Invest Local?
An ode to small business and community banks
Banking, and especially community banking is a wonderful industry, and one I’m personally grateful to know just a little bit about. Banks in general are weird and misunderstood for most of the public. Their balance sheets are weird. They run with constant leverage. There’s the whole fractional reserve thing. People talk about failure this failure that. Bank runs recently made the news. And even just bringing up “banking” elicits an image of an elitist, greedy, money hungry Wall Street CEO in a jet-black suit looking to pick the pockets of anyone in their path.
But away from “Banking” there is an entire sector of the universe that is equally misunderstood and underappreciated. That of community banking. You can think of these people as the Main Street of banking, and the salt of the Earth types that at least I had the pleasure of growing up with. High morals, high integrity, driven by purpose and profits (not just profits), and genuinely looking to do good in the world.
So, what is “community banking”? Well, a community bank in the U.S. is generally defined as a depository or lending institution that primarily serves businesses and individuals in a small geographic area. These banks emphasize personal relationships with their customers and often have specialized knowledge of their local community and customers. They tend to base credit decisions on local knowledge and nonstandard data obtained through long-term relationships, rather than relying solely on models-based underwriting used by larger banks.
The Federal Reserve Bank defines a Community Bank by asset size, and while not perfect it does paint a fairly sobering view of the ecosystem. In the U.S. a Community Bank is defined as a bank with under $10 Billion in assets. So how big is the Community Banking industry?
My research tells me that as of a year or two ago there were roughly $25 trillion in assets in the entire U.S. Banking system.
And the entire amount of assets in the Community Banking system is … drumroll please … $4.8 trillion for a grand total of 19.2%. Only 1/5 of all the assets in the system are controlled and managed by these smaller banks.
This then is a real David vs. Goliath situation and any investment banker worth their salt has a graphic handy of the “extinction level event” happening in banks whereby smaller banks are getting merged/acquired away at a rate of roughly 3% to 5% a year (which unbeknownst to them is actually on par with the data for most public companies). This has led the number of banks to drop from 11,000 in 1993 to about 4,500 today. With most of the attrition happening in smaller community banks.
Why is this happening? A few reasons.
#1 - The atrophy is mostly happening because there are not enough NEW banks popping up to replace the attrition. Again, banks consolidate at roughly the same pace as other industries, but the divot is not being replaced because …
#2 - Regulations for all sized banks continues to go up. And with increasing regulations come increasing hassle and increasing costs. And in their infinite wisdom regulators pass these on to large banks and small banks the same (insert conspiracy theory about how the regulators want fewer banks to have to deal with).
#3 - And so logically, with higher costs come a drag to profitability.
#4 - Lower profitability means less capital is attracted to the industry. Why invest in a company with stable 8% to 10% returns when the “opportunity cost” is the S&P doing 12% to 20% a year? Or why put money in a community bank when you could invest in NVDA 290% this year?
You also have a “hollowing out” of the talent pool, which is a massive existential event for the industry. As it turns out banking is a bit of an “older” business with most bank exec teams and boards being in the 55-75 age range. Turns out the Great Financial Crisis gave the industry a black eye and that coupled with the rise of Big Tech and the Silicon Valley boom created a situation where lots of the human capital went elsewhere. The net effect being, there aren’t a ton of 35–55-year-old up and coming bank CEOs looking to take the industry forward.
So why should I care?
I’ll tell you why, and if you read on, I think you’ll see that you all should be investing into local community banks, and that in doing so you can “do well by doing good”. And here are some facts about why it makes sense to “invest local”.
The Missing Piece in the “Local” Movement
In recent years, there’s been a seismic shift in consumer consciousness. “Buy local” and “shop local” have become rallying cries for communities across America. From farmer’s markets bustling with activity to independent bookstores enjoying a renaissance, consumers have embraced the idea that supporting local businesses is vital for community health and economic resilience.
70% of consumers say they’re willing to pay more for locally produced goods.
The number of farmer’s markets in the U.S. has grown by 180% since 2006
53% of shoppers say they feel better about themselves when they buy local.
“People have realized that where they spend their money matters,” says Emma Thompson, a consumer behavior analyst. “They’re voting with their wallets for the kind of communities they want to live in.”
But there’s a glaring omission in this local movement: banking. What’s more, while people are becoming increasingly conscious about buying local produce or frequenting neighborhood cafes, they won’t think twice about investing in large corporations like NVIDIA or Tesla. These tech giants, while innovative and often profitable, have little direct impact on local communities across America. Okay, they have almost zero impact on the local communities. It’s as if we’re carefully tending our community garden while simultaneously sending our financial seeds to be planted in distant, corporate fields.
