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ID A H O ALASKA FEDERAL 1 VASHING TO N RESERVE TWELFTH BANK FEDERAL OF SAN RESERVE FRANCISCO DISTRICT S&pisunJbsLtL 1961 Sdue Review of Business Conditions page 178 UTAH District Bank Earnings Decline; Net Profits Rise . . . . page 183 EGON C ALIFO RN IA AR IZ O N A NEVADA Review of Business Conditions incom e in the n atio n rose $4.5 billion at a seasonally adjusted annual rate to $ 4 2 1 .8 billion in July. H alf of the in crease w as, how ever, accounted for by the accelerated paym ents of N atio n al Service Life In su ran ce dividends. If the N SL I dividends are om itted, the Ju n e-Ju ly gain was less th a n in the preceding two m onths. D espite the ad dition to perso n al incom e, retail sales declined from $18.3 billion in June to $18.1 billion in July. T he high rate of personal saving in the second q u arte r of 1961 is apparently co n tin u ing into the th ird quarter. C onsum er credit outstan d in g began to increase by sm all am ounts in the second q u arter, b u t season ally adjusted repaym ents of autom obile loans have exceeded extensions in every m onth thro u g h Ju n e this year. C o n stru ctio n ex p en ditures rose in each of the m onths of M ay thro u g h A ugust, in co n trast to v irtual stabil ity in earlier m onths of the year. M an u fac tu re rs’ sales of durable goods (seasonally ad ju ste d ) con tin u ed the rise since the beginning of the year into July, and new orders for all durables and also fo r m achinery and eq u ip m ent w ere larger in July th an in preceding m onths of this year. T he business expansion is clearly evident in the em ploym ent data, which in m id-A ugust rose to a record 6 8 ,5 3 9 ,000 for the m onth. U nem ploym ent, how ever, declined only seasonally in A ugust to around 4.5 m illion persons, and the seasonally ad justed rate of unem ploym ent of 6.9 percent continues n ear the level of the p ast nine m onths. W ith larg er deficits or sm aller surpluses m onth by m onth th an last year, th e im pact of F ed eral G overnm ent operatio n s continued th ro u g h July to be m ore expansionary in 1961 th a n in 1960. A lthough n ational security expenditures in July w ere b u t th ree-q u arters of the June figure, new orders for m ilitary hard w are are rep o rted to be rising sharply. A n upsurge in b an k lending had yet to ap p ear, and accum ulations of U nited States P 178 erson al G overnm ent securities co n tin u ed through July. D em and deposits (seasonally ad ju sted ) were only a trifle low er in July than in June and were about equal to M ay and A pril. S hort-term interest rates, w hich h ad drifted dow n in July, m oved upw ard in the first p a rt of A ugust. L ong-term rates co ntinued to rise in A ugust with the sharpest increases evident in the longer m aturities of U nited States bonds. July unemployment and employment down from June F o r the second m onth in a row , th ere was a decline in Pacific C oast States seasonally adjusted unem ploym ent. Joblessness in July was 2.6 p ercen t less th an in Ju n e. T h e d e crease was accounted fo r by w ithdraw als from the lab o r force; civilian em ploym ent fell off one-half percent. T he rate of unem ploym ent m oved from 7.2 percent to 7.0 p ercent of the lab o r force b u t rem ained above the national rate and the D istrict rate fo r July last year. T he nu m b er of unem ployed in m id-July was 19 percent above July last year. Total District n o n a g ric u ltu ra l e m p lo y m e n t and t wo major compo nents down in July T housands of P trto n t Source: State departments of employment. Septem ber 1961 M O NTH LY T he decline in Pacific C oast nonagricultural wage and salary em ploym ent from June to July extended to every m ajo r industry group w ith the exceptions of finance and gov ernm ent, em ploym ent in w hich was essen tially unchanged. T he largest loss was in con struction, but this was aggravated by a strike of construction w orkers in W ashington and O regon. A ll three Pacific C oast states (W ash ington, O regon, and C alifo rn ia) were af fected by one o r m ore of the strikes in o r ganized industry th a t directly involved 7,500 w orkers. T he decline in m anufacturing em ploym ent on the Pacific C oast was slight. A labor-m anagem ent dispute in O regon was partially re sponsible for the failure of lum ber and w ood products em ploym ent to rise seasonally. A h eat wave in W ashington and O regon sh o rt ened the vegetable harvest p eriod and resulted in a less th a n seasonal volum e of canning and preserving em ploym ent fo r July. T here was also a less than usual gain in electrical m achinery em ploym ent, the rate of grow th in this industry’s em ploym ent having abated considerably in the first p a rt of this year as com pared to last year. G reate r th an seasonal gains in prim ary and fabricated m etals, n o n electrical m achinery, auto assem bly, and o rd nance did not quite com pensate for the losses in other m anufacturing industries. In contrast to the Pacific C oast States, nonagricultural em ploym ent in the In term o u n tain S tates 1 rose slightly betw een Ju n e and July and was up 2.6 