As small banks grow, community banking becomes regional banking

David Fettig | Editor

Published July 1, 1997  | July 1997 issue

The onset of liberalized bank branching rules—both within states and across boundaries—was supposed to usher in an era of bigger and bigger banks. And, to a certain degree, that has happened.

But the big institutions aren't the only ones enjoying the benefits of opening branches in cities away from the home office—community banks have also begun branching. Unlike their larger competitors, though, many community banks haven't strayed too far from their own area, often never leaving state boundaries. And the reason they usually stay in a certain region is the same reason they had success in all those years before branching, according to Keith Colbo, executive secretary of the Montana Independent Bankers Association: Community banks know their neighboring towns well and they are able to transfer their banking philosophy to similar places with similar economic circumstances.

Geography shapes branching strategy

In the case of Farmers State Bank in Victor, Mont., population 500, the coincidences of geography have helped define that bank's branching strategy. Nestled in about the midpoint of the scenic Bitterroot Valley of Montana's Ravalli County, along a highway that leads north to Missoula, Farmers has branches in Florence and Darby, and plans to open another this fall in Hamilton, the county seat and the largest city in the Valley at about 3,500. Another operation is also planned for Stevensville in the near future.

"The Valley is 100 miles long," says Lee Yockey, president and chief executive officer of Farmers State Financial Corp. the bank's holding company. "To expect people to come to us just won't happen. So, we have to grow to survive."

And Farmers wasn't going to wait for new branching laws in order to grow. Montana's Legislature just passed an intrastate branching law this year; prior to this new law, which allows banks to branch within the boundaries of Montana, if a financial institution wanted to move into a new market it had to charter a new operation. So that's what Farmers State Bank did, opening a federal savings bank in Florence in 1990—that bank will now become a branch of the holding company's headquarters in Victor. (Montana is also one of the few states to have opted out of Riegle-Neal, the law allowing states to branch across state lines. This "opt out" status holds until 2001, when the state will automatically become part of the national branching network—unless it votes to retain its current position.)

The growth of Farmers has occurred at a time of similar growth along the Bitterroot Valley; this expansion has come despite the drop off in the region's traditional industries, ranching and timber. For many small communities across the Ninth District, when the natural resource-based industries have begun to fade, so have the area's towns. But the Bitterroot Valley has experienced a rebirth largely because of its other natural resource—its picturesque setting. Immigration to the county, which peaked in 1992 and 1993, according to Yockey, has fired up the service industries, which have now become the economy's driving force. The county's population grew by more than a third from 1990 to 1996, to reach nearly 34,000.

Farmers State Bank has shared in that growth. Farmers' total assets, which were at about $47 million in the late 1980s, have since more than doubled to $110 million.

"I hope we continue to grow," Yockey says. "I hope we put the branches in the right places."

No problem, says Pam Melton, executive director of the Bitterroot Valley Chamber of Commerce. Melton says the bank—along with other financial institutions in the region—will be key to the valley's continuing growth. "The banks are very important," she says. "Anything we do, we look to our local bankers."

Melton says Farmers' branching strategy was not only good for the bank, but for the valley. "Farmers met a need," she says about the communities, most of which did not have a banking facility until Farmers moved in. "They've really filled a niche in the local communities. Those communities rely on them."

As the fast-paced growth of the early '90s has slowed, Melton says the Bitterroot Valley has reached a point where it must both stabilize its population base by offering good jobs, and it must continue to focus on growth in order to do so. People are lured to the valley because of its beauty and lifestyle, but many come without special skills or the capital to start their own business. "And the jobs aren't what they expect," she says. Still, as the county continues to grow and the demand for services increases, more of those jobs become available.

For his part, Yockey is hopeful that the area's growth will continue. Many of those that are continuing to move to the valley are retirees, and as consumers of services they encourage much economic development, he says, from food, entertainment, retail and medical services. For example, Yockey says, the new homes in the valley range from $100,000 to $750,000, "and an awful lot of activity is created by their construction," he says, including materials suppliers, plumbers, excavators, electricians and other well-paying jobs.

A community techno bank

One key to Farmers State Bank's future will be its acceptance of technology, Yockey says, because of the efficiencies that it brings and because, more and more, he thinks bank customers will demand it. "Technology is the wave of the future, whether you're a small bank or a megabank," he says.

Farmers was one of the first Montana banks to offer check imaging for its customers and is also investigating home banking, depending on customer needs. "We're not going to stand back and watch the world go by. We're fortunate in that Kay has a technical mind," Yockey says of Kay Groff Clevidence, who was recently named president of the bank at Victor, and who follows her father and grandfather in that position.

But whether the bank has an eye toward growth or toward technology, it will always stay focused on its local community, Yockey says. "Obviously, you [in Minneapolis] would not know what is going on in Victor, but we know what's going on in Victor. I may be naive, but I think there will always be a place for a community bank."