The future remains bright for small rural banks, even as big banks get the go-ahead to expand into their markets, according to a recent study from Southeast Missouri State University.

In fact, banks in the country's rural agricultural areas showed greater productivity growth when more competition entered their markets than when their own market concentration increased, said the study, which examined banks in rural markets between 1988 and 1993.

That same productivity surge is likely to result from actual or potential expansion through interstate banking and branching, said Michael Devaney, a professor of accounting, finance, and business law at Southeast Missouri State, a co-author of the study.

"As much as the concern evolves around branch entry, we didn't see it as that much of a problem if it enhances competition," Mr. Devaney said.

Mr. Devaney and co-author William Weber, a professor of economics - both at the university's Donald L. Harrison College of Business - became interested in rural banking and economic development issues after they were involved with a Missouri rural development council's financing committee.

The hand-wringing in the 1980s over economically stagnant rural areas, the need for development banks, and questions about rural banks' lending records and performance led the professors to examine bank performance and competition. The first area they studied was the Mississippi Delta region - one of the nation's poorest - and then applied the same methods in looking at rural banking in general.

Using Federal Deposit Insurance Corp. call report data, the yearlong study looked at rural banks' efficiency and productivity in relation to the competition in the banks' communities.

"There's still room for these small-town banks to play," Mr. Weber concluded. "Some of them are going to do quite well when they find the right niche in the market. Some are going to go out of business - those that are becoming more inefficient and not adopting technological change."

After studying the efficiency of 6,000 rural banks based on four types of traditional lending - real estate, commercial (which included agriculture), personal, and securities - Mr. Devaney and Mr. Weber came to several conclusions:

* Banks in rural counties that see more competition had more productivity growth than when those banks' market concentration increased. Mr. Devaney had a simple explanation: "More competition creates more efficiency."

* Banks where markets saw increases in the total number of branches experienced greater technological change as competitors tried to keep up with one another.

* Rural markets are better served when efficient banks acquire inefficient banks, rather than when big banks simply acquire small banks.

"The efficiency gains from big banks are not all that great," Mr. Weber said. "Bigness by itself is not going to make a lot of these banks more efficient."

In interviews, the professors predicted survival for many small rural banks.

"There is a niche for these banks, so I don't think things are as dire as some people in rural development might suggest," Mr. Devaney said.

"I think that ag lending may be one of the more efficient areas," he said. "You do have a lot of these long-term lending relationships between banks and farmers. Of course all of these federal programs have helped make lending available."

Both professors said rural banks would benefit from the use of secondary markets where they could sell off loans and mitigate risk. A study they released last year found that entities such as Farmer Mac, which has a relatively new secondary market for farm operating loans, are doing a "pretty good job" helping banks to diversify outside their areas, Mr. Weber said.

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