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F ederal Reserve Bank o f D allas DALLAS, TEXAS 75222 Circular No. 71-38 February 1 6 , 1971 To the Chief Executive Officer of the Member Bank Addressed: The Functional Cost Analysis program is now entering its sixth yearin the Eleventh Federal Reserve District. As a result of the interest expressed by the participating banks, we are endeavoring to provide supple mental data that will prove meaningful in analyzing and measuring bank per formance. The article enclosed with this letter, "Cost and Returns for Major Bank Functions, 1 9 6 9 *" should prove helpful to any bank wanting more detailed information about its funds-supplying and funds-using functions. All data in the article was obtained from Functional Cost Analysis reports submitted by banks in the Eleventh Federal Reserve District. This provides a valid geographical comparison. We hope that the data will prove helpful in answering questions you might have concerning costs and profits of deposits and investments. If you have any questions concerning this article, please feel free to contact the Functional Cost Analysis Division of this Bank. Yours very truly, P. E. Coldwell President Enclosure This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) COST AND RETURNS FOR MAJOR BANK FUNCTIONS 1969 PROVIDED BY THE FUNCTIONAL COST ANALYSIS DIVISION OF THE BANK RELATIONS AND SERVICES DEPARTMENT FEDERAL RESERVE BANK OF DALLAS COSTS AND RETURNS FOR MAJOR B A M FUNCTIONS, 1969 What is your hank's most profitable asset--instalment, real, estate, commercial and agricultural loans, or security investments? The 1969 Functional Cost Analysis (FCA) program administered by the Federal Reserve Bank of Dallas for the Eleventh District member banks reveals that security investments proved the most profitable asset for a majority of banks regardless of size. When banks are categorized into three size groups, asset earning differences are more pronounced and varied. The FCA program was originated to provide individual banks with standardized and detailed information about costs and income for each banking function. The following data was developed from the 66 banks participating in 1969 in this District. The three group sizes follow the FCA program format and enable more meaningful comparisons. Group I consists of banks with total deposits up to $50 million. Group II banks have total deposits from $50-$200 million. Group III banks have total deposits over $200 million. Group sizes are based on deposits because demand and time deposits along with certain non-deposit funds make-up a pool of available funds for lending and investment. This report will analyze the loan function, investment function, demand deposit function and the time deposit function. * * * Loan Function Composition of assets and liabilities differ significantly among the three size groups. The differences reflect various geographical demands and bank needs and preferences for liquidity. All three size groups have a similar ratio of loans to total assets. Differences occur in the composition of the loan portfolio. In other words, the loan port folios of the three size groups have different proportions of the three major loan categories— instalment, real estate, and other— to total loans. Ratio of loans to total assets (Percent) Distribution of Loans Instalment Real Estate Other Total Group I Group II Group III ^9 51 ^-9 27 17 56 100 19 1^67 100 11 15 7^ 100 The Group I banks have a relatively high proportion of their loans to individuals in the form of consumer instalment loans. The "other" loan category includes commercial and agricultural loans. The commercial loan is very important to the Group III banks which provide credit to large manufacturers, finance firms, and wholesale and retail trade establishments. A sizable proportion of other loans for the Group I banks are agricultural loans and noninstalment loans to individuals. Net earnings for instalment loans were significantly larger per $100 of funds used for Group I banks than for the