Financial Institution Effeciency Ratio

Hi Everyone,

Here's my definition of the efficiency ratio.  It's operating expenses divided by (interest income plus other operating income minus dividend and interest expense).  A credit union's efficiency ratio is typically around 80%.  That means that for every dollar earned a credit union uses 80 cents to earn it.  A community bank's efficiency ratio typically runs around 50%.  Part of the reason community banks' ratio is lower is they charge a lot more fees.  But before all the credit union folks get all worked up and excited about how they are better than banks it should be noted that community banks also typically have much lower operating expenses.  This is one of the weak points of the credit union movement.  Credit unions must drive down their operating expenses relentessly to survive.

Comments

[Clay Yearsley]

Evan-
Do you include provision for loan loss in the calculation?
Thanks,
Clay

[Evan Clark]

Clay,
No, but an fun number to look at is net income prior to PLL. Looking at your September FPR your numbers look awesome. All the Best for 2010. Evan