic expansion of the past five years — an of the Currency, discussed federal government expansion driven mainly by small business initiatives of the past five years to foster small people like yourselves, especially in the service business lending. Those initiatives were: and technology areas. revisions to the Community Reinvestment Act Small business men and women are the ve- (CRA) regulations; innovative programs to hicles for the nation’s initiative and creative encourage financial institutions to lend to imagination. We count on all of you here to small businesses; research into problems that support that initiative and imagination and to interfere with small business lending; and put it to work — as you always have. Small steps to strengthen the national banking firms produce twice as many product innova- system and the banks’ ability to lend. Ludwig tions per employee as do larger firms. From also discussed the OCC’s Banking on Minority small businesses have come innovations as Business Program. The program encourages complex as the artificial heart valve and the improved communication among bankers and optical scanner and as prosaic as the zipper. potential small business borrowers; counsel- From small businesses will come undoubtedly ing and education for entrepreneurs; in- the product breakthroughs of the future that creased use of established programs, such as will enhance the American standard of living the Low Doc Program; innovations in lending, and ensure the nation’s continued economic such as the second- and third-look programs; success. and the importance of partnerships among lenders and small business people. Richard Notwithstanding the strength and ingenuity of C. Hartnack, vice chairman, Union Bank of the small business sector, we live in turbu- California, defined small business market lent times. The financial turmoil that today characteristics and how they are viewed by besets so many of the nations of Asia — lending institutions. He explained that mar- nations that not many months ago were ket awareness is critical to retaining and hailed for their economic successes — re- improving market share in an increasingly minds us that the future is essentially un- competitive landscape. knowable. And yet, I believe that we have much reason for optimism. The reason is Keynote Address, Eugene A. Ludwig, former sitting right in this room. Our forum today Comptroller of the Currency, OCC, 1993-1998 shows that we are not resting on our laurels. It is a genuine pleasure to welcome you to our We came here today because we recognize meeting on small business banking — a subject that there remains a rich mother lode of that is crucial to our nation’s continued eco- ideas and enterprise in our people — ideas nomic vitality and opportunity. and enterprise — waiting to be recognized and financed. We came here today because, To understand how crucial, one must look at despite all that many of our financial institu- the facts and figures. By Small Business Ad- tions have done already, lack of credit or ministration (SBA) standards, more than 99 capital is still an obstacle that may prevent percent of our nation’s businesses qualify as tomorrow’s small business success stories “small.” The vast majority are very small — from being written. And we are here — all of two-thirds of them employ fewer than five us together — because we understand that people. But they make an outsized contribution through partnerships between financial to our nation’s well-being. Small businesses providers and small entrepreneurs, all things employ more than half of the private nonfarm are possible for ourselves and for our people.

3 I believe we have proved that over the past • We adopted a low documentation loan program five years. Five years ago, we were in the to allow highly rated and well-capitalized midst of a credit crunch. Many in the small banks to make a portion of their loans to small business community were unable to get the and medium-sized businesses — loans that loans they needed and deserved. Some firms examiners would review solely on the basis of undoubtedly failed as a result. Yet, as painful performance and not on the basis of the as it was for many, the credit crunch experi- documentation in the file. These are loans ence reminded us of something terribly made because of character that may not important: that financial institutions and necessarily meet standard requirements for small business need one another — and so collateral or detailed performance plans. does the national economy. But nothing has done more to highlight and promote that constructive partnership between small business and financial institutions than Through partnerships between our revisions to the Community Reinvestment Act (CRA). Much has been said, and rightly so, financial providers and small about the new CRA’s emphasis on performance entrepreneurs, all things are as opposed to paperwork. As important, in my possible for ourselves and for mind, is that the new CRA takes a far broader, our people. more holistic view of what really constitutes community development. It recognizes that small business lending can be an important component of financial institutions’ commit- That lesson was on everyone’s mind when I ment to the communities they serve. became Comptroller of the Currency, and it led us immediately to develop and implement a Stimulated by CRA and their own good business four-point plan to restore the flow of credit into sense, financial institutions have demon- the small business community. First, we went strated lately a renewed commitment to small over our regulatory rule book with a fine- business lending. One of the most auspicious toothed comb, weeding out or modifying those developments in recent years has been the rules that seemed to complicate unduly fair growth of small business finance intermediar- access to small business credit. Second, we ies for institutions that lack the expertise or developed innovative new programs to encour- the resources to establish special small busi- age financial institutions to make those loans. ness lending programs of their own. Their Third, we conducted research into the systemic variety is truly impressive —and encouraging. problems that interfere with the whole process Lending consortia, loan pools, bank-owned or of small business lending. Finally — and the affiliated community development corporations, one that made all the other possible — we small business investment companies, commu- sought to stabilize and strengthen the national nity-based micro-enterprise loan funds — all of banking system, so that banks were once again those institutional devices are helping to fill in a position to lend. the gaps in the small business lending market. Let me give you some specific examples. Thanks to constructive regulation and innova- tions by lenders and community development • We liberalized the rules requiring a small partners, we have made impressive progress business owner to obtain a real estate ap- over the past five years in small business fi- praisal from a licensed appraiser whenever nance. Our nation’s banks have reaffirmed their personal real estate was used as collateral for traditional role as a major source of funding to a business loan — a change whose benefits, the small business community. Small business for those who qualify, can be measured, not lending dominates the loan portfolios of many only in the savings of dollars, but also in the community banks. Commercial banks also savings of time — weeks sometimes, critical provided more than half of all loans used to weeks when loans can be delayed awaiting finance the purchase of equipment and vehicles the completion of an appraisal. by small firms. These days, fewer and fewer

4 small business people are reporting difficulty in religion, or national origin of an applicant for a obtaining credit. And bankers, for their part, are non-mortgage loan. If the Fed changed Reg. B, finding that, as a rule, small business loans so that creditors could collect such information perform as well, if not better, than other compo- voluntarily, it would assist us materially in the nents of the loan portfolio. fight against discrimination. I would urge you to support such a change. And the evidence suggests that many of our bankers are not sitting back passively and Fact-finding was an important part of the waiting for small business customers to walk rationale for the OCC’s Banking on Minority through the door. The recent Federal Reserve Business program, which we launched last year report to Congress on the availability of credit in Washington and took on the road to cities all to small businesses shows a new aggressive- over America. This cross-country dialogue ness by bankers in seeking out small business brought together community leaders, minority customers, by offering better terms, additional small business entrepreneurs, and bankers to products and services, and more direct mar- discuss how to break down barriers and build keting. Even while striving to meet their CRA mutually profitable relationships that will bring obligations, bankers are moving beyond mere economic opportunity to our neglected and compliance to a recognition that partnerships ignored communities. As I listened and learned with small business make good business during those visits, a number of points became sense. clear — points whose relevance goes beyond minority small business to the small business Now the time has come to build on our successes community at large. and to consider new approaches where we have been less successful than we would like. Unfortu- First, improved communication must exist nately, many of the gains I have just described between bankers and potential small business have been distributed less evenly than we would borrowers. In the home mortgage area, a field like. For years we have heard anecdotes about we have studied intensively, we have found the special obstacles facing minority small again and again that merely making a loan to business people in obtaining credit. Considering first-time borrowers may not be enough for it to the importance of small business as an engine work. The best performing affordable mortgage for job creation and upward mobility, we must loans appear to be those accompanied by educa- ensure that small business does not face special tion and counseling — helping borrowers to handicaps just when small business’s contribu- negotiate the application process, and helping tions are most needed. them understand what lenders expect of them, and to manage a budget, and so forth. To help us determine the nature and extent of the problems that minority small business This seems to be true in the small business people face — and to begin formulating workable field. Based on what I have heard around the remedies — we have moved aggressively on country, there continues to be considerable several fronts. First, as part of CRA reforms, we misunderstanding among lenders and small have begun to collect information on a national business borrowers about what is expected of basis from every large bank and thrift for the them. Some would-be entrepreneurs have first time — on small business originations — minimal experience with all of the intricacies information that we can use to determine of running a financial operation. They need where small business loans are going — and, as counseling and education almost as much as important, where they are not going. This was they need capital. For their part, some lenders an important breakthrough. But the data we have limited familiarity with small business have collected tells us nothing about the recipi- markets generally and with market condi- ents of those loans — information that we need tions that prevail in minority communities. If to determine whether illegal discrimination is the relationship is to succeed, both parties preventing some potential small business must think about their partnership in the borrowers from obtaining credit. In fact, lenders broadest sense — as one that involves an are forbidden by the Federal Reserve’s Regula- investment of time and expertise as well as tion B from inquiring about the race, color, sex, financial capital.

5 Second, what I heard in my discussions around reduced costs should help lenders make more of the country convinces me that we regulators them. And when they do, it may open the door can do more to encourage banks to use those for the development of a secondary market for programs that are currently available. Take these loans, with all that implies for increased our low documentation program. At last count, availability and better pricing. only about 200 national banks are using it, Most of all, I saw evidence of genuine long-term because, I am told, the others continue to commitment to community development, believe that examiners will criticize them broadly defined. In our discussions today, I later for inadequate documentation. Let me expect to hear and learn more about those assure those of you here today that you can innovations and how we can use them to ad- take full advantage of that program without dress the problems that persist. fear of adverse criticism. When I became Comptroller of the Currency five This also is true of the public welfare invest- years ago, I made a commitment to do every- ment authority embodied in Part 24 of the thing in my power to promote fair access to OCC’s regulations. Certainly the amount of credit and other financial services for all of our Part 24 equity investments used by banks people. I think we have made significant generally, and for small business lending and progress to that end. One reason we are meeting investing specifically, has increased in the here today is to help ensure that the momentum last few years. But most national banks are not continues to build, so that, one year from now, at their 5 percent of capital threshold for self- we will have even more striking progress to certification of qualifying investments, and report. Wherever the future takes me personally, only a handful are at their aggregate statutory let me assure you that the cause of financial 10 percent limit. It is in your interest — and in democratization will always be special to me. that of the small business community — for banks to take fuller advantage of this program. Eugene A. Ludwig is the 27th Comptroller of the I encourage you to do so. Currency. The Office of the Comptroller (OCC) supervises nearly 2,800 federally chartered Although we certainly have obstacles to over- commercial banks that account for more than half come in the years ahead, the dominant impres- of the assets of the commercial banking system. sion I took away from my meetings across the By statute, the Comptroller also serves a concur- country was one of energy, pride, and optimism. rent term as a director of the Federal Deposit I met many lenders and small business people Insurance Corporation. In January 1997, he was who, through creativity and perseverance, have elected Chairman of the Neighborhood Reinvest- became allies in common partnerships. ment Corporation. The Comptroller is also chair- I learned about organizations, such as The East man of the Federal Financial Institutions Exami- Los Angeles Community Union (TELACU) — a nations Council and of the federal Consumer one-stop resource for minority small business Electronic Payments Task Force. Ludwig joined people, which provides counseling and arranges the OCC from the law firm of Covington and loans — loans with some of the lowest delin- Burling in Washington, where he was a partner quency rates in the entire industry. beginning in 1981. He specialized in intellectual property law, banking, and international trade. I heard about innovations in lending, such as He has written numerous articles on banking and second- and third-look programs, whose opera- finance for scholarly journals and trade publica- tive philosophy reflects a dogged determination tions and was a guest lecturer at Yale and to find ways to make loans to worthy borrowers Harvard law schools and Georgetown University’s who might not qualify by traditional standards. International Law Institute. I heard about encouraging developments in the use of credit scoring models to reduce the costs Special Guest Speaker, Richard C. Hartnack, of reviewing and monitoring small business Vice Chairman, Union Bank of California loans, while attending to the potential problems I would like to provide some insight into the of inadvertent discrimination in their use. The market size, revenue streams, and changing

6 competition and technology that we will see in the nature of that opportunity is important to the small business market. servicing those firms most effectively.

The small business market represents a large The revenue stream is also important. In total, and attractive opportunity for banks and other small businesses create about a $33 billion financial service providers. Although this revenue market for traditional banking products. seems obvious today, not many years ago the Today, that $33 billion market is dominated, combination of capital strain, cost tensions, and about 93 percent, by America’s banks. Approxi- loss aversion led banks to walk away from that mately 7 percent of the participation by nonbanks opportunity. in those areas, and most of that participation, is in the area of credit, not core checking products. There are 5.5 million small businesses operat- ing in America that conduct up to $10 million The $33 billion revenue stream creates ap- in sales. The huge majority of those businesses proximately $20 billion and some high return- are small. To tap this market meaningfully, one on-equity (ROE) opportunities for the banks that has to build in a cost-effective and risk-accept- do this well. Because one does not see 40 able way for systems, processes, procedures, percent ROEs routinely posted by banks, one and a culture to attract small businesses. must remember that there are shared costs, shared facilities, and other factors that lower This market possesses some interesting the total at the bottom line. At $10 to $15 characteristics. Turnover in the small busi- billion, however, the bottom line is an interest- ness market is relatively large. One-half of all ing market for all participating in it. the firms listed in any single year disappear or reorganize in the next five years. Approxi- Banking revenues are only part of the picture. mately 14 percent of the institutions disappear In addition to banking revenues, there is a from the market in any one year, because they sizable property and casualty insurance go broke, or they are bought, enriching every- revenue stream, nearly as large as the bank- one. Approximately 16 percent of the total of ing stream. The life and health insurance small businesses operating each year are stream is approximately one-third as large as start-ups. That is a tremendous number of the banking stream. But when it is combined start-ups. with property and casualty, the insurance stream exceeds banking revenues. Some significant competitors, and notably no banks, The small business market play in each of those fields. represents a large and Altogether the small business and commercial attractive opportunity for revenue potential in the small business market banks and other financial today totals approximately $78 billion in rev- service providers. enue stream. This is interesting because approximately one-fourth or one-third of that opportunity lies with traditional products, and For a bank or a competitor trying to enter this the rest with nontraditional products. market, sitting still means falling behind. You can shrink out of this business quickly, if you are Also interesting is the propensity of small not adding to your client set every year by retain- business people to group their personal and ing those you have and bringing in new ones. business activities. Indeed, 36 percent of all small businesses bank with their current The nature of small business is changing. financial institution, because they conducted Growth occurs mainly in the services and their personal business there first. Twenty-six financial services arena, which presents some percent conduct their personal business at the interesting implications for those who make same bank in which they conduct their busi- their living lending money. Service firms use ness banking, because their business banking much less credit on average, but more deposit was there first, and 38 percent have split the products, than nonservice firms. Understanding relationship purposefully.

7 Small business owners also tend to be more American Express; and investment managers, affluent customers, offering a much higher such as Fidelity, are all trying to split that large average revenue per retail relationship. revenue opportunity.

Besides the owners, small business employ- It is significant that small businesses adapt to ees represent approximately $33 billion in technology nearly twice as fast as consumer revenue and approximately $19 billion in households, and that ability allows competitors product profits when addressed and captured to reach those clients in a new way. Technol- as a whole. ogy also works for banks and ultimately for the small business customer. The changing credit Small business presents an interesting profit processes, which include credit scoring and story with approximately $33 billion of tradi- cost cutting methods, have reduced by a huge tional commercial small business services and amount the cost to originate, the turnaround another $45 billion in nonbank small business time, and the break-even loan size. Our BAI/ services. McKenzie report noted that Wells Fargo origi- nated more than $1.4 billion in new loans Small business owners’ retail revenue is $27 during a two-year period (1996-1997). Those billion. The owners are almost as valuable as changes enable bankers and others to address the small businesses. this market quite efficiently. The 83 billion small business employees The growth in automated small business lend- present to banks a huge opportunity — a $188 ing has two sides, both good and bad. The good billion revenue opportunity. Because nature scenario shows automated lending lowering the and a free market abhor a vacuum, that profit- cost to the institution and, ultimately, the able opportunity is forcing competition to hassle factor and the waiting for small busi- change rapidly. We are not the only industry nesses. However, it will also lead to that recognizes that opportunity. securitization, which will make available an almost limitless amount of capital to small business, but will require a new set of skills for Small business owners’ retail competitors to participate. revenue is $27 billion. The message to the banking industry is clear: if you do not like the share of the credit card market that you have today, or the share of The combination of new competition, technol- the mortgage market that you have left, be ogy that encourages new competitors, and careful about the small business market. You regulatory changes creates a different competi- might have an equally small share of that tive landscape. The message today, if any, is market in less than a decade. The standard- that bankers must think carefully about that ization and securitization of this product could competitive landscape. cause small banks with a huge amount of their total profit emerging from this market The average, reasonably well-established small segment to be unable to play any longer, as business probably uses brokerage companies, they are unable to do in the credit card and such as Merrill Lynch. Dedicated lenders, such mortgage markets. as the Money Store, participate in this market. Leasing participants, such as G.E. Capital, are All of those issues will change dramatically building huge portfolios. Complimenters, such the way small business people think about as AT&T, that provide credit services, leasing their relationships. Some may value conve- services for their own equipment, and long nience and deal impersonally with providers distance services and other telecommunica- that specialize in convenience. Some may tions services become key competitors. Insur- value access to capital more than anything ance service providers, such as ADP; software else. Clearly, the less creditworthy you are, providers, such as Intuit, with its Quick Books; the less likely you will be to obtain such as Fidelity payments people; such as preapproved credit in the mail. Without that

8 preapproved credit in the mail, you must ment and deposit systems, and electronic value your ability to obtain credit. That may delivery. Other changes in the market will be be the number one problem facing a small price cutting, newly-packaged products, proac- business person. tive marketing efforts directed at customers, and a lack of geographic boundaries to compe- Payments — cash, coin, currency, clearing tition with the leveraging of the high-cost checks, accepting payments — may be a small delivery system. business person’s most major activities and determine where the small businesses will The end result will be reduced spreads on bank. Credit and access may be secondary to lending, which can be seen either in lower the coin and currency and payment services pricing or in the increased risk that people that small businesses obtain. Some busi- take; reduced spreads on deposits as sweep nesses may be able to value advice and infor- accounts and other activities and products are mation and use providers with that approach aimed at putting idle balances to work for the to the market. small business person; much higher acquisi- tion costs; and more switching. One need look If small business people behave as other con- only at the telecommunications industry as the sumers of services in our complex, multi- number of active switchers substantially in- competitor economy, they will make choices crease the average cost of acquisition. based on their own set of values and needs. They will determine, in addressing this market, The status quo will lead to focused players steal- whether to use providers who build a brand ing market share in the small business market. name that establishes value and capability. Banks that compete in the same way tomorrow as Alternatively, they may use advisors who make they do today will not increase their market the choices for them. Those advisors could be share over time. Their share will shrink. CPAs or consultants to Internet Web sites. Some businesses may choose to disaggregate The Treasury and fee-based payment systems their purchases and seek the best of the class will come under increasing attack by compa- in each of the different kinds of services that nies, such as ADP, Microsoft, and Intuit. Merrill they provide or require. This would result in a Lynch, Fidelity, and Vanguard will actively huge disaggregation in the marketplace. market replacements for traditional deposit products. On the credit side, companies, such The old way was profitable for everyone, and it as American Express, the Money Store, and G.E. worked. It was a fragmented industry of more Capital, will grasp parts of the market. That will than 10,000 banks. All businesses dealt with leave banks with a hammerlock on the low banks. Earlier, we showed that 93 percent of all return, high cost currency, and check process- traditional products are provided still by banks. ing aspects of the business. That is a dangerous There was an expensive distribution system place to be. that focused on location convenience. It gave small businesses relatively limited access to The small business market continues to be capital, although good access to debt. There was large and lucrative. New competitors are seek- a high retention of small business, and banks ing to stake out market share at the expense of were regulated to ensure a low cost of funds, current providers. The way businesses buy, the which provided the profit engine. Industry way they are served, and the nature of the conduct was directed to high margins, standard value proposition being offered to them will products, nonaggressive competition, and change greatly in the next decade. Banks that conservative loan standards. Geography was the do not adapt surely will lose clients, revenues, basis of competition. ROEs were high, and one and ultimately profits. was fairly secure with a stable market share. Richard A. Hartnack is the vice chairman and head The structure of delivery is adapting to of the Community Banking Group at Union Bank of changes in technology, competition, regula- California in Los Angeles. He is also a member of tions, increased lending capacity, and market- the board of directors. Mr. Hartnack is the immedi- ing capacity and capability, alternative pay- ate past president of the Consumer Bankers

9 Association (CBA) and the current chairman of the lending staffs on their overtime. They are California Community Reinvestment Corporation. building a business, which does not work on a He also serves on the boards of several civic dollar-for-dollar basis. The lending business, organizations, such as the Los Angeles Urban particularly for small banks, is a small busi- League and Operation HOPE. ness. When aggressive entrepreneurs spend extra time building their businesses, counsel- Last year, Mr. Hartnack became chairman-elect of ing pays off handsomely in terms of the return- the Bank Administration Institute (BAI), an organi- on-assets (ROAs) and ROEs. zation dedicated to improving the competitive position of banks and financial services organiza- A participant asked if a federally-funded part- tions. Under his leadership, BAI, in partnership nership for counseling could be established with McKenzie & Company, published a recent between the banking industry or the financial report entitled, “Unlocking Winning Strategies to industry and the government entities operat- Serve Small Business, Banking the American ing technical assistance programs for the Dream.” He is active in, and extremely knowledge- community. Hartnack responded that this able about, small business. type of partnership can work well. A commu- nity partnership to address those most in need of counseling could be formed, even Q and A Summary though the government cannot provide tech- The issue was raised about the costs for pre- nical counseling to 5.5 million small busi- and post-counseling for small businesses. nesses in America. Hartnack said it is difficult to provide five hours of counseling for a $5,000 loan and Also raised was the issue of the market mov- make a profit. However, it is not possible to ing toward securitizing small business loans, make a safe $5,000 loan to some entrepre- i.e., small business loans guaranteed by the neurs without good counseling. Institutions SBA or conventional products standardized for must make a reasoned decision on whether resale by a bank in the secondary market. counseling for the $5,000 loan pays off in Hartnack responded that securitization refers terms of the net present value of all future to general market loans. The size of the loan is flows from that business. not a barrier. We will not securitize $1 million loans in the near future, but it is foreseeable Ludwig added that two market approaches are that we could securitize $50,000 and $100,000 developing. One is a commodity-driven approach loans in packages. Wall Street likes to deal using credit scoring in the secondary market; with large numbers, such as blocks of $50 and that approach should grow. There also will be $100 million. This makes life even scarier for those who are adept at the more traditional small banks, unless they carve out the highly community and high touch approach. Those convenience-oriented part of the business that people will be successful and will have a valu- allows them to pay operating fees and the able market niche to the extent that they prices. Hartnack also stated that small banks emphasize counseling. should be concerned about large banks Ludwig remarked that it is not feasible to have securitizing those loans. The emergence of a $5,000 loan that includes $500 worth of large banks may reduce the room in each counseling time, if you pay people by the hour. market for the number of community banks However, some institutions have charged up and the size and the growth they enjoy.

