Access to Capital and Credit for Access to Capital and Credit for Small Businesses in AppalachiaSmall Businesses in Appalachia

Presented by 

Greg Bischak Senior Economist

Appalachian Regional Commissionat

Federal Reserve Bank of Cleveland 2007 Community Development Policy Summit

Cleveland, OH

Access to Capital and Credit for Small Access to Capital and Credit for Small Businesses in AppalachiaBusinesses in Appalachia

ARC commissioned a study by ARC commissioned a study by National National Community Reinvestment CoalitionCommunity Reinvestment Coalition to to examine access to capital and credit in the examine access to capital and credit in the Appalachian Region.Appalachian Region.Examined a range of issues, including: Examined a range of issues, including: �� Impact of bank consolidation, relationship and Impact of bank consolidation, relationship and 

transactional lending, credit scoring, role of transactional lending, credit scoring, role of bank branches, discrimination, and the impact bank branches, discrimination, and the impact of CRA on access to capital & credit.of CRA on access to capital & credit.

�� Released in April, 2007Released in April, 2007

Appalachian Region

• 13 States

• 410 counties

• 200,471 sq. miles

• 23 million people

• $680 billion GRP

By the mid 20th century, Appalachia had becomeBy the mid 20th century, Appalachia had become“a region apart“a region apart––geographically and statistically.”geographically and statistically.”

−− PARC report, 1964PARC report, 1964

� One of three Appalachians lived inpoverty, 50 percent higher than thenational average.

� Unemployment was 40 percenthigher than the national average.

� Between 1950 and 1960, net migration data showed a populationloss in the region of more than twomillion people.

� The high school dropout rate inAppalachia exceeded 50 percent.

Distressed (223)

1960

Distressed Counties in Appalachia

Distressed counties:Distressed counties:

••150% or more US 150% or more US unemployment rateunemployment rate

••150% or more US 150% or more US poverty ratepoverty rate

••67% or less per Us 67% or less per Us capita incomecapita income

County Economic 

Status, Fiscal Year 

2007

Distressed (78)

Transitional (221)

Competitive (26)

Attainment (7)

Economic Status

At-Risk (78)

Measures of Progress in Access to Measures of Progress in Access to Capital and CreditCapital and Credit

Appalachia compares favorably to Nation Appalachia compares favorably to Nation on key indicators of lending.on key indicators of lending.Appalachia also is similar to the nation in Appalachia also is similar to the nation in its business demographics.its business demographics.Appalachia has significant infrastructure Appalachia has significant infrastructure for lending.for lending.Despite progress, significant credit gaps Despite progress, significant credit gaps remain and need to be addressed.remain and need to be addressed.

Lending Infrastructure in Lending Infrastructure in AppalachiaAppalachia

An evolving lending infrastructure which has An evolving lending infrastructure which has enhanced access to credit, albeit with gaps.enhanced access to credit, albeit with gaps.227 banks with $500 billion in assets. 227 banks with $500 billion in assets. These banks made $5.4 billion in CRA These banks made $5.4 billion in CRA community development loans and investments community development loans and investments over the 2.5 years period examined.over the 2.5 years period examined.100 Community Development Financial 100 Community Development Financial Institutions including Institutions including CDFIsCDFIs, ARC Revolving , ARC Revolving Loan Funds.Loan Funds.

Appalachia Compares Favorably to Appalachia Compares Favorably to Nation in Key IndicatorsNation in Key Indicators

Small business loanSmall business loan--toto--deposit ratio for deposit ratio for Appalachia was 7% versus 5.2% for nation Appalachia was 7% versus 5.2% for nation �� 35% higher in Appalachia.35% higher in Appalachia.

Banks in Appalachia provided 57.5 small Banks in Appalachia provided 57.5 small business loans per branch in nonbusiness loans per branch in non--metro metro counties.  counties.  Nationally banks provided 53.2 loans per Nationally banks provided 53.2 loans per branch in nonbranch in non--metro counties.metro counties.

Lending by Minority Population Share  Lending by Minority Population Share  in Counties: Appalachia vs. Nationin Counties: Appalachia vs. Nation

Minority Population #of counties* # SB Loans/#SB

Minority Pop 0-20%Appalachia 371 39.4%Nation 2,100 41.8%

Minority Pop 20-50%Appalachia 41 51.4%Nation 831 42.4%

Minority Pop >50%Appalachia 6 53.6%Nation 263 40.2%

* Includes Virginia Independent Cities

Similarities in Lending Trends: Similarities in Lending Trends: Appalachia and NationAppalachia and Nation

41.4% 41.7%

0%

10%

20%30%

40%

50%60%

70%

80%90%

100%

Appalachia Nation

Percent of Small Businesses Receiving Loans

Within Appalachia, Differences in Within Appalachia, Differences in Access to CreditAccess to Credit

Differences by State.Differences by State.Differences in Metro and NonDifferences in Metro and Non--Metro Counties.Metro Counties.Differences by Size of Business Differences by Size of Business �� Just 28% of businesses with less than $1 million in Just 28% of businesses with less than $1 million in 

revenues received loans.revenues received loans.Less Access in Distressed Counties:Less Access in Distressed Counties:�� 32% of businesses in distressed counties;32% of businesses in distressed counties;�� vs. 42% in nonvs. 42% in non--distressed counties receive loans.distressed counties receive loans.

