Lessons From a Cautionary Small Bank Tale

What can community banks learn from the story of the decline and eventual demise of the National Bank of Delaware County? What mistakes should they avoid? What are the areas where they can continue to compete and win? 

Those topics and more are discussed in this week's episode of The Purposeful Banker


Helpful Links

The Problem for Small-Town Banks: People Want High-Tech Services (Wall Street Journal)

Live Oak Bank Picked Own Path to Grow (Wilmington Biz)

How Banking-As-A-Platform Propels Cross River Bank (Knowledge @ Wharton)

Small Banks You've Never Heard of Are Quietly Enabling the Tech Takeover of the Financial Industry (CNBC) 

Citizens Bank of Edmond Thrives as a 'Model' Community Bank (American Banker)

North Carolina Paper Draws Readers With Full News of Local Goings-On (Wall Street Journal)

PrecisionLender Resource Page

Podcast Transcription

Jim Young: Hi and welcome to the Purposeful Banker. The podcast brought to you by PrecisionLender where we discussed the big topics on the minds of today's best bankers. I'm your host, Jim Yong, director of communications of PrecisionLender, and I'm joined again by Dallas Wells, our EVP for strategic innovation.
The inspiration for today's podcast is a recent Wall Street Journal article titled The Problem for Small-Town Banks: People Want High-Tech Services, and we'll have the link to that in the show notes. And it tells the frankly depressing story of the National Bank of Delaware County. We will discuss that story and the lessons it might present for community banks trying to compete in today's market.
Dallas let's start with first, can you give us the cliff notes version of what happened to the National Bank of Delaware County.
Dallas Wells: Yeah, I can and I think their story unfortunately is gonna ring all to true for a lot of other banks it has over the last couple decades but National Bank of Delaware was a classic small town community bank in New York I believe I think at their peak they were maybe 370 million, 400 million something like that and total assets and had six branches but had been in this kind of malaise this long, steady decline over the years. And it was mostly demographics of the local market that they served. And they started to really feel some of those struggles and as a board, they decided, if we're going to survive, and we have long term viability, we're going to have to be bigger. And it's going to have to be bigger to, one, handle some of the compliance overhead and burden and number two, and bigger, and handle some of the technology requirements that are coming our way. 
So about that time Bank of America put up for sale in a nearby town, six branches. So this is between 2012, 2015 Bank of America sold 300, 400 branches across the country. So they were shrinking their footprint trying to really shrink their asset size into the capital base after the financial crisis. And this was part of a long term strategy for them. So National Bank of Delaware scrapes up a million bucks and buys the six branches. Of course, the nature of banking it's not the million bucks it's the issue it's that they're buying 140 million dollars of additional deposits, which means they have to raise some additional capital to be able to support now their new bigger size. So they borrowed money to make this transaction happen, increased their overhead, and we're really betting on this new 140 million of deposits from Bank of America really being the foundation for their future. And it just didn't turn out that way at all.
The article actually opens with some of the ugliness, so they had customers standing in line for hours as they made the transition trying to figure out where the heck all their information was, what their current balances were, how to work the website, clunky as it was, and they actually at one point had to have security guards at the front doors at some of these branches, because that's a really upset people. 
Over time, they actually not a long time either, over a pretty short time frame they actually lost about half the deposits from those branches that they bought. And so the economics no longer worked. The bank went from slow and steady and low profits, but profitable to losing money. And so they had to sell themselves in a fire sale to a slightly bigger bank, a bank of about a billion, two billion, three, something like that in a neighboring town that just had a little stronger base, better management team that can handle these sorts of things and took over all the branches now. So it was this bank that that made a big bet in a way to try to save themselves, and it just didn't work at all.
Jim Young: And there was the tech aspects of it too, where the people that we're kind of used to getting that Bank of America and online experience and all that sort of thing and a lot of them I think, fled to the JP Morgan still had a branch in town or close to town and they went there and I think the bank that bought them had a little bit better. It had that ability, enough scale to have a decent enough online experience that they felt like they could probably retain the people that they were bringing on with it. So, that was the tech aspect of it. As you said, though, there's some familiar notes in the story. I take it, you've run across some similar sad small bank tales over the years.
