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 5 of 21)
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in fact, continue to have small business as a priority.

Another concern which was raised was that as the larger banks
merged, there continue to be made an effort to provide loans for
small businesses at the same or a better rate than in the past. Evi-
dently, there was for some time a reluctance to make public the
number of small business loans issued.

Many of the small businesses indicated that having that public
information might spur on the banks to make those small business
loans, keeping their feet to the fire even as they grow to have as
an expectation that so, too, will be their commitment to small busi-
ness.

In most of my conversations with the individuals mentioned, they
each indicated that for the banks, it is just as easy to do the paper-
work on a $1 million loan as it is on a small one of $100,000, which
is usually the top amount a small business is looking for — again,
the concern about whether banks will commit, make that strong
commitment to small businesses over time.

I don't need to remind you that small business is the engine
which keeps our economy bustling. A number of the people with
whom I've met drew my attention to a number of recommendations
from the White House Conference on Small business, with particu-
lar regard to banking industry reforms. One of those recommenda-
tions called for relaxing of collateral and income-to-debt ratio re-
quirements, allowing banks to make smaller loans based on char-
acter, as you mentioned earlier, and personal background and cred-
itworthiness.

They indicated that with mergers taking place, the ability of
bankers to look at each small business on an individual basis
might be impaired. There continues to be a consistent interest in
encouraging banking institutions to keep a strong community in-
volvement, and that's something that we as chambers have seen
over the years.



31

In having that community involvement based with the local
banks, there's an ability to understand the particular small busi-
nesses which exist in the communities, as well as being invested
in those communities. I think there's a sense of cooperativeness
which comes from that association.

Having loan officers who have traditionally handled small busi-
ness loans, there was concern that they may be at risk with the
proverbial downsizing which would go on after a merger, that, in
fact, those people who were most knowledgeable about small busi-
nesses might then be either laid off or sent to another location, so
that that community sense might be diminished, as well.

There is an uneasiness which reflects the concern that without
continuity in loan officers, a chronic lack of long-term capital for
small business might result.

Finally, I think it's striking when one looks at the fact that dur-
ing the 1989 to 1991 period, of the 2.6 million new jobs that were
created, 1.5 million of them came from expansion of small firms
when they went from zero to 5 employees to 5 to 19 employees.

That's really the critical time when the involvement with bank-
ing is important. I think that that's a concern that the job growth
that we are hoping to look at over the next few years might be im-
paired if there wasn't a cognizance of small business and the im-
portance of dealing with them as an important factor with the
emerging larger banks.

Thank you.

[Ms. Allan's statement may be found in the appendix.]

Mr. Meehan. Thank you.

Our next witness is Mr. John Gould, President and CEO of Asso-
ciated Industries of Massachusetts. Mr. Gould is also an Executive
Community Member of the Better Business Bureau. We welcome
you, Mr. Gould.

TESTIMONY OF JOHN GOULD, PRESIDENT AND CEO,
ASSOCIATED INDUSTRDZS OF MASSACHUSETTS

Mr. Gould. Thank you, Mr. Chairman and Madam Chair, Con-
gressman Meehan. I'm delighted to be here. AIM is an organization
that operates in Massachusetts. It has 3,550 members, 60 percent
of whom are manufacturers; 40 percent are employers in all other
areas included within the standard industrial code. Some of our
members employ as many as 19,000 people, some as many as 2.
Our average member employs 50 persons.

The late 1980's and the early 1990's were difficult for employers
and for bankers of Massachusetts. There were higher capital re-
quirements for commercial loans. There were more stringent risk
capital requirements for small borrowers. We were in the midst of
the worst economic recession since the 1930's. In 1990, late 1990,
bank regulators sensitive to criticism arrived here and began to put
pressure on bank loan portfolios.

This was, in my opinion, an inflexible, self-protective exercise
based on Texas's experience — excuse me; I've been to the dentist
this morning, and this is not a good day for it — the problem being
that the regulators who came in had been in Texas. The economy
in Texas at that time was 30 percent based on oil, totally different



32

from Massachusetts, and the same formats, if you will, for review
were used at that time.