p ercen t over July 1960. F o r the entire Tw elfth D istrict, em ploym ent dropped 0.2 percent from Ju n e; still, 1.3 p e r cent m ore people w ere at w ork in July 1961 than in July 1960. A n increase in jobs m oderately exceeding seasonal changes is foreseen by em ployers for A ugust and Septem ber. G re a te r th an sea sonal increases are expected in state and lo cal governm ent and in services as schools re open. C onstruction em ploym ent is expected 1 Arizona, Idaho, Nevada, and Utah. REVIEW A g g r e g a t e incom e o f District m a n u factu rin g production workers expanded faster this year than 1960 Index 1959 = 100 Note: Data are not adjusted for seasonal variation. Source: State departments of employment. to resp o n d to the pickup in residential and com m ercial building perm its of recent m onths and should show a sizable increase with the term in atio n of the cu rren t strikes. O rdnance firms anticipate additional hirings, and em ploym ent generally in the defense-related in dustries probably will rise in response to the placem ent of a rapidly expanding volum e of defense-procurem ent orders in the last few m onths. B arrin g a b reak d o w n in co n tract ne gotiations, autom obile assem blers will recall w orkers as the m odel changeover is com plet ed and, apparently, expect to m ake net new additions to their lab o r force. T he m ost recent d a ta available on incom e of D istrict m anufacturing pro d u ctio n w ork ers shows a rise in Ju n e of 1.0 percent above the sam e m onth last year. T he im provem ent resulted from an increase in hourly earnings; average w eekly hours were ab o u t the sam e as in June I960. The w orkw eek has been length ening since the end of last year, and if the de m and for lab o r continues to expand, addi tional gains in w orker incom e can be expected to take increasingly the form of additions to the w ork force. In com ing m onths expansion 17 9 FEDERAL RESERVE BANK of the dem and fo r lab o r can be expected to have a m ore favorable im pact on em ploy m ent, and hence unem ploym ent, th an has been tru e in recen t m onths. OF SAN FRANCISCO D o u g la s fir o rd e rs a b o v e production in June and July M illio n s o f B o a r d F o o t Construction little changed in July T he value of to tal co nstruction contracts in the D istrict am ounted to $630 million in July, slightly above the sam e m onth last year. R esidential co nstruction contracts rose 17 p ercen t above 1960, largely because of in creased co n tracts fo r m ulti-fam ily units. N onresidential activity increased to 2 0 percent over the preceding year. T his w as due m ainly to a larg er volum e of contracts for education al, science, hospital, and o th er in stitutional buildings. A w ards fo r m an u fac tu rin g buildings, on the o th er h an d , declined. July con tracts fo r heavy engineering co n stru ctio n fell 33 p ercen t below last year, as public w orks activity slipped substantially. Streets and highw ay contracts in the D istrict did, how ever, stay close to last y e a r’s pace, and on a cum ulative basis, co n tracts fo r all public w orks co nstruction are still above the to tal fo r th e first seven m onths of 1960. T he D istrict m ortgage m ark et in June and July continued to show little change; m ortgage rates and discounts w ere rep o rted to be steady. F N M A secondary m arket purchases in the D istrict picked up som ew hat in June, in p a rt as a result of the fact th a t the F N M A purchase price was above the m arket. This w as p articu larly the case in th e Los A ngeles area. Lumber output up seasonally 1 go L u m b er o u tput, w hich had been reduced substantially d uring the first half of July due to vacation shutdow ns, rose seasonally in the la tter half of the m onth. N evertheless, D oug las fir pro d u cers kept o u tp u t below the level of th eir incom ing new orders, and prelim i nary figures indicate they continued to do so through the first th ree weeks of A ugust. Production at W estern pine mills, on the other Source: West Coast Lumbermen’s Association. hand, was slightly above o rd ers and ship m ents d uring this sam e period. L u m b er prices co n tinued to decline in July and A ugust. A c cording to C row ’s lum ber price index, they averaged $73 p er th o u san d feet on A ugust 17, close to $ 2 less th a n the average in the early p art of July. T he reportedly heavy lum ber shipm ents from C an ad a have been given as a p art of the reason fo r this price w eakness. T he price fo r sanded fir plyw ood (q u arte rin ch ) was rep o rted to be holding steady at $ 6 8 tow ard the latter p art of A ugust. Small gain s in steel production T he vacation season draw ing to a close and the pro d u ctio n of 1962 m odel autom obiles getting u n d er way, w eekly steel ingot p ro d u c tion rates for n ational mills rose in A ugust from July. H ow ever, w eekly rates fo r mills in the W estern states 1 w ere little changed from July. D uring the second q u a rte r of 1961, W estern mills apparently increased o u tp u t som ew hat m ore th an in p ro p o rtio n to the in crease in dem and. W ith the revival of eco nom ic activity from the w