Big-city banks are catching up to their country cousins.

Small-town bankers have always taken comfort from the idea that they could outearn small urban banks no matter how fast the latter grew.

But with growth flat and loan demand low in many nonmetropolitan areas, small-town bank profitability has been stagnant since 1992. Meanwhile, the shakeout from the realty loan debacle of the late '80s and early '90s has finally run its course at urban community banks, and bottom lines are fattening.

Despite high noninterest expenses, their one big disadvantage, the urban banks churned out returns on assets only 12 basis points below those of small-town banks for the first nine months of 1995. Three years earlier, the urban banks were 37 basis points behind.

In fact, it wasn't until the last quarter of 1993 that the 5,202 community banks in metropolitan areas broke the 1% ROA mark. Such banks had been below 1% for three years; returns were skewed because many in the Northeast and the West were having problems.

Bankers cite several reasons besides improvement in asset quality for the performance surge at metropolitan banks.

For one thing, they depend much less on commercial real estate than four years ago. And they're also becoming more efficient, bankers say, in part by figuring out new ways of cross-selling.

Cross-selling, in fact, is one major advantage small-town banks have always had over community banks in big cities, according to Joe Kesler, president of First National Bank and Trust in Carbondale, Ill., a town of 25,000.

"The competition is just as tough here as it is in the city," said Mr. Kesler, noting that several large regionals operate in the small university town 100 miles from St. Louis. "I'm just shooting off the top here, but I would say our big advantage from an income standpoint is that we know our customers a lot better. Our relationship is deeper, so we're able to sell them many more services, and that helps our fee income."

Ricky Ray, president of $68 million-asset First Bank of Boaz, a no- branch commercial bank in an Alabama town of 7,000, chalks up his 2.23% ROA to the bank's size.

"We're small, and we have no goal to be big," he said. "Small organizations, whether you're a bank or not, have many more opportunities to control costs than a larger organization."

Being a small-town banker is also less distracting, he said, so management can concentrate on doing business.

"This is the best place to be a bank," he said. "I have no desire whatsoever to do business in the city."

But then Mr. Ray probably wouldn't know what to do with an employee like Bob Hornaday. An electrical engineer by training and a computer whiz, Mr. Hornaday was hired by Lakeside Bank in downtown Chicago to come up with ways to make it easier for the bank to generate deposits and sell fee-based services.

"I go to a lot of conferences in which my brothers from the country are there," said the vice president of the $212 million-asset bank. "And they tend to be pretty shocked at what I do."

Mr. Hornaday's job is to come up with remote-delivery services for commercial customers. He invented a customized lockbox system, and he's figuring out ways to service the bill payments for 317 suburban water systems.

Coincidentally, his sister works at First National Bank of Carbondale, Mr. Kesler's institution, six hours' drive away.

He said that while Lakeside has cost disadvantages compared to small- town banks, he's confident that, by employing technology and a focused cross-selling effort, Lakeside can outearn most country banks. In fact, it already is doing so: Lakeside had a 1.9% return on its assets in the third quarter, and its noninterest income was a whopping 2.8% of total assets, almost twice the small-town bank average.

However, metropolitan community banks still have a way to go before reaching parity with small-town banks' profitability. A recession inflicts more damage on metropolitan banks, as economic cycles in small towns tend to be more gradual and less extreme, Mr. Kesler said.

And he added that small-town bank managers are increasingly becoming more astute.

"We've benefited greatly from the restructuring and consolidation going on at bigger banks," Mr. Kesler said. "I have a CFO who was restructured out of First of America. I have a loan officer from Magna Bank and a VP from Wachovia."

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