the vision of using SBA as a, think of it as a source of funds to help businesses manage their operating cycle, as opposed to a deal or a transaction, our bankers conduct working capital engagements to help our customers with their money movement and SBA plays a critical role again, as a source of, capital for these businesses.
We talk a lot about origination, but this life cycle of the customer and being a portfolio owners gives us the optionality to help them in any way that we can to make their experience a good one.
From the American Bankers Association, this is the ABA Banking Journal podcast. Welcome back. I'm Evan Sparks. Today's episode is presented by Biz2x and I'm delighted to be joined by Eric Daniels. Eric is head of Small Business Administration lending at U.S. Bank and and is thus responsible for Leading the team that makes SBA loans and, and across the country. And also is one of the one of the largest SBA lenders in the United States.
So excited to hear about how this fits into the U S bank strategy, as well as learn a little bit more about the outlook for SBA, Eric, thanks for being on the show.
Evan, thank you so much for having me. I'm really looking forward to the opportunity to, to share about this amazing program of ours that helps so many small businesses in the United States. So thanks for having me.
Great. I'd love it if before we can get started, before we dig into the, into the details of the policy discussion, the top of the business discussion, if you could just tell introduce yourself a little bit to our to our audience. How, what's your, what's your career story in banking and how did you get into the SBA area at U.S. Bank?
Oh, yeah. Total accidental banker, Evan. So started actually many years ago not too far out of school. And funny story. I was talking to one of my uncles and I didn't know what he did for a living. I've known him all my life. And here I go talking to, to uncle Rudy Estrada and find out that he has this consulting business that he was launching and invited me to, to join him, to learn about the business. And what I've later learned is that he was actually district director.
Of the Los Angeles district office of the Small Business Administration. So that launched the lifelong love affair with SBA worked in the consulting space with about 30 community banks. So learned a lot about how that, that delivery works and in the benefit of communities and this program and how it enables and empowers small business. Then I pivoted and I went to work for a midsize bank for about five years. And then a couple of years at a non bank lender.
I started here at US Bank October, 2006. So it's been about 16 and a half years with US Bank, and I currently head SBA lending and I'm just thrilled to to be a part of, of, of, of how this program is contributing to the economy right now.
Great. Can you speak a little bit to the scale of US bank's SBA lending and, and lending commitments and how it fits into the it fits into your overall bank commercial lending strategy?
Sure. So let's really talk about. Why SBA and why it so seamlessly fits. I'm going to use the strategy of four pillars. Okay. So, first of all, if you're thinking about the big stories over the last year. Capital, right? Efficient use of capital. So the SBA guarantee actually serves as an efficient use of capital. If you think about for the bankers on the line, risk weighted asset allocation, we can actually get about a dollar of capital and lever that into 2. 5 dollars of SBA loan.
So it's very efficient. Number two. The program mitigates risk. So we use an SBA language credit elsewhere. So we may use SBA lending to help a business owner acquire commercial real estate. If they have lower liquidity, let's say that they're, excuse me, plowing their earnings back into the company and they have a really good business plan, a good business model, good trends. However, maybe they can't afford a 20 to 25 percent down payment. 10 to 15%. That's an SBA loan.
A second example, we may assist in the transition of a business where there's little secondary source of repayment. That will, will be the, the either a partner buyout or somebody wants to acquire a business. And then lastly, we help businesses restructure debt by extending their terms to Improve their cashflow. I would say with regards to the SB program, SB lending is somewhat counter cyclical.
If you think about it, what that means is in stronger economies, customers have more choices in uncertain economies, such as this, there are less choices and the ability to use the guarantee should become more prominent. So that's number two. Number three, these are all owner operating businesses. And SBA lending is actually part of our overall strategy to bring the whole bank to our customers. For example.
They may have needs and they usually do for things such as deposits, card, merchant, treasury management. So we have a capital efficient SBA program bringing in both non interest income or other programs, which helps us deepen these relationships. And then lastly, the fourth pillar, there's a community impact element. SBA hits on two levels for Community Reinvestment Act purposes in the small business lending category and also the community development lending category.
So those four pillars have made this program a very, a very strong mechanism and delivery method for us as we seek to grow our lending platforms and the bank as a whole and help our small businesses.
Yeah. So what share of your overall commercial loan portfolio at the bank is in SBA.
Our program is, is well north of 20 percent of the, of the whole contribution in terms of the business banking space. So we continue to grow the portfolio. We acquired MUFG Union Bank. That was closed last year. That helped to increase the portfolio. There are also a very active SBA lender. So we've used the combination of what we delivered legacy U.S. Bank plus the union bank and combined our resources and continue to grow.
