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As beleaguered larger banks curtail technology spending, regional and community banks that have managed to keep their balance sheets in good shape are investing in projects aimed at taking advantage of the lull in competition.

These banks are augmenting their capabilities where the banking giants are pulling back, especially in lending.

Bankers say that streamlining their lending operations and improving risk management are top priorities, as are any products and services that can help them attract the new deposits that they can use to fund these loans.

And with the industry facing one of its worst downturns ever, banks are looking carefully at projects that promise to deliver a quick return.

"Invest, if you can," said Bruce Livesay, the chief information officer at First Horizon National Corp. The market will eventually recover, and "now is the time to get ready."

The Memphis financial company's technology budget is up about 10% this year, and might increase even more in 2009, he said.

Michael Hayford, the president and chief operating officer of Metavante Technologies Inc. in Milwaukee, agreed that for some financial companies, the downturn is an opportunity.

"The market is not as dire" as it looks from "watching CNN every day," he said. "The community banks and regional banks that avoided the risky real estate and residential lending practices in the last few years are feeling pretty good about their balance sheets."

Metavante, a provider of banking technology, mainly targets small and midsize banks.

Many of these banks are seeing significant gains in their lending operations in response to the credit crunch that has prompted several large lenders to pull back, Mr. Hayford said.

Metavante's community bank customers once had to compete for commercial loans, but some of them now "may be the only player" willing to lend, Mr. Hayford said. "They can get all the loans, all the balance sheet growth, that they want. The challenge is how to fund them."

As a result, Mr. Hayford said, any project that can help banks bring in new deposits is selling, as are initiatives that can improve efficiencies and reduce operating costs.

Check imaging is particularly popular, he said, because it can accommodate both those goals by sharpening banks' back-office operations and offering services such as remote deposit that appeal to business customers.

"Banks are looking at everything around caring for the customer," he said, and "anything that can get back to cost efficiency."

Despite all the turbulence this year, banks "are continuing to spend on more strategic projects," Mr. Hayford said, and projects that can be implemented quickly "are getting signed faster" because "people want to save money as soon as possible."

Metavante expects to report a nearly 6% increase in revenue for this year.

Still, total technology spending by banks is expected to dip 4% in 2009, to $52.2 billion, according to Jeanne Capachin, the research director of corporate banking at the Financial Insights unit of International Data Group Inc. in Boston.

The decline is driven mainly by the largest banks, which account for as much as 70% to 80% of the industry's tech spending, Financial Insights says.

Many of these banks are busy integrating big deals, such as JP-Morgan Chase & Co. absorbing the assets of Washington Mutual Inc. and Wells Fargo & Co. poised to acquire Wachovia Corp.

(Still, mergers and acquisitions do require technology dollars. A spokeswoman for JPMorgan Chase said that the "consolidation of the Wamu branches is A-Number 1. That's where our focus on spending is going now." Other major banks declined to discuss their technology strategies.)

Many observers have said that the biggest banks, many of which are using decades-old core systems for processing customer accounts, are long overdue for new cores, and the wave of consolidation will only exacerbate this.

However, Ms. Capachin said in this poor economic climate the core-conversion trend will definitely slow.

She said she knew of "two Tier 1 banks" that were evaluating new core systems this year, "but now those projects have been put on hold until 2010."

But further down the rankings, Ms. Capachin said, a number of banks are moving forward with technology projects.

"At individual Tier 2 banks, spending may increase," she said. "And smaller banks are in a pretty good capital position. They are continuing to invest. They want to make investments now so when we come out of the recession they are in a better position."

Ms. Capachin said financial companies are showing particular interest in risk management and analytics software applications, which can help them retool their lending businesses to avoid making the types of bad loans that triggered the financial crisis.

Other priorities include "automating manual-intensive processes" to increase efficiencies and cut costs.

And unlike larger rivals, smaller banks are upgrading their core processing systems.

Crescent Financial Corp. in Carey, N.C., is a case in point. The $956 million-asset bank has "outgrown the capabilities" of its current core system from Jack Henry & Associates Inc., according to John Davis, a senior vice president.

That contract is due to expire this month, and Crescent plans to outsource its core processing to Metavante.

With deposits and loans both expected to swell next year, Mr. Davis said that switching cores was a critical part of Crescent's expansion plan.

Besides a more powerful core system, he said Crescent plans to introduce several other Metavante products and services that could help pull in new deposits, including online banking for retail and business customers, online bill presentment, wealth management, and commercial account reconciliation.

"We will continue to spend money on technology," said Bruce Elder, Crescent's chief financial officer. "We are not delaying the important stuff."

Crescent is winning customers from larger banks, he said. "After these economic issues clear up, deposit growth of 10% to 12% next year "is very reasonable."

Mr. Elder also expects to pick up more lending business from the top banks, many of which he said "are not even entertaining the idea" of issuing credit to some prospective borrowers.

Associated Banc-Corp. of Green Bay, Wis., also installed a new core, upgrading in May from one Fiserv Inc. system to a new one.

Mark Quinlan, an executive vice president and the chief information officer at the $22 billion-asset Associated, said the new core has delivered several important benefits that are helping it land new customers, including faster funds availability, leaner lending systems, and better sales management tools.

Associated's other projects in the works for next year include branch automation and check imaging systems. Mr. Quinlan said he expects its tech budget to rise slightly next year.

Deposits are also up at Associated as customers move money to its from other financial companies.

"We are seeing some deposit growth," Mr. Quinlan said. "We absolutely are taking advantage of that through 2009."

Mark Sievewright, Fiserv's senior vice president for strategic marketing, said community banks will benefit from these new lending opportunities, but that market factors are forcing them to seek out technology that can help them boost their deposits.

"The business today is all about deposit gathering," he said, because they need the deposit base in order to fund these loans. "Banks have to go back to basics, and use deposits to lend."

Community banks' share of the banking market has been sliding for years, from about 30% of loans and deposits in the early 1990s to about 12% to 15% now, Mr. Sievewright said.

But he said the upheaval in the banking industry will likely reshape the market, especially benefiting banks that are able to invest now and position themselves for the economic upturn, when it finally comes.

"Community banks are in pretty good shape," he said. "They are keen to reverse that decline in market share."

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