Income, Expenses, Profits · 7 Income, Expenses, Profits As WAS shown in an earlier chapter, the...

This PDF is a selection from an out-of-print volume from the NationalBureau of Economic Research

Volume Title: Industrial Banking Companies and Their Credit Practices

Volume Author/Editor: Raymond J. Saulnier

Volume Publisher: NBER

Volume ISBN: 0-870-14463-4

Volume URL: http://www.nber.org/books/saul40-1

Publication Date: 1940

Chapter Title: Income, Expenses, Profits

Chapter Author: Raymond J. Saulnier

Chapter URL: http://www.nber.org/chapters/c5010

Chapter pages in book: (p. 146 - 168)

7

Income, Expenses, Profits

As WAS shown in an earlier chapter, the functions performedby industrial banking companies have had a marked effectupon the financial structure of these institutions. In the rec-ord of their income, expenses and profitability, their func-tional character is reflected even more sharply.

INCOME

The income of industrial banking companies, like that ofother consumer credit agencies, is derived mainly from in-terest and discounts on loans. Other sources of income areinterest and dividends on securities, delinquency charges, in-surance commissions, recoveries on loans previously chargedoff, profits on sales of securities, interest on bank deposits,rents and miscellaneous minor items. These sources vary inimportance, of course, with the nature and diversity of opera-tions of a given company; a firm engaged in what is in effecta general banking business will draw its income from a widevariety of sources, while a company which concentrates upona straight consumer loan business will have a correspond-ingly less complicated income structure.

The relative significance of the different income sourcesis evidenced by several collections of data. Information col-lected by the North Carolina Banking Department, pertain-ing to industrial banking companies in that state, bothMorris Plan and others, is presented in Table 40. These datacover a relatively small group of companies but they serveto indicate that interest and discounts on loans are of pfe-

146

INCOME, EXPENSES, PROFITS 147

TABLE 40

PERCENTAGE DISTRIBUTION OF TOTALNORTH INDUSTRIAL BANKING1928—38, SOURCE OF INcoMEa

INCOME OFCOMPANIES,

Source of Income

a Based on Reports of the Condition of theCarolina, Banking Department.b Includes reductions in valuation allowances.Dollar figures in thousands.

State Banks, State of North

dominant importance as a source of income. Year-to-yearchanges in the relative weight of this item during the period1928-38 show no consistent trend, and it may be that thechanges here revealed are traceable primarily to changes inthe composition of the group of companies for which reportsare available.

The significance of interest and discounts as a source ofincome is revealed also by Table 41, based on reports madeto the Federal Deposit Insurance Corporation by insured

XumberTear of Com-

panies

Interest Interest Otherand Dis-counts on

and Divi- Currentdends on Operating

Loans Securities Earnings

Recover-ies onLoans

andProfits on

AssetsSoldb

Total°

1928 48 77.8 .2 21.6 .4 100.0% $1,638

1929 45 85.2 .2 13.5 1.1 100.0 1,619

1930 41 82.7 .3 15.3 1.7 100.0 1,644

1931 40 • 78.9 .3 19.5 1.3 100.0 1,697

1932 43 66.6 1.0 31.1 1.3 100.0 1,286

1933 33 70.4 2.0 24.8 2.8 100.0 800

1934 30 67.1 2.8 27.2 2.9 100.0 873

1935 29 63.9 3.7 28.1 4.3 100.0 1,020

1936 29 65.8 3.1 24.5 6.6 100.0 1,182

1937 32 67.0 2.8 26.0 4.2 100.0 1,348

1938 33 71.1 2.0 23.1 3.8 100.0 1,461

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119

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63

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572

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543

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1,645

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16

70.9

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14.9

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1.6

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1,919

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574

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71

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150 INDUSTRIAL. BANKING COMPANIES

industrial banking companies. From this table it appears thatthe size of the company, as measured by the total of capital,surplus and undivided profits, does not stand in any signifi-cant relationship to the percentage of income derived frominterest and discounts on loans.

An important difference between industrial banking com-panies and commercial banks is brought out by a comparisonof the income structures of the two types of institutions. Datapublished by the Federal Deposit Insurance Corporation in-dicate that for insured commercial banks interest and dis-counts on loans varied between 31.0 and 38.1 percent of totalincome over the period 1934-38.' Table 41, however, showsthat for insured industrial banking companies this propor-tion was about twice as high during the same period. Thisdivergence between the two types of institutions reflects dif-ferences in both asset structure and investment policy; aswas noted in Chapter 3, industrial banking companies keepa much larger proportion of their total assets in loans a.nddiscounts than do commercial banks.

