Two or three times a month for the last three or more years, since before the worst of the financial crisis rocked the giant financial institutions that tend to dominate news headlines, those who monitor the health of small regional and community banks have turned, glumly, to the Federal Deposit Insurance Corp.’s update on the number of those small players that have been shut down or ushered into shotgun marriages with larger and more robust entities.

At the end of 2010, that list—to which the most recent batch of names was added only last week—makes for dismal reading. As of now, 153 financial institutions have failed this year, the vast majority of them small or even tiny institutions serving communities like Bartow, Florida, or Blackwell, Oklahoma. And not only is no respite likely in 2011, but some pundits predict that the number of bank failures will grow still further and that even the survivors will have a tough time finding their way back from the brink.

The immediate problem is straightforward: Too many banks have too many soured real estate loans on their book, too little capital to set against any losses on those loans, and too few options when it comes to raising more capital. And even when the lenders at those institutions did a good job managing their credit risk, they’re still facing the same problems that they did years ago—the one that got them into this mess in the first place.

“Diversity has become increasingly difficult for a small local bank to achieve in terms of its business mix,” says Robert Albertson, a partner at Sandler O’Neill, an investment bank that has specialized in working with financial institutions of all stripes. “Almost always, these entities have wound up with balance sheets with a lot of real estate loans because the bigger guys took away the auto-finance business, the residential mortgage business, the credit-card business—in fact, most of the other businesses” on which a well-diversified bank traditionally relied to help it shelter from just this kind of storm in the past.

Joseph Pucella, a vice president of the banking team at Moody’s Investor Services, notes that some 8,000 smaller banks—those with assets of $10 billion or less—make up about 20 percent of the assets of the banking systems, but account for no less than half of all the commercial real estate loans outstanding. “Many smaller banks have essentially become commercial real estate banks,” he says. “They’ve been pushed out of other businesses because they haven’t been able to offer as broad a suite of products as the big guys do. Commercial real estate is the one product where small banks can compete.” For instance, a larger lender—thanks to its scale—can offer cash-management products to any client taking out a general business loan.

But the problem isn’t just that banks made foolish loans to commercial real estate development projects, Albertson notes. Rather, their traditional business of small-business lending became, de facto, a matter of making loans secured by the most valuable assets of those companies: the store, the car dealership, the land on which the factory stands, or other kinds of commercial real estate. Add to that the fact that smaller institutions tend to be less reliant on deposits for capital and more on external funding—such as CDs—and the potential for problems becomes clear, says Pucella.

After 140 bank closures last year and 153 (or maybe more) in 2010, Albertson expects to see an additional 300 financial institutions close their doors in the next year or two. “And probably many more than that,” he adds. Smaller banks are becoming the walking dead of the banking industry—their participation in TARP has made potential providers of non-government capital reluctant to provide them with backing, and yet these institutions are too small to be systemically important and thus set off alarms among policymakers and legislators that might lead to them being given an additional helping hand.

On the contrary, banking overseers want even small institutions to diversify—a rational concept, given that the cause of the current woes was a lack of balance-sheet diversification. But not enough has changed in the broader banking industry to make it likely that small institutions will be able to make inroads into the dominance of national, super-regional, and even the larger regional institutions. At the same time, losses in what has become their core business are likely to increase. The result? A toxic environment that may force even otherwise-healthy small banks to consider selling themselves—not necessarily at a profit—to larger rivals.

Whether it is the FDIC or harsh market realities that are the catalyst, the result is almost certainly going to be that small-business owners and entrepreneurs are going to be dealing with bigger banks as the coming years slide by. For Albertson, that’s a source of concern. If the big banks are the arteries that help propel the blood throughout the body of the U.S. economy, then smaller banks, he argues, are the capillaries that deliver that lifeblood—aka, capital—to smaller companies that don’t need the big loans in which bigger banks specialize. “Ultimately, a lot of banking is about local contacts and local knowledge,” he says. “To make good loans requires both.” The much-touted efforts by big banks like Bank of America to hire more small-business specialists is a great idea, but it’s a top-down solution when the better option is a bottom-up approach that is based on local expertise.

Consolidation—the transformation, via consolidation, of the strongest community banks into regional players, of the regionals into new super-regionals, and so on—is already well under way. “I joke that Buffalo has become the new Charlotte,” says Albertson, referring to the presence there of First Niagara and M&T, both early movers building new super-regional footprints. First Niagara’s August pact to buy NewAlliance Bancshares Inc. of Connecticut transformed it into one of the 25 biggest bank lenders in the country—and left it with 10 times as much in assets (a cool $29 billion) as it boasted a decade ago. “There will be other Buffalos,” Albertson adds. Small banks that can’t find large partners will be left on the sidelines.

What remains unclear is how the changing shape of the banking industry will affect the way that capital flows through the system, and how smaller companies and entrepreneurs access capital. Some pundits believe the bigger problem is the extent to which the shadow-banking system has collapsed, and that long-term, small-business owners will find few significant changes. After all, they note, the collapse of a few hundred of the thousands of small banks nationwide is not only systemically less important than the potential demise of a behemoth bank like Citigroup, but statistically insignificant. “There are plenty of other institutions out there willing to pick up any slack,” says one small-business banker, who asked not to be named.

Let’s hope so.