The huckster's adage that you have to spend money to make money doesn't hold water with P.C. "Pete" Vrontakis.

He opened Bank of Salem, Ore., in 1990, and it quickly began to make money hand over fist. In the seven years since, Bank of Salem has been so successful that some start-up banks are now copying its low-budget, six- product strategy, hoping for the same success.

In this year's "Stars of Community Banking," Bank of Salem took the top spot in an unprecedented two categories: most efficient bank and best lender. It's the second year in a row the bank was the best all-around lender, based on its portfolio's profitability and safety. And it was also the best performing start-up bank in 1993.

Mr. Vrontakis has done it all while being a skinflint. He freely admits to being cheap. "Our secret, and it's no secret, is our efficiency," said the 30-year career banker.

An analysis of Bank of Salem and the dozens of other banks that have been top-performing community banks during the four years the American Banker has been ranking them shows that the one thing they have in common is stinginess. Big or small, big-city or rural, the way to make a ton of money in the banking business is to spend very little of it.

"We look at every bill - the power bill, the phone bill, the office supplies bill - every month," said J. Knox McConnell, whose First National Bank of Keystone, W.Va., was the most profitable community bank in the country - based on three-year average returns on equity and assets - for the second straight year. "If there's been an increase in that expense, no matter how small, we have a meeting to figure out how to correct it."

Roger Kornder, whose tiny bank in Lincoln, Mont., was the most profitable small-business lender in the country for the second straight year, isn't satisfied with looking at expenses every month.

"We monitor them every day," he said. "We don't use a lot of technology or other things to keep costs down. We just run a tight ship."

Of the nine banks that made it to the top of the 10 categories designating the "Stars of Community Banking," five had overhead expenses equal to 2% of total assets or less. The industry average is about 4%.

Further, the 18 banks that made it to the top of lists in previous years and that are still independent average a 3.28% ratio of overhead to assets.

Many of the best-performing community banks, observers say, are so low-cost because of who owns them.

"In many of these cases where you have high-quality institutions, what you see is the presence of a very strong-willed CEO who often has a large personal stake in the company," said George Freibert, chairman of Professional Bank Services, Louisville, Ky. "What stands out as being low- cost is explained by the fact that every nickel and dime saved goes directly into the CEO's pocket. That's a powerful motivation to save money."

In both Mr. Vrontakis' and Mr. McConnell's case, that is definitely true. Both essentially control their institutions, and have for years.

Counting paper clips and dimming the lights might have its rewards for the CEO, but employees often don't find it fun. That's why Mr. McConnell motivates them with cash. All 70 employees (every one of them a woman) participate in an employee stock ownership plan; a 19-year employee retired last year to discover she was a millionaire.

Also, he offers a $1,500 quarterly bonus to each employee if the bank makes more than it did the previous quarter.

"That comes out to $6,000 a year in a good year," Mr. McConnell said, "and it can really light a fire under people."

It's not only nickel-and-diming office expenses and equipment that makes these banks hyper-profitable, either. In many cases, the most profitable banks simply have done away with the infrastructure that hampers banks competing with nonbanks which have lower cost structures.

In Mr. McConnell's case, First National Bank of Keystone is a one- branch operation with a mortgage subsidiary that operates out of a floor of offices above the bank. The mortgage unit buys loans nationwide, making huge profits with very low fixed expenses.

Bank of Salem's niches are business and first mortgage loans, and it has developed a reputation throughout Oregon as being very good at both. Thus, it can charge a point or two more than the competition. Because it doesn't do much else, Mr. Vrontakis doesn't see much reason to spend money on anything else.

"We handle about $6 million in deposits per employee," Mr. Vrontakis said. "When I started in banking, the average was $1 million per employee."

Bank of Salem now has $45 million of assets. Its profitability through September 1996 was actually down compared to 1995, showing the effect of a recently opened branch in Portland. Still, the company earned a 2.87% return on assets. It hasn't had a loss on a loan since it opened.

It's First National Bank of Keystone, however, that continues to defy gravity. It expanded its mortgage subsidiary this year, spending some money to upgrade its facility, so earnings weren't as great as in the past. Still, it's hard to quibble with a 5.95% return on assets for the first nine months of 1996. The three-year average: 6.26%.

"We're going to keep it up," Mr. McConnell said. "I don't see us making any less money in the foreseeable future, and I know we're going to do better this year." u

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