The Problem: The Forgotten Aspect of “Going Local”
While we’ve become conscious about the origins of our produce and the ownership of our favorite coffee shops, most people remain unaware of the critical role that local banking plays in community economic health. This oversight is costing our communities dearly.
Only 29% of consumers say they consciously choose to bank with a community bank or credit union.
Large banks hold 88% of all banking assets, despite making up only 13% of all banks.
Since 1990, the number of community banks has fallen by 70%, largely due to mergers and acquisitions by larger banks.
“It’s a blind spot in the local movement,” explains Dr. Robert Chen, professor of economics at UCLA. “People don’t realize that where they bank can have an even bigger impact on their local economy than where they buy their groceries.
The Impact: How Non-Local Banking Hurts Communities
When people don’t bank locally, they inadvertently contribute to a cycle that can harm their local economies:
Capital Drain: Deposits in non-local banks are often invested in national or international ventures, rather than being reinvested in the local community
Reduced Access to Credit: As community banks disappear, so does their deep understanding of local economic conditions and business opportunities.
Loss of Personalized Service: Large banks often use standardized lending criteria that may not account for local economic conditions or individual circumstances.
Economic Homogenization: As local banks disappear, communities lose a key institution that helps maintain their unique economic character.
Decreased Local Decision-Making: When banking decisions are made in distant headquarters, local economic needs and opportunities may be overlooked.
I don’t want to over dramatize the situation, but do any of these things sound good to you? And given lots of us grew up in small towns, love where we came from, owe our position in life to the kindness of a HS coach or the first job at a local restaurant, do you want capital to move away from these people? I don’t think I do.
Banking is numbers, so here are some numbers because they paint a stark picture:
For every $100 deposited in a local bank, $58 is reinvested locally. For large banks, that number drops to just $36. This isn’t to demonize big banks, only to point out the facts.
Community banks make 60% of small business loans, despite holding only 12% of all banking assets. (I know their 12% doesn’t jive with my 19%).
When a community bank closes, the local area experiences an average 33% reduction in small business lending for several years. I highly recommend checking out this study. This is an awful second level impact of losing community banks.
The good news is that this problem also presents an enormous opportunity. Just as consumers have embraced buying local produce and supporting local restaurants, they can complete the circle by banking locally.
Even Ben Bernanke agrees, “local communities, ranging from small towns to urban neighborhoods, are the foundation of the U.S. economy and communities need community banks to help them grow and prosper.”
Imagine the potential:
If just 10% of the deposits in large banks were moved to community banks, it would result in over $60 billion in new loans for local communities. Now I speak of investing local, but even just depositing local would produce a boom for local communities.
The Small Business Powerhouse: Driving America’s Economic Engine
People don’t realize how important small businesses are to the American Economy.
I’ll say that again.
People don’t realize how important small businesses are the American Economy.
In fact, they aren’t just important, they’re the bedrock of it.
The Scope of Small Business Impact
As of 2023, the United States is home to a staggering 33.2 million small businesses. These enterprises employ 61.7 million people – that’s 46.4% of all U.S. employees. To put it in perspective, if small business employees formed a country, it would be the 23rd most populous nation on Earth, just behind Italy. That was pretty crazy to me. Imagine if all of the small businesses went away?
But it doesn’t stop there. Small businesses are the dynamos of American innovation and economic activity:
They create 1.5 million jobs annually (64% of new jobs created) - that’s like creating a new city the size of Philadelphia every year, filled entirely with new job holders. And even for those of us who aren’t Eagles or Phillies fans, we can agree this is a massive deal.
“Small businesses are more than just economic units,” says Dr. Emily Chen, economist at the Small Business Administration. "They’re the innovation labs of America, constantly adapting and evolving to meet new challenges and opportunities."
For me small businesses are the core of the entrepreneurial spirit in America.
Industry-Specific Contributions
Small businesses make significant contributions across various sectors:
In manufacturing, they account for 98.6% of all firms and 43.9% of employment
In the professional, scientific, and technical services sector, they make up 99.7% of all firms.
In the health care and social assistance sector, they represent 76.2% of all businesses.
Economic Resilience and Growth
Small businesses don’t just contribute to the economy; they help it bounce back from setbacks:
During the recovery from the 2008 financial crisis, small businesses created 62% of all new jobs. When it mattered most, small businesses showed up.
What sets the United States apart from its European counterparts is the sheer entrepreneurial spirit embedded in its culture. While Europe boasts many successful small businesses, the scale and impact of American small enterprises are unparalleled.
Comparative Statistics
Cultural Differences
Dr. Sarah Thompkins, a comparative economics professor at Stanford, explains: "The U.S. has a unique cultural attitude towards entrepreneurship. Failure is often seen as a steppingstone to success, not a career-ending event. This encourages more risk-taking and innovation”. This is what I mean when I say that the very American Spirit and attitude is based on small business.
