The merger trend of 1995 put the smallest remaining independent banks at an even greater cost disadvantage to their largest brethren.

A survey on retail banking by the American Bankers Association showed that banks with less than $1 billion of assets reported substantial increases in average retail bank operating expenses per customer and per employee in 1994 from a year earlier. By contrast, the cost per customer declined at banks with more than $1 billion of assets.

James Chessen, chief economist at the ABA, said the survey's results do not necessarily signal that small banks are spending more money than they used to on their retail function.

Instead, the sample is changing. Small banks with few branches are increasingly dominating the category as mergers claim those small banks that own more extensive branch networks.

The result is a greater cost disparity between small and large banks.

"Operating expenses may not necessarily have jumped at banks under $1 billion in assets," he said, a view supported by other analysts. "The pool of institutions we're surveying is changing."

For example, banks in the smallest category - those with less than $300 million in assets - reported spending $414 in retail operating expenses per retail customer in the 1994 survey. In 1995's survey, banks in the same category reported spending $766 per customer, an 85% jump.

Comparatively, banks with $1 billion or more in assets experienced a 17.8% drop in retail operating expenses per customer, to $207.

But while the remaining pool of smallest banks may be at a considerable cost disadvantage, their skill in squeezing more money out of their customers is starkly illustrated as mergers change the landscape.

Large banks reported a drop in gross revenue per retail customer, to $367 from $469, while at midsize banks ($300 million to $999 million in assets) it increased 61%, to $711. At the smallest banks, the revenue per customer increased 8.2%, to $1,067.

"The small banks and midsize banks are learning how to get more 'wallet share' from their customers," said Carl S. Meyer, managing director of Meyer & Associates, Manhasset, N.Y. "The smaller banks in particular are able to adapt faster and are adopting more of the sales culture. Consequently, they're pulling more people in and getting more from them."

As part of the survey, conducted in the first half of 1995 by mail and telephone interviews, the ABA contacted 180 banks in the three asset categories on issues ranging from branch revenue and expenses, to retail services and products, to electronic banking, customer service, and demographics. The survey also includes 1994 deposit and market share trends based on government data.

Among its other highlights, the report showed that the total number of branches grew by 2,422 in 1994, despite assertions to the contrary and an increase in bank consolidation.

Also running against the trend were figures showing the average number of branches per bank increased among large banks, to 148 from 104. Among midsize banks, the number dropped to 19 from 21, and to four from six among institutions under $300 million in assets.

Industry consultants, however, speculated that the increase in large- bank branches was due primarily to acquisitions of smaller institutions with large branch networks, while the decline in small-bank branch networks could be due to a surge in start-up institutions.

"The larger institutions with the fixed costs must spread that over a wider network of customers," said Anita G. Newcomb, managing director of Professional Bank Services Inc., Washington. "When they buy these institutions, they really want to buy the customer base, but the branches come with it."

Mr. Meyer agreed, saying, "Some of them have consolidated branches, but they're still very much in favor of branching because branching is the way they can bring their competitive edge to bear, which is service and convenience."

Mr. Meyer also cautioned that while the ABA survey can indicate trends in general, because of the low level of participation, "I wouldn't lay too much stock in it as a statistically valid survey that purports factual changes for the industry."

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