R.I.P.: The Death of the Small Community Bank

Despite the title of this article, community banks are not going to croak and die out altogether tomorrow.

However, the U.S. banking industry has been consolidating for the past 15 years. The big gobble up the small.  As a result, banks keep getting bigger. It’s harder to find small banks. 

This could mean it gets harder for small businesses to get loans in the future.  And at the very least, the face of small-business banking will change — in part, for the better and in part, for the worse.

According to research by Celent, smaller banks are on their way to becoming an endangered species. Between 1992 and 2008 the number of U.S. commercial banks under $100 Million in assets dramatically shrank, with the number dropping by 5,410 (from over 8,000 to under 3,000 banks in that size range).

The amount of deposits held by these smaller banks also declined. Today, the top 5 banks in the United States have almost 40% of all deposits. As this chart from the Celent research report shows, smaller banks are bleeding deposits, with the amount of deposts held by small banks declining every year since 1992:

amount of deposts held by small banks declines

Large banks are able to drive operational efficiencies due to economies of scale. The report notes: “Running a bank requires a certain amount of scale, and that floor is rising due to increasing regulatory requirements, channel support, and product support.”  Thus, there’s a lot of pressure for banks to consolidate and get bigger, so that they can get more efficient and profitable.  In other words, they may not be able to afford to stay small.

So what does this have to do with small businesses? Well, it means that as smaller banks go away, small businesses, particularly in rural areas without a lot of competing banks, may have a tougher time in the future getting loans.

I’ve long contended that the main advantage of a community bank over a larger bank is if you need a loan. By developing a personal relationship with the local lending officer in a small community bank, as a business owner you may have a better shot at getting a business loan on favorable terms, especially in borderline situations.

But larger banks can be good news for small businesses, too.  If you’re looking for the most sophisticated banking products; advanced online banking and bill pay technology; extended branch networks/ hours — larger banks usually walk all over the smaller banks.  The wider range of banking products and the convenience of online banking and longer hours — typically provided by larger banks — is a positive development for small businesses.

For your small business, you have to decide what you want most. Do you go for a larger bank that gives you the kind of sophisticated services and banking products that can help make your business more productive,  efficient and profitable? Or do you go for a smaller bank where you can get access to the decision-makers, and forge a relationship that may come in handy for a business loan?

Meanwhile, the Federal government is paying healthy banks to take on weaker banks under the financial system bailout from 2008.  For instance, if you look at this list of banks getting TARP money, you’ll notice many are not even in trouble.  Some have already made “arranged marriages,” such as PNC which quickly acquired National City Bank with some of the TARP money.  That means this consolidation trend will not only continue, but probably increase — and small and midsize banks may disappear faster than ever before.


Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

26 Reactions
  1. One of the problems for small businesses is that the large banks don’t seem to want to take on their business. A number of my clients have been told by the big banks that their accounts are ‘too small’ – meaning the big guys don’t find it efficient and/or cost effective to do as much work (maybe more) on a small business account as a large business account. Small businesses will find it harder than ever to get the money they need to fund their operations.

  2. Micro financing is the way to go!

  3. Jiggy, what do you mean by this ->Micro financing is the way to go!?

  4. As large businesses get into more and more financial trouble and the small business market increases, I think many large banks will start new programs targeting the small business market.

    Micro, VC funding are not going to get the job done. Bootstraping will help small businesses get started, but they will eventually need bank loans.

  5. Anita,
    Thank you for pointing out some things I did not know-concerning community banks.

    How many more casualties are there going to be, because of the financial services meltdown?

    It is really getting ridiculous.

    The Franchise King, Joel Libava

  6. Interesting…now that I think about it, there are no small community banks around me. It’s sad how difficult it’s becoming to find funding to start a business. I wish more would be done to encourage entrepreneurs.

  7. This is a double edged sword with both good and bad aspects. The problem with consolidation is that it may also create more institutions that are “too big to fail”. Said differently, institutions that are so big that their failure could jeopardize the economy.

    There are benefits in diversification…..

  8. Interestingly, there are a number of startup banks in the tri-state area. Commerce Bank comes to mind (just acquired by TD), which had a big impact on the way the bigger companies do business. Around here, the pushed the envelope by opening on the weekends (even Sunday) which forced Chase and Citi to open for most of the day on Saturday. I read an article last week in BW about a new community bank that launched recently and is lending. There may be more of these. Yes, the regulatory effort and the general cost of running a bank is requires scale but its not preventing new banks to emerge. As the big ones collapse, it paves the way for smaller ones to pick up the slack!

