Coronavirus Makes Community Count in Banking

In the face of an economic shutdown triggered by the coronavirus pandemic, small banks stepped up in a big way to ensure local businesses received government aid.

Over the past 50 years, the American community bank has become a threatened species. Yet these institutions rose to the occasion amid the coronavirus-induced economic shutdown. The Small Business Administration reported that 20% of loans made in the first round of the Paycheck Protection Program, were funded by banks with less than $1 billion in assets, and 60% were funded by banks with less than $10 billion in assets. In total, the first round of lending delivered $300 billion to 1.7 million businesses.

There were just 5,177 bank or savings institutions insured by the Federal Deposit Insurance Corp at the end of 2019 —a fraction of the 24,000 commercial banks in the U.S. in 1966. The majority of these institutions were local, community banks, some with only a single branch serving their market. But over the past 25 years, the banking industry has increasingly become the domain of large conglomerates that combine commercial banking, retail banking, investment banking, insurance, and securities trading under one roof.

Technology has accelerated this consolidation further as consumers select the institutions they can most easily access through their smartphone. Deposit market share tells this story most starkly: in 2019, over 40% of total assets were held by the four largest banks alone. From 2013 to 2017, total deposits at banks with assets of less than $1 billion fell by 7.5%.

Despite that erosion, small banks were willing and able to help hurting businesses. After the dust settled from the initial round of PPP loans, many of the nation’s largest banks faced lawsuits alleging they prioritized larger, more lucrative loans over those to small businesses with acute need.

Community banks filled in the gaps. USA Today reported that a food truck business with a long relationship with Wells Fargo & Co., but couldn’t get a banker on the phone during the second round of PPP. Instead, Bank of Colorado, a community bank in Fort Collins, Colorado, with about $5 billion in assets, funded their loan.

Another one of those banks, Evolve Bank & Trust, an institution with about $600 million in assets based in Memphis, Tennessee, answered the calls of customers and non-customers alike. Architecture firm Breland-Harper secured a loan through Evolve; firm principal Michael Breland the called the funds “crucial in meeting payroll.” Special education program The Center for Learning Unlimited was turned away at 15 banks for a PPP loan. Evolve funded their loan within days.

The coronavirus pandemic has proven two things for small financial institutions. First, community still counts — and it may expand beyond a bank’s local community. A bank’s willingness to work with small businesses and organizations proved to be the most important factor for many businesses seeking loans. Small banks were willing and able to serve these groups even as the nation’s biggest bank by assets, JPMorgan Chase & Co., reportedly advised many PPP loan applicants to look elsewhere at some points.

As big banks grow bigger, their interest in and ability to serve small businesses may fade further. The yoga studio, the restaurant and the small business accounting firm, may be best served by a community bank.

Second, community banks were empowered by technology. Technology is a lever with which big banks pried away small bank customers, but it was also crucial to small banks’ success amid the PPP program. Because of the pandemic many small banks accelerated innovation and digital solutions. During the crisis, Midwest BankCentre, a community bank in St. Louis with $2.3 billion in assets, fast-tracked the implementation of digital account openings for businesses, something they did not have in place previously.

By tapping tools created by fintech companies, small banks can use technology to support their efforts to assist the nation’s small businesses during and beyond these uncertain times.