"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?
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.