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A review by the F e d e r a l R e s e r v e B a n k o f C h ic a g o Business Conditions 1967 M a y Contents Trends in banking and finance— Income of District banks in 1966 3 Bank markets and services— Summary of three surveys of bank customers 6 1966 farm loan survey— Most banks extend credit to agriculture, some have inadequate funds and small loan limits 11 BUSINESS C O N D IT IO N S is published m o n th ly by th e Federal Reserve B ank o f C hicago. D orothy M . Nichols was p rim a rily responsible fo r the a rtic le , "T ren d s in b a n kin g and fin a n c e ," George G. K a u fm a n fo r " B a n k m ark ets and surveys" and Roby L. Sloan fo r " 1 9 6 6 fa rm loan su rvey." Subscriptions to Business Conditions are a v a ila b le to th e public w ith o u t ch arge. For in fo rm a tio n concerning b u lk m ailin gs, address inquiries to th e Federal Reserve B ank o f C hicago, C hicago , Illin ois 6 0 6 9 0 . A rticle s m ay be reprinted provided source is credited. Business Conditions, May, 1967 Trends •» banking and finance Income of District banks in 1966 T , heavy loan demand and high interest rates that prevailed during 1966 resulted in a sharp rise in bank operating revenue and earnings. Gross revenues of Seventh District member banks last year were 17 percent above those reported for 1965, and net cur rent operating earnings were up 18 percent despite the slower growth in assets in the late summer and fall. E arnings rela tiv e to cap ital for the “average” member bank, as measured by the average of the individual bank ratios of net current earnings to capital accounts, were the highest in 10 years and increased more than in any year since 1959.1 Profits after taxes also rose, but by much less than earnings mainly because of larger losses on sales of securities. The average ratio of net income after taxes to capital was 9.2 percent, com pared with 8.7 percent in the previous year. There was considerable variation among banks, with losses on securities reported mainly by the large banks. Incom e and e xp en ses For the first time in several years income from current operations rose faster than ex penses—but only slightly faster. The major portion of the gain in revenue was in loan interest and other charges on loans, reflecting ’All figures on outstandings used in this article are based on condition statement averages for Decem ber 31, 1965, and June 30, 1966. Earnings, expenses and income in 1965 and 1966 Seventh District member banks 1965 1966 (million dollars) C urrent op erating revenue On U. S. Government securities On other securities On loans Service charges on deposit accounts Other Total 320 172 1,317 72 157 324 199 1,603 78 188 2,038 2,392 413 62 702 453 72 848 27 77 252 46 84 291 1,533 1,794 505 598 C urrent op erating expenses Salaries and wages Officer and employe benefits Interest on time deposits Interest and discount on borrowed money Net occupancy expense Other expenses Total N et current earnings Deductions from earnings Losses and charge-offs On securities On loans Other (recoveries [ — ]) Net transfers to (from [ — ]) valuation reserves On securities On loans Net deductions N et income before taxes Taxes on net income N et income a fte r taxes - — 2 1 4 77 1 2 3 77 — 13 81 73 148 432 119 313 450 118 332 both further growth in loans as a proportion of total assets and higher loan charges evi denced by the rise from 4.5 to 6 percent in the rate on prime commercial loans from December 1965 to mid-August 1966. For Federal Reserve Bank of Chicago the average bank, in Revenue absorbed by interest terest earned on loans paid on time deposits has rose to 6.58 percent increased sharply since 1960 from 6.49 in 1965. The average return banks with deposits o f banks with deposits o f $ 5 0 m illion or more $ 5 0 m illio n o r less on U. S. Government securities rose from 0 10 20 30 40 50 0 10 20 30 40 50 3.86 to 4.21 percent, as rates on some of these issues moved up to the highest levels in 40 years. Gross earn ings on Governments were not much above the previous year, however, because of the reduction in the amount of these secu rities held. All types of ex penses increased. The two m ajor expense components—s al ari e s and wages and interest on time deposits—rose 10 and 21 percent, respectively. Interest on Sixties. Last year, in addition to the increased borrowed money, although still small in rela expenses due to higher rates paid and a larger tion to total expenses, was sharply higher aggregate volume of time and savings de than in 1965, reflecting higher money market posits, shifts from passbook savings into rates. The proportion of net operating higher-yielding certificates of deposit, often revenue absorbed by interest on time deposits within the same bank, added to interest costs. continued to rise. A “ loss” y e a r There are still substantial differences among various banks on the importance of