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Banking & Finance
AN EIGHTH DISTRICT PERSPECTIVE
SUMMER 1985

Real Problems in Real Estate?
Much concern has been voiced recently about the health
of banks and thrift institutions due to an alleged rise in the
riskiness of their real estate loan portfolios. The increased
risk is attributed popularly to a wide range of economic fac­
tors which includes overly ambitious lending programs,
lower-than-anticipated rates of property appreciation, the
use of variable rate mortgages, as well as various aspects
of both fiscal and monetary policy.
This issue examines the real estate lending activities of
Eighth District banks. The growth rates of residential and
nonresidential real estate loans over the past five years are
highlighted and broken down to permit analysis of real estate
lending trends in the District’s four major metropolitan
statistical areas (MSAs): Little Rock, Louisville, Memphis
and St. Louis. Comparisons with U.S. data are also
indicated. Data on loan delinquencies and past due loans
do not support the preceding allegations about real estate
loans and bank profitability. While the data indicate that
real estate loan losses have risen slightly at banks, the
evidence does not suggest that bank problems in the Eighth
District can be attributed to real estate lending difficulties.

Table 1
Real Estate Loans Outstanding as of March 31
(Growth Rates from the Previous Year)

T o ta l R ea l E sta te L o a n s
R e sid en tia l
N o n r e sid en tia l

1984

1 2.4%

11 .7 %

5 .2 %

8 .4 %

7 .5

7 .7

1 .5

6 .3

1 8 .5

1 6 .5

9 .9

1 1 .0

2 .2

1983

1982

District
T o ta l R ea l E sta te L o a n s

1 4 .4

1 2 .6

4 .3

R e sid en tia l

1 1 .9

1 0 .9

5 .5

3 .7

N o n r e sid en tia l

1 7 .4

1 4 .8

2 .8

0 .5

1 0 .7

2 4 .7

4 9 .6

-4 .5

8 .8

3 .1

1 2 8 .6

-1 5 .2

1 2 .4

5 3 .6

2 .2

3 .4

0 .3

Little Rock
T o ta l R ea l E sta te L o a n s
R e sid en tia l
N o n r e sid e n tia l

Louisville
T o ta l R ea l E sta te L o a n s

2 1 .4

1 7 .8

-2 .5

R e sid en tia l

1 1 .7

1 8 .2

-5 .0

2 .0

N o n r e sid en tia l

3 0 .6

1 7 .4

0 .1

-1 .3

M em phis
T o ta l R ea l E sta te L o a n s

Growth in Real Estate Lending 1981-85

1985
U .S .

3 1 .4

3 5 .1

4 .4

2 .5

R e sid en tia l

1 0 .8

3 8 .8

-1 .9

5 .8

N o n r e sid e n tia l

5 2 .8

3 1 .6

1 1 .5

-0 .9

St. Louis
Data from banks’ first-quarter 1985 Reports of Condition
T o ta l R ea l E sta te L o a n s
1 6 .8
5 .2
-1 3 .2
3 .3
indicate that real estate loans constituted 35 percent of all
R e sid en tia l
1 1 .4
6 .8
-1 6 .8
3 .3
bank loans in the Eighth District as compared to 30 per­
N o n r e sid e n tia l
2 3 .9
- 8 .0
3 .0
2 .6
cent for the national average. Over the 1981-85 period, real
estate loans in the U.S. and the Eighth District grew at rates
of 9.4 percent and 8.3 percent, respectively. Within the
over the past five years, although this trend is less clear
major MSAs of the District, annual growth over the past
at the MSA level. The acceleration also is shown to have
five years has been as rapid as 18.5 percent in Little Rock
been the result of an expansion in nonresidential lending,
and as slow as 2.5 percent in St. Louis. Memphis also posted
which has generally been more rapid than the expansion of
a rapid growth in real estate lending over the
residential real estate lending.
past five years with a rate of 17.4 percent,
Past-Due Real Estate Loans
while Louisville was near the national
average with an 8.8 percent rate. Table 1
Data on the volume of real estate loans con­
displays annual growth rates for real estate
THE
sidered past due by banks are available for the
FEDERAL
loans and divides them into residential or
last three years. If the initial suppositions of
RESERVE
nonresidential categories. It shows that at
HANK of
increasing problems with real estate loans were
ST. m u s
both national and District levels, real estate
true, one would expect this to be corroborated
loan growth has been steadily accelerating
by rising levels of real estate loans past due.




SUMMER 1985

FEDERAL RESERVE BANK OF ST. LOUIS

TABLE 3
Percentage of Real Estate Loans
Classified as Renegotiated “ Troubled” Debt
on March 31 at Banks Larger than $100 million of Total Assets

TABLE 2
Percentage of Real Estate Loans
Classified as Past Due on March 31

1985
U.S.
District
Little Rock
Louisville
Memphis
St. Louis

3.3%
3.4
3.7
2.4
2.8
2.2

1984
3.5%
3.7
4.3
2.5
2.5
2.8

1983
4.3%
4.0
4.6
3.6
3.6
2.9

1985
U.S.
District
Little Rock
Louisville
Memphis
St. Louis

1.9%
1.6
3.4
1.7
2.3
1.3

1983

1984
2.0%
1.7
2.3
3.1
2.7
1.5

'

2.7%
2.3
2.5
3.7
4.9
2.5

The data in table 2, however, tell the opposite story, as the
percentages of real estate loans considered past due have
fallen at the national, District and MSA levels.

been quite small on an absolute level. They have increased,
however, from .03 percent of real estate loans outstanding
in first quarter 1984 to .04 percent in first quarter 1985 in
the U .S., and from .05 percent to .06 percent in the District.

