2017 Farm Bank Performance Report

Transcription

1 2017 Farm Bank Performance Report

2 2017 Farm Bank Performance Report Key Findings The banking industry is the nation s most important supplier of credit to agriculture providing nearly 50 percent of all farm loans in the U.S. $180 billion as of December Small loans made up almost half of bank farm and ranch lending with $76 billion in small and micro farm and ranch loans on the books at the end of The 1,847 farm banks recorded strong asset quality and capital levels in 2017 through serving their communities and sticking to traditional banking practices: a focus on the fundamentals of credit, solid underwriting standards and knowledge of the customer s business. Farm banks asset quality remained healthy in Noncurrent loans (loans 90 days or more past due or in nonaccrual status) have fallen to a pre-recession level of 0.52 percent of total loans. As a group, farm banks, remained well-capitalized through 2017, as these banks continued to raise equity capital levels a more conservative form of capital. Farm banks increased farm lending by 5.9 percent, or $5.9 billion, in 2017 and held $106 billion in farm loans at year-end. In 2017, farm banks increased employment by 1.9 percent, adding more than 1,600 jobs, and employed more than 88,000 rural Americans. Since 2007, employment at farm banks has risen 25.3 percent. Over 96 percent of farm banks were profitable in 2017, with over 55 percent reporting an increase in earnings. Based on solid 2017 performance, farm banks are well positioned to meet the needs of their customers in The ABA definition of farm bank has changed over the production of this report. In 2012, ABA made the decision to include institutions, previously excluded, with more than $1 billion in assets as these institution grew in number and importance to our country s farmers and ranchers. In addition, due to changing reporting requirements, ABA began to include savings and loan associations in the production of this report as data became available. American Bankers Association 2

3 Table of Contents Performance Review... 4 Regional Summary Northeast... 9 South Cornbelt Plains West ABA Agricultural Banking Experts American Bankers Association 3

4 2017 Farm Bank Performance Report The U.S. banking industry is a major provider of credit to agriculture with more than $180 billion in farm loans extended nearly 50 percent of the total farm credit outstanding in the U.S. as of year-end Moreover, the U.S. banking industry is a major source of credit to small farmers. Banks reported holding over $76 billion in small farm loans with nearly $20 billion in micro farm loans at the end of The number of outstanding small farm loans totaled 1.3 million with the vast majority over 897,000 loans under $100,000. In 2017, the agricultural sector continued a strong performance despite signs of slowing down and, as a result, farm banks posted solid results. 2 Farm banks reported solid asset quality and a strengthened balance sheet in In addition, farm banks, as a group, remained wellcapitalized through The U.S. Department of Agriculture (USDA) is forecasting net farm income to decline to $59.5 billion in Farm banks are well-prepared for possible turbulence in the agricultural sector. Farm banks have benefited from several years of strong agricultural sector performance and have, during these years, increased their quality and quantity of capital while strengthening their balance sheets. This paper examines the 2017 performance of the 1,847 banks that specialize in lending to agriculture. These farm banks have 8,270 offices and employ over 88,000 workers. Employment at farm banks increased by 1.9 percent in Since the end of 2007, employment at farm banks is up 25.3 percent. The majority of farm banks are small institutions. The median sized farm bank had $125 million in assets. However, there were forty-eight farm banks with more than $1 billion in assets. 1 A small farm loan is defined as a loan with an original value of $500,000 or less. A micro farm loan is a loan with an original value of $100,000 or less. 2 Farm banks are defined by the American Bankers Association as banks whose ratio of domestic farm loans to total domestic loans greater than or equal to the industry average, in 2017 this was percent. Studies before 2012 did not include banks with more than $1 billion in assets, nor savings and loan associations. American Bankers Association 4

