Community Banks Capitalizing on Their Assets

The folks at Savings Bank of Mendocino have refinanced Katherine O’Rourke’s loan so often, they can’t remember how many times they’ve refigured the amount, redone the paperwork and signed the forms.

It’s all part of an effort to keep their colorful, beloved 75-year-old neighbor from defaulting on her lender and winding up in Bankruptcy Court.

“I’ve had financial problems and they’ve helped me,” O’Rourke said one recent afternoon while passing time with the clerks and tellers. “If you have a problem or if you want to talk, they’ll give you the time.”

That’s why O’Rourke and others like her prefer to do business with community banks, some of which have only one office and few of the modern amenities most customers have come to expect: no supermarket branches, no automated teller machines, no 24-hour telephone banking and computer transactions.

That’s also why community banks continue to hold their own, even as the nation’s big banks keep getting bigger.

While Chemical Banking Corp. has merged with Chase Manhattan Corp. and Wells Fargo & Co. is gobbling up First Interstate Bancorp, Orwellian predictions that there will soon be just one huge bank are not coming true.

What’s more, the prediction by Microsoft Corp. Chairman Bill Gates that online banking would render local banks obsolete is turning out to be false.

Nationwide, there are about 9,000 community banks, many in rural and small-town America. An independent community bank is defined as less than $1 billion in assets and not part of a larger conglomerate.

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Despite their numbers, they lag far behind the big banks in total assets. In California, for example, the state’s two largest financial institutions, Wells Fargo and Bank of America, now command 66% of all assets. By contrast, some 384 community banks share only 19% of the pie, according to a 1996 study commissioned for the California Bankers Assn.

That might make it seem that community banks are dying. But industry observers say mega-mergers actually boost their business.

“It’s playing right into our hands,” said Harry Grashoff Jr., president and chief executive officer of Redding Bank of Commerce in California, which has about $196 million in assets. “People say, ‘Hey, we’re tired of each month getting a new name on our checks.’ ”

Donald Fischer, who started Community Bank-Wheaton/Glen Ellyn in Illinois in 1994 after mergers swallowed up most of the area’s smaller banks, agrees.

“There is a sense of being angry. A sense of loss of community,” he said. “I constantly get people thanking me for opening the bank. They say, ‘I’m so mad at such and such a bank. I’m going to come over and see you.’ ”

His bank picked up 240 new accounts one month last year when one of the newly merged bigger banks instituted a $3 charge for teller service. In California, Tri Counties Bank in Chico, which has $600 million in assets, opened 500 new accounts the month after the Wells Fargo and First Interstate merger, senior vice president Dan Herbert said.

The independents will always find a market because they can offer something big banks can’t--personalized service, said Robert Forbus, director of communications for the Independent Bankers Assn. in Washington.

Customers with good credit can apply for loans and take the money home that afternoon because everyone needed for approval is in one office and already knows the client’s credit history.

Family traditions of banking with one institution help guarantee a stable customer base.

“Major banks up in this neck of the woods aren’t viewed with the same fondness as they are in the city,” Tri Counties’ Herbert said. “Customers want to visit with their neighbors and talk to real people. They don’t want to interface with a machine.”

But some independent banks are adding services by forming alliances with other banks to gain access to automated teller networks, credit card processing services, Web sites and after-hours telephone transactions they can’t support on their own.

“They’re not the sleepy little institutions a lot of people think,” said Virginia Stafford of the American Bankers Assn. in Washington. “They may be small, they may be locally based, but that doesn’t mean they’re sacrificing innovation.”

Some critics say smaller banks are less secure and more likely to fail than the big institutions. But the independents’ supporters say the smaller banks are more tightly regulated, tend to make more conservative investments and are less likely to make bad loans because they know their customers so well.

Many smaller banks also tend to specialize, most often in agricultural or small business loans, making them more efficient.

But community banks face new challenges. In some cases they are losing customers to brokerage houses and mutual fund companies like Dean Witter Reynolds, Merrill Lynch and Schwab.

With deregulation, consumer finance companies were allowed to offer interest earning accounts with unlimited checking and debit cards. That makes them attractive alternatives to standard checking accounts.

As a result, some small banks have too much overhead and too many employees for their asset level and risk overextending their credit.

Also, small banks are not immune to the same mergers consolidating the bank sector. Huge mergers are actually an oddity--most acquisitions involve banks with assets of $3 billion or less, Stafford said.

Performance among community banks has varied more widely than among their larger counterparts. While they have been more likely to fail in the past--especially during the 1980s when many agricultural banks failed--that hasn’t been a big issue during the past two years of record profits, Forbus said.

And the nation’s largest banks say they aren’t losing as many customers as a result of mergers as their smaller competitors might make it seem. Wells Fargo’s recent quarterly report, for example, showed only a 2% erosion in revenue since it combined forces with First Interstate.

That could change. Wells Fargo started closing about 300 branches around California in July as part of its merger. While most of those Wells and First Interstate customers are expected to remain with the merged company, small banks are hoping to pick up some of the disgruntled castoffs.

“The stability isn’t there with the big banks,” said Dina Nichelson, executive director of the American League of Financial Institutions in Washington. “You have to go back to square one when you’re involved with a bank that merges or is acquired by a bigger bank.”

Besides, she added, “there’s just a sense of security that goes along with knowing your banker.”