Less Access in Low & ModerateLess Access in Low & Moderate--Income Census Income Census Tracts.Tracts.

Differences by State in Credit AccessDifferences by State in Credit Access

Percent of Small Businesses Receiving Loans

32% 33% 34% 38% 38% 40% 41% 44% 45% 47% 48% 49%56% 58%

0%10%20%30%40%50%60%70%80%90%100%

KY

WV PA NY OH VAApp

alach

ia

TN SC GA NC MD AL MS

Lending in Distressed & NonLending in Distressed & Non--Distressed Distressed CountiesCounties

Lending by Income Group of Census Lending by Income Group of Census TractTract

41.40%35.39%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

All Census Tracts LMI Census Tracts

Percent of Small Businesses Receiving Loans by Income Category of Census Tract

Lending to Smallest Business in Lending to Smallest Business in Low/Mod Census TractsLow/Mod Census Tracts

35.39%

23.63%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

All Businesses Businesses withRevenues <$1 million

Percent of Small Businesses Receiving Loans in Low- and Moderate- Income Census Tracts

Role of Branches: More Branches Role of Branches: More Branches Means More LoansMeans More Loans

1,2871,2872222MedianMedian

463,475463,4757,0207,020Above median Above median -- totaltotal

23523566MedianMedian

66,83466,8341,3241,324Below median Below median -- totaltotalMedian # Branches =11Median # Branches =11

Total #SB Loans Total #SB Loans --All LendersAll Lenders

# Branches # Branches -- All LendersAll Lenders

Influence of Credit Scores on Influence of Credit Scores on Lending LevelsLending Levels

Higher the score (lower the risk), the Higher the score (lower the risk), the higher the number of loans in a county higher the number of loans in a county 

Distribution of scores not much different by Distribution of scores not much different by distress or metropolitan status of countydistress or metropolitan status of county

MidMid--size bank lending levels do not vary size bank lending levels do not vary by differences in credit scoresby differences in credit scores

Role of MidRole of Mid--Size BanksSize Banks

Higher Market Higher Market Share in Rural Share in Rural & Distressed & Distressed CountiesCountiesRelationship Relationship Lending not Lending not influenced by influenced by credit scorescredit scores

Mid-Size Bank Market Share in Metro and Rural Counties

12.32%6.49%

0%

5%

10%15%

20%

25%

30%

35%40%

45%

50%

Metro Areas Rural Areas

Perc

ent o

f Loa

ns b

y M

id S

ize 

Ban

ks

Role of SBA LendingRole of SBA LendingSBA Lending has small overall market SBA Lending has small overall market shareshareHigher market share in rural counties than Higher market share in rural counties than metro counties.metro counties.Not as successful in reaching minorities as Not as successful in reaching minorities as nonnon--SBA backed lending.  SBA backed lending.  �� Particularly AfricanParticularly African--Americans;Americans;�� May reflect the relatively high nonMay reflect the relatively high non--SBA SBA 

lending to minorities which may reduce lending to minorities which may reduce demand for SBA lending by minorities in demand for SBA lending by minorities in Appalachia.Appalachia.

Regression Analysis of Small Business Regression Analysis of Small Business Lending in Appalachian Counties 2003Lending in Appalachian Counties 2003

Three models for different dependent variables: Three models for different dependent variables: 1.1. lending by all lenders of all asset sizes reporting CRA lending by all lenders of all asset sizes reporting CRA 

small business loan data, small business loan data, 2.2. lending by midlending by mid--size banks with assets between $250 size banks with assets between $250 

million and $1 billion, and million and $1 billion, and 3.3. SBA lending.SBA lending.

These models were developed to analyze the These models were developed to analyze the impact on lending of county level demographic impact on lending of county level demographic & economic factors as well as:& economic factors as well as:�� the influence of bank concentration;the influence of bank concentration;�� credit scoring;credit scoring;�� the number bank branches, and other factors.the number bank branches, and other factors.

