Efficiency Ratio
A bank’s efficiency ratio is its noninterest expense divided by its revenue (net interest income plus noninterest income). It shows how many cents the bank spends to earn each dollar of revenue, so lower is better.
How it is calculated
Efficiency ratio = noninterest expense ÷ (net interest income + noninterest income). A bank with $60 million in operating expenses and $100 million in revenue has an efficiency ratio of 60%: it spends 60 cents to earn each dollar. Many banks also report an adjusted ratio that excludes one-time items such as merger costs or securities losses.
What counts as efficient
Below 60% is a common benchmark for an efficient community bank, and the best performers run in the low 50s or below. Ratios in the 70s or higher leave little room for credit losses or investment. Scale helps, which is one reason smaller banks pursue mergers, but business model matters more than size: a branch-light commercial bank and a branch-heavy retail bank of the same size can land far apart.
Where the costs go
Salaries and benefits are the largest line at most community banks, followed by occupancy and technology. Manual work in lending and account opening shows up here directly: every application that needs someone to chase a pay stub, call an employer or review an uploaded bank statement adds staff time per loan. Automating verification is one of the few ways to grow volume without growing that line in step.
Common questions
What is a good efficiency ratio for a bank?
Below 60% is generally considered efficient for a community bank, and top performers run near or below 50%. Lower means the bank spends less to earn each dollar of revenue.
Is a lower efficiency ratio always better?
Usually, but not always. A bank can cut its ratio by underinvesting in technology, compliance or staff, which tends to cost it later. The trend over several years says more than a single quarter.
Does the efficiency ratio include loan loss provisions?
No. Provisions for credit losses are excluded, so the ratio measures operating cost against revenue before credit costs.