Dallas Wells: Unfortunately, I have. So this story really was impactful to me because I grew up in community banking. I worked in the community bank for seven, eight years earlier in my career and I grew up in one of these small rural communities where the small local banks really dominated the banking market. And it's been really a similar tale for some of them. So I'll back up a little bit to, there's a saying in the banking industry, that bankers have short memories and that, that's part of the cyclical nature of the business where we too quickly forget the bus when times are good and we make some of the same mistakes over and over again.
I don't think that's true with community bankers. I think sometimes they actually have too long of memories and again, I say that fondly as a community banker myself they are I think, at times fighting yesterday's battle and here's what I mean by that. The Bank of America the way they actually got a lot of these branches in this small towns was the exact reverse transaction. So if you back up in the little town I'm from to back in the 80s, it was a fair number of community banks in town and one of them was the dominant player, they had probably close to a 50% market share. Strongly profitable, had branches and a few other nearby towns, but all within the wonderful state of Missouri. 
Then in the early '90s, the interstate banking laws changed and several other regulations changed and Bank of America which wasn't yet Bank of America, at the time, I believe, was Nation's Bank. So one of the predecessors came through the Midwest, rolling up all kinds of banks, and they paid a gigantic premium for this lead bank here in town, like four times the book value of the bank, and they did this everywhere. And that was eventually rolling up from nations to a couple of others, and then to Bank of America in the form that it became.
And as they did this, they bought these branches and part of the calculation they missed was that this was at the time all about relationships. So a couple of the other small banks in town just hired away their lending staff just literally came in and picked off the whole team and took a big chunk of that business away. And that happened to Bank of America all over the place.
And so these rural branches that they paid just gobs of money for, and it was a big branch in town, at one time was probably staffed by 40 people, all of a sudden there'd be three people in there. And you go into this giant, cavernous branch and there's three very unhappy Bank of America employees in there, watching the deposits just and the loans just slowly trickle out of the branch. They were just kind of sad places.
Eventually, when times got tough through the financial crisis, Bank of America said, "We're out of here, right? We're out of these small towns." And so these community bankers, they almost look at it as like 25 years later, but they're like, "Ha! Told you, right? You can't come in here and steal our business from us. We're going to buy back those branches." And sometimes they did, they bought back the exact same branches. The logos have changed a few times on both sides but it was some of the same players involved in the transaction. They bought back the branches at a discount and they're like, 'Gotcha!" only now it's not as much about the relationships and this is part of the struggle I had with community banking. 
Part of the reason I eventually moved on to other things is community banks always viewed the other community banks in town as their competition because of things like that, that happened with Bank of America. I remember my boss telling me, we had a Bank of America in town and there were a couple of the other big regionals and he's like "They're not our competition. We compete with the other community banks and the credit unions and that's who we have to worry about and eventually those big banks."
That may have been true for the majority of the customer base at the time but I'm looking around at some of my peers, some of the younger customers and I'm like I don't think that's true once mobile banking started becoming a thing and internet banking and you could find ATM that would refund the fees all over the place, it just wasn't true anymore. 
Every day that becomes more true and the demographic shift more that way. And so now if you look at the flip side of that, it's the big banks that are out there now stealing all the market share when it comes to deposits. They don't view the community banks is their competition because it's a rounding error. It almost feels like an inevitability in that they just keep spending more and more on technology, keep widening the gap further and further and in the meantime, the community bank customer base just gets older. And so it's trying times for a lot of these small banks.
Jim Young: Alright. Well, that was pretty depressing, we're going to wrap up Purposeful Banker at this point, close up shop.
