Defining a Community Bank—Past and Present

After decades of transformative growth and change, relationship banking continues to distinguish community banks

By Bill McDonald and Tim Cook

Not really that long ago, nearly every bank in America was a Main Street community bank. And virtually every one was a locally owned and operated financial institution, where local bankers knew their customers and marketplaces and where customers knew and trusted their neighborly bankers.

A thousand flowers bloomed along America’s Main Street, providing an abundance of financial choice and accountable, responsive service.

Then the Great Depression triggered a series of forces and events—which were later accelerated by various technological advances and public policy measures adopted in Washington—that began steadily reshaping what would become today’s much less diversified and much more concentrated banking system.

Community banks expanded their markets. They diversified their charters. Their products and services proliferated. And they, too, grew larger.

Some community banks grew into what would become a new breed of regional banks, adding into the banking system a new dynamic—one more akin to larger institutions—that never before existed. A few of those regional banks would evolve into today’s mind-bogglingly colossal—and systemically dangerous—too-big-to-fail global megabank monstrosities.

But for decades before megabanks, what generally was considered the right size for a community bank gradually expanded as the banking industry continued to consolidate and community banks grew larger over time. As community banks evolved and grew in size and scope, the size of a bank—typically an approximate amalgamation of its total assets, the number of its retail locations and the geographic footprint it served—offered a shorthand indicator of whether it was a Main Street community bank or something qualitatively different. Whether being a “typical” community bank meant having $50 million in assets, $100 million or $1 billion became relative to a bank’s operations and local marketplace at a place and time. But a bank’s size generally still provided a reliable but approximate answer to the question of whether it was truly a relationship-based community bank, and whether it could stay close to its customers and communities as a trustworthy, responsive financial service provider.

The hallmark characteristics of community banks withstood the test of time and their steady growth into larger institutions, which brought new opportunities for their customers. As Mark Raitor, ICBA senior executive vice president and chief operating officer and a longtime industry observer, points out, “Community banking has evolved with the changing times, but the core principles, purposes and missions of the community bank have not. Community banking is a philosophy of commitment to the community, and the community and the community bank are interdependent.”

By contrast, Wall Street megabanks ultimately emerged from the merger-and-consolidation dustups of the 1980s and 1990s, so now there exist stark extremes in both the size and nature of our banks. What’s more, size is no longer an obvious or easy measure of what defines a community bank. The range is wider. Today’s smallest ICBA-member community bank is less than $9 million in assets, while its largest member stands at $13 billion in assets.

Several past ICBA chairmen have witnessed and remember the evolution of community banks during their respective time serving on the association’s executive committee. Despite their different experiences and perspectives, these past chairmen agree that growth and change have contributed as much to the success of community banks over the years as they have to their challenges.

George Bailey lives on

Rising from the ashes of the subprime mortgage inferno of 2008–09 was a new community banking hero named George Bailey. The only thing is, George Bailey never actually existed. He was just a fictional character played by Jimmy Stewart in the 1946 holiday movie classic, It’s a Wonderful Life. Financial writers like to invoke the name George Bailey as a kind of iconic, gray-suited avatar for the extremely honest, dedicated community banker who is close to his customers and looks out for the best interests of his community.

This traditional relationship model followed by today’s Main Street community banks is, of course, often contrasted with the impersonal transactional banking model of the new giant, nationwide Wall Street mega-institutions. Both the Main Street and Wall Street banking models have been around for decades, but general awareness of the inherent structural differences between the two models, particularly the extreme shortcomings and risks posed by the too-big-to-fail giants, has become nearly commonplace—for both everyday consumers and wonky government policymakers alike—since the global calamity of the Wall Street financial crisis.

And as community banks have grown larger, they have held onto their mission—and in the process, for example, they have continued to make 46 percent of the country’s small-business loans to farms and businesses.

About 200 miles from the nation’s capital, through the forested mountains and fertile valleys of West Virginia, ICBA Chairman Bill Loving shares this perspective from Pendleton County, which boasts of having the highest point in the Allegheny Mountains.

Loving, president and CEO of the $260 million-asset Pendleton Community Bank in Franklin, considers the relationship-based model the primary defining characteristic of community banks. “The relationship-banking model works anyplace, regardless of size or location,” he says. “It applies to all types of charters—commercial banks, minority banks, S&Ls, mutuals.

