Community bank mergers and their impact on small business lending

There have been increasing concerns about the potential of larger banks acquiring community banks and the declining number of community banks, which would significantly reduce small business lending (SBL) and disrupt relationship lending. This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. We analyze risk characteristics of acquired community banks, compare pre- and post-acquisition performance, and investigate how the acquisitions have affected SBL. Contrary to the concerns, our analysis shows that the overall amount of SBL increases more after a merger when a community bank is acquired by a large bank. Data also suggest an overall (regardless of mergers) declining SBL trend for all bank size groups. In fact, the decline in the SBL ratio, on average, has been more severe among community banks, relative to large banks. Our results indicate that mergers involving community bank targets over the past decade have enhanced the overall safety and soundness of the banking system without adversely impacting SBL.