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Banking & Finance
AN EIGHTH DISTRICT PERSPECTIVE
SPRING 1986

Eighth District Bank Performance in 1985
For many Eighth District banks, 1985 was a strong year
for reported earnings, as the positive impact of lower interest
rates and profitable investment decisions more than offset
the negative effects of steadily increasing loan losses. For
some Eighth District banks, however, 1985 was characterized
by loan problems that depressed earnings as well as return
on assets. This article examines the recent Eighth District
banking experience and highlights profitability distinctions
among District states.

banks primarily accounts for the declining returns on assets
and equity. Banks in Kentucky and Mississippi, on the other
hand, outranked the other District states, posting the highest
returns on assets and equity.

Asset Quality

Because the quality of an institution’s assets eventually
is reflected in its earnings stream, the composition of the
asset portfolio is an indicator of the future earnings of an
organization.
Asset quality is sensitive to both national and
Earnings
international conditions and particular regional trends that
affect the quality of a bank’s loan portfolio. As the financial
In assessing earnings performance, both the size and the
composition of items in a bank’s portfolio must be appraised.
strength of certain borrowers deteriorates, their ability to
The quantitative aspect of earnings is evaluated through an
satisfy loan obligations is impaired.
analysis of a bank’s return on assets (ROA) and return on
Changes in asset quality can be monitored by two
shareholders’ equity (ROE). The ROA ratio, calculated by
indicators. The first, loan loss rates, have direct impact on
dividing a bank’s net income by its assets, gauges how well
bank profitability since they represent actual charge-offs
a bank’s management is employing its assets. The ROE ratio,
against income. As loan loss rates rise, banks increase their
obtained by dividing a bank’s net income by its total equity
loan loss provision account, thereby reducing profitability.
The second indicator, loan delinquency (nonperforming)
capital, indicates to shareholders the earnings on their
investment.
rates, indicate the potential for loan losses and, therefore,
provide a rough indication of future losses.
As indicated in table 1 on the next page, Eighth District
banks earned a 0.89 percent ROA and an 11.05 percent ROE
Credit or loan quality, as measured by the loan loss ratio,
in 1985, compared with 1984 averages of 0.87 percent and
deteriorated during 1985. As indicated in table 2, data for
the Eighth District and individual states reveal increases in
10.93 percent, respectively. The higher profitability ratios
are due, in large measure, to a wider spread between interest
the ratio of loan losses to total loans. Illinois banks, with
income and interest expense. With a decline in interest
the agricultural loan problems experienced during 1985,
expense as a percent of bank assets, net interest margins
posted a significant increase in their average loan loss ratio.
improved. In general, banks benefit from periods of declining
Nonperforming loans as a percent of total loans increased
interest rates because their cost of funds declines more
slightly at the District level during 1985. Arkansas, Illinois
rapidly than the interest rates they charge
and M ississippi experienced rising
borrowers.
delinquency rates in 1985. The remaining
Returns on assets and on equity were up
District states saw lower nonperforming loan
in all Eighth District states except Illinois,
ratios last year and, as a result, may realize
where lower reported earnings by banks with
THE
lower loan loss rates in 1986.
FEDERAL
less than $100 million in assets, hampered
Because of deteriorating average loan
RESERVE
BANK of
the profitability ratios. It should be noted,
quality experienced during the past several
ST. I X H IS
however, that only banks in southern Illinois
years, most banks in the Eighth District have
are within the Eighth District’s borders so
increased their loan loss reserves as a share
of their total loans. This action has been taken
that the performance of small agricultural



SPRING 1986

FEDERAL RESERVE BANK

as a precautionary measure to absorb potential future loan
losses. As a percent of total loans, Eighth District banks’
loan loss reserves increased from 1.20 percent in 1984 to
1.30 percent in 1985.

Summary

data generally point to improved average performance.
Returns on assets and equity increased in 1985 in most
District states. In terms of returns on assets and equity,
Kentucky and Mississippi posted the highest ratios for the
seven states examined. Reported earnings were retarded
somewhat, however, by larger provisions for loan losses.

While some Eighth District banks continue to experience
a variety of difficulties, such as rising loan loss rates, state

—Lynn M. Barry

Table 1
Percentage Returns on Assets and Equity at Insured Commercial Banks (by state)
Return on Assets

Eighth District
Arkansas1
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

Return on Equity

1984

1985

1984

0.87%
0.78
0.89
0.93
1.04
1.01
0.84
0.73

0.89%
0.85
0.77
0.98
1.12
1.21
0.90
0.90

10.93%
9.55
10.43
10.87
12.35
12.28
11.07
10.27

1985
11.05%
10.29
9.06
11.22
13.37
14.41
11.72
12.77

1 Certain 1985 ratios for Arkansas have been adjusted to negate the effects of substantial losses which occurred when a now defunct government
securities group was unable to honor obligations of a large commercial bank. The unadjusted 1985 ratios for Arkansas are as follows:
Return on Assets
0.52%
Return on Equity
6.36
SOURCE: Federal Deposit Insurance Corporation, “ Consolidated Reports of Condition and Income for Insured Commercial Banks,” 1984-85.

