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A review by the F e d e r a l R e s e rv e B a n k o f C h ic a g o Business Conditions 1967 August Contents Trends in banking and finance— W hat’s happened to liquidity 2 1966 farm loan survey— Larger loans, longer maturities, higher interest rates 8 Federal Reserve Bank of Chicago in banking and finance W h at's happened to liquidity C o n tr a stin g changes have been charted over the past year and a half in the liquidity position of financial institutions. Particularly affected have been commercial banks and savings and loan associations. The banks With business corporations since the end of 1966 covering a large and growing portion of their financing needs in the capital mar kets, commercial banks have been in a posi tion to improve their liquidity positions. At the end of last summer it appeared that banks had reached something close to rock bottom in holdings of liquid assets, at least as com pared with earlier postwar experience. Not only were loans for many banks at new highs in relation to deposits, but in addition large proportions of U. S. Government securi ties— the bank assets most easily convertible into cash, especially the short-term Govern ments— were effectively immobilized as they were pledged as collateral against deposits of state, local and Federal governments. More over, a technique on which many banks had come to rely heavily in meeting liquidity needs— the acquisition of funds through the issuance of certificates of deposit— had be come virtually useless with legal rate ceilings lower than the market yields offered by com peting users of funds. How much liquidity has been restored to the banking system since late 1966? The con ventional way of judging changes in liquidity is to look at the proportion of “nonliquid” assets (principally loans) or, conversely, “liquid” assets that banks hold in relation to deposits. While it is obvious that these ratios as such do not measure the way banks feel about their liquidity— which is what really matters— changes in them may be indicative of trends toward more or less comfortable positions, given reasonably stable prospects for flows of funds. Despite some reversal of the steady climb in loan-deposit ratios, reflecting the channel- BUSINESS CONDITIONS is published monthly by the Federal Reserve Bank of Chicago. Dorothy M. Nichols and Lynn A. Stiles were primarily responsible for the article "Trends in banking and finance" and Roby L. Sloan for "1966 farm loan survey." Subscriptions to Business Conditions are available to the public without charge. For information concerning bulk mail ings, address inquiries to the Federal Reserve Bank of Chicago, Chicago, Illinois 60690. 2 Articles may be reprinted provided source is credited. Business Conditions, August 1967 Loan-deposit ratios remain relatively high ing of a larger share of bank funds into invest ments, bank liquidity by the conventional measures is still relatively low. There is evi dence also that many banks have abandoned the short-term U. S. Government security portfolio as a primary liquidity reservoir, with growth in bank holdings of investments since late last year mostly confined to securi ties in the intermediate (one to five) maturity range. Outstanding customer loans in relation to collected deposits for large city banks reached a peak toward the close of 1966.1 Although JA s used in this a rtic le , loan s exclud e in terb an k cred its and loan s to secu rities d ealers since these are assum ed to represent uses o f short-run cash su r pluses. D ep osits are adjusted fo r cash item s in p ro cess o f c o lle c tio n . loan volume leveled off after mid year, the sharp runoff of time certificates of deposit in the fourth quarter continued to push loandeposit ratios higher. Much of the easing in such ratios during the first quarter of this year reflected the recovery of CD money as mar ket rates moved down. By mid1967, large city banks were show ing ratios somewhat lower than a year earlier, but country banks were more “loaned-up” than ever before (seechart). As one might have expected, the banks that had the highest ratios last summer generally ex perienced the greatest improve ment in liquidity, as measured by the loan-deposit ratio; but inevit ably there have been exceptions. Of the 55 Seventh District city banks that report their assets and liabilities weekly, 17 had loan ratios higher than 75 percent in mid-September, and the average ratio for these banks was 81 percent. Al though six months later the average had dropped to 77 percent, individual ratios had risen during the period at about one-third of the banks. Another factor obviously bearing on the liquidity question is the level of loan-deposit ratios. In previous postwar “breathing spells” in loan demand, the relatively small contrac tion in these ratios reflected the strong desire by banks to increase loans