Problems and practices in managing the earning assets of a commercial bank

Transcription

1 Atlanta Unversty Center W. Woodruff Lbrary, Atlanta Unversty Center ETD Collecton for AUC Robert W. Woodruff Lbrary 8965 Problems and practces n managng the earnng assets of a commercal bank Getahoun Terrefe Atlanta Unversty Follow ths and addtonal works at: Part of the Busness Commons Recommended Ctaton Terrefe, Getahoun, "Problems and practces n managng the earnng assets of a commercal bank" (965). ETD Collecton for AUC Robert W. Woodruff Lbrary. Paper 757. Ths Thess s brought to you for free and open access by DgtalCommons@Robert W. Woodruff Lbrary, Atlanta Unversty Center. It has been accepted for ncluson n ETD Collecton for AUC Robert W. Woodruff Lbrary by an authorzed admnstrator of DgtalCommons@Robert W. Woodruff Lbrary, Atlanta Unversty Center. For more nformaton, please contact cwseman@auctr.edu.

2 PROBLEMS AND PRACTICES IN MANAGING THE EARNING ASSETS OF A COMMERCIAL BANK A THESIS SUBMITTED TO THE FACULTY OF ATLANTA UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION BY GETAHOUN TERREFE SCHOOL OF BUSINESS ADMINISTRATION ATLANTA, GEORGIA AUGUST 965. v X "50 J

3 ACKNOWLEDGMENTS The wrter wshes to make due acknowledgments to Mr. Basl A. Wapensky, lecturer at Atlanta Unversty School of Busness and assstant casher n the Federal Reserve Bank of Atlanta, for hs very valuable assstance through hs advce from the begnnng of the study to the fnal. Although Mr. Wapensky was not teachng at the Unversty durng most of the tme ths study was made, he has not hestated to help the wrter n correctons and suggestons to mprove the thess. Also, the wrter s ndebted,almost exclusvely, to Mr. Bruce E. Campbell, assstant vce presdent n the Trust Company of Georga, n preparng the fourth chapter. Mr. Campbell has always spared hs precous tme whenever the wrter needed hs help. Certanly, ths paper would not have been what t s wthout the assstance receved from Mr. Campbell. Acknowledgments are also due to the staff of the Research Lbrary of the Federal Reserve Bank of Atlanta where most of the statstcal data were gathered, partcularly for the frst three chapters. Last, but not least, the wrter wshes to express hs apprecaton of the help receved from Mss Bertha Brown n typng the fnal paper.

4 TABLE OF CONTENTS Page ACKNOWLEDGMENTS LIST OF TABLES v LIST OF ILLUSTRATIONS v INTRODUCTION v Chapter I. PBI0RITIES IN USING EARNING ASSETS Defnton of Earnng Assets The Frst Prorty: The Need for Protectve Lqudty The Second Prorty: The Need to Satsfy Customer Credt Demands The Thrd Prorty: Addtonal Investment Portfolo II. INVESTMENT IN SECURITIES Functons of Bank Investments Lqudty provson: Secondary Reserves Earnngs: The whole nvestment portfolo Knds of Bank Investment Portfolos U. S. Government Securtes Investment Maturty Standng Yeld State and Muncpal Oblgatons Qualty of Muncpals Yeld and Maturty Corporate Securtes Flexblty n Portfolo Management Dversfcaton Balance and Tmng Loan Demand

5 Chapter III. LOANS 23 Functons of the Loan Account Proftablty Safety and Lqudty Major Knds of Bank Loans Commercal Loans Shortterm loans Mortgage Term Consumer loans Loans Loans IV. THE TRUST COMPANY OF GEORGIA: EARNING ASSETS MANAGEMENT CURING 9606* 39 The Investment Portfolos The Loan Account Concluson BIBLIOGRAPHY» ««47 v

6 mm m ma*» Slt of Barrng Assets of all Co^aeroal Barks for f* Ctaapttara Avapage Hut Stterat an «mb8 of Comaerclal Ms Iteag 556 «Cteershp of 0, S. QovenraRent Oblgatons % Cmsmro&l Bmm for Selsctad Perods»*.*.,..* «Gom!erd.al Banl OroersMp of tanmwt Securtes t»j for Selector. Ferote «* * **»»»* 2 Comparatve Average Yelds on fax Exeapt and f * S» Govemaent tasafel Bonds Held by Coasercal Basrks Dua?ng Selected Yeax*s»»»«*#*,»»«###»#»* 6* BasBess Loffls at Member Bac by Maturty for Selected Tears * * **** ** * «**» «* * # * 27 7* Bak Kates on Short Term Busness Loans at Banks to 9 Large Gtes, for Selected Perods *«* «*#** 30 $«form Loans As A. Percentage of Total Easness Loans and to 9. v^hare of All Mdrtptg Loans Held hy Selected * 33 30* <)atrbuton by Sze of Insured Commercal Banks Eztondag Consder Crodts J»me %&, 9$9» «.*., * lmng Assets of fh@ Trust Conpacy o 3* tootmt? Maturty and Yeld of Sectsrtes ftxmed hj Tm. Trust Otorgla, 96O6 I3«Loans of tte Trast Comparer of Georga hj Class aud Ther Proftablty Compared "to Inbr Bc n the 6tt Federal Iteserve Dstrct, 96(>6[j...»..,,* «,».

7 LIST OF ILLUSTRATIONS Chart. Deposts of Commercal Banks(By class of Bank), Yelds on U. S. Government Securtes, 9l*>96 $ 3, Delnquency Bates on Bank Installment Loans, 96O9&}. 38. Level of Deposts and the Two Major Classes of Earnng Assets of the Trust Company of Georga Durng v

8 INTRODUCTION Purpose of the Study. All fnancal nsttutons operate wthn a narrower proft margn than most other busness concerns because of ther responsbltes to the publc. However, none of them has as exactng a responsblty as a commercal bank snce the latter must pay on demand, and wthout notce, a good share of ts labltes. Therefore, t must expect, as a matter of course, rather large fluctuatons n the demands for ts labltes. Ths mples that t must have suffcent lqudty to prepare aganst such fluctuatons. At the same tme, a commercal bank must also be reasonably proftable f t has to meet ts oblgatons to stockholders. The purpose of ths study s, therefore, to analyze these basc problems and revew the practces of the commercal bankng ndustry n general, especally durng the postwar perod, n managng ther funds n vew of the two conflctng requrements. Thus, n the frst three chapters, we shall measure, as far as possble, the needs of lqudty, safety and proftablty and then dscuss the practces of bank fund management. In chapter one we wll see the orders of prorty of usng earnng assets. In the second and thrd chapters, the two major classes of earnng assets, nvestments and loans wll be studed. Generally, all commercal banks have the same problems n managng ther funds. However, the problems vary from one bank to another, dependng on the relatve sze, locaton and other dfferences drectly affectng

