Small business lending in Baltimore plummeted over a decade, while at the same time banks nearly doubled the deposits they took in from the city, a Johns Hopkins University study found.
In 2007, banks and other lenders doled out $457 million in loans to Baltimore small businesses. Amid the recession, that number plunged to $197 million in 2010, but by 2016 it only recovered to $307 million, the Hopkins researchers found. That’s a third less than a decade earlier.
The number of loans from all types of lenders declined by more than half to 8,274 transactions in 2016, from 17,084 loans. The average loan size shrank from $191,819 per loan to $70,877.
At the same time, bank deposits in the city nearly doubled, reaching $26.5 billion.
“We need to ask our large banks to do more here,” said Mary Miller, a senior fellow with Hopkins’ 21st Century Cities Initiative, which wrote the report. “They have doubled their deposits. They have a lot of Baltimore’s money. They need to devote more attention and resources to small business lending.”
Hopkins released the study as a comprehensive look into bank lending following a report last September that evaluated small business access to venture capital funding and loans. Last year’s review called for a more robust financing system to help small companies grow and to attract new businesses.
The researchers examined the most recent 10 years of loan and deposit data from lenders that are required to report to federal regulators, including depository banks, non-branch banks and credit card institutions. They did not review mortgage loans, community development loans or loans to larger city businesses, choosing to focus on small business loans that they said represent the largest source of job creation.
Baltimore suffers from bank consolidation that has left it a “branch town,” the new study argues, with many of the largest banks showing significantly higher lending in their headquarters cities than in Baltimore.
Lending by depository banks, those with branches but not necessarily headquarters in the city, slid to $212 million in total reported small business loans in 2016, a 32 percent drop from $311 million in loans in 2007.
“We are a branch town to these banks, and the decisions tend to be made more in headquarters than in a branch,” Miller said.
The drop in lending may reflect a lack of creditworthy borrowers, said Peter Lorenzi, a professor of management at Loyola University’s Sellinger School of Business.
“The fact that there’s more money available in the banks doesn’t necessarily make the borrowers more attractive to those bankers,” Lorenzi said. “It’s a supply of money. Is there a supply of credible borrowers?”
Baltimore also has a high concentration of health care, nonprofit and education sectors, “not the kinds of things that drive entrepreneurship and small business,” Lorenzi said. “The general economic infrastructure of the city is not entrepreneurial,” unlike a place such as Silicon Valley,
Student loan debt also has increased over the past decade, so indebted recent college grads who might want to start businesses may be less attractive to lenders.
The study did not come as a surprise to the Baltimore branch of the NAACP, the head of the chapter said.
"Access to capital is the life blood of all small businesses,” Sandra Cooper, president of the Baltimore branch, said in an email. “While small businesses in general are suffering from capital shortages, minority and black-owned businesses are especially challenged.”
Cooper said the group hopes to conduct a deeper review of the study and work more closely with banks and political leaders to turn the situation around.
The Hopkins report determined the loan-to-deposit ratio of the top depository banks in Baltimore, those serving 98 percent of the market. Of 14 banks on the list, Bank of America and M&T Bank, the two largest city banks by deposits, had among the lowest ratios.
Bank of America, with $10.4 billion in deposits and $22 million in small business loans, had a ratio of 0.21 percent, offering average loans in the city of $22,689.
M&T, with $8.3 billion in deposits and $55 million in small business loans, had a 0.66 ratio, and average loans to small businesses of $251,306.
By contrast, Columbia Bank had a ratio of 8.07 percent and Howard Bank, which acquired First Mariner Bancorp March 1, had a ratio of 6.32 percent.
Some in the industry have argued that such rankings are skewed in favor of smaller, community banks, because large banks take in deposits from large corporations, leading to pumped up deposits and lower shares of small business lending. And, some say, the decade under review covered a time when lending peaked just before the recession, after which lending declined sharply.
Phil Hosmer, a spokesman for M&T in Baltimore, said the bank was not familiar with the report, its methodology or findings, and “would not be comfortable commenting on it at this time.”
But he pointed to the bank’s strong record of small business lending. The bank announced in October that it remained a leading provider of new loans guaranteed by the U.S. Small Business Administration during the 2017 federal fiscal year, ranking eighth nationally in the SBA’s most widely used program, known as 7(a) loans. M&T said it has long held the top position in small business lending based on the total number of 7(a) loans in Baltimore, Buffalo, Delaware and Washington. Its average loan under that program was $147,138, with the bank offering $183.6 million in financing to 1,248 business owners.
“We are proud to have once again expanded our total lending to small businesses over the past year, and SBA loans are one of the many tools we have to help entrepreneurs start and grow businesses,” said Eric Feldstein, M&T’s senior vice president for business banking, in an announcement in October. “Whether it’s the small manufacturer buying a new piece of equipment, or the neighborhood dentist opening a second office, small businesses are the backbone of the economy across many of our communities.”
A Bank of America spokesman said the bank extended $630 million in small business loans in Maryland last year and more than doubled its small business lending nationally on an annual basis between 2010 and 2016. Don Vecchiarello, the spokesman, said the bank is the second biggest small business lender in the country, with $35 billion in outstanding small business loans.
“It represents our commitment to providing funding to small business owners who fuel the nation’s jobs and economy,” Vecchiarello said.
Miller, who wrote the report with Ben Siegel, the Hopkins’ initiative’s executive director, and Mac McComas, program coordinator, said she hopes the study will spur further conversation about banks doing even more.
The authors recommend that banks not only do more direct lending but help small businesses indirectly.
Banks could make SBA guaranteed loans and also help capitalize community development financial institutions that offer financial services to under-served communities. And they could work with city and state loan programs to help leverage those typically limited programs. Public loan programs would reach more borrowers if they were to be used as loan loss reserves or guarantees for much larger private bank loans, the study says.
“I would like to see a constructive conversation about how can we strengthen the financial system in Baltimore to make it hospitable for growth,” Miller said.