10 3. Forum Topics

The Changing Structure of the I have been in banking for 26 years in some of the more renowned banking organizations in the Banking Industry and Its Effect state of Texas. I have worked in large banks, on Small Business Lending medium-sized banks, and in the last 12 years or so, in small banks. It is my opinion that small Bankers from community banks and larger business banking is best understood and prac- financial institutions discuss the numerous ticed by the community banks across America. benefits that accrue to them from active small At Gateway, we have a basic formula for success. business lending programs, and how those We take seasoned bankers with good business institutions now serve the needs of the small acumen, provide them with quality products and business market. They describe a community services, put them in front of the customers, and bank’s successful SBA lending program; how a leave them there. Our bank officers do not large bank’s small business lending is designed outgrow our customers; they stay with them. so that banking can be done at the bank’s That creates a bond, a sense of trust between offices, through the mail, fax, ATM, PC or the the loan customer and the bank, and it rein- Internet; and a community development bank, forces an important role that the banker has established in 1990, that provides loans and played throughout history with the small busi- investments to borrowers and community-based ness community: the “consulting” or “advisory” projects that typically would not qualify for role. As bankers, we see small businesses face conventional loans. Barbara Grunkenmeyer, many pitfalls. Most small businesses have one credit risk expert, Credit Risk Policy Division, thing in common: the person who established OCC, moderated the session. the business either knew how to make it or knew how to sell it. Most are not great business William Gene Payne, President and CEO, people, although many become great business Gateway National Bank people. That bond must exist, so that the banker Gateway National Bank ended 1997 as a locally- can advise the small business person on how to owned community bank in Dallas with $97 avoid potential pitfalls in their business. million in total assets. In January 1994, we started SBA lending and have achieved preferred The middle market is most often described as lender status. Since 1994, we have closed $44 those companies with sales between $1 to $50 million in SBA loans. In 1996, we were the million. The lower end of the middle market, number three bank lender in terms of volume in which consists of companies with sales of $10 the Dallas-Fort Worth district, which is one of the million or less, is the target market for Gateway. more active SBA districts in the country. In the In the 1960s through the 1980s, Gateway’s same year, we were awarded the top lender to target market consisted primarily of small women in business award by the SBA, Dallas manufacturing companies, distributors, and District, for our efforts in lending to women-owned retailers that sold durable goods to consumers. businesses. Most of those businesses had qualities in I am here as a proponent of SBA lending for the common: strong fixed assets and inventories community bank, although it might seem un- that we understood well. We knew how to liqui- usual for a Dallas, Texas, banker to address a date them and how to lend to them. The market forum in Washington, D.C., on best business is different today. We have seen an explosion in lending practices. A few years ago, most of the service-oriented businesses with fixed assets country viewed Texas bankers as something less that consist often of office equipment, comput- than positive role models. Gateway National Bank ers and software, and furniture. Traditional and Gene Payne survived the crisis. Having banking must change to lend to companies survived the crisis, I am imminently qualified to such as those. We must lend for longer terms address you today on a subject near and dear to on assets that at first blush do not justify a loan my heart: small business banking issues. term of that length. In other words, computers

11 do not justify a seven-year amortization; their themselves unable to reduce their loans to life span is not that long. amounts below the loan amount when their loans matured, putting the collateral under We needed to change to be prudent and to lend water. The result was credit deterioration, to those growth-oriented businesses. One nonaccruals, classifications, foreclosures, and example is Tactica, Incorporated, a Dallas-based business failures. The traditional approach to computer consulting company that specializes lending failed many Texas banks. It did not fail in computer networking systems for busi- Gateway, but we learned a few million lessons. nesses. They approached us for a small busi- ness working capital line to enable them to We looked for an alternative method that would fund their growth. Tactica is a well-capitalized enable us to lend to those emerging growth business that has experienced management companies that had collateral insufficient for and a strong business plan. However, the use as a good secondary source for repayment. company had a nominal operating history. We looked for a way to lend money on collateral Traditional methods would not accommodate a that recent history had proven was deteriorat- loan to Tactica. The collateral did not justify it. ing in value. However, we were able to make the loan through our partnership with SBA. Today, In looking for alternatives, we found a partner Tactica is a successful business. It employs in SBA. We did not plan to do a little SBA lend- more than 30 people in our market and makes ing. We planned to be regarded as a premier a profit. It also is a net provider of funds to the small business lender in our market, to make a bank; in other words, Tactica has more in difference, not only in the profit and loss state- deposits than it has borrowed from the bank. ment of the bank, but also in the community. Most community banks still lend money using Rosa Rodriguez, or Mamma Rosa, is one ex- the traditional method, which works well for ample. Mamma Rosa immigrated from Puerto them. They may let the young companies or the Rico in the mid-1980s. In the early 1990s, she companies without safe, hard collateral choose became a citizen of the United States and their competitors. Some of the community bank- started a small day care center in her home for ers may be saying, “Gateway, this is the 1990s. four or five children. She did well and expanded Everything is great. Maybe you are just too into a rental facility that took care of 50 chil- conservative in the way you approach things.” dren. She operated there for a couple of years, then approached us to assist her in building a In the late 1970s and the early 1980s, we had 6,000 square foot, state-of-the-art day care one of the most dynamic, vibrant economies in center in a lot adjoining her home in southern Texas. In many ways, it was the envy of many Dallas County, a lower income area. parts of the country. In the mid-1980s, the economic cycle changed in significant ways and We accommodated her. When the construction created the banking crisis in Texas. In Dallas, was completed, she opened at full capacity. She the traditional approach did not work alone. has done very well; as of last week, she had a Economic changes occurred, even when deci- waiting list of 125 children more than her sions were made using safe, sound, and tried capacity. Mamma Rosa is a success story, but and true methodologies. Gateway could not have made a 25-year, fully amortizing real estate loan to Mamma Rosa Real estate lending is one example. Does it without the assistance of SBA. sound familiar and safe to lend 80 percent of cost to market, 15- to 20-year amortizations, Through more than 200 loans, 41 percent of five-year balloons? Shortly in Dallas, real which went to women and minorities, our estate values plummeted 25 percent to 50 customers have created more than 1,600 jobs percent, and more in some cases. Almost in the last four years. There are many success overnight, collateral values deteriorated below stories justifying our partnership with the SBA. loan amounts. Those customers able to make It has been fantastic for Gateway as well. Over their payments continued to do so. Others found that same four years, Gateway’s total assets

12 have grown by 70 percent. Every year, we have administration and lending at Citizens National improved our profitability compared with the Bank, Texas Commerce Bank, and Allied Bank previous year. before joining Gateway National Bank in 1984. Gateway is a $97 million independent community There are many benefits to an active, vibrant bank located in three areas in Dallas. It is a top SBA program in your bank. It increases the small business lender in its market. economic development in the community — more than 200 loans and 1,600 jobs. It in- Robert K. Kottler, Senior Vice President, Small creases community reinvestment opportunities Business Banking, Hibernia National Bank — think of Mamma Rosa. It improves competi- I would like to talk about the activities of a tiveness with larger banks and nonbank lend- large bank. Hibernia has grown quickly from a ers. Gateway can lend longer term against bank of $10 billion to $12 billion through two shorter lived assets. It increases liquidity and recent mergers. Things are changing rapidly. loan-to-deposit ratio, which are important issues to the community bank, in that an Hibernia operates in Louisiana and Texas. In active secondary market exists for the guaran- 1992, our new CEO determined that we were teed portion of the SBA loans. It increases missing the opportunity in small business. In lending limits in the amount that we can lend 1992, Hibernia with approximately $5 billion in to any individual borrower because the guaran- assets, was the largest bank in the state, but teed portion does not count against our loan the fifth largest small business lender. Basi- limit internally. The guarantees are useful as cally, we were not lending to small businesses. security for deposits for public sector funds. We told our small business customers that we did not know what to do with them. We decided Gateway is a flagship for SBA lending in many to change that. In January 1993, Hibernia had ways. As we raise that flag, we also see other 1,000 small business loans totaling $100 mil- opportunities to lend money to non-SBA quali- lion. Today, we have 30,000 small business fied borrowers. We have also seen growth in our loans totaling nearly $1.5 billion. In January commercial and real estate and consumer 1993, Hibernia processed 90 loans through the products. Over the past four years, SBA lending Small Business Loan Center that we had has represented good business for Gateway recently created. Today, we process more than National Bank. The SBA is the most significant 3,000 small business loans a month. In 1992, private-public partnership ever created by 15 bankers were assigned to seek business Congress. from small firms. Today, there are more than I would like to comment on the securitization 150. In 1992, it probably took two weeks to get a issues discussed earlier. Securitization is not $10,000 loan. Today, it takes less than two an avenue for community banks. Gateway does hours; in many cases, our application serves as not have the large funds necessary to put our note. You do not even have to come into the together securitization packages. More impor- bank to get credit. In 1992, our average size tantly, we need earnings assets to fund and to loan was $150,000, even though the average support deposit growth in our community. small business borrows about $25,000. Today, Besides, if we sell the guaranteed and the our average loan size is $35,000. We are mak- unguaranteed portions of the loan or non-SBA ing more $5,000, $10,000, $15,000, and $25,000 loans in a securitized fashion, what is the loans. For the first time, we are making an motivation to provide small businesses with the effort to serve the under $1 million revenue continuing advisory or consulting role provided segment of small business that we believe has by the banker throughout history: Small busi- been underserved. nesses need bankers to stay in touch and to Self-selection and convenience are important. advise. Our premise at Hibernia has been that custom- William Gene Payne is president and CEO of Gate- ers and potential customers will decide how, way National Bank headquartered in Dallas, Texas. when, and where they will obtain information, He has been active in business lending throughout purchase products, or obtain customer service. his 26-year banking career, having served in loan The old paradigm was that a customer had to

13 come into the branch between nine and five to inbound number and provide our application and get a loan. We did not come to you. Business could information on the Internet. be conducted only face-to-face, and we treated our customers as either commercial or consumer. Arthur Andersen’s study indicated that 30 We did not understand small business. percent to 40 percent of small businesses were started with credit cards. Because we thought We would take a commercial approach whether many small business owners were comfortable it was a $10 million loan or a $10,000 loan. We with credit cards, we issued a Visa business required an annual financial statement from credit card with a line of credit that also could be every small business. If it was not complete, we used for purchases. We learned from the credit sent it back five times until it was completed card experience. On smaller loans, your applica- accurately. We did not understand why none of tion becomes the note. After you apply for the our small business customers wanted to bank loan, you are informed of your approval and with us. asked where you want the money deposited. On the deposit side, we offered a flat fee busi- Our self-selection services are designed so that ness checking account for $8 per month for up small businesses can do business with us at to 200 transactions. My favorite question to banking offices with dedicated business bank- members of small business-owner focus groups ers, and through the mail, the fax, the ATM, the is whether participants understand account PC, or the Internet. You have your pick. analysis. They all say they do, but most busi- nesses do not. We reduced the minimum Some customers still want to come to the balance for waiving fees to $5,000, and other- banking office. To accommodate this, we moved wise charged a flat fee each month. many of our business bankers from downtown and put them in the branches or in suburban On the loan side, we added business credit cards, locations where our customers are. That is check access business line of credit cards, and where our customers feel comfortable and term loans to make it easy for our small busi- where our bankers are today. nesses to borrow. We made the documentation simpler and in some cases part of the note. We We also have dedicated business bankers who also began to fulfill through alternate channels, work with our customers. They work on incen- and we took the approach that we want to do tive pay: approximately 50 percent of their business with every small business owner seven salary is incentive. If they do not do business, days a week, 24 hours a day. they do not eat very well. That has made a huge difference. At the same time, we also took The way we fulfill credit has changed dramati- precautions, so that our bankers cannot get cally. I use the concept of my wife as a small paid for loans approved under their authority. business owner. She wants a problem solved Those business bankers are much closer to the immediately; she does not want to be bothered. customers, and they act as advisors. When she needs a loan for her business, she would likely apply by fax, late in the evening. We decided to provide instant gratification for as Our goal is to let people know many small business owners as possible. Every that we want to do business credit application has three or four items on it. It with them. has an inbound 800 number. If you call us, we will try to make the loan over the phone. It also has a self-mailer. If you are not comfortable talking with us face-to-face, you can mail the Hibernia sends out more than 1 million pieces application, and we will call back and tell you of direct mail each year. Recently I bought a whether we can do business with you. We also light fixture for my house. I went into a small provide a fax number. My wife and I are notori- business in the French Quarter in New Orleans ous for using the fax and Internet at two o’clock wearing my Hibernia shirt, and the proprietor in the morning when we finally sit down to talk said, “I know you.” He said, “I know you want about her business. We will also give you an my business. Here is the mail you sent me.

14 Your telebankers have called me, and a banker FASTRAK 2000 is not the SBA FASTRAK, but stopped in to see me yesterday.” Our goal is to rather a training program sponsored by the let people know that we want to do business Kaufman Foundation in Denver. This is “first- with them. time business owner training,” which is the equivalent of first-time homeowner training. We Even after five years, many small business became the lead sponsor of the program, which is owners still are not convinced that we really conducted in two six-week sessions. We provided want their business. advertising and funds. More importantly, we We have a direct bank operation. We send employed business bankers to act as counselors mail. We make outbound phone calls. We also and teach the program. We also offer scholar- have inbound sales people, and we do about 20 ships to our customers and to some of our pros- percent of our business with small businesses pects who we think would benefit from the over the phone and through the mail. Those program. A person who has been through customers do not necessarily want to come FASTRAK 2000 is five times as likely to be in into the branch or to see a banker. They have business five years from now than the tradi- small credit needs, and they are willing to do tional business owner. The money spent to buy business with us that way. this nationally tested program was far better spent than if our own bank had developed a We have an inbound telebanking group. We program. find that similar to many large companies, many business owners of smaller firms are Robert Kottler is senior vice president and manager satisfied with doing business over the phone, if of Small Business Banking at Hibernia National they can get the information they need quickly Bank. He is responsible for developing small and efficiently. business products and policies. Under his leader- ship, Hibernia has become a leader in creating We also use the fax a lot. We have an inbound innovative products and services for small busi- fax server that allows our customers to call an nesses. Hibernia is a $14 billion bank headquar- 800 number, have the fax service send the tered in New Orleans. It also has operations application, and fax it back to us. We do a centered in Louisiana and Texas. substantial amount of business over the fax, and it has worked well. Howie Hodges, Bank of America Michael Mantle was unable to attend the forum. We have tried the Internet. Our application for Howie Hodges gave his presentation. credit appears on the Internet, but it still does not receive many hits. The small business Bank of America Community Development section and our SBA page are accessed often. Bank was established in 1990 as a subsidiary However, we are still not receiving applications of Bank of America Corporation. We provide at the rate we want. loans and investments to borrowers and community-based projects that typically would Technology-based solutions will continue to help not qualify for conventional loans. In eight the small business market. We use our data- years, we have made over $3.2 billion in new bases as effectively as we can to identify those community development loans and more than people with whom we would like to do business, $500 million in equity investments. and we try to use our technology to make appli- cations simpler, faster, and more efficient. One The market’s acceptance of our products and of my biggest fears is that I will wake up one day service has been spectacular. Last year alone, and my small business customer will be banking we originated more than $1 billion in new with credit card companies instead of me. Self- loans, nearly double the amount we booked two selection will make a difference. years ago. We are determined to do even more. Last year, Bank of America Corporation Training for small business owners also is an pledged $140 billion for community lending important issue. About a year and one-half ago, over the next decade. A large portion of this the University of New Orleans, SBIC, and a commitment belongs to the Community Devel- company called FASTRAK 2000 visited us. opment Bank. Over the next 10 years, we have

15 set an objective of $10 billion in government- It has developed several dynamic and pioneer- assisted small business lending and $13 billion ing ways of placing capital into the hands of for multifamily affordable housing. the traditionally underserved markets.

There are several reasons for our success. We The Micro Loan Program, which uses interme- have absolutely the best, first-rate staff. Long diaries as lenders to businesses seeking loans ago, we determined that it is easier to turn a up to $25,000, allowed hundreds of businesses community activist into a banker than to turn a to secure financing at a reasonable cost and banker into a community activist. That deci- terms, particularly during California’s reces- sion continues to drive our staffing decisions, sion several years ago. The SBA should con- and it has given us a better understanding of sider expansion of this program. community development organizations and what they need from a financial services The Low Doc Program has reduced paperwork and institution. enabled hundreds of banks to make SBA loans to small business owners in amounts below Another reason for our success is aggressive $100,000. The introduction of the minority and market expansion. We now have offices in 33 women prequalification programs has increased cities and 25 states across the country. Last the availability of capital to both of those histori- year, we opened a new office in Atlanta, and two cally underserved markets and, perhaps more years ago, one in the District of Columbia. importantly, has sent a strong message that the credit window is open to everyone. This program As the bank moves into markets, we have is important particularly in light of the dynamic continued to introduce additional products. In growth of minority and women-owned businesses 1997, we began to offer tax exempt private throughout the United States. placement financing for affordable housing.

