Lending and local business decline as banks leave towns they think are too small for branches

Danielle Baker (Photo by Veasey Conway for WSJ)

"The financial fabric of rural America is fraying," Ruth Simon and Coulter Jones report for The Wall Street Journal. "Even as lending revives around cities, it is drying up in small communities. In-person banking, crucial to many small businesses, is disappearing as banks consolidate and close rural branches. Bigger banks have been swallowing community banks and gravitating toward the business of making larger loans," making it harder for very small towns to attract business. It's a downward spiral: "Bankers say they don't see enough business in small towns."

The story opens in Roxobel, N.C., population 220, with the case of Danielle Baker, who "wanted a $324,000 loan last year to expand the peanut-processing business she ran from the family farm. She had a longstanding relationship with the Roxobel branch of Southern Bank, and she thought Southern would help fund the peanut operation she had spun off, too. But that branch—the town’s only bank—closed in 2014. A Southern banker based in Ahoskie, 19 miles away, said Baker’s Southern Traditions Peanuts Inc. was too small and specialized, she says. A PNC Bank branch also turned her down," the Journal reports. "She finally got a loan from a nonprofit in Raleigh two hours away that provides financing to small businesses but not other traditional banking services. She must drive 19 miles every afternoon to make cash deposits or get change for her cash register, and expects to make a two-hour trip when she wants to refinance."

“It’s very aggravating on a day-to-day basis,” Baker told the newspaper. “If you are not a big company with tons of assets and a big bank account, they just overlook you.”

Simon and Jones report, "Rural communities in parts of the U.S. have become less attractive to local banks because they are suffering from a variety of economic ills that have taken a toll on business activity and new business formation." Those include "weak schools," big-box stores that crushed local retailers, lower credit ratings after the financial crisis and migration of young people to cities.

WSJ graphic shows decline of rural lending. For a larger version of the chart, click on it.

"The value of small loans to businesses in rural U.S. communities peaked in 2004 and is less than half what it was then in the same communities, when adjusted for inflation," the Journal reports, based on its analysis of Community Reinvestment Act data. "In big cities, small loans to businesses fell only a quarter during the same period, mainly due to large declines in lending activity during the financial crisis. Adjusted for inflation, rural lending is below 1996 levels. Of America’s 1,980 rural counties, 625 don’t have a locally owned community bank—double the number in 1994, federal data show. At least 35 counties have no bank, while about 115 are now served by just one branch."

A town with no bank has little future. “It’s really like a death sentence for a small town because the bank is the center of all activity,” North Carolina insurance agent Tommy Davis told the Journal. He moved his office 25 miles from Colerain, pop. 187, to Windsor, pop. 3,700, when the only bank branch in Colerain closed. There's a lot more in the story; read it here.