What in the World Is Bank of America Thinking?

"Life Is Better When We're Connected" goes the new marketing slogan at Bank of America (NYSE: BAC  ) .

That is unless you're a business owner trying to connect with a small business loan. In that case, Bank of America's actions imply you're better off disconnected.

Small business lending
The Small Business Administration (SBA) administers a handful of specialized loan programs that offer borrowers and banks advantageous terms on small business loans. The 7a Loan, the SBA's flagship lending program, essentially guarantees a portion of the loan, reducing the credit risk for the bank, while ensuring fair market-driven rates, amortizations, and terms for the borrower.

The government is trying to make small business loans, particularly of the riskier variety, more approachable for banks. Make these loans safer, banks will be more willing to originate them, and more small businesses will have access to capital.

Even better, banks can easily sell these loans into the secondary markets, oftentimes fetching a premium of more than 10% for the guaranteed portion of the loans. Low credit risk, highly profitable. Sounds like a great business, right?

Wells Fargo (NYSE: WFC  ) sure thinks so. Through the third quarter of this year, Wells originated 2,532 7a loans for a total dollar amount of $743 million. 

Huntington Bancshares (NASDAQ: HBAN  ) agrees. This regional bank originated 2,196 7a Loans for a total dollar amount of $196 million.

Wells and Huntington are two of the most well respected and successful banks in the country, and they are taking full advantage of this program. Beyond the economic sense of making these loans, these banks have used the programs as a way to expand the brand deeper into the community (and to cross sell).

Take Wells, for example. If a Wells Fargo loan officer is able to provide a small business loan to a local retailer when other banks could not, what bank do you think that individual will turn to when its time to refinance her mortgage? What bank will she go to for a personal credit card? What bank will she go to when her certificate of deposit rolls over? 

She will go to Wells Fargo and Wells Fargo will profit. Same goes for Huntington. 

Enter Bank of America
Apparently Bank of America doesn't see it that way. Bank of America ranks 76th in 2013 SBA 7a production with just 201 loans originated for approximately $20 million. 

What kind of company does Bank of America -- with $2.4 trillion in total assets and 248,000 total employees -- find itself with all the way down in 76th place?

Wait, we're 76th? Photo: BofA

Well, the 75th ranked bank is a $236 million total asset bank formed in 2006. The 74th ranked bank is a three branch community bank with just $124 million in total assets. For emphasis, these banks are roughly 10,000 and 19,000 times smaller than Bank of America, respectively.

To be fair, Bank of America does make small business loans; it just does it without using the SBA 7a program. In the bank's 2012 Annual Report, CEO Brian Moynihan reported a 28% increase in small business loans for the year and emphasized the bank's commitment to this segment.

What fails to compute, though, is why the bank would ostensibly turn its back on the added credit enhancement of a government guarantee, the profit engine of selling guaranteed loans into the secondary markets, and the value to its customers by offering the more favorable terms and reduced fees now available through the 7a program.

The program seems to be working for Wells, Huntington, and others. Perhaps the bank's focus is too limited of a resource and all hands remain on deck dealing with the legal, credit quality, and reputation problems stemming from the Countrywide acquisition. Perhaps not. 

Either way, Bank of America appears to once again be leaving money on the table.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2013, at 7:47 PM, jesterisdead wrote:

    "What fails to compute, though, is why the bank would ostensibly turn its back on the added credit enhancement of a government guarantee, the profit engine of selling guaranteed loans into the secondary markets, and the value to its customers by offering the more favorable terms and reduced fees now available through the 7a program."

    Perhaps BoA is smarter than the author? Rather than taking on any portion of high risk, small business loans that the government is insuring, BoA is minimizing its risk and avoiding them altogether. Hopefully they have learned their lesson and are trying to avoid being taken over by the government again when the high risk loan market collapses.

  • Report this Comment On November 03, 2013, at 1:02 AM, Skeeter wrote:

    Boa is doing it right rolling up there sleves and going to work not trying to maxing out profit on the back of the tax payer I'm sure the ceo of wells' are taken there profit!!!

  • Report this Comment On November 03, 2013, at 7:53 AM, Rusty56 wrote:

    I read somewhere recently that Bank of America provided 1/3 of all business loans last year. If this is indeed true, they are making hay in other areas other than this govt sponsored program.

  • Report this Comment On November 03, 2013, at 11:36 AM, peckbill wrote:

    The tax law requires 501(c)(4) organizations to operate exclusively to promote the "public welfare." In 1959 the IRS edited their tax codes to only require that they mostly promote the public welfare. This loophole has allowed political activists to assume that they can spend up to 49% of their budgets on political ads, while still maintaining tax-exempt status that allows them to keep their donors secret.

    This massive loophole was never authorized by Congress!

    The current version of the Revenue Act of 1913 provides a tax exemption for: Civil leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

    26 U.S.C. § 501(c)(4)(A)(emphasis added)

    Then in 1959 the IRS redefined the term "promotion of social welfare" to depart radically from the statute:[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.

    I selected eight individuals, ranging from age 6 to 11 and ask each of them if they knew the difference between the words “exclusively” and “primarily”; Congress, the President, all government workers, including the IRS, appear to have a problem with the meaning and intent of these words. Each of the individuals I talked with couldn’t give me a dictionary definition of each word but they told me between their parents and what they learned in school they could give me a good example of each. They said they were taught that marriage was “exclusively” between a man and a woman who loved each other and wanted to live together forever; but, marriage was “no longer exclusively” between a man and a woman since some idiots in the court changed all that. Their use of the word primarily was somewhat a surprise, but it amounted to the American Food Stamp Program was “primarily” for the poor people, but was used by a lot of people that wasn’t poor. If it weren’t for the age restrictions I would gladly nominate all of these individuals for seats in Congress because they could easily out perform any of the “idiots” currently serving in the Congress.

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