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Banking & Finance
AN EIGHTH DISTRICT PERSPECTIVE
FALL 1987

Midyear Review of Large Bank Performance
An initial review of first half 1987 banking data suggests
a deterioration in the performance of large Eighth District
banks.1 Large banks, as defined in this article, have assets
between $1 and $10 billion. As of June 1987, there were 13
District banks in this asset range: three in Kentucky, two
in Mississippi, five in Missouri and three in Tennessee.
Further analysis reveals, however, that poor earnings at
two Missouri banks contributed heavily to the decline in
District performance. The reason for lower earnings in both
the District and the banking system as a whole was the
decision of many large banks to reserve earnings as a buffer
against potential losses on loans to developing countries.
Increased loan loss provision levels for Latin American debt
resulted in second quarter losses for many of the larger
banks. Nationally, second quarter earnings were the worst
in U.S. banking history.

Earnings

Brazilian debt into nonperforming status. Influenced by this
Latin American debt exposure, annualized 1987 ROAs for
large District banks declined to 0.45 percent. As shown in
Table 1, this marks a considerable reduction when compared
to last year’s 0.98 percent ROA; however, the District ROA
is identical to the national average. Annualized ROE also
declined, falling to 6.94 percent from 14.59 percent at yearend 1986.
Aggregate District profitability was severely weakened by
negative earnings at two large St. Louis banks. Table 2
suggests that the Missouri profit decline is the direct result
of increases in the provision for loan loss as these two
organizations followed the lead of several multi-national
banks in reserving for Latin American loans. The special
provision at these two banks totaled $95 million, or 26
percent of the District’s total loss provision, which was $364
million in the second quarter. In last year’s second quarter,
the Districtwide loan loss provision was $256 million.
Discounting the effects of the Brazilian debt situation at these
two banks, Eighth District banks earned an average
annualized ROA of 0.82 percent and a 12.36 percent ROE.
Also indicated in Table 2 is the percent of loan loss reserves
to total loans. When banks write off bad loans, they charge
their loan loss reserves, not earnings. Charge-offs affect
earnings only to the extent that banks provide enough funds
for their reserves to offset the charge-offs. Increased allocations
to loan loss reserves were reported by most District states.
At the District level, loan loss reserves to total loans averaged
1.94 percent at midyear, with the level of
reserves increasing 43 percent since year-end.
Nationally, reserves as a percent of total loans
rose from 1.46 percent to 1.85 percent.

Two key measures of evaluating bank earnings and
managerial performance are the return on average assets
(ROA) ratio and the return on equity (ROE) ratio. The ROA
ratio, calculated by dividing a bank’s net income after taxes
by its average assets, gauges how well a bank’s management
is employing its assets. The ROE ratio, obtained by dividing
a bank’s net income by its equity capital, indicates the return
on the shareholders’ investment.
Recognition of a deterioration in the quality of Latin
American debt has reduced aggregate earnings
(and therefore, returns on assets and equity)
at District banks. During the first quarter of
1987, Brazil declared a temporary moratorium
on its intermediate- and long-term debt
THE
payments, forcing many of the larger banks
FEDERAL
to move substantial portions of their
RLSIRM
The Eighth District includes the state of Arkansas and
portions of Illinois, Indiana, Kentucky, Mississippi, Missouri
and Tennessee.




BANK of
ST.IXH iS

Asset Quality
Asset quality is a primary factor influencing
the banking industry’s earnings pattern. One
measure of asset quality, the nonperforming

FALL 1987

FEDERAL RESERVE BANK OF ST. LOUIS

loan rate, indicates the percentage of problem loans as well
as the potential for future loan losses. Problem loans include
the following: loans more than 89 days past due, nonaccrual
loans and renegotiated loans.
Nonperforming loans at large District banks had shown
signs of improvement in recent years; however, during the
first six months of 1987, the level of nonaccrual loans rose
sharply as a result of the debt problems of developing
countries. As shown in Table 3, nonperforming loans to total
loans at large District banks increased to 2.43 percent at
midyear versus 1.81 percent at year-end. Nonperforming loan
levels increased significantly in Missouri, rising from 1.71
percent in December 1986 to 3.06 percent in June. Future
developments in loans to developing countries will continue
to play an important role in large bank profitability for the
second half of 1987.
—Lynn M. Barry

Table 2
Loan Loss Provision and Loan Loss Reserve
at Large Banks
6/1987'

12/1986

12/1985

0 .9 8 %

0.67%

0.56%

0.46

0.43

K en tu ck y

1.10
0.73

0.37

0.33

M ississip p i
M is so u ri

0 .3 6
1.72

T en n e sse e

0.66

Loan Loss Provision2
U n ite d S tates
E ig h th D istric t

1.85%
1.94

U n ite d S tates
E ig h th D istric t
K en tu ck y

1.62
1.54
2 .5 0
1.47

T en n e sse e

6/19871

12/1986

12/1985

N .A .
0.38

1.46%
1.40
1.40

1.35%
1.41

0.60

Loan Loss Reserve3

M is sissip p i
M isso u ri

Table 1
Return on Average Assets and Return on
Equity at Large Banks

0 .5 0
0.55
0.41

1.45

1.63

N .A .

1.45
1.27

1.40
1.37

'Annualized
A s a percent of average assets
A s a percent of total loans
Source: FDIC Reports of Condition and Income for insured commercial banks.

Return on Average Assets
0.46%

0.74%

0.85%

0.45

0.9 8

K entucky
M ississip p i
M isso u ri

0.78
0 .9 6

1.07
1.33

0.87
1.04
N .A .

0.03

0.9 3

T ennessee

0.68

0.91

0.79
0.80

U n ited S tates
E ighth D istric t

Table 3
Nonperforming Loans as a Percent of Total
Loans

Return on Equity
U n ited S tates

7.41 %

11.65%

13.49%

E ighth D istric t

6 .9 4

13.47

K entucky
M ississip p i
M isso u ri

12.01

14.59
16.97

T ennessee

13.10
0.43
10.42

13.75
13.55
14.14

16.12
N .A .
11.94
12.85

6/1987

12/1986

12/1985

U n ite d S tates

2 .5 1 %

2 .0 6 %

2 .2 4 %

E ig h th D istric t

2.43

1.81

2.19

K en tu ck y

2 .4 6

2.01

1.68

M ississip p i

1.66

2.14

N .A .

M isso u ri

3.06
1.53

1.71
1.67

2.51
2 .40

T en n essee
'Annualized
Source: FDIC Reports of Condition and Income for insured commercial banks.

Source: FDIC Reports of Condition and Income for insured commercial banks.

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.
2




FEDERAL RESERVE BANK OF ST. LOUIS

FALL 1987

EIGHTH DISTRICT BANKING DATA

LARGE WEEKLY REPORTING BANKS*1
Rates of Change
L evel
111/1987
($ m illio n s)

C urren t
Q u arter

C u rre n t
Year

11/1987111/1987

111/1986111/1987

S a m e P erio d s
P re v io u s Y e a r
11/1986111/1986

111/1985111/1986

S e le c t e d A s s e ts & L ia b ilit ie s
T otal Loans & Leases
C o m m e rc ia l Loans
C o n s u m e r Loans
R eal E state Loans
Loans to F in a n cia l In s titu tio n s
A ll O th e r Loans
T otal S e c u ritie s
U .S. T re a s u ry & A g e n c y S e cu ritie s
O th e r S e c u ritie s
T otal D eposits
N o n -T ra n sa ctio n B a la n ce s
MMDAs
$ 1 0 0 ,0 0 0 C D s
D e m a n d D e p o sits
O th e r T ra n s a c tio n B a la n c e s 2