I am proud of those accomplishments, but none of our initiatives could succeed without help The business that cannot from federal agencies in Washington, D.C., in overcome those challenges will the form of partnerships, a critical ingredient of not survive, and that is why the our success. SBA is so important. To a great extent, our success depends on initiatives from economic development and public sector support from such agencies as the Not long ago, the National Foundation for Women SBA, the Department of Housing and Urban Business Owners saw that businesses owned by Development (HUD), and the United States Hispanic, Asian, and African American women Department of Agriculture (USDA). Those were growing three times faster than all the U.S. agencies help companies, such as mine, to firms combined. The survey also concluded that pump resources into neighborhoods that desper- firms owned by minorities and women employed ately need more jobs and better housing. They more than 1.6 million people and generated are catalysts for better communities and per- approximately $184.2 billion in sales. That is a form a critical role in the economic develop- market worthy of some attention. ment of our nation. The SBA is not alone in supporting small At different times and for different reasons, businesses. The USDA is joining it in helping companies may find it hard to obtain loans. in the economic development in rural commu- This may happen at the start-up phase or nities. Jill Thompson and Dayton Watkins are during periods of rapid growth. It might occur serving well the department’s Rural Develop- as a result of economic recession or unfore- ment Agency. Last month, Bank of America’s seen operating problems. Regardless, the Community Development Bank became the business that cannot overcome those chal- first nationwide certified lender under the lenges will not survive, and that is why the Business and Industry Guaranteed Loan Pro- SBA is so important. gram, which finances new and existing rural

16 businesses. Many people do not realize it, but collected at the expense of both the SBA and its the USDA makes a significant contribution to borrowers. To boost gain on sale premiums, the growth of small businesses. Last year, the lenders often offer 25-year repayment schedules Program guaranteed $815 million in loans and to companies that need government-guaranteed created or preserved nearly 30,000 American credit for only a few years. As a result, their jobs. At Bank of America, we hope to add to this loans remain on the books long after the program’s effectiveness by helping to stream- company’s assets are depreciated. This does line the application process and shorten the nothing to help the borrower’s debt-to-worth ratio turnaround time for rural borrowers. or the SBA’s risk exposure. We can put the taxpayers’ money to better use. Virtually all government agencies, including the SBA and USDA, are now being asked to do SBA lenders deserve a fair return, one that more with less, and this challenge presents reflects the risk of a conventional small business them with excellent opportunities to introduce portfolio. However, some of those premiums are some fundamental changes. hard to justify; in fact, the current rates of return sometimes exceed 50 percent. If one-half of the Initiatives have been taken to complement the SBA 7(a) loans are sold in the secondary market continuing efforts of both SBA and USDA to save at a 10 percent premium, the federal government money and leverage capital. First, those agen- relinquishes $500 million a year of revenue that cies should encourage representatives of each could be used to expand capital formation. Instead district office to meet with participating lenders of inflating gain on sale premiums, we should to develop goals and strategies tailored to local return the money to the SBA for additional credit needs. Financial institutions must economic development activities. assess under the CRA the needs of their geo- graphic markets and report small business Many people argue that the SBA loans will not lending patterns. Each SBA district office should be made if lenders cannot make money. The perform a similar assessment. Lending pat- truth is that for a long time many of them did terns also should be reviewed alongside CRA not want to deal with the SBA’s bureaucracy. guidelines to determine whether credit needs are SBA has remedied that problem. Today, banks being met. We must stretch every dollar as far as are making small business loans, and the it can go, and that means doing a better job of proper compensation of government for credit steering borrowers toward more appropriate and enhancement could add billions of dollars to the cost-effective products that present less interest pool of capital available to small firms. rate risk and require less taxpayer subsidy. Government agencies can better leverage An example is the SBA’s 7(a) product, which is their resources by applying their guarantees designed to provide small companies with work- more creatively. For example, the SBA might ing capital. Often, however, it is used to finance issue loan guarantees with annual insurance the acquisition of commercial real estate. This premiums in a manner similar to the Federal use of the 7(a) product typically adds unneces- Housing Administration (FHA) Title 1 home sary risk and expense. For commercial real improvement product. This would keep the SBA estate transactions, the SBA should mandate from issuing guarantees that remain in place the 504 program whenever it is the least costly long after the need for credit enhancement alternative to the client and to the government. expires. If Microsoft Corporation had borrowed under the SBA 7(a) program in 1980, the The SBA also should look at gain on sale premi- technology giant could still carry an outstand- ums and loan origination. I read almost every ing loan balance guaranteed by the SBA. week about another conference aimed at teach- Under the annual insurance premium option, ing lenders how to maximize returns by convert- lenders typically would drop the SBA credit ing conventional small business loans into SBA enhancement after the borrower’s financial 7(a) loans. They will teach you to increase conditions had improved. dramatically your rate of return by lengthening prepayment schedules and selling loans into the One final recommendation is that the SBA secondary market. These premiums are being should require the disclosure of all loan referral

17 payments made to third parties. Most SBA income housing tax credit. The tax credit has borrowers probably are not fully aware of the generated billions of dollars of what I refer to as amounts that brokers receive from lenders. I “synthetic equity” for affordable housing. believe that they are entitled to this information. Since its creation 11 years ago, we have wit- The Comptroller points out that virtually all nessed the development of more than 90,000 working class Americans were once considered units of safe, decent, and affordable housing. unworthy of credit. Today, credit is widely Demand for tax credits has increased signifi- available. Innovation has reshaped attitudes, cantly as community development organiza- leading gradually to the recognition that most tions learn how to use them in leveraging Americans know how to use credit when they are private investment. If our society can develop a given a chance. The democratization of credit has successful incentive for the creation of afford- enabled millions of Americans to enjoy the ben- able housing, we can do the same for small efits of home ownership and asset accumulation. business lending and economic development. The CRA has made a big difference in recent It will take cooperation among banks and commu- years. The financial services industry has nity organizations, government officials, business redoubled its efforts to make credit more easily leaders, and religious and social organizations. available in distressed and underserved com- Together, we must exercise our imagination. We munities. Consider several examples. Between must redouble our commitment, and we must 1993 and 1996, mortgage lending to minorities stretch every dollar as far as it can go. has grown at twice the rate for all borrowers. Small business lending nationwide has sky- Howie Hodges is a regional vice president for Bank rocketed 144 percent during the last five years, of America in its Community Development Bank in and since 1993, banks and thrifts have made Washington, D.C. He and his group are responsible CRA commitments of more than $270 billion. for small business lending throughout the East Coast. Before joining Bank of America, Mr. Hodges There is much work to be done throughout the worked for the Department of Commerce in the United States in disadvantaged areas and Minority Business Development Agency. particularly among low-income and minority borrowers. The need for capital from the Bronx Q and A Summary to South Central Los Angeles is still acute. We Several questions were asked about services must find a way to raise capital from emerging provided to small business customers. Payne enterprises. This is still one of the greatest said that the company employs 10 lenders, challenges in lending. All of us must think who are trained for SBA lending. A special about the challenge of stimulating capital division of three lenders focuses on SBA formation in distressed communities. lending. In addition, the company employs a credit analyst and a closing clerk, who work with local attorneys. The loan department If our society can develop a handles most of the volume. successful incentive for the Kottler discussed the turnaround time on loan creation of affordable housing, decisions and paperwork requirements. we can do the same for small Hibernia has a one-page application only for business lending and economic unsecured loans less than $50,000. Hibernia development. either calls or writes customers to inform them if the loan has been approved. Loan approval takes about 15 minutes. Loan pro- cessing takes more time to close if collateral Society has made a start through the introduc- is needed. Hibernia will fund the loan the tion of empowerment zones and other initia- next day, if the applicant has a checking tives, but we must keep working at it. It may be account. If the applicant does not have a possible to apply to economic development many checking account, Hibernia will ask the of the same principles behind our nation’s low- applicant to open one.

18 A participant commented that the audience is takes a second look at any declined loan appli- supportive of the SBA. However, Bank of America cations. Because the Community Development may not have the perspective of the majority of Bank is a specialized unit within Bank of program users. For example, Gateway could not America that focuses exclusively on small afford to participate, because the financial business lending, it conducts credit reviews one return would be removed and the credit risk at a time using the five Cs. greatly increased, which would drive the major- ity of the 7,000 banks from participating in the A participant asked about the securitization of program. The participant asked how can that be small business loans in the Hibernia and Bank balanced with the present trend of reducing of America portfolios. Kottler responded that at public funding for these enhancement programs. Hibernia there is not a large amount of pres- Hodges responded that a number of nonbank sure on capital or liquidity. As a result, it still lenders have used the program or the products keeps the earning assets on the books. How- inappropriately, placing people in the wrong SBA ever, Hibernia will consider securitization program and thereby using up the credit and the should either its capital requirements or its guarantee. Bank lenders and regulated lenders ability to fund itself change. must be aware of marketplace occurrences as Hodges stated that Bank of America does not they compete against many nonbank lenders in have capital problems. Bank of America has a the small business area. When a portfolio of portfolio of all of its small business loans. The small business loans is sold in the secondary mission and history of the Community Develop- market, the fees paid should be disclosed fully as ment Bank leads us to think that it probably is required for packaged and sold home loans. will not securitize or sell loans. Bank of Many small borrowers are unaware of the fees America believes strongly that each small that lenders, banks, and nonbanks pay to refer- business may need special guidance to adjust to ral sources for leads on small business loans. the ups and downs of the economy. Bank of Those fees can be dropped to the bottom line for America wants to assist with that guidance. the loan amount, or should not be collected at all. However, if the bank were to securitize and sell, A participant asked about the effect of credit it would be unable to provide that service. scoring on capital access for minority busi- nesses. Kottler commented that Hibernia would Bank Small Business Investing not have grown its small business portfolio Issues and Opportunities without credit scoring, would not have increased its loan volume from 1,000 to 30,000, and would not have decreased its average loan size from Experts from a financial institution, community $150,000 to $35,000. Mr. Kottler also told the development corporations (CDC), an equity pool, story of how Hibernia hired a new community and the public sector discussed how financial development banker from another bank. The institutions provide equity capital in innovative banker assumed that Hibernia would not make a ways to help small businesses expand. The loan unless the credit scoring rating was perfect. panelists described four options: the multibank He looked at 100 loans based on credit scoring. community development corporation; the bank Of that total, he found only one that he would subsidiary corporation; the equity fund, in have made in his position as a community which the bank serves as a limited partner; and development banker. Clearly, credit scoring did the SBIC. All of the speakers focused on the not seem to limit access to capital. power of partnerships in serving the small business market successfully. Janice A. Payne noted that 9,000 community banks exist Booker, former director, OCC Community in the country, the vast majority of which do not Development Division, moderated the session. practice credit scoring. A large majority of small businesses will continue to avoid it. Hodges Jean L. Wojtowicz, President, The Cambridge stated that Bank of America does not credit Capital Management Corporation score — it is still an old-fashioned banker, Cambridge Capital Management Corporation making one loan at a time. Bank of America is a manager of nontraditional sources of

19 financing. In that role, company employees to 57 companies. So far, 29 of the companies have found many unique ways to work with have paid their loans successfully. Similarly, regulated financial institutions to provide risk in West Virginia, 55 banks pooled $7.5 million capital to businesses. dollars to provide mezzanine financing to businesses. Before I tell you about some of those options, I would like to describe a printing company in Lynx Capital Corporation was funded by nine northern Indiana. The company was started in bank investors and 11 other corporate inves- 1951. The entrepreneur with whom we worked, tors. We were asked to provide subordinated Hank, purchased it in 1987. In 1994, he ap- debt and equity financing to companies owned proached us, because of tight cash constraints; his by racial minorities in our community. Those current ratio typically fluctuated from .22 to .58. private investors put $3.5 million into equity in He lost money in 1991. He was profitable in 1992 this fund, and we have now been able to lever- and lost money again in 1993. When he ap- age up additional financing from the state proached us in 1994, he again showed a loss for government. the first six months, although four of the months were profitable. His debt to net worth ratio was Cambridge Ventures is a small business 14 to 1. The balance sheet would have been investment company. Our venture fund, the considered upside down. Previously, Hank had SBIC, has 88 limited partners, two of which are been a major shareholder in another printing bank investors. The $6 million in equity that company that filed bankruptcy. Of 90 employees we raised enabled us to leverage an additional in the current company, 18 pressmen had voted $2.5 million from the SBA through its deben- recently to become unionized. Hank wanted to ture program and an additional $1 million from restructure $2 million in debt, including the the state of Indiana. To date, we have invested payment of past due property taxes. He indicated with the SBIC more than $8 million in 22 that his existing bank was willing to take a companies. haircut by reducing the loan repayment by All of this is interesting. But, take for example $536,000 to have it paid in full. It is a credit that if you are a parent, it is difficult to describe story from which most lenders would run. to your child what you do. I started by telling my We will return to Hank later. We manage five preschooler that I was a venture capitalist, and I different funds under our Cambridge Capital received a glazed look. Then I said, “Well, we do Management umbrella. The first is the Indi- mezzanine financing,” and I got the same glazed ana Statewide Certified Development Corpora- look. I finally told my daughter that we provided tion, an SBA 504 lender. The corporation, money to businesses, and when we did that, it formed in 1983, was structured a little differ- made their dreams come true. That new phras- ently than most 504 lenders. This is a private, ing enabled her to understand. That was proven for-profit company, which has had nearly 127 to me when I went to her preschool graduation. bank shareholders. In the first 15 years, we As the children were walking across the stage, have provided fixed asset financing to more the MC asked them what they wanted to do than 400 companies, and the portion of the when they grew up; most of the kids talked about financing that we have provided is now more being teachers or doctors or Ninja turtles. When than $120 million. Jenny walked across the stage, she said she wanted to make people’s dreams come true. I The Indiana Community Business Credit may have been the only one who understood that Corporation and the West Virginia Capital comment. Corporation are considered multibank commu- nity development corporations, in which banks I believe that risk and cost cannot be unbundled pool their capital to take risks that might in an unsubsidized environment. Therefore, for exceed their normal parameters. For the perspective, I would suggest that measuring Credit Corporation in Indiana, we have 33 those funds on a spectrum of risk with a scale banks that pooled $19 million. With that pool of of 0 to 10 would be useful, with zero being fairly capital, we have provided mezzanine financing low risk and low cost and 10 being high risk and

20 high cost. If I were to allocate a number to each officers are not rewarded for being champions of those funds, I would suggest that the State- of tough credits. If they work, nobody notices. wide Certified Development Company, the 504 If they do not, the loan officer is tainted as lender, would tend to have a risk rating of marginal. perhaps zero to one. The two mezzanine funds would typically fall into a five or six rating on The Credit Corporation has marketed itself as a risk, and the Lynx and Cambridge Ventures, bank’s mezzanine department for smaller our venture funds, would have a risk rating of credits. There are plenty of places to turn if you eight or nine. need mezzanine financing for $2 million or more, but few sources if you need risk capital, Our mezzanine fund with the longest history is that is, mezzanine financing in the $100,000 to the Indiana Community Business Credit Corpo- $750,000 range. ration. The credit corporation is now beginning its twelfth year. At the start, not every bank We have the experience to evaluate those investor was a believer; some might have said credits and the flexibility through this fund to they were coerced into investing. By the second structure transactions that compensate for the annual meeting, however, those same detrac- risk. Our targeted return for each of those tors said, “You know, I was one of the first ones transactions is 18 percent to 22 percent, and of in.” We were able to convince the bankers that the 29 credits that have now been repaid, our this was a market niche that we could address returns have ranged from 11 percent to 37 and provide with capital effectively. percent. The fund was formed in 1986. It became Occasionally, banks will approve a loan on the profitable in 1988, reached consistent profit- basis of insufficient information, but they are ability in 1992, showed positive retained not being compensated for the risk they are earnings by 1993, and since 1992, its return taking. They try to disguise the loan as a prime on assets has ranged from 1.2 percent to 6.1 plus two credit and hope that no one notices. percent and has averaged 3.5 percent. That Our bank partners that have embraced this is attractive for a lender. To be prudent about concept use it wisely. It allows them to meet a the risk we take, our loan loss reserve over customer’s needs and, hopefully, to build loyalty. the last five years has ranged from 5.3 per- Ideally, when this company’s balance sheet cent to 8.8 percent and has averaged 7.4 regains some strength, the bank will be able to percent of outstandings. refinance the mezzanine dollars and reduce the The type of borrower that seeks mezzanine borrower’s overall cost of financing. Some banks financing is a company of great potential, have invested in the Credit Corporation only as although possibly one that is growing too a defensive measure to be on the list that we quickly. The bank’s or commercial lender’s send to potential borrowers. In that way, they reaction to that growth is, “Let’s pull in the appear to be in the game, but are clearly missing reins and get this back under control.” Alterna- opportunities. tively, the company could be a borrower who wants to diversify its product. Again, the bank’s In launching the two venture funds, Lynx reaction might be, “Stick to what you know. Capital Corporation and Cambridge Ventures, Don’t go into unchartered waters.” It certainly we believed a portion of the market was could be true that the company is too highly underserved as a market niche. Many equity leveraged, its collateral is viewed as inad- sources are available to entrepreneurial equate, or it might be experiencing an early companies, if they need $2 million or more turnaround. and plan to go public in five years. However, we believed that some interesting opportuni- A typical project will possess seven of the 10 ties were available for companies that items that a loan officer knows his committee needed less capital. Therefore, we invest in wants to see. In the case of the shareholder some companies that most venture funds who I referred to earlier as Hank, he did not would scoff at, “boring” companies that only even have seven items to be reviewed. Loan make money “day in and day out.” Those

21 companies can consistently hit singles and were able to restructure the balance sheet. The doubles, perhaps not home runs, but they will company was profitable in 1994, but lost money not often strike out either. This strategy makes again in 1995. In the fall 1996, Hank called me our returns to investors quite acceptable. and said, “I have to meet with you tomorrow.” Those of you in the lending business know that An example is helpful. Through our SBIC, we is usually not good news. After I hung up the provided financing for a company that makes phone and scheduled the appointment, I franti- tombstones. An audience of finance people cally went through the file to locate any excep- might think about the lucite type — I mean the tions. I found a few, nothing too serious, al- type in the graveyard. This company had a though some of the statements were not as $40,000 line of credit to support $400,000 worth current as I would have liked them to be — his of inventory; they were struggling. We provided personal statement had not been updated. I some patient money to allow this company to created my list and went in to the meeting. grow. Three years after we made that invest- ment, we had identified for the company an The next day, Hank and I sat down at the confer- acquisition opportunity, another manufacturing ence table. He told me about the 180-day union plant located 35 miles from the existing facility. strike that he had lived through the previous We provided all of the equity dollars to bring that year. He indicated that 1996 was starting to look acquisition to fruition and were able to leverage as if it might be a good year. He also said that up more traditional senior debt. The company the reason for his trip was to sit down across the made burial vaults; we saw the loan as a table, look me in the eye and say, “Thank you,” chance to integrate this company vertically. and request a payoff figure. He said that without The company has grown significantly. We us he would have lost his company and would not expect they will be able to repurchase our have been able to make his dreams come true. warrants in 1999, and that our average com- pounded return on this investment will ex- Jean Wojtowicz is the president and founder of ceed 20 percent. It is a low tech company, a Cambridge Capital Management Corporation in “boring” company that “day in and day out” Indianapolis. Her firm manages the Indiana makes money. Community Business Credit Corporation, which is a multibank CDC, aided by national bank and Often we can use a variety of our financing other bank investors. Cambridge Capital also sources to craft a balance sheet strategically for helped develop the West Virginia Capital Corpora- a company, allowing us to price the money to tion, which is modeled after its Indiana initiative. It minimize the overall cost of capital to the also works with two venture capital funds to borrower, while obtaining the appropriate level provide capital to small business clients. of return for our investors. This approach has allowed us to be viewed as a real partner and a Gail Snowden, Group Executive, Community resource to commercial lenders. This partner- Banking Group, BankBoston, NA ship is important. All of us, consumer or busi- What is needed for a financial institution to be ness borrower alike, are taught that if we need a catalyst for wealth creation in low- and money, we go to the bank regardless of the type moderate-income, underserved, and emerging of money we seek; for that reason, we become a markets? What does it take to be innovative in resource to the banks. They become our mar- banking services, partnerships, programs, and keting arm, and we help to prevent them from investments for small business? And what does saying “no” to their customers, and to say at it take to be a visible leader in implementing a least, “No, but.” holistic approach in economic development? Let us return to Hank and his printing company. BankBoston meets those challenging questions We financed this transaction through the Credit directly through its Community Banking Group, Corporation, our mezzanine fund. We provided which links the businesses of our nationally $400,000. A new senior bank provided $630,000; modeled First Community Bank, BankBoston coupled with the debt forgiveness from the Development Company (BBDC), and Urban former bank and some additional equity, we Developmental Real Estate.

22 We believe that it is a powerful approach to the expanded to 44 branches across three states. challenges of our distressed and underserved Our customers are a diverse reflection of the urban neighborhoods, and an approach that cultural mosaic of our urban areas. We are infuses the same dynamism, optimism, job serving substantial Hispanic, Asian, and Afri- creation, wealth creation, and business owner- can American populations in 13 cities. Our staff ship in those emerging markets as is the case reflects the diversity in each of our locations. in the broader community. Daily we face the task of reaching out to those populations and providing education on finan- We do not have all the answers, but we cer- cial basics. The market is large. As Michael tainly have the passion for seeking solutions. Porter of Harvard Business School has con- We must heed the call of respected leaders, cluded, high population density translates into such as the Comptroller of the Currency substantial purchasing power and a large Eugene Ludwig, who has been a long-time market, even though average incomes are advocate of investing capital in inner cities. relatively low. Not only is the low- to moderate- Urban neighborhoods need equity investments income (LMI) urban market large, it is young from venture capitalists. Also needed is a and growing rapidly. Minority consumers repre- partnership with development groups, local sent a major growth market. First Community government, churches, and not-for-profits. Bank has positioned its branches strategically. Finally, innovative loan products can make it They serve as financial service centers that easier for consumers and business owners to offer all of the advantages of our larger regional qualify for credit. banks, including mortgage, consumer, and small business lending.