9 the lqudty needs of banks. Therefore, n the last chapter, we shall try to study how these problems and practces of one ndvdual bank may apply to those of the ndustry. For ths purpose, we have taken the case of management of earnng assets by the Trust Company of Georga durng 96064, a reserve cty bank n Atlanta. v

10 CHAPTER I PRIORITIES IN USING EARNING ASSETS A commercal bank s organzed to provde earnngs to ts owners, although t s chartered wth the expectaton that t wll serve the fnancal needs of ts communtes. Therefore, the statement of cond ton of a bank, lke the balance sheet of any busness concern, s d vded nto assets and labltes. Labltes are major sources of fund for a commercal bank. Assets are the uses to whch these funds are employed. In ths chapter prortes n uses of funds are dscussed. Defnton of Earnng Assets Although all assets are uses of fund, not all of them are drectly used to produce ncome. The practce commonly followed n publcatons of bankng statements s the dvson of assets among cash assets, earnng assets and fxed assets. Fxed assets are bank houses and premses, furnture and fxtures. Generally, they do not produce ncome. Cash assets are cash on hand and due from banks whch serve as prmary reserve legal and other day to day requrements. Thus, they are charged as prac tcally unproductve assets drectly. Earnng assets are assets employed, n varyng degrees of lqudty, to produce the ncome needs of a bank. Investments and loan portfolos serve these needs.

11 2 Strctly speakng, nvestment portfolos of a commercal bank consst of securtes, such as long term bonds, manly employed for the sake of earnngs. However, secondary reserves, whch are nvest ment securtes wth maturtes of one year or less, are also properly ncluded as part of a bank's nvestments, therefore, as part of ts earnng assets. The mportance of secondary reserves n bank portfolos wll be seen n the next chapter. Loans, the other major group consttutng a commercal bank's earnng assets, are credts made to customers drectly and personally. The man dfference between the two classes of earnng assets s that nvestments are bank credts made to the publc n the open market, whereas loans are made drectly to prvate borrowers, most of whch are regular customers of the bank. The Frst Psorty; The need for protectve lqudty All commercal banks are unquely smlar to each other n ther needs to meet wthdrawals of deposts on demand and wthout notce. There fore, n no other fnancal nsttuton s the need for separatng the uses of fund nto cash and earnng assets more mportant than to a com mercal bank. However, to plan for all possble and remote contngences of depost wthdrawals by holdng adequate cash requres foregong earnngs needlessly. In the event that the prmary reserves may not be suffcent to meet these requrements, therefore, a bank provdes addtonal protectve lqudty from ts earnng assets as a frst prorty n the use of such funds. Such requrements are mostly met by acqurng securtes close to cash. The

12 3 ncome from these securtes, substantal as t may be, takes a secondary role as aganst the need for lqudty. The Second Prorty; The need to satsfy customer credt demands Once a part of the assets s allocated as a protectve lqudty, the major part of the remanng funds s normally devoted to the makng of drect loans to customers. Loans are not only mportant from the pont of vew of proftablty, they are also essental to satsfy the credt needs of customers from whom deposts orgnate. The recognton of ths prorty of loans wll be dscussed n detal n Chapter III. The Thrd Prorty: Addtonal nvestment portfolo After provdng the lqudty and safety requrements and after satsfyng ts customers' loan demands, a bank follows the practce of enterng the longer term nvestment market wth the remanng balance of ts earnng assets, f any. Ths choce may often be made to avod too much concentraton of funds n the loan portfolo and to mantan a reason able rato of loans to deposts, especally f the bank's captal s rela tvely low. Also a bank may be forced nto the nvestment market of a long term nature f t cannot secure local loans n adequate volume. In such a stuaton, t may be dffcult for a bank wthout a specalzed nvestment department to attan the desred ncome snce t lacks the ad vantage of better management n the open market over larger competng banks. Therefore, t s necessary to use the advce and servce of specal sts whch may often prove to be costly for small banks. The growng mportance of earnng assets to commercal banks s shown n Table. The conspcuous rse of earnng assets n relaton to

13 4 total assets lately s prmarly due to the busness expanson natonwde, whch stmulates both drect lendng and open market nvestments. Thus, loans expanded almost nne tmes from ther 94 level, whle nvestments n securtes ncreased about three and a half tmes. Because of such a huge rse n the demand for credt, reserve requrements of commercal banks are eased up, currently at 6% of deposts from a hgh of 257. n the early 940s. Ths prmarly accounts for the relatvely low rate of ncrease n cash assets of commercal banks. TABLE SIZE OF EARNING ASSETS OF ALL COMMERCIAL BANKS FOR SELECTED YEARS (In bllons of dollars) Years Cash Assets Loans Earnng Assets Investments Total Total Assets Earnng Assets To Total Assets % May, Source: Federal Reserve Bulletn, July, 962 and May, 965.

14 CHAPTER II INVESTMENT IN SECURITIES Prortes n management of bank earnng assets were dscussed n the prevous chapter. It was then suggested that the frst prorty s the provson of adequate lqudty. As a thrd prorty we have also mentoned that banks use ther remanng funds n the long term open market nvestment. Functons of Bank Investments The functon of bank nvestment portfolo s, therefore, nothng but the fulfllment of these two prortes. Just as the prmary reason for number one prorty s the need for lqudty, the thrd prorty s a reflecton of the need for earnngs. We wll now see how bank nvest ments can fulfll these two needs. Lqudty Provson: Secondary Reserves The need for lqudty s not confned to the bankng system, but t s a specal problem for a bank. Ths need for lqudty s man fested when the bank provdes, and all banks do, a certan degree of protecton by allocatng a part of ts assets, other than the prmary lbertrand Fox and El Shapro, The Amercan Bankers Assocaton, Commercal Bankng Industry (New Jersey: Prentce Hall Inc., 962), p. 272.

