How seriously do you take efficiency at your bank? If the answer is a reluctant "not as much as I should," you are far from being alone. Community banks, particularly smaller institutions with under $100 million of assets, continue to be reluctant players in the drive toward efficiency.

According to the American Bankers Association's latest study of community bank practices, only 47% of the almost 800 respondents set a target for their efficiency ratio, which is calculated by dividing total noninterest expenses such as salaries and office costs by total revenues.

By contrast, almost all larger regional banks take this ratio seriously and strive to improve it.

What gives with the smaller banks?

Some leading community-based bankers say that small banks continue to measure success by asset growth divorced from efficiency.

"Community banks like to make loans," says David Payne, chairman of Westamerica Bancorp., a $3.8 billion-asset bank company in San Rafael, Calif. "It's not as much fun and it's harder work to be efficient."

Also, community banks argue that the added costs necessary to offer the personalized service that has become their hallmark and competitive advantage run counter to the goal of achieving optimum efficiency. Mixed with this thinking is the concern that draconian cost-cutting, which may include layoffs, will offend the small communities that they serve.

Still, some bankers contend that there are always ways to wring needless costs out of the system and that goal-setting constitutes a large step toward improving efficiency.

"I have to agree that banks should take this ratio more seriously," says Joe Williams, chief executive officer of American Heritage Bank of El Reno, Okla.

Indeed, the study appears to support this advice. Community banks that set a target had an average efficiency ratio of 53.8% last year, about 4 percentage points lower than the group as a whole, and 6 percentage points lower than the 60% benchmark that community banks normally use to gauge their success.

Though half the banks in the study managed to reduce their efficiency ratios last year over the previous year, the study demonstrates that most banks fell short of their target for the year.

Last year, 80% of banks that set efficiency goals missed them, compared with 77% the year before.

Keith Leggett, an ABA senior economist, argues that various events - including higher-than-expected Year-2000 upgrade costs, higher salaries in a robust labor market, and tighter loan margins - may have gotten in the way of the best-laid plans.

He suggests that "there are limits to cost-cutting and we may be close to approaching those limits."

So how do banks become more efficient?

According to Mr. Leggett and others, it is not just a matter of cutting costs, particularly when staff costs or other administrative expenses have been wrung out already. Often, banks need to focus on increasing the denominator of the ratio by boosting revenues.

For example, good banks, he says, are focusing on increasing the number of products sold to a single customer.

Still, Henry A. Logue, chief executive officer of First Republic Bank in Monroe, La., argues that the industry still may need to bite the bullet and cut more staff costs, even if it ruffles community feathers. "We may need to operate with fewer people," he says.

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