inter recession low, som e custom er inventory stocking was e x pected, b u t actual additions to custom er in1 Twelfth District States and Colorado. Septem ber 1961 M O N T H L Y REVIEW ventories ap p ear to have b een slight. T he July-A ugust lull in ingot p ro d u ctio n rates represents an adjustm en t of the rate of p ro duction to a rate of sales th at, while n o t spec tacular, nevertheless reflected a vigorous re covery of activity by m ajo r users of steel. The p rospect of a strike in the autom obile indus try m ay have affected n atio n al p roduction som ew hat tow ard the end of A ugust. July m ine production of co p p er was below June ow ing to sum m er closing by producers and custom ers for vacations b u t was also slightly below July last year. H ow ever, the re lationship betw een refinery p ro d u ctio n and deliveries to fabricators is m uch m ore favor able this year th a n last; last y ear inventories of refined copper increased d uring the spring and sum m er m onths w hile this y ear invento ries have been falling since F eb ru ary . A strike by electrical w orkers at a m ajo r dom estic copper p roducer in the D istrict resulted in 1,700 w orkers being laid off and created the p rospect of additional layoffs. T he strike of copper w orkers in Chile ap p ears to have h ad little effect on the dem and fo r dom estically p roduced copper, prices rem aining firm at re cent levels. Farm income continues to strengthen C ash receipts from farm m arketings poured into D istrict farm ers’ pockets at a n ear record p ace in June. N evertheless, returns from farm m arketings in N evada and U tah reflected drought conditions in these states and w ere dow n 42 percent and 12 p ercen t respectively from June of 1960. These declines were m ore th an offset by substantial increases in A ri zona and C alifornia. A fter lagging behind the 1960 level of cash receipts by 7 p ercen t at the end of the first fo u r m onths of the year, the y ear-to-year deficit was reduced to ab o u t 3.5 p ercent at the m id-year m ark, as returns strengthened in M ay and Ju n e. A ccording to A ugust 1 p roduction estim ates, crop ou tp u t in the D istrict will ap p ro ach record levels in 1961. D rought conditions in parts of the D is trict have reduced yields; the rise in expected p ro d u ctio n reflects, in p a rt, m ore th a n offset ting increases in yields on irrig ated lands and, in p art, a m ore th a n p ro p o rtio n ate increase in the o u tp u t of higher value crops, such as sugar beets. C rop p ro d u ctio n prospects in general com pare favorably w ith o u tp u t in 1960 and changed little d uring the m onth of July. Retail trade stronger Sales of G ro u p I retail stores in the Tw elfth D istrict during June rose 4 p ercen t from M ay and fo r the first tim e this y ear exceeded the d o llar volum e of sales fo r the year-ago m onth. H ow ever, th e gain over the year-ago level w as m inor, and cum ulative sales for the first six m onths of this y ear w ere still running about 5 p ercen t below the like 1960 period. D ep artm en t store sales in the D istrict evi denced strength during Ju n e an d continued to increase through July, being 7.5 index points above last year, on a seasonally ad justed daily average basis. W eekly d a ta for A ugust indicate th a t d ep artm en t store sales have continued to increase over the year-ago levels. N ew passenger c a r registrations in C alifornia during July d ro p p ed 12 percent from June, the high fo r the year, and 8 p e r cent from July of last year. F o r the year-todate, C alifornia registrations w ere still con siderably below the cum ulative to tal fo r 1960, although the percent of decline h ad dim in ished from 19 percent in A p ril to just u nder 12 p ercen t fo r the period th ro u g h July. Loan dem and shows overall increase in first half of A ugust In the early p art of A ugust ban k s generally w ere subject to a som ew hat tig h ter reserve position th a n had been prevailing in recent m onths. R eq u ired reserves of D istrict m em ber banks w ere higher because of an increase in deposits accounted for, in p art, by higher T ax and L o an accounts resulting from T reasury sales of tax anticipation bills at the end of FEDERAL RESERVE BANK OF SAN FRANCISCO CHAN G ES IN S E LE C TE D B ALAN CE S H E E T ITE M S OF W E E K LY R EPO R TIN G M EM BER BANKS IN LEAD IN G C IT IE S (dollar amounts in m illions) Twelfth D istrict From July 26. 