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September 1991

voozLi

THE
FEDERAL
RESERVE
RANK of
ST. LOLLS

State Governments Feel Fiscal Squeeze
Cloudy Forecast fo r Farmland Values
Credit Unions Contend fo r Bigger Piece o f the Pie



THE EIGHTH FEDERAL RESERVE DISTRICT

CONTENTS________________________________________________________________

Business
District States Confront Mounting Fiscal Problems................................................. . . . ...............
Agriculture
Where Are Farmland Prices Headed?...........................................................

.......... . .1

............................................ . .5

Banking and Finance
Banking at Credit Unions: An Industry Profile..................................................................... ........................... 9
Statistics ................................................................................................. ............................................... .

14

Pieces of Eight—An Economic Perspective on the 8th District is a quarterly summary of agricultural, banking and
business conditions in the Eighth Federal Reserve District. Single subscriptions are available free of charge by writing:
Research and Public Information Department, Federal Reserve Bank of St. Louis, Post Office Box 442, St. Louis,
MO 63166. The views expressed are not necessarily official positions of the Federal Reserve System.



1

District States
Confront Mounting
Fiscal Problems
by Thomas B. Mandelbaum
Research assistance by Thomas A. Pollmann.

T

recession that began after July 1990
has been accompanied not only by the usual rising
unemployment and falling incomes, but also with
the deteriorating financial condition of many state
and local governments. Layoffs of thousands of
state government workers and large state budget
shortfalls in California and throughout the North­
east beg the question: Is the Eighth Federal
Reserve District next? This article examines fiscal
conditions in the seven states in the Eighth District
and describes the developments that have led to
the current crisis in state government.1

budget deficit would have been had the state not
taken action to balance its budget. This measure
reflects the amount by which expenditures had to
be cut or revenues had to be increased—either by
dipping into reserves or raising taxes—to balance
the budget. Figure 1 shows the projected fiscal
1991 deficits in dollars and as a percentage of the
original budget in Eighth District states.4 Arkansas
and Kentucky, where revenues are near expecta­
tions, have avoided the current problems.
Mississippi, Missouri and Tennessee had the most
severe problems: each was forced to adjust its
budget by roughly 5 percent. In absolute dollar
terms, however, Illinois’ deficit is twice as large
as any other District state.
Those District states required to take correc­
tive action have generally chosen to reduce their
deficits by cutting spending, rather than increasing
taxes, which is apparently too difficult in times of
economic contraction. Table 1 summarizes the
budget strategies states have implemented during
fiscal 1991. Mississippi, Missouri and Tennessee
resorted to “ across-the-board” cuts, though certain
high-priority programs, such as primary and second­
ary education in Missouri and Tennessee and Medi­
caid in Mississippi and Tennessee, were exempted.

I s ll

m

Are District State Governments
In Trouble?
Most analysts are worried primarily about
shortfalls in state operating budgets. Unlike the
federal government, state governments calculate
their operating budgets separately from their capi­
tal budgets. The operating budget essentially is the
spending needed to provide government services
during the fiscal year. It includes compensation for
employees, outlays for goods and services, and in­
terest expense. The capital budget, on the other
hand, encompasses spending for infrastructure
projects—water treatment facilities, highways and
schools—and are largely financed through the sale
of bonds that are paid off over time.2
Except for Vermont, all states’ operating
budgets must balance over the fiscal year or, in
some cases, over a two-year period. Operating
budgets generally are balanced by collecting
revenues as least as large as outlays. Past
reserves—sometimes called “ rainy day” funds or
budget stabilization funds—can also be drawn upon
to eliminate shortfalls in many states. In District
states, the governor must propose a balanced
budget, and the legislature must pass a balanced
budget, allowing no deficit to be carried over to
the next fiscal year.3
One way to assess recent state fiscal problems
is to examine how large each state’s operating



National Recession Precipitates
State Fiscal Problems
Illinois’ projected deficit—the largest among
District states—was swamped by that of California
($3.6 billion or 8.6 percent of the original budget)
and was smaller, in both dollar and percentage
terms, than the deficits in Connecticut, Florida,
Maryland, Massachusetts, Michigan, New Jersey,
New York, North Carolina, Pennsylvania and
Virginia. In both fiscal 1990 and 1991, state gov­
ernments in New England and the Mid-Atlantic
states have fared the worst.
Not coincidentally, these two regions have
been the most severely economically depressed
during the last few years, bothered by problems in
real estate, financial and defense-related sectors.
As unemployment rates in these states rose, con­
sumers earned and spent less, slowing state reve­
nues from personal income taxes and sales taxes,
which typically account for almost two-thirds of
state revenues.5 As corporate profits in these
regions were curtailed, corporate income tax reve­
nues fell off as well. At the same time, state spend­
ing on transfer programs, such as Aid to Families
with Dependent Children and Medicaid rose, as it
tends to in times of economic contraction.6 Since

M I-H U M

2

Figure 1

Projected Deficits for Fiscal 1991 Before State Action

Percent of Original Budget

Size of Debt
Arkansas

No Deficit

Illinois

$500
92

Indiana
Kentucky

3.9%
1.8

No Deficit

Mississippi

105

5.2

Missouri

250

5.5

Tennessee

180

4.8

I

I

I

I

600 500 400 300
(millions of dollars)

I

l

200

100

I
1

l
2

I
3

l
4

I
l
5
6
(percent)

SOURCE: National Conference of State Legislatures (June, 1991) and
Arkansas Department of Finance and Administration (July, 1991)

those who projected state revenues and expen­
ditures failed to foresee this turn of events, state
revenues fell short of budgeted expenditures.
As one might expect, District states without
significant budget shortfalls—Arkansas and Ken­
tucky—are enjoying the most rapid economic ex­
pansion among District states. Between April 1990
and April 1991, payroll employment in Arkansas
and Kentucky grew at 3.2 percent and 1.5 percent
rates, respectively, while the five other states
reported employment changes ranging from a 1
percent decline in Missouri to a 0.4 percent in­
crease in Mississippi.
Another reason Kentucky escaped the fiscal
problems of other states is because it had taken
steps to increase revenues in early 1990. Kentucky
raised its sales tax from 5 percent to 6 percent,
broadened the scope of its personal income tax by
repealing automatic deduction of federal personal
income tax payments, changed its personal income
tax code to conform to Internal Revenue codes and
increased its corporate income tax. (The changes
in Kentucky were enacted, in part, to fund a courtordered two-year education program to reduce in­
equalities in its school system.)
Arkansas recently increased its corporate in­
come tax rate by one percentage point, its sales tax
rate from 4 percent to 4.5 percent and its taxes on
gasoline, diesel fuel and cigarettes. These changes
may help the state to continue to avoid problems
in fiscal 1992.