A final collection of data on sources of income is pre-sented in Table 42, in regard to three separate groups ofcompanies: Indiana industrial banking companies of the in-vestment type; a mixed group of companies reporting to theAmerican Industrial Bankers Association; and companies re-porting to the Morris Plan Bankers Association. Again in-terest and discounts are seen to constitute the chief source ofincome, amounting in 1937 to approximately 75 percent ofthe total income of these companies.

The three tables here presented show also the relative un-importance, as a source of income, of interest and dividendson securities. In 1935, when the North Carolina industrialbanking companies represented in Table 40 received a higherproportion of their total income from this source than ini. Federal Deposit Insurance Corporation, Annual Report, for the year endedDecember 31, 1938, Table 137, pp. 212-13.


TABLE 42

PERCENTAGE DrsTRIBuTION OF TOTAL INCOME OF IN-DUSTRIAL BANKING COMPANIES REPORTING TO THEAMERICAN INDUSTRIAL BANKERS ASSOCIATION, 1936—37,TO THE MORRIS PLAN BANKERS ASSOCIATION, 1937,AND TO THE INDIANA BANKING DEPARTMENT, 1937,BY SOURCE OF INCOME

Members of Members of Indiana

Source of IncomeMorris PlanBankers As-.

sociationb

Industrial.

Bankzng

Companies°1936 1937

Interest and discounts on .

loans 74.7 73.3 75.6 78.7Fees and charges 15.4 13. 1 13.2 d

Delinquency charges 1 .0 5. 1 1 .5 1 .7Insurance commissions 1 .6 1 .4 d 2.4Interest and dividends on

securities 0.2 0.8 d 33Interest on bank balances d d d . 1

Rent received 2.0° 0.9° d 2.1Recoveries on loans 4. 1 3.2 d 37Profits on assets sold or

exchanged d d d .2Other income 1.0 2.2 9.7 7.8

TOTAL' 100.0% 100.0%$2,201 $1,953

100.0%g

100.0%$ 603

Number of companies 47 37 b 8

aBased on data supplied by the American Industrial,, Bankers Association,covering both investment and non-investment types of institutions.b Based on data supplied by the Morris Plan Bankers Association.Based on Annual Report of the Department of Financial Institutions of

the State of Indiana, for the year ended June 30, 1938,.. p. 89; data are forthe calendar year 1937, and pertain to companies authorized to issue in-vestment certificates.

Not reported separately.Reported as real estate income.Dollar figures in thousands.

g Total income not given.Ii Data are for all reporting Morris Plan banking companies; the numberreporting is not given in the statement of the Morris Plan Bankers Associ-ation, but it represents a majority of the companies.

152 INDUSTRIAL BANKING COMPANIES

any other year, the figure was only 3.7 percent, as comparedwith 0.2 percent in the low years 1928-29. After 1935 thissource of income for the North Carolina companies declinedgradually until it stood at 2.0 percent in 1938. Table 42shows a comparable low figure for Indiana industrial bank-ing companies in 1937, and still lower ones for membersof the American Industrial Bankers Association; Morris Plancompanies do not report this income source separately. Table41, covering insured companies—a group which generallyholds a larger proportion of total assets in investment securi-ties—corroborates the evidence in Table 40 that in recentyears interest and dividends on securities have tended todecline in relative importance as a source of income. Theproportion represented by this item fell from 7.7 in 1934 to3.8 percent in 1938 for the entire group of companies; forthe companies whose equity account was $1,000,000 or morethe figure was well over average, and it tended to be lowestfor the companies in the $200,000-1,000,000 groups.

In regard to income from securities the insured industrialbanking companies stand in significant contrast to the in-sured commercial banks. For the latter, according to reportsmade to the Federal Deposit Insurance Corporation,2 invest-ment income varied between 26.7 and 30.4 percent of totalincome during these same years, and showed no consistentdownward trend; it was lowest—26.7 percent—in 1936, androse in 1937, though it fell again in 1938. Forcommercial banks the income arising from security invest-ments is nearly equal to the income from interest and dis-counts on loans, but for industrial banking companies thistype of income is scarcely more than an incidental part ofthe earnings structure.

