PROCEEDINGS

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Volume 4, Number 1 2004 Allied Academies
International Conference New Orleans, Louisiana April 7-10, 2004 Academy of Commercial Banking and Finance PROCEEDINGS Volume 4, Number 1 2004 page ii Allied Academies International Conference New Orleans, 2004 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 Table of Contents AN EMPIRICAL STUDY OF SOUTH CENTRAL U.S. BANKS PROFITABILITY, CREDIT QUALITY AND
LOAN GROWTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Donald J. Brown, Sam Houston State University
James Bexley, Sam Houston State University
Joe F. James, Sam Houston State University THE BEHAVIOR OF CREDIT CARD INTEREST RATES DURING THE DECLINE
IN OTHER INTEREST-RATE MARKETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Stephen T. Evans, Southern Utah University ANALYSIS OF THE RATIO ADJUSTMENT PROCESS AND THE CONTRIBUTION OF FIRM-SPECIFIC
FACTORS: A PRELIMINARY REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Sharon S. Seay, Mississippi College
Sarah T. Pitts, Christian Brothers University
Rob H. Kamery, Christian Brothers University A RESEARCH METHODOLOGY FOR ENHANCING THE UNDERSTANDING OF THE RATIO
ADJUSTMENT PHENOMENON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Sharon S. Seay, Mississippi College
Sarah T. Pitts, Christian Brothers University
Rob H. Kamery, Christian Brothers University EMPIRICAL DETERMINANTS OF SECURITIZATION AND OFF-BALANCE-SHEET ACTIVITIES IN BANKING . . . . . . . . . . . . . . . . . . . . 21
Christopher Ngassam, Virginia State University Authors Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Allied Academies International Conference page 1 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 New Orleans, 2004 AN EMPIRICAL STUDY OF SOUTH CENTRAL U.S. BANKS PROFITABILITY, CREDIT QUALITY AND LOAN GROWTH Donald J. Brown, Sam Houston State University fin_djb@shsu.edu James Bexley, Sam Houston State University fin_jxb@shsu.edu Joe F. James, Sam Houston State University fin_jfj@shsu.edu ABSTRACT The U.S. economy is in the recovery stage from a recession that apparently began in March 2001 and probably ended in the first half of 2002. Banks have remained very profitable over this
recession and recovery period. However, there has been concern expressed that declining credit
quality might become a problem. This paper is an empirical analysis of the performance, credit quality and loan growth of banks located in the seven South-Central U.S. states, of Arkansas, Louisiana, Mississippi,
Oklahoma, New Mexico, Tennessee and Texas. We used FDIC data, which we received from Stratis
Technologies, of Louisville, Kentucky, to analyze performance ratios such as the Return on Assets
and the Return on Equity which were then compared to the average for all U.S. banks.
Non-performing loans and loan charge offs for these states were compared to the national average.
Finally, the average loan growth rates for these states were then compared to the average loan
growth of all U.S. banks. Preliminary analysis of the performance, credit quality and loan growth of the banks in these seven South-Central states, shows that they compare favorably with the national averages in all the
above areas. In fact in the credit quality and loan growth categories the majority these seven banks
consistently exceeded the national averages. page 2 Allied Academies International Conference New Orleans, 2004 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 Allied Academies International Conference page 3 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 New Orleans, 2004 THE BEHAVIOR OF CREDIT CARD INTEREST RATES DURING THE DECLINE IN OTHER INTEREST-RATE MARKETS Stephen T. Evans, Southern Utah University evans_s@suu.edu ABSTRACT The three-year period beginning in December 2000 saw historic declines in the interest rates in most financial markets including 15 reductions in the key rates established by the Federal
Reserve. However, interest rates in the credit-card industry gave mixed signals with some rates
remaining "sticky" or inelastic. While other studies have identified the mathematical relationships between credit-card interest rates and the discount rate, federal funds rate, and prime rate, this study looks at both the
"introductory rates" charged by credit-card providers as well as the "ongoing rates" following the
introductory period. It also focuses solely on the rates contained in the mailed advertising materials
sent by national credit-card marketers. The evidence shows that "introductory rates" have declined at approximately the same rate as other interest-rate markets. However, the "ongoing rates" have been inde-pendent of other rate
declines and, in fact, have increased during the three-year period. INTRODUCTION Although some consider 1949 to be the beginning of the modern credit-card era (Brooker, 2004), the genesis of this innovation certainly goes back to the early 1900s. In 1914, for example,
Western Union was using metal cards to allow its best customers to defer payments, and the cards
became known as "Metal Money" (ETI, 2003). The use of credit cards was prohibited during World War II. But the practice re-emerged in the late 1940s, especially when the Diner's Club card was instituted to allow customers to use one
card to charge purchases from many retailers. The success of this "one card for many businesses"
