An Analysis of Overhead-Expense Measures and Relative Bank Profitability

This study reports the results of an analysis of the relationship of selected overhead expense and related measures to relative bank profitability. These measures include non-interest expenses, non-interest income, and net non-interest expenses. Overhead expense control is a component variable in day-to-day bank operations.Conceptually, every decision should be considered for its impact on the maximization of shareholder wealth. However, in a world of uncertainty, regulation and limited reaction/action time and resources, it is not possible to follow the conceptually correct approach for the multitude of decisions bankers face. One practice approach to the complex, interactive nature of bank decisions is to disaggregate this system of interrelationships into key variables for daily bank financial management: (1) "interest spread" (net interest margin) management, (2) overhead expense control, (3) liquidity management, and (4) capital management. The relationship of the second of these key variables to relative bank profitability is the focus of this study. Overhead expense and interest-margin management are related to the income maximization component of the wealth maximization equation; the other variables are related to the risk component