Contrary to popular belief, heavy competition may actually lead to better performance by small banks.

At least that appears to be the case in St. Louis.

An American Banker comparative study of community banks in heavily competitive St. Louis and less-competitive Pittsburgh revealed that the St. Louis banks performed better on average in several key categories:

*They lent out more of their deposits, while earning 10 basis points more on assets and nearly 1.5% more on equity.

*Their net interest margin was 20 basis points above the average for small Pittsburgh banks.

*Their expenses, including for salaries, were slightly lower.

A St. Louis banker was pleasantly surprised by the findings.

"I'm really surprised that Pittsburgh doesn't have the same return on assets, given that there are fewer banks," said M. J. Ross, chairman and president of $385 million-asset Jefferson Bank and Trust Co.

"The only answer is that the banks (here) are run more efficiently. You can't rest at your oars here. There are a lot of banks that are dead in the water. And it shows in their numbers."

According to second-quarter call report data from Sheshunoff Information Services, small banks in both cities had about the same capital strength and asset quality, with Tier 1 leverage ratios of about 9.5% and only about 1% of their loans nonperforming.

The St. Louis and Pittsburgh metropolitan areas cover about the same amount of territory - 61.4 square miles and 55.5, respectively - and each is home to about 2.5 million people. But St. Louis has 85 banks of less than $3 billion of assets, while Pittsburgh has only 36.

A number of bankers suggested that the heavy competition for loans and depositsin cities like St. Louis makes banks there beat the bushes for customers rather than just wait for them to walk through the door.

"Where there is a concentration of banking assets among just a few banks, they tend over time to become a little lazier," said Camden R. Fine, president and chief executive of Midwest Independent Bank, a bankers' bank in Jefferson City, Mo. "They tend to lose a little of that competitive edge. I don't think they work quite as hard to get the customer."

Anat Bird, who is chief financial officer of St. Louis-based Roosevelt Financial Group, agreed. "Competition creates entrepreneurial spirit," she said. "It makes them more aggressive and keeps them on their toes. If you want to survive, you have to be creative, you have to be resourceful."

Jockeying for business also pushes the banks to become more efficient and customer-oriented, and that benefits consumers in the long-run, observers said.

"Competition generally serves to make us all better and stronger," said Robert E. Marling, president and chief executive of $285 million-asset Woodforest Bancshares in Houston, a heavily banked market.

Such views, however, seem to contradict the concerns some community bankers raise when suddenly faced with new competition from start-ups or other small banks entering their markets.

"If you have 85 banks competing in a market area that is the same size as a market that 36 are competing in, those 85 banks have to compete a whole hell of a lot harder just to maintain their market share, let alone increase it," Mr. Fine said.

On a similar but smaller scale, Mr. Fine said, the numerous banks in Springfield, Mo., including four start-ups, are far more aggressive than those in St. Joseph, Mo., which like Pittsburgh is dominated by three regionals.

"It is because of the competition that the banks are doing better," Mr. Fine said. "It keeps the banks sharper. They're more vigilant; they stay closer to the customers."

And in fact, as the competitive environment in Pittsburgh has heated up recently, so have the banks' activities. "We're becoming more active," said John M. Kish, chairman of Great American Federal Savings and Loan Association in Pittsburgh. "Business doesn't walk in the door anymore."

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