15 6 reserves, for lqudty purpose. By so dong the bank supplements a protectve lne of defense behnd ts prmary reserves. However, perhaps the most recurrng problem faced by almost all banks s the determnaton of the proper degree of lqudty necessary from tme to tme. Ths problem, although common to all commercal banks, vares wthn banks dependng on the sze or locaton of each bank. Generally, however, all banks have to determne the probable magntude and tmng of depost wthdrawals. Then, the level of loans can be estmated n lght of the prortes adopted n the uses of funds. It s relatvely easy to determne the ndvdual bank's depost poston f t s representatve of a group of banks, state or natonwde, because the effect s caused by general economc condton. Thus, as shown n Chart, depost movements generally reflect the state of the naton's economy. For example, there s a sudden fall n the level of deposts between 957 and 9 8 because of the recesson durng that year. The ndvdual bank should not, however, rely on such a general concluson. For t to determne ts lendng and nvestment polces solely on the bass of a large group of banks, and thus gnorng ts own prevous exper ence of depost movement, would be hghly unrealstc and even dangerous. Tlllhatever the nature of ts deposts, a bank typcally provdes the degree of lqudty deemed necessary by holdng cash as prmary reserves and by ownng securtes convertble nto cash qudcly and wth a mnmum loss. Such types of securtes are normally classfed as secondary reserves. The term secondary s used to dentfy these securtes as they are "a second lne of defense behnd prmary reserves^ash asset^for quck

16 8 BILLIONS OF DOLLARS DEPOSITS OF COMMERCIAL BANKS BY CLASS OF BANK JUNE BILLIONS OF DOLLARS t r 250 PER PERCENTAGE DISTRIBUTION FOR SELECTED YEARS CENT or eo*e#xc*t or r* rtctta. tnsa/e

17 8 converson nto cash to meet both expected and unforeseen demands for funds by depostors* The general requrements for assets of ths type are that they should be short term (maturty of one year or under) or hgh grade, and readly marketable. For ths purpose, most banks rely on ther holdngs of short term U. S. government securtes snce they ev dently satsfy ther lqudty requrements. However, other securtes havng the same maturty can serve as addtonal secondary reserves pro vded they are also hgh grade and readly marketable. Earnngs; The Tffhole Investment Portfolo The nvestment accounts of a commercal bank, n practce, are ts long term bonds, whch are prmarly employed for the sake of earnngs. However, as shown n Chart 2, securtes of shorter maturtes, such as treasury blls, may also gve consderable yeld. In fact, between 9663, the yeld from such securtes have approached those from notes and bonds. As compared to the average net return on loans, securtes also gve substantal return, although loans are, conventonally, the major source of ncome for commercal banks. Ths relatonshp s ndcated n Table 2. Ths table also shows that, although bank securtes are manly held n ther short, hence less proftable form, the rate of ncrease n the average returns on both loans and nvestments annually are the same* Thus, from 955 to 956, the rate ncreased by about 0$ n both 2lyle E. Gramley, "Depost Instablty at Commercal Banks," Federal Reserve Bank of Kansas Cty, Essays on Commercal Bankng, (August, 962), p. 6.

18 TABLE 2 COMPARATIVE AVERAGE NET RETURN ON LOANS OF INSURED COMMERCIAL BANKS DURING 95596& Tears I * Return on Loans 3.5# 3.U5 3*7* 3.72 U.O7 U.35 l*.35 U.l*5 U o Return on Investments * * *0 Sources: Annual Reports, Federal Depost Insurance Corporaton and Federal Reserve Bulletn, 963 and 965* cases* For the next year, the ncrease was 9% and Q% for loans and nvestments respectvely. In dollar amounts, the ncome from nvest ments was about #.6 bllon for all commercal banks, n 96;. Ths was 8$ of all revenues from earnng assets. Therefore, n spte of the volatlty of marketable securtes, they form a sgnfcant amount of total commercal bank earnngs. Knds of Bank Investment Portfolo Prmarly, commercal banks own two knds of securtes, oblgatons of the federal government (both drect and ndrect) and state and muncpal

19 0 bonds. In practce, however, banks acqure corporate bonds when they can afford to, although such securtes do not appeal to commercal banks n vew of ther lqudty poston. Unted States Government 'Securtes Investment standngs Securtes ssued by the federal government, or those guaranteed by t, are defned as beng "rskless assets n as much as there s no doubt that nterest and prncpal on every ssue wll be pad promptly at maturty.^ The prmary role of government secur tes n bank portfolos s therefore, to provde lqudty and safety and then to produce Income, f possble. In ths respect, they are unque among the varous knds of bank securtes. Normally, four marketable securtes are ssued by the government. They are, n order of maturty, treasury blls, certfcates of ndebted ness, notes, and bonds. They are hgh grade. In ther short form they are also the only securtes that satsfy the basc qualfcatons of securtes for secondary reserves. They can be quckly sold wth mnmum loss, f at all, on the prncpal. Ths s a specal advantage for com mercal banks to meet ther lqudty problems. As a result, commercal banks are one of the most mportant groups of nvestors n government securtes. Thus, n 6U» they held almost 30% of the total marketable U. S. government securtes outstandng. Although they have actually reduced ther ownershp of such securtes from the level just after World 3llajor B. Ensten, "Investng for Bankng,* Commercal and Fnancal Chroncle, (July 20, l 6l), p. *.

20 TABLE 3 OWNERSHIP OF U. S. GOVERNMENT OBLIGATIONS BY ALL COMMERCIAL BANKS FOR SELECTED PERIODS (Amount n bllons of dollars) Year End Gross U. S. Government Securtes Other Securtes Total Percentage of Governments to Total 9* U U k 62.lt Sources Federal Reserve Bulletn, February, 965* War II, they are, today, the second most mportant owners, after nd vduals. However, not only have commercal banks reduced ther volume of government securtes, but these securtes are also decreasng n relaton to total bank nvestments, as shown n Table 3* The latter result may be explaned by the yeld advantage from muncpal bonds. Thus, n tryng to ncrease ther tax exempt securtes, banks have generally tended to reduce ther government holdngs beyond those servng secondary reserve requrements. Moreover, n order to satsfy the great demand for loans that resulted n the post war busness expanson, com mercal banks have reduced ther government securtes. Thus, n 959 alone, about threeffths of the funds needed for loans came from sale

21 2 of government securtes.' On the other hand, when there s a declnng demand for loans, such as the recesson of 95758, commercal banks prncpal response s to ncrease the demand for government securtes, and decrease ther maturty (Table h) as there would be excess funds beyond loan demands. TABLE t COMMERCIAL BANK OWNERSHIP OF GOVERNMENT SECURITIES BI MATURITY FOR SELECTED PERIODS (Amounts n bllons of dollars) Perod Wthn one Yr. 5 Yrs. 50 Yrs. Over 0 Yrs. Total 95U 7, *6 h U k u.u 5» I960 U A uO *. 8 96k Source: Federal Reserve Bulletn, February, 965. Maturty. Generally, when securtes are held longer, they would Pox and Shapro, p. h>