A group of related items may be considered together as athird source of income: recoveries on loans or other assetspreviously charged off; profits from the sale or exchange of2 Ibid., p. 212.


assets; and reductions in valuation Table 41 in-dicates that for insured industrial banking companies thiscomposite source provided, for the group as a whole, aboutone-tenth of total income in 1934-36, and about 7 percentin 1937-38. These items too are considerably less importantfor insured industrial banking companies than for insuredcommercial banks. For the latter their significance in totalincome varied between 16 and 27 percent during the years1934-38, approximately three-fourths of this non-operating in-come originating in investment activity.3 Year-to-year changesin the proportion of total income arising from recoverieson loans may indicate changes in economic conditions, re-flected in a new development in collection experience, butalso they may merely indicate changes in managerial policy,reflected in the relative volume of charge-offs and subsequentrecoveries.

Chief among the other sources of industrial banking com-pany income are various charges and fees, and insurance com-missions. Income from property rented and interest on bankbalances may also supply some incidental funds. The rela-tive importance of these items may be gauged from Table42, although these data should not be interpreted too lit.erally, for companies are likely to follow different proceduresin classifying such sources of income. It seems clear, however,that insurance commissions and delinquency charges are butminor sources of income for industrial banking companies.

On loans and discounts the ratio of earnings to total loanaccount, as contrasted to their ratio to total income, hastended to decline in recent years for those industrial bankingcompanies whose deposits are insured by the Federal DepositInsurance Corporation. In 1935 interest and discounts onloans, plus fees, commissions and charges, amounted for thesecompanies to $9.38 per $100 of average loan account, but

p. 212.


this figure had fallen to $8.73 by During this sameperiod commercial bank income from loans remained fairlystable, in relation to average loan account, ranging from$5.75 per $100 in 1935 to $5.91 in

Also the average rate of income from security investmentshas tended to fall in recent years for insured industrial bank-ing companies, declining from $4.07 per $100 of securitiesowned in 1935 to $3.24 in 1938.° This rate has fallen too forinsured commercial banks—from $3.51 per $100 of securitiesowned in 1935 to $3.27 in

EXPENSES

The main items of expense incurred by industrial bankingcompanies are salaries and wages, interest paid on depositsand outstanding investment certificates, interest and dis-counts on borrOwed money, losses resulting from the charg-ing off of defaulted loans and from the sale of assets, andtaxes.Table 43, pertaining to the same group of North Carolina

industrial banking companies, shows that salaries, wages andfees constituted (except in 1932) the greatest single item ofexpense during the years 1928-38, ranging from one-fifth totwo-fifths of total expenses over this period; the proportionrepresented by this item decreased in the years 1928-32, andthereafter rose to a figure considerably beyond its 1928 level.Also for the group of insured industrial banking companiesthe proportion of expenses accounted for by, salaries, wagesand fees has increased in recent years; as can be seen from

Computed from data provided by the Federal Deposit Insurance Cor-poration.

Federal Deposit Insurance Corporation, Annual Report, for the year endedDecember 31, 1938, p. 57.8 Computed from data provided by the Federal Deposit Insurance Cor-poration.' Federal Deposit Insurance Corporation, Annual Report, for the year endedDecember 31, 1938, p. 57.

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27.8

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19.7

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27.9

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$1,186

$1,336

$1,589

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$753

$796

$748

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$863

$958

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100.0% $8,411

100.0

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100—

200

200—

300

22 8

16.2

13.2

.6

4.2

28.6

28.2

4.2

7.2

27.9

26.6

18.8

20.0

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100.0

1,157

100.0

500

300—

500

516.2

.8

34.1

4.3

30.8

8.2

5.6

100.0

654

500— 1000

414.8

3.4

32.7

3.2

28.1

13.2

4.6

100.0

1,497

1000&over

324.2

.0

24.9

.7

22.2

15.6

12.4

100.0

4,195

1935

All Companies

Under$ 100

62

18

19.1

19.2

.8

.3

29.9

30.4

3.6

9.5

26.8

21.4

12.5

16.0

7.3

3.2

100.0

8,875

100.0

401

100—

200

200—

300

22

10

17.2

14.4

.4

29.2

31.3

6.1

7.5

28.2

29.0

12.5

14.8

6.1

1.6.

