Agriculture: Rural Banks Tap Cities for Growth, Loan Diversity

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For much of its 106-year history, the fortunes of State Savings Bank in Baxter, Iowa, have been harnessed to those of local farmers. The future might be a different story. The $49 million-asset thrift last year opened a loan-production office in West Des Moines - a fast-growing suburb of Iowa's capital that lies 40 miles from the bank's 1,000-person hometown. The goals of the new office are to increase loans and diversify away from agriculture. "Banks, like most businesses, are either moving forward or going backward," said John Edge, chief executive officer of State Savings. "With a declining number of farmers, we need to find ways to diversify and grow. It's hard to look at agriculture and believe that significant growth can come from that." Rural banks and thrifts around the country echo that sentiment. Frustrated by slow growth or decline in population, and a dependence on consistently risky agricultural loans, many small-town community banks have turned to nearby cities to grow through loan offices or branches. The Federal Deposit Insurance Corp. does not break down how many branches are opened in metropolitan areas by rural banks. But anecdotal evidence and some other FDIC statistics support the trend. For example, the total number of bank branches in metropolitan areas grew from 45,702 in 1995 to 49,265 in 1999, a 7.8% increase over four years, according to the FDIC. Nonmetropolitan locations sprouted up at a slower pace over the same period, growing from 19,626 to 20,943, a 6.7% increase. Metropolitan areas also offered more financial opportunities. Deposits at metropolitan branches grew by 26.3% between 1995 and 1999 compared with a 19.4% increase in nonmetropolitan areas. Bill King, president of the Indiana Bankers Association, agreed that metropolitan areas often offer the most logical growth opportunity for rural banks. At least 20 rural Indiana banks have opened branches or loan-production offices in Indianapolis in recent years, Mr. King said. Overall, the number of bank branches in Indiana have increased from 1,470 in 1990 to 1,743 in 1999, with much of that growth coming from rural banks "expanding into and around metropolitan areas," Mr. King said. "They're going places that might be underbanked or where there might be a niche opportunity for them," Mr. King said. "That's happening with increasing regularity." Still, few institutions anywhere are changing to the extent of Baxter's State Savings Bank. By the end of the year, the thrift company plans to pull up its roots, move its charter to Des Moines, and open a new headquarters there. It plans to keep its branch in Baxter. But like agriculture, that location is expected to play an ever-diminishing role for the thrift. Thanks in large part to its loan office in West Des Moines, State Savings has reduced agricultural loans to 10% of its portfolio from 50% in the early 1990s, Mr. Edge said. Commercial and residential real-estate loans have picked up much of that difference, and accounts in metropolitan Des Moines now hold about half of the thrift's assets. "It's just a matter of time before our center of activity is Des Moines," Mr. Edge said. "By some measures, it already is." A Minnesota bank recently transformed itself in a similar manner. Just three years ago, $43 million-asset Prime Security Bank in the northwestern Minnesota town of Karlstad depended on loans to wheat, sugar beet, and barley farmers for about 60% of its business, said Lee Madetzke, the bank's president and chairman. Then in the fall of 1998, the bank opened a branch 250 miles away in suburban Minneapolis - its first foray from its home county. Prime Security built on that expansion by opening two loan production offices in the Twin Cities area at the end of 1999 and the beginning of 2000. …