Revenue is stalling and expenses keep rising at numerous community banks — and investors are getting impatient with the worst offenders.

Generating positive operating leverage, when revenue rises faster than expenses, has become a challenge for bankers. The industry's third-quarter results are drawing even more attention to the issue.

Management teams that struggled with cost control have found themselves in analysts' cross hairs. BancorpSouth (BXS), which had a 78.1% efficiency ratio at Sept. 30, was pressed by Kevin Fitzsimmons, an analyst at Sandler O'Neill, about improving efficiency. The company's efficiency ratio was 75.7% a year earlier.

"If you're looking for some magic pixie dust that is going to fix it all quickly, I don't think that is the way it works," Dan Rollins, the Tupelo, Miss., company's chief executive, responded.

"We are going to spend day after day, week after week, month after month, and quarter after quarter working to improve our efficiency ratio" by adding revenue and cutting costs, Rollins said.

BancorpSouth is not alone. The efficiency ratio at 230 banks with $40 billion or less in assets averaged 67.1% at Sept. 30, rising from 64.1% a year earlier, according to American Banker research.

At those banks, total revenue fell 0.6% from a year earlier, to an average of $55.1 million, and noninterest expense rose 4.1%, to $37 million.

Banks have been hard pressed to report higher revenue because of low interest rates and the collapse of mortgage refinancing, says Stephen Scinicariello, an analyst at UBS. Instead, bankers have focused on cutting costs, which is one of their few remaining options.

"That's what we're seeing in terms of branch rationalization and cost-cutting across mortgage operations," Scinicariello says. "When the economy ramps up, loans will ramp up and, as short rates move up, margins will move up. We're waiting for those catalysts to kick in."

Several regional banks also reported negative operating leverage in the third quarter, including the $12.9 billion-asset BancorpSouth. M&T Bank (MTB) in Buffalo, N.Y.; East West Bancorp (EWBC) in Los Angeles; and Synovus Financial (SNV) in Columbus, Ga., also had setbacks, based on analysis by Ken Zerbe, an analyst at Morgan Stanley

Community bankers, including Chuck Sulerzyski, president and CEO of Peoples Bancorp in Marietta, Ohio, lamented about an inability to generate positive operating leverage at the $2 billion-asset company.

"Although we held expenses in check, we were not able to overcome the slow start to loan growth and greater than expected margin compression," Sulerzyski said during a conference call Tuesday. "We are disappointed to come up short this year."

Other bankers highlighted a renewed focus on cost control.

"We are going to be much more focused on driving positive operating leverage" to get closer to a 60% efficiency ratio, Don Kimble, chief financial officer at KeyCorp (KEY), said during an Oct. 16 conference call. The Cleveland company's efficiency ratio was 67.5% at Sept. 30.

Analysts questioned Grayson Hall, CEO at Regions Financial (RF), about the Birmingham, Ala. company's recent hiring spree. A rise in compensation and benefits contributed to a 2% increase in noninterest expense, compared to a year earlier.

"You cannot generate shareholder value in the long term from expense reductions," Hall conceded during Tuesday's conference call.

Other banks are reluctant to stop searching for talent. The $1.7 billion-asset Suffolk Bancorp (SUBK), opened a loan production office in Melville, N.Y., last year, and plans to open a Garden City, N.Y., office next month, says Frank Filipo, the company's operating officer. Suffolk seems to be doing fine despite the openings, and related hiring; the Riverhead, N.Y. company's third-quarter efficiency ratio fell to 70%, compared to 95% a year ago.

"We've done a fair amount of hiring in the last 12 months," Filipo says. "We're willing to invest in revenue generation."

Andy Peters writes about regional banks and community banks for American Banker.