United States. Congress. House. Committee on Small.

The effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 online

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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 2 of 21)
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business in a very concentrated geographic area.

In our core market area, one out of every four small businesses
is already banking with Fleet because of our 950 branch locations
and 100-plus locally based business bankers, all of whom make
credit and deposit services available to these small businesses.
They also bank with Fleet because of our sponsorship, participa-
tion, and outreach in dozens of business organizations throughout
New England and New York.

Most importantly, we feel they bank with Fleet because we make
more small business loans than any other New England based or
New York bank. Our easy business banking loan program truly
puts Fleet's money on the line for smaller companies. Fleet's easy
business banking guarantees that Fleet will give an answer to a
small business loan request of loans of under $100,000 in 3 days
or less. If we do not meet that pledge, we will give the applicant
$250 in cash.

The marketplace has responded enthusiastically to this and other
credit offerings. Since easy business banking was introduced just
over 1 year ago then to the very smallest of companies, more than
10,000 companies have received $560 million in loans throughout
New England and New York. Each of these loans is less than
$100,000. In fact, the average loan is only $50,000 in that program.

As a result of this, easy business banking has been a hit, but it's
only one of Fleet's small loan services. In 1995, we funded nearly
$1.4 billion in small business loans throughout our market area.
That's fully 10 percent more than the amount that we did in 1994,
an increase, therefore, in our lending in each of the marketplaces
in which we do business. That is exemplified, as Mr. Gallagher in-
dicated, in Concord. That percentage is even higher, 27 percent.

On May 15, 1995, Fleet was named the Nation's first regional
preferred lender by the SBA. Through SBA programs, Fleet pro-
vides credit to startup companies and expanding businesses. With
over $140 million and nearly 1,200 SBA loans in our portfolio,
Fleet is committed to providing a full range of financing options to
all of our customers.

We also try to help the customer through more exotic products
that are not necessarily always able to be afforded by other smaller
banking institutions. With the delegated lending authority granted
to Fleet by the United States Export-Import Bank, Fleet is an ac-
tive lender under Eximbank's working capital guarantee program



8

aimed at subsidizing corporations where working capital financing
is provided to support new export sales.

This bank lending, guaranteed by Eximbank, will facilitate the
purchase of raw materials and the production/shipment of manu-
factured goods to overseas customers. We all know that New Eng-
land exports are a very important part of our growing economy.

State and local loan pools also comprised an important part of
our lending to small businesses. They are critical to our customers,
as we tried to lend aggressively through these programs, as well
as set good examples of State and local private-public partnerships,
the Massachusetts Capital Access Program and the New Bedford
Fishing Industry Loan Fund, where we provided matching funds to
allow New Bedford to qualify for a Federal grant, Connecticut
Works Fund, which provides loan guarantees to businesses for the
purpose of job creation and retention, where we are the largest par-
ticipant in the State with over $90 million in loans, and in New
York, where Fleet was the first bank to make a major commitment
of $57 million to support the Harlem-South Bronx Empowerment
Zone and its critical revitalization project.

Fleet is also a major participant in the Mid-Hudson Bankers
Small Business Loan Fund, which was established to encourage
and fund the creation of small companies in communities experi-
encing corporate downsizing.

While we believe our small business lending statistics are im-
pressive, business banking is really about people and companies
and jobs. Thousands of Massachusetts companies which have bene-
fited from these services include a wide array of companies in our
State, as well as the other States where we exist.

One example is a new startup company where Fleet provided
term loan equipment financing in conjunction with the U.S. Small
Business Administration. These funds enabled the company to es-
tablish the first USDA-approved Hispanic food preparation com-
pany in the Northeast. The company currently employs 7 people,
with 10 to 15 new employees to be hired this year. The potential
additional employees from this new manufacturing equipment
could create as many as 30 new jobs in the future.

Although we're excited about the positive market impact of the
small business programs I have highlighted for you today, we re-
main committed to continual improvement as we work together to
build an even stronger small business franchise at Fleet. We intend
to ensure that our small business customers realize many addi-
tional benefits of our merger and continue to provide superior serv-
ice to our business banking customers.