over the longer run, while reducing their holdings of invest ments. At present levels, however, there clearly is much less latitude for a further in crease in loan-deposit ratios, and many banks undoubtedly would prefer to see them some what lower. The willingness of banks to meet 3 Federal Reserve Bank of Chicago 4 loan demand in the future, however, is not likely to shrink so long as they are able to attract proportionate deposit inflows. For the banking system as a whole, of course, this will depend on the extent to which the Federal Reserve supplies the necessary re serves, and for individual banks it will depend also upon the competitiveness of deposit solicitation efforts. Much attention has been focused on the fact that from October through June, on a seasonally adjusted basis, commercial banks increased their holdings of U. S. Government securities by roughly 4 billion dollars and acquired another 7 billion dollars of other securities. On the basis of information avail able for the weekly reporting banks, however, it appears that the bulk of the Treasury issues had maturities of more than a year. Likewise, the bulk of the municipal issues acquired were of intermediate maturity. On balance the ratio of short-term securities to total assets rose only slightly at District reporting banks —from 6.2 percent last September to 7.5 percent prior to the July Treasury financing. Despite the narrow maneuverability to ac commodate future loan demand suggested by the present composition of bank assets, there is no reason to expect that banks will en counter serious difficulties in the period ahead because of their liquidity positions. In fact, two major factors seem likely to remove some of the pressure now evident. First, and most immediate, is the importance of the U. S. Government sector in the prospective total demand for credit in the second half of 1967. As banks participate in the new Treasury financing, their liquidity can be expected to improve. Second, and probably with longer-term implications, is the reduction in the need for bank credit resulting from the huge volume of capital market financing that has occurred this year. Notwithstanding current expecta tions of strong seasonal loan demand this fall, the improved liquidity position of corpora tions, combined with a slowing in the growth of business inventories and capital expendi tures seems certain to moderate business de mands for bank credit for a considerable span of time. Such a view is supported by the experience following earlier periods of heavy capital market financing in 1957 and 1961. In the long run, of course, the ability to meet loan demand must derive mainly from overall deposit growth, which in turn will depend upon the availability of reserves provided by the Federal Reserve. The savings and loan associations Net inflow of share capital at savings and loan associations rebounded sharply in the fourth quarter of 1966 and continued at a near record level through at least the first six months of this year. The abrupt falling off in savings inflow earlier in 1966— with a net Sharp rebound in savings and loan inflow began in fourth quarter 1966 Business Conditions, August 1967 outflow of 750 million dollars occurring in the third quarter—had given strong motivation to the industry to curtail the volume of mortgage lending. But because of the long lead time involved in real estate financing and the prac tical necessity of honoring outstanding loan commitments, the associations were able to checkrein their new loan disbursements only after some time lag. As a consequence, they were obliged to add almost 1.2 billion dollars to their borrowings from the Federal Home Loan Banks during the first three quarters of 1966 while also allowing their cash holdings to run down by 1.3 billion during the same interval. The roll back on September 26, 1966 from 5 Vi to 5 percent in the ceiling rate that may be paid by commercial banks on time certi ficates of deposit of less than 1 0 0 ,0 0 0 dollars apparently was accountable in large part for the quick recovery in savings and loan share inflow in the ensuing quarter, when outstand ing share capital racked up a net gain of nearly 2.3 billion dollars. Coming as it did at a time of virtually no net change in mort gage loan outstandings, this sharp increase in savings capital enabled the associations to pay down their advances to the Home Loan Banks by 240 million dollars while adding 733 million to their holdings of cash. With a share capital increase of 2.4 billion dollars in the first quarter of this year—up from 1.3 billion in the year-earlier quarter— the associations began to renew their interest in new mortgages. Yet their net loan acquisi tions in the first three months of this year, while up sharply from the final quarter of last year, were only a third or so as great as in the first quarter of 1966. The liquidity of the savings and loan