encouraged others, and the 1950s was really the period when financial intermediaries began
handling credit cards for other organizations. In the 1960s, credit-card organizations emerged that issued licensing agreements to other financial intermediaries. The Bank of America, for example, created the Bank-Americard (later
known as Visa) and it licensed its use to other banks. The 1970s saw the main movement in
credit-card internationalization, and the 1980s were characterized by the development of ATM
machines. Credit-card usage exploded in the 1990s with the computer revolution and Internet, and
the trend continues into the 21st Century. page 4 Allied Academies International Conference New Orleans, 2004 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 The credit-card phenomenon has consistently grown faster than the economy as a whole and has had a powerful impact on it. By 2002, "well over one billion cards (were) in circulation (with)
the average household (having) about a dozen credit cards" (CFA, 2003). In 2003, for the first time
in history, Americans bought more with cards than with cash" (Brooker, 2004), and the industry now
generates $2 trillion in transactions per year (Brooker, 2004), facilitating nearly 20 percent of the
economy. While a positive impact on the economy, there is also great concern because credit use has grown fastest among debtors with the lowest incomes. For example, "by 2000, about one-third of
lower income families spent more than 40% of their income on debt repayment" (CFA, 2003). The
numbers paint a sad picture of low, moderate and middle income citizens caught in impossible
burdens of debt plus mounting fees and late charges" (Nader, 2004). The high credit-card interest
rates is a cause for concern, but an additional problem is the fact that the credit-card rates do not
respond to interest-rate declines in other markets, and this "stickiness" of interest rates has been the
focus of much research. LITERATURE SEARCH In an early study on interest rates, it was recognized that the industry is a paradox with near-perfect competition but with interest rates that are unresponsive to the markets (Ausubel, 1991).
Possible reasons cited are cardholders who don't expect to pay on unpaid balances (Ausubel, 1991),
high search and switch costs in other forms of borrow-ing (Calem and Mester, 1995), and
transaction costs in other options (Brito, 1995). As to the actual relationship between traditional interest rates and credit-card rates, one author found mathematical evidence that the federal funds rate affects credit-card rates to a small
degree, but the prime rate and cost of funds have no impact on credit-card rates (Yu Hsing, 2003).
And finally, a more recent article provided evidence that showed drops of 4.75% in the rates set by
the Federal Reserve but only a 1.35% decline in credit-card rates (CFA, 2003). METHODOLOGY Building on the solid contributions of other researchers, this study focused solely on the advertising materials that have been sent from the national advertisers of credit cards as opposed to
industry data for all providers. Also, other studies have focused almost solely on the so-called
regular interest rates charged over time, but this study also focused on the introductory rates that are
contained in the advertising materials. Using a sample of 120 advertising flyers from 30 national
marketers received over the 36-month period from 2001 through 2003 (when other rates were
falling), the credit-card rates were compared to interest rates in other markets. The four hypotheses were that (1) "introductory rates" have been declining over the three-year period in question, (2) these "introductory rates" have been declining faster than other
general interest rates in society, (3) the "ongoing rates" following the introductory periods have not
been declining, and (4) the "ongoing rates" have actually been rising during the period of decline
for other interest rates. Allied Academies International Conference page 5 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 New Orleans, 2004 THE RESEARCH It seemed crucial to begin the analysis by establishing the general pattern of interest rates, and that did prove helpful both for its orientation and for identifying the most fertile period of time
for analysis. Over an 11-year period from January 1993 through December 2003, the federal funds
rate (that banks charge each other), and the prime rate (that banks charge their best customers) were
selected for their representative characteristics. Also, credit-card interest rates charged by a
mid-sized, regional bank with local ties to customers were also selected to represent typical
credit-card interest rates (as opposed to the industry segment with aggressive national solicitors).
These three rates are shown in Exhibit 1 and show a strong lock-step relationship. Exhibit 1: Representative Interest Rates 0.00 5.00 10.00 15.00 20.00 1 11 21 31 41 51 61 71 81 91 101 111 121 131 Monthly Data from January 1993 through Decem ber 2003 In
t
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t
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s Regional Bank Credit Card Rate Prime Rate Federal Funds Rate It can also be readily observed in Exhibit 1 that the period of time from January 2001 (data point #97) through December 2003 saw a significant drop in interest rates in other financial markets.