I thank you very much.

[Mr. Hamill's statement may be found in the appendix.]

Chairwoman Smith. Thank you, Mr. Hamill.

Mr. Meehan, would you introduce the next witness?

Mr. Meehan. David Aloise is the New England director of the
small business banking at the Bank of Boston, one of the Massa-
chusetts top banks. The Bank of Boston also has branches in three
New England States, as well as in 23 countries, and has been a
leader in small business banking in Massachusetts. David?



TESTIMONY OF DAVID A. ALOISE, NEW ENGLAND DD1ECTOR
OF SMALL BUSINESS BANKING, BANK OF BOSTON

Mr. Aloise. Thank you, Mr. Torkildsen, Ms. Smith, and Mr.
Meehan. I'm Dave Aloise. I am the Director of Small Business
Banking for Bank of Boston. I'm most pleased to be here today, as
our bank has always had a significant interest in credit availability
for this marketplace.

You might recall in 1992 at the heart of the credit crunch, as
some have called it, our bank launched a credit incentive for over
$36 billion. It was shortly after that time that our bank began to
energize and invest more in small business banking.

I snould state right up front that it is our view that there is no
evidence today that would suggest a bank merger or fewer banks
today have caused any negative impact on credit availability.

If you take a look at our recent history since the beginning of our
new small business banking group in 1993 and look at what has
occurred as we have purchased smaller banks like First Aggie,
Multibank, Pioneer and others, you would find that, in fact, our
lending capabilities and our services to the market have greatly ex-
panded.

We have put new credit products in place. In fact, we have a one-
page credit application. We have simplified loan documents for
lower costs for our borrowers. We put products in place that would
not have been in place. Those communities where we bought those
banks, in fact, have services that even those banks would agree
wasn't present.

Through the last 3 years, we now have over 50,000 small busi-
nesses banking with us. In addition, we have, in fact, become the
number one SBA bank lender for Massachusetts in the recent re-
porting of the SBA. We also have an outstanding CRA rating. We
have, in fact, made loans in middle, lower, and moderate-income
areas at a percent greater than the profile of the market. We have
been the preferred lender for many programs, including MIFA,
Eximbank, and SBA.

But all of this became possible because of the merger activities.
We have expanded our loan platform presence significantly. We
have more people, more products, and we would like to believe
today that those customers are served equally well, if not better.

But one really needs to look beyond Bank of Boston to see some
of the forces at work here that make this even clearer. If you look
at the marketplace today, competition, I'm sure all of the panelists
would agree, has reached very significant levels, probably the high-
est that we have seen in some time, and not just among large
banks like ourselves or Fleet. But, in fact, even smaller banks and
thrifts are now moving more aggressively in small business lend-
ing.

If you were to walk into any of these institutions, you would find
new brochures, new people, new services. Clearly, competitive
forces have changed. I would dare say that we are probably in the
most competitive period we have been in the last 10 years.

But it doesn't stop there. We also have nonbanks now in the
marketplace. Some of you may be aware of players like Merrill
Lynch, ITT, AT&T Capital now becoming very aggressive, even the
Money Store, who, in fact, is one of the largest SBA lenders in the



10

country. So, banks are no longer the only player here. The
nonbanks are coming very vigorously into this marketplace, and I
don't think that's going to change.

The bottom line is that this gives more availability, more options
to smaller businesses. In fact, it has brought costs down for them,
as well.

Industry capital, loan portfolio health, and regulatory scrutiny,
in my judgment, are also powerful factors. If you look at industry
levels of capital — bank capital — it has now reached near-record lev-
els. Perhaps in Massachusetts, the average is at least 10 percent
capital at most banks. Banks have capital to lend.

At the same time, portfolios of the banks, most banks, have be-
come healthy now. Problem credits that we had in portfolios have
now diminished. We are at normalized levels. There's clearly an ap-
petite today to make funds available and to do business.

