Why Are Small Banks Sputtering?
Despite the overall gains in reducing the net noninterest margin, small District banks have not enjoyed equivalent cost savings. At 2.21 percent, the net noninterest margin at the smallest District banks was considerably above that (1.89 percent) of District midsized banks at year-end 1998. The margin fell just 5 basis points at small banks between 1994 and 1998, compared with a dip of 26 basis points at midsized banks, leaving 1998 ROA at 1.05 percent for small District banks and 1.29 percent for midsized banks. The efficiency ratio also highlights small banks’ struggle to contain overhead costs. This ratio is calculated by dividing noninterest expense by the sum of noninterest income and net interest income. An efficiency ratio of 60 percent, for example, means that a bank is spending 60 cents to generate a dollar of income. Declining efficiency ratios, therefore, signal a reduction in overhead relative to income. Although the average efficiency ratio for District banks with less tha