With the additional component of our commu- Urban neighborhoods need nity development outreach staff, this unit equity investments from reaches out to our consumers and small busi- venture capitalists. ness owners with financial seminars and access to banking services. At the end of our seventh year, the total group had an operating profit of $17 million and $12 million pre-tax. A few days ago, Federal Reserve Chairman When I report to the bank’s board of directors, Greenspan said, “Unless minorities can have as I do twice a year, I can always say the busi- access to all forms of capital from which to ness is a great business. It is profitable. create wealth, they will be denied the full ben- efits of our vibrant economy in which all should We realized that there was so much more to be participate.” At BankBoston, we accepted this done, and the next step in this evolution was to challenge eight years ago. First Community launch a commercial bank, BankBoston Devel- Bank represented our “bank within a bank” opment Corporation (BBDC). I visited the concept. It was our response to community streets of Grove Hall and Roxbury, the neigh- leaders who pointed to the banking industry’s borhood in which I was raised. There I saw an lack of enthusiasm in the inner city. We underutilized center that had seen its share of planned to enter those markets, provide ser- economic and social tailspins, and something vices, share in the revitalization, and deliver was missing. What was missing was the shareholder value; after all, we are a business economic vitality of downtown Boston two miles measured as any other business. BankBoston’s away. The economic engine was misfiring. No First Community Bank began with the belief in one was investing in small businesses or real the viability of such urban areas as Boston’s estate projects; entrepreneurs who lived there Roxbury and Dorchester neighborhoods. Because were extremely frustrated. we had never left the community, we launched this concept with seven branches. The challenge of investing in the fabric of urban neighborhoods needed a solution. Our The business, now growing and profitable, has response was the creation of the first urban more than $1.6 billion in deposits and has investment bank in America, chartered by a

23 commercial bank. Through it, we are investing real estate development in our primary mar- in, and being an innovative provider of, capital kets in Massachusetts, Connecticut, Rhode to businesses and not-for-profits that benefit Island, and New Hampshire. This approach LMI and disadvantaged communities in our emphasizes equity investments in companies New England base and beyond. BBDC promotes that provide jobs and services. community stabilization, housing, job develop- ment, equity ownership, and wealth creation Our means of investment include business in a sustainable and profitable manner. When equity, real estate development equity, joint we launched BBDC nine months ago, Comptrol- ventures, and investing through funds. We have ler of the Currency Gene Ludwig was there. He other products, such as low-income housing tax said that the new BBDC represents an extraor- credits and debt products. dinary and creative commitment by BBDC strengthens the ability of urban com- BankBoston to inner city markets. The BBDC munities to be active participants in the is the key to unlocking an untapped potential broader regional and global economy. BBDC’s in LMI and urban neighborhoods by investing $100 million commitment is projected to in and nurturing an indigenous business class stimulate an estimated one-half billion total through a powerful incentive, equity capital. dollars of new financial resources in urban We seek to be partners with our businesses. areas. Our goal is to help transform and grow companies, particularly those that are minor- Immediately after our launch, there were a ity or women-owned. large volume of calls on our 1-800 number. We were overwhelmed; we had started with three It is a three-pronged approach: capital, capac- people that expanded immediately to a staff of ity, and access. First, BBDC targets companies 14. It proved that there was a great need for with sales in excess of $500,000 for direct working capital in these markets. equity, provided they possess the potential for significant growth. Because of our decision on Although BankBoston had performed commu- these minimums, we are a later stage invest- nity development lending on a more diffuse ment company. We realized that we would be basis for a number of years, we wanted to do best at creating wealth in communities, and we more. We wanted to be innovative and set up were targeting mid-sized companies that had our own company. We set it up as a subsidiary significant growth potential. However, we of the bank, so that we could book assets at the addressed start-ups and smaller companies by bank level. The OCC regulations gave us more investing in funds. flexibility in structuring our products. Gene talked today about 12 CFR 24; those regulations Second, BBDC works in conjunction with the offered a conducive climate to innovation and BankBoston line lenders to assist a broad allowed us to do more in the CRA area. spectrum of companies, whose credit needs range from as little as $5,000 to as much as $5 We knew from experience that business owner- million. We fill the gap by providing debt that ship and the development of this entrepreneur- often works like equity. ial base are hindered by inadequate capital, limited opportunity to network with the larger Third, we help businesses overcome informa- business community, and inadequate capacity tion and operational barriers that can hinder and scale to compete effectively. Our response growth and development. Sophisticated techni- through BBDC was to invest in LMI and disad- cal assistance, business management training, vantaged communities with an eye toward networking opportunities, and other consulting community stabilization. Our target markets services are offered. We have developed and are businesses located in LMI tracts, disadvan- used a Spanish language one-page application taged businesses, minority-owned and women- to assist that market. owned businesses, and worker ownership opportunities. We look at 20 to 50 deals for each one we approve. Someone mentioned that our lenders We are making $100 million available over the and equity folks must have a passion for this next four years, targeting business growth and business, because it is a lot of work. The types

24 of businesses range from construction develop- housing authority in an investment of ers to flower shops. Our initial capitalization is $775,000. This innovative arrangement re- $300,000, with an additional commitment up to sulted in new housing for LMI families. The $10 million. low-income housing tax credits averaged in the low teens in returns. However, these are front- In his strong support for this business, end weighted, which helps with the overall BankBoston Chairman Chad Gifford noted that portfolio balance. it presents a significant opportunity for the bank. We would not be successful if we did not have the support of top management. He said We use our resources to do that BBDC is viewed as a principal partner in creating commerce, economic ownership, and what we do best: to grow jobs. We are managing for value. existing businesses significantly, while we There are many successes. On the equity side, strengthen the ability of local we have eight approvals totaling almost $4 partners to invest at the million. We recently approved a direct equity grassroots level. investment to a minority-owned construction, management, and development company based in Roxbury. They needed short-term equity financing to secure a surety bond to compete for To date, we have made $27 million in new an $8 million HUD demonstration disposition commitments, which created more than 1,000 construction project. BBDC approved an units of new affordable housing. We also have a $800,000 equity infusion into the company. We co-lending product in addition to a continuous also allocated up to $50,000 for technical assis- evaluation process. We have made 13 co-loans tance to create a long-term strategic focus for totaling $1.4 million with our line business partners, BankBoston. this company. An owner-occupant of a popular restaurant in a Another example shows how we meet the needs low-income neighborhood requested a $205,000 of smaller businesses and start-up businesses. loan at a bank branch to pay out an existing loan It is represented by our $500,000 investment in and obtain additional working capital. The the Boston Community Loan Fund. It would be previous year, the borrower was severely ill and impossible for us to run a direct equity invest- fell behind in many personal obligations. His ment business that invests amounts as low as credit bureau report did not look good. Although $25,000 or $50,000. However, we are the largest the owner brought the existing loan current, his investor in this loan fund and several other bank demanded payment of the total amount funds that address the needs for micro-equity four months later. Our First Community Bank and the significant hand-holding often neces- lender capitalized on this opportunity to help sary to nurture those businesses. With 10 stabilize this customer. A BBDC co-loan was percent of our equity earmarked for those types used to bridge the gap on the 75 percent esti- of funds, BBDC can be a partner’s partner. mated market value and the request amount. We use our resources to do what we do best: to This resulted in a First Community Bank senior grow existing businesses significantly, while we debt of $160,000 and a BBDC co-loan of $45,000 strengthen the ability of local partners to invest subordinated for a total of $205,000. Today, the at the grassroots level. business is doing well. We also provide low-income housing tax credits. We cannot do our job without partnerships. A A unique low-income housing tax credit part- good example is the South Hartford initiative, a nership resulted in a ribbon-cutting event last partnership investing in small businesses in week when BBDC became sole partner in a 17- that region. The partnership among our First unit LMI housing project in New Hampshire. Community Bank, the state of Connecticut, and For the first time in that state, the general the SBA created a not-for-profit CDC. We work partnership joined a not-for-profit and the local with partners to leverage funds available to that

25 CDC by the state. The CDC that can take a Community Loan Fund, low-income housing higher risk portion of the loan joins the bank, tax partnerships, and a HUD partnership. which provides the lender origination and service. We also were able to get the SBA to We expect 25 percent to 30 percent returns and guarantee our portion of the loans. The result is a seat on the board of the company when we that we make available more money than the exit in three to five years. partners could provide individually. This has Our experience in meeting the needs of small proven an interesting model. In its first four business owners has been successful. It ben- months, the South Hartford initiative has efits community economic development and committed $735,000 to four customers: a meets new challenges. Our scenario for the restaurant owner, two contractors, and a dis- future envisions other financial providers tributor, customers to whom the bank would not entering small business lending and sharing lend ordinarily. CRA responsibility. Another approach to finding effective ways to Our own commitment exceeds CRA, because strengthen businesses is the “Open for Busi- BankBoston wants to be a leader in community ness” program. To encourage economic change economic development, and we are meeting in one Boston neighborhood, we forged a part- our responsibility through example. We need nership to conduct seminars to help small initiatives, such as low-income housing tax businesses sharpen their effective business credits, and economic development tax credits, practices. This initiative is unique, because to facilitate capital flow to the inner city. our partners were a not-for-profit housing development organization; a Latino merchants That is where we stand today. We are con- association, which provided the people attend- stantly looking for ways to enlarge this busi- ing the sessions; the Latino Grocers Associa- ness and to meet the needs of our inner city tion; and a neighborhood agency that provided community. programs and business development. Our small grant of $25,000 purchased a 20-week seminar Gail Snowden is the group executive for the Com- that graduated 17 small business owners. The munity Banking Group of BankBoston, a multistate owners were instructed in finance, accounting, group that focuses on meeting basic banking and computers, taxes, cash flow, and dealing with credit needs of inner city residents and women- banks. Before the seminar, most of those and minority-owned businesses throughout New owners had used minimal skills that they had England. She directs product development, adver- learned in their native countries to run their tising, community development lending, construc- businesses. We believe this training has made tion, financing, housing construction, and commer- a difference in inner city neighborhoods, par- cial loans. Last year, BankBoston was authorized ticularly for Latino businesses. by the OCC to establish BankBoston Development Company as a subsidiary of the bank. This is an We have committed over $100,000 to conduct investment bank for urban communities that this training for the first four years. In less than focuses especially on venture capital. two years, at the end of 1998, $90 million has been made in commitments for the entire BBDC portfolio. On the debt side, we extended reserve Jerrold B. Carrington, General Partner, IN- credit at BankBoston to 100 small businesses ROADS, Inc. and leveraged with the bank a total extension of We formed INROADS almost four years ago to more than $6 million in working capital. invest in growing businesses, typically over- looked by private equity firms, particularly We want to forge partnerships with others. We those owned or operated by minority or female have a field study underway by students of the entrepreneurs. Our investors are primarily Kennedy School of Government to gather pension funds. The District of Columbia Retire- information and assist us in finding partners. ment System is an investor, and three banks Our current partnerships include the not-for- contribute about 10 percent of the $50 million profit Community Enterprise Fund, the Boston fund. They are: LaSalle Bank, Northern Trust,

26 and Bank One of Ohio. They were able to re- Many of our companies never have seen that ceive CRA credit by investing in our firm, even level of bank support. For example, the owner though our investment focus is national. They of a woman-owned company had requested had to apply for that certification; they could not from her banker a $500,000 increase in her self-certify. In essence, we are the only private credit line. The company was earning $20 equity fund in the United States that has that million in revenue and netting $2 million a type of regulatory approval. year. The bank refused. She came to us and said, “I must have an equity investment so I We target small businesses for investment for can obtain this $500,000 credit line.” We six reasons. First, small businesses comprise replied, “We want to invest in your business a growth engine in today’s economy. A tremen- and make it a $100 million business.” We dously large number of exciting and profitable called the senior officer of the bank and said, growth products and services is provided by “We are prepared to invest $7.5 million dollars those firms. Second, we face less competition of equity in this company, and we would like from other private equity firms and the lending you to provide $15 million of debt instead of community that generally target larger compa- $500,000.” Needless to say, that investment nies. Third, many more investment opportuni- was approved, and the company is happy with ties exist, because the small businesses that investment today. outnumber larger companies. Fourth and most important is that less competition means The second way that banks participate is that lower purchase prices. On average, we pay four they can market their fee-based services, times earnings before interest and taxes which is important to all banks’ profitability as (EBIT) compared with six to eight times EBIT they begin to increase their ROAs. for larger companies. Nonetheless, we believe that we possess the same quality of manage- Third, and most importantly, they have gained ment. Fifth, it provides us with an opportunity insight about, and access to, a profitable, yet often to add value. The partners at INROADS have overlooked and misunderstood, customer base. financed collectively more than 70 small Banks can access this market profitably in four businesses. We are experienced in guiding a ways. It is excellent to invest in, and partner company during its growth phase. with, private equity firms with a demonstrated The sixth and final reason for targeting small record of success in the small business market. business for investment is simple: profit. I am Banks may earn high economic returns on always amazed by the number of investment their investment in that market through firms that invest in ideas that are not profitable. capital gains. There are three more important reasons, however, for banks to gain access to One would ask, how have banks participated in this market. the development of the small businesses, in which we have invested since 1985. The three First, banks can secure a safer and more banks that have invested in INROADS have efficiently deployed loan portfolio that has been provided to our seven portfolio companies more screened rigorously by a private equity firm. than $125 million in senior debts. One bank This rigorous screening process provided by has already recouped its entire investment in your private equity partner to any investment fee income in only 18 months of a 10-year opportunity is valuable for banks. partnership. This does not include interest Second, banks can focus on what they do best, income or the fees earned by providing related which is lending money and providing related services to our investments. banking services. It is a hassle to deal daily with entrepreneurs. Entrepreneurs need technical support, company-building resources, and some- One bank has already recouped one with whom to talk. On average, we talk to our its entire investment in fee company executives four to five times a week. income in only 18 months of a This is impossible if you have a loan portfolio of 10-year partnership. hundreds, perhaps thousands of companies.

27 Third, banks also can receive CRA credit, Rarely has one set of mandatory government subject to regulatory approval. regulations benefited another government program. That day has now arrived. All banks INROADS is committed to the small business can obtain CRA credit by meeting the financial area, because it is extremely profitable. We will needs of your business communities and, raise our next fund this summer to focus once simultaneously, earn high returns. This is again on this area, and we will invest in, hope- accomplished by investing in SBICs. As Dr. fully, numerous new small businesses. This Pangloss said in Voltaire’s Candide, “This is the time, our target is $200 million instead of $50 best of all possible worlds.” million. Many profitable opportunities are created by focusing on what one does best and partnering I have made an important discovery from my with people who know what they can do. involvement in CRA during the past 12 months largely owing to the OCC’s Community Develop- Jerrold Carrington is the co-founder and general ment director and division. For the past 25 partner of INROADS Capital Partners, a $50 years, an entire body of lenders, investment million private equity investment firm based in bankers, and state and municipal governments, Evanston, Illinois, and authorized to operate working together with development companies nationwide. It is a small business equity pool, in and neighborhood nonprofit organizations, has which a national bank took the lead in participat- learned how to layer various types of financing ing as a limited partner. INROADS provides growth and tax benefits to achieve social goals that and acquisition equity capital for small- and make financial sense in the area of housing medium-sized businesses. Its limited partners and real estate development. This creative include highly respected pension funds, banks, financial layering, however, only recently has and many successful people. begun to be applied to financing for small businesses. One proven tool in almost four Saunders Miller, Senior Policy Advisor, SBIC, decades of use should now become more widely SBA available through the innovative financing of The SBA has the Small Business Investment the SBIC program. Company Program, which has been almost invisible to most banks. However, a knowledge- This program is a public-private partnership that able group of banks has benefitted from the works. It can be used for economically targeted program for many years, some for almost four investments. The huge California state pension decades, and they have found it to be highly fund, CALPERS, invested in a California-targeted profitable. SBIC in Los Angeles where, in spite of the city’s size, there is a dearth of equity venture capital SBICs are government-licensed venture capital for small businesses. In New York City, various firms that invest solely in small businesses. For New York City pension funds invested in a city- the purpose of this program, a small business is oriented, early-stage, high-tech SBIC. In Mary- defined as one with $6 million or less of after- land, the state made an investment in an SBIC tax income and $18 million or less of net worth. that targets minority investing. SBICs derive many benefits through licensing. For banks, one of the primary benefits is an Although SBICs may be used for economically exemption to the Glass-Steagall Act, which targeted investments, their primary motivation enables them to own voting equity in nonfinan- or goal still must be to earn fully risk-adjusted cial institutions that exceed the 5 percent limit profits, and any applicant receiving a license otherwise imposed by the act. must have fully qualified venture management. We believe you do good by doing well. Over the past 10 years, the banks that have invested in SBICs have earned an average 13.1 The median size investment by all SBICs in percent return on investments, on realized fiscal year 1997 was $150,000; for that subset returns; they have earned this return during of bank SBICs, it was $430,000. Some SBICs the past two decades. This translates into 13.1 are making $50,000 financings to laundromats percent over a 21-year period through many and to dry cleaners; others are funding multi- economic cycles. million dollar companies. Fifty percent of all

28 financings are made to businesses less than SBIC to make long-term equity investments three-years-old. without having to pay dividends before it has positive cash flow. With participating securi- The majority of financings are equity invest- ties, the SBIC also gives SBA approximately 10 ments, consisting of debt with warrants, pre- percent of its profits. We are truly partners in ferred stock, or straight equity. The better- your SBIC. managed SBICs receive ROIs that exceed 20 percent without risk of overall portfolio loss. For a profitable SBIC, its internal rate of return can increase by 600 to 800 basis If an SBIC is managed properly, the goal of high points. The leverage, however, can cut both returns with acceptable risk should be fully ways. If your ROI falls below about 11 percent, attainable. The key is “managed properly.” you would probably be better off without it. History tells us that the most successful SBICs are those run independently of the related bank. In 38 years, SBICs have invested more than Commercial lenders are not venture capitalists. $17 billion through 113,000 financings. In fiscal Bankers look at past performance and at making year 1997, there were 2,731 financings in 47 loans based on cash flow, financial statements, states and the District of Columbia and Puerto and collateral. Venture capitalists look at future Rico. Interestingly, 90 percent of the funds that potential, and they make investments based on were invested had equity features. At the end of the quality of management, because the finan- fiscal year 1997, we had 300 licensees with cial statements usually are weak. If the state- $5.1 billion of private capital compared with ments were not, commercial lenders would $2.2 billion of private capital in 1993. The new provide all of the necessary financing. program was implemented in 1994. That amount is more than a doubling of capital in To keep good SBIC managers, compensation four years. During this past four-year period, must be oriented to the long term. SBIC manag- more new capital flowed into the program than ers are usually paid more than commercial loan during the prior 30 years. The program is officers, and they do not fit into the compensa- demonstrating its success. tion structure of the parent bank. At the end of 1997, bank-dominated SBICs Currently, 79 bank-dominated SBICs partici- represented 68 percent ($3.5 billion) of the pate in the program. All, but four, rely solely on program’s private capital. Clearly, both banks their parent bank’s own capital to finance their and private investors are demonstrating their SBICs, because its cost of capital is lower than faith in the future of the program. that obtained through the SBA. However, the program’s appeal for all nonbank SBICs and the The program has had many successes. In four exceptions is the ability to obtain up to Fortune Magazine’s 1996 list of the 100 fastest- three times their private capital by borrowing growing businesses, 18 had received SBIC from the public market at a rate of approxi- funding. Early examples included Federal mately 175 basis points over the 10-year Trea- Express, Intel, Cray Research, and Apple Com- sury rate. The funds are backed by the full faith puter. More recent well-known examples of and credit guarantee of the U.S. government. public companies include America Online, Staples, Amgen, Callaway Golf, Microcom, and Leverage is the capital that comes through Gymboree. However, most of the businesses public market financings. Two types of lever- financed are private, are much smaller, and do age exist in the SBIC program. The traditional not grow to that size. type of debenture leverage requires semian- nual interest payments and principal repay- But it was not a smooth road from 1958 to the ment at the end of the tenth year. A second, present. The program shrank during the newer type was introduced in 1994. It is known 1980s. There were $600 million of gross lever- as “participating securities” and has a similar age liquidations before recoveries that are now interest rate spread, although dividend pay- running at approximately 60 percent. In 1990 ments are made only when an SBIC has and 1991, the Senate held hearings to con- positive retained earnings. This enables an sider whether to eliminate the program. To

