The head of the small-business service group at FleetBoston Financial in Boston says his division has not seen any “wild gyrations” in the performance of its customer bases.

At year-end, many major companies came out with dire earnings reports, but at least one market segment weathered the recession well: the commercial lending sector.

While credit availability tightened, it was much more readily available during this recession than previous ones, and lending to the small-business sector actually grew, according to a recently released report by the Federal Deposit Insurance Corp.

While outstanding commercial and industrial loans fell by 9 percent in the third quarter of 2001, the decline continued and reached 11 percent in the fourth quarter. Overall, however, commercial credit grew at a slow rate different than in the last three recessions, according to the report. Another standout in this recession is the effect that the Federal Reserve’s rapid lowering of interest rates resulted in, inspiring borrowers to refinance corporate debt.

The Fed lowered the federal funds rate target 11 times, and the prime rate offered by banks fell to 4.8 percent last December, according to the report. “By comparison, the prime rate barely moved downward in the 1990-91 recession, falling from 10 percent in July 1990 to 9 percent in March 1991,” the report states.

Large borrowers tended to bypass banks in favor of the capital markets, but smaller businesses continued to rely on banks for credit.

Ralph Sillari, executive vice president at FleetBoston Financial, said in the division he heads up – the small-business service group – credit is much more available. While there has been some tightening, it is proportional to the size of the credit request, he said.

“In small business, which I’m responsible for, we have not seen the wild gyrations in the performance of our customer bases,” he said.

Sillari’s group deals with customers that have between $1 million and $10 million in annual revenues.

“Our credit production has actually increased in my market segment by a little bit more than 20 percent year-over-year from 2000 to 2001. We still see very good demand occurring in the couple months of this year,” he said.

‘Harder to Move’

Why this recession isn’t nearly as bad for the small business sector as the last one lies in the reasoning behind the tightening of credit. In the late 1980s and early 1990s, said Sillari, banks tightened credit not because of what was happening with the performance of the customer base but rather because of possible financial instability of the banks themselves.

“There are no financial institutions I’m aware of that have anywhere near the problems for the balance sheets that any of the banks did years ago. We’re certainly incredibly strong,” he said.

In the FDIC report, authored by financial economist Lisa Ryu, she wrote, “Despite the recent tightening of lending standards, the vast majority of FDIC-insured banks currently have the financial wherewithal to expand their loan portfolios in 2002.”

Small business credit activity is up over last year’s figures at Citizens Bank as well, according to Charles J. Clark, a senior vice president of regional banking.

One telling factor as to whether credit availability is still good is the competition, he explained.

“You see the competition is still very hot [for small business lending]. In good times customers can go to a different bank to find credit, but in bad times, they’re almost stuck with the bank that they have because it’s harder to move to another bank,” Clark said.

While credit remains available, many companies, including small businesses, pulled back on the amount they were spending nationwide as well as in Massachusetts. “The slowdown in commercial credit in 2001 partly reflects considerably weaker demand for credit resulting from a sharp curtailment of business investment in plant, equipment and inventories,” wrote Ryu.

This is when the more intimate relationships that tend to develop between banker and small business borrower becomes important. Nowhere is that more true than in the smaller banks, such as Commonwealth National Bank in Worcester. Because it is a de novo, most of the bank’s loan portfolio is from the small-business sector where loans can range from $10,000 to $1.5 million.

Carl Bindoo, vice president and commercial lender at the bank, said officials at a smaller bank can afford to look at customers individually and decide whether to loan money, sometimes based more on the person’s reputation than on whether the business is hugely successful.

“I have one customer that supplies to the defense industry,” Bindoo cited as an example. “In the past two years, they probably suffered [a] 40 percent decline in sales because the government was spending less, but because of [the terrorist attacks that] happened in September, this company, for the first two months of this year, is on a pace to double their sales” from their best year in 1999.

Not having sweeping policies that apply to all customers enables Commonwealth to lend to many businesses that may not even qualify for loans at other, larger banks, because they don’t have the potential for extended growth but instead, serve the community well.

“I think the small business customer really values a relationship with a banker … The accessibility is a very, very critical factor for them. They like to know that if there’s a need, they can pick up the phone, call the loan officer and discuss that need,” said Bindoo.

“Normally, in troubled times, the banks are a spot to lean on. They can, in effect, help finance people out of the recession,” said Clark. That interplay helped drive the small-business segment during the recession.

Fleet’s small business sector saw a more cautionary business practice from its customers.

“In our portfolio as well, we have probably seen a little bit [of a] shift in the second half of last year from people who were requesting term loans or real estate mortgages to more lines of credit,” said Sillari. The average use of lines of credit is from 40 to 50 percent, he said, rather than the full 100 percent of other loans.

“[Customers] probably weren’t thinking about adding that additional piece of equipment if they could get by without it,” he said, adding that businesses are already bouncing back and slowly returning to the purchase market.

The small business market is not subject to the public markets as much as larger companies are, even those that aren’t public, said Sillari. As a result, entrepreneurs have never really lost a lot of confidence in their businesses or the economy, which resulted in the consistency that helped preserve the small-business market.

“I think once we get through this, there will be even more confidence that the small business owners, who by nature are pretty gritty people to begin with [having survived the recession] … they’ll be even more confident in their businesses than before,” said Sillari.