Later in 1991, AIM published a business confidence index we
began because of the difficult circumstances. In that first survey
published in December of 1991 based on actual findings from 800
employers, we found the business confidence index among employ-
ers to be at 41.5; that is to say, of each 100 who were surveyed,
41.5 felt pessimistic about the outlook for their companies and for
the future of business generally at that time.

Today in the mid-1990's, that drop in confidence is being filled
by more optimistic attitudes. The confidence index at the close of
1995 had improved by more than 17 points, a complete reversal, if
you will, of the conditions that had existed earlier. It's clear that
one of the major causal factors has been the expansion in available
bank credit.

The expansion came on the heels of major lending availability
programs first initiated and widely advertised by Bank of Boston
and Fleet Bank in 1992. We had been involved in negotiations with
them. The development and wide communication of these programs
had a clear impact on confidence.

A survey AIM conducted in September of 1991 found 17 percent
of employers indicating that they had lines of credit suspended, de-
manded, or canceled. In a follow-up in January 1993, that number
was down to 10 percent. In October, the number was down by an-
other 3 to 7 percent.

Further, from June 1994 through 1995, bank lending to small
business rose by an acknowledged small 2 percent. But as com-
pared to the prior period June to June where bank lending was
down 2.8 percent, this was as far as we're concerned looked upon
as being something of a benefit or a better situation.

Today this requires us looking at this question — in my mind, re-
quires that we understand the regional economy that we live in
here. We have trailed the national economy now for 12 years.
There has been a gap. It has been almost a trailing gap. It's inter-
esting to note that as 1995 finished, that gap was being closed by
that 17 percent pick-up. It's a happy kind of a coincidence.

Now, as we move forward, we're finding at AIM that free from
the regulatory oppression of the OCC at that time, larger commer-
cial banks in this area today clearly want to make good loans to
medium- and small-sized businesses. As they do so, they're finding
competition. That competition, as we have heard here this morning,
is coming from smaller banks who have suddenly found that busi-
ness lending in the medium and small areas is and can be profit-
able.

Nonbank financial intermediaries — again, is something that was
mentioned earlier, so I won't belabor it — very heavily moved into
the medium and small sized firms. A State investment tax credit
passed in 1993 also brought new access to capital and to business
credit. Together, a capital access fund, an export finance fund, and
an emergency technology fund, all made possible through support
of Massachusetts financial institutions, incidentally, have seen 900
loans totaling $56 million that have been made since the fall of
1993.



33

The one negative development in this general area comes in the
national support, the Congressional support, if you will, with the
recent decision in Congress to lower the loan grantees of some SBA
programs from 90 to 75 percent.

Madam Chair, Chairman Torkildsen, and Congressman Meehan,
although I believe what you're doing here this morning is very im-
portant, I believe that the problem is not as severe as it might be
reported. But the fact that you're looking over this situation, that
there is oversight, that there is caution and attention I think is
commendable.

We have been fortunate here in Massachusetts in that the major
banks have stepped up to a serious problem a few years ago, to
what was then severe regulatory pressure. We have been fortunate
in that most of the major mergers that have taken place here thus
far have been regional in nature, and they help us to forego a great
deal of fear about lack of attention and remote lending decisions.

Admittedly, the lackluster pace of the economy in recent periods
well could change and could lead us to a situation where profit con-
centration would go to other areas of lending. Finally, one must
consider the vagaries of bank regulation — and it has been well dis-
cussed here this morning — the fact that it can and does impact on
the cost of making a loan.

This is something that is very, very important. It could change
our market dramatically. Frankly, on behalf of all our members,
I'm delighted that you are paying close attention to this.

[Mr. Gould's statement may be found in the appendix. 1

Chairwoman Smith. Thank you.