in dustry— also “conventionally” defined as the ratio of cash and Government securities to total share capital—has remained com Backlog of savings and loan mortgage loan commitments reached 1966 level by M ay 1967 j f m a m j j o s o n d paratively low by past experience. At the end of April 1967 the liquidity ratio was just under 10 percent, compared with 9.5 percent a year earlier but 10.3 percent in April 1965. Obviously, the conventional liquidity yard stick for savings and loan associations has the same drawback as its counterpart for the commercial banks in that it does not directly shed light on any gap that may exist between actual and desired levels of liquidity. Thus, even a level that appeared high in the light of past experience might now seem unduly low to association managers expecting a sizable expansion in loan demand later in the year or uncertain over the future course of savings inflow. With long-term market rates of interest at or close to their highs of 1966 and expecta- 5 Federal Reserve Bank of Chicago tions widespread that economic activity will expand through the remainder of this year, suppliers of mortgage funds other than the savings and loan associations—chiefly life insurance companies and the mutual savings and commercial banks—have been and ap parently are confident of continuing for some time ahead to be confronted with an attrac tive variety of outlets for funds. The financial pressures associated with the recent moderate revival in housing activity, therefore, have converged largely on the savings and loan associations, which specialize in residential financing. An important result has been that mortgage loan terms began to tighten some what in May after the modest easing that had been under way during the January-April period. This serves to suggest that savings and loan associations had not yet achieved desired levels of liquidity, given their expecta tions for the months ahead. The conventional liquidity measures for savings and loan associations also is deficient Savings and loan mortgage lending responded to savings gain, after short lag Savings and loan debt to Home Loan Banks declined sharply in failing to reflect the availability of “bor rowed liquidity” in the form of advances by Home Loan Banks to member associations. As has been indicated, association borrowings from this source were sizable during 1966, with outstanding balances rising 938 million dollars for the year as a whole. A substantial net reduction in advances, however, has oc curred since July 1966 when total advances reached a record 7.3 billion dollars. By the end of June 1967 association debt to the Home Loan Banks had been reduced by 4 billion dollars from its 1966 peak. The ability of the savings associations to utilize credit from the Home Loan Banks— albeit at interest rates closely aligned to the market—is a factor that has a distinct bearing on the “effective” liquidity position of the in dustry. The substantial borrowing potential that this source represents, coupled with the sizable volume of net savings inflow in the first half, would suggest that the savings asso Business Conditions, August 1967 ciations are well situated at present to finance a growing volume of residential construction during the remainder of 1967. Significantly, such a judgment assumes that recent trends in share capital growth at savings and loan associations will persist in coming months. Appreciable further in creases in yields on market instruments, how ever, could cloud the prospects for additional growth in share capital, given the prevailing ceilings on savings account rates that savings and loan associations and banks may not ex ceed. Moreover, termination of the present regulatory control of savings and loan divi dend rates and of bank time deposit rates by reference to deposit denominations, which is scheduled to occur in late September under the statutory authority now in effect, could complicate matters still further if it were to lead to an outflow of funds from savings and loan shares to market securities or the obliga tions of other financial institutions. Adoption of a Federal income tax sur charge undoubtedly would serve to strengthen the chances of sustained high levels of savings inflow into savings and loan associations and banks in coming months. Such fiscal action would reduce Treasury borrowing below what otherwise would be needed and would restrain private spending, thus tending to moderate upward pressures on capital market yields. Under these circumstances a more normal and orderly flow of savings than oc curred during the period of stringent credit markets in 1966 hopefully would be main tained. 