A Rough Road For Financial-Services ETFs

By Robert Goldsborough

In the first half of 2014, the market performance of the US financial-services sector trailed the broader US equity market by several hundred basis points.

Thus far this year, there have been some small bumps in the road for a sector that has enjoyed a robust comeback during the past five years, but where volatility remains meaningfully high and uncertainty even higher. While no one doubts that large banks, which dominate the financial sector, are far better capitalized than they were heading into the financial crisis, the final results in March of the Federal Reserves annual stress test on the United States 30 largest banks demonstrate both a lack of robustness on the part of some large lending institutions–including Citigroup (C)–as well as the clear presence of a prominent headwind in the form of elevated compliance, regulatory, and legal costs across the industry.

Another headwind is the US economy. While it unquestionably has shown some bright spots during the past several years, concerns about a less-than-strong economy generally has weighed on banks, which feel less inclined to lend in such an environment. Less lending means less growth for banks.

The Opportunity in US Financial Services
Morningstars equity analysts view the financial-services sector as largely fairly valued, with pockets of opportunity in individual stocks. A future rally in the sector likely would be driven by several factors, including continued improvement in the US economy (and likely, overseas economies as well), which would in turn prompt central banks to continue pulling back on their easy money policies and instead allow for interest rates to rise. That likely would mean greater lending from banks, as well as lower global unemployment. At the same time, global markets would need to continue their march upward (Morningstars equity analysts hold the view that the financial-services industrys asset managers performance more or less will follow the market). And, in theory, continued strong markets would bring more deal activity for investment banks. On top of all this, banks likely would continue their ongoing cost-cutting efforts (we view many physical bank branches as endangered species).

Unpacking Specific Subsectors Performance
Broadly, the financial-services sector breaks down into a handful of subsectors, which include banks, insurance firms, REITs, and asset managers/capital markets. Banks have underperformed the overall US equity market thus far this year, amid stress-test results and a general sector rotation away from financial services. Insurance firms also have lagged amid strong debt and equity markets, which tend to force down insurers prices and thus returns on invested capital. Meanwhile, REITs have done very well after a not-so-great 2013, during which investors panicked. Although one might think that the specter of rising rates would hurt REITs, rising rates also usually mean a strong economy, and for REITs, a boom means higher occupancy and steadily increasing rents on tenants.

A Closer Look at an Array of Financial-Services ETFs
Some of Morningstars own proprietary data points can help investors make sense of the many exchange-traded funds out there that are devoted to the financial-services sector. First, we will apply some of these data points to a group of broad-based, market-capitalization-weighted financial-services ETFs. Next, we will take a closer look at strategic-beta financial-services ETFs, global and foreign financial-services ETFs, and the narrowly constructed ETFs devoted to several financial subsectors. Finally, well examine recent trends in fund flows in the financial-services sector.

An Overview of Market-Cap-Weighted Financial-Services ETFs
There are three large and liquid cap-weighted financial-services ETFs: Financial Select Sector SPDR (XLF), Vanguard Financials (VFH), and iShares US Financials (IYF). All seek to replicate broad indexes of the largest US financial stocks, including diversified financial-services companies, banks, REITs, insurers, and capital markets firms. All have relatively similar portfolios, although there are small differences in composition.

The table below provides more details on the three funds:

Fidelity recently launched a broad-based, cap-weighted financial-services ETF, Fidelity MSCI Financials Index (FNCL), with a rock-bottom expense ratio of 0.12%. Although the fund has had some success gathering assets ($121 million as of this writing), the three larger broad financials ETFs dwarf FNCL in terms of assets and liquidity.

PowerShares Samp;P SmallCap Financials (PSCF) is another market-cap-weighted ETF devoted to the financial sector. As its name suggests, PSCF tracks an index of small-cap US financial-services companies. It takes its holdings from the Samp;P SmallCap 600 Index. In the Morningstar Style Box, PSCF falls within the core-value segment, between micro-cap and small cap. Morningstar does not compute a price/fair value ratio or an Economic Moat Rating for PSCF. The ETF has lagged cap-weighted financial ETFs during the past year, although its performance has been in line with those funds over the trailing three-year period. PSCFs expense ratio is 0.50%.

