Small-Business Lending Trends and Commercial Bank Performance.(Statistical Data Included)

Economic growth and competition for consumer and corporate loans have led to an overall increase in small-business lending by commercial banks. The total amount invested in nonagricultural commercial and industrial (C&I) loans of under $250,000 increased 19.25% from 1995 to 1999. However, as nonbanks have continued to increase their market share, these loans have declined from 1.25% to 1.16% of commercial bank asset portfolios. In addition, overall trends in small-business lending by banks in different asset-size classifications are far from uniform. Small banks, for example, have increased not only the total amount but also the percentage of assets dedicated to small-business lending during the past five years. Large banks, on the other hand, have reduced their emphasis on small nonagricultural business loans. This article summarizes recent national trends in small-business lending and compares the performance characteristics of banks that provide small-business loans with those that do not. The overall findings suggest that bank managers should focus more intently on small-business lending as a means to achieve profitable growth.

Bank managers continually face trade-offs as they address the interests of their customers, shareholders, communities, and regulators. This article asks the question, does small-business lending add to the overall value of the institution? Do banks that provide small-business loans generally outperform their peers?

This article investigates the small-business lending activity of 8,506 domestic banks and relates it to asset growth, profitability, loan quality, and other performance measures. We find that small-business lending is relatively high and growing as a percentage of assets among smaller banks and low and shrinking among larger institutions. We also find that banks that invest in small nonagricultural business loans generally have higher returns on equity, greater leverage, higher levels of nonaccruing loans, and higher rates of institutional growth.

SMALL-BUSINESS LENDING BY U.S. COMMERCIAL BANKS

In this study we use the Financial Institutions Report of Earnings (FIRE) database, which compiles detailed financial and descriptive information on domestic intermediaries. This data includes small nonagricultural commercial and industrial loans made by U.S. commercial banks. Since regulatory reports specify loan size rather than the size of the borrowing firm, it has become common to define bank loans to nonagricultural small businesses as the number and cumulative dollar amount of loans provided in three size classifications: C&I loans of $100,000 and less, $100,001 to $250,000, and $250,001 to $1,000,000.(1) To ensure that the lending activities considered in this article involve only small businesses, we focus strictly on the two smallest loan classifications (that is, loans of $250,000 or less). Using that criterion, 72% of banks nationwide provided small-business loans during …