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FARMLAND

. . .

An Increasingly Valuable

Asset

Sada L. Clarke

“Land is a many-splendored
thing. To some, it is soil- how
many
will it raise?
To others, it is a small piece of the earth’s surface,
something

to be cherished

it is space- something

and enjoyed

like an old masterpiece.

on which to build a home, an apartment,
-William
“Values

“Meadow
Farm to Be Sold.”
This headline, announcing
the sale of the Caroline
County, Virginia,
birthplace
of Triple Crown champion
Secretariat
and
other champions
such as Hill Prince and Riva Ridge,
appeared
in the Richmond
Times-Dispatch
late
One of the nation’s most respected
last September.
horse farms, the Meadow was a 2,6OO-acre land and
breeding
operation
with a reported
asking price of
$2,650,000.
This pencils out to a little more than
$1,000 per acre.
News stories have since revealed
that the Meadow was purchased
by a group of Virginia investors shortly after it was put on the market.
The actual selling price was not disclosed, but it was
said to be very close to the asking price.
While the
sale price will undoubtedly
have a significant
impact
on the value of land nearby, it by no means sets a
precedent.
Farmland
values per acre in 1974, for
example,
averaged
$1,000 or higher in nearly onetenth of all the counties in Virginia.
For Would-Be

Landowners

Market

values

such

as these are enough
to discourage
many potential
owners of farm real estate, especially those thinking
of buying farmland
as an investment
or those toying
with the idea of purchasing
a little tract in the country for retirement.
Would-be
buyers need to remember that the market value of farmland
depends
on its potential
use.’
Generally,
the more intensive
the use, the higher the price. A nationwide
survey of
Note:
The author wishes to thank Cynthia Vaughan,
Senior Research Assistant, for her very able and willing
assistance in preparing the statistical material and preliminary drafts of the charts for this article.
1 USDA, Economics, Statistics, and Cooperatives Service,
Farm Real Estate Market Developments, CD-83 (Washington, July 1978), Table 37.

H. Scofield,
and Competition

bushels of corn
rare as a gem,
To still others,

a shopping

center.”

for Land’

the price per acre and probable

use of farmland

five

years after purchase, conducted during the year ended
March 1, 1978, revealed
that land expected
to remain in agriculture
sold for an average of $595 per
acre.
Farmland
to be used for forestry
went for
$373- the
lowest price. On the upper end, land sold
for commercial
and industrial
development
brought
$2,008 per acre, while tracts intended
for rural residences went at $1,024.
Land is selling at premium prices throughout
much
of the District and the nation.
United
States farmland, on the average, was valued at a record $490
per acre on February
1, 1978. On that same date,
farm real estate in the Fifth Federal Reserve District
sold for an average of $705 per acre-also
a record.
Average
market values ranged from $403 in West
Virginia

to $1,578

in Maryland.

Would-be
buyers of a complete farm, rather than
part of a farm, will find that farm real estate values
per farm have increased
at a much faster rate than
values per acre. This is due to the steady increase in
the average size of farms.
Today, for example, the
value
of a Fifth
District
farm averages
around
$101,925, more than double its 1972 value.
Values
per farm range from $71,300 in West Virginia
to
$263,000
in Maryland.
North
Carolina,
with a
$79,100 value per farm, has the second lowest average.
Higher
priced farms can be found in South
Carolina,
where the average is $92,900, and in Virginia where the average value stands at $118,800.
The potential
buyer will also find
wide variations
in the average values
pending
on the type of farm, its size,
of its sales. Tallies of the 1974 census
instance,
that the value of land and

FEDERAL RESERVE BANK OF RICHMOND

that there are
of farms, deand the value
revealed, for
buildings
for
3

Fifth

District

farms

with

sales

of $2,500

and

over

averaged $118,921 but ranged from a low of $56,725
for farms with sales under
$5,000 to a high of
$1,091,059 for farms with sales of $500,000 and over.
The value of farmland
and buildings
per farm increased
as the value of farm products
sold rose.
Similarly,
the value of farm real estate on farms with
sales of $2,500 and over varied widely by type of
farm.
In South Carolina,
for example, dairy farms,
valued at $242,262 per farm, had the highest average,
while horticultural
specialty
farms with a $56,612
price tag had the lowest.
South Carolina
tobacco
farms, producers of the major source of farm income,
were

valued

at an average

For the Would-Be

of $88,934

per farm.

Owner of Farmland

The nation’s farmland, on the average, was valued
at a record $490 per acre on February 1, 1978.
On that same date, farm real estate in the
Fifth District sold for an average of $705 an
acre,
with the market value ranging from $403 in
West Virginia to $1,578 in Maryland.
Market values of District farms, according
to the
census, are relatively
low when compared
to market
values nationally.
This situation
most likely results
from the fact that the average size farm in the District is much smaller
than the national
average.
Market
values of 48 percent
of all District
farms
were less than $40,000 in 1974, for example,
while
the values of 29 percent
ranged
from $40,000 to
$99,999.
The remaining
23 percent were valued at
$100,000 and over.
By contrast,
only 33 percent of
the nation’s farms were valued at less than $40,000,
while 37 percent had market values of $100,000 and
over.
A Backward
Glance The movements
of District
and national
farmland
values per acre have shown
marked similarities
since records began back in 1912.
During
much of this period-up
through
the midfifties, in fact-farmland
prices followed the movements of farm prices and farm income.
But in the
years that have followed, with the exception
of 1972
and 1973, farmland
prices have continued
to advance
despite an irregular
downtrend
in farm income.
Much of the current
boom in farmland
values
began back in 1972 with the huge grain sale to
Russia.
Farmland
became such a favored investment
that its market value in the District
has jumped an
average of 104 percent in the six years since, rising
at an average
annual
rate of 12.6 percent.
The
largest rise in a single year occurred
in 1973 when
values zoomed an unprecedented
26 percent.
The
4

ECONOMIC

REVIEW,

only other

year

that

gains

in land values

to equaling
this increase was
ence of World War I pushed
But following the increase
turned
downward,
finally

came close

1919, when the influvalues up 23 percent.

of 1919, farmland
values
hitting
bottom
with the

crash of 1933 when they plummeted
almost 20 percent in a single year. Market values of farmland have
moved steadily upward since the Great Depression,
with only minor
interruptions,
mostly of one-year
duration,
occurring
in 1938, 1949, and 1953.
The rise in farmland
values accelerated
notably
after the start of World
estate values more than

War II.
doubled

District
by early

farm real
1949, re-

sponding
in part to a sharp gain in farm income.
They then fell slightly, largely because of a drop in
farm prices and income that accompanied
a downturn in overall economic
activity.
The 1949 dip was of short duration,
however.
Values of farmland
began to advance again with
outbreak
of war in Korea in June 1950, rising

the
by

March 1953 to a new high some 30 percent above the
pre-Korean
level.
They
held at this new level
through
early 1954.
Meanwhile,
prices of farm
products,
which began to decline after reaching
an
all-time high in February
1951, dropped sharply by
early 1954.
By mid-1954,
farmland
values
in the District
turned
upward
again despite continued
declines
in
the prices and incomes
received
by farmers.
The
escalation
in farm real estate prices has continued
since, sometimes
at a slower, sometimes
at a faster,
pace.
Meanwhile,
net farm income, except in 1972
and 1973, has continued
on an irregular
downward
course, moving generally
counter to farmland
prices.
INFLUENCES

Market

values

IN THE LAND

of farmland

are

MARKET

controlled

by the

classic law of supply and demand.2
Both supply and
demand factors play strong roles in determining
the
price. When limited supplies offered for sale coincide
with escalating
bids from would-be
purchasers,
the
market price climbs.
The supply and demand equation is influenced
by many factors whose importance
varies widely, not only from state to state, but also
from county
to county,
and even within the same
Most of these factors reflect the different
county.
interests competing
for farmland
on the demand side.
Farmers’
demand
for land to enlarge their farming
operations
is one
of the strongest
factors
forcing
prices upward.
But the demand
for land for non2 USDA, Economic Research Service, “High Stakes in
the Country,” The Farm Index, Vol. XVI, No. 3 (Washington, March 1977), p. 11.
MARCH/APRIL

1979

Chart

FARM
1967

=

REAL ESTATE:

100

Note:
Source:

United

Farmland

and buildings,

U. S. Department

March

INDEX

NUMBERS

1

OF AVERAGE

States and Fifth District,

1 values for

1940-1975

and February

VALUE

PER ACRE

1940-1978

1 values for

of Agriculture.

FEDERAL RESERVE BANK OF RICHMOND

1976-1978.

farm uses has also become an increasingly
important
influence
competing
in farm real estate markets.
A
high rate of inflation,
anticipated
capital appreciation,
tax shelters,
and the disappointing
performance
of
the stock market
nonfarmers
into
“For

Sale”

“They’re

have been among the factors luring
the land-buying
rush since 1972.

