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Small BusinessBanking Issues

A National ForumSponsored by theOffice of the Comptroller of the Currency

Renaissance Washington HotelWashington, D.C.February 5, 1998

The Office of the Comptroller would like to express itsappreciation to the speakers at the Small Business BankingIssues Forum, whose presentations are summarized here.Appreciation is also extended to the forum attendees, listed inAppendix A of this publication, for their questions, comments,and experiences shared about small business banking.

The project was developed to enable bankers and small busi-ness owners to learn about successful programs, techniques,and strategies relevant to small business banking that couldbe replicated in their own communities.

OCC staff contributing to the planning and conduct of theforum included: Janice A. Booker, director, Community Devel-opment Division (CDD); Yvonne McIntire, senior attorney,Community and Consumer Law; Denise Kirk-Murray, commu-nity reinvestment and development specialist, Communityand Consumer Policy Division; Alfred T. Mitchell, communitydevelopment specialist, CDD; Glenda Cross, director, Minorityand Urban Affairs; John Turner, national bank examiner,Credit Risk; and Jacquelyn C. Allen, community developmentspecialist, CDD. Lillian M. Long, program coordinator, CDInvestments Program, CDD, served as project leader. Adminis-trative assistance was provided by Tawanda Hudge and LisaHemphill, CDD. The Communications Division, particularlyAmy A. Millen, senior editor, and Rick Progar, publicationsliaison officer, helped to bring this publication to fruition.

The OCC welcomes your comments or questions about thispublication. Please write to the Community DevelopmentDivision, Office of the Comptroller of the Currency, 250 EStreet, SW, Washington, DC 20219, or call (202) 874-4940.You are encouraged to visit the OCC Web site at <http://www.occ.treas.gov>.

Acknowledgments

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Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Opening Session . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Keynote AddressEugene A. Ludwig, former Comptroller of the Currency, OCC(1993-1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Ludwig discusses federal initiatives of the past five years tofoster small business lending. Those initiatives are: revisions tothe Community Reinvestment Act (CRA) regulations; innovativeprograms to encourage financial institutions to lend to smallbusinesses; research into problems that interfere with smallbusiness lending; and steps to strengthen the national bankingsystem. He also discusses the OCC’s Banking on MinorityBusiness Program.

Special Guest SpeakerRichard C. Hartnack, Vice Chairman, Union Bank ofCalifornia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Hartnack defines small business market characteristics and howthey are understood by lending institutions. He explains that thisawareness is critical to retaining and improving market share inan increasingly competitive landscape.

Q and A Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Forum Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

The Changing Structure of the Banking Industry and ItsEffect on Small Business LendingBankers from community banks and larger financial institutionsdiscuss the numerous benefits that accrue to them from activesmall business lending programs and how those institutionsnow serve the needs of the small business market.

Session PresentationsWilliam Gene Payne, President and CEO, Gateway NationalBank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Payne points out that an active SBA partnership benefits GatewayNational Bank by increasing economic development and employ-ment in the community through more loans to small businesses;improving competitiveness of Gateway with larger banks andnonbank lenders; liquidity and the loan-to-deposit ratio throughaccess to the secondary market; and increasing lending limits inthe amount loaned to any individual borrower. Payne commentsthat the SBA is the most significant private-public partnershipcreated by Congress.

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Table of Contents

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Robert K. Kottler, Senior Vice President, Small BusinessBanking, Hibernia National Bank . . . . . . . . . . . . . . . . . . . 13Kottler describes changes instituted by Hibernia National Bank toincrease lending to small business customers. They include:expediting the loan application process; moving business bank-ers from downtown to the branches; targeting small businesscustomers through direct mail campaigns; using outbound andinbound telebanking groups and inbound fax servers; placingloan applications on the Internet; and training and counselingsmall business entrepreneurs.

Howie Hodges, Bank of America . . . . . . . . . . . . . . . . . . . . 15Hodges proposes initiatives to save money and leverage capitalthrough the programs of the SBA, the U. S. Department of Hous-ing and Urban Development, and the U. S. Department of Agricul-ture. Those initiatives are: a stronger partnership between gov-ernment district offices and participating lenders to tie lendinggoals to local credit needs; steering borrowers to appropriate andcost-effective products that present less interest risk and tax-payer subsidies; the more creative application of guarantees bygovernment agencies; the disclosure by SBA of all loan referralpayments made to third parties; and the application of many ofthe same principles behind the nation’s low-income housing taxcredit to small business lending and economic development.

Q and A Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Bank Small Business Investing Issues and OpportunitiesExperts from a financial institution, community developmentcorporations (CDC), and the public sector discuss how financialinstitutions provide equity capital creatively to help small busi-nesses expand.

Session PresentationsJean L. Wojtowicz, President, The Cambridge CapitalManagement Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . 19Wojtowicz describes five Cambridge funds, which include an SBA504 lender; two mezzanine funds (multibank community develop-ment corporations), and two venture funds, one of which providessubordinated debt and equity financing to companies owned byracial minorities in the community; and a small business invest-ment company fund.

Gail Snowden, Group Executive, Community Banking Group,BankBoston, NA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Snowden describes how BankBoston’s First Community Bankprovides services to inner city markets, helps in city revitaliza-tion, and delivers shareholder value. From First CommunityBank, BankBoston launched the first urban investment bank inthe nation chartered by a commercial bank, BankBoston Devel-opment Company (BBDC). BBDC’s success can be attributed toinnovative partnerships, SBA guarantees, and small businessseminars through BankBoston’s Open for Business Program.

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Jerrold B. Carrington, General Partner, INROADS, Inc. . . 26Carrington discusses the mission of INROADS, a private equityfund; why it targets small businesses; how banks have devel-oped INROADS-funded businesses since 1985; and whybanks can access the small business market profitablythrough partnering with private equity firms. The reasonsinclude: high returns on investments through capital gains; asafer and more efficiently deployed loan portfolio; and theability to focus on lending money and receiving CRA credit,subject to regulatory approval.

Saunders Miller, Senior Policy Advisory, SBIC, SBA . . . . . 28Miller discusses the successes and benefits of the Small BusinessInvestment Company (SBIC) Program. He emphasizes that allbanks can now obtain CRA credit by investing in SBICs and thatthey can expect high returns with acceptable risk if the SBIC ismanaged properly. A difficult decision for bankers is whatamount to invest in SBICs.

Q and A Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

The State of Small Business in America

Aida Alvarez, Administrator, SBA . . . . . . . . . . . . . . . . . . . 31Alvarez states that the SBA and OCC are moving in the samedirection. The SBA is advancing its ability to serve underservedcommunities and deliver services in a cost-effective way. TheSBA is preparing itself and its small business customers for theeconomy in the 21st century, which will be diverse, technologi-cally driven, and global in scope.

Q and A Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

What Are the Future Issues of Small Business and Bankingand How Should They Be Addressed?Leaders from banking, small business, academia/research, andsecurities share their innovations and visions for the smallbusiness and banking arena.

Session PresentationsDr. Emma C. Chappell, Chairman, President and CEO,United Bank of Philadelphia . . . . . . . . . . . . . . . . . . . . . . . 36Chappell describes how a community bank continues to serve itscustomers in a competitive marketplace. In her presentation,innovative strategies are recommended including tax incentives,low-interest government loans, earnings credits, and expandedCRA.

Michael R. James, Executive Vice President, Wells FargoBank, NA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38James discusses the concept and need for a national capitalaccess lending program. Capital access can help the market in adownturn and reach businesses that are nearly bankable.

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William J. Dennis, Senior Research Fellow, NationalFederation of Independent Business Foundation . . . . . . . . 40Dennis reveals, from the small business perspective, six gaps inlending and borrowing. He also identifies current problems,including: the continuing restructuring of the industry and theconstant turnover of personnel; the need for personalized ser-vices; the learning curve for technology; lack of collateral; theneed for change in the bankruptcy laws; and the continuingreview of subsidy programs.

Dr. Margaret C. Simms, Vice President for Research, JointCenter for Political and Economic Studies . . . . . . . . . . . . . 42Simms points out that demographic changes will result in anincreasingly diverse U.S. population, that will affect employ-ment, product markets, and businesses. She states that under-standing the minority small business market will be necessaryto make effective investments for the community.

Paul L. Pryde, Jr., President, Capital Access Group . . . . . . 44Pryde explains that in a well-organized market, the credit deliverysystem is divided into eight major functions: marketing, developingproducts, loan origination, underwriting, loan funding, loanservicing, credit enhancement, and liquidity. Those functions arenot performed well in poorly-organized markets, inner cities, andsmall and minority businesses. Pryde describes the structure ofthe Capital Access Group partnership, which is based on solvingthe organizational problems that inhibit the delivery of credit tosmall business.

Q and A Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Appendixes, 49Appendix A: Forum Attendees List, 51Appendix B: Small Business References, 71

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The National Forum on Small BusinessBanking Issues, convened by the Office of theComptroller of the Currency on February 5,1998, provided a look at substantive and inno-vative issues affecting today’s small businessbanking market. Forum participants sharedvaluable information and engaged in livelydiscussions about successful small businessbanking initiatives. The forum reflected thecontinuing demand and interest in smallbusiness lending and emphasized many di-verse ways to ensure the realization andcontinuation of entrepreneurship in the newmillennium. This publication summarizes theforum for the benefit of bankers, bank examin-ers, and others interested in small businessbanking opportunities.

A recent survey revealed that 87 percent of allsmall business owners have developed a rela-tionship with a commercial bank. By the end of1997, those banks were responsible for morethan 60 percent of all small business credit andmore than half of all loans used to finance thepurchase and lease of equipment and vehiclesby small firms. Commercial banks hold mostsmall business checking accounts and performa variety of critical financial functions —managing cash, providing accounting services,issuing letters of credit, safekeeping valuables,and conducting many other financial andfiduciary services — for small business firms.

In recent years, many large banks have targetedthe small business market aggressively anddeveloped innovative ways to serve its needs.Some banks introduced small business resourcecenters, which offer one-stop shopping for a widerange of products and services. Banks also cre-ated innovations in lending that have reducedpaperwork and costs for both lenders and smallbusiness borrowers. For example, small businessloans of nearly $1 million are offered throughdirect mail. Credit report data is linked directly toa computer model that establishes a maximumloan amount and interest rate. No business planor other financial data is required.

Banks recognize that small businesses oftenneed diverse credit types or structures, includ-

ing secured and unsecured lines of credit andflexible credit terms. New or expanding smallbusinesses, in particular, may require equitycapital and technical assistance on financialmanagement issues. An increasing trendexists among banks to establish communitypartnerships to make credit more available tosmall businesses, even though many financial

The OCC is optimistic thatfinancial institutions willcontinue to make smallbusiness banking an integralpart of their business strategy.

institutions continue to pursue small businesslending without external partners. Banksparticipate with government agencies, such asthe Small Business Administration, communityorganizations, national intermediaries, andother banks to create efficiencies and to miti-gate risks associated with small businesslending.

The OCC is optimistic that financial institu-tions will continue to make small businessbanking an integral part of their businessstrategy. Banks know that small businessescan be excellent bank customers. Entrepre-neurs place a premium on convenience andare more likely to conduct all of their bankingbusiness with their primary lender and topurchase ancillary financial products andservices where they bank. Despite the rela-tively high small business failure rates, smallbusiness loans tend to be better collateralizedthan many other kinds of loans and theirrepayment histories compare favorably withother classes of borrowers.

The Community Development Division developspolicies and procedures for national banks’economic and community development activitiesand approves bank investments in communitydevelopment corporations, projects, and financialinstitutions. The division also works with na-tional community and economic developmentgroups and monitors banks’ innovative commu-nity development lending and investing activities.

1. Introduction

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We put most of the emphasis on local commu-nity development loan funds, community devel-opment banks, and similar organizationscarrying out the program. Those organizationsoriginate and underwrite loans and advancefunds to borrowers. They can act assubservices, but they do not have the money toact as credit supporters or to provide liquidity inthe marketplace. Essentially, they find theborrowers, package the loans, make the loansin accordance with agreed upon underwritingstandards, and fund the loans.

My favorite part of this partnership is loansecuritization. We have asked a couple ofcities to create a “secondary market” organi-zation, using existing loan assets. This corpo-ration essentially buys loans from the origina-tors, packages them into securities, andresells the senior piece of the securities tothe banks.

With respect to CRA, they canmeet the investment test or thelending test, whichever testthey wish to meet.

Securitization transactions involve putting theloans in a pool or in a trust and dividing theminto two pieces. You have $10 million in loans.You divide the loans into two pieces, a seniorpiece and a junior piece. The senior piece has apriority on the cash flows of a pool of loans, andthe junior piece has subordinate interest. Wewant the banks to invest in the senior piece,and the conduit or someone else to hold thesubordinate interest. The result is a systemthat places the banks in three roles with whichthey may be comfortable: originating loans,funding loans, and investing in senior securi-ties. With respect to CRA, they can meet theinvestment test or the lending test, whichevertest they wish to meet.

In Miami and Atlanta, we are looking at exist-ing community development block grant loansto capitalize the secondary market vehicle. Thecities admit that some loans have not beenwell-managed. We are trying to improve theirmanagement, and we are going to sell those

loans. The city will place the money in thespecial purpose corporation. It is “found” moneyfor them. Once again, it will use the capital topurchase loans from the originating communitydevelopment bank. The special purpose corpora-tion or conduit will package those loans intosecurities and sell them to local banks.

As long as the pricing of loans is appropriateand the losses are not too severe, this pro-gram can replenish continually the amount oflending in that community. We call it ourperpetual credit machine, because you re-plenish continually the amount of capitalflowing through the system. There is plenty ofliquidity in the system. The bankers I knowdo not have problems with funding loans. Theyhave excess liquidity. They are looking forearning assets. That is their big problem.Investors come to us all the time since theResolution Trust Corporation closed. There isa huge appetite for new types of assets and noone to supply them. There is a huge amountof money looking for deals.

The partnership that seems to work has astructure that places the city or government inthe credit support role, assigning the origina-tion responsibility to competent organizationsthat exist in profusion in cities to originate andservice loans, and putting the banks in theposition of investor that funds credit lines to theoriginator. We have tested this in conceptualform, given banks in a few cities term sheets,and said, “Will you do this?” So far, we have hada good response.

Paul Pryde, Jr., is president of Capital AccessGroup, a limited liability company, a financialadvisory and consulting firm, specializing infinancial innovation for lenders in underservedmarkets. He has more than 25 years of economicdevelopment and finance experience. He is theauthor of several publications, including “BlackEntrepreneurs in America.” He also is a consult-ant to and a board member of several nationalpolicy development organizations. Most recently,Mr. Pryde has focused his energies on smallbusiness loan securitization.

Q and A SummaryMike James provided additional detail oncapital access programs, which exist in 20states. The program in Michigan was begun

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The National Forum on Small BusinessBanking opened with a discussion of the stateof small business today and the role of thelending community in ensuring its continuedsuccess. Eugene A. Ludwig, former Comptrollerof the Currency, discussed federal governmentinitiatives of the past five years to foster smallbusiness lending. Those initiatives were:revisions to the Community Reinvestment Act(CRA) regulations; innovative programs toencourage financial institutions to lend tosmall businesses; research into problems thatinterfere with small business lending; andsteps to strengthen the national bankingsystem and the banks’ ability to lend. Ludwigalso discussed the OCC’s Banking on MinorityBusiness Program. The program encouragesimproved communication among bankers andpotential small business borrowers; counsel-ing and education for entrepreneurs; in-creased use of established programs, such asthe Low Doc Program; innovations in lending,such as the second- and third-look programs;and the importance of partnerships amonglenders and small business people. RichardC. Hartnack, vice chairman, Union Bank ofCalifornia, defined small business marketcharacteristics and how they are viewed bylending institutions. He explained that mar-ket awareness is critical to retaining andimproving market share in an increasinglycompetitive landscape.

Keynote Address, Eugene A. Ludwig, formerComptroller of the Currency, OCC, 1993-1998It is a genuine pleasure to welcome you to ourmeeting on small business banking — a subjectthat is crucial to our nation’s continued eco-nomic vitality and opportunity.

To understand how crucial, one must look atthe facts and figures. By Small Business Ad-ministration (SBA) standards, more than 99percent of our nation’s businesses qualify as“small.” The vast majority are very small —two-thirds of them employ fewer than fivepeople. But they make an outsized contributionto our nation’s well-being. Small businessesemploy more than half of the private nonfarm

work force and, combined, generate 51 percentof our private gross domestic product. Todaythey produce almost two-thirds of all new jobs.

The small business community is largely thereason why we have enjoyed an unparalleledeconomic expansion of the past five years — anexpansion driven mainly by small businesspeople like yourselves, especially in the serviceand technology areas.

Small business men and women are the ve-hicles for the nation’s initiative and creativeimagination. We count on all of you here tosupport that initiative and imagination and toput it to work — as you always have. Smallfirms produce twice as many product innova-tions per employee as do larger firms. Fromsmall businesses have come innovations ascomplex as the artificial heart valve and theoptical scanner and as prosaic as the zipper.From small businesses will come undoubtedlythe product breakthroughs of the future thatwill enhance the American standard of livingand ensure the nation’s continued economicsuccess.

Notwithstanding the strength and ingenuity ofthe small business sector, we live in turbu-lent times. The financial turmoil that todaybesets so many of the nations of Asia —nations that not many months ago werehailed for their economic successes — re-minds us that the future is essentially un-knowable. And yet, I believe that we havemuch reason for optimism. The reason issitting right in this room. Our forum todayshows that we are not resting on our laurels.We came here today because we recognizethat there remains a rich mother lode ofideas and enterprise in our people — ideasand enterprise — waiting to be recognized andfinanced. We came here today because,despite all that many of our financial institu-tions have done already, lack of credit orcapital is still an obstacle that may preventtomorrow’s small business success storiesfrom being written. And we are here — all ofus together — because we understand thatthrough partnerships between financialproviders and small entrepreneurs, all thingsare possible for ourselves and for our people.

2. Opening Session

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I believe we have proved that over the pastfive years. Five years ago, we were in themidst of a credit crunch. Many in the smallbusiness community were unable to get theloans they needed and deserved. Some firmsundoubtedly failed as a result. Yet, as painfulas it was for many, the credit crunch experi-ence reminded us of something terriblyimportant: that financial institutions andsmall business need one another — and sodoes the national economy.

Through partnerships betweenfinancial providers and smallentrepreneurs, all things arepossible for ourselves and forour people.

That lesson was on everyone’s mind when Ibecame Comptroller of the Currency, and it ledus immediately to develop and implement afour-point plan to restore the flow of credit intothe small business community. First, we wentover our regulatory rule book with a fine-toothed comb, weeding out or modifying thoserules that seemed to complicate unduly fairaccess to small business credit. Second, wedeveloped innovative new programs to encour-age financial institutions to make those loans.Third, we conducted research into the systemicproblems that interfere with the whole processof small business lending. Finally — and theone that made all the other possible — wesought to stabilize and strengthen the nationalbanking system, so that banks were once againin a position to lend.

Let me give you some specific examples.

• We liberalized the rules requiring a smallbusiness owner to obtain a real estate ap-praisal from a licensed appraiser wheneverpersonal real estate was used as collateral fora business loan — a change whose benefits,for those who qualify, can be measured, notonly in the savings of dollars, but also in thesavings of time — weeks sometimes, criticalweeks when loans can be delayed awaitingthe completion of an appraisal.

• We adopted a low documentation loan programto allow highly rated and well-capitalizedbanks to make a portion of their loans to smalland medium-sized businesses — loans thatexaminers would review solely on the basis ofperformance and not on the basis of thedocumentation in the file. These are loansmade because of character that may notnecessarily meet standard requirements forcollateral or detailed performance plans.

But nothing has done more to highlight andpromote that constructive partnership betweensmall business and financial institutions thanour revisions to the Community ReinvestmentAct (CRA). Much has been said, and rightly so,about the new CRA’s emphasis on performanceas opposed to paperwork. As important, in mymind, is that the new CRA takes a far broader,more holistic view of what really constitutescommunity development. It recognizes thatsmall business lending can be an importantcomponent of financial institutions’ commit-ment to the communities they serve.

Stimulated by CRA and their own good businesssense, financial institutions have demon-strated lately a renewed commitment to smallbusiness lending. One of the most auspiciousdevelopments in recent years has been thegrowth of small business finance intermediar-ies for institutions that lack the expertise orthe resources to establish special small busi-ness lending programs of their own. Theirvariety is truly impressive —and encouraging.Lending consortia, loan pools, bank-owned oraffiliated community development corporations,small business investment companies, commu-nity-based micro-enterprise loan funds — all ofthose institutional devices are helping to fillthe gaps in the small business lending market.

Thanks to constructive regulation and innova-tions by lenders and community developmentpartners, we have made impressive progressover the past five years in small business fi-nance. Our nation’s banks have reaffirmed theirtraditional role as a major source of funding tothe small business community. Small businesslending dominates the loan portfolios of manycommunity banks. Commercial banks alsoprovided more than half of all loans used tofinance the purchase of equipment and vehiclesby small firms. These days, fewer and fewer

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small business people are reporting difficulty inobtaining credit. And bankers, for their part, arefinding that, as a rule, small business loansperform as well, if not better, than other compo-nents of the loan portfolio.

And the evidence suggests that many of ourbankers are not sitting back passively andwaiting for small business customers to walkthrough the door. The recent Federal Reservereport to Congress on the availability of creditto small businesses shows a new aggressive-ness by bankers in seeking out small businesscustomers, by offering better terms, additionalproducts and services, and more direct mar-keting. Even while striving to meet their CRAobligations, bankers are moving beyond merecompliance to a recognition that partnershipswith small business make good businesssense.

Now the time has come to build on our successesand to consider new approaches where we havebeen less successful than we would like. Unfortu-nately, many of the gains I have just describedhave been distributed less evenly than we wouldlike. For years we have heard anecdotes aboutthe special obstacles facing minority smallbusiness people in obtaining credit. Consideringthe importance of small business as an enginefor job creation and upward mobility, we mustensure that small business does not face specialhandicaps just when small business’s contribu-tions are most needed.

To help us determine the nature and extent ofthe problems that minority small businesspeople face — and to begin formulating workableremedies — we have moved aggressively onseveral fronts. First, as part of CRA reforms, wehave begun to collect information on a nationalbasis from every large bank and thrift for thefirst time — on small business originations —information that we can use to determinewhere small business loans are going — and, asimportant, where they are not going. This wasan important breakthrough. But the data wehave collected tells us nothing about the recipi-ents of those loans — information that we needto determine whether illegal discrimination ispreventing some potential small businessborrowers from obtaining credit. In fact, lendersare forbidden by the Federal Reserve’s Regula-tion B from inquiring about the race, color, sex,

religion, or national origin of an applicant for anon-mortgage loan. If the Fed changed Reg. B,so that creditors could collect such informationvoluntarily, it would assist us materially in thefight against discrimination. I would urge you tosupport such a change.

Fact-finding was an important part of therationale for the OCC’s Banking on MinorityBusiness program, which we launched last yearin Washington and took on the road to cities allover America. This cross-country dialoguebrought together community leaders, minoritysmall business entrepreneurs, and bankers todiscuss how to break down barriers and buildmutually profitable relationships that will bringeconomic opportunity to our neglected andignored communities. As I listened and learnedduring those visits, a number of points becameclear — points whose relevance goes beyondminority small business to the small businesscommunity at large.

First, improved communication must existbetween bankers and potential small businessborrowers. In the home mortgage area, a fieldwe have studied intensively, we have foundagain and again that merely making a loan tofirst-time borrowers may not be enough for it towork. The best performing affordable mortgageloans appear to be those accompanied by educa-tion and counseling — helping borrowers tonegotiate the application process, and helpingthem understand what lenders expect of them,and to manage a budget, and so forth.

This seems to be true in the small businessfield. Based on what I have heard around thecountry, there continues to be considerablemisunderstanding among lenders and smallbusiness borrowers about what is expected ofthem. Some would-be entrepreneurs haveminimal experience with all of the intricaciesof running a financial operation. They needcounseling and education almost as much asthey need capital. For their part, some lendershave limited familiarity with small businessmarkets generally and with market condi-tions that prevail in minority communities. Ifthe relationship is to succeed, both partiesmust think about their partnership in thebroadest sense — as one that involves aninvestment of time and expertise as well asfinancial capital.