5 Farm Banks Grow Agricultural Loan Portfolios Farm lending posted solid growth during Total farm loans at farm banks increased by 5.9 percent to $106 billion in 2017, up from $100 billion in Over one in every three dollars lent by a farm bank is an agricultural loan. Farm real estate loans grew at a faster rate than farm production loans. Outstanding farmland loans rose by 7.7 percent, or $4.0 billion, to $56.3 billion. Farm production loans grew at a pace of 3.9 percent, or $1.9 billion, to a total of $49.8 billion. Farm banks are a major source of credit to small farmers holding more than $48.5 billion in small farm loans with $11.1 billion in micro farm loans at the end of The number of outstanding small farm loans at farm banks totaled 756,198 with the vast majority more than 481,800 loans with origination values less than $100,000. In addition, the overall loan portfolio for farm banks experienced solid growth in 2017 rising 6.5 percent to $292.8 billion compared to overall banking industry growth of 4.5 percent over the year. One area of concern for farm bankers and their supervisors has been the appreciation in farmland values in some areas of the country. In addition, the Federal Reserve s monetary policy, known as Quantitative Easing, has spurred asset prices, including farm land. However, the run up in farmland values has not been a credit driven event. Farm banks are actively managing risks associated with agricultural lending, and underwriting standards on farm real estate loans are very conservative. The key consideration of farm bankers is the ability of their farm customers to repay debts regardless of their collateral position. To help manage risk, farm bankers regularly run stress tests on their customers portfolios to evaluate the health of borrowers under different adverse scenarios. Furthermore, according to Federal Reserve surveys, after several years of large increases in farmland values, farm bankers have indicated that farmland values have edged down from recent peaks in several states while year-over-year value gains have moderated in others. According to the latest ABA and Farmer Mac Agricultural Lender Survey Report, 25 percent of lenders reported lower farm land values in 2017, while an additional 66 percent of respondents reported no change in land values. The majority (60 percent) of respondents expect no further change in land values through the first half of However, 38 percent did note an expectation for declining farm land values with just over half expecting the decline to be between 0 to 10 percent over the next year. American Bankers Association 5

6 Over the last several years, farmland loans at farm banks have represented around half of total farm loans. In 2017, very few farm banks were overly concentrated in farm real estate loans relative to Tier 1 capital. The majority of farm banks had a farmland concentration ratio of under 200 percent a level that has not raised supervisory concerns. Deposits Grow at Farm Banks The loan-to-deposit ratio for farm banks rose from 79.8 percent at the end of 2016 to 84.9 percent at the end of Farm banks continue to have ample ability to meet the future demand for credit for qualified farm and ranch customers. Farm banks have posted solid deposit growth over the last several years. Reflecting continued trust by their customers, farm banks held $344.8 billion in deposits in Farm Banks Continue to Build Capital Equity capital at farm banks increased 5.6 percent to $48.4 billion in 2017 while Tier 1 capital increased by $2.1 billion to $45.7 billion. 3 Since the end of 2007, farm banks have added $22.1 billion in equity capital and $22.2 billion in core capital. Farm banks have built strong high-quality capital reserves and are wellinsulated from risks associated with the agricultural sector. The median Tier-1 leverage ratio for farm banks rose by 11 basis points during 2017 to percent; and is now 77 basis points above the leverage ratio before the recession began at the end of Equity capital is invested capital; it consists of the funds invested in a bank on a long-term basis. Such capital is obtained by issuing preferred or common stock, or retaining a portion of earnings. 4 Tier-1 leverage ratio is Tier-1 capital divided by total average assets for leverage capital purposes. American Bankers Association 6

7 Healthy Asset Quality at Farm Banks Consistent with industry trends, farm banks saw an increase in noncurrent loans during the recession. However, since the recession, farm banks have experienced improved asset quality as farmers and ranchers benefited from the strong farm economy. Noncurrent loans (loans 90 days or more past due and in nonaccrual status) stood at $2.8 billion at year-end The median noncurrent loan ratio held steady at 0.52 percent. This compares favorably to an industry noncurrent loan ratio of 1.20 percent. While farm and ranch customers continue to repay their loans, long-term delinquencies (90 days past due or more) did rise in 2017, possibly reflecting weaker farm incomes and reduced cash flow among farmers. These results are in line with various Federal Reserve District Banks reports which indicate only a modest deterioration in credit conditions despite the drop in farm income. According to the most recent ABA and Farmer Mac Agricultural Lender Survey Report, nearly 79 percent of respondents reported an overall decline in farm profitability in the last six months of Furthermore, on average survey respondents indicated that 60 percent of their current agricultural borrowers were profitable in 2017, but expect only 50 percent will remain so through Farm Banks Post Solid Earnings Farm banks posted solid earnings in 2017, reporting total net income of $4.7 billion. While this is a 3.1 percent drop from the previous year, farm banks hold a positive outlook for the future as unnecessary regulatory burdens are addressed and their customers and communities begin to benefit from the new tax law. Ninety-seven percent of all farm banks were profitable in 2017, with 56 percent reporting an increase in earnings compared to a year earlier. Interest income at farm banks rose during 2017 by 6.9 percent to $16.6 billion. Noninterest income at farm banks also rose over the year, by 1.0 percent to $3.0 billion. In comparison, interest income for the entire banking industry rose 11.0 percent and noninterest income rose 0.7 percent over the same timeframe. Interest expenses rose during 2017 by 15.3 percent to $1.9 billion, while noninterest expenses rose 7.3 percent to $11.4 billion. In comparison, interest expenses for the entire banking industry rose 34.7 percent and noninterest expenses rose 4.6 percent over the same timeframe. Salary and employee benefits at farm banks grew by 5.5 percent to $6.4 billion. Salaries and employee benefits represented 56.3 percent of all noninterest expenses in American Bankers Association 7