My next question was sort of how does this fit, you went into it. Actually I've written this phrase I gotta be honest, the story had a feel of inevitability to it, call me a dreamer Dallas, but I don't necessarily know if that's the case either. I guess you've laid out very clearly the worst case scenario for community banks, which is the slow death if you stay still and possibly quicker death if you try to make a move, but I got to imagine that we talked to banks around these sizes every day and a lot of them are doing very well. So I guess can you paint that picture but also explain how it doesn't apply to all banks in this situation of that size?
Dallas Wells: So first of all, let's get away from the anecdotes and the sad story part of it for a second, let's just look at the numbers. So the banking industry as a whole is actually really healthy. But there's some charts in the Wall Street Journal article that won't surprise any bankers that are listening, but it shows the market share for those small banks. And in this case, they're defining those as those under a billion. So those under a billion, 30 years ago had a, I don't know, a third of the deposit market in the country now, it's something like 6%. So, if you look long enough term part of that is inflation. A billion dollars ain't what it used to be but still those small banks, there's just a lot fewer of them. We've gone from 11,000 banks of that size to 4,600, and they just don't have the market share that they used to.
The other part is just recent performance. So like, Well, what about now? So we actually pulled some data from 12/31/2018 and just looked at banks, but it's [inaudible 00:11:16] Billion and in total assets and those over a billion. So everybody's doing pretty well, in the grand scheme of things. The big banks have higher loan growth in just about every loan category, they have higher deposit growth, two times higher deposit growth, by the way, they have higher growth in the non interest bearing checking, so that's free checking accounts, they have higher return on equity, they have fewer past two loans, fewer net charge offs. And historically what small banks could do is they say, yeah, the big banks have all the fee income and they have this wider base of their business, but they can't compete with us on the main street banking activities of gathering loans and deposits from local consumers. And that shows up in net interest margin. We kick their tails and net interest margins.
Well, those small banks are still higher but that gap has shrunk all the way down to 10 basis points. So over the last few years, the big banks that made up a ton of ground there too. Again, it's because they're the ones coming and stealing your cheap deposits. So performance wise, on average, these small banks are in trouble. But all is not lost. It just is that I think the big takeaway here is that you can't just keep doing what you're doing and hope that the outcomes are going to change.
Within that average performance, again, there's 4,600 banks there. There's quite a few of them that are doing quite well thank you. The little bank that I used to work for is actually still doing pretty darn well. They have always north of 20, so they're doing fantastic.
The question is, what's the difference? Right? Why are some banks doing well, and others aren't? Part of it as part of what sort of doomed the National Bank of Delaware County is its demographics, some of those areas there's population shrinking, the economy shrinking the old farm and industry jobs have gone away and there's just nothing there to replace it. Some markets ... My little hometown is actually doing pretty well. So there's still growth there and there's job growth and the local economy is reasonably strong. So the local banks are reasonably strong. 
The other thing though, is that community banking used to be all about geography. So if you are a small bank, you had to be all things to all people in your little local market. And so that's what you tried to own, is your geography, your local town, your local county, whatever it may be. And what technology has done now is it's allowed community banking, those niches don't have to be geographic anymore, they can be something else entirely. So a couple of examples of small banks doing really well. So Live Oak Bank, which does SBA lending only, they do it nationwide so their total assets are, I don't know, 2,3,4 billion, something like that. So they're above the line that we're talking about here, but just barely, and they're one of the top performing banks in the country. 
There's a few others that are similar that have really embraced the technology side of things. So Cross River Bank is a bank that really their primary customers are fintechs. So, all the person to person payment things, and square and things like that. The interface is all the fintech's, but the money actually moving around is still on the rails of the banking system. And Cross River is the bank that's behind a lot of those things.
There are other banks that are partnering with the Fintech lenders, where they're actually providing some of the credit and some of the transaction infrastructure. Some of those are really surprisingly small banks that have been able to embrace that and make it their little niche.