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Second, what I heard in my discussions aroundthe country convinces me that we regulatorscan do more to encourage banks to use thoseprograms that are currently available. Takeour low documentation program. At last count,only about 200 national banks are using it,because, I am told, the others continue tobelieve that examiners will criticize themlater for inadequate documentation. Let meassure those of you here today that you cantake full advantage of that program withoutfear of adverse criticism.

This also is true of the public welfare invest-ment authority embodied in Part 24 of theOCC’s regulations. Certainly the amount ofPart 24 equity investments used by banksgenerally, and for small business lending andinvesting specifically, has increased in thelast few years. But most national banks are notat their 5 percent of capital threshold for self-certification of qualifying investments, andonly a handful are at their aggregate statutory10 percent limit. It is in your interest — and inthat of the small business community — forbanks to take fuller advantage of this program.I encourage you to do so.

Although we certainly have obstacles to over-come in the years ahead, the dominant impres-sion I took away from my meetings across thecountry was one of energy, pride, and optimism.I met many lenders and small business peoplewho, through creativity and perseverance, havebecame allies in common partnerships.

I learned about organizations, such as The EastLos Angeles Community Union (TELACU) — aone-stop resource for minority small businesspeople, which provides counseling and arrangesloans — loans with some of the lowest delin-quency rates in the entire industry.

I heard about innovations in lending, such assecond- and third-look programs, whose opera-tive philosophy reflects a dogged determinationto find ways to make loans to worthy borrowerswho might not qualify by traditional standards.

I heard about encouraging developments in theuse of credit scoring models to reduce the costsof reviewing and monitoring small businessloans, while attending to the potential problemsof inadvertent discrimination in their use. The

reduced costs should help lenders make more ofthem. And when they do, it may open the doorfor the development of a secondary market forthese loans, with all that implies for increasedavailability and better pricing.

Most of all, I saw evidence of genuine long-termcommitment to community development,broadly defined. In our discussions today, Iexpect to hear and learn more about thoseinnovations and how we can use them to ad-dress the problems that persist.

When I became Comptroller of the Currency fiveyears ago, I made a commitment to do every-thing in my power to promote fair access tocredit and other financial services for all of ourpeople. I think we have made significantprogress to that end. One reason we are meetinghere today is to help ensure that the momentumcontinues to build, so that, one year from now,we will have even more striking progress toreport. Wherever the future takes me personally,let me assure you that the cause of financialdemocratization will always be special to me.

Eugene A. Ludwig is the 27th Comptroller of theCurrency. The Office of the Comptroller (OCC)supervises nearly 2,800 federally charteredcommercial banks that account for more than halfof the assets of the commercial banking system.By statute, the Comptroller also serves a concur-rent term as a director of the Federal DepositInsurance Corporation. In January 1997, he waselected Chairman of the Neighborhood Reinvest-ment Corporation. The Comptroller is also chair-man of the Federal Financial Institutions Exami-nations Council and of the federal ConsumerElectronic Payments Task Force. Ludwig joinedthe OCC from the law firm of Covington andBurling in Washington, where he was a partnerbeginning in 1981. He specialized in intellectualproperty law, banking, and international trade.He has written numerous articles on banking andfinance for scholarly journals and trade publica-tions and was a guest lecturer at Yale andHarvard law schools and Georgetown University’sInternational Law Institute.

Special Guest Speaker, Richard C. Hartnack,Vice Chairman, Union Bank of CaliforniaI would like to provide some insight into themarket size, revenue streams, and changing

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competition and technology that we will see inthe small business market.

The small business market represents a largeand attractive opportunity for banks and otherfinancial service providers. Although thisseems obvious today, not many years ago thecombination of capital strain, cost tensions, andloss aversion led banks to walk away from thatopportunity.

There are 5.5 million small businesses operat-ing in America that conduct up to $10 millionin sales. The huge majority of those businessesare small. To tap this market meaningfully, onehas to build in a cost-effective and risk-accept-able way for systems, processes, procedures,and a culture to attract small businesses.

This market possesses some interestingcharacteristics. Turnover in the small busi-ness market is relatively large. One-half of allthe firms listed in any single year disappear orreorganize in the next five years. Approxi-mately 14 percent of the institutions disappearfrom the market in any one year, because theygo broke, or they are bought, enriching every-one. Approximately 16 percent of the total ofsmall businesses operating each year arestart-ups. That is a tremendous number ofstart-ups.

The small business marketrepresents a large andattractive opportunity forbanks and other financialservice providers.

For a bank or a competitor trying to enter thismarket, sitting still means falling behind. Youcan shrink out of this business quickly, if you arenot adding to your client set every year by retain-ing those you have and bringing in new ones.

The nature of small business is changing.Growth occurs mainly in the services andfinancial services arena, which presents someinteresting implications for those who maketheir living lending money. Service firms usemuch less credit on average, but more depositproducts, than nonservice firms. Understanding

the nature of that opportunity is important toservicing those firms most effectively.

The revenue stream is also important. In total,small businesses create about a $33 billionrevenue market for traditional banking products.Today, that $33 billion market is dominated,about 93 percent, by America’s banks. Approxi-mately 7 percent of the participation by nonbanksin those areas, and most of that participation, isin the area of credit, not core checking products.

The $33 billion revenue stream creates ap-proximately $20 billion and some high return-on-equity (ROE) opportunities for the banks thatdo this well. Because one does not see 40percent ROEs routinely posted by banks, onemust remember that there are shared costs,shared facilities, and other factors that lowerthe total at the bottom line. At $10 to $15billion, however, the bottom line is an interest-ing market for all participating in it.

Banking revenues are only part of the picture.In addition to banking revenues, there is asizable property and casualty insurancerevenue stream, nearly as large as the bank-ing stream. The life and health insurancestream is approximately one-third as large asthe banking stream. But when it is combinedwith property and casualty, the insurancestream exceeds banking revenues. Somesignificant competitors, and notably no banks,play in each of those fields.

Altogether the small business and commercialrevenue potential in the small business markettoday totals approximately $78 billion in rev-enue stream. This is interesting becauseapproximately one-fourth or one-third of thatopportunity lies with traditional products, andthe rest with nontraditional products.

Also interesting is the propensity of smallbusiness people to group their personal andbusiness activities. Indeed, 36 percent of allsmall businesses bank with their currentfinancial institution, because they conductedtheir personal business there first. Twenty-sixpercent conduct their personal business at thesame bank in which they conduct their busi-ness banking, because their business bankingwas there first, and 38 percent have split therelationship purposefully.

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Small business owners also tend to be moreaffluent customers, offering a much higheraverage revenue per retail relationship.

Besides the owners, small business employ-ees represent approximately $33 billion inrevenue and approximately $19 billion inproduct profits when addressed and capturedas a whole.

Small business presents an interesting profitstory with approximately $33 billion of tradi-tional commercial small business services andanother $45 billion in nonbank small businessservices.

Small business owners’ retail revenue is $27billion. The owners are almost as valuable asthe small businesses.

The 83 billion small business employeespresent to banks a huge opportunity — a $188billion revenue opportunity. Because natureand a free market abhor a vacuum, that profit-able opportunity is forcing competition tochange rapidly. We are not the only industrythat recognizes that opportunity.

Small business owners’ retailrevenue is $27 billion.

The combination of new competition, technol-ogy that encourages new competitors, andregulatory changes creates a different competi-tive landscape. The message today, if any, isthat bankers must think carefully about thatcompetitive landscape.

The average, reasonably well-established smallbusiness probably uses brokerage companies,such as Merrill Lynch. Dedicated lenders, suchas the Money Store, participate in this market.Leasing participants, such as G.E. Capital, arebuilding huge portfolios. Complimenters, suchas AT&T, that provide credit services, leasingservices for their own equipment, and longdistance services and other telecommunica-tions services become key competitors. Insur-ance service providers, such as ADP; softwareproviders, such as Intuit, with its Quick Books;such as Fidelity payments people; such as

American Express; and investment managers,such as Fidelity, are all trying to split that largerevenue opportunity.

It is significant that small businesses adapt totechnology nearly twice as fast as consumerhouseholds, and that ability allows competitorsto reach those clients in a new way. Technol-ogy also works for banks and ultimately for thesmall business customer. The changing creditprocesses, which include credit scoring andcost cutting methods, have reduced by a hugeamount the cost to originate, the turnaroundtime, and the break-even loan size. Our BAI/McKenzie report noted that Wells Fargo origi-nated more than $1.4 billion in new loansduring a two-year period (1996-1997). Thosechanges enable bankers and others to addressthis market quite efficiently.

The growth in automated small business lend-ing has two sides, both good and bad. The goodscenario shows automated lending lowering thecost to the institution and, ultimately, thehassle factor and the waiting for small busi-nesses. However, it will also lead tosecuritization, which will make available analmost limitless amount of capital to smallbusiness, but will require a new set of skills forcompetitors to participate.

The message to the banking industry is clear:if you do not like the share of the credit cardmarket that you have today, or the share ofthe mortgage market that you have left, becareful about the small business market. Youmight have an equally small share of thatmarket in less than a decade. The standard-ization and securitization of this product couldcause small banks with a huge amount oftheir total profit emerging from this marketsegment to be unable to play any longer, asthey are unable to do in the credit card andmortgage markets.

All of those issues will change dramaticallythe way small business people think abouttheir relationships. Some may value conve-nience and deal impersonally with providersthat specialize in convenience. Some mayvalue access to capital more than anythingelse. Clearly, the less creditworthy you are,the less likely you will be to obtainpreapproved credit in the mail. Without that

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preapproved credit in the mail, you mustvalue your ability to obtain credit. That maybe the number one problem facing a smallbusiness person.

Payments — cash, coin, currency, clearingchecks, accepting payments — may be a smallbusiness person’s most major activities anddetermine where the small businesses willbank. Credit and access may be secondary tothe coin and currency and payment servicesthat small businesses obtain. Some busi-nesses may be able to value advice and infor-mation and use providers with that approachto the market.

If small business people behave as other con-sumers of services in our complex, multi-competitor economy, they will make choicesbased on their own set of values and needs.They will determine, in addressing this market,whether to use providers who build a brandname that establishes value and capability.Alternatively, they may use advisors who makethe choices for them. Those advisors could beCPAs or consultants to Internet Web sites.Some businesses may choose to disaggregatetheir purchases and seek the best of the classin each of the different kinds of services thatthey provide or require. This would result in ahuge disaggregation in the marketplace.

The old way was profitable for everyone, and itworked. It was a fragmented industry of morethan 10,000 banks. All businesses dealt withbanks. Earlier, we showed that 93 percent of alltraditional products are provided still by banks.There was an expensive distribution systemthat focused on location convenience. It gavesmall businesses relatively limited access tocapital, although good access to debt. There wasa high retention of small business, and bankswere regulated to ensure a low cost of funds,which provided the profit engine. Industryconduct was directed to high margins, standardproducts, nonaggressive competition, andconservative loan standards. Geography was thebasis of competition. ROEs were high, and onewas fairly secure with a stable market share.

The structure of delivery is adapting tochanges in technology, competition, regula-tions, increased lending capacity, and market-ing capacity and capability, alternative pay-

ment and deposit systems, and electronicdelivery. Other changes in the market will beprice cutting, newly-packaged products, proac-tive marketing efforts directed at customers,and a lack of geographic boundaries to compe-tition with the leveraging of the high-costdelivery system.

The end result will be reduced spreads onlending, which can be seen either in lowerpricing or in the increased risk that peopletake; reduced spreads on deposits as sweepaccounts and other activities and products areaimed at putting idle balances to work for thesmall business person; much higher acquisi-tion costs; and more switching. One need lookonly at the telecommunications industry as thenumber of active switchers substantially in-crease the average cost of acquisition.

The status quo will lead to focused players steal-ing market share in the small business market.Banks that compete in the same way tomorrow asthey do today will not increase their marketshare over time. Their share will shrink.

The Treasury and fee-based payment systemswill come under increasing attack by compa-nies, such as ADP, Microsoft, and Intuit. MerrillLynch, Fidelity, and Vanguard will activelymarket replacements for traditional depositproducts. On the credit side, companies, suchas American Express, the Money Store, and G.E.Capital, will grasp parts of the market. That willleave banks with a hammerlock on the lowreturn, high cost currency, and check process-ing aspects of the business. That is a dangerousplace to be.

The small business market continues to belarge and lucrative. New competitors are seek-ing to stake out market share at the expense ofcurrent providers. The way businesses buy, theway they are served, and the nature of thevalue proposition being offered to them willchange greatly in the next decade. Banks thatdo not adapt surely will lose clients, revenues,and ultimately profits.

Richard A. Hartnack is the vice chairman and headof the Community Banking Group at Union Bank ofCalifornia in Los Angeles. He is also a member ofthe board of directors. Mr. Hartnack is the immedi-ate past president of the Consumer Bankers

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Association (CBA) and the current chairman of theCalifornia Community Reinvestment Corporation.He also serves on the boards of several civicorganizations, such as the Los Angeles UrbanLeague and Operation HOPE.

Last year, Mr. Hartnack became chairman-elect ofthe Bank Administration Institute (BAI), an organi-zation dedicated to improving the competitiveposition of banks and financial services organiza-tions. Under his leadership, BAI, in partnershipwith McKenzie & Company, published a recentreport entitled, “Unlocking Winning Strategies toServe Small Business, Banking the AmericanDream.” He is active in, and extremely knowledge-able about, small business.

Q and A SummaryThe issue was raised about the costs for pre-and post-counseling for small businesses.Hartnack said it is difficult to provide fivehours of counseling for a $5,000 loan andmake a profit. However, it is not possible tomake a safe $5,000 loan to some entrepre-neurs without good counseling. Institutionsmust make a reasoned decision on whethercounseling for the $5,000 loan pays off interms of the net present value of all futureflows from that business.

Ludwig added that two market approaches aredeveloping. One is a commodity-driven approachusing credit scoring in the secondary market;that approach should grow. There also will bethose who are adept at the more traditionalcommunity and high touch approach. Thosepeople will be successful and will have a valu-able market niche to the extent that theyemphasize counseling.

Ludwig remarked that it is not feasible to havea $5,000 loan that includes $500 worth ofcounseling time, if you pay people by the hour.However, some institutions have charged up

lending staffs on their overtime. They arebuilding a business, which does not work on adollar-for-dollar basis. The lending business,particularly for small banks, is a small busi-ness. When aggressive entrepreneurs spendextra time building their businesses, counsel-ing pays off handsomely in terms of the return-on-assets (ROAs) and ROEs.

A participant asked if a federally-funded part-nership for counseling could be establishedbetween the banking industry or the financialindustry and the government entities operat-ing technical assistance programs for thecommunity. Hartnack responded that thistype of partnership can work well. A commu-nity partnership to address those most inneed of counseling could be formed, eventhough the government cannot provide tech-nical counseling to 5.5 million small busi-nesses in America.

Also raised was the issue of the market mov-ing toward securitizing small business loans,i.e., small business loans guaranteed by theSBA or conventional products standardized forresale by a bank in the secondary market.Hartnack responded that securitization refersto general market loans. The size of the loan isnot a barrier. We will not securitize $1 millionloans in the near future, but it is foreseeablethat we could securitize $50,000 and $100,000loans in packages. Wall Street likes to dealwith large numbers, such as blocks of $50 and$100 million. This makes life even scarier forsmall banks, unless they carve out the highlyconvenience-oriented part of the business thatallows them to pay operating fees and theprices. Hartnack also stated that small banksshould be concerned about large bankssecuritizing those loans. The emergence oflarge banks may reduce the room in eachmarket for the number of community banksand the size and the growth they enjoy.

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The Changing Structure of theBanking Industry and Its Effecton Small Business Lending

Bankers from community banks and largerfinancial institutions discuss the numerousbenefits that accrue to them from active smallbusiness lending programs, and how thoseinstitutions now serve the needs of the smallbusiness market. They describe a communitybank’s successful SBA lending program; how alarge bank’s small business lending is designedso that banking can be done at the bank’soffices, through the mail, fax, ATM, PC or theInternet; and a community development bank,established in 1990, that provides loans andinvestments to borrowers and community-basedprojects that typically would not qualify forconventional loans. Barbara Grunkenmeyer,credit risk expert, Credit Risk Policy Division,OCC, moderated the session.

William Gene Payne, President and CEO,Gateway National BankGateway National Bank ended 1997 as a locally-owned community bank in Dallas with $97million in total assets. In January 1994, westarted SBA lending and have achieved preferredlender status. Since 1994, we have closed $44million in SBA loans. In 1996, we were thenumber three bank lender in terms of volume inthe Dallas-Fort Worth district, which is one of themore active SBA districts in the country. In thesame year, we were awarded the top lender towomen in business award by the SBA, DallasDistrict, for our efforts in lending to women-ownedbusinesses.

I am here as a proponent of SBA lending for thecommunity bank, although it might seem un-usual for a Dallas, Texas, banker to address aforum in Washington, D.C., on best businesslending practices. A few years ago, most of thecountry viewed Texas bankers as something lessthan positive role models. Gateway National Bankand Gene Payne survived the crisis. Havingsurvived the crisis, I am imminently qualified toaddress you today on a subject near and dear tomy heart: small business banking issues.

I have been in banking for 26 years in some ofthe more renowned banking organizations in thestate of Texas. I have worked in large banks,medium-sized banks, and in the last 12 years orso, in small banks. It is my opinion that smallbusiness banking is best understood and prac-ticed by the community banks across America.

At Gateway, we have a basic formula for success.We take seasoned bankers with good businessacumen, provide them with quality products andservices, put them in front of the customers, andleave them there. Our bank officers do notoutgrow our customers; they stay with them.That creates a bond, a sense of trust betweenthe loan customer and the bank, and it rein-forces an important role that the banker hasplayed throughout history with the small busi-ness community: the “consulting” or “advisory”role. As bankers, we see small businesses facemany pitfalls. Most small businesses have onething in common: the person who establishedthe business either knew how to make it orknew how to sell it. Most are not great businesspeople, although many become great businesspeople. That bond must exist, so that the bankercan advise the small business person on how toavoid potential pitfalls in their business.

The middle market is most often described asthose companies with sales between $1 to $50million. The lower end of the middle market,which consists of companies with sales of $10million or less, is the target market for Gateway.

In the 1960s through the 1980s, Gateway’starget market consisted primarily of smallmanufacturing companies, distributors, andretailers that sold durable goods to consumers.Most of those businesses had qualities incommon: strong fixed assets and inventoriesthat we understood well. We knew how to liqui-date them and how to lend to them. The marketis different today. We have seen an explosion inservice-oriented businesses with fixed assetsthat consist often of office equipment, comput-ers and software, and furniture. Traditionalbanking must change to lend to companiessuch as those. We must lend for longer termson assets that at first blush do not justify a loanterm of that length. In other words, computers

3. Forum Topics

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do not justify a seven-year amortization; theirlife span is not that long.

We needed to change to be prudent and to lendto those growth-oriented businesses. Oneexample is Tactica, Incorporated, a Dallas-basedcomputer consulting company that specializesin computer networking systems for busi-nesses. They approached us for a small busi-ness working capital line to enable them tofund their growth. Tactica is a well-capitalizedbusiness that has experienced managementand a strong business plan. However, thecompany had a nominal operating history.Traditional methods would not accommodate aloan to Tactica. The collateral did not justify it.However, we were able to make the loanthrough our partnership with SBA. Today,Tactica is a successful business. It employsmore than 30 people in our market and makesa profit. It also is a net provider of funds to thebank; in other words, Tactica has more indeposits than it has borrowed from the bank.

Most community banks still lend money usingthe traditional method, which works well forthem. They may let the young companies or thecompanies without safe, hard collateral choosetheir competitors. Some of the community bank-ers may be saying, “Gateway, this is the 1990s.Everything is great. Maybe you are just tooconservative in the way you approach things.”

In the late 1970s and the early 1980s, we hadone of the most dynamic, vibrant economies inTexas. In many ways, it was the envy of manyparts of the country. In the mid-1980s, theeconomic cycle changed in significant ways andcreated the banking crisis in Texas. In Dallas,the traditional approach did not work alone.Economic changes occurred, even when deci-sions were made using safe, sound, and triedand true methodologies.

Real estate lending is one example. Does itsound familiar and safe to lend 80 percent ofcost to market, 15- to 20-year amortizations,five-year balloons? Shortly in Dallas, realestate values plummeted 25 percent to 50percent, and more in some cases. Almostovernight, collateral values deteriorated belowloan amounts. Those customers able to maketheir payments continued to do so. Others found

themselves unable to reduce their loans toamounts below the loan amount when theirloans matured, putting the collateral underwater. The result was credit deterioration,nonaccruals, classifications, foreclosures, andbusiness failures. The traditional approach tolending failed many Texas banks. It did not failGateway, but we learned a few million lessons.

We looked for an alternative method that wouldenable us to lend to those emerging growthcompanies that had collateral insufficient foruse as a good secondary source for repayment.We looked for a way to lend money on collateralthat recent history had proven was deteriorat-ing in value.

In looking for alternatives, we found a partnerin SBA. We did not plan to do a little SBA lend-ing. We planned to be regarded as a premiersmall business lender in our market, to make adifference, not only in the profit and loss state-ment of the bank, but also in the community.

Rosa Rodriguez, or Mamma Rosa, is one ex-ample. Mamma Rosa immigrated from PuertoRico in the mid-1980s. In the early 1990s, shebecame a citizen of the United States andstarted a small day care center in her home forfour or five children. She did well and expandedinto a rental facility that took care of 50 chil-dren. She operated there for a couple of years,then approached us to assist her in building a6,000 square foot, state-of-the-art day carecenter in a lot adjoining her home in southernDallas County, a lower income area.

We accommodated her. When the constructionwas completed, she opened at full capacity. Shehas done very well; as of last week, she had awaiting list of 125 children more than hercapacity. Mamma Rosa is a success story, butGateway could not have made a 25-year, fullyamortizing real estate loan to Mamma Rosawithout the assistance of SBA.

Through more than 200 loans, 41 percent ofwhich went to women and minorities, ourcustomers have created more than 1,600 jobsin the last four years. There are many successstories justifying our partnership with the SBA.It has been fantastic for Gateway as well. Overthat same four years, Gateway’s total assets

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have grown by 70 percent. Every year, we haveimproved our profitability compared with theprevious year.

There are many benefits to an active, vibrantSBA program in your bank. It increases theeconomic development in the community —more than 200 loans and 1,600 jobs. It in-creases community reinvestment opportunities— think of Mamma Rosa. It improves competi-tiveness with larger banks and nonbank lend-ers. Gateway can lend longer term againstshorter lived assets. It increases liquidity andloan-to-deposit ratio, which are importantissues to the community bank, in that anactive secondary market exists for the guaran-teed portion of the SBA loans. It increaseslending limits in the amount that we can lendto any individual borrower because the guaran-teed portion does not count against our loanlimit internally. The guarantees are useful assecurity for deposits for public sector funds.

Gateway is a flagship for SBA lending in manyways. As we raise that flag, we also see otheropportunities to lend money to non-SBA quali-fied borrowers. We have also seen growth in ourcommercial and real estate and consumerproducts. Over the past four years, SBA lendinghas represented good business for GatewayNational Bank. The SBA is the most significantprivate-public partnership ever created byCongress.

I would like to comment on the securitizationissues discussed earlier. Securitization is notan avenue for community banks. Gateway doesnot have the large funds necessary to puttogether securitization packages. More impor-tantly, we need earnings assets to fund and tosupport deposit growth in our community.Besides, if we sell the guaranteed and theunguaranteed portions of the loan or non-SBAloans in a securitized fashion, what is themotivation to provide small businesses with thecontinuing advisory or consulting role providedby the banker throughout history: Small busi-nesses need bankers to stay in touch and toadvise.

William Gene Payne is president and CEO of Gate-way National Bank headquartered in Dallas, Texas.He has been active in business lending throughouthis 26-year banking career, having served in loan

administration and lending at Citizens NationalBank, Texas Commerce Bank, and Allied Bankbefore joining Gateway National Bank in 1984.Gateway is a $97 million independent communitybank located in three areas in Dallas. It is a topsmall business lender in its market.

Robert K. Kottler, Senior Vice President, SmallBusiness Banking, Hibernia National BankI would like to talk about the activities of alarge bank. Hibernia has grown quickly from abank of $10 billion to $12 billion through tworecent mergers. Things are changing rapidly.

