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In addition to the adverse effects of the decline in the proportion of total assets held in earning assets, changes in the character and yield of these assets reduced the earning power of banks. Interest rates on all types of loans and investments were sharply below the predepression rates, and for the first time member bank holdings of securities (more than half of which were United States Government securities) represented a larger proportion of assets than loans.

A number of the provisions of the banking reform measures enacted by Congress in the early thirties also directly or indirectly affected the trend in bank earnings. The prohibition of the payment of interest on demand deposits and the maximum limits set on interest rates on time deposits operated to curb the expansion of interest-paid charges as expense items. In addition, limitations imposed by new legislation on bank activities in regard to security loans and investment banking served to eliminate some sources of earnings and expenses. On the other hand, adoption of deposit insurance served to increase expenses somewhat.

Reduced opportunities for private loans and investments at depressed levels of economic activity, particularly at a time when the public debt was being expanded to provide funds for increased Government expenditures to stimulate recovery trends, led to increased investment in United States Government securities, The search for other ways of maintaining bank earnings also led to the wider adoption of service charges on deposits and to increased bank activity in the consumer loan field.

Except for a temporary reversal in 1938, earnings on loans gradually increased during this recovery period, both in actual amount and as a proportion of total earnings. By 1941, earnings on loans represented 47 percent of earnings as compared to the low of 40 percent in 1936. Earnings on securities during the period declined somewhat in dollar amount and as a percentage of earnings despite the expansion in holdings of United States Government securities. This reflected a continuation of the decline in the average rate of return received on securities from 3.3 percent in 1934 to 1.9 percent in 1941.

Wage and salary payments continued to increase and interest on deposits continued to decline in importance as expense items. Interest on deposits used only 10 percent of total earnings in 1941 as compared to the peak of 35 percent in 1927. The assessment for Federal deposit insurance represented about 3 percent of total earnings in 1941. The proportion of earnings taken by taxes increased, largely as a result of higher Federal income taxes, and was 9 percent in 1941 compared with 5 percent in 1935.

With the exception of the years 1935 and 1938, when losses were large, and the year 1936 when profits on securities sold were large, net profits of member banks over the prewar recovery period as a whole averaged slightly more than 6 percent of total capital accounts.

The World War II period, 1942-45.-Despite the increased industrial activity that accompanied the war, member bank earnings from loans declined slightly until the end of the war. This reflected primarily changes in the types of loans being made and the low rates of return obtained on war contract financing. Bank earnings, however, were bolstered during the period by the huge volume of United States Government securities absorbed by the banking system, and by the

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opportunities for making profits on these securities in a supported market. In 1943, for the first time, member bank earnings from securities (largely United States Government securities) constituted the largest source of bank earnings. By 1945 earnings from United States Government securities alone accounted for 47 percent of all earnings and earnings on loans accounted for only 28 percent. Total earnings from loans and investments at the end of the war period were above those at the beginning of the war, but they were based on a much lower rate of return on a greatly expanded volume of earning assets. In addition to the general increase in expenses during this period, income taxes continued to become a more important factor than in earlier years. In 1941, all taxes paid by member banks amounted to 129 million dollars or 9 percent of total earnings. By 1945, taxes amounted to 354 million dollars or 17 percent of earnings; 270 million of this or 13 percent of earnings was for income taxes. The decline in the proportion of income from tax-exempt and partially tax-exempt securities as well as higher tax rates contributed to this increase.

Despite the increase in taxes and other expenses, the average rate of net profits on capital of all member banks rose sharply from 6.4 percent in 1942 to a peak of 10.9 in 1945. This increased return reflected to some extent higher net current earnings but, to a much larger extent, the favorable developments in noncurrent items, particularly in profits on securities sold. A larger proportion of these net profits were retained to strengthen capital positions than in previous periods. Postwar earnings trends, 1946-50-At the close of the war, opportunities for loan expansion became available and by 1948 loans were again the most important source of earnings for member banks. By 1950 they received 50 percent of their earnings from loans, 27 percent from United States Government securities, 6 percent from other securities, 5 percent each from service charges on deposit accounts and trust department operations, and 7 percent from all other sources. Expenses also increased during this period although there were only very minor changes in the relative importance of expense items. Salaries and wages were still the largest expense item in 1950, and absorbed 31 percent of total earnings. Taxes of all types accounted for 15 percent of total earnings and interest on deposits accounted for 8 percent. Payments on deposit insurance in 1950 are estimated to have amounted to about 100 million dollars or 3 percent of earnings; 56 percent of these payments was refunded in 1951.

In 1947, the impact of income taxes was temporarily eased by the adoption of a formula clarifying the tax provisions relating to the establishment of reserves for bad debt losses on loans.97 This resulted in the establishment of large reserves for bad debt losses in 1947 and the years immediately following. In 1948 net additions to reserves for losses on loans reached a peak of 171 million dollars. The establishment of these reserves not only reduced taxes but also, since they are deducted in computing net income subject to tax, reduced reported net profits.