Table 2
Indicators of Asset Quality at Insured Commercial Banks (by state)
Net Loan Loss -r
Total Loans

Eighth District
Arkansas1
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

Nonperforming Loans -r
Total Loans

Loan Loss ReservedTotal Loans

1984

1985

1984

1985

1984

1985

0.60%
0.69
0.80
0.51
0.52
0.75
0.53
0.61

0.88%
0.97
1.55
0.79
0.66
0.89
0.69
0.93

2.49%
2.57
2.88
2.05
2.35
1.89
2.42
2.99

2.50%
3.30
3.19
1.78
2.06
2.02
2.35
2.47

1.20%
1.10
1.04
1.11
1.37
1.11
1.25
1.23

1.30%
1.40
1.23
1.15
1.34
1.28
1.27
1.31

1 Loan losses for Arkansas in 1985 have been adjusted to negate the effects of substantial losses which occurred when a now defunct government
securities group was unable to honor obligations of a large commercial bank. The 1985 unadjusted loan loss ratio for Arkansas is 1.05 percent.
SOURCE: Federal Deposit Insurance Corporation, “ Consolidated Reports of Condition and Income for Insured Commercial Banks,” 1984-85.
Banking & Finance—An Eighth District Perspective is a quarterly summary of banking & 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.
Digitized for2 FRASER


FEDERAL RESERVE BANK OF ST. LOUIS

SPRING 1986

EIGHTH DISTRICT BANKING DATA

LARGE WEEKLY REPORTING BANKS1
Rates of Change
Level

Current
Quarter

Current
Year

1/1986
($ millions)

IV/19851/1986

1/19851/1986

Sam e Periods
Previous Year
IV /19841/1985

1/19841/1985

S e le c te d A s s e ts & L ia b ilitie s

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

$16,028
5,434
3,749
3,570
796
2,479

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

9.7%
6.6
15.8
13.9
-3 8 .8
25.0

7.8o/o
0.3
22.7
7.0
-2 3 .4
22.8

19.3o/o
8.6
24.1
14.5
-1 5 .4
90.3

13.8o/o
12.2
13.8
11.3
8.4
26.5

3,836
2,113
1,721

6.7
-1 6 .2
46.9

5.6
- 3 .8
19.9

3.5
- 4 .7
17.8

- 2 .0
- 9 .3
11.6

18,905
11,765
2,442
3,718
5,393
1,733

-0 .8
1.2
29.6
- 1 .3
- 7 .4
21.9

2.7
0.8
13.5
- 4 .4
2.7
16.1

4.1
6.6
32.1
4.3
- 5 .7
22.8

7.4
12.0
11.4
17.0
- 2 .2
9.4

SMALL WEEKLY REPORTING BANKS3
Rates of Change
Level
1/1986
($ millions)

Current
Q uarter
IV /19851/1986

Current
Year
1/19851/1986

Previous
Year
IV /19841/1985

S e le c te d A s s e ts & L ia b ilitie s

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

$5,060
1,509
1,001
2,077
473

O.70/0
- 5 .5
-1 3 .4
8.1
25.8

4.4%
- 3 .2
- 0 .4
8.4
29.1

8.2%
9.5
10.3
8.2
- 2 .2

1,951

- 3 .0

- 0 .6

13.3

742

22.5

8.4

3.0

7,671

-2 3 .3

- 0 .2

10.2

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 1985. These adjustment factors, which are
computed each year, are used to construct a consistent time series for which year-to-year growth rates can be calculated. Adjustment factors are available
upon request from the Statistics Section of the Research and Public Information Department. 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 Ratios
RATIOS

IV/1985

IV/1984

IV/1983

77.32%
58.55

73.82%
59.11

66.02%
57.10

1.45
1.22

1.39
1.12

1.48
1.04

3.80
5.13

3.87
4.95

5.21
4.68

0.64
1.03

0.42
0.70

0.43
0.68

January 1986

Year Ago
March 1985

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 Loan Losses to Total Loans
Large Banks
Small Banks

EIGHTH DISTRICT INTEREST RATES6
March 1986
Super NOWs
MMDAs
Time CDS
92 — 182 days
1 — 2 1/2 years
2 1/2 years and over

February 1986

5.52%
6.53

5.70%
6.83

5.72%
6.85

6.89%
7.76

6.96
7.65
7.99

7.30
8.08
8.43

7.32
8.10
8.49

8.79
9.50
9.77

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.




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