Senior managers at little Bailey Bank in Clinton, S.C., knew they had to improve efficiency.

Though earnings were solid and assets had grown almost 20% in 1997, president John W. Dickens saw the 77% efficiency ratio-noninterest expenses as a percentage of income-as a threat to its independence.

Small banks nationwide face a similar problem.

"We as community banks have to look beyond our little worlds and realize what is going on in banking," Mr. Dickens said in a recent interview. "Larger banks are becoming more efficient. To compete, we have to do the same."

Big banks have been focusing on efficiency for much of the decade. It is only in the last few years that efficiency ratios have become an obsession for small ones-including many of the very smallest.

Through September the national average efficiency ratio for commercial banks was 59.78%, according to the Federal Deposit Insurance Corp. (The figure is for individual banks, not holding companies.)

Banks with less than $100 million of assets had the highest average, 65.01%. Bigger banks generally do better.

The rule breaks down for the biggest, which seem to pay a penalty for their infrastructures and bureaucracies. But banks like $414 million-asset Columbia Bank in Maryland "will never have efficiency ratios as low as the big banks'," says John A. Scaldara Jr., its chief financial officer.

Nevertheless, "trimming down has to be part of the survival strategy of any bank, no matter what the size," said David Payne, chairman, president, and chief executive officer of $3.8 billion-asset Westamerica Corp., San Rafael, Calif. "Banking is relatively inefficient, and that will hurt us as we compete more and more with different kinds of financial service companies."

Mr. Payne, whose company has a 43% ratio, said that to all banks must push toward the 30s to survive.

The target has shrunk fast.

"A decade ago, people used to say that 70% was good, then 65%," said Henry A. Logue, president and chief executive officer of $175 million-asset First Republic Bank of Rayville, La. "A couple of years ago our 58% ratio was considered good."

Community bankers are responding in various ways.

At $139 million-asset Bailey, South Carolina's oldest bank-its old-timey full name is M S Bailey & Son Bankers - managers added fees such as overdraft charges and whittled product offerings. In addition, the staff was cut 20%, to 80.

The result: The bank's efficiency ratio fell 15 points last year, to 62%, Mr. Dickens said. He's aiming for 56%.

Technological advances and a proliferation of delivery channels give almost every bank room to cut, experts said.

"An organization in a moving industry is always going to have a changing waistline," said Thomas Parliment, a Johnsburg, Ill.-based bank consultant. "As delivery systems change, some positions become fat to trim."

But other bankers aim improve their ratios by growth. Mr. Logue in Louisiana, for example, said that by midyear 2000 he intends to cut First Republic's ratio by 8 points, to 50%, by continuing to increase assets 10% a year.

The bank, owned by $2.4 billion-asset First United Bancshares of El Dorado, Ark., could add $50 million of assets without significant hiring, he said. "But to grow, you need people in place. And we want to grow."

Community banks also want to provide quality service.

Columbia Bank in Maryland uses service to differentiate itself from big banks. "And personal attention generally means more costs," said Mr. Scaldara.

Charles A. Webb, president of Peak National Bank in Nederland, Colo., said its efficiency ratio ballooned from 53.2% at yearend 1997 to 69.4% through September, largely because the bank installed a new computer system.

Though he would like to see $107 million-asset Peak National recover that lost efficiency, it is not his primary concern, he said.

"We are looking for strong fundamentals, quality loans, and a good rate of return on those loans. If we can do that, everything else will take care of itself."

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