Data Points
Valuation-wise, investors could benefit from looking first at price/fair value ratios. One of the most useful data points for ETF investors is Morningstars fair value estimate, which leverages the bottom-up fundamental analysis produced by our global team of equity research analysts. Our equity analysts evaluate the value of a business using our discounted cash flow model, which calculates the present value of a companys future discretionary cash flows based on its cost of capital, as determined by our analysts. Our per-share fair value estimate represents the aggregate, asset-weighted fair value estimate of the stocks in an ETFs portfolio that are covered by Morningstar equity analysts, divided by the ETFs number of shares outstanding. Our equity analysts may not cover each of the stocks in an ETFs portfolio, so we assume the stocks that arent under coverage trade at fair value.

Looking at the three market-cap-weighted financial-services ETFs, we see that they all trade at ratios greater than one, which indicates that the portfolio may be overvalued. XLF trades at 101% of fair value, VFH trades at 102% of fair value, and IYF trades at 101% of fair value. So the three big cap-weighted financial-services ETFs do not trade at any kind of discounts to their fair values.

When evaluating ETFs, another useful data point is the economic moat rating, which helps establish the quality of a funds underlying portfolio. Morningstars equity analysts evaluate firms competitive advantages, or the barriers that a company builds around itself, as well as how long we believe the company can sustain that edge over its competitors. Our equity analysts spend a great deal of time evaluating and debating the strength and sustainability of a firms competitive advantage and examining its returns on invested capital before assigning it to one of three moat sizes: wide, narrow, or none. Wide-moat companies all tend to have at least one strong sustainable competitive advantage (many have several) and earn ROICs well in excess of their cost of capital. Narrow-moat firms, by contrast, are ones that may not be able to continue generating hefty ROICs as competition heats up over the long haul.

In any sector, theres a broad mix with all kinds of moat sizes. However, a portfolio with a large percentage of companies with narrow and wide moats is one that we would categorize as high-quality. The bulk of the assets in large, market-cap-weighted financial-services ETFs are invested in narrow-moat companies. For example, 19% of XLFs assets are devoted to wide-moat companies and 61% are invested in narrow-moat firms. The ratios are similar for VFH, which invests 13% of its assets in wide-moat companies and 50% in narrow-moat firms, and for IYF, where the breakdown is 20% and 49%. Clearly, the large market-cap-weighted financial services ETFs are fairly high-quality portfolios, although anywhere from 10% to 15% of assets are invested in companies with no competitive advantages whatsoever.

Strategic-Beta Financial-Services ETFs
There are several good-sized ETFs devoted to the financial-services sector that seek to improve their return profile relative to traditional market benchmarks. Morningstar terms this category of funds strategic beta. Here are three strategic-beta ETFs devoted to the financial-services sector that we believe are worth discussing.

The first, Guggenheim Samp;P 500 Equal Weight Financial (RYF), tracks an equal-weighted index of 84 stocks. As is the case with other equally weighted funds, RYF offers more of a small- and mid-cap tilt than its market-cap-weighted peers. For example, 35% of RYFs portfolio consists of mid-cap names, compared with just 9% of XLF and 21% of VFH. RYF is only slightly more volatile than its cap-weighted counterparts. RYF has meaningfully outperformed its cap-weighted brethren over the trailing one-, three-, and five-year periods. RYFs position in the style box is almost identical to that of VFH; both funds fall between medium and large and near the boundary of core value and core. RYF also invests in a significant number of high-quality financials firms. In fact, just 18% of RYF is devoted to companies with no economic moat. RYF charges 0.40% and trades at 103% of fair value.

