A regional bank in the Midwest is preparing to do what small business owners and politicians have been urging since the start of the financial crisis in 2008: increase lending to small businesses.
Huntington National Bank committed to making $4 billion in new small business loans over the next three years—substantial for a bank with total assets of $52 billion. To do so, Huntington will consider borrowers that previously wouldn’t have qualified. The Columbus-based bank’s 600 branches span the Rust Belt from Pittsburgh to Michigan. Huntington CEO Stephen Steinour believes he can make prudent loans to small companies, including those that have not been consistently profitable through the downturn. That’s a big departure from traditional small business underwriting.
“If a company’s profitable for the last couple of years, we love it. But there’s been a severe correction and dislocation, and many companies will have a quarter or two [where] they’ll have isolated problems,” he told me Tuesday.
For these so-called “turnaround loans,” Huntington underwriters will look for the following things:
1) What caused the problem?
2) How did the business respond?
3) What’s the firm’s current outlook?
“This is a fairly intensive effort. This is not a cup of coffee, one conversation, and a look at the financials,” says Steinour, who joined Huntington as CEO in January 2009. “We really want to take our time to understand these businesses, to make an informed businesses judgment.”
Regulators recently signaled that they want to see more of that kind of labor-intensive underwriting, rather than automated loan decisions based on credit scores and industry and geographical trends. Huntington plans to double its current number of business bankers to 300. The bank expects to originate $1.2 billion* in new small business loans in 2010 (up from $800 million last year). That figure will increase each year to $1.5 billion by 2012, according to the bank’s plan. The total $4 billion in new lending is expected to reach 27,000 customers with an average loan size of about $150,000.
What’s behind this push? The strategy is that Huntington can grow its customer base for other services--like deposit accounts, employee retirement plans, and the like--by making loans when competitors won’t. “To be the bank right now that is saying yes to small businesses when others are saying no is the opportunity” to gain market share, says Terry McEvoy, a senior analyst at Oppenheimer & Co. in Portland, Me., who covers Huntington.
McEvoy notes that Washington has also encouraged banks--particularly those still holding bailout money--to resume lending to small businesses, seen as a prerequisite for job growth. Huntington received $1.4 billion in capital from the Treasury in November 2008 through the TARP program, which it has not repaid. The bank has not turned a profit since the third quarter of 2008 but executives have said they expect Huntington to be profitable on a quarterly basis again sometime in 2010.
While many banks have made public statements about expanding small business lending in the last six months, Huntington’s decision to loosen credit standards is relatively new, McEvoy says. In the Federal Reserve’s January survey of senior loan officers (PDF) at 54 banks, most said they had not changed credit standards for small firms over the last three months--two had tightened credit and none had eased it.
Steinour says easing credit standards doesn’t mean taking on more risk. “I don’t view this as taking significant additional risk. I view this as applying good business judgment in an environment where there’s been significant economic challenges,” he says.
Huntington doesn’t break out its small business lending separate other commercial loans, but a bank spokeswoman says the existing small business portfolio has performed slightly better than the bank’s overall commercial and industrial loans.
This shift is significant. No bank of Huntington’s size has committed to bending loan standards to accommodate businesses pummeled by the recession. Whether it’s a good strategy or a recipe for future losses depends on Huntington’s ability to make good loans using a more nuanced evaluation of borrowers’ ability to repay than conventional underwriting allows. Oppenheimer’s McEvoy says his firm’s analysis suggests the worst of the credit losses for this cycle are over. “Now’s the time that it would make sense to develop new banking relationships,” he says. Huntington’s plan is welcome news for Midwestern businesses that have had little to cheer about.
*Update, Feb. 18: Because of a typo, this post originally said Huntington expects to originate $1.2 million in new small business loans in 2010. The correct figure is $1.2 billion.