1961 From Aug. 24, 1960 to Aug. 23, 1961 to Aug. 23, 1961 Dollars Dollars Percent Percent United States From July 26, 1961 From Aug. 24, 1960 to Aug. 23, 1961 to Aug. 23, 1961 Dollars Percent Dollars Percent ASSETS: Total loam and investments Loans and investments adjusted^ Loans adjusted^ Commercial and industrial loans Real estate loans A gricultural loans Loans for purchasing and carrying securities Loans to non-bank financial institutions Loans to domestic commercial banks Loans to foreign banks Other loans U. S. Government securities Other securities + — + + 95 26 77 + — 0 .3 8 0 .11 0 .5 0 + 17 72 + 1754 96 + 0.51 0 .4 7 2 .3 4 + 40 53 63 7 .6 9 7 .7 0 0.6 2 — — — + 0 .7 6 0 .9 8 9 .2 6 + + + + — — — - - 0 .3 6 0 .71 0 .1 9 + + — 418 82 1 131 17 8 86 52 + + — 0 .5 7 0 .6 6 4 .4 5 + + 27 25 17 + + + + + 21 + 0 .6 6 + 14 + 6 .8 6 — 447 + 16 + 2 ,1 2 -— 72 — 8 .5 5 + + 7 6 .1 0 — 9 .4 5 — 0 .2 9 — 1.51 + 0 .0 4 + — 18 11 131 + + 13 42 + 316 + — 6 .8 7 5 .7 0 + 4 .3 3 + 2 4 .6 4 + 16 .11 + — 197 + + 1642 + 927 + 1.7 6 + 1 4 .4 8 + 9.81 + 121 — 19 — 9 — 10 4 1 + + 8.01 8 .0 2 + + + + 1 .6 0 1 .2 7 1.23 7 .8 3 81 — 1 1 .6 4 + 605 + 1 9 .9 6 226 + — 756 — 1 2 .9 3 403 + 3 9 .4 3 — 5 .3 3 — 0 .5 7 — 2 .2 9 + 0 .8 2 + 98 — 121 + 850 + 5808 + 15 72 + 7 .3 9 — 18.01 + 5 .5 3 + 2 1 .1 1 — + + + 778 + 6627 n.a. + 1 .2 8 + 1 9 .5 5 n.a. + + + 19 64 305 19 2 — + + + 31 93 781 91 — + 8577 + 8479 + 1099 + 391 + 15 9 4 .6 5 + 6 .3 3 LIABILITIES: Demand deposits adjusted Tim e deposits Savings accounts 112 + 98 + 71 — — + + 0 .9 7 0 .7 6 0 .6 9 3 .1 0 0 .7 6 0 .6 7 n,a. Not ava ilable. 'Exclusive of loans to domestic commercial banks and after deduction of valuation reserves: individual loan items are shown gross. Sources: Board of Governors of the Federal Reserve System and Federal Reserve Bank of San Francisco. July. B ecause of this tighter reserve position, banks in the D istrict were net p urchasers of F ed eral funds in the early p art of A ugust. T hen, as reserve positions eased n ear m id m onth, sales were sufficiently in excess of purchases so th a t fo r the four-w eek period, July 26-A ugust 23, D istrict banks were net sellers of F ed eral funds. T h e decline in loan volum e th at occurred in July at D istrict weekly reporting m em ber b anks was reversed in the follow ing four weeks as loans ad ju sted 1 on A ugust 23 were $77 million above the July 26 level. This was ab o u t a th ird larger than the increase in the corresponding period last year. Business loans rose as m etals and m etal p ro d u cts m anufac turers, food, liquor, and tobacco processors, and lum ber m anufacturers stepped up their 182 1 Exclusive of loans to domestic commercial banks and after de duction of valuation reserves. borrow ing. D uring this period there was a fu rth er reduction in the volum e of public utility loans outstanding, b u t the decrease was sm all in co n trast to previous m onths w hen funds obtained in the capital m arket had been used to effect substantial rep ay m ent of bank debt. C alifornia banks w ere responsible for the largest w eekly increase in real estate loans this year; alm ost the entire $25 m illion in crease fo r the four-w eek period occurred in the week ended A ugust 23, w ith increases scattered th ro u g h o u t C alifornia. B rokers and dealers sought bank credit aro u n d m id-m onth, both for financing U nited States G overnm ent securities and oth er securities. Sales finance com panies increased th eir ou tstanding bank indebtedness in the first half of A ugust, and agricultural loans rose seasonally. T he vol um e of consum er loans was not sufficient to Septem ber 1961 M O NTHLY offset m id-m onth repaym ents by a national retailer, and therefore the “ oth er lo a n ” cate gory show ed a net decline for this period. As a result of the July T reasu ry refinancing and certain securities d ropping from one m a turity range to ano th er at m id-m onth, p o rt folios of D istrict w eekly reporting banks show ed sizable changes in the prop o rtio n of U nited States G overnm ent securities held in the period July 26-A ugust 16. T ax anticipa tion bills purchased in late July were sold in substantial am ounts during the first p art of A ugust, resulting in a net decline in T reasu ry bill holdings. H oldings of certificates of in debtedness were also reduced as a 3 Vs p e r cent issue m atured on A ugust 1. Exchanges in T reasury notes and bonds affected on A u gust 1 resulted in an increase in the over 1-5 year m aturity range. W hen the 3 percent bonds of A ugust 1966 d ro p p ed into the 1-5 year m aturity range at m id-m onth, total ho ld REVIEW ings over 5 years were reduced by $137 m illion from the end of July level. A lthough two notes in the interm ediate range m oved into the u n d er one y ear m aturity category, total hold ings in the interm ediate range still show ed a substantial gain for the period. As a result of all of these shifts, weekly reporting m em ber banks ended the three-w eek p eriod with an overall reduction in holdings of U nited States G overnm ent securities and a gain in the 1-5 year m aturity category at the expense of both short and longer term s. D em and deposits adjusted at D istrict w eek ly reporting banks w ere low er on A ugust 23 than at the end of July. U nited States G o v ern m ent deposits w ere up over $80 m illion, b ut deposits of state and political subdivisions declined, as units invested tax receipts in G overnm ent securities. Tim e deposits, on the oth er hand, experienced a large gain concen trated , as in o th er recent periods, in savings deposits. District Bank Earnings Decline; Net Profits Rise earnings and expenses of m em ber banks in the Tw elfth D istrict rose to record highs in the first six m onths of 1 9 6 1.1 B ecau se ex p en ses ro se m o re ra p id ly th a n earnings, net cu rren t earnings declined to a level 6 percent u n d er the first half of last year. G ains from security transactions, how ever, were sufficiently large to nearly offset o ther losses, in co n trast to a significant sub traction from cu rren t earnings last year, so th a t net profits before taxes rose to a record high, exceeding the co m p arab le period of last year by 7 percent. T he co ntinued rise in bank o th B 1 As b a s e d o n r e p o r ts c o v e r i n g th e p e r i o d f r o m D e c e m b e r 31, I 9 6 0 t h r o u g h J u n e 30, 196 1. T w e l f t h D i s t r i c t e a r n i n g s a n d e x p e n s e s d a t a c ite d fo r 1961 a re n o t c o m p l e t e l y c o m p a r a b l e to p a s t fig ur es, d u e to c h a n g e s in t h e D i s t r i c t b a n k i n g s t r u c t u r e d u r i n g t h e first s ix m o n t h s o f 1961, b u t a re a d e q u a t e fo r a n a ly tic a l p u r p o s e s . c a p ita l p ro d u c e d an av era g e re tu rn a fte r taxes of 9 percent this year as against over 11 percent last year. Slack in economy reflected in earnings from securities T he com position of b an k portfolios n o r m ally reflects the business clim ate existing at the tim e. T herefore, a brief look at the busi ness situation in the first six m onths of 1961 is in o rder to set the stage for an analysis of m e m b er b an k earnings and expenses in the T w elfth D istrict. Industrial p ro d u ctio n declined, according to the F ederal R eserve Index, from a p eak of 110 in M ay 1960, to a low p o in t in Jan u ary and F eb ru ary 1961, of 102 (1 9 5 7 = 1 0 0 ). G ross national p ro d u ct fell by $5.6 billion FEDERAL RESERVE BANK C o m p a ra tiv e e a r n in g s a n d profits in the Twelfth District for three recovery periods Percent Increase 0 From 10 P re vio u s F irs t H a l f -Y e a r 20 30 40 ------------------,------------------- ,--------------------1--------------------1 ---- - -■ L oans h ib iii E a rn in gs I on U.S. G o v e r n m e n t S e c u ritie s Net Profits After Taxes ■ 1954 ^ ... ; 1 .. .'"■ j ..............— ...... — ................................ □ 1 9 5 8 mh; » ..— ■■■■t , « ..... .. ............................ - ............... - i I~ ll9 6 l Source: Federal Reserve Bank of San Francisco. from the second q u arte r 1960 to the first q u a rte r 1961. Since F eb ru ary , how ever, re co v ery h as b e e n v ig o ro u s, w ith in d u s tria l p ro d u ctio n reaching a record high and m ost pre-recession peaks in o th er series also sur passed in a relatively short p eriod of time. U nem ploym ent, how ever, has continued at high levels, being close to 7 p ercen t since last D ecem ber. R ecovery does n o t ap p ear to have been q u ite as v ig o ro u s in th e T w elfth D istric t. D uring the dow nsw ing from M ay 1960 to F e b ru a ry 1 9 6 1 , D is tric t n o n fa rm e m p lo y m ent actually rose slightly. In the following phase of the cycle, how ever, the rate of u n em ploym ent rose above 7 p ercen t and has rem ained th ere th ro u g h June. C ontinued cu t backs in aircraft em ploym ent and a co m paratively w eaker co n stru ctio n and lum ber industry acco u n t for m uch of this relatively p o o r perform ance. 184 T o tal m em ber b an k earnings increased by $42 m illion in the perio d from D ecem ber 31, 1960 to Ju n e 30, 1961, as shown in T able 1. R oughly tw o-thirds of the dollar increase was accounted fo r by earnings from loans, w hich reached a reco rd level of $551 million. In te r est e a rn e d o n U n ite d S ta te s G o v e rn m e n t securities also reach ed a new high of $105 OF SAN FRANCISCO m illion; the sam e was tru e of in terest and dividends on “o th er securities.” In p erce n t age term s, the greatest relative increase in earnings this year over the co m p arab le half of last year was in earnings on U n ited States G overnm ent issues; these show ed nearly a 20 p ercen t rise from the first six m onths of 1960 and reflect the easy reserve positions o f the b an k s and the relatively w eak d em and for loans. T he behavior of the 13 largest b an k s con trasts to th a t of the sm aller b an k s w ith re spect to relative earnings gains. T h e sm aller b a n k s in c re a s e d th e ir lo a n e a rn in g s o v er twice as m uch as did the 13 largest. E arnings on securities, how ever, increased nearly 24 p ercen t fo r the 13 largest banks, as co m p ared to 8 p ercen t for the sm aller banks. This m ay be attrib u ted to the relatively g reater w illing ness and ability of larger banks to shift their funds into securities in periods of slack eco nom ic activity, as co m p ared to sm aller banks w hich are faced with lo an d em an d that is less responsive to cyclical fluctuation and are, at the sam e tim e, n o t as h ab itu ated to full use of their resources. M uch the sam e reasoning a p p lie s to th e c o m p a ris o n o f e a rn in g s in creases on “o th er securities.” Increased securities earnings can be traced both to a rise in the am ounts held by D istrict banks and to a shift in the com position of portfolios, as indicated in T able 2. B anks in g e n e ra l in c re a s e d th e ir h o ld in g s o f lo n g e r m aturities, w ith, of course, higher yields for the latter. (T h e substantial rise in holdings of certificates of indebtedness show n at the end of Ju n e of this year may be attrib u ted to accum ulation of “ rights” to the T reasu ry re funding carried o u t in Ju ly .) E arnings on loans increased 3.6 percent above those of the first six m onths of 1960. This is attrib u tab le to a carry fo rw ard of a larger total volum e of loans into this year th a n e x is te d a y e a r e a r lie r a n d to so m e change in the mix of loans. R ates on new M O N T H L Y R EV IEW Septem ber 1961 T EARNINGS AND able 1 EX P EN S ES O F T W E L F T H D IS T R IC T M EM BER BANKS SIX M O N TH S ENDING JU N E 30, 1961 (m illions of dollars) Percent change from firs t half of 1960 All Member 13 Banks Largest Other All Member Banksp 13 LargestP 5 5 1 .1 4 5 4 .2 9 6 .9 + 1 0 4 .5 8 2 .4 22 .1 3 3 .2 6 3 .4 2 2 .6 2 2 .8 7 9 7 .6 2 6 .2 50.1 1 9 .6 1 7 .8 6 5 0 .4 7 .0 13 .3 3 .0 5 .0 1 4 7 .2 Earnings on loans Interest and dividends on U. S. Government securities Other securities Service charges on deposit accounts Trust department earnings Other earnings Total earnings OtherP 3 .6 + 3 .0 + 6 .7 + 1 9 .8 + 9 .7 + 2 3 .5 + 11.1 + + 7 .7 4 .4 + 7 .9 + 1 2 .6 — 1 7 .7 + 5 .5 + 7.1 + 1 1 .8 — 14 .3 — 5 .5 + 1 1 .0 + 1 7 .9 — 2 8 .0 + 5 .6 Salaries and wages Interest on tim e deposits Other expenses Total expenses 2 0 9 .3 1 9 2 .4 1 6 9 .3 1 6 0 .7 40.1 3 1.7 + 6 .6 + 1 9 .0 + 6 .6 + 19.2 + 6 .8 + 1 7 .9 1 5 7 .4 5 5 9 .1 126.1 4 5 6 .1 3 1 .3 103.1 + 1 0 .0 + 1 1 .5 + 11.3 + 12.1 + + 5 .0 9 .3 Net current earnings 2 3 8 .4 1 9 4 .3 44.1 — — — 2 .0 Net recoveries and profits (— losses) On securities On loans A ll other Total net recoveries and profits Net profits before income taxes Taxes on n e t income N et profits after taxes Cash dividends declared Undistributed profits - — 2 1 .6 19.1 3 .4 — 0 .8 — — — 2 3 7 .7 1 1 3 .8 1 2 3 .7 6 4 .0 6 0 .7 1 6 .6 16 .2 2 .5 2.1 1 9 2 .1 9 3 .3 9 8 .8 5 4 .2 4 4 .6 — — 6 .4 7.3 5 .0 2 .8 0 .9 1.3 4 5 .5 2 0 .5 2 4 .9 9 .8 16 .0 + 7 .4 + 6 .4 + 8.1 + 1 2 .9 + 6 .9 + 4 .8 + 9 .0 + 11.7 + + 5.1 5 .8 + 9 .5 + 1 4 .8 + 5 .0 + 1 9 .5 + 3 .3 i1Preliminary. Note: Due to rounding, individual items may not add to totals shown. Source: Federal Reserve Bank of San Francisco. business loans, for exam ple, ap p aren tly clined, and the volum e of such loans showed little change in the first half of year while loans to farm ers, consum ers, on real estate rose. d e also this and T he earnings of b an k tru st dep artm en ts showed a 1 2 . 6 percent increase for all m em ber banks in the first six m onths of 1961. It is interesting to note th a t in com paring the increases for the 13 largest banks and the rem aining banks in the D istrict, the relative increase was considerably greater for the lat ter. T he 13 largest banks show ed an increase in tru st d ep artm en t earnings of 1 1 . 8 percent, while the sm aller banks earn ed 17.9 percent m ore on their trust activities than in the first half of 1960. Time deposits a major factor in cost increase T o tal expenses fo r all m em ber banks in the D istrict rose to a record level of $559 m illion in the first half of 1961. W ages and salaries of b an k officers and em ployees con tinued to increase as they have done in the p ast b u t at a som ew hat slow er rate as com p ared to the 1 0 p ercen t p er year grow th of the past two years. T h e m iscellaneous cate gory of “oth er expenses” also show ed an in crease, but the m ajor elem ent in the cost rise was in interest paid on tim e deposits. S tart ing in A pril of this year, m any large co m m ercial banks announced daily calculation of interest on tim e deposits based on the actual balance in the account and not, as was 185 FEDERAL RESERVE BANK OF SAN FRANCISCO T able 2 P R IN C IP A L R ESOUR CE AND L IA B IL IT Y ITE M S A LL T W E L F T H D IS T R IC T M EM BER BANKS (m illions of dollars) Item June 30, 1961 Dec. 31, 1960 2 7 ,6 3 7 26,361 + 4.8 1 7 ,4 8 3 17,1 02 + 2.2 5 ,8 8 8 5 ,8 6 8 + 0.3 863 7 72 + 11 .7 Real estate lo a n s 6 ,1 5 7 5 ,8 8 6 4 “ 4.6 Loans to in d iv id u a ls 3 ,6 5 6 3 ,3 6 8 + 7 ,5 9 8 6,861 + 10.7 Treasury b ills 686 693 — Certificates of ind eb te dne ss 447 271 + 6 4 .9 Loans a n d investm ents Loans a n d discounts, nef C om m ercial a n d ind ustrial lo a n s A gricu ltu ra l lo an s U. S. G o v e rn m e n t securities Percent change 8.6 1.0 Treasury notes 2,201 1,92 2 + 14.5 Treasury b o n d s 4 ,2 5 4 3 ,9 7 0 2 ,5 6 7 2 ,3 9 5 + + 7.1 6.8 3 4 ,1 8 6 3 3 ,0 8 6 + 3.3 O th er securities Total assets D e m a n d d e po sits 1 6 ,4 3 8 1 6 ,8 0 8 — 2.2 Tim e d e po sits 1 4 ,4 4 0 1 3 ,1 6 3 + 9 .7 Total d e po sits 3 0 ,8 7 8 2 9,9 71 + 3 .0 2 ,3 6 6 2 ,2 0 4 + 7 .4 C a p ita l accounts Note: Due to rounding, individual items may not add to totals as shown. Source: Federal Reserve Bank of San Francisco. previously th e case, o n the m inim um balance over a three-m o n th period. This w ould, on the average, raise the effective interest cost on tim e deposits for the banks, especially th o s e w ith m a n y sm a ll s a v in g s a c c o u n ts w hich are added to at fairly freq u en t in ter vals. P artly as a resu lt of this