Years of highest earnings performance are time deposit interest as an expense. In 1966 typically years of relatively low bank profits. the average ratio of such interest to operating This pattern reflects the effect of nonoperat revenue ranged from 22 percent for Illinois ing transactions (mainly losses on sales of banks with deposits of less than 2.5 million securities and transfers to valuation reserves) dollars to 45 percent for Detroit banks with which tend to reduce net income. To some deposits of more than 50 million. But the extent the income-reducing effects of these growth in the cost of time deposits has been transactions grow out of the same basic forces the major factor affecting expenses of banks that increase earnings—rising interest rates in all major District areas throughout the and strong loan demand. During 1966, when tim e de p o sit in te re s t pa id as T------------------1----------------- 1------------------1----------------- 1 4 percent of o p e ra tin g revenue I----------------- 1----------------- 1------------------1------------------1----------------- 1 Business Conditions, May, 1967 Federal Reserve policy was aimed at mod erating the rate of growth in total bank credit, many banks sold securities in order to serve their loan customers. Pressure from these sales lowered prices of securities, entailing greater than usual losses. Some of these losses undoubtedly resulted from tax considerations. Since capital losses are deductible from regular income for com mercial banks, it is advantageous for banks, in years when market prices decline, to sell securities for which market value is below book value and to purchase other issues avail able at discounts. Sales of the latter may be made later, in years when earnings are rela tively low, and the gains realized on such sales are taxable at the 25 percent rate. Such operations tend to further moderate year-toyear fluctuations in bank profits and, indeed, cause profits to move inversely with earnings in the short run. In 1966 the “average” District bank showed an increase in net income after taxes in relation to both capital accounts and total assets despite losses on nonoperating transac tions. But losses on securities were concen trated at the large banks, and for banks with deposits of 50 million dollars or more the average ratio of profits to capital declined. This reflected both the greater need of large banks to liquidate securities to meet loan de mand, heaviest from large businesses, and the greater tax advantage in taking losses for large banks subject to the maximum corpo rate tax rates. The effect on profits at both large and small banks was much less, how ever, than in 1959 when the rise in interest rates closely followed the very sharp decline in yields (and rise in securities prices) that occurred in late 1957 and early 1958. With some slackening of loan demand in recent months, banks have again been acquir ing substantial amounts of U. S. Government N onoperating transactions caused less divergence in 1965 between earnings and profits than in 1959 banks with deposits o f $ 5 0 million or more percent of capital accounts . . . especially at small banks i4 r banks with deposits o f $ 5 m illio n o r less _________ i_________ i 1958 NOTE: banks. i i_________ i_________ i I9 6 0 1962 i_________ i_________ i 1964 1966 Data are averages of ratios for individual and municipal securities. While rising prices of securities have increased the potential for capital gains, they also have entailed lower interest income. Recent reductions in lending charges, as well as lower loan-to-asset ratios, likewise will adversely affect operating rev enues and, unless offset by reduced expenses, will result in lower earnings, though not necessarily lower net income after taxes. Banks with a substantial volume of largedenomination certificates of deposit have al ready reduced the rates paid on these instru ments. But most banks appear reluctant to adjust rates on either consumer-type CDs or passbook savings in response to changing monetary conditions. 5 Federal Reserve Bank of Chicago Bank markets and services Summary of three surveys of bank customers 6 " \ ^ / h i l e a major function of the Federal Reserve System is to provide monetary and credit conditions conducive to the achieve ment of full employment and sustained eco nomic growth at stable prices, an important additional responsibility is the supervision of commercial banks in the public interest. Experience has demonstrated that unre strained competition may endanger the sol vency of some banks. On the other hand, there is strong reason to believe that a large measure of competition helps to assure that banks will be operated efficiently and provide their customers high-quality services at mini mum prices. Public policy, therefore, under takes to assure the maximum degree of com petition consistent with the survival of banks.1 The execution of such policy