Federal Reserve District, 8th ; Bank profits ; Bank assets

Linda Faulkner Condit

English

Research Papers in Economics

Income and Expenses
Of Eighth District Member Banks —1971
by LINDA FAULKNER CONDIT
ET INCOME of member banks in the Eighth
Federal Reserve District increased 7 percent in 1971
to $151 million, compared with a 15 percent increase
in 1970. Chief factors accounting for the slower in-
come growth in 1971 were a decline in the average
rate charged on loans and the increased costs of time
and savings deposits. Trends in the sources and dis-
position of income of all member banks in the nation
were generally similar to those in the Eighth Dis-
trict, with net income increasing 8 percent to $4.1
billion in 1971 following an 11 percent i-ise in 1970.
Operating income of District member banks in-
creased 8 percent to $944 million in 1971, while op-
erating expenses rose 11 percent to $748 million,
Since expenses rose by a larger dollar amount than
earnings, income before taxes and securities gains or
losses declined 4 percent, compared with a 12 per-
cent gain in 1970. Income taxes applicable to operat-
ing income declined $13.5 million, and net gains on
security transactions after taxes rose $5.8 million, re-
sulting in a net income gain of $9.8 million from the
previous year.
Operating Income
Operating income of commercial banks is primarily
detci-mined by the volume and composition of earn-
ing assets held and their respective rates of return.
Revenue from loans and securities is the major source
of income; other sources include trust department in-
come, service charges on deposit accounts, and other
fees, The dollar volume of earning assets increased
more rapidly in 1971 than in 1970, but the rate of re-
turn on loans, which comprised over half of the asset
portfolio, was less. Thus, operating income rose only
8 percent, compared to a 13 percent rise in the pre-
vious year.
More expansive monetary actions during the first
half of 1971 as well as aggressive competition for
Page 8
—~— ~r
Operating Income ~‘l25%
19.0%
~&:ingE~ ~i
~
Net Income~ -_____
,
-191%
~
~-~t-~
—14 5
~
-~-
~--——~
savings throughout the year enabled District banks to
increase their total assets 13 percent to $17.7 billion,
compared to a 10 percent increase in 1970. Time and
savings deposits became a more attractive investment
for the public because rates of return on most com-
peting market instruments generally declined rela-
tive to rates offered by banks.
Loans outstanding increased 12 percent to $9.1 bil-
lion between December 1970 and December 1971.
Loans accounted for 52 percent of total assets at
Operating Income, Operating Expenses
and Net Income
Eighth District Member Banks
Ratio Scale
Millions of Dollars
l20”
1000
800
Ratio Scale
Millions of Dollars
1200
600
400
200 200
100
90
80
IOU
90
80
70 70
1966 1967 1968 1969 1970 1971
N,f,~S’a,Iiog ‘1959 Op”ati’ 98’p,,ses o’d N,lln,ome a,,co,, p,f,d
i,com, ,,po,’i,9 ba,is. Fa, k,th,, ,xplo,oli,, a
5
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,e,,i,io’ a,, IS, F,d,,oI 9,,,,,, Br,IkSi, J,Iy 197q. pp 571 a,d 572.
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P
0FEDERAL RESERVE BANK OF ST. LOUIS
and other nonearning assets declined slightly relative
to total assets.
Average rates of return on earning assets remained
relatively stable from the previous year with the ex-
ception of the rate on loans, which fell about 60 basis
points to 7.1 percent.1 The average rates of return on
U.S. Treasury securities and obligations of U.S. Coy-
ernment agencies remained at 5.8 and 6.3 percent,
respectively. The rate on obligations of states and
political subdivisions combined increased about 20
basis points to 4.1 percent.
Interest and fees on loans accounted for about two-
thirds of total operating income but showed litfie
growth in 1971, rising only 2 percent to $604 million.
Interest on U.S. Treasury securities increased 9 per-
cent to $113 million. Returns on all other securities,
primarily tax-exempt state and municipal bonds, were
the most rapidly rising source of income, increasing
32 percent to $117 million. Income from all other
sources, including trust department income and serv-
ice charges on deposit accounts, totaled $110 million,
an increase of 17 percent from 1970.
‘All rates of return are unweighted averages computed from
Reports of Condition for December 31, 1970; June 30, 1971;
and December 31, 1971 and Report of Income for 1971.
Page 8
JULY 1972
Trust income was a more important source of in-
come for the larger than the smaller banks. For ex-
ample, 4 percent of total operating income was de-
rived from trust operations by those banks holding
deposits in excess of $100 million. In contrast, only a
fraction of a percent of the income of banks with less
than $5 million in deposits was derived from trust
operations.
The growth in income from securities accounted for
over one-half of the $66.8 million gain in operating
income in 1971. Income from tax-exempt state and
municipal bonds rose $164 million icprcsenting al
most a quarter of the increase. Due to a decline in
average lending rates, returns from loans accounted
for only one fifth of the gain compared to two thirds
in 1970 Trust dep’irtment income and service charges
on deposit -iccounts rcpresentcd 5 and 2 percent re
spectivcly of the incrc’tse Miscellaneous income
sources which include sif c deposit box rental prop-
erty leasing foreign department operations, and data
processing accounted for 17 percent of the income
gam
Operating Expenses
Operating expenses of District member banks in-
creased 11 percent in 1971 to $748 million Expenses
rose at a faster rate and by a larger absolute amount
than operating income and thus income before in-
come taxes and securities gains or losses fell below
the year-earlier level. This growth in expenses can be
attributed primarily to a larger volume of time and