Another measure of the soundness of District
state governments is their general obligation bond
ratings, which reflect states’ ability to pay their
debts. Except for Indiana, which has no general
obligation debt, bonds from all District states were
rated as high grade. As of July 1991, Moody’s In­
vestors Service assigned its highest rating, Aaa, to
bonds issued by Illinois, Missouri and Tennessee.
This rating carries the smallest degree of invest­
ment risk. Moody’s rated bonds from Arkansas,
Kentucky and Mississippi as Aa, which are high
quality, but with slightly more risk than Aaa bonds.
Reflecting the stability of fiscal conditions in
District states, the July 1991 bond ratings were un­
changed from the past two years with one excep­
tion: in 1990, Moody’s upgraded Arkansas’ bond
rating one step from A1 to Aa. States with more
serious problems, such as Massachusetts, had July
ratings as low as Baa, a rating assigned to
medium-grade obligations lacking outstanding in­
vestment characteristics and carrying greater risk.

Longer-Run Problems
In addition to the depressed economy, state
governments have been affected by a decline in
federal government aid in the 1980s and, simultan­
eously, a rise in the demand for and costs of state
services. Making matters worse, many state
governments failed to build adequate “ rainy day”

3

Table 1
State Budget Reduction Strategies in Fiscal 1991
Across-theboard cuts

Targeted
cuts

Delayed
spending

Rainy day
fund

Hiring
freeze

Arkansas
Illinois

X

Indiana

X

X

Kentucky
Mississippi

X

X

Missouri

X

X

Tennessee

X

X
X
X

X
X

X

X

SOURCE: National Governors’ Association, National Association of State Budget Of­
ficers, Fiscal Survey of the States (April 1991).

funds in the boom years following the 1981-82
recession that could have provided a financial buf­
fer against unforeseen problems.

The Federal-Local Squeeze

Throughout the 1960s and 1970s, federal aid
to state and local governments rose rapidly: federal
aid rose from 15 percent of state and local govern­
ment outlays in 1960 to 26 percent in 1979.7 Such
programs as Medicaid and so-called general rev­
enue sharing provided federal monies for state and
locally administered programs. This ended in the
late 1970s and was reversed by the Reagan Ad­
ministration’s “ New Federalism.” Federal aid to
states fell to 17 percent of 1989 state and local
government outlays. As federal aid to states was
cut back, states were forced to rely on within-state
revenue sources to keep the level of services up.
Meanwhile, local governments have also been
under pressure from cuts in federal aid and wide­
spread taxpayer resistance to higher property taxes,
which fund the bulk of local government functions.
Thus, many state governments are being pressed to
increase aid for functions that were previously
local responsibilities. Most importantly, roughly
half the funding for primary and secondary public
education now comes from state governments,
while local governments’ share of such expen­
ditures has declined.
Cost Pressures

While state governments have received less aid
from Washington in the 1980s, the cost of provid­
ing desired services has escalated. Since the early
1980s, when reports publicized the shortcomings
of the nation’s public schools, there has been a



widespread demand to improve our educational
system. District states have responded to the call
for educational improvements. Revenues from
Arkansas’ recent sales tax increase will be used to
improve the state’s school system. Kentucky’s re­
cent $1.3 billion program to reduce educational
inequalities and improve education is one of the
region’s most ambitious. In November 1991, Mis­
souri voters will decide the fate of “ Proposition
B,” a $385 million program to improve elemen­
tary, secondary and higher education. The program
would be funded by increased corporate income
taxes, limiting the deduction of federal income tax
payments from Missouri personal income taxes, in­
creasing the state’s sales tax rate by three-eighths
of 1 percent and raising cigarette taxes. The gover­
nor of Tennessee is calling for a restructuring of
state taxes, in part, to raise money for education.
His program includes a reduction of sales taxes
coupled with a broad personal income tax. Cur­
rently, only income from dividends and interest
is taxed.
Increases in outlays for Medicaid, which pro­
vides medical services for the poor and disabled,
also have pressured state budgets. As medical care
prices have risen sharply and caseloads have in­
creased, states have been forced to increase fun­
ding. Total outlays for Medicaid rose 18 percent
in fiscal 1990 alone. In fiscal 1991, the costs of
the program were higher than originally budgeted
in most states, including all seven District states.
Finally, spending for corrections, largely for
prison construction and maintaining prisoners, rose
rapidly during the 1980s. Although the nation’s
crime rate was actually lower at the end of the
decade than at the beginning, the national trend to
“ get tough” on criminals by imposing longer sen­
tences led to increased spending, as did court
orders to improve prison conditions.8

Summary
The fiscal problems of most states in the
Eighth District are not as serious as those in
California or the Northeast. One reason District
states have avoided these larger problems is their
relative economic strength during the national
recession. None of the District states have experi­
enced the severe downturns of the New England
and Mid-Atlantic states, nor the associated revenue
shortfalls. Still, the forces that have affected most
states during the 1980s—declining federal aid and
increased calls to fund education, corrections and
social services—have put the squeeze on District
state governments.
When the national recession ends, and employ­
ment, earnings and corporate profits rise, so will

state tax revenues. While this may help balance
state budgets in the short run, many state govern­
ments, including those in the Eighth District, will
continue to feel pressured. It is likely that demands
to boost spending for education and medical pro­
grams will not slacken, while demands for im­
provement of the quality of highways, bridges
and the environment will intensify.
State policymakers, therefore, will continue to
face the difficult choice between raising taxes and
cutting expenditures. Research suggests that, other
things equal, higher state tax rates tend to hinder
economic growth. Such a slowing could conceiv­
ably negate any revenue gains that higher tax rates
would create. If, however, lawmakers cut govern­
ment spending, especially for services such as
improving highways and education, they may well
end up hindering economic growth anyway.9

FOOTNOTES
1Many local governments are also facing budgetary pro­
blems. See Laura S. Rubin, “ The Current Fiscal Situa­
tion in State and Local Governments,” Federal Reserve
Bulletin (December 1990), pp. 1009-18. The Eighth
District includes Arkansas and parts of Illinois, Indiana,
Kentucky, Mississippi, Missouri and Tennessee.
2Social insurance funds, such as employee pension
funds and unemployment insurance, are not considered
part of operating or capital funds and are handled
separately. For a discussion of state social insurance
funds, as well as problems with state capital budgets,
see Laura S. Rubin, op cit.
Arkansas’ unique budgeting system technically
precludes a deficit.
4Fiscal 1991 ends June 30, 1991, in District states.
5As personal incomes fall, state tax revenues tend to fall
proportionately more, especially personal income tax
revenues. This “ income-elasticity” of state taxes can
exert a destabilizing influence on state budgets.




6States pay slightly less than half the costs of these
programs, with the federal government funding the
remainder.
7State and local government revenues are aggregated
because of differences among states in the way state
and local governments allocate services and because
some federal aid to states is transferred to local
governments.
8See Steven D. Gold, “ Changes in State Government
Finances in the 1980s,” National Tax Journal (March
1991), pp. 12-13.
9One study found that state and local government tax
increases retard economic growth when the revenue is
used to fund transfer payments. When the revenue is
used to improve public services, however, growth is
enhanced. See L. Jay Helms, “ The Effect of State and
Local Taxes on Economic Growth: A Time Series-Cross
Section Approach,” Review of Economics and Statistics
(November 1985), pp. 574-82.

