Commercial banks in Tenth District states continued to perform well in 1997. Profitability remained high, loan quality improved, and loan growth and deposit growth were both strong. Banks in district states also outperformed banks nationwide by all four performance measures.Federal Reserve District, 10th

William R. Keeton

English

Research Papers in Economics

Good Times Continue for Tenth
District Banks
By William R. Keeton
C
ommercial banks in Tenth District states
continued to perform well in 1997. Profit-
ability remained high, loan quality improved, and
loan growth and deposit growth were both strong.
Banks in district states also outperformed banks
nationwide by all four performance measures.
Performance of district banks
This article examines changes in the perform-
ance of banks headquartered in Tenth District
states. In looking at changes in performance, it is
essential to control for changes in the sample due
to district banks becoming branches of nondistrict
banks and to nondistrict banks becoming branches
of district banks. Such sample changes have
become particularly important during the last year
due to a surge in interstate branching.
1 To ensure
that changes in measured performance do not reflect
changes in the mix of banks, this article focuses on
a constant sample of banks—those that were head-
quartered in the district at the end of 1997 and in
operation during both 1996 and 1997.
Profits at district banks remained high in 1997
(Chart 1). Profits are measured by return on assets
(ROA), the ratio of after-tax profits to average
assets. The roughly 1,740 banks headquartered in
the district at the end of 1997 earned an average
ROA of 1.31 percent during the year, one basis
point higher than the same banks earned in 1996.
District banks also maintained a narrow lead over
banks in the nation, where ROA edged up four
basis points to 1.23 percent.
Profits remained high at district banks because
the major components of profits changed only
slightly and in offsetting ways (Table 1). Net
interest income slipped one basis point, as interest
expense increased slightly more than interest
expense. Noninterest expense declined slightly
more than noninterest expense, reducing net nonin-
terest expense by two basis points. After two years
of moderate increases, loan loss provisions remained
virtually unchanged at 0.30 percent of assets. While
little changed, provisions were more than enough to
cover chargeoffs of bad loans, which also leveled
off in 1997. Net gains from the sale of securities
had virtually no effect on bank profits in 1997 after
boosting profits slightly the year before. And
extraordinary gains were negligible for the third
year in a row.
Loan quality at district banks was strong in 1997,
showing some improvement over 1996. Loan qual-
ity can be measured by noncurrent loans, which
include loans at least 90 days overdue and not
accruing interest. At yearend, these noncurrent
loans were 0.86 percent of total loans, nine basis
points lower than a year earlier. Delinquency rates
remained high on credit card loans but fell sharply
on farm operating loans, reflecting a turnaround in
the cattle industry and improved growing condi-
tions for crop producers. Delinquency rates edged
down on real estate loans and business loans and
were unchanged on consumer loans other than
credit card loans. The district delinquency rate
remained a little below the national delinquency
rate, which fell eight basis points to 0.96 percent.
11
1 During 1997, 39 banks headquartered in district states became
branches of banks headquartered in nondistrict states, and 6 banks
headquartered in nondistrict states became branches of banks head-
quartered in district states. The net effect of these sample changes was
to reduce the total assets of banks headquartered in district states by 22
percent. The implications of interstate branching for measures of local
banking performance are discussed in detail in Keeton and McKibbin.District bank loans continued to grow rapidly in
1997. Loans at district banks rose 10.9 percent, two
percentage points faster than the year before and five
percentage points faster than in the nation.Theaccel-
eration in loan growth was due entirely to increased
absorption of thrifts into the banking industry. Spe-
cifically, thrift acquisitions added 2.2 percentage
points to bank loan growth in 1997, versus only 0.1
point in 1996.  Even after adjusting for thrift acqui-
sitions, however, loan growth remained very strong.
This strength reflected solid economic growth
throughout the district and the continued eagerness
of banks to lend.
District bank deposits rose a strong 8.5 percent
in 1997. That pace was up 1.6 percentage points
from the previous year and was two percentage
points faster than in the nation. Thrift acquisitions
contributed just as much to deposit growth as to
loan growth in 1997. But adjusted for such acquisi-
tions, deposits still grew over 6 percent, considera-
bly faster than in the first half of the decade. Some
of the recent strength in deposit growth has been
due to the flattening of the yield curve, which has
made deposits look more attractive relative to
longer term investments.
Because deposit growth was not as strong as