8 As farm banks continue to struggle with unnecessarily burdensome regulations, the median return on average assets (ROA) for farm banks fell slightly to 1.05 percent in However, more than two-fifths of all farm banks had an ROA in 2017 in excess of 1.12 percent near prerecession levels. Outlook for 2018 Continued Headwinds in the Farm Economy Farm sector profitability is forecasted to decline in 2018, as the sector continues to adjust after reaching historic highs during The USDA is forecasting net farm income in 2018 of $59.5 billion. 5 This is down 6.7 percent from the previous year, and represents the lowest net farm income level in nominal dollar terms since Net cash farm income in 2018 is forecasted to be $91.9 billion. 6 This is down 5.1 percent from 2017, and the lowest level since In inflation adjusted dollars, net farm income is forecasted to fall 8.3 percent and net cash farm income to decline by 6.8 percent. The USDA is forecasting that cash receipts for all commodities will fall 0.5 percent in 2018 to $363.1 billion. Annual declines are predicted for both animal/animal product (0.3 percent) and crop (0.8 percent) receipts. Forecast declines in receipts for milk and poultry/eggs are expected to more than offset a forecast increase in meat animal receipts. While in the crop sector, forecast increase in soybean receipts (4.5 percent) will be more than offset by expected declines in receipts for wheat (3.5 percent), corn (4.0 percent), cotton (5.9 percent), fruits/nuts (2.3 percent) and vegetables/melons (7.0 percent). Direct government farm payments are forecasted by the USDA to decline 18.6 percent to $9.3 billion, reflecting large declines in Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) payments. ARC and PLC program payments accounted for nearly 61 percent of total direct government payments in 2017, and are expected to represent 54 percent in The USDA is forecasting an increase of one percent in total production expenses in In inflation-adjusted terms, total production expenses are forecast to remain relatively flat. However, in nominal terms, rising expenses will be driven by the increased expense of fuels/oil (10.2 percent), interest (13.8 percent) and hired labor (2.5 percent). Notably, expenses for inputs that typically are produced by the farm sector itself, including feed, as well as livestock and seed, are expected to decline by 1.3 percent. The value of farm assets is expected to increase by 1.6 percent in 2018, to $3.1 trillion, as the value of farm real estate is again on the rise. The value of farm real estate assets account for 83.5 percent of 2018 farm sector assets. The USDA expects farm sector debt to increase to $388.9 billion (1.0 percent) by the end of Farm sector real estate debt is expected to increase by 1.2 percent to $239.0 billion, while non-real estate farm debt is expected to grow more slowly, rising 0.6 percent, to $150.0 billion. Farm banks have ample funds to meet the credit needs for qualified farm borrowers and reported growth in loan volumes to farmers suggesting that credit to the sector has not been curtailed. 5 Net farm income reflects a broader measure of profitability as it includes noncash values such as inventory flows, economic depreciation and gross imputed rental income. 6 Net cash farm income reflects all cash receipts from farming and farm-related income, minus cash expenses. American Bankers Association 8

9 Northeast Media n Top Bottom Number of Full-Time Employees Total Assets ($ in Mil) $315.5 $504.4 $263.2 Total Loans & Leases ($ in Mil) $224.3 $349.3 $170.3 Total Deposits ($ in Mil) $265.9 $388.8 $201.6 Tier 1 Common Equity Risk-Based Capital Ratio 13.6% 20.0% 12.9% Tier 1 Leverage Ratio 9.9% 12.2% 8.9% Return on Average Assets 0.9% 1.0% 0.7% Return on Average Equity 8.0% 9.9% 6.2% Net Interest Margin 3.2% 3.6% 3.1% Total Interest Expense/Average Assets 0.6% 0.4% 0.7% Total Interest Income/Average Assets 3.6% 3.8% 3.6% Total Noninterest Income/Average Assets 0.4% 0.5% 0.3% Efficiency Ratio 55.1% 49.5% 61.6% Noncurrent Loans*/Total Loans 0.6% 0.2% 1.1% Net Charge-Offs/Average Loans 0.0% 0.0% 0.1% Loan Loss Reserves/Gross Loans 1.1% 1.4% 0.9% Farmland Loans/Total Loans & Leases 18.3% 25.4% 14.7% Agricultural Production Loans/Total Loans & Leases 3.6% 5.8% 3.0% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. The 13 farm banks in the Northeast region reported a 19.0 percent increase in farm loans from a year ago, rising to $1.2 billion, largely influenced by one institution. Agricultural production loans rose 7.6 percent from a year ago to $245 million, while farmland loans increased 22.5 percent to $909 million. Farm banks in the Northeast region were able to maintain profitability in The median return on assets increased to 1.0 percent, while the median return on equity fell slightly to 8.0 percent. The median Tier 1 risk-based capital ratio for farm banks in the Northeast region was 13.6 percent. Northeast farm banks employed 930 full-time employees in American Bankers Association 9

