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Banking & Finance
AN EIGHTH DISTRICT PERSPECTIVE
SU M M ER 1987

Recent Loan Quality Changes at District Banks
The quality of bank loan portfolios has become a hot topic
in banking circles. With loan losses rising at many
commercial banks over the past few years, investors and
regulators alike are placing added focus on asset quality when
assessing the health of the banking industry. Mounting loan
losses have decreased the average profitability of the industry,
increased loan loss reserve levels, and contributed to the
rising number of bank failures. This experience holds true
for Eighth District banks as well; however, there is some
recent indication that the average loan quality of banks in
the District may be improving. This article examines loan
losses and overall loan quality at District banks, comparing
the performance of different loan types.

Loan Losses
The most direct measure of a bank’s loan problems is
the percent of loans charged-off during the year. The ratio
of net charge-offs (adjusted for recoveries) to total loans is
a traditional measure of loan quality, showing the percentage
of loans actually written off as losses.
The average charge-off rate at banks in the United States
and the Eighth District has risen in recent years. Nationally,
the average ratio of net loan losses to total loans has risen
from 0.72 percent in 1984 to 0.93 percent in 1986. In the
District, the average charge-off ratio at year-end 1984 was
0.60 percent compared with 0.87 percent in 1986.
Table 1 on the following page shows the distribution of
total loan loss by type of loan. As indicated, for both the
nation and the District, commercial loan losses constitute
the greatest percent of overall loan loss.
Farm-related charge-offs accounted for 16.30
percent of District losses in 1986, down from
their 1985 levels.
Chart 1 on the next page compares loss
rates for specific loan types. As one can see
from the chart, the loss rate was highest for
District banks’ agricultural loans, with
commercial loans a close second. As a
percent of total agricultural loans outstanding,
3.79 percent were charged-off in 1986 while



2.04 percent of commercial loans were classified as a loss.

Nonperforming Loans
Another measure of the severity of a bank’s loan problems
and potential for future loan losses is the percent of
nonperforming loans. Nonperforming or problem loans
include the following components: loans 90 days or more
past due, nonaccrual loans and renegotiated loans.
Nonaccrual loans are those with scheduled payments due
and unpaid for more than 90 days, and for which full payment
of interest or principal is unlikely. After a loan reaches
nonaccrual status, the decision to charge it off on a bank’s
balance sheet depends on how well-secured the loan is, the
extent to which scheduled payments are being met, and the
future prospects for repayment. Banks have some discretion
in making these judgements. Typically there is a flurry of
charge-off activity at year-end, when the year’s earnings
picture is nearly complete and banks are concerned with
their tax liability. Renegotiated loans have been restructured
to provide a reduction of either interest or principal to
facilitate payment. Insofar as a bank’s own information on
its loans is good, and its reporting accurate, we may expect
that the percent level of problem loans will give us some
indication of future levels of charge-offs.
Nonperforming loans in Eighth District states decreased
from 2.50 percent of total loans in 1984 to 2.17 percent
at year-end 1986. Nationally, nonperforming loans
also declined, falling from 3.05 percent in 1984 to 2.77
percent in 1986.
Table 2 on the next page shows the
distribution of total nonperforming loans by
type of loan. As indicated, commercial and
real estate loans contribute the greatest
percentage to overall nonperforming loans at
both the national and District levels. In 1986,
farm-related nonperforming loans constitute
9.91 percent of all nonperforming loans in
the District, more than double that of the
nation, indicating the region’s exposure in
agricultural lending.

SUMMER 1987

FEDERAL RESERVE BANK OF ST. LOUIS
Chart 1
LOAN LOSSES
as a Percentage ot Total Loans by Category
Eighth District

Table 1
Distribution of Loan Losses
1986

1985

1984

7.72%
54.48
26.32
11.76

10.40%
60.29
22.82
8.63

8.35%
68.34
15.80
8.18

16.30
60.31
18.71
16.94

19.46
64.93
14.05
18.08

16.91
66.85
13.85
17.00

UNITED STATES
A griculture
C om m ercial
C onsum er
R eal estate

DISTRICT
A griculture
C om m ercial
C onsum er
R eal estate
SOURCE:

NOTE:

Federal Deposit Insurance Corporation, “ Consolidated Reports o f
Condition and Income for Insured Commercial Banks,” 1984-1986

Chart 2
NONPERFORMING LOANS
as a Percentage of Total Loans by Category
Eighth District

Percentages may sum to greater than 100 because agricultural loans are
included in other categories as well.
Percent

