The efficiency ratio is non-interest expenses over the sum of net interest income before provision for loan losses plus non-interest income.
It's analogous to dividing operating expenses into revenues. What you get is the percentage of revenues you're spending on operating expenses. The lower the ratio, the better. Numerically, 1 (the numeral 1) minus the efficiency ratio equals a bank's operating margin. Banking executives were obsessed with this ratio after the S&L fallout and the real estate implosion in the northeast and west coast in the early 1990s.
A middle of the road bank runs an efficiency ratio of .7 to 0.8; a good bank from 0.6 to 0.7, and the really lean operations run under 0.6.
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