5

Where Are Farmland
Prices Headed?
by Kevin L. Kliesen
Kevin B. Howard provided research assistance.

T

he value of farmland in the Eighth
District, after adjusting for inflation, was the same
in 1990 as it was in 1970. But to think that farm­
land prices were fixed during the intervening 20
years is to miss the whole story. What happened is
that the substantial increases in District farmland
values in the 1970s were offset by corresponding
declines in the 1980s. Though not quite as pro­
nounced, farmland values nationally exhibited
similar movements.
After providing details on U.S. and District
farmland values, this article examines some of the
factors that have contributed to these changes in
land values. In addition, some of the factors likely
to affect future land values are identified.

Land Values Since 1970
Figure 1 illustrates the behavior of real farm­
land values at the District and national levels since
1970.1 After declining slightly in 1970, Eighth
District real land values increased by 106 percent
from 1971 to their subsequent peak in 1981. Na­
tional land prices show a similar movement: from
1971 to 1981, U.S. real land prices rose by 91
percent. Since 1981, however, real land values
have fallen significantly. District land prices have
fallen by over 50 percent and at the national level
by about 42 percent. Since 1987, real land prices
have remained virtually unchanged.
Underlying the general movement in District
farmland values is substantial variation across
states. The decline in farmland values shown in
figure 2 was most severe in Illinois, Indiana and
Missouri as land prices in real terms declined by
59 percent, 58 percent and 51 percent, respec­
tively. Slightly less severe declines occurred in the
Delta states of Arkansas and Mississippi. In each
of these states, prices in real terms declined by
approximately 50 percent. The remaining two
states in the District—Kentucky and Tennesseeexperienced smaller declines of 37 percent and 36
percent, respectively.2
States with the largest declines in the 1980s
were also those with the largest gains in the 1970s.
For example, as table 1 shows, Illinois and Indiana



had both the largest increases in farmland prices
and the largest decline in land values. As of Janu­
ary 1, 1991, prices in both states were less than
one-half their peak value in inflation-adjusted
terms. On the other hand, those states that ex­
hibited the smallest increases in farmland values—
Kentucky and Tennessee—also have retained the
greatest percentage of their peak values.
Interestingly enough, some states may not
have hit bottom in land values yet. As of January
1, Kentucky, Missouri and Tennessee have re­
corded their lowest values since their peak year.
Moreover, although Arkansas and Mississippi
reached their lowest values in 1990, the rise in
land prices over the past year was only 0.2 percent
in Arkansas and 1 percent in Mississippi. Only
two states seem to be rebounding, albeit at a slow
pace: since their trough in 1987, real land values
have risen 9 percent in Illinois and 5 percent in
Indiana.

What Determines
Land Values?
The present value of an acre of farmland is
determined by the amount of income it can gener­
ate now and in the future and the expected interest
rate for converting the value of future income
flows to the present.3 In a highly simplified world,
if an asset like land yields the same expected flow
of income forever, then its present value is ex­
pressed by the following equation:
P = E/r,
where P equals the price of land, E is the expected
earnings component and r is the discount rate.4
Thus, if the expected earnings from an acre of
farmland are $100 and the discount rate is 10 per­
cent, then the price of land would equal $1000.
Accordingly, the price of land will increase if ex­
pected earnings increase or the interest rate
decreases.
The expected earnings component depends on
those factors that influence the expected revenues
and costs associated with agricultural production.
Thus, any factor that affects the demand for or
supply of agricultural production can affect land
prices.

Determinants Of The Recent
Movements Of Land Prices
Several reasons are usually given for the rise
and fall of U.S. land prices over the past two
decades. A significant factor accounting for the
rise in the 1970s was the increase in U.S. agricul-

6

Figure I

Real U.S. and Eighth District Farmland Values1

1970

73

76

79

82

85

88

1991

'See footnote 1 in the text for a description of the data.

tural exports. The primary reason for the surge in
exports was the substantial demand by the Soviet
Union for U.S. farm products beginning in 1972.
Other factors that contributed to rising land values
were low real interest rates and certain tax advan­
tages that encouraged the holding of farmland as
an investment.
The early 1980s saw a reversal of these con­
ditions: significantly higher real interest rates, a
strong dollar and a generally weak world econ­
omy, which caused U.S. exports of farm products
to fall by almost 40 percent from 1981 to 1986.
W eakness in the agricultural sector had direct ef­
fects on many farmers who purchased additional
land or equipment based on what in hindsight were
inflated equity values. In turn, agricultural banks
were harmed.
Before the 1980s, agricultural bank failures
were rare, as farmers enjoyed relative prosperity.
In 1982, however, a total of 11 agricultural banks
failed; this number jumped to 32 in 1984, before
more than doubling to 68 in 1985, then peaking at
69 in 1987. The number of agricultural banks that
failed in 1990 dropped to 17.
Conditions in the farm sector have improved
somewhat in recent years. Since 1986, agricultural
exports, spurred on by a declining dollar, have in­
creased by 53 percent. This increase has effective­
ly tripled the agricultural trade balance, rising
from $5.4 billion in 1986 to $17.7 billion in 1990.
This favorable movement in agricultural exports
has also contributed to the upward trend in real net
farm income, which reached a 15-year high in
1990.
Undoubtedly, the preceding developments af­
fected the movement of land values at the District
level; however, the question of what explains the



substantial differences in the movement of land
prices across District states remains. A simplistic
explanation may be found in the type of commodi­
ties produced in each state.
With the exception of Illinois and Indiana,
every state in the District derives the majority of
its cash receipts from livestock and livestock prod­
ucts. Accordingly, when livestock prices rise faster
than crop prices, farm income—and thus farmland
values—in those states more dependent on live­
stock than crops should rise. Although livestock
prices received by farmers increased an average of
7.1 percent per year from 1970 to 1981, crop

prices increased even more, rising an average of 9
percent per year. It is not surprising then that the
rise in farmland values in Illinois and Indiana
should have outpaced those of other District states.
During the period of falling land prices, the
opposite occurred. Farmland values in cropproducing states fell relatively more than in the
livestock-producing states, as livestock prices over
the period 1982-90 increased an average of 2.1
percent per year vs. the less than 1 percent per
year for crop prices.5

Future Land Prices
What does the future hold? Over time, several
factors are likely to affect farmland prices.6 Fore­
casting the quantitative impact of these factors is
not possible; it is possible, however, to identify
three factors that are likely to have substantial af­
fects on farmland prices: government policies, the

0

Figure 2

Highest and Lowest Farmland Prices in District States Since 1980.

