increasing geographic scope of some banking activities, and the increased importance of nonbank providers of financial services are some of the factors altering the financial marketplace. while many of these changes may have increased financial system efficiency and lowered costs for consumers, they also present new and sometimes difficult challenges for community banks. these changes have coincided with a significant consolidation of the banking industry and a pronounced decline in the number of community banks. if we define a community bank as any bank or thrift organization that has total real assets of less than $ 1 billion, in 2002 dollars, the number of community banks has declined about a third over the past decade. most of this consolidation has been due to mergers. a federal reserve board staff study reports that between 1994 and 2003 there were more than 3, 500 bank and thrift mergers ( pilloff, 2004 ). in more than 90 percent of these mergers, the target institution had less than $ 1 billion in total assets, and in about half of those cases the acquiring organization also had assets of less than $ 1 billion. acquiring organizations were typically larger than their targets ; about 50 percent of the transactions involved an acquirer that was at least ten times as large as the target institution. although merger activity has slowed since the 1990s, there were still at least 200 mergers each year between 2000 and 2006. despite these changes, community banks continue to fill an important niche in banking, providing relationship loans in specific business and economic sectors ( most notably small - business and agricultural lending ), personalized service, and a local presence. indeed, we have a considerable body of evidence that points to the value and viability of these institutions. for example, despite the decline in numbers that i just mentioned, there are still more than 7, 000 community banking organizations, accounting for about 95 percent of all banks and thrifts in the united states today. furthermore, new community banks continue to be formed. during the period 2000 through 2005, about 120 new community banks were chartered, on average, each year. and during the first three quarters of 2006, 137 new community banks were chartered. these figures suggest that many people continue to believe that community banks have an important niche to fill and, as a result, are willing to invest in the future of community banking. a variety of indicators suggest that as a whole, today ’ s community banks are doing well. the average return on equity ( roe ) at community banks, for instance, is quite solid and has improved over the past few years. net

same time obtained slightly more services from each bank than did firms that used only larger banks. this suggests that community - bank - only firms are more likely to cluster their purchases at a single institution than are other firms, behavior that is consistent with the importance of relationship finance. overall, in my judgment, our survey data confirm the view that, despite changes in the competitive environment, community banks continue to play an important role in providing relationship finance to small businesses in their local banking markets. potential conflicts of interest the very relationships that underlie relationship finance, and that constitute the primary source of community bankers ’ comparative advantage in meeting the financial needs of small businesses and households, also present challenges. as i mentioned earlier, relationship finance dates back to the very earliest banking institutions in our country. although the extreme form of relationship lending that characterized early nineteenth century new england banking had the potential to undermine the safety and soundness of these early banking institutions, naomi lamoreaux ’ s research suggests that market forces acted to minimize the adverse effects. in an environment characterized by easy entry into banking, bank directors apparently had strong incentives to monitor lending and minimize risks because their business success depended crucially on maintaining their unsullied reputations. of course, this salutary outcome was by no means inevitable, as evidenced by experiences in a number of developing countries where this type of lending behavior has had quite pernicious effects ; rather, the outcome was the result of the particular circumstances and competitive environment prevailing in new england at the time ( lamoreaux, 1994 ). when it comes to more recent times, evidence on the extent to which conflicts of interest resulting from close ties between banks and their potential borrowers may have adversely affected bank performance is limited to studies of the largest banking organizations. one example is my own research with phil strahan that looked at linkages between the boards of directors of banks and nonfinancial firms. such board linkages can be beneficial because they improve information flow between the linked firms ; however, they can also lead to conflicts of interest because the individual who serves as the link has fiduciary responsibilities to both firms, and those firms ’ interests can sometimes diverge. in our research, phil and i focus on board linkages between large u. s. banks and fortune 500 nonfinancial firms. this focus is driven largely by data availability. i would be very interested in hearing from you about the extent to which community bankers sit on the boards of nonfin