When the subject of bank acquisitions comes up, as it has frequently of late, Bank of America Corp. chief executive Kenneth D. Lewis often refers to his company's "embedded opportunities" in organic growth.
Usually the opportunities involve the consumer business, but B of A has also identified elements of its commercial business where it sees room to grow. Last week it created a banking group to specialize in lending to middle-market franchisees, a segment it defines as those with revenue of $2.5 million to $20 million.
The Charlotte company has added specialists to branches in its Atlanta, Boston, and New York markets, and plans to hire specialists for 31 markets it expects to enter this quarter.
Douglas B. Woodruff, the franchise banking executive, said B of A had never focused on those clients, though it offers loans to larger franchisees through Eagle Franchise Funding LLC, which it obtained in its 2004 acquisition of FleetBoston Financial Corp., and a restaurant finance group in Atlanta. He said Eagle is closely aligned with McDonald's Corp. franchises; it has market share of about 25% in the fast-food giant's network.
The $1.46 trillion-asset B of A has just 1% market share among smaller established franchisees, Mr. Woodruff said. "We needed to codify and focus on those operators," he said in an interview last week. "Forming this group will allow us to offer a consistent set of products throughout the country."
Franchises generate about $1.53 trillion a year in goods and services in industries such as restaurants and lodging, according to the International Franchise Association. But the lending environment is very crowded, with banking companies such as Sovereign Bancorp Inc. of Philadelphia, SunTrust Banks Inc. of Atlanta, and a number of specialized lenders competing for business.
Mr. Woodruff said the initial aims are relatively modest and include adding specialists in Los Angeles, San Francisco, Seattle, and Dallas, among other markets. "Our goal is to become the franchise experts in all of those markets," financing projects ranging from renovations to acquisitions. He said originations could range from $300,000 to $6 million, with B of A holding and securitizing loans.
A spokesman said it is targeting "tens of millions of dollars" in annual revenue, though B of A would not be more specific.
The effort is one of several ways the company wants to grow without making acquisitions. Many are pilot programs focused on the consumer, including a no-fee mortgage in Washington state, unsecured lines of credit in Boston, Chicago, and Los Angeles, judgmental lending initiatives - giving specialists authority to overturn a rejection issued by the company's automated system and issue a loan if they get more information from a customer. That program is being tried out in Baltimore and Philadelphia.
Mr. Lewis, who is also B of A's chairman and president, discussed so-called embedded opportunities on Jan. 31 during the Citigroup Financial Services Conference in New York. "We are the best-known bank brand in the United States," he said. "We have an opportunity to get more than our share of the growth in our markets, in part because of brand recognition and in part because we have so many ways to serve the customer."
Frank Barkocy, the director of research at Keefe Managers Inc., said B of A has a knack for meeting those types of goals. It has "the potential to add scale and scope pretty rapidly and making the business a bigger contributor," and has "the expertise to do that," he said.
Patrick Sullivan, Sovereign's managing director of specialized lending groups, said B of A's entry would raise the level of competition. "Franchisees talk to each other, so landing one account can create a lot of business," he said. He said franchise lending is a difficult business that relies on cash flow rather than assets. "We've seen a lot of people come in and out of the business," he said.
Nicholas Cole, the managing director of Wells Fargo Commercial Capital, said his team has avoided lending to companies with revenue of less than $25 million.
"It's a tougher end of the market," he said. "There is a different risk profile for those businesses. And there are staffing issues, because we'd have to put as much effort into a $2 million loan as we would for a $20 million loan."
Mr. Woodruff said B of A spent a year evaluating the business and developing risk management procedures. It is sending some of its own lenders to the franchise group but is also hiring from competitors and in some cases bringing on former franchisees.
The initial focus is on fast-food restaurants, though as B of A expands it will look at other industries, Mr. Woodruff said.
Before it started the group, B of A's offerings were narrow - it either steered applicants toward Small Business Administration loans or turned business away, Mr. Woodruff said. The group probably will not lend to start-up franchisees, he said.
SunTrust Banks;Sovereign (Philadelphia);SunTrust;Keefe Managers;McDonald's;
