This document provides an introduction to the history and evolution of community banking in the United States. It discusses how the US banking system developed in a non-linear way, with periods of booms and busts. The National Banking Act of 1863 led to the dual chartering system of national and state-chartered banks. This resulted in a proliferation of small, locally-focused banks. Over time, banks diverged in size and capabilities, with many community banks remaining focused on specific geographic areas and industries. The report will examine how community banks have adapted their business models in recent generations to survive changing market conditions.

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THINK LOCAL,
ACT LOCAL
A Better Business Model for Retail Banking
Peter A. Soraparu

2. THINK LOCAL,
ACT LOCAL
A Better Business Model for Retail Banking
By Peter A. Soraparu
LAFFERTY
Lafferty Group
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2013 Report

3. Table of Contents
Letter from the Publisher Page 4
Foreword Page 5
Introduction Page 8
Chapter 1: This Crisis Changed Everything Page 10
Chapter 2: Retail Banking Holds Banking’s Future Page 15
Chapter 3: The Generational Evolution of Community Banking Page 18
Chapter 4: The Past Generation’s Effect on Banking Tactics Page 23
Chapter 5: Landmark Shifts in Business Approaches Page 28
Chapter 6: Subtle but Signigicant: How One Crisis Begat Another Page 31
Chapter 7: The Regulatory Ying and Yang Page 35
Chapter 8: An Established Framework Page 38
Chapter 9: Regulatory Responses to Market Changes Page 41
Chapter 10: The Long-Term Regulatory View Page 46
Chapter 11: Community Banking – Expanding and Contracting Page 49
Chapter 12: The Community Banking Model Page 52
Chapter 13: The Peak of Numbers Coverage Page 58
Chapter 14: Refining Delivery in the Face of Challenges Page 61
Chapter 15: Capital Is King Page 66
Chapter 16: The “De Novo” Burst Page 70
Chapter 17: Managing Through Capital Ideas Page 73
Chapter 18: Building a Capital Base for the Future Page 76
Chapter 19: Defining the Community Bank Advantage Page 81
Chapter 20: Focus on Customers: Retail and Small Business Page 84
Chapter 21: Integrating Information and Technology Page 88
Chapter 22: Pioneering “Ring-Fencing” Page 97
Chapter 23: Understanding the Community Banking Opportunity Page 101
Chapter 24: Redefining Communities Page 104
Chapter 25: Morphing into “Accessographics” Page 107
Chapter 23: Evolving Markets, Evolving Approaches Page 111
Summary Page 114
Figure Citations Page 121
Appendix Page 122
Case Studies Page 123
Endnotes Page 130
Image Sources Page 136
About the Author Page 137

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Publisher’s Note
We are all sick and
tired of hearing
about banks that
were supposedly
‘too-big-to-fail’.
The truth is they
were too big to
change, too big to
innovate, too big
to notice what was
happening toreal
people and, in the
end, too big to do
anything but fail.
People are crying out for a better way and
there are many lessons to be learned from
the US community banking model. That’s
why Lafferty Group commissioned this
report, expertly written by Peter Soraparu,
a man immersed in the minutiae of US
community banking for the last 30 years.
In the US, small banks are generally the
pride of their communities. They are
not merely called ‘community banks’ as
part of some nefarious corporate social
responsibility whitewash; they are banks
based at the very heart of their localities.
These are not credit unions (which are
thriving mutuals) or savings and loan
associations (which, like mutual building
societies in countries such as Australia,
South Africa, Ireland and the UK have
largely disappeared), but shareholder-
owned, commercial and mainly retail banks.
A confident credit union system and a
reinvigorated building society movement
certainly have a role to play but there is a
lot more to the community banking model
than either of those limited entities have to
offer.
Most community banks have fewer than
200 shareholders, while some are quoted
companies. Many have been owned by the
same family for generations and focus on
relationship (as opposed to transactional)
banking. They tend to have assets of no
more than $1bn and are generally better
capitalised than bigger banks.
As this report illustrates, over 70 percent
of all small business loans are arranged by
community banks. They are the lender of
first resort for the true engines of growth
in the economy – the exact opposite of
the type of reckless casino banking which
caused our current crisis.
We need to move away from a world where
bankers are playing with our money for their
own gain. Richard Abbey, a writer once
described as ‘the Thoreau of the American
West’ once said “When the biggest, richest,
glassiest buildings in town are the banks,
you know that town’s in trouble.”
Community banks don’t have such
problems; they are ran by the people of
the town, for the people of the town. They
are not all mom and pop operations by
any means, and some have hundreds of
branches, but it is the ethos that matters.
They are there to serve, not tosiphon off,
and that is something we can all learn from.
Michael Lafferty