29 deal with that issue, the SBA formed an in- bank-oriented licensee, because SBA is not at vestment advisory committee composed of financial risk, and overhead often is absorbed venture capitalists who were not with SBICs. by the bank. However, we do not recommend They found that the program was basically this small an amount. sound, and that it had a high return to the taxpayer. We would like to emphasize that This is a great opportunity for bankers. Federal Express or Intel pays more taxes in one Your biggest decision should not be whether to year than the entire cost of the program since invest, but how much to invest. Your greatest it began. challenge is to find good management. We A number of identifiable problems existed, would suggest that you start by investing in a however. First, the program was plagued by consortium SBIC where outside fund managers inadequate management. Second, the capital are hired. You may ask, “Where do we find such base of most SBICs was too small to be economi- managers?” At the SBA, we cannot make cally viable. Third, portfolio valuations were specific recommendations, but we can help you performed poorly, which led to inaccurate get started and point you in the right direction. reporting and false credit evaluation by the You can call me at (202) 205-3646. SBA will be SBA. Fourth, debt leverage was being used to glad to help you get started. finance equity investments, causing a mis- Saunders Miller is a senior policy advisor for the match of funds flow. Those problems were SBA’s Small Business Investment Company Pro- corrected by new legislation in 1992 and by new gram. The program is designed to meet a market regulations finalized in 1994. need for risk capital that is larger than that pro- “Management, management, management” vided customarily by some private investors and to forms the core of our philosophy today as does finance active small operating companies of a size “location, location, location” in real estate not generally assisted by private venture capital- investing. Therefore, we admit only qualified ists. Miller is responsible for the modernization of management. We have the philosophy of licens- the SBIC Program, including its policies and ing hard and regulating rationally. regulations, and establishing a rigorous licensing process and other important initiatives. The current minimal capital requirements now are based on economic viability, which encom- Q and A Summary passes the need for SBIC management to afford A participant asked about the infrastructure sufficient expenditures to perform adequate due appropriate to start an SBIC, i.e., if you require diligence and continuing oversight. Thus, to $5 to $10 million to capitalize one and it takes obtain a participating securities license, a several years to invest the capital, the ROI will minimum of $10 million of private capital is be greatly reduced over a period of time sitting required under most circumstances. This in money market accounts. Wojtowicz said that enables SBIC’s management to perform suffi- legally you can draw the money down over time cient due diligence, oversight, and marketing. if you have firm commitments, which reduces the idle fund drag that often occurs in the early stage of funds. The minimum capital neces- Your biggest decision should sary for licensing and to continue to increase not be whether to invest, but capital also can be obtained. Since Cambridge how much to invest. was licensed in 1991, it has continued to sell additional partnership units to increase the capital base. Typically, venture fund partner- ships have a 10-year life, because that is For a debenture licensee who may make loans expected by the institutional investor, al- in a smaller geographic area, as little as $5 though a venture fund may have to exit an million of private capital is sometimes suffi- investment before reaching the company’s cient. By law, however, only $3 million of pri- ultimate top earning period. Cambridge en- vate capital is required for a non-leveraged gaged in a 15-year investment that gave it five

30 years to leverage up and invest private capital The State of Small Business in — five years of active leveraging with SBA and other investors, and an additional five-year America period to begin harvesting those investments. Cambridge did not have to exit the investment Aida Alvarez, administrator of the SBA, said in before reaching maximum return. her presentation that the OCC and SBA are moving in the same direction. The SBA is A participant asked about the type of overhead advancing its ability to serve underserved and management needed with an SBIC. communities and, at the same time, deliver Wojtowicz stated that Miller’s comments were services in a cost-effective way. The SBA is extremely important. As a venture fund, Cam- preparing itself and its small business custom- bridge looks first at management when making ers for the economy in the 21st century, which an investment, and investors that invest in will be diverse, technologically driven, and venture funds should look at the same. A global in scope. smaller SBIC can operate only in a shared overhead environment in which people on the Aida Alvarez, Administrator, SBA front-end review investments and, most impor- It is a pleasure to be here today at this OCC tantly, from which they may obtain the money conference on small business. As administra- easily. It is much harder to add value and find an tor of the SBA, I must applaud the efforts of appropriate way to exit from those investments. Gene Ludwig. He has shown an outstanding commitment to this topic during his five-year Another participant asked about the typical ROI tenure as the Comptroller of the Currency. We and a predetermined amount of equity required cannot thank him enough for his work on the for an investment. Carrington responded that credit availability program and leadership in INROADS generally looks for a return of a the CRA revision. After a five-year stint in an minimum of four times its money in a five-year extraordinarily demanding job, Gene is looking period. That equates to roughly a 38 percent or forward to a break in the private sector. I must 39 percent IRR. The minimum amount of express some sadness because we will miss capital required depends on how much capital his leadership. He has made a great contribu- the company will need over time, because tion, has been a great Comptroller, and has growth companies usually exhaust capital. In been good for the small business community. general, INROADS invests with partners, but it We can only hope that his successor will follow likes to contribute up to $4 million over the life in his footsteps. of the investment on equity. The SBA and the OCC are moving in the same Wojtowicz stated that the typical hurdle rate is direction. Gene mentioned my prior tenure as at least a 35 percent annual compounded the financial regulator of Fannie Mae and return. If that is not possible, Cambridge Freddie Mac, during which time he was a great usually will contract it, because they know colleague and helped me to think about doing they will not always reach that percentage. On that job effectively. There was always a balanc- the amount of investment capital, Cambridge ing act between protecting the interests of the looks at how much it will take to meet its taxpayer and ensuring that the entire country business plan objectives; it will invest only if it would be served by a thriving business commu- can keep one-half available for reinvestment. nity, that the business community would not be For example, if it will take $2 million, Cam- impeded at the same time that we were looking bridge will invest only $1 million on the front- out for the taxpayer. At all times, we were end, knowing that it might have to reinvest protecting the public mission. around $2 million or $3 million. A venture fund gets into deep trouble if it does not have the Let me reiterate. The SBA and OCC are moving capacity to return for rounds two and three. At very much in the same direction. We are ad- that point, the fund has lost its negotiating vancing our ability to serve the underserved position and can be diluted significantly in the communities, while at the same time delivering next rounds of financing. our services in a cost effective, sophisticated

31 way, with an increasing reliance on our finan- Our first challenge is to prepare for a more cial intermediaries and private sector partners. diverse America. The Census Bureau projects that by the year 2050, there will be no more At the SBA, we are preparing ourselves and our racial or ethnic majorities in America. It will, small business customers for the 21st century. indeed, be a very diverse country. It is not only rhetoric, it is real, it is happening, and it takes some preparation. The face of small business also is changing rapidly. Minority- and women-owned firms are The rapid changes in our economy give us growing faster than all other firms. The Census some indication of the shape of the future Bureau has found that minority-owned busi- economy if we do the right things. The economy nesses grew at a rate of 62 percent over the in the 21st century will be more diverse, tech- 1987-1992 period. Women-owned firms grew at nologically driven, and global in scope. Today, I a rate of 43 percent, compared with 26 percent will address the meaning of those changes for for the overall population. I strongly believe that the SBA, for the small business community, the SBA must be in the forefront of serving those and for small business lending. growing business communities. Simply put, it SBA’s principal objective is to create opportuni- makes good business sense. ties for small business success. We achieve SBA has already done a good job of increasing this objective for small business by supporting lending to its more diverse American business access to capital and credit by expanding federal community. Since 1992, SBA has more than procurement opportunities, by providing a wide doubled its loans to African Americans and to range of counseling and education programs, Hispanic-owned firms and almost tripled lend- and by serving as its voice. ing to women-owned firms. We have achieved Last year, SBA provided record levels of loan those levels of growth, while improving our guarantees, $10.9 billion, and record levels of credit quality. While increasing our lending to venture capital financing, $2.4 billion. We those underserved communities, we have supported more than $40 billion in federal lowered our program’s cost to the government. contracts for small business and provided That linkage is important. We can do both. counseling, training, educational services, and In 1992, we estimate that the cost to the gov- technical assistance to more than 1 million ernment was $4.85 for every $100 we guaran- small businesses. teed through our 7(a) loan guarantee program. SBA is already prepared for the 21st century. Contrast that to today’s cost, which has been We are serving an increasingly diverse busi- reduced to $1.39 for every $100 we guarantee. ness population and have set in motion a That is going in the right direction. number of initiatives to increase our penetra- tion into rapidly growing markets of women- owned and minority-owned businesses. We are Women-owned firms grew at a at the forefront of technology, serving small rate of 43 percent, compared businesses in smart, sophisticated ways and with 26 percent for the overall are well on our way to becoming a paperless population. organization. We are expanding our understand- ing of the global marketplace and increasing our ability to help small business find opportu- nities in the international arena. Our record shows that loans to minority-owned businesses and women-owned businesses are SBA has changed and will continue to change, good business. Nonetheless, we have much as the banking and financial community has further to go. changed. I invite all of you to take another look at SBA and join us in our mission of serving Although African Americans make up 12.6 America’s small businesses. percent of the population, they own only 3.6

32 percent of all businesses. Hispanic Americans to reduce our paperwork requirements to one make up 10.3 percent of the population; they page for loans under $100,000. Since its intro- own only 5.6 percent of all businesses. SBA duction, SBA has guaranteed more than 72,000 wants to close this gap and increase minority Low Doc loans, and it continues to serve thou- and women business ownership. We want to sands of small businesses. increase our loans to this fast-growing sector of the population and see a huge need for coordi- SBA’s Low Doc Program is successful particu- nated economic and business development larly in providing credit to underserved commu- strategies in other parts of the country. nities. According to our Chief Counsel for Advocacy, Jerry Glover, we have seen a phe- SBA has launched a series of initiatives to do a nomenal growth rate in private sector loans better job of serving those increasingly diverse under $100,000. Since SBA introduced the communities, and it extends everywhere from program, the stock of loans under $100,000 held building on goals. We have had goals for our by private banks has grown from $97.6 billion in field structure, our 69 district offices; those 1994 to $112.2 billion last year. That is a growth date from Erskine Bowles’ days. He introduced of $14.6 billion in those smaller size loans. This them, and I am building on Erskine’s good idea is the real success of the Low Doc Program: we by establishing aggressive three-year overall gave the private sector confidence that these goals for all eight of the lending categories. loans could be done efficiently, economically, These categories include African Americans, and practicably. We showed the private sector Hispanic Americans, Asian Americans, Native the way. Americans, women, exports, rural, and veter- ans. Those are the categories where we are The marketplace has changed. SBA’s Low Doc pushing the frontier. The entire agency, not Program needs another look. John Gray is in only our field offices, is being held accountable charge of our Capital Access Financing Pro- for those goals. gram. He and Jane Butler, Jim Hammersley, Jean Schater and others, are examining the I have announced a marketing and outreach Low Doc Program. They are thinking about ways effort through which SBA is identifying new to upgrade the program and make it more partners to help us develop and improve rela- competitive in the marketplace. tionships in the minority and business com- munities. Last week, we signed a memoran- Our fifth strategy for reaching the underserved dum of understanding with a statewide organi- business community is to do a better job of zation, the Texas-Mexican American Chamber linking our capital and credit programs with of Commerce, composed of 27 chambers of our vast entrepreneurial development ser- commerce, 11,500 members. They will work vices. We have an enormous network of busi- with us and with our lending partners to bring ness education, counseling, and training in more business. This is good business. programs across the country. This network is Hopefully, we will find more customers in the somewhat of a secret to many of us in Wash- Hispanic American community through those ington, although if you travel around the partnerships. country as I do, you realize the presence and importance of our 1,000 small business devel- We have learned a lot. We have had good meet- opment centers, our 69 district offices, our 41 ings with our lenders and our trade associa- business information centers, 60 women’s tions on what constitutes best practices to business centers, 14 one-stop capital shops, expand lending to those diverse communities. and more than 13,000 retired executives who We will continue that dialogue and make sure volunteer their time to counsel small busi- that our success is everyone’s success. We nesses through our SCORE Program. It is a have learned a lot of lessons from CRA, and daunting presence. there is more to be learned. The figures last year were impressive. The Finally, we are reviewing our products and network provided counseling advice to about 1 practices. Our Low Doc Program, for example, is million entrepreneurs whether or not they a huge success. The idea behind the program is received an SBA guaranteed loan. We want to

33 continue to open up our doors to small busi- sophistication among small businesses. We nesses through counseling, and especially to have had a partnership with the U.S. Chamber the underserved communities. of Commerce and Microsoft to educate small businesses on how they can be more sophisti- We have a prequalification program that is cated in their use of the Internet and all the successful. It allows us and our intermediaries technologies associated with the World Wide to help women and minorities work through Web. their business plans and loan applications. By the time they get to the bank, they already There also is the issue of the global economy, have an SBA guarantee attached to their loan in which you can participate if you are techno- application. It makes life a lot easier for the logically sophisticated. You cannot have one customer, the lender and the bank. I want to without the other, but do you know that small expand that into a nationwide program. businesses comprise 96 percent of all the exporters in this country? However, they are We must use technology to access our customers bringing in only 30 percent of the export rev- directly. We have a great success story. On enues. The goal is to maintain that high in- January 5 of this year, the Vice President volvement by small businesses and to allow inaugurated our online Women’s Business them to bring in more dollars by exporting. Center. It is free, interactive, and provides information on business development strategies We are working actively, and will continue to do and SBA services. You need only to get online. In so, with our lenders to expand the use of our the few weeks since we inaugurated this site, it Export Working Capital Program, which is a 90 has received more than 250,000 hits, which we percent guaranteed program. You cannot get estimate is at least 4,000 visitors per week and much better than that, and we will introduce a visits from representatives of more than 45 new online risk management support system. different countries. We now operate in an inter- We already have 19 U.S. Export Assistance national arena through the Internet. We help Centers, and we are entering into strategic many people, not only our own citizens. binational relationships that will promote joint venture exporting opportunities for small We have a new online product called PRONET. businesses from our country and other nations. Today, we have a bank of 171,000 small busi- nesses on our PRONET, which links them with Many good things are happening at the SBA. It is our federal contract procurement officers. Last an exciting place to be. All of those good things year, we granted $40 billion in federal contracts are reflected in our fiscal year 1999 budget, which to small business. That number is rising, is good news for America’s small businesses. It probably to $46 billion, because we now have offers small businesses unprecedented levels of increased the set-aside for small business in capital in credit; in total, $15.3 billion. Our fiscal the federal government from 20 percent to 23 year 1999 budget proposes $11 billion for the 7(a) percent of all federal contracting. PRONET is an general business loan guarantee. It proposes $3 unbelievable way for federal contracting officers billion for our 504 Economic Development Pro- to access small businesses and for small busi- gram, and we have been able to decrease fees in nesses to access one another. The possibilities the 504 program for the second straight year. We are endless. ACE-net is another way in which are proposing $72 million in microlending, $60 we use the Internet to link small firms that million for direct loans, and $12 million for loan have capital needs with equity investors. guarantees, and we are requesting $1.1 billion for the SBIC Program. All of these are the highest Technology is important as SBA pursues its program levels ever achieved. The capital and mission. We also know that small businesses credit will help strengthen the small business must be technologically smart if they are going sector for the future. to compete in the world economy. This will be a major focus of my attention. We also have requested $112 million in train- ing and counseling funds, an 11 percent in- We already have 41 business information crease over fiscal year 1998. I am particularly centers (BICs) that promote technological pleased that the President has agreed to more

34 than double our funding for the women’s All of this is good news. I am confident that SBA business centers. It is good news, because we is on the right track. Take another look at the are working on integrating counseling ser- SBA if you are not doing business with us. Take vices with lending. That is really the key to a look at our lending programs. Get involved in success. Overall, the budget request repre- our community outreach efforts. Those activities sents only a 1 percent increase. What a bar- will be good business. Link up with our district gain. We are able to achieve this because we offices. Talk to our lending partners. Ask them have been blessed with a wonderful economy, what their experience has been. Talk to our and we have done a great job of managing our small business development centers. Take a programs better. look at forming a bank-owned SBIC. I know that Saunders Miller made a good presentation and a The subsidy rates that measure the costs to the good case for our bank-owned SBIC program. government for our programs continue to Take another look at the SBA. decrease. For the 7(a) program, we project that the subsidy rate will drop from 2.14 percent this I would like to quote Gene Payne, who said this year to 1.39 percent next year. We will keep morning that SBA is the most significant public- working on lowering that number. This is a private partnership in the government. We are tribute to our management of credit risk and getting smarter and more sophisticated every increased attention to our servicing of the day. Partner with us. Together, we can serve the portfolio. One of my principal goals is to trans- increasingly diverse small business community. form SBA into a 21st century leading-edge Help us prepare the small business community financial institution, one that delivers smart, for the technology-driven economy of the 21st innovative products to its customers and man- century. Work with us to give our small business ages its risks to the highest standards. customers opportunities in the global economy. At the SBA, we will show small business the way SBA has improved its program management by to success into the 21st century. relying more on our private sector lending partners. For example, we have improved our Q and A Summary processing through our Preferred Lender Pro- Alvarez commented that SBA will review the gram (PLP). Under the PLP, lenders make the FASTRAK (SBA Express) Program. The SBA is credit decisions and undertake all of the liquida- looking for ways to go beyond the pilot and tion and servicing of loans. SBA approves loans expand the program. She emphasized that it is for guarantees in less than 24 hours. PLP has a good program. been successful, and that has made a funda- mental change in our business. In 1994, 16 In response to a question on the prospects for percent of our 7(a) loans were granted through working with the proposed reduction in the the PLP program. Last year, more than 52 per- subsidy, Alvarez said that the SBA has gone cent of our loans went through our PLP program. from $9.2 billion in fiscal year 1998 to $11 We are growing our programs while the cost to billion in fiscal year 1999. SBA works hard to the government is decreasing. Approximately keep the subsidy rate low. Some of the improve- 400 lenders have qualified thus far as PLPs. ments discussed in terms of partnering with the private sector will continue to reduce the SBA continues to delegate responsibilities to subsidy. There is a direct relationship: the the private sector. Beginning this year, all of smaller the subsidy, the greater the loan our lenders will be required to service and capacity. liquidate our 7(a) loans. This fall, we will begin a program of asset sales starting with a $150 Alvarez said that her comments did not address million sale. a large portion of the SBA portfolio: the 8(a) contracting program. The SBA has regulations We have been working hard to improve the that will be published shortly that will stream- management of the SBA, and it shows in the line the 8(a) process, the mentor protégé idea. increasingly efficient delivery of our services. SBA also will use nationally in pilot form an We are providing better products at a lower electronic 8(a) application that will streamline cost to the taxpayer. that process. Recent legislation has created hub

35 zones, another category of firms that will be anniversary and unprecedented growth from involved in the procurement process. These an idea to a more than a $113 million-asset, firms will be sole source contractors with price full-service, commercial and community preferences, if they can demonstrate that they development bank. The bank has six branches, can create jobs in these zones, which are a 26 ATM network, strong asset quality, and a similar to SBA’s empowerment zones. If the 70 percent loan-to-deposit ratio. United Bank firms can hire 35 percent of their employees opened its doors in March 1992 and remains from a community having high unemployment, the only minority-controlled, full-service, they become eligible for the same type of oppor- commercial community bank within the tunities as 8(a) companies. The procurement Greater Philadelphia Region (Pennsylvania, landscape is becoming more interesting. South Jersey and Delaware — the nation’s fourth largest metropolitan area and fifth A participant wondered if SBA is planning an largest city). evaluation of its fee structure to differentiate between community bank lenders and larger United Bank was born in the troubled decade of banks. Alvarez said that SBA is working on the the 90’s, as many banks were leaving urban issue. Alvarez also pointed out that SBA has neighborhoods and becoming megabanks been focusing on ways to facilitate small bank through mergers. As a result, economic growth entrance into the PLP. declined, businesses moved, and commercial areas deteriorated. Homes were boarded up and What Are the Future Issues of abandoned, because no one was putting invest- ment dollars back into the community. Crime Small Business and Banking and and drug traffic increased; resulting in despair, How Should They Be fear, and all-pervasive poverty. A 1987 survey revealed that the six major banks in Philadel- Addressed? phia collectively invested $387 million in mortgage loans. Only $8 million of that loan Experts from banking, small business, money was granted to minorities and less than academia/research, and securities markets $2 million went directly to women of all races. A shared their innovations and visions for the 1995 survey conducted by the Rand Think Tank small business and banking arena. The speak- reported that banks, savings and loans, and ers explained how community banks can best credit unions denied mortgage applications serve their customers in a competitive market- received from: 33.4 percent of African Ameri- place; the benefits of capital access lending cans; 31.6 percent of American Indians; 23 programs; ongoing problems in lending and percent of whites and 12 percent of Asians. borrowing from the small business perspective; and keys to understanding the minority small United Bank was founded to foster community business market. Eugene A. Ludwig, former development by providing quality, personalized Comptroller of the Currency, OCC, moderated commercial banking products and services to the session. businesses and people in the Greater Philadel- phia region, especially African Americans, Dr. Emma C. Chappell, Chairman, President Hispanics, Asians, and women. United Bank and CEO, United Bank of Philadelphia provides innovative financial products and ser- My comments today are predicated upon more vices within a primary market comprised of 111 than a decade of research and personal experi- census tracts, in which more than 73 tracts are ence in developing — from scratch — a unique low- to moderate-income; 28 tracts are moderate minority-controlled, commercial community income and only 10 are designated upper income. development bank. I sometimes subtitle it, “A Thriller in Philly.” United Bank has been rated “Outstanding” in community reinvestment by the Federal Re- Anchored in the cradle of American liberty — serve Bank for each consecutive year of opera- a scant block from the Liberty Bell — United tion — objective evidence of the bank’s ability Bank of Philadelphia is celebrating its sixth and commitment to fulfilling its mission.