Signs
not

Scarce

making

The

anymore

old timer
land”3

who
must

said
have

been thinking about the small supply and the scarcity
of listings.
The number
of farms today is limited.
But the number
for sale is even more limited.
Reportedly,
only around 2 percent of the nation’s total
acreage in farms typically
changes hands each year.
This situation
sets the stage for stiff competition
and
higher bidding in the event of a sudden increase in
demand for farmland.4
Voluntary
and estate sales are generally
assumed
to reflect the supply of farmland
put on the market
in a given period.5
On this basis, the supply
of
farmland
offered for sale has been trending
downward since the midforties,
although
a temporary
increase did occur during the 1972-1975 period of high
net farm incomes.
By 1978, voluntary
and estate
sales were only about one-fifth as large as they were
during the record year 1944. This downturn
in the
supply of land for sale has been one of the prime
factors
influencing
farmland
values,
especially
in
recent years.
Farmers
Still
Leading
Buyers
Farmers
who
want to enlarge their farming operations
continue
to
be the number
one purchasers
of farmland,
despite
the growing
competition
from land-hungry
nonfarm
buyers.
Farm expansion,
the largest single reason
for buying
farmland,
is definitely
on the uptrend.
Last year, for instance, almost 60 percent of all farmland transfers- up
from less than 30 percent in 1954
-were
made to enlarge existing
farms.
Parcels or.
tracts sold for enlargement
purposes
usually
bring
better prices than those sold as complete farms.
But
since the turnover
rate for farmland
is generally
low,
farmers
who want to expand
will usually
pay the
price to meet their competition.
When a neighboring
farm is put on the auction block, it isn’t at all un3 Bill Humphries, “They’re Not Making Anymore Land,”
News and Observer (Raleigh, October 9, 1960), Sec. III,
p. 1.
4 USDA, Economics, Statistics, and Cooperatives Service,
“Real Estate,” Farmers’ Newsletter, G-3 (Washington,
August 1978), p. 2.
5 Marvin Duncan, “Farm Real Estate Values-Some
Important Determinants,”
Monthly Review, Federal Reserve Bank
of Kansas City (Kansas City, March 1977),
pp. 6-7

6

ECONOMIC

REVIEW,

common for farmers living close by to be the strongest bidders.
They know that with the aid of presentday machinery
and equipment,
they can increase their
volume of business and spread overhead
costs over
the additional
acres, thus reducing
average costs per
unit of output.
Many farmers
linas’ flue-cured

in the heart of the Virginia-Carotobacco-growing
area have sought

more land for still another reason:
to increase their
acreage allotments.
Buying land that carries a tobacco allotment is the only realistic way to accomplish
this since an allotment
is tied to the land and not to
the landowner.
Such farmland
is in strong demand
and consequently
it carries a much higher price tag
than acreage which has no allotment.
“They’re

not making anymore

land.”

-Author Unknown
Growth in part-time
farming has also contributed
to the increasing
demand for farmland.6
Part-time
farmers in 1975, for example, bought 12 percent of
all farm tracts sold nationally
compared
with only 6
percent
in 1954.
Because those farming
part-time
usually buy fewer acres than full-time
farmers, they
generally
pay more per acre than do the full-time
operators.
In other words, the smaller the farm tract
purchased,
the higher the price per acre. During the
year ended last March
1, for example,
farm real
estate transfers
that were smaller
than 100 acres
typically
commanded
more than twice the price of
the overall national
average.7
The generally
higher
price of land bought by part-time
farmers is also due
to factors other than the “volume
discount
effect”
cited.
Part-time
farms, for instance, are more likely
to be located near cities, and the average
price is
higher because of the location.
Off-Farm

Income

Significant

Farm

families’

nonfarm
income has become an important
factor in
the land market, enabling many of them to bid for the
dwindling
supply of land that is for sale (see Chart
2).
Such earnings
have shown a steady growth for
many years, providing
a supplement
to farmers’ net
farm income and increasing
their ability to invest
and to service real estate debt.8
The situation
is
especially
true for farm operator
families with farm
6 USDA, Farm
83, Table 22.

Real Estate

Market

Developments,

CD,-

7 USDA, Farm
83, Table 38.

Real Estate

Market

Developments,

CD-

8 USDA, Farm
83, p. 7.

Real Estate

Market

Developments,

CD-

MARCH/APRIL

1979

sales under $10,000, for their average
off-farm income is generally
equal to, or far exceeds,
their
average debt.9

9 Readers may be interested in knowing that the U. S.
Department of Agriculture’s classification
of farms by
value of sales lists three classes with farm sales under
$10,000. Farm operator families in the $5,000 to $9,999
class had an average off-farm income in 1977 of $12,179,
around 120 percent of their average debt of $10,195.
Those with sales of $2,500 to $4,999 received an average
off-farm income of $14,559, far in excess of their debt
which averaged $6,727.
The average farm family with
sales valued at less than $2,500,. however, had off-farm
earnings of $15,077 compared with debt of only $3,905.
While these small farmers received the largest off-farm
income, they also owed the least debt.
Economics,
Statistics, and Cooperatives Service:
Farm

nonfarm
earnings
per farm
By the midsixties,
family equaled the family’s net farm income.
But
today’s farm families, on the average, earn more from
their sources
of off-farm
income
than from their
Of each $100 of income received
farming operations.
by farm families in 1977, for instance, $61 came from
nonfarm sources.
On the average, their total income
from farm and nonfarm
sources amounted
to a little
more than $19,000.
Of this sum, around $7,400 was

Income Statistics, Statistical

Bulletin

No. 609 (Washing-

ton, July 1978), Table 8D; Balance Sheet of the Farming
Sector, 1978, Supplement No. 1 to Agriculture Information Bulletin
No. 416 (Washington,
October
1978),
Table 33.

FEDERAL RESERVE BANK OF RICHMOND

7

net farm income and the remaining
$11,600 was income from sources off the farm.
While nearly all farm families have some off-farm
income, such earnings
are most important
on small
farms.
Stated another way, nonfarm
income generally becomes a larger share of total farm family income as the value of a farm’s sales declines.
Farm
operator
families
whose farm sales in 1977 totaled
$100,000 and over, for example,
earned 20 cents of
every dollar
of their total income
from nonfarm
sources.
Those with farm sales of $10,000 to $19,999
had off-farm earnings
amounting
to 66 cents of each
dollar of total income.
But families with farm sales

cents of every dollar of their total earnings.
As noted earlier, net farm income, with the exception of 1972 and 1973 was generally
moved counter
to farmland
values from the midfifties to the present.
While net farm income has trended irregularly
downward, values of farmland
have continued
to advance,
a relationship
that many see as a paradox.
Meanwhile, off-farm income of farm operator families has
continued
upward, climbing at almost the same pace
as farmland
values until very recent years.
The offfarm earning
supplements
to net farm income have
contributed
to the ability of some farmers,
particularly those on small and part-time
farms, to compete

below

for and

8

$5,000

depended

on off-farm

income

for

ECONOMIC

91
REVIEW,

MARCH/APRIL

purchase
1979

additional

farmland.

When

these

data

are

adjusted

for inflation,

the

influence
of nonfarm
income on farmers’ capacity to
purchase
land is even more evident.
Real market
values of farmland
in early 1978 were more than
double the 1960 level. Real net farm income in 1977,
however, was 11 percent below the level in 1960.
contrast,
farmers’
real nonfarm
earnings
rose
percent during the same period (see Chart 3).
Farmland

a Good Investment10

For

much

By
66

of the

history of this country, many individuals
who are not
interested
in farming have chosen to invest in farmland.
Such investments
have proven to be an effective hedge against inflation for more than 40 years.
Many also view farmland
as a safe and desirable
Farmland
prices, in fact, have
long-term
investment.
outstripped
consumer
prices throughout
the last 20
years. During that period, there has generally been a
2 percent average annual rate of increase in farmland
values for every 1 percent
average annual
rate of
gain in the Consumer
Price Index.
“Real estate investments have yielded long-term
returns equal to, or better than, other
long-term investment alternatives.”
-Robert

D. Reinsel

Measured
against the gross national
product price
deflator,
the most comprehensive
price index,
few
alternative
investment
opportunities
since 1960 have
been as profitable
and as safe a hedge against inflation as has United States farmland.
Farm real estate
values have risen faster than this general price index
each year.
They have also increased
much faster
than Standard
and Poor’s average
of 500 common
stocks.
During this period, farmland
values climbed
to more than four and one-half times the 1960 level,
while the GNP price deflator more than doubled and
10 References
for this section include: Jack Bickers,
“Why the Southern Land Boom May Be Just Beginning,” Progressive Farmer, Vol. 93, No. 7, July 1978, p.
15; Marvin Duncan, “Farm Real Estate:
Who Buys and
How,” Monthly
Review, Federal
Reserve
Bank of
Kansas City (June 1977), p. 6; Robert G. Healy and
James L. Short, “New Forces in the Market for Rural
Land,” The Appraisal Journal, Vol. XLVI, No. 2 (April
1978). pp. 190-192: Howard W. Hjort, Statement Before
the House
Agriculture
Committee,
Subcommittee
on
Family Farms, Rural Development and Special Studies
(Washington,
June 20, 1978), pp. 1-10; E. C. Pasour, Jr.,
“Farm Real Estate Prices in the United States and North
Carolina,” Tar Heel Economist,
North Carolina State
University
(Raleigh, November 1976), p. 2; Robert D.
“Land Rents, Values, and Earnings
(Paper
presented at the meeting of the American Agricultural
Economics
Association,
Edmonton,
Canada,
August
1973), pp. 11-12; Ted Vaden, “Duke U. Buys 1,222 Acres
in North Wake,” News and Observer (Raleigh, September 6, 1978), p. 1.