  9. There aren’t any small banks left around my area either. And I think that the larger banks tend to snub small businesses and small business owners. But it is possible that they will develop new programs geared towards small business. If they don’t, honestly, they’re missing out in my opinion.

  10. We live in a small town (5,000-10,000 people), and have a large-ish community bank (with about 12 locations in the Western Slope of Colorado).

    However, we’ve had success with our gi-hugic Wells Fargo bank, because we have a personal relationship with our mortgage person.

    We tried to refinance through the non-local Wells Fargo in Minnesota (to save “middle-man money”)–no go.

    But, we tried through our local banker (who got us our first house loan to begin with), and it worked! She knows us, so she had the incentive to seek out special programs, etc., instead of dealing with us on a “volume” basis.

    So, even sans community banks, personal relationships can help a lot.

  11. I wonder if this just happens to be the current sway of the pendulum. It would seem that technology would make it easier for small community banks to exist. It also seems that the issues in big banks and lack of personalized service will cause some sway back toward small banks. It seems like it may be a market that will grow again. In the area I live in it seems like their are a lot of small banks and many of the big names as well. Could just be here.

    Thanks for the article.


  12. It is amazing how times change. Hopefully this is just an example of moving to better things…hopefully.

  13. I want to give a huge shout-out to our community bank, locally owned Stockyards Bank of Louisville, KY. After 20+ years of sticking with the bank that was, at the time, closest to us, and as each one got gobbled up by newer, bigger bank with ever-worsening service (ending up with Chase) we switched banks to Stockyards.

    We had dreaded what a pain it would be to switch our several personal and business accounts, but Stockyards made it easy – and has been making it easy ever since. Oh what a difference it makes to be known, to have somebody across the counter or on the other end of the phone line or email who actually cares about our sucess, cares to help solve our problems. And guess what — since they did not get tied up in poor loans, Stockyards has lines of credit at good rates available for small businesses with good credit.

    Relationships do matter. Thanks for the great piece.

    Eleanor Flagler Hardy
    The Society of International Railway Travelers


  14. My very profitable, stable Bank of Marin is bucking the tide thank goodness as i am among the many loyal, secure customers – both for my personal and my business account (the founders started at big banks)

  15. This is a topic I have been looking for. What are the best small banks to do business with? I’m with WAMU which is now Chase and don’t want to support a bank that got bought out. Anyone have any data on this?

  16. Jason Gorham:

    One bank that could be of interest for you is BB&T. It started out as small banking institution in 1872 and has now 1500 offices. Here you could read BB&T CEO John Allison’s take on the financial situation:


    I have written about this bank a couple of times on my blog. See the link in “Martin Lindeskog” Says:

  17. I’m with WAMU which is now Chase and don’t want to support a bank that got bought out. –> I agree Jason. You will really lose that confidence if that’s the case.

  18. I think that community banking goes in cycles, and now we are in a consolidation period. Which will be followed by the creation of many “new” community banks. These are the banks I prefer to use (I have a distrust of large banks, partially supported by the TARP excessed). Often overlooked is that if you find a particularly good community banl, they can often make great investments before the next cycle of consolidation comes along.

  19. @Kris Bovay — it’s true that some banks have disdain for small businesses. But some large banks value the business of small businesses. 🙂

  20. But some large banks value the business of small businesses. -> It would be best Anita if you could atleast share a few of the banks you know who value small businesses. So we could have that idea who to turn to.

  21. Hi Anita
    I can’t argue with your data, but working with several clients in the banking world I see community and local banks doing very well. I see your points, but i have to believe that the attributes that draw us to smaller, local banks are what will keep them around. Despite the economy, I know of four new banks being started today. Imagine.

    And investors are putting their money in to kick these banks into high gear because people want to know where there money is — in the hands of local people they know and trust.

    I bank locally with a small community bank for my retirement assets and a few other things and I bank with a large bank (Wells) for my main business banking. The advantages you cite for each are why I put a bit in both baskets. The relationships matter in both cases and I receive service at both banks because I maintain the relationship, and actively try to help each of my bankers with their efforts to land new accounts, customers, etc…

  22. Community Banks or Independent Banks will never disappear as they have been part of the fabric of commerce since Hamilton, Jefferson, Washington and Lincoln. People always want to believe they have a choice. We often forget that while banking is a transaction business it is a relationship with the banker that sustains it over time. Todays small banks can operate more efficiently than their large counter parts as they can be paperless from the day they open. They actually have a greater selection of technology driven products than the large banks. oh and recently we all learned the to big to fail theory was flawed. we need to return to a time where we knew our bankers and they knew us but we do need ones who are more business astute than just bankers. this site has a lot of content on the subject http://www.denovobanks.com