To calculate a bank’s efficiency ratio, take total noninterest expense, subtract amortization of intangible assets, and divide the result by the sum of net interest income and noninterest income. Multiply by 100 to express it as a percentage. A result of 58% means the bank spends 58 cents in overhead to produce every dollar of revenue, leaving 42 cents for loan-loss provisions, taxes, and profit. Lower is better.
The Formula
The FDIC defines the efficiency ratio as noninterest expense, less amortization of intangible assets, as a percentage of the sum of net interest income and noninterest income.1Federal Deposit Insurance Corporation. Quarterly Banking Profile – Fourth Quarter 2023 Written out:
Efficiency Ratio = (Noninterest Expense − Intangible Asset Amortization) ÷ (Net Interest Income + Noninterest Income) × 100
Everything else is about pulling the right numbers off the right line items.
Where to Find the Inputs
Publicly traded banks file an annual Form 10-K and quarterly 10-Q with the SEC. The 10-K carries audited financial statements for the full fiscal year along with management’s discussion of financial condition and results of operations.2Legal Information Institute (LII) / Cornell Law School. Form 10-K The consolidated income statement inside is where you will find both sides of the ratio.
Banks that are not publicly traded file Call Reports with the FFIEC, which the FDIC makes available through its BankFind tool. Credit unions file the equivalent 5300 Call Reports with the NCUA. Whatever source you use, pull the expense and revenue figures from the same reporting period. Mixing a quarter’s expenses with a year’s revenue is a common first error.
The Denominator: Net Interest Income Plus Noninterest Income
Net interest income is the spread between what the bank earns on loans and investments and what it pays depositors. If a bank collects $500 million in interest on its loan portfolio and pays $200 million to savings and CD holders, net interest income is $300 million.
Noninterest income covers everything the bank earns that is not a lending spread: service charges on deposit accounts, wealth management fees, credit card interchange revenue, gains on loan sales, and similar items. Add the two together for the denominator.
The Numerator: Noninterest Expense Minus Intangible Amortization
Noninterest expense is the cost of running the bank. The largest items are usually salaries and employee benefits, followed by occupancy, technology and equipment, professional fees, and marketing. Total the noninterest expense line, then subtract amortization of intangible assets. The FDIC strips out that amortization because it reflects the accounting tail of past acquisitions rather than current operating cost.1Federal Deposit Insurance Corporation. Quarterly Banking Profile – Fourth Quarter 2023
What Does Not Belong in the Calculation
Three items sit on the income statement but stay out of the efficiency ratio. Folding them in is the mistake that most often produces a wrong answer, and it always makes the bank look worse than it is.
- Provisions for credit losses. These reserves cover expected loan defaults. The FDIC reports them separately from noninterest expense, and they stay separate in the calculation.1Federal Deposit Insurance Corporation. Quarterly Banking Profile – Fourth Quarter 2023
- Amortization of intangible assets. Already subtracted in the numerator; do not leave it in the total noninterest expense figure.
- Income tax expense. Taxes depend on jurisdiction and structure, not on how well management runs the bank.
Large one-time charges, such as litigation settlements or merger-related restructuring, are a separate judgment call. Some banks publish an “adjusted” efficiency ratio that removes these so the underlying trend is visible. If you are comparing two institutions, confirm both are handling non-recurring items the same way. Otherwise you are measuring two different things.
A Worked Example
Assume a mid-size commercial bank reports the following for the year:
- Net interest income: $420 million
- Noninterest income: $130 million
- Total noninterest expense: $330 million
- Amortization of intangible assets: $10 million
Numerator: $330 million minus $10 million equals $320 million.
Denominator: $420 million plus $130 million equals $550 million.
Divide: $320 million ÷ $550 million = 0.5818. Multiply by 100. The efficiency ratio is 58.2%. The bank spends about 58 cents on overhead for every dollar of revenue.
Now change one variable. If noninterest expense drops by $20 million the next year and revenue holds, the numerator falls to $300 million and the ratio moves to 54.5%. If instead expenses stay flat but revenue falls by $50 million because interest margins compressed, the denominator drops to $500 million and the ratio jumps to 64%, without the bank spending any more. Both sides of the fraction move independently, so the direction of a change matters as much as the number.
Reading the Result
Well-managed banks generally target an efficiency ratio in the 50% to 60% range. Below 50% signals unusually tight cost control, which large banks achieve more easily because they spread fixed costs across greater volume. Above 70% suggests overhead is heavy relative to revenue, though smaller community banks and credit unions run higher naturally, and a credit union at 78% may be normal for its peer group.
One quarter’s number tells you little on its own. A ratio drifting from 56% to 63% over two years shows overhead absorbing a growing share of revenue. A steady decline from 68% to 61% points the other way. The FFIEC groups institutions into peer categories by total assets and publishes trimmed averages that drop the top and bottom 5% of outliers, which gives a more honest comparison than lining a $500 million community bank up against a global bank.3Federal Financial Institutions Examination Council. Peer Group Average Distribution Report
A few limits are worth carrying with the number. Falling market rates compress net interest margins and shrink the denominator, so a rising ratio in a rate-cutting cycle does not necessarily mean spending got out of hand. The formula treats all revenue as equal, so it cannot tell you whether a bank’s income is stable or volatile. And because loan-loss provisions sit outside the calculation, the ratio says nothing about credit quality. It answers one question well: how much does this bank spend to make a dollar. Use it alongside other measures for anything broader.