First Trust Financials AlphaDEX (FXO) tracks a fundamental index that uses a proprietary stock-selection methodology to rank financials firms on both growth and value factors. As a result, FXOs portfolio differs meaningfully from many of its sector-ETF peers. The index rebalances quarterly and takes valuation into account when rebalancing. As a result, FXO sits squarely in the center of the core-value band in the style box, while the cap-weighted financials ETFs–and RYF–all sit at or near the border between core value and core. FXOs portfolio also has more of a small- and mid-cap tilt than its competitors, with fully 57.5% of assets invested in mid-cap firms and another 15.0% devoted to small-cap companies. FXO has meaningfully outperformed the cap-weighted US financials ETFs over one-, three-, and five-year periods, and it has done so with slightly less volatility than the cap-weighted funds. FXO charges 0.70%.

Finally, PowerShares KBW High Dividend Yield Financial (KBWD) is a concentrated, higher-risk but higher-yielding financial industry ETF that tracks a dividend-yield-weighted index containing small- and mid-cap financials firms like banks, insurers, and equity and mortgage REITs. In the style box, KBWD is squarely in the deep-value region, between micro-cap and small cap. It has no direct peer. Morningstars equity analysts dont cover enough of its holdings for us to have an estimate of fair value for the fund or a moat rating. And the fund only has traded for about three and a half years, so it has less performance history than some other financials ETFs. However, KBWD has meaningfully lagged its traditional cap-weighted peers over the trailing one- and three-year periods. The ETF yields about 8% but charges a pricey 1.55%.

Global and Foreign Financial-Sector ETFs
Investors looking for exposure to financial-sector firms outside of the US have several options. One is to consider an ETF holding global financial-services names. iShares Global Financials (IXG) is one such option. IXG devotes about 41% of its assets to US companies, with most of the remaining assets invested in companies based in developed foreign markets, such as Banco Santander, Commonwealth Bank of Australia, and Royal Bank of Canada.

IXG has posted meaningfully higher volatility during the past five years (19.9%) relative to its US-only financial-sector ETF peers. At the same time, IXG charges 0.48%. IXGs performance is highly correlated with the three large US-only financial-services ETFs (92% to 93% during the past five years). As a result, cost-conscious investors looking for financial-services sector exposure might prefer XLF or VFH, which carry expense ratios of 0.16% and 0.19%, respectively.

Other ETF options for investors seeking access to financial-services companies from outside the US include iShares MSCI Europe Financials (EUFN), the very small SPDR Samp;P International Financial Sector (IPF) (0.50%), and even First Trust STOXX European Select Dividend Index Fund (FDD) (0.60%). However, its important to note that while FDD has a large tilt toward financials companies (40.5% of assets), it also holds European dividend-paying companies from other sectors as well.

Sub-Sector-Level Financial-Services ETFs
Investors with a strong conviction about an individual subsector within US financial services can consider ETFs devoted to banks, REITs, or insurers. Banking firms have lagged the US financials sector thus far this year in the wake of the mixed results from the stress tests. The largest and most liquid broad-based banking ETF is SPDR Samp;P Bank (KBE), which charges 0.35%. Investors interested solely in regional banks can consider SPDR Samp;P Regional Banking (KRE) (0.35%), iShares US Regional Banks (IAT) (0.46%), or PowerShares KBW Regional Banking (KBWR) (0.35%).

REITs have performed very well thus far in 2014, enjoying a recovery after investors panicked in 2013. The market for REITs came back after investors acclimated to the notion of the Fed potentially winding down quantitative easing. And investors bullishness comes from the signaling effect that would be inherent in higher interest rates–namely, that rates tend to rise when an economy is strong. REITs are cyclical by nature, and with a boom would come higher occupancies and the ability for REITs to steadily increase building rents. Investors interested in REIT ETFs should consider Vanguard REIT (VNQ) (0.10% expense ratio), Schwab US REIT (SCHH) (0.07%), iShares US Real Estate (IYR) (0.44%), and iShares Cohen amp; Steers REIT (ICF) (0.35%).