Hibernia operates in Louisiana and Texas. In1992, our new CEO determined that we weremissing the opportunity in small business. In1992, Hibernia with approximately $5 billion inassets, was the largest bank in the state, butthe fifth largest small business lender. Basi-cally, we were not lending to small businesses.We told our small business customers that wedid not know what to do with them. We decidedto change that. In January 1993, Hibernia had1,000 small business loans totaling $100 mil-lion. Today, we have 30,000 small businessloans totaling nearly $1.5 billion. In January1993, Hibernia processed 90 loans through theSmall Business Loan Center that we hadrecently created. Today, we process more than3,000 small business loans a month. In 1992,15 bankers were assigned to seek businessfrom small firms. Today, there are more than150. In 1992, it probably took two weeks to get a$10,000 loan. Today, it takes less than twohours; in many cases, our application serves asour note. You do not even have to come into thebank to get credit. In 1992, our average sizeloan was $150,000, even though the averagesmall business borrows about $25,000. Today,our average loan size is $35,000. We are mak-ing more $5,000, $10,000, $15,000, and $25,000loans. For the first time, we are making aneffort to serve the under $1 million revenuesegment of small business that we believe hasbeen underserved.

Self-selection and convenience are important.Our premise at Hibernia has been that custom-ers and potential customers will decide how,when, and where they will obtain information,purchase products, or obtain customer service.The old paradigm was that a customer had to

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come into the branch between nine and five toget a loan. We did not come to you. Business couldbe conducted only face-to-face, and we treated ourcustomers as either commercial or consumer.We did not understand small business.

We would take a commercial approach whetherit was a $10 million loan or a $10,000 loan. Werequired an annual financial statement fromevery small business. If it was not complete, wesent it back five times until it was completedaccurately. We did not understand why none ofour small business customers wanted to bankwith us.

On the deposit side, we offered a flat fee busi-ness checking account for $8 per month for upto 200 transactions. My favorite question tomembers of small business-owner focus groupsis whether participants understand accountanalysis. They all say they do, but most busi-nesses do not. We reduced the minimumbalance for waiving fees to $5,000, and other-wise charged a flat fee each month.

On the loan side, we added business credit cards,check access business line of credit cards, andterm loans to make it easy for our small busi-nesses to borrow. We made the documentationsimpler and in some cases part of the note. Wealso began to fulfill through alternate channels,and we took the approach that we want to dobusiness with every small business owner sevendays a week, 24 hours a day.

The way we fulfill credit has changed dramati-cally. I use the concept of my wife as a smallbusiness owner. She wants a problem solvedimmediately; she does not want to be bothered.When she needs a loan for her business, shewould likely apply by fax, late in the evening. Wedecided to provide instant gratification for asmany small business owners as possible. Everycredit application has three or four items on it. Ithas an inbound 800 number. If you call us, wewill try to make the loan over the phone. It alsohas a self-mailer. If you are not comfortabletalking with us face-to-face, you can mail theapplication, and we will call back and tell youwhether we can do business with you. We alsoprovide a fax number. My wife and I are notori-ous for using the fax and Internet at two o’clockin the morning when we finally sit down to talkabout her business. We will also give you an

inbound number and provide our application andinformation on the Internet.

Arthur Andersen’s study indicated that 30percent to 40 percent of small businesses werestarted with credit cards. Because we thoughtmany small business owners were comfortablewith credit cards, we issued a Visa businesscredit card with a line of credit that also could beused for purchases. We learned from the creditcard experience. On smaller loans, your applica-tion becomes the note. After you apply for theloan, you are informed of your approval andasked where you want the money deposited.

Our self-selection services are designed so thatsmall businesses can do business with us atbanking offices with dedicated business bank-ers, and through the mail, the fax, the ATM, thePC, or the Internet. You have your pick.

Some customers still want to come to thebanking office. To accommodate this, we movedmany of our business bankers from downtownand put them in the branches or in suburbanlocations where our customers are. That iswhere our customers feel comfortable andwhere our bankers are today.

We also have dedicated business bankers whowork with our customers. They work on incen-tive pay: approximately 50 percent of theirsalary is incentive. If they do not do business,they do not eat very well. That has made a hugedifference. At the same time, we also tookprecautions, so that our bankers cannot getpaid for loans approved under their authority.Those business bankers are much closer to thecustomers, and they act as advisors.

Our goal is to let people knowthat we want to do businesswith them.

Hibernia sends out more than 1 million piecesof direct mail each year. Recently I bought alight fixture for my house. I went into a smallbusiness in the French Quarter in New Orleanswearing my Hibernia shirt, and the proprietorsaid, “I know you.” He said, “I know you wantmy business. Here is the mail you sent me.

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Your telebankers have called me, and a bankerstopped in to see me yesterday.” Our goal is tolet people know that we want to do businesswith them.

Even after five years, many small businessowners still are not convinced that we reallywant their business.

We have a direct bank operation. We sendmail. We make outbound phone calls. We alsohave inbound sales people, and we do about 20percent of our business with small businessesover the phone and through the mail. Thosecustomers do not necessarily want to comeinto the branch or to see a banker. They havesmall credit needs, and they are willing to dobusiness with us that way.

We have an inbound telebanking group. Wefind that similar to many large companies,many business owners of smaller firms aresatisfied with doing business over the phone, ifthey can get the information they need quicklyand efficiently.

We also use the fax a lot. We have an inboundfax server that allows our customers to call an800 number, have the fax service send theapplication, and fax it back to us. We do asubstantial amount of business over the fax,and it has worked well.

We have tried the Internet. Our application forcredit appears on the Internet, but it still doesnot receive many hits. The small businesssection and our SBA page are accessed often.However, we are still not receiving applicationsat the rate we want.

Technology-based solutions will continue to helpthe small business market. We use our data-bases as effectively as we can to identify thosepeople with whom we would like to do business,and we try to use our technology to make appli-cations simpler, faster, and more efficient. Oneof my biggest fears is that I will wake up one dayand my small business customer will be bankingwith credit card companies instead of me. Self-selection will make a difference.

Training for small business owners also is animportant issue. About a year and one-half ago,the University of New Orleans, SBIC, and acompany called FASTRAK 2000 visited us.

FASTRAK 2000 is not the SBA FASTRAK, butrather a training program sponsored by theKaufman Foundation in Denver. This is “first-time business owner training,” which is theequivalent of first-time homeowner training. Webecame the lead sponsor of the program, which isconducted in two six-week sessions. We providedadvertising and funds. More importantly, weemployed business bankers to act as counselorsand teach the program. We also offer scholar-ships to our customers and to some of our pros-pects who we think would benefit from theprogram. A person who has been throughFASTRAK 2000 is five times as likely to be inbusiness five years from now than the tradi-tional business owner. The money spent to buythis nationally tested program was far betterspent than if our own bank had developed aprogram.

Robert Kottler is senior vice president and managerof Small Business Banking at Hibernia NationalBank. He is responsible for developing smallbusiness products and policies. Under his leader-ship, Hibernia has become a leader in creatinginnovative products and services for small busi-nesses. Hibernia is a $14 billion bank headquar-tered in New Orleans. It also has operationscentered in Louisiana and Texas.

Howie Hodges, Bank of AmericaMichael Mantle was unable to attend the forum.Howie Hodges gave his presentation.

Bank of America Community DevelopmentBank was established in 1990 as a subsidiaryof Bank of America Corporation. We provideloans and investments to borrowers andcommunity-based projects that typically wouldnot qualify for conventional loans. In eightyears, we have made over $3.2 billion in newcommunity development loans and more than$500 million in equity investments.

The market’s acceptance of our products andservice has been spectacular. Last year alone,we originated more than $1 billion in newloans, nearly double the amount we booked twoyears ago. We are determined to do even more.Last year, Bank of America Corporationpledged $140 billion for community lendingover the next decade. A large portion of thiscommitment belongs to the Community Devel-opment Bank. Over the next 10 years, we have

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set an objective of $10 billion in government-assisted small business lending and $13 billionfor multifamily affordable housing.

There are several reasons for our success. Wehave absolutely the best, first-rate staff. Longago, we determined that it is easier to turn acommunity activist into a banker than to turn abanker into a community activist. That deci-sion continues to drive our staffing decisions,and it has given us a better understanding ofcommunity development organizations andwhat they need from a financial servicesinstitution.

Another reason for our success is aggressivemarket expansion. We now have offices in 33cities and 25 states across the country. Lastyear, we opened a new office in Atlanta, and twoyears ago, one in the District of Columbia.

As the bank moves into markets, we havecontinued to introduce additional products. In1997, we began to offer tax exempt privateplacement financing for affordable housing.

I am proud of those accomplishments, but noneof our initiatives could succeed without helpfrom federal agencies in Washington, D.C., inthe form of partnerships, a critical ingredient ofour success.

To a great extent, our success depends oninitiatives from economic development andpublic sector support from such agencies as theSBA, the Department of Housing and UrbanDevelopment (HUD), and the United StatesDepartment of Agriculture (USDA). Thoseagencies help companies, such as mine, topump resources into neighborhoods that desper-ately need more jobs and better housing. Theyare catalysts for better communities and per-form a critical role in the economic develop-ment of our nation.

At different times and for different reasons,companies may find it hard to obtain loans.This may happen at the start-up phase orduring periods of rapid growth. It might occuras a result of economic recession or unfore-seen operating problems. Regardless, thebusiness that cannot overcome those chal-lenges will not survive, and that is why theSBA is so important.

It has developed several dynamic and pioneer-ing ways of placing capital into the hands ofthe traditionally underserved markets.

The Micro Loan Program, which uses interme-diaries as lenders to businesses seeking loansup to $25,000, allowed hundreds of businessesto secure financing at a reasonable cost andterms, particularly during California’s reces-sion several years ago. The SBA should con-sider expansion of this program.

The Low Doc Program has reduced paperwork andenabled hundreds of banks to make SBA loans tosmall business owners in amounts below$100,000. The introduction of the minority andwomen prequalification programs has increasedthe availability of capital to both of those histori-cally underserved markets and, perhaps moreimportantly, has sent a strong message that thecredit window is open to everyone. This programis important particularly in light of the dynamicgrowth of minority and women-owned businessesthroughout the United States.

The business that cannotovercome those challenges willnot survive, and that is why theSBA is so important.

Not long ago, the National Foundation for WomenBusiness Owners saw that businesses owned byHispanic, Asian, and African American womenwere growing three times faster than all the U.S.firms combined. The survey also concluded thatfirms owned by minorities and women employedmore than 1.6 million people and generatedapproximately $184.2 billion in sales. That is amarket worthy of some attention.

The SBA is not alone in supporting smallbusinesses. The USDA is joining it in helpingin the economic development in rural commu-nities. Jill Thompson and Dayton Watkins areserving well the department’s Rural Develop-ment Agency. Last month, Bank of America’sCommunity Development Bank became thefirst nationwide certified lender under theBusiness and Industry Guaranteed Loan Pro-gram, which finances new and existing rural

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businesses. Many people do not realize it, butthe USDA makes a significant contribution tothe growth of small businesses. Last year, theProgram guaranteed $815 million in loans andcreated or preserved nearly 30,000 Americanjobs. At Bank of America, we hope to add to thisprogram’s effectiveness by helping to stream-line the application process and shorten theturnaround time for rural borrowers.

Virtually all government agencies, includingthe SBA and USDA, are now being asked to domore with less, and this challenge presentsthem with excellent opportunities to introducesome fundamental changes.

Initiatives have been taken to complement thecontinuing efforts of both SBA and USDA to savemoney and leverage capital. First, those agen-cies should encourage representatives of eachdistrict office to meet with participating lendersto develop goals and strategies tailored to localcredit needs. Financial institutions mustassess under the CRA the needs of their geo-graphic markets and report small businesslending patterns. Each SBA district office shouldperform a similar assessment. Lending pat-terns also should be reviewed alongside CRAguidelines to determine whether credit needs arebeing met. We must stretch every dollar as far asit can go, and that means doing a better job ofsteering borrowers toward more appropriate andcost-effective products that present less interestrate risk and require less taxpayer subsidy.

An example is the SBA’s 7(a) product, which isdesigned to provide small companies with work-ing capital. Often, however, it is used to financethe acquisition of commercial real estate. Thisuse of the 7(a) product typically adds unneces-sary risk and expense. For commercial realestate transactions, the SBA should mandatethe 504 program whenever it is the least costlyalternative to the client and to the government.

The SBA also should look at gain on sale premi-ums and loan origination. I read almost everyweek about another conference aimed at teach-ing lenders how to maximize returns by convert-ing conventional small business loans into SBA7(a) loans. They will teach you to increasedramatically your rate of return by lengtheningprepayment schedules and selling loans into thesecondary market. These premiums are being

collected at the expense of both the SBA and itsborrowers. To boost gain on sale premiums,lenders often offer 25-year repayment schedulesto companies that need government-guaranteedcredit for only a few years. As a result, theirloans remain on the books long after thecompany’s assets are depreciated. This doesnothing to help the borrower’s debt-to-worth ratioor the SBA’s risk exposure. We can put thetaxpayers’ money to better use.

SBA lenders deserve a fair return, one thatreflects the risk of a conventional small businessportfolio. However, some of those premiums arehard to justify; in fact, the current rates of returnsometimes exceed 50 percent. If one-half of theSBA 7(a) loans are sold in the secondary marketat a 10 percent premium, the federal governmentrelinquishes $500 million a year of revenue thatcould be used to expand capital formation. Insteadof inflating gain on sale premiums, we shouldreturn the money to the SBA for additionaleconomic development activities.

Many people argue that the SBA loans will notbe made if lenders cannot make money. Thetruth is that for a long time many of them didnot want to deal with the SBA’s bureaucracy.SBA has remedied that problem. Today, banksare making small business loans, and theproper compensation of government for creditenhancement could add billions of dollars to thepool of capital available to small firms.

Government agencies can better leveragetheir resources by applying their guaranteesmore creatively. For example, the SBA mightissue loan guarantees with annual insurancepremiums in a manner similar to the FederalHousing Administration (FHA) Title 1 homeimprovement product. This would keep the SBAfrom issuing guarantees that remain in placelong after the need for credit enhancementexpires. If Microsoft Corporation had borrowedunder the SBA 7(a) program in 1980, thetechnology giant could still carry an outstand-ing loan balance guaranteed by the SBA.Under the annual insurance premium option,lenders typically would drop the SBA creditenhancement after the borrower’s financialconditions had improved.

One final recommendation is that the SBAshould require the disclosure of all loan referral

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payments made to third parties. Most SBAborrowers probably are not fully aware of theamounts that brokers receive from lenders. Ibelieve that they are entitled to this information.

The Comptroller points out that virtually allworking class Americans were once consideredunworthy of credit. Today, credit is widelyavailable. Innovation has reshaped attitudes,leading gradually to the recognition that mostAmericans know how to use credit when they aregiven a chance. The democratization of credit hasenabled millions of Americans to enjoy the ben-efits of home ownership and asset accumulation.

The CRA has made a big difference in recentyears. The financial services industry hasredoubled its efforts to make credit more easilyavailable in distressed and underserved com-munities. Consider several examples. Between1993 and 1996, mortgage lending to minoritieshas grown at twice the rate for all borrowers.Small business lending nationwide has sky-rocketed 144 percent during the last five years,and since 1993, banks and thrifts have madeCRA commitments of more than $270 billion.

There is much work to be done throughout theUnited States in disadvantaged areas andparticularly among low-income and minorityborrowers. The need for capital from the Bronxto South Central Los Angeles is still acute. Wemust find a way to raise capital from emergingenterprises. This is still one of the greatestchallenges in lending. All of us must thinkabout the challenge of stimulating capitalformation in distressed communities.

If our society can develop asuccessful incentive for thecreation of affordable housing,we can do the same for smallbusiness lending and economicdevelopment.

Society has made a start through the introduc-tion of empowerment zones and other initia-tives, but we must keep working at it. It may bepossible to apply to economic development manyof the same principles behind our nation’s low-

income housing tax credit. The tax credit hasgenerated billions of dollars of what I refer to as“synthetic equity” for affordable housing.

Since its creation 11 years ago, we have wit-nessed the development of more than 90,000units of safe, decent, and affordable housing.Demand for tax credits has increased signifi-cantly as community development organiza-tions learn how to use them in leveragingprivate investment. If our society can develop asuccessful incentive for the creation of afford-able housing, we can do the same for smallbusiness lending and economic development.

It will take cooperation among banks and commu-nity organizations, government officials, businessleaders, and religious and social organizations.Together, we must exercise our imagination. Wemust redouble our commitment, and we muststretch every dollar as far as it can go.

Howie Hodges is a regional vice president for Bankof America in its Community Development Bank inWashington, D.C. He and his group are responsiblefor small business lending throughout the EastCoast. Before joining Bank of America, Mr. Hodgesworked for the Department of Commerce in theMinority Business Development Agency.

Q and A SummarySeveral questions were asked about servicesprovided to small business customers. Paynesaid that the company employs 10 lenders,who are trained for SBA lending. A specialdivision of three lenders focuses on SBAlending. In addition, the company employs acredit analyst and a closing clerk, who workwith local attorneys. The loan departmenthandles most of the volume.

Kottler discussed the turnaround time on loandecisions and paperwork requirements.Hibernia has a one-page application only forunsecured loans less than $50,000. Hiberniaeither calls or writes customers to informthem if the loan has been approved. Loanapproval takes about 15 minutes. Loan pro-cessing takes more time to close if collateralis needed. Hibernia will fund the loan thenext day, if the applicant has a checkingaccount. If the applicant does not have achecking account, Hibernia will ask theapplicant to open one.

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A participant commented that the audience issupportive of the SBA. However, Bank of Americamay not have the perspective of the majority ofprogram users. For example, Gateway could notafford to participate, because the financialreturn would be removed and the credit riskgreatly increased, which would drive the major-ity of the 7,000 banks from participating in theprogram. The participant asked how can that bebalanced with the present trend of reducingpublic funding for these enhancement programs.Hodges responded that a number of nonbanklenders have used the program or the productsinappropriately, placing people in the wrong SBAprogram and thereby using up the credit and theguarantee. Bank lenders and regulated lendersmust be aware of marketplace occurrences asthey compete against many nonbank lenders inthe small business area. When a portfolio ofsmall business loans is sold in the secondarymarket, the fees paid should be disclosed fully asis required for packaged and sold home loans.Many small borrowers are unaware of the feesthat lenders, banks, and nonbanks pay to refer-ral sources for leads on small business loans.Those fees can be dropped to the bottom line forthe loan amount, or should not be collected at all.

A participant asked about the effect of creditscoring on capital access for minority busi-nesses. Kottler commented that Hibernia wouldnot have grown its small business portfoliowithout credit scoring, would not have increasedits loan volume from 1,000 to 30,000, and wouldnot have decreased its average loan size from$150,000 to $35,000. Mr. Kottler also told thestory of how Hibernia hired a new communitydevelopment banker from another bank. Thebanker assumed that Hibernia would not make aloan unless the credit scoring rating was perfect.He looked at 100 loans based on credit scoring.Of that total, he found only one that he wouldhave made in his position as a communitydevelopment banker. Clearly, credit scoring didnot seem to limit access to capital.

Payne noted that 9,000 community banks existin the country, the vast majority of which do notpractice credit scoring. A large majority of smallbusinesses will continue to avoid it. Hodgesstated that Bank of America does not creditscore — it is still an old-fashioned banker,making one loan at a time. Bank of America

takes a second look at any declined loan appli-cations. Because the Community DevelopmentBank is a specialized unit within Bank ofAmerica that focuses exclusively on smallbusiness lending, it conducts credit reviews oneat a time using the five Cs.

A participant asked about the securitization ofsmall business loans in the Hibernia and Bankof America portfolios. Kottler responded that atHibernia there is not a large amount of pres-sure on capital or liquidity. As a result, it stillkeeps the earning assets on the books. How-ever, Hibernia will consider securitizationshould either its capital requirements or itsability to fund itself change.

Hodges stated that Bank of America does nothave capital problems. Bank of America has aportfolio of all of its small business loans. Themission and history of the Community Develop-ment Bank leads us to think that it probablywill not securitize or sell loans. Bank ofAmerica believes strongly that each smallbusiness may need special guidance to adjust tothe ups and downs of the economy. Bank ofAmerica wants to assist with that guidance.However, if the bank were to securitize and sell,it would be unable to provide that service.

Bank Small Business InvestingIssues and Opportunities

Experts from a financial institution, communitydevelopment corporations (CDC), an equity pool,and the public sector discussed how financialinstitutions provide equity capital in innovativeways to help small businesses expand. Thepanelists described four options: the multibankcommunity development corporation; the banksubsidiary corporation; the equity fund, inwhich the bank serves as a limited partner; andthe SBIC. All of the speakers focused on thepower of partnerships in serving the smallbusiness market successfully. Janice A.Booker, former director, OCC CommunityDevelopment Division, moderated the session.

Jean L. Wojtowicz, President, The CambridgeCapital Management CorporationCambridge Capital Management Corporationis a manager of nontraditional sources of

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financing. In that role, company employeeshave found many unique ways to work withregulated financial institutions to provide riskcapital to businesses.

Before I tell you about some of those options, Iwould like to describe a printing company innorthern Indiana. The company was started in1951. The entrepreneur with whom we worked,Hank, purchased it in 1987. In 1994, he ap-proached us, because of tight cash constraints; hiscurrent ratio typically fluctuated from .22 to .58.He lost money in 1991. He was profitable in 1992and lost money again in 1993. When he ap-proached us in 1994, he again showed a loss forthe first six months, although four of the monthswere profitable. His debt to net worth ratio was14 to 1. The balance sheet would have beenconsidered upside down. Previously, Hank hadbeen a major shareholder in another printingcompany that filed bankruptcy. Of 90 employeesin the current company, 18 pressmen had votedrecently to become unionized. Hank wanted torestructure $2 million in debt, including thepayment of past due property taxes. He indicatedthat his existing bank was willing to take ahaircut by reducing the loan repayment by$536,000 to have it paid in full. It is a creditstory from which most lenders would run.

We will return to Hank later. We manage fivedifferent funds under our Cambridge CapitalManagement umbrella. The first is the Indi-ana Statewide Certified Development Corpora-tion, an SBA 504 lender. The corporation,formed in 1983, was structured a little differ-ently than most 504 lenders. This is a private,for-profit company, which has had nearly 127bank shareholders. In the first 15 years, wehave provided fixed asset financing to morethan 400 companies, and the portion of thefinancing that we have provided is now morethan $120 million.

The Indiana Community Business CreditCorporation and the West Virginia CapitalCorporation are considered multibank commu-nity development corporations, in which bankspool their capital to take risks that mightexceed their normal parameters. For theCredit Corporation in Indiana, we have 33banks that pooled $19 million. With that pool ofcapital, we have provided mezzanine financing

to 57 companies. So far, 29 of the companieshave paid their loans successfully. Similarly,in West Virginia, 55 banks pooled $7.5 milliondollars to provide mezzanine financing tobusinesses.

Lynx Capital Corporation was funded by ninebank investors and 11 other corporate inves-tors. We were asked to provide subordinateddebt and equity financing to companies ownedby racial minorities in our community. Thoseprivate investors put $3.5 million into equity inthis fund, and we have now been able to lever-age up additional financing from the stategovernment.

Cambridge Ventures is a small businessinvestment company. Our venture fund, theSBIC, has 88 limited partners, two of which arebank investors. The $6 million in equity thatwe raised enabled us to leverage an additional$2.5 million from the SBA through its deben-ture program and an additional $1 million fromthe state of Indiana. To date, we have investedwith the SBIC more than $8 million in 22companies.

All of this is interesting. But, take for examplethat if you are a parent, it is difficult to describeto your child what you do. I started by telling mypreschooler that I was a venture capitalist, and Ireceived a glazed look. Then I said, “Well, we domezzanine financing,” and I got the same glazedlook. I finally told my daughter that we providedmoney to businesses, and when we did that, itmade their dreams come true. That new phras-ing enabled her to understand. That was provento me when I went to her preschool graduation.As the children were walking across the stage,the MC asked them what they wanted to dowhen they grew up; most of the kids talked aboutbeing teachers or doctors or Ninja turtles. WhenJenny walked across the stage, she said shewanted to make people’s dreams come true. Imay have been the only one who understood thatcomment.

I believe that risk and cost cannot be unbundledin an unsubsidized environment. Therefore, forperspective, I would suggest that measuringthose funds on a spectrum of risk with a scaleof 0 to 10 would be useful, with zero being fairlylow risk and low cost and 10 being high risk and

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high cost. If I were to allocate a number to eachof those funds, I would suggest that the State-wide Certified Development Company, the 504lender, would tend to have a risk rating ofperhaps zero to one. The two mezzanine fundswould typically fall into a five or six rating onrisk, and the Lynx and Cambridge Ventures,our venture funds, would have a risk rating ofeight or nine.

