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Banking & Finance
AN EIGHTH DISTRICT PERSPECTIVE
WINTER 1988

Margin Analysis at District Banks
In the com petitive world of com m ercial banking, the
financial success o f a bank is contingent on the
institution’s ability to m axim ize the difference between
revenue and cost. Ensuring success entails actions by bank
m anagement to generate revenue and control costs. M ore
c o n c re te ly , m a n a g e rs m ake n u m e ro u s d e c is io n s
concerning asset and liability m anagem ent, the pricing
of services and operating expenses. Two indicators of the
results of these decisions are interest and noninterest
m argins. This issue of Banking and Finance examines
these indicators for com m ercial banks in the Eighth
Federal Reserve District and throughout the United States
for the years 1986 and 1987.

Table 1
Net Interest Margin
19871
District U.S.
Aggregate
< $25 million in assets
$25-50 million
$50-100 million
$100-300 million
$300-1 billion
$1-10 billion
> $10 billion

4.08% 3.71%
4.23
4.29
4.18
4.34
4.22
4.38
4.22
4.36
4.41
4.35
3.71
4.07
N.A.
2.84

1986
District U.S.
4.05%
4.30
4.20
4.24
4.12
4.12
3.74
N.A.

3.76%
4.29
4.34
4.39
4.33
4.26
3.92
3.12

’Annualized based on data through September 1987

Net Interest Margin
An important measure of the results of asset and liability
management is the net interest margin, the difference
between interest income and interest expense as a percent
of average assets. This ratio indicates how well interestearning assets are being employed relative to interest-bearing
liabilities.
On the asset side, this includes interest income and fees
related to interest-earning assets. Examples are interest on
loans, points on loans, income on tax equivalent municipal
loans and bonds and income on U.S. government securities.
On the liability side, interest expense includes the amount
paid on all categories of interest-bearing deposits, short-term
deposit-like instruments and capital notes. In simplest terms,
net interest margin is the difference between what a bank
earned on loans and investments and what
it paid its depositors relative to average assets.
A bank is concerned not only with the
level of the net interest margin, but also with
the variability of the net interest margin over
time. With volatile interest rates, the stability
of the net interest margin indicates that the
interest sensitivity of assets and liabilities is
matched.




Source: FDIC, “Consolidated Reports of Condition and Income for Insured
Commercial Banks,” 1986-1987.

Table 1 shows the average net interest margin for
com m ercial banks on a national and regional level. For
1986 and 1987, the average aggregate net interest margin
of D istrict banks exceeds that of the nation. The average
results, however, conceal differences between asset-size
classes. U pon clo se r in spection of the asset-size
categories, banks across the nation tended to outperform
banks in the Eighth District. For five of the six categories
encom passing banks with assets less than $10 billion,
averages for the D istrict banks are below the national
average. The overall national average is reduced because
of the net interest m argins of the banks
(none of w hich are in the Eighth District)
with assets greater than $10 billion. This
category of banks experienced a decline in
net interest m argin due, in part, to lost
income from nonperforming foreign loans.
In 1987, many large banks placed millions
of Latin A m erican loans on nonaccrual
status, m eaning that even if the bank

FEDERAL RESERVE BANK OF ST. LOUIS

WINTER 1988

receives an interest payment it will not be counted as
interest-earning income.

Noninterest Margin
The noninterest m argin is an indicator of the efficiency
of a bank’s operations and the result of its pricing and
marketing decisions. The noninterest m argin is the
difference betw een other (noninterest) incom e and
noninterest expense as a percentage of average assets.
Since noninterest expense generally exceeds other income,
the calculation yields a negative num ber; however, it is
common practice for the noninterest margin to be reported
as a positive number. Thus, sm aller noninterest m argins
indicate better bank performance, holding all other things
constant.
As a supplement to income generated from earning
assets, banks have been concentrating their efforts on fee
income. Noninterest income derived from bank services
and sources other than interest-bearing assets has increased
as banks seek to price more of their products explicitly.
Sources of noninterest income include fees for checking
accounts, discount brokerage services, credit cards,
fiduciary activities, mortgage loan servicing and safe deposit
box rentals.
Noninterest expense includes all the expense items
involved in overall bank operations. Noninterest expense
(overhead) includes employee salaries and benefits as well
as expenses of premises and fixed assets. Noninterest
expense also covers such items as director’s fees, insurance
premiums, legal fees, advertising costs and litigation
charges.
Table 2 shows the noninterest margin for banks in the
Eighth District and in the nation grouped by various asset

sizes. As presented in the table, D istrict banks
outperform ed the national average across all asset sizes
for both 1986 and 1987. In the aggregate, however, the
nation outperform ed the District prim arily because of the
pricing strategies and operating efficiencies of banks with
assets greater than $10 billion. These banks continue to
expand their noninterest sources of incom e while
c o n tro llin g th e ir n o n in te re st expenses. S m aller
institutions, on the other hand, have had m uch slower
growth o f noninterest income. Therefore, noninterest
income relative to average assets has rem ained essentially
unchanged at small banks while increasing at banks with
assets greater than $300 m illion.
Noninterest expenses have been moving upward for the
past several years in both the D istrict and the nation. As
a result, banks are closely m onitoring personnel and
occupancy costs in an effort to improve profits. Some
banks have elected to reduce staff in an effort to streamline
operations. In addition, mergers and consolidations have
allowed banks the opportunity to centralize operations,
improving efficiency due to improved economies of scale.
—Lynn M . Barry

Table 2
Noninterest Margin
19871
District U.S.
Aggregate
< $25 million in assets
$25-50 million
$50-100 million
$100-300 million
$300-1 billion
$1-10 billion
> $10 billion

2.00%
2.43
2.08
2.04
2.02
2.16
1.78
N.A.

