For community bankers, life's a niche.

Surrounded by larger competitors, small banks are carving out places for themselves by concentrating on specific markets or lines of businesses.

"I think there's tremendous opportunity for community banks in consolidation," said James Schmidt, senior vice president for John Hancock Funds, Boston, and an investor in dozens of community banks.

Mr. Schmidt spoke Tuesday at an investment conference here given by Howe Barnes Investments. The 15 bankers who gave presentations-most of whom represented midwestern institutions with $3 billion of assets or less- underscored the idea that there are many ways to specialize and beat the big banks in certain niches. All had different strategies for how a little guy can get some elbow room in the crowded industry.

For Joseph N. Reid, chief executive officer of Capitol Bancorp Ltd., Lansing, Mich., being tiny is a virtue. The $492.3 million-asset banking company has built a nine-bank franchise in Michigan and Arizona by chartering single-branch banks in cities and going after small businesses turned off by the impersonal service of big banks.

"Have you ever heard of a bank merger that didn't have disgruntled customers?" he asked, rhetorically. "We cater to those folks."

By design, all but two of Capitol Bancorp's banks have less than $100 million of assets, Mr. Reid said. Three of the banks are less than a year old.

"We think small and stay small," Mr. Reid said. "You can't know everyone in the neighborhood as well as you do the people next door."

Last year, Capitol Bancorp racked up a return on assets of 1.1% and a return on equity of 12%. The bank's returns were diluted by rapid asset and capital growth, Mr. Reid said.

On the other hand, Donald R. Mengedoth, chief executive officer of Community First Bankshares thinks big-but in a small way.

Over the past 10 years, the Fargo, N.D., banking company has accumulated $3.1 billion of assets in seven western and midwestern states by acquiring banks that serve small towns in that territory.

Mergers and acquisitions "represent a line of business for us," he said.

Earlier this month, Mr. Mengedoth pushed the bank into Wyoming by acquiring the $1.2 billion-asset KeyCorp subsidiary there for 1.8 times book value. To give an idea of how methodical an acquirer Community First is, Mr. Mengedoth said the bank had looked at 250 other deals before inking the KeyCorp one.

Meanwhile, Bancfirst Corp., Oklahoma City, racked up a 1.3% return on average assets and 14.5% return on equity in 1996 by serving two types of markets: small towns and big cities.

The $1.2 billion-asset banking company competes against rural banks by offering a wider range of products; in the city it caters to small businesses with a high-touch approach and a line of cash management services, chief executive officer David Rainbolt said.

"The agility we developed to compete with community banks serves us well in the metropolitan areas," Mr. Rainbolt said, noting that the metropolitan markets are the bank's source of internal loan growth.

Wintrust Financial Corp., Lake Forest, Ill., takes its strategy from the advice of Deep Throat in "All the President's Men": Follow the money.

Wintrust, which has $621 million of assets and was formed in September 1996 through the combination of four bank holding companies and an insurance premium finance company, caters to Chicago's tonier suburbs. The average household income in its markets is $121,000.

A fifth bank subsidiary opened in December 1996.

The bank, which is in the midst of raising up to $23 million in a community stock offering, is confident of its ability to thrive by catering to the individuals and businesses in its market area, said its chief executive officer Howard Adams.

"We are long-term," he said. "We have more provisions to prevent takeover than any bank you have ever seen."

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