7 Federal Reserve Bank of Chicago 1966 farm loan survey Larger loans, longer maturities, higher interest rates ■^agricultural loans held by commercial banks in the Seventh Federal Reserve District continue to reflect the changes taking place on farms. Three major trends are widely evi dent, all with an impact on credit. First and foremost is the continued growth in the size of farm operations. Second, and closely as sociated with the first, is the large volume of purchases of farm machinery and equipment made to reduce dependence upon farm labor which has become increasingly expensive and scarce. Finally, farmers continue to specialize in particular lines of production and to pur chase greater proportions of their overall inputs—such as seed, fertilizers, chemicals, feeds and feeder animals. All these trends are based largely upon a rapidly advancing technology and, hence, are likely to continue in the years ahead. The impact on farm credit has been considerable and also is likely to continue. Larger loans Possibly the most striking development in the extension of bank credit to farmers during the past decade has been the substantial rise in the average loan size. The average loan in 1966 was more than double that reported ten years earlier. Inasmuch as the average invest ment per farm has risen by more than two and one-half times during this period, the large increase in loan size is not surprising. 8 *T h e first o f this series o f a rticle s on the 1966 farm loan su rve y appeared in B u sin ess C o n d itio n s, M a y , 1967, pp. 11-16. Banks, however, make a large number of relatively small loans. The original amount of more than one-third of the agricultural loans outstanding at mid-1966 was less than $ 1 ,0 0 0 while one-seventh of these loans were for less than $500. But small loans were a substantially larger proportion in 1956 when well over half of all farm loans made by com mercial banks were $ 1 ,0 0 0 or less. These small loans, though numerous, account for only a small portion of the total dollar amount of loans. Those for less than $1,000, for example, accounted for about 5 percent of the total dollar volume, while loans for $ 1 0 ,0 0 0 or more accounted for about two-fifths, and those for $25,000 or more for around 15 percent of the total. The size of a loan depends largely upon the purpose for which it was made. Loans for the purchase of farm real estate averaged $ 11,634 and were the largest of any “purpose category,” followed by those for the purchase of feeder livestock, which averaged $6 ,5 4 7 . On the other hand, loans written for operat ing expenses were small, averaging $ 1 ,9 7 3 . Only loans for purchase of automobiles, other consumer durables and for family living ex penses were smaller. Although the average loan size for operat ing expenses was relatively small, more than one-fifth of the agricultural credit outstanding at banks in the District was of this type. Loans for all current expenditures, including those for operating, family living and feeder cattle, amounted to about 45 percent of Business Conditions, August 1967 Large loans increase in number and proportion of credit outstanding percent of total loans 40 30 20 10 0 percent of total dollar Seventh DiS' n C ’ 0 10 20 size o f loan 19561 under $ 25 0 $250-5999 $ IP 0 0 - $ P 9 9 $2p00-$4£99 $5,000-59,999 $10,000-549,999 $50,000 8 over the total loans outstanding as of mid-1966. (Feeder cattle loans are at a relatively low level at midyear.) In this category of “short term” loans the greatest increase—more than double—had occurred since the previous farm loan survey in 1956. For the most part, this rapid expansion merely reflects the stead ily rising expenditures for farm production items and the larger proportion of such items being financed. Bank loans for capital items, other than farmland, rose about 94 percent between 1956 and 1966. About two of every five farm notes held by District banks, accounting for about 30 percent of the credit outstand ing, were for capital items—such as breeding livestock, machinery and equip ment, improvements for land and buildings, automobiles and other consumer durables. Machinery, tractors, trucks and other items of this type accounted for more than half of the credit outstanding for capital goods, and the total amount extended for this purpose was exceeded only by that loaned for feeder cattle and other operat ing expenses. Smaller amounts of credit were used for improving land and buildings and financing purchases of breeder livestock, automobiles and other consumer durable goods. Loans for the purchase of farm real estate, while few in number, accounted for about 18 percent of the dollar amount outstanding because of the large average size of such loans. The amount ex tended for this purpose had about doubled in the past decade, re flecting both the steady rise in land prices and the general trend toward financing a greater proportion of the purchase price. Loans for consolidation or payment of debt also rose since the preceding survey, but the increase was less than for most other types of loans. Credit for this purpose ac counted for about 3.5 percent