Community bankers could easily be a gloomy bunch.

Each week an average of eight small banks disappear, victims of intense competition across the country. As a result, small banks have seen their share of the industry's assets drop to about 25% from 36% just 10 years ago. And, in the view of some experts, the slide is sure to continue.

But when community bankers meet in Honolulu this week for the Independent Bankers Association of America's annual convention, they won't be shedding tears. In fact, the 1,300 bankers in attendance will have ample reason to rejoice - and not just for landing in an island paradise.

The survivors of community banking have been booking record profits for two years and are on pace to make it three. Community banks stand to reap big savings from proposed cuts in deposit insurance. And the rise of Republicans is boding well for reductions in regulations.

"The mood is generally quite bullish," said Kenneth A. Guenther, the IBAA's executive vice president.

But even the bulls acknowledge that community banks have their work cut out for them if they are to remain a vibrant part of the financial services industry in the years to come.

"We must rethink our strategies," said Robert L. McGoffin, president of American Consulting and Training Services, a Tulsa-based affiliate of American National Bank of Bristow, in Oklahoma. "The question is, how are we going to change? What we have got to do is protect the relationships we have. If we can't we will cease to exist."

That has already happened to a large number of banks. In the past 10 years, the number of banks with assets of less than $1 billion shrank nearly 30%, while the number of large banks grew slightly. In fact, the larger institutions - those with more than $1 billion of assets - now control nearly 75% of the banking assets.

If community banks continue to decline at the current rate of about 400 a year, there will be about 8,000 of them by the end of the decade, down from 10,201 as of Sept. 30.

Some observers say that community banks will continue to lose market share to bigger banks and other competitors if they don't quickly upgrade their technology and offer more products and services.

"I just don't see in general how the small bank will survive," said Douglas C. Eby, vice president of Robert E. Torray & Co., a Bethesda, Md.- based investment management firm that holds stakes in big and small banks. "To survive in the future you really need to offer a wide range of services to customers."

David Berry, director of research at Keefe, Bruyette & Woods Inc. in New York, says smaller banks have slipped because they aren't operating as efficiently as their bigger brethren.

"The average small bank isn't measuring up to the average large bank right now," he said.

In a recent article that appeared in the American Banker, Mr. Berry said large banks have improved their performance in net interest margins, overhead, fee income levels, and credit costs. All of this points to the fact that bigger banks are simply becoming more efficient.

Going forward, small banks will have to wrestle with ways to upgrade their institutions with technology.

"Should I buy this Unisys computer, or gosh, people say they want to do their banking by phone," he said. "Faced with that investment . . . joining somebody who already has this is a little more appealing."

Even Mr. Guenther's own trade group is being pinched by consolidation. Although revenues continue to rise, the IBAA's membership has slipped by 1,340 since 1987, to 5,663.

He expects the trade group to lose an additional 800 to 1,000 members over the next five years.

"There is a very personal impact," he said. "Friends are no longer in business. We have to run more elections for state board members. It (consolidaton) is an ongoing trend that is not over. But do I sit here in despair? No."

Nor do many community bankers.

"Anyone who thinks the small bank is going to go out of business and fade away, that's bull," said David B. Hartman, former chairman and chief executive of Lincoln Savings Bank, Carnegie, Pa.

All the same, Mr. Hartman's thrift last month sold itself to Integra Financial Corp., partly because of the intense competition for deposits in the Pittsburgh area from big banks. It also couldn't find a merger partner, which would have given it the size to compete.

"I don't think that a small bank can survive in the city, not effectively," Mr. Hartman said. "You've got to be bigger. We tried our best to do mergers with other banks in Pittsburgh. I'm not overstating it when I say we almost begged."

Observers see fewer community banks operating in cities because of higher overhead costs and the ability of larger banks to quickly attract deposits with their branch networks. On the other hand, a solid core of community banks may well flourish in suburban and rural markets.

One way for community banks to protect their franchises is to plow money into technology, staff training, and better products, said Mr. McGoffin, the consultant. He also believes that community banks have to invest in technology that will allow them to offer such services as home banking and to boost communication between branches.

"If a bank says 'I really can't afford that,' what they are saying is 'I really can't survive,' " he said.

Community banks also have to look for ways to bring in fee income - such as investment services - and to continually train their staffs.

"The ones who survive are recognizing that now 'I have gotten behind on my skills,' " he said.

Despite all the challenges, a number of observers maintain that small banks ultimately will prevail.

"I go to state after state and I find that the little guys are the ones that are gaining market share," said Arnold Danielson, president of Danielson Associates Inc., a bank and thrift consulting firm in Rockville, Md.

"Their total share of the market is probably headed up because people like NationsBank come in and lose share. Texas is where the small ones have done the best,"he added.

Mr. Guenther, whose trade group draws more than 60% of its membership from rural areas, believes community bankers are resilient and will prosper under the toughest circumstances.

He recalls with relish Ross Perot's public handwringing over a report that hundreds of banks would fail following the 1992 election. The failures never materialized, even though 20% of the nation's small banks were unprofitable at the time.

"It's not that the light is at the end of the tunnel," Mr. Guenther said. Small banks "are at the end of the tunnel. They have climbed the mountain."

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