The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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.