Insurance companies have lagged the broader market in 2014. The reason is that as the capital markets have done well–both stock and bond markets have rallied–insurance companies book values have gone up. That has resulted in declining customer prices and as a result, lower ROICs for insurers. Several suitable insurance-sector ETFs are SPDR Samp;P Insurance (KIE) (0.35% expense ratio) and iShares US Insurance (IAK) (0.46%).

Flow Trends
A look at where fund flows have been going often can help give investors some insight into what other investors are thinking. Recent fund-flow data for financial services show several noteworthy dynamics. First, strategic-beta ETFs devoted to the financials industry have enjoyed strong inflows during the past year, owing to their track records of outperformance and a generally increased focus from investors and advisors on strategic-beta funds. Next, most regional-bank ETFs have had significant inflows during the past year but outflows year to date. Also, there have been meaningful flows into financial-services industry ETFs devoted to European financial companies.

Disclosure: Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.

Is Detroit’s financial oversight board too big to succeed?

Since Mike Duggan became mayor of Detroit more than six months ago, hes methodically kept a list of his accomplishments, including his friendly working relationship with City Council. Given the toxic relations of past mayors with council, Duggans detente with its members is akin to finding bigfoot on the second floor of City Hall.

It could come in handy when Emergency Manager Kevyn Orr leaves this fall and the mayor and city council are allowed to have a hand in city finances.

But a third party soon will be introduced into this budding relationship: After Detroit exits bankruptcy, a state Financial Review Commission will have authority to approve the mayor and councils four-year budgets, approve sizeable contracts, approve collective bargaining agreements and report to the governor twice a year for the next 13 years.

This powerful, nine-member commission, created as part of a grand bargain with state leaders, is intended to protect nearly $200 million in state funding to Detroit by ensuring that city leaders budget money responsibly. But experts say the commissions credibility and effectiveness could be blunted if its perceived as blocking the ability of Detroits democratically elected officials to run the city. If not handled delicately, these experts say, the commission could face the same old political fighting that has scared away residents, businesses and progress.

To avoid this, the state must ensure a meaningful number of local experts and officials are on the commission, said James Spiotto, a municipal bankruptcy expert and co-author of Municipalities in Distress?: How States and Investors Deal with Local Government Financial Emergencies.

Duggan and Council President Brenda Jones pushed for local representation on the commission and lawmakers added a city council appointee. Theres also a counter-balance a gubernatorial non-Detroit resident appointee.

Nobody likes being told what to do, Spiotto said. No mayor or city council wants a mandate from on high. It should be the citys recovery plan. If you dont have buy in, itll never get done.
You need the right people on the board who are professional and experienced and have power and dedication to help the municipality turn itself around.

The commission and its duties

As part of the so-called Grand Bargain, the state legislature approved a package of bills to help Detroit get out of bankruptcy, that included $195 million in state funding to Detroit and creation of the Michigan Financial Review Commission, run out of the state Department of Treasury.

If all goes well, and the citys financial targets are met, the commission will dissolve in 13 years.

The size of Detroits commission nine people could slow progress to that finish line, said Lawrence Miller, a researcher at the University of Washington, who has studied the relationship between financial control boards and governmental financial conditions in distressed cities nationwide.

The creation of state-controlled boards to oversee troubled cities is nothing new, with Philadelphia, New York City and Pittsburgh serving as predecessors to Detroit. But Miller said that smaller boards of five to seven people help maximize cooperation and minimize political logjams.

I think theres a tradeoff between representativeness and expediency, Miller said. Washington DC and Springfield, Mass. had five-member boards. In New York, Yonkers and New York City had seven members. Eight (members) is certainly too many because it will slow the decision-making process without adding new information, and because bigger cities had success with financial control boards with fewer members.

While the Detroit commission may be too large, its budget will help reduce political games, according to Miller. The commission is to receive $900,000 from this years state treasury budget for operations. Financial control boards in New York and Washington, DC worked better than those in cities such as Yonkers because the big-city boards had the money to hire their own staffs to conduct financial research instead of relying on city officials to turn over information, Miller said.