Percent

Table 2
Distribution of Nonperforming Loans1
December 1986

December 1985

UNITED STATES
A griculture
C om m ercial
C onsum er
Foreign
R eal estate

4.20%
41.15
17.57
28.68

5.57%
41.26
6.55
20.67
24.89

9.91
47.98
8.43
1.78
38.33

11.23
47.85
7.63
3.45
37.92

6 .8 8

DISTRICT
A griculture
C om m ercial
C onsum er
F oreign
R eal estate

'Consistent reporting o f data was not available until 1985.
SOURCE:

Federal Deposit Insurance Corporation, “ Consolidated Reports of
Condition and Income for Insured Commercial Banks,” 1985-1986

NOTE:

Percentages may sum to greater than 100 because agricultural loans
are included in other categories as well.

Chart 2 compares nonperforming loans by category for
the Eighth District. Nonperforming agricultural loans as a
percent of total agricultural loans was 5.73 percent in 1986,
followed by nonperforming commercial loans at 4.03 percent.

Loan Loss Reserves
Because of deteriorating asset quality during the past
several years, banks in the Eighth District and across the
nation have increased their allowance for loan losses as a
share of their total loans outstanding. This action has been
taken as a precautionary measure to absorb expected future
loan losses. As a percent of total loans, Eighth District banks’
loan loss reserve increased from 1.20 percent at year-end
1984 to 1.41 percent in 1986, while nationally this ratio rose
from 1.24 percent to 1.63 percent. In a fundamental sense,
this reserve protection against problem loans can be
considered more important to balance-sheet strength than
the degree of asset quality alone, and should provide
investors, regulators and the general public with an extra
measure of security.
—Lynn M. Barry

Banking & Finance—An Eighth District Perspective is a quarterly summary o f banking & finance conditions in the area served
by the Federal Reserve Bank o f St. Louis. Single subscriptions are available free o f charge by writing: Research and Public
Information Department, Federal Reserve Bank o f St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are
not necessarily official positions o f the Federal Reserve System.
2




FEDERAL RESERVE BANK OF ST. LOUIS

SUMMER 1987

EIGHTH DISTRICT BANKING DATA
LARGE WEEKLY REPORTING BANKS*
1
Rates of Change
Level
11/1987
($ millions)

Current
Quarter
1/198711/1987

Current
Year
11/198611/1987

Same Periods
Previous Year
JOa§611/1985W ft, H/1986
__ ^_-4r

Selected Assets & Liabilities
$ 1 9 ,5 0 7

T o ta l L oans & L e a s e s
C o m m e rc ia l L oans

6 ,4 6 8

C o n s u m e r L oans

4 ,7 0 9

R e a l E s ta te L oans

4 ,9 1 4

L oa ns to F in a n c ia l Institutions

1 ,0 5 9

All O th e r L oans

2 ,3 5 7

9 .7 %

'w

7 .4 %

1 2 .4 %

7 .6 %

9 .2

1 1 .6

2 .4

1 2 .3

1 8 .3

1 2 .0

1 8 .0

2 1 .6

2 2 .7

0 .6

- 1 4 .7

1 5 .7

4 7 .7

1.5

-6 .9

-8 .2

7 .3

5 .9
-5 .1
1 3 .6

4 ,6 8 6

1 2 .8

1 7 .8

-8 .8

-1 .7

U .S . T re a s u ry & A g e n c y S e c u ritie s

3 ,2 0 9

2 2 .6

3 8 .9

-0 .6

-8 .9

O th e r S e c u ritie s

1 ,4 7 7

-5 .2

- 1 1 .5

-1 8 .8

1 0 .5

2 2 ,5 1 9

6 .9

8 .5

9 .4

4 .2

1 3 ,7 1 5

9 .8

6 .0

5 .3

1 .5

MMDAs

2 ,9 1 0

-1 3 .4

1 4 .3

1 8 .2

1 9 .9

$ 1 0 0 ,0 0 0 C D s

T o ta l S e c u ritie s

T o ta l D e p o s its
N o n -T ra n s a c tio n B a la n c e s

-3 .1

-4 .2

4 ,1 4 4

3 0 .4

7.1

D e m a n d D e po sits

6 ,3 3 3

2.1

7 .5

1 7 .7

6 .5

O th e r T ra n s a c tio n B a la n c e s 2

2 ,4 7 0

4 .3

2 7 .9

1 7 .0

1 6 .8

EIGHTH DISTRICT INTEREST RATES3
June 1987______ May 1987_____ April 1987

June 1986

NOW s

5 .0 6 %

5 .0 4 %

5 .0 2 %

5 .3 6 %

MMDAs

5 .2 7

5 .2 5

5 .2 3

6 .0 9

9 2 — 1 8 2 d ays

5 .8 7

5 .8 9

5 .8 0

6 .4 7

1 — 2Vz y e ars

6.61

6 .5 5

6 .3 6

7 .1 4

2 V2 y e a rs an d o v e r

7 .0 8

7 .0 4

6 .9 1

7 .4 3

T im e C D S

All data are not seasonally adjusted.
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 1986. 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, ATS and accounts permitting telephone or pre-authorized transfers.
3 Average interest rates paid on new deposits by a sample of Eighth District commercial banks.