Mr. Meehan. I would like to introduce Frank Romano. Frank Ro-
mano is the President of a small business, Elder Living Concepts
of Rowley, Massachusetts. He's also one of the leading advocates
for small business in Massachusetts, having been involved in the
White House Conference on Small Business.

When I was first elected to Congress, Frank helped me establish,
after my being appointed to the Small Business Committee, a task
force on small business to help me better understand the market
dynamics of small business in Massachusetts.

Frank, thank you for joining us.

TESTIMONY OF FRANK C. ROMANO, JR., PRESIDENT AND CEO,
ELDER LIVING CONCEPTS, INC.

Mr. Romano. Thank you for the opportunity to be here today. I
would like to go off my written remarks and just make some com-
ments, if I could, please.

Chairwoman Smith. Please do.

Mr. Romano. I would like to say, Mr. Meehan, that certainly,
SBANE has always been a strong believer in setting up Congres-
sional task forces and task forces for Members of the Senate and
New England so we can better provide information back and forth,
at least grass root information, as to what we really see every day.
Because I think we're there on the firing line. We're the people who
try to cover that payroll every Friday and try to expand and try
to grow our businesses.

But as we approach the 21st Century, it is being said by many
well-known economists that we're entering a global economy. Our



34

real competition is Germany and Japan. When you look at that, if
you really believe that, you look at our deficits, the trade deficits,
then the question is, what do we have in the United States that's
different, that's unique. Obviously, it's small business.

Both of those countries do not have the level of entrepreneurship
we have because they don't have access to capital. I think there is
the key that we have all been talking about today. You've already
mentioned, Congressman Torkildsen, about job generation. I think
we all know that. There's no use repeating what small business
does for this economy. But the problem is access to capital.

With large corporations today, the Fortune 500, the word is
downsizing. AT&T announced a couple weeks ago 40,000 people are
going to be laid off in the next 12 months. The defense industry
is shrinking. There are a lot of great people in those companies
who have ideas that maybe were passed over that they could want
to start a small business. But I would say to you today, their abil-
ity to get a loan as my ability was 20-something years ago when
I left IBM is totally different.

It is much more difficult today to get a small business loan than
it has been in the past. I would submit to you it's a combination
of things. I think certainly that consolidation plays a role, without
any question. I will certainly — let me just dwell on that for a mo-
ment.

The Wall Street Journal article published last year by Michael
Saltz called 'Truth in Small Business Lending: Big Banks Fall
Short of Their Claims," if I might just quote one little point from
that. "When it comes to small business lending in the New York
area, we're the market leader, says Frank Lorenzo, an executive
vice President of Chemical Bank. There's one problem with that
claim. The Federal banking reports show it isn't true."

Let me just say, I think the Federal banking reports that were
done now for the last 3 years that had been at the request of small
business, that whole rule came about because we had here in Bos-
ton about 10 years ago asked to set up a Small Business Advisory
Board of the Federal Reserve Bank.

Because of the effort of that and particularly the Congressman,
Torkildsen, before you, your previous Congressman, pushed very
hard to ask all the Federal Reserve banks to set up a small busi-
ness advisory board. One of the things we asked for in the meet-
ings we had with Mr. Vulker and then the subsequent chairman
of the Federal Reserve was to set up a reporting mechanism that
we could have an even score card to look at what banks are doing
the small business lending. Because up to that point, there had
been none.

I think it's interesting in the report that Michael Saltz wrote in
ranking banks with over $20 billion in assets, Fleet ranked number
six, which is not a bad ranking. However, Bank of Boston ranked
number 26. I think it's interesting is the percentage of loans they
make to small businesses in this category.

Other large banks have been successful in developing small busi-
ness lending, such as Key Bank and Bank One. Now, both of those
banks have set up special groups within the bank to concentrate
on small business loans. I think that is important.



35

Especially in the case of Key Bank, they keep the local president
and the local board of directors when they buy a bank still em-
ployed. They do not change those people getting back at the char-
acter loans that we were talking about earlier. Clearly, to make a
character loan, you have to know the person. It's not going to be
done on a matrix kind of lending.

