Community banks seeking expansion find similarities, differences between customer bases

As community banks based in rural communities face pressure to scale and grow deposits amid industry-wide consolidation and shifting population trends, some are expanding into more-populated areas. .In Minnesota, the seven-county Twin Cities metropolitan area has been the significant driver of the state’s growth during the past seven decades, increasing its share of the state’s population to more than 60 percent in 2020 from 30 percent in 1950. One example of a bank adjusting to this trend is Security Bank & Trust, which is headquartered 50 miles west of the Twin Cities in Glencoe. The bank has branches west and north of the Twin Cities along with suburbs Chaska, Eden Prairie, Minnetonka, North Oaks and Wayzata. There are significant differences in operating branches in rural and urban areas, said President and CEO Andy Schornack. Marketing is much easier in rural areas where the bank is often the only game in town, compared to the Twin Cities, which is dominated by large banks such as U.S. Bank, Wells Fargo and even branches of Chase and BofA.To adjust to the different needs, Security Bank & Trust markets itself in the metro to the niche owner-operated business community. On a micro level, this is done by each lender creating their own relationship based on personal networks. “The core skill is building that trust and really giving that customer the attention they need, because the ultimate goal of our business is to see our customers succeed and to create value,” Schornack said. “If we can do that, on a one-to-one basis, and you start layering that cake over time, you’ve built a very stable and resilient client base, but also one that’s very appreciative of what the bank has done for them and done for their company, done for them personally.” .In less-populated communities, Security Bank & Trust supports youth by sponsoring county fairs, FFA programs and through volunteering. In recognition of the generally tight-knit nature of smaller communities, the bank provides municipal financing and has helped fund affordable housing projects in Greater Minnesota, the name rural advocates came up with for the state’s minimally-populated areas.Schornack, who splits his time between the Twin Cities suburb of Eden Prairie and the bank’s rural branches, sees opportunities in both Greater Minnesota and the Twin Cities where there is strong growth in the number of owner-operated businesses. Security Bank & Trust, he said, provides emerging business owners with the financial advice and products needed to navigate financial challenges. “The services we provide are very similar,” said Schornack, comparing the bank’s presence in Greater Minnesota and the Twin Cities. “We want to take a very much customer-first approach, so giving them the attention they deserve and require, particularly as you look at owner-operators in smaller medium-sized businesses, where they’re growing and building.“We’re going to have a lot of succession changes in Minnesota, just like we do across the country, and making sure our business owners understand how they’re going to sell their business and transition to the next generation and being part of that process and supporting them,” Schornack added. “Whether it’s on the investments from the seller standpoint or it’s on the financing from the buyer standpoint.” Schornack’s approach to success in urban and rural markets is echoed by Anna Kooi, national financial services industry leader for Wipfli. She said doing both requires understanding the customers in the regions, potentially by measuring foot traffic and profitability. Banks looking to serve both groups must understand the competition they’ll face from the largest players, said Marcia Malzahn, president and founder of Malzahn Strategic, a Twin Cities-based financial institution consultancy.Malzahn said even ag lending-focused rural banks can expand to larger population centers by offering Automated Clearing House origination, remote and mobile deposit capture along with online wires. Doing so will allow banks to secure more commercial and industrial lending, which ultimately brings top-notch treasury management customers, she added. “If you’re going to be in the metro area, you have to offer a robust suite of treasury management services,” Malzahn said. “And then make sure you have the infrastructure for treasury management to support it.”.Malzahn described the questions bank owners need to ask before expanding to a metropolitan area. “How much more can you expand?” she said. “Are you going to grow by opening branches, acquiring other little banks that are also on the outskirts of the metro?” Breaking through the divideEach small town generally has a strong sense of close-knit, individual identity, seemingly making it harder for an “outsider” to break into the market. Despite the challenge, Greg Evans, president and CEO of Winona, Minn.