As you'll see in the rankings, we're seeing somewhat of a growth trajectory, both in units. And in dollars, and that's just really started a few years ago about this idea about, you know, let SBA as a growth engine to enable growth for, for small businesses. And we just felt it was the right time to, to really double down in our investments. And in focusing on how we can help as many small businesses as we can with the the, the benefit in terms of being able to help grow the bank as well.
Reflecting back to 2020 when the Paycheck Protection Program was launched through the Small Business Administration and every, and thinking about how every single bank in the country became an SBA lender at that point. I know, you know, I know before that it had been a little bit more of a specialty operation.
You know, as banks consider their strategy for serving small businesses, connecting with this, this segment, what do you think it takes to succeed in today's SBA as a major player in the SBA lending space today?
Yeah, number one would be a commitment to the program as an essential driver to your business or your commercial banking platform. I would say right next to that is essential to have expertise in SBA as a specialty lending program. Remember this program, the 7A lending program is what we call deferred participation. Basically, what that means, the, the lender makes the loan subject to certain conditions.
And should something happen down the road and the bank asks the SBA to honor its guarantee, the bank or the lender must make sure that it is complied with Everything that it said it was going to do. And because of the, the complexities of this program, the specialized nature of this program, having expertise in it is absolutely essential.
I would say thirdly the vision of using SBA as a, think of it as a source of funds to help businesses manage their operating cycle, as opposed to a deal or a transaction, our bankers conduct working capital engagements to help our customers. With their money movement and SBA plays a critical role again, as a source of, of of capital for these businesses. And lastly, for us, we have the benefit of being a portfolio lender, meaning that we do not sell our loans.
We hold onto our loans, which gives our customers great opportunity with rate structure, modifications, any flexibility down the road. Let's just say that Customer wants to substitute collateral. "Hey, I sold my house and I bought a new house and I want to substitute." These kinds of things are actually quite common.
We talk a lot about origination, but this life cycle of the customer and being a portfolio owners gives us the optionality to help them in any way that we can to make their experience a good one.
Yeah. I'm curious, you know, you talked a little bit about, you know, envisioning the, the, having this vision of. SBA as a source of funds and ongoing capital for the for the, for the borrower. How do you fit the SBA loans that you make into a broader relationship banking model for this for these business clients?
We actually have a full integration. We've got a terrific group of leaders, our region executives and business bank, and we primarily work with our team. We have teams in our regions that communicate quite frequently with our, our our teammates. In business banking. So it's a full integration. We have customer conversations. This is not a second look, but it's a concurrent look.
So our delivery of the program with our bankers is going out on joint calls and identifying the things that we just talked about. So let's just say there's an indicator such as, "Hey, I'm thinking about buying out my partner." Then that opportunity arises right then and there. As opposed to let's just contrast that and say, "Hey, we'll look at everything and then if we decline the loan, maybe we'll think of SBA" is not the success model.
Success model is actually identifying needs concurrently and up front with our bankers as part of a whole. So SBA lending is not a separate program as much as it is an integrated program as we fully deliver our bank to our customers. So it's a full integration on that. It's really been. Our story in terms of why we're seeing the success that we're seeing right now.
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To learn more about how the platform is designed to help banks achieve faster processing, lower overall costs, and increased loan volume, visit Biz2X.com. That's BIZ, the number two and the letter x.com. And thanks again to Biz2X for sponsoring this episode. So Eric back to the conversation here. As we look ahead, we're about a third of the way through the third of the way through the year in 2024.
What can we expect out of the SBA program out of SBA and to see in terms of SBA lending in the remainder of 2024?
Yes, so the SBA has actually a fiscal year from October 1st to September 30th. So we're going to see between now and September 30th is the remainder of fiscal year 24. And the president's office has already proposed a 2025 budget, but from the, the, the indicators, the program expects to be fully funded for the remainder of the year. In terms of overall loan demand and what we're seeing, which is right, an indicator of whether there's, there's going to be capacity.
The industry is up year over year, about 3 percent in dollars and actually 19 percent in units through March, which is the, again, the first six months of SBA, SBA's fiscal year. And we are seeing strong demand currently. So I think the outlook is, is barring, you know, things such as continuing resolutions, which seem to be more common of the program in and of itself appears to be fully funded.
And you know, in terms of the, any, any changes that you're anticipating to the program over the, either, whether, whether in the current fiscal year or in the next fiscal year, how, how can, how can banks anticipate and respond to, to what you might, what we might see?
Yeah. So the SBA last year delivered actually two new standard operating procedures, actually an update from one. And one of the things that, that we observed. Was the SBA began to allow business partner buy ins and we're actually seeing more of this. So you think of the traditional SBA lending program, you think of commercial real estate. You think of change of ownership, you think of startup, you think of partner buyouts. Evan and I, you are partners.