Standard and Poor’s 500 common stock average rose
only 71 percent.
These comparisons
clearly indicate
that the average investor in farmland
since 1960 has
done much better than the average investor
in the
stock market (see Chart 4).
Last fall, Duke University,
in an unusual
investment initiative
for an educational
institution,
joined
the ranks of nonfarm
investors
when they bought a
1,222-acre
tract of prime development
land along
the Neuse River in northern
Wake County. Although
the price was not disclosed, the
the tract includes 9,000 feet of
While noting that “. . . inflation
to diversify their investments
. .

announcement
said
riverfront
property.
was forcing schools
. ,” the Duke presi-

dent was also quoted as saying, “. . . the Wake
County purchase,
we think, gives us an opportunity
to make more money on our investment
than stocks
and bonds."11
Duke itself does not plan to develop the propertyquite unlike the real estate venture
by Campbell
College at nearby Buies Creek in 1975. At that time,
Campbell opened a 371-acre residential
development,
including
a golf course, tennis courts, and a swimming pool.
Since United States farmland
has become such an
attractive
investment,
foreigners
have joined
the
ranks of nonfarm investors in recent years in buying
large tracts of the nation’s farm real estate. Whether
these foreign
interests
are oil-rich
Arabs,
Italian
grain magnates,
German industrialists,
bankers from
the Netherlands,
or tycoons from Argentina,
these
eager buyers may well have helped to drive the price
of land up. Most popular spot for foreign investors
is California,
but they are also reported
to be purchasing land in the Midwest and Southeast,
including
this five-state
area.
Among the few foreign transactions known to have taken place in the Fifth District is the Italian-owned
Open Grounds Farm, Inc.,
located in Carteret
County,
North Carolina.
This
42,000-acre tract of farmland, timberland,
and marsh,
is currently
being used to produce cattle and feed
crops.
Foreign
investments
in this country’s
farmland
have received a great deal of publicity, partly because
foreign buyers have made large, lump sum payments.
Moreover, their investments
have raised a number of
economic
and political
questions,
as well as some
emotions.
The best information
now available indicates that the amount
of United
States farmland
owned by foreigners is only around 1 percent.
Recent
reports from the Department
of Agriculture
conclude
that thus far the amount of farmland presently
owned
11 Vaden, News and Observer,

FEDERAL RESERVE BANK OF RICHMOND

p. 1.

9

by foreign investors
the nation’s farmers

has had no significant
or on the agricultural

impact on
economy.

Population
Pressures
Boost Values12
The competing demands for farmland
stemming
from population pressures
come in many different
forms and
usually have a considerable
impact on local farmland
prices.
The “back-to-the-country”
trend, suburbanization, purchases
for second homes or retirement
homes,
development
of recreational
facilities,
and
industrialization
are all reflections
of these pressures.
That
significant
evident

the market

for rural

pressures

from

in both the District

the “back-to-the-country”

land is undergoing
the population
and the nation.
trend.

Since

some

is clearly
Consider

1970, for the

12 USDA, Economics,
Statistics, and Cooperatives Service, “Population Shuffle,” The Farm Index, Vol. XVII,
No. 6 (Washington,
June 1978), pp. 4-6; Healy and Short,
The Appraisal Journal, pp. 195-197.

10

ECONOMIC

REVIEW,

first time in decades,
the population
of nonmetropolitan counties
has grown faster than that of the
This phenomenon,
which has
metropolitan
areas.
occurred
in both the District
and the nation, is un
precedented.
Districtwide,
statistics
show that between 1970 and 1975 population
in the nonmetro
counties rose by 6.6 percent, as against 5.1 percent in
the metro areas.
Net inmigration
in the nonmetropolitan
counties
totaled around 214,100,
compared.
with some 127,600 in the metropolitan
areas.
Generally, the fastest nonmetro
growth
has occurred
in
But the nonmetro
counties bordering
metro areas.
population
gain has not been limited to the spillover
from the cities-to
suburbanization,
that is.
Rural population
evenly distributed.
losing

population.

from metro

But where

to nonmetro

to the demand
MARCH/APRIL

growth
has by no means been
Some counties,
in fact, are still

1979

areas,

for farmland,

population
the shuffle
as has

the

has shifted
has added
population

dispersal
Where

from

the

this demand

central

cities

has been

to

strong,

the
market

NET GAINS

suburbs.

have soared.
This situation
is amply illustrated
in
the accompanying
table showing net gains in population and increases
in farmland
values in specified
nonmetro
and metro counties
(see Charts 5 and 6).

IN POPULATION

INCREASES IN FARMLAND

values

Specified

Counties,

Fifth District,

widespread

system

of

good

roads,

makes

long-

1969-1974

Net Migration
1970-1974
Percent

County and State

Gains in
Farmland Values
1969-1974
Percent

Some population
pressures
have resulted from the
increased
job opportunities
in rural areas as well as
the availability
of jobs in the suburbs.
Moreover,
the
desire for the amenities
of rural life, coupled with a

AND

VALUES

Nonmetropolitan
Calvert,

Counties
16.1

Md.

71.3

6.1

142.7

distance
commuting
both desirable
and practicable
for many.
The strong wave of movement
to the
country and the resulting
boom in farmland
prices is

Worcester,

Albemarle, Va.

16.0

81.5

well illustrated

Louisa,

16.6

125.0

10.8

137.1

22.0

177.2

vania, Virginia.
percent between
sharply,
rising

by the nonmetro

county

of Spotsyl-

There, with net inmigration
at 22
1970 and 1974, land values jumped
177 percent
during
the five years

ending in 1974. Many who migrated to Spotsylvania
were former residents
of the nation’s capital and its
environs
and continue
to commute
to their jobs by
bus (see Table and Chart 6).
Much of the pressure
for rural land has come
increasingly
from people who are buying
land for
second homes or for retirement
homes.
Generally,
many of these people have chosen such places as the
North Carolina highlands
or sandhills.
Coastal areas,
reservoirs,
lakes, and the foothills are other favorite
locations.
Moreover,
some urbanites,
in response to
rising farmland
prices, have bought
rural acreage
far ahead of actual need to make sure they have their
“place in the country”
when retirement
time rolls
around.
Demand for rural land to be used in recreational
pursuits has also been on the upswing.
Such developments can and often do take good land out of agricultural
use forever.
But with
today’s
leisureoriented
society, growing
pressure
for recreational
facilities
is not surprising.
Ski centers with their
lodges and slopes and accompanying
real estate complexes, l8-hole golf courses, tennis on mountain
and
valley courts as well as in the lowlands, lands owned
or leased by hunting
clubs, “theme”
parks, and facilities
oriented
to campers
are but some of the
recreational
developments
now occupying a great deal
of acreage that once was farmland.
The resort complex in Watauga
County,
North Carolina- a nonmetro county-provides
an excellent example of how
this type demand
has influenced
land values
(see
Table and Chart 6).
Other Nonfarm
Influences
The demand structure for farmland
has changed significantly
over the
years as many new uses and demands
have been

Md.

Va.

Orange,

Va.

Spotsylvania,

Va.

13.4

127.6

15.1

102.7

W. Va.

8.5

126.7

W. Va.

Stafford,

8.0

100.6

8.9

118.6

8.8

111.2

12.2

102.6

10.5

108.1

8.4

153.4

17.7

83.0

Va.

Warren,

Va.

Barbour,
Berkeley,
Hampshire,

W. Va.

Jefferson,

W. Va.

Jackson,
Macon,

N. C.
N. C.

Polk, N. C.
Watauga,

N. C.

14.3

Metropolitan

66.7
55.7

101.2

11.3

S. C.

5.0

12.5

Horry, S. C.
Orangeburg,

79.8

21.8

106.2

16.7

177.3

12.6

103.2

23.9

102.3

Counties

Carroll,

Md.

Harford,

Md.

Chesterfield,

Va.

Gloucester,

Va.

Montgomery,
New

Va.

Kent, Va.

Powhatan,

Va.

32.1

142.9

Brunswick,

N. C.

26.0

106.6

33.8

106.8

12.1

85.5

Currituck,
Orange,

N. C.
N. C.

Dorchester,
Lexington,

S. C.
S. C.

Pickens, S. C.

Source:

23.1

90.5

19.6

76.2

10.1

140.7

U. S. Bureau of the Census.

FEDERAL RESERVE BANK OF RICHMOND

11

Chart 5

FARM REAL ESTATE: AVERAGE

VALUE PER ACRE

Fifth District by Counties,

Cities of the Standard
Source:

Metropolitan

U. S. Bureau of the Census.

Statistical

Area.

1974

Chart 6

FARM REAL ESTATE: CHANGE

IN AVERAGE

Fifth District by Counties,

*Data

not published

in 1969 for counties with less than

Cities of the Standard
Source:

Metropolitan

U. S. Bureau of the Census.

Statistical Area.

10 farms

VALUE PER ACRE

1969-1974

to avoid possible disclosure of information

for individual

farms.

added to the normal
demands
for land for farming
purposes.
When these demands
for farmland
result
in strong competition
between agricultural
and nonagricultural
The
rises.

uses, the
conversion

value of such land typically
of farmland
to nonfarm
uses,

such as commercial-industrial
developments,
shopping centers,
highways,
airports,
and the like, not
only increases
the value of that land but also has a
carry-over
effect on the value of surrounding
land.
The trend towards industrial
parks has added sigForwardnificantly
to the demand
for farmland.

With
the generally
early sixties.
market of the past several decades,

ucts-since
the
strong farmland

the value of farm real estate in this five-state
area
totaled an unprecedented
$26.9 billion by 1978, up
from $11.5 billion in 1970 and $2.3 billion in 1940
just prior
Rising

to World
farmland

ing asset values.