savings deposits with no change in the average rate
paid. Salaries, wages, employee benefits, occupancy
and equipment expenses, and provision for loan losses
were also higher than in 1970, but interest paid for
borrowed money declined.
Liabilities of member banks increased more rapidly
in 1971 than a year earlier. The volume of time and
savings deposits increased 20 percent to $6.9 billion,
a pace even more rapid than in 1970 when regulatory
ceiling rates were suspended on large-denomination
CDs having matm-ities of thirty to eighty-nine days.
The growth in 1971 resulted from the decline in short-
term market interest rates from 1970 levels relative to
the average rate paid on time and savings deposits-
Demand deposits at District member banks rose 6 per-
cent to $8.1 billion, and other liabilities increased 30
percent to $1.2 billion. Federal funds purchased and
securities sold under agreements to repurchase, which
constituted the major portion of “other liabilities,” in-
creased 42 percent. This sharp increase reflects a
sizable decline in the interest rate on Federal funds
Trends in Operating Income
- Eighth DistrictMember Banks Ratio Scale Ratio Scale
Millions of Dollars Millions of Dollars
700 700
600 600
500 500
400 400
300
200
100
80
40
1971
60FEDERAL RESERVE BANK OF ST. LOUIS
relative to the discount rate. In contrast, during most
of 1970 the Federal funds rate greatly exceeded the
discount rate.
The composition of bank liabilities shifted consid-
erably in 1971 as time and savings deposits continued
to grow rapidly. These deposits increased from 37 to
40 percent of total liabilities and capital accounts,
while demand deposits fell from 49 to 46 percent.
Other liabilities, such as Federal funds purchased and
other borrowed funds, increased from 6 to 7 percent,
while capital accounts decreased slightly relative to
the total.
40 ~{ Time and
30 —
I ~
—~
Total CapitaI Accounts
-i-- —
2C
The average rate paid on time and savings deposits
remained at 4.9 percent in 1971. Most banks main-
tained their rates on regular savings and small-de-
nomination time deposits at or near the regulatory
ceilings which have been in effect since early 1970.
However, rates on large-denomination CDs fluctuated
with other money market rates.
Interest on time and savings deposits, the most rap-
idly growing expense item and the only one to exceed
the growth rates of 1970, increased 20 percent to $314
million in 1971. This increase reflected both the rapid
growth of time and savings deposits and the rela-
tively stable average rate paid. Other interest ex-
JULY 1972
penses declined 25 percent to $38 million This drop
resulted from a decline in the average rate paid on
Federal funds purchased and securities sold under
agreements to repurchase. The average rate on such
borrowings declined from 6.6 percent in 1970 to 6.2
percent in 1971. The volume of other borrowed funds,
consisting largely of Federal Reserve credit, dechned
60 percent, reflecting the differential between the
discount rate and market interest rates.
Salaries, wages, and employee benefit expenses rose
9 percent to $201 million, reflecting both a rise in
average wages paid and an increase of 3 percent in
the number of officers and employees. Salaries and
wages are a larger percentage of expenses of the very
small banks as compared to other banks, reflecting the
greater labor intensity of the small banks. Average
compensation per person increased only 5 percent in
1971, reflecting in part the price-wage freeze initiated
on August 15, 1971. Remaining expenses rose 12 per-
cent to $195 million.
Net Income
Income before taxes and securities gains or losses
of Eighth District member banks in 1971 was $197
million, a decrease of 4 percent from 1970. Income
Trends in Operating Expenses
Eighth DistrictMember Banks
Ratio Scale Ratio Scale
Millions of Dollars
350
Distribution of Liabilities
and Capital Accounts
Eighth District Member Banks
Fsd of Year Date.
Percent
60 —
56
Percent
— 60
Demand Deposits
9’
1966 1967 1968 1969 1970 1971
Note~ Stodi,g in1969 All Othe, isp e,ses is cornp~ned on the neon income
neparting basis. For further explanation of this nennision. see theFederal
Reserse Bulfeti,iJsnly 9701. pp 571 and 572, Data for 19t2 on theseen
,eponling basi, are estimated-
50
40
30
20
10 1: Other ~!~ilifieL.._4
1966 1967 1968 1969 1970 1971
Page 9FEDERAL RESERVE BANK OF ST. LOUIS JULY 1972
taxes applicable to operating income declined 21 per-
cent to $52 million. This reduction in taxes resulted
from increased holdings of tax-exempt securities, re-
moval of the Federal corporate income surtax, a drop
in income before taxes and securities gains or losses,
and a previous shift in tax accounting techniques
from a cash to accrual basis. This considerable de-
crease in taxes boosted after-tax income 3 percent.
Net securities gains after taxes jumped from $0.3 mil-
lion in 1970 to $6 million in 1971, contributing to
further improvement in earnings. After adjusting for
the net effects of taxes, securities gains or losses, and
extraordinary charges, net income increased 7 percent
to $151 million in 1971.
Bank Capital
Capital accounts of Distiict member banks — equity
capital plus capital notes and debentures — totaled
$1 3 billion at the end of 1971 an 8 percent increase
fiom the previous year Equity capital incieased 8
percent to $1 271 million and capital notes and de-
bentures rose 18 percent to $62 million Because of a
30 percent mciease in cash dividends to 863 million,
net retained earnings — the major source of equity
capital — declined 5 percent from the previous year
to $88 million Net income as a percentage of equity
capital declined from 12 percent in 1970 to 11 9 per-
cent m 1971

Income and expenses of Eighth District member banks - 1971

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Income and expenses of Eighth District member banks - 1971

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