“The too-big-to-fail crisis had a positive side for the community bank,” he continues. “People have found out who we are, that we didn’t make the mess and that we’re the ones with the common sense and local expertise.”

Pendleton Community Bank opened for business in 1937 as a single-unit institution in Franklin. The bank opened its first branch in 1999 in Moorefield, W.Va. Not long after, it opened three more financial hubs in the West Virginia communities of Marlington and Petersburg as well as in Harrisonburg, Va.—growing along the way to $260 million in assets and expanding to serve 75,000 customers in a 2,700-square-mile marketplace.

Today, Pendleton Community Bank is a thoroughly modern financial institution with all the available products, services and delivery channels—from ATMs to remote deposit capture to mobile banking. Its directors are leading the way to make the bank totally paperless by accessing all their documents before and during board meetings via tablet computers.

However, Loving points out that the fundamental work of a community bank—taking deposits and reinvesting them in the community—hasn’t changed over time. But the operational changes in executing this model—driven by changes in technology, products and services, governance structures and regulation—have been enormous since he first became a community banker in 1973. (One of ICBA’s and Loving’s biggest industrywide concerns is how overall regulatory burdens have outpaced the growth and scale of community banks. Appearing in a recent FDIC panel for ICBA, he once again urgently called for more proportionally tiered regulation based on the scope and activities of financial institutions.)

ICBA has maintained throughout the years that there is no business in which personal relationships are more important than in banking. Federal banking laws pretty much put states in the driver’s seat on structure issues until 1994, when interstate banking walls tumbled with the full implementation of the Riegle-Neal Interstate Banking and Branching Efficiency Act. Two years later the Gramm-Leach-Bliley Act of 1999 wiped away the Glass-Steagall Act’s firewalls separating the common ownership of banks, insurance companies and brokerage firms.

In short, it’s been Katy-bar-the-door since 1984, as industry consolidation has accelerated and reduced the number of federally insured banking and thrift charters by over half. Today, a handful of the largest institutions hold well over one-half of the banking industry’s total assets.

But in Loving’s mind and in those of many other past ICBA chairmen who witnessed the banking industry’s consolidation and transformations, nothing is new about relationship banking. ICBA has emphasized the term since its founding in 1930, when it was organized to resist the concentration threat from giant financial organizations. Along with the opportunity that today’s increasingly sophisticated financial products and services provide, relationship banking is needed more than ever to help people best sort through their options.

The FDIC agrees with the relationship definition, saying the attributes associated with community banking today are only loosely correlated with size. In its FDIC Community Banking Study published last December, the agency emphasized the “relationship” definition in its analysis. Through June of this year, there were 6,753 FDIC-insured community banks operating (or 92 percent of all banking organizations).

The 6 percent of banks identified by the FDIC as “noncommunity banks” represent only 390 organizations, and those institutions account for 85 percent of total industry assets. The four largest noncommunity banks—Bank of America, Citigroup, JPMorgan Chase and Wells Fargo—by themselves control 45 percent of total assets.

As the FDIC study reports, “The larger the institution, and the more places it does business, the more difficult it is to manage relationships at a personal level.”

Local competition thrives

One veteran community banker who lives side by side with some of these big noncommunity bank offices is O. Jay Tomson, chairman of First Citizens National Bank in Mason City, Iowa. Among his competitors in this town of 29,000 people are Bank of America, US Bank and Wells Fargo.

“These institutions tend to be more interested in the three million square feet of big-box stores in town, such as Target, Menard’s, Kohl’s, Shopko and Mills Fleet Farm,” says Tomson, who served as ICBA chairman from 1989–90 amid a strong wave of banking industry merger-and-acquisition consolidation. “My real competitors are the other community banks in Mason City.

“Our business comes from local people—doctors, dentists, hospitals, restaurants, architects—people who live here and are dependant on the local area.”

From its origins as a modest bank in the 1800s, First Citizens National Bank grew leaps and bounds, amassing $13 million in assets by the early 1970s. In 1994, as was a common change made by community banks operating under different charters during that period, the bank’s four subsidiary institutions—operating in the Iowa communities of Charles City, New Hampton, Osage and Clarion—merged their assets and began operating under a single-bank charter headquartered in Mason City.

Since then, Tomson has led the community bank to grow to $1 billion in assets and 10 retail locations. Now employing more than 200 people, the bank serves eight North Iowa communities in seven counties.