War

II.

prices, therefore,
lead to increasAs the growth in asset values has

not only

improved
the asset position of landowners’
balance
sheets, it has resulted in substantial
gains in proprietors’ equities, enabling
them to expand
their borrowings
and to use the higher priced farmland
as

as sites for new plants but also for future expansion.
Today’s modern, well-engineered
plants require siz-

collateral.
But with the rapidly rising land prices of
recent years, farmers
who have recently
invested

able acreage.
Since industry
more for land than farmers,

large

looking

industrial

establishments

want

is often
pressure

land

willing to pay
from industry

can be significant
in some areas.
With the economic
development
that has occurred
in the Fifth District
over the past couple of decades, in rural as well as in
urban areas, it seems safe to say that industrial
demand for land has played a major role in the escalation of farmland
prices.
Development
of the interstate
highway system has
also had a major impact on farmland
prices.
One
mile of interstate
highway
requires nearly 40 acres,
while a single
interchange
may take another
10
acres.13
The dual lanes of asphalt or concrete such
as I-95, cutting across the Fifth District and extending north and south up and down the East Coast,
became wands of magic that sent farmland
prices
skyrocketing.
On the average, land values per acre
along the North
Carolina
segment
zoomed from a
low of $1,684 in 1955 to a high of $26,611 in 1963.14
And owners
of farm property
adjacent
to interchanges
reaped even bigger windfalls.
The strong
demand for land exerted
by the interstate
highway
program
aptly illustrates
that location value is often
more important
as a price-making
factor in the land
market than productive
value.

items

have

been finding
it increasingly
difficult
to meet
debt payments
out of net farm income.

sums in farmland

their

AND

been

forthcoming,

validity
In

some

in certain
a recent

discussion

of the Board

Reserve

System

Net farm

income,

farm assets

Farm
real estate,
a farmer’s
major
production
asset, has dominated
the capital structure
of agriculThe value of farmland,
in
ture for many decades.
fact, has comprised
from three-fourths
to four-fifths
of the total market value of all farm production
assets
-those
assets used in the production
of farm prod“Values and Competition
for
13 William H. Scofield,
Land,”
The Yearbook
of Agriculture, 1963,
USDA
(Washington:
Government Printing Office, 1963), p. 64.
14 Dick Brown, “Land Values Soar as Interstate Routes
Expand,” News and Observer (Raleigh, May 19, 1968),
Sunday Reading Sec., p. 1.

14

ECONOMIC

REVIEW,

undoubtedly

geographic

Melichar

areas

The amount
labor

have

income

must

assets.

Melichar

proportion

be regarded

ment of Agriculture

sharply

past

estimates

analyses.16
not only

labor

to

and manage-

value

of farm oper-

in recent

decades,

of total

net farm

as a return

then pointed

Emanuel

of the Federal

is a return

and probable

more

in others.

subject,

many

he noted,

and thus an increasing

than

of this

challenged

fallen

having

of Governors

but also to operators’

ators’

EARNINGS

capital

Over the years, many attempts have been made to
explain rising farmland
prices.
The traditional
hypothesis states that farm income is the basic factor
influencing
farmland
va1ues.15
But as noted in the
historical perspective
above, this hypothesis
fell into
disrepute in the midfifties
when farmland
prices continued to rise without
an accompanying
increase in
net farm income.
By and large, this apparent
paradox continued
through
1977, puzzling
land appraisers, prospective
land buyers, and farm lenders alike.
This departure
from the historic
relationships
between farmland
prices and farm income has stimulated many analysts
to search for possible explanaMany different
factors or explanations
have
tions.

ment.
FARM ASSET VALUES

and other

out that

to production
U. S. Depart-

show that

such annual

15 John Brake, “A Perspective
on Future Capital and
Credit Needs of Agriculture” (Remarks prepared for the
meeting of the National Agricultural Credit Committee,
Chicago, Illinois, September 24, 1973), p. 2.
16 See
Farm
sented
Spring
1978),

Between
Emanuel Melichar, “The Relationship
Income and Asset Values, 1950-1977” (Paper preat the Seminar on Food and Agricultural Policy,
Hill Center, Wayzata,
Minnesota,
March 27,
pp. 1-13.

MARCH/APRIL

1979

Chart

7

RATES OF RETURN TO FARM
Percent

United

1950

Sources:

1955

U. S. Department

States,

1960

of Agriculture

PRODUCTION

ASSETS

1950-1977

1965

1970

and Board of Governors

1975

of the Federal

1980

Reserve System.

residual returns to production
assets rose faster than
the value of those assets over the period 1954-1971.17
The rate of return
to assets thus increased
even
though land prices were rising-an
observation
quite
contrary
to the commonly
held view (see Chart 7).
While the rising trend in returns
to production
assets has gone unnoticed
by most observers,
many
have noted that the major purchasers
of farmland
have been the large farmers who, for the most part,
have above-average
rates of return.
These farmers,

mostly those with sales of $100,000 and over, have
been prominent
in buying farmland
for farm expansion, and it is believed that their purchases
have had
a marked influence in determining
the price of farmland. Indeed, it appears that these farmers have been
setting the tone of the rural land market.
Therefore,
as Melichar
has pointed
out, it seems logical that
“. . . farm real estate might be priced at the return
achieved by these [large] farms capitalized
at their
cost of borrowing
funds.”18

17 Melichar, “The
and Asset Values,

18 Melichar, “The
and Asset Values,

Relationship
Between
1950-1977,” p. 8.

Farm

Income

FEDERAL RESERVE BANK OF RICHMOND

Relationship
Between
1950-1977,” p. 12.

Farm

Income

15

FINANCING

Someone

REQUIREMENTS

has said, and

rightly

farmers
ditions,

RISE

so, that

“. . . the

farm

lending of money is the keystone of most land purchases.”19
While
rising
farmland
prices lead to
increasing
asset values,
create greater financing

as indicated
above,
requirements.

has been

portion
19 USDA,

of farm

due, however,

they also

transfers

to the increasing

comprised

The Farm Index,

1950
Source:

16

apply

1955
U. S. Department

only

transfers
comprised
Chart 8).

nanced

the addi-

the amount

of cash

of farm real estate transused has been climbing

89

percent

of

with

borrowed

funds,

the

total

Strong
transfers

it should

come

(see

With
now fias no

21 Paul L. Holm and William H. Scofield, “The Market
for Farm Real Estate,” The Yearbook of Agriculture,
1958, USDA (Washington:
Government Printing Office,
1958), p. 205.

to credit-

1965

1970

of Agriculture.

ECONOMIC

to buy

Demand
for Borrowed
Funds
roughly
nine out of ten farmland

by

1960

borrowing

steadily.
While credit financing
was involved in 54
percent of all farmland
transfers in 1951, the proportion was up sharply
by 1978 when credit-financed

March 1977, p. 13.

20 Data used in this paragraph
financed farmland transfers.

when

Moreover, the proportion
fers for which credit was

pro-

of purchases

as security

tional land, oftentimes
reducing
required
for a downpayment.

The amount of money borrowed
in relation to the
purchase
price of farmland,
for example,
trended
upward steadily from a low of 54 percent in 1951 to a
high of 78 percent in 1973.20 Moreover,
the debt-topurchase-price
ratio has averaged around 76 percent
in the years since.
Some of the increase
in the
amount of debt relative to the purchase price of farmland

to enlarge their farms.21
Under such conthe prospective
buyer can use his existing

REVIEW,

MARCH/APRIL

1979

1975

1980

surprise
District’s

that farm real estate indebtedness
of the
farmers at the beginning
of 1978 hit $3,083

million, a record January
1 high and more than 11
times the $277 million outstanding
on the same date
in 1940.
Over this 38-year period, the volume of
farm-mortgage
credit outstanding
grew at an average
annual rate of 6.5 percent-almost
as fast as the 6.7
percent
yearly increase
in the total value of farm
Greatest
expansion
in the use of farm
real estate.
real estate credit has occurred since 1972, with District farmers
boosting
their outstanding
debt at an
annual
rate of 13.0 percent-faster
even than the
yearly rates of gain in farmland value per acre and in
the total value of all farmland.
Moreover,
the rate
was somewhat
higher than the 11.9 percent rate
increase in farm-mortgage
indebtedness
nationally.

of

Because
of the burgeoning
demand
for farmmortgage
credit, the sources of credit have become
increasingly
important
in paving the way for transfers of farmland.
The availability
of credit is, unquestionably,
the one ingredient
that affects nearly
all purchases
of farmland,
regardless
of location.‘”
And closely tied to credit availability,
of course, is
the average interest rate charged on farm real estate
loans, or the cost of borrowing.
Generally,
when
credit availability
for farm-mortgage
loans tightens,
the move is reflected in higher interest
rates.
But
higher interest
rates do not always signify tighter
credit conditions.
Last year, for example, farmers in
general did not find it difficult to arrange loans, but
interest
rates-like
most everything
else-moved
higher.
The Principal
Lenders
Who
is providing
the
large sums of money required to finance purchases of
By far the major
today’s high-priced
farmland ?
share of funds for financing
new farm capital has
traditionally
been provided by farmers themselves.23
But in recent years as their capital needs have expanded

sharply,

creasingly
Fifth

District

tutional
land

on

banks,

relative
individuals,
providing
22 USDA,

farmer

lenders

ministration,

farmers

generally

The

that

today’s

finds

are, according

commercial
and

importance

life

more

to volume,

banks,

Farmers

insurance

of seller

has declined
slightly

have

funds.

borrowed

financing,
one-fifth

outstanding,
sellers
source of loan funds

major

Meanwhile,
commercial
banks’ share of farm real
estate credit held at around
one-fifth
of the total
from 1960 through
the early seventies.
Financing
by banks has been declining since and now stands at
14 percent-far
below their relative position among
the institutional
lenders during the late forties and
fifties when banks played the leading role in financing farmers’ long-term
credit needs.
District banks,
however, continue to play a relatively more important
role in the farm-mortgage
field than banks nationwide.
Life insurance
companies
and the Farmers
Home
Administration
have not been as active in extending
credit to District farmers as have commercial
banks
and the Federal land banks.
Life insurance
companies’ relative position in farm real estate lending
has followed a downward
trend since 1960, with their
share dropping to 5 percent by 1978. While the profinancing
supplied
by the
portion
of long-term
FmHA has followed an up-and-down
pattern for the
past several decades, it has also trended
downward
since the early seventies
and now accounts
for
around 8 percent of the total outstanding.

ininsti-

the Federal
Home
mostly

AdThe
by

But by still
of the credit

The Farm Index, March 1977, p. 12.