100.0

1,315

100.0

627

300—

500

517.4

.3

37.6

5.0

29.9

7.0

2.8

100.0

685

500— 1000

317.3

3.8

33.4

2.7

32.0

9.5

1.3

100.0

1,338

1000&over

421.0

.0

27.6

1.9

24.6

13.5

11.4

100.0

4,509

1936

AilCompanies

Under$ 100

63

17

18.9

18.8

.7

.3

31.3

34.9

2.7

7.0

26.0

24.3

10.3

8.2

10.1

6.5

100.0

9,688

100.0

341

100—

200

20

18.4

.4

31.5

4.5

25.5

11.6

8.1

100.0

1,144

200—

300

300—

500

13 5

17.5

17.4

.8

1.2

30.8

39.0

5.5

2.6

28.0

.27

.19.0

8.6

8.4

4.1

100.0

1,096

100.0

580

500—

100

01000&over

4 417.1

20.3

2.4.0

35.8

28.5

1.1

2.0

29.2

24.3

9.1

11.1

5.3

13.8

100.0

1,892

100.0

4,745

0 tTl

C,,

I. 0 I- H (I,

TA

BL

E 4

4

PER

CE

NT

AG

ED

IST

RIB

UT

ION

OF

TO

TA

LE

XPE

NSE

SO

FIN

SUR

ED

IND

UST

RIA

LB

AN

KIN

GC

OM

PAN

IES,

1934

—38

, BY

SIZ

EO

FC

OM

PAN

Y A

ND

TY

PE O

F E

XPE

NSE

S (c

oncl

uded

)

tTl

Tear

Size

of

Com

pany

"

.

Num

ber

of C

orn-

pani

es

Typ

eof

Exp

ense

Interest

on

Tim

ean

dS

avin

gsD

epos

its

Inte

rest

and

Dis

-co

unts

on B

or-.

row

edM

oney

Sala

-. rie

s,W

ages

and

Fees

Tax

es(i

nclu

d-in

gin

com

etaxes)

Oth

erC

urre

ntO

pera

t-ing

Ex-

pens

es

Los

ses

onLoans

All

Oth

erLosses

1937

AilC

ompa

nies

6919

.7.4

32.2

3.2

26.4

8.0

10.1

100.

0%$1

1,10

2Under$ 100

20

18.9

.3

36.9

6.3

26.5

4.5

6.6

100.

039

6100—

200

20

18.1

.932

.85.

025

.28.

19.9

100.0

1,169

200—

300

16

18.6

.9

31.3

5.1

27.8

10.2

6.1

100.0

1,477

300—

500

517.8

1.6

38.6

3.0

28.3

8.8

1.9

100.0

634

500—

100

03

16.4

.8

33.5

1.7

31.4

7.4

8.8

100.

01,

294

1000&over

521.2

.2

31.1

2.5

24.9

7.7

12.4

100.0

6,132

1938

AilC

ompa

nies

Und

er$

100

71 2119

.319

.0.3 .2

34.4

38.3

3.5

8.2

26.3

23.7

8.2

6.0

8.2

6.0

100.0

10,588

100.0

415

100—

200

19

16.6

.3

31.1

4.6

21.6

9.8

9.8

100.0

1,315

200—

300

17

17.1

.2

31.7

4.7

29.2

12.9

12.9

100.0

1,607

300—

500

718.9

.8

36.3

3.3

29.7

7.3

7.3

100.0

909

500— 1000

212.8

2.3

40.7

2.3

33.1

6.5

6.5

100.0

384

1000&over

521.0

.1

35.0

2.6

25.9

6.9

6.9

100.0

5,958

* B

ased

on y

ear-

end

data

sup

plie

d by

the

Fede

ral D

epos

it In

sura

nce

Cor

pora

tion.

bA

smeasured by total equity account (capital, surplus and undivided profits), in

clusive of the lower figure and exclusive of the higher.

Dollar figures in thousands.

thou

sand

s of

dol

lars

. Eac

h le

vel i

s in

-I- —1

158 INDUSTRIAL BA1NKING COMPANIES

Table 44, it rose steadily from nearly 28 percent in 1934 tonearly 35 percent in 1938. Except in 1938, when they wereabout average, the companies whose equity account was$1,000,000 or more had the lowest proportion of expense

TABLE 45

PERCENTAGE DISTRIBUTION OF TOTAL EXPENSES OFINDUSTRIAL BANKING COMPANIES REPORTING TO THEMORRIS PLAN BANKERS AssocIATIoN AND TO THEINDIANA BANKING DEPARTMENT, 1937, BY TYPE OFEXPENSE

' Members of. Indiana

Type of ExpenseMorris I (anBankers As-

sociationa

IndustrialBanking

Companiesb

Salaries and wages 31 . 1 31 .9Director and loan committee fees ° 1 .8Interest on investment certificatesInterest on borrowed money ) .

22.2 21 .32.5

Rent 5.0 4.3Advertising 5.9 6.8Auditing ° .6Taxes 8.7Losses on loansLosses on securities sold }

9. 29.4

. iCredit information ° .8Other expenses 18.8 11.8

TOTALa.