And then there are just some classic community banks who, just through like, sheer force of will, and in some cases, leadership are surviving just being old fashioned community banks. Old fashioned in the sense that they are all about community, but they've embraced the technology side and decided to spend a bunch of money on it. So the big example there is Citizens Bank of Edmond, who we've mentioned a few times on this podcast. Jill Castilla is their CEO. She's actually been on this podcast before, but Jill actually walked into a similar situation as what was being faced by the bank in this wall street journal article. But she took a very different approach. She closed some existing branches. And she said, 'We're going to take that money and we're not paying it out to shareholders. We're not buying more Bank of America branches. We're going to invest in technology, and we are going to really embrace this community thing'."
So they do this local festival called Heard on Hurd. Hurd Street is the street that their headquarters is on. It's like a big street market. I think there's like 30,000 people that show up for this thing and their brand name is all over it. They do small business, almost like a WeWork office style thing. They had these little small business hubs where small businesses and startups can come in and use the branch and use the conference rooms and use some office space there and they've turned it into a little revenue and it's also just kind of become this community hub. So Jill's banks doing very well but they've had to really think outside the box. You can't just do the same things you've always done.
Whether that's embracing the community thing in a different way, finding a specialty, finding some technical advantage, because you're small and nimble there's ways to do it out there, but burying your head in the sand there is some inevitability in that. The numbers don't lie.
Jim Young: It's almost ... I think we can call it almost a boutique approach to it?
Dallas Wells: Yeah, that's a good way to describe it.
Jim Young: And in that sort of way, that community part of it becomes one sort of example of this. And I go because if I'm not making Seinfeld references, I'm making references to my previous career as a journalist and I need to actually here in North Carolina, small town to the east of us have done, the Dunn Daily Record and back in the early aughts, it was the number one newspaper in America in terms of circulation penetration. It had like 112%, which is insane. I mean, it literally means some households getting two papers and this is the time when everybody else is planning and their way of doing it was ... Believe me, this was not Woodward and Bernstein, this was getting names in the paper. This is the way we do it and it became this almost fat and newsletters when they called hyper localism and the publisher of the paper said look I can't do any of these, I can't cover the Iraq war, I can't cover tobacco road basketball better than these other guys only thing we can do better is cover done.
So that's what we're going to do and it's a similar sort of thing is maybe it's sort of like in City Slickers when he said that you find that one thing.  If you're the smaller when you find the one thing that you're going to be able to do better in some cases that may still be as you mentioned with the Jill Christie story that may still be we can provide community better. We can put that ... Connect people locally and give that sense of community better or it may be like you said a certain type of loan I can't remember the name of the bank that does trucking loans. That that's their thing and you find those niches out there and it becomes like you said geography could still be one of them but it's not the only thing anymore it's really about whatever niche that you can find where you can be better than the others around you, whether they are also your size, or as in the case of the stories are talking about the ones that had the enormous scale, like the ones they talked about in the story.
Dallas Wells: That's a good point, Jim. And I think the key there is that you have to have a strategy, and you have to invest in that strategy. So the temptation for these small banks is, and we've run into a bunch of them through the years where we've been trying to actively sell them something and they're like, look, we're cutting budgets everywhere. So income was down last year so we cut all budgets by 10%. And so just know like, we're not even going to listen, we're fairly persistent salespeople. I think that's the name of the game but when we hear that we're like, got it. We know what we need to know here and we're moving on. And so it can be death by 1,000 cuts self inflicted, where every year it gets a little worse. So you get a little more budget, and the gap gets wider between you and the big banks. And so that's what Jill had to convince her board to do, is really embrace this thing and invest in it.
And so now they to that hyper localism thing, they do cash mobs which are social media driven and they take their employees and they try to round up other people who follow them and they say, "Let's go to the local cupcake shop and everybody buys stuff till they're sold out." And it's just a cool little surprise thing that it ends up getting newspaper coverage and talking about making a customer happy. You show up at the door with a whole bunch of paying customers wave and money around and then they join in on the next one. 
