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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