10 South Median Top Bottom Number of Full-Time Employees Total Assets ($ in Mil) $158.0 $285.2 $93.5 Total Loans & Leases ($ in Mil) $102.5 $180.2 $48.9 Total Deposits ($ in Mil) $125.2 $243.0 $79.0 Tier 1 Common Equity Risk-Based Capital Ratio 16.5% 20.6% 13.6% Tier 1 Leverage Ratio 10.9% 12.8% 9.5% Return on Average Assets 1.0% 1.4% 0.8% Return on Average Equity 8.4% 12.2% 6.1% Net Interest Margin 4.0% 4.4% 3.6% Total Interest Expense/Average Assets 0.4% 0.3% 0.5% Total Interest Income/Average Assets 4.1% 4.5% 3.7% Total Noninterest Income/Average Assets 0.6% 0.8% 0.4% Efficiency Ratio 65.4% 59.4% 73.9% Noncurrent Loans*/Total Loans 0.8% 0.3% 1.7% Net Charge-Offs/Average Loans 0.1% 0.0% 0.3% Loan Loss Reserves/Gross Loans 1.3% 1.7% 1.1% Farmland Loans/Total Loans & Leases 17.0% 23.2% 13.3% Agricultural Production Loans/Total Loans & Leases 6.2% 12.2% 3.0% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. The 192 farm banks in the South region increased farm loans by 7.9 percent, or $610 million, from a year ago rising to $8.3 billion in Agricultural production loans rose by 5.6 percent from a year ago, to $2.2 billion, while farmland loans rose by 8.9 percent to $5.5 billion. Farm banks in the South remained profitable in The median return on assets remained steady at 1.0 percent, while the median return on equity held steady at 8.4 percent. The region s farm banks median Tier 1 risk-based capital ratio was 16.5 percent, representing healthy banks in the region. Farm banks in the South region employ over 12,100 men and women, an increase of 2.0 percent from the previous year. American Bankers Association 10

11 Cornbelt Median Top Bottom Number of Full-Time Employees Total Assets ($ in Mil) $125.0 $222.6 $67.6 Total Loans & Leases ($ in Mil) $82.4 $156.2 $40.4 Total Deposits ($ in Mil) $100.8 $183.8 $56.6 Tier 1 Common Equity Risk-Based Capital Ratio 15.1% 19.0% 12.6% Tier 1 Leverage Ratio 10.7% 12.3% 9.5% Return on Average Assets 1.0% 1.4% 0.7% Return on Average Equity 9.1% 12.1% 6.3% Net Interest Margin 3.6% 3.9% 3.2% Total Interest Expense/Average Assets 0.4% 0.3% 0.6% Total Interest Income/Average Assets 3.9% 4.2% 3.5% Total Noninterest Income/Average Assets 0.4% 0.6% 0.3% Efficiency Ratio 63.5% 56.1% 71.1% Noncurrent Loans*/Total Loans 0.5% 0.1% 1.3% Net Charge-Offs/Average Loans 0.0% 0.0% 0.2% Loan Loss Reserves/Gross Loans 1.2% 1.5% 1.0% Farmland Loans/Total Loans & Leases 21.2% 28.6% 15.1% Agricultural Production Loans/Total Loans & Leases 15.9% 25.1% 8.6% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. Farm banks in the Cornbelt region increased farm loans by 6.6 percent, or $2.9 billion, from a year ago to $46.4 billion in Agricultural production loans rose 5.9 percent from a year ago to $21.2 billion, while farmland loans increased 7.2 percent to $25.2 billion. There are 873 farm banks in the Cornbelt region. Farm banks in the Cornbelt region maintained profitability in The median return on equity was 9.1 percent, while the median return on assets at 1.0 percent. The region s median Tier 1 risk-based capital ratio rose to 15.1 percent. Farm banks in the Cornbelt region employ more than 35,600 men and women, a 1.8 percent increase compared to 2016 employment levels. American Bankers Association 11