I wanna retire, you wanna buy me out, but let's just say that you don't wanna buy me out fully. I still wanna retain 20% of the company. You're gonna buy 30%. That's now eligible. So we're seeing that right now in terms of opportunities. The administration, usually every August or September unveils it's guaranteed fee structure. So there are fees that are, are borrower fees and lender fees.
And in this fiscal year, the administration brought down the SBA guarantee fee to zero for loans up to a million dollars, and this has created great relief in lowering businesses' cost of capital. So we're going to have to wait for another few months or so to see what the administration has, has in store, but the indicators with regards to Program health continued to be continue to indicate to us that we, we may be into some level of, of fee relief. We don't know what that is.
We've never seen it up to a million dollars. The year before it was up to half a million dollars and up to a million dollars is where we're at right now. And we'll, we'll adjust and adapt once we get indications from the agency.
So you talked a little bit about the the, the CRA credit, the community impact that that this program generates for the bank. Can you just speak to a little bit more to the importance of SBA lending and supporting these business, business formation and growth and in underserved communities?
Absolutely. The SBA program has been making an increased number of loans to black owned and Latino owned businesses and women owned businesses as well. Industry wide, the SBA backed nearly 1. 5 billion of loans to black owned businesses in fiscal year 23, which ended September 30th of 23, through the agency's signature SBA lending programs, more than double the amount from fiscal year 2020. And industry wide, the SBA backed 3 billion.
And loans to Latino owned small businesses in fiscal year 23 double the amount roughly from fiscal year 2020. I will tell you that I'll just share one, one bit of personal information. My grandfather, his name is Enrique Pineda Daniels actually started during the great depression a butcher shop in East Los Angeles to serve Latino community. And through it supported my father and his 13 brothers and sisters for about 30 years.
So I'm, I'm very inspired by the story of how business ownership creates and sustains families, economies, communities, and so forth. So I'm, I'm heartened to see this. We use at U S bank, the SBXpress program to assist businesses in the small loan space. So We're very active in that in that particular space, and you see that in our average loan sizes. And then we also seen our SBA team work with our business access advisor teams, which are specifically designated to assist.
And things such as forums where we discuss how the SBA program works. And it's a way for us to engage in underserved communities with the SBA program.
It's great to hear that personal story. I know obviously U.S. Bank is super plugged in with with your clients, with the small businesses that you are talking to. And and doing research and making sure you understand them, given your your scale in this space. Can you can you speak to just to kind of wrap things up here? Speak to what you're hearing from small businesses. What are they telling you about their needs and goals and growth plans here in 2024?
What can bank what can bankers across the country learn from your expertise in this area?
Sure. When U.S. Banks surveyed small businesses last year, the outlook was, was very fascinating. It's, it's when you ask questions and stop and listen, you learn things, right? So our survey of small businesses found 9 out of 10 businesses overall define their business as successful and nearly 9 and 10 feel optimistic about their future. Or about the future of their businesses. However, they indicated that they're under a lot of stress.
They think about the world in the last few years, obtaining capital competition, there's still lingering supplying chain issues in some areas, the need to upskill their workforce, staffing shortages, minimum wage, but the biggest challenge they're citing is obtaining the funding to support the businesses. And this is where SBA can play a significant role. Another element in terms of insights is about one out of five SBA loans is for change of ownership.
And according to 2019 U. S. Census data, over half business owners were over 55 years old. So using the logic and the progression of our population, what we're seeing is an opportunity as we move forward. There should be an increase in business transfers, right? We hear a lot about business starts. But business transfers, and this is a program SBA the life's pay lending program that consists in financing with these transfers of ownership.
And we're looking forward to again, helping our businesses. In any way, whether it's helping them expand their operation, help a retiring partner have have a financing option for our customer and in any other way that we can help and enable. So, we want to help them with regards to their access to capital issues. But as I mentioned before, our delivery is a holistic relationship value delivery, which our program plays a role in that cycle.
In helping our customers really benefit and making sure that they're on solid ground.
Yeah, talking, thinking about that, those, those transfers of ownership is so critical to, you know, dealing with the generational, this generational transition and, and making sure that these businesses remain going concerns for the, the employees they support, the community, the services they support in their community. So it's it's great to hear about what y'all are doing and using SBA to do in that in that, in that space.
Well, Eric, thank you so much for being on, being on the show today and for talking to us about the great things that are going on in the SBA world at U.S. Bank. Thank you.
Evan, thank you for having me. It's been a pleasure.
For our listeners, you can find this and previous episodes at aba. com slash banking journal podcast. You can also find us on any of your favorite podcast apps or platforms. Thanks again to Biz2x for sponsoring this episode. We appreciate having Eric on and we will be back with you again very soon.