ILLINOIS

INDIANA

$2382
$ 979

$2174
$ 904

MISSOURI
$1053
S 511

KENTUCKY
'$1139
$ 714
$1139

ARKANSAS

lillt

$1123
S 570

H tt

Top Number is peak land value; bottom number is trough land value.
Land values measured in constant (1982) dollars.

international trading environment and environmen­
tal concerns.
Government Policies

Since land prices respond to current and ex­
pected future earnings, government policies design­
ed to support farm income likely influence farm­
land values. This occurs because government pay­
ments to existing landholders become capitalized
into higher asset (land) values. The recent farm
bill attempts to reduce government involvement in
agriculture by mandating cuts in farm subsidies of
$13.6 billion. Moreover, its five-year cost is pro­
jected to be approximately one-half of the previous
farm bill’s final cost.7
In the Eighth District, government payments
as a percentage of gross farm income (GFI) vary
substantially. For the past four years, three states

have derived an average of over 10 percent of
their GFI from government payments: Illinois, 14
percent; Indiana, 10.5 percent; and Mississippi,
10.5 percent. Two states depend on government
monies for nearly 10 percent of their GFI: Arkan­
sas at 9.1 percent and Missouri at 9.2 percent.
Kentucky and Tennessee depend much less on
government support payments, with averages of
4.5 percent and 5.8 percent, respectively. It is
reasonable to anticipate that farmland values in
states with relatively more government support in
the past are likely to be the most adversely af­
fected by the reduction in this support.
International Trading Environment

Related to the effects of government policies
are the effects of trade policies. Currently, the
U.S. government is proposing large cuts in world-

Table 1
Movements in Real Farmland Values
Category

Arkansas Illinois

Indiana

Kentucky Mississippi

Missouri Tennessee

United States

Percent Change,
1971 to Peak

96

114

129

89

105

98

83

91

Current Percent
of Peak Value

51

45

44

63

51

49

64

58

SOURCE: U.S. Department of Agriculture.



8

wide farm and export subsidies at the General
Agreement on Tariffs and Trade (GATT) negotia­
tions in Uruguay. If successful, the so-called
Uruguay Round could have substantial implications
for farm incomes and farmland prices.
Research, however, is inconclusive about how
liberalized trading agreements will affect farm in­
come. One study predicts that by 1995—assuming
complete trade liberalization—annual real farm in­
come in the United States will be $3.1 billion
larger than if no trade liberalization occurred.
Another study, conducted by the U.S. Department
of Agriculture (USDA), paints a different picture.
The USDA predicts that free trade in agricultural
commodities would actually lower farm income by
almost $10 billion annually.8 Although no one ex­
pects the complete elimination of farm subsidies
and price supports in the near future, the prevail­
ing trend seems to be toward less government sup­
port for agriculture. The precise consequences of
these changes internationally on U.S. farmland
prices remain to be seen.

price of farmland. One such policy is the Conser­
vation Reserve Program (CRP). The CRP attempts
to retire, for at least 10 years, those lands subject
to erosion, usable as a wildlife habitat or which
contribute to surplus production of agricultural
commodities.
Although CRP land tends to be marginally
productive in the first place, the effective reduction
in the supply of land puts a premium on the most
productive land left out of the program, thereby
raising the average price of farmland near CRP
concentrations.9 In the Eighth District CRP enroll­
ment varies. Mississippi has had the greatest per­
centage of its farmland enrolled (5.8 percent),
followed by Missouri (5.1 percent), Tennessee (3.6
percent) and Kentucky (3.0 percent). The remain­
ing states have less than 3 percent of their
farmland enrolled in the program.

Environmental Concerns

After posting large gains in the 1970s, U.S.
and Eighth District land values in real terms have
declined for most of the 1980s. The future course
of land prices remains nebulous because of numer­
ous and conflicting policy-induced pressures on
farm income. Among these influences is the pres­
sure to reduce government intervention in agricul­
ture, increased trade liberalization and policies
designed to enhance environmental concerns.

Concerns about the environment and the ef­
fects of agriculture production on soil and water
quality are becoming increasingly commonplace.
Although environmental policies are ostensibly
designed to protect the productivity of farmland
and ensure a safe and reliable source of food and
fiber, they also affect farm income and thus the

FOOTNOTES
1Land prices are defined as the average value per acre
of the 48-state average. From 1970 to 1975, land prices
are measured as of March 1; from 1976 to 1981 and
1986 to 1988, February 1; from 1982 to 1985, April 1;
from 1989 on, January 1. Real land values are con­
structed by deflating nominal land values by the annual
average of the GNP deflator. The January 1, 1991, real
land value uses the first quarter 1991 deflator.
2ln nominal terms, the highest and lowest average
farmland values in each of the District states since 1980
are as follows: Arkansas, $1096 and $724; Illinois,
$2188 and $1149; Indiana, $2031 and $1061; Kentucky,
$1058 and $878; Mississippi, $1034 and $685; Missouri,
$990 and $604; Tennessee, $1070 and $935.

Conclusion

6The U.S. Department of Agriculture (USDA) recently
forecasted nominal land values to increase next year by
about 1 percent to 3 percent, but an expected inflation
rate in the 4 percent to 5 percent range will necessarily
offset any gains in real terms. See Roger Hexem
“ Farmland Value Change Varies Regionally,”
Agricultural Outlook, U.S. Department of Agriculture
(June 1991), pp. 21-22.
7See Gene D. Sullivan, “ The 1990 Farm Bill,” Economic
Review, Federal Reserve Bank of Atlanta (January/
February 1991), pp. 22-29, for a discussion of the 1990
farm bill’s features.

4The expected earnings component and the discount rate
do not have to be constant over time, and in all
likelihood they will not.

8The studies cited here are summarized in Alan
Barkema, David Henneberry and Mark Drabenstott,
“ Agriculture and the GATT: A Time for Change,”
Economic Review, Federal Reserve Bank of Kansas City
(February 1989), pp. 21-42. In general, those countries
who have relatively low-cost, low-subsidized agricultural
economies (for example, the United States or Australia)
will inevitably reap larger benefits than those nations
who subsidize their agriculture sector heavily because of
its relatively high-cost nature (for example, Japan and
the European Community).

5Prices received by farmers are the compounded annual
growth rate of the Index of Crop Prices Received by
Farmers and the Index of Livestock Prices Received by
Farmers over the periods indicated.

9Michael D. Boehlje, Philip M. Raup and Kent D. Olson,
“ Land Values and Environmental Regulation,” Staff
Paper P91-3, Department of Agricultural and Applied
Economics, University of Minnesota (January 1991).

3This future income is referred to as its capitalized value
or the present discounted value of all future earnings.
See Bruce L. Gardner, The Economics of Agricultural
Policies (Macmillan, 1987) for a more formal discussion.