of the total bank credit outstanding to farmers as of mid-1966, compared with approximately 4 percent of total outstandings a decade earlier. This relative improvement may have been associated with the rise of farm income, which in 1966 was at a near record level. Collateral is important Security is often stressed in the extension Federal Reserve Bank of Chicago of credit to help assure payment upon ma turity. Borrowers, however, that have good financial statements and have demonstrated their capacity for repayment often receive unsecured loans. As of mid-1966, about 29 percent of the agricultural loans outstanding at District banks were unsecured. This was a slightly smaller proportion than in 1956. Chattel mortgages were the most common form of security for farm loans. Some 44 percent of the farm loans, representing nearly 46 percent of the dollar amount outstanding at mid-1966, were secured by chattel mort gages. These proportions represented a signi ficant increase from the previous survey when less than two-fifths of the loans, amounting to about one-third of the outstanding credit, were secured by chattel mortgages. Nearly four-fifths of the livestock and more than two-thirds of the machinery loans were se cured in this manner. The increase in chattel mortgages since the 1956 survey is undoubt edly associated with the expansion in owner- ship of farm machinery and other durables that can be used as collateral and the increas ing amounts of funds borrowed to purchase machinery, livestock and similar items. About four-fifths of the oustanding in debtedness secured by farm mortgages was to buy farmland or to improve land or build ings. Loans for the purpose of consolidating or paying debts were also frequently secured by real estate mortgages; about one-third of such loans were secured in this manner. Maturities short but lengthened The maturities of farm loans made by Seventh District banks were predominantly short term. Indeed, approximately threefourths of the loans, representing around two-thirds of the farmers’ outstanding indebt edness, were for maturities of one year or less; loans written with maturities of six months or less accounted for approximately 44 percent of the number of loans and about 30 percent of the dollar volume. Yet maturities have lengthened considerably since the earlier sur Loans of 9-36-month maturity increase . vey. In mid-1956 about 55 per cent of the loans outstanding, percent of total loons Seventh percent of total dollar volume amounting to around 40 percent of the outstanding dollar amount, had maturities of six months or less. The importance of short term notes is associated in part with the crop planting and har vesting seasons and the cycle of livestock feeding; traditional lend ing practices in many country banks may also be reflected. About 57 percent of the loans made for operating expenses ma tured within six months and an additional 34 percent within one year. Only a small amount had maturities extending beyond one Business Conditions, August 1967 year. Similar maturities were re . . . and m any loans ported for feeder cattle loans with with short maturities more than 90 percent of the total are lengthened by renewals dollar volume maturing in one percent of total dollar volume year or less. Short maturities were also com m renewal status some mon for loans to finance farm REN EW ED loans machinery and equipment— ap proximately one-fifth of such loans had maturities of six months planned or less. However, over half had and some w ere maturities exceeding one year and unplanned about 10 percent of such loans due to provided for payment in excess of four years. Loans to buy real estate, of and course, were written primarily other cau ses with longer m aturities— about but most were two-thirds of the dollar amount NOT R E N E W E D exceeded five years. Only about 14 percent of the loans for the n.a. Not available. purchase of real estate specified repayment within one year. Many of the loans providing short maturities were Of the total amount of loans renewed, probably made to individuals with substantial more than three-fourths had been renewed assets or were made as interim loans while under an understanding at the time the loan other assets were being sold or other financing was originally made that this might be done. was being arranged. Many District bankers apparently feel the need for the flexibility that this type of ar Renewals lengthen maturities rangement permits by providing them with While a sizable proportion of notes are the opportunity to review the progress the written with relatively short maturities, the borrower has made at frequent intervals be stated maturity does not always coincide with fore extending the credit for an additional the length of time credit is outstanding to the period. In addition, farmers may find such banks. Renewals of loans are used widely in arrangements