36 In May 1997, the U.S. Treasury Department accounts) to earnings. This process would certified United Bank as a Community Develop- allow the bank to be compared equitably to ment Financial Institution (CDFI) — the first other institutions that are not delivering and only bank in the Commonwealth of Penn- comparable social responsibilities. sylvania to receive that designation. The U.S. Treasury also was awarded a $500,000 grant, • Community Reinvestment Act (CRA) — matched with funds from the University of Expanded, so that participating (investing) Pennsylvania, which will provide technical institutions can receive continuing rather assistance and education in the community. than one-time credits for capital infusions in minority banks based on the level of their The nonprofit Community Development Corpo- investment. ration (CDC) affiliate of United Bank — Phila- delphia United — was founded in 1998. To- • Overhead expense ratio — Increased for gether we seek aggressively to unleash private minority banks that must provide greater capital to motivate, rebuild, connect, and hu- staffing in servicing typically low-balance manize economic development. This approach accounts. is grounded in education, advocacy, and a four- • American Bankers Association’s “Minbanc” phased plan designed to increase significantly: — Required to function as originally legis- lated, i.e., as a pool of funds collected from • Neighborhood revitalization. majority banks that would be invested in • Minority business growth. minority banks. • Employment opportunities. Private sector support measures and initiatives that should also be encouraged are: • Community stability and wealth. • Capital infusion in minority banks helps to Bold and innovative strategies — such as those ensure stability and growth. New capital now pioneered by United Bank of Philadelphia allows for expansion of branch networks, — are absolutely essential for economic stabil- deposits, and loans. Non-cumulative pre- ity and redevelopment in urban America to ferred stock investments would provide become a reality in the 21st century. The additional equity without jeopardizing the accomplishments of six ground breaking years minority status of those financial institu- of experience could serve as a national model tions. Investments also could improve finan- for urban banking. This background of experi- cial institutions’ CRA ratings. ence should be enhanced by the following government and private industry incentives. • Grants to nonprofit CDFI’s (Community Development Financial Institutions) affiliated • Tax incentives — Provided to businesses with minority banks would expand education depositing in, partnering with, or borrowing and training services within the community from minority-controlled financial institu- and provide much needed assistance to new tions engaged in community development. homeowners and entrepreneurs. • Low-interest government loans — Made • Pro bono services would assist cost control available to minority controlled institutions to strategies and ensure operational profitability establish, maintain, or acquire branch facili- of minority banks. The cost of operating a ties located in or serving predominantly minority institution is higher than that for minority neighborhoods. traditional financial institutions, because of high volume/low balance accounts and the Earnings credit — To be used by regulators • need to educate customers. Pro bono services in evaluating minority-controlled financial enhance minority banks by increasing profit- institutions. The appropriate federal regula- ability and ultimately, shareholder value. tor should add the cost incurred in providing community services (e.g., the high cost of • Loan syndication for large corporations maintaining high transaction, low balance provides much needed loan activity for

37 minority banks, generating loan interest, fee loans are being made. Although this data does income, and, ultimately, profitability. Minority not tell us to whom these small business loans banks have the ability, capacity, and desire to are being made, it does show the neighborhoods lead and/or facilitate loan syndication with benefiting from the growth in small business other minority banks and can service the lending. Wells Fargo is the number one small facilities as well as majority banks. business lender in low-income neighborhoods in the United States today. We could not have • Large corporate deposits in minority achieved this status without credit scoring. banks help mitigate the cost effect of high volume/low balance accounts that plague I would like to focus my remarks today on the those banks and threaten their bottom- concept of a national capital access lending lines. Those deposits also provide growth program — why we need this type of program and the ability to make more loans in and what it is. urban communities. Major corporations often put large amounts in majority banks, Right now, times are good: the economy is but cap deposits in minority banks at great, loan losses are down, and bank earnings $100,000 (the FDIC insurance limit). Since have attained record levels. Nevertheless, there many minority banks are well capitalized are clouds on the horizon. We are not reaching and stable, the risk of loss of deposits in as many small businesses as we should. We do excess of insurance limits is no greater not have scalable lending programs that appeal than that of majority banks. to the small, near bankable business. Finally, I am most concerned about creating a I am concerned that during the next economic new type of “social” fund to funnel investment downturn, and it will come, small businesses money into the small business community, could face another credit crunch, much like the similar to the socially conscious mutual funds. one we experienced in the early 1990s. The fund could obtain credit or an incentive And finally, I am concerned about the risk from the government in the initial phase. As associated with credit scoring and lending the fund invests in small businesses, everyone through alternative distribution channels. would benefit, because they would receive a Many small business lenders have jumped on certain return. this bandwagon, and I am not sure they under- Dr. Emma Chappell is the founder, chairman, and stand how to manage and monitor this risk. president and CEO of United Bank of Philadel- When we have an economic downturn, we may phia, a full service, minority-owned and controlled see many lenders withdraw from the small commercial bank. She has received more than 500 business market. That would be a shame, given prestigious awards and honorary doctoral degrees, what we have accomplished in the last five including the Paradigm Award, the highest honor years. given to women business owners by the Greater Philadelphia Chamber of Commerce. A national capital access, small business lending program could help us in an economic Michael R. James, Executive Vice President, downturn. Also, such a program can help us Wells Fargo Bank, N.A. reach businesses that are near bankable today. I am a credit guy at heart. I grew up doing Capital access involves taking risk. It is about traditional lending. However, for the last eight taking more loan losses than a traditional bank years that I have worked in Wells Fargo’s small or even the SBA. Currently 20 state-sponsored business banking group, I have learned a lot capital access programs exist in the United about credit scoring, behavioral scoring, and the States, one of which is the California capital new generation of loan decision models that are access loan program. This program allows one beginning to be used on much larger credits in to build a small business loan portfolio that has the United States. a loss rate of 8 percent.

I want to congratulate the Comptroller’s Office Here is how the program works. The loan loss for publishing data on where small business reserve is funded by the bank through a portion

38 of its future income stream on the loan. In loan programs are two to three times more California, it is 2 percent. The money is given expensive to administer than a conventional to the state of California to create a reserve. bank loan. The offset to that is risk. You get a The borrower, who does not qualify for tradi- guarantee. The capital access program allows tional bank credit, also pays a 2 percent fee into lenders to say “yes” to more borrowers, and it that reserve. The state contributes 4 percent, leverages public funds 25 to 1. creating a 8 percent loan loss reserve. There are also benefits to the public. Besides The reserve is lender-specific. The lender can the leverage of public funds, the government access only the reserve — and this is important risk is limited to 4 percent, versus a guarantee — to cover loan losses. If a business does not of 50 percent to 80 percent. Although subsidy take enough risk, it cannot use all of the rates are lower in SBA right now, the SBA will reserve. If the business takes too much risk, see larger loan losses in the future that will the bank is responsible for any loan losses that require higher subsidy rates. There is minimal exceed 8 percent. government overhead. One person runs the state of California program. That is because the This type of program works, because it is bank uses all of its own processes. market-driven. If a borrower qualifies for con- ventional financing, a bank will not enroll the Another important benefit of the program is borrower in the program, because it will lose that it teaches lenders how to take more risk. I the business to another competitor. I believe would not suggest that anyone try to lend lenders will use this type of program only when billions of dollars through this type of program; no other way exists to make the loan, such as however, I think one can learn how to structure SBA or conventional bank financing. a small business loan portfolio with higher than traditional bank loss rates. Even though the capital access fees sound high, they are actually low versus factoring your The program accrues additional benefits to receivables or some of the other ways you can the banking industry. The most important one finance your business. Also, capital access is that lenders can take additional risk and loans are less expensive than using venture that allows them to make more loans. If you capital. As we learned today, little venture ask small business people what they need, capital lending occurs at the $25,000 loan level. they will say access to capital and fewer hassles. The second reason capital access programs are attractive is that they are easy to use. All types I would like to see a standardized national capital of loans can be enrolled. In California, a one- access program across all markets instead of page application is used to enroll the customer dealing with the different state programs. This in the program. If you incur a loss, you can would make the program even more efficient and claim your money from the state using a one- provide geographic risk diversification, which is page claim form. critical for portfolio insurance. That is what this is: portfolio insurance. The capital access program gives the borrower two benefits: One is access to capital. The other Wells Fargo’s experience is relevant. We cur- is that it eliminates third parties. The partici- rently participate in the California, Colorado, pants are the borrower and the bank. The state Oregon, Texas, and Utah capital access pro- is not involved. The bank handles the loan grams. We are new to all those programs, except approval and the credit monitoring. In a work- for California. The California program started in out situation, the borrower deals with the bank. 1994; and through the end of 1997, Wells Fargo There is no third party. It really is the bank’s has made 1,400 loans, totaling $201 million in loan program. its program. This is $201 million in loans that we would have denied. The benefits of the programs to the bank are many. Importantly, the capital access program Our net loan losses in this program are $11.6 has a low transaction cost. Most government million, which is 5.8 percent of commitments.

39 We are on track in building a loan portfolio with NFIB conducted other research. As late as 8 percent loan losses. December, it found that of those people inter- ested in borrowing, seven could get all of the I believe capital access could be an attractive money they wanted for the one person who program to many small business lenders. It could not, and that the one person who could not should be especially attractive to government, get all the money desired usually could get a because it is elegantly designed to address large share of what he or she wanted. increased credit risk at negligible administrative cost to either lenders or government partners. In Wells Fargo/NFIB study, we examined new businesses. Today, only 25 percent of those Michael James is the executive vice president of brand new businesses, not operating busi- Wells Fargo’s Business Banking Group in San nesses, say that capital is their primary prob- Francisco. The Wells Fargo Business Banking lem in starting that business; the rest point to Group provides a wide range of products and other issues, such as marketing. services to small business owners, including lines of credit and SBA loans. Mr. James has many Right now, times are good. However, we should years of experience in the commercial banking take a longer perspective to identify the gaps in arena and has served on numerous boards. Wells the entire system. I have identified six gaps. Fargo has been a pioneer in the credit scoring approach to small business lending. The first gap involves starts, particularly larger starts or those of $100,000 or more. Clearly, William J. Dennis, Senior Research Fellow, there are problems with this group. The amount National Federation of Independent Business is too small for venture capital financing and Foundation too large for people to use their own resources. I began in this business about 23 years ago, when I walked into my office at 490 L’Enfant The second gap is in rapidly growing busi- Plaza East. For those of you who know the OCC, nesses. They are voracious consumers of its address was also 490 L’Enfant Plaza East, fifth capital. On the other hand, they are risky and floor or sixth floor. NFIB’s office was on the third tend to grow in a snake-like pattern or a sine floor and I would sneak upstairs to use the OCC curve rather than in a straight line. That library. One day, I ran into someone from the pattern makes lenders rightfully nervous. OCC; we chatted and during the conversation decided to conduct a conference on small busi- We have business cycles. At some point, we are ness, perhaps on some unusual approaches to going to enter a recession, and it will change small business lending. Janice Booker was in balance sheets. When it changes balance charge of the conference, and we gathered in a sheets, it alters creditworthiness and, there- small OCC conference room. Only one person fore, the availability of credit. attending the meeting was from out of town, a We also go through transitions: mergers and fellow by the name of Pete Hanson, from Califor- other activities of that nature. Not too long ago, nia. He had developed the loan loss reserve we also had certain regional problems, and they program. Sixteen years later, the program was can cause problems, too. adopted in California. Look at what we have today. What a contrast, and what a pleasant one. Then we have the marginal, the close call. If you think of the turndown point as Point A on a From the small business perspective we live straight line, the objective is to slide Point A today in a golden age of lending or borrowing. A toward the turndown side. But there always will couple of years ago, NFIB conducted one of its be a turndown point. periodic studies, in which it asked the mem- bers to rank their business problems. Borrowing Finally, we have the troubled businesses. Even short-term and borrowing long-term ranked an advocate, such as myself, clearly recognizes 64th and 65th on a list of 75. In other words, 63 that some businesses exist, for which, unfortu- other issues were more important than lending nately, bank credit or debt credit is not appropri- or borrowing money. ate for either side.

40 In the last few years, we have seen major look, and I listened for 10 minutes. As I was changes. Credit scoring has been enormously walking out, I said, “Boy, son, that is really positive. We have not heard much on terrific. You did something really great.” When securitization from the private side, but prob- I got outside, I said to my wife, “I do not have a ably we will. Large businesses are buying clue of what he was talking about. He lost me commercial paper. The international market in the first 10 seconds.” The point is that a is rocky. Consumer credit is highly competi- technology revolution is going on. Who knows tive. So what is left? You found small busi- where it will take us? Small business owners ness, and found it was a marvelous market. are trying to join. About 75 percent of the We are appreciative. owners use computers in their businesses. Ninety percent of firms with 10 to 15 employ- From the small business owner’s perspective, ees have computers. Beyond that, virtually there still are problems. Unfortunately, I have everyone has them. However, only 20 percent more problems than solutions. A few of those of the firms have Internet connection. So this problems should be familiar. is a learning process that has implications for The continuing restructuring of the industry everyone in the banking business. is compounded by personnel practices within Think of something as simple as exporting, many banks, in which personnel changes which most small businesses do not do today. constantly, both within and among banks. To But imagine when everyone is trading inter- a small business owner, this means a disrup- nationally on the Internet. Think what that tion of the banking relationship, and that means for the need for financial services. makes the customer unhappy. A survey conducted several years ago, showed that a Another issue is how we conduct transactions large portion of the public was dissatisfied without collateral. To some extent, that question with banks that had merged, mostly because has been answered partially by those who are they disrupted the transition process. That lending a lot based on personal characteristics suggests that enormous tension is placed on and personal record. However, we are becoming the transition, because most small busi- increasingly a service economy where thoughts nesses that change banks are pushed away and ideas are the value of the company. The from their old bank rather than attracted to owner of those ideas is the owner of the company. the new one. Moreover, we see what I had always thought The second point is that there will always be a was an important source of collateral stagnating high touch market (personal customer service). in value: home ownership. This stagnation I am a great believer in credit scoring. It has occurs not necessarily in the number of been marvelous for small business, but there homeowners, but rather in the value of their will always be a need for someone to offer more homes. The value of those homes is not rising personal attention. I had a conversation about quickly and will not be the source of the collat- this issue with two business owners this eral that it has been. morning. One owner thought she would like the Finally, we need to change the bankruptcy laws. high touch side; the other thought she would I expect major legislation this year, or at least like the high tech side. All of our surveys tell us proposed legislation. The increasing bankrupt- that customers want to know their banker and cies over the last few years cannot be sustained their banker to know them. The question is in a good period. As a small business advocate, I whether they are willing to pay for it. Some are am on two sides of this issue. Clearly, small willing, some are not. business will not receive money unless lenders The third point is technology. Last night, I can be assured that the collateral they hold can walked into my son’s bedroom. He is 15, and I be repossessed, if necessary. However, a distin- said, “What are you doing, son?” He was on the guishing characteristic of the United States, as computer, and he replied, “Well, I am really an entrepreneurial society, is the capacity to doing this, Dad. It is really neat, I want to tell fail and to not be penalized so severely that it you about it.” I sat down. I put on my wisest leaves the individual stigmatized and outside of

41 the entire process. The balance now appears to changes that will have a much greater effect as lay in favor of the borrower/debtor. we move into the 21st century. Increasingly, the population will be diverse. We will see some We also need a continuing review of our subsidy growth in the African American population, and programs. By definition, government finance much more rapid growth in the Hispanic and programs are subsidy programs. That means we Asian populations. Those changes have impli- must consistently ask, what is subsidized, how cations for employment, product markets, and much, and why? Some of the answers may be investment opportunities. pleasing, some may be troubling. However, they must be asked. We often hear reference to Census Bureau numbers on the growth in minority- and Finally, the gap in funds needed sometimes women-owned businesses. Those numbers only may be filled best by equity. The question is scratch the surface. I do not want to cast any how do we handle the problem or situation. This negatives on the way in which the Census morning, this issue was discussed by a panel, Bureau calculates the numbers. They have the which had some fascinating ideas on the most comprehensive figures for minority- and subject. Mike James talked about an entirely women-owned businesses, but they do not different group of people and a different ap- include regular corporations. Subchapter C proach to the situation, but clearly equity is corporations are missing. part of the answer. I would like to give you a sense of what that One of the government’s most innovative means. A few years ago, the Joint Center activities is SBA’s ACE-net Program. For lack conducted a mail survey of firms at the high of better terminology, it is an Internet match- end of the minority business market. The ing service between lenders and borrowers or survey included about 500 to 600 firms sur- between investors and business owners. It has veyed by Black Enterprise, when it compiles its just started. It will be a marvelous service, and BE-100, and firms in a number of state re- there is no reason why bank subsidiaries of gional councils of the National Minority Sup- one kind or another cannot participate actively plier Development Council. In that survey, in it. approximately 53 percent of the firms were William Dennis is currently senior research regular corporations. Although that does not fellow at the National Federation of Independent indicate that you can double the Census Business Foundation, where his research activi- Bureau number for a true sense of minority ties have focused on small business and public businesses, it suggests that a whole world of policy. His most recent publication is “Wells minority business exists about which we know Fargo NFIB, Business Starts and Stops.” Mr. only a little. Dennis works actively with universities and That knowledge is important for lending, be- organizations that have a small business focus cause you want to bet on sure things. Those are and has held numerous positions with those businesses that will continue to grow and institutions. develop, particularly minority businesses. They make large contributions to their communities, Dr. Margaret C. Simms, Vice President for which many of you probably know because you Research, Joint Center for Political and are involved with minority businesses. Economic Studies I am not in the banking business, so I cannot The Joint Center survey was conducted in part give you the detailed advice that some of the to look at the willingness of firms to recruit in other speakers have; however, I would like to low-income neighborhoods. The difference draw a slightly larger picture and return to between minority and nonminority firms in some of the themes that arose during the terms of their willingness to recruit in those luncheon address. neighborhoods was astounding, even to those of us who entered into the program knowing During the speech, we heard from Administra- that these firms were much more likely to tor Alvarez about a number of demographic employ minority workers. We are continuing to

42 do research in that area, so that we can exam- Finding the winners rather than the losers ine further what makes some see people from makes a big difference. Nobody wants or would low-income neighborhoods as good workers, encourage you to invest in losers; identifying when others seem to think that those workers the winners is important. I would like to are not the kind of people they want to hire. promote an idea that no one has offered so far, although it has been alluded to: investing in How can we pick the ones that will be the people. By investing in people, I mean the equivalent of the BE-100 or at the top end of next generation of bankers. When we look at their market? I was reading in the business the demographics, the young population is section of the Washington Post this week about emerging increasingly from non-white groups. Network Solutions. How many of you know that Those are your workers of tomorrow. They are Network Solutions used to be a black-owned the people who will make the connection, who firm? Here is someone who had the monopoly will be those high touch people at the firms on assigning Internet addresses, a man who that will make a real difference in our inner was looking to the future. He had some assis- cities and urban communities. tance from the government, but the owner was someone who could take an idea on the cutting This concept is easier said than done, because edge, ahead of the curve, and work on it. He sold many young people are in educational institu- the bulk of the business to move on to other tions that do not provide them with the kind of ventures. We must find those people when they foundation that we would like to see. On one are on the upswing, when they can really make hand, you may be required to invest your time. a contribution. It is important, because both you In the long-run, however, the payback should be and the community get a return. a good one. As we look at the banking industry, we must make available mentorships and When we look at the effect of minority firms on apprenticeships for young people. A number of employment and inner city development, we communities are developing school-to-work find that the firm’s characteristics and not programs, in which young people at the high their location determines whether they hire school level combine classroom learning with people from the inner city. work-based learning. Because those programs Danny Boston, on the faculty at Georgia Tech proceed at different rates around the country, it and one of my colleagues on the Black Enter- is hard to talk about a typical school-to-work prise Board of Economists, is promoting an idea program. The programs often lack employers called 20 by 10. The idea consists of the willing to participate in developing curricula concept that, if in 10 years we can grow minor- and to provide opportunities for young people to ity businesses, in particular black-owned learn the work of a banker. businesses, by 20 percent each year, those You should identify the right people and invest firms can provide a significant amount of in them, even if you do not pay them. Clearly, employment in communities that would other- the most important cost to you is the time that wise have large unemployment. Boston has you and your employees take to train, develop, compiled some national figures based on encourage, and keep in touch with those people adjusting the Census Bureau numbers. The after they have left your employ and move along results are modest, but in terms of capital the in their educational careers. investment will be significant. A few weeks ago, he published an article in the Atlanta I receive great satisfaction from having my past Journal Constitution on the concept for Atlanta research assistants reappear in my life in and for Georgia. Boston has reinforced the different ways and at different ages; I might add findings of the Joint Center on people em- that a former student of mine is in the audi- ployed by those companies. He proposes to ence. We talk about people who return, and at raise by 3 percentage points the growth rate for times need help that is time consuming. When those businesses. With that, you could affect you invest in them, however, you invest in an the community significantly; that means, improvement in your industry. It is a special however, that these firms will need the capital contribution to find those winners who will build to grow. your profits and your community.