100.0% 100.0%$452

Number of companies g 8

Based on data supplied by the Morris Plan Bankers Association.b Based on Annual Report of the Department of Financial Institutions of theState of Indiana, for the year ended June 30, 1938, P. 89; data are for thecalendar year 1937, and pertain to companies authorized to issue investmentcertificates.

Not reported separately.d Includes payments for licenses.o Dollar figure in thousands.

Total expenses not given.g Data are for all reporting Morris Plan banking companies; the numberreporting is not given in the statement of the Morris Plan Bankers Asso-ciation, but it represents a majority of the companies.


for this item, and the $300,000-500,000 companies had thehighest (again with the exception of 1938). These variousfindings as to the relative importance of salary expense arecorroborated in Table 45 for Morris Plan companies and forindustrial banking companies in Indiana.

As for the firms reporting to the American IndustrialBankers Association, the data presented in Table 46 showthat the proportion of expenses accounted' for by salariesand wages does not differ significantly between the invest-ment and the non-investmentinstitutions. In 1936 and 1937the figures reported by the AIBA members were very nearlythe same as those shown for the same years for the othergroups of companies discussed (with the single exception ofthe North Carolina companies, for which salaries representeda relatively larger item).

The next most important expense item for industrialbanking companies is the cost of borrowing money frombanks or of obtaining funds from depositors or purchasersof investment certificates. Table 43 shows that for the NorthCarolina companies the two items, interest paid on depositsand interest paid on borrowings, varied widely in relationto total expenses over the eleven-year period. The formeritem tended to decline in relative importance from 1928 to1934, increased from 12 to 17 percent in 1935 and thereafterremained fairly constant; interest on borrowings decreasedfairly steadily throughout the period, from 9 to 1 percent.This item represented a much smaller proportion for thegroup of insured companies, but for them too it declined inthe period 1934-38—from 1 to 0.3 percent, as shown inTable 44; for these companies interest on time and savingsdeposits remained fairly steady, at about one-fifth of totalexpenses. Size of institution seems to bear no significant re-lation to the relative importance of these expenses, exceptfor the fact that in each of the years 1934-38 the companiesof $1,000,000 or more in equity account reported the highest

i6o 'INDUSTRIAL BANKING COMPANIES

TABLE 46

PERCENTAGE DISTRIBUTION OF TOTAL EXPENSES OFREPORTING MEMBERS OF AMERICAN INDUSTRIALBANKERS ASSOCIATION, 1936—37, BY TYPE OF EXPENSEa

Type of Expense

1936 1936

All.

Companies

1937

All.

CompaniesInvestment

.Compamesb

Non-Investment

.

Companies

Salaries 29.0 32.6 30.0 33.8Rent 3.4 5.9 4.1 3.9Advertising 3.7 2. 9 3.5 3.7Interest on deposits, in-

vestment certificates .

and bank loans 20.2 7.2° 16.4 18.3

Interest on bonds andpayments on preferredstock .9 2.9 1.5 33d

Charge-offs and provi-sions for losses 14.4 15.2 14.7 10.8

Insurance and bondpremiums 1.6 1.8 1.6 1.8

Provisions for taxes 7.8 10.8 8.7 8.4Other expenses 19.0 20.7 19.5 16.0

TOTALO 100.0%$1,010

100.0%$420

100.0%$1,430,

100.0%$1,190

Number of companies 25 21 46 34

Based on year-end data supplied by the American Industrial BankersAssociation.b Investment companies are those companies that accept deposits or sellcertificates.

Represents interest on bank loans only.d Represents payments on preferred stock oniy.e Dollar figures in thousands.

percentage of total expense for interest on time and savingsdeposits.

As was pointed out in Chapter 3, the acceptance of depositsand the sale of investment certificates constitute a majorsource of working funds for firms which can be classified as

INCOME, EXPENSES, PROFITS i6i

industrial banking companies under the definition used inthis volume. The value of this criterion is demonstrated inTable 46, in which companies reporting to the AmericanIndustrial Bankers Association are divided, for the year 1936,into two groups, investment and non-investment. The non-investment companies, of course, had no expenses for fundsobtained from deposits and investment certificates. For pay-ments on bank borrowings, however, and on bonds and pre-ferred stock, they had a higher proportion of expense thandid the group of investment companies.

All industrial banking companies incur some expense oncharged-off loans, and although in any one year charge-offs,net of recoveries, may amount to as little as 1 percent, oreven less, of the loans made during that year, it is not to beinferred that such losses are of negligible significance. Norcan the importance of such losses be measured solely by acomputation of their relation to total expenses over a givenperiod of time; a considerable proportion of wages and otherexpenses should be included in any calculation of the totalcost of collecting industrial loans, and this procedure wouldinvolve a highly arbitrary scheme of cost allocation. It is notpossible, therefore, to do more than show the relative im-portance of the loss expense item alone, as compared withother types of expense.

