Bank profits ; Banks and banking - Accounting

Theodore A. Veenstra

English

Research Papers in Economics

Member Bank Earnings, 1958
FOR THE YEAR 1958 member banks re-
ported $2,510 million of net current earn-
ings before income taxes, $39 million less
than in 1957.
x The decline reflected a larger
increase in operating expenses than in cur-
rent earnings. Net profits nevertheless were
$288 million higher than the year before,
for nonoperating transactions resulted in a
NOTE.—This article was prepared by Theodore A.
Veenstra, Jr., of the Board's Division of Bank Opera-
tions.
xNet current earnings are gross current operating
earnings less gross current operating expenses, before
adjustments for losses, profits on sales of securities,
recoveries, and transfers to and from valuation re-
serves, and before taxes on net income.
net addition of $96 million contrasted with
a net reduction of $485 million in 1957.
Larger provisions for Federal and State in-
come taxes offset part of the gain for 1958.
Larger profits on sales of securities in
1958 were the major factor in the shift from
a loss to a gain on nonoperating transac-
tions. In other postwar years member banks
reported net gains from these transactions
only in 1946 and 1954.
Net profits rose at a faster rate than total
capital accounts in 1958. As a result the
ratio of net profits to average total capital
accounts increased from 8.3 per cent in
1957 to 9.7 per cent in 1958. Declarations
MEMBER BANK EARNINGS, 1947-58
[Dollar amounts in millions]
Item 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958
Earnings
On U. S. Government securities....
On other securities
On loans
Service charges on deposit accounts.
Other earnings
Expenses
Salaries and wages
Interest on time deposits
Taxes other than income
Other expenses
Net current earnings before income taxes.
Profits on securities
Recoveries 1
Losses and charge-offs
2
Net increase in valuation reserves ....
Profits before income taxes
Taxes on net income
Net profits
Cash dividends declared
4.
$2,579
921
149
1,044
119
346
1,650
797
236
88
529
929
90
142
251
910
257
653
281
$2,828
855
158
1,308
141
367
1,795
876
250
90
579
1,033
55
135
195
173
854
234
621
294
$2,986
859
169
1,427
158
373
1,889
926
261
96
605
1,097
64
91
166
125
961
275
686
313
$3,265
865
190
1,634
172
403
2,020
1,000
271
109
640
1,245
82
93
149
121
1,150
369
781
346
$3,669
832
211
2,003
187
436
2,232
1,125
306
115
686
1,437
52
87
202
128
1,247
491
756
371
$4,120
929
235
2,306
198
452
2,501
1,244
365
118
775
1,619
29
84
226
68
1,437
608
829
390
$4,590
1,011
252
2,632
219
477
2,782
1,371
425
125
860
1,809
35
86
332
40
1,558
692
865
419
Ratio of net profits to average total
capital accounts (per cent)
Number of banks at end of year
7.9 7.2 7.6
6,923 6,918 6,892
8.3
6,873
7.6 7.9 7.8
6,840 6,798 6,743
$4,826
1,066
273
2,711
252
523
2,999
1,463
494
140
902
1,828
375
117
254
165
1,900
804
1,096
456
9.3
6.660
$5,343
1,118
296
3,083
274
572
3,265
1,571
543
149
1,002
2,077
51
113
426
139
1,676
691
985
501
$6,078
1,101
308
3,725
310
634
3,680
1,735
650
157
1,138
2,398
28
124
577
229
1,744
718
1,027
547
$6,771
1,168
339
4,208
354
702
4,222
1,877
927
172
1.246
2,549
57
102
468
177
2,063
895
1,169
604
7.9 7.7
6,543 6.462 6,393
$7,127
1,266
411
4.326
389
734
4,617
1,981
1.123
185
327 1
2,510
612
142
315
342
2,606
1,148
1,457
646
9.7
6,312
1 Beginning with 1948, includes recoveries credited either to un-
divided profits or to valuation reserves; see note 3.
2 Beginning with 1948, includes losses charged either to undivided
profits or to valuation reserves; see note 3.
3 Not reported separately; transfers to these reserves were included
with losses, and transfers from these reserves were included with re-
coveries.
4 Includes interest on capital notes and debentures.
586
Federal Reserve Bulletin: June 1959MEMBER BANK EARNINGS, 1958 587
of cash dividends by member banks were
$42 million higher than in 1957. Average
total capital accounts represented the same
proportion of average total assets in 1958 as
in 1957, 7.9 per cent.
A summary of factors contributing to the
increase in net profits of member banks in
1958 appears in the accompanying table.
FACTORS IN HIGHER NET PROFITS
[In millions of dollars]
Item
Increase in net profits
Factors increasing net profits, total.
Increase in operating earnings
On loans
On U. S. Government securities.
On other securities
Miscellaneous current earnings. .
Nonoperating transactions
Increase in profits on sales of securities
Decrease in net losses on securities
 2
Smaller net increase in valuation reserves on loans.
Increase in miscellaneous recoveries
Decrease in net losses on loans
2
Factors decreasing net profits, total.
Increase in operating expenses
Nonoperating transactions
Change from net decrease to net increase in valua-
tion reserves on securities
Increase in miscellaneous losses