Our mezzanine fund with the longest history isthe Indiana Community Business Credit Corpo-ration. The credit corporation is now beginningits twelfth year. At the start, not every bankinvestor was a believer; some might have saidthey were coerced into investing. By the secondannual meeting, however, those same detrac-tors said, “You know, I was one of the first onesin.” We were able to convince the bankers thatthis was a market niche that we could addressand provide with capital effectively.

The fund was formed in 1986. It becameprofitable in 1988, reached consistent profit-ability in 1992, showed positive retainedearnings by 1993, and since 1992, its returnon assets has ranged from 1.2 percent to 6.1percent and has averaged 3.5 percent. Thatis attractive for a lender. To be prudent aboutthe risk we take, our loan loss reserve overthe last five years has ranged from 5.3 per-cent to 8.8 percent and has averaged 7.4percent of outstandings.

The type of borrower that seeks mezzaninefinancing is a company of great potential,although possibly one that is growing tooquickly. The bank’s or commercial lender’sreaction to that growth is, “Let’s pull in thereins and get this back under control.” Alterna-tively, the company could be a borrower whowants to diversify its product. Again, the bank’sreaction might be, “Stick to what you know.Don’t go into unchartered waters.” It certainlycould be true that the company is too highlyleveraged, its collateral is viewed as inad-equate, or it might be experiencing an earlyturnaround.

A typical project will possess seven of the 10items that a loan officer knows his committeewants to see. In the case of the shareholderwho I referred to earlier as Hank, he did noteven have seven items to be reviewed. Loan

officers are not rewarded for being championsof tough credits. If they work, nobody notices.If they do not, the loan officer is tainted asmarginal.

The Credit Corporation has marketed itself as abank’s mezzanine department for smallercredits. There are plenty of places to turn if youneed mezzanine financing for $2 million ormore, but few sources if you need risk capital,that is, mezzanine financing in the $100,000 to$750,000 range.

We have the experience to evaluate thosecredits and the flexibility through this fund tostructure transactions that compensate for therisk. Our targeted return for each of thosetransactions is 18 percent to 22 percent, and ofthe 29 credits that have now been repaid, ourreturns have ranged from 11 percent to 37percent.

Occasionally, banks will approve a loan on thebasis of insufficient information, but they arenot being compensated for the risk they aretaking. They try to disguise the loan as a primeplus two credit and hope that no one notices.

Our bank partners that have embraced thisconcept use it wisely. It allows them to meet acustomer’s needs and, hopefully, to build loyalty.Ideally, when this company’s balance sheetregains some strength, the bank will be able torefinance the mezzanine dollars and reduce theborrower’s overall cost of financing. Some bankshave invested in the Credit Corporation only asa defensive measure to be on the list that wesend to potential borrowers. In that way, theyappear to be in the game, but are clearly missingopportunities.

In launching the two venture funds, LynxCapital Corporation and Cambridge Ventures,we believed a portion of the market wasunderserved as a market niche. Many equitysources are available to entrepreneurialcompanies, if they need $2 million or moreand plan to go public in five years. However,we believed that some interesting opportuni-ties were available for companies thatneeded less capital. Therefore, we invest insome companies that most venture fundswould scoff at, “boring” companies that onlymake money “day in and day out.” Those

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companies can consistently hit singles anddoubles, perhaps not home runs, but they willnot often strike out either. This strategy makesour returns to investors quite acceptable.

An example is helpful. Through our SBIC, weprovided financing for a company that makestombstones. An audience of finance peoplemight think about the lucite type — I mean thetype in the graveyard. This company had a$40,000 line of credit to support $400,000 worthof inventory; they were struggling. We providedsome patient money to allow this company togrow. Three years after we made that invest-ment, we had identified for the company anacquisition opportunity, another manufacturingplant located 35 miles from the existing facility.We provided all of the equity dollars to bring thatacquisition to fruition and were able to leverageup more traditional senior debt. The companymade burial vaults; we saw the loan as achance to integrate this company vertically.The company has grown significantly. Weexpect they will be able to repurchase ourwarrants in 1999, and that our average com-pounded return on this investment will ex-ceed 20 percent. It is a low tech company, a“boring” company that “day in and day out”makes money.

Often we can use a variety of our financingsources to craft a balance sheet strategically fora company, allowing us to price the money tominimize the overall cost of capital to theborrower, while obtaining the appropriate levelof return for our investors. This approach hasallowed us to be viewed as a real partner and aresource to commercial lenders. This partner-ship is important. All of us, consumer or busi-ness borrower alike, are taught that if we needmoney, we go to the bank regardless of the typeof money we seek; for that reason, we become aresource to the banks. They become our mar-keting arm, and we help to prevent them fromsaying “no” to their customers, and to say atleast, “No, but.”

Let us return to Hank and his printing company.We financed this transaction through the CreditCorporation, our mezzanine fund. We provided$400,000. A new senior bank provided $630,000;coupled with the debt forgiveness from theformer bank and some additional equity, we

were able to restructure the balance sheet. Thecompany was profitable in 1994, but lost moneyagain in 1995. In the fall 1996, Hank called meand said, “I have to meet with you tomorrow.”Those of you in the lending business know thatis usually not good news. After I hung up thephone and scheduled the appointment, I franti-cally went through the file to locate any excep-tions. I found a few, nothing too serious, al-though some of the statements were not ascurrent as I would have liked them to be — hispersonal statement had not been updated. Icreated my list and went in to the meeting.

The next day, Hank and I sat down at the confer-ence table. He told me about the 180-day unionstrike that he had lived through the previousyear. He indicated that 1996 was starting to lookas if it might be a good year. He also said thatthe reason for his trip was to sit down across thetable, look me in the eye and say, “Thank you,”and request a payoff figure. He said that withoutus he would have lost his company and would nothave been able to make his dreams come true.

Jean Wojtowicz is the president and founder ofCambridge Capital Management Corporation inIndianapolis. Her firm manages the IndianaCommunity Business Credit Corporation, which isa multibank CDC, aided by national bank andother bank investors. Cambridge Capital alsohelped develop the West Virginia Capital Corpora-tion, which is modeled after its Indiana initiative. Italso works with two venture capital funds toprovide capital to small business clients.

Gail Snowden, Group Executive, CommunityBanking Group, BankBoston, NAWhat is needed for a financial institution to bea catalyst for wealth creation in low- andmoderate-income, underserved, and emergingmarkets? What does it take to be innovative inbanking services, partnerships, programs, andinvestments for small business? And what doesit take to be a visible leader in implementing aholistic approach in economic development?

BankBoston meets those challenging questionsdirectly through its Community Banking Group,which links the businesses of our nationallymodeled First Community Bank, BankBostonDevelopment Company (BBDC), and UrbanDevelopmental Real Estate.

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We believe that it is a powerful approach to thechallenges of our distressed and underservedurban neighborhoods, and an approach thatinfuses the same dynamism, optimism, jobcreation, wealth creation, and business owner-ship in those emerging markets as is the casein the broader community.

We do not have all the answers, but we cer-tainly have the passion for seeking solutions.We must heed the call of respected leaders,such as the Comptroller of the CurrencyEugene Ludwig, who has been a long-timeadvocate of investing capital in inner cities.Urban neighborhoods need equity investmentsfrom venture capitalists. Also needed is apartnership with development groups, localgovernment, churches, and not-for-profits.Finally, innovative loan products can make iteasier for consumers and business owners toqualify for credit.

Urban neighborhoods needequity investments fromventure capitalists.

A few days ago, Federal Reserve ChairmanGreenspan said, “Unless minorities can haveaccess to all forms of capital from which tocreate wealth, they will be denied the full ben-efits of our vibrant economy in which all shouldparticipate.” At BankBoston, we accepted thischallenge eight years ago. First CommunityBank represented our “bank within a bank”concept. It was our response to communityleaders who pointed to the banking industry’slack of enthusiasm in the inner city. Weplanned to enter those markets, provide ser-vices, share in the revitalization, and delivershareholder value; after all, we are a businessmeasured as any other business. BankBoston’sFirst Community Bank began with the belief inthe viability of such urban areas as Boston’sRoxbury and Dorchester neighborhoods. Becausewe had never left the community, we launchedthis concept with seven branches.

The business, now growing and profitable, hasmore than $1.6 billion in deposits and has

expanded to 44 branches across three states.Our customers are a diverse reflection of thecultural mosaic of our urban areas. We areserving substantial Hispanic, Asian, and Afri-can American populations in 13 cities. Our staffreflects the diversity in each of our locations.Daily we face the task of reaching out to thosepopulations and providing education on finan-cial basics. The market is large. As MichaelPorter of Harvard Business School has con-cluded, high population density translates intosubstantial purchasing power and a largemarket, even though average incomes arerelatively low. Not only is the low- to moderate-income (LMI) urban market large, it is youngand growing rapidly. Minority consumers repre-sent a major growth market. First CommunityBank has positioned its branches strategically.They serve as financial service centers thatoffer all of the advantages of our larger regionalbanks, including mortgage, consumer, andsmall business lending.

With the additional component of our commu-nity development outreach staff, this unitreaches out to our consumers and small busi-ness owners with financial seminars andaccess to banking services. At the end of ourseventh year, the total group had an operatingprofit of $17 million and $12 million pre-tax.When I report to the bank’s board of directors,as I do twice a year, I can always say the busi-ness is a great business. It is profitable.

We realized that there was so much more to bedone, and the next step in this evolution was tolaunch a commercial bank, BankBoston Devel-opment Corporation (BBDC). I visited thestreets of Grove Hall and Roxbury, the neigh-borhood in which I was raised. There I saw anunderutilized center that had seen its share ofeconomic and social tailspins, and somethingwas missing. What was missing was theeconomic vitality of downtown Boston two milesaway. The economic engine was misfiring. Noone was investing in small businesses or realestate projects; entrepreneurs who lived therewere extremely frustrated.

The challenge of investing in the fabric ofurban neighborhoods needed a solution. Ourresponse was the creation of the first urbaninvestment bank in America, chartered by a

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commercial bank. Through it, we are investingin, and being an innovative provider of, capitalto businesses and not-for-profits that benefitLMI and disadvantaged communities in ourNew England base and beyond. BBDC promotescommunity stabilization, housing, job develop-ment, equity ownership, and wealth creationin a sustainable and profitable manner. Whenwe launched BBDC nine months ago, Comptrol-ler of the Currency Gene Ludwig was there. Hesaid that the new BBDC represents an extraor-dinary and creative commitment byBankBoston to inner city markets. The BBDCis the key to unlocking an untapped potentialin LMI and urban neighborhoods by investingin and nurturing an indigenous business classthrough a powerful incentive, equity capital.We seek to be partners with our businesses.

Immediately after our launch, there were alarge volume of calls on our 1-800 number. Wewere overwhelmed; we had started with threepeople that expanded immediately to a staff of14. It proved that there was a great need forworking capital in these markets.

Although BankBoston had performed commu-nity development lending on a more diffusebasis for a number of years, we wanted to domore. We wanted to be innovative and set upour own company. We set it up as a subsidiaryof the bank, so that we could book assets at thebank level. The OCC regulations gave us moreflexibility in structuring our products. Genetalked today about 12 CFR 24; those regulationsoffered a conducive climate to innovation andallowed us to do more in the CRA area.

We knew from experience that business owner-ship and the development of this entrepreneur-ial base are hindered by inadequate capital,limited opportunity to network with the largerbusiness community, and inadequate capacityand scale to compete effectively. Our responsethrough BBDC was to invest in LMI and disad-vantaged communities with an eye towardcommunity stabilization. Our target marketsare businesses located in LMI tracts, disadvan-taged businesses, minority-owned and women-owned businesses, and worker ownershipopportunities.

We are making $100 million available over thenext four years, targeting business growth and

real estate development in our primary mar-kets in Massachusetts, Connecticut, RhodeIsland, and New Hampshire. This approachemphasizes equity investments in companiesthat provide jobs and services.

Our means of investment include businessequity, real estate development equity, jointventures, and investing through funds. We haveother products, such as low-income housing taxcredits and debt products.

BBDC strengthens the ability of urban com-munities to be active participants in thebroader regional and global economy. BBDC’s$100 million commitment is projected tostimulate an estimated one-half billion totaldollars of new financial resources in urbanareas. Our goal is to help transform and growcompanies, particularly those that are minor-ity or women-owned.

It is a three-pronged approach: capital, capac-ity, and access. First, BBDC targets companieswith sales in excess of $500,000 for directequity, provided they possess the potential forsignificant growth. Because of our decision onthese minimums, we are a later stage invest-ment company. We realized that we would bebest at creating wealth in communities, and wewere targeting mid-sized companies that hadsignificant growth potential. However, weaddressed start-ups and smaller companies byinvesting in funds.

Second, BBDC works in conjunction with theBankBoston line lenders to assist a broadspectrum of companies, whose credit needsrange from as little as $5,000 to as much as $5million. We fill the gap by providing debt thatoften works like equity.

Third, we help businesses overcome informa-tion and operational barriers that can hindergrowth and development. Sophisticated techni-cal assistance, business management training,networking opportunities, and other consultingservices are offered. We have developed andused a Spanish language one-page applicationto assist that market.

We look at 20 to 50 deals for each one weapprove. Someone mentioned that our lendersand equity folks must have a passion for thisbusiness, because it is a lot of work. The types

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of businesses range from construction develop-ers to flower shops. Our initial capitalization is$300,000, with an additional commitment up to$10 million.

In his strong support for this business,BankBoston Chairman Chad Gifford noted thatit presents a significant opportunity for thebank. We would not be successful if we did nothave the support of top management. He saidthat BBDC is viewed as a principal partner increating commerce, economic ownership, andjobs. We are managing for value.

There are many successes. On the equity side,we have eight approvals totaling almost $4million. We recently approved a direct equityinvestment to a minority-owned construction,management, and development company basedin Roxbury. They needed short-term equityfinancing to secure a surety bond to compete foran $8 million HUD demonstration dispositionconstruction project. BBDC approved an$800,000 equity infusion into the company. Wealso allocated up to $50,000 for technical assis-tance to create a long-term strategic focus forthis company.

Another example shows how we meet the needsof smaller businesses and start-up businesses.It is represented by our $500,000 investment inthe Boston Community Loan Fund. It would beimpossible for us to run a direct equity invest-ment business that invests amounts as low as$25,000 or $50,000. However, we are the largestinvestor in this loan fund and several otherfunds that address the needs for micro-equityand the significant hand-holding often neces-sary to nurture those businesses. With 10percent of our equity earmarked for those typesof funds, BBDC can be a partner’s partner.

We use our resources to do what we do best: togrow existing businesses significantly, while westrengthen the ability of local partners to investat the grassroots level.

We also provide low-income housing tax credits.A unique low-income housing tax credit part-nership resulted in a ribbon-cutting event lastweek when BBDC became sole partner in a 17-unit LMI housing project in New Hampshire.For the first time in that state, the generalpartnership joined a not-for-profit and the local

housing authority in an investment of$775,000. This innovative arrangement re-sulted in new housing for LMI families. Thelow-income housing tax credits averaged in thelow teens in returns. However, these are front-end weighted, which helps with the overallportfolio balance.

We use our resources to dowhat we do best: to growexisting businessessignificantly, while westrengthen the ability of localpartners to invest at thegrassroots level.

To date, we have made $27 million in newcommitments, which created more than 1,000units of new affordable housing. We also have aco-lending product in addition to a continuousevaluation process. We have made 13 co-loanstotaling $1.4 million with our line businesspartners, BankBoston.

An owner-occupant of a popular restaurant in alow-income neighborhood requested a $205,000loan at a bank branch to pay out an existing loanand obtain additional working capital. Theprevious year, the borrower was severely ill andfell behind in many personal obligations. Hiscredit bureau report did not look good. Althoughthe owner brought the existing loan current, hisbank demanded payment of the total amountfour months later. Our First Community Banklender capitalized on this opportunity to helpstabilize this customer. A BBDC co-loan wasused to bridge the gap on the 75 percent esti-mated market value and the request amount.This resulted in a First Community Bank seniordebt of $160,000 and a BBDC co-loan of $45,000subordinated for a total of $205,000. Today, thebusiness is doing well.

We cannot do our job without partnerships. Agood example is the South Hartford initiative, apartnership investing in small businesses inthat region. The partnership among our FirstCommunity Bank, the state of Connecticut, andthe SBA created a not-for-profit CDC. We workwith partners to leverage funds available to that

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CDC by the state. The CDC that can take ahigher risk portion of the loan joins the bank,which provides the lender origination andservice. We also were able to get the SBA toguarantee our portion of the loans. The result isthat we make available more money than thepartners could provide individually. This hasproven an interesting model. In its first fourmonths, the South Hartford initiative hascommitted $735,000 to four customers: arestaurant owner, two contractors, and a dis-tributor, customers to whom the bank would notlend ordinarily.

Another approach to finding effective ways tostrengthen businesses is the “Open for Busi-ness” program. To encourage economic changein one Boston neighborhood, we forged a part-nership to conduct seminars to help smallbusinesses sharpen their effective businesspractices. This initiative is unique, becauseour partners were a not-for-profit housingdevelopment organization; a Latino merchantsassociation, which provided the people attend-ing the sessions; the Latino Grocers Associa-tion; and a neighborhood agency that providedprograms and business development. Our smallgrant of $25,000 purchased a 20-week seminarthat graduated 17 small business owners. Theowners were instructed in finance, accounting,computers, taxes, cash flow, and dealing withbanks. Before the seminar, most of thoseowners had used minimal skills that they hadlearned in their native countries to run theirbusinesses. We believe this training has madea difference in inner city neighborhoods, par-ticularly for Latino businesses.

We have committed over $100,000 to conductthis training for the first four years. In less thantwo years, at the end of 1998, $90 million hasbeen made in commitments for the entire BBDCportfolio. On the debt side, we extended reservecredit at BankBoston to 100 small businessesand leveraged with the bank a total extension ofmore than $6 million in working capital.

We want to forge partnerships with others. Wehave a field study underway by students of theKennedy School of Government to gatherinformation and assist us in finding partners.Our current partnerships include the not-for-profit Community Enterprise Fund, the Boston

Community Loan Fund, low-income housingtax partnerships, and a HUD partnership.

We expect 25 percent to 30 percent returns anda seat on the board of the company when weexit in three to five years.

Our experience in meeting the needs of smallbusiness owners has been successful. It ben-efits community economic development andmeets new challenges. Our scenario for thefuture envisions other financial providersentering small business lending and sharingCRA responsibility.

Our own commitment exceeds CRA, becauseBankBoston wants to be a leader in communityeconomic development, and we are meetingour responsibility through example. We needinitiatives, such as low-income housing taxcredits, and economic development tax credits,to facilitate capital flow to the inner city.

That is where we stand today. We are con-stantly looking for ways to enlarge this busi-ness and to meet the needs of our inner citycommunity.

Gail Snowden is the group executive for the Com-munity Banking Group of BankBoston, a multistategroup that focuses on meeting basic banking andcredit needs of inner city residents and women-and minority-owned businesses throughout NewEngland. She directs product development, adver-tising, community development lending, construc-tion, financing, housing construction, and commer-cial loans. Last year, BankBoston was authorizedby the OCC to establish BankBoston DevelopmentCompany as a subsidiary of the bank. This is aninvestment bank for urban communities thatfocuses especially on venture capital.

Jerrold B. Carrington, General Partner, IN-ROADS, Inc.We formed INROADS almost four years ago toinvest in growing businesses, typically over-looked by private equity firms, particularlythose owned or operated by minority or femaleentrepreneurs. Our investors are primarilypension funds. The District of Columbia Retire-ment System is an investor, and three bankscontribute about 10 percent of the $50 millionfund. They are: LaSalle Bank, Northern Trust,

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and Bank One of Ohio. They were able to re-ceive CRA credit by investing in our firm, eventhough our investment focus is national. Theyhad to apply for that certification; they could notself-certify. In essence, we are the only privateequity fund in the United States that has thattype of regulatory approval.

We target small businesses for investment forsix reasons. First, small businesses comprisea growth engine in today’s economy. A tremen-dously large number of exciting and profitablegrowth products and services is provided bythose firms. Second, we face less competitionfrom other private equity firms and the lendingcommunity that generally target larger compa-nies. Third, many more investment opportuni-ties exist, because the small businessesoutnumber larger companies. Fourth and mostimportant is that less competition meanslower purchase prices. On average, we pay fourtimes earnings before interest and taxes(EBIT) compared with six to eight times EBITfor larger companies. Nonetheless, we believethat we possess the same quality of manage-ment. Fifth, it provides us with an opportunityto add value. The partners at INROADS havefinanced collectively more than 70 smallbusinesses. We are experienced in guiding acompany during its growth phase.

The sixth and final reason for targeting smallbusiness for investment is simple: profit. I amalways amazed by the number of investmentfirms that invest in ideas that are not profitable.

One would ask, how have banks participated inthe development of the small businesses, inwhich we have invested since 1985. The threebanks that have invested in INROADS haveprovided to our seven portfolio companies morethan $125 million in senior debts. One bankhas already recouped its entire investment infee income in only 18 months of a 10-yearpartnership. This does not include interestincome or the fees earned by providing relatedservices to our investments.

One bank has already recoupedits entire investment in feeincome in only 18 months of a10-year partnership.

Many of our companies never have seen thatlevel of bank support. For example, the ownerof a woman-owned company had requestedfrom her banker a $500,000 increase in hercredit line. The company was earning $20million in revenue and netting $2 million ayear. The bank refused. She came to us andsaid, “I must have an equity investment so Ican obtain this $500,000 credit line.” Wereplied, “We want to invest in your businessand make it a $100 million business.” Wecalled the senior officer of the bank and said,“We are prepared to invest $7.5 million dollarsof equity in this company, and we would likeyou to provide $15 million of debt instead of$500,000.” Needless to say, that investmentwas approved, and the company is happy withthat investment today.

The second way that banks participate is thatthey can market their fee-based services,which is important to all banks’ profitability asthey begin to increase their ROAs.

Third, and most importantly, they have gainedinsight about, and access to, a profitable, yet oftenoverlooked and misunderstood, customer base.

Banks can access this market profitably in fourways. It is excellent to invest in, and partnerwith, private equity firms with a demonstratedrecord of success in the small business market.Banks may earn high economic returns ontheir investment in that market throughcapital gains. There are three more importantreasons, however, for banks to gain access tothis market.

First, banks can secure a safer and moreefficiently deployed loan portfolio that has beenscreened rigorously by a private equity firm.This rigorous screening process provided byyour private equity partner to any investmentopportunity is valuable for banks.

Second, banks can focus on what they do best,which is lending money and providing relatedbanking services. It is a hassle to deal daily withentrepreneurs. Entrepreneurs need technicalsupport, company-building resources, and some-one with whom to talk. On average, we talk to ourcompany executives four to five times a week.This is impossible if you have a loan portfolio ofhundreds, perhaps thousands of companies.

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Third, banks also can receive CRA credit,subject to regulatory approval.

INROADS is committed to the small businessarea, because it is extremely profitable. We willraise our next fund this summer to focus onceagain on this area, and we will invest in, hope-fully, numerous new small businesses. Thistime, our target is $200 million instead of $50million. Many profitable opportunities are createdby focusing on what one does best and partneringwith people who know what they can do.

Jerrold Carrington is the co-founder and generalpartner of INROADS Capital Partners, a $50million private equity investment firm based inEvanston, Illinois, and authorized to operatenationwide. It is a small business equity pool, inwhich a national bank took the lead in participat-ing as a limited partner. INROADS provides growthand acquisition equity capital for small- andmedium-sized businesses. Its limited partnersinclude highly respected pension funds, banks,and many successful people.

Saunders Miller, Senior Policy Advisor, SBIC,SBAThe SBA has the Small Business InvestmentCompany Program, which has been almostinvisible to most banks. However, a knowledge-able group of banks has benefitted from theprogram for many years, some for almost fourdecades, and they have found it to be highlyprofitable.

SBICs are government-licensed venture capitalfirms that invest solely in small businesses. Forthe purpose of this program, a small business isdefined as one with $6 million or less of after-tax income and $18 million or less of net worth.SBICs derive many benefits through licensing.For banks, one of the primary benefits is anexemption to the Glass-Steagall Act, whichenables them to own voting equity in nonfinan-cial institutions that exceed the 5 percent limitotherwise imposed by the act.

