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Small business loans down

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Ray Ono is vice chairman and chief banking officer of First Hawaiian Bank. An earlier version said he was a senior vice president.


Lending to small businesses in Hawaii has declined at a significantly faster pace than on the mainland, following the meltdown on Wall Street that rocked credit markets nearly two years ago.

Four of the state’s top seven banks have seen their small business loan portfolios shrink. Total lending has dropped to $1.38 billion in the first quarter of this year, a 14 percent decline from the $1.6 billion the seven banks had on their books before the financial crisis broke out in the fall of 2008, according to a review of loan data on file with the Federal Deposit Insurance Corp.

Nationwide, lending to small businesses, defined as enterprises with fewer than 500 employees, fell by 5.4 percent to $670 billion during the same period.

The deterioration of small business lending is serious enough to prompt calls for action by the Federal Reserve Board and Congress, both of whom have noted the important role small businesses play in job growth.

In a recent speech urging banks to lend more to small firms, Federal Reserve Chairman Ben Bernanke said small businesses employ roughly half of all Americans and account for about 60 percent of gross job creation.

Four of Hawaii’s biggest banks reported declines in small business lending between June 2008 and March 2010, while three others reported loan growth, according to quarterly reports filed with the Federal Deposit Insurance Corp.

Banks reporting a drop in small business loan portfolios included Bank of Hawaii, Central Pacific Bank, Finance Factors and Hawaii National Bank. First Hawaiian Bank, American Savings Bank and Territorial Savings reported increases in small business lending.

First Hawaiian, the state’s largest institution by assets, led the way with $531 million worth of small business loans on its books at the end of March, a 7 percent increase from the second quarter of 2008.

Although the Fed chairman and others have been pressing banks for months to lend more to small businesses, the reason for the decline in lending is not clear.

Some small businesses and lawmakers say bank loan officers are turning down credit-worthy borrowers because of increased scrutiny by banking regulators following the loose lending during the last economic expansion. Banks have countered by saying loan demand is weak.

The Fed chairman acknowledged the complexity of the issue.

"An important but difficult-to-answer question is how much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability," Bernanke said in a July 12 address in Washington, D.C.

Joann Seery, who runs the Hawaii chapter of BNI, a global professional business networking organization, said she is seeing evidence of all of the factors mentioned by Bernanke.

"Small businesses are having a tough time getting credit right now. It’s a very difficult time," she said.

Some of BNI’s 800 members in Hawaii have been forced to use their personal credit cards for business expenses after being turned down by banks.

"Using your credit card is not a preferred strategy, but if you can’t get a loan it becomes your second line of credit."

Bank of Hawaii, which saw its small business loan portfolio contract by more than $180 million between June 2008 and March 2010, attributed the decline to a drop in demand and an erosion of credit quality among borrowers.

"A lot of it has to do with small business owners reluctant to increase their debt during tough economic times," said Tom Koide, Bank of Hawaii executive vice president.

In addition, some small businesses that have applied for loans are finding it more difficult to qualify because their balance sheets have deteriorated due to declining revenues and rising expenses, he added.

"Small businesses are struggling. That’s been validated in the focus groups we’ve held," Koide said.

He said Bank of Hawaii has not changed its lending standards as a result of the financial market turmoil.

"Nationally some of that has gone on, but at Bank of Hawaii we have always been a prudent lender in terms of working with clients. It helps that Bank of Hawaii has always been conservative."

First Hawaiian Bank, which also characterizes its approach to banking as conservative, said it worked on cultivating its relationships with small business customers as the economy soured.

"It really has been our mission not to contract because the world around us is having a hard time," said Ray Ono, First Hawaiian vice chairman and chief banking officer. "Now is not the time to bail on our customers."

He said the bank has not shifted in its approach to evaluating credit quality.

"We’ve been very consistent during both times when the economy has been robust and when it has been challenged like over the past 2 1/2 years."

At Central Pacific Bank, which leads all local banks in the number of Small Business Administration loans made so far this year, underwriting standards have remained constant, said Susan Utsugi, senior vice president and West Oahu region manger for the bank.

Some firms that have been hit harder by the recession, like construction companies, have had a more difficult time getting loans, she said. Others, like phototovoltaic installation companies, have done well despite the challenging economy, Utsugi said.

"Our standards remain constant. But the ability for borrowers to meet those standards has changed."

Bert Ely, a Washington, D.C.-based banking consultant, said many small businesses were too leveraged even before they were hit by the recession.

"A lot of small businesses don’t have much equity capital. Combined with that you have banks tightening their credit standards through the roof. It all works against businesses of any size wanting to borrow."



Whether it be the result of weaker loan demand from small businesses or tighter credit on the part of banks, one thing is clear, lending to the small business sector has fallen sharply over the past two years.


BANK 6/30/08 3/31/10 PCT. CHANGE
Small business loans $495M $531M 7.3%
All loans $7.28B $7.88B 8.2%
BANK OF HAWAII » Assets $12.41B
Small business loans $416M $328 M -21.1%
All loans $6.43B $5.47B -14.8%
Small business loans $142M $154M 8.3%
All loans $4.12B $3.62B -12.1%
Small business loans $273M $229M -16.3%
All loans $4.02B $2.69B -33.0%
Small business loans $8.35M $9.80M 17.3%
All loans $604M $607M 0.43%
Small business loans $53M $24M -55.0%
All loans $518M $396M -23.7%
Small business loans $110M $107M -2.7%
All loans $331M $331M -0.1%
Small business loans $1.6B $1.38B -13.5%
All loans $23.3B $21.25B -8.8%

Source: FDIC


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