23 Alvin S. Tostlebe, Capital in Agriculture: Its Formation and Financing since 1870, A Study by the National
Bureau
of Economic
Research
(Princeton,
N. J.:
Princeton University Press, 1957), p. 19.

continue
as the second
for buying farmland.

Competition
between
lending
agencies
intensified
in the postwar years, and major shifts occurred
in
the shares of outstanding
farm-mortgage
loans held
by the principal
lender groups.
Districtwide,
the
greatest
competition
was between the Federal land
banks and commercial
banks.
The Federal
land
banks have steadily
increased
their share of total
farm-mortgage
credit since the midfifties,
becoming
the major institutional
lender in 1960 and increasing
their hold on this position almost every year since.
Half the farm real estate loan volume outstanding
for the past couple of years, in fact, has been provided by the Federal land banks.

IN SUMMARY

modern-day

companies.

over the years.
than

relied

volume
largest

Farmland
is, indeed, an increasingly
valuable asset.
With the generally
strong farmland
market of the
past several decades, the value of farm real estate in
this five-state
area totaled an unprecedented
$26.9
billion in 1978, up from $11.5 billion in 1970 and
$2.3 billion in 1940 just prior to World War II.
While rising farmland
prices have led to increasing asset values, they have also created greater fiRoughly
nine out of ten
nancing
requirements.
farmland
transfers
are now financed with borrowed
funds.
Moreover,
borrowed
funds make up around
three-fourths
of the purchase price of each transfer.
Outstanding
farm-mortgage
debt in the District has

FEDERAL RESERVE BANK OF RICHMOND

17

thus grown significantly,
hitting a record $3.1 billion
at the beginning
of 1978. Half this loan volume was
held by the Federal land banks.
Land

is presently

selling

of the current

boom

in

the

1972

with

Market
years

values

at premium

in farmland
huge

have

sale

more

prices.

values

began

of grain

than

Much

to

doubled

back

Russia.

in the

six

since.

Both

supply

and demand

factors

play

strong

roles

in determining
the price of farmland.
The supply of
farms for sale is limited, which sets the stage for stiff
competition

and

Many
creases.
on the demand

higher
factors
side,

bidding
influence

however.

into two categories-either
by nonfarmers.

when

demand

buyers

in-

of farmland

Generally,

fall

by farmers

demand

they

or

Farmers
who want to enlarge their farming operations are still the leading buyers.
Their demand is
one of the strongest
factors forcing prices upward.
Growth
in part-time
farming
has also become an
important
factor in the land market, as has the nonfarm income of full-time
farmers and their families.
Land purchased
for nonfarm
uses has become an
increasingly
important
influence
competing
in farm
real estate markets.
Among
the factors that have
lured nonfarmers
into the land-buying
rush since
1972, these stand out: population
pressures,
including the “back-to-the-country”
trend, purchases
for
second homes or retirement
homes, and development
of recreational
facilities;
conversion
of farmland
to
nonfarm uses, such as commercial-industrial
developments, shopping centers, highways,
and the like; the
disappointing
performance
of the stock market;
and
investment
in farmland
as a hedge against inflation.
The would-be
buyer, seriously
considering
getting
into the land market, would do well to remember:
l

The

market

value

of farmland

depends

on its

potential
use.
Generally,
the
the use, the higher the price.
l

The smaller
the farm tract
higher the price per acre.

purchased,

l

Market
values of different
farms vary widely.

l

Location value
a price-making

l

18

more

Few alternative
investment
opportunities
since
1960 have been as profitable
and as safe a
hedge against
inflation
as has farmland.

is oftentimes
factor than

sizes

and

intensive

types

the

of

more important
as
productive
value.

ECONOMIC

REVIEW,

References
Bickers, Jack. “Why the Southern Land Boom May Be
Progressive Farmer.
Vol. 93,
Just Beginning.”
No. 7. July 1978. pp. 16-17.
Blazar, Sheldon. “Farmland Investment Determinants.”
Farm and Land Realtor. Vol. XXIX, No. 9. National Association
of Realtors.
Chicago, October
1977. p. 6.
Brake, John.
“A Perspective on Future Capital and
Credit Needs of Agriculture.”
Remarks prepared
for the meeting of the National Agricultural Credit
Committee, Chicago, Illinois, September 24, 1973.
Duncan, Marvin.
“Farm Real Estate: Who Buys and
How.” Monthly Review. Federal Reserve Bank of
Kansas City. June 1977. pp. 3-9.
“Farm
Real Estate Values-Some
Important Determinants.”
Monthly Review. Federal
Reserve Bank of Kansas City. March 1977. pp. 3-12.
Healy, Robert G., and Short, James L. “New Forces in
the Market for Rural Land.”
The Appraisal Journal. Vol. XLVI, No. 2. April 1978. pp. 185-199.
Hjort, Howard W. Statement before the House Agriculture Committee, Subcommittee on Family Farms,
Rural Development and Special Studies, Washington, June 20, 1978.
Holm, Paul L., and Scofield, William H. “The Market
for Farm Real Estate.”
The Yearbook of Agriculture, 1958.
USDA.
Washington : Government
Printing Office, 1958.
Melichar, Emanuel.
“The Relationship Between Farm
Income and Asset Values, 1950-1977.”
Paper presented at the Seminar on Food and Agricultural
Policy, Spring Hill Center, Wayzata,
Minnesota,
March 27, 1978.
News and Observer, October
September 6, 1978.

9, 1960;

May

19, 1968;

Pasour,. E. C., Jr.
“Farm Real Estate Prices in the
United States and North Carolina.”
Tar Heel
Economist. North Carolina State University. Raleigh, November 1976. p. 2.
Reinsel, Robert D. “Land Rents, Values, and Earnings.”
Paper presented at the meeting of the
American Agricultural
Economics Association, Edmonton, Canada, August 1973.
Richmond Times-Dispatch, September
15, 1978

27, November

7,

Scofield, William
H.
“Values
and Competition for
Land.” The Yearbook of Agriculture, 1963. USDA.
Washington:
Government Printing Office, 1963.
Tostlebe, Alvin S. Capital in Agriculture: Its Formation and Financing since 1870.
A Study by the
National Bureau of Economic Research. Princeton,
N. J.: Princeton University Press, 1957.
USDA.
Economics, Statistics, and Cooperatives
Service.
Farm Real Estate Market Developments.
CD-83. Washington, July 1978. pp. 3-50.
. Economic Research Service. “High Stakes
in the Country.”
The Farm Index.
Vol. XVI,
No. 3. Washington, March 1977. pp. 11-13.
Economics,
Statistics, and Cooperatives
Service. “Population
Shuffle.”
The Farm Index.
Vol. XVII, No. 6. Washington, June 1978. pp. 4-6.
“Real Estate.”
Farmers’ Newsletter.
Washington, August 1978. pp. l-4.

MARCH/APRIL

1979

G-3.

PROFITABILITY

OF MINORITY BANKS IN 1977
James F. Tucker

A significant
development
in the American
banking industry
during the post-World
War II era has
been the interest shown by certain ethnic groups in
the ownership
and operation
of commercial
banks.
So-called minority
banks have drawn special attention from both the government
and private businesses.
The executive and legislative branches of the Federal
government,
along with the Federal bank supervisory
agencies, have favored minority banks with a number
of special programs,
rules, regulations,
and studies
aimed at strengthening
the operation
of these banks.
Private industrial
firms and the major trade association of the banking
industry
also have been active
in designing
special programs
to assist minority
banks.
For purposes
of the discussion
that follows, minority banks are considered
to be those commercial
banks in which 50 percent
or more of the common stock is owned and controlled
by any of the
following racial groups:
(1) Black;
(2) HispanicAmerican;
(3)
Asian-American;
(4)
American
Indian;
(5) Eskimo, Aleut; and (6) Multiracial.
A
recent amendment
to the Federal Reserve System’s
rules and regulations
allows a bank to qualify as a
minority
bank if : (a) more than 50 percent of its
stock is owned by women ; (b) a majority
of its
board consists
of women;
and (c) women hold a
significant
number of its management
positions.
Minority
banks have existed in this country
for
many years and some can show an impressive
record
of sustained
success.
A number of black banks, for
example, have operated profitably
since early in this
century,
and eight such banks survived
the “bank
holiday”
of 1933.
Until recently,
neither
banking
students
nor bank supervisory
agencies
gave any
particular
attention
to black or other ethnic banks,
although in the 1930’s J. B. Blayton, a noted black
accountant,
businessman,
and college professor,
reported on the successful operations
of black banks in
a number
of studies of black business
firms.l
In recent years, a steady flow of research
has
begun to focus on the operations
of black banks and
the growing
number
of banks owned and operated

1 See e.g., J. B. Blayton,

Bankers

Magazine,

“The

Negro

Vol. 4, December

in

Banking,”

1936, p. 511.

by groups designated
as minorities.
Most of this
research compares
the operations
and financial
performance of minority
banks with those of nonminority banks. A previous issue of this Review, however,
carried
another
type article
which
undertook
to
evaluate
minority
banks
by comparing
the highearning banks in this group with the others.2
The paragraphs
that follow extend that article by
examining
the general profitability
of minority banks
during 1977 and by comparing
the financial
performance of minority banks in that year and 1976. The
data used were derived from Reports
of Condition
and Reports of Income filed by each insured commercial bank with its Federal
bank supervisor.
The
study is limited to minority banks at least three years
old. The reason for excluding
less-than-three-yearold banks is that, in the first three years of their
existence, new minority banks, according to an FDIC
sponsored
study, can typically
expect to experience
losses from current
operations.3
PROFIT LEVELS, 1976-1977

Consistent
with the trend for the entire banking
industry,
minority
banks as a group
realized
increased profits in 1977.
The number
of profitable
minority
banks rose by 16.6 percent compared
with
an increase of 6.1 percent in the number of profitable
banks in the industry
generally.
On the other hand,
there was also an increase
in the number
of unprofitable
minority
banks in 1977, while the number
of unprofitable
banks in the industry
as a whole
declined.
For this study, there were ten more minority banks in 1977 than in 1976. This fact, however, made the gain in the number
of profitable
minority
banks in 1977 all the more impressive
since
the ten additional
banks were just emerging from the
less-than-three-year-old
category,
which contains
a
high percentage
of unprofitable
banks, according
to
the previously
mentioned
FDIC study.
2 Bruce J. Summers and James F. Tucker,
Characteristics
of High-Earning
nomic Review, Federal Reserve
62, No. 6 (November/December

“Performance
Minority Banks,” EcoBank of Richmond, Vol.
1976), pp. 3-12.

