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Banking & Finance
AN EIGHTH DISTRICT PERSPECTIVE
SPRING 1985

Uneven Trends in Eighth District Bank Profitability
Bank data for 1984 suggest that, on a consolidated basis,
bank profitability in the Eighth District continued to decline
slightly as it has over the past four years. Closer scrutiny,
however, reveals that profitability trends among banks of
different size groups have been markedly uneven. This issue
examines the recent Eighth District banking experience and
explores the distinctions among banks of different sizes.
Table 1 summarizes the main components of bank income
and expenses for District banks, as a whole, expressed as
percentages of average assets over the last four years.
Declining bank profitability is indicated by the return on
assets (ROA) data, which relate banks’ net income to total
assets. The ROA for District banks fell from .93 in 1981
to .86 by 1984. Increases in loan losses and in allocations
to loan loss reserves to cover potential losses are
important factors in explaining the profitability decline.
Although the percentage of loan losses has been increas­
ing over the past four years, loan delinquencies as a per­
cent of average assets have not shown a clear trend during
the three years for which these data are available. Loan loss
rates have a direct impact on bank profitability since they
represent actual charge-offs. Delinquency rates, however,
show only the potential for loan losses which may or may
not be realized in the future.
Table 1 also highlights the disposition of banks’ income.
Due to higher interest rates in 1984, banks’ interest income
increased from 1983. Commensurately higher interest ex­
penses on deposits, however, left net interest income un­
changed from 1983. Net non-interest income improved
significantly from 1983 to 1984 due to a combination of
higher fee income and reductions in non-interest expenses.

Bank Income
While Eighth District banks, as a whole,
exhibited declining profitability, medium­
sized banks have posted consistent gains in
profitability over the past four years. These
banks, defined as those having total assets
between $100 and $500 million, have shown
increases in both the return on average assets
and return on average equity (see charts 1



Table 1
Income and Expenses as a Percent of Average Assets for
Eighth District Commercial Banks, 1981-84
1981
N et Incom e (Return on A ssets)

.93%

1982

1983

.89%

.88%

1984
.86%

G ross Interest Incom e

11.03

10.91

9 .6 4

10.20

G ross Interest E xpense

7 .6 2

7 .4 9

6 .1 5

6.71

N et Interest Incom e

3 .41

3 .4 2

3 .4 9

3 .4 9

G ross N on-Interest Incom e
G ross N on-Interest E xpense
N et N on-Interest Incom e

.77

.77

.83

.93

3.01

3 .1 7

3 .2 6

2 .9 7

- 2 .2 4

- 2 .4 0

- 2 .4 3

- 2 .0 4
.29

Loan L osses

.18

.22

.27

Loan L oss R eserves

.53

.56

.58

.65

Loan D elinquency

NA

2 .6 5

2 .4 0

2 .5 2

and 2 on the next page). The return on equity ratio measures
the percentage return earned by banks on stockholders’ equi­
ty. Small banks, those with less than $100 million in total
assets, on the other hand, have seen a continuing decline
in profitability, which was particularly sharp in 1984. Large
banks, those with more than $500 million in total assets,
have recently shown improved ROA, but registered a slight
decline in returns on equity in 1984.

Loan Losses, Reserves and
Delinquencies

Loan losses explain much of the declining profitability
of small banks relative to medium and large
banks. As shown in chart 3, loan losses at
small banks have doubled over the past four
years, while losses at other banks have
changed little since 1982. Banks of all three
THE
size groups, however, have increased their
FEDERAL
loan loss reserves.
RESERVE
BANK of
Loan delinquency rates, which may not
ST.IXH IS
directly explain current or past changes in
profitability, provide a rough indication

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 1
RETURN ON AVERAGE ASSETS FOR EIGHTH DISTRICT BANKS

of future loan losses. In this case, delinquency rates include
all loans past due more than 30 days as well as nonaccrual
and renegotiated loans expressed as a percent of average
loans outstanding for the year. Chart 4 shows the noticeable
difference in loan delinquencies between the largest banks
on one hand, and the small- and medium-sized banks on
the other. As a leading indicator, the delinquency data also
suggest possible improvement in large bank profitability due
to potentially lower loan loss rates. Conversely, the higher
delinquency rates for small- and medium-sized banks may
portend moderating earnings performance.

Changes in Bank Data Reporting
This issue introduces revisions to the large- and smallbank data series and a new series of Eighth District bank
loan performance ratios (see pages 3 and 4). The revised
data format uses quarterly rather than monthly averages and
presents trends expressed as aqnual growth rates. The revis­
ed format facilitates comparison of recent trends in bank
asset and liability growth to historical trends. This presen­
tation of data avoids misleading comparisons based on series
that are not seasonally adjusted. For example, over the first
Chart 3
NET LOAN LOSSES AS A PERCENT OF AVERAGE LOANS FOR EIGHTH DISTRICT BANKS