-based Merchants Bank, sees similarities between urban and rural areas. Both require banks to identify local needs and be active, local leaders.“Remain steadfast to the values that define your institution, as authenticity and community alignment are pivotal to sustained success in Wisconsin and Minnesota’s diverse banking landscape,” he added. Evans’ assertions are backed by evidence across the states. Much of the footprint of Sioux Falls, S.D.-based First PREMIER Bank is in rural areas of the state along the Interstate 29 corridor, including Watertown, Madison, Castlewood, Lake Norden, Wakonda and Kranzburg. First PREMIER has had a presence in both rural and urban areas since Denny Sanford bought the now-$3.3 billion bank nearly 40 years ago. “The rural communities provide us with a portal or access to provide ag banking services, and then also commercial and consumer banking services to a population who we wouldn’t otherwise be a part of,” said CEO Dave Rozenboom. Key to the bank maintaining branches in both areas is ensuring consistent services and treating employees well, Rozenboom said. Employees are encouraged to stay with the bank, receiving $1,000 for every year of service, in five-year increments starting at 20 years. The bank’s work pays off, especially in rural communities, where customer relationships are more likely to span family generations. Roughly one-third of First PREMIER employees have at least 20 years of experience. Part of the bank’s expansion in rural South Dakota has come through local connections. In Madison, First PREMIER had an existing relationship with Dakota State University and community leaders, with the university serving as a pipeline for IT employees at the bank. The CEO of the bank’s Premier Bankcard, Dana J. Dykhouse, graduated from Dakota State. First PREMIER employees have significant leadership roles in their communities. In one instance, the bank provided $100,000 toward the construction of a new elementary school in Castlewood, after a tornado devastated the city of 700 residents in 2023. First PREMIER employee Breanna Beebe is on Castlewood’s Economic Development Board. Merchants Bank has operated in rural and urban markets since the early 1990s, which Evans said has led to consistent business growth through diversifying revenue from commercial and retail banking, residential mortgage lending and equipment finance along with wealth management and trust.There are differences in the composition of Merchants Bank customers based on location, Evans said. In rural areas, the bank serves individuals and families along with agricultural enterprises and small businesses. Commercial customers in larger markets are generally more diverse and larger. Today, the bank has multiple locations in rural communities in Minnesota and Wisconsin along with relatively populated cities — Rochester, Winona along with Twin Cities suburbs Apple Valley, Rosemount, Edina and Cottage Grove; along with La Crosse, Wis. “Our overall service footprint is not that expansive, and the digital world in which we operate today has made the world smaller,” Evans said. “All of our customers are increasingly mobile and conduct business in more than just their localized area. It is key for our bankers to understand this and provide value for each unique situation.” Regardless of location, Evans said Merchants Bank is focused on growing based on market needs, community strengths and opportunities to improve the local economy. “We do not restrict our vision to a single type of community but strive to achieve balanced growth by identifying communities in the region where our services and expertise can deliver meaningful value,” Evans said. Bell Bank has branches in populated areas including the Twin Cities, Fargo, N.D., and Phoenix along with more rural communities such as Detroit Lakes and Dilworth, Minn. “While Fargo remains our corporate headquarters, we’ve seen significant expansion in each of our regional hubs of Minneapolis-St. Paul and Phoenix — as well as in eastern North Dakota and west central Minnesota,” said Lynn Johnson, executive vice president of retail banking and marketing.In the early 2000s, Bell Bank started expanding outside of Fargo — Wahpeton-Breckenridge, N.D., along with northern Minnesota cities Pelican Rapids, Detroit Lakes, Fergus Falls and Alexandria, usually by opening a loan production office. Bell Bank has grown in metropolitan areas ever since, including through its 2004 merger with Northern Capital Trust, which onboarded wealth management; its 2011 acquisition of Bell Mortgage, beginning the bank’s expansion in both Minneapolis and Phoenix; and its 2019 purchase of Fargo insurance firm Warner & Co., which launched the bank’s insurance division. Johnson listed several challenges Bell Bank had to overcome, including cost associated with new branches and employees. “We make sure we set expectations for ‘patient growth’ so our new locations can launch successfully, then grow deposits and relationships over time,” he said. “Second, expanding teams and growth across the company creates challenges as we strive to maintain our culture and bring employees together — we address that in careful hiring and onboarding, making sure our teams support our core values.”