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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
Average
Loans
Classification

1956

Amount outstanding
1966

(number)

1956

1966

(thousand dollars)

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
Average
Amount outstanding

Loans
Classification

1956

1966

(number)

1956

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

s ?\h
r?'?

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.

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