9

Banking at Credit
Unions: An Industry
Profile
by Michelle A. Clark
Thomas A. Pollmann provided research assistance.

the past decade, financial news
reporters have chronicled the troubles of the na­
tion’s banks and thrifts—failures, mergers, fraud,
problem loans, insurance fund shortfalls. At the
same time, but with far less fanfare, another type
of financial institution—the credit union—has chal­
lenged these traditional players for a position in
the increasingly competitive arena of consumer
banking. Though a look at the numbers would show
you that there are substantially fewer credit unions
in the United States today than there were at the
start of the last decade, the fact is, the number of
Americans “ banking” at credit unions continues to
rise, as does the industry’s share of total depository
institution assets.
How are credit unions doing in the Eighth
Federal Reserve District? How do they compare
with their commercial bank counterparts? These
issues and a few more related to safety, soundness
and competition with other depository institutions
are discussed in this article.

Credit Union Basics
More than one-fifth of all Americans are
members of credit unions. Moreover, at year-end
1990, there were more credit unions—about
14,000—in the United States than any other type
of depository institution. Despite tremendous
growth in membership and assets in the last two
decades, however, credit unions still rank well
below other financial institutions in industry size.
At year-end 1990, for example, the industry’s
$245 billion in assets accounted for just 5.2 per­
cent of the total for all depository institutions,
compared with 71.5 percent for commercial banks
and 23.3 percent for thrifts (savings and loans and
savings banks). Still, credit unions’ share of this
pie almost doubled during the last decade, while




thrifts’ share dropped and commercial banks’ share
rose only slightly.
Unlike commercial banks and thrifts, credit
unions are non-profit institutions. Cooperatively
organized, credit unions take deposits (or shares)
from and make loans to members who share a
common bond; that bond may be an employer, an
industry, or a religious, social or community orga­
nization. The common bond is supposed to facilitate
judgment about the creditworthiness of potential
borrowers, and therefore rationalizes the existence
and contributes to the safety and soundness of the
industry. Much of the industry’s rapid growth
during the 1980s can be attributed to the easing of
the “ common bond” criteria for membership and
the authorization of new deposit and loan powers,
both of which have blurred the lines among deposi­
tory institutions. The common bond rationale for
credit unions has become quite controversial as
credit unions have become larger and more diverse
in membership.
The largest U.S. credit union is the Navy
Federal Credit Union, a $4.6 billion institution in
Merrifield, Virginia. Its members are active-duty
and retired employees of the U.S. Navy and their
dependents. The vast majority of credit unions are
much smaller than Navy Federal: at year-end 1990,
about 80 percent had less than $15 million in assets.
Credit unions were first established to make
loans to workers who had difficulty obtaining the
types and sizes of loans they needed from banks.
Although credit unions have greatly diversified
their services during the past 20 years, the bulk of
their lending is still consumer-based. Most loans
are backed by physical collateral (a house or an
automobile) or by the borrowing member’s shares.
Credit union earnings (after distribution to capital
and loss allowance accounts) are paid out to mem­
bers as dividends or as rebates on outstanding
loans. Each credit union member has one vote,
regardless of the number of shares held, and is
eligible to vote on the institution’s board of
directors.
Many small credit unions’ day-to-day opera­
tions are conducted by volunteers, although most
have some paid employees. The vast majority of
their share accounts are federally insured for
amounts up to $100,000. Since 1985, regulators
have required federally insured credit unions to
maintain a non-interest-bearing deposit in the in­
surance fund equal to 1 percent of their deposits,
which is adjusted annually to reflect current in­
sured deposits. Federal credit union regulators also
have the authority to levy an insurance premium
on institutions if the fund balance drops below a
certain level. The regulatory structure of credit
unions is much like that of banks and thrifts: credit
unions can be state- or federally-chartered and they
are subject to on-site as well as off-site (through
financial reports) examinations.

10

Figure 1

Number of District Credit Unions and Their Assets
(in millions of dollars)
December 31, 1990

SOURCE: Report of Condition and Income for Credit Unions.

Eighth District Credit Unions
About 680, or 5 percent, of all U.S. credit
unions are located in the Eighth District, compared
with the District’s 10 percent share of commercial
banks. The District’s distribution of credit unions
and their assets are presented in figure 1. Credit
union trends in the District have closely mirrored
those in the nation: though the number of institu­
tions continues to decline from its 1969 peak, credit
unions are drawing more members and growing in
total assets. In the District, the number of credit
unions declined almost 9 percent from 1987
through 1990, yet membership increased 16.3 per­
cent to 1.87 million. The number of potential
members (those who share the common bond of
the credit union’s charter) has risen even faster:
about 5.35 million District residents are eligible to
join credit unions, up almost 37 percent from
1987.
U.S. trends are much the same, with the num­
ber of institutions declining about 12 percent and
membership increasing about 15 percent from 1987
through 1990. Potential membership at U.S. credit
unions rose 21.6 percent. Approximately 35 per



cent of eligible District credit union customers
were credit union members at year-end 1990, vs. a
27.7 percent rate of participation in the nation.
Asset and deposit growth at both District and
U.S. credit unions has outpaced membership
growth. At year-end 1990, District credit unions
had $6.39 billion in assets and $5.78 billion in
shares, up 29 percent and 25.9 percent, respective­
ly, from their 1987 levels. The assets of U.S.
credit unions rose more than 30 percent from 1987
through 1990. District and U.S. commercial bank
assets, in contrast, rose 21.1 percent and 14.4 per­
cent, respectively.
As with commercial banks, assets at credit
unions are heavily concentrated at the largest in­
stitutions: in the District, 87 percent of all credit
unions have less than $15 million in assets, yet
their share of District credit union assets is about
24 percent. The distribution of assets is even more
skewed in the nation, as the four-fifths of credit
unions with assets of less than $15 million control
only about 15 percent of total assets.
Eighth District credit unions compare favorably
to their national peers in conventional measures of
financial performance and operating soundness. As
indicated in table 1, District credit unions are more
profitable (as measured by return on average assets
or ROA), better capitalized, and have lower prob­
lem loan and loan loss ratios than their U.S. peers.
Despite a slightly lower average loan-to-deposit
ratio, District credit unions earn proportionately
more income from loans than the average U.S.
credit union. In addition, both the average loan
and the average share account have lower balances
in the District than in the nation. Table 1 also il­
lustrates the improvement in some important
measures of performance for credit unions since
1984: higher capital ratios, lower nonperforming
loan ratios and lower operating expense ratios.
Table 2 presents data for entire states rather
than for just that portion of the state in the Eighth
District. As the table shows, the operating and
financial characteristics of credit unions vary sub­
stantially. Credit unions in states with the smallest
numbers of institutions (Arkansas and Mississippi)
are, on average, better capitalized than their larger
counterparts. Arkansas and Mississippi also have
the highest loan-to-deposit ratios in the District,
which may account for their relative profitability
since loans tend to generate higher returns than
other assets. Despite an underrepresentation (in
numbers and market share) of credit unions in the
District, the rate of credit union participation is
higher than the national average in every District
state but one.
Performance ratios for U.S. and District credit
unions compare quite favorably to those of their
commercial bank competitors. In 1990, District
credit unions recorded an average ROA of 0.99
percent, compared with 0.88 percent for District