requires in formation on the nature and quality of serv ices offered by banks and the size and charac ter of the areas from which banks draw their customers. For example, what determines the size of area a bank serves; how is area size affected by size of bank and size and type of customer; how do customers select a bank; what bank services do customers use; are customers satisfied with the quality, cost and number of bank services and how do cus tomers view the services provided by non bank financial institutions in comparison with those provided by commercial banks? In an effort to acquire additional informa tion on such questions, a number of surveys of bank customers are being conducted by the Federal Reserve System in various parts of the country. The Federal Reserve Bank of Chicago has undertaken in recent years sur veys in several Midwest communities. This article summarizes the major findings of three surveys—of business firms and households in Appleton, Wisconsin and Elkhart, Indiana and of business firms in Cedar Rapids, Iowa.2 M an u fa c tu rin g centers Appleton, located in northeast Wisconsin, Cedar Rapids, in northeast Iowa, and Elk hart, in north central Indiana, are all dynamic manufacturing centers but differ in many other respects. The populations of Appleton and Elkhart are only about one-half that of Cedar Rapids which has some 100,000 in habitants. Elkhart is only 15 miles from a larger metropolitan area— South BendMishawaka. However, Cedar Rapids is more than 70 miles from the nearest larger centers —Des Moines and the Quad Cities (Daven port, Moline, East Moline and Rock Island); and Appleton, is about 100 miles from Mil waukee, the nearest major metropolitan area. The three cities also differ with respect to banking structure. Unit banking prevails in T o r a more detailed discussion see Business Conditions, “Competition in Banking”— January 1967, “The Issues,” and February 1967, “What is Known? What is the Evidence?” ^Copies of the Cedar Rapids and Elkhart reports are available from the Federal Reserve Bank of Chicago; copies of the Appleton report will be available in the near future. Business Conditions, May, 1967 Iow a and W isconsin, while countywide branch banking is Both businesses and households use permitted in Indiana.3 On the local banks almost exclusively dates of the surveys, there were five banks in Appleton; six banks Business firms Households Cedar Location of in Cedar Rapids with two addi Appleton Rapids Elkhart Appleton Elkhart primary bank tional banks in the adjoining, but (percent) considerably smaller, community City 94 96 96 96 96 of Marion and three banks in County 2 Elkhart which operated eight 1 1 1 outside city 0 State outside branches within the city limits. 3 county 4 0 0 3 (Subsequent to the survey, two of Chicago 1 2 2 0 0 the banks in Elkhart merged.) Other 1 1 0 0 0 The banks in all three cities varied 100 Total 100 100 100 100 considerably in size. The surveys were based on ran dom samples of business firms in Appleton, Cedar Rapids and Elkhart and of characteristics of respondents represented by households in Appleton and Elkhart. The small numbers of businesses or households. While all three surveys were designed to surveys of Appleton and Elkhart were con ducted in 1966 through the use of mail ques answer the same basic questions, the survey questionnaires were slightly different. Thus, tionnaires. Replies were received from about 125 business firms and 170 households in answers to some questions are available for Appleton, and 285 business firms and 165 only one or two of the areas. households in Elkhart. The business firms in Firms use local banks Cedar Rapids were visited personally in May All three surveys found the market areas 1965 by representatives of the Federal Re serve System. One hundred forty of the for banking services to be strongly localized. approximately 1 ,0 0 0 business firms in the Business firms, except for the very largest immediate Cedar Rapids area were inter establishments, used banks in their own city viewed. almost exclusively. The samples of both businesses and house Many of the businesses used more than holds were selected to be representative of one bank. This was the case for one-half of all firms and households in the areas sur the Elkhart firms and more than one-third of veyed. Nevertheless, great emphasis should the firms in Appleton and Cedar Rapids. not be placed on small differences in the sur Quality of services was cited most fre vey results, especially for those classes or quently as the most important consideration in the selection of a primary bank. However, 3Banks in Wisconsin are permitted to maintain most firms also reported that their primary the branches they operated prior to 1947 when further organization of branch offices was pro bank is the bank most convenient to them. hibited. However, bank holding companies are per Business firms by and large do not consider mitted