I think, too, if I was to ask the question of Members of Congress,
"If you didn't have to have your votes recorded of how you voted,
do you think there would be a change in some of the outcomes of
the votes in Congress?"

Mr. Meehan. Not us, the other ones. You ought to ask the other
Members.

Mr. Romano. So I say to you, I think the recording every year
that requires banks to record loans under a million dollars is abso-
lutely critical for any future research in trying to understand what
is happening. I certainly believe it's in the interest of small banks
to lend to small business, but it's going to have to be a commitment
on their part.

We have had precedent here in New England. Back when Bank
of New England was existing as a bank, it had a small business
lending group. During the late 1980's, they even had a small busi-
ness lending prime, which was two points below the average lend-
ing.

I would say that the last issue I would like to point out is the
regulatory environment that John commented on. It has still been
a problem. Certainly, lenders today in New England remember
those regulators who came in and told them what they had to do
in their banks. I spoke with the chairman of a major New England
bank, and he really felt about a year ago that half of his lending
officers might have to be replaced because their decision was so
damaged by how tough the regulators were on them.

Just recently, I spoke to a banker in a small town in Durham,
Massachusetts, and he commented when I asked him the question,
"Is the regulatory problem still a problem?" he said, "Well, Frank,
I just made a loan for a five home division subdivision. Two were
presold, and I've done business with this borrower for 20 years.
We're in the rotary together, and he has never defaulted."

He said, "They come in this year, and that loan was written up
as being substandard because I didn't have an absorption study."
Now an absorption study was going to cost about $20,000. That
was about a third of all the profits that builder ever hoped to make
on that kind of loan.

So, I would say to you the residue of the FDIC and the OCC is
still very prevalent here in New England. I would go back to Peggy
Gilligan's report and tell you that when we look at this report, even
though it has been questioned today — but I would tell you, I
haven't seen anything in this report to say it isn't true, looking at
the numbers, that small business lending is off 300 percent in New
England versus the rest of the country. That's pretty significant.

That's a real strong number of what lending is off by. I would
say that if we ever hope to be competitive, then we have got to look
at this and say, "Why is that the case?" Why is small business
lending off at all? If the numbers are real — now, unless someone



36

says the numbers are wrong, but if those numbers stand up, some-
thing isn't right.

I would submit to you, too, regarding the SBA — this weekend, I
was off with my family, and I had a chance to read an out-of-State
newspaper in Vermont. I was interested to know that both Federal
Express, Apple Computer, and Intel all received SBA loans to start
their businesses. My question is, if those three companies wanted
to start there in New England today, in listening to the bankers,
I would submit to you probably the only banker that would have
made the loan was Jim Zafris at Danvers Savings Bank.

Those three companies generate in taxes $500 million a year,
which is the total budget of the SBA. So, again, this is a very key
issue, and I appreciate your taking the time to look into it. Thank
you.

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

Chairwoman Smith. Thank you.

Mr. Meehan. For our next witness, we originally had scheduled
David Blohm, President of Virtual Entertainment, to speak on be-
half of Massachusetts Software Council. However, he has become
ill. We're most appreciative that Joyce Plotkin, the Executive Direc-
tor of the Massachusetts Software Council, will be testifying today.

Ms. Plotkin, thanks very much for being here.

TESTIMONY OF JOYCE PLOTKIN, EXECUTDTE DIRECTOR, MAS-
SACHUSETTS SOFTWARE COUNCIL, ON BEHALF OF DAVID A.
BLOHM, PRESBOENT, VIRTUAL ENTERTAINMENT, INC.

Ms. Plotkin. Thank you. Thank you also for inviting us to be a
part of these proceedings and have a voice in them. The Software
Council is the trade association that represents the software indus-
try. In 1989 when we did our census of software companies, we
found that we had 800 companies that employed 46,000 people and
generated about $3 billion in revenue.

