America's smallest and largest community bank: $3 million vs. $3 trillion

Meet the nation's smallest bank: the $3 million Kentland Federal in rural Kentland, Indiana, halfway between Indianapolis and Chicago. Kentland has two employees and a proud history of serving its community since 1920. Think about the bank in "It's a Wonderful Life."

By comparison, the nation's largest bank, JPMorgan Chase, is one million times larger at $3 trillion. Just add six zeros.

What could the nation's smallest and largest banks have in common, other than Federal Deposit Insurance Corp. coverage and being in America's most heavily regulated industry?

Based on Chase's recently announced plans to open 100 new branches in branchless inner city and rural communities, also known as "banking deserts," around the country, I would argue Chase is about to become the nation's largest community bank.

Yes, Jamie Dimon has become a community banker with this decision to "democratize" banking by bringing branches to 100 banking deserts. Instead of a toll-free number to speak with someone in a different country or an internet URL, these communities will get real branches with real people, including 75 new community managers.

The FDIC defines a community bank not only based on size, formerly under $1 billion but currently under $10 billion, but also other factors like its business model, relationship lending and branch network. The FDIC categorizes 94% of the industry as community banks, but specifically excludes the four trillionaire banks, namely Chase, Bank of America, Wells Fargo and Citibank.

I respectfully disagree and define a community bank as one serving its entire community, including low- and moderate-income areas and households as well as small businesses and farms with gross annual revenue under $1 million. This definition is consistent with the Community Reinvestment Act, or CRA.

I grew up in community banking believing in the ICBA's original motto: "Why give a community a branch, when you can give it the whole tree including the roots?"

In today's digital and consolidating environment with fewer and fewer "community bank trees," I am happy to see a branch, which represents a community's economic center, much like a church is its spiritual center.

A branch is more than another business on Main Street or in an inner-city neighborhood. It is physical evidence that a bank believes the community is important enough to invest in a building with a staff that shares their values. Talking the financial inclusion talk is one thing, but walking the branching walk is another.

The number of bank offices approached 100,000 prior to the Great Recession in 2009, but declined steadily, especially after the pandemic, to 76,742 as of midyear 2024, a nearly 25% reduction in just 15 years.

The first branches to be closed after a merger or for financial reasons usually have low deposits, typically under $25 million, and many of these are in inner cities and small towns.

The worst situation is when the last branch in a neighborhood closes, the final nail in a community's coffin, resulting in a "banking desert." With community blood in the water, financial sharks move in as well as payday lenders, check cashers and other lenders of last resort.

Consumer banking

PNC doubles its branch-expansion plan

The Pittsburgh-based superregional bank plans to build more than 200 new branches in 12 states by 2029, twice the number it announced in February, in a bid to increase scale.

By Allissa Kline

November 8

The Federal Reserve has identified over 3,600 banking deserts as neighborhoods without a branch within a two-mile radius in urban areas, five miles in suburban areas and ten miles in rural areas. Banking deserts, inhabited by over 12 million people, are 14% rural, 66% suburban and 20% urban.

How will Chase's 100 banking desert branches help?

First, unlike other banks, they are making the banking desert problem better not worse.

Second, this is part of Chase's growth strategy of opening 500 new branches, renovating 1,700 locations and hiring 3,500 branch employees over the next three years. They realize "branches matter" to all communities, and that a checkless or cashless society does not mean a branchless one.

Third, Jamie Dimon, the "banker's banker," at the nation's alpha bank is sending a clear message to the industry that banking deserts represent a large source of untapped small-business and other potential: "This is not just 'do-gooding,' this is business."  Why else would one out of five of Chase's new branches be in banking deserts?

Chase will have first-mover advantage, but other big banks should follow suit. Based on relative assets, that would mean about 75 new Bank of America branches in banking deserts and 50 each for Wells Fargo and Citibank.  

Adding in the other top ten retail banks, namely U.S. Bank, PNC, Truist, Capital One and TD, would mean a combined 75 more new banking desert branches, averaging about 15 each. Thus, if the ten largest banks, excluding branchless wholesaler Goldman Sachs, followed Chase's lead, those 350 new branches would eliminate nearly 10% of our banking deserts.

Ironically, such "do-gooding" has not helped Chase's CRA ratings, which have been stuck at satisfactory for the last decade with little chance of improving under the recent final rule.

Worse than disincentivizing the nation's biggest community bank is when regulators improperly give a failing CRA rating to the smallest community bank, as was recently done to Kentland Federal. Despite an outstanding 126% loan-to-deposit ratio, it received a failing rating because four of its six home mortgage loans over the previous three years were outside its home county assessment area.

Had examiners considered one of the two loans just over the county line, the bank would have passed. Examiners are supposed to be guided by "common sense rather than adherence to mechanistic procedures." Is regulatory common sense dead?

This author has no business relationship with Chase bank, other than a bank account, but is acting as Kentland Federal's pro bono CRA consultant to help them get upgraded to their deserved passing rating.

Community banks, whether at $3 million or $3 trillion, are critical to our nation, and regulators and interested members of Congress should be encouraging rather than discouraging them to meet the needs of their entire community in addition to their shareholders.