3 John T. Boorman, New Minority-Owned
Commercial
Banks, A Comparative Analysis (Washington,
D. C.:
Federal Deposit Insurance Corporation, 1973), p. 34.

FEDERAL RESERVE BANK OF RICHMOND

19

Minority
three years

banks that had been in operation
or longer numbered
70 in 1977.

for
Of

from 11 to 15, while their net income rose from $1.4
million to $1.8 million.
Average net income per bank

these, 49 showed a net income (i.e., profit)
for the
year, while 21 experienced
net losses.
In 1976 there
were 60 such banks, 42 of which showed net income

was up sharply for the largest
in 1976 to $581,000 in 1977.
$25-$50 million class, average

banks, from $168,000
But for those in the
per bank income was

for that year, while 18 experienced
net losses.
The
percentage
of the total number showing positive net

down

to $118,000.

income was practically
the same, 70 percent for each
year.
By size group, as shown in Table I, slightly
more than half the banks with assets under
$10

less favorable.
As a group,
million
category,
numbering

million realized a net income in 1977, down from
62 percent in 1976.
Seventy percent of those with
assets in the $10-$25 million range were profitable
in
1977, as against 75 percent in 1976. Of those in the
$25-$50 million group, 80
percent were profitable
in
1977 compared
with 82 percent in 1976. All banks
with assets over $50 million were profitable
in 1977,
whereas
only 50 percent
of this group showed
a
profit in 1976.
The year-to-year
changes
in these
percentages,
and especially
the reductions
in the
percentage
of smaller
banks that were profitable,
were no doubt affected by such factors as the operating experience
of the ten additional
banks in 1977
and the failure of some of the banks to correct a
number
of long-standing
problems.
Total net income of the 70 banks in 1977 exceeded
$5 million, compared with just under $1.5 million for
the 60 banks in 1976.
The increase
in 1977 was
accounted
for not by the inclusion
of the ten additional banks in that year but rather by the growth
and the greatly improved
profitability
of the larger
banks.
As shown in Table I, the number
of banks
with assets in excess of $50 million grew from four,
with net income of $672,000 in 1976, to seven, with
net income of over $4 million in 1977, thus accounting for the bulk of the year-to-year
gain.
Banks in
the $25-$50 million
category
increased
in number

Table

BANKS AND

AGGREGATE PROFITS IN 1976 AND

Total Number
of Banks

Number of
Profitable
Banks

1977

Aggregate
Profits
(in thousands
of dollars)
1976

1976

1977

1976

1977

21

21

13

11

10-25

24

27

18

19

312

25-50

11

15

9

12

1,364

1,770

4

7

2

7

672

4,067

60

70

42

49

1,424

5,174

Under

Over
Total

20

10

50

from

smaller

banks

$124,000

the income

picture

was

those in the under
21 in both 1976

much
$10
and

1977, suffered losses in both years.
Losses in 1977
totaled $609,000 or $29,000 per bank on the average.
This was, however, an improvement
over 1976, when
losses came to $924,000 or an average loss of $44,000
per bank. The 27 banks in the $10-$25 million category lost a total of $54,000 in 1977. This compares
unfavorably
with the positive net income of $312,000
recorded by 24 banks in this category in 1976.
Net Operating
Income
While the magnitude
of
the increase in net income for the aggregate
of minority banks in 1977 was substantial,
the sources of
the increase
were perhaps
equally important.
As
shown in Table II, the average
minority
bank in
every size class except the $25-$50 million category
actually incurred
a loss on current operations
during
1976.
For the banks as a group, however,
gains
from securities
transactions
more than offset this
operating
loss and produced an overall net profit.
In
1977, the situation was much different.
The average
minority
bank in every size class except the under$10 million category earned a net income on operations.
Even the average
bank in the under-$10
million category showed an improvement
in operating
net income over 1976, as the average loss fell from
$56,000 to $30,000.
Thus the average bank in every
size category
turned
in a better operating
performance in 1977 than in 1976, although in dollar terms
the bulk of improvement
was concentrated
at the
larger banks.

I

NUMBER OF PROFITABLE MINORITY

Size of Banks
by Assets
(in millions
of dollars)

a shade,

For

-924

ECONOMIC

1977
-609
-54

REVIEW,

Profitability
Measures
Two
commonly
used
measures for evaluating
the earnings performance
of
commercial
banks are the ratios of net income to
average
equity capital
(return
on equity)
and net
income to average
total assets (return
on assets).
The former indicates
the yield on the stockholder’s
investment,
while the latter is a measure of the effectiveness with which management
employs the bank’s
assets.
Both measures
reflect increased
profitability
of
minority
banks taken as a group in 1977.
For the
average minority
bank, the return on equity for 1977
was 5.2 percent, compared
with 1.7 percent in 1976.
The return
on assets for 1977 was 0.3 percent
as
MARCH/APRIL

1979

Table

II

INCOME AND EXPENSES OF THE AVERAGE MINORITY BANK BY ASSET-SIZE, 1976 AND
(Amounts

in thousands

of dollars)

Size Groups in
Item

Under 10

1977

10-25

Millions

of Dollars

25-50

Average,

Over 50

All Banks

1976
OPERATING

1976

1977

1976

1977

1976

1977

1976

1977

316

325

705

681

1,316

1,345

3,738

3,138

883

962

8.95

5

4

24

12

49

17

159

150

31

25

- 19.35

38

36

101

81

135

150

198

300

92

104

13.04
25.92

% Change

INCOME:

Interest and Fees on Loans
Interest

1977

on Balances

Income on Federal
Sold, etc.

with

Banks

Funds

Interest and Dividends on:
U. S. Treasury Securities

76

69

143

157

252

243

482

706

162

204

Obligations of Other U. S.
Government
Agencies

45

39

130

115

297

198

402

373

149

136

-8.72

Obligations of States and
Political Subdivisions

11

9

22

16

165

58

429

327

71

54

-23.94

2

4

15

15

78

26

10

60

22

19

-13.64

Service Charges on Domestic
Deposit Accounts

44

42

75

61

154

151

153

220

84

91

8.33

Other

28

35

31

35

61

47

163

139

44

48

9.09

14

7

19

12

19

27

80

50

22

17

578

570

1,266

1,185

2,526

2,262

5,813

5,463

1,560

1,659

176

164

330

286

723

606

1,016

1,132

394

403

2.28

2,739

2,307

586

607

3.58

15

87.50

All Other

Service Charges,

All Other
Total

Securities

Income

Operating

OPERATING

etc.

Income

and Employee

Interest

on Deposits

Benefits

interest on Other
Money

193

187

433

404

888

768

1

2

14

27

4

5

18

27

8

1

Expense on Federal
Purchased

1

1

4

13

6

2

2

5

39

22

25

40

13

11

167

186

76

77

1.32
11.36

Funds

Borrowed

Interest on Subordinated
Notes and Debentures

2

Other

Expenses

Income Before Tax and
Securities Gains (Loss)*
Income

Gains

* May

38

38

74

75

123

110

44

49

46

122

127

112

82

995

260

159

106

881

782

296

305

5,976

4,849

1,577

1,574

-33.33

141

263

229

456

447

634

600

1,283

1,177

2,420

2,126

8

107

137

-162

615

-18

85

572.22

17

8

36

-197

119

-7

26

471.43

99

100

35

496

-10

59

690.00

20

18

133

34

31

9

119

118

168

530

20

67

235.00

Items,

51

4

7

75.00

581

24

74

208.23

60

70

-30

of Banks

not add to totals

-32

-30
8

-43
Net

-17
15

-51

(Losses) Net

Income

Number

24

-4

Taxes

Net Income Before
Extraordinary
Items

Net

125

-55

Income Before Securities
Gains or Losses

Extraordinary

61

-15.38

137

Expense
Operating

Applicable

34

117

0.00

Equipment

Provision for Possible
Loon losses

Total

8
75

67

Expense

1

36

22

Occupancy

Furniture and
Expenses

Securities

6.35

EXPENSES:

Salaries

Net

-22.73

1

-29

-1
-44
21

-9

38

6

3

-6

7
-29
21

13
24

4
-2
27

5
124

118

168

11

15

4

7

3.04
-0.19

-70.96

16.67

due to rounding.