.‘We want each market to be competitive’Iowa Trust & Savings Bank is also operating in rural and urban areas. The $528 million bank, based in the northern Iowa community of Emmetsburg, population 3,700, has two branches in rural communities in the southern part of the state along with the Des Moines suburb of Clive. One reason for expanding to the Des Moines area is to remain relevant amid the decades-long population shift to the Des Moines metro from rural Iowa, said CEO Kris Ausborn. The Des Moines metro is the fastest-growing area of the state, and 63 percent of the state’s residents now live in an urban area, compared to 36 percent who reside in rural communities. The bank’s 2017 expansion to the Des Moines metro was sparked by networking. Iowa Trust & Savings connected with a construction lending team that had worked for a recently-sold bank. Expanding to Des Moines had been a strategic focus for the bank in recent years, but had been held up due to staffing constraints, Ausborn said.Onboarding the construction lending team allowed Iowa Trust & Savings also to serve the team’s preexisting customer base, ensuring success in the metro for the first couple of years. One employee Iowa Trust & Savings onboarded referred the bank to a lender working in the Quad Cities region, sparking the bank’s opening of a loan office in Bettendorf, Iowa.To account for the geographical differences, Iowa Trust & Savings decentralizes much of its local decisionmaking with flexibility for senior managers at individual branches. Depending on the competitive landscape of the local environment, local leaders can decide, within a range, the interest rate they offer on a CD. “It’s worked for us,” Ausborn said. “We want each market to be competitive with its local market.” The willingness of rural banks to expand in more populated areas comes as more of the country’s population moves to urban areas. As of June 2023, 80 percent of the U.S. population lived in urban areas, up from 75 percent in 1990. Twenty percent reside in a rural area. Also, opportunities to expand in competitive markets have risen as the number of FDIC-insured institutions has fallen, to 4,500 early this year from 8,500 in 2008. Northern Missouri-based Verimore Bank expanded to the northeast Kansas City metro earlier this summer by acquiring a competitor: Liberty, Mo.-based Clay County Savings Bank. The expansion introduced Verimore to two of the most populous counties in Missouri – Clay and Platte – with a combined population of more than 400,000. Verimore Bank had been interested in “prudent, smart growth” for years in an area that has valued community banking, said CEO Kristie Stuewe. Five years ago, community banks held the third and fourth largest share of local deposits in the northeast Kansas City suburbs, with recent consolidation lowering the local market share of smaller banks. “It’s the personalization, but also making sure you’ve got all the bells and whistles, and products and services of the big banks,” Stuewe said. .Verimore Bank doesn’t staff its branches differently based on geographic location but does based on activity. The bank’s CFO and COO are both in Brookfield, while Stuewe and Chief Deposit Officer Ken Honeck are in the Kansas City area. Verimore Bank has managed its rural and urban branches through strong communication — ad hoc and more structured, regular meetings — and staff who can make decisions based on their local experience, Stuewe said. The bank had developed the architecture to enable expansion. In 2013, Verimore opened a de novo branch in North Kansas City. Five years later, the bank acquired a branch in the rural north Missouri town of Milan. Two years later, the bank rebranded from First Missouri Bank to reflect its offering of advanced technology. Though Verimore Bank prioritizes core deposits regardless of location, marketing varies by location. For example, the bank is more likely to use radio advertising to reach more people in rural Missouri than in the Kansas City metro.“We don’t have the opportunity to sit around a table together as much as I would like, but we embrace technology and work well together,” Stuewe said. “Having talented people who can help lead the different areas is really the key there.”