The profit efficiency of small US commercial banks

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. (C) 2002 Published by Elsevier Science B.V.