22 3 offer hgher yelds. However, snce lqudty needs are more mportant than returns from government securtes, banks must be prepared to sell ther longer term maturtes or to acqure more securtes to satsfy ther lqudty needs* Durng the past ten years, commercal banks have become more aware of the role of government securtes as major source of lqudty. Thus, n Table U, we see that n all the years, except the frst two, over 80$ of commercal banks government securtes matured wthn fve years, and less emphass s beng put on securtes especally maturng beyond ten years. At the same tme, n order to get hgher yelds from the short maturty securtes, commercal banks hold more securtes n the 5 year maturty than those maturng n less than a year. Thus, n spte of the fact that nvestment ncome s secondary to safety and lqudty, commercal banks have not gnored the possblty of earnngs from government securtes* On the other hand, although earnngs from nvestment portfolos of commercal banks are substantal, they are lmted by regulatons mposed by the government on the qualty and amount of such securtes owned. Yeld*It s sad that nvestments n government securtes are free from rsk n as much as there s no declne n qualty of the nvestment or nsolvency of the debtor. Yet, the nvestor who buys long term or short term bonds (and commercal banks are mportant owners of the latter) and later needs to recover hs prncpal by resale pror to maturty faces the rsk of a prce declne resultng from a rsng level of nterest

23 rates. Such a rsk s called the nterest rate rsk and t s especally sgnfcant to commercal banks not only because of the volume of ther securty ownershps, but also ther lqudty s a constant problem forcng them to sell ther short term holdngs. The volatlty of yelds on U. S. government securtes can be understood clearly by referrng to Chart 2. It may be observed that although yelds on long term securtes fluctuate consderably, there s greater fluctuaton n treasury blls, securtes preferred by banks for ther lqudty* Vewed from the yeld angle, therefore, there are obvous dff cultes facng the banker. The spacng of maturtes to avod such unexpected fluctuatons n the yeld, whch s bound to affect the market prce of securtes, s not a matter of precse soluton. Generally, t may be advsable to hold more of the long term maturtes and be wllng to sell them shortly where lowprce and hgh yeld exst. Ths can reduce the rsk n fluctuatons of market prces due to changes n yelds to a certan extent. On the other hand, "a bank need not hestate to lengthen ts average maturty when yelds are hgh, nor need t refuse to contract maturtes when yelds seem relatvely low by hstorcal standards."** %alph E. Badger, Harold W. Torgerson, and Harry G. Guthman, Invest ment Prncples and Practces, (New Jersey: Prentce Hall, Inc., Ffth Edton, 963), p. WLB. Roland I. Robnson, Management of Bank Funds (2nd Ed. rev*, New York: McGrawHll Book Company, Inc., 962), p. 352.

24 YIELDS ON U. S. GOVERNMENT SECURITIES Cont. 25 PEI 6 CENT PER ANNUM MONTHLY AVERAGES OF DAILY IGURES. PER CENT PER ANN LONG TERM BONDS hw V / r kln \ I* n l v \ / V^w/7 r \ v V t / 2 PARTIALLY TAX EXEMPT NOT ES AND JONDS / 35 YE) *RS I y j f \ \r r rr / rv \ If r. f\ J K l\ \ j TV lv f \ WTREAS URY BILLS V 3 MONTHS T BANK DISCOUNT RATE &omo er GovcaNQBs er r«t rtecnt ntseavt srsrett CHART 2 *NEW SERIES. SEE PAGE 7. f FOR EXCEPTIONS SEE PAGE 7

25 6 State and Muncpal Oblgatons Qualty of muncpals, Oblgatons of state and local governments, also called muncpals, are the second most mportant nvestment outlets for commercal banks. As an nvestment standng they are excelled only by securtes of the federal government. Snce wde range exsts between the best and the poorest qualty of muncpals, regulatory and supervsory authortes have recommended that, for bank nvestment purposes, only the four hghest ratngs are elgble.a n general, therefore, commercal banks exercse a hgh degree of conservaton n ther choce of muncpal bonds. Yet, durng the last two decades, they have ncreased ther munc pal portfolos whle they have tended to reduce ther government securtes. Between 9*0 and 96k the amount of commercal banks muncpals jumped from $f>«6 bllon to About $28*9 bllon, an ncrease from a lttle over $% of total commercal bank securtes to over 30$. On the other hand, Idle conspcuous declne n ther ownershp of government securtes can be seen n fable 3. The prmary reason for ths s the yeld advantage of buyng muncpals over governments, as shown n Table 5>. Yeld and maturty* The man purpose for the presence of muncpals n bank portfolos s for earnngs, just as the purpose for government secur tes s manly for lqudty. The best reason that makes muncpals attrac tve to commercal banks s that they are the prncpal tax reducng outlets Goody's Government and Industral Manual lsts the four hghest classes of muncpals as: Aaa, Aa, A, and Baa.

26 7 snce nterest earned on all state and local oblgatons s fully exempt from federal taxes. Ths provdes a specal ncentve to purchase such securtes especally for banks n the hgher tax bracket. The relatve advantage of otmng muncpal bonds from the pont of vew of yeld alone can be seen from Table $ for banks n the hgher tax bracket. Thus, n $$9, a bank wth applcable tax rate of J>2$ should have earned $,$6% on ts government securtes n order to get an equvalent yeld to ts tax exempt securtes. Therefore,the table shows that banks payng the hgher tax rate would be better off to possess muncpals than governments con sdered only from the yeld standpont. Whle yelds from muncpals may be appealng to commercal banks, they are faced wth a perplexng problem n formng a maturty polcy for tax exempt securtes. Typcally, when the yelds on muncpals are most favorable (whch assumes a fall n ther demand) the demand for loans also rses. But snce banks have to fulfll the loan needs of ther customers frst, they wll not be able to buy muncpals at depressed prces and earn hgher yelds from them. Moreover, snce these securtes do not have a partcularly good lqudty standng, t s dsadvantageous for banks to hold them for a short tme. Therefore, f muncpals are to be bought, t should be on the assumpton that they wll be hald to fnal maturty to gve the maxmum avalable yeld, snce they are manly acqured for ther yelds. Corporate Securtes Corporate securtes are not an mportant part of commercal bank nvestments. Ther relatve sgnfcance has actually declned n ths

27 8 TABLE 5 COMPARATIVE AVERAGE YIELDS ON TAX EXEMPT SECURITIES AND U. S. GOVERNMENT TAXABLE BONDS HELD BY COMMERCIAL BANKS DURING SELECTED YEARS Before Tax Average AfterTax Average Average Yeld Year Yeld on Governments Yeld on Governments* OaaTax; Exempts ! &! & U * ! * 957 3^ U.08 2.* k 963 U H 96* U *The aftertax yeld on government securtes s determned assumng an average of U0$ ncome tax for all commercal banks. Survey. Source: Moodys Government and Muncpal Manuals and Moody's Bond respect over the past years. At the end of 9U7, they accounted for a lttle over % of total commercal bank earnng assets and less than 3% of ther nvestments. By June, 96}, these ratos were less than % and about 2% respectvely. Ths relatve declne of corporate bonds as bank securtes over the past perods s prmarly due to the emergence of term loans for commercal banks as a much more desrable medum for

