After moving away from his hometown of Latimer 16 years ago, Brian Lubkeman is making plans to return to Franklin County, in part because of a loan package offered by a local bank to attract former residents.

Late last year, on the same weekend the Ames resident reached an agreement to buy an acreage near Latimer, his wife, Kirsten, spotted an article in the Ames Tribune detailing the deal being offered to former Franklin County residents by Hampton State Bank. The “Come Home to Franklin County” program offers below-market rates on house and car loans, a new personal computer after closing on a loan, and free banking services as long as they reside in the county.

“Frankly, the timing just seemed amazing to us,” Brian Lubkeman said. “Here we are, needing to find financing, and here’s this spectacular program. We actually approached the bank. I kind of view it as luck that all of that fell together at the same time.”

Hampton State Bank, which set aside $1 million last November for the low-interest house and car loans, expects to have lent about one-third of that amount to three families by the program’s one-year anniversary, said Brad Davis, the bank’s president and CEO.

“There have been a lot of articles about brain drain and young Iowans leaving the state,” said Davis, a third-generation owner. “We wanted to do something that was targeted at our market area.”

The bank has since sold customized versions of the program to three other community banks across the state and donated the $250 profit from each sale to the Franklin County Development Association. Davis said he’s working with seven other community banks that are interested in purchasing the program.

As rural communities struggle to cope with demographic realities that are increasingly stacked against them, banks are often leading the effort to create new opportunities, say economic development experts.

“The more active a role bankers play in economic development in their communities, the more success there seems to be,” said John Anderlik, regional manager for the Federal Deposit Insurance Corp.’s divisions of insurance and research in Kansas City, Mo. Anderlik co-authored a study that examined the causes of rural depopulation and strategies that banks are using to counter that trend.

“However,” he added, “there are many rural communities, and the opportunities are relatively few among them. There are many communities that have made the efforts, but have been unsuccessful. In some cases, the shortage of housing in an area can prevent small communities from drawing in a large project. They may have the low cost of living, they may have the labor pool, but they may not have the housing stock.”



More consolidation ahead

The FDIC report highlighted the downward spiral that rural counties often face as declining populations make it more difficult to maintain vital infrastructure such as roads, schools and hospitals, which causes more residents to leave and creates a difficult climate for attracting new businesses. At the same time, farm operations continue to grow larger, outpacing the ability of rural communities, including the banks, to serve them.

Rural banks have been consolidating to gain efficiencies in a pattern very similar to that of the agriculturae industry, said Don Hole, executive director and CEO of Iowa Independent Banks, which represents 230 banks in more than 700 locations across the state.

At the end of 2005, 392 banks operated in the state, about 100 fewer than a decade ago, according to Iowa Division of Banking statistics. The rate of consolidations is expected to accelerate over the next 20 years, as rural populations continue to grow older and fewer banks succeed in passing ownership to the next generation.

Despite the lack of strong loan demand and shrinking customer bases, rural banks in counties that are declining in population are performing about as well financially as those in growing counties, according to the FDIC study. Anderlik attributed this to the stabilizing effect of federal crop subsidy payments, as well as bankers’ abilities to adapt to the changing market.

The community bank is not in danger of disappearing, Hole said, noting that the number of rural branch locations has remained about the same despite consolidation of charters.

“We have community bankers who are very good managers, and they understand how to serve folks and run a business,” he said, “We also find that the larger banks tend to not want to be in the rural markets, so we think that’s a market that we’ll be very successful in.”

A number of Iowa’s rural banks have diversified by opening branches in the state’s metropolitan areas. Depending upon the depth of an institution’s management expertise, that may or may not be a good move for a particular bank, Anderlik said.

Bank Iowa, which moved its headquarters from Clarinda to a newly built office in West Des Moines in February, has experienced a loan growth rate of about 30 percent at that location. By comparison, its loan growth at its more rural branches averages about 10 percent, said Stan Honken, Bank Iowa’s CEO.

