The profit efficiency of small US commercial banks

Abstract

This study investigates the profit efficiency (PROFEFF) of small banks (those under $500 million in total assets) for 1990–96. Assuming that small banks and large banks use the same production technology, we find, consistent with Berger and Mester [J. Bank. Finance 21 (1997) 875], that small banks are more profit efficient than large banks. Small banks in non-metropolitan statistical areas (non-MSA) areas are consistently more profit efficient than small banks in MSAs. Cross-sectional analysis of the correlates of the PROFEFF estimates suggests that structure–performance factors, relationship–development factors, and expense-preference behavior play an important role in explaining the PROFEFF of small US commercial banks.