Table 43 indicates that for North Carolina firms charge-offs and losses from the sale of assets amounted, together, towidely varying proportions of total expenses, ranging from4 to 27 percent over the period 1928-38; they were relativelymost important in the years 1931-34. Industrial banking firmsinsured by the Federal Deposit Insurance Corporation sub-mit reports from which losses on loans may be computedseparately from other losses. The data in Table 44 showthat for all insured companies losses on loans fell from 15percent of total expenses in 1934 to 8 percent in 1937-38;losses on securities showed less variation, ranging from 7 to


10 percent with no discernible trend. Losses incurred throughthe sale of securities were far less for the group of Indianaindustrial banking companies covered in Table 45, amount-ing to only 0.1 percent of total expenses in 1937; these com-panies' losses on loans were about 9 percent in that year,and the loss percentage on loans and securities combined waspractically the same as that of the Morris Plan companiesreporting for 1937. For the members of the American Indus-trial Bankers Association, represented in Table 46, theon combined losses in 1937 was not greatly different—around11 percent—and the data for 1936 show little variation be-tween the investment and the non-investment institutions inthis respect.

The relative importance of taxes as an item of expense isalso to be gauged from the tables already presented. Althoughthe data on tax expenditures for North Carolina companies,as given in Table 43, do not include the corporation incometax paid by these firms, the tax item nevertheless amountedto approximately 10 percent of total expenses in the period1928-38, ranging between 8 percent in 1931 and nearly 14percent in 1935. Expenditures for taxes, including incometaxes, by insured industrial banking companies were muchlower, as Table 44 indicates; in the years 1934-38 they fluctu-ated narrowly around 3 percent of total expenses. Com-parable data in Tables 45 and 46 are in rough conformitywith those for the North Carolina companies; here too taxes,including corporation income taxes, accounted for about 10percent, or less, of 'total expenses.

It was pointed out above that in the years 1935-38 insuredindustrial banking companies experienced a decrease in theiraverage loan income per $100 of loan account. But theircurrent operating •expenses (exclusive of charge-offs, losseson assets sold or exchanged and increases in valuation al-lowances) also declined during this period, falling from


$7.14 per $100 of average loan account in 1935 to $6.42 per$100 of average loan account in 1938.8

PROFITS

The profit record of industrial banking companies over aperiod of years reveals that despite depression lows these in-stitutions have shown a remarkable earning capacity. Table47 shows that in the period 1922-38 the net earnings ofMorris Plan banking companies averaged about 10 percentof total equity account. From an average of nearly 12 percentin the years 1922-29 they fell to 3 percent in 1933, but there-after recovered fairly rapidly, and by 1937 had reached nearly14 percent, a level never before attained by Morris Plan in-stitutions. It is true, however, that these data pertain to achanging group of companies, and are thus subject to somecriticism. Therefore it is worth noting that figures on 86identical Morris Plan companies corroborate the evidencepresented here that net earnings have in recent years repre-sented a higher proportion of equity funds than they didbefore the depression; for the 86 companies this figure was13 percent in 1938, as compared with 11.5 percent in l929.°

Table 48, based on reports to the Federal Deposit Insur-ance Corporation by insured industrial banking companies,shows, for 1934-38, net profits after income taxes and netprofits after the total of income taxes, dividends and intereston capital. Of the two sets of figures the former are thecloser to those in Table 47, but they are not strictly com-parable because they are not exclusive of interest on capitalnotes and debentures. It is not likely, however, that theseprofit percentages would be much lower if they excludedthis item; as was indicated in Chapter 3, these insured com-8 Computed from data provided by the Federal Deposit Insurance Corporation.

Industrial Finance Corporation, Annual Report to Stockholders, for theyear ended January 31, 1939, p. 5.


