Our last PE was over a year ago and we were criticized for not making loans to businesses varying revenue sizes - specifically businesses with revenues of less that $1MM. We have a task force meeting next week and I need to present some suggestions for how we can improve in this area. I'm sure we aren't the only bank that has had a comment like this in their PE. If so, please share what you did to get your officers interested in finding/making these types of loans.

Much appreciated!!

I would have immediately added individual goals into the individual loan officer performance evaluation requirements a year ago when the criticism was first made.

Are you too small to have loan officers segmented by revenues of clients?

Maybe something like branch managers handle customers up to $1 million in revenues, small business officers up to $5 million, and commercial lenders over that?

Both good ideas that I will suggest at the meeting next week.

What was your penetration rate? What was the latest market penetration rate for your AA? What was the market demographic cited by examiners for this lending test?

Yes, the market demographics were noted by the examiners. D&B data for 2012 and 2013 indicates the 73.4% and 73.3% of AA's businesses reported GARs of $1MM or less. In the three year's reviewed the Bank's lending was 24.8%, 25.8%, and 16.6%. Aggregate data for the first two years was 47.5% and 47.2%. We were not in line with our peers and we had a declining trend.

The D&B data is questionable in my opinion. Having said that if you examine the County Business patterns business demographic data you will find that there are 22.7 million businesses that consist of only self-employed people. You also will find that there are 7.5 million "establishments" that employ people. Of those 7.5 million employers, 54.6% employ 1-4 people. So the overwhelming demographic shows that 26.5 million of 30.2 million businesses in the USA are really small businesses. The regulators assume they all rely on business loans to finance their businesses. But that is radically incorrect. I grew up in a small business family and I was a small business banker for years. Many of the smallest businesses finance their operations through consumer type loans including credit cards and home equity loans. These loans are not reflected in small business borrowing statistics and don't show up in the small business lending of banks. Given the overwhelming business demographic and the heavy reliance on non-business type of loans it is really misleading to compare the business demographic which is dominated by very small businesses, mostly self-employed people, to small business loan data. The small business demographic always far exceeds the volume of small business lending reported under CRA.

When they published their study about small businesses and small business finance the 4 Fed Reserve Banks who sponsored the study did not take this into consideration. I wrote to them and urged them in their next study to include data about these non-business loans that are widely used by many small businesses.

The problem with your results is not so much that you are very far below the business demographic as it is that you are very far below the reported small business lending penetration rates. Those should be your target for performance.