28 $ grantng longer term credts to busnesses than corporate bond pur 7 chases. Corporate bonds are purchased by commercal banks for the hgher yelds they offer than most other securtes. At the same tme, they present a relatvely greater rsk than muncpal bonds. As prevously mentoned, regulatons governng the sze of a bank's securtes would also apply especally on ts corporate bonds. Such a lmt vares de pendng on the nature of the captal structure, loandepost rato and the qualtes of other rsk assets. Therefore, banks usually gve the last prorty for corporate securtes snce ther lqudty poston may not allow them to speculate for greater yeld and captal gans. Such securtes are, however, partcularly attractve for banks wth low level of earnngs and n a low tax bracket as all corporate securtes are subject to taxes. They can also prove to be attractve for banks wth serous defcency n loan demand and consequently, a surplus of funds avalable for such nvestments* Flexblty n Bank Portfolo Management In spte of the fact that bank portfolo management has been largely responsble for the bankng systems contrbuton to the credt needs of the economy, commercal banks have fallen short of perfecton n ther endeavors of portfolo management. Indvdual banks have shown ths de fcency ether n ncome lost through mantenance of excess lqudty or n captal losses ncurred when nsuffcent lqudty forced sales 7Ensten, 3>.

29 20 of securtes at unfavorable prces. Dversfcaton At best all portfolos of commercal banks, other than Unted States government securtes, have credt rsks of varous types. Although such rsks cannot be elmnated, they can be mnmzed by spreadng securtes among the varous maturty classes and over several geographcal locatons. The basc phlosophy behnd ths s that f losses occur the spreadng of securtes wll tend to reduce them to about ther average probable value. We have seen how commercal banks have generally dstrbuted ther securtes between the varous nvestment classes. Thus, the; fact that over 80$ of ther government securtes matured wthn the frst 5 years (Table J>) may prove that, from the ncome pont of vew, t s a ds advantage. However, bearng n mnd the faet that the whole problem of flexblty n portfolo management revolves around the conflctng needs of lqudty and earnngs, ths concluson may very well be wrong. On the other hand, commercal banks have also ncreased ther purchase of the less lqud muncpal bonds and even the rsker corporate securtes n pursut of hgher yelds* Thus, although dversfcaton (partcularly by maturty) s hghly essental, an elaborately'dversfed portfolo s usually advsable to the large bank wth an nvestment staff adequate to supervse a large number of ssues. Balance and Tmng After the nvestment outlets and perod are selected, and the degree of dversfcaton planned, the next ssue s determnng the proporton

30 2 n whch securtes are to be held n the varous maturty classes from tme to tme. Although the problem s manly a matter of personal judg ment of the bank's needs, the prudent banker can have some nsght by forecastng future probabltes wthn and outsde the bank. In many cases, the necessty of changng the proporton among the earnng asset classes, or reducng them by changng to cash n the event of unusual depost losses depends on trends n the regonal and natonal economy. For the purpose of portfolo management, the prces at whch present holdngs of securtes were acqured are rrelevant to the determnaton 8 of whether present securtes consttute the optmum use of funds* For example, f the bank holds tro ssues of securtes wth dfferent yelds, t mght be better n the nterest of ultmate gans to change the lower yeld securtes to the hgher or vce versa although some loss may be ncurred. For that matter, sale of securtes at a loss has tax advantages especally for commercal banks. Whle captal losses of other busnesses are deductble only from captal gans realzed durng that year for tax purposes, there are no restrctons on the amount of deductons for com mercal banks. Loan Demand The need to satsfy customer credt demands has been mentoned n Chapter I as a second prorty n the use of earnng assets. Accordngly, long term nvestments take a secondary role n relaton to the demand for ^Gramley, 9.

31 22 loans. The great expanson of loans has meant that commercal banks have lost a large part of the bg lqudty cushon they possessed n the nvestment portfolo durng the early postwar years. Therefore, problems of portfolo management are substantally dfferent today from those perods. Generally, commercal banks have used ntellgent plan nng n spacng the maturty perods of ther securtes n such a manner that they wll be redeemed to meet loan requrements. On the other hand, durng recessons, such as those of 9B3$k and 95758, commercal banks' response s to ncrease greatly the demand for securtes because of the declnng demand for loans. The extent of dversfcaton of securtes by maturty durng such perods depends on the probable duraton of the recesson. Generally, the longer the recesson the more securtes n longer maturty years should be held.

32 CHAPTER III LOANS Functons of the Loan Account Whle banks engage n a large number of fnancal actvtes, the central busness of commercal banks s the makng of loans, to customers. It s also ther most proftable type of busness snce they almost always obtan a hgher return than from nvestments (See Table 2)«Commercal banks' lendng, however, nvolves certan problems and even some dangers. Bank lendng typcally nvolves varyng degrees of credt rsk, although commercal banks mght lke to thnk of ther bor rowng customers as among the very best* Thus, whle the need for proft takes a prmary consderaton, safety and lqudty are mportant ele ments also to be met n bank loans. Proftablty The latest avalable data shows the total earnngs from loans made by nsured commercal banks as $6.9 bllons n 96k as compared to $*5 bllons from nvestments. Ths lead has been mantaned ever snce commercal banks ncreased ther loan portfolos over ther securtes durng the postwar perod* Also, as shown n Table 2, the average return on loans s greater than the average return on commercal bank securtes. The most mportant factor determnng the amount earned by banks s de average rate of nterest on loans. Banks operatng n major money 23

33 market centers charge the prme rate on a sgnfcant proporton of ther loans. Ths rate s a formally announced rate adopted by the major money market banks and s charged on unsecured loans to ther best preferred customers. Untl 953, prme rates were almost always lower than the prevalng yelds on new ssues of hgh grade corporates. Snce 953, however, prme rates are hgher and the dfferental rate s about l/2. Outsde large ctes, the rates charged are rates consdered custo mary or equtable wthn those areas. Beyond the prme and customary rates the rate pad on loans dffer even on dentcal grants. Varatons are due to dfferences n rsk, tme, sze of the loan, or sze of the borrower. Such dfferences are reflected n Table 7. Evdently, ths depends on the relatve cost of bank lendng, whch s drectly related to the rsk nvolved. And rsk s usually assocated wth sze of borrow er. As ndcated n ths table, nterest rates charged on busness loans tend to vary nversely wth the sze of the borrower. The sze of the borrower normally gves evdence to the sze of the lender as well, snce larger busnesses mostly tend to borrow from larger banks.? Snce also large banks happen to be n large ctes where large busnesses are located, the lower nterest rates charged by cty banks than country banks can be prmarly accounted for ths reason. Not only does the nterest rate vary from reserve cty to cty and country banks, t also ^Leonardo Lodado, "Sze of Banks, Sze of Borrower and the Inter est Rate," Journal of Fnance, (March, 963), p. ZU