The lesson, then, is that financial control boards with their own staffs have the capacity to implement new information systems to obtain reliable numbers they can trust and use to make important decisions that will affect the citys future including replacing agency leaders when necessary, according to Miller.

Avoiding do-overs

Lou Schimmel knows a little something about overseeing a city or three. Schimmel served as emergency financial manager or emergency manager in Ecorse, Hamtramck and Pontiac. In each city, after he balanced the budgets and left, the city back slid into deficit. Each was then placed in the hands of yet another state-appointed emergency manager.

Schimmel is now on the transition advisory board for Pontiac, a body permitted under the current Michigan emergency manager law. The Pontiac transition advisory board is less powerful than the commission that will oversee Detroits finances. However, the role is the same to make sure a distressed city does not fall back into the hole after an appointee reins in the budget.

In all three places, as emergency manager Schimmel sidelined elected officials while he cut the budget. The route to recovery, Schimmel said, is the mindset of the people involved both elected officials and those on the oversight board.

The question is, when do you get rid of the board? I guess when you get a mayor and council that buy into doing things that dont create problems, Schimmel said.

Americans Are Borrowing More To Buy Cars – But Should They Be?

Tiffany Franc, an attorney in Towson, Md., was surprised when she and her husband had no trouble getting a car loan last October. They had completed a short sale of an investment property in June, and short sales typically damage credit substantially.

They were purchasing a used 2013 Dodge Avenger. They went to their credit union and were approved for an auto loan at 5%. Franc says the 5% rate was “phenomenal” since their credit tanked after the short sale. Yet, they got an even better rate in the end.

“At settlement, our loan ended up being 3.74%,” Franc says. “We received a 0.25% interest reduction with auto debit from my checking account.” The average 60-month new auto loan cost 4.08% when she was in the market, according to Bankrate.

Franc’s story isn’t unusual in today’s market. Credit has become easier to obtain, even for borrowers with lower credit scores. And according to a Feb. 25 report from TransUnion, a credit and information management company, consumers have been taking on increasing amounts of auto loan debt for almost three years straight. The average borrower had an auto loan balance of $16,769 at the end of 2013. Auto loan debt hit a low point in early 2010 at just $14,764 per borrower, and has been increasing ever since.

Why Consumers Are Taking out Larger Auto Loans

Average interest rates on 60-month new car loans are 4.2% right now, according to Bankrate. At this time last year, the same loan cost 4.09%. But back in 2009, this loan cost consumers 6.91%.

Lower interest rates make it less expensive to borrow more money. On a $17,000, 60-month new auto loan at today’s 4.2% average rate, you’ll pay $315 a month and a total of $1,877 in interest over the life of the loan. Back in 2009, at 6.91%, the monthly payment would have been $336 and the total interest expense would have been $3,154, a difference of $21 per month and $1,277 overall.

Consumers aren’t just taking out larger auto loans, they’re also taking out more of them. The number of loans increased by 3.5 from 57 million to 60.5 million last year. One reason for the increase in loan volume is probably the increase in auto sales, which increased to 15.6 million last year. That’s a 7.6% increase from 2012, and a 50% increase from 2009, when annual sales were just 10.4 million. Edmunds predicts even higher sales in 2014. The increase in sales could be increasing both the number and average balance of auto loans.

“Higher prices of both new and used vehicles make for larger car notes,” says Terry Anderson, partner and manager of Auto USA, which consists of two used car dealerships in the Dallas/Fort Worth area. “The new car business is not quite as generous with rebates as a few years ago,” he says, and manufacturers such as GM are no longer flooding the market with inventory, then discounting heavily to make sales. “The price stability has trickled down to the used car business,” he says.

Consumers may also be taking on more auto loan debt, because they’re feeling better about the economy. The unemployment rate fell from 7.9% in December 2012 to 6.7% in December 2013, and consumers are feeling more optimistic. US consumer sentiment has averaged 71.0 since 2008, according to Thomson Reuters/University of Michigan’s overall index of how consumers feel about their personal financial situations and the overall economy. February’s 81.6 measurement is significantly above that average and about 10 points higher than one year ago. Consumers tend to spend more when sentiment is up.