other two size groups. Income, expense, and net earnings for each loan category ares shown in the table below. GROUP II GROUP 1 In sta lm e n t Loans Volume (millions) Real E s t a te O th e r In sta lm ent Real E s t a te GROUP III O th e r I n s t a lm e n i Real E s t a te O th e r $3.2 $2.1 $6.7 $11.4 $8.2 $44.4 $32.6 $37.1 $262.6 3,133 22 1,148 10,886 499 2,837 31,182 $1,110 $11,449 $6,500 $1,179 $21,053 $16,583 $1,192 1,303 $50,548 $232,484 .2 .1 .2 .8 .4 1.5 1.9 2.8 8.8 Volume (thousands) 492 2,062 1,631 1,808 411 1,807 2,314 450 223 393 409 384 1,908 Number 125 130 365 88 60 Number Average Size 3,939 Net earnings before "Cost of Money" (millions) Loans per employee Ratio to dollar volume (percent) Income 11.1 7.2 7.7 10.2 7.0 7.8 9.8 9.1 7.6 Expenses -3.7 -1.5 -3.8 -1.1 -3.1 -3.2 -3.2 -3.2 -1.1 -3.2 -4.2 Cost of Money -1.3 -3.1 -3.2 -1.1 -3.2 -3.2 4.3 2.5 3.3 3.2 2.7 3.5 2.4 4.8 3.6 Net Earnings -.8 The dollar volume and number of loans per employed in each lending function can provide a useful comparison or operational efficiency. The loan volume per employee is fairly consistent for all three size groups for each lending function, but each employee in the Group 11banks serviced a greater number of loans in each function. This is partially explained by the fact that Group II and Group III banks have a much larger volume and a far greater number of loans. It also indicates that njiore time and effort are required to make and service larger loans. One reason for the greater expense incurred in th^ instalment loan department is the large number of personnel required. The 66 banks participating in this study had one of every sis officers and employees assigned to the instalment loan function. This is second only to the demand deposit function which accounts for nearly half of tljie total personnel. * * • * The Investment Function There are some differences among the three groups in both relative size and composition of security holdings. The Group I banks held a slightly higher proportion of total assets in investments than the two larger groups. - 2 - Group I Ratio of investments to assets Distribution of Investments U. S. Securities Tax-Exempt Obligations Other Investments Liquidity Loans* Total Group II Group III 33 28 37 h i 31 k 6 k-7 *+9 8 k 9 100 27 k 8 16 100 100 *Federal funds sold, commercial paper, broker's loans, banker's acceptances and purchased certificates of deposit. All three size groups held between b-5 percent and 50 percent of total investments in tax-exempt obligations. Groups I and II did hold a significantly larger proportion of total investments in Government securities than did Group III. The Group III banks, on the other hand, held a higher proportion of liquidity loans. The Group III banks in most instances, were net purchasers rather than net sellers of federal funds, while the opposite is true of the Group I banks. The averagegross yield on Government securities held by all three size groups in 19&9 was a little over 5 percent. Tax-exempt securities returned 8 percent for all banks after earnings were converted to a taxiable basis. Liquidity loans yielded over 8 percent for all three size classifi cations. Income from tax-exempt securities, after conversion to a taxable basis, accounted for approximately half of investment income for all three size groups. Investment earnings are shown in the chart below. Group I Group II 8.1 3 2 .k 1 7 0 .1 6.7 -.3 -3.1 3.3 6.7 -.1 7 .2 -.2 -3.2 u -3.2 T ^ - Investments Volume (millions) Ratio to dollar volume (percent) Income Expenses Cost of Money Net Earnings * * Group III * The Demand Deposit Function Group I Ratio of deposits to total assets Distribution of Deposits Demand Tme Total Group II Group III 90 87 81 53 1+7 100 5^ H6 100 58 b2 100 - 3 - Demand deposits in c lu d e re g u la r checking accounts, s p e c ia l checking accounts, c e r t if i e d and o f f ic e r s ' checks, t r a v e le r s ' checks, l e t t e r s o f c r e d it , Treasury Tax and Loan Account, and d e a le rs ' reserve s. The la r g e r the bank, the