This cultural difference is reflected in the numbers:
Not to offend anyone, but if you want the U.S. to turn into Europe, get rid of small businesses and get rid of Community Banking.
And here’s the numbers behind why Community Banks are so important to Small Businesses.
The Crucial Role of Community Banks: Fueling the American Dream
Behind almost every successful small business is a story of a banker who believed in a dream. Community banks are the unsung heroes of our economic landscape, providing the financial fuel that powers small business growth.
The Numbers Don’t Lie
Consider these striking statistics:
This is a repeat stat, but worth mentioning again. Community banks provide 60% of all small business loans, despite holding only 12% of all banking industry assets. It’s as if the local high school football team was outscoring all the pro teams combined!
They make 80% of agricultural loans, forming the financial backbone of rural America.
Community banks have over 50,000 locations nationwide, compared to about 18,000 locations for the largest banks. That’s like having a friendly neighbor on every block, compared to a distant acquaintance every few neighborhoods.
Beyond the Numbers: The Personal Touch
What sets community banks apart is their deep understanding of local markets and personal relationships with customers:
On average, community banks make decisions on small business loans 20% faster than large banks.
Resilience in Times of Crisis
This local focus isn’t just good for communities—it’s good business. Community banks have consistently demonstrated resilience in the face of economic challenges:
From Small Loans to Big Success: American Success Stories
The power of community banking is perhaps best illustrated by success stories of companies that started small and grew into household names.
The Chobani Story
In 2005, Hamdi Ulukaya bought a defunct yogurt factory in New Berlin, New York, with the help of a Small Business Administration loan backed by a local bank. From this modest beginning, Chobani has grown into a billion-dollar company, employing thousands and revolutionizing the yogurt industry.
Today, Chobani:
Employs over 2,000 people - that’s like creating jobs for the entire population of a small town.
Has an annual revenue exceeding $1.5 billion - equivalent to the GDP of a small nation.
Controls about 19% of the U.S. yogurt market - imagine if nearly one in five yogurt containers in every refrigerator was Chobani.
Other Success Stories
Under Armour: Founded in 1996 with a $40,000 loan from a community bank, it’s now a $5 billion company.
Jet Blue: Started with a $2 million loan from a community bank in 1999, now one of the largest airlines in the U.S.
Chipotle: Founded with a small loan from a community bank, it has grown into a major player in the fast-casual dining industry.
The Ripple Effect: How Community Banks Build Stronger Local Economies
When community banks invest in local businesses, the benefits ripple throughout the entire community:
Job Creation: For every $1 million in small business loans, 9.5 new jobs are created. That’s like a new small business springing up with each major loan.
Charitable Contributions: Small businesses donate 250% more than larger businesses to local nonprofits and community causes.
Call to Action: Invest in Your Community, Invest in America
As Warren Buffett wisely said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” By investing in community banks, you’re planting the seeds for a flourishing economic forest that will provide shade and sustenance for generations to come.
I am not saying to rush out and buy any community bank stock or put your deposits in any bank. Because just as there are good actors and bad actors or good performers and bad performers in the big bank space, so are there those people in the Community Banking space.
But remember this. Small businesses are not just the backbone of America—they are its beating heart and vibrant soul. These enterprises, ranging from your local bakery to innovative tech startups, form the very fabric of our communities. They create jobs, foster innovation, and keep wealth circulating within our neighborhoods. But these vital economic engines don't run on passion alone; they need fuel in the form of financial support and guidance.
This is where community banks step in as the unsung heroes of our local economies. Unlike large national banks, community banks are deeply rooted in the areas they serve. They understand the unique challenges and opportunities of their regions, and they have a vested interest in seeing their communities thrive. These institutions provide more than just loans; they offer personalized service, local expertise, and a genuine commitment to the success of small businesses.
By choosing to bank with and invest in community banks, you're not just making a financial decision—you're making a pledge to support America's grassroots economy. Every dollar you deposit or invest locally has a multiplier effect, circulating through your community and supporting jobs, innovation, and growth right where you live.
So, if you truly want to support America and see your local community flourish, there's a simple yet powerful step you can take find ways to invest locally. Whether it's moving your accounts to a community bank, seeking out local investment opportunities, or simply choosing to shop at small businesses, your actions can make a tangible difference. Remember, when you invest in your community, you're not just building a stronger local economy—you're strengthening the very foundation of our nation.
Let's champion the symbiotic relationship between small businesses, community banks, and local investors. Together, we can create a more resilient, prosperous, and uniquely American economic landscape.
The best is ahead,
Victaurs