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Small banks vs. small branches—bank style may mean more than bank ownership

As industry evolves, bank style may mean more to local communities than bank ownership

July 1, 1994


Small banks vs. small branches—bank style may mean more than bank ownership

C. Douglas Atchley is anyone's idea of an ideal community banker.

He has been a banker for nearly 25 years in a small town that is almost 300 miles from a major metropolitan area. He knows the economic history of the area and the lending history of many of the bank's customers.

A "kick the tires" kind of banker, he likes to visit with prospective business clients at their work sites to get a better feel for their loan application. And if there's a meeting in town—or even hundreds of miles away—dealing with the economic development of the region, Atchley is almost certainly there.

His bank even has a philosophy in keeping with community banking ideals: "We're only as good as our community."

All in all, Atchley is a prime candidate for independent banking's poster child, except for one technicality: Atchley is the managing officer of a bank branch that may soon be directed by corporate headquarters over 1,000 miles away.

Back in 1971, when Atchley began his banking career in Delta, Colo., he worked at an independent bank. Over the years, though, that bank was purchased by United Bank of Colorado, headquartered in Denver. Recently, Norwest Corp. of Minneapolis purchased United and, with the likely passage of an interstate branching bill this Congress, that $57 million-asset bank branch in western Colorado may soon take its marching orders from a $55 billion-asset corporation with its flagship bank in downtown Minneapolis.

How important is local bank ownership?

In the war of words between big banks and small banks over the years, the image of a locally owned bank, nestled among other local businesses on Main Street, has always remained sacrosanct—right up there with baseball and apple pie. That image is grounded in the important role local banks have played in the economic development of much of the country. As Alan Greenspan, chairman of the Federal Reserve System's Board of Governors, said in a recent speech in Iowa:

"Today, in many, if not most, regions we continue to owe the community banks of our country for their creative financing, their innovative skills, and their knowledge and support of their local communities—all the while maintaining a level of capital and prudence that over time these institutions have learned is central to their continued success. ... It is their knowledge of local markets and their economic and community participation that makes small banks so important to our economy."

Greenspan's comments were made regarding the expected passage of interstate branching legislation, and he stressed that community banks will always have an important niche in the financial services industry, regardless of banks' ability to branch nationwide. Greenspan's view is shared by many in the financial services industry; indeed, Ron Isaacson, president of Mid-Wisconsin Bank in Medford, Wis., is so confident of small banks' viability in the brave new world of banking that he calls interstate branching "a big hullabaloo over nothing."

Still, bank numbers are dwindling, largely due to consolidation within the industry. In 1984, there were about 14,500 banks; by 1993, there were about 11,000. In the Ninth Federal Reserve District, bank numbers dropped from 1,391 in 1984 to 1,084 today. Of the 100 largest banking corporations in the country 10 years ago, 42 have been acquired or will be acquired if all current applications are approved. Also, for many years, the top 100 banks held about 50 percent of the nation's deposits; now, that level is 64 percent.

Consolidation has not been limited to larger banks. The American Bankers Association reports that more than half of the banking acquisitions between 1984 and 1993 were driven by purchasers under $500 million in assets. A poll conducted this spring by the Independent Community Bankers of Minnesota revealed that two-thirds of the respondent bankers—who were from nine Midwestern states—plan to acquire another bank by 1999, 23 percent plan to merge and 11 percent expect to sell their banks. Nearly two-thirds of the bankers also expect a 5 percent to 20 percent decrease in the number of independent banks within five years, and 34 percent of the respondents expect more than a 20 percent decrease.

All of this consolidation, and all of the predicted changes, have occurred before the passage of an interstate branching bill; likewise, even more consolidation is likely.

So, while community banks are expected to remain as a strong force in the coming years, they may not be as prevalent as before. Given their role in the development of many smaller towns' economies, will independent banks' diminished presence negatively impact some communities? Are community banks, with their "knowledge of local markets and their economic and community participation," as described by Greenspan, better for a town than a branch? Beyond their financial resources, do those locally owned banks bring important leadership qualities to a town?

Anecdotal reality: A glimpse beneath the numbers

In a presentation last year on the survivability of rural banks and their communities, Ron Shaffer, a professor of agricultural economics at the University of Wisconsin-Madison, said bankers must go beyond the role of money lender and aggressively prod the community toward economic growth. "Community bankers need to provide leadership to the community and help develop a vision for how the community can adapt to economic change," said Shaffer, who has studied community development issues for years. Many communities don't recognize that local banks are not just financial resources, according to Shaffer, but also intellectual resources—they have knowledge about special funding programs beyond their own banks.