“Our strategic direction has been growth in Iowa,” Honken said. “We’ve done that by acquiring other banks and pulling them together into a unit.” The company holds six bank charters for its branches in Western and Central Iowa. “Des Moines is really booming in its growth patterns, and we just really wanted to be part of that,” he said.



Investing in Main Street

Several programs have been launched by the state within the past several years to spur new business growth in rural communities, among them Vision Iowa, the Grow Iowa Values Fund and other programs offered through the Iowa Department of Economic Development. A program that’s now 20 years old, Main Street Iowa, has seen a number of successes that can be tied to community banks’ participation, said Thom Guzman, director of the Iowa Downtown Resource Center.

“In virtually every town that we work in, the bank is a leader in the leadership, project management and involvement, being part of the daily mechanics of Main Street programs,” said Guzman, whose agency has worked with more than 50 communities across the state. Through the Main Street Iowa program, nearly $572 million in private money has been invested in downtown buildings since the program’s inception.

One of the most consistent success stories in many of the communities he’s worked with has been the development of downtown housing above Main Street retail shops, Guzman said.

“It’s a unique way for us to add value to downtowns, by having the entire building be part of the revitalization of downtown,” he said. “There’s also the recognition that we won’t have the same types of businesses downtown [as in the past], but they can be economically healthy.”

In some instances, projects that were launched with low-interest financing through the Main Street program were refinanced by the local bank within a year or two, Guzman said. “What it’s done is show bankers that these projects can cash flow. Before there was a track record, it was hard to get a bank to do that.”

A recent award of $105 million in federal tax credits through the New Markets Tax Credit program has also presented new opportunities for rural communities. Now, bankers are working to find projects that will qualify for the tax credits, which can only be applied to projects within designated low-income tracts within the state.

John Rigler, president and CEO of Security State Bank in New Hampton, also chairs Iowa Community Development L.C., one of two Iowa organizations that were allocated tax credits through the U.S. Treasury Department’s Community Development Financial Institutions Fund.

“We have worked extensively with the Iowa Bankers Association for the past two years,” he said. “We have generated about three dozen banks that have committed [to finding projects that will qualify for the tax credits to finance].” Those banks, mostly rural, have provided letters expressing interest in financing over $125 million of these projects, he said.

Among the challenges will be to educate bankers about where the low-income tracts, which may cover only a portion of a county, are located, Rigler said. Among the communication efforts is a workshop scheduled this week during the annual Iowa Bankers Association state convention in Des Moines.

“Quite frankly, if we wanted to deploy all $45 million (allocated to Iowa Community Development) today we could do it, but (the requests) are almost all from metro Iowa,” he said. “We want to make sure rural Iowa has a chance at it, to make sure Iowa gets the most bang for the buck, so to speak.”

Rigler said many rural banks are working closely with the Iowa Department of Economic Development, which has a number of initiatives in which banks can play a role in financing. “They’re also working very closely with their communities in using tax increment financing,” he said, “and you’re also seeing Iowa bankers working together to form consortiums to finance deals.”

While he was with Wells Fargo Bank in Des Moines, Rigler worked with a number of rural banks in Iowa on loan participations.

“It’s an old tool, but in recent years I see more partnerships being put together between the Des Moines banks and correspondent banks,” he said. “It shares risk through diversification; it allows banks to do larger financings than what they could do by themselves; and it allows a variety of bankers with various [areas of] expertise to work together in putting together the deals.”

Similarly, business people in some of the smaller communities have formed limited liability corporations to facilitate financing projects and collectively sharing the risk of projects, which have included ownership of new grocery stores and downtown housing, Guzman said.

Guzman said he’d like to see more bankers who are willing to take greater risks for their communities, particularly by investing in more downtown housing in small communities.

“Iowa bankers have traditionally been very conservative in their investments,” he said. “The challenge is trying to figure out how to get more of our banks to sometimes think differently than they did before, be a little more creative,” he said. “If all of our bankers were like Brad Davis [and other bankers] who think outside the box, there would be a lot more success stories across the state.”