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Foreword
In a sense, the history of banking
around the world has always been about
communities. Like-minded groups of
people have always congregated in
geographic enclaves to advance their
common interests, with complementary
skills and talents building to a common
good, and with recognised financial stakes
considered for all community members.
In various parts of the world, specialised
financial institutions (and industries,
indeed) have evolved from these sorts of
endeavours.
Great cities grew up around this approach,
and spawned companies that demanded
more products and services from those
financial institutions, creating tremendous
growth that created large, then huge and
then mega-banks. As banks grew ever
larger, in some ways they sparked a sort of
mitosis of those exploding organisations,
spewing divisions-cum-companies that
demanded separate and extremely focused
financial resources and management
attention.
Overall though, the community banking
experience in the United States has been
unique and extremely differentiated.
It’s difficult to imagine a more variegated
past than that of community banking in
the US. Stretching back over at least 10
generations, pre-dating even the formation
of the state itself, it’s challenging to
construct an exact bridge between what we
call banking today and what out ancestors
experienced. As recently as 30 years
ago, there were nearly 15,000 separately
chartered ‘banks’ in the US (and several
thousand more ‘thrift’ institutions and credit
unions), and in many parts of the world that
is simply unimaginable. How that many
banks could survive, much less thrive, in
an economically advanced country like the
United States, is more than a fair question.
The answer, which will be examined in
depth in this report, has at least in part
been provided by the events of the past
generation, which have halved the number
of those banks in the US. That generation
has survived two garden variety recessions,
‘The Great Recession’ of the last few years
and the explosion of the dot-com bubble
in the equity markets. The banks that
have emerged – 95 percent - of them can
be classified as community banks – have
mostly morphed their business models in
an extremely adaptive way, but it still may
not be enough to ensure their collective
survival. Individual banks will surely remain
in place, but perhaps in not a purely
Darwinian fashion.
It may be that the absolute fittest of US
community banks will be those that are
the most attractive to the burgeoning
group of likely acquisitive regional banks
and the handful of US banks that serve a
more national market. There will also be
a continuing consolidation of community
banks in the mid-sized markets that now
support multiple parochially-focused
banks. One thing is certain – it will not take
another entire generation to again halve
the size of the US banking market.
But how can we best focus this investigation
into the recent past and more importantly,
the near-term future of US community
banks?
This report will not delve deeply into the
roots of US community banking (that effort
would likely span several volumes of this
size); rather, it will continually reference
the legacy business that sired a singular
approach to serving the basic and evolving
financial needs of entrepreneurs and
individuals, in turn sparking the continuing

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Figure 1: The number of banks in the US went up by
over 1000 in 30 years – a slow and gradual growth (Note
– this figure refers to banking groups or companies as
opposed to bank branches, which will be covered later.)

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economic regeneration of the American
economy, which became and remains the
engine of economic growth (or recovery,
depending upon the period) across the
globe.
It’s probably appropriate at this very early
stage to define the lexicon of this venture.
Here, simply, are the general definitions of
some of the concepts in this report:
Community Banking:
The US-centric but globally relevant
approach to banking that focuses on a
specific geographic area and generally
includes an asset size determinant as well;
we will be including all banks of US$1
billion in assets in this categorical grouping.
Despite relatively similar sizes, community
banks in the US don’t necessarily fit a
homogeneous description. How they
achieved, and how they sustain, their size
and viability might significantly differ.
Regional Banking:
Referencing those US banks that meet the
dual metrics of an asset size between $1
billion and $25 billion, and a geographic
reach of up to 1000 miles from their
headquarter offices. For a time in the
1990s, there was a sub-class of US banks
referred to as ‘super-regional’ banks, but
that description has mainly disappeared.
US regional banks generally feed on
community banking institutions as their
principal source of growth.
National Banking:
A surprisingly small group of banks that
combine a more or less national reach
across the US (at least 15 of the 50 United
States) with assets of more than $25
billion, with many of them reaching toward
or beyond $1 trillion. These massive
organisations have absorbed countless
banks and bank holding companies over
the past 25 years, with nothing materially to
show for those acquisitions beyond sheer
size.
Retail Banking:
For the purposes of this report, retail
banking will refer to the efforts of financial
institutions to serve the various banking
needs of ordinary individuals and assorted
small businesses (often referred to as small-
and medium-sized enterprises, or SMEs)
that comprise the backbone and engine
of any economic system. Many industry
observers in the US and around the world
believe that retail banking provides a
vibrant path forward in the aftermath of the
recent financial crisis, juxtaposed against
the abject failure of a universal banking
model.
Universal Banking:
Contextually, this report will reference
universal banking as the jumbling of all
manner of financial services including
corporate, investment, commercial and
retail banking, insurance and other variants
within one broad organisational structure.
This generally describes all of the world’s
largest banks, and is a model increasingly
decried by regulators and customers across
the globe. There are just a few universal
banks that can claim any consistent success,
and their ongoing successful performance
is in jeopardy due to the growing velocity
of the crosswinds in the financial services
industry.