and two of the smaller Appleton banks are banks located outside the community to be owned by the same interests that own each of the readily acceptable sources of banking servtwo largest banks. Federal Reserve Bank of Chicago ices. This was indicated by their answers to questions asking which banks would be con sidered if, for any reason, they were to change their present banking connection. Only about one-half of the firms in Appleton and Elkhart listed “alternative” banks, and, again, except for the very largest firms already using banks outside the local area, these alternatives were located largely within the respective cities. Business firms that have given some con sideration to alternative banking affiliations apparently are well informed of banking services available in their community. The large majority of the firms citing alternate banks reported that they are informed of prices and policies at such banks, primarily through direct contact. Bank lo y a lty strong 8 Business firm loyalty to their banks ap pears very strong. Less than 10 percent of the firms in either Elkhart or Cedar Rapids re ported having changed their primary bank within the last 10 years. It appears that once having selected a primary bank, firms change banks very infrequently—usually only after experiencing a substantial disappointment such as a loan turndown. It may be that the “cost” of changing banks is quite high for business firms and that this discourages frequent changes. Business customers tend to develop a close relation ship with their banks, which in turn acquire considerable expertise in serving the particu lar needs and problems of the firm. These banks, therefore, are able to provide estab lished customers needed banking services with a minimum of inconvenience and cost. Such a relationship is developed only over a period of years and much time would be lost and considerable expense incurred by firms undertaking to make frequent changes in their banking connections. Few customers consider a nonlocal bank an acceptable alternative Location of alternative Households Business firms Appleton Elkhart Appleton Elkhart (percent) City State outside city Other 45 43 59 0 6 2 7 1 2 2 52 100 No alternative 54 49 0 39 Total 100 100 100 39 Almost all firms use the demand deposit services of their primary bank. Loans were the next most frequently used service, being reported by more than 60 percent of the firms. Comparatively few firms used time deposit services. Relatively more of the large firms than small firms used bank loan services. Large firms borrowed primarily for working capital needs while small firms borrowed for a vari ety of purposes. The average size of loan, of course, varied directly with size of firm. Customers satisfied Business firms were generally satisfied with the quality of banking services, although deposit services were rated somewhat more favorably than loan services. Few firms reported that they “shopped” for credit. Only 10 percent of Cedar Rapids respondents believed it necessary to contact a number of banks before entering into credit agreements. The vast majority believed that they were receiving the best possible terms at their banks, that rates were approximately uniform at all banks or that shopping entailed more trouble than it was worth. Although commercial banks are very im portant, they are not the sole providers of credit to business firms. Firms may obtain credit from a large variety of nonbank insti- Business Conditions, M ay, 1967 tutions, including their suppliers, finance companies, acceptance companies, insurance companies, savings and loan associations and small business investment corporations. Onefifth of both the Appleton and Elkhart firms reported having obtained credit from non bank sources at some time within recent years. Of these, the larger firms cited pri marily the unavailability of sufficient credit at banks or the need for longer-term loans as the major reason for using nonbank credit; the smaller firms often noted lower costs and greater convenience as the reasons. Most firms currently using credit from nonbank sources also reported having bank loans currently outstanding, suggesting that nonbank credit is used to supplement, not substitute for, bank credit. Those firms which had used nonbank credit in recent years rated bank loan services less favorably than those which had not used such credit. Households also b a n k locally Households also tend to use local banks almost exclusively. In Elkhart, for example, the only households with a primary bank out side the city also had the head of the house hold employed outside the city and typically used banks in the city of his employment. Households headed by retired persons tended to use a larger number of banks than house holds headed by employed persons, possibly reflecting the distribution of funds among a number of banks in order to make maximum use of deposit insurance coverage. More than