advantageous in accommodat farm lending and often serve to stretch out ing changes in marketing or expenditure plans. repayment periods. Nearly one-fourth of all the loans outstanding in mid-1966 had been Arrangements of this type appear slightly renewed at least once. Moreover, this figure more prevalent for intermediate-term loans. may understate the portion of loans that are For example, about one-third of the dollar volume of loans for livestock other than ultimately renewed because some of the loans were made too close to the survey date to be subject to renewal. — continued on page 14 11 0 20 40 60 80 Farm loans at commercial banks in the Seventh District, June 30, 1956 and 1966* Average Loans Classification 1956 Amount outstanding 1966 (number) 1956 1966 (thousand dollars) Average effective original size interest rate 1956 1966 (dollars) 1956 1966 (percent) 706,236 733,735 133,660 130,366 43,574 17,978 $250-499................................... 41,545 $500-999................................... 143,461 62,317 129,714 83,940 $1,000-1,999............................. 134,052 164,594 153,397 $2,000-4,999............................. 11 3,720 190,285 285,320 491,915 2,930 2,977 5.9 6.6 $5,000-9,999............................. 86,654 194,799 493,070 6,466 6,651 5.1 6.3 $10,000-24,999........................ 36,600 13,364 46,880 140,458 572,873 13,151 14,383 4.9 6.0 $25,000-49,999........................ 927 8,146 24,890 222,405 31,399 32,680 4.7 6.0 $50,000-99,999........................ 86 1,399 3,940 64,563 57,521 68,228 4.7 5.8 $100,000 and over.................... — 171 — 37,704 — 260,671 — 6.1 474,160 3,129 6,547 5.3 A ll loan s.................................... 946,267 2,184,674 1,581 3,486 5.8 6.3 6,579 146 7.0 7.0 80,263 349 652 156 352 7.1 20,299 671 6.6 6.9 195,003 1,330 1,328 6.4 6.9 Original size Under $ 2 5 0 ............................... 7.0 Purpose Current expenses Feeder livestock...................... Other operating expenses. . . . Family living........................... 40,324 270,642 79,838 [263,206 { 20,161 1 16,783 189,839 [492,469 \ 13,388 739 f 1,973 \ 728 6.0 6.0 [ 6.4 [ 6.6 Intermediate term Other livestock....................... 50,506 50,882 70,079 140,484 1,636 3,188 5.9 6.8 Machinery and equipment. . . . 168,829 172,693 176,495 390,974 1,266 2,779 6.6 6.8 improve land and buildings. . . 30,009 16,396 64,396 75,468 2,489 5,847 5.3 Automobiles............................ Other consumer durables....... 43,629 [ 38,933 { 4,902 29,503 [ 50,668 \ 2,466 921 f \ 1,782 614 8.5 6.2 [ 8.2 \ 8.0 Buy farm real estate.................. 43,789 43,414 6,030 11,634 4.8 5.8 28,288 15,439 198,737 56,124 384,698 Consolidate or pay debts.......... 76,655 2,267 5,486 5.7 6.2 Other or not ascertained............ 30,219 27,871 44,31 1 83,244 1,681 3,620 5.6 6.1 Unsecured................................... 309,493 312,100 292,930 625,485 1,012 2,161 5.8 6.3 Comaker or endorser.................. 50,824 32,185 47,568 61,389 1,036 2,129 6.3 6.4 277,209 57,918 318,836 337,162 999,412 1,437 3,626 6.5 6.6 Farm real estate..................... 49,584 250,479 382,467 5,715 10,708 4.8 5.9 Government guaranteed........ 3,858 4,003 4,290 65,931 1,684 17,344 5.5 5.0 Other or not ascertained........ 6,933 17,027 13,838 49,992 2,149 3,418 5.4 6.2 6.3 Security Secured Chattel mortgage................... Maturity (to nearest date) Demand ...................................... 30,195 14,940 36,319 34,309 1,364 2,483 5.8 1-6 months................................. 363,862 310,595 335,951 613,718 976 2,084 5.8 6.3 9-1 2 months............................... 160,222 211,695 226,913 740,771 1,590 3,848 5.9 6.2 7.1 15-36 months.............................. 100,611 138,936 119,747 327,810 1,627 3,110 7.1 4-5 years................................... 20,434 21,895 133,124 4.9 6.2 30,911 35,673 5,139 6,363 8,086 Over 5 years.............................. 82,491 144,845 12,602 4.7 5.7 334,943 Average Amount outstanding Loans Classification 1956 1966 (number) 1956 Average effective original size interest rate 1956 1966 1966 (dollars) (thousand dollars) 1956 1966 (percent) Renew al status Note has been renewed............ 208,487 173,464 310,238 520,267 1,670 3,327 5.8 6.5 Planned renew al.................... 128,381 124,081 222,981 405,166 1,965 3,604 5.6 6.4 Unplanned renew al................ 80,106 49,383 87,257 115,101 1,197 2,631 6.1 6.6 Due to low income.................. n.a. 25,081 n.a. 43,157 n.a. 1,873 n.a. 6.6 Other causes........................... n.a. 24,302 n.a. 71,944 n.a. 3,413 n.a. 6.5 Not renewed.............................. 496,236 560,270 634,490 1,664,408 1,544 3,535 5.8 6.3 Not reported.............................. 1,512 — 1,539 — 1,296 — 5.6 — Repaym ent status Note is overdue......................... 18,087 13,630 29,313 25,931 2,420 1,902 5.6 6.3 Not overdue............................... 