- 14 lending bank. Interest rates on floating-rate loans averaged 49 basis points lower where a demand deposit was maintained. For the entire time period covered in the survey, rates on fixed-rate loans where a demand deposit balance existed were an average of 89 basis points lower than rates on loans where a demand deposit did not exist. Over the entire period, the average rate on all loans where a demand deposit existed was 7.66 percent compared to 8.39 percent for loans where a demand deposit balance was not present. Differences in loan origination dates, loan maturities, loan-to-collateral ratios, and borrower credit worthiness could account for some of the observed interest rate differences. The average rate for fixed-rate loans where a demand deposit existed was below the average prime rate in 4 of the 11 time periods, compared to 1 of 11 periods where a demand deposit was not present. For all fixed-rate loans where a demand deposit was present subsequent to 1969, only 8.9 percent was originated in periods in which the average weighted rate was less than the average prime rate, compared to 4.5 percent of loans where there was no demand deposit. However, each period in which the average interest rate was below the average prime rate can be characterized in periods of tight money and high and rapidly changing prime rates (1970, 1973, 1974, and the first half of 1975). The range of prime rates for these periods was as follows: 1970--6.75 to 8.5 percent 1973--6.0 to 10.0 percent First half of 1975--7.0 to 10.5 percent The wide range in prime rates for these periods may be a partial explanation for why the average rate was below the average prime rate since the survey data do not indicate precisely when the loan was originated during the period. - 15 State-by-state comparisons reveal that banks in Texas, Illinois, Florida, Oklahoma, Missouri, Tennessee, and Minnesota, none of which permit statewide branching, have the most loans and largest dollar volume of loans to insiders of other banks. Texas had the largest number and amount of such loans (9,126 loans totaling $933.7 million). Illinois had the second largest number and amount (4, 546 loans totaling $584.7 million). Both are unit banking states. In eight states, the average rates on loans where there was no demand deposit relationship were at least one percentage point higher than rates on loans associated with a demand deposit. Hawaii had the largest differential (2.93 percentage points), followed by Nevada (1.60), Oklahoma (1.51), Minnesota (1.45), Iowa (1.39), Arizona (1.26), Colorado (1.20) and Kansas (1.17). On the other hand, there were nine states that charged a higher average rate on loans associated with a demand deposit than on those without. Montana had the largest differential (2.98 percentage points), followed by Connecticut (0.45), Maine (0.30), and six others with a differential between 0.05 and 0.16 percentage points. *Banks in five states had loan amounts greater than that of banks in Georgia but less than that of banks in Florida. - 16 Looking at loans to insiders of other banks by bank size class shows that about 43.7 percent of the number but only 22.7 percent of the dollar volume of loans to insiders of other banks was held by banks with less than $100 million in total assets. Banks between $100 million and $5 billion held 52.0 percent of the number and 67.8 percent of the dollar volume of such loans, while the largest banks held 4.2 percent of the number and 9.5 percent of the dollar volume. According to figures shown in the table above, in banks under $100 million and those over $5 billion in total assets, there is no apparent connection between the rates charged on fixed-rate loans extended to insiders of other banks and whether the other bank maintained a demand deposit with the reporting bank. However, banks with $100 million to $5 billion in total assets charged from 63 to 100 basis points less on fixed-rate loans where a demand deposit relationship existed. With respect to floating rate loans, the weighted average interest rates were lower when the insider's bank maintained a demand deposit with the lending bank. The rate differential was less than 30 basis points except in the $100 to $300 million and $300 million to $1 billion total asset classes where the differential was 104 and 60 basis points, respectively. - 17 IV. LOANS TO INSIDERS OF REPORTING BANK A. Introduction Commercial banks were required to report in Schedule III of the survey the number, amount and weighted average interest rate for loans extended to executive officers, major stockholders, and directors of their bank that were outstanding on September 30, 1977. This information was provided separately for each insider group. Unlike Schedule II, the definition of reportable loans included those made to insiders' business interests and their immediate families as well as those made directly to the insiders. Fixed-rate loan da ta were reported for 12 time periods according to the date of the note. All loans with a current balance less than $10,000 and real estate loans under $60,000 were excluded from reporting requirements. There were 10, 800 or 76.4 percent of the 14, 137 banks that reported outstanding loan balances to insiders as of September 30, 1977.* Included among those 10, 800 banks were 3, 769 (26.7 percent of all reporting banks) that had made loans to their executive officers, 1,535 (10.9 percent) that had extended loans to their major stockholders and 9, 171 (64.9 percent) that had made loans to their directors. The average number of loans extended by each bank was 3 to executive officers totaling $198, 000, 4 to major stockholders totaling $268, 000 and 10 to directors totaling $978,000. There were 106, 385 loans to insiders of reporting banks amounting to just over $10 billion, about 1.8 percent of total loans of all insured commer *Data contained in this paragraph are not contained in the attached tables or in any of the tables transmitted to the Committee. cial banks as of September 30, 1977. The majority of these loans was to directors and their interests (82.2 percent of number of loans and 88.6 percent of amount), followed by loans to executive officers (11.9 percent and 7.4 percent), and loans to major shareholders (5.9 percent and 4.1 percent). The survey excluded from the "director" category those directors who were either executive officers or major shareholders. Over 80 percent of the number and 56 percent of the volume of these loans to insiders of the reporting bank were fixed-rate loans. Similar to the results reported for loans to insiders of other banks, the average interest rate charged on fixed-rate loans to insiders of the reporting banks was below the average prime rate during 1970, 1973 and 1974. As noted before, these years were characterized by tight money and high and rapidly changing prime rates. About 7.2 percent of the number and 9.2 percent of the dollar volume of fixed-rate loans were originated in periods in which the average loan rates were less than the average prime rates. However, in recent time periods, fixed-rate loans have been made at rates substantially higher than the average prime. The rate differential was 115 basis points for the second half of 1975, 156 basis points for the first half of 1976, 171 basis points for the second half of 1976, 193 basis points for the first half of 1977, and 117 basis points for the third quarter of 1977. Approximately 82 percent of the total volume of fixed-rate loans to insiders outstanding on September 30, 1977 was originated during those time periods. Differences among the weighted average interest rates paid on fixed- or floating-rate loans by the three insider groups are small. |