Having recently recognized Small Business Saturday, it’s a good time overall to consider the vital role of small businesses, and of community banks as part of local economies across the country. As a former business owner, myself, with a love of entrepreneurship that strongly influenced my career in community banking since 2008, it’s also a time of personal reflection. There are over 33,000 small businesses and over 4,000 community banks in the U.S. They play an important role in enhancing the quality of life within the communities they do business.
Most community banks can be considered small businesses, with less than $10 billion in total assets (versus regional banks having $10 to $100 billion or more each). Community banks—which exist in all 50 states—tend to focus on services for the local communities in which they are based and keep money circulating locally. Combined, they comprise almost 97% of all of the banks operating in the U.S.
That being said, competition is rising for community banks—from the growth of non-banks like credit unions, challenger banks, and fintech companies that are not required to comply with the same regulations as community banks. “Way too big banks” (aka those too big to fail) also get an advantage because the government gives them an implied 100% deposit insurance versus everybody else (other institutions) getting the normal $250,000, during “systematic” stress. The market continues to consolidate, and the share of large banks is growing. Simultaneously, margins for smaller banks are getting squeezed and have been for years.
While there were 4,129 community banks in the U.S. in 2023, this is a 46% drop from the number in 2003. And it is an over 70% drop from the 14,300+ community banks in the U.S. at the end of 1988. Banking Strategist points to a community bank consolidation rate of 2.3% in the last 12 months alone, based on FDIC call reports, and 1.3% consolidation in Michigan (78 community banks) during that time period. This is worrisome as community banks provide personalized and regionally localized services that many trust and depend on.
What should local business owners and consumers know about community banks, their services and how they impact small businesses? Here are five ways community banks serve consumers, small businesses, and local communities and should be valued for their place within a local economy.
- Community banks and small banks do a large, disproportionate share of small business lending – Even though they are smaller, community bank lending is larger to small businesses when compared to the share of big banks. Community banks make about 60% of all small business loans and 80% of agriculture loans according to Independent Community Bankers of America (ICBA). This compares to the community bank market share, which is less than 15% of total assets as of 2023, versus assets of the five largest commercial banks, accounting for about half of all banking assets.
They can be counted on in times of need, too. Community banks made 60% of all PPP loans—and 72% of PPP loans to minority businesses during the pandemic, ICBA.
Community banks may also look beyond credit scores, income, and other data big banks may focus on in considering lending. Sometimes they may consider the business story, larger history, and background in addition to financials in determining whether or not to provide a loan.
- Community banks are focused on relationships – As part of the local community, community banks tend to prioritize local businesses and residents and may work harder to gain their business. They might be more timely with loans, with decisions made locally versus on a national level. Where self-service and channels at larger banks can be complex, customers typically can directly reach a live person at a community bank. And part of the relationship should include moving your deposit accounts to community banks you are working with, because that is critical to the banks’ ability to be able to provide high value loans to clients. Leaving deposit relationships with a large bank that you are no longer working with is akin to rewarding them for poor service or why ever you left and punishing the community bank who went the extra mile to help you.
Overall, small businesses owners say they experienced a higher level of satisfaction with community banks over larger banks. About 80% of those surveyed in the Federal Reserve Small Business Credit Survey (2021) said they were happy with their small-bank lender, versus 68% indicating satisfaction with bigger banks.
- Community banks invest in the markets in which they are located – They invest in the community by providing business loans, giving back to organizations and charities, and employing people locally. By their very nature of being local, community banks tend to be focused on the community over national or large regional areas. Unlike some institutions which might take deposits in one state and lend in another, community banks primarily invest in the markets in which they are located. With management and employees often also living in the local community and surrounding areas, they may hold themselves and employees to higher standards.
Community banks also tend to be focused on supporting local businesses. Their employees tend to be involved in giving back to area nonprofits and causes. They may hold informative or networking events to help residents and local businesses. As a result, these smaller banks give back to area businesses and the local economy.
- Community banks are a leading local provider of jobs – Some may be surprised to learn that community banks may be bigger area employers than larger bank counterparts. At Oxford Bank, headquartered in Oxford, Michigan, we currently employ 145. Nationwide, community banks employ 700,000 people, ICBA.
- Community banks are prioritizing safety, technology, customer experience. Without national name recognition, community banks often have to work harder and be even more scrappy to obtain and maintain business. Every business today is a tech company, and community banks are no different. Technology and providers have come a long way to help smaller banks provide big bank technology experience, alongside a personal experience advantage. Over 90% of community banks in a recent BNY survey report being prepared to initiate digital transformations. Focusing on efficiency, security, innovation, and customer service, to make banking even, easier tops, our, and many other smaller banks’, technology priorities.
AI also holds huge promise for analysis and continuous transaction and security monitoring. It allows community banks to be more efficient without impacting their personal service. And, of course, deposits of up to $250,000 per account owner are insured, which means you usually get insured for more than the standard $250,000, plus most community banks are able to insure all of your deposits regardless of the dollar amount using well-established services.
Community banking is a relationship business. One of my favorite things about it is the ability for our different departments to pull together internally, and to make an impact on our combined team, customers, and communities.
I urge small businesses to consider a banking relationship with a local community bank. Community banks may better serve local businesses, keep money local, tailor services to support the needs of regional businesses and consumers, and invest in the community in many ways. And when you call a community bank with a challenge, someone is apt to pick up the phone, greet you by name, and ask how they can help.
David Lamb is Chairman, President and CEO of Oxford Bank and its parent company, Oxford Bank Corporation, headquartered in Oxford, Michigan, operating continuously under local ownership and management since 1884, and celebrating its 140th year in business this year. Lamb started 30+ years ago as a bank examiner working at the smallest to the largest banks. During the early 2000s, he operated a business as an importer of teak and mahogany furniture from Thailand and Indonesia with stores in Ann Arbor and Ferndale which taught him you can’t be an entrepreneur part-time as doing so needs beyond full time attention to be successful. He has been an executive leader for the past 20 years, focused on business relationships and overall leadership as a CEO.
