Foes of interstate branching argue that the number of community banks will greatly diminish once constraints to consolidation disappear. But a Washington consultant, using California as an example, says those fears are unfounded.

A study by Secura Group managing director John P. Danforth said that in the past 25 years in California, with its long-time unrestricted intrastate branching, community banks have made significant gains on their larger brethren.

And though he admits that unfettered interstate branching will greatly reduce the number banks in the nation, he argues that community banks won't disappear and will be a much more efficient group.

"There are inherent benefits to being small, flexible, and quick to move," Mr. Danforth said. "And the California experience shows that unconstrained market forces and consolidation do not put them at a disadvantage over time."

Mr. Danforth culled call report data from 1983 and 1993 for commercial banks in California and compared them with census data for the same years. He found that during the past 10 years, the number of small banks actually increased their share of the market in California. The number of small banks rose as well, though not as fast as the population, increasing the amount of customers and deposits per institution.

What emerges from Mr. Danforth's research is that for California, a state that has had unrestricted intrastate branching since 1908, the past 10 years have overall been a boon to community banking. The large banks like Wells Fargo, BankAmerica, First Interstate, and the old Crocker and Security Pacific had the most to worry about in terms of market share.

The number of banks in California in 1993 was 407, compared with 400 in 1983, a year in which the number was already the highest in 25 years. By contrast, the number of banks with more than $5 billion in assets fell from six to four, and their deposit share drifted from 78% in 1960 to 72% in 1983 to 69% today.

Mr. Danforth admitted that the fast-growing California economy of the '80s did play a significant role in the development of new community banks there, but he added that there has been a trend toward stronger community banks in California for 25 years.

To be sure, California is starkly different in terms of banking structure than many parts of the country. There are fewer than 400 community banks in California. The state nearest in comparable size, Texas, has almost 800 small banks.

The bottom line: If the entire country were to have the same number of people per banking organization that exists in California (73,120 per bank), the number of banking organizations in the United States would plummet 60%, from 8,638 to 3,401.

Mr. Danforth doesn't think such drastic change is in the offing, however, given the political environment that exists in states where community banks are strong in number and influence.

"I would be shocked if small banks didn't resist this movement with a great amount of vigor," he said. "I think that's unfortunate. But a small bank with a monopoly in a small town has a lot more to fight for and a lot more to lose."

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