loan growth in 1997, the district loan-deposit ratio
rose another 1.6 percentage points to 70.5 percent
at yearend. The greatest increase in loan-deposit
ratios in 1997 was at small banks, those with less
than $100 million in assets. These banks
experienced faster loan growth than larger banks
but slower deposit growth. As a result, their aver-
age loan-deposit ratio rose 3.4 percentage points.
Some analysts argue that the sharp increase in
loan-deposit ratios at small banks during the last
several years has strained their liquidity, making
them more vulnerable to a sudden outflow of funds
or slowdown in loan payments.
Performance by state
While Tenth District banks performed well on
average during 1997, performance varied across the
seven district states. Compared with the previous
year, profitability increased in Wyoming, Kansas,
Oklahoma, and New Mexico. Profitability decreased
in Nebraska, Missouri, and Colorado (Chart 2). Loan
quality was little changed in Colorado and Missouri
but improved in all other states (Table 1). Loan
growth was strong in all states except Wyoming,
12
Chart 1
Return on Assets
Commercial banks
.25
0
Percent
1.25
1
.75
.25
0
Percent
1.25
1
.75
1.75 1.75
District U.S.
1.5 1.5
.5 .5
1996 199713
Table 1
Bank Performance Measures
Tenth District states (constant sample)
Tenth District
States Colorado Kansas Missouri
1996 1997 1996 1997 1996 1997 1996 1997
Profits (ROA) 1.30 1.31 1.42 1.35 1.11 1.21 1.30 1.27
Net interest income 4.32 4.31 4.87 4.80 4.17 4.21 4.03 3.94
- Loan loss provisions .29 .30 .20 .27 .32 .27 .20 .23
- Net noninterest expense 2.02 2.01 2.49 2.45 2.15 2.07 1.80 1.73
+ Net securities gains .02 .00 .04 -.02 .01 .00 .01 .01
+ Extraordinary gains .00 .00 .00 .00 .00 .00 .00 .00
- Total taxes .72 .70 .81 .71 .61 .67 .74 .72
Net chargeoffs .25 .26 .18 .22 .33 .24 .17 .18
Noncurrent loans .95 .86 .65 .69 1.09 .85 .80 .80
Loan growth 8.7 10.9 15.7 7.7 6.9 16.3 8.5 14.0
Deposit growth 6.9 8.5 10.6 10.1 4.9 10.1 6.0 11.7
Nebraska New Mexico Oklahoma Wyoming
1996 1997 1996 1997 1996 1997 1996 1997
Profits (ROA) 1.26 1.24 1.25 1.29 1.12 1.17 2.36 2.49
Net interest income 4.41 4.35 4.78 4.66 3.97 4.15 5.25 5.45
- Loan loss provisions .73 .61 .22 .21 .23 .33 .23 .13
- Net noninterest expense 1.73 1.83 2.67 2.51 2.01 2.11 1.47 1.54
+ Net securities gains .01 .01 .05 .00 .00 .01 .07 .00
+ Extraordinary gains .00 .00 .00 .00 .00 .00 .00 .00
- Total taxes .69 .67 .69 .65 .61 .55 1.26 1.29
Net chargeoffs .57 .59 .18 .21 .17 .27 .14 .12
Noncurrent loans 1.03 .93 1.00 .85 1.39 1.19 .71 .52
Loan growth 8.2 7.0 4.3 9.3 8.8 9.8 2.0 1.3
Deposit growth 7.4 5.2 6.0 6.9 5.9 3.5 11.0 5.5
Note: For each area, data for 1996 exclude those local banks that later became branches of nonlocal banks and include those nonlocal banks
that later became branches of local banks. ROA,components of ROA, and net chargeoffs are a percent of average assets. Noncurrent loans
are a percent of total loans. Loan and deposit growth rates are percent changes from the end of the prior year to the end of the current year.
Loans are net of unearned income, and deposits are for domestic offices only.
Source: “The Consolidated Reports of Condition and Income” for all FDIC insured commercial banks in the seven states of the Tenth Fed-
eral Reserve District.where a decline in loans at a large interstate bank
held down the statewide average. Deposit growth
was moderate to strong in all states except Oklahoma.
Wyoming. Average profitability increased in
Wyoming in 1997. ROA rose 13 basis points to
2.49 percent, giving the state the highest profit rate
in the district for the third year in a row. Most of
this gap in profitability has been due to exception-
ally high earnings at a large interstate bank. But
other Wyoming banks have also been highly profit-
able, earning an average ROA of 1.44 percent in
1997. That profit rate was up moderately from the
previous year, helped by an improvement in net
interest income and a decline in loan loss provisions.
Loan quality strengthened and deposit growth
was healthy, while loan growth was held down by a
steep decline in loans at one of Wyoming’s other
interstate banks. Noncurrent loans declined from
0.71 percent of total loans to 0.52 percent, as a
recovery in the state’s cattle industry helped speed
repayments on farm loans. Loans grew only 1.3
percent. Excluding the bank with the big decline,
however, loans grew a strong 10.4 percent. Depos-
its increased 5.5 percent, below the district average
but still solid.
Kansas. Average profitability increased moder-
ately in Kansas. ROA rose 10 basis points to 1.21
percent, bringing Kansas closer to the district aver-
age. The increase in ROA resulted from an increase
in net interest income, a decline in loan loss provi-
sions, and a decrease in net noninterest expense.
Banks in all major size categories shared in the
earnings gain.
Loan quality improved, and loan growth and
deposit growth were both strong. Noncurrent loans
fell 24 basis points to 0.85 percent of total loans.
Delinquencies were down sharply on farm loans
and down moderately on business loans and com-
mercial real estate loans. Loans grew 16.3 percent
and deposits rose 10.1 percent, more than double
