Bank profits ; Banks and banking - Accounting

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Research Papers in Economics

MemberBank Income and
Expenses--1967
IWET INCOME at member banks in the Eighth
District continued to increase in 1967, although less
rapidly than in 1966. Net income after taxes rose 8
per cent for the year compared with a 14 per cent
increase a year earlier and an average annual rate of
gain of 7 per cent during the 1957-67 period.
Total operating revenue rose 13 per cent in 1967, re-
flecting both a larger volume of earning assets and a
somewhathigher average rate of return on these assets.
Expenseswere up lOpercent, with the greatestincrease
being interest payments on time and savings deposits,
Net current earnings (operating revenue less operating
expenses) rose only 4 per cent. However, the net effect
of security transactions was more favorable than a year
earlier, resulting in net income being up more than net
current earnings.
Net income after taxes at all member banks in the
nation rose 18 per cent, a much greater increase than
at district banks. Gains in net current earnings at
banks in the district were not greatly different from
member banks in the nation, rising 4 per cent and 5
per cent respectively. A major factor in the more rapid
gains in after-tax income at banks in the nation was
the handling of valuation reserves and gains or losses
on security transactions. While recoveries, transfers
from valuation reserves, and profits on security sales
rose 24 per cent from the previous year at banks in the
nation, such adjustments fell 21 per cent at district
member banks. Losses, charge-offs, and transfers to
valuation reserves declined about one-fifth from the
previous year in both the district and the nation.
Average Return on Securities and Loans
Eighth District MemberBanks
PerCent Percent
:
4
—-— —
~
~---~-
Interest on U.S. Government Securities
I
4
S
---
—- ~-- 3
2
Interest on Other Securities
2
~T IIIII/ I I ‘ I T~
~957 1959 1961 1963 1965 1967
Page 7Table 1
REVENUES AND EXPENSES OF EIGHTH DISTRICT MEMBER BANKS
Millions of Dollors Per Cent chonge
Ar,rn’al Rate
1967 1966 1965 1957 196o-67 1965.66 1957-67
Revenue an loans 374.2 334.3 287.4 140.8 11.9 16.3 10.3
Interest an sect_rihes
U. S. Government 822 75.7 69.6 47.6 9.2 8.8 52
Other 53.4 43.5 36.7 12.7 22.8 1 8.5 15.4
Servicc charges or depas;t occoun’ 20.5 18.6 16.9 9.3 10.2 10.1 8.2
Trjst departm.’rt 16.8 15 I 138 6.6 11.3 9.4 9.8
All other ‘evenues 8.1 1 5.1 - 11.0 10.2 19.9 37.3 5.9
Total Operating Revenues 565,7 502.3 435.4 227.2 12.6 15.4 9.6
Salaries, wages, arid benefits 132.4 118.8 109.0 63.7 11.4 9.0 7.6
Interest on time deposits 171 8 138.4 114.2 22.6 24.1 21.2 22.5
Other expenses. 113.8 102.8 87.1 - 50:7 10.7 18.0 8.4
Total Operating Expenses 418.0 360.0 310.3 !3!:0 16.1 16.0 11.8
Net Current Earnings 147.7 142.3 125.1 90.2 3.8 13.7 5.1
Recoverin,, transfers from reserves, and prof’.ts. .. - 160 20.2 18.1 5.2 20.8 11.6 11.9
Losses, ct,arge-offs, aS transfers to reserves 35.5 45.2 36.9 16.7 21.5 22.5 78
Net Income (Before Income taxes~ 128.2 117.3 106.3 78.7 9.3 10.3 5.0
Taxes On net income 36.1 32.1 31.3 33.1 12.5 2.6 0.9
Net Income (After Income taxes) 92.1 85.2 75.0 456 8.1 13.6 7.3
Cash dvider,du or’ common stock 35.0 32.8 30.9 I 8 2 6.7 6.1 6.8
Interest on capital notes and debertures 2.0 1.9 1.4
Number of bonks 47d 480 483 491
in,Ic.~i: LU ii oorrit -f ~
5
h,hddc id I.’, plc-Is-i I’’ I sI’,
°1.i-ss tl:i, II 1)5
Revenues
Operating revenues atdistrict member banks totaled
$566 million in 1967, an increase of 13 per cent from
a year earlier. Major factors influencing this rise were
a substantial increase in loans and state and local
government securities, along with a slightly higher
average rate of return on earning assets.
Although total vevenue increased somewhat more
rapidly than loan revenue, the latter accounted for
nearly two-thirds of the dollar amount of increase in
total revenue from a year earlier. Revenue from securi-
ties other than U. S. Government securities (mostly
issues of state and local jurisdictions) was the most
rapidly rising source of revenue. Income from these
sources rose 23 per cent from a year earlier and
accounted for almost one-sixth of the gain in total
revenue at district member banks, Miscellaneous
revenue rose 20 per cent from a year earlier, reflecting
the broader range of non-lending services being
offered by commercial banks.
Operating revenues at district banks have risen at
an average 10 per cent annual rate during the past
decade, from $227 million in 1957 to $566 million in
1967.’ In addition to an increase in total assets of these
banks, the growth in revenue reflects a marked rise
