Super community banks, in general, let their efficiency ratios slide a bit. Because they put a premium on local autonomy and customer service, this measure of overhead expenses as a percentage of revenues will tend to be higher than at banks that centralize everything.

Then how did Collective Federal Savings Bank of New Jersey, which adheres to the super community format, achieve the astounding efficiency ratio of 43%? (The lower the ratio, the better. Most banks struggle to approach 50%.)

While expanding from its mortgage-lending core into a full-service community bank, the $3 billion-asset thrift did not forget its roots and found new uses for its historical expertise.

"We came from a small town, so we had to be cost conscious," says Thomas Hamilton, president and chief executive officer of the parent, Collective Bancorp.

Those roots are evident in the nondescript building that is Collective's headquarters in the town of Egg Harbor.

Built Its Own Data Center

The company also built its own infrastructure, consisting of a data center, check processing system, and servicing capacity. This may seem unusual, but it seems to work for Collective, which likes the idea of being in control of its systems to improve service and manage costs.

Collective has grown in an interesting way. When it identified a new market opportunity, it would not immediately put up an expensive brick-and-mortar facility.

Rather, it would open a branch in a small rental space, often in a strip mall or small shopping center. The branch manager and staff would announce the opening by sponsoring a celebration at the local high school basketball or football game.

Only when the branch achieved a critical mass of deposits would its location be traded up. In short, the branch is expected to pay its own way before moving into a permanent location. This permits inexpensive and efficient site testing, and accelerates the break-even point.

Collective's branching strategy is thus very different, and more cost effective, than the typical approach of erecting a fancy building and waiting 18 months or longer to break even.

Collective augments its high efficiency with low-cost funds. It actively pursues transaction accounts and is making an effort to change its deposit mix to lower the cost of funds even more. It seeks out younger customers but refuses to use high interest rates as a lure.

"We were concerned that, given the no-frills nature of the branches, customers would expect us to compensate by offering higher rates," says Mr. Hamilton.

Took Chance on Lowering Rates

But true to its culture, Collective lowered rates to test the market's reaction. There were no major defections.

"The timing was right," Mr. Hamilton says. "The industry underwent bad publicity, and high rates were associated with a perception of high risk. We were always perceived to be very prudent, and therefore we generated deposits despite the lower rates."

1.5% Return on Assets

Collective knows its future is in the transition to super community banking. It views its competitors as commercial banks, not other thrifts.

Its expansion is cautious but steady. Its profitability - a 1.5% return on assets last year - is achieved through very low operating costs coupled with a broad product menu, ranging from the traditional mortgage to annuities, mutual funds, and discount brokerage by phone.

"We sell to our customers' needs," says Mr. Hamilton. "Our biggest hurdle was to switch our branch people from deposit gatherers to sellers of both liabilities and assets.

"Our underlying strength is we are good to our customers. Many people say it, but we truly mean it." An efficiency ratio of 43% certainly helps.

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