34 ranges accordng to the sze, hence accordng to the rsk of the borrower wthn these areas* There s, however, more nvolved n most bank lendng than merely apprasng the borrower's credt standng. Increasngly, bank loan offcers demand that ther customers keep part of the borrowed funds on depost frequently 20$, although requrements vary dependng upon the barganng power of the borrower (whch s, of course, nfluenced by ts credt standng) and the state of the money market. These compen satng balances add to the cost of credt to the borrower. If, for example, $00 s borrowed at h% nterest and $20 s requred as a compen satng balance, the effectve nterest rate becomes $%. Besde ther yeld advantage, compensatng balances make funds avalable for loans to more customers, partcularly when credt s tght. Safety and Lqudty The specal need for commercal bank lqudty s emphaszed n the prevous two chapters. In ths connecton we have also seen that one of the basc responsbltes of the banker s to be able to meet wthdrawal of deposts by mantanng suffcent lqudty. The basc objectves served n the makng of loans ares ) to meet responsbltes to busness by provdng credt, when justfed, and 2) to select loans whch provde an overall lqudty for deposts by an adequate system of credt analyss. Loans are not partcularly suted to meet mmedate requrements of lqudty. In fact, too many loans (measured n terms of deposts or captal) are detrmental to safety and lqudty. The lqudty of

35 26 banks as measured by the rato of ther short term government secur tes to deposts has also declned whle loans expanded durng the postwar perod. Banks have generally become n danger of ther lqud ty poston, as a result. However, as the loandepost rato for all banks ncreased (from 52$ n 950 to over 60% n 6U), banks that have been ncreasng ther captal structure steadly can probably be sounder and stronger than ever, snce growng captal provdes addtonal cushon of safety for ncreased ownershp of rsk assets. In spte of the fact that loans are not generally expected to meet mmedate lqudty requrements, they are also a source of lqudty as they mature. Although present data are not avalable, for the perods shown n Table 6, busness loans were concentrated n the one year or less maturty perod for all member banks. Ths shows, perhaps n part, the slower growth n depost than loans so that the turnover for loans had to be ncreased to accommodate more loan applcatons. Moreover, as the tendency to reduce government securtes (conventonally "the best source of lqudty) exsts at commercal banks, there must be a counter effect by shortenng loan maturtes. More wll be sad about ths n the next part of ths chapter. Major Knds of Bank Loans Before the depresson of the 930s, banks lmted ther loans almost only to busnesses not only because they were the only nsttu tons to provde such loans, but also the other avenues of lendng were lomlton J. Drake, "Lqudty and Loan Polcy Today," Bankers Monthly, (June, I960), p. 22.

36 27 TABLE 6 BUSINESS LOANS AT MEMBER BANES BY MATURITY, FOR SELECTED YEARS (Amount In bllons of dollars) Maturty 9U year or less over year 3U. 3l.O 38.0 Source: Board of Governors of the Federal Reserve System. not well developed untl the 9l0s. Today, however, commercal banks have a sgnfcant role n the extenson of credts for other purposes as well, notably mortgage and consumer fnancng. Commercal Loans As noted earler, meetng the needs of the busness communty has been the prme functon of the commercal bankng ndustry snce ts orgn. In 929, total commercal bank loans consttuted over 80$ of ther earnng assets, and almost all of them were n busness loans. Today, due to the other loan actvtes of commercal banks, ths relatonshp s roughly 6k% as shown n Table. Yet, busness loans stll reman to be the sngle most mportant class n bank loan portfolos, Snce no other group of nvestor or lender s equpped to provde the same essental lendng servce to busness on equvalent terms. As ther loan actvtes expanded after the Great Depresson, commercal banks have tended to separate ther loans nto workng captal loans, also called short term loans, and term loans, for fnancng longer term projects.

37 28 Shortterm loans. Tradtonally, the average commercal concern reles on the commercal bank chefly for seasonal or other shortterm cash requrements as these banks are partcularly suted to meet such needs* Thus, short term loans, defned n the Federal Reserve Surveys as "loans of one year maturty or under at the tme of extenson}' reman the largest n volume of commercal bank loans to busnesses (Table 6), although term loans are fast ganng wdespread acceptance, especally n large cty banks lke New York as shown on Table 8* As already dscussed, the proftablty of loans, apart from eco nomc condtons, s drectly related to the sze of the loan, and hence the sze of the borrower. Typcally, ths apples to short term loans as Table 7 reflects. As the loan sze decreases, the nterest charged n creases. Ths shows that smaller busnesses tend to present greater rsks (manly because most of them are relatvely new) and therefore hgh er nterest could be charged on them. In addton, Table 7 shows that the rates charged also reflect the economc condtons prevalng durng certan perods. Thus, the yeld on loans was generally very low between 930^5 as a result of the depresson n the 930s and the sladcenng of loan demand durng the war perods. After Jj5, rates have gradually ncreased as prosperty contnued wth slght cyclcal fluctuatons. Apparently, short term loans are the most lqud of all bank loans. However, snce most borrowers establsh a lne of credt wth banks, t gves room for a constant renewal of such loans. Ths has, undoubtedly, an adverse effect upon lqudty poston of banks, partcularly when there s a repeated request for renewal, whch warrants all s not well

38 29 wth the borrower. Commercal banks, therefore, need to exercse great cauton n managng these loans snce they deal often wth borrowers wth chronc demand for workng captal loans* Such borrowers, as already mentoned, tend to be new and, therefore, present greater rsk than larger busness borrowers. Term loans, Busness loans carryng a maturty of more than one year are generally classfed as term loans. Perhaps tte bggest sngle change n the nature of commercal bank lendng after World War II has been the growth of term loans. Accordng to the Natonal Bureau of Econom c Research Study of 9*0, the volume of such loans held by commercal banks was 02.2 bllon at the end of that year. Ths was 8$ of total loans and about k*$% of total earnng assets. On December 3, 96U, total term loans were $29 bllon, or 7$ of loans and US of earnng assets of commercal banks as estmated by the Federal Reserve Bank of New Tork. In terms of busness loans alone, ths fgure stands at over 50$. The reason for such a fast growth n term loans can be vewed as a dsplacement of commercal bank corporate bond ownershp before the War perods. Prom the pont of vew of the borrower, term loans have a more sgnfcant appeal to bg busnesses whch could command open mar ket credt but prefer not to dsclose such detals of ther busnesses as would be requred by the Securtes and Exchange Commsson. Consequently, such loans are made more frequently and on a greater volume by bg cty banks, whch, for reasons already dscussed, favor large borrowers. Thus, as reflected n Table 8, whether measured by the mportance of such loans or by the share of the larger banks n the term loan market, term loans