688,149 720,105 916,954 2,158,743 1,559 3,500 5.8 6.3 538,597 606,404 1,441,287 1,290 2,915 5.6 6.2 146,301 294,360 668,270 3,026 6,025 5.2 6.0 Method of repaym ent and interest charge Single payment.......................... 508,603 Instalment On outstanding balance......... Add-on.................................... Discount................................... 130,536 66,877 ( 39,355 \ 9,481 45,004 f 60,682 \ 14,435 973 | 2,022 2,063 /10.4 11.4 1 13.1 Effective interest rates Under 5.0................................... 30,021 2,595 155,801 19,481 6,629 11,520 4.2 5.0-5.9....................................... 99,994 53,393 290,051 403,655 3,399 9,035 5.0 6.0-6.9....................................... 337,557 359,859 357,536 1,270,750 1,200 6.1 170,445 267,448 7,231 98,710 418,875 7.0 7.0 996 13,143 639 600 4,079 1,783 6.0 ....................................... 8.0-8.9........................................ 2,222 8.0 8.5 7,668 2,157 11,504 12,008 1,023 2,536 9.7 8,754 1,316 2,379 9.1 10.0 10.5 3,120 21,328 2,117 11.2 11.6 1,672 12.0 12.3 13.9 16.2 13.8 7 .0 -7 .9 10.0-10.9................................... 2,191 2,906 12,161 1 1.0-11.9................................... 3,905 4,789 15,212 12.0-12.9................................... 30,017 3,283 19,291 4,033 1,059 964 13.0-14.9................................... 13,380 8,774 5,580 9,211 612 1,402 15.0 and o v e r............................ 3,659 3,478 1,521 3,437 571 1,408 9.0-9.9....................................... 3.9 5.4 17.0 Origin of purchased notes Correspondent bank................... n.a. 848 n.a. 11,786 n.a. 14,701 n.a. 6.0 Other bank................................. n.a. 2,011 n.a. 20,436 n.a. 10,544 n.a. 5.8 Insurance company..................... n.a. 78 n.a. 62 n.a. 1,000 n.a. 6.0 Farmers Home Administration . n.a. n.a. 21,141 n.a. 5.0 n.a. n.a. 59,308 125,664 n.a. Merchant or d e a le r.................... 2,939 86,626 n.a. 1,798 n.a. 7.3 O ther.......................................... n.a. 1,883 n.a. 4,739 n.a. 7,610 n.a. 6.3 Not purchased............................ n.a. n.a. 3,585 n.a. 6.3 n.a. 1,962,678 221,995 n.a. Total purchased......................... 639,350 94,385 n.a. 2,815 n.a. 6.3 n.a. n.a. Not available. *The above data were obtained by expanding information reported by a stratified sample of banks to previously reported loan totals for all commercial banks in the District. The reliability of the estimates is lower for the sub categories of loans than for the totals. 13 Federal Reserve Bank of Chicago — continued from page 11 14 loans made to consolidate or pay other debts. Repayments feeder animals and slightly more than onefifth of the machinery loans were renewed Methods of repaying bank loans generally according to earlier agreements. Also, nearly are related to the purpose of the loan and two-fifths of the loans outstanding that were the regularity of the borrowers’ income. Be made to consolidate and pay debts were re cause of the predominance of loans for feeder livestock and operating expenses and the newed by prearrangement, presumably be cause of the bankers’ desire to exercise con sporadic nature of receipts from farm mar trol over the loan. ketings in much of the District, most loans While it would appear that renewals serve are repayable in one lump sum. Indeed, about primarily as a method of handling loans two-thirds of the dollar volume were of this rather than an indicator of credit distress, type. This proportion may overstate some about one-fourth of the renewals, represent what the actual importance of single-payment ing about 5 percent of the total loans out notes because of the widespread practice of standing, were unplanned. This proportion planned renewals as noted above. In addition, the outstanding amounts of many single was well below the 9 percent estimated in the previous survey in 1956, possibly reflecting payment loans at midyear were less than the the higher farm income in 1966. Difficulty in original amounts of the loans. Single-payment meeting scheduled repayments was attributed loans, nevertheless, were reported to account to low income for about two-fifths of the for about 99 percent of the total dollars outunplanned renewals. This accoun ted for about 2 percent of the total amount of loans outstanding. The remaining unplanned renewals Chattel m ortgage loans were due to other causes which become more important were unspecified. Approximately two of every 100 loans, representing slightly o — 0 40 30 20 10 s e c u r it y more than 1 percent of the dollar volume outstanding, were re u n se cu re d ported to be delinquent. This co m a k e r compares with delinquencies or e n d o rse r amounting to around 3 percent in mid-1956. Furthermore, more c h a tte l m ortgage than one-third of the past-due loans were delinquent for one month or less. Most delinquencies farm real e s ta te were for loans made for operating expenses and the purchase of G overnm ent gua ran te e d farm real