TABLE 47

NET PRoFrrs OF REPORTING MORRIS PLAN BANKINGCOMPANIES, 1922—38, IN DOLLARS AND IN PERCENT OFTOTAL ACCOUNTa

Tear Number of Companies Net Projissb

1922 $1,506,004 9.0%1923 ° 1,925,192 10.81924 100 2,472,154 12.8

1925 106 2,842,317 13.3

1926 106 3,003,419 12.8

1927 106 3,029,129 12.0

1928 108 3,152,490 11.4

1929 108 3,129,773 11.2

1930 108 2,604,511 8.5

1931 106 1,957,525 6.7

1932 102 1,046,049 4.0

1933 92 696,187 3.0

1934 • 92 1,412,847 6.2

1935 92 2,357,201 9.8

1936 89 2,861,569 11.8

1937 86 3,480,097 13.6

1938 86 3,581,858 13.0

a Based on data from Industrial Finance Corporation annual reports tostockholders. With the exception of 1938, the data for each year are fromthe annual report for the year ended January 31, two years later; data for1938 are from the report for the year ended January 31, 1939."Net profits after income taxes and interest paid on capital notes and deben-tures. For the percentage figures the base, total equity account., comprisespaid-in capital, surplus and undivided profits. For 1934-38 these data arc asof the end of the year; for all other years surplus and undivided profits areas of the end of the year and capital is an average of figures for the begin-ning and for the end of the year.Number of companies not given.

panics obtained but a negligible proportion of their fundsfrom borrowings—never as much as 2 percent and in 1938only 0.1 percent of total assets.'° It is not possible to deter-mine the extent to which these profit percentages would be

1O Table 2, p. 60.


TABLE 48NET PROFITS OF INSURED INDUSTRIAL BANKING COM-PANIES, IN DOLLARS AND PERCENT OF TOTALACCOUNT, 1934—38, BY SIZE OF COMPANYa

Tear Site ofCompanyb

Num-bet ofCorn-

panies

Net Profits AfterTaxes 0

Divi-dends

and Inierest'1

Net Profits AfterTaxes, Dividends

and Interest°

1934 AliCompanies 60 $ 377 2.4% $ 415 $ — 38 — .2%Under$ 100 18 28 2.3 36 — 8 — .7

100— 200 22 57 1.8 54 3 .1

200— 300 8 98 5.7 52 46 2.7300— 500 5 129 7.0 67 62 3.4500— 1000 4 196 7.1 171 25 .9

1000&over 3 —131 —2.6 35 —166 —3.31935 AliCompanies 62 1,358 7.1 627 731 3.8

Under$ 100 18 104 8.4 64 40 3.2100— 200 22 261 102 159 4.7200— 300 10 168 6.9 66 102 4.2300— 500 5 160 8.4 83 77 4.0500— 1000 3 221 10.8 93 128 6.2

1000&over 4 444 5.5 219 225 2.8

1936 AilCompanies 63 2,180 11.2 811 1,369 7.0Under$ 100 17 107 9.2 45 62 5.3

100— 200 20 363 11.9 115 248 8.2200— 300 13 238 8.0 112 126 4.2300— 500 5 175 9.7 71 104 5.8500— 1000 4 371 13.9 137 234 8.8

1000 & over 4 926 11.9 331 595 7.6

1937 All Companies 69 2,402 11.3 932 1,470 6.9Under$ 100 20 121 9.1 51 70 5.2

100— 200 20 410 13.5 111 299 9.8200— 300 16 374 10.1 147 227 6.1300— 500 5 173 9.1 77 96 5.0500— 1000 3 141 7.1 75 66 3.3

1000&over 5 1,183 .12.8 471 712 9.1

1938 AilCompanies 71 2,638 13.0 1,091 1,547 7.6Under$ 100 21 124 8.3 51 73

100— 200 19 209 6.5 140 69 2.2200— 300 17 385 9.6 168 217 5.4300— 500 7 157 6.2 85 72 2.8500— 1000 2 99 7.8 77 22 1.8

1000 & over 5 1,664 21.1 570 1,094 13.9

a Based on year-end data supplied by the Federal Deposit Insurance Cor-poration.b As measured by total equity account (capital, surplus and undivided profits),in thousands of dollars. Each level is inclusive of the lower figure and ex-clusive of the higher.

Net profits after income taxes, in thousands of dollars and in percent oftotal equity account at beginning of year.d Dividends paid on preferred and common stock and interest paid on capitalnotes and debentures, in thousands of dollars.

Net profits after income taxes, dividends and interest on capital notes anddebentures, in thousands of dollars and in percent of total equity accountat beginning of year.

i66 INDUSTRIAL BANKING COMPANIES

reduced if they were expressed in the same way as those inTable 47, hut even without such adjustment they revealthat the insured companies, as a group, had a less favorableearnings record during the years 1934-38 than did the entiregroup of reporting Morris Plan companies.

