Like alley cats confronting challengers to their turf, community banks often strive to make themselves appear larger than they really are. That is where partnering comes in.

By forming partnerships with businesses as diverse as retail brokerage houses, insurance carriers, and other banks, small banks are capable of offering more services in a relatively cost-efficient manner.

According to the 1999 American Bankers Association survey of community bank competitiveness, almost one in five has hooked up with a complementary nonbank.

"Being a community bank, we don't have to be experts in all areas," says David Hayes, president of $130 million-asset Security Bank Corp. of Dyersburg, Tex. "We look for companies that bring us products and services that allow us to compete with large regional banks."

Through partnering, community banks trade control in return for another company's expertise, financial resources, assumption of shared risk, and start-up money.

For banks, the payoff is satisfying customer demands without losing business to another bank and access to fee income.

In addition to hooking up with nonbanks, community banks find partners from among bank associations, large regional and national banks, and even each other.

In the case of two Florida banks First Federal Savings Bank, Leesburg, and First National Bank of Mount Dora it is the smaller bank servicing the larger.

Under their nine-month-old arrangement, $99 million-asset First National provides trust officers - one full-time, one part-time - who make the rounds of $463 million-asset First Federal's branch network, where they meet with referred customers.

From the customer's viewpoint, First Federal is providing a welcome new service, but in reality it is First National that holds the fiduciary responsibility.

Fee income is split between the two at a percentage that will be renegotiated once income has surpassed First National's start-up costs.

According to Ed Brooks, senior vice president and trust officer at First National, the two banks' familiarity and rapport started the alliance off on the best foot. "We respected each other going in," Mr. Brooks says, "and as a result it was easier to talk about things like customer service, confidentiality, and competition issues."

Trust will be an important factor in the success of this partnership as First Federal faces the possible runoff of assets to First National.

Sometimes, partnerships have benefits that go beyond the stated goals of the relationship.

Take the example of Bank of Astoria, a $101 million-asset bank in Astoria, Ore., and its partnership with Morgan Stanley Dean Witter for brokerage services.

Morgan's market research on Astoria clients turned up accounts at other banks that the brokerage house's savvy account rep managed to turn into new Astoria time deposit and savings accounts.

Of utmost importance in these partnerships is that the bank providing a service does not turn off the other bank's customers.

Astoria had taken that possibility into consideration in its partnership with $1.1 billion-asset West Coast Bancorp of Lake Oswego, Ore., for credit card issuance and processing.

When West Coast Bancorp receives a credit card application from an Astoria customer that does not pass muster, the West Coast employee will put a call into Astoria to discuss the problem rather than automatically rejecting the application.

While this practice gives West Coast Bank a look into a customer profile that may not have been available otherwise, it also helps preserve Astoria customer relationships.

"With a bank as small as ours, when your customers are unhappy, you know about it," says Cheri Folk, Astoria's president and chief operating officer.

The final credit decision, of course, still lies with West Coast Bank, a condition that illustrates where partnerships can run into conflicts.

If Astoria wanted a risky customer to have a card simply to preserve a customer relationship, the two banks may find themselves at a crossroads.

The ABA's survey highlights why some banks end partnerships.

According to the survey, 35% of respondents complained of insufficient profitability, 26% were dissatisfied with their partner's service delivery, and 11% complained of unfair competition by the partner.

Overall, the ABA survey shows that 7.2% of responding community banks ended a nonbank partnership last year.

Though many banks complain that the deals are not profitable enough, a shrewdly negotiated contract can help improve returns. One way is to make the service provider responsible for expenses such as marketing materials, product design, and mailings.

John M. Floyd, a Baytown, Tex., consultant specializing in profitability, says he suggests a program that rewards outside sales staff for bringing in new business for the partnered bank's own products.

Some options in a card issuing alliance include dividing interest income between partners, establishing a flat rate for each card approved or renewed, and splitting a percentage of the card's annual fee.

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