11

banks. The difference between credit union and
bank earnings ratios were more pronounced at the
national level: U.S. credit unions recorded an ROA
of 0.79 percent vs. 0.53 percent for U.S. banks
with assets of less than $15 billion. District and
U.S. credit unions also had lower nonperforming
loan ratios ratios, 1.48 percent and 1.69 percent,
respectively, than the 1.81 percent and 3.05 per­
cent ratios posted by their commercial bank
counterparts.
While the tax-exempt status of credit unions
no doubt contributes to their superior performance
over banks, the composition of their loan portfolios
is another important factor. Auto loans make up
about 40 percent of District credit union loans,
real estate loans comprise about 30 percent and
credit card and other consumer loans another 20
percent. In contrast, real estate loans make up
almost 50 percent of District commercial bank
loans, and consumer loans of all types make up
only about 21 percent of the portfolio. Business
loans make up a mere 0.2 percent of credit union
loans vs. the 23 percent share of District banks’
loan portfolio.
The lack of commercial real estate, domestic
and foreign business and agricultural loans in credit
union loan portfolios has shielded them from the
loan problems and, hence, losses suffered by banks
in the past decade. In addition, because more than
99 percent of District credit union loans are made
to members, the bulk of which are secured by
tangible property or member shares, loan default
rates at credit unions are substantially below those
of commercial banks. Nonetheless, as the General
Accounting Office (GAO) noted in its recent review
of federally insured financial institutions, the poten­
tial for substantial loan problems at credit unions
exists because of the industry’s increasing exposure
to real estate.1 Between 1985 and 1990, the share
of real estate loans in credit union portfolios qua­
drupled, putting the industry in the same vulnerable
position as many troubled banks and thrifts.

Table 1
Selected Measures of Credit Union Performance
Eighth District
1990

United States
1990

1984

1984

Return on average
assets

0.99%

1.32%

0.79%

1.22%

Equity/assets

8.06

6.09

6.78

5.85

Nonperforming
loans/total loans

1.48

2.14

1.69

2.02

Net loan losses/
total loans

0.56

n/a

0.63

n/a

Loans/deposits

60.5

65.8

63.0

64.5

Loan income/
gross income

67.4

62.9

64.2

62.0

Operating
expenses/total
assets

3.18

3.48

3.13

3.22

Loan loss
provision/total
loans

0.59

0.22

0.71

0.30

Average loan

$3,480

$2,539

$4,499

$3,156

Average deposit

$2,105

n/a

$2,352

n/a

SOURCE: Report of Condition and Income for Credit
Unions, Federal Financial Institutions Examina­
tion Council, 1984-90.

Safe and Sound?
Despite their rapid growth during the 1980s,
credit union safety has gone largely unnoticed by
policymakers. While the GAO’s review of the in­
dustry’s financial health was mostly favorable, it
did recommend a number of changes to credit
union supervision, regulation and accounting prac­
tices that would lessen the potential for problems.
Specific recommendations were made concern­
ing the National Credit Union Administration

Table 2
A Snapshot of Credit Unions in Eighth District States, December 31, 1990
AR

IL

IN

KY

MO

MS

TN

107

900

350

179

252

165

348

Number of current members (thousands)

191

2,238

1,688

485

933

336

1,225

Current members/potential members

41.6%

31.4%

47.8%

48.8%

27.10/0

48.70/0

$6,319.6

$1,731.9

$3,926.6

Number of credit unions

Total assets (millions)

$563.8

$10,612.7

$936.5

38.6%
$4,878.1

Loans/(deposits and shares)

71.6%

56.1%

59.4%

59.9%

52.2%

69.8%

62.2%

Return on average assets

1.32%

0.70%

0.94%

0.96%

0.74%

0.87%

1.12%

Nonperforming loans/total loans

1.84%

1.46%

1.57%

1,500/o

1.53%

1.63%

1.40%

Equity/assets

10.4%

5.5%

6.8%

8.0%

6.3%

9.2%

7.8%

SOURCE: Report of Condition and Income for Credit Unions, Federal Financial Institutions Examination Council, 1990.



12

(NCUA), the federal agency charged with oversee­
ing the industry’s federally chartered credit unions
and running its insurance fund, the National Credit
Union Share Insurance Fund (NCUSIF). The
NCUA is responsible for chartering, supervising
and providing insurance to the vast majority of
credit unions in the United States. While commen­
ding the NCUA for its managerial prudence, the
GAO recommends several management-related
changes. First, it recommends the NCUA establish
links to other regulatory bodies and suggests plac­
ing the Chairman of the Federal Reserve Board
and the Secretary of the Treasury on the NCUA’s
Board of Directors. Second, the GAO advises the
NCUA to rely less on informal approaches to cor­
recting problems at credit unions and establish in­
stead “ tripwires,” such as minimum capital
requirements.
The second major area of concern was the in­
dustry’s capitalization. The target range for the
NCUSIF is $1.25 to $1.30 for each $100 of in­
sured deposits. At year-end 1990, the fund was at
the low end of the range. The Federal Credit Union
Act mandates that if NCUSIF capital is below the
minimum ratio of 1 percent, the NCUA can assess
a premium for each credit union equal to onetwelfth of a percent of insured shares; if the fund
is above the target range, the surplus is distributed
back to credit unions. Premiums have not been
assessed since the NCUSIF was recapitalized in
1985.2
Because problems in insurance funds can arise
quickly, the GAO recommends the NCUA be given
the authority to raise the target range for the fund
and assess premiums as needed. Indeed, five years
of bank failures has virtually depleted the fund that
insures commercial bank deposits, the Bank In­
surance Fund (BIF). At year-end 1990, the BIF
had $0.26 for every $100 in insured deposits vs.
the $1.19 per $100 it had at year-end 1985. The
GAO also recommends the NCUA establish a twotiered method for measuring fund capital: one based
on total capital to insured shares, the other based
on liquid fund assets to insured shares. Maintaining
a higher ratio of liquid fund assets to total insured
deposits, currently at 1 percent, would help ensure
the prompt resolution of a failing credit union.
In addition, the credit union industry’s method
for counting capital came under fire. The 1 percent
of insured shares a credit union is required to main­
tain in the NCUSIF is counted as fund capital by
the NCUSIF and as an asset by the contributing
credit union. This double-counting “ produces a
misleading picture of the combined strength of the
NCUSIF and the credit unions.” The GAO recom­
mends credit unions count the insurance contribu­
tion as an expense, which will reduce their capital
while having no effect on the NCUSIF. This change
will help policymakers and credit union super­
visors accurately gauge the industry’s total
capitalization.



The GAO made a number of additional recom­
mendations designed to strengthen credit union
supervision and mitigate the possibility of thrift­
like problems. Among the major recommendations
were: a cap on permissible commercial lending;
limits on the amount of money that can be loaned
to one borrower; minimum capital standards that
are no less stringent than those for other insured
depository institutions; specific underwriting stan­
dards for real estate loans; and more frequent off­
site monitoring through the submission of quarter­
ly, as opposed to semiannual, reports of condition
and income, especially for large credit unions.

