As the wave of mergers and acquisitions continues and community banks are under siege more than ever, it is appropriate to revisit the question: Will community banking survive?

This is an especially valid question in light of the virtual elimination of certain segments of community banks in specific geographic markets. For example, in North Carolina, two-thirds of the thrifts were absorbed within one year.

One answer is in the number of new banks being chartered each year in the United States.

Amazingly, de novo banking is strong despite growing restrictions and mounting obstacles on the formation of new banks.

Starting Up

Investors still feel they can realize a good return on their investments by forming community banks all around the country.

In Philadelphia five years ago, five community banks were formed on one street within three blocks. All are still alive. Some are actually doing well.

In Florida, community banks continue to sprout year after year.

Even in somewhat depressed markets such as Connecticut, two de novos were formed last year.

Are all these investors foolish enough to believe that they could outwit a dying market? Or do they know something that we are missing?

Key Observations

It seems to me that the investors are observing the following facts: (1) Community banks, by and large, are still highly profitable, and some are much more so than noncommunity banks; (2) The consumer preference for community banking's type of service is increasing, and (3) the dislocation created by mergers and acquisitions, particularly by rolled-up branch networks, is significant.

Customers who were used to community-type banking service and local decision-making are being shuffled about and put off by remote decision-making and loan officers who cannot answer their questions or meet their needs.

These investors see voids in many banking markets around the country.

Although there is overcapacity in the business, they have concluded, existing banks do not necessarily meet the full range of needs of all customer segments. So there are underserved niches they can target.

Alive and Well

It appears the de novo interest says something about community banking as a whole. It is not only alive and well but will continue to thrive as long as some customers prefer community banking service, local decision-making, and warm, caring personnel.

At most community banks, 15% of employees have 10 years or more tenure.

Although that may mean obsolete staffing, it certainly means staff continuity, customer knowledge, and in some cases greater competence and technical understanding.

Fertile Ground

The result - improved service, value added, and improved customer attention that in turn enhance profitability and long-term franchise value (since a long-term customer implies not only current earnings but a future income stream).

Most of us recognize that we will not have 11,000 banks in our system in the next decade, but recent experience with community banking indicates to me that the opportunity for well-run community banks to succeed and grow is more attractive than ever.

While we will experience further contraction, successful community banks will continue to thrive and new ones continue to form in order to meet the needs of those customers which were left behind in the wake of mercenary mergers and acquisitions.

The key to success is the identification of the underserved niches - attorneys, doctors, or the employees of one major employer in the target market. Whichever way the market is segmented, targeting is essential to success, not only from a market differentiation standpoint but also from a resource allocation perspective.

One community bank for example, set up a portable branch on site in a major employer facility.

The branch opens once a week to receive payroll, cash checks and meet the various banking needs of the employees.

That strategy has been most successful and permitted the bank to capture file relationship of the employees fully, something that larger banks could not do effectively.

Finding a Niche

Geography is not the limiting factor for community banks that it used to be. Small community banks can thrive in major metropolitan areas as well as small towns. There are successful rural community banks that meet the needs of agricultural communities, such as First National Bank of Russelville, Ark., which specializes in poultry lending.

Similarly, there are banks that serve a small suburb or a well-defined community within a major metropolitan area, such as Cole Taylor Bank in Chicago, which serves area entrepreneurs; Northbrook Bank, which serves the private banking needs of an affluent suburb in Chicago, or Sterling Bank, a small-business lender in the heart of New York City.

They and others like them are successful not because of where they're located, but because of attention to the critical success factors.

They all have a clear mission and strategic focus. They pay attention to the fundamentals and do not forget what community banking is all about.

Getting Their Share

Market share is one of the critical success factors. A dominant market share can make the size of a small bank transparent. In its own community, a small bank can still command a 30%, 40%, or even 60% share.

This allows the bank, regardless the size, to enjoy the benefits of a dominant market position including pricing flexibility and lower customer acquisition costs.

The community bank does have significant assets, namely customer relationships. Consumers regard community banks as the most trusted financial institutions.

These banks also enjoy long term customer retention, which often is directly correlated to profitability.

Although the product line is limited, it is not a major handicap because most community bank customers do not need the extra services that larger banks have to offer.

At the same time, through technology, community banks can expand their product and geographic reach.

Through "rent a trust department, mutual fund, telemarketing, etc." small banks can access others' economies of scale to mask their site disadvantages.

Small Can Be Beautiful

These services, coupled with joining an ATM network, help the small bank anticipate some of its size limitations. At the same time, small can be beautiful when it comes to service levels, customer accessibility, and turnaround time.

In summary, the world is changing. The industry is contracting and customers are less loyal. Many are also less interested in-person service, a departure from past practices,

These trends do mean that there is room for fewer community banks, yet they do not imply, in my mind, the extinction of the species.

Community banks fulfill an important role in meeting the unique needs of many customers. Well-run, strategically focused community banks which can change and respond to a changing market will continue to thrive in the future.

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