April 27, 2015


  • Please explain why interest expense is subtracted from operating expenses when calculating the efficiency ratio. Why is it subtracted if it isn't in operating expenses to begin with? Also, what is the most traditional way of presenting the efficiency ratio-with the Allowance for Loan Loss Provision or without it? The ALLL is really credit losses, not operating expense, correct? thanks
  • Thanks for your question. What we're doing is dividing operating expenses by interest income less interest expenses plus non-interest income. I looked back at the original design and thought it might have been a little confusing so we adjusted it. This ratio is different from the basic operating expense to total income ratio in that it much less volatile, as subtracting interest expenses from interest income smooths out the ratio and can control the effect of interest rates a little better. If you wanted to present the efficiency ratio and include the provision for loan losses, you would add it to the denominator.
    Sam Taft