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May 29, 2019
By Mark Lee, Reliabank Sioux Falls market president
Consumers today have more options than ever competing for their financial services business – community, regional and national banks, financial technology companies, brokerage houses, credit unions and more. Further, consumers have and demand unprecedented technology-based access to all these options. So it seems a fair question: Do community banks still matter in this new, quickly changing and very competitive financial services landscape?
Before addressing the question, what exactly defines a community bank? Here is one definition:
Community banks are locally owned and operated without connection to regional or national bank brands. Community banks see the vast majority of their deposits come from their immediate trade area and, likewise, make loans to businesses and individuals in the same trade area. Community banks are locally governed, make local business decisions and reinvest in their local communities. Community banks are not defined by their size per se but rather by their affiliation with and dedication to a local trade area.
Thirty-five years — and three recessions — ago, there were 14,400 FDIC-insured commercial banks in the United States. At the end of 2018, there were 4,687, according to Federal Reserve of St. Louis data, which means the number of commercial bank charters has declined by 67 percent. While closures do occur, the main factor in the decline is consolidations. Fewer and larger banks are becoming the norm. Community bank numbers have followed this particular decline over the same 35 years.
Like larger banking institutions, community banks use strategic mergers and acquisitions as a way to grow and compete — but on a local or regional basis that’s not at all similar to large bank mergers such as, for example, Norwest and Wells Fargo in 1998. And what may surprise some people is that community banks have always represented over 95 percent of the total bank charters in the United States. Community banks exist in significant numbers in every state. Texas at 438 and Illinois at 434 have the most, while Alaska at five and Hawaii at six have the fewest. Nationally, community banks operate out of 52,000 branch locations and employ almost 760,000 people.
The Independent Community Bankers Association notes that community banks in the U.S. make over 60 percent of all small-business loans and over 80 percent of all agricultural loans.
South Dakota shows 66 community banks chartered in the state at the end of 2018. However, there are 80 community banks operating in the state, which means that 14 community banks chartered elsewhere have a presence here. These 80 banks own and operate 394 branches spread throughout our state in towns of all sizes and employ almost 21,000 full-time employees.
As previously noted, community banks serve local residents, which means their deposits and loans are almost entirely rooted in their immediate trade area. In South Dakota, $75.5 billion in community bank loans and leases are summarized in the following categories:
In South Dakota’s community banks, the above summarized loan volume is supported by $84.4 billion in deposits. This loan-to-deposit ratio of 89.5 percent is evidence that the industry is true to its community-building purpose of putting local deposits to work locally for organizations, residents, commercial enterprise and agribusiness — in other words, people you live with and know.
The impact of community banks in South Dakota as a secure depository, quality lender, superior employer and local community-building partner is obvious and ubiquitous.
South Dakota’s unique and enviable distinction as the home of a number of large regional and national bank charters skews total bank asset percentages in the state. Thirty-five years ago, South Dakota was home to banks with total assets of $10.6 billion. That number grew through 2003, when assets totaled $84 billion. However, by the end of the first quarter of 2004, assets had jumped to over $419 billion when Wells Fargo added $319 billion to the state. Two other large spikes catapulted asset growth in our state when Wells Fargo added $457 billion in the first quarter of 2010 and Citibank added over $1 trillion in assets in the third quarter of 2011. There were other significant additions over time, but these three were the largest by far.
Today, South Dakota community banks show assets of $102.4 billion out of the $3.2 trillion in total assets registered in the state — which, by the way, ranks South Dakota No. 1 nationally. So while community banks may represent 97 percent of all the banks chartered in state, their assets account for 3.2 percent of the total bank assets reported here. The median community bank asset size in South Dakota is $182 million.
Today’s impact is significant, but community banks are not without their challenges. In addition to expanding competition from various types of institutions and financial services providers, customers are demanding more of an “Amazon-like” technology experience in financial services much like they do in other commercial transactions. Community banks need to continually invest in their people and technologies to compete in an ever-changing world. The Wall Street Journal on April 12 posted an article titled “Tech Service Rankles Small Banks” that was based on the challenges of getting first-rate, consumer-friendly and competitive technologies to smaller banks. No small issue indeed.
Moreover, community banks in rural areas are challenged by changing population demographics and the changing nature of agribusiness. Those of us of a certain age and who were raised in South Dakota vividly recall thriving small-town main streets with grocery stores, movie theaters, hardware stores, pharmacies, cafes and more. However, these small businesses are not as easy to find in our smallest communities as they once were. Many of these same communities still have a community bank anchoring their town and serving local ag producers, residents and businesses. Yes, there have been closures and consolidations, but it is unlikely you will see many regional or national bank brands in small-town South Dakota. Serving small towns has its own risk and adds to the challenges of community banking, but this service is part of the fabric woven into the mission of these banks.
For community banks, like many other businesses and industries, there are no competitive certainties, change is constant, and they need to strategically compete.
So do community banks still matter?
The answer, arguably, is still a resounding “yes!” However, if we had phrased the question as “Are all community banks certain to succeed in the future?” we would undoubtedly have had to answer a similarly resounding “no!”
Community banks are neither destined for success or failure. Quite the opposite, community banks are in a highly competitive environment with changing demographics, technology, competitors and customer expectations. Continual adaptation is a competitive imperative.
Maybe the answer to the question should be something like this: Community banks still matter because who better to succeed in a changing world than the financial institution that is closest to its customers, actively embraces technology, reinvests directly into its community and values relationships above all else. That describes the successful and constantly evolving community bank located near your home or business. These banks are ready to go to work with you and for you, as they always have been, as together we focus on building better communities and a better South Dakota.
Mark Lee is the Sioux Falls market president for Reliabank. A family-owned bank, Reliabank serves two trade areas — Watertown and Sioux Falls — and will celebrate its centennial in 2020, marking 100 years of service to South Dakota.
Do community banks still matter in a new, quickly changing and very competitive financial services landscape? This market president has some valuable insight.