estate, although the and other highest rate of delinquencies relative to outstandings was for Business Conditions, August 1967 standing for feeder cattle and nearly 94 percent of that for oper ating expenses. About one-fifth of the loans, representing nearly one-third of the amount outstanding, carried provision for repayment in instal ments. These loans, on the aver age, were considerably larger than the single-payment loans mainly because of the amortized real estate mortgages. Nearly 80 per cent of the real estate loans were amortized and in total accounted for more than one-third of all instalment loans. Over half of the loans for equipment provided for repayment in instalments. Interest rates were higher in 1966 Interest rates On all farm loans outstanding at District banks in mid-1966, interest rates averaged 6.3 per cent. This was about one-half of 1 percent higher than the average rate reported a decade earlier; much of the rise occurred in the months immediately prior to the survey last year . Depending upon the loan size, security, repayment method, purpose and, presum ably, other reasons such as traditional lend ing practices, interest rates vary widely. Gen erally, interest rates tended to decline as the size of loans increased, ranging from an average of 7.1 percent for loans under $250 to 5.8 percent for loans over $50,000. This probably is because the costs of negotiating and servicing a loan tend to be proportionally smaller for larger loans. Also, the lower rates on large loans may reflect better financial statements of the larger borrowers. Interest rates on loans secured by real estate were generally lower than on unsecured percent of total loans sr?'? ? \ h percent of total dollar volume interest ra te s under 5.0 1956 1966 ME 5 .0 - 5 .9 6 ,0 - 6.9 7 .0 - 7 .9 8 .0 - 8.9 9 .0 - 9.9 10.0 and over loans or those secured by other collateral, owing, in part, to the larger average size of real estate loans. Also, many of the real estate loans had been written prior to the most recent upward move in interest rates. Rates on single-payment loans were gen erally slightly higher than rates on instalment loans with interest payable on the unpaid balance (the latter included real estate loans). Instalment loans where interest pay ments were discounted or added-on carried substantially higher effective interest charges, averaging 10.4 and 13.1 percent,respectively. Purchased notes important Purchased loans accounted for a rather significant portion of the agricultural loans held by District banks, amounting to around 10 percent of the total outstanding farm debt. While comparable data from the 1956 survey 15 Federal Reserve Bank of Chicago is not available, it would appear that this practice probably has increased over the past few years, primarily because of the rise in debt for such items as machinery and equip ment. About half of the purchased loans held by banks at mid-1966 were for capital invest ments, while most of the remainder were about equally split between loans for current expenses and those to buy farm real estate. Notes acquired from merchants and dealers accounted for well over half of the purchased notes held by banks and represented approxi mately 6 percent of the total debt outstand ing. Nearly all of these notes had been taken by the merchant or dealer to finance the sale of some capital item. District banks also acquired a relatively large amount of loans from other financial institutions. About onefourth of those purchased, representing around 3 percent of total outstandings, were acquired from the Farmers Home Adminis tration and were made primarily to buy farm real estate. Most of the remaining were ac quired from other banks. Conclusions Commercial banks appear to be striving to 16 keep abreast of the growing as well as chang ing credit requirements of District farmers. This is partly evidenced, of course, by the more than twofold increase in bank credit outstanding during the past decade. While the number of loans has risen slightly, nearly all of the increase in farmer indebtedness out standing has come through larger loan size. Banks are securing more loans with chattel mortgages but this development appears to be associated with the relative increase in amounts borrowed to purchase such items rather than a departure from past lending practices. While maturities of loans continue to be predominately of short duration, they have lengthened considerably over the years. In addition, many farmers’ intermediateterm credit needs are being met by pre arranged loan renewals. All available evidence points to a continua tion of the trends toward larger farms, further mechanization and overall adjustments in the structure of production costs and capital in vestments. Commercial banks will, undoubt edly, continue to have an important role to play in making funds which can facilitate these changes available to agriculture.