43 Dr. Margaret Simms is vice president for Re- community development loan programs (CDFI’s search at the Joint Center for Political and for short); commercial banks; and a special Economic Studies in Washington, D.C. She has purpose “securitization” conduit. conducted research on minority business devel- opment issues for many years and has numerous As is true of any partnership, each participant publications to her credit, including “Is the Inner should do what that participant does best, is City Competitive?,” appearing in the Review of comfortable doing, and needs to do to make Black Political Economy. Dr. Simms has served money, if profit is part of the motivation. We on the faculty of Atlanta University and the have assigned each participant a role in each of University of California at Santa Cruz. She has the eight functions I mentioned earlier. For been a member of the Black Enterprise Board of example, the city has no role in marketing, Economists since 1987. origination, underwriting, funding, or servicing, but has an approval role in product development Paul L. Pryde, Jr., President, Capital Access to the extent that public money is being used. Group The city has a role only in credit support; it has Small business credit problems are not prob- no role in funding or providing liquidity for loans. lems of money — they are problems of organi- Most city officials no longer make loans. They zation. Credit delivery involves eight major have been in that business for a long time. And functions: marketing, product development, now, they want to get out of it. They want the loan origination, loan underwriting, loan private sector involved. This partnership struc- funding, loan servicing, credit enhancement, ture accommodates the inclusion of the private and liquidity. In a well-organized market, sector. Private originators and private lenders, people or organizations exist that perform each however, want the city government to take the of those eight functions well. In underserved risk that they are unwilling to take. This is markets, inner cities, small and minority relevant to Mike James’ discussion of the businesses, those functions are not performed California Capital Access Program. adequately. The principal role of government is credit In a well-organized market, you have aggres- support. We have said to the banks: you can sive marketing. For example, many of you help design the marketing program. You have receive 8 to 10 credit card solicitations from the human and other technical resources to various banks each month. In addition, a high help design an aggressive marketing program degree of product innovation exists in a well- to find borrowers. You can help in designing the organized market. In the mortgage market, pricing of a product. there is a 125 percent loan-to-value loan. B&C mortgages and other new products have been I cannot emphasize too much the need to developed to serve customers better. design products appropriate to the market. One problem in an economy increasingly comprised Many people originate loans. There is credit of service businesses is that credit products scoring and disciplined underwriting. Numer- dependent upon large amounts of collateral and ous sources of funding are available for those short maturities will not work. You have to loans as well as large and efficient servicing design products appropriate to the borrowers. organizations. Private mortgage insurance You do not want to be the only business that companies, credit supporters, and capital says the customer is always wrong. markets provide liquidity. Banks can play a role in origination, depending Generally, none of those activities are taking upon their preferences. Some banks want to place in the inner city and other underserved originate small loans, others do not. If we want markets. In two cities, we work to create a the banks to fund credit lines to loan origina- partnership that solves the organizational tors, they must approve underwriting standards. problem that inhibits the delivery of credit to Banks have large servicing capabilities in some small businesses. The partnership has four cases. By contrast, banks provide no role in principal participants: local government; credit support.

44 We put most of the emphasis on local commu- loans. The city will place the money in the nity development loan funds, community devel- special purpose corporation. It is “found” money opment banks, and similar organizations for them. Once again, it will use the capital to carrying out the program. Those organizations purchase loans from the originating community originate and underwrite loans and advance development bank. The special purpose corpora- funds to borrowers. They can act as tion or conduit will package those loans into subservices, but they do not have the money to securities and sell them to local banks. act as credit supporters or to provide liquidity in the marketplace. Essentially, they find the As long as the pricing of loans is appropriate borrowers, package the loans, make the loans and the losses are not too severe, this pro- in accordance with agreed upon underwriting gram can replenish continually the amount of standards, and fund the loans. lending in that community. We call it our perpetual credit machine, because you re- My favorite part of this partnership is loan plenish continually the amount of capital securitization. We have asked a couple of flowing through the system. There is plenty of cities to create a “secondary market” organi- liquidity in the system. The bankers I know zation, using existing loan assets. This corpo- do not have problems with funding loans. They ration essentially buys loans from the origina- have excess liquidity. They are looking for tors, packages them into securities, and earning assets. That is their big problem. resells the senior piece of the securities to Investors come to us all the time since the the banks. Resolution Trust Corporation closed. There is a huge appetite for new types of assets and no one to supply them. There is a huge amount With respect to CRA, they can of money looking for deals. meet the investment test or the The partnership that seems to work has a lending test, whichever test structure that places the city or government in they wish to meet. the credit support role, assigning the origina- tion responsibility to competent organizations that exist in profusion in cities to originate and service loans, and putting the banks in the Securitization transactions involve putting the position of investor that funds credit lines to the loans in a pool or in a trust and dividing them originator. We have tested this in conceptual into two pieces. You have $10 million in loans. form, given banks in a few cities term sheets, You divide the loans into two pieces, a senior and said, “Will you do this?” So far, we have had piece and a junior piece. The senior piece has a a good response. priority on the cash flows of a pool of loans, and the junior piece has subordinate interest. We Paul Pryde, Jr., is president of Capital Access want the banks to invest in the senior piece, Group, a limited liability company, a financial and the conduit or someone else to hold the advisory and consulting firm, specializing in subordinate interest. The result is a system financial innovation for lenders in underserved that places the banks in three roles with which markets. He has more than 25 years of economic they may be comfortable: originating loans, development and finance experience. He is the funding loans, and investing in senior securi- author of several publications, including “Black ties. With respect to CRA, they can meet the Entrepreneurs in America.” He also is a consult- investment test or the lending test, whichever ant to and a board member of several national test they wish to meet. policy development organizations. Most recently, Mr. Pryde has focused his energies on small In Miami and Atlanta, we are looking at exist- business loan securitization. ing community development block grant loans to capitalize the secondary market vehicle. The Q and A Summary cities admit that some loans have not been Mike James provided additional detail on well-managed. We are trying to improve their capital access programs, which exist in 20 management, and we are going to sell those states. The program in Michigan was begun

45 first in 1986 and is the largest. Most states important for a smaller bank. Sometimes began those programs after the credit crunch of United Bank does not obtain the pricing needed the late 1980s and early 1990s. The programs to make securitization cost effective, although are relatively new. The second largest program securitization helps liquidity. United can sell is in California. the loans and obtain new capital to make more loans. In that way, United Bank continues to A participant asked James if the 2 percent serve the community. Because community reserve was passed on to the borrower and banks often have difficulty accumulating whether the 8 percent reserve is a portfolio deposits in the face of the competition among reserve, rather than a loan-specific reserve. He large banks, this is one way community banks responded in the affirmative, noting that the can leverage existing deposits and maintain borrower pays a 2 percent fee, and the bank liquidity. pays 2 percent from its future income stream; the municipality pays 4 percent. He added that Pryde responded that three problems of price the reserve exists for the portfolio, not for the have become evident in this area. One prob- specific borrower. lem is the opportunity cost for the investment banking community. The investment bankers For credit scoring, James stated that capital do not want to transact smaller deals with access is not a product, but rather a govern- small community banks when it can transact ment enhancement of credit risk. The program $100 million credit card deals. The second could be used on any type of loan, from a line of problem of price is that the market does not credit to a term loan or equipment loan to a real exist at this time. We do mainly private place- estate loan. He also stated that credit scoring ment deals. The market is not really efficient, allows one to standardize underwriting. When and one may not get the desired pricing, you underwrite 1,000 loans at a certain score, a although interest is increasing. The third certain loss rate is expected. Credit scoring problem is that it is costly for a small bank to helps determine the composition of an 8 transact its first securitization deal. A small percent or a 4 percent loss portfolio. It allows bank may only want to use the securitization one to track the portfolio. process as a funding alternative, or when it will improve the return on equity. A participant asked about management of the use of the SBA Low Doc and FASTRAK Programs with A participant asked Dennis if the consolidation the capital asset role. James answered that people of regional banks into super regional ones will are learning how to use those different programs. affect the efforts toward community develop- Wells Fargo participates in only five access pro- ment. Dennis said that it may not make a great grams, although it lends money in 50 states. difference. Over the long term, it will depend on FASTRAK exists in more states. At times, they the leadership on both sides. The consolidation complement each other. Both are relatively new can be a positive experience, if the leadership in programs, and both have pluses and minuses. the larger firms and in the banks is inclined to consider it a profitmaking activity, and one that Often relationship-building opportunities with is worthy, workable, and useful. As a practical small business borrowers can be lost when matter, there probably will be some downside. community banks do not securitize loans. A participant asked if the relationship can be Comptroller Ludwig asked Simms for her opinion preserved. Chappell responded that it can be on the small business environment today versus preserved even after loans are securitized and 10 years ago. Simms responded it is a better sold. United Bank maintains the relationship environment for a number of reasons. One and sells other services to the customer. Many reason is that the overall economic growth is of the customers do not see that United Bank generating opportunities that allow those firms assembles the portfolios and sells them in the to present themselves more favorably to lenders. secondary market. Chappell also stated that the It is not such a stretch for lenders to see those only barrier to securitization by community opportunities as profitable ones. Education or banks is that the banks must build their fee learning has cast some minority firms in a more income as must other banks. It is even more positive light in the lending community, but a

46 significant gap exists. The most recent numbers seling and other activities. The CDCs provide show significant differences in the treatment of that funding and so could CDFIs. Some CDCs minority entrepreneurs, who have the same would offer education and training, if they could characteristics as white ones. pay for it through a grant. It would be better than tacking it onto the loan, because that Comptroller Ludwig asked panel members for means less money available to put into the their opinions on the need for government businesses. Because many businesses are enhancements and education. Pryde stated that start-up businesses that create new jobs, the government credit support reduces the anxiety less expenses involved, the safer and sounder over inaccurate pricing. For example, all of the will be the business. mortgages being securitized and sold were government guaranteed. People no longer A participant asked Chappell if her bank is needed government guarantees after they experiencing such bullish returns as its coun- became comfortable that they could price the terparts at Wells Fargo. Chappell answered in risk accurately and knew exactly how a particu- the negative. According to Chappell, the commu- lar type of asset would perform. The credit nity must be educated on the importance of enhancement is a short-term need over a dealing with minority banks. United Bank is period of time. For certain types of loans, you specific about its mission, which is returning will not need any enhancement. The market those dollars directly to the communities it will be efficient. Enhancement is a temporary serves. One of the greatest difficulties is that need in the small business marketplace. minority banks typically have high transaction, low balance accounts. So United Bank must Simms stated that the question of whether a educate the community, because once people government role is defined, in part, by whether enter the middle class or upper middle class, one believes the market captures everything they do not see the importance of dealing with necessary in terms of the lending experience. If minority banks. United Bank was founded by a social purpose or social benefit exists, one 3,000 shareholders, people who believed that could argue that the government may not have they traditionally and historically had been to withdraw completely. The nature of the locked out of the system. They had been redlined government support might be different. and otherwise treated unfairly. They lined up Dennis stated that the education function can and bought stock at $10 a share. Most sharehold- be built into the price of the loan, although the ers never owned stock, but they own stock in delivery does not necessarily have to be per- United Bank because they saw a need. It has formed by the bank. He said that he thought been difficult to tell the other part of the commu- that had been assumed, but is not necessarily nity that United Bank will be successful, if true. In fact, he said the bank may not be the people who have sizable accounts bring them to best place to do it, since it is not usually the bank to balance the low balance, high trans- equipped to perform that function. In a few action accounts. It has been a delicate balance. places there have been cooperative ventures. United Bank’s returns are not as large as they ought to be, but there is a major improvement. It James pointed out in terms of government all boils down to education and communication. subsidy that when you are pricing for risk, not enough knowledge exists yet on how to do an 8 Comptroller Ludwig said that everyone can percent loss portfolio. The data must be ob- make great strides from what was learned at tained. When that occurs, it can be priced. the forum. He emphasized that the OCC has set Technical assistance and education is a critical out on a mission to partner with banks and issue. Chappell disagreed in some respects. small business enterprises and associations, in She noted that she is a practitioner of this particular low- and moderate-income and entire piece. Small businesses cannot afford minority organizations. And he said, that the the many services that they receive. Because OCC is in for the long haul. The OCC, he they were not able to obtain financing for many pointed out, will continue to deepen this part- years, the government could fund various nership and to foster this important area of nonprofit groups to provide pre-mortgage coun- economic development in the nation’s economy.

47 48 Appendixes

Appendix A — Forum Attendees List

Appendix B — Small Business References

49 50 Attendees

Small Business Banking Issues Forum Alabama Len Canty Craik Davis Chairman Senior Vice President Nu Capital Access Group, LTD South Trust Bank Oakland, CA Birmingham, AL Selma Taylor California Executive Director California Resources and Training Ezekiel Patten, Jr. Oakland, CA President Patten Energy Enterprises, Inc. George E. Williamson Culver, CA President & Chief Executive Officer California Economic Development Deborah E. Franco Lending Initiative Consultant Oakland, CA Far East National Bank Los Angeles, CA Frank Greene Managing Member Marjorie Grant New Vista Capital, LLC Certified Public Accountant Palo Alto, CA M.R. Grant, CPA Los Angeles, CA Manny Alonzo Assistant Vice President, Branch Manager Richard C. Hartnack Mission National Bank Vice Chairman San Francisco, CA Union Bank of California Los Angeles, CA Michael James Executive Vice President Carlton J. Jenkins Wells Fargo Bank, N.A. President & CEO San Francisco, CA Founders National Bank of Los Angeles Los Angeles, CA David Jones Business Development Manager Robert B. Oehler Mission National Bank President & CEO San Francisco, CA Far East National Bank Los Angeles, CA Dominic Venturo Vice President/Manager Wesley R. Buford Credit Products Chairman & Founder Bank of America, NT & SA Freedom Card, Inc. San Francisco, CA Marina Del Ray, CA Anita M. Robinson Sharnia T. Buford President & CEO President & Chief Executive Officer Mission Community Bank Freedom Card, Inc. San Luis Obispo, CA Marina Del Rey, CA

51 Colorado Aida Alvarez Administrator Colleen Schwarz U.S. Small Business Administration Director of Commercial Programs Washington, DC Colorado Housing and Finance Authority Denver, CO Lisa S. Andrews Director, Business & Public Liaison Connecticut U.S. Treasury Department Washington, DC Carl M. Harris First Vice President Lloyd M. Arrington, Jr. People’s Bank President Bridgeport, CT Columbia Capital Group Washington, DC Martin J. Geitz President Sonia Barbara Fleet Community Development Corporation Manager, Public Relations Hartford, CT American Bankers Association Washington, DC Delaware Michael Barr Deputy Assistant Secretary Stephen D. Briggs Community Development Policy Personal Banking Officer U.S. Department of Treasury MBNA America Bank, N.A. Washington, DC Wilmington, DE Erica Batie Michael J. Kelley Investment Associate Vice President Columbia Capital Group SunTrust Bank USA Washington, DC Wilmington, DE Haron Battle Joseph M. Kopp Associate Legislative Director Director National Association of Counties U.S. Small Business Administration Washington, DC Wilmington, DE Larry Beard District of Columbia Assistant Deputy Comptroller Bank Supervision Harry C. Alford Office of the Comptroller of the Currency President/CEO Washington, DC National Black Chamber of Commerce Washington, DC Janice A. Booker Director Jacquelyn C. Allen Community Development Division Community Development Specialist Office of the Comptroller of the Currency Community Development Division Washington, DC Office of the Comptroller of the Currency Washington, DC

52 Raphael Bostic Courtland Cox Economist Acting Director Federal Reserve Board Minority Business Development Agency Washington, DC Washington, DC

James L. Bothwell Glenda B. Cross Director Director Office of Policy Minority and Urban Affairs Federal Housing Finance Board Office of the Comptroller of the Currency Washington, DC Washington, DC

Joanne Buck Donna Deale Program Administrator Manager Banking Relations Supervision Policy Office of the Comptroller of the Currency Office of Thrift Supervision Washington, DC Washington, DC

Liz Butler William J. Dennis Special Project Manager Senior Research Fellow National Congress for Community National Federation of Independent Economic Development Business Washington, DC Education Foundation Washington, DC Eileen Canning Press Camille Dickerson BNA Secretary Washington, DC Legislative and Regulatory Activities Division Barbara Chiapella Office of the Comptroller of the Currency Federal Legislative Representative Washington, DC American Bankers Association Washington, DC Bles P. Dones Associate Director Don A. Christensen Professional Development Group Associate Administrator for Investments American Bankers Association Small Business Administration Washington, DC Washington, DC Diane Dorius Patricia Cinelli Office of Policy Manager Federal Housing Finance Board Public Relations Washington, DC American Bankers Association Washington, DC Kerry Early Federal Legislative Representative Donna Clarke American Bankers Association Marketing Representative Washington, DC U.S. Department of Housing & Urban Development Washington, DC

53 Diane Feeney Caffin Gordon Banking Relations Analyst Complaints Manager Banking Relations Division Equal Employment Programs Office of the Comptroller of the Currency Office of the Comptroller of the Currency Washington, DC Washington, DC

Allen Fishbein Bill Grant General Counsel Director for Banking Relations Center for Community Change Office of the Comptroller of the Currency Washington, DC Washington, DC

Arthur A. Fletcher Don Graves Chairman Director, Washington Office National Black Chamber of Commerce, Inc. ONE Washington, DC Washington, DC

Patricia Forbes Houston E. Gray Minority Staff Director and Chief Counsel Supervisory Economic U.S. Senate Committee on Small Business Development Specialist Washington, DC U.S. Small Business Administration Washington, DC Scott Frame Financial Economist Barbara Grunkemeyer U.S. Treasury Department Credit Risk Expert Washington, DC Office of the Comptroller of the Currency Washington, DC Rudy Fuentes Senior Advisor to the Director Kendra L. Gunter Minority Business Development Agency Business Recruiter U.S. Department of Commerce ENCORE Management Corporation Washington, DC Washington, DC

Shirley Galiber Carlos E. Guzman Executive Director Vice President Health Quest Foundation, Inc. Community Development Lending Washington, DC First National Bank of Maryland Washington, DC Harvey Gantz, Jr. Program Coordinator for Community James W. Hammersley Relations Director Office of the Comptroller of Currency Secondary Market Sales Washington, DC U.S. Small Business Administration Washington, DC Cynthia A. Glassman Director Cordell Harris Commercial Bank Risk Management National Bank Examiner Ernst & Young, LLP Community Development Division Washington, DC Office of the Comptroller of the Currency Washington, DC Myrtle R. Gomez President Nursing Enterprise, Inc. Washington, DC

54 B. Garfield Haynes Sandra Jowers Attorney CEO Pena & Associates, P.C. Sandy Jowers and Associates Washington, DC Washington, DC

Lisa J. Hemphill Bud Kanitz Secretary Director Community Development Division Community Relations Office of the Comptroller of the Currency Office of the Comptroller of the Currency Washington, DC Washington, DC

Christina Hines Judith Knight Director of Operations Director Accion International Center for Community Development Washington, DC American Bankers Association Washington, DC C. Howie Hodges, II Regional Vice President Nick Lambrown Community Development Division Vice President & Director Bank of America, FSB Small Business Lending Washington, DC First National Bank of Maryland Washington, DC Tawanda S. Hudge Senior Secretary Susan C. Lee Community Development Division Board Member Office of the Comptroller of the Currency Congressional Asian Pacific American Washington, DC Caucus Institute Washington, DC Anita G. Jackson Business Recruiter Veronica Lee ENCORE Management Corporation Accounting Technician Washington, DC Office of the Comptroller of the Currency Washington, DC Robin Y. Jackson Lobbyist Robert C. Leland Independent Bankers Association Vice President Washington, DC National Congress for Community Economic Development David B. Jacobsohn Washington, DC Esquire Verner, Liepfert,, Bernhard, Chris Lewis McPherson and Hand Special Advisor for External Relations Washington, DC Office of the Comptroller of the Currency Washington, DC Roberta L. Johnson National Bank Examiner Alex Lichtenstein Northeastern District Conference Specialist Office of the Comptroller of the Currency Office of the Comptroller of the Currency Washington, DC Washington, DC

55 Lillian M. Long Alfred T. Mitchell Program Coordinator Community Development Specialist Community Development Division Community Development Division Office of the Comptroller of the Currency Office of the Comptroller of the Currency Washington, DC Washington, DC

Eugene A. Ludwig Lucinia Mundy Comptroller Community Affairs Specialist Office of the Comptroller of the Currency Federal Reserve Board Washington, DC Washington, DC

Bill Magrini Sean Narayan Senior Project Manager Director of Programs Office of Thrift Supervision National Association of Development Washington, DC Organizations Washington, DC Sheila F. Maith Director of Federal Policy Stanley Newman Local Initiatives Support Corporation Associate Director for Community Washington, DC Development Federal Housing Finance Board Alex McElroy Washington, DC Press BNA Margaret Nilson Washington, DC Financial Economist U.S. Treasury Department Yvonne McIntire Washington, DC Senior Attorney Community and Consumer Law Bobbie Jean Norris Office of the Comptroller of the Currency National Coordinator Washington, DC Community Affairs Reinvestment Federal Deposit Insurance Corporation Gregory J. Melanson Washington, DC Vice President Community Lending Group Valerie R. O’Brian NationsBank Attorney Washington, DC U.S. Department of Justice Washington, DC Saunders Miller Senior Policy Advisor Lois S. O’Connor U.S. Small Business Administration Associate Director Washington, DC Research Development The George Washington School Deric A. Mims of Business & Public Management Vice President Washington, DC Small Business Resource Center Crestar Bank Charles Ou Washington, DC Senior Economist U.S. Small Business Administration Washington, DC

