The Internet gives community banks the opportunity to expand their territory without the cost of new facilities.

At first that sounds exciting, but expansion for its own sake can bring trouble.

Many banks developed Internet capabilities to show the public that they were keeping up with the times. But the public has kept up too - using the Web to get account information, transfer funds, and pay bills.

The Internet is also helping community banks to prevent migration of commercial and institutional customers to bigger banks. Some community bankers wonder, "If we have all these facilities in place, why not try to get more value out of them by attracting new customers from more distant locations?"

This is where trouble can begin, because growth by geographic expansion has inherent risks.

A decade ago many thrifts went belly-up by making loans to finance hotels, office buildings, and apartment complexes in areas hundreds of miles from their headquarters.

They forgot a fundamental of construction lending: If you don't get your shoes dirty - by visiting the property regularly as it is being built - you can end up in a real mess.

These are the people who said when the crisis was over: "When we started, we had the money and they had the experience. Now they have the money and we have had the experience."

I remember asking the head of BankWatch, Keefe Bruyette's loan monitor program (Thomson, American Banker's parent company, later bought it), to name the first sign that a bank is in peril.

The reply: when it is lending outside its territory.

As a rule, many community bankers will not approve a loan for a property that is more than a few hours' drive from home.

But the Internet is tempting some bankers to look beyond their territory again. The ease with which they can accept deposits from remote locations is an obvious part of that temptation, but the danger here is also obvious. If I attract local deposits, the people want service, advice, and attention to unusual needs. This breeds loyalty.

If a bank tries to draw in deposits from distant locations, generally the only feature it can offer is high interest rates. If someone else later offers even higher rates, the deposits will leave as quickly as they came in. This type of "silent bank run" has seriously hurt many a small bank.

The basic strengths of the community bank remain its customer contacts and its ability to offer face-to-face meetings at the customer's convenience. Such personal banking is diametrically opposed to the impersonal features that drive Internet banking operations.

Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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