Community Bankers Say They Aren't Afraid of Merging Giants

As the rush of big-bank mergers shakes the ground under community bankers, many remain convinced that they will do well by sticking to what they do best.

Even if the behemoths are able to offer better rates by cutting overhead and improving efficiency, community bankers say some customers-especially small-business owners-prefer the kind of personal attention that small banks are best equipped to give.

"In our 15 years of business, we have found there are more than enough customers willing to pay a little extra for good service," said Richard L. Mount, president and chief executive of Saratoga (Calif.) National Bank.

Arnold G. Danielson, chairman of Danielson Associates Inc., a Rockville, Md., investment banking firm, said midsize banks are more likely to feel near-term effects of planned mergers like those of Citicorp and Travelers Group, NationsBank Corp. and BankAmerica Corp., and Banc One Corp. and First Chicago NBD Corp.

"These deals increase the pressure on midsize banks to get out," he said. "The more people squeezed out of the middle, the more opportunity there is for the small."

Banks with assets between $2 billion and $20 billion should "view themselves as prime takeover candidates," said Robert D. Clore, an analyst with Cowen & Co. in Albany, N.Y.

Smaller, community-oriented banks can thrive not only through personal service but also with more flexible loan terms and by choosing their niches well.

"We don't have to have the cheapest rates in town, we just have to be in the ballpark," said Dallas H. Enger, president and chief executive officer of Linn-Benton Bank, a $65 million-asset institution in Albany, Ore.

"If you have had a problem in the past with your credit, you're likely to be rejected by a big bank," said Joseph K. Morford, an analyst with BT Alex. Brown in San Francisco. "A community bank is more likely to sit down and really get to know your business."

Banks in the middle tier could be squeezed because they often cannot offer the most personalized service yet lack the economies of scale of the megabanks, said Sydney Finkelstein, professor at the Amos Tuck School of Business at Dartmouth College.

"That leaves the midsize banks at a competitive disadvantage," he said. "What can they offer that isn't offered better at one of the two edges?"

"Midsize banks have the advantages of neither and the disadvantages of both," added Stephen Y. Scurlock, executive vice president of the Independent Bankers Association of Texas.

Top executives of banks in that size range disagree.

Peter M. Martin, president and CEO of Provident Bank of Maryland, Baltimore, said his $4 billion-asset bank is nimble enough to compete with the community banks and has deep enough pockets to offer the services and products of a big bank.

Other observers warn that as the companies resulting from the megamerger get their acts together, they could put the same kinds of competitive pressures on small banks as the midsize banks can expect.

Richard A. Soukup, a partner at Grant Thornton LLP, said community banks' high-touch services appeal to the baby boomer generation, but younger, technology-savvy customers will prefer computer banking and often seek out banks with the most automated teller machines.

"In the short term, community banks will do great," Mr. Soukup said. "But for the long-term, the jury is out. The consolidation in this marketplace is a sign of that."

Edward Carpenter, chairman and chief executive officer of Carpenter & Co., an Irvine, Calif., consulting firm, said that as big banks integrate computer systems and trim management, they will be able to offer lower interest rates while enjoying the same interest margins. As a result, community banks will probably have to lower their rates to compete.

"This will put a substantial squeeze on net interest margins available to independent banks," Mr. Carpenter said.

Still, small banks that endure megabank competition will be the ones that take the time to know their customers and adjust to their needs.

Mr. Mount at $130 million-asset Saratoga National, based in affluent Silicon Valley, targets two distinct sectors: residential construction lending and individual private banking.

"We may not get the Intels of the world through service," Mr. Mount said, referring to the giant computer chip maker. "But with personal service, we do get some of their executives."

At Commercial Bank of San Francisco, the niche is trade finance.

"If all you need is an off-the-shelf product, the customer will probably go to a larger bank," said Robert A. Fuller Jr., chairman, president, and chief executive of the $125 million-asset bank. "But customers that need to borrow $500,000 or $1 million tend not to have off-the-shelf needs."

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