97 The Bureau of Internal Revenue approved a formula based on the average loss experience on loans in individual banks over the past 20 years. In general the formula provides that the 20-year average percentage, applied to outstanding loans at the end of the current year, determines the permissible additions for that year to reserves acceptable for tax purposes. The total amount of the tax-free reserve is limited, however, to three times the 20-year average percentage applied to current outstanding loans.

A relatively larger increase in earnings than in expenses during this period resulted in a gradual upward trend in net current earnings. This trend, together with favorable developments in noncurrent earnings and expenses, yielded net profits of 781 million dollars in 1950. This was an average return of 8.3 percent on capital accounts, which compared favorably with the average return received during the twenties. It should be noted, however, that this level of profitability was not uniformly realized in all regions. Banks in some of the financial centers where the ratio of capital to total assets remained relatively large, as in New York City, showed a considerably lower return on capital than the average for all member banks. For member banks as a group, retention of profits to strengthen capital positions continued at a high rate.

The general trends of this period extended into 1951. Both earnings and expenses continued to increase. Earnings on loans led the expansion in earnings, and a sharp increase in income taxes was the most important factor in a somewhat lower level of net profits. Preliminary figures indicate a net return of 7.6 percent on total capital

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TABLE XXIV.-Member bank earnings, 1919–50

Interest and dividends on: U. S. Government securities.

Other securities..
Earnings on loans.

Service charges on deposits.
Other current earnings..

Expenses-

[In millions of dollars]

1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929

1, 436 1,804 1,744 1,652 1, 720 1, 787 1, 919 2, 028 2,014 2,194 2,399

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423

Taxes 2

105

981 1, 227 1, 210 1, 146 1, 233 1, 281 1, 368 1, 442 1, 516 1,614 1,684 224 291 307 314 336 355 373 397 420 440 464 469 468 509 548 595 643 673 713 750 759 116 128 99 103 97 102 106 110 114 112

68

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455 577 534 506 487 506 551 586 498

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Taxes on net income 2.

Net profits..

351

396 293 349 337 362 420

431 447

504

Cash dividends 7.

197

238 233 247 243 250 265

277 299

318

387

See fotnotes at end of table, p. 567.

TABLE XXIV.-Member bank earnings, 1919–50—Continued

[In millions of dollars]

Earnings 1

Interest and dividends on: U. S. Government securities..

Other securities.

Earnings on loans.

Item

1930 1931 1932 1933 1934 1935

1936 1937 1938 1939 1940

2, 158 1, 841 1, 554 1,237 1, 244 1, 207 1, 271 1,321 1, 274 1,296 1,323

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336 288 245

Other current earnings.

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1 Beginning with 1927 interest on balances with other banks, previously included with earnings on loans and securities, is included with other current earnings; and profits on securities sold, previously included in other current earnings, are reported in a separate item under recoveries. Beginning with 1942, service charges and fees on loans, previously included in other current earnings, are included in earnings on loans. 2 Taxes on net income are included with other taxes in current expenses prior to 1942.

3 Estimated.

Beginning with 1942, recurring depreciation on real estate, previously included in losses and charge-offs, is included in expenses.

Prior to 1948, transfers to reserves were included in losses and charge-offs, and transfers from reserves were included in recoveries.

Included in other current earnings prior to 1927.

'Includes interest on capital notes and debentures; may include stock dividends declared by State member banks prior to 1933, and by national banks prior to 1922.

TABLE XXV.Sources and disposition of member bank earnings, 1919–50

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Total earnings..

89.7 88.8 88.2

84.9 86.9 84.8! 84.2 84.4

Service charges on deposits..

10.3 11.2 11.8

22.8 22.7 62.3 62.6 15. 1 13.1 15.2 15.8 15.6 14.9 14.7

19.7

65. 2

15.1

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

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Total earnings..

34.5 38. 1
48.8 43.4
1.7 2.2 3.0
15.0 16.3 17.0 18.2 18.4

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

38.7

38.3 36.4 35.2

(*17.3

34.3

*15. 3

41.3

40.4

41.8

42.7

43.3

45. 0

3. 1

3.4

4.0

4. 2

4.5

18. 1

18. 2

17.9

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1 Beginning with 1927 interest on balances with other banks, previously included with earnings on loans and securities, is included with other current earnings; and profits on securities sold, previously included with other current earnings, are treated as noncurrent earnings and are deducted from losses. Beginning with 1942 service charges and fees on loans, previously included in other current earnings, are included with earnings on loans.

2 Taxes on net income are included with other taxes in current expenses prior to 1942.

Beginning with 1942 recurring depreciation on real estate, previously included in losses and chargeoffs, is included in expenses.

* Includes interest on capital notes and debentures; may include stock dividends declared by State member banks prior to 1933, and by national member banks prior to 1922.

Beginning with 1935 includes deposit insurance assessments.

*Estimated.

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