We do a number of surveys each year of our customer base and
others not banking with us. Our surveys clearly indicate that cus-
tomers feel there is more availability, and they have less difficulty
in getting credit, whether it's at our bank or others.

Regulatory scrutiny has also been a factor. While I think every-
one here would agree that that scrutiny has moderated, it's still
vigilant, I would say. But it is certainly now at a stage where
banks are encouraged to do more and to be accommodating to cus-
tomers. It's an interesting dichotomy to go back to the period of the
credit crunch. There were more banks than there are today, and
yet credit availability was near zero.

Others have mentioned loan programs. Today, there are more
and more loan programs available to companies and to banks.
Many of these programs, whether SBA, MIFA, MASS Capital, and
others, really now give a bank, any bank, the ability to do more,
particularly for those customers who can't meet the conventional
credit standards. It's really those customers that we look at clearly
in terms of this issue of credit availability.

There are even programs at city levels, and my bank participates
in almost all of them. I would dare say that all these programs
have been vital, particularly during this post-recession period.

Access and delivery of credit is also changing. Yes, you can walk
into a branch. Yes, you can see loan officers on platforms, particu-
larly at Bank of Boston — in fact, over 17 platforms in this State
alone. Clearly, small business has more options today. They can
apply by phone. They can even apply by fax.

Soon, we will see customers applying through a PC. So, I think
when it comes to access and delivery, customers will have more
and more choices, and greater access to credit.

In conclusion, I think it's very clear that at least at this point,
that merger activity and lesser number of banks has not, in fact,
affected credit availability. This is still a very substantial segment
of the U.S. economy, and both banks large and small; and
nonbanks alike, lending to this segment as a significant profit op-
portunity.

Large corporate America, large middle market companies don't
offer the same alternatives of profitability for banks anymore. Of
course, the nonbanks in their actions make that pretty clear.



11

Some have talked about the study done by Peggy Gilligan. Re-
cently, as you all know, the Federal Reserve Bank of New York did
their own review of that study and, in fact, concluded that there
was no negative impact resulting from current merger activities.

The Gilligan study suggested that the reduced percentage of
small dollar loans versus total commercial loans at NE banks was
an indicator of less credit availability. I believe this is misleading.
It's clear that a reason for this is that there is a larger portion of
loans, large loans extended to companies outside of this region by
Boston and New England banks. Let's face it — Boston is a major
financial center. That same dynamic occurs in other cities, New
York, Illinois, et cetera. So, I don't think one can infer from that
study, the Gilligan study, that consolidation is, in fact, a driver
here.

Mergers are certainly creating more efficiencies for everyone,
particularly for the banks, as well as the customers. I think those
efficiencies will continue and, as such, will continue to make this
a very profitable and good segment for banks and nonbanks to pur-
sue.

At the end of the day, I really see this marketplace, the small
business marketplace, enjoying what it enjoys today and even
more, more options, more products, better pricing for the future. I
don't see at this point that credit availability will change in a nega-
tive way unless some of the things I mentioned like capital, regu-
latory reform, or other things hamper that. I can tell you, as one
bank sitting on the panel today, that our commitment to small
business will continue and won't wane or lessen in any way.

Thank you.

[Mr. Aloise's statement may be found in the appendix.!

Chairwoman Smith. Thank you.

Mr. Torkildsen?

Chairman Torkildsen. I would like to introduce Lincoln
Morison, Jr., President of the First National Bank of Ipswich. He's
also appearing on behalf of the Massachusetts Bankers Association.
Mr. Morison is also a Trustee of Bates College, an Appropriator of
Beverly Hospital. Welcome, Mr. Morison.

TESTIMONY OF T. LINCOLN MORISON, JR., PRESIDENT, FIRST
NATIONAL SAVINGS BANK OF IPSWICH

Mr. Morison. Thank you very much. I'm very pleased to be here
and to have a chance to address you on this very important issue.
Let me just state at the outset that prior to joining The First Na-
tional Bank of Ipswich 5 years ago, I spent 25 years at Bank of
Boston in the commercial lending area. So, I have had an oppor-
tunity to see the circumstance of small business from two sides of
the industry.