In an interview, Shaffer says that locally owned banks, rather than branches, may be better suited to provide leadership in a community because of their local ties, but he admits that such a hunch is not based on quantitative data. Likewise, his contention that active leadership by a local bank—or bank branch—is beneficial to a community is also largely based on anecdotal evidence. "I can't point to a study that says, if you do this, then things will be better."

According to Elizabeth Laderman, economist at the Federal Reserve Bank of San Francisco, any claims about the advantages of local bank ownership will have to be made on anecdotal evidence, because "it's something we can't see in the data." In research published earlier this year, Laderman found that despite widespread consolidation in banking between 1982 and 1992, local banking markets in Western states are not more concentrated than before; in most cases banking markets are even less concentrated. Several factors, including the tendency of smaller competitors in local markets to gain market share when larger banks move in, as well as the establishment of new banks and branches, provide a competitive check against larger institutions, she says.

Laderman's colleague, Fred Furlong, the San Francisco Fed's vice president of banking and regional studies, in a report published this April, says the long-held fear that out-of-state banks will drain funds to their home states is wrong on two counts: It implies that interstate banks have an intrinsic interest in bonding with their home states, and it fails to recognize that banks have an incentive to allocate credit to its highest valued uses—wherever that might be. Besides, he says, the empirical evidence is contrary to such theoretical fears:

"Statistical analysis of individual banks in the Twelfth District [nine western states] did not reveal a significant difference in loan growth at banks owned by holding companies headquartered in another state and other banks. Likewise, no relationship was found between growth in loans for each of the 50 states and the degree of interstate banking in the states." Furlong also notes that both sets of analysis controlled for economic and banking conditions.

Such studies of economic data, though, don't necessarily capture the intangibles of community life, according to some observers interviewed for this article. Chuck Stroup, the director of North Dakota's Department of Economic Development and Finance, and a community banker himself, not only is convinced that an active bank is critical to the future of a community, but also that locally owned banks are better positioned than a branch to fill that special role. "You need a deep-rooted, sincere appreciation and sensitivity to what a city's needs are," he says. "You have to perceive and understand what's in the hearts and minds of people."

Even a locally owned bank, though, will fail in that role if its executives just go through the motions of community involvement, Stroup says. At a recent economic development conference in a small North Dakota town, Stroup says one participant said that the biggest encumbrance to the town's development efforts was the uninspired participation of the local banker. This banker was on the right committees but he didn't attend the meetings, he made much-appreciated donations to events, Stroup was told, but didn't follow through with leadership. What can we do? Stroup was asked.

In that case, Stroup says he told the members of that community to approach the banker, or another member of the institution, and stress that the town is dependent on the bank's expertise and natural leadership role. "Bankers, by reputation, are leaders," Stroup says, adding this advice to local bankers: "Don't go through the motions, it only offends people."

Stroup fears that the growth of bank holding companies across state lines may start to "breed out" the deep-rooted feelings of community that he says are important to a town's survival. Those "feelings of community" are not only important for such efforts as economic development, he says, but also to enhance a town's everyday life. For example, the sponsorship of a town picnic or a float in an annual parade may not seem like much, Stroup says, but if those events eventually collapse from lack of support, it affects the town's collective psyche. Out-of-town ownership of banks, as well as dwindling local ownership of grocery, hardware and drug stores, can fracture a community's relationship with its Main Street, Stroup says. Historically, along with the local schools, Main Street has been the glue that held a community together.

Jim Goetz, president of the State Bank of Oliver County in Center, N.D., and president of the Independent Community Banks of North Dakota, says locally owned banks are ultimately better for a community because they have a vested interest in the town. If Center is having problems, or even a larger city like Bismarck, Goetz questions whether bank management located hundreds of miles away can respond effectively.

A proactive financial institution is as vital to a smaller community as a school or local newspaper, Goetz says, and that role will not be filled with interstate branching. Goetz stresses that he is not critical of large bank holding companies—they do an effective job of bringing value to their shareholders—it's just that he doesn't believe that the best interests of a large financial institution are always in line with the special needs of a small town.

Community survival clues

In its "20 Clues to Rural Community Survival," the Heartland Center for Leadership Development, a non-profit organization based in Lincoln, Neb., lists number 15 as: "Strong presence of traditional institutions that are integral to community life." Banks were included in that assessment, says Milan Wall, the Heartland Center's co-director, "Because we have seen time and time again where local banks go beyond the role of bringing money to a community."

The Heartland Center has studied many rural communities' efforts to survive and grow in recent decades, and in most successful cases a bank has been at the forefront, Wall says. Beyond providing financial services, banks often act as "cheerleaders of the community," he says, through active participation and as a positive influence. He cites the somewhat dramatic example of a bank in a small Nebraska town, in the middle of the '80s farm crisis, that bank decided to stick to its plans and construct a new bank building. The idea that the local bank would build a structure in the middle of hard times, demonstrated the bank's commitment to the town, Wall says, and provided a sense of hope.