56 Julie Paller Darren V. Roman Senior Financial Analyst Associate Federal Housing Finance Board Katten Muchin & Zavis Washington, DC Washington, DC

Scott Park Tedd Russell Editor Chief Financial Officer Regulatory Compliance Watch American Home Owner Education and Washington, DC Counseling Institute Washington, DC Gloria Parker Secretary Kaye E. Savage Office of the Comptroller of the Currency Deputy Superintendent Washington, DC Office of Banking & Financial Institutions Washington, DC Eduardo Pena, Jr. Past National President Richard Shack League of United Latin American Citizens Accountant Washington, DC Office of the Chief Accountant Office of the Comptroller of the Currency Brenda Powell Washington, DC Marketing Director Health Quest Foundation, Inc. Joshua Silver Washington, DC Vice President of Research National Community Reinvestment Judith Richard Coalition President Washington, DC Richards Development Company Washington, DC Russell D. Simmons Senior Vice President & Director Larry Riedman Business Community Development Fair Lending Specialist Riggs Bank, N.A. Community & Consumer Policy Washington, DC Office of the Comptroller of the Currency Washington, DC Margaret C. Simms Vice President for Research Benson Roberts Joint Center for Political and Economic Vice President for Policy Studies LISC Washington, DC Washington, DC Lawrence Smith Andrea L. Robinson President Vice President National Settlements, Inc. Credit Administration Washington, DC Crestar Bank Washington, DC Janis Smith Senior Public Affairs Specialist Ken Rogers Press Relations President Office of the Comptroller of the Currency Ideal Electronic Security Company Washington, DC Washington, DC

57 John Sower Mary Thorpe Principal Vice President Mezzanine Capital Management, Inc. Federal Relations Washington, DC The Money Store Washington, DC Herbert L. Spira Tax Counsel Karen Tucker Independent Bankers Association of National Bank Examiner America Community and Consumer Policy Washington, DC Office of the Comptroller of the Currency Washington, DC Lisa Stanley Deputy Director Dionne Walsh Office of Policy Development Secretary Federal Deposit Insurance Corporation Press Relations Division Washington, DC Office of the Comptroller of the Currency Washington, DC Theresa Stark Project Manager Dayton J. Watkins Compliance Policy Administrator Office of Thrift Supervision USDA, Rural Business Cooperative Washington, DC Service Washington, DC Corlis Steveson Secretary Sonja L. White Securities & Corporate Practices Division National Community Affairs Coordinator Office of the Comptroller of the Currency Office of Thrift Supervision Washington, DC Washington, DC

Terry L. Strong Woody Widrow Acting Director Associate Director Howard University Small Business National Association of Affordable Development Center Housing Lenders Washington, DC Washington, DC

John E. Taylor Cora H. Williams President & CEO President National Community Development Ideal Electronic Security Company Reinvestment Coalition Washington, DC Washington, DC Julie L. Williams Sandra Thompson Chief Counsel Assistant Director Office of Chief Counsel Federal Deposit Insurance Corporation Office of the Comptroller of the Currency Washington, DC Washington, DC

Roger Thompson Pamela Williams Deputy Editor Associate National Bank Examiner Nation’s Business Office of the Comptroller of the Currency Washington, DC Washington, DC

58 Roberta Youmans Nancy Gresham-Jones Program Analyst CRD Specialist, Southeastern District Federal Housing Finance Board Office of the Comptroller of the Currency Washington, DC Atlanta, GA

Maurice F. Zeitler Pamela J. Hubby Program Coordinator Senior Vice President, Small Business Community Development Division NationsBank, N.A. Office of the Comptroller of the Currency Atlanta, GA Washington, DC Karol Klim Thomas E. Zemke CRD Specialist, Southeastern District Deputy to the Director of the FDIC Office of the Comptroller of the Currency Office of the Comptroller of the Currency Atlanta, GA Washington, DC Illinois Florida Fred Alford James Carras President President First Midwest Bank, N.A. Buffalo Grove Carras Community Investment Buffalo Grove, IL Fort Lauderdale, FL Frances R. Grossman Corey J. Coughlin President President/CEO Community Development Corporation 1st National Bank of Central Florida Bank of America Longwood, FL Chicago, IL

Bridget Ellis Anke Koning Business Development Officer Partner Black Business Investment Fund The Koncar Group Orlando, FL Chicago, IL

Georgia Bert A. Otto Deputy Comptroller Michael Embry Central District Business Development Coordinator Office of the Comptroller of the Currency NAACP Chicago, IL Atlanta, GA Sherrie L. Rhine Robert T. Goff Consumer Issues Research Manager Managing Member Federal Reserve Bank of Chicago Southeast Capital Associates, LLC Chicago, IL Atlanta, GA Jonathan Rohde Charles H. Green Vice President Managing Member Harris Trust & Savings Bank Southeast Capital Associates, LLC Chicago, IL Atlanta, GA

59 Liz Ryan Indiana Housing Staff National Training & Information Center Jean L. Wojtowicz Chicago, IL President The Cambridge Capital Management David Taylor Corporation Executive Vice President Indianapolis, IN Bank Administration Institute Chicago, IL Kansas

David Veda Ralph Leno Regional Director President and CEO Minority Business Development Agency Gardner National Bank U.S. Department of Commerce Gardner, KS Chicago, IL Louisiana Gary S. Washington Senior Vice President LaSalle National Bank LaVerne Kilzore Chicago, IL Business Development Center Director Jefferson Housing Foundation Mary T. White Harvey, LA Senior Vice President Bank of America David L. Majkowski Chicago, IL Vice President Compliance/Loan Review Jerrold B. Carrington MidSouth National Bank General Partner Lafayette, LA INROADS Capital Partners Evanston, IL Robert K. Kottler Senior Vice President Thomas J. Doherty Hibernia National Bank First Vice President Metairie, LA LaSalle Bank, N.A. Skokie, IL Vaughn R. Fauria Executive Director Joseph Kirkeeng Newcorp Business Assistance Center Senior Vice President New Orleans, LA Cole Taylor Bank Skokie, IL Claudia R. Plummer Owner Michael A. Cullen Claudia’s Career Apparel President New Orleans, LA The National Bank and Trust Company of Sycamore James M. Whalen Sycamore, IL Vice President Whitney National Bank New Orleans, LA

Diedria B. Wooden President & CEO Topp Knotch Industries New Orleans, LA

60 Maryland Robert G. Snyder Business Development Consultant Jeffrey S. Armiger Business Consultant Services Senior Vice President Bethesda, MD Business Banking Annapolis National Bank Lynn R. Whiteside Annapolis, MD Executive Director Social Compact Barry D. Blumberg Chevy Chase, MD Senior Vice President NationsBank Veronica M. Cleveland Baltimore, MD Vice President Farmers & Mechanics National Bank Frank C. Bonaventure, Jr. Frederick, MD Esquire Ober, Kaler, Grimes & Shriver Wayne F. Fox Baltimore, MD Senior Vice President Farmers & Mechanics National Bank Timothy C. Elliott Frederick, MD Vice President First National Bank of Maryland Denise Gaither Baltimore, MD Commercial Loan Officer FCNB Bank Kenneth N. Oliver Frederick, MD Senior Vice President Development Credit Fund, Inc. David R. Stauffer Baltimore, MD Executive Vice President Farmers & Mechanics National Bank Mercedes Rodriquez Frederick, MD Director Youth Investment Kathy M. Walters The Development Training Institute Senior Commercial Loan Officer Baltimore, MD FCNB Bank Frederick, MD Lehr Sorden Business Development Coordinator Jan W. Clark NAACP-National Office President/CEO Baltimore, MD County National Bank Glen Burnie, MD R. Eugene Taylor President Sujapa Roy Mid-Atlantic Banking Group President NationsBank, N.A. Janux Group Baltimore, MD Landover, MD

Patricia John Leonard Gray Coordinator Assistant Vice President USDA Rural Information Center 1st National Bank of St. Mary’s Beltsville, MD Leonardtown, MD

61 Nicole Jackson Massachusetts Editor Credit Risk Management Report Marcus V. Alston Potomac, MD Associate Counsel BankBoston, N.A. Thomas A. Wright Boston, MA Vice President The National Bank of Rising Sun James T. Daley Rising Sun, MD Principal PCI Services, Inc. Daniel P. Rease Boston, MA Executive Director Montgomery County Bankers’ Small Juan J. Everteze Business Loan Fund Project Director Rockville, MD Trotter Institute, University of Massachusetts Michael A. Hairston Boston, MA Owner Michael Hairston Fine Art & Faith Kalaski Custom Framing Senior Counsel Silver Spring, MD BankBoston, N.A. Boston, MA Dorothy L. Hairston Owner Sarah C. Lincoln Michael Hairston Fine Art & Director Custom Framing Commercial Lending Silver Spring, MD BankBoston, N.A. Boston, MA Ernest Hairston Owner Renee T. Simms Michael Hairston Fine Art & Vice President, Emerging Markets Custom Framing BankBoston, N.A. Silver Spring, MD Boston, MA

Diane McElrath Gail Snowden Administrative Assistant Group Executive Special Care Health Spa Community Banking Group Silver Spring, MD BankBoston, N.A. Boston, MA Marilyn Dawson CEO Carol Holey Special Care Health Spa Director Silver Spring, MD BankBoston First Community Bank Dorchester, MA Robert G. Holmes, Jr. Vice President James A. Langway Union National Bank President & CEO Westminster, MD Community National Bank Hudson, MA

62 Michigan New Jersey

James Bernacki Sy Henderson First Vice President Vice President Commercial Bank Summit Bank Detroit, MI Dayton, NJ

Harry J. Ford Christopher L. Davis Manager, Community Affairs Attorney Federal Reserve Bank of Chicago Pepper Hamilton & Sheetz Detroit, MI Jersey City, NJ

Electra Fulbright Stephen M. Lane Deputy Director Senior Vice President U.S. Department of Commerce - First Union Detroit MBOC Summit, NJ Detroit, MI Garret G. Nieuwenhuis Ronald R. Reed Senior Vice President Area Director Valley National Bank Northeast Business Financial Services Wayne, NJ Michigan National Bank Farmington Hills, MI New York

Minnesota Thomas C. Crowley Executive Vice President Jerry E. Gray Evergreen Bancorp, Inc. Executive Vice President, Regional Glen Falls, NY Manager of Twin Cities Business Banking Norwest Bank John C. VanWormer Minneapolis, MN President & CEO First National Bank of the Hudson Valley Missouri LaGrangeville, NY

Samuel D. Kaplan Ted Cohen Vice President Vice President Business & Professional Credit Citibank Acquisitions Long Island City, NY Citibank Ballwin, MO Benny Joseph Senior Vice President George K. Philips Fleet Community Development Corporation President Melville, NY Philips & Associates, Inc. Ballwin, MO Nia Rock Vice President Mitchell P. Baden CRA Fair Lending Director President Long Island Savings BankCorp Mercantile Bank of St. Louis Melville, NY Clayton, MO

63 Margaret Agostino National Bank Examiner Peter M. Williams Northeastern District Director Office of the Comptroller of the Currency Housing and Community Economic New York, NY Development National Urban League Elizabeth R. Cribbs New York, NY Economic Development Specialist Republic National Bank Mark A. Willis New York, NY President Chase Community Development Group Sheila J. Daniels New York, NY Program Officer Local Initiatives Support Corporation Steve O’Brien New York, NY National Bank Examiner Northeastern District Heyward B. Davenport Office of the Comptroller of the Currency Regional Director North Syracuse, NY U.S. Department of Commerce, MBDA New York, NY Kousalya S. Ramdas Region Executive, Commercial Banking Kenneth W. Janosick Chase Manhattan Bank Vice President Rochester, NY The Chase Manhattan Bank New York, NY Carolyn Smith Regional Coordinator Consultant Denise Kirk-Murray Woman’s Work Banking CRD Specialist Throngs Neck, NY Northeastern District Office of the Comptroller of the Currency North Carolina New York, NY Carol A. Clavir Shirley Middleton Vice President Executive Director First Union National Bank Bridge The Gap Charlotte, NC New York, NY Gerald P. Hurst Rod Montero Associate General Counsel Vice President NationsBank Corporate Citibank Charlotte, NC New York, NY Russell Robby Florence M. Rice Vice President/Lending Manager President First Union National Bank Harlem Consumer Education Council, Inc. Charlotte, NC New York, NY Ellen Rogers Ruth Salzman Community Development Officer Executive Vice President Centura Bank Chase Community Development Charlotte, NC Corporation New York, NY

64 Kathrine McKee Lynn Gellermann Associate Director Small Business Liaison Self Help Community Reinvestment Group Durham, NC Bank One Corporation Columbus, OH Vincent Long Senior Vice President Joseph S. Hagan Wachovia Bank, N.A. President High Point, NC Banc One Community Development Corporation Michael Atkinson Columbus, OH Vice President Community Development Officer Ronald Newsome First Citizens Bank Vice President Raleigh,NC Banc One Community Development Corporation Kevin Harris Columbus, OH Community Development Manager Centura Bank Lynn Platter Rocky Mount, NC Manager KPMG Barefoot Marrinan Lynn Harton Columbus, OH Senior Vice President BB&T Richard E. Wise Winston Salem, NC President and Chief Executive Officer American National Bank A. Michael Wilkerson Parma, OH Small Business Manager Wachovia Bank Michelle Spain Winston-Salem, NC Director WRMCC Ohio Shaker Heights, OH

David Ekey Oklahoma Commercial Loan Officer Fifth and Third Bank Peter G. Pierce III Cincinnati, OH President First Bethany Bancorp Louise J. Gissendaner Bethany, OK Assistant Vice President & Director Anthony R. Wilkinson Community Lending President & CEO Fifth Third Bank of Northeastern Ohio National Association of Government Cleveland, OH Guaranteed Lenders Stillwater, OK David Prus Vice President KeyCorp Cleveland, OH

65 Pennsylvania Nelson A. Diaz Esquire Patricia A. Cobb Blank Rome Comisky & McCauley Senior Vice President Philadelphia, PA Pioneer American Bank, N.A. Carbondale, PA Donald W. James Community Affairs Specialist James E. Jackson Federal Reserve Bank of Philadelphia Senior Vice President Philadelphia, PA Pioneer American Bank, N.A. Carbondale, PA Wanda Jame Speight Director of Lending James R. Derrick Delaware Valley Community Commercial Loan Officer Reinvestment Fund Citizens National Bank of Philadelphia, PA Southern Pennsylvania Greencastle, PA Pamela Martin Director David R. Dowd Agency Relations & Communications Vice President Robert Morris Associates Pennsylvania National Bank Philadelphia, PA Hamburg, PA Mark Weber Jordan Peterson Senior Vice President Senior Vice President Business Banking Segment Business Banking Loan Center Chief Credit Officer PNC Bank PNC Bank Horsham, PA Philadelphia, PA

Ollyn J. Lettman Timothy H. Johnson Senior Economist Vice President and Manager The Community First Fund Community Development Lending Lancaster, PA Department National City Bank of Pennsylvania Kina Guyton Pittsburgh, PA Marketing Manager SEI Investments Ellen M. Marcus Oaks, PA Vice President, Business Banking Mellon Bank Emma C. Chappell Pittsburgh, PA Chairman, President & CEO United Bank of Philadelphia Cathy Niederberger Philadelphia, PA Vice President & Manager Community Development Division William J. Dahms PNC Bank Senior Vice President Pittsburgh, PA First Union National Bank Philadelphia, PA Charles Reaves Consultant Small Business Pittsburgh, PA

66 Eric Renner Texas Vice President National City Bank of Pennsylvania William G. Payne Pittsburgh, PA President & CEO Gateway National Bank Howard A. Russell Dallas, TX Senior Loan Officer Community Loan Fund of SWPA, Inc. Julie A. Cripe Pittsburgh, PA Executive Vice President OmniBank, N.A. Eustace O. Uku Houston, TX President EXICO, Inc. Jimmy Enriquez Pittsburgh, PA President New Century Financial Andrew Russin Houston, TX Attorney Pennsylvania Bar Association Kenneth R. McCowan Wynnewood, PA President CDI Management Services, Inc. Rhode Island Houston, TX

Tom Schumpert Richard R. Torres President President and CEO TS Associates, Inc. Houston Hispanic Chamber of Commerce Cumberland, RI Houston

South Carolina Phillip W. Yelder Management Analyst IV Dorothy Garrick City of Houston Regional Coordinator Office of the Mayor National African American Consumer Houston, TX Education Organization Columbia, SC Gary G. Jacobs President & CEO H. Dabney Smith II The Laredo National Bank Senior Vice President Laredo, TX NationsBank, N.A. Columbia, SC Utah

Tennessee Kent Moon Senior Vice President Randall Drake Zions Bank Business Marketing Manager Salt Lake City, UT First Tennessee Bank Memphis, TN Virginia

Barbara Abell President O’Connor-Abell, Inc. Arlington, VA

67 Sheila Jones Roy T. Darney, Jr. Marketing Associate Vice President MTS Technologies, Inc. First Union National Bank Arlington, VA McLean, VA

Paul L. Pryde, Jr. John J. Hays President Policy Analyst Capital Access Group Farm Credit Administration Arlington, VA McLean, VA

Steven I. Zeisel Gary C. Klein Vice President & Senior Counsel Business Banking Executive Consumer Bankers Association First Union National Bank Arlington, VA Richmond, VA

Sally B. Robertson Jake LaBello Executive Director CRA Administrator Virginia Asset Financing Corporation Central Fidelity National Bank Centreville, VA Richmond, VA

Crystal Detamaro Ronald F. Miller Editor President/CEO Guaranteed Lender First Bank Charlottesville, VA Strasburg, VA

Christine Gaillard Theodore P. Lauer Analyst Senior Vice President The Secura Group United Bank Falls Church, VA Vienna, VA

Cynthia Nickerson Carroll C. Markley Manager Chairman & CEO The Secura Group United Bank Falls Church, VA Vienna, VA

Mary T. Somerville Robert D. Willey, Jr. Manager Executive Vice President The Secura Group Central Fidelity National Bank Falls Church, VA Vienna, VA

Jerry Reynolds Ted Coleman Director Vice President Information Services F&M Bank-Peoples First Nations Development Institute Warrenton, VA Fredericksburg, VA West Virginia Marla M. Aptheker Senior Credit Analyst Roger Mooney Tysons National Bank Senior Vice President McLean, VA One Valley Bank Charleston, WV

68 Kenneth R. Summers Daniel M. Schneider President & CEO Vice President One Valley Bank, Inc. Associated Bank, N.A. Morgantown, WV Neenah, WI

Carl A. Guthrie Canada President First National Bank Stephen Frank St. Marys, WV Research Associate Task Force on the Canadian Wisconsin Financial Service Ottawa, Ontario, CAN Jason T. Monnett Commercial Credit Analysis Associated Bank, N.A. Neenah, WI

69 70 Small Business References

To obtain these OCC small business resource documents, contact:

Office of the Comptroller of the Currency OCC Issuances and Publications 250 E Street, SW Washington, D.C. 20219 (202)874-4700

or visit our web site at .

OCC Advisory Letter AL 98-9 Access to Financing for Minority Small Businesses July 1998

OCC Advisory Letter AL 97-3 Credit Underwriting Standards and Portfolio Credit Risk Management March 1997

OCC Bulletin 97-24 Credit Scoring Models May 1997

OCC Bulletin 96-63 12 CFR 24 — CDC, CD Project, and Other Public Welfare Investments October 1996

Interpretive Letter 765, 12 USC 2901 Loans to Churches January 1997

Interpretive Letter 792, 12 USC 2901 CRA Consideration for Investments in a Fund August 1997

Interpretive Letter 797, 12 USC 2901 CRA Consideration for Investments in a Fund September 1997

Interpretive Letter 799, 12 USC 2901 CRA Consideration for Investments in a Fund September 1997

OCC CRA Interpretations — Letter 723 CRA Consideration for the Purchase of an SBIC Debenture April 1996

71 Joint Release — OCC, FDIC, Federal Reserve Board, OTS, NR 93-19 Interagency Policy Statement on Documentation of Loans March 1993

Interagency Policy Statement on Documentation for Loans to Small- and Medium-Sized Businesses and Farms March 1993

Banking Bulletin — BB 93-18 Interagency Policy on Small Business Loan Documen- tation April 1993

Banking Bulletin — BB 93-23 Questions and Answers regarding Documentation Policy April 1993

Banking Bulletin BB 93-46 Interagency Policy on Small Businesses Loan Docu- mentation (Supplement) August 1993

Banking Bulletin BB 93-54 Questions and Answers regarding Documentation Policy November 1993

72