39 30 TABLE 7 BANK RATES ON SHORT TIERS! BUSINESS LOANS AT BANKS IN 9 LARGE CITIES, FOR SELECTED PERIODS Sze of Loans (Thousands of dollars) Year & Over All Loans 920 n.a n.a n.a n.a n.a n.a n.a n.a l n.a n.a n.a n.a U. 85 *35 n.a n.a n.a n.a U0 l lt , k.$ U u.u l.o I $.k (March) : U n.a. note avalable Source: Federal Reserve Bulletn, July, 962, May 965. play a more mportant role at the large cty banks, partcularly New York, than at other banks. Thus, accordng to the Federal Reserve Bank of New York, at the end of 96 such loans consttuted over 58$ of all busness loans at the New York Cty banks whle the relatonshp was only about 33$ at other member banks. The greater mportance of term loans at New York Cty banks largely reflects the fact that these banks servce large customers located throughout the country and abroad. Moreover, nstead

40 3 TABLE 8 TERM LOANS AS A PERCENTAGE OF TOTAL BUSINESS LOANS AND TO SELECTED INDUSTRIAL BORROWERS, 9 5 AND 957 (Amount n mllons of dollars) ml Banks wth deposts of: $ and over 29% 33 *3 36 *8 Industral Borrowers: Petroleum, Coal, Chemcal & Rubber Transportaton and Utltes Metal and Metal products 72* * 68 3* Sources Board of Governors of the Federal Reserve System. of lockng themselves n wth a debtofferng fxed nterest rate n the captal markets, bg busnesses lke term loan fnancng (Table 8) espec ally when rates are hgh. Ths s because the rates they pay on ther borrowng are ted to the prme rate and wll go down when rates ease. Many crtcsms are forwarded aganst the sgnfcance banks attached to term loans. Thus Alfred Hayes, presdent of the Federal Reserve Bank p. *. "Lendng Problems Term Loans," Busness Week, (July 30, I960),

41 32 of New Toxc, has warned banks aganst becomng Mso heavly commtted n the form of long term advances that they cannot adequately meet the legtmate short term needs for whch commercal bankng provdes unque 2 facltes." An mportant factor behnd ths argument seems to be that banks mght fnd themselves n unnecessarly frozen poston that could hurt ther lqudty. Although Mr. Hayes argument may be justfable to a certan extent, t must also be admtted that the prme functon of term loans for larger banks s to realze hgher earnngs that could be earned from makng a large loan to a large borrower. Moreover, snce vrtually all term loans are wrtten wth provsons for regular amortzaton as opposed to the lne of credt establshed by short term borrowers they provde a con sderable degree of lqudty. Thus, whle the fnal maturty on a term loan mght be for fve years, the average maturty could be 2^ years or even less dependng on the repayment terms specfed. Mortgage Loans The Natonal Housng Act of 9$k provded a landmark n the develop ment of mortgage lendng by commercal banks as well as by other lenders. Ths act not only requred that nsured mortgates be fully amortzed but also made avalable to mortgage lenders that, n the event of default, such loans were exchangeable for government guaranteed bonds or cash. Thus, commercal banks are one of the four major mortgage lendng nsttutons today, as shown n Table 9* Totally, the four nsttutons 2"Term Lendng By New Tork Cty Banks," Federal Reserve Bank of Hew York, February 96*

42 33 held over 83$ of such loans n 96* of whch over 3$ was held by com mercal banks. Ths was 2$% of ther total loans and 6$ of ther earnng assets. In 9*55 these were 8$ and k% respectvely. TABLE 9 SHARE OF ALL MORTGAGE LOANS HELD BY SELECTED INSTITUTIONS, IN 9»5 AND 96U Insttutons 9*5 96* Savngs and Loan Assocatons Lfe Insurance Companes 2O,5# 8.7 ko.$% 7.5 Commercal Banks 3.* 3.5 Mutual Savngs Banks Totals 8*.lj$ 83.5ff Source: Federal Reserve Bulletn, February, 965. The relatve mportance of commercal bank mortgage lendng s drectly related to the expanson n savngs deposts. Savngs deposts are qute stable n character. As a result, such knds of funds can be placed n large part n mortgage loans wthout fear that heavy wthdrawal wll gve rse to lqudty problem. Ths fact also accounts for the larger proporton of mortgage loans to total loans n country than n cty banks. Thus, accordng to the Commsson on Money and Credt of the Amercan Bankers Assocaton, on December 3, I960, total country bank mortgage loans amounted to $2.4 bllon, or 8$ of ther total earnng assets. For banks n New York Cty the total was less than

43 3k $ bllon, and about 3% of ther earnng assets. The reason s that demand for other loans are so heavy that large cty banks lmt accommo datons to the real estate sector. By contrast, banks n growng sub urban areas may devote a large part of ther loanable funds snce these may very well consttute the chef credt need of the communty. As far as ther proftablty s concerned, mortgage loans compare favorably wth the average return of total loans of the commercal bankng ndustry. For the perod 966; average nterest rates on mortgages were 5«98, 5»*93j 5«8l, and $»7k respectvely on all loans of commercal banks, as shown on Table 7* Commercal banks are unque among the mportant sources of mortgage credts n the dversty and scope of ther lendng. They are the only nsttutons among them that seek to serve all types of credt rsks, therefore requrng a major flexblty n ther portfolo. Despte the great advantage of regular amortzaton, mortgage loans provde consder ably less portfolo flexblty than other classes of loans. In spte of ths, "f commercal banks do not play a promnent role n mortgage lendng, t wll have serous mplcatons not only for them but also for the publc as well," naecause the publc provdes the savngs deposts needed for such loans. Consumer Loans It s only snce World War II that consumer credt by commercal banks had grown from a relatvely mnor part of banks loan portfolo to IE. Flexney, "The Role of Banks n Mortgage Lendng," Borrough's Clearng House, (September, 963), p. I6»

44 35 ts present poston as one of the three major classes of bank loans. Today, commercal banks have no major compettor n extendng consumer loans. They are followed by sales fnance companes, credt unons and consumer fnance companes and n that order. In fact, sales fnance and consumer fnance companes do borrow from commercal banks to make consumer credts. Total bank loans to ndvduals, both nstallment and nonnstallment, ncreased over twenty tmes from 9\& to 96;, or from $l,k bllon to $29»k bllon. Darng the same perod, all other bank loans ncreased only seven tmes. The latest consumer credts of commercal banks consttuted 6% of ther total loans and $ of ther earnng assets. Pror to the 900's, drect consumer lendng by commercal banks was conducted on a hghly selectve bass. "Bank atttudes began to change, nevtably, as the record of these loans, however reluctantly they may have been extended orgnally, demonstrated ther favorable performance."^ Not only were sources of personal credt nformaton mproved, but also there has been an extensve market for such loans as the needs of consumers expanded and became more sophstcated. Perhaps, consumer fnancng by commercal banks receved ther greatest Impetus out of the growth n the demand for consumer credt, assocated wth the mass appeal of the auto moble. Another factor s the declne n the relatve mportance of retal outlets as consumer fnancng nsttutons. Thus, whle consumer credt held by banks ncreased from 25$ of all consumer loans n 9US to 3% n l 6l, those held by retal outlets decreased at the same tme from and Shapro, p. 63.