Increase in provision for taxes on net income
Change
from 19571
+288
+ 1,160
356
118
98
72
67
804
554
191
34
14
11
-872
395
223
199
24
254
1 Details may not add to totals because of rounding.
2 Includes recoveries credited and losses charged either to undivided
profits or to valuation reserves.
EARNING ASSETS AND EARNINGS
Earning assets of member banks rose $12.5
billion during 1958 to a total of $155 bil-
lion at the year-end. Loans accounted for
$3.1 billion of this growth, U. S. Govern-
ment securities for $7.2 billion, and other
securities for $2.2 billion. The increases in
these items from the end of 1957 to the end
of 1958 were larger than those in average
holdings over the year as a whole.
Commercial and industrial loans, the
largest loan category, declined for the first
time in recent years, but real estate loans
were $1.8 billion larger than at the end of
1957 and other loan categories were also
larger. Most of the expansion in member
bank holdings of Government securities was
in Treasury notes and certificates, and al-
most all of the increase in other securities
was in State and local government issues.
All items of current operating earnings in-
creased, as in most other recent years, but
the over-all increase of 5 per cent was the
smallest since 1954. Earnings on loans ac-
counted for $ 118 million of the growth for
1958. The average rate of return on loans
rose from 5.32 to 5.35 per cent, and the
average amount of loans held expanded $1.8
billion.
Earnings on U. S. Government securities
were $98 million larger than in 1957. This
growth was due to the increase of $5.5 bil-
lion in average holdings during the year.
Although member banks expanded their
portfolios of U. S. Government securities,
their holdings of the lower yielding, short-
term issues—bills, notes, and certificates—
expanded more than holdings of longer term
issues. As a result of this and of the gen-
eral decline in yields on Government securi-
ties during 1958, the average rate of return
on Government security portfolios declined
to 2.45 per cent from 2.53 per cent in 1957.
An increase of $72 million in earnings on
other securities reflected a higher average
rate of return and larger average holdings.
The major sources of member bank earn-
ings have changed since 1947, as the table
on the preceding page shows. Earnings on
loans have increased from 40 to 61 per cent
of total earnings, while earnings on U. S.
Government securities have declined from
36 to 18 per cent of the total.
EXPENSES
All categories of member bank expenses
continued to rise in 1958, and for the year
Federal Reserve Bulletin: June 1959588 FEDERAL RESERVE BULLETIN • JUNE 1959
CHANGES IN MEMBER BANK LOANS AND INVESTMENTS
1958
[Dollar amounts in millions]
Item
Total loans and investments
Loans *
Commercial and industrial
Agricultural
For purchasing and carry-
ing securities
Real estate
Other loans to individuals
All other
U. S. Government securities
Treasury bills, notes, and
certificates
Bonds2
Other securities
State and local government. . .
Other
Amount
Dec. 31,
1958
$154,865
84,061
37,444
3,052
4,329
20,013
17,028
3,920
54,299
21,904
32,396
16,504
13,405
3,100
Change from
Dec. 31, 1957
Amount Percentage
+$12,512
+ 3,112
425
+ 580
472
1,781
253
605
+ 7,220
,862
,358
,181
,170
11
-f 8.8
+ 3.8
- 1.1
+23.4
+ 12.2
+ 9.8
+ 1.5
+ 18.2
+15.3
+ 36.5
+ 4.4
+15.2
+ 19.3
+ .3
1 Totals are net (after deduction of valuation reserves); individual
loan items are gross and do not add to totals.
2 Includes small amount of guaranteed obligations.
as a whole current operating expenses to-
taled $4,617 million, 9 per cent more than
in 1957. Interest payments on time de-
posits continued to expand at a sharp rate
and in 1958, as in 1957, these payments ac-
counted for about half of the increase in all
current operating expenses.
The accelerated growth in interest pay-
ments during 1957-58 reflected a rapid rate
of expansion in average time deposits out-
standing—by $6.5 billion in 1958 and $3.4
billion in 1957 compared with $1.2 billion
in 1956—as well as further advances in the
average rate of interest paid. By 1958 this
average rate was 2.20 per cent compared
with 2.08 in 1957 and 1.58 in 1956. Total
interest expense on time deposits was 73 per
cent larger in 1958 than in 1956. The in-
crease in this expense for the two years com-
bined absorbed 45 per cent of the total
growth in gross current operating earnings
during the period.
Salaries and wages accounted for $104
million of the increase in operating expenses
during 1958. Both the number and the
average compensation of officers and em-
ployees continued to expand.
PROFITS, RECOVERIES, LOSSES, AND
TRANSFERS TO VALUATION RESERVES
Profits and recoveries on loans and securities
exceeded losses, charge-offs, and net trans-
fers to valuation reserves in 1958 for the
first time since 1954; the last gain previous