Over the past 10 years, the banks that haveinvested in SBICs have earned an average 13.1percent return on investments, on realizedreturns; they have earned this return duringthe past two decades. This translates into 13.1percent over a 21-year period through manyeconomic cycles.

Rarely has one set of mandatory governmentregulations benefited another governmentprogram. That day has now arrived. All bankscan obtain CRA credit by meeting the financialneeds of your business communities and,simultaneously, earn high returns. This isaccomplished by investing in SBICs. As Dr.Pangloss said in Voltaire’s Candide, “This is thebest of all possible worlds.”

I have made an important discovery from myinvolvement in CRA during the past 12 monthslargely owing to the OCC’s Community Develop-ment director and division. For the past 25years, an entire body of lenders, investmentbankers, and state and municipal governments,working together with development companiesand neighborhood nonprofit organizations, haslearned how to layer various types of financingand tax benefits to achieve social goals thatmake financial sense in the area of housingand real estate development. This creativefinancial layering, however, only recently hasbegun to be applied to financing for smallbusinesses. One proven tool in almost fourdecades of use should now become more widelyavailable through the innovative financing ofthe SBIC program.

This program is a public-private partnership thatworks. It can be used for economically targetedinvestments. The huge California state pensionfund, CALPERS, invested in a California-targetedSBIC in Los Angeles where, in spite of the city’ssize, there is a dearth of equity venture capitalfor small businesses. In New York City, variousNew York City pension funds invested in a city-oriented, early-stage, high-tech SBIC. In Mary-land, the state made an investment in an SBICthat targets minority investing.

Although SBICs may be used for economicallytargeted investments, their primary motivationor goal still must be to earn fully risk-adjustedprofits, and any applicant receiving a licensemust have fully qualified venture management.We believe you do good by doing well.

The median size investment by all SBICs infiscal year 1997 was $150,000; for that subsetof bank SBICs, it was $430,000. Some SBICsare making $50,000 financings to laundromatsand to dry cleaners; others are funding multi-million dollar companies. Fifty percent of all

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financings are made to businesses less thanthree-years-old.

The majority of financings are equity invest-ments, consisting of debt with warrants, pre-ferred stock, or straight equity. The better-managed SBICs receive ROIs that exceed 20percent without risk of overall portfolio loss.

If an SBIC is managed properly, the goal of highreturns with acceptable risk should be fullyattainable. The key is “managed properly.”History tells us that the most successful SBICsare those run independently of the related bank.Commercial lenders are not venture capitalists.Bankers look at past performance and at makingloans based on cash flow, financial statements,and collateral. Venture capitalists look at futurepotential, and they make investments based onthe quality of management, because the finan-cial statements usually are weak. If the state-ments were not, commercial lenders wouldprovide all of the necessary financing.

To keep good SBIC managers, compensationmust be oriented to the long term. SBIC manag-ers are usually paid more than commercial loanofficers, and they do not fit into the compensa-tion structure of the parent bank.

Currently, 79 bank-dominated SBICs partici-pate in the program. All, but four, rely solely ontheir parent bank’s own capital to finance theirSBICs, because its cost of capital is lower thanthat obtained through the SBA. However, theprogram’s appeal for all nonbank SBICs and thefour exceptions is the ability to obtain up tothree times their private capital by borrowingfrom the public market at a rate of approxi-mately 175 basis points over the 10-year Trea-sury rate. The funds are backed by the full faithand credit guarantee of the U.S. government.

Leverage is the capital that comes throughpublic market financings. Two types of lever-age exist in the SBIC program. The traditionaltype of debenture leverage requires semian-nual interest payments and principal repay-ment at the end of the tenth year. A second,newer type was introduced in 1994. It is knownas “participating securities” and has a similarinterest rate spread, although dividend pay-ments are made only when an SBIC haspositive retained earnings. This enables an

SBIC to make long-term equity investmentswithout having to pay dividends before it haspositive cash flow. With participating securi-ties, the SBIC also gives SBA approximately 10percent of its profits. We are truly partners inyour SBIC.

For a profitable SBIC, its internal rate ofreturn can increase by 600 to 800 basispoints. The leverage, however, can cut bothways. If your ROI falls below about 11 percent,you would probably be better off without it.

In 38 years, SBICs have invested more than$17 billion through 113,000 financings. In fiscalyear 1997, there were 2,731 financings in 47states and the District of Columbia and PuertoRico. Interestingly, 90 percent of the funds thatwere invested had equity features. At the end offiscal year 1997, we had 300 licensees with$5.1 billion of private capital compared with$2.2 billion of private capital in 1993. The newprogram was implemented in 1994. Thatamount is more than a doubling of capital infour years. During this past four-year period,more new capital flowed into the program thanduring the prior 30 years. The program isdemonstrating its success.

At the end of 1997, bank-dominated SBICsrepresented 68 percent ($3.5 billion) of theprogram’s private capital. Clearly, both banksand private investors are demonstrating theirfaith in the future of the program.

The program has had many successes. InFortune Magazine’s 1996 list of the 100 fastest-growing businesses, 18 had received SBICfunding. Early examples included FederalExpress, Intel, Cray Research, and Apple Com-puter. More recent well-known examples ofpublic companies include America Online,Staples, Amgen, Callaway Golf, Microcom, andGymboree. However, most of the businessesfinanced are private, are much smaller, and donot grow to that size.

But it was not a smooth road from 1958 to thepresent. The program shrank during the1980s. There were $600 million of gross lever-age liquidations before recoveries that are nowrunning at approximately 60 percent. In 1990and 1991, the Senate held hearings to con-sider whether to eliminate the program. To

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deal with that issue, the SBA formed an in-vestment advisory committee composed ofventure capitalists who were not with SBICs.They found that the program was basicallysound, and that it had a high return to thetaxpayer. We would like to emphasize thatFederal Express or Intel pays more taxes in oneyear than the entire cost of the program sinceit began.

A number of identifiable problems existed,however. First, the program was plagued byinadequate management. Second, the capitalbase of most SBICs was too small to be economi-cally viable. Third, portfolio valuations wereperformed poorly, which led to inaccuratereporting and false credit evaluation by theSBA. Fourth, debt leverage was being used tofinance equity investments, causing a mis-match of funds flow. Those problems werecorrected by new legislation in 1992 and by newregulations finalized in 1994.

“Management, management, management”forms the core of our philosophy today as does“location, location, location” in real estateinvesting. Therefore, we admit only qualifiedmanagement. We have the philosophy of licens-ing hard and regulating rationally.

The current minimal capital requirements noware based on economic viability, which encom-passes the need for SBIC management to affordsufficient expenditures to perform adequate duediligence and continuing oversight. Thus, toobtain a participating securities license, aminimum of $10 million of private capital isrequired under most circumstances. Thisenables SBIC’s management to perform suffi-cient due diligence, oversight, and marketing.

Your biggest decision shouldnot be whether to invest, buthow much to invest.

For a debenture licensee who may make loansin a smaller geographic area, as little as $5million of private capital is sometimes suffi-cient. By law, however, only $3 million of pri-vate capital is required for a non-leveraged

bank-oriented licensee, because SBA is not atfinancial risk, and overhead often is absorbedby the bank. However, we do not recommendthis small an amount.

This is a great opportunity for bankers.

Your biggest decision should not be whether toinvest, but how much to invest. Your greatestchallenge is to find good management. Wewould suggest that you start by investing in aconsortium SBIC where outside fund managersare hired. You may ask, “Where do we find suchmanagers?” At the SBA, we cannot makespecific recommendations, but we can help youget started and point you in the right direction.You can call me at (202) 205-3646. SBA will beglad to help you get started.

Saunders Miller is a senior policy advisor for theSBA’s Small Business Investment Company Pro-gram. The program is designed to meet a marketneed for risk capital that is larger than that pro-vided customarily by some private investors and tofinance active small operating companies of a sizenot generally assisted by private venture capital-ists. Miller is responsible for the modernization ofthe SBIC Program, including its policies andregulations, and establishing a rigorous licensingprocess and other important initiatives.

Q and A SummaryA participant asked about the infrastructureappropriate to start an SBIC, i.e., if you require$5 to $10 million to capitalize one and it takesseveral years to invest the capital, the ROI willbe greatly reduced over a period of time sittingin money market accounts. Wojtowicz said thatlegally you can draw the money down over timeif you have firm commitments, which reducesthe idle fund drag that often occurs in the earlystage of funds. The minimum capital neces-sary for licensing and to continue to increasecapital also can be obtained. Since Cambridgewas licensed in 1991, it has continued to selladditional partnership units to increase thecapital base. Typically, venture fund partner-ships have a 10-year life, because that isexpected by the institutional investor, al-though a venture fund may have to exit aninvestment before reaching the company’sultimate top earning period. Cambridge en-gaged in a 15-year investment that gave it five

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years to leverage up and invest private capital— five years of active leveraging with SBA andother investors, and an additional five-yearperiod to begin harvesting those investments.Cambridge did not have to exit the investmentbefore reaching maximum return.

A participant asked about the type of overheadand management needed with an SBIC.Wojtowicz stated that Miller’s comments wereextremely important. As a venture fund, Cam-bridge looks first at management when makingan investment, and investors that invest inventure funds should look at the same. Asmaller SBIC can operate only in a sharedoverhead environment in which people on thefront-end review investments and, most impor-tantly, from which they may obtain the moneyeasily. It is much harder to add value and find anappropriate way to exit from those investments.

Another participant asked about the typical ROIand a predetermined amount of equity requiredfor an investment. Carrington responded thatINROADS generally looks for a return of aminimum of four times its money in a five-yearperiod. That equates to roughly a 38 percent or39 percent IRR. The minimum amount ofcapital required depends on how much capitalthe company will need over time, becausegrowth companies usually exhaust capital. Ingeneral, INROADS invests with partners, but itlikes to contribute up to $4 million over the lifeof the investment on equity.

Wojtowicz stated that the typical hurdle rate isat least a 35 percent annual compoundedreturn. If that is not possible, Cambridgeusually will contract it, because they knowthey will not always reach that percentage. Onthe amount of investment capital, Cambridgelooks at how much it will take to meet itsbusiness plan objectives; it will invest only if itcan keep one-half available for reinvestment.For example, if it will take $2 million, Cam-bridge will invest only $1 million on the front-end, knowing that it might have to reinvestaround $2 million or $3 million. A venture fundgets into deep trouble if it does not have thecapacity to return for rounds two and three. Atthat point, the fund has lost its negotiatingposition and can be diluted significantly in thenext rounds of financing.

The State of Small Business inAmerica

Aida Alvarez, administrator of the SBA, said inher presentation that the OCC and SBA aremoving in the same direction. The SBA isadvancing its ability to serve underservedcommunities and, at the same time, deliverservices in a cost-effective way. The SBA ispreparing itself and its small business custom-ers for the economy in the 21st century, whichwill be diverse, technologically driven, andglobal in scope.

Aida Alvarez, Administrator, SBAIt is a pleasure to be here today at this OCCconference on small business. As administra-tor of the SBA, I must applaud the efforts ofGene Ludwig. He has shown an outstandingcommitment to this topic during his five-yeartenure as the Comptroller of the Currency. Wecannot thank him enough for his work on thecredit availability program and leadership inthe CRA revision. After a five-year stint in anextraordinarily demanding job, Gene is lookingforward to a break in the private sector. I mustexpress some sadness because we will misshis leadership. He has made a great contribu-tion, has been a great Comptroller, and hasbeen good for the small business community.We can only hope that his successor will followin his footsteps.

The SBA and the OCC are moving in the samedirection. Gene mentioned my prior tenure asthe financial regulator of Fannie Mae andFreddie Mac, during which time he was a greatcolleague and helped me to think about doingthat job effectively. There was always a balanc-ing act between protecting the interests of thetaxpayer and ensuring that the entire countrywould be served by a thriving business commu-nity, that the business community would not beimpeded at the same time that we were lookingout for the taxpayer. At all times, we wereprotecting the public mission.

Let me reiterate. The SBA and OCC are movingvery much in the same direction. We are ad-vancing our ability to serve the underservedcommunities, while at the same time deliveringour services in a cost effective, sophisticated

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way, with an increasing reliance on our finan-cial intermediaries and private sector partners.

At the SBA, we are preparing ourselves and oursmall business customers for the 21st century.It is not only rhetoric, it is real, it is happening,and it takes some preparation.

The rapid changes in our economy give ussome indication of the shape of the futureeconomy if we do the right things. The economyin the 21st century will be more diverse, tech-nologically driven, and global in scope. Today, Iwill address the meaning of those changes forthe SBA, for the small business community,and for small business lending.

SBA’s principal objective is to create opportuni-ties for small business success. We achievethis objective for small business by supportingaccess to capital and credit by expanding federalprocurement opportunities, by providing a widerange of counseling and education programs,and by serving as its voice.

Last year, SBA provided record levels of loanguarantees, $10.9 billion, and record levels ofventure capital financing, $2.4 billion. Wesupported more than $40 billion in federalcontracts for small business and providedcounseling, training, educational services, andtechnical assistance to more than 1 millionsmall businesses.

SBA is already prepared for the 21st century.We are serving an increasingly diverse busi-ness population and have set in motion anumber of initiatives to increase our penetra-tion into rapidly growing markets of women-owned and minority-owned businesses. We areat the forefront of technology, serving smallbusinesses in smart, sophisticated ways andare well on our way to becoming a paperlessorganization. We are expanding our understand-ing of the global marketplace and increasingour ability to help small business find opportu-nities in the international arena.

SBA has changed and will continue to change,as the banking and financial community haschanged. I invite all of you to take another lookat SBA and join us in our mission of servingAmerica’s small businesses.

Our first challenge is to prepare for a morediverse America. The Census Bureau projectsthat by the year 2050, there will be no moreracial or ethnic majorities in America. It will,indeed, be a very diverse country.

The face of small business also is changingrapidly. Minority- and women-owned firms aregrowing faster than all other firms. The CensusBureau has found that minority-owned busi-nesses grew at a rate of 62 percent over the1987-1992 period. Women-owned firms grew ata rate of 43 percent, compared with 26 percentfor the overall population. I strongly believe thatthe SBA must be in the forefront of serving thosegrowing business communities. Simply put, itmakes good business sense.

SBA has already done a good job of increasinglending to its more diverse American businesscommunity. Since 1992, SBA has more thandoubled its loans to African Americans and toHispanic-owned firms and almost tripled lend-ing to women-owned firms. We have achievedthose levels of growth, while improving ourcredit quality. While increasing our lending tothose underserved communities, we havelowered our program’s cost to the government.That linkage is important. We can do both.

In 1992, we estimate that the cost to the gov-ernment was $4.85 for every $100 we guaran-teed through our 7(a) loan guarantee program.Contrast that to today’s cost, which has beenreduced to $1.39 for every $100 we guarantee.That is going in the right direction.

Women-owned firms grew at arate of 43 percent, comparedwith 26 percent for the overallpopulation.

Our record shows that loans to minority-ownedbusinesses and women-owned businesses aregood business. Nonetheless, we have muchfurther to go.

Although African Americans make up 12.6percent of the population, they own only 3.6

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percent of all businesses. Hispanic Americansmake up 10.3 percent of the population; theyown only 5.6 percent of all businesses. SBAwants to close this gap and increase minorityand women business ownership. We want toincrease our loans to this fast-growing sector ofthe population and see a huge need for coordi-nated economic and business developmentstrategies in other parts of the country.

SBA has launched a series of initiatives to do abetter job of serving those increasingly diversecommunities, and it extends everywhere frombuilding on goals. We have had goals for ourfield structure, our 69 district offices; thosedate from Erskine Bowles’ days. He introducedthem, and I am building on Erskine’s good ideaby establishing aggressive three-year overallgoals for all eight of the lending categories.These categories include African Americans,Hispanic Americans, Asian Americans, NativeAmericans, women, exports, rural, and veter-ans. Those are the categories where we arepushing the frontier. The entire agency, notonly our field offices, is being held accountablefor those goals.

I have announced a marketing and outreacheffort through which SBA is identifying newpartners to help us develop and improve rela-tionships in the minority and business com-munities. Last week, we signed a memoran-dum of understanding with a statewide organi-zation, the Texas-Mexican American Chamberof Commerce, composed of 27 chambers ofcommerce, 11,500 members. They will workwith us and with our lending partners to bringin more business. This is good business.Hopefully, we will find more customers in theHispanic American community through thosepartnerships.

We have learned a lot. We have had good meet-ings with our lenders and our trade associa-tions on what constitutes best practices toexpand lending to those diverse communities.We will continue that dialogue and make surethat our success is everyone’s success. Wehave learned a lot of lessons from CRA, andthere is more to be learned.

Finally, we are reviewing our products andpractices. Our Low Doc Program, for example, isa huge success. The idea behind the program is

to reduce our paperwork requirements to onepage for loans under $100,000. Since its intro-duction, SBA has guaranteed more than 72,000Low Doc loans, and it continues to serve thou-sands of small businesses.

SBA’s Low Doc Program is successful particu-larly in providing credit to underserved commu-nities. According to our Chief Counsel forAdvocacy, Jerry Glover, we have seen a phe-nomenal growth rate in private sector loansunder $100,000. Since SBA introduced theprogram, the stock of loans under $100,000 heldby private banks has grown from $97.6 billion in1994 to $112.2 billion last year. That is a growthof $14.6 billion in those smaller size loans. Thisis the real success of the Low Doc Program: wegave the private sector confidence that theseloans could be done efficiently, economically,and practicably. We showed the private sectorthe way.

The marketplace has changed. SBA’s Low DocProgram needs another look. John Gray is incharge of our Capital Access Financing Pro-gram. He and Jane Butler, Jim Hammersley,Jean Schater and others, are examining theLow Doc Program. They are thinking about waysto upgrade the program and make it morecompetitive in the marketplace.

Our fifth strategy for reaching the underservedbusiness community is to do a better job oflinking our capital and credit programs withour vast entrepreneurial development ser-vices. We have an enormous network of busi-ness education, counseling, and trainingprograms across the country. This network issomewhat of a secret to many of us in Wash-ington, although if you travel around thecountry as I do, you realize the presence andimportance of our 1,000 small business devel-opment centers, our 69 district offices, our 41business information centers, 60 women’sbusiness centers, 14 one-stop capital shops,and more than 13,000 retired executives whovolunteer their time to counsel small busi-nesses through our SCORE Program. It is adaunting presence.

The figures last year were impressive. Thenetwork provided counseling advice to about 1million entrepreneurs whether or not theyreceived an SBA guaranteed loan. We want to

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continue to open up our doors to small busi-nesses through counseling, and especially tothe underserved communities.

We have a prequalification program that issuccessful. It allows us and our intermediariesto help women and minorities work throughtheir business plans and loan applications. Bythe time they get to the bank, they alreadyhave an SBA guarantee attached to their loanapplication. It makes life a lot easier for thecustomer, the lender and the bank. I want toexpand that into a nationwide program.

We must use technology to access our customersdirectly. We have a great success story. OnJanuary 5 of this year, the Vice Presidentinaugurated our online Women’s BusinessCenter. It is free, interactive, and providesinformation on business development strategiesand SBA services. You need only to get online. Inthe few weeks since we inaugurated this site, ithas received more than 250,000 hits, which weestimate is at least 4,000 visitors per week andvisits from representatives of more than 45different countries. We now operate in an inter-national arena through the Internet. We helpmany people, not only our own citizens.

We have a new online product called PRONET.Today, we have a bank of 171,000 small busi-nesses on our PRONET, which links them withour federal contract procurement officers. Lastyear, we granted $40 billion in federal contractsto small business. That number is rising,probably to $46 billion, because we now haveincreased the set-aside for small business inthe federal government from 20 percent to 23percent of all federal contracting. PRONET is anunbelievable way for federal contracting officersto access small businesses and for small busi-nesses to access one another. The possibilitiesare endless. ACE-net is another way in whichwe use the Internet to link small firms thathave capital needs with equity investors.

Technology is important as SBA pursues itsmission. We also know that small businessesmust be technologically smart if they are goingto compete in the world economy. This will be amajor focus of my attention.

We already have 41 business informationcenters (BICs) that promote technological

sophistication among small businesses. Wehave had a partnership with the U.S. Chamberof Commerce and Microsoft to educate smallbusinesses on how they can be more sophisti-cated in their use of the Internet and all thetechnologies associated with the World WideWeb.

There also is the issue of the global economy,in which you can participate if you are techno-logically sophisticated. You cannot have onewithout the other, but do you know that smallbusinesses comprise 96 percent of all theexporters in this country? However, they arebringing in only 30 percent of the export rev-enues. The goal is to maintain that high in-volvement by small businesses and to allowthem to bring in more dollars by exporting.

We are working actively, and will continue to doso, with our lenders to expand the use of ourExport Working Capital Program, which is a 90percent guaranteed program. You cannot getmuch better than that, and we will introduce anew online risk management support system.We already have 19 U.S. Export AssistanceCenters, and we are entering into strategicbinational relationships that will promote jointventure exporting opportunities for smallbusinesses from our country and other nations.

Many good things are happening at the SBA. It isan exciting place to be. All of those good thingsare reflected in our fiscal year 1999 budget, whichis good news for America’s small businesses. Itoffers small businesses unprecedented levels ofcapital in credit; in total, $15.3 billion. Our fiscalyear 1999 budget proposes $11 billion for the 7(a)general business loan guarantee. It proposes $3billion for our 504 Economic Development Pro-gram, and we have been able to decrease fees inthe 504 program for the second straight year. Weare proposing $72 million in microlending, $60million for direct loans, and $12 million for loanguarantees, and we are requesting $1.1 billion forthe SBIC Program. All of these are the highestprogram levels ever achieved. The capital andcredit will help strengthen the small businesssector for the future.

We also have requested $112 million in train-ing and counseling funds, an 11 percent in-crease over fiscal year 1998. I am particularlypleased that the President has agreed to more

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than double our funding for the women’sbusiness centers. It is good news, because weare working on integrating counseling ser-vices with lending. That is really the key tosuccess. Overall, the budget request repre-sents only a 1 percent increase. What a bar-gain. We are able to achieve this because wehave been blessed with a wonderful economy,and we have done a great job of managing ourprograms better.

The subsidy rates that measure the costs to thegovernment for our programs continue todecrease. For the 7(a) program, we project thatthe subsidy rate will drop from 2.14 percent thisyear to 1.39 percent next year. We will keepworking on lowering that number. This is atribute to our management of credit risk andincreased attention to our servicing of theportfolio. One of my principal goals is to trans-form SBA into a 21st century leading-edgefinancial institution, one that delivers smart,innovative products to its customers and man-ages its risks to the highest standards.

SBA has improved its program management byrelying more on our private sector lendingpartners. For example, we have improved ourprocessing through our Preferred Lender Pro-gram (PLP). Under the PLP, lenders make thecredit decisions and undertake all of the liquida-tion and servicing of loans. SBA approves loansfor guarantees in less than 24 hours. PLP hasbeen successful, and that has made a funda-mental change in our business. In 1994, 16percent of our 7(a) loans were granted throughthe PLP program. Last year, more than 52 per-cent of our loans went through our PLP program.We are growing our programs while the cost tothe government is decreasing. Approximately400 lenders have qualified thus far as PLPs.

SBA continues to delegate responsibilities tothe private sector. Beginning this year, all ofour lenders will be required to service andliquidate our 7(a) loans. This fall, we will begina program of asset sales starting with a $150million sale.

We have been working hard to improve themanagement of the SBA, and it shows in theincreasingly efficient delivery of our services.We are providing better products at a lowercost to the taxpayer.

All of this is good news. I am confident that SBAis on the right track. Take another look at theSBA if you are not doing business with us. Takea look at our lending programs. Get involved inour community outreach efforts. Those activitieswill be good business. Link up with our districtoffices. Talk to our lending partners. Ask themwhat their experience has been. Talk to oursmall business development centers. Take alook at forming a bank-owned SBIC. I know thatSaunders Miller made a good presentation and agood case for our bank-owned SBIC program.Take another look at the SBA.

I would like to quote Gene Payne, who said thismorning that SBA is the most significant public-private partnership in the government. We aregetting smarter and more sophisticated everyday. Partner with us. Together, we can serve theincreasingly diverse small business community.Help us prepare the small business communityfor the technology-driven economy of the 21stcentury. Work with us to give our small businesscustomers opportunities in the global economy.At the SBA, we will show small business the wayto success into the 21st century.

Q and A SummaryAlvarez commented that SBA will review theFASTRAK (SBA Express) Program. The SBA islooking for ways to go beyond the pilot andexpand the program. She emphasized that it isa good program.

In response to a question on the prospects forworking with the proposed reduction in thesubsidy, Alvarez said that the SBA has gonefrom $9.2 billion in fiscal year 1998 to $11billion in fiscal year 1999. SBA works hard tokeep the subsidy rate low. Some of the improve-ments discussed in terms of partnering withthe private sector will continue to reduce thesubsidy. There is a direct relationship: thesmaller the subsidy, the greater the loancapacity.

Alvarez said that her comments did not addressa large portion of the SBA portfolio: the 8(a)contracting program. The SBA has regulationsthat will be published shortly that will stream-line the 8(a) process, the mentor protégé idea.SBA also will use nationally in pilot form anelectronic 8(a) application that will streamlinethat process. Recent legislation has created hub

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zones, another category of firms that will beinvolved in the procurement process. Thesefirms will be sole source contractors with pricepreferences, if they can demonstrate that theycan create jobs in these zones, which aresimilar to SBA’s empowerment zones. If thefirms can hire 35 percent of their employeesfrom a community having high unemployment,they become eligible for the same type of oppor-tunities as 8(a) companies. The procurementlandscape is becoming more interesting.

A participant wondered if SBA is planning anevaluation of its fee structure to differentiatebetween community bank lenders and largerbanks. Alvarez said that SBA is working on theissue. Alvarez also pointed out that SBA hasbeen focusing on ways to facilitate small bankentrance into the PLP.

What Are the Future Issues ofSmall Business and Banking andHow Should They BeAddressed?

Experts from banking, small business,academia/research, and securities marketsshared their innovations and visions for thesmall business and banking arena. The speak-ers explained how community banks can bestserve their customers in a competitive market-place; the benefits of capital access lendingprograms; ongoing problems in lending andborrowing from the small business perspective;and keys to understanding the minority smallbusiness market. Eugene A. Ludwig, formerComptroller of the Currency, OCC, moderatedthe session.

Dr. Emma C. Chappell, Chairman, Presidentand CEO, United Bank of PhiladelphiaMy comments today are predicated upon morethan a decade of research and personal experi-ence in developing — from scratch — a uniqueminority-controlled, commercial communitydevelopment bank. I sometimes subtitle it, “AThriller in Philly.”

Anchored in the cradle of American liberty —a scant block from the Liberty Bell — UnitedBank of Philadelphia is celebrating its sixth

anniversary and unprecedented growth froman idea to a more than a $113 million-asset,full-service, commercial and communitydevelopment bank. The bank has six branches,a 26 ATM network, strong asset quality, and a70 percent loan-to-deposit ratio. United Bankopened its doors in March 1992 and remainsthe only minority-controlled, full-service,commercial community bank within theGreater Philadelphia Region (Pennsylvania,South Jersey and Delaware — the nation’sfourth largest metropolitan area and fifthlargest city).

United Bank was born in the troubled decade ofthe 90’s, as many banks were leaving urbanneighborhoods and becoming megabanksthrough mergers. As a result, economic growthdeclined, businesses moved, and commercialareas deteriorated. Homes were boarded up andabandoned, because no one was putting invest-ment dollars back into the community. Crimeand drug traffic increased; resulting in despair,fear, and all-pervasive poverty. A 1987 surveyrevealed that the six major banks in Philadel-phia collectively invested $387 million inmortgage loans. Only $8 million of that loanmoney was granted to minorities and less than$2 million went directly to women of all races. A1995 survey conducted by the Rand Think Tankreported that banks, savings and loans, andcredit unions denied mortgage applicationsreceived from: 33.4 percent of African Ameri-cans; 31.6 percent of American Indians; 23percent of whites and 12 percent of Asians.

United Bank was founded to foster communitydevelopment by providing quality, personalizedcommercial banking products and services tobusinesses and people in the Greater Philadel-phia region, especially African Americans,Hispanics, Asians, and women. United Bankprovides innovative financial products and ser-vices within a primary market comprised of 111census tracts, in which more than 73 tracts arelow- to moderate-income; 28 tracts are moderateincome and only 10 are designated upper income.

United Bank has been rated “Outstanding” incommunity reinvestment by the Federal Re-serve Bank for each consecutive year of opera-tion — objective evidence of the bank’s abilityand commitment to fulfilling its mission.

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In May 1997, the U.S. Treasury Departmentcertified United Bank as a Community Develop-ment Financial Institution (CDFI) — the firstand only bank in the Commonwealth of Penn-sylvania to receive that designation. The U.S.Treasury also was awarded a $500,000 grant,matched with funds from the University ofPennsylvania, which will provide technicalassistance and education in the community.

The nonprofit Community Development Corpo-ration (CDC) affiliate of United Bank — Phila-delphia United — was founded in 1998. To-gether we seek aggressively to unleash privatecapital to motivate, rebuild, connect, and hu-manize economic development. This approachis grounded in education, advocacy, and a four-phased plan designed to increase significantly:

• Neighborhood revitalization.

• Minority business growth.

• Employment opportunities.

• Community stability and wealth.

Bold and innovative strategies — such as thosenow pioneered by United Bank of Philadelphia— are absolutely essential for economic stabil-ity and redevelopment in urban America tobecome a reality in the 21st century. Theaccomplishments of six ground breaking yearsof experience could serve as a national modelfor urban banking. This background of experi-ence should be enhanced by the followinggovernment and private industry incentives.

• Tax incentives — Provided to businessesdepositing in, partnering with, or borrowingfrom minority-controlled financial institu-tions engaged in community development.

• Low-interest government loans — Madeavailable to minority controlled institutions toestablish, maintain, or acquire branch facili-ties located in or serving predominantlyminority neighborhoods.

• Earnings credit — To be used by regulatorsin evaluating minority-controlled financialinstitutions. The appropriate federal regula-tor should add the cost incurred in providingcommunity services (e.g., the high cost ofmaintaining high transaction, low balance

accounts) to earnings. This process wouldallow the bank to be compared equitably toother institutions that are not deliveringcomparable social responsibilities.

• Community Reinvestment Act (CRA) —Expanded, so that participating (investing)institutions can receive continuing ratherthan one-time credits for capital infusions inminority banks based on the level of theirinvestment.

• Overhead expense ratio — Increased forminority banks that must provide greaterstaffing in servicing typically low-balanceaccounts.

• American Bankers Association’s “Minbanc”— Required to function as originally legis-lated, i.e., as a pool of funds collected frommajority banks that would be invested inminority banks.

Private sector support measures and initiativesthat should also be encouraged are:

• Capital infusion in minority banks helps toensure stability and growth. New capitalallows for expansion of branch networks,deposits, and loans. Non-cumulative pre-ferred stock investments would provideadditional equity without jeopardizing theminority status of those financial institu-tions. Investments also could improve finan-cial institutions’ CRA ratings.

• Grants to nonprofit CDFI’s (CommunityDevelopment Financial Institutions) affiliatedwith minority banks would expand educationand training services within the communityand provide much needed assistance to newhomeowners and entrepreneurs.

• Pro bono services would assist cost controlstrategies and ensure operational profitabilityof minority banks. The cost of operating aminority institution is higher than that fortraditional financial institutions, because ofhigh volume/low balance accounts and theneed to educate customers. Pro bono servicesenhance minority banks by increasing profit-ability and ultimately, shareholder value.

• Loan syndication for large corporationsprovides much needed loan activity for

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minority banks, generating loan interest, feeincome, and, ultimately, profitability. Minoritybanks have the ability, capacity, and desire tolead and/or facilitate loan syndication withother minority banks and can service thefacilities as well as majority banks.

• Large corporate deposits in minoritybanks help mitigate the cost effect of highvolume/low balance accounts that plaguethose banks and threaten their bottom-lines. Those deposits also provide growthand the ability to make more loans inurban communities. Major corporationsoften put large amounts in majority banks,but cap deposits in minority banks at$100,000 (the FDIC insurance limit). Sincemany minority banks are well capitalizedand stable, the risk of loss of deposits inexcess of insurance limits is no greaterthan that of majority banks.

Finally, I am most concerned about creating anew type of “social” fund to funnel investmentmoney into the small business community,similar to the socially conscious mutual funds.The fund could obtain credit or an incentivefrom the government in the initial phase. Asthe fund invests in small businesses, everyonewould benefit, because they would receive acertain return.

Dr. Emma Chappell is the founder, chairman, andpresident and CEO of United Bank of Philadel-phia, a full service, minority-owned and controlledcommercial bank. She has received more than 500prestigious awards and honorary doctoral degrees,including the Paradigm Award, the highest honorgiven to women business owners by the GreaterPhiladelphia Chamber of Commerce.

Michael R. James, Executive Vice President,Wells Fargo Bank, N.A.I am a credit guy at heart. I grew up doingtraditional lending. However, for the last eightyears that I have worked in Wells Fargo’s smallbusiness banking group, I have learned a lotabout credit scoring, behavioral scoring, and thenew generation of loan decision models that arebeginning to be used on much larger credits inthe United States.

I want to congratulate the Comptroller’s Officefor publishing data on where small business

loans are being made. Although this data doesnot tell us to whom these small business loansare being made, it does show the neighborhoodsbenefiting from the growth in small businesslending. Wells Fargo is the number one smallbusiness lender in low-income neighborhoodsin the United States today. We could not haveachieved this status without credit scoring.

I would like to focus my remarks today on theconcept of a national capital access lendingprogram — why we need this type of programand what it is.

Right now, times are good: the economy isgreat, loan losses are down, and bank earningshave attained record levels. Nevertheless, thereare clouds on the horizon. We are not reachingas many small businesses as we should. We donot have scalable lending programs that appealto the small, near bankable business.

I am concerned that during the next economicdownturn, and it will come, small businessescould face another credit crunch, much like theone we experienced in the early 1990s.

And finally, I am concerned about the riskassociated with credit scoring and lendingthrough alternative distribution channels.Many small business lenders have jumped onthis bandwagon, and I am not sure they under-stand how to manage and monitor this risk.

When we have an economic downturn, we maysee many lenders withdraw from the smallbusiness market. That would be a shame, givenwhat we have accomplished in the last fiveyears.

A national capital access, small businesslending program could help us in an economicdownturn. Also, such a program can help usreach businesses that are near bankable today.Capital access involves taking risk. It is abouttaking more loan losses than a traditional bankor even the SBA. Currently 20 state-sponsoredcapital access programs exist in the UnitedStates, one of which is the California capitalaccess loan program. This program allows oneto build a small business loan portfolio that hasa loss rate of 8 percent.

Here is how the program works. The loan lossreserve is funded by the bank through a portion

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of its future income stream on the loan. InCalifornia, it is 2 percent. The money is givento the state of California to create a reserve.The borrower, who does not qualify for tradi-tional bank credit, also pays a 2 percent fee intothat reserve. The state contributes 4 percent,creating a 8 percent loan loss reserve.

The reserve is lender-specific. The lender canaccess only the reserve — and this is important— to cover loan losses. If a business does nottake enough risk, it cannot use all of thereserve. If the business takes too much risk,the bank is responsible for any loan losses thatexceed 8 percent.

This type of program works, because it ismarket-driven. If a borrower qualifies for con-ventional financing, a bank will not enroll theborrower in the program, because it will losethe business to another competitor. I believelenders will use this type of program only whenno other way exists to make the loan, such asSBA or conventional bank financing.

Even though the capital access fees sound high,they are actually low versus factoring yourreceivables or some of the other ways you canfinance your business. Also, capital accessloans are less expensive than using venturecapital. As we learned today, little venturecapital lending occurs at the $25,000 loan level.

The second reason capital access programs areattractive is that they are easy to use. All typesof loans can be enrolled. In California, a one-page application is used to enroll the customerin the program. If you incur a loss, you canclaim your money from the state using a one-page claim form.

The capital access program gives the borrowertwo benefits: One is access to capital. The otheris that it eliminates third parties. The partici-pants are the borrower and the bank. The stateis not involved. The bank handles the loanapproval and the credit monitoring. In a work-out situation, the borrower deals with the bank.There is no third party. It really is the bank’sloan program.

The benefits of the programs to the bank aremany. Importantly, the capital access programhas a low transaction cost. Most government

loan programs are two to three times moreexpensive to administer than a conventionalbank loan. The offset to that is risk. You get aguarantee. The capital access program allowslenders to say “yes” to more borrowers, and itleverages public funds 25 to 1.

There are also benefits to the public. Besidesthe leverage of public funds, the governmentrisk is limited to 4 percent, versus a guaranteeof 50 percent to 80 percent. Although subsidyrates are lower in SBA right now, the SBA willsee larger loan losses in the future that willrequire higher subsidy rates. There is minimalgovernment overhead. One person runs thestate of California program. That is because thebank uses all of its own processes.

Another important benefit of the program isthat it teaches lenders how to take more risk. Iwould not suggest that anyone try to lendbillions of dollars through this type of program;however, I think one can learn how to structurea small business loan portfolio with higher thantraditional bank loss rates.

The program accrues additional benefits tothe banking industry. The most important oneis that lenders can take additional risk andthat allows them to make more loans. If youask small business people what they need,they will say access to capital and fewerhassles.

I would like to see a standardized national capitalaccess program across all markets instead ofdealing with the different state programs. Thiswould make the program even more efficient andprovide geographic risk diversification, which iscritical for portfolio insurance. That is what thisis: portfolio insurance.

Wells Fargo’s experience is relevant. We cur-rently participate in the California, Colorado,Oregon, Texas, and Utah capital access pro-grams. We are new to all those programs, exceptfor California. The California program started in1994; and through the end of 1997, Wells Fargohas made 1,400 loans, totaling $201 million inits program. This is $201 million in loans thatwe would have denied.

Our net loan losses in this program are $11.6million, which is 5.8 percent of commitments.

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We are on track in building a loan portfolio with8 percent loan losses.

I believe capital access could be an attractiveprogram to many small business lenders. Itshould be especially attractive to government,because it is elegantly designed to addressincreased credit risk at negligible administrativecost to either lenders or government partners.

Michael James is the executive vice president ofWells Fargo’s Business Banking Group in SanFrancisco. The Wells Fargo Business BankingGroup provides a wide range of products andservices to small business owners, including linesof credit and SBA loans. Mr. James has manyyears of experience in the commercial bankingarena and has served on numerous boards. WellsFargo has been a pioneer in the credit scoringapproach to small business lending.

William J. Dennis, Senior Research Fellow,National Federation of Independent BusinessFoundationI began in this business about 23 years ago,when I walked into my office at 490 L’EnfantPlaza East. For those of you who know the OCC,its address was also 490 L’Enfant Plaza East, fifthfloor or sixth floor. NFIB’s office was on the thirdfloor and I would sneak upstairs to use the OCClibrary. One day, I ran into someone from theOCC; we chatted and during the conversationdecided to conduct a conference on small busi-ness, perhaps on some unusual approaches tosmall business lending. Janice Booker was incharge of the conference, and we gathered in asmall OCC conference room. Only one personattending the meeting was from out of town, afellow by the name of Pete Hanson, from Califor-nia. He had developed the loan loss reserveprogram. Sixteen years later, the program wasadopted in California. Look at what we havetoday. What a contrast, and what a pleasant one.

From the small business perspective we livetoday in a golden age of lending or borrowing. Acouple of years ago, NFIB conducted one of itsperiodic studies, in which it asked the mem-bers to rank their business problems. Borrowingshort-term and borrowing long-term ranked64th and 65th on a list of 75. In other words, 63other issues were more important than lendingor borrowing money.

NFIB conducted other research. As late asDecember, it found that of those people inter-ested in borrowing, seven could get all of themoney they wanted for the one person whocould not, and that the one person who could notget all the money desired usually could get alarge share of what he or she wanted.

In Wells Fargo/NFIB study, we examined newbusinesses. Today, only 25 percent of thosebrand new businesses, not operating busi-nesses, say that capital is their primary prob-lem in starting that business; the rest point toother issues, such as marketing.

Right now, times are good. However, we shouldtake a longer perspective to identify the gaps inthe entire system. I have identified six gaps.

The first gap involves starts, particularly largerstarts or those of $100,000 or more. Clearly,there are problems with this group. The amountis too small for venture capital financing andtoo large for people to use their own resources.

The second gap is in rapidly growing busi-nesses. They are voracious consumers ofcapital. On the other hand, they are risky andtend to grow in a snake-like pattern or a sinecurve rather than in a straight line. Thatpattern makes lenders rightfully nervous.

We have business cycles. At some point, we aregoing to enter a recession, and it will changebalance sheets. When it changes balancesheets, it alters creditworthiness and, there-fore, the availability of credit.

We also go through transitions: mergers andother activities of that nature. Not too long ago,we also had certain regional problems, and theycan cause problems, too.

Then we have the marginal, the close call. Ifyou think of the turndown point as Point A on astraight line, the objective is to slide Point Atoward the turndown side. But there always willbe a turndown point.

Finally, we have the troubled businesses. Evenan advocate, such as myself, clearly recognizesthat some businesses exist, for which, unfortu-nately, bank credit or debt credit is not appropri-ate for either side.

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In the last few years, we have seen majorchanges. Credit scoring has been enormouslypositive. We have not heard much onsecuritization from the private side, but prob-ably we will. Large businesses are buyingcommercial paper. The international marketis rocky. Consumer credit is highly competi-tive. So what is left? You found small busi-ness, and found it was a marvelous market.We are appreciative.

From the small business owner’s perspective,there still are problems. Unfortunately, I havemore problems than solutions. A few of thoseproblems should be familiar.

The continuing restructuring of the industryis compounded by personnel practices withinmany banks, in which personnel changesconstantly, both within and among banks. Toa small business owner, this means a disrup-tion of the banking relationship, and thatmakes the customer unhappy. A surveyconducted several years ago, showed that alarge portion of the public was dissatisfiedwith banks that had merged, mostly becausethey disrupted the transition process. Thatsuggests that enormous tension is placed onthe transition, because most small busi-nesses that change banks are pushed awayfrom their old bank rather than attracted tothe new one.

The second point is that there will always be ahigh touch market (personal customer service).I am a great believer in credit scoring. It hasbeen marvelous for small business, but therewill always be a need for someone to offer morepersonal attention. I had a conversation aboutthis issue with two business owners thismorning. One owner thought she would like thehigh touch side; the other thought she wouldlike the high tech side. All of our surveys tell usthat customers want to know their banker andtheir banker to know them. The question iswhether they are willing to pay for it. Some arewilling, some are not.

The third point is technology. Last night, Iwalked into my son’s bedroom. He is 15, and Isaid, “What are you doing, son?” He was on thecomputer, and he replied, “Well, I am reallydoing this, Dad. It is really neat, I want to tellyou about it.” I sat down. I put on my wisest

look, and I listened for 10 minutes. As I waswalking out, I said, “Boy, son, that is reallyterrific. You did something really great.” WhenI got outside, I said to my wife, “I do not have aclue of what he was talking about. He lost mein the first 10 seconds.” The point is that atechnology revolution is going on. Who knowswhere it will take us? Small business ownersare trying to join. About 75 percent of theowners use computers in their businesses.Ninety percent of firms with 10 to 15 employ-ees have computers. Beyond that, virtuallyeveryone has them. However, only 20 percentof the firms have Internet connection. So thisis a learning process that has implications foreveryone in the banking business.

Think of something as simple as exporting,which most small businesses do not do today.But imagine when everyone is trading inter-nationally on the Internet. Think what thatmeans for the need for financial services.

Another issue is how we conduct transactionswithout collateral. To some extent, that questionhas been answered partially by those who arelending a lot based on personal characteristicsand personal record. However, we are becomingincreasingly a service economy where thoughtsand ideas are the value of the company. Theowner of those ideas is the owner of the company.

Moreover, we see what I had always thoughtwas an important source of collateral stagnatingin value: home ownership. This stagnationoccurs not necessarily in the number ofhomeowners, but rather in the value of theirhomes. The value of those homes is not risingquickly and will not be the source of the collat-eral that it has been.

Finally, we need to change the bankruptcy laws.I expect major legislation this year, or at leastproposed legislation. The increasing bankrupt-cies over the last few years cannot be sustainedin a good period. As a small business advocate, Iam on two sides of this issue. Clearly, smallbusiness will not receive money unless lenderscan be assured that the collateral they hold canbe repossessed, if necessary. However, a distin-guishing characteristic of the United States, asan entrepreneurial society, is the capacity tofail and to not be penalized so severely that itleaves the individual stigmatized and outside of

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the entire process. The balance now appears tolay in favor of the borrower/debtor.

We also need a continuing review of our subsidyprograms. By definition, government financeprograms are subsidy programs. That means wemust consistently ask, what is subsidized, howmuch, and why? Some of the answers may bepleasing, some may be troubling. However, theymust be asked.

Finally, the gap in funds needed sometimesmay be filled best by equity. The question ishow do we handle the problem or situation. Thismorning, this issue was discussed by a panel,which had some fascinating ideas on thesubject. Mike James talked about an entirelydifferent group of people and a different ap-proach to the situation, but clearly equity ispart of the answer.

One of the government’s most innovativeactivities is SBA’s ACE-net Program. For lackof better terminology, it is an Internet match-ing service between lenders and borrowers orbetween investors and business owners. It hasjust started. It will be a marvelous service, andthere is no reason why bank subsidiaries ofone kind or another cannot participate activelyin it.

William Dennis is currently senior researchfellow at the National Federation of IndependentBusiness Foundation, where his research activi-ties have focused on small business and publicpolicy. His most recent publication is “WellsFargo NFIB, Business Starts and Stops.” Mr.Dennis works actively with universities andorganizations that have a small business focusand has held numerous positions with thoseinstitutions.

Dr. Margaret C. Simms, Vice President forResearch, Joint Center for Political andEconomic StudiesI am not in the banking business, so I cannotgive you the detailed advice that some of theother speakers have; however, I would like todraw a slightly larger picture and return tosome of the themes that arose during theluncheon address.

During the speech, we heard from Administra-tor Alvarez about a number of demographic

changes that will have a much greater effect aswe move into the 21st century. Increasingly,the population will be diverse. We will see somegrowth in the African American population, andmuch more rapid growth in the Hispanic andAsian populations. Those changes have impli-cations for employment, product markets, andinvestment opportunities.

We often hear reference to Census Bureaunumbers on the growth in minority- andwomen-owned businesses. Those numbers onlyscratch the surface. I do not want to cast anynegatives on the way in which the CensusBureau calculates the numbers. They have themost comprehensive figures for minority- andwomen-owned businesses, but they do notinclude regular corporations. Subchapter Ccorporations are missing.

I would like to give you a sense of what thatmeans. A few years ago, the Joint Centerconducted a mail survey of firms at the highend of the minority business market. Thesurvey included about 500 to 600 firms sur-veyed by Black Enterprise, when it compiles itsBE-100, and firms in a number of state re-gional councils of the National Minority Sup-plier Development Council. In that survey,approximately 53 percent of the firms wereregular corporations. Although that does notindicate that you can double the CensusBureau number for a true sense of minoritybusinesses, it suggests that a whole world ofminority business exists about which we knowonly a little.

That knowledge is important for lending, be-cause you want to bet on sure things. Those arebusinesses that will continue to grow anddevelop, particularly minority businesses. Theymake large contributions to their communities,which many of you probably know because youare involved with minority businesses.

The Joint Center survey was conducted in partto look at the willingness of firms to recruit inlow-income neighborhoods. The differencebetween minority and nonminority firms interms of their willingness to recruit in thoseneighborhoods was astounding, even to thoseof us who entered into the program knowingthat these firms were much more likely toemploy minority workers. We are continuing to

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do research in that area, so that we can exam-ine further what makes some see people fromlow-income neighborhoods as good workers,when others seem to think that those workersare not the kind of people they want to hire.

How can we pick the ones that will be theequivalent of the BE-100 or at the top end oftheir market? I was reading in the businesssection of the Washington Post this week aboutNetwork Solutions. How many of you know thatNetwork Solutions used to be a black-ownedfirm? Here is someone who had the monopolyon assigning Internet addresses, a man whowas looking to the future. He had some assis-tance from the government, but the owner wassomeone who could take an idea on the cuttingedge, ahead of the curve, and work on it. He soldthe bulk of the business to move on to otherventures. We must find those people when theyare on the upswing, when they can really makea contribution. It is important, because both youand the community get a return.

When we look at the effect of minority firms onemployment and inner city development, wefind that the firm’s characteristics and nottheir location determines whether they hirepeople from the inner city.