factor, and p artly by reason of an increase over the first h alf of 1961 in the am o u n t of tim e deposits outstanding, the to tal cost of in terest on tim e deposits has show n alm ost a 2 0 p ercen t in crease over the first six m onths of 1960, with no substantial change in th e rates p aid on such deposits. Net profits remain high despite fa llin g earnings 186 T w elfth D istrict b anks m anaged to show reco rd n et profits over the first half of this year in spite of a 6.4 p ercen t decline in their net c u rre n t earnings. T h e m ajo r elem ent in the conversion to net profits from net e a rn ings w as, in this case, the large gains m ade on sale o r red em p tio n of securities held by the banks. Sales of securities originally ac q uired at low er th an sale prices con trib u ted sufficiently large gains to nearly offset the b a n k s’ losses o n oth er op eratio n s. T his situ ation co n trasts w ith th a t o f th e first half of 1960 w hen su b stan tial securities losses w ere realized. In 1961, D istrict b an k s m ade net gains o f nearly $ 2 2 m illion on securities, as com p ared to reco rd ed net losses of $15 m il lion in 1960 and $28 m illion in 1959. T he last y ear in w hich substantial gains on securi ties are show n was in 1958, w hich will be recalled as a p erio d in w hich in terest rates w ere falling during the first half of the year. In general, the earnings p osition o f the sm aller banks in the D istrict w as m ore fav o r able in 1961 th a n was th a t of the 13 largest banks. E arn in g s on loans increased tw ice as rapidly as fo r th e largest banks, and net cu r re n t earnings fell only 2 p erce n t from the first half of 1960 fo r th e sm aller banks, as co m p ared to a decline of 7 p erce n t for the 13 largest banks. T h e sam e p a tte rn repeats itself in term s of net profits before taxes; the M O N T H L Y R EV IEW Septem ber 1961 T a ble 3 P ER C E N TA G E R ETU R N S ON M AJOR BALAN CE S H E E T ITE M S , A LL M EM BER BAN KS (percent per annum) Twelfth District!1 Change from First Half F irst Half 1961 1960 5.3 Return on loan s Return on U. S. G overn m ent securities United Statesn Change from First Half First Half 1961 1960 — 1.1 5.8 — 0.1 — 0.5 3.0 — 0.1 N et current e a rn in gs to total cap ita l accounts 17.4 — 7.3 17,7 — 2,3 N et profits after taxes to total cap ital accounts 9.0 — 2.1 9 .7 — 0.2 Preliminary. Source: Board of Governors of the Federal Reserve System; Federal Reserve Bank of San Francisco. P 13 largest b an k s’ net profits increased nearly 7 p e rc e n t in th e J a n u a r y - J u n e p e rio d , as com pared to nearly 10 p ercen t for the sm aller banks. A substantial rise in tax liabilities for the sm aller banks, how ever, reverses the p at tern for net profits after taxes as betw een large and small banks. Mem ber bank returns lower As show n in T able 3, the average returns on loans and holdings of U nited States G ov ernm ent securities w ere low er in the first half of this year than in the co m p arab le period of last year, as w ere cu rren t earnings and net profits as a percen t of capital. A co ntributing factor in the low er retu rn s is the general de cline in interest rates from the first half of 1960 to the first half of 1961. In terest rates on business loans in the Tw elfth D istrict fell roughly lA of 1 percent, and yields on m ar ketable governm ent securities also declined over the sam e period. T reasu ry bill rates, for exam ple, averaged around 2 Va percent this spring, while ranging from 4lA percent dow n ward to 2Vi p ercen t in the first half of last y ear. Y ield s o n in te rm e d ia te -te rm U n ite d States G overnm ent securities declined from 4.41 p ercen t to 3.48 percent, and long-term bonds fell from an average of 4.165 in the first half of 1960 to 3.815 this year. It ap pears th a t banks w hich acquired issues b ear ing higher co u p o n values took advantage of the fall in yields to sell off th e ir holdings at considerable prem ium s d u rin g the first six m onths of this year; this w ould account for the large figure show n as gains on securities holdings. D istrict m em ber banks h ad declines in re tu rn s on their loans and investm ents which w ere c o n s id e ra b ly la rg e r th a n ex p e rie n c e d n a tio n a lly , as e v id e n t fro m T a b le 3. T h e m uch sh arp er d ro p in cu rren t earnings may also have been influenced by the institution in A pril of daily interest paym ents on tim e d e p o s its a m o n g th e la r g e r b a n k s in th e T w elfth D istrict. T im e deposits are bo th rela tiv ely m o re im p o rta n t in th e D is tric t and carry a higher average retu rn th a n is the case elsew here, so th a t the effect of daily interest co m p u tatio n w ould be significant. ERRATA Please note the follow ing co rrectio n : T he M o n thly Review , A ugust 1961, page 167, colum n 2, line 32, should read “T he B ank of T okyo L td. opened an agency in Seattle in F eb ru ary 1961.” 