Efficiency Ratios Are Tight. Time to Look Beyond Expenses

The Federal Reserve Bank of Kansas City dropped a bulletin in March 2026 that confirmed what community bankers have been quietly stressing about for months: non-interest expenses are rising, the burden is landing harder on smaller institutions, and the efficiency ratio math is getting uncomfortable.

Here's the problem in plain terms: Efficiency ratio is non-interest expense divided by net revenue. When expenses climb and NIM expansion is limited by a rate environment that's essentially frozen in place, you're getting squeezed from both sides simultaneously. For banks under $1.5 billion in assets, there's less operational scale to absorb the impact. Every basis point matters more. Most banks respond to an efficiency ratio problem by looking at the expense line. Cut staffing. Consolidate vendors. Renegotiate contracts. Those are legitimate tactics, but they have hard floors where so many community banks are already sitting and they do nothing for the revenue side of the equation.

The non-interest income line is where smaller community banks consistently leave money on the table, and treasury management is one of the most direct ways to build it. I want to be specific about what I mean, because so often "treasury management" gets treated like a vague add-on product rather than a strategic revenue engine. Commercial treasury relationships built around ECR (earnings credit rate) generate fee income or meaningfully offset cost-of-funds, depending on how your program is structured. Smart sweep account arrangements keep commercial cash working on your balance sheet rather than walking out the door to a money market fund. These aren't theoretical benefits. They're line items. More importantly, commercial DDA accounts anchored by treasury services are among the most durable deposits a community bank can hold.…and that durability matters more right now than it has in a long time.

When a business client is using your bank for payments, collections, and day-to-day cash management, not just a loan, the relationship becomes operational with daily touchpoints. That’s what stabilizes deposits and drives real value.

The issue isn’t that community banks don’t offer treasury services. It’s that they’re often unsure of how to sell them or the services are generally underutilized.

Too often, treasury shows up after the loan is closed if at all. That leads to:

• loans without operating accounts

• deposits without fee income

• and relationships that remain transactional and rate-sensitive

That’s where value gets left on the table.

Improving efficiency ratio isn’t just about cutting expenses. It’s about increasing the value of each and every relationship.

Treasury management is one of the most direct ways to do that with stronger deposits, more durable relationships, and meaningful non-interest income.

In this environment, that’s not a nice-to-have. It’s a competitive advantage.

Community banks are under pressure as efficiency ratios tighten and non-interest expenses continue to rise.

While most institutions focus on expense management, one of the most overlooked opportunities is on the revenue side with treasury management and commercial deposit relationships.

When treasury services are fully activated, they strengthen deposit stability, increase non-interest income, and deepen commercial relationships beyond rate sensitivity.

In this environment, improving efficiency ratio is not just about cutting costs, it’s about capturing more value from existing relationships.