With improvements in the economy, consumers who were finally able to refinance their mortgages gained enough breathing room in their budgets to afford car payments, and consumers who couldn’t afford cars over the last several years finally started buying.

Hacking & ID Theft: Are you next?

At least 110 million consumers were affected by the hack involving Target and Neiman Marcus retailers. Whether or not millions more will have their identities manipulated and finances ruined within the coming months due to more breaches of security at other stores is anyones guess, says identity theft recovery expert Scott A. Merritt, CEO of Merritt amp; Associates and author of Identity Theft Dos and Donts.

Before you become a victim of identity theft, Merritt offers this tip to guard against it:

bull; Understand how and where it happens. Identity theft is like being robbed when you are away from home; most thefts occur in places where you do business every day. Either a place of business is robbed, a bad employee acts improperly or a hacker breaches the office through the computer.

FCA regulated brokers could be missing out on full advice

Secured loan packager, V Loans, has reminded brokers that even though they might have full authorisation for regulated mortgage contracts, they must apply for interim permissions with the FCA in respect of consumer credit activities.

According to Operations Director, Marie Grundy, there are circumstances that could stop a regulated broker from providing the right advice.

She said:

In discussing a consumers financial position, particularly in relation to consolidating debt as part of a remortgage application, it might become apparent that it would be better for the client to retain the existing mortgage and look at a second charge loan. However, without interim permissions from the FCA, introducing a client to a second charge lender or a specialist packager like us will not be possible.

GroupMe Founder Gets $3.4M to Make Small Business Loans More Accessible …

In the past five years, the number of bank loans under $1 million has dropped by more than 20 percent. This puts small business owners, arguably the driving force of our economy, at a severe disadvantage when it comes to starting a business.

But Jared Hecht, co-founder of startup success story GroupMe, alongside cofounders Rohan Deshpande and Andres Moran, is today launching a totally new service called Fundera, built specifically to facilitate small business funding through alternative lending.

Fundera has received a total of $3.4 million in funding from Khosla, First Round Capital, Lerer Ventures, SV Angel, and various angel investors including Strauss Zelnick, Rob Wiesenthal, David Rosenblatt, and David Tisch.

Fundera is an online marketplace for small business loans. Once SMB owners are on the platform, they can fill out one common application with information on how long the business has been in place, annual revenue, approximate credit score, accounts receivable, among other data points.

Once theyve filled out the necessary information, it only takes seconds to be pre-approved and matched with potential lenders.

Instead of harassing big banks, getting rejected, or (in the best-case scenario) getting approved and waiting months for the cash, Fundera allows entrepreneurs to secure the funding they need in days.

It all started when Hecht saw his cousin-in-law, Zach, struggling to raise funding to open a third restaurant in his thus-far successful Fusian chain of restaurants. After multiple attempts, Zach still couldnt secure a loan from a bank, despite having a profitable business.

Once Hecht started investigating the situation, he realized that the alternative lending space is growing rapidly, but has yet to be touched by the efficiency and transparency of the internet.

And so, Fundera was born.

Unlike the traditional model, which taxes between 5 percent and 15 percent on the borrower side, Fundera only receives a 1-3 percent origination fee, from lenders only. But where does the money come from?

In small business lending, alternative lenders source capital through a variety of sources: credit facilities from banks, institutional investors, hedge funds, private equity, family offices, and accredited investors, explained Hecht. The higher risk that lenders assume is reflected in their respective pricing.

In beta testing, the company has matched 200 business owners with lenders and facilitated nine loans.

Big bank loans to Santa Cruz County small business down 60 percent

Editors Note: This is the first of a three-part series on small business lending in Santa Cruz County. Today: Loans from big banks down 60 percent.