to that year had been in 1946. These non-
operating transactions added $96 million to
member bank profits during 1958; additions
of $346 million from transactions in securi-
ties were offset to the extent of $200 million
by transactions in loans and $49 million by
transactions in all other assets. In 1957
these nonoperating transactions had reduced
net profits by $485 million.
Valuation reserves on loans were in-
creased by $153 million in 1958, and those
on securities by $189 million. For loans
the increase represented a continuation of
the upward trend of the last decade, but it
was the smallest rise since 1954. Valua-
tion reserves on securities, on the other
hand, have declined in most of the last 10
years, and the current increase was the first
since 1954.
INCOME TAXES
Provision for taxes on net income increased
$254 million in 1958. This was 44 per
cent of profits before income taxes, com-
pared with 43 per cent in 1957.
CASH DIVIDENDS
Cash dividends declared in 1958 totaled
$646 million, $42 million more than in
1957; they represented only 44 per cent of
net profits compared with 52 per cent in
the earlier year. The ratio of cash dividends
to average total capital accounts was 4.3
per cent, the same as in 1957. Retained
Federal Reserve Bulletin: June 1959MEMBER BANK EARNINGS, 1958 589
earnings increased $246 million to $811
million and accounted for 89 per cent of
the increase in total capital accounts, com-
pared with 63 and 55 per cent in 1957 and
1956, respectively.
EARNINGS AND PROFITS BY
CLASS OF BANK
Net profits increased by an average of 25
per cent for all member banks, with in-
creases ranging from 21 per cent at reserve
city banks to 34 per cent at central reserve
city banks in Chicago. The sharp increase
for the Chicago banks occurred despite a
decline in their gross current operating earn-
ings. For banks in all other reserve classi-
fications such earnings rose in 1958.
Earnings on U. S. Government and other
securities increased for member banks in all
reserve classes. Earnings on loans increased
at reserve city and country banks, but de-
clined at central reserve city banks. Cur-
rent operating expenses rose for all classes
of member banks.
Nonoperating transactions increased net
profits at all reserve classifications of banks
except country banks, where the effect of
such transactions was to reduce net profits by
$2 million. The ratio of net profits to aver-
age total capital accounts, and the amounts
of cash dividends and retained earnings, in-
creased at all classes of member banks.
Summary data by class of bank are shown
in the accompanying table. Detailed figures
on earnings and related items appear on
pages 650-58 of this BULLETIN.
MEMBER BANK EARNINGS, BY CLASS OF BANK, 1958 AND 1957
[Dollar amounts in millions]
Total
1958 1957
Central reserve city banks
New York
1958 1957
Chicago
1958 1957
Reserve
city banks
1958 1957
Country
banks
1958 1957
Earnings ,
On U. S. Government securities.
On other securities
On loans
All other
Expenses
Salaries and wages
Interest on time deposits
All other
Net current earnings before income taxes.
Profits on securities
Recoveries 1
Losses and charge-offs2
Net increase in valuation reserves.
Profits before income taxes.
Taxes on net income
Net profits
Cash dividends declared 3.
Ratios (per cent):
Net current earnings before income taxes to
Average total capital accounts
Average total assets
Net profits to—
Average total capital accounts.
Average total assets
$7,127
1,266
411
4,326
1,123
4,617
1,981
1,123
1,512
2,510
612
142
315
342
2,606
1,148
1,457
646
16.6
1.32
9.7
0.77
$6,771
1,168
339
4,208
1,056
4,222
1,877
927
1,418
2,549
57
102
468
177
2,063
895
1,169
604
18.1
1.42
8.3
0.65
$1,164
170
61
699
234
636
300
110
227
528
92
19
25
39
576
276
300
160
16.4
1.55
9.3
0.88
$1,136
137
47
727
225
592
293
80
220
544
11
13
97
29
442
209
233
152
18.2
1.70
7.8
0.73
$272
58
17
157
40
142
68
25
49
130
48
8
21
25
140
69
71
26
18.4
1.51
9.9
0.82
$274
46
15
172
41
136
65
23
49
137
7
4
25
30
93
41
53
24
20.6
1.65
7.9
0.64
$2,835
478
151
1,759
447
1,823
111
474
572
1,012
280
45
113
171
1,053
490
563
258
18.1
1.35
10.1
0.75
$2,664
426
128
1,694
415
1,666
731
398
537
998
24
37
166
43
849
385
464
242
19.2
1.42
8.9
0.66
$2,856
560
183
1,712
401
2,016
836
515
664
840
192
70
157
108
837
313
524
202
15.0
1.16
9.4
0.72
$2,697
558
149
1,615
374
1,827
788
427
613
870
15
49
180
74
679
260
419
186
16.5
1.26
8.0
0.61
1 Includes recoveries credited either to undivided profits or to
valuation reserves.
2 Includes losses charged either to undivided profits or to valuation
reserves.
3 Includes interest on capital notes and debentures.
Federal Reserve Bulletin: June 1959

Member bank earnings, 1958

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Member bank earnings, 1958

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