in the general level of interest rates, and a shift in the
composition of assets, to relatively more of the higher
earning types.
Largely as a result of national monetary expansion,
total resources of district member banks grew from
$6.6 billion in 1957 to $11.9 billion in 1967, an average
annual increase of 61 per cent. Reflecting a slight de-
cline in the proportion of assets in cash balances,
earning assets grewsomewhat more rapidly, from $5.0
billion in 1957 to $9.4 billion in 1967, a 0.4 per cent
rate.
In addition to the growth in earning assets, banks
have enhanced operating revenues by adjusting the
composition of their portfolios to include proportion-
ately more of the higher earning types of assets. Bank
holding of U. S. Government securities dropped from
28 per cent of assets in 1957 to 16 per cent in 1967.
1
These data do not take into account changes in total num-
ber of banks, resulting from new member banks, withdrawals
from membership, mergers, etc. The effect of such changes
in the totals shown would he very minimal.
Page 8Meanwhile, loans rose from 40 per cent to 50 per cent
of assets, and “other” securities (mostly tax exempt
issues of state and local governments) rose from 8 to
13 per cent.
A major factor tending to increase revenues ofbanks
during the past decade was the upward trend of
interest rates. The average return on bank loans
increased from 5.3 per cent in 1957 to 6.3 per cent in
1967. Meanwhile, the average return on Government
securities rose from 2.6 per cent to 4.5 per cent,
Greater interest and fees charged on bank loans
have accounted for a major portion of total bank
revenue growth during the past decade. From $141
million in 1957, or 62 per cent of the total, revenue
from loans rose to $374 million in 1967, or 66 per cent
of the total. Returns on loans increased at an average
annual rate of 10 per cent during the period.
The most rapidly growing source of revenue over
the past decade has been interest on securities other
than U. 5. Governments. Revenue from these securities
rose from $13 million in 1957 to $53 million in 1967,
an average annual increase of 15 per cent,
Although revenue from U. S. Government securities
has continued to rise during the past decade, such
revenue has declined as a proportion of total revenue,
Interest on Government securities was $48 million in
1957, 21 per cent of total revenue, while in 1967 such
revenue was $83 million, 15 per cent ofthe total. From
1957 to 1967 such revenue rose at an annual rate of
6 per cent.
Income from sources other than loans and invest-
ments has also grown during the past decade. Service
charges on deposit accounts have risen at an average
annual rate of S per cent since 1957, and trust depart-
ment earnings at a 10 per cent rate. Revenue from all
other sources showed very little net increase from
1957 through 1965. In the past two years however,
such miscellaneous revenue has expanded rapidly,
rising 37 per cent in 1966 and 20 per cent in 1967.
Expenses
Operating expenses at district member banks totaled
$418 million in 1967, an increase of 16 per cent from
the previous year (Table I). As in most other recent
years expenses grew at a more rapid rate, although
by a smaller absolute amount, than revenues. Reflect-
ing both the rising interest rates and growth in time
and savings deposits, interest paid on time and savings
deposits was the most rapidly rising major expense
itemfrom 1966 to 1967, increasing 24 per cent, Wages,
salaries, and employee benefits rose 11 per cent, as
did all other expenses.
Over the past decade operating expenses increased
at a high annual rate, but somewhat less than the rise
last year. Since 1957 operating expenses of member
banks in the district have risen from $137 million to
$418 million, an average annual rate of increase of 12
per cent. A sharply rising volume of time and savings
deposits and an upward trend in interest rates paid
Page 9on these accounts have resulted in interest expense
accounting for a major portion of the rise in bank
operating expenses.
Reflecting the generally rising demand for loanable
funds and the competition of financial agencies to
obtain such funds, interest paid by banks has increased
sharply during the past decade. Interest expense rose
from $23 million in 1957 to $172 million in 1967, an
increase of 23 per cent per year. The volume of time
and savings accounts at district banks rose from $1.3
billion in 1957 to $4.2 billion in 1967, or 12 per cent
per year, while the average rate paid on these accounts
rose from 1.68 per cent to 4.07 per cent.
Other major expense items have increased, but less
rapidly than interest expense during the past decade.