la r g e r the p ro p o rtio n o f demand deposits to t o t a l d e p o s its . A lso , the number o f accounts and the average s iz e o f the account increased w ith the s ize o f the bank. GROUP I Demand Deposits Volume (millions) Number of Accounts Average Size Regular Checking Demand Deposits $ 12.1 $11.5 6,326 $1,718 $56.4 5.9 -2.4 3.5 5.8 -2.3 3.5 5.0 -1.9 3.1 Ratio to Dollar Volume Income Expenses Net Earnings Monthly Account Activity Activity Income Portfolio Income Total Expenses Net Earnings GROUP III GROUP II Demand Deposits $1.05 7.01 8.06 -3.15 $4.91 Demand Deposits Regular Checking $53.4 15,632 $3,635 $315.0 $300.5 36,346 $ 7 ,59 9 5.0 -1.7 3.3 4.8 -1.7 3.1 4.7 -1.5 3.2 Regular Checking $1.41 13.11 14.52 -5.06 $ 9 .4 6 $ 1.10 27.10 28.20 -8.36 $19.84 Regular checking accounts c o n s titu te w e ll over 90 p ercen t o f a l l demand d ep o sits. Income generated was s u b s ta n tia lly la r g e r p er $100 o f demand deposits f o r Group I banks than fo r the two la r g e r groups. However, h ig h er o p e ra tin g expenses in the Group I banks o ffs e t t h e ir la r g e r income. Expense d iffe re n c e s between the th re e groups r e f le c t h ig h e r processing costs f o r each d o lla r o f demand deposits in the sm aller banks. This could p o s s ib le mean a sm aller average s iz e tra n s a c tio n . A l l th re e s iz e groups averaged n e a rly $1.00 p er $100 o f demand deposits f o r commercial t e ll e r s and bookkeeping expenses. Other expenses, such as fu r n itu r e and equipment, paper and p rin te d m a te r ia ls , were p ro p o rtio n a te ly low er in the la r g e r banks, r e f le c tin g economies o f la rg e s ca le o p e ra tio n s . Demand dep osit expenses made up a la rg e share o f t o t a l expenses. Approxim ately 25 p ercen t o f t o t a l adjusted expenses are r e la te d to demand deposits f o r a.l 1 th re e s iz e groups. * * * Time D eposit Function Time deposits comprise V7 p ercen t o f t o t a l deposits in Group I banks and b2 p ercen t in Group I I I banks. Group I I banks c lo s e ly compare w ith the sm aller banks. The sm all banks do have a la r g e r p ro p o rtio n o f re g u la r savings accounts to t o t a l tim e deposits than the two la r g e r s iz e groups. - k - Distribution of Time Deposits Regular Savings CD’s and other time deposits Total Group III Group I Group II 3^- 28 29 66 100 72 100 71 100 Certificates of deposit make-up two-thirds of all time deposits for the three size groups. Club and school accounts are a very small percentage of total time deposits for all group sizes. Portfolio income provided virtually all of the income related to time deposits. The number and average size of regular savings accounts increased with the size of the bank. Interest paid on time deposits was the largest expense and amounted to almost .5 percent more in Group III banks than in Group I banks. Earnings were $1.20 per $100 dollars of time deposit volume for both Groups I and III. Many banks in the three groups are carrying a sizable number of small accounts that in total comprise a very low proportion of total time deposits. Group I Reg-ular Savings Deposits Volume (millions) Number of accounts Average Size Group II Group III 3.3 2,661 1,325 Ik.6 ^9.3 10,645 1,550 26 7^7 2,038 6.3 6.1 "673 6.1 -.5 - . k , Ratio to dollar volume (total time deposits) Portfolio income Other income Total Operating Expenses Interest on Deposits Net Earnings -k.6 1.2 6 . k -.2 - b . 9 .8 1.2 *Less than .05 percent. A bank participating in the FCA program receives a report in which each of its functions is analyzed and compared in detail with banks of similar size and characteristics. If you do not now participate in the FCA program but would like to receive the type of information detailed in the above tables and paragraphs, contact the Federal Reserve Bank of Dallas. The information contained in the FCA report becomes increasingly useful as banks obtain cost and profit data for successive years. - 5 -
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