Despite that success, change and growth, Tomson says, the mission of First Citizens National Bank remains what it always has been—responsiveness to the financial needs of people and the overall community in and around Mason City.

Like other community banks, First Citizens National Bank also has kept up with various technological changes—such as automation, electronic banking and social media—to stay competitive. Tomson credits the fact that the community bank has remained locally owned and operated as the reason it has been able to provide exceptional personal service while still offering technologically advanced products and services.

The increasing number of sophisticated products and services that bankers must understand and maintain, he adds, has made community bankers among the hardest-working people around.

Growth, humble beginnings

Far to the west, in the cowboy country of southeastern Colorado, Dale Leighty shares Tomson’s bedrock dedication to relationship banking and has done so throughout his nearly 40-year career as a community banker. Some multistate banks mistakenly refer to themselves in their branding and marketing campaigns as community banks, says Leighty, chairman, CEO and president of First National Bank of Las Animas, Colo., and an ICBA chairman from 2004–05. “It sounds good in their advertising, but it doesn’t apply to them.”

No stranger to serving a broad geographic footprint, First National Bank of Las Animas operates in six communities in a 7,000-square-mile region, which includes the Colorado Springs metro area.

With starting capital of $50,000, First National Bank of Las Animas began operating in 1901, becoming the fourth community bank operating in Las Animas at the time. Today, the bank offers a broad range of financial services, including loans, online banking and debit cards for families and cash management, credit and debit cards, and merchant services for businesses.

When Leighty started out in banking in 1975 at the Farmers and Merchants Bank of Colby, Kan., bookkeeping and other operations were pretty much done manually. The first loan he made was on a three-part carbon-paper form. He laughs when he thinks about how far First National Bank of Las Animas has come since then: “When we bought our first PC, we talked about whether we would ever really use it.”

Leighty bought First National Bank of Las Animas in 1982. Under his leadership since then, the community bank has grown from assets of $17 million to nearly $305 million, an eighteen-fold increase during those 30 years. In 1990, the bank expanded for the first time, acquiring deposits and operations of a failed savings and loan. Three years later it began opening three more branch offices, and last year it acquired a second bank in Oradway County, Colo.

That growth brings up a prominent question that many community banks confront: When a community bank experiences prodigious growth through its own success, how does it keep from letting its expanding size interfere with how it operates as a relationship-based community bank?

“Our bank was built on relationships, and we stick with what got us there,” answers ICBA Past Chairman Lee Stenehjem, a retired president of First International Bank and Trust of Fargo, N.D. “There will always be a need for community banks and a need for ICBA to represent their interests.” Stenehjem served as ICBA chairman from 1996–97.

First International of Fargo is one of 21 retail locations in North Dakota, Minnesota and Arizona, owned by Watford City BancShares Inc., a bank holding company owned by the Stenehjem family. Lee Stenehjem’s brother, Steve, heads the holding company and is also CEO and chairman of the main office, First International Bank and Trust of Watford City, which is located in the heart of North Dakota’s oil boom.

Thanks to the miracle of horizontal drilling and the “fracking” extraction process of shale oil, the First International system has experienced explosive growth in the past 18 months, adding 100 employees and $300 million in assets for a total asset size of $1.4 billion.

First International Bank & Trust’s origins reach back to 1910, and it was one of the only institutions in North Dakota’s McKenzie County to remain afloat throughout the Depression. Today, the bank offers a sophisticated and diverse line of financial services, from insurance and retail investments to trust and wealth management services.

Shale oil has made North Dakota’s economy the envy of the nation; the state boasts the country’s lowest unemployment rate: 3.3 percent. Watford City has experienced population growth from 1,744 to 7,500 and the Watford City bank has added 20 employees during the period.

The oil boom ended 25 years of recession in Watford City, but such rapid growth has not come without problems, such as a housing shortage and questions about available city services. But Steve Stenehjem says he’ll take those problems, saying, “It’s fun to see the smiles on the faces of people who were unemployed before they came here and now have jobs.”

So, after many years of industry change, the spirit of George Bailey’s community bank is still going strong. Community banking was founded on a good idea—competition in the marketplace with longstanding customer relationships fueling continual growth.

Today’s community banks aren’t what they used to be, but then again, what has been central to their enduring success is the same, and always will be.

Bill McDonald, a past ICBA executive and ICBA Independent Banker editor, now writes in Sauk Centre, Minn. Tim Cook is ICBA’s senior vice president, publications.