The First National Bank of Ipswich is a $100 million independ-
ent, locally owned community bank. In addition to our head office
in Ipswich, we have branches in Essex, Rowley, Gloucester, and
soon in Newbury Fort.

The principal target market for The First National Bank of Ips-
wich is small business. Small business is the dominant form of
business in Northern Essex County. During the last 5 years, I
think we can easily conclude that our competitive life has not been



12

made any easier by the pace of consolidation in the industry in
New England.

Indeed, there are fewer banks operating in Massachusetts, but a
higher number of them are lending to small businesses today than
ever was the case in the past. As Mr. Aloise has pointed out, the
capital of banks in Massachusetts has grown to an historic high.
Small business lending is receiving the benefit of that increasing
capacity to lend.

Our own loan portfolio increased by 15 percent in 1995, rising
from $56 to $65 million. Most of that growth was in small business
loans. Loans to small business are the core market for us and
many other banks for a couple of very obvious reasons. First, 96
percent of all businesses in the United States have sales of $5 mil-
lion or less. So, in terms of numbers, that's where the action is.

Perhaps more importantly, many medium-size and certainly larg-
er companies today have perfected their access to the public capital
markets as well as to insurance companies and pension funds,
which allows them to very aggressively seek alternative sources of
financing to banks.

Quite often, the issue of whether there is sufficient credit avail-
ability for small business or for any segment of the marketplace
really turns on a difference of opinion as to creditworthiness rather
than credit availability. The First Natioral Bank of Ipswich, like
most of the banks represented at this table, has plenty of money
to lend. We would like to see another 15 or 20 percent increase in
our loan portfolio, and we would love to see that in the form of
loans to small business. The competition to bring loans to The First
National Bank of Ipswich and away from such fierce competitors
as are represented at this table is very intense.

Often, the small businesses that feel left out in the cold in the
middle of this very intense competition are really out in the cold
because of issues related to creditworthiness. Those issues turn on
our ability to identify adequate sources of repayment rather than
on the adequacy of collateral to support those loans. Commercial
banks and most banks in general today lend into situations where
the prospects for repayment are very high.

No one of us ever wants to repossess a piece of collateral, wheth-
er it's a guarantor's house, a car, a piece of machinery or equip-
ment or commercial property. That's not the business we're in.
We're in the business of intermediating funds and absorbing risk.
The kind of profit margins that are available to financial institu-
tions do not justify taking on risks that fall in the range of venture
capital.

Therefore, we must be convinced of the borrower's ability to
repay. That takes a well-constructed set of financial statements,
and it takes a businessperson who has a plan for success. There-
fore, I think the issue of creditworthiness and its influence on the
perception of availability needs to be explored in greater detail.

The good news about consolidation in the financial services in-
dustry in the United States and locally is that, as has been pointed
out, availability of credit, the variety of products, the ease of access
is being spurred by the intenseness of competition. As a small
bank, we see the market as being given an increasingly clear choice



13

between a high-speed, low-cost delivery system and traditional re-
lationship banking.

The First National Bank of Ipswich is a classic community rela-
tionship lender. Our product is not just the money that we lend.
Our product is the face-to-face delivery of advice and counsel based
on the 100 years of experience that our commercial lenders bring
to bear on our customer base.

The issue for us is the leveling of the playing field. As David
Aloise has indicated, nonbanking competition has increased. It is
intense, whether it's the Money Store, ITT, GE Capital, credit
unions, or the like. We don't need walls to protect us; what we need
is access to compete.

So, from my perspective, I do not want to be protected. I want
to be allowed to reach out into as many different profitable lines
of business without regulatory fences that will allow me and my in-
stitution to survive and grow and to continue to serve the customer
base that we have targeted.

In conclusion, I would say that both the Massachusetts Bankers
Association and the The First National Bank of Ipswich do not be-
lieve that the trend toward consolidation in financial institutions in
Massachusetts has reduced the availability of credit to small busi-
ness. In fact, we think it has enhanced it. We think there's more
to come.