At the end of 1995, we have 2,000 software companies that em-
ploy 97,700 people and that generate $7.1 billion in revenue, so we
are one of the fast-growing sectors of the Massachusetts economy.
The profile of these 2,000 software companies is that 76 percent of
them have 25 or fewer employees and 5 million or less in revenue,
so they are primarily small businesses.

I would like to comment a little bit about the financing of soft-
ware companies. Some of this doesn't relate directly to bank financ-
ing, but there are some implications.

In terms of startup, startup capital is key, obviously, to new com-
pany formation and to the future of the software industry. We have
found through our research that 77 percent of our companies are
self-financed. That means that they are financing their companies
by using their own savings, by using their home equity lines, by
taking cash advances on their credit cards, and by borrowing
money from family and friends.

The other primary method of startup financing is what we call
angel investing. This is money from wealthy individuals who have
excess spendable money. Many of the angels who are investing in
the current and future generation of software companies we have
determined from our research are successful software entre-
preneurs. We actually have a small fund here in Massachusetts



37

made up of successful software CEO's who put their money to-
gether, they have a fund manager, and they are investing only in
software companies.

The more traditional methods of financing, venture capital and
ITO's, we find, are not as relevant to the software industry. Our
research tells us that about 20 percent of our software companies
have venture capital money. That's not a really high percent. We
find that the standards that are needed for venture backing are
pretty high for the software industry.

You need a very large potential market. You need a high growth
rate of 30 percent or more. You need to have a high probability of
generating a very good rate of return within 3 to 5 years.

In terms of the public markets, the research has been consistent
over the last 6 years that just about 10 percent of our companies
have the option of going to the public market. So, again, that's a
very small percentage of our companies.

So, as you can see from my remarks about the financing of soft-
ware companies, that bank financing does not play much of a role.
We find that the primary way that banks participate in software
company development is really through equipment financing and
through the financing of receivables.

Equipment financing is generally the financing of computers. As
you know, they are becoming obsolete pretty fast, so bankers are
even more cautious about financing that type of equipment. The re-
ceivables, when you get those financed, you obviously have to be a
going concern. You have to have a product. You have to have cus-
tomers. It helps, obviously, to have some Blue Chip customers in
order to get your receivables financed.

The reason I had asked David Blohm to give testimony here
today — and I'm sorry he couldn't be with us — was that he had par-
ticipated in the startup of three companies. I think it's representa-
tive of the industry. The first company started out with a DOD con-
tract, and they were able to develop something that they were then
able to market to venture capital companies.

His second company was started by actually a group of people,
angels, who each contributed an amount of money totaling about
$150,000. He then was able to get banks to help finance equip-
ment, so that was the second company.

The third startup company that he's associated with has one in-
vestor who has contributed $3.8 million. So, that's sort of typical
of software companies and how they are started up. So, the bottom
line as far as we are concerned is that banks don't play a large role
in the startup financing of the software industry.

That makes it a little difficult, because the Massachusetts soft-
ware industry is known all over the world. I think the latest fig-
ures say that we have about $80 billion of sales for the worldwide
software industry. We have $7 of that $80 billion just coming from
Massachusetts. So, we have a pretty good share of that.

I could suggest a couple of things that people might consider in
terms of partial solutions to this problem. One is that we need to
continue to provide tax advantages to people who provide the early
stage investments like our angel investors. That would be ex-
tremely helpful. We found that that was problematic during the



38

credit crunch a few years ago in that everyone's credit was being
crunched, including those people. So, that was difficult.

Also additional loan guarantees to provide banks with incentives
to make some of the equipment financing would be helpful at some
level, as well. We have generally found, however, that we have to
be really creative to try to find financing for software companies.

One of the things we did here in Massachusetts is we helped to
get passed a State law that allowed for the creation of a new fund
called the Commonwealth Fund that is administered by the State's
venture capital firm, MTDC. We didn't ask for money from the
State. We just asked to change the charter of that organization to


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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 5 of 21)