two-thirds of the households reported that their primary bank was the bank most con venient to their place of residence, employ ment or both. Appleton and Elkhart households also ex pressed an overwhelming preference for local banks in case they were ever to consider changing their present banking connections. Checking accounts are the most widely used service Business firms Service Appleton Cedar Rapids Households Elkhart Appleton Elkhart (percent of customers at primary bank) Checking account 98 100 99 92 86 Time deposit Loan 10 11 26 61 72 70 58 64 35 32 Less than 10 percent considered banks neighboring cities as convenient alternatives for checking account services, savings ac counts or loans. The majority of the house holds reported they were aware of interest rates paid by “alternative” banks on savings accounts while less than half reported they were aware of rates charged by these banks on loans. This undoubtedly reflects both the greater frequency of use of savings deposit services by households and the more exten sive advertising by banks of rates paid on savings accounts. The bank-customer relationship may be less strong for households than for business firms. In Elkhart proportionately more house holds than businesses reported having changed their primary banking connection in recent years. This may reflect either that banks value household customers less highly than business customers and thus act less vigorously to retain these accounts, or that households require less specialized banking services than do most businesses and thus find it easier and less costly to shift to different banks. Only a small number of households reported they had changed banks in recent years because they moved their residence or because a new branch had opened at a more convenient location. Households tended to make greatest use of Federal Reserve Bank of Chicago 10 bank checking serv ices, followed respec Customers are generally satisfied tively by savings ac with banking services count services and Business firms Households loan services. Loan Deposit Loan Quality of Deposit Loan services were service Appleton Elkhart Appleton3 Elkhart Appleton Elkhart Appletonb Elkha obtained almost ex (percent of respondents) clusively at the pri Excellent 77 73 54 56 84 64 32 40 mary bank. HigherGood 10 19 16 16 8 23 2 15 2 3 Adequate 3 5 3 0 0 4 income househ o ld s Poor 0 1 1 3 1 2 0 1 had larger loans out Not rated 11 7 23 20 8 9 65 39 standing and made Total 100 100 100 100 100 100 100 100 proportionately great aBusiness loan. er use of m ortgage blnstalment loan. loans, single payment perso n al sig n atu re — — —— loans and loans se cured by stocks, bonds or insurance policies savings and loan associations and credit unions primarily for savings account services than did the lower-income households. The lower-income households used predominantly and mortgage companies for loans. instalment loans. Households headed by Sum m ary white-collar workers made the greatest use of bank loan facilities, while retiree households In summary, the surveys reveal that acces used these services only infrequently. sibility is the primary factor determining the selection of banks by both business firms and O n e -th ird b a n k b y m ail households. Almost all of the firms and One-third of the Elkhart household re households use only local banks and consider spondents use the mail to conduct some of only other local banks as possible alternatives their business with commercial banks or non to their present banks. In addition, the large bank financial institutions. The overwhelming majority of households and, to a somewhat number of these use local or nearby institu lesser extent, business firms use a primary tions. Only a small minority reported using bank that is most convenient to them. West Coast or other distant institutions. Bank customers appear generally satisfied Households, like business firms, appear with the quality of bank services. Almost all generally satisfied with the quality of bank customers use checking accounts and many ing services. Again, loan services were rated households use time deposit services. Twosomewhat less favorably than deposit serv thirds of the firms and one-half of the house ices, possibly reflecting the more widespread holds also use bank loan services. Nonbank use of the latter. financial institutions are used by about oneMore than half of the households reported half of the households—which use them for currently using the services of one or more both credit and savings services— and onefifth of the firms—which use them primarily nonbank financial institutions, mostly savings for credit. and loan associations. The households used Business Conditions, May, 1967 1966 farm loan survey* Most banks extend credit to agriculture, some have inadequate funds and small loan limits cV_>redit plays an extremely important role in modern agriculture and its importance seems certain