SANTA CRUZ — Three years after the worst of the recession, lending by the nations largest banks to small businesses in Santa Cruz County has grown at a snails pace, similar to the state as a whole, prompting the California Reinvestment Coalition to call on regulators to allow banks to make good loans.

Alan Fisher, author of the coalitions report, found bank loans to California small businesses in 2012 were off 60 percent from 2007, before the economy crashed.

In Santa Cruz County, loans to businesses with annual revenue of less than $1 million totaled 2,440 in 2012, compared to 2,389 in 2009 and 7,237 in 2007.

Women and people of color owning a business found it difficult to get a loan guaranteed by the US Small Business Administration. Only 14 percent of SBA loans were made to women, only 11 percent to Latinos, according to national statistics for fiscal 2013.

Credit needs of the smallest businesses are being ignored, according to Fisher, noting the average SBA loan grew from $165,723 in 2007 to $498,971 in 2013.

In Santa Cruz County, banks made 5,441 business loans for less than $100,000 in 2012, compared to 17,696 in 2007 and 5,759 in 2009.

In low- and moderate-income areas of the county, banks made 1,170 loans in 2012 compared to 3,413 in 2007 and 1,019 in 2009.

Business owners have been turning to merchant cash advance firms, some of which take 25 to 30 percent of the borrowers credit card sales, charging the equivalent of 60 percent interest on an annual basis.

Small businesses normally create two out of every three new jobs in our country but, without banks lending again, we wont see a strong recovery, said Fisher.

He analyzed loan data filed by the nations largest banks with the Federal Financial Institutions Examination Council. As a result, his report did not include Santa Cruz County Bank, which made the most SBA loans in Santa Cruz County in 2012 and 2013, or Santa Cruz Community Credit Union, a significant SBA lender locally.

REMEDIES

Fisher offered several remedies. He suggested regulators focus on the community credit need rather than compare a banks small business lending to its peers. He urged the Consumer Financial Protection Bureau to write regulations required in the Wall Street Reform Act to collect small business loan data including race and gender and make it accessible to the public.

In Santa Cruz County, Wells Fargo made 972 small business loans in 2012 for less than $100,000. That was more than any other national bank, but down from 2,004 in 2009 and 2,630 in 2007.

Bank of America led the national banks in boosting loans to Santa Cruz County businesses with less than $1 million in revenue, from 882 in 2007 to 1,671 in 2012.

In that same category, loans to county businesses with less than $1 million in revenue, US Bank reported increases from 69 in 2007 to 209 in 2012.

Lenders are wary of making long-term loans at fixed rates when interest rates, which have been at historic lows, are expected to rise.

Wages locally have been stagnant, consumer spending flat and many business owners have been, not surprisingly, cautious.

Wells Fargo

Were still post-recession, still digging our way out, said Sandi Eason, Wells Fargos business banking manager for Santa Cruz and Monterey counties, noting business owners have been cautious about borrowing. But things are getting better.

She said her team posted a record year for business loans, SBA and conventional, in 2013, a year not covered by Fishers study.

SBA loans of less than $150,000 are more affordable now, she noted, because the SBA is waiving guarantee fees, a policy that began in November.

Wells Fargo is stepping up its commitment, Eason said, by offering a SBA loan with a fixed interest rate and 25-year term, geared for business owners who want to stop paying rent and buy their building. Its more common for business owners to be offered a shorter term with a balloon payment that must be refinanced, a risky choice when interest rates are expected to rise.

Bank of America

Bank of America does not lend to startups, requiring a business to be in operation for two years and gross $250,000 in annual revenue.

However, practice solution loans can be tailored for doctors, lawyers, accountants and dentists who run their own business, according to Whitney Chen, Bank of America small business relationship specialist.

Weve actually expanded in last two years, she said, noting three small business teams are working in California.

Much of the work is done over the phone, with a toll free line, 866-953-2481, dedicated to small business inquiries rather than at brick-and-mortar branches.

For those seeking a loan of less than $25,000, Chen recommends a business credit card with no annual fee, no interest for the first seven months, and rates after that ranging from 11.24 to 21.24 percent.