FEDERAL RESERVE BANK OF RICHMOND

21

against 0.1 percent for 1976. Moreover,
the number
of minority
banks realizing
a return on equity of 10
percent or more was 23 in 1977, compared with only
11 in 1976.
Return
on assets also showed an improvement
for minority
banks as a group.
The ratio
of net income to total assets rose from 0.1 percent in
1976 to 0.3 percent in 1977. There was, however, a
decline

in the number

on assets
clined

of 1.0 percent

from

eight

of banks

that realized

or more.

This

in 1976 to six in 1977

a return

number

de-

(Chart

1).

From these data it seems clear that a substantial
number
of minority
banks that realized a return of
10 percent or better failed to earn as much as 1 percent on total assets.
To some financial
analysts this
would
suggest
that such banks are either undercapitalized
or are carrying
too many low-yielding
assets.
Aggregate
data for the 70 banks do, in fact,
indicate that growth in equity capital for the group
has lagged behind
growth
in other parts of their
financial structure.
From 1976 to 1977, for example,
total equity capital for the group increased
3.1 percent while total assets rose 12.4 percent,
net loans
9.8 percent,
and total deposits
14.1 percent
(Table
III).
The ratio of total equity capital to total assets
22

ECONOMIC

over the same period fell from 8.8 percent
to 8.1
percent.
It should be noted, however,
that in the
same period this ratio declined from 9.2 percent to
9.0 percent for nonminority
banks as well.
Sources
of Profits
Previous
studies
have suggested that the relatively
high expense
structure
of
minority
banks was the principal
reason
for the
difference in their financial
performance
and that of
nonminority
banks of similar size.4 One study, comparing minority
banks with each other, illustrated
in
detail that the crucial
factor determining
a given
bank’s position in a profitability
ranking is the extent
to which it is able to control expenses.5
Thus experience suggests that effective measures
to restrict
the growth of operating
expenses
could become an
important
source of improved
profitability.
In fact,
effective cost control appears to have been a major
source of increased
profits in 1977.
4 See John T. Boorman, “The Prospects for MinorityOwned Commercial Banks: A Comparative Performance
Analysis,” Journal of Bank Research
(Winter
1974),
pp. 263-279.
5 Summers

REVIEW, MARCH/APRIL

and Tucker,
1979

op. cit., pp. 9-10.

Table

SELECTED ASSETS AND

III

LIABILITIES OF THE AVERAGE MINORITY
(As of December
(Amounts

in thousands

1976

10-25

1977

31)
of dollars)

Size Groups
Under 10

Item

BANK BY ASSET-SIZE, 1976 AND

in Millions

of Dollars

25-50

Over 50

Average,

All Banks

1977

1976

1977

1976

1977

1976

1977

1976

1977

684

1,041

1,933

1,648

3,755

3,937

9,092

7,791

2,307

2,571

11.40

1,143

1,098

2,763

2,143

4,104

3,787

7,520

13,338

2,759

3,301

19.64

Other U. S. Government
Agencies

686

646

1,568

1,845

3,871

2,745

4,630

5,480

1,885

2,042

8.33

States and Political
Subdivisions

169

215

424

404

2,384

1,258

9,017

5,692

1,267

1,059

25

42

193

208

884

196

838

253

219

13.44

% Change

ASSETS:
Cash and Due From Banks
Total Securities Held:
U. S. Treasury

All Others
Federal

Funds Sold, etc.

-16.42

Assets

Total Assets

1,768

2,019

1,820

3,156

7,138

8,593

1,651

2,514

52.27

7,323

7,123

15,255

14,640

42,276

37,568

9,679

10,631

9.83

316

411

405

1,345

1,243

2,837

1,907

986

708

3.21

88

Assets

664
3,300

244

Net

Fixed

382
3,241

loans,

All Other

74

95

229

246

478

438

1,667

1,262

321

344

7.16

16,612

16,043

6,663

7,516

33,896

31,402

84,251

82,470

20,808

23,389

12.40

13.00

LIABILITIES:
Demand

Deposits,

IPC

1,595

1,812

3,886

3,797

9,777

8,701

16,420

17,768

5,000

5,650

2,854

2,635

6,717

6,021

14,977

12,371

40,191

39,677

9,111

9,732

6.81

Deposits of U. S. Government

354

800

1,009

1,885

1,906

2,126

2,885

4,728

1,069

1,896

77.36

Deposits of States and
Political Subdivisions

984

1,278

2,632

2,632

3,329

4,286

9,329

8,283

2,629

3,145

43

32

140

24

66

5,625

3,272

461

352

Time and Savings

Deposits

Deposits

of Commercial

Other

Deposits

Total

Banks

Deposits

Demand

81

Time and Savings
Federal

Deposits

Funds Purchased,

Mortgage

236

14,687

14,598

2,812

5,919

3,758

3,843

8,768

65

396

61

245

26
5

Indebtedness

All Other

etc.

295

6,655

2,154

Deposits

97

5,911

liabilities

Total

Liabilities

Subordinated
Debentures

EQUITY

74

Notes

6,017

Preferred

15,342

2,284

1,995

367

494

34.60

76,734

75,723

18,638

21,269

14.11

7,179

8,623

20.62

11,459

12,646

30,428

28,323

6,413

13,272

12,279

24,363

26,743

8,185

17,156

16,044

52,372

48,980

96

230

729

231

139

-39.83
-17.53

17

313

13

448

322

121

66

97

80

174

273

558

1,495

992

274

304

14,881

31,380

29,220

78,662

138

530

282

338

511

19,240

77,510

21,792

10.36

10.94
13.26

and
48

27

128

188

173

-7.98

20

Undivided

Total liabilities and
Equity Capital
of Banks

52

143

28

203

50

51

630

541

601

708

1,690

1,204

608

605

.49

251

393

399

915

798

3,163

2,457

618

646

4.53

76

31

244

347

398

586

88

115

1

83

20

17

6

-39

Profits

Equity Capital

43

414

233

Reserves for Contingencies,

17

378

Stock-Par
Stock-Par

Surplus

Number

6,801

808

19.62
-23.64

CAPITAL:

Common

Total

13

373

30

etc.

-99

2.00

30.68

6

5

598

589

1,143

1,024

1,986

1,900

5,251

4,449

1,381

1,424

3.11

6,663

7,416

16,612

16,043

33,896

31,402

84,251

82,470

20,808

23,808

12.40

21

21

24

27

11

15

FEDERAL RESERVE BANK OF RICHMOND

4

7

60

-64.71

70

23

Table

IV

KEY OPERATING RATIOS, AVERAGE MINORITY BANK, 1976 AND
Size Groups
Item

Average

in Millions

Under 10

Total

1977

of Dollars

10-25

25-50

Over 50

1976
Percent of Average

1977

1976

1977

1976

1977

1976

1977

1976

1977

Total Assets:

Operating

Income

7.5

7.1

8.7

7.7

7.6

7.4

7.5

7.2

6.9

6.6

Operating

Expense

7.6

6.7

9.5

8.1

7.7

7.3

7.1

6.8

7.1

5.9

Percent of Average

Financial

Assets:

Gross Interest

Earned

8.0

7.6

6.6

8.1

8.1

7.8

8.1

7.9

7.7

7.1

Gross Interest

Expense

3.5

3.2

2.6

3.1

3.2

3.2

3.3

3.1

3.9

3.3

Margin

4.5

4.4

4.0

5.1

5.9

4.6

4.8

4.8

3.8

3.8

Net

Interest

The data in Table IV indicate that, for the banks
as a group, the improvement
in the expense structure
in 1977 was a considerably
more important
factor
increasing
net income or profits of these banks than
the improvement
in operating
income.
In fact, even
though
total net income
of minority
banks
was
greater in 1977 than in 1976, the ratio of operating
income to average total assets declined in 1977. On
the other hand, even with increased
deposits, loans,
and investments,
the ratio of operating
expense
to
average total assets declined from 7.6 percent in 1976
to 6.7 percent in 1977. In short, the drop in the operating expense to asset ratio more than matched the
drop in the corresponding
operating
income to asset
ratio, thereby resulting
in an improvement
in net income for the banks as a group. While the drop in the
operating
expense to asset ratio was indeed important, perhaps
even more significant
was the decline
in the ratio of noninterest
expense to average total
assets, which fell from 4.7 percent
to 3.9 percent
(Table V).
The decline in this latter ratio was

greatest
dropping

for the over $50 million asset-size
from 3.6 percent to 2.5 percent.

banks,

Salary
Expense
A key expense
that minority
banks were able to improve
upon in 1977 was the
outlay for salaries and employee benefits.
The improvement
in this expense
item is reflected
in the
reduction
in the ratio of salaries and employee benefits to average total assets for the banks as a group
(see Table V).
Increased
attention
to recruiting
and training,
along with better
utilization
of personnel appear to have been the principal
factors in
this improvement.
Salaries
and employee
benefits
tend to be relatively high expense
items at minority
banks.
One
reason for this is that more personnel
are needed to
service a given dollar deposit total when the average
size of each deposit is small.
Most minority
banks
levy service charges but the relatively
high salaries
that these banks must pay to secure qualified
personnel are an offset to revenues
from this source.

