SBA Becoming Crowded Field as More Banks Take the Plunge

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The number of banks jumping into small-business lending keeps growing.

DCB Financial in Lewis Center, Ohio, is the latest to take the plunge after poaching a nine-person team that specializes in Small Business Administration lending from a unit of the $180 million-asset United Midwest Savings Bank in De Graff, Ohio.

The move coincided with the $545 million-asset company's receipt of preferred lender status from the SBA. Preferred lenders are allowed to underwrite their own loans, which expedites processing.

DCB's push also makes the company the latest financial institution seeking to tap into mushrooming demand for loans from the SBA's 7(a) program. The agency's guarantees under that effort totaled $5.4 billion through Dec. 31, putting it on a pace to surpass the prior fiscal year's record of $23.6 billion. The SBA's fiscal year began Oct. 1.

The SBA path has been well-trodden by banks in recent years.

The $9.4 billion-asset United Community Banks in Blairsville, Ga., bought Business Carolina, a Columbia, S.C., SBA lender in 2014. Last year, the $22.5 billion-asset BankUnited in Miami Lakes, Fla., bought CertusHoldings' small-business finance unit, and the $7.8 billion-asset Berkshire Hills Bancorp in Pittsfield, Mass. acquired 44 Business Capital, a SBA lender in Blue Bell, Pa.

"Other banks of [DCB's] size have adopted the same strategy and become very successful," said Paul Schaus, president of CCG Catalyst in Phoenix. "It's not unusual to lift out a [lending] team. … It's a good strategy."

"The future looks extremely bright" for the SBA, said Arne Monson, president of Holtmeyer & Monson, a Memphis, Tenn., firm that services SBA loans for more than 400 banks. "Year-over-year increases just keep coming and more lenders are getting interested."

To be sure, SBA lending has some degree of risk, Schaus said.

The business has become increasingly competitive, and adding a group as large as the United Midwest lending team will immediately increase DCB's noninterest expenses. The company's earnings could take a hit if it takes longer for those lenders to ramp up their production.

"There are a lot of up-front costs involved in paying nine people before they see any production," Schaus said.

Ronald Seiffert, DCB's chief executive, has big expectations for small-business lending.

After spending his first four years nursing DCB back to health, Seiffert said he is intent on making the company the "premier small-business lender" in central Ohio.

"A community bank needs to be engaged in small-business lending," said Seiffert, who joined DCB in September 2011.

Obtaining preferred lender status had long been a goal for DCB, but the company had to put its house in order. "Until we got [our] issues resolved, we were not going to get that PLP status," Seiffert said.

That mission is largely accomplished. Nonaccrual loans totaled $1.3 million, or 0.35% of total loans, at the end of last year, representing a significant decline from $7.7 million, or 2.1% of total loans, at the end of 2013.

DCB has reported seven straight quarterly profits, and it recognized a $10.7 million deferred-tax asset last year.

Serendipity brought DCB and the United Midwest bankers together.

"We were looking for a lift-out and they were looking to move," Sieffert said. "Sometimes it's better to be lucky than good."

The lending team has built a national business lending to funeral homes, insurance agencies and veterinary and dental practices. Seiffert said the group will maintain a national presence while taking a generalist approach to business within DCB's central Ohio markets.

The goal is to make high-quality loans that DCB can hold or sell into the secondary market. Selling the guaranteed portion of SBA 7(a) loans should boost DCB's noninterest income, which made up about 22% of total revenue last year through Sept. 30.

The move should also help DCB further diversify away from commercial real estate. DCB has been able to reduce such credits to 29% of total loans from 43% in 2008. "Part of the reason the bank had its issues was that it overdosed on CRE," Seiffert said.

DCB's move into small-business lending is "a good, viable strategy," Monson said. Through loan sales, "a lot of community banks drive $1 million to their bottom lines … and that's really meaningful."

DCB's home turf, which is located due north of Columbus, is an affluent area with "a lot of small-business growth," Schaus said.

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