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Banking & Finance
AN EIGHTH DISTRICT PERSPECTIVE
SPRING 1987

Reviewing Small Bank Performance in 1986
As of December 31, 1986, approximately 63 percent of
commercial banks in the Eighth District could be classified
as small banks; that is, banks with $50 million or less in
assets. This article examines the overall condition of small
banks in the Eighth District, comparing their performance
to that of their national counterparts. Several measures of
performance including earnings, asset quality and capital
adequacy are evaluated in order to assess the operating
soundness of the regional banking industry.

Earnings

Increased profitability at small banks arose from both
wider net interest margins and improved asset quality (which
resulted in fewer loan charge-offs). Net interest margin
measures the spread between a bank’s interest income and
interest expense. Because the maturity of bank assets tends
to be longer than that of deposits, the general decline in
interest rates increased the lending spread in 1986. The table
shows that, for Eighth District banks with assets less than
$25 million, the average spread between interest income and
expense as a percent of average assets was 4.31 and 4.19
percent for banks in the $25-50 million category.

Small banks showed earnings improvement as the number
Asset Quality
of District banks with negative earnings fell from 97 in 1985
Asset quality is a primary factor influencing the banking
to 85 in 1986. A notable improvement occurred in those
industry’s earnings pattern. Changes in asset quality are
banks with less than $25 million in assets, in which the
typically monitored by two indicators. The ratio of net
number with negative net income declined by seven.
charge-offs to total loans indicates the percentage of net loans
Two key measures of bank earnings and managerial
(adjusted for recoveries) actually written off as losses. The
performance are the return on assets (ROA) ratio and the
second measure, the nonperforming loan rate, is the ratio
return on equity (ROE) ratio. The ROA ratio, calculated by
of problem loans to total loans, which represents the potential
dividing a bank’s net income after taxes by its average assets,
for future loan losses. Problem loans include those past due
gauges how well a bank’s management is employing its
greater than 89 days, nonaccrual loans and renegotiated
assets. The ROE ratio, obtained by dividing a bank’s net
income by its equity capital, indicates the return on the
loans.
shareholders’ investment.
In contrast to the national average, small District banks
Small District banks had higher returns on assets and
saw the ratio of net loan losses to total loans decline in 1986.
equity in 1986 than in the previous two years and far
In particular, banks with assets less than $25 million reported
outperformed their national counterparts. Given the District’s
a large decline, with the ratio falling from 1.51 to 1.24
diversified base, these banks have been able
percent. For small District banks, the loss
to limit their exposure to the agricultural and
rate was highest for commercial loans, with
energy problems experienced by lenders in
agricultural loans a close second. The
other areas of the country. As indicated in
nonperforming loan rate also decreased
the table on the next page, Eighth District
substantially at small District banks while
banks with assets less than $25 million
remaining fairly stable at the national level.
THE
FEDERAL
earned an average 0.76 percent ROA and an
For District banks with assets less than $25
RESERVE
RANK
of
8.06 percent ROE in 1986. Banks with assets
million, nonperforming loans fell from 3.26
ST. IDEIS
between $25 and $50 million had returns of
percent of total loans to 2.68 percent over the
0.85 and 9.80 percent, respectively.
year.



FEDERAL RESERVE BANK OF ST. LOUIS

SPRING 1987

Table 1
Small Bank Performance Ratios
December 1986

December 1985

December 1984

District

U .S .

District

U .S .

District

U .S .

0.76%
0.85

0.08%
0 .50

0.70%
0.80

0.28%
0.68

0.68%
0.81

0.50%
0.76

8.06
9.80

0.86
5.77

7.63
9.29

2.81
7.81

7.37
9.36

4.95
8.74

4.31
4.19

4.29
4.35

4.18
3.88

4.31
4.19

4.23
4 .10

4.52
4.49

1.24
1.16

1.98
1.56

1.51
1.38

1.71
1.38

1.15
0.92

1.14
0.96

2.68
2.61

3.76
3.19

3.26
3.05

3.73
3.31

3.03
2.95

3.05
2.87

10.07
9.29

10.39
9.36

9.90
9.25

10.62
9.39

9.83
9.19

10.63
9.29

EARNINGS

Return on Average Assets
< $ 2 5 m illio n
$25-$50 m illio n

Return on Equity
< $ 2 5 m illio n
$25-$50 m illio n

Net Interest Margin
< $ 2 5 m illio n
$25-$50 m illio n

ASSET QUALITY

Net Loan Losses1
< $ 2 5 m illio n
$25-$50 m illio n

Nonperforming Loans1
< $ 2 5 m illio n
$25-$50 m illio n

CAPITAL ADEQUACY

Total Capital Ratio
< $ 2 5 m illio n
$25-$50 m illio n
1 As a percent o f total loans

Capital Adequacy
Capital—the difference between a bank’s assets and its
liabilities—supports a bank’s operations and provides a
cushion for losses that may arise. Bank capital traditionally
has been seen as a way to protect a bank and its creditors
from failure. For a given quality of assets, the lower the
capital base the greater the risk of insolvency. The level of
capital also serves to maintain public confidence in the
soundness of individual banks and the banking system as
a whole.
The amount of capital by itself does not necessarily provide
useful information to regulators; capital must be measured
relative to those balance sheet items whose fluctuations bank
capital is intended to cushion. Regulators generally are
concerned with the amount of primary and total capital
relative to some measure of the bank’s asset base.
Improvement in bank capital ratios in recent years is
apparent throughout the range of institutions. One reason

for the increased levels of capital has been the adoption of
capital adequacy guidelines by the three federal agencies that
regulate U.S. commercial banks: Federal Deposit Insurance
Corporation, Federal Reserve System and Office of the
Comptroller of the Currency. These agencies have set
minimum standards of 5.5 percent primary capital to assets
and 6.0 percent total capital to assets.
As indicated in the table, both for small banks in the
District and the banking industry as a whole, total capital
ratios are well above the minimum standards established by
the bank regulatory agencies. The average total capital ratio
was 10.07 percent for District banks with less than $25
million in assets and 9.29 percent for banks in the $25-50
million range. As of December 1986, 15 small District banks
or 1.1 percent of all District banks did not meet the minimum
regulatory total capital standards.
Lynn M. Barry

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.




SPRING 1987

FEDERAL RESERVE BANK OF ST. LOUIS

EIGHTH DISTRICT BANKING DATA
LARGE WEEKLY REPORTING BANKS*1
R a te s o f C h a n g e
Level

Current
Quarter

Current
Year

1/1987
($ millions)

IV/19861/1987

1/19861/1987

Same Periods
Previous Year
IV /19851/1986

1/19851/1986

S e le c te d A s s e ts & L ia b ilitie s
$19,060
6,355
4,574
4,680
1,102
2,348

Total Loans & Leases
Com m ercial Loans
C onsum er Loans
Real Estate Loans
Loans to Financial Institutions
All Other Loans
Total Securities
U.S. Treasury & A gency Securities
O ther Securities
Total Deposits
Non-Transaction Balances
MMDAs
$100,000 CDs
Demand Deposits
Other Transaction Balances2

13.2%
15.6
17.0
26.4
-1 3 .6
-7 .2

9.0%
6.2
15.2
12.3
- 3 7 .6
23.8

11.8%
10.3
18.2
17.0
32.7
-9 .2

7.3%
0.3
21.9
6.2
- 2 2 .7
21.6

4,546
3,049
1,496

24.8
53.4
-1 5 .6

11.7
31.8
- 1 4 .9

6.3
- 1 4 .9
45.6

5.2
-3 .5
19.4

22,144
13,398
3,016
3,878
6,301
2,444

3.7
8.5
35.8
12.2
-1 5 .4
39.6

9.1
4.9
23.5
-0 .5
11.4
31.6

-0 .7
1.1
29.6
-1 .3
-7 .0
20.2

2.5
0.8
13.5
-4 .2
2.6
14.9

EIGHTH DISTRICT INTEREST RATES3

Mar. 1987
NOWs
MMDAs
Tim e CDS
92 — 182 days
1 — 2 V2 years
2 1/2 years and over

Feb. 1987

Jan.1987

Mar. 1986

5.02%
5.21

5.04%
5.24

5.04%
5.24

5.5 2 %
6.53

5.58
6.25
6.63

5.56
6.22
6.63

5.52
6.14
6.64

6.96
7.65
7.99

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
IV/86

IV/85

United S tates
IV/84

IV/86

IV/85

IV/84

Return on Average Assets
(annualized)
< $ 1 0 0 m illion
$100 — $300 m illion
$300 m illion — $1 billion
>$1 billion

.89%
.89
.74
.98

.86%
.97
.53
.87

.84%
.95
.86
.73

.51%
.74
.64
.65

.64%
.85
.76
.66

.77%
.85
.84
.51

Return on Average Equity
(annualized)
< $ 1 0 0 m illion
$100 — $300 m illion
$300 m illion — $1 billion
> $ 1 billion

10.28
11.36
9.58
14.65

10.01
12.48
6.83
13.47

9.84
12.21
11.80
11.67

5.95
9.88
9.15
11.17

7.39
11.41
10.22
11.80

8.86
11.50
12.25
9.78

53.58
60.13
67.26
80.21

54.77
63.32
65.60
79.87

55.23
63.28
63.53
76.16

70.54
62.32
70.99
85.86

70.55
64.47
71.58
85.33

59.77
64.89
70.05
85.44

2.55
1.99
2.27
1.82

2.89
2.11
2.72
2.19

2.73
2.10
2.22
2.61

3.41
2.52
2.49
2.78

3.64
2.57
2.42
2.85

2.76
2.37
2.18
3.24

1.41
1.31
1.44
1.39

1.29
1.19
1.37
1.41

1.18
1.07
1.12
1.40

1.25
1.44
1.54
1.67

1.16
1.30
1.37
1.45

1.18
1.20
1.15
1.22

1.10
.94
.86
.57

1.25
.71
.81
.59

.85
.47
.51
.40

1.20
.99
.93
.82

1.12
.83
.73
.71

.89
.64
.54
.70

Loans as Percent of Deposits
< $ 1 0 0 m illion
$100 — $300 m illion
$300 m illion — $1 billion
> $1 billion

Nonperforming Loans as Percent
of Total Loans2
< $ 1 0 0 m illion
$100 — $300 m illion
$300 m illion — $1 billion
> $ 1 billion

Loan Loss Reserves as Percent
of Total Loans
< $ 1 0 0 m illion
$100 — $300 m illion
$300 m illion — $1 billion
> $ 1 billion

Net Loan Losses as Percent
of Total Loans
< $ 1 0 0 m illion
$100 — $300 m illion
$300 m illion — $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