Teri Charest, spokeswoman for US Bank, said, We have made a special emphasis on increasing the number of loans, focusing on increasing the number of smaller dollar loans we approve through our SBA Division.

Follow Sentinel reporter Jondi Gumz at Twitter.com/jondigumz

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GroupMe Founder Gets $3.4M to Make Small Business Loans More Accessible …

In the past five years, the number of bank loans under $1 million has dropped by more than 20 percent. This puts small business owners, arguably the driving force of our economy, at a severe disadvantage when it comes to starting a business.

But Jared Hecht, co-founder of startup success story GroupMe, alongside cofounders Rohan Deshpande and Andres Moran, is today launching a totally new service called Fundera, built specifically to facilitate small business funding through alternative lending.

Fundera has received a total of $3.4 million in funding from Khosla, First Round Capital, Lerer Ventures, SV Angel, and various angel investors including Strauss Zelnick, Rob Wiesenthal, David Rosenblatt, and David Tisch.

Fundera is an online marketplace for small business loans. Once SMB owners are on the platform, they can fill out one common application with information on how long the business has been in place, annual revenue, approximate credit score, accounts receivable, among other data points.

Once theyve filled out the necessary information, it only takes seconds to be pre-approved and matched with potential lenders.

Instead of harassing big banks, getting rejected, or (in the best-case scenario) getting approved and waiting months for the cash, Fundera allows entrepreneurs to secure the funding they need in days.

It all started when Hecht saw his cousin-in-law, Zach, struggling to raise funding to open a third restaurant in his thus-far successful Fusian chain of restaurants. After multiple attempts, Zach still couldnt secure a loan from a bank, despite having a profitable business.

Once Hecht started investigating the situation, he realized that the alternative lending space is growing rapidly, but has yet to be touched by the efficiency and transparency of the internet.

And so, Fundera was born.

Unlike the traditional model, which taxes between 5 percent and 15 percent on the borrower side, Fundera only receives a 1-3 percent origination fee, from lenders only. But where does the money come from?

In small business lending, alternative lenders source capital through a variety of sources: credit facilities from banks, institutional investors, hedge funds, private equity, family offices, and accredited investors, explained Hecht. The higher risk that lenders assume is reflected in their respective pricing.

In beta testing, the company has matched 200 business owners with lenders and facilitated nine loans.

Ohio Nissan dealership specializes in bad credit car loans

BOARDMAN, Ohio, Feb. 26, 2014 /PRNewswire-iReach/ — Having a reliable vehicle is essential to everyday life for most Americans. But for people plagued with bad credit, securing a loan for a trustworthy automobile can seem impossible. The professionals at Boardman Nissan take pride in offering car loans to individuals in bad credit situations.

(Photo: http://photos.prnewswire.com/prnh/20140226/MN72581)

By simply getting in touch with someone at the dealership or applying online, individuals in the township of Boardman, city of Warren and the surrounding Ohio communities can be on their way to getting a new or used car. Boardman Nissan also offers the New Chance program which focuses on getting people behind the wheel of a reliable vehicle no matter their credit situation. This program helps people out that have been affected by foreclosure, judgements, collections, repossessions or other situations.

The professionals at Boardman Nissan are proud to offer their services to a wide area of consumers as well. This is why people searching for car loans in Warren, Ohio oftentimes make the short drive to Boardman Nissan. The staff on hand excels in getting people in the right vehicle for them, and getting an affordable rate that isnt going to put them back in a difficult situation.

Boardman Nissan offers the full lineup of new Nissan vehicles, in addition to a large selection of pre-owned automobiles as well. The dealership has a full service center and stocks or can order parts for customer vehicles.

To get in touch with one of the professionals at Boardman Nissan, consumers are encouraged to call 866-879-5141. The dealership can also be reached online at www.boardmannissan.com.

Media Contact: Matt Wickwire, Boardman Nissan, 866-879-5141, mwickwire@boardmannissan.com

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SOURCE Boardman Nissan