*Highlighted - 5% level of significance

Firm Size (10-19 employees) 32.80750.2136

Firm Size (5-9 employees) 21.14740.0830

Firm Size (1-4 employees) 10.04310.0029

Credit Score (medium risk) 3-0.9786-0.0675

Credit Score (small risk) 2-1.3258-0.0869

Credit Score (Low Risk) 12.95150.2083

Personal Income Growth1.40230.5733

HHI, ICB + THRIFT @50%, COUNTY LEVEL-11.9991-0.0002

Number of Branches12.31470.0133

Median Household Income6.25120.0000

% Hispanic2.84625.7996

% Black2.70370.8410

MSA/Non-MSA1.78970.1519

Distressed/Non-distressed-3.4101-0.3346

Intercept20.52935.1486

Coefficientst-score*Estimated Coefficients

0.77370.7815

Explanatory VariablesAdjusted R 

SquareR Square

All Lenders: Log No. Small Business Loans (Full Model)

Significant FindingsSignificant Findings

More bank branches result in more small More bank branches result in more small business loans for banks of all sizes business loans for banks of all sizes �� and for SBA 7(a)and for SBA 7(a)--guaranteed loans. guaranteed loans. 

Lower lending occurred in distressed Lower lending occurred in distressed counties than noncounties than non--distressed counties. distressed counties. Counties with higher minorities population Counties with higher minorities population shares had higher lending levels. shares had higher lending levels. MidMid--size bank lending on a county level size bank lending on a county level was unaffected by the distribution of credit was unaffected by the distribution of credit scores.scores.

Additional FindingsAdditional FindingsLending by all banks was lower in counties with Lending by all banks was lower in counties with higher levels of concentration.higher levels of concentration.�� CountyCounty--level bank concentration however did level bank concentration however did 

not impact midnot impact mid--size bank lending.size bank lending.Lending by all banks was higher in counties with a Lending by all banks was higher in counties with a higher portion of businesses with 10 to 19 higher portion of businesses with 10 to 19 employees.employees.�� small businesses employment size did not affect midsmall businesses employment size did not affect mid--

size bank lending.size bank lending.

Findings suggest that SBA 7(a) program was Findings suggest that SBA 7(a) program was focused on nonfocused on non--metro areas.metro areas.

Analysis of Appalachian CRA ExamsAnalysis of Appalachian CRA Exams

The regulatory agency break down for the bank sample:

14278220Sample Size7.7%7.7%7.7%OTS24.4%25.6%25.5%OCC18.3%9.0%15.0%FRB48.6%57.7%51.8%FDIC

Large BanksSmall BanksAll Banks

Sample drawn from 2001-2005, with 90% from 2002-2004 period.

Role of CRA Role of CRA –– Ratings Matter:   Ratings Matter:   $5.4 Billion in CD Financing $5.4 Billion in CD Financing 

Median Community Development Investments by CRA Rating

$84,995 $858,388$2,003,915

$17,250,000

$0$2,000,000$4,000,000$6,000,000$8,000,000

$10,000,000$12,000,000$14,000,000$16,000,000$18,000,000

Needs toImprove

LowSatisfactory

HighSatisfactory

Outstanding

More Community Development More Community Development Financing by Metro BanksFinancing by Metro Banks

Community Development Lending in Metro and Rural Areas

Metro Areas, $3,269,832,196

Rural Areas, $264,387,608

Community Development Investment in Metro and Rural Areas

Metro Areas, $1,696,854,929

Rural Areas, $205,892,899

CRA Community Development Financing: CRA Community Development Financing: More Housing than Small BusinessMore Housing than Small Business

Community Development Loans by Purpose: Housing and Small Business

Housing, $297,397,431

Small Business, 

$117,271,479

Community Development Investments by Purpose: Housing and Small Business

Housing, $807,413,830

Small Business, $174,107,733

Key Findings & ImplicationsKey Findings & ImplicationsConsider incentives for developing more bank Consider incentives for developing more bank branches and growth of community banking.branches and growth of community banking.�� e.g. NY Banking Development District program.e.g. NY Banking Development District program.

Ensure continued efficacy of CRA Ensure continued efficacy of CRA �� integrity of midintegrity of mid--size exams & enhance small business size exams & enhance small business 

data.data.Increase capitalization and sustainability of Increase capitalization and sustainability of Community Development Financial Institutions in Community Development Financial Institutions in region.region.�� Particularly development venture capital.Particularly development venture capital.

Conduct longitudinal research to assess the Conduct longitudinal research to assess the impact of CRA and further explore lending impact of CRA and further explore lending trends to distressed counties and minority trends to distressed counties and minority communities.communities.

Greg BischakGreg BischakSenior EconomistSenior Economist

Appalachian Regional CommissionAppalachian Regional Commissiongbischak@arc.govgbischak@arc.gov

www.arc.govwww.arc.gov