Danny Boston, on the faculty at Georgia Techand one of my colleagues on the Black Enter-prise Board of Economists, is promoting an ideacalled 20 by 10. The idea consists of theconcept that, if in 10 years we can grow minor-ity businesses, in particular black-ownedbusinesses, by 20 percent each year, thosefirms can provide a significant amount ofemployment in communities that would other-wise have large unemployment. Boston hascompiled some national figures based onadjusting the Census Bureau numbers. Theresults are modest, but in terms of capital theinvestment will be significant. A few weeksago, he published an article in the AtlantaJournal Constitution on the concept for Atlantaand for Georgia. Boston has reinforced thefindings of the Joint Center on people em-ployed by those companies. He proposes toraise by 3 percentage points the growth rate forthose businesses. With that, you could affectthe community significantly; that means,however, that these firms will need the capitalto grow.

Finding the winners rather than the losersmakes a big difference. Nobody wants or wouldencourage you to invest in losers; identifyingthe winners is important. I would like topromote an idea that no one has offered so far,although it has been alluded to: investing inpeople. By investing in people, I mean thenext generation of bankers. When we look atthe demographics, the young population isemerging increasingly from non-white groups.Those are your workers of tomorrow. They arethe people who will make the connection, whowill be those high touch people at the firmsthat will make a real difference in our innercities and urban communities.

This concept is easier said than done, becausemany young people are in educational institu-tions that do not provide them with the kind offoundation that we would like to see. On onehand, you may be required to invest your time.In the long-run, however, the payback should bea good one. As we look at the banking industry,we must make available mentorships andapprenticeships for young people. A number ofcommunities are developing school-to-workprograms, in which young people at the highschool level combine classroom learning withwork-based learning. Because those programsproceed at different rates around the country, itis hard to talk about a typical school-to-workprogram. The programs often lack employerswilling to participate in developing curriculaand to provide opportunities for young people tolearn the work of a banker.

You should identify the right people and investin them, even if you do not pay them. Clearly,the most important cost to you is the time thatyou and your employees take to train, develop,encourage, and keep in touch with those peopleafter they have left your employ and move alongin their educational careers.

I receive great satisfaction from having my pastresearch assistants reappear in my life indifferent ways and at different ages; I might addthat a former student of mine is in the audi-ence. We talk about people who return, and attimes need help that is time consuming. Whenyou invest in them, however, you invest in animprovement in your industry. It is a specialcontribution to find those winners who will buildyour profits and your community.

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Dr. Margaret Simms is vice president for Re-search at the Joint Center for Political andEconomic Studies in Washington, D.C. She hasconducted research on minority business devel-opment issues for many years and has numerouspublications to her credit, including “Is the InnerCity Competitive?,” appearing in the Review ofBlack Political Economy. Dr. Simms has servedon the faculty of Atlanta University and theUniversity of California at Santa Cruz. She hasbeen a member of the Black Enterprise Board ofEconomists since 1987.

Paul L. Pryde, Jr., President, Capital AccessGroupSmall business credit problems are not prob-lems of money — they are problems of organi-zation. Credit delivery involves eight majorfunctions: marketing, product development,loan origination, loan underwriting, loanfunding, loan servicing, credit enhancement,and liquidity. In a well-organized market,people or organizations exist that perform eachof those eight functions well. In underservedmarkets, inner cities, small and minoritybusinesses, those functions are not performedadequately.

In a well-organized market, you have aggres-sive marketing. For example, many of youreceive 8 to 10 credit card solicitations fromvarious banks each month. In addition, a highdegree of product innovation exists in a well-organized market. In the mortgage market,there is a 125 percent loan-to-value loan. B&Cmortgages and other new products have beendeveloped to serve customers better.

Many people originate loans. There is creditscoring and disciplined underwriting. Numer-ous sources of funding are available for thoseloans as well as large and efficient servicingorganizations. Private mortgage insurancecompanies, credit supporters, and capitalmarkets provide liquidity.

Generally, none of those activities are takingplace in the inner city and other underservedmarkets. In two cities, we work to create apartnership that solves the organizationalproblem that inhibits the delivery of credit tosmall businesses. The partnership has fourprincipal participants: local government;

community development loan programs (CDFI’sfor short); commercial banks; and a specialpurpose “securitization” conduit.

As is true of any partnership, each participantshould do what that participant does best, iscomfortable doing, and needs to do to makemoney, if profit is part of the motivation. Wehave assigned each participant a role in each ofthe eight functions I mentioned earlier. Forexample, the city has no role in marketing,origination, underwriting, funding, or servicing,but has an approval role in product developmentto the extent that public money is being used.The city has a role only in credit support; it hasno role in funding or providing liquidity for loans.

Most city officials no longer make loans. Theyhave been in that business for a long time. Andnow, they want to get out of it. They want theprivate sector involved. This partnership struc-ture accommodates the inclusion of the privatesector. Private originators and private lenders,however, want the city government to take therisk that they are unwilling to take. This isrelevant to Mike James’ discussion of theCalifornia Capital Access Program.

The principal role of government is creditsupport. We have said to the banks: you canhelp design the marketing program. You havethe human and other technical resources tohelp design an aggressive marketing programto find borrowers. You can help in designing thepricing of a product.

I cannot emphasize too much the need todesign products appropriate to the market. Oneproblem in an economy increasingly comprisedof service businesses is that credit productsdependent upon large amounts of collateral andshort maturities will not work. You have todesign products appropriate to the borrowers.You do not want to be the only business thatsays the customer is always wrong.

Banks can play a role in origination, dependingupon their preferences. Some banks want tooriginate small loans, others do not. If we wantthe banks to fund credit lines to loan origina-tors, they must approve underwriting standards.Banks have large servicing capabilities in somecases. By contrast, banks provide no role incredit support.

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We put most of the emphasis on local commu-nity development loan funds, community devel-opment banks, and similar organizationscarrying out the program. Those organizationsoriginate and underwrite loans and advancefunds to borrowers. They can act assubservices, but they do not have the money toact as credit supporters or to provide liquidity inthe marketplace. Essentially, they find theborrowers, package the loans, make the loansin accordance with agreed upon underwritingstandards, and fund the loans.

My favorite part of this partnership is loansecuritization. We have asked a couple ofcities to create a “secondary market” organi-zation, using existing loan assets. This corpo-ration essentially buys loans from the origina-tors, packages them into securities, andresells the senior piece of the securities tothe banks.

With respect to CRA, they canmeet the investment test or thelending test, whichever testthey wish to meet.

Securitization transactions involve putting theloans in a pool or in a trust and dividing theminto two pieces. You have $10 million in loans.You divide the loans into two pieces, a seniorpiece and a junior piece. The senior piece has apriority on the cash flows of a pool of loans, andthe junior piece has subordinate interest. Wewant the banks to invest in the senior piece,and the conduit or someone else to hold thesubordinate interest. The result is a systemthat places the banks in three roles with whichthey may be comfortable: originating loans,funding loans, and investing in senior securi-ties. With respect to CRA, they can meet theinvestment test or the lending test, whichevertest they wish to meet.

In Miami and Atlanta, we are looking at exist-ing community development block grant loansto capitalize the secondary market vehicle. Thecities admit that some loans have not beenwell-managed. We are trying to improve theirmanagement, and we are going to sell those

loans. The city will place the money in thespecial purpose corporation. It is “found” moneyfor them. Once again, it will use the capital topurchase loans from the originating communitydevelopment bank. The special purpose corpora-tion or conduit will package those loans intosecurities and sell them to local banks.

As long as the pricing of loans is appropriateand the losses are not too severe, this pro-gram can replenish continually the amount oflending in that community. We call it ourperpetual credit machine, because you re-plenish continually the amount of capitalflowing through the system. There is plenty ofliquidity in the system. The bankers I knowdo not have problems with funding loans. Theyhave excess liquidity. They are looking forearning assets. That is their big problem.Investors come to us all the time since theResolution Trust Corporation closed. There isa huge appetite for new types of assets and noone to supply them. There is a huge amountof money looking for deals.

The partnership that seems to work has astructure that places the city or government inthe credit support role, assigning the origina-tion responsibility to competent organizationsthat exist in profusion in cities to originate andservice loans, and putting the banks in theposition of investor that funds credit lines to theoriginator. We have tested this in conceptualform, given banks in a few cities term sheets,and said, “Will you do this?” So far, we have hada good response.

Paul Pryde, Jr., is president of Capital AccessGroup, a limited liability company, a financialadvisory and consulting firm, specializing infinancial innovation for lenders in underservedmarkets. He has more than 25 years of economicdevelopment and finance experience. He is theauthor of several publications, including “BlackEntrepreneurs in America.” He also is a consult-ant to and a board member of several nationalpolicy development organizations. Most recently,Mr. Pryde has focused his energies on smallbusiness loan securitization.

Q and A SummaryMike James provided additional detail oncapital access programs, which exist in 20states. The program in Michigan was begun

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first in 1986 and is the largest. Most statesbegan those programs after the credit crunch ofthe late 1980s and early 1990s. The programsare relatively new. The second largest programis in California.

A participant asked James if the 2 percentreserve was passed on to the borrower andwhether the 8 percent reserve is a portfolioreserve, rather than a loan-specific reserve. Heresponded in the affirmative, noting that theborrower pays a 2 percent fee, and the bankpays 2 percent from its future income stream;the municipality pays 4 percent. He added thatthe reserve exists for the portfolio, not for thespecific borrower.

For credit scoring, James stated that capitalaccess is not a product, but rather a govern-ment enhancement of credit risk. The programcould be used on any type of loan, from a line ofcredit to a term loan or equipment loan to a realestate loan. He also stated that credit scoringallows one to standardize underwriting. Whenyou underwrite 1,000 loans at a certain score, acertain loss rate is expected. Credit scoringhelps determine the composition of an 8percent or a 4 percent loss portfolio. It allowsone to track the portfolio.

A participant asked about management of the useof the SBA Low Doc and FASTRAK Programs withthe capital asset role. James answered that peopleare learning how to use those different programs.Wells Fargo participates in only five access pro-grams, although it lends money in 50 states.FASTRAK exists in more states. At times, theycomplement each other. Both are relatively newprograms, and both have pluses and minuses.

Often relationship-building opportunities withsmall business borrowers can be lost whencommunity banks do not securitize loans. Aparticipant asked if the relationship can bepreserved. Chappell responded that it can bepreserved even after loans are securitized andsold. United Bank maintains the relationshipand sells other services to the customer. Manyof the customers do not see that United Bankassembles the portfolios and sells them in thesecondary market. Chappell also stated that theonly barrier to securitization by communitybanks is that the banks must build their feeincome as must other banks. It is even more

important for a smaller bank. SometimesUnited Bank does not obtain the pricing neededto make securitization cost effective, althoughsecuritization helps liquidity. United can sellthe loans and obtain new capital to make moreloans. In that way, United Bank continues toserve the community. Because communitybanks often have difficulty accumulatingdeposits in the face of the competition amonglarge banks, this is one way community bankscan leverage existing deposits and maintainliquidity.

Pryde responded that three problems of pricehave become evident in this area. One prob-lem is the opportunity cost for the investmentbanking community. The investment bankersdo not want to transact smaller deals withsmall community banks when it can transact$100 million credit card deals. The secondproblem of price is that the market does notexist at this time. We do mainly private place-ment deals. The market is not really efficient,and one may not get the desired pricing,although interest is increasing. The thirdproblem is that it is costly for a small bank totransact its first securitization deal. A smallbank may only want to use the securitizationprocess as a funding alternative, or when itwill improve the return on equity.

A participant asked Dennis if the consolidationof regional banks into super regional ones willaffect the efforts toward community develop-ment. Dennis said that it may not make a greatdifference. Over the long term, it will depend onthe leadership on both sides. The consolidationcan be a positive experience, if the leadership inthe larger firms and in the banks is inclined toconsider it a profitmaking activity, and one thatis worthy, workable, and useful. As a practicalmatter, there probably will be some downside.

Comptroller Ludwig asked Simms for her opinionon the small business environment today versus10 years ago. Simms responded it is a betterenvironment for a number of reasons. Onereason is that the overall economic growth isgenerating opportunities that allow those firmsto present themselves more favorably to lenders.It is not such a stretch for lenders to see thoseopportunities as profitable ones. Education orlearning has cast some minority firms in a morepositive light in the lending community, but a

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significant gap exists. The most recent numbersshow significant differences in the treatment ofminority entrepreneurs, who have the samecharacteristics as white ones.

Comptroller Ludwig asked panel members fortheir opinions on the need for governmentenhancements and education. Pryde stated thatgovernment credit support reduces the anxietyover inaccurate pricing. For example, all of themortgages being securitized and sold weregovernment guaranteed. People no longerneeded government guarantees after theybecame comfortable that they could price therisk accurately and knew exactly how a particu-lar type of asset would perform. The creditenhancement is a short-term need over aperiod of time. For certain types of loans, youwill not need any enhancement. The marketwill be efficient. Enhancement is a temporaryneed in the small business marketplace.

Simms stated that the question of whether agovernment role is defined, in part, by whetherone believes the market captures everythingnecessary in terms of the lending experience. Ifa social purpose or social benefit exists, onecould argue that the government may not haveto withdraw completely. The nature of thegovernment support might be different.

Dennis stated that the education function canbe built into the price of the loan, although thedelivery does not necessarily have to be per-formed by the bank. He said that he thoughtthat had been assumed, but is not necessarilytrue. In fact, he said the bank may not be thebest place to do it, since it is not usuallyequipped to perform that function. In a fewplaces there have been cooperative ventures.

James pointed out in terms of governmentsubsidy that when you are pricing for risk, notenough knowledge exists yet on how to do an 8percent loss portfolio. The data must be ob-tained. When that occurs, it can be priced.Technical assistance and education is a criticalissue. Chappell disagreed in some respects.She noted that she is a practitioner of thisentire piece. Small businesses cannot affordthe many services that they receive. Becausethey were not able to obtain financing for manyyears, the government could fund variousnonprofit groups to provide pre-mortgage coun-

seling and other activities. The CDCs providethat funding and so could CDFIs. Some CDCswould offer education and training, if they couldpay for it through a grant. It would be betterthan tacking it onto the loan, because thatmeans less money available to put into thebusinesses. Because many businesses arestart-up businesses that create new jobs, theless expenses involved, the safer and sounderwill be the business.

A participant asked Chappell if her bank isexperiencing such bullish returns as its coun-terparts at Wells Fargo. Chappell answered inthe negative. According to Chappell, the commu-nity must be educated on the importance ofdealing with minority banks. United Bank isspecific about its mission, which is returningthose dollars directly to the communities itserves. One of the greatest difficulties is thatminority banks typically have high transaction,low balance accounts. So United Bank musteducate the community, because once peopleenter the middle class or upper middle class,they do not see the importance of dealing withminority banks. United Bank was founded by3,000 shareholders, people who believed thatthey traditionally and historically had beenlocked out of the system. They had been redlinedand otherwise treated unfairly. They lined upand bought stock at $10 a share. Most sharehold-ers never owned stock, but they own stock inUnited Bank because they saw a need. It hasbeen difficult to tell the other part of the commu-nity that United Bank will be successful, ifpeople who have sizable accounts bring them tothe bank to balance the low balance, high trans-action accounts. It has been a delicate balance.United Bank’s returns are not as large as theyought to be, but there is a major improvement. Itall boils down to education and communication.

Comptroller Ludwig said that everyone canmake great strides from what was learned atthe forum. He emphasized that the OCC has setout on a mission to partner with banks andsmall business enterprises and associations, inparticular low- and moderate-income andminority organizations. And he said, that theOCC is in for the long haul. The OCC, hepointed out, will continue to deepen this part-nership and to foster this important area ofeconomic development in the nation’s economy.

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Appendixes

Appendix A —Forum Attendees List

Appendix B —Small Business References

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Attendees

Small Business Banking Issues Forum

Alabama

Craik DavisSenior Vice PresidentSouth Trust BankBirmingham, AL

California

Ezekiel Patten, Jr.PresidentPatten Energy Enterprises, Inc.Culver, CA

Deborah E. FrancoConsultantFar East National BankLos Angeles, CA

Marjorie GrantCertified Public AccountantM.R. Grant, CPALos Angeles, CA

Richard C. HartnackVice ChairmanUnion Bank of CaliforniaLos Angeles, CA

Carlton J. JenkinsPresident & CEOFounders National Bank of Los AngelesLos Angeles, CA

Robert B. OehlerPresident & CEOFar East National BankLos Angeles, CA

Wesley R. BufordChairman & FounderFreedom Card, Inc.Marina Del Ray, CA

Sharnia T. BufordPresident & Chief Executive OfficerFreedom Card, Inc.Marina Del Rey, CA

Len CantyChairmanNu Capital Access Group, LTDOakland, CA

Selma TaylorExecutive DirectorCalifornia Resources and TrainingOakland, CA

George E. WilliamsonPresident & Chief Executive OfficerCalifornia Economic Development Lending InitiativeOakland, CA

Frank GreeneManaging MemberNew Vista Capital, LLCPalo Alto, CA

Manny AlonzoAssistant Vice President, Branch ManagerMission National BankSan Francisco, CA

Michael JamesExecutive Vice PresidentWells Fargo Bank, N.A.San Francisco, CA

David JonesBusiness Development ManagerMission National BankSan Francisco, CA

Dominic VenturoVice President/ManagerCredit ProductsBank of America, NT & SASan Francisco, CA

Anita M. RobinsonPresident & CEOMission Community BankSan Luis Obispo, CA

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Colorado

Colleen SchwarzDirector of Commercial ProgramsColorado Housing and Finance AuthorityDenver, CO

Connecticut

Carl M. HarrisFirst Vice PresidentPeople’s BankBridgeport, CT

Martin J. GeitzPresidentFleet Community Development CorporationHartford, CT

Delaware

Stephen D. BriggsPersonal Banking OfficerMBNA America Bank, N.A.Wilmington, DE

Michael J. KelleyVice PresidentSunTrust Bank USAWilmington, DE

Joseph M. KoppDirectorU.S. Small Business AdministrationWilmington, DE

District of Columbia

Harry C. AlfordPresident/CEONational Black Chamber of CommerceWashington, DC

Jacquelyn C. AllenCommunity Development SpecialistCommunity Development DivisionOffice of the Comptroller of the CurrencyWashington, DC

Aida AlvarezAdministratorU.S. Small Business AdministrationWashington, DC

Lisa S. AndrewsDirector, Business & Public LiaisonU.S. Treasury DepartmentWashington, DC

Lloyd M. Arrington, Jr.PresidentColumbia Capital GroupWashington, DC

Sonia BarbaraManager, Public RelationsAmerican Bankers AssociationWashington, DC

Michael BarrDeputy Assistant SecretaryCommunity Development PolicyU.S. Department of TreasuryWashington, DC

Erica BatieInvestment AssociateColumbia Capital GroupWashington, DC

Haron BattleAssociate Legislative DirectorNational Association of CountiesWashington, DC

Larry BeardAssistant Deputy ComptrollerBank SupervisionOffice of the Comptroller of the CurrencyWashington, DC

Janice A. BookerDirectorCommunity Development DivisionOffice of the Comptroller of the CurrencyWashington, DC

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Raphael BosticEconomistFederal Reserve BoardWashington, DC

James L. BothwellDirectorOffice of PolicyFederal Housing Finance BoardWashington, DC

Joanne BuckProgram AdministratorBanking RelationsOffice of the Comptroller of the CurrencyWashington, DC

Liz ButlerSpecial Project ManagerNational Congress for CommunityEconomic Development

Washington, DC

Eileen CanningPressBNAWashington, DC

Barbara ChiapellaFederal Legislative RepresentativeAmerican Bankers AssociationWashington, DC

Don A. ChristensenAssociate Administrator for InvestmentsSmall Business AdministrationWashington, DC

Patricia CinelliManagerPublic RelationsAmerican Bankers AssociationWashington, DC

Donna ClarkeMarketing RepresentativeU.S. Department of Housing & Urban DevelopmentWashington, DC

Courtland CoxActing DirectorMinority Business Development AgencyWashington, DC

Glenda B. CrossDirectorMinority and Urban AffairsOffice of the Comptroller of the CurrencyWashington, DC

Donna DealeManagerSupervision PolicyOffice of Thrift SupervisionWashington, DC

William J. DennisSenior Research FellowNational Federation of Independent BusinessEducation FoundationWashington, DC

Camille DickersonSecretaryLegislative and Regulatory Activities DivisionOffice of the Comptroller of the CurrencyWashington, DC

Bles P. DonesAssociate DirectorProfessional Development GroupAmerican Bankers AssociationWashington, DC

Diane DoriusOffice of PolicyFederal Housing Finance BoardWashington, DC

Kerry EarlyFederal Legislative RepresentativeAmerican Bankers AssociationWashington, DC

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Diane FeeneyBanking Relations AnalystBanking Relations DivisionOffice of the Comptroller of the CurrencyWashington, DC

Allen FishbeinGeneral CounselCenter for Community ChangeWashington, DC

Arthur A. FletcherChairmanNational Black Chamber of Commerce, Inc.Washington, DC

Patricia ForbesMinority Staff Director and Chief CounselU.S. Senate Committee on Small BusinessWashington, DC

Scott FrameFinancial EconomistU.S. Treasury DepartmentWashington, DC

Rudy FuentesSenior Advisor to the DirectorMinority Business Development AgencyU.S. Department of CommerceWashington, DC

Shirley GaliberExecutive DirectorHealth Quest Foundation, Inc.Washington, DC

Harvey Gantz, Jr.Program Coordinator for Community RelationsOffice of the Comptroller of CurrencyWashington, DC

Cynthia A. GlassmanDirectorCommercial Bank Risk ManagementErnst & Young, LLPWashington, DC

Myrtle R. GomezPresidentNursing Enterprise, Inc.Washington, DC

Caffin GordonComplaints ManagerEqual Employment ProgramsOffice of the Comptroller of the CurrencyWashington, DC

Bill GrantDirector for Banking RelationsOffice of the Comptroller of the CurrencyWashington, DC

Don GravesDirector, Washington OfficeONEWashington, DC

Houston E. GraySupervisory Economic Development SpecialistU.S. Small Business AdministrationWashington, DC

Barbara GrunkemeyerCredit Risk ExpertOffice of the Comptroller of the CurrencyWashington, DC

Kendra L. GunterBusiness RecruiterENCORE Management CorporationWashington, DC

Carlos E. GuzmanVice PresidentCommunity Development LendingFirst National Bank of MarylandWashington, DC

James W. HammersleyDirectorSecondary Market SalesU.S. Small Business AdministrationWashington, DC

Cordell HarrisNational Bank ExaminerCommunity Development DivisionOffice of the Comptroller of the CurrencyWashington, DC

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B. Garfield HaynesAttorneyPena & Associates, P.C.Washington, DC

Lisa J. HemphillSecretaryCommunity Development DivisionOffice of the Comptroller of the CurrencyWashington, DC

Christina HinesDirector of OperationsAccion InternationalWashington, DC

C. Howie Hodges, IIRegional Vice PresidentCommunity Development DivisionBank of America, FSBWashington, DC

Tawanda S. HudgeSenior SecretaryCommunity Development DivisionOffice of the Comptroller of the CurrencyWashington, DC

Anita G. JacksonBusiness RecruiterENCORE Management CorporationWashington, DC

Robin Y. JacksonLobbyistIndependent Bankers AssociationWashington, DC

David B. JacobsohnEsquireVerner, Liepfert,, Bernhard, McPherson and HandWashington, DC

Roberta L. JohnsonNational Bank ExaminerNortheastern DistrictOffice of the Comptroller of the CurrencyWashington, DC

Sandra JowersCEOSandy Jowers and AssociatesWashington, DC

Bud KanitzDirectorCommunity RelationsOffice of the Comptroller of the CurrencyWashington, DC

Judith KnightDirectorCenter for Community DevelopmentAmerican Bankers AssociationWashington, DC

Nick LambrownVice President & DirectorSmall Business LendingFirst National Bank of MarylandWashington, DC

Susan C. LeeBoard MemberCongressional Asian Pacific AmericanCaucus InstituteWashington, DC

Veronica LeeAccounting TechnicianOffice of the Comptroller of the CurrencyWashington, DC

Robert C. LelandVice PresidentNational Congress for Community Economic DevelopmentWashington, DC

Chris LewisSpecial Advisor for External RelationsOffice of the Comptroller of the CurrencyWashington, DC

Alex LichtensteinConference SpecialistOffice of the Comptroller of the CurrencyWashington, DC

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Lillian M. LongProgram CoordinatorCommunity Development DivisionOffice of the Comptroller of the CurrencyWashington, DC

