Community bankers continue to demonstrate the cost-cutting edge they have over their larger rivals.

At the end of the first quarter, noninterest expense as a percentage of average assets at community banks stood at 3.52%, compared with 3.94% for all U.S. banks, according to W.C. Ferguson & Co., Irving, Tex.

For community banks the first-quarter figure represented a slight drop from the yearend expense ratio of 3.55%, while the figure for all U.S. banks actually spiked up from 3.82%.

"Business as a whole in America has been on a cost-containment, cost-efficiency kick for a number of years, and banks are no exception," said Thomas J. Maier, analyst at Kemper Securities Inc., Chicago.

By bringing down their expense ratios, community bankers have managed to improve their net interest margins - and their earnings.

In fact, partly because of community banks' lower expenditures, their net interest margin stood at 4.67% at the end of the first quarter - compared with 4.38% for all banks.

Because small banks have lower loan-to-deposit ratios - and therefore fewer interest-earning assets - every penny counts. Loans accounted for just 65% of deposits at the nation's community banks, while large banks had a 76% loan to deposit ratio at the end of the first quarter.

|Looking for Other Ways'

"It gets tougher and tougher to do loan business," said Mr. Maier. "Banks are looking for other ways of driving their earnings up."

Because employee costs account for most bank expenditures, many community bankers have been trimming their workforces in much the same manner as larger banks.

At some banks, increased use of automation has freed up employees to perform other functions. Other banks have slashed the costs of health insurance and other benefits by employing more part-timers.

"That's where most of the costs are coming from," said Dan Coughlin, community banking analyst at Howe Barnes Investments, Chicago.

Holding companies with more than one community bank have taken to consolidating boards of directors and functions such as data processing and accounting.

Chicago's Heritage Financial Services, for example, cut costs by merging the back office functions of seven subsidiary banks over the past two years.

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