the rates of growth in the previous year.  The accel-
eration in loan and deposit growth was due partly to
thrift acquisitions, which contributed 4.1 percentage
points to loan growth and 3.7 percentage points to
deposit growth.
Oklahoma. Average profitability increased
modestly in Oklahoma. ROA climbed five basis
points to 1.17 percent, somewhat below the district
average but still healthy. Net interest income rose
14
Chart 2
Return on Assets by State
Commercial banks
.5
0
Percent
2.5
2
1.5
.5
0
District
Percent
2
1.5
3 3
WY KS OK MO NE NM CO
2.5
1 1
1996
1997substantially, offsetting increases in loan loss provi-
sions and net noninterest expense. Banks under
$100 million in size had an especially good year,
earning an average ROA of 1.27 percent.
Loan quality improved and loan growth
remained strong, while deposit growth slowed some-
what. Noncurrent loans fell 20 basis points to 1.19
percent, helped by faster repayments on farm loans
and business loans. Even with the improvement,
however, delinquency rates exceeded the district
average for most loan categories. Loans grew 9.8
percent, one percentage point faster than the previ-
ous year. Deposits grew only 3.5 percent, however,
two percentage points slower than in 1996.
New Mexico. Bank profitability edged up in New
Mexico. ROA rose four basis points to 1.29 per-
cent, just short of the district average. Net noninter-
est expense fell, making up for a decrease in net
interest income and a decline in net securities gains.
Loan quality improved, while loan growth and
deposit growth were both healthy. Noncurrent loans
fell 15 basis points to 0.85 percent, reflecting lower
delinquencies on farm operating loans and business
loans. Loans grew a robust 9.3 percent, twice as
much as in 1996.  Deposits grew 6.9 percent, up
slightly from the year before.
Nebraska. Bank profitability declined slightly
in Nebraska. ROA slipped two basis points to 1.24
percent, slightly below the district average. Net
interest income fell and net noninterest expense
rose, outweighing a decrease in loan loss provisions.
Loan quality improved, while loan growth and
deposit growth were both healthy. Noncurrent loans
fell ten basis points to 0.93 percent. Delinquencies
eased on farm loans and commercial real estate
loans but rose somewhat on credit card loans,
which are more important in Nebraska than in the
rest of the district. Loans grew 7.0 percent and
deposits increased 5.2 percent, slower than the pre-
vious year but still solid.
Missouri. Profitability edged down at Missouri
banks, as ROA declined three basis points to 1.27
percent. Net interest income declined and loan loss
provisions increased slightly, outweighing a
decrease in net noninterest expense.
Loan quality remained strong, while loan
growth and deposit growth both accelerated due to
thrift acquisitions. Noncurrent loans were unchanged
at 0.80 percent of total loans, as lower delinquen-
cies on farm loans and commercial real estate loans
made up for somewhat higher delinquencies on
business loans. Loans grew a rapid 14.0 percent in
1997, up from 8.5 percent the year before. Deposits
increased 11.7 percent, up from 6.0 percent the year
before. Adjusted for thrift acquisitions, loan and
deposit growth were approximately unchanged
from the previous year but still strong.
Colorado. Bank profitability declined in Colo-
rado, but only modestly and from a very high level.
ROA fell seven basis points to 1.35 percent. Loan
loss provisions rose, net interest income fell, and
net securities gains declined. Net noninterest
expense and taxes also fell, however, limiting the
decline in profits.
Loan quality stayed high, loan growth slowed
from the torrid pace of the previous year, and
deposit growth remained strong. Noncurrent loans
edged up to 0.69 percent of total loans, well below
the district average. Delinquencies eased on busi-
ness loans but increased somewhat on real estate
loans and consumer loans. Loan growth fell by half,
from 15.7 percent in 1996 to 7.7 percent in 1997.
The slowdown was due entirely to declines at two
large interstate banks. Loans at other banks contin-
ued to grow close to 15 percent. Deposits grew 10.1
percent, about the same as the year before.
Conclusion
Banks in Tenth District states continued to do
well in 1997. Profitability was high and little
changed from a year ago. Loan quality improved
from an already high level, and loan and deposit
growth remained strong even after adjusting for
thrift acquisitions. District banks also continued to
outperform banks nationwide, earning higher prof-
its, holding fewer delinquent loans, and enjoying
faster loan and deposit growth.
15
William R. Keeton is a senior economist at the Federal Reserve Bank of
Kansas City.REFERENCES
Keeton, William R., and Anne D. McKibbin.  1997.
“Solid Performance at Tenth District Banks,”
Regional Economic Digest, Federal Reserve Bank of
Kansas City, Fourth Quarter.
16

Solid Performance at Tenth District Banks,” Regional Economic Digest, Federal Reserve Bank of Kansas City, Fourth Quarter.

Good times continue for Tenth District banks

http://www.kansascityfed.org/publicat/red/pdf/2q98bank.pdf

Good times continue for Tenth District banks

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics