Karen Grandstrand - Assistant Vice President, Bank Supervision
Published July 1, 1995 | July 1995 issue
The following summary of Ninth District banks' 1994 performance is from the Banking Supervision Department's annual report on Ninth District Banking Conditions by Karen L. Grandstrand, vice president. Also included are her comments on the vulnerability of district banks to changes in agriculture.
Ninth District bank earnings remained strong in 1994 and were up sharply from the late 1980s and early 1990s. Interest income continued healthy and lending expanded except for housing and other loans.
District bank earnings remained strong across the region.
Interest income continued healthy and lending expanded except for housing and other loans.
At year-end 1994 there were 1,038 commercial banks in the Ninth Federal Reserve District, ranging in size from $3.7 million to $15.5 billion in assets. (Note: These figures exclude credit card banks.)
The number of district banks has declined significantly since the early 1980s, primarily because of changes in merger laws for Minnesota and Montana, consolidation through acquisitions and, to a much lesser degree, bank failures. During 1994, the total number of banks declined by 43. The Ninth District did not report any bank failures last year.
The distribution of banks by states in the Ninth Federal Reserve District is Minnesota 543 (52 percent), Montana 112 (11 percent), North Dakota 135 (13 percent), South Dakota 112 (11 percent), northwestern Wisconsin 103 (10 percent) and the Upper Peninsula of Michigan 33 (3 percent). At year-end 1994, 710 bank holding companies were headquartered within the Ninth District, and 589 of them are one-bank holding companies.
30 district banks with total assets over $300 million represent one half of the total banking assets in the district, while most district banks are small, with 67 percent reporting total assets of less than $50 million. 62 percent of the district's banking assets are in Minnesota
Are district banks vulnerable to agricultural change?
Ninth District agriculture is confronted with several major changes:
Small Midwest dairy units are under increasing price pressure from larger, more efficient Western dairy producers. The biggest producers are increasing their share of the dairy market, and small producers are cutting costs to the bare minimum and relying on non-farm income to survive. (See January 1995 fedgazette feature story on dairying.) Montana and North Dakota wheat farmers face increasing Canadian competition with the implementation of the U.S.-Canada Free Trade Agreement. The omnibus Farm Bill is up for renewal this year, and Congress could impose large cuts on some programs or possibility eliminate them. Targeted programs include commodity price supports and the Conservation Reserve Program (CRP). CRP, authorized in the 1985 Farm Bill, provides landowners direct payments for taking highly erodible or otherwise environmentally sensitive land out of production.
These changes concern Ninth District bankers and their regulators. Agricultural loans account for one-third of loans held by district banks outside the region's metropolitan areas and regional trade centers. These rural banks have a considerable, continuing exposure to changes in agricultural conditions, and they account for 64 percent of the district's 1,038 commercial banks and for 27 percent of the region's $98 billion in commercial banking assets.
District rural banks, however, are better positioned to deal with adverse agricultural conditions than they were in the early 1980s. The exposure of rural banks to finance agricultural production has declined as a percent of total loans. Most of this decline has been offset by increases in real estate loans secured by farmland. The fact that a larger portion of agricultural loans are now collateralized by farmland reduces the relative risk of loss to banks.
In addition to the greater protection provided banks by a greater reliance on collateral lending, rural banks have taken other steps to protect themselves from a repeat of the farm lending crisis of the 1980s. The most dramatic of these has been the substantial increase in reserves and capital available to absorb potential losses.
While rural banks today are less susceptible to agricultural problems than a decade ago, those banks with many customers participating in the CRP could face problems if it is eliminated or sharply curtailed. Curtailing CRP would eliminate a contingent source of funds for repaying farm operating loans, and it may decrease the ability to service and repay debt secured by farmland.
Although most Ninth District rural counties receive CRP payments, in 42 of them CRP payments exceed $1 million and payments constitute a minimum of 10 percent of net farm income.
The 77 commercial banks in the CRP counties derive most of their income from farming. They constitute 7 percent of the district's commercial banks and account for 2 percent of the region's commercial banking assets. These banks have exposure to agriculture lending four to five times greater than for all district banks and twice as great as for all rural banks. While there are forces that will work to offset the loss of income to CRP payments, such as the income from bringing these marginal lands back into production, the banks in CRP counties may feel the stress of change to a greater degree than other district banks.