187 FEDERAL RESERVE BANK OF SAN FRANCISCO BANKING AND CREDIT STATISTICS AND BU SIN E SS IN D EX ES— TWELFTH DISTRICT 1 (In d exes: 1947-1949 = 100. D ollar am ounts in m illions of dollars) Condition items of all m em ber banks2’ 1 Bank debits index 31 cities*' 5 Demand deposits adjusted3 Total time deposits 495 720 1,450 6,463 6,619 6,639 7,942 7,239 6,452 6,619 8,003 6,673 6,964 1,234 951 1,983 9,937 10,520 10,515 11,196 11,864 12,169 11,870 12,729 13,375 13,060 1,790 1,609 2,267 6,777 7,502 7,997 8,699 9,120 9,424 10,679 12,077 12,452 13,034 42 18 30 132 140 150 153 173 190 204 209 237 253 17,142 16,923 16,958 16,898 17,139 6,303 6,339 6,626 6,697 6,964 12,579 12,575 12,848 12,907 13,060 12,454 12,547 12,628 12,616 13,034 249 253 263 248 258 16,751 17,525 17,517 17,637 17,632 17,578 17,504 17,772p 6,984 6,991 6,916 7,436 7,393 7,571 7,935 7,866p 13,010 12,7.50 12,860 13,222 12,865 12,935 13,206 13,212p 13,121 13,639 13,754 13,999 14,289 14,371 14,492 14,656p 255 257 274 267 265 269 267 Year and M onth Loans and discounts 1929 1933 1939 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 2,239 1,486 1,967 7,866 8,839 9,220 9,418 11,124 12,613 13,178 13,812 16,537 17,139 1960 August September October November December 1961 January February March April May June July August U.S. Gov't securities Bank rates on short-term business loans6’ 7 Total nonagri cultural employ ment 3.66 3.95 4.14 4.09 4.10 4.50 4.97 4.88 5.36 5.62 5.53 5.50 5 48 5.50 Industrial production (physical volume)* Year and month 1929 1933 1939 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 August Septem ber October Novem ber December 1961 January February March April M ay June July Refined D ep't store sales (value)5 30 18 31 112 120 122 122 132 141 140 143 157 156 64 42 47 113 115 113 113 112 114 118 123 123 125 Retail food prices 7, 6 60 112 118 121 120 127 134 139 138 146 150 57 121 130 137 134 143 154 160 155 166 166 102 52 77 101 100 100 96 104 104 96 89 94 88 150 1,50 150 150 150 164 164 164 163 163 82 86 85 85 87 155 155 160 152 159 125 126 126 126 127 151 151 151 151 151 152 152p 162 162 163 162 163 164 164p 84 83 83 88 81 85 86 154 164 160 164 153 162 167 127 127 127 127 127 126 126 Exports Cement Electric power Imports Total D ry Cargo Tanker Total Dry Cargo 29 26 40 120 136 145 162 172 192 209 224 229 252 271 190 110 163 92 186 171 141 133 166 201 231 176 188 241 150 247 7 107 80 194 201 138 141 178 261 308 212 223 305 243 108 175 130 145 123 149 117 123 123 138 149 124 72 95 144 162 204 314 268 314 459 582 564 686 808 128 24 125 146 139 158 128 154 163 172 142 138 154 103 17 80 115 116 115 113 103 120 131 130 116 99 129 97 145 140 141 163 166 187 201 216 221 263 269 '57 103 733 1,836 4,239 2,912 3,614 7,180 10,109 9,504 11,699 14,209 149 164 143 159 155 151 133r 125 131 127 129 133 123 121 141 144 141 137 270 275 279 275 276 274 193 227 2,50 244 220 271 257 280 3^7 347 306 338 102 153 113 97 97 175 681 1,025 885 779 826 1,046 263 261 284 238 254 245 11,565 20,948 16,550 9,240 15,744 21.919 159 176 178 168 169 188 111 152 162 172 191 187 183 139 134 137 133 143r 142p 277 276 235 248 264 261 318 362 363 331 118 95 124 163 779 666 952 759 218 233 252 286 15,394 11,985 19,268 13,139 95 40 71 114 113 115 116 115 122 120 106 107 116 110 87 52 67 98 106 107 109 106 106 105 101 94 92 91 78 50 63 103 112 116 122 119 124 129 132 124 130 134 55 27 56 112 128 124 131 133 145 156 149 158 174 161 108 109 106 103 100 99 91 90 90 91 91 91 138 138 136 131 135 137 101 101 103 112 110 109 91 91 92 92 92 91 134 134 131 135 143 142 1960 J u ly Crude Car loadings (num ber)5 W aterborne Foreign Trade Index7* •• 10 Petroleum 7 Lumber Total m f’g employ ment Steel7 Copper7 Tanker 1 Adjusted for seasonal variation, except where indicated. Except for banking and credit and department store statistics, all indexes are based upon data from outside sources, as follows: lumber, National Lumber M anufacturers’ Association, West Coast Lumberman’s Association, and Western Pine Association; petroleum, cement, and copper, U.S. Bureau of Mines; steel, U.S. Departm ent of Commerce and American Iron and Steel Institute; electric power, Federal Power Commission; nonagricultural and manufacturing employm ent, U.S. Bureau of Labor S tatistics and cooperating state agencies; retail food prices, U.S. Bureau of Labor Statistics; carloadings, various railroads and railroad associations; and foreign trade, U.S. Departm ent of Commerce. 2 Annual figures are as of end of year, monthly figures as of last W ednesday in month. 3 Dem and deposits, excluding interbank and U.S. Government deposits, less cash item s in process of collection. M onthly data partly estim ated. 4 D ebits to total deposits except interbank prior to 1942. Debits to demand deposits except U.S. Government and interbank deposits from 1942. b D aily average. • Average rates on loans made in five major cities, weighted by loan size category. 7 N ot adjusted for seasonal variation. 8 Los Angeles, San Francisco, and Seattle indexes combined. 9 Commercial cargo only, in physical volume, for the Pacific Coast custom s districts plus Alaska and Hawaii; starting with July 1950, “special category” exports are excluded because of security reasons. 10 Alaska and Hawaii are included in indexes beginning in 1950. p— Preliminary. r— Revised. 188
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