12 Plains Median Top Bottom Number of Full-Time Employees Total Assets ($ in Mil) $108.5 $224.5 $57.3 Total Loans & Leases ($ in Mil) $63.6 $143.5 $30.0 Total Deposits ($ in Mil) $88.4 $173.1 $46.7 Tier 1 Common Equity Risk-Based Capital Ratio 15.5% 20.0% 12.6% Tier 1 Leverage Ratio 10.7% 12.5% 9.4% Return on Average Assets 1.1% 1.5% 0.7% Return on Average Equity 9.4% 13.1% 6.2% Net Interest Margin 3.7% 4.2% 3.3% Total Interest Expense/Average Assets 0.4% 0.3% 0.6% Total Interest Income/Average Assets 3.9% 4.4% 3.5% Total Noninterest Income/Average Assets 0.4% 0.7% 0.3% Efficiency Ratio 64.4% 55.8% 72.4% Noncurrent Loans*/Total Loans 0.4% 0.0% 1.2% Net Charge-Offs/Average Loans 0.0% 0.0% 0.2% Loan Loss Reserves/Gross Loans 1.4% 1.7% 1.1% Farmland Loans/Total Loans & Leases 17.5% 26.4% 12.0% Agricultural Production Loans/Total Loans & Leases 23.6% 37.5% 12.9% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. The 705 farm banks in the Plains region increased their farm loans by 5.1 percent, or $2.0 billion, from a year ago to more than $40.3 billion in Agricultural production loans rose 2.5 percent from a year ago to $21.4 billion, while farmland loans increased 8.3 percent to $18.9 billion. Farm banks in the Plains maintained profitability in The median return on assets held steady at 1.1 percent, while the median return on equity fell slightly to 9.4 percent. The region s farm banks had a median Tier 1 risk-based capital ratio of 15.5 percent a slight increase from the previous year. Farm banks in the Plains region employ over 33,000 men and women, an increase of 2.0 percent compared to American Bankers Association 12

13 West Median Top Bottom Number of Full-Time Employees Total Assets ($ in Mil) $200.7 $480.1 $90.3 Total Loans & Leases ($ in Mil) $104.3 $323.9 $54.3 Total Deposits ($ in Mil) $171.8 $381.9 $72.0 Tier 1 Common Equity Risk-Based Capital Ratio 15.5% 18.6% 12.7% Tier 1 Leverage Ratio 10.1% 11.7% 9.4% Return on Average Assets 1.0% 1.2% 0.8% Return on Average Equity 9.8% 12.0% 6.9% Net Interest Margin 4.0% 4.5% 3.6% Total Interest Expense/Average Assets 0.3% 0.1% 0.4% Total Interest Income/Average Assets 4.0% 4.5% 3.7% Total Noninterest Income/Average Assets 0.5% 0.7% 0.3% Efficiency Ratio 64.0% 54.3% 73.3% Noncurrent Loans*/Total Loans 0.7% 0.2% 1.7% Net Charge-Offs/Average Loans 0.0% 0.0% 0.2% Loan Loss Reserves/Gross Loans 1.5% 1.8% 1.3% Farmland Loans/Total Loans & Leases 16.4% 22.6% 10.4% Agricultural Production Loans/Total Loans & Leases 15.0% 22.9% 10.4% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. The 64 farm banks in the West region increased farm loans by 2.9 percent, or $280 million, from a year ago to $9.8 billion in Agricultural production loans rose slightly from a year ago to $4.5 billion, while farmland loans increased 5.1 percent to $5.3 billion. Farm banks in the West remained profitable in The median return on equity rose to 9.8 percent, while return on assets fell only slightly to 1.0 percent. The median Tier 1 risk-based capital ratio for farm banks in the West region was 15.5 percent. Farm banks in the West region employ more than 6,400 men and women, up 2.2 percent from the previous year. American Bankers Association 13

14 ABA's Agricultural & Rural Banking Resources ABA Agricultural Banking Experts Ed Elfmann, Senior Vice President, Agriculture and Rural Banking Policy Sarah Grano, Vice President, Public Relations Brittany Kleinpaste, Vice President, Economic Policy & Research Cynthia Hall Watkins, Senior Director, Congressional Relations & Political Affairs Barbara McCoy, Senior Meeting Coordinator, Agricultural & Rural Banking Policy Brian Nixon, Senior Editor, Member Communications Resources for Agricultural Banks ABA Ag Banker Quarterly Bert Ely's Farm Credit Watch ABA National Agricultural Bankers Conference: November 11-14, 2018, Omaha, Nebraska Agricultural Banks Performance Scorecard ABA and Farmer Mac Agricultural Lender Survey Report Introduction to Agricultural Lending Facilitated Course Farmer Mac Alliance American Bankers Association 14

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