to increase further. The amount of capital invested in United States agricul ture and the amount of funds needed to carry on day-to-day farming activities have risen dramatically as farming has become increas ingly technical and farms more highly mechanized. The value of agricultural assets nearly doubled during the past decade, and farmers’ annual cash outlays for operating expenses have increased nearly one-half. These increases have been financed in part by annual additions to farm debt. Total farm debt, currently estimated to total nearly 45 billion dollars, has more than doubled since the mid-Fifties. That commer cial banks have provided about 6 billion dol lars—or about one-fourth—of the more than 2 0 billion increase in outstanding farm debt since 1956, reflects their important role as a source of agricultural credit. This sharp ad vance in farm debt and the important role of banks in providing credit service to agricul ture were important factors prompting the Federal Reserve System, in cooperation with the American Bankers Association and the Federal Deposit Insurance Corporation, to undertake a nationwide survey in 1966 of agricultural loans held by commercial banks. *This is the first in a series of articles on the 1966 agricultural loan survey. The recent survey was similar to studies con ducted in 1947 and 1956. A representative sample of bankers were requested to supply data concerning individual borrower and loan characteristics for a portion of their outstand ing farm loans as of midyear. These data were then expanded to reflect the total of farm loans for all banks. N e a rly a ll banks extend credit to farmers percent 40 r of D istrict banks Federal Reserve Bank of Chicago S even th District banks 12 The extension of at least some credit to agriculture by nearly all banks in the Seventh Federal Reserve District reflects the impor tance and wide dispersion of this industry in the Midwest. More than 90 percent of the more than 2,500 banks in the District had agricultural loans on their books as of mid1966. Such loans, nevertheless, are much more important at some banks than at others, both in terms of total value of such loans held and as a portion of all loans. For example, about one-half of the agricultural credit outstand ing is held by approximately one-fifth of the banks. Nearly a third of the banks had 1 million dollars or more of farm loans out standing; about 3 percent had more than 3 million outstanding. Agricultural loans are a relatively large portion of total loans at many banks, espe cially many small banks. As of mid-1966 there were 1,330 banks— about half of the total number in the District— at which loans to farmers comprised 25 percent or more of their total loans outstanding. Moreover, at about one-fourth of the banks the proportion was 50 percent or more. In Iowa, where agriculture is relatively more important, farm loans accounted for 50 percent or more of total loans in 60 percent of all banks; in Michigan, where agriculture is relatively less important, only 4 percent of the banks had such a large proportion of farm loans. (The small proportion for the Michi gan banks is also the result of the existence of branch banking in that state. When banks operate offices in several communities, the number of banks serving predominantly agri cultural customers tends to be reduced.) Despite the widespread participation by District banks in the financing of agriculture, their relative importance as suppliers of agri cultural credit has declined in recent years. These banks provided about 82 percent of the non-real estate debt and about 16 per cent of the real estate debt outstanding at institutional lenders in 1956; in 1966 these proportions had declined to about 75 and 14 percent, respectively. There is some dis agreement whether these declines indicate that farmers’ credit needs are growing faster than the ability of commercial banks to serve them. A number of agricultural and banking spokesmen have concluded that this is the situation. Not all agree, however, and some have asserted that even if this situation does exist, it need not remain so—that banks can adapt and can serve the changing credit needs of agriculture quite adequately. Banks in agricultural areas, as elsewhere, have experienced a rise in loans relative to deposits in recent years. This reflects the rapidly expanding loan demand and the less rapid pace of deposit growth. Also, the amount of credit required by most individual farmers has risen, reflecting changes in size and characteristics of farms. Many banks have not raised their capital, and thereby their Banks w ere unable to grant some loans from their own resources because of legal limit Loans not granted to total farm loans outstanding (percent) Size of capital and surplus* 100300 300500 500- 1,000- Over 1,000 2,000 2,000 1.0-4.9 2,716 3,164 120 150 5.0-9.9 6,692 2,496 - - 120 150 10.0-19.9 Total Total Requests exceeding legal