That provided an opportunity to observe whether credit-card rates generally respond to declines in
other interest rates. As previously mentioned, both the introductory interest rates shown in the advertising flyers as well as the ongoing rates after the introductory period were the focus of this study, and the
information shown below in Exhibit 2 shows the average introductory interest rates advertised each
month over the 36-month evaluation period. Exhibit 2: Introductory Interest Rates Offered by Credit Card Solicitors 0.00 2.00 4.00 6.00 8.00 10.00 12.00 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Montly Data from January 2001 through December 2003 In
t
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a
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s Smoothed Data Raw Data Notice that the introductory rates "jump around" a lot because each of the companies has a different strategy with some using low introductory rates as enticements and others using other
enticements. Even with the smoothing technique that has been added (five-month running
averages), it is not easy to see the trend, but the regression line for the introductory rates is shown
in Exhibit 3 along with actual prime rate data for the same 36-month period. As shown, both rates page 6 Allied Academies International Conference New Orleans, 2004 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 have declined during the period but there is a slightly different pattern. The decline is steeper for
the prime rate in 2001, but both are more comparable in 2002 and 2003. Exhibit 3: Introductory Rates Compared to Prime 0.00 2.00 4.00 6.00 8.00 10.00 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Monthly Data from January 2001 through Decem ber 2003 In
t
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s
t
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a
t
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s Prime Rate Regression Line of Introductory
Rate The correlation coefficient of the introductory-rate is only +.122547, so it would be hard to use the data to predict a rate offer for a given month, but the 120 randomly selected data points do
provide sufficient information to make inferences about the trend. The calculated y-intercept is
+2.350635, the value of the slope is -.032317, and the data is statistically significant in confirming
the first hypothesis that the introductory rates charged by the national credit-card marketers did drop
significantly during the 36-month period. But the data analysis did not provide conclusive evidence
relating to the second hypothesis. For the entire 36 months, the introductory rates dropped less
statistically than the prime rate, but part of that was the fact that there was not much more room to
go when many of the rates were already at zero. Also, during the last two years the slopes were
comparable, so the data on the second hypothesis was considered inconclusive. Exhibit 4: Advertised Ongoing Interest Rates after Introductory Period 0.00 5.00 10.00 15.00 20.00 25.00 30.00 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Monthly Data from January 2001 through Decem ber 2003 I
n
te
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e
s
t
R
a
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s Raw Data Smoothed Data As to the advertised "ongoing interest rates" (after the introductory periods), the rates also "jumped all over" because of differing marketing strategies used by the marketers. Consequently,
the data, with a low correlation coefficient of +.056764 would hardly be helpful in predicting a rate
offer for a specific month, but the sum total of the 120 randomly selected data points is statistically
significant in defining the ongoing trend. With a smoothing procedure added, the data is shown
above in Exhibit 4. For the data on ongoing rates, a regression analysis identified the Y-intercept as +14.80467 and the slope as +.023802. This regression line is shown in Exhibit 5 on the following page along
with data for the Prime Rate and Federal Funds Rate. The data is statistically significant in
confirming the third hypothesis-namely that the ongoing interest rates charged by the national
marketers of credit cards have been unresponsive to declines in interest rates in other markets and Allied Academies International Conference page 7 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 New Orleans, 2004 remain at a fairly high level. The positive value for the slope also shows a slight increase over the
three-year period, but the data was not considered significant enough statistically to confirm the
fourth hypothesis. The evidence does not support the idea that the increase in interest rates is part
of an industry trend. Exhibit 5: Ongoing Rates Compared to Market Rates 0.00 5.00 10.00 15.00 20.00 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Monthly Data from January 2001 through Decem ber 2003 I
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s Ongoing Rate (Regression) Prime Rates Federal Funds Rates Summary of Regression and Correlation Values Intercept Slope Correlation Coefficient Data for|
36 months Ongoing Rates +14.80467 +.023802 +.056764 Prime Rate +7.454508 -.119718 +.872041 Federal Funds Rate +4.416365 -.118332 +.869246 Introductory Rates +2.350635 -.032317 +.122547 A summary of the statistical data is shown in the table above, and the data does provide clear evidence of a continuing decline in the introductory rates and inelasticity in the ongoing rates. Other
evidence suggests that introductory rates have declined partly because of declines in other interest
markets but probably more because of competitive pressures in competing for new customers. But
that is not true of the ongoing rates. Surveys show that a majority of cardholders are not even aware
of the ongoing rates that they pay, so there is no incentive for the credit-card providers to lower the
rates. SUMMARY AND CONCLUSION The focus of this study was 120 randomly selected advertising flyers from national credit-card marketers from January 2001 through December 2003 (a period of decline in other
interest rates). As to the hypotheses that were tested, (1) the "introductory rates" offered by these
companies have declined significantly in the 36-month period; (2) there is insufficient statistical
evidence that the "introductory rates" have declined faster than general interest rates; (3) the page 8 Allied Academies International Conference New Orleans, 2004 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 "ongoing interest rates" after the introductory periods have remained unaffected by declines in other
interest rates, and (4) although there was a slight increase in ongoing rates, the increase over the
36-months was not strong enough to conclude that it is a statistically significant upward trend. REFERENCES AVAILABLE UPON REQUEST Allied Academies International Conference page 9 Proceedings of the Academy of Commercial Banking and Finance, Volume 4, Number 1 New Orleans, 2004 ANALYSIS OF THE RATIO ADJUSTMENT PROCESS AND THE CONTRIBUTION OF FIRM-SPECIFIC FACTORS: A PRELIMINARY REVIEW Sharon S. Seay, Mississippi College seay@mc.edu Sarah T. Pitts, Christian Brothers University spitts@cbu.edu Rob H. Kamery, Christian Brothers University Rkamery@cbu.edu ABSTRACT This paper seeks to enhance the understanding of the ratio adjustment phenomenon by investigating the association between certain firm-specific factors and the rates of ratio adjustment
(