According to a recent Pew Research Center survey, about a third of Americans say they’re very concerned about the stability of banks and financial institutions. Banks of all sizes have been under the microscope since this spring’s failures of Silicon Valley Bank and Signature Bank, which marked two of the three biggest failures in U.S. banking history.
As fears of a recession still loom and interest rates rise, small business loans from larger financial institutions become increasingly harder to get. But community banks — defined as those with less than $10 billion in total assets — continue to provide small business lending at higher rates than big banks.
Greg Lundberg is the president and CEO of Fortifi Bank, a community bank with financial centers in Berlin, Green Lake, Green Bay, Montello, Ripon, Omro, Oshkosh, Waunakee and Winneconne.
He says despite a challenging financial landscape, community banks play a vital role in fueling economic development and entrepreneurship because they are best equipped to service small business loans. Small banks, Lundberg says, are sensitive to the economic realities of the communities in which they operate, understanding both the risks and opportunities at the local level.
“That small to medium business portfolio is really where we are focused. That’s our bread and butter,” Lundberg says of Fortifi Bank. “And if you look around at most community banks, that’s the case. For big banks, the numbers aren’t there from a profitability perspective and they don’t have the boots on the ground. We want to help that small business grow and hopefully bank with us for 30 years, and become a big business and employer in the community where we live.”
The changing landscape
In 2022, according to the U.S. Small Business Administration Office of Advocacy, there were 462,292 small businesses in Wisconsin, which represents 99.4% of businesses in the state. In total, these small businesses employed 1.3 million people.
If the state economy depends on small businesses, small businesses depend on community banks — the Independent Community Bankers of America (ICBA) reports that small banks provide roughly 60% of all small business loans in the country.
“So much of economic development in this country is driven by small businesses. A huge percentage of people work in small businesses, which are responsible for a massive percentage of our total GDP,” says John Brogan, CEO of The Bank of Kaukauna. “Preserving those small businesses, I think, is critical to maintaining what is strong about our financial system, which is that there is a lot of diversity, a lot of ability for people to start businesses and to grow them. That’s the American dream.”
But the American dream is being challenged as the number of community banks, which disproportionately lend to small businesses, has been decreasing over the last 20 years, primarily due to bank mergers and consolidations.
According to FDIC data, the number of U.S. community banks fell from 7,620 in 2003 to 4,129 in 2023 — a drop of nearly 50% over the last two decades. At the same time, the number of regional banks — midsize banks with assets between $10 and $100 billion — grew by nearly the same amount, almost 50%.
Brogan sees the waves of consolidation occurring in the banking space being driven largely by increased efficiency as a result of technological advancements. Consolidation allows smaller banks to access enhanced technologies such as cybersecurity, online platforms and data analytics.
“As the technology has gotten better and better, [banks] can manage more loans; they can manage more deposits; they can manage more customer relationships,” he says. “The larger entities spend a lot of money to develop that technology to create those efficiencies.”
Impact on entrepreneurship
As banks consolidate and grow to a larger scale, it becomes less efficient — and less profitable — for them to make smaller loans, like to a small manufacturer looking to replace $100,000 worth of equipment.
“Realistically speaking, the larger financial institutions get, the less they are adapted to the local needs of the community and they tend to start to look for bigger deals, mid-market deals, because if you’re a multibillion-dollar bank, you can’t make $100,000 loans,” Brogan says. “You have to be making $20 or $30 million loans in order to put that capital to work.
“You start to worry that access to capital will be restricted, and that is an important part of the capital stack,” Brogan continues. “But then who’s going to bank with these smaller businesses; who’s going to help people get into business or help them scale through the early stages of growth?”
This can be seen in June 2023 FDIC call report data. The larger the financial institution, the smaller the ratio of small business loans to its total assets.
An October 2023 article by Eldar Beiseitov, a business economist at the Federal Reserve Bank of St. Louis, analyzed the data that revealed “small business loans — i.e., loans less than $1 million — accounted for 12.6%, 11.1% and 7.9% of total assets at three different sizes of community banks. Larger banks, those with assets of more than $10 billion, held just 3.6% of their total assets in small business loans.”
This is no surprise, as small business loan approval rates at big banks have continued to drop. According to the latest Biz2Credit Small Business Lending Index, approval rates decreased from 13.8% in March to 13% in October.
However, small business loan approval rates at community banks have been increasing every month since June, rising from 19.3% in September to 19.5% in October.
Lundberg says small banks can take the time to get to know individuals, consider creative solutions and make recommendations in a way big banks can’t.
“We’re more than happy to take that first look at a business plan and share issues we might see, what things might make it difficult, things we’ve seen with other small businesses that helped with their startup success,” Lundberg says. “It’s really that advisory nature of the relationship that makes it a little bit special.”
Future outlook
As financial landscapes evolve, both Brogan and Lundberg underscore the delicate balance community banks in Northeast Wisconsin must navigate, especially in small business lending.
“I’d say those loans will still happen, but the cost of doing those deals will become more expensive if you’re on that smaller side of the equation,” says Brogan, who believes the diverse mix of financial institutions in the New North is one of the region’s advantages. However, he acknowledges that pressures for increased efficiency and regulatory compliance put strain on smaller lenders.
“In Northeast Wisconsin, we’re very fortunate to still have quite a few independent community banks and other national and regional banks. We’re still in a very strong position and have a lot of diversity in the ecosystem,” Brogan says. “But I’m aware that there is a lot of pressure on banks to become more efficient, and efficiency probably means more consolidation.”
Despite this, Lundberg believes in the enduring role of community banks, not just as financial institutions but as trusted advisors and community partners.
“At the end of the day, taking the time to get to know the small businesses that are created is really important to us,” Lundberg says. “I do think there will always be a role for community banks. The community bank is the heartbeat of any community.”