2 .8 %
-2 .4
9.1
27.5
-5 2 .5
-1 0 .0

9 .7 %
8.6
15.8
2 4 .7
-2 1 .3
-9 .2

4,6 6 0
3,2 0 0
1,461

-2 .1
-1 .1
-4 .3

13.6
29 .0
-9 .9

13.0
32.9
-1 0 .7

2.0
-1 .6
8.0

22,591
14,059
2,7 3 8
4,4 9 2
6,050
2,481

1.3
10.4

7.3
8.2
2.9
19.0
0.4
22 .3

5.8
1.9
19.2
-9 .4
9.6
21.6

5.9
3.0
19.6
-1 .0
9.7
20.3

$ 1 9 ,6 4 0
6,4 2 9
4,8 1 2
5,2 2 2
879
2,2 9 6

-2 1 .6
38.1
-1 6 .7
1.9

9 .7 %
5.1
17.2
9.0
10.6
10.3

1 3 .3 %
-0 .2
18.7
19.3
121.8
-0 .4

EIGHTH DISTRICT INTEREST RATES3

Sept 1987_______Aug 1987______ July 1987
NOW s
MMDAs
T im e C D S
92 — 182 days
1 — 2 1/2 years
2 1/2 ye a rs and o ve r

Sept 1986

5 .0 4 %
5.38

5 .0 3 %
5.32

5 .0 3 %
5.31

5 .2 1 %
5.48

6.36
7.03
7.59

6.03
6.67

5 .9 0
6 .5 7
7.06

5.71
6.40
6 .7 7

7.20

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.
„




BANK PERFORMANCE RATIOS1
E ig h t h D i s t r i c t
11/87

11/86

U n it e d S t a t e s
11/85

11/87

11/86

11/85

R e tu rn on A v e ra g e A s s e ts
(a n n u a liz e d )

< $ 1 0 0 m illio n
$100 — $300 m illio n
$300 m illio n — $1 b illio n
> $ 1 b illio n

1.00%
.97
.97
.45

1.09%
1.04
.89
1.02

1 .0 6 %
1.05
.23
.87

.6 7 %
.80
.57
-.9 1

.7 5 %
.92
.79
.60

.8 9 %
.93
.85
.63

R e tu rn on A v e ra g e E q u ity
(a n n u a liz e d )

< $ 1 0 0 m illio n
$100 — $300 m illio n
$300 m illio n — $1 b illio n
> $ 1 b illio n

11.23
12.16
12.34
6.94

12.32
12.95
11.68
15.19

12.17
13.63
2.96
13.75

7.71
10.43
7.93
-1 7 .9 7

8.66
12.16
11.21
10.59

10.15
12.37
12.26
12.09

55.61
64.66
67.92
83.47

55.16
62.64
68.61
79.54

5 6.26
6 4.27
66.50
82.81

58.4 0
64.81
74.39
85.95

58.6 2
64.39
72.54
86.51

60.61
65.49
7 2.72
8 5.86

2.52
2.15
2.15
2.43

3.00
2.31
2.65
2.02

3.05
2.19
2 .6 6
2.49

3.08
2.50
2.53
4.15

3.40
2.66
2.53
2.91

3.17
2.55
2.23
3.25

1.51
1.38
1.44
1.94

1.38
1.30
1.38
1.44

1.23
1.10
1.35
1.45

1.63
1.52
1.65
3.14

1.48
1.37
1.47
1.65

1.24
1.24
1.24
1.35

.30
.31
.33
.30

.38
.32
.28
.27

.43
.24
.31
.24

.47
.35
.40
.37

.57
.38
.37
.39

.45
.32
.25
.30

L o a n s as P e rc e n t of D e p o s its

< $ 1 0 0 m illio n
$ 100 — $ 300 m illio n
$ 300 m illio n — $1 b illio n
> $ 1 b illio n
N o n p e rfo rm in g L o a n s as P e rc e n t
o f T o ta l L o a n s 2

< $ 1 0 0 m illio n
$ 1 0 0 — $300 m illio n
$ 3 0 0 m illio n — $1 b illio n
> $ 1 b illio n
L o a n Loss R e s e rv e s as P e rc e n t
o f T o ta l L o a n s

< $ 1 0 0 m illio n
$ 1 0 0 — $ 3 0 0 m illio n
$ 3 0 0 m illio n — $1 b illio n
> $ 1 b illio n
N e t L o a n L o s se s as P e rc e n t
o f T o ta l L o a n s

< $ 1 0 0 m illio n
$ 1 0 0 — $ 3 0 0 m illio n
$ 3 0 0 m illio n — $1 b illio n
> $ 1 b illio n

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