Megamergers Widen Midsize Banks' Niche

In a Sept. 26 American Banker commentary ["Big Banks vs. Small: Fuel for Debate," page 4], William M. Isaac predicted that the outlook may not be as dim as others foresee for the few hundred midsize banks in the U.S. heartland.

Mr. Isaac was describing the class of super community banks, about 500 multibank holding companies with assets ranging from $500 million to $40 billion.

Super community institutions are committed to continuing their community orientation. They offer unparalleled levels of quality service, delivered through community banking offices in direct competition with the small community banks.

They are also committed to making the whole greater than the sum of the parts by bringing about cost efficiencies companywide.

Super community banks are expanding product lines to resemble those of larger banks. That makes it possible to meet the full spectrum of customers' needs and augment fee income without sacrificing the community-style banking service that is so important to customers around the country today.

10 Banks or 5,000?

Some expect megamergers to absorb the whole banking system into 10 to 15 giants. I believe our industry will cluster into three size ranges: megabanks, super community banks, and community banks. We may have 5,000 or 6,000 banks in the country by the next century.

The industry seems to share my opinion. This is supported by the recent Bank Administration Institute/Arthur Andersen survey of hundreds of bankers on their views of banking in the year 2000. The survey indicates wide agreement on the view of a multitiered industry with a single growth segment -- the super community bank.

Sparing the Ax

The survey of some large super community banks that we conducted recently with the American Banker, was published Dec. 2 ["Midsize Banks: A Tough New Breed Arises," page 1]. Banks of this size stated that they could realize savings of 3,000 people or more by centralizing. But they are electing not to do so -- and their performance indicates the rightness of this decision.

Megamergers continue to create vacuums in customer service and displacement of customer relationships. The super community bank is perfectly positioned to capture those relationships by offering the level of service that consumers crave -- without sacrificing the product breadth that they seek.

While the megamergers increase market-share opportunities for super community banks, they put pressure on them to increase size as a way of competing more effectively on the cost level.

It is necessary for the full realization of opportunities to leverage both cost and product line. However, growth for growth's sake may divert attention from the basic strength of the company -- its culture and its focus on service and the customer.


Growth should be consistent with the strategic position and the nonnegotiables of the super community bank:

* Community banking orientation.

* Cost savings that are transparent to the customer.

* Expansion of the product line.

It should be noted that super community banks are becoming more friendly acquirers. As merger mania continues, more institutions will seek merger partners and acquirers who will maintain management and the character of the institution.

Super community banks are committed to local presidents, local boards, and -- sometimes -- local charters (95% of the respondents to our survey have independent boards, charters, and presidents).

Their culture is compatible with the community bank's culture, from the customer's viewpoint: flexibility of service and responsiveness. It may be easier today than ever before for super community banks to grow through mergers and acquisitions.

Consider a $50 billion megabank that is in the process of expanding to $100 billion. It will be much less interested in acquiring a bank in the range of $1 billion to $5 billion bank, while it will be attracted to a $25 billion prospect on its way to $30 billion.

As significant size becomes a critical competitive variable, super community banks may find greater difficulty in accomplishing an upstream acquisition.

However, a bank in the range of $25 billion to $50 billion may still be looking to augment its market or diversify geographically: For such an acquirer, a super community bank may be a prime vehicle.

The super community bank is the industry's growth segment for the '90s. It has tremendous potential to realize market share and profits without sacrificing its precious corporate culture.

However, it is up to the managements of the super community banks to take advantage of the opportunities which are created by merger mania.

The recipe for success for super community banks is tending to basics while expanding into a full-service, fee-income-generating institution. Super community banks currently outperform the industry by sticking to this winning formula, they will continue to do so.

Ms. Bird is director of financial institutions consulting at BDO Seidman, New York.

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