[Mr. Morison's statement may be found in the appendix.]

Chairman Torkildsen. Thank you, Mr. Morison, for your testi-
mony.

Now, we'll hear from Mr. Jim Zafris, President of the Danvers
Savings Bank. Mr. Zafris is also on the board of North Shore
Chamber of Commerce and the Massachusetts Fund. Welcome, Mr.
Zafris.

TESTIMONY OF JAMES G. ZAFRIS, JR., PRESIDENT, DANVERS

SAVINGS BANK

Mr. Zafris. Thank you very much, Congressman Smith and Con-
gressman Torkildsen. I welcome the opportunity to address the
issue of the effects of bank consolidation on small business lending,
because there is an impact which I believe operates to the dis-
advantage of small and growing companies seeking financing.

First, let me say that there is a broad range of definitions of
what constitutes a small business. Most larger hanking companies
have traditionally defined small companies as those with annual
sales of $10 million to $50 or $100 million. But lately, and often
as a response to CRA requirements that crop up during merger ap-
plications, they have reduced that number.

In fact, many larger banks have recognized that it's in their self-
interest to participate in programs like the Small Business Admin-
istration's Low Doc Program. But my sense is their participation in
this kind of lending is more the result of practical regulatory con-
siderations than philosophical conviction. It will be interesting to
see as mergers continue and banks become larger and the pressure
is off whether that same inclination to loan to small companies will
continue.

Let me give you my definition of a small business. It includes
startup companies, as well as those with sales of up to $10 million.



14

But most small, growing companies generate sales of less than $5
million annually, and they tend to share some fairly common char-
acteristics. On the whole, they do not have very pretty balance
sheets. Many of them were started in a cellar or garage. In many
cases, the founder

Chairman Torkildsen. Excuse me, Mr. Zafris. If you could pull
the microphone closer to you. I understand some people are having
trouble hearing you in the back. Thank you.

Mr. Zafris. Sorry. In many cases, the founder has sunk every
cent of his or her cash into the operation to support its growth.
There are varied levels of management sophistication among small
business owners, with many needing much more support and direc-
tion than others.

In short, as Congressman Meehan said earlier, small business
lending is a unique and very labor-intensive type of activity for
banks. Many banks are simply not equipped or ready to devote
their resources to doing it well. I do not think I'm stretching the
point to say that a $50,000 small business loan is not high on the
profit agenda of a multibillion dollar institution.

It takes no more effort, perhaps less, for them to extend a credit
of $1 million or more to an established company with a strong fi-
nancial state. As large banks continue to dominate an increasing
share of our market, the truly small businesses are going to find
it even more difficult to get their attention and their financial help.

That is not to say that large institutions have not developed
theories about how to loan to small companies. The theory that
seems to be currently in vogue is something one might describe as
a point-score system. The potential small business borrower simply
calls a designated number and talks to the bank's small business
loan center. The applicant is asked to provide some fairly rudi-
mentary financial information, and if it passes muster, a loan of
let's say up to $100,000 may be approved.

This theory says you can automate small business lending. It is
a great theory, but it won't work. A few minutes ago, I said that
small business lending is labor-intensive. It is also a highly per-
sonal kind of lending. If you are going to make a successful small
business loan to a small company with a leveraged financial state-
ment, you have to know the people involved and be willing to work
with them through the inevitable rollercoaster ride that most small
companies experience in the early stages of their history.

The first loan is easy to make. You can probably do that through
a loan center. But are the big banks going to give the borrower an
800 number they can use on some Thursday afternoon when the
company suddenly discovers it needs help in meeting Friday's pay-
roll because an expected receivable didn't get paid? I doubt it.

It is not the fault of multibillion dollar banks that they cannot
effectively meet the needs of small business. It is a byproduct of
their size and their multilayered organization.

Small business lending is done most efficiently and profitably by
small- and medium-sized community banks. For these banks, small
business lending is an important part of their portfolio. These are
relationship-oriented institutions with experienced lending officers
who remain in place and develop extensive knowledge of the com-


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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 2 of 21)