A Competitive Edge?
While the existence of federal insurance makes
credit union safety and soundness of concern to all
taxpayers, the competitive position of credit unions
is of most concern to other depository institutions.
Banking and thrift industry leaders view many
credit unions as equals in the financial market­
place, so they oppose any regulatory or legislative
practices that give credit unions a competitive ad­
vantage. Not surprisingly, concern about the com­
petitive nature of credit unions has increased as the
industry has grown.
Taxation

No single competitive issue raises more hackles
than the tax-exempt status of credit unions.3 The
exemption from the corporate income tax that
banks and thrifts are required to pay means credit
unions can finance services through untaxed rather
than taxed retained earnings; they are therefore
able to pay more on deposits and charge less on
loans than banks and thrifts. Federal taxation of
credit unions was proposed by the Carter Adminis­
tration in 1978 and the Reagan Administration in
1985, both times on the grounds that it would
level the playing field for depository institutions.
Proponents of credit union taxation cite the relaxa­
tion of common bond rules, the expansion of credit
union powers and the rising median income of
members as evidence that credit unions today are
virtually indistinguishable from other depository
institutions.
Taxation opponents argue that credit unions
serve a particular market segment with small
loans, financial counseling and low-cost checking
accounts that “ for-profit financial institutions are
unable or unwilling to provide.” 4 They also con­
tend that the safety and soundness of credit unions
would be jeopardized by taxation, as credit unions
can only raise capital through retained earnings,
not stock sales. Opponents also point out that
about 90 percent of credit union earnings are paid
out as dividends to members (the equivalent of
deposit interest income), and those earnings are
taxed at the individual level. In addition, the

13

revenue gains from taxation are apt to be sm alljust $3.7 billion over the 1991-95 period, accor­
ding to Congressional Budget Office estimates.
The Common Bond

The relaxation of membership requirements
during the past two decades has prompted the
development of some very large credit unions
whose members constitute groups with very dif­
ferent common bonds. While this relaxation has
facilitated mergers and diversification, both of
which make the industry more financially viable,
many bankers and thrift executives believe the
bonds have been stretched too far. They argue that
today’s credit unions are essentially serving the
same customers as banks and thrifts, and therefore
should be subjected to the same market conditions.
One of the most controversial credit union
charters was issued in 1987 to the American
Association of Retired Persons (AARP), an associ­
ation representing Americans 50 years of age and
older. With a potential membership of 19 million,
the AARP Federal Credit Union would have had
one of the largest customer bases in the world.
Banking and thrift industry groups called foul,
however, and the credit union was disbanded in
1990, ostensibly because of a lack of participation.
Analysts have suggested that credit union trade
groups leaned heavily on AARP to dismantle its
credit union because of fears it would threaten the
industry’s tax-exempt status.
Credit Union Powers

The expansion of powers is another area of
competitive concern. During the last 20 years,
credit unions have been authorized to offer a varie­

FOOTNOTES
1See “ Credit Unions: Reforms for Ensuring Future
Soundness,” GAO Document GGD-91-85, July 1991, for
a detailed analysis of the industry’s condition and recom­
mendations for reform.
2ln mid-September, the NCUA Board of Directors voted
to assess the statutory premium on insured credit unions
effective January 1, 1992. This one-time assessment, the
first in seven years, was deemed necessary to keep the
target level for the NCUSIF in the desired range, after
several large credit union failures in fiscal year 1991.




ty of accounts, including ordinary checking and
NOW accounts, money market deposit accounts,
certificates of deposits, and, through third-party
private companies, products like insurance. On the
asset side, credit unions are permitted to offer a
wide variety of consumer installment loans and
real estate loans with terms as long as 30 years.
Credit unions can now offer loans with variable
rates of interest as well as business loans that meet
certain criteria.

Conclusion
Credit unions have made a place for themselves
in the financial marketplace by serving the needs
of their members. Increased powers and diversity
of membership, however, expose credit unions to
risks similar to those borne by their bank and thrift
counterparts. Concern has been directed, for exam­
ple, at the rising share of real estate loans in credit
union portfolios. Nevertheless, the industry today
is healthy and there is no evidence to suggest that
credit unions will experience the failure rates banks
and thrifts experienced during the last decade.
Policymakers, however, will continue to hear
complaints of unfair competition from bankers and
thrift executives regarding the tax-exempt status of
credit unions and the relaxation of the common
bond. Whether and how legislators will respond to
these complaints is unclear. What is clear is that
tension between credit unions and other depository
institutions is likely to continue as long as the
credit union industry grows.

The premium, equal to 8.3 cents for every $100 in
deposits, is expected to raise $160 million for the fund.
fe d e ra lly chartered credit unions are exempt from all
federal taxes and most state taxes. State-chartered
credit unions are required to pay federal tax on unrelated
business income and can be taxed by their home state.
4Taken from 1985 testimony by credit union and con­
sumer group lobbyists before the House Committee on
Ways and Means, and contained in GAO report on
credit unions, p. 307.




14

Eighth D istrict Business
Level

11/198911/1990

108,836.0
6,921.9
948.1
256.3
1,479.5
486.0
2,316.4
1,172.3
2,178.0
478.5

-1.2%
- 2 .9
1.6
- 1 .7
- 4 .2
- 4 .6
- 3 .6
- 3 .0
-3 .1
- 3 .0

-1.3%
-0 .1
2.9
1.4
0.9
1.9
-1 .1
- 1 .0
- 0 .9
0.6

1.5%
1.9
3.6
3.2
2.9
2.7
1.1
0.9
1.3
1.0

2.6%
3.2
3.3
3.2
3.7
3.7
2.5
2.3
3.6
4.2

18,400.0
1,440.2
234.4
281.5
416.1
508.1

-3.2%
- 3 .3
0.3
- 0 .9
- 4 .5
- 5 .4

-4.3%
- 2 .9
0.9
- 2 .0
- 5 .6
- 2 .8

-1.7%
-0 .1
0.7
0.9
- 0 .8
- 0 .3

0.5%
2.2
2.1
3.7
1.6
2.1

49.4
289.1
340.3
408.6
1,615.1
1,632.6
1,144.4

-8.4%
-1 2 .8
- 2 .4
- 2 .3
- 1 .7
- 3 .4
- 1 .7

-4.3%
- 1 .9
-0 .1
0.6
2.5
0.0
0.4

2.0%
1.6
0.6
1.8
4.5
1.0
2.6

■3.8%
1.1
0.7
4.2
5.8
2.5
3.3

11/1991

Payroll Employment (thousands)
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis
Manufacturing
Employment (thousands)
United States
District
Arkansas
Kentucky
Missouri
Tennessee
District Nonmanufacturing
Employment (thousands)
Mining
Construction
FIRE2
Transportation3
Services
Trades
Government
Real Personal Income4 (billions)
United States
District
Arkansas
Kentucky
Missouri
Tennessee

