Tomorrow never looked so tough.

Even as they basked in the warmth of the Arizona sun and the afterglow of yet another year of record profits, conferees at the annual convention last week of the Independent Bankers Association of America were, on the whole, worried.

Faced with a host of threats-more nonbank competitors, the imminent arrival of full-fledged interstate branching, and the prospect of wider banking powers-small institutions are scrambling to find their place in the world.

"Even though the industry has prospered, this is a time of change," said L. William Seidman, former chairman of the Federal Deposit Insurance Corp., in a Wednesday address to directors. Banks that stagnate "won't be ready for the new era that is coming up," he warned.

Joseph L. Haskins, president of Baltimore's $116 million-asset Harbor Bank, articulated the same conclusion in different words.

That bank executives would even worry about their relevance speaks to the explosive growth of competition in the financial services industry, where all the buzz is about smart cards, Money Store, or the Internet.

Nonbanks and regionals are snapping up market share in agricultural and small-business lending, niches community banks once owned. Credit unions are turning them into road kill in the fight for car loans. Mutual fund companies and discount brokerages are siphoning away deposits.

This competitive picture will likely remain gloomy, because these giant competitors totally outclass community banks in their use of technology.

For example, during a meeting of about 30 banks with between $50 million and $100 million of assets, only one banker said he had a PC-based banking system in place.

And though most community bankers acknowledged the importance of technology, only 40% of them have developed strategic technology plans to determine their selection of hardware, software, and telecommunications, according to the 1997 Grant Thornton community bank survey.

But independent-minded community bankers aren't resigning themselves to obsolescence. Instead, some are trying to find ways to fight back through the use of technology, outsourcing, and marketing as well as mining niches and redoubling their traditional focus on service.

The cost of technology remains formidable for community banks and one wrong decision can translate into disaster. One waggish executive likened such an investment to "betting the bank." But progressive managers are willing to make those bets.

For instance, Springs Valley Bank and Trust, Jasper, Ind., is in the midst of revamping its technological arsenal, said chief executive officer Ron Seals. This year it plans to offer debit cards and add more transaction functions to its six cash-dispensing automated teller machines.

"Competition was the greatest stimulant to make us move forward," he said.

Since the early 1990s, Harbor Bank has invested heavily to expand its ATM network, open an Internet site, and add cash management and telebanking services. The expenditures have dragged down the bank's returns, but Mr. Haskins maintains the money was well spent and earnings will be back up this year.

"These are the things people are going to be asking about," he said.

Besides keeping up with the competition on the technology front, some community banks are trying to use marketing to enhance their local presence.

For instance, Linda Oeffling, the marketing director of McHenry (Ill.) State Bank, gave a presentation in which she showed the newsletters the bank distributed in the community.

For its part, the IBAA is encouraging members to slap decals with the group's slogan "Your Community Bank: On Your Corner, In Your Corner," on the doors of their banks to build a sort of brand recognition for the segment.

Four-year-old Washington State Bank, Federal Way, Wash., is studying ways to market itself right now, said Ed Opstad, chairman of the $30 million-asset institution.

"You've got to get your name out," he said.

The thrust of any small bank's marketing campaign will likely focus on its local presence and its knowledge and commitment to the community. Virtually every conference attendee said these traditional strengths would serve them well no matter the competitive environment.

"The main thing is knowing your customers and knowing their businesses," said Dean Withers, vice president of $166 million-asset Farmers and Merchants Bank, Timberville, Va., which caters to small businesses.

Indeed, community bankers maintained that they will endure because they can't pick and choose markets to operate in the way the regionals and Merrill Lynches of the world do. So if their backs are up against the wall on their own turf, they will do what it takes to survive.

"Rural America may account for a smaller portion of the total deposit base of the country, but for us it's everything," said O. Jay Tomson, chairman of $520 million-asset First Citizens National Bank of Mason City, Iowa. At the regionals, "people who manage their banks are on a trip and Mason City isn't necessarily their final destination."

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