Loan Portfolios in South Dakota

Banks and Credit Unions

Leon Korte

The University of South Dakota School of Business

Vermillion, South Dakota

February 2004

Community Banks and Comparable Credit Unions

Interest Yield on Outstanding Loans

Summary and Conclusions

Data were gathered for all commercial banks reporting South Dakota as operating headquarters for the years ended December 31, 1999 through 2002.  Observations qualifying as "community banks" [total assets of less than $100 million] were retained as part of the study.  Sixty-three community banks were identified; two observations were eliminated from the population.  One bank reported no outstanding loans in any of the four years of the study.  A second bank was chartered in 1999 and was eliminated because it did not report activity in all four years of the study period.  Sixty-one community banks were included in the analysis.  Total assets were estimated to be more than $2 billion in each of the four years and total outstanding loans were estimated to be more than $1.25 billion in each year.  Total assets grew approximately 4 percent in 2000 and 2002 and approximately 6 percent in 2001.  Growth in outstanding loan balanced declined from 9 percent in 2000 to 6 percent in 2001 to just under 5 percent in 2002.  Outstanding loans and leases accounted for fifty-eight percent of total assets in 1999 and then appeared to stabilize at approximately 61 percent of total assets in the last three years of the study period.

Table 1 Outstanding Loans as  a Percentage of Total Assets Community Banks and Credit Unions in South Dakota For Years Ended December 31, 1999, 2000, 2001, and 2002
	Community Banks [n = 61]			Credit Unions [ n = 57]
	Assets	Loans	% assets	Assets	Loans	% assets
1999	$2,167,408	$1,263,988	58%	$643,150	$488,606	76%
2000	$2,271,033	$1,380,954	61%	$703,765	$555,323	79%
2001	$2,417,356	$1,464,755	61%	$801,327	$584,510	73%
2002	$2,514,540	$1,533,034	61%	$848,933	$607,252	72%

Data were also gathered for credit unions reporting South Dakota as operating headquarters for the same four year period.  Preliminary data were gathered for fifty-nine credit unions.  One firm was eliminated from the study because it exceeded the $100 million ceiling applied to community banks.  One firm was eliminated because its reporting was identified as "Inactive".  An inactive reporting designation is assigned when regulatory reports are not timely.  The inactive status calls into question the accuracy of the financial data reported by the credit union.  Total assets for credit unions in South Dakota grew by 9 percent in 2001, 14 percent in 2001, and 6 percent in 2002.  Growth in outstanding loan balances was 14 percent in 2000, 5 percent in 2001 and 4 percent in 2002.  Outstanding loans as a percentage of total assets for credit unions peaked at 79 percent in 2000 and then declined to approximately 72 percent by the end of 2002.  The higher percentage of loan to total assets for credit unions may be a function of alternative investment opportunities and a lower investment in fixed assets for credit unions.

The average community bank grew from $35.5 million in total assets in 1999 to just over $41 million at the end of 2002.  During this same period, the average South Dakota credit union grew from just over $11 million in 1999 to nearly $15 million at the end of 2002.  In terms of absolute size, the average community bank in South Dakota is approximately three times larger than the average credit union.  Average values can be misleading.  The smallest community bank in South Dakota reported total assets of approximately $8.3 million in 2000.  During that same time period, twenty-four credit unions reported total assets of $8.3 million or more in each year.  When comparing the average total assets of the two groups the differences were statistically significant in the first three years of the study period [1999, 2000, and 2001].  Although the average credit unions was still smaller in 2002, the difference in the average total assets of the two groups was not statistically significant at a confidence level of 0.05.  With a higher relative proportions of outstanding loans to total assets, the differences in average balances of the outstanding loan portfolios were not statistically significant in any of the four years of the study period.

Table 2 Average Total Assets and Average Outstanding Loans Community Banks and Credit Unions in South Dakota Reporting More than $8 million and Less Than $100 million in Total Assets For Years Ended December 31, 1999, 2000, 2001, and 2002
	Average Total Assets			Average Outstanding Loans
	Banks [n = 63]	Credit Unions [n = 24]	Signif	Banks [n = 63]	Credit Unions [n = 24]	Signif
1999	$35,531	$22,458	0.0073	$20,721	$17,047	0.2475
2000	$37,230	$24,696	0.0188	$22,639	$19,374	0.3599
2001	$39,629	$28,186	0.0426	$24,012	20,492	0.3635
2002	$41,222	$29,892	0.0518	$25,132	21,276	0.3383

A review of headquarters communities reflects no overlap between the community banks and the credit unions of similar size.  Those communities serve by the twenty-four largest credit unions in South Dakota are not identified with community banks.  The communities served by the largest credit unions may be served by branches of community banks or by branches of larger regional financial services.  The communities served by the community banks of South Dakota may be served by the smaller credit unions, but a preliminary glance suggests a minimal overlap of competition in lending activity between community banks and credit unions of similar sizes in the state of South Dakota.

Community banks and credit unions reflected different yield rates on outstanding loans.  Community banks consistently earned rates greater than the estimated annual prime lending rate.  Credit unions, in this analysis all credit unions in South Dakota, earned less than the prime lending rate for the first two years of the study period, a rate equal to the prime lending rate in the third year of the study period, and a rate higher than the prime lending rate in the last year of the study period.  In all four years, credit unions earned yield rates lower than community banks.  The differences between the rates earned were statistically significant in all years of the study period.

Table 3 Comparison of Average Yield on Loans and Consumer Loans as a Percentage of Total Loan Portfolio Community Banks and Credit Unions in South Dakota For Years Ended December 31, 1999, 2000, 2001, and 2002
	Comparison of Average Yield on Loans				Consumer Loans as % of Total Loans
	Prime	Banks	Credit Unions	Significance	Banks	Credit Unions
1999	7.99	9.4192	6.9446	0.0000	10.30	86.99
2000	9.23	9.8254	7.2809	0.0000	10.18	85.27
2001	6.92	9.2164	6.9196	0.0000	10.27	83.74
2002	4.68	7.9080	6.1784	0.0000	10.19	83.06

One principle difference between the loan portfolios for community banks and credit unions is proportion of consumer loans as a percentage of the total loan portfolio reported by the two segments of the industry.  Community banks consistently reported approximately ten percent of their outstanding loan portfolio in the consumer loan category.  Credit unions reported consumer loans at approximately 85 percent of the outstanding loan portfolio.

In South Dakota community banks outnumber credit unions and are approximately three times larger in average size.  When comparing firms of approximately similar asset size, there is no statistical difference in the average balance of outstanding loan portfolios.  Credit unions earned on average less per dollar loaned than did community banks and have a larger percentage of their portfolios in consumer loans.  In terms of geographic competition, there is limited evidence that suggests credit unions which match community banks in terms of total assets are not usually located in the same communities as banks which qualify as "community banks."

In South Dakota community banks outnumber credit unions and are approximately three times larger in average size.  In terms of geographic competition, there is limited evidence that suggests credit unions which match community banks in terms of total assets are not usually located in the same communities as banks which qualify as "community banks."

When comparing firms of approximately similar asset size, there is no statistical difference in the average balance of outstanding loan portfolios.  Credit unions earned on average less per dollar loaned than did community banks and have a larger percentage of their portfolios in consumer loans. 

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