Problem Real Estate Loans

Problem Banks and Real Estate Lending

In addition to past due loans, banks with total assets
greater than $100 million are required to report those real
estate loans considered to be either in nonaccrual or in
renegotiated “ troubled” debt status. These loans are refer­
red to here as “ problem loans.” Table 3 also shows that
the alleged real estate lending problems are not borne out
by the data. The proportion of problem real estate loans
has steadily decreased in the nation, in the District and in
all but one MSA.

One further way of testing the assertion that real estate
lending difficulties contribute to poor bank performance is
by examining those banks currently experiencing stress. If
real estate loan losses represent a higher proportion of total
loan losses at problem banks than at banks experiencing
more normal conditions, real estate loans could be im­
plicated as important factors in banks’ deteriorating health.
A problem bank, for the purpose of this study, is defined
as one with a volume of past due and problem loans greater
than the volume of its capital and loan loss reserves. Real
estate loan losses of problem banks were compared with
the loan loss experiences of “ normal” banks, i.e., those
at which past due and delinquent loans were less than half
of the bank’s volume of capital and loan loss reserves.
At the national level, real estate loan losses accounted
for 12.7 percent of total losses at problem banks vs. 9.9
percent at normal banks. At the District level, however,
real estate loan losses accounted for a smaller proportion
of total losses (15.6 percent) at problem banks than at nor­
mal banks (17.6 percent). These data indicate that, while
at the national level real estate loans may have contributed
to banks’ difficulties, albeit to a relatively minor extent,
Eighth District banks do not appear to have been disproportionally affected by real estate lending problems.

Real Estate Loan Losses
Detained reports of loan losses by loan purpose, such as
real estate lending, are available only for the five most recent
quarters, which permits a year-over-year comparison for
the first quarters of 1984 and 1985. One limitation to us­
ing first-quarter data from income statements as opposed
to balance sheet data is that a bank’s performance over one
quarter may not be representative of its performance over
the entire year. This data problem is lessened as the number
of banks sampled increases. This suggests that loan loss data
for the nation and for the District would be more accurate
than for the individual MSAs in which relatively small
numbers of banks are located. With this in mind, real estate
loan losses expressed as a percentage of real estate loans
outstanding indicate that losses on real estate loans have

—Kenneth C. Carraro

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.
2



FEDERAL RESERVE BANK OF ST. LOUIS

SUMMER 1985

EIGHTH DISTRICT BANKING DATA

LARGE WEEKLY REPORTING BANKS1
Rates of Change
L evel

C u rren t
Q u a rte r

C u rre n t
Year

11/1985
($ m illio n s)

1/198511/1985

11/198411/1985

S a m e P e rio d s
P rev io u s Y e a r
1/198411/1984

11/198311/1984

S e le c t e d A s s e t s & L ia b ilit ie s

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

15.1%
22.0
10.6
10.8
41.2
- 4 .5

16.1%
8.4
19.6
10.2
3.5
80.4

7.1%
3.0
29.8
2.4
-3 5 .8
22.4

12.7%
8.0
19.7
10.7
-1 1 .0
35.7

3,458
2,025
1,431

23.5
33.2
11.4

2.5
- 3 .3
12.1

2.0
- 2 .9
10.8

NA
NA
NA

17,272
10,842
2,124
3,730
5,030
1,403

2.9
2.5
-5 .1
- 3 .6
1.4
11.8

6.7
10.0
10.1
8.9
- 1 .2
13.0

7.8
14.7
-0 .1
31.6
- 2 .9
2.1

8.1
NA
4.0
18.6
2.2
NA

$14,286
5,268
3,044
2,973
930
2,071

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

SMALL WEEKLY REPORTING BANKS1
Rates of Change
Level
11/1985
($ m illions)

C u rre n t
Q u a rte r
1/198511/1985

C u rre n t
Year
11/198411/1985

P rev io u s
Y ear
1/198411/1984

S e le c t e d A s s e t s & L ia b ilit ie s

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

$4,496
1,451
912
1,784
349

10.6%
0.7
6.2
18.0
31.3

11.0%
4.0
15.5
18.5
- 2 .7

18 .50/0
21.4
18.8
16.7
14.1

1,712

7.8

4.5

15.4

651

-9 .1

- 2 .0

- 5 .4

7,025

12.9

8.6

8.1

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 as of January 1984.




3

EIGHTH DISTRICT BANKING DATA
Bank Performance Ratios1
RATIOS

1/1985

1/1984

1/1983

Loans to Deposits
Large Banks4
Small Banks5

79.93%
59.37

77.08%
58.41

72.65%
57.18

1.49
1.14

1.39
1.08

1.48
1.03

3.92
5.29

4.84
5.00

6.61
4.94

0.13
0.14

0.10

0.10

0.08

0.08

April 1985

Year Ago
June 1984

Loan Loss Reserves to Total Loans
Large Banks
Small Banks

Delinquent Loans to Total Loans
Large Banks
Small Banks

Net Loan Losses to Total Loans
Large Banks
Small Banks

EIGHTH DISTRICT INTEREST RATES6

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

May 1985

6.07%
6.89

6.36%
7.20

6.63%
7.53

7.45
8.30

7.74
8.65
8.95

8.27
9.13
9.40

8.66

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




7.54%
8.65
10.37

10.68
10.82

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