That's sort of the Dunn Daily Record thing of saying we can out compete JP Morgan Chase and Bank of America when they're spending ... I think the article said Bank of America spent 20 billion on technology since 2012. You're not competing with that. But can Bank of America organize a cash mob to the local cupcake store? Heck, no, they can't.
You have to find where you can compete where you can differentiate and make that your thing and you can't ignore the fact that no matter how much the local cupcake shop loves you, you still need an app. They still need to be able to use modern technology and get to you. It doesn't have to be as good as Bank of America's but it's got to be a competent version of one. So you can't ignore those things. But you have to find your way to differentiate.
Jim Young: Before we close this out I want to go back to actually the ... We've talked about this really from the bank perspective here but I want to go back to sort of the customer perspective whether it's retail customer or small town business and the town of Monticello, New York where this whole thing happened.
You talked about the way that community banks may have responded when the Bank of America started selling branches, that sort of thing and that's what I was thinking. I was like okay, now a niche has just opened up. Now we can move back in here because the big guys are pulling out they don't want this market anymore and we can take it but then you had the sort of, well, no, that didn't work for them either. And I'm left thinking okay, I think in the story like you said there was like a JP Morgan branch that they went to but what if JP Morgan says is not worth it anymore. Are we talking about, we're not even talking about branches here, but at some point simple you want to go to an ATM so you still the cash at some point. At some point you do need some interactions. Are we talking about a situation where some towns you might just be like, I gotta go 40 miles to get to a bank, physical bank at some point.
Dallas Wells: So the article mentions that I think there's a third of US counties now that do not have a local bank branch. And the regulators are trying to prop up some of that. So as you see the SunTrust and BB&T merger that was announced not too long ago, which by the way, was another technology driven merger according to them. They will go back to their regulators, and they're going to say, I don't know what the number will be but here's making something up 200 branches we want to close because there's lots of overlap. And what the regulators are going to do, they're going to go down through that list and they're going to say, all right, yes to 180, these 20 for you to get approval have to stay open because otherwise you're not properly serving those communities. 
The regulators will force some of that but what you realistically see, this is where when you go into a Walmart Supercenter, they have a little money center there. That's how these rural communities end up surviving. And there's lots of them surrounding my little hometown. Some of those towns that aren't doing as well, people bank from the Walmart, basically, because there's an ATM there, and they paid check cashing fees to cash their paycheck or there's the ATMs at the gas stations that you pay the fee for and so it's inconvenient, it's expensive, but that's what's left. 
You're right, there's a need there, someone will serve it, but it feels like it could be served by technology and not by the old relationship banking, the community bankers fighting yesterday's battle and saying, hey, we saw what happened last time, we'll just do it again, didn't work out for this bank in New York and I think that's a real risk that these bank boards have to evaluate.
Jim Young: Alright. I feel like it just brought us back down to a depressing note on this and I don't know if it's depressing, it's just the way markets move and shift and shape and the sort of thing. So there are some small town issues that become trickier and all this. 
Dallas Wells: Yeah. And I think the bottom line is like, you just have to be proactive and you have to have an aggressive strategy. And it's not just a wish and a prayer, it has to be a purposeful, intentional game plan going forward. And you have to know what the headwinds are. And there's some pretty strong ones for small banks in rural towns, so that might mean what feels like some drastic measures need to be taken I think that's the big takeaway. 
Jim Young: Yeah, absolutely. Alright. Well, that'll do it for this week's show. And for a few friendly reminders, if you want to listen to more podcasts, or check out more of our content, you can visit our resource page at precisionlender.com or head over to our homepage to learn more about the company behind this content. Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, SoundCloud, Google Play or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this has been Jim young, Dallas Wells, you've been listening to Purposeful Banker.

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About the Author

Jim Young

Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships. Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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