Table

V

RATIO OF NONINTEREST EXPENSES TO AVERAGE TOTAL ASSETS
AT MINORITY BANKS DURING 1976 AND
Size Groups
Noninterest

Expense

Average

Total

in Millions

Under 10

Net

and

Occupancy

Furniture

and

Provision

for

Other
Total

24

Benefits

Equipment
Possible Loan losses

Expenses

1977

1976

1977

1976

1.9

1.7

2.6

2.2

0.4

Employee

0.3

0.5

0.4

0.2

0.2

0.3

0.8

0.4

1.4

1.3

4.7

3.9

6.4

ECONOMIC

of

Dollars

10-25

1976
Salaries

1977

25-50

Over 50

1977

1976

2.0

1.8

2.0

1.9

1.2

1.9

0.5

0.4

0.4

0.4

0.2

0.2

0.3

0.2

0.2

0.2

0.2

0.1

0.1

1.0

0.6

0.7

0.8

0.3

0.3

1.1

0.3

2.0

1.9

1.6

1.4

1.3

1.4

1.4

1.3

5.4

5.0

4.6

4.2

4.2

3.6

2.5

REVIEW,

MARCH/APRIL

1979

1977

1976

1977

Moreover, at many minority
banks, a large fraction of
the clientele is likely to be made up of small business

1976, even though the former period was marked
the deepest recession during the post-World
War

owners

era

and of moderately

households
more

personnel

established
Loan

time

expenses

provisions
most
more

the

at minority

for possible
As

provision
than

any

outlay

expense

charge-offs
reported

and
income.

loan losses
percent

loan

V).

declined
between
the provi-

as a typical

it

is

related

to

net
on

of provision

greater
ratio

(see Chart 2).
In most of the studies and observations
to date on
the performance
of minority
banks, analysts
have
concluded
that the high volume of loan losses has
kept these banks from achieving
the earnings
level
enjoyed by nonminority
banks of comparable
size. A
study of the 1970 operations
of minority
banks, for
example,
found that “the provision
for loan losses
consumes
three times as much income at minority
banks than at either new or established white banks.”6
Another
ence in

study concluded
that the substantial
profitability
between
minority-owned

nonminority-owned

banks

was “attributed

differand

to the very

high loan losses suffered at the minority
banks.”7
Thus, by reducing losses
from loans in 1977, minority banks succeeded
in mitigating
a long-standing
problem in their current
operations
and in drawing

for possible

decreased
in 1977.

than

cash-

influence

has a direct

net loans

the
total

losses

Although

salaries,

with

expense

is not viewed

(average

1977, the

of average

noninterest

The ratio

was much

1972-75

during

was perhaps

possible

therefore

to average

in con-

losses

loan

other

like

of

associated

in 1976 to 1.07 percent

provement
period

banks

a percentage

for

losses

made

expenses

1976 and 1977 (see Table
sion for loan

of customers

progress

in curtailing

dramatic.

assets,

those

or

to require

banks.

Of all

improvement

individuals

needs are likely

than

nonminority

Losses

trolling

low income

whose banking

by
II

from

1.27

This

im-

that between

for these

years)

the
and

6 Donald L. Kohn, “Minority Owned Banks,” Monthly
Review, Federal Reserve Bank of Kansas City (February 1972), p. 19.
7 John T. Boorman, New Minority-Owned
Banks: A Comparative Analysis.

FEDERAL RESERVE BANK OF RICHMOND

Commercial

Table

VI

NONINTEREST EXPENSES AT MINORITY
DURING 1976 AND

Noninterest

Average Total
(in thousands
of dollars)

Expense

BANKS

1977

Net

and

Benefits

Occupancy

Furniture

403

2.3

77

1.3

44

49

159

106

Other

296

405

Expenses

Equipment

394

Provision for Possible Loon Losses

Total

and

1977

76

Employee

969

closer to the rest of the industry’s
one of its key operating
expenses.

9.0 percent in 1977 compared
1976 (Table VIII).
For

Percentage
Change

1976
Salaries

rising
sharply,
earnings
benefited.
interest and fees on loans to average

the 70 banks,

percent above
loans suggests

loans

The ratio of
net loans was

with

8.6 percent

in 1977 rose

in

almost

the 1976 level.
This increase
that minority
bankers
might

10

in net.
be ex-

periencing
more success in developing
loans, not only
in their traditional
markets,
but also in nontraditional markets-particularly
in the suburbs.

11.4

Income

-33.3

940

experience

3.0
-3.1

with

Other Noninterest
Expenses
A reduction
in the
relative
burden
of other noninterest
expenses
was
also noticeable
at minority
banks in 1977. The ratio
of net occupancy to average total assets dropped from
0.4 percent in 1976 to 0.3 percent in 1977, and the
ratio of “other expenses”
dropped from 1.4 percent
to 1.3 percent
(Table
V).
For the 70 banks taken
in the aggregate,
total outlays for noninterest
expenses were 3.1 percent
less in 1977 than in 1976
(Table VI).
The need to lower the overhead at these banks has
been emphasized
in several studies.8
No doubt the
decline in loan losses helped to bring about the relative reduction
of “other expenses,”
since in the past
these other expenses
have been closely associated
with monitoring
problem loans.
Changes
in the Revenue
Mix
In addition
to the
rather
successful
control
of operating
expenses
at
minority
banks during
1977, a change in the distri-

and

and interest

Yields

Interest

and dividends

bulk of minority
from interest

bank

and

fees

on securities

income

in 1977.

and fees on loans

on

loans

provided
Gross

the:

income

in 1977 increased

by

almost 9 percent over 1976, while gross income from
interest and dividends
on securities increased by only
2.4 percent.
Of the four categories
of securities held
by most banks, only U. S. Treasury
securities
produced a larger gross income in 1977 than in 1976
Also, the percentage
increase
in
(see Table II).
income from U. S. Treasury
securities
was greater
than

that from any other

single

source.

U. S. Treasury
and Government
agency securities
constituted
the largest
element
in the investment
portfolio
of minority
banks in both 1976 and 1977.
Holdings
of these securities rose substantially
in 1977
and in that year dominated
investment
portfolios
to
an even greater extent than in 1976. As a matter of

Table

VII

DISTRIBUTION OF REVENUE AT THE AVERAGE
MINORITY BANK IN 1976 AND 1977
As a Percent of Total
Operating Income

Item

8 See e.g.., Summers and Tucker, op. cit., p. 10. This
study points in particular to high occupancy expense as a
major factor depressing earnings of these banks.

26

ECONOMIC

REVIEW,

1977

56.6

58.0

2.0

1.5

5.9

6.3

26.0

24.9

10.4

12.3

9.6

8.2

Obligations of States and Political
Subdivisions

4.6

3.3

All Other

1.4

1.1

Service Charges on Domestic
Deposit Accounts

5.4

5.5

Other

bution
of revenue
over its several sources was an
important
factor contributing
to profitability.
For
the 70 banks in the aggregate,
an increased
proportion of operating
income
came from interest
fees
earned on loans and less from earnings
on government securities
in 1977.
Income from interest
and
fees on loans amounted
to 58.0 percent of total operating income in 1977 as compared
with 56.6 percent
in 1976 (Table VII).
As was the case for the banking industry
generally,
minority
banks’ portfolios
shifted toward
loans in 1977, and, with loan rates

1976

2.8

2.9

1.4

1.0

Interest

and Fees on Loans

Interest

on Balances

Income

on Federal

Interest

and Dividends -Total

U. S. Treasury
Obligations
Agencies

Charges,

Income

1979

etc.

Securities
U. S. Government

Securities

Total Operating

MARCH/APRIL

Banks

Funds Sold,

of Other

Service

All Other

with

Income

etc.

100.0

100.0

Table

Vlll

RATES OF RETURN ON FULLY CONSOLIDATED
PORTFOLIOS OF THE AVERAGE MINORITY BANK
IN 1976 AND 1977
ltem

than

Percent
1976

Obligations
Agencies

of Other

6.2

U. S. Government
7.9

6.7

Obligations of States and
Political Subdivisions

5.6

5.1

All Other

8.7

8.7

8.6

9.0

8.1

8.0

Securities

Loans - Gross
Total

Securities and

Gross Loans

the rate for 1976.9

6.2

5.9

U. S. Treasury

securities market possessed
might be noted, however,
rates, the rate of return on
loans for all insured comonly 20 basis points higher

1977

6.5

Securities- Total

intimate knowledge of the
by nonminority
banks.
It
that despite rising interest
total securities
and gross
mercial banks in 1977 was

fact, holdings
clined during

of municipals
and other securities
dethe year.
The large increase in Treasury securities
may have been associated
not only
with yield differentials,
but also with increases
in
public deposits requiring
a pledge of such securities
(Table III).
Although
the rate of return on gross loans at the
average
minority
bank increased
during
1977, the
overall
return
on total securities
and gross loans
remained
at about the same level as in 1976 (Table
VIII).
This was not too different from developments
in the banking
industry
as a whole.
The margin of
difference
in the overall rate of return between minority banks and the industry,
.87 percent, was accounted for by the increase of 124 basis points earned
by the industry on “all other securities.”
This difference may result from the longer experience
and more

SUMMARY

Taken as a group, minority
banks experienced
a
substantial
improvement
in profitability
in 1977.
Both the number of profitable
banks and net income
for the group increased,
although
a large portion of
the increased
net income was accounted
for by a
relatively
small number of the larger banks.
Unlike
the situation
in 1976 when the net income came
solely from securities
transactions,
almost all of the
income in 1977 was derived from current operations.
Improved
expense performance
as well as increased
gross revenues
figured
importantly
in the better
profitability
picture in 1977. Perhaps
the most outstanding development
in the 1977 operations
of these
banks
was the reduction
in noninterest
expenses
compared
with the previous
year.
As a group, the
banks were especially successful in reducing the loan
loss expense.
High loan losses have been the major
obstacle to increased
profitability
at these banks in
the past. The marked reduction
in such losses during
1977 suggests that minority
banks are devoting more
resources to such functions as credit investigation
and
are placing the adherence to sound banking principles
ahead of other considerations,
such as community
economic development.
9 Barbara N. Opper, “Insured Commercial Bank Income
in 1977,” Federal Reserve Bulletin, Vol. 64, No. 6 (June
1978), p. 442.

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I
FEDERAL RESERVE BANK

OF RICHMOND

27


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