Eugene A. LudwigComptrollerOffice of the Comptroller of the CurrencyWashington, DC

Bill MagriniSenior Project ManagerOffice of Thrift SupervisionWashington, DC

Sheila F. MaithDirector of Federal PolicyLocal Initiatives Support CorporationWashington, DC

Alex McElroyPressBNAWashington, DC

Yvonne McIntireSenior AttorneyCommunity and Consumer LawOffice of the Comptroller of the CurrencyWashington, DC

Gregory J. MelansonVice PresidentCommunity Lending GroupNationsBankWashington, DC

Saunders MillerSenior Policy AdvisorU.S. Small Business AdministrationWashington, DC

Deric A. MimsVice PresidentSmall Business Resource CenterCrestar BankWashington, DC

Alfred T. MitchellCommunity Development SpecialistCommunity Development DivisionOffice of the Comptroller of the CurrencyWashington, DC

Lucinia MundyCommunity Affairs SpecialistFederal Reserve BoardWashington, DC

Sean NarayanDirector of ProgramsNational Association of Development OrganizationsWashington, DC

Stanley NewmanAssociate Director for Community DevelopmentFederal Housing Finance BoardWashington, DC

Margaret NilsonFinancial EconomistU.S. Treasury DepartmentWashington, DC

Bobbie Jean NorrisNational CoordinatorCommunity Affairs ReinvestmentFederal Deposit Insurance CorporationWashington, DC

Valerie R. O’BrianAttorneyU.S. Department of JusticeWashington, DC

Lois S. O’ConnorAssociate DirectorResearch DevelopmentThe George Washington School of Business & Public ManagementWashington, DC

Charles OuSenior EconomistU.S. Small Business AdministrationWashington, DC

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Julie PallerSenior Financial AnalystFederal Housing Finance BoardWashington, DC

Scott ParkEditorRegulatory Compliance WatchWashington, DC

Gloria ParkerSecretaryOffice of the Comptroller of the CurrencyWashington, DC

Eduardo Pena, Jr.Past National PresidentLeague of United Latin American CitizensWashington, DC

Brenda PowellMarketing DirectorHealth Quest Foundation, Inc.Washington, DC

Judith RichardPresidentRichards Development CompanyWashington, DC

Larry RiedmanFair Lending SpecialistCommunity & Consumer PolicyOffice of the Comptroller of the CurrencyWashington, DC

Benson RobertsVice President for PolicyLISCWashington, DC

Andrea L. RobinsonVice PresidentCredit AdministrationCrestar BankWashington, DC

Ken RogersPresidentIdeal Electronic Security CompanyWashington, DC

Darren V. RomanAssociateKatten Muchin & ZavisWashington, DC

Tedd RussellChief Financial OfficerAmerican Home Owner Education and Counseling InstituteWashington, DC

Kaye E. SavageDeputy SuperintendentOffice of Banking & Financial InstitutionsWashington, DC

Richard ShackAccountantOffice of the Chief AccountantOffice of the Comptroller of the CurrencyWashington, DC

Joshua SilverVice President of ResearchNational Community Reinvestment CoalitionWashington, DC

Russell D. SimmonsSenior Vice President & DirectorBusiness Community DevelopmentRiggs Bank, N.A.Washington, DC

Margaret C. SimmsVice President for ResearchJoint Center for Political and Economic StudiesWashington, DC

Lawrence SmithPresidentNational Settlements, Inc.Washington, DC

Janis SmithSenior Public Affairs SpecialistPress RelationsOffice of the Comptroller of the CurrencyWashington, DC

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John SowerPrincipalMezzanine Capital Management, Inc.Washington, DC

Herbert L. SpiraTax CounselIndependent Bankers Association of AmericaWashington, DC

Lisa StanleyDeputy DirectorOffice of Policy DevelopmentFederal Deposit Insurance CorporationWashington, DC

Theresa StarkProject ManagerCompliance PolicyOffice of Thrift SupervisionWashington, DC

Corlis StevesonSecretarySecurities & Corporate Practices DivisionOffice of the Comptroller of the CurrencyWashington, DC

Terry L. StrongActing DirectorHoward University Small Business Development CenterWashington, DC

John E. TaylorPresident & CEONational Community Development Reinvestment CoalitionWashington, DC

Sandra ThompsonAssistant DirectorFederal Deposit Insurance CorporationWashington, DC

Roger ThompsonDeputy EditorNation’s BusinessWashington, DC

Mary ThorpeVice PresidentFederal RelationsThe Money StoreWashington, DC

Karen TuckerNational Bank ExaminerCommunity and Consumer PolicyOffice of the Comptroller of the CurrencyWashington, DC

Dionne WalshSecretaryPress Relations DivisionOffice of the Comptroller of the CurrencyWashington, DC

Dayton J. WatkinsAdministratorUSDA, Rural Business Cooperative ServiceWashington, DC

Sonja L. WhiteNational Community Affairs CoordinatorOffice of Thrift SupervisionWashington, DC

Woody WidrowAssociate DirectorNational Association of Affordable Housing LendersWashington, DC

Cora H. WilliamsPresidentIdeal Electronic Security CompanyWashington, DC

Julie L. WilliamsChief CounselOffice of Chief CounselOffice of the Comptroller of the CurrencyWashington, DC

Pamela WilliamsAssociate National Bank ExaminerOffice of the Comptroller of the CurrencyWashington, DC

59

Roberta YoumansProgram AnalystFederal Housing Finance BoardWashington, DC

Maurice F. ZeitlerProgram CoordinatorCommunity Development DivisionOffice of the Comptroller of the CurrencyWashington, DC

Thomas E. ZemkeDeputy to the Director of the FDICOffice of the Comptroller of the CurrencyWashington, DC

Florida

James CarrasPresidentCarras Community InvestmentFort Lauderdale, FL

Corey J. CoughlinPresident/CEO1st National Bank of Central FloridaLongwood, FL

Bridget EllisBusiness Development OfficerBlack Business Investment FundOrlando, FL

Georgia

Michael EmbryBusiness Development CoordinatorNAACPAtlanta, GA

Robert T. GoffManaging MemberSoutheast Capital Associates, LLCAtlanta, GA

Charles H. GreenManaging MemberSoutheast Capital Associates, LLCAtlanta, GA

Nancy Gresham-JonesCRD Specialist, Southeastern DistrictOffice of the Comptroller of the CurrencyAtlanta, GA

Pamela J. HubbySenior Vice President, Small BusinessNationsBank, N.A.Atlanta, GA

Karol KlimCRD Specialist, Southeastern DistrictOffice of the Comptroller of the CurrencyAtlanta, GA

Illinois

Fred AlfordPresidentFirst Midwest Bank, N.A. Buffalo GroveBuffalo Grove, IL

Frances R. GrossmanPresidentCommunity Development CorporationBank of AmericaChicago, IL

Anke KoningPartnerThe Koncar GroupChicago, IL

Bert A. OttoDeputy ComptrollerCentral DistrictOffice of the Comptroller of the CurrencyChicago, IL

Sherrie L. RhineConsumer Issues Research ManagerFederal Reserve Bank of ChicagoChicago, IL

Jonathan RohdeVice PresidentHarris Trust & Savings BankChicago, IL

60

Liz RyanHousing StaffNational Training & Information CenterChicago, IL

David TaylorExecutive Vice PresidentBank Administration InstituteChicago, IL

David VedaRegional DirectorMinority Business Development AgencyU.S. Department of CommerceChicago, IL

Gary S. WashingtonSenior Vice PresidentLaSalle National BankChicago, IL

Mary T. WhiteSenior Vice PresidentBank of AmericaChicago, IL

Jerrold B. CarringtonGeneral PartnerINROADS Capital PartnersEvanston, IL

Thomas J. DohertyFirst Vice PresidentLaSalle Bank, N.A.Skokie, IL

Joseph KirkeengSenior Vice PresidentCole Taylor BankSkokie, IL

Michael A. CullenPresidentThe National Bank and Trust Company of SycamoreSycamore, IL

Indiana

Jean L. WojtowiczPresidentThe Cambridge Capital Management CorporationIndianapolis, IN

Kansas

Ralph LenoPresident and CEOGardner National BankGardner, KS

Louisiana

LaVerne KilzoreBusiness Development Center DirectorJefferson Housing FoundationHarvey, LA

David L. MajkowskiVice PresidentCompliance/Loan ReviewMidSouth National BankLafayette, LA

Robert K. KottlerSenior Vice PresidentHibernia National BankMetairie, LA

Vaughn R. FauriaExecutive DirectorNewcorp Business Assistance CenterNew Orleans, LA

Claudia R. PlummerOwnerClaudia’s Career ApparelNew Orleans, LA

James M. WhalenVice PresidentWhitney National BankNew Orleans, LA

Diedria B. WoodenPresident & CEOTopp Knotch IndustriesNew Orleans, LA

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Maryland

Jeffrey S. ArmigerSenior Vice PresidentBusiness BankingAnnapolis National BankAnnapolis, MD

Barry D. BlumbergSenior Vice PresidentNationsBankBaltimore, MD

Frank C. Bonaventure, Jr.EsquireOber, Kaler, Grimes & ShriverBaltimore, MD

Timothy C. ElliottVice PresidentFirst National Bank of MarylandBaltimore, MD

Kenneth N. OliverSenior Vice PresidentDevelopment Credit Fund, Inc.Baltimore, MD

Mercedes RodriquezDirectorYouth InvestmentThe Development Training InstituteBaltimore, MD

Lehr SordenBusiness Development CoordinatorNAACP-National OfficeBaltimore, MD

R. Eugene TaylorPresidentMid-Atlantic Banking GroupNationsBank, N.A.Baltimore, MD

Patricia JohnCoordinatorUSDA Rural Information CenterBeltsville, MD

Robert G. SnyderBusiness Development ConsultantBusiness Consultant ServicesBethesda, MD

Lynn R. WhitesideExecutive DirectorSocial CompactChevy Chase, MD

Veronica M. ClevelandVice PresidentFarmers & Mechanics National BankFrederick, MD

Wayne F. FoxSenior Vice PresidentFarmers & Mechanics National BankFrederick, MD

Denise GaitherCommercial Loan OfficerFCNB BankFrederick, MD

David R. StaufferExecutive Vice PresidentFarmers & Mechanics National BankFrederick, MD

Kathy M. WaltersSenior Commercial Loan OfficerFCNB BankFrederick, MD

Jan W. ClarkPresident/CEOCounty National BankGlen Burnie, MD

Sujapa RoyPresidentJanux GroupLandover, MD

Leonard GrayAssistant Vice President1st National Bank of St. Mary’sLeonardtown, MD

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Nicole JacksonEditorCredit Risk Management ReportPotomac, MD

Thomas A. WrightVice PresidentThe National Bank of Rising SunRising Sun, MD

Daniel P. ReaseExecutive DirectorMontgomery County Bankers’ Small Business Loan FundRockville, MD

Michael A. HairstonOwnerMichael Hairston Fine Art & Custom FramingSilver Spring, MD

Dorothy L. HairstonOwnerMichael Hairston Fine Art & Custom FramingSilver Spring, MD

Ernest HairstonOwnerMichael Hairston Fine Art & Custom FramingSilver Spring, MD

Diane McElrathAdministrative AssistantSpecial Care Health SpaSilver Spring, MD

Marilyn DawsonCEOSpecial Care Health SpaSilver Spring, MD

Robert G. Holmes, Jr.Vice PresidentUnion National BankWestminster, MD

Massachusetts

Marcus V. AlstonAssociate CounselBankBoston, N.A.Boston, MA

James T. DaleyPrincipalPCI Services, Inc.Boston, MA

Juan J. EvertezeProject DirectorTrotter Institute, University of MassachusettsBoston, MA

Faith KalaskiSenior CounselBankBoston, N.A.Boston, MA

Sarah C. LincolnDirectorCommercial LendingBankBoston, N.A.Boston, MA

Renee T. SimmsVice President, Emerging MarketsBankBoston, N.A.Boston, MA

Gail SnowdenGroup ExecutiveCommunity Banking GroupBankBoston, N.A.Boston, MA

Carol HoleyDirectorBankBoston First Community BankDorchester, MA

James A. LangwayPresident & CEOCommunity National BankHudson, MA

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Michigan

James BernackiFirst Vice PresidentCommercial BankDetroit, MI

Harry J. FordManager, Community AffairsFederal Reserve Bank of ChicagoDetroit, MI

Electra FulbrightDeputy DirectorU.S. Department of Commerce - Detroit MBOCDetroit, MI

Ronald R. ReedArea DirectorNortheast Business Financial ServicesMichigan National BankFarmington Hills, MI

Minnesota

Jerry E. GrayExecutive Vice President, Regional Manager of Twin Cities Business BankingNorwest BankMinneapolis, MN

Missouri

Samuel D. KaplanVice PresidentBusiness & Professional Credit AcquisitionsCitibankBallwin, MO

George K. PhilipsPresidentPhilips & Associates, Inc.Ballwin, MO

Mitchell P. BadenPresidentMercantile Bank of St. LouisClayton, MO

New Jersey

Sy HendersonVice PresidentSummit BankDayton, NJ

Christopher L. DavisAttorneyPepper Hamilton & SheetzJersey City, NJ

Stephen M. LaneSenior Vice PresidentFirst UnionSummit, NJ

Garret G. NieuwenhuisSenior Vice PresidentValley National BankWayne, NJ

New York

Thomas C. CrowleyExecutive Vice PresidentEvergreen Bancorp, Inc.Glen Falls, NY

John C. VanWormerPresident & CEOFirst National Bank of the Hudson ValleyLaGrangeville, NY

Ted CohenVice PresidentCitibankLong Island City, NY

Benny JosephSenior Vice PresidentFleet Community Development CorporationMelville, NY

Nia RockVice PresidentCRA Fair Lending DirectorLong Island Savings BankCorpMelville, NY

64

Margaret AgostinoNational Bank ExaminerNortheastern DistrictOffice of the Comptroller of the CurrencyNew York, NY

Elizabeth R. CribbsEconomic Development SpecialistRepublic National BankNew York, NY

Sheila J. DanielsProgram OfficerLocal Initiatives Support CorporationNew York, NY

Heyward B. DavenportRegional DirectorU.S. Department of Commerce, MBDANew York, NY

Kenneth W. JanosickVice PresidentThe Chase Manhattan BankNew York, NY

Denise Kirk-MurrayCRD SpecialistNortheastern DistrictOffice of the Comptroller of the CurrencyNew York, NY

Shirley MiddletonExecutive DirectorBridge The GapNew York, NY

Rod MonteroVice PresidentCitibankNew York, NY

Florence M. RicePresidentHarlem Consumer Education Council, Inc.New York, NY

Ruth SalzmanExecutive Vice PresidentChase Community Development CorporationNew York, NY

Peter M. WilliamsDirectorHousing and Community Economic DevelopmentNational Urban LeagueNew York, NY

Mark A. WillisPresidentChase Community Development GroupNew York, NY

Steve O’BrienNational Bank ExaminerNortheastern DistrictOffice of the Comptroller of the CurrencyNorth Syracuse, NY

Kousalya S. RamdasRegion Executive, Commercial BankingChase Manhattan BankRochester, NY

Carolyn SmithRegional Coordinator ConsultantWoman’s Work BankingThrongs Neck, NY

North Carolina

Carol A. ClavirVice PresidentFirst Union National BankCharlotte, NC

Gerald P. HurstAssociate General CounselNationsBank CorporateCharlotte, NC

Russell RobbyVice President/Lending ManagerFirst Union National BankCharlotte, NC

Ellen RogersCommunity Development OfficerCentura BankCharlotte, NC

65

Kathrine McKeeAssociate DirectorSelf HelpDurham, NC

Vincent LongSenior Vice PresidentWachovia Bank, N.A.High Point, NC

Michael AtkinsonVice PresidentCommunity Development OfficerFirst Citizens BankRaleigh,NC

Kevin HarrisCommunity Development ManagerCentura BankRocky Mount, NC

Lynn HartonSenior Vice PresidentBB&TWinston Salem, NC

A. Michael WilkersonSmall Business ManagerWachovia BankWinston-Salem, NC

Ohio

David EkeyCommercial Loan OfficerFifth and Third BankCincinnati, OH

Louise J. GissendanerAssistant Vice President & DirectorCommunity LendingFifth Third Bank of Northeastern OhioCleveland, OH

David PrusVice PresidentKeyCorpCleveland, OH

Lynn GellermannSmall Business LiaisonCommunity Reinvestment GroupBank One CorporationColumbus, OH

Joseph S. HaganPresidentBanc One Community Development CorporationColumbus, OH

Ronald NewsomeVice PresidentBanc One Community Development CorporationColumbus, OH

Lynn PlatterManagerKPMG Barefoot MarrinanColumbus, OH

Richard E. WisePresident and Chief Executive OfficerAmerican National BankParma, OH

Michelle SpainDirectorWRMCCShaker Heights, OH

Oklahoma

Peter G. Pierce IIIPresidentFirst Bethany BancorpBethany, OK

Anthony R. WilkinsonPresident & CEONational Association of GovernmentGuaranteed LendersStillwater, OK

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Pennsylvania

Patricia A. CobbSenior Vice PresidentPioneer American Bank, N.A.Carbondale, PA

James E. JacksonSenior Vice PresidentPioneer American Bank, N.A.Carbondale, PA

James R. DerrickCommercial Loan OfficerCitizens National Bank of Southern PennsylvaniaGreencastle, PA

David R. DowdVice PresidentPennsylvania National BankHamburg, PA

Jordan PetersonSenior Vice PresidentBusiness Banking Loan CenterPNC BankHorsham, PA

Ollyn J. LettmanSenior EconomistThe Community First FundLancaster, PA

Kina GuytonMarketing ManagerSEI InvestmentsOaks, PA

Emma C. ChappellChairman, President & CEOUnited Bank of PhiladelphiaPhiladelphia, PA

William J. DahmsSenior Vice PresidentFirst Union National BankPhiladelphia, PA

Nelson A. DiazEsquireBlank Rome Comisky & McCauleyPhiladelphia, PA

Donald W. JamesCommunity Affairs SpecialistFederal Reserve Bank of PhiladelphiaPhiladelphia, PA

Wanda Jame SpeightDirector of LendingDelaware Valley Community Reinvestment FundPhiladelphia, PA

Pamela MartinDirectorAgency Relations & CommunicationsRobert Morris AssociatesPhiladelphia, PA

Mark WeberSenior Vice PresidentBusiness Banking SegmentChief Credit OfficerPNC BankPhiladelphia, PA

Timothy H. JohnsonVice President and ManagerCommunity Development Lending DepartmentNational City Bank of PennsylvaniaPittsburgh, PA

Ellen M. MarcusVice President, Business BankingMellon BankPittsburgh, PA

Cathy NiederbergerVice President & ManagerCommunity Development DivisionPNC BankPittsburgh, PA

Charles ReavesConsultantSmall BusinessPittsburgh, PA

67

Eric RennerVice PresidentNational City Bank of PennsylvaniaPittsburgh, PA

Howard A. RussellSenior Loan OfficerCommunity Loan Fund of SWPA, Inc.Pittsburgh, PA

Eustace O. UkuPresidentEXICO, Inc.Pittsburgh, PA

Andrew RussinAttorneyPennsylvania Bar AssociationWynnewood, PA

Rhode Island

Tom SchumpertPresidentTS Associates, Inc.Cumberland, RI

South Carolina

Dorothy GarrickRegional CoordinatorNational African American Consumer Education OrganizationColumbia, SC

H. Dabney Smith IISenior Vice PresidentNationsBank, N.A.Columbia, SC

Tennessee

Randall DrakeBusiness Marketing ManagerFirst Tennessee BankMemphis, TN

Texas

William G. PaynePresident & CEOGateway National BankDallas, TX

Julie A. CripeExecutive Vice PresidentOmniBank, N.A.Houston, TX

Jimmy EnriquezPresidentNew Century FinancialHouston, TX

Kenneth R. McCowanPresidentCDI Management Services, Inc.Houston, TX

Richard R. TorresPresident and CEOHouston Hispanic Chamber of CommerceHouston

Phillip W. YelderManagement Analyst IVCity of HoustonOffice of the MayorHouston, TX

Gary G. JacobsPresident & CEOThe Laredo National BankLaredo, TX

Utah

Kent MoonSenior Vice PresidentZions BankSalt Lake City, UT

Virginia

Barbara AbellPresidentO’Connor-Abell, Inc.Arlington, VA

68

Sheila JonesMarketing AssociateMTS Technologies, Inc.Arlington, VA

Paul L. Pryde, Jr.PresidentCapital Access GroupArlington, VA

Steven I. ZeiselVice President & Senior CounselConsumer Bankers AssociationArlington, VA

Sally B. RobertsonExecutive DirectorVirginia Asset Financing CorporationCentreville, VA

Crystal DetamaroEditorGuaranteed LenderCharlottesville, VA

Christine GaillardAnalystThe Secura GroupFalls Church, VA

Cynthia NickersonManagerThe Secura GroupFalls Church, VA

Mary T. SomervilleManagerThe Secura GroupFalls Church, VA

Jerry ReynoldsDirectorInformation ServicesFirst Nations Development InstituteFredericksburg, VA

Marla M. ApthekerSenior Credit AnalystTysons National BankMcLean, VA

Roy T. Darney, Jr.Vice PresidentFirst Union National BankMcLean, VA

John J. HaysPolicy AnalystFarm Credit AdministrationMcLean, VA

Gary C. KleinBusiness Banking ExecutiveFirst Union National BankRichmond, VA

Jake LaBelloCRA AdministratorCentral Fidelity National BankRichmond, VA

Ronald F. MillerPresident/CEOFirst BankStrasburg, VA

Theodore P. LauerSenior Vice PresidentUnited BankVienna, VA

Carroll C. MarkleyChairman & CEOUnited BankVienna, VA

Robert D. Willey, Jr.Executive Vice PresidentCentral Fidelity National BankVienna, VA

Ted ColemanVice PresidentF&M Bank-PeoplesWarrenton, VA

West Virginia

Roger MooneySenior Vice PresidentOne Valley BankCharleston, WV

69

Kenneth R. SummersPresident & CEOOne Valley Bank, Inc.Morgantown, WV

Carl A. GuthriePresidentFirst National BankSt. Marys, WV

Wisconsin

Jason T. MonnettCommercial Credit AnalysisAssociated Bank, N.A.Neenah, WI

Daniel M. SchneiderVice PresidentAssociated Bank, N.A.Neenah, WI

Canada

Stephen FrankResearch AssociateTask Force on the Canadian Financial ServiceOttawa, Ontario, CAN

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71

Small Business References

To obtain these OCC small business resource documents,contact:

Office of the Comptroller of the CurrencyOCC Issuances and Publications250 E Street, SWWashington, D.C. 20219(202)874-4700

or visit our web site at <http://www.occ.treas.gov>.

OCC Advisory Letter AL 98-9Access to Financing for Minority Small BusinessesJuly 1998

OCC Advisory Letter AL 97-3Credit Underwriting Standards and Portfolio CreditRisk ManagementMarch 1997

OCC Bulletin 97-24Credit Scoring ModelsMay 1997

OCC Bulletin 96-6312 CFR 24 — CDC, CD Project, and Other PublicWelfare InvestmentsOctober 1996

Interpretive Letter 765, 12 USC 2901Loans to ChurchesJanuary 1997

Interpretive Letter 792, 12 USC 2901CRA Consideration for Investments in a FundAugust 1997

Interpretive Letter 797, 12 USC 2901CRA Consideration for Investments in a FundSeptember 1997

Interpretive Letter 799, 12 USC 2901CRA Consideration for Investments in a FundSeptember 1997

OCC CRA Interpretations — Letter 723CRA Consideration for the Purchase of an SBICDebentureApril 1996

72

Joint Release — OCC, FDIC, Federal Reserve Board,OTS, NR 93-19Interagency Policy Statement on Documentation ofLoansMarch 1993

Interagency Policy Statement on Documentation forLoans to Small- and Medium-Sized Businesses andFarmsMarch 1993

Banking Bulletin — BB 93-18Interagency Policy on Small Business Loan Documen-tationApril 1993

Banking Bulletin — BB 93-23Questions and Answers regarding DocumentationPolicyApril 1993

Banking Bulletin BB 93-46Interagency Policy on Small Businesses Loan Docu-mentation (Supplement)August 1993

Banking Bulletin BB 93-54Questions and Answers regarding DocumentationPolicyNovember 1993