The evolution of community banking.

To paraphrase Mark Twain, reports of our imminent demise have been greatly exaggerated. Just a few years ago, experts predicted that Internet banking and mega-mergers would spell the doom of the community bank. But it comes as no surprise to those of us involved in community banking to learn that, according to a recent report from the Federal Reserve Bank, the number of community bank branches rose by more than 50% in the last 15 years, and the number of new bank openings increased dramatically. In fact, at the end of 2002, community banks accounted for 89% of all banks in the United States.

Community banking has become one of this nation's strongest assets by playing to its greatest strength--the personal touch. On the surface, community banks have changed considerably over the years in terms of size, technology and services. However, the fundamentals of community banking have remained the same: a very personal, one-on-one involvement in the community.

That was true in the earliest days of community banking, when Savings and Loans and Building and Loan Associations were first formed by the residents of rural areas to provide more financial flexibility to their farming neighbors. And it is still true today, as local bankers reach out to local residents and town businesses through the joys and adversities of everyday life.

The Independent Community Bankers of America defines community banks as "independent, locally owned and operated institutions with assets ranging from less than $10 million to a few billion dollars." That is a reasonable definition. But, in truth, a community bank is as much a state of mind as it is an institution. At its core, a legitimate community bank has a very personal stake in the community itself. Bank employees live in the area, raise their families in the towns they serve, join community groups, serve on boards and coach soccer and Little League teams. It is this grass-roots involvement, not size or assets, that define a community bank. In an age of conglomerates and giant corporate entities, this personal touch makes the community bank such an important resource. Although it has become fashionable for banks to portray themselves in warm and fuzzy terms, it soon becomes clear to the individual and small business customer that their accounts are not particularly valued by the larger banking organizations. Many customers are shocked when promises of personal service and caring are replaced by high fees and a faceless institutional approach. Indeed, many banks are moving towards elimination of all face-to-face service, replacing tellers with machines and live advisors with telephone recordings.

In a true community bank, tellers know their customers by name and chat about family and shared local interests. This so-called 'relationship banking' is why community banks maintain their hold on a substantial portion of small business accounts, farm lending and the smaller, often overlooked retail depositor.

The board of directors of a community bank is made up of local citizens for whom a loan applicant is not just a series of numbers on paper. Board members can give a personal perspective tn the paperwork, explain extenuating circumstances and suggest personally tailored approaches to individual financing situations. They understand that not everyone has a perfect credit record--that sometimes an extension on a loan deadline is a mutually beneficial idea. When a board member walks into a local hardware store and sees thinning stock or low customer volume, chances are that board member will bring it up at the next meeting, suggesting ways to help the store owner before his or her financial situation reaches crises proportions. That is what neighbors do and that attitude distinguishes a community bank.

At the same time, community banks offer services and staff comparable to large, sophisticated financial institutions. Indeed, the way in which we provide services has changed dramatically in recent years with the advent of new technology. Internet banking, telephone banking and ATM's are all new means of making the banking process even more convenient for customers. The key, however, is to provide those services in addition to, rather than in place of, person-to-person contact.

But even as it adds convenience for the customer, technology may prove to be the single greatest challenge to the community banking field. Community banks may find it necessary to increase in size--often by way of increased number of branch sites--in order to afford the burgeoning costs of technology. In some cases, systems will be outsourced. For example, in the near future, check processing the way we know it will be a thing of the past. Rather than processing actual paper checks, we will soon be transmitting only digital images. That necessitates the technology to capture, transmit and receive these images--a technology that may be too costly to be handled in-house.

To remain competitive, community banks must embrace the new technology and the increased array of products and services, which can also be outsourced. This enables the banks to compete with larger institutions without the heavy financial investment.

As the economy waxes and wanes, predictions about the fate of community banking have their own ups and downs. Some thought that the spate of big-bank mergers would spell the end of the community bank. Instead, these mergers proved to be a boon as small banking operations saw an emerging niche for more personalized service. Others believed that the current economic downturn would prove fatal to small banks. Yet deposits are way up as people seek safe harbor from the stock market volatility.

Clearly, the community bank has inherent strengths that will continue to sustain it as an attractive alternative for many individuals and businesses. While larger banks grapple with staff retention issues, many community banks find that employees are drawn to the friendly atmosphere and the opportunities for advancement. Similarly, while other financial institutions invest in heavy advertising and name recognition, community banks can rely on word of mouth to bring in customers who are attracted by the knowledge that the community banks offer competitive rates, lower fees, personal attention and--equally important--service with a smile.

DANIEL TOWER CHIEF OPERATING OFFICER NORCROWN BANK