Academic journal article ABA Banking Journal

Net Overhead: Correction & Amplification

Academic journal article ABA Banking Journal

Net Overhead: Correction & Amplification

Article excerpt

In the December cover story, "Efficiency: Good for the bottom line," one of the recommended practices was to lower net overhead. A banker contacted us about the definition of net overhead in the article, which was, "the difference between non-interest expense and non-interest income." He said he could not determine how that formula could have been used to calculate the percentages cited in the article. However, the banker felt the ratio could be a very useful number.

The concept of net overhead had come up in interviewing bank consultant Jay Brew, so we reached back to him for a clarification. Brew, who is co-chairman of Seifried & Brew, explained in an email that net overhead is, "non-interest expense less non-interest income." A key point, however, is that those numbers would be expressed as a percentage of assets to get the percentages cited.

Seifried & Brew maintains a national benchmark of community banks from $100 million to $5 billion in assets, and in the third quarter, this group had non-interest expense of 3.28% of assets and non-interest income of 0.89% of assets. Thus, the net overhead for this benchmark group was 2.39%.

A lower percentage, of course, is better, indicating that non-interest income comes closer to covering non-interest expense.

The banker (head of a western bank of less than $150 million in assets) indicated that smaller banks like his often don't have insurance, brokerage, or trust operations that generate commission-based income. …

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