SPRING 1985
Chart 2
RETURN ON AVERAGE EQUITY FOR EIGHTH DISTRICT BANKS

quarter of 1985, total loans at large reporting banks grew
at a 20.5 percent annual rate; this rate appears to be rapid
until it is compared to the 43 percent rate of growth that
occurred over the first quarter of the previous year. The
small-bank data, which previously had been reported by
regions, have been combined to create a larger series, less
susceptible to erratic changes. Due to recent changes in the
reporting panel, comparisons with previous periods are not
yet available. As these data become available, the smallbank report will be expanded to the same format as the largebank data series.
The new series of loan performance ratios provide a way
of discerning trends in bank lending over the past three
years. The ratio of delinquent loans to total loans outstand­
ing, for example, shows that delinquency rates at District
banks with more than $750 million in assets have fallen
sharply from 1982 to 1984, while delinquency rates at banks
with less than $300 million in assets have risen from 1983
to 1984. These ratios will be updated quarterly and are based
on Call Report data filed by all FDIC insured banks.
—Kenneth C. Carraro
Chart 4
LOAN DELINQUENCIES AS A PERCENT OF AVERAGE LOANS FOR EIGHTH DISTRICT BANKS

Banking & Finance—An Eighth District Perspective is a quarterly summary of banking and finance conditions in the area served
by the Federal Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information
Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official
positions of the Federal Reserve System.



FEDERAL RESERVE BANK OF ST. LOUIS

SPRING 1985

EIGHTH DISTRICT BANKING DATA

LARGE WEEKLY REPORTING BANKS1

Level
1/1985
($ millions)

Current
Quarter
IV/19841/1985

Rates of Change
Current
Same Periods
Year
Previous Year
1/19841/1983IV/19831/1984
1/1984
1/1985

Selected Assets & Liabilities
Total Loans & Leases
Commercial Loans
Consumer Loans
Real Estate Loans
Loans to Financial Institutions
All Other Loans

$14,044
5,229
2,851
2,956
1,039
1,969

Total Securities
U.S. Treasury & Agency Securities
Other Securities
Total Deposits
Non-Transaction Balances
MMDAs
$100,000 CDs
Demand Deposits
Other Transaction Balances2

20.5%
8.9
26.0
16.6
-1 5 .5
95.1

14.7%
12.7
14.9
12.9
8.4
27.6

43.0%
0.6
22.8
27.7
36.5
NA

13.2%
0.8
20.8
11.5
-4 .1
NA

3,280
1,885
1,393

3.9
-5 .6
18.4

2.3
-1 0 .7
11.9

NA
NA
NA

NA
NA
NA

17,151
10,775
2,152
3,764
5,013
1,364

4.4
7.2
33.0
4.5
- 6 .0
25.2

8.0
13.2
11.5
17.7
2.3
10.4

14.4
NA
16.3
28.3
6.6
NA

8.2
NA
44.7
- 0 .9
6.5
NA

SMALL WEEKLY REPORTING BANKS3

Level
Ql, 1985
($ millions)

Rates of Change
Current
Current
Quarter
Year
IV/19841/19841/1985
1/1985

Selected Assets & Liabilities
Total Loans & Leases
Commercial Loans
Consumer Loans
Real Estate Loans
All Other Loans
U.S. Treasury & Agency Securities
Other Securities
Total Deposits

$4,097
1,359
830
1,616
292

4.6%
6.5
10.4
3.3
-1 1 .8

11.7%
7.7
21.2
17.3
-1 5 .0

1,499

- 2 .7

4.3

618

6.0

- 8 .3

6,304

2.7

4.8

1 A sample of commercial banks with total assets greater than $750 million. Historical data have been revised to incorporate adjustment factors
that offset the cumulative effects of mergers and other changes involving weekly reporting banks during 1984. All data are not seasonally adjusted.
Rates of change are compounded annual rates.
2 Includes NOW, Super NOW, ATS and accounts permitting telephone or pre-authorized transfers.
3 A sample of commercial banks with total assets less than $300 million.




3

EIGHTH DISTRICT BANKING DATA
Bank Performance Ratios 1
RATIOS

IV/1984

IV/1983

IV/1982

73.8%
59.1

66.0%
57.1

68.5%
58.1

1.39
1.10

1.48
1.04

1.42
1.00

3.87
4.96

5.21
4.68

6.56
4.91

.42
.68

.43
.68

.50
.57

Loans to Deposits
Large Banks4
Small Banks5

Loan Loss Reserves to Total Loans
Large Banks
Small Banks

Delinquent Loans to Total Loans
Large Banks
Small Banks

Net Loans Losses to Total Loans
Large Banks
Small Banks

EIGHTH DISTRICT INTEREST RATES6

March 1985
Super NOW
MMDAs
Time CDS
92 — 182 days
1 — 2 V2 years
21/2 years and over

February 1985

January 1985

6.89%
7.76

6.80%
7.63

6.68%
7.54

8.79
9.50
9.77

8.56
9.31
9.51

8.28
9.19
9.41

All Eighth District banks with total assets greater than $750 million. Ratios are derived from Call Reports.
All Eighth District banks with total assets less than $300 million.
Average interest rates paid on new deposits by a sample of District commercial banks.




Year Ago
March 1984
7.52%
8.52
9.78
10.08
10.30


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102