limits * 17,319 — 26,727 5,660 — 6,150 500 9,688 — 17,319 500 33,157 *Amounts shown are in thousands of dollars. Business Conditions, May, 1967 maximum loan size. Consequent Agricultural banks are ly, they have been unable to pro generally smaller . . . vide comprehensive credit service 30 r to all of their farmer customers. A portion of the survey, there 2 5 .n o n a g ricu ltu ro l banks fore, was designed to obtain in formation on the recent experi ence of country banks in serving farmers’ credit needs and to iden tify any factors that tend to restrict the flow of agricultural credit. Banks in the Seventh Federal Reserve District apparently have encountered only nominal diffi culty in meeting farm credit de mands. Indeed, more than 90 percent of the banks reported no difficulty in obtaining funds to serve their regular farm custom ers. This is consistent with the . . . and have lower loan-to-deposit ratios relatively small volume of loans in comparison with deposits at many 2o r country banks. Of the 1,330 “agricultural banks” (those banks at which loans to farmers com prise 25 percent or more of their total loans outstanding), 236 or nearly one out of five had loan-todeposit ratios below 40 percent and 69 of these had loan-deposit ratios below 30 percent. In some instances these ratios may reflect *Bank$ with agricultural loans equal to 25 percent or more of total restrictive lending practices; in loans. others, relatively weak local de excess of 70 percent. mand for credit. Most of the banks reporting difficulty in More than 150 District banks, about 6 serving the credit requirements of their farm percent of the total, did experience difficulty customers apparently were aggressively seek in obtaining adequate funds from their own ing deposits. Overall, they reported paying resources to serve the credit requests of their farm customers. Generally, these banks had higher rates on savings deposits than did relatively high loan-deposit ratios. Nearly banks with an abundance of funds available. More than half were paying the maximum three-fourths of the banks had ratios of 60 percent or more, and 7 percent had ratios in rate of 4 percent for savings deposits while percent of D istrict under 200 banks 2 0 0 -3 0 0 s ize percent of D istrict under 30 of 3 0 0 -5 0 0 cap ita l and 5 0 0 - 1,00 0- 1,000 2,00 0 s urp lu s (thousand 2,000 and ov e r dollars) banks 3 0 -3 9 to ta l 4 0 -4 9 lo a n s os 5 0 -5 9 percent of 6 0 -6 9 70 and over de po sits 13 Federal Reserve Bank of Chicago 14 about one-third reported paying rates of less than 3.5 percent. In comparison, only about one-third of those banks experiencing no dif ficulty reported paying maximum rates. Moreover, a relatively large proportion of those banks experiencing no difficulty (more than 10 percent) reported paying rates of less than 3 percent. A more prevalent problem for Seventh Dis trict agricultural banks than their aggregate loan demand was the size of individual loans. As farms have expanded in size and in capital invested, the credit needs of some farmers have outgrown the maximum credit local banks can extend to individual borrowers. National banks cannot extend credit to indi viduals in amounts exceeding 10 percent of their capital and surplus, and state banks (although laws governing them vary from state to state) usually cannot loan more than an amount equal to 2 0 percent of capital and surplus to individual customers. Because of the relative smallness of many rural banks the amount of funds that may be lent to an individual is severely restricted. As of mid-1966, more than two-fifths of the banks in the Seventh District had capital and surplus of 300 thousand dollars or less. More than 80 percent of these were agricultural banks. Moreover, of these agricultural banks, 562, or about 40 percent, had capital and surplus under 2 0 0 thousand dollars, and at 87 the capital and surplus were under 100 thousand. Largely because of the relatively small amount of credit that could be extended to individual customers, 430 banks, or about 17 percent of all banks in the District, were unable to grant loans to some of their farm customers because the loan request exceeded the banks’ legal limit during the 12 months ending June 30, 1966. Of the banks reporting loan requests that exceeded their loan limit, nearly one-third had capital and surplus accounts of less than 2 0 0 thousand dollars, and nearly four-fifths had capital and surplus accounts of less than 300 thousand. About 2,000 loan requests were reported to have exceeded the local banks’ maximum lending limit during the year ending June 1966; the aggregate value of such loans was about 33 million dollars, or about 2 percent of total farm loans out- Business Conditions, May, 1967 standing on June 30, 1966. Participation loans are used more by smaller banks O u tsid e sources used A num ber of banks sought Participation loans funds from outside sources in an originated by reporting bank Participations to attem p t to o b tain ad d itio n al Held by Held by total agricultural Size of capital Total reporting other loans outstanding financing for their farm custom Number bank and surplus value bank Number Value ers. More than one-third of the (thousand dollars) (million dollars) (percent) banks in the District, or a total of Under 200 7.4 2.3 573 5.1 0.59 2.13 978, utilized the services of other 736 14.8 10.2 4.5 0.42 3.87 200-300 credit institutions during the 12 300-500 382 13.9 6.5 7.4 0.18 2.91 month period for this purpose. 