Salaries, wages, and fringe benefits rose at an average
annual rate of 7.6 per cent, and all other expenses rose
at an 8.4 per cent rate.
District member banks have made sizable gains in
the efficient use of labor resources. The number of
bank employees in the district has increased less
rapidly than either bank assets or loans. Since 1957
the number of employees has dropped from 2.5 per $1
million total assets to 1.8 per $1 million assets last
year. Relative to loans the decline has becn even
Page 10
greater. In 1957 member banks in the district em-
ployed a2 persons per $1 million loans outstanding,
compared with 3.7 persons in 1967. These trends
reflect some gains in economies of scale as banks have
grown. Also, there was an increasing efficiency in per-
forming the numerous clerical tasks associated with
bank operations, resulting in part from increased adap-
tion of electronic data processing equipment in bank-
ing. Reflecting these developments, furniture and
equipment expense increased from $5.8 million in
1961 (the first year such expense was reported as a
separate item) to $15.3 million in 1967, an average
annual increase of 17.5 per cent. Of those expense
items reported by banks, only interest expense on time
and savings deposits rose more rapidly.
Net Losses on Loans and Securities
Actual losses on loans at district member banks
totaled $7 million in 1967, about unchanged from
the previous year. The ratio of net losses to total loans
was 0.12 per cent, a slight decline from a year earlier.
District member banks experienced net profits on
securities of $3.8 million in 1967, compared with netlosses of $11 million in 1966. Several factors con-
tributed to these gains on securities sold. The demand
for loans at commercial banks in 1967 was somewhat
weaker than in 1966. Consequently, there was less
need to sell securities to meet loan demands. In
addition, 1966 was a year of depressed securities
prices, and banks could take losses which are often
favorable on after-tax income. In much of 1967 secur-
ities prices were rising, and loss-taking opportunities
were notso prevalent.
Net Earnings and Income
Net current earnings of member banks in the
Eighth District totaled $148 million in 1967, an in-
crease of 3.8 per cent from a year earlier (Table I).
This was somewhat below the avenge annual increase
of 5.1 per cent during the 1957-67 period. The effect
of adjustments for net losses, charge-offs, and transfers
to valuation reserves, however, was more favorable
in 1967 when net current earnings were reduced only
$19.5 million, compared with a $25 million reduction
in 1966.
Net income before taxes totaled $128 million, an
increase of 9 per cent over $117 million in 1966. In-
come taxes rose 13 per cent from the previous year.
In addition to the moderate rise in net current earn-
ings, the larger tax payments reflected net profits on
security sales, compared with large losses on such
sales in 1966.
Net income after taxes at district member banks
totaled $92 million in 1967, an increase of 8 per cent
and slightly above the trend rate of 7.3 per cent per
year during the past decade. In comparison, net in-
come after taxes at all member banks in the nation
has risen at an 8.4 per cent rate since 1957. Net after-
tax income relative to capital accounts was 9.5 per
cent in 1967, compared with 9.3 per cent a year
earlier. During the past decade the ratio of profits to
capital at member banks in both the district and the
nation has been in the 8 - to - 10 per cent range.
Member banks in the Eighth District distributed
dividends on common stock of $35 million in 1967, an
increase of 6.7 per cent from the previous year. Net
retained earnings at these banks totaled $55 million.
These undivided profits are the primary source of in-
creased capital in banks. In addition, member banks
in the district sold $3.9 million in capital notes and
raised $3.2 million of other capital, for a net increase
in capital of $62 million, 6.7 per cent above year-
end 1966.
Conclusions
The operations of member banks in the district
showed somewhat mixed results for the year 1967. Net
operating earnings rose somewhat less rapidly than
the average rate of gain for the past decade. Although
after-tax income of these banks rose 8 per cent, this
was considerably less than the 18 per cent gain ex-
perienced by all member banks in the nation. Net
income relative to capital accounts was 9.5 per cent
in 1967, compared with 9.3 per cent in 1966.
Page 11

Member bank income and expenses -1967

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Member bank income and expenses -1967

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