When the insured companies' profit ratios are examinedwith reference to the size of the institution, it appears thatthe largest companies, those with a total equity account of$1,000,000 or over, had the greatest variation in earningsduring 1934-38. In 1934 these companies showed a loss intheir percentage for net profits after income taxes, the onlyloss recorded for this item by any group of companies dur-ing the entire five-year period; in 1938, however, these com-panies' net earnings after income taxes amounted to 21 per-cent of total equity account, the highest proportion foundfor any size class. Neither set of net profit percentages re-veals any close relation between size of company and earningcapacity. This lack of correlation is borne out by earningsdata, not presented here, for North Carolina industrial bank-ing companies. In 1934 and 1935 firms in that state wereclassified into three size classes, and in 1934 the largest com-panies were found to have the lowest ratio of net profit (afterincome taxes and preferred stock dividends) to total equityaccount, while in 1935 they had the highest.

The high earnings record of industrial banking companiesis further illustrated in Table 49, which compares, for in-sured industrial banking companies and commercial banks,net profits after payment of income taxes, and after paymentof income taxes, dividends and interest on capital, per $100of total assets. For both items the industrial banking com-panies are shown to. have had higher rates, in all five yearsof the period 1934-38. The explanation is to be found, ofcourse, in the differences in the asset distributions of the twotypes of institutions. Industrial banking company assets, ashas previously been noted, are almost exclusively short-term

P1 Cl,

P1

C,) 0 -3 (I)

TA

BL

E 4

9

SEL

EC

TE

D E

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NSE

, EA

RN

ING

S A

ND

PR

OFI

T I

TE

MS,

PE

R $

100

OF

TO

TA

L A

SSE

TS,

FO

R0

INSU

RE

D I

ND

UST

RIA

L B

AN

KIN

G C

OM

PAN

IES

AN

D I

NSU

RE

D C

OM

ME

RC

IAL

BA

NK

S1

P1

1934

1935

1935

1937

1938

item

Indu

s-.

tria

lB

ank.

Cos

.

Cor

n- .m

erci

alB

anks

Indu

s-.

tria

lB

ank.

Cos

.

Cor

n- .m

erci

alB

anks

Indu

s-.

tria

lB

ank.

Cos

.

Cor

n- .

mer

cial

Ban

ks

Indu

s-.

tria

lB

ank.

Cos

.

• Cor

n- .m

erci

alB

anks

Indu

s-.

tria

lB

ank.

Cos

.

Cor

n- .m

erci

alB

anks

Tot

al c

urre

nt o

pera

ting

ex-

penses

$6.2

5$2

.48

$5.77

$2.2

4$5.34

$2.0

9$5

.19

$2.1

1$5

.23

$2.0

9Net current operating

earn

-.

ings

1.42

1.00

1.73

.92

2.11

.83

2.27

.86

2.36

.78

Net profits

after

income

taxes

.37

—.75

1.10

.43

1.49

.98

1.37

.69

1.58

.54

Net profits after taxes, divi-

dend

s an

d in

tere

st1'

— 0

4—

1.17

.59

...9

4.5

6.8

4:2

8.9

1.1

4

Num

ber

of in

stitu

tions

6014

,124

6214

,110

6313

,956

6913

,783

7113

,645

For

indu

stri

al b

anki

ng c

ompa

nies

bas

ed o

n da

ta s

uppl

ied

by th

e Fe

dera

l Dep

osit

Insu

ranc

e- C

orpo

ratio

n. F

or c

omm

er-

cial

ban

ks b

ased

on

Fede

ral D

epos

it In

sura

nce

Cor

pora

tion,

Ann

ual R

epor

t, fo

r th

e ye

ar e

nded

Dec

embe

r 31

, 193

8, T

able

137,

pp.

212

-13.

Tot

al a

sset

s of

indu

stri

al b

anki

ng c

ompa

nies

are

as

of

the

end

of th

e ye

ar; t

hose

of

com

mer

cial

ban

ksar

e av

erag

es o

f as

sets

at b

egin

ning

, mid

dle

and

end

ofyear.

bA

fter

inco

me

taxe

s, d

ivid

ends

pai

d on

pre

ferr

ed a

nd c

omm

on s

tock

and

inte

rest

pai

d on

cap

ital n

otes

and

deb

entu

res.

C.,

i68 INDUSTRIAL BANKING COMPANIES

consumer loans. Commercial bank assets, on the other hand,are about evenly divided among cash, investment securities(public and private) and loans and discounts. Moreover, onlya relatively small part of the loans and discounts of com-mercial banks would carry rates of interest as high as thoserequired by industrial banking companies. It is because oftheir relatively high rate of net current operating earningsthat industrial banking companies are able to show higherprofit than commercial banks, for the latter spend con-siderably less per $100 of total assets than the former oncurrent operating expenses.

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