Compounded Annual Rates of Change
1/199111/1991

19901

19891

IV/1990

111/1990IV/1990

IV/1989IV/1990

1990

1989

$3,528.7
193.2
25.2
41.7
68.0
58.3

-3.3%
- 3 .4
- 4 .6
- 3 .7
- 1 .7
- 4 .7

-0.3%
- 0 .6
0.4
0.2
- 1 .2
- 0 .9

1.0%
0.7
1.6
1.4
0.1
0.5

2.7%
1.9
2.0
2.5
1.8
1.7

11/1991

1/1991

1990

1989

1988

5.5%
5.8
6.9
5.9
5.8
5.1
5.7
5.9
5.2
4.5

5.3%
5.8
7.2
6.3
6.2
5.6
5.5
5.5
5.1
4.7

5.5%
6.5
7.7
6.4
7.9
6.3
5.7
5.9
5.8
5.1

Levels

Unemployment Rate
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis

6.8%
6.7
7.5
6.3
6.8
5.6
6.8
6.8
6.0
5.1

6.5%
6.5
7.1
5.9
6.5
5.4
6.3
6.5
6.6
5.2

Note: All data are seasonally adjusted . On this page only, the sum of data from Arkansas, Kentucky, Missouri and Tennessee
is used to represent the District.
1Figures are simple rates of change comparing year-to-year data.
2Finance, Insurance and Real Estate
transportation, Communications and Public Utilities
4Annual rate. Data deflated by CPI-U, 1982-84= 100.

15

U. S. Prices
Level
11/1991

Compounded Annual Rates of Change
1/199011/1991

11/199011/1991

19901

19891

Consumer Price Index
( 1982-84

= 100 )

Nonfood
Food
Prices Received by Farmers

135.3
136.9

1.8%
3.9

5.0%
4.1

5.3%
5.7

4.70/0
5.9

152.0
164.7
138.3

16.5%
-5.4
53.3

0.0%
-3.7
5.0

1.6%
6.5
-4.8

6.6%
6.8
6.6

175.0
190.0

4.7%
4.3

2.9%
3.8

2.3%
3.4

6 .40/0
4.9

(1977 = 100 )

All Products
Livestock
Crops
Prices Paid by Farmers
(1977 = 100 )

Production items
Other items2

Note: Data not seasonally adjusted except for Consumer Price Index.
1Figures are simple rates of change comparing year-to-year data.
2Other items include farmers’ costs for commodities, services, interest, wages and taxes.

Eighth D istrict Banking
Changes in Financial P osition fo r the y e a r ending
June 30, 1991 (by Asset Size)
Less than
$100 million

SELECTED ASSETS
Securities
U.S. Treasury &
agency securities
Other securities1
Loans & Leases
Real estate
Commercial
Consumer
Agriculture
Loan loss reserve
Total Assets
SELECTED LIABILITIES
Deposits
Nontransaction accounts
MMDAs
Large time deposits
Demand deposits
Other transaction accounts2
Total Liabilities
Total Equity Capital

1.7%

$100 million $300 million

14.6%

$300 million $1 billion

27.6%

3.4
-4.7
1.9
4.8
-2.2
-3.1
9.3
6.8
0.9

16.1
10.4
2.7
9.1
-8.4
-2.3
13.9
7.6
5.6

34.6
8.9
10.5
16.2
-0.2
8.3
18.8
22.1
13.9

0.8%
1.2
5.3
-2.6

5.3%
5.1
5.1
-5.9

14.9%
14.4
13.5
-6.7
7.9
26.4
13.9
13.8

- 4 .4
3.2
0.9
0.9

1.1
10.8
5.3
8.6

More than
$1 billion

Note: All figures are simple rates of change comparing year-to-year data. Data are not seasonally adjusted.
includes state, foreign and other domestic, and equity securities,
includes NOW, ATS and telephone and preauthorized transfer accounts.




4.3%
5.7
0.3
1.2
5.2
-1.7
-2.5
23.6
10.1
5.6
9.6%
10.4
14.6
-24.4

1.6
16.1

5.5
6.4

16

P erform ance R atios (by Asset size)
Eighth District

United States

11/91

II/90

II/89

11/91

II/90

II/89

EARNINGS AND RETURNS
Annualized Return on Average
Assets
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

.97%
1.05
.98
.97
.78
1.16

1.07%
1.06
1.05
.88
.72
1.15

1.14%
1.09
1.03
.77
.79
1.18

.82%
.87
.80
.67
.33
1.07

.83%
.96
.82
.61
.58
1.05

.89%
1.01
.89
.83
.94
1.11

Annualized Return on Average
Equity
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

10.59%
12.73
12.58
14.46
12.52
12.30

11.69%
13.18
13.23
13.37
11.13
12.32

12.52%
13.40
13.43
11.68
12.74
12.59

8.99%
10.74
10.52
9.92
5.45
11.59

9.16%
11.97
11.07
8.96
9.90
11.40

9.90%
12.82
12.72
12.40
15.90
12.00

Net Interest Margin1
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

4.30%
4.28
4.42
4.35
3.70
4.26

4.29%
4.25
4.47
4.15
3.67
4.19

4.36%
4.42
4.57
4.18
4.30
4.25

4.56%
4.63
4.64
4.49
4.34
4.34

4.61%
4.66
4.67
4.38
4.25
4.33

4.79%
4.91
4.79
4.48
4.42
4.45

ASSET QUALITY2
Nonperforming Loans3
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

1.70%
1.80
1.62
1.65
2.62
1.81

1.65%
1.76
1.44
1.46
2.23
1.79

1.67%
1.79
1.52
1.62
2.81
1.96

2.13%
2.17
2.62
3.44
4.79
1.86

2.03%
1.98
2.33
2.49
3.05
1.95

2.28%
1.93
2.59
1.95
2.65
2.27

Loan Loss Reserves
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

1.53%
1.58
1.53
1.83
1.94
1.60

1.46%
1.51
1.39
1.81
1.63
1.64

1 .470/0
1.49
1.50
1.60
1.84
1.70

1.71%
1.64
1.84
2.44
2.89
1.83

1.65%
1.49
1.71
1.88
2.29
1.88

1.66%
1.48
1.64
1.59
1.88
1.97

Net Loan Losses4
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

.22%
.25
.33
.35
.53
.17

.17%
.20
.25
.37
.37
.13

.15%
.21
.18
.37
.33
.18

.27o/o
.34
.44
.71
.84
.16

.26%
.28
.38
.51
.80
.20

.31%
.29
.33
.39
.47
.23

Note: Agricultural banks are defined as those banks with a greater than average share of agriculture loans to total loans.
11nterest income less interest expense as a percent of average earning assets
2Asset quality ratios are calculated as a percent of total loans.
3Nonperforming loans include loans past due more than 89 days and nonaccrual loans.
4Loan losses are adjusted for recoveries.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102