3

BANK PERFORMANCE RATIOS1
Eighth District
i/8 7

i/86

United S ta te s
I/8 5

i/8 7

i/8 6

i/8 5

Return on A verage Assets
(annualized)
< $ 1 0 0 m illion
$ 1 0 0 — $ 3 0 0 m illion
$ 3 0 0 m illion — $1 billion
> $ 1 billion

1 .0 5 %
1 .1 2
.9 2
.89

1 .2 0 %
1.08
1.09
.94

1 .1 1 %
1 .0 0
.9 3
-.2 8

.7 2 %
.8 8
.79
.7 0

.8 9 %
1.01
.8 4
.6 7

.9 2 %
.9 2
.8 9
.6 5

Return on A verage Equity
(annualized)
< $ 1 0 0 m illion
$ 1 0 0 — $ 3 0 0 m illion
$ 3 0 0 m illion — $1 billion
> $ 1 billion

1 1 .9 6
1 4 .0 5
12.01
1 3 .2 2

1 3 .6 6
1 3 .6 3
1 4 .1 3
1 4 .4 4

1 2 .8 2
1 2 .6 7
12.61
-4 .5 8

8 .4 3
1 1 .5 5
1 1 .3 4
1 2 .0 7

1 0 .2 0
1 3 .4 2
1 1 .2 5
1 1 .9 8

1 0 .5 9
1 2 .2 6
1 2 .7 2
1 2 .6 0

5 3 .7 3
6 2 .5 6
6 8 .5 4
8 1 .1 4

5 4 .6 7
6 2 .5 3
6 9 .6 5
8 0 .1 4

5 5 .2 1
6 4 .2 7
6 5 .7 1
8 2 .4 0

7 2 .2 6
6 3 .8 0
7 3 .0 7
8 6 .1 4

7 0 .5 3
6 4 .5 9
7 2 .7 8
8 6 .1 6

6 0 .2 3
6 5 .4 7
7 2 .8 1
8 5 .7 8

2.71
2 .1 7
2.41
2 .4 3

3 .2 9
2.41
2 .7 5
2 .2 3

3.11
2 .3 2
2 .4 6
2.61

3 .4 9
2 .5 6
2 .5 9
4 .2 8

4 .0 8
2 .7 6
2 .5 4
2 .9 3

3 .1 7
2 .5 3
2 .3 0
3 .2 8

1.51
1 .3 4
1 .5 3
1 .4 5

1 .3 7
1 .2 4
1 .3 4
1 .4 4

1.21
1.11
1 .1 6
1 .4 9

1 .3 0
1 .4 9
1.61
1 .7 4

1 .2 2
1 .3 6
1 .4 5
1 .5 5

1 .2 2
1 .2 3
1 .2 0
1 .2 7

.1 4
.1 3
.1 7
.15

.15
.1 6
.1 5
.15

.1 3
.1 6
.1 0
.1 3

.1 7
.1 6
.2 0
.1 8

.1 9
.1 6
.1 5
.1 8

.1 8
.1 3
.11
.1 4

Loans as Percent of Deposits
< $ 1 0 0 m illion
$ 1 0 0 — $ 3 0 0 m illion
$ 3 0 0 m illion — $1 billion
> $ 1 billion

N onperform ing Loans as Percent
of Total Loans 2
< $ 1 0 0 m illion
$ 1 0 0 — $ 3 0 0 m illion
$ 3 0 0 m illion — $1 billion
> $ 1 billion

Loan Loss R ese rve s as Percent
of Total Loans
< $ 1 0 0 m illion
$ 1 0 0 — $ 3 0 0 m illion
$ 3 0 0 m illion — $1 billion
> $ 1 billion

Net Loan Losses as Percent
of Total Loans
< $ 1 0 0 m illion
$ 1 0 0 — $ 3 0 0 m illion
$ 3 0 0 m illion — $1 billion
> $ 1 billion

1 Size range based on bank assets.
2 Includes past due greater than 89 days and nonaccrual.




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