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Introduction
The history of banking in the US might
best be described as spotty. There has
been no straight-line evolution, smoothing
any rough developmental edges. Rather,
US banking’s path has been a serpentine
circuit that has produced heady highs
and dastardly lows. Experiencing a series
of booms, busts, expansions, recessions,
mania and bursting bubbles, US banking
has navigated a course that sometimes
resembled that of a person flying blind in a
blizzard.
All along that rough-tumble route, the US
banking industry has exuded a myriad of
winners and losers; often, a clear winner of
one generation might become a disgraced
loser in the next, leaving in its wake
confused customers, consigned employees
and contrite shareholders. As the industry
progressed, there was a divergence point
that separated the survivors by size and,
often, capabilities.
After the National Banking Act became
effective on January 1, 1863, American
banks of all types scrambled for the
coveted national charters that, because of
the US Civil War that was raging at the time,
went to banks throughout the northern
states that comprised the Union. The states
that were part of the Confederacy in the
south had to wait until much later to receive
their national charters, so in many ways the
banks in the major Union cities like New
York, Philadelphia, Cleveland and Chicago
had a head start on those in southern cities
such as Atlanta, Charlotte, Richmond and
New Orleans.
Of course, the National Banking Act
also created another sort of divide in the
nascent US banking industry – it led to what
became known as the ‘dual chartering’
system. The first two attempts at creating
national banks in the US had miserably
failed, so the third time around it was
important that the experiment succeeded.
Banks chartered by the individual states
and that dominated individual cities had
become the norm and actually remained so
post-1863.
The principal reason for that outcome was
that despite the word ‘national’ in their
names, these newly-chartered banks were
limited to another word in their names –
that of the geography cited. For example,
The First National Bank of Chicago only had
one office in Chicago and, interestingly, due
to the vagaries of state law in Illinois, that
bank was limited to only one retail banking
outlet in its home city and none anywhere
else in the state or US. Of course, state-
chartered banks in that particular US state
were limited to one retail banking office as
well; so while it was a level playing field, it
was an extremely peculiar pitch.
The new national banks in other parts of
the US were much more fortunate than First
Chicago (as that bank came to be popularly
known), and they were able to establish
retail branches within the states in which
they operated. True interstate banking
would not come to the US for another
century.These geographic constraints on
the banking business in the US produced a
proliferation of separately-chartered state
and national banks that focused on the
parochial needs of regions and industries.
The banks became specialists of sorts,
which brought plenty of positives but
countless negatives, too.
Banks that were too closely aligned with
agriculture were hostage to inconsistent
weather patterns that affected crop yields;
those that served a heavy manufacturing
base suffered when the manufacturers’
markets dried up. Business concentrations
that banks later learned to better manage

9. LAFFERTY9
or avoid altogether often spelled doom
for banks that didn’t find the time to work
through them in developing businesses in a
rapidly-growing US.
Was it ironic that the US banking industry’s
evolution seemed to turn on a piece of
federal legislation? In this, our current,
era of overreaction to any new piece of
regulation that emanates from the national
level, that is a catalytic question.
There may be similar dual banking systems
in other advanced economic markets
around the world, but none quite like that
in the US. There have been state-chartered
banks that have grown to be industry
behemoths, and there have been banks
with national charters that have existed in
the same small towns in which they were
born for more than 100 years.
The differences between the two have
probably been slight, and to cite the great
American poet Robert Frost, may have
hinged on ‘The Road Not Taken.’The
narrator in that fabled poem says that all
the difference lay in taking the road less
travelled. In the US banking industry, that
road was lonely indeed, for banks of all
shapes and sizes have tended to follow the
leader, lemming-like, toward whatever cliff
might await them. All those variant banks
often emulate possibly the most common
model in the world – junior football players.
As any parent, grandparent or other
relative who has watched an interminably
long football match among five and six
year-olds knows, a pack of players track
the ball wherever it might go on the pitch.
The continuous action of pairs of little feet
reinforce the invention of shin guards, as
nearly all of the players involved in the
match attempt to get a touch... but the key
observation is ‘nearly’ all of the players…
For it’s the intelligent young footballer
who realises that separating oneself from
the pack is the key to success. As the ball
inevitably squirts from the rugby-like scrum
to the lone player, a weak kick past an
uninvolved keeper brings cheers from the
crowd and glory to the solo star. And so it is
for the banks that found a way to separate
themselves from the crowd of banks and
other types of financial services providers,
and to truly differentiate themselves in the
eyes of their customers and markets.
Achieving that positive separation is
always much simpler in easy times; not so
much in tougher eras such as the one that
the world’s banks and economies have
endured over the period since 2008. Whilst
impossible to predict the future twists
(either near or intermediate term) that will
affect the banking organisations that have
endured the storms of the past several
years, the experiences that have shaped
them during the tempered tempest should,
in theory, strengthen them. What will truly
matter, though, is what has affected their
customers (especially their retail customers)
and how that will influence the future
behaviour of those customers.
Franklin Delano Roosevelt, the American
president during much of the Great
Depression and most of World War II,
once said, “When you come to the end
of your rope, tie a knot and hang on.”
Survivor banks and their valiant customers
know all too well the feelings of fear
and exasperation that Roosevelt’s quote
exemplifies, and have vowed to apply the
lessons of the most recent global financial
crisis to enrich their collective future lives.
And, of course, President Roosevelt would
become the once, present and future
saviour of American community banking –
but that issue will be addressed a bit later in
this report.

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1. This Crisis Changed Everything
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