19 0.9 0.7 0.02 0.34 500-1,000 1.6 2.8 1.2 1.6 1,000-2,000 105 0.10 1.36 The major source of such funds 2,000 and over 2.4 4.2 0.02 11 6.5 2.33 was other banks. A total of 840 26.3 20.7 0.25 2.06 Total 1,826 47.0 banks, or about 85 percent of those utilizing outside sources, obtained at least a portion of their additional funds from other banks. Indeed, additional funds from insurance companies; for about two-thirds of the banks, this was the 152 banks obtained 75 percent or more of sole source of such additional funds. their outside funds from this source. About A number of the banks also obtained assis 46 banks obtained at least some additional tance from other financial institutions (in funds through Agricultural Credit Corpora varying degrees). Of the 978 banks utilizing tions; for 35 banks, such corporations were outside sources, nearly one-third obtained the chief source of additional funds. P articip atio n s Banks w o rkin g with other financial institutions Source of outside funds Percent of outside Agricultural funds obtained Correspondent Insurance credit from each source banks companies corporations (percent) (number of banks) None 119 675 911 1-24.9 200 37 13 25-49.9 9 86 50-74.9 10 9 10 621 152 25 19 19 19 978 978 978 75 and over Not reported Total — Loan participation agreements between banks are the primary means utilized in ob taining additional funds from other banks to accommodate farm customers. As of midyear 1966, outstanding participation loans origi nated by reporting banks numbered about 2,000 and amounted to about 47 million dol lars. Of the total amount originated by re porting banks, other banks held slightly over 20 million dollars. While the volume of loan participations is sizable, it is small in comparison with the total volume of agricultural loans. The amount of participation loans accounted for only about 2 percent of total agricultural loans outstanding and the number of partici pations accounted for less than one-fourth of 15 Federal Reserve Bank of Chicago percent of all farm loans. The relative importance of participation loans, of course, varies widely among banks. The smaller banks account for the bulk of such loans, and as a result, participation loans at these banks make up a larger portion of their total farm loans than for larger banks. As of midyear, more than 90 percent of the number of participation loans outstanding and about three-fourths of the dollar value of such loans were originated by banks with under 500 thousand dollars in capital and surplus. Banks with under 300 thousand dol lars in capital and surplus accounted for about 70 percent of the number and about one-half of the dollar value outstanding. Among individual banks, 86 originated par ticipation loans in amounts in excess of 5 percent of their total farm loans outstanding; 71 banks had originated participation loans in amounts exceeding 10 percent of their total agricultural loans outstanding. 1 A lo o k to th e fu tu re The problems surrounding the financing of agriculture in the years ahead will undoubted ly intensify. Pressures to enlarge farm size, the need to further mechanize and the trend 16 toward a larger portion of production items being purchased off the farm— all point to a further increase in the credit demands of indi vidual farm borrowers as well as additional growth in the overall volume of agricultural credit. Also, it is likely that many country banks will continue to find it difficult to at tract sufficient deposits to keep pace with the expected rapid growth in farm credit require ments. Moreover, it may not be feasible for many of the small country banks to increase their maximum lending limit in order to ac commodate all of their larger farm cus tomers. Many rural banks, therefore, most likely will need to intensify their efforts to secure outside assistance to accommodate the larger size and volume of agricultural loans. Possibly because of difficulty in obtaining bank financing in the past, many farmers have apparently sought other sources of credit as indicated by the decline in the proportion of farm credit held by banks. The degree to which rural banks can adapt to the rapid changes currently taking place will largely determine whether their role as a major supplier of farm credit is maintained or diminished further and will influence the development of modern agriculture.
@FedFRASER