45 36 to 2$%, It s clear from Table 0 that wthn commercal banks themselves dstrbuton of consumer loans s uneven. Thus, although banks wth deposts of $50 mllon dollars and over extendng consumer credts were only about h% of all nsured commercal banks on June 0, 959, they held over 60% of the consumer loans by such banks. Although large bascs have, obvously, more demand from the commercal and ndus tral borrowers, they have stll more funds than smaller banks for con sumer and real estate loans. Also the extent to whch ndvdual banks are engaged n drect consumer lendng s often nfluenced by the presence of or absence of competng fnancal nsttutons. TABLE 0 DISTRIBUTION BY SIZE OF INSURED CCMMERCIAL BANKS EXTENDING CONSUMER CREDIT, JUNE 0, 959 = Sze of Banks Number of Banks Percentage of All (Deposts n mllons of dollars) Consumer Loans Less than 2 hp$k.9% 2 to and over * Source: Federal Depost Insurance Corporaton, December 3, I960. Clearly, consumer loans have a great advantage to the consumer and to the general growth of the economy. Through experence bank manage ments have learned to handle ths relatvely new type of lendng effcent ly and safely. As shown on Chart 3, loss rates have been held at low levels. Although there are no statstcs on the earnngs of commercal

46 37 banks from these loans, they generally gve hgher yelds because of the rsk they nvolve. Consumer loans are, however, dfferent from commercal loans. Where as workng captal or long term loans to busness borrowers usually en large ther capacty to realze profts and repay the loan, consumer loans as a rule do not ncrease the money ncome of the borrower. To recover the borrowed funds, therefore, the lender must depend on the contnuty of normal ncome of the consumer and upon hs fundamental honesty to meet hs oblgatons. Moreover, consumer credt s ncreasng at a faster rate than the rate of personal dsposable ncome. "Ths carres the danger that the market for those consumer goods bought largely wth nstallment credt may become temporarly saturated,nl* so that ths mportant source of outlet of commercal bank funds may prove to be less relable and less proftable as long as ths trend contnues. l5cosmr A. Senkwez, "Need for Cauton at Present n Case of Consumer Credt, Commercal and Fnancal Chroncle, (Aprl 7, I960), p. 0.

47 CHART 3 A MONTHLY REPORT COMPILED 3Y INSTALMENT CREDIT COMMITTEE, THE AMERICAN BANKERS ASSOCIATION DATA AS OF DECEMBER 3, 964 BL.?.LL.TJ.NTjsp:. FEB. 965 CENT NUMBER OF LOANS DELINQUENT AS PERCENTAGE OF TOTAL NUMBER Of PER CENT OF LOANS OUTSTANDING : automoble; drect l! I 2F.H.A. TITLE! I.25 ' ' I ; 5 AUTOMOBILE; INDIRECT ' S64! 3 HOME APPLIANCE 2.00 j j I J M A M J J I 6 PROPERTY IMPROVEMENT OWN PLAN JFMAMJJASOND 2.25 FIVE YEAR TREND AVERAGE OF SIX TYPES L L_.J.._ S S

48 CHAPTER IV THE TRUST COMPANY OF GEORGIA: EARNING ASSET MANAGEMENT DURING 96O6U Investments and loans consttute tle two major classes of the earnng assets of the Trust Company of Georga, lke n any other commercal bank. Durng 9606* earnng assets of the bank were made up of an average of 69% of ts total assets. There were not consderable changes n the composton of these assets, as shown n Table, durng ths perod except for a correspondng rse n the level of cash assets n 962. The average earnng assets for all commercal banks n the 6th Dstrct durng the same perod was slghtly over 6%. Ths fgure s consderably hgher than that of the Trust Company because, as a group, banks n ths dstrct have a hgher earnng assets fgure both n terms of dollar amounts and as a percentage of total assets than reserve cty banks, Although the Trust Company s supposed to own hgher cash assets rato than the average (for the 6th dstrct) snce t s a reserve cty bank, t has, evdently, greater loan demands at the same tme. Thus, whle the cash assets were 22$ of total assets of all member banks n the 6th Dstrct n 96*, those of the Trust Company were also about 23$ durng the same year. Lke any other commercal bank, the characterstcs of the earnng assets of the Trust Company are nfluenced by the nature of ts deposts. 39

49 ko TABLE EARNING ASSETS OP THE TRUST COMPANY OF GEORGIA, 9606* (Amounts n mllons of dollars) Year Gash Assets Loans Earnng Assets Investments Total Total Assets j Percentage of Earnng Assets to Total Assets I Itlt.3 6U.3 28.U 66% ; * lt * U U Sources 7l*th Annual Report, Trust Company of Georga, I96I4. Ths fact may be seen from Chart k whch shows the level of the bank's depost durng the perod under study, as compared to ts loans and nvestments. Notceable fluctuatons n the level of deposts are absent n ths chart. Consequently, the level of both classes of assets are sub ject to consderable fluctuatons, so that portfolo management problems from both the pont of y&m of safety and proftablty were not as acute as they would have been for a small country bank wth deposts of a hghly volatle nature. In vew of ths hndsght on the nature of ts deposts, we shall now try to study the two classes of earnng assets separately. Frst we shall see the characterstcs of ts securtes between I960 and I96I4. *Although tme deposts were only about 26% of total deposts n 96*, they accounted for over Sk% of the total ncrease n deposts be tween I960 and 96*.

50 _.! _! : j _ I I I _.. I..._ \ l _.._! _.!.... _. j I _ o T' fit f J. «a \ I U Q J L I I rv JJM. T[H t t 7 't xro I h. * A, TQ a / ( t ll I 4 I rv.) t L c. w r % 5 4» X k te "" 7h to v F RGL krl nl L.J ons ' A ; ^5 T T tp *?> ' u 4 *! L f nsrt JSJ / IC r 7 X >4c M jsl 7L_ A I A U r Ecep j t V L'k. E t_4_ J T? > A. r 9 6 f «l l r < u J j n 5to** a " l T _L 4 r.! I p \~ r ^ H. T " I T" T' K Lh ll 7J7 T I I f h I J J7_ I, J [ U j_ h r,~ I Years f" 4 } z: t / \ n r V r " ; / ^_ ' _j_ \'r k rr wl 4 "" 4 J } JT: tff,v """ " r 96U {7 ^«4*4 _L f" T T ", I I 4 ML T" I 4 4 I r I \ y,t L ~\ [j 4 T ~l