1.92%
2.81
2.55
2.40
2.36
2.30
1.98
1.44

1986
District U.S.
1.97% 1.92%
2.51
2.90
2.13
2.58
2.07
2.47
2.01
2.36
2.34
2.20
1.61
1.95
N.A.
1.42

1Annualized based on data through September 1987
Source: FDIC, “Consolidated Reports of Condition and Income for Insured
Commercial Banks,” 1986-1987.

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.




WINTER 1988

FEDERAL RESERVE BANK OF ST. LOUIS

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

Current
Quarter
111/1987IV/1987

Current
Year
IV/1986IV/1987

Same Periods
Previous Year
IV/1985111/1986IV/1986
IV/1986

Selected Assets & Liabilities
$20,054
6,619
4,767
5,535
816
2,315

Total Loans & Leases
Commercial Loans
Consumer Loans
Real Estate Loans
Loans to Financial Institutions
All Other Loans
Total Securities
U.S. Treasury & Agency Securities
Other Securities
Total Deposits
Non-Transaction Balances
MMDAs
$100,000 CDs
Demand Deposits
Other Transaction Balances2

13.4o/o
14.9
25.4
23.6
9.6
-1 9 .8

10.8%
8.0
17.7
13.6
22.3
- 2 .4

12.3
22.8
- 6 .2

21.0
48.9
-1 4 .1

7.3
13.8
- 2 .4

5.7
10.4
- 6 .0
28.9
- 5 .4
10.7

18.0
4.0
21.5
- 0 .6
41.0
50.9

7.9
3.1
22.1
- 3 .7
14.0
26.7

8.7%
12.4
- 3 .7
26.2
-2 5 .6
3.4

8.5%
8.0
8.4
25.4
-2 8 .6
- 3 .2

4,830
3,366
1,465

15.4
22.4
1.1

23,194
14,492
2,627
4,856
6,214
2,488

11.1
12.9
-1 5 .3
36.5
11.3
1.0

EIGHTH DISTRICT INTEREST RATES3

Dec 1987
NOWs
MMDAs
Time CDS
92 — 182 days
1 — 2 V2 years
2 1/2 years and over

Nov 1987

Oct 1987

Dec 1986

5 .050/0
5.42

5.05%
5.39

5 .030/0
5.42

5.07%
5.27

6.45
7.05
7.57

6.32
6.97
7.58

6.42
7.09
7.59

5.63
6.26
6.73

All data are not seasonally adjusted.
1

2
3

A sample of commercial banks with total assets greater than $750 million. Historical data have been revised to incorporate adjustm ent 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.
Includes NOW, ATS and accounts permitting telephone or pre-authorized transfers.
Average interest rates paid on new deposits by a sample of Eighth District commercial banks.
3




BANK PERFORMANCE RATIOS1
Eighth District
111/87

111/86

United States
111/85

111/87

111/86

m /85

Return on A verage Assets
(annualized)

<$100 million
$100 — $300 million
$300 million — $1 billion
>$1 billion

.99%
1.01
.96
.59

1.06%
.99
.83
1.01

1.07%
1.09
.48
.84

.65%
.81
.57
- .3 3

.66%
.85
.68
.65

.87°/
.93
.84
.68

Return on A verage Equity
(annualized)

<$100 million
$100 — $300 million
$300 million — $1 billion
>$1 billion

11.02
12.31
12.11
8.90

11.88
12.29
10.68
14.93

12.09
13.58
6.36
12.98

7.35
10.35
8.15
-6 .1 8

7.56
11.26
9.80
11.25

9.82
12.12
11.81
12.21

56.71
65.94
69.64
85.95

55.37
62.22
67.69
81.98

56.64
64.54
67.06
79.13

59.20
65.70
75.63
87.23

58.51
64.06
72.52
86.78

60.41
65.35
71.22
86.36

2.31
2.09
1.87
2.42

2.84
2.24
2.58
2.12

3.08
2.31
2.85
2.45

2.94
2.47
2.56
4.10

3.41
2.68
2.74
2.97

3.33
2.72
2.47
3.24

1.50
1.41
1.39
1.92

1.42
1.33
1.37
1.43

1.26
1.16
1.30
1.39

1.63
1.53
1.71
3.08

1.53
1.41
1.59
1.66

1.30
1.27
1.31
1.42

.47
.42
.52
.46

.61
.57
.59
.39

.66
.36
.52
.45

.73
.53
.66
.55

.92
.64
.65
.61

.74
.50
.45
.49

Loans as Percent of Deposits

< $ 10 0 million
$100 — $300 million
$300 million — $1 billion
>$1 billion
N onperfo rm ing Loans as Percent
of Total Loans 2

< $ 10 0 million
$100 — $300 million
$300 million — $1 billion
>$1 billion
Loan Lo ss R ese rve s as Percent
of Total Loans

< $ 1 0 0 million
$100 — $300 million
$300 million — $1 billion
>$1 billion
Net Loan Losses as Percent
of To ta l Loans

< $ 1 0 0 million
$100 — $300 million
$300 million — $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