However, Wall quickly adds that he can cite several examples where local community banks have been negative influences on a community. "From my perspective, ownership may not be a critical variable," he says. "I can't say that a branch bank is, by definition, not as community oriented. The critical factor is how bankers behave."

In one section of their book, The Decline of Rural Minnesota, Joseph Amato, history professor at Southwest State University in Marshall, Minn., and John Meyer, city administrator of Canby, Minn., discuss the often difficult role of community leaders: "... rural leaders, mirroring the area they represent, invariably become fewer, get older, and are asked to account for themselves in the face of an ever more complicated world. For rural leaders, there are more wants, more needs, more laws, more things to be mastered."

In an interview, Amato acknowledges the importance of active bankers in a community, for all those reasons listed above, but adds another intangible: ego. Many community leaders, especially bankers, are driven to lead projects because they want to make their mark on the history of a town. Meyer acknowledges that motivation, but questions whether that is as strong an impulse as in the past, when a town's population was steady or growing and local history may have been more important to its citizens.

Glenn Moran, a retired teacher in Marshall, Minn., sat on the board of directors of Lyon County Savings and Loan—now a branch of TCF Banks—from 1965 to 1983. Moran says he misses "old-time banking," the days of character loans, when bankers and their staff were old acquaintances of their customers. While he recognizes the efficiencies of branching and electronic banking, he laments the loss of more personalized service and recounts how some older bank customers have grown disenchanted with the financial services industry. There were six people on the board of Lyon County Savings and Loan, Moran says, and in the early days of his tenure, at least one board member knew every loan customer.

The residents of Browning, Mont., can attest to the value of personalized banking services, because for four years in the 1980s they were without any banking service at all. Browning, a town of about 1,100 in north central Montana, is on the Blackfeet Indian Reservation, where the economy is dependent on agriculture and natural resources. The '80s were hard enough on the town, but when Browning's 70-year-old bank became insolvent in 1983, it put added stress on the community, according to Jack Kelly, president of First National Bank of Browning, which was formed by the Blackfeet Tribe in 1987. Residents drove 35 miles to the nearest banking facility where they not only did their banking business, but also much of their retail shopping.

"The morale of the town was really bad," Kelly says. However, that mood has improved since 1987, he says. The bank—with about $12 million in assets, $10.5 million in deposits and $7 million in loans—focuses its lending strategy on small business, ranching, consumer and real estate loans. None of the bank's officers has left the institution since it was formed seven years ago, and Kelly says area residents have come to count on that stability.

"The bank is an integral part of the community," Kelly says. "We try to be leaders." The bank has a special place in the community because many of its customers are members of the Blackfeet tribe, which owns the bank. "We get lots of support in the community. Without that support, we couldn't have a bank."

One minute he's making a loan, Kelly says, and the next he might be chatting with an old customer, attending a local meeting held at the bank or even shoveling snow. "We do the best with what we've got," he says.

Ron Isaacson, of Mid-Wisconsin Bank in Medford, Wis., says community bankers choose their careers because of the special role banks have with their communities. The job is not about bottom-line bookwork, he says. Bankers generally have "a real affinity for community," he says. "They're the type of people who like to help people."

But Isaacson says that large bank holding companies can serve the same purpose. There are many large banking companies that value their role in the community, he says, and size alone does not mean that a company is losing touch. A bank can still be community-oriented, he says, while taking advantage of economies of scale.

In describing the ideal financial institution, Jack Kelly of Browning, Mont., says it would combine the efficiencies of a branch system with the historical continuity and the community spirit of a stable staff. Which brings us back to C. Douglas Atchley of Norwest Bank Delta, Delta, Colo. One of Atchley's big fans is Mary Chapman, a Delta-area resident who is a senior fellow for rural development with the Center for the New West, a Denver-based research institution. Chapman says the loss of institutional leadership is a primary concern in contemporary rural America. She applauds Atchley's role in the many local and regional economic development efforts, including a recent trip the banker made to Montana to attend a conference on natural resource management.

"We talk about this leadership issue all the time," Chapman says. "It's a quiet issue but a real one. There's hardly any leadership left in rural America in terms of institutions. Banks do play, absolutely, a key role in this."

For his part, Atchley accepts the important role that banks play in a community—and he thinks his bank branch can perform that role as well as any independent bank. "I don't think size has anything to do with it. I feel very strongly about Norwest's case, and that's why I'm working here."