In the battle for market share in the Nebraska heartland, credit card and consumer lenders are putting the squeeze on farm banks.

The returns generated from credit card and consumer loans have allowed some banks to pay premium rates and lure deposits away from rural competitors.

That has compressed net interest margins at some banks that depend on agriculture for their bread and butter.

The situation is unusual because of growing loan demand and a stagnant deposit base. According to the Omaha branch of the Federal Reserve Bank of Kansas City, deposits in Nebraska have hovered around $25 billion for the last three years.

"Given the stable deposit picture, those people who have got loan growth are having to take deposits from others in the market," said J. William Henry, an executive vice president with First National Bank of Omaha. "It can't be driven totally by credit cards, because our loans were up in all categories in 1995."

The bank's Omaha-based parent company, First National of Nebraska, has for years nurtured a thriving credit card business, according to Stuart Feldstein, a credit card industry analyst and principal with SMR Research in Budd Lake, N.J. Of its $5 billion in assets, nearly half is in the form of credit card loans. And credit cards accounted for nearly half of the $500 million rise in total loans last year.

To fund this loan growth, the bank has helped bid up deposit costs in the state. According to Bank Rate Monitor, a Palm Beach, Fla.-based newsletter tracking interest rates paid on deposits and charged on loans, the average money market account nationwide paid 2.75% as of March 20.

For rural Nebraska banks like Commercial State Bank in Hoskins, about 100 miles northwest of Omaha, the same account would yield 5.13%.

Commercial State Bank's rates are also higher on certificates of deposit than in all major markets across the country. Commercial State Bank's rates are 66 basis points above the national average on six-month certificates of deposit, and 74 basis points above the national rate on one-year rates.

Like its competitors, First National of Nebraska is able to pay this premium because of the returns on its credit card operations. Unlike its competitors, it has funded its portfolio largely through deposits and focused its credit card efforts in Nebraska.

"They never really went national in a big way," said Mr. Feldstein. "But they certainly blanket their area very well."

Of the $4.1 billion in loans reported by First National of Nebraska at Sept. 30, nearly $2.3 billion, or 55.6%, were from credit cards. Likewise, this type of credit made up more than 55% of the portfolio at six of its nine subsidiary banks, including 90.4% at its First National Bank of Kansas in Overland Park, a Kansas City suburb.

"While they're rock-ribbed and conservative, they're still leading-edge- type people," said Jerry Swords, a regional bank analyst in Kansas City, Mo.

He noted, however, "they are very aggressive on rates."

That aggressiveness has paid off. All but one of First National's credit card banks reported double-digit growth in deposits between 1993 and Sept. 30, 1995. The Overland Park bank had a 315.9% increase during the period.

But the higher rates caused by this aggressiveness are also ruffling feathers at rural banks across the state. For these banks, it is a question of paying the going rate or losing the deposits to a bank, thrift competitor, or brokerage company.

"All of our small rural banks are having trouble keeping deposits," said Max Rossiter, president of the Nebraska Independent Bankers Association and chief executive of the Bank of Hartington. "I just went out and bought my first $1 million in brokered deposits."

The rural banks are up against a growing tide. Mr. Rossiter said that the banks in Omaha have already given credit cards to some of his customers and have sent deposit rate cards to his customers off and on for the last 10 years.

"While they have this customer base, they don't have to service it," he added. "But they come in and take money out of my coffers anytime they want."

Fred Otten, chairman and chief executive of Commercial State in Hoskins, said his rates are below those of the two highest bidders in the market. But he also said the competition for deposits has made a noticeable dent in the bank's operating margins.

"We used to operate at a 4% (net interest) margin," he said. "We are now down around 3% or less. I've even seen it as low as 2.7%."

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