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Farmers: How Strong Is Your Bank?

In a town of 200 located 8 miles east of the South Dakota border, the State Bank of Bellingham, Minnesota, is surrounded by farms.

Like most of nearly 2,000 lenders defined by the American Bankers Association as farm banks, it’s not remarkable, except for one thing: More of its loans go to farmers than any other bank in the nation. 

With 97% of its loans backing agriculture, the State Bank of Bellingham is first on the ABA’s Top 100 Lenders Ranked by Concentration list.

“We take care of our existing customers, but in a town of 200 people, you can wrap up our total residential loans with one ag loan,” says Brian Haugen, the bank’s vice president.  

The list with the Bellingham bank differs from ABA’s other annual list, the top 100 lenders ranked by dollar volume. Wells Fargo Bank easily leads it, with almost $7.3 billion in agricultural loans. Yet, that’s a tiny share of Well Fargo’s nearly $1 trillion in loans, giving the bank a farm loan concentration of only 0.8%. 

So, for a snapshot of agriculture and rural lending today, talk to the bankers on that list of country banks specializing in agriculture. That ABA list doesn’t tell you how individual banks are doing. The website of the Federal Deposit Insurance Corporation (FDIC) will, if you download bank quarterly financials, known as call reports. 

A call report has at least 50 pages of tables and numbers that only a bank examiner could love. So why would you want to check out your local bank’s standing with the FDIC? 

In the 1980s, when the FDIC took over failed rural banks to protect depositors, farmer borrowers with high-risk loans had a tough time finding another lender. 

Today, even after several years of falling commodity prices, rural banks are in much better shape than they were in the 1980s. In fact, they’re getting stronger, according to ABA’s 2016 Farm Bank Performance report on 1,912 farm banks (those who lend at least a third of their loan dollars to farmers). 

Farm bank capital, a cushion against bad years, grew from 2015 to 2016. Equity capital at farm banks grew 3.7% in 2016 to $48.4 billion. The farm banks’ median return on assets grew slightly from 2015, as well, to 1.03% in 2016.

Noncurrent loans (90 days or more past due or loans not accruing interest, as measured by ABA) are at a pre-recession level of 0.54% of total loans. (That’s an uptick from the 2015 level of 0.47%.) 

Like all banks, farm lenders were hit by the Great Recession that began in late 2007. As the economy slowly recovered, farm banks strengthened faster, due to commodity prices that saw corn futures peak in 2012.

“Banks were able to build up capital and their balance sheets when farmers were doing well,” says Brittany Kleinpaste, director of economic policy and research for the ABA. “That will help farmers in return, because banks can be there for farmers. It allows lenders to stretch out the length of loans.”


To get a snapshot of the state of country banks, we drilled into 2017 second-quarter FDIC call reports for the top five lenders on the ABA list of the leading 100 banks by farm loan concentration. The chart above shows key indicators for these banks, along with public return on asset data provided by ABA.

In Minnesota, the State Bank of Bellingham has strengthened.

At 2.23%, the Bellingham bank’s ROA was more than double the median for all farm banks. With assets of $50 million, its size is less than half of the $118 million median size for those banks. The capital ratio that is called out, the Common Equity Tier 1 Capital Ratio, is also strong. It’s almost double the 6.5% level that the FDIC requires for a bank to be considered well capitalized. The Bellingham lender reported no past-due loans.

Bank officer Haugen attributes part of that to good weather.

“The only thing we were blessed with last year, we probably had the best crops in 35 years,” he says. In 2016, corn yielded about 185 to 195 bushels an acre there. This year, Haugen says corn is more likely to reach 165 to 175 bushels.

“It’s going to be an average year or less,” he says. For his borrowers, repayment will be more difficult. “It’s going to be very tight,” he says.

Farther out in the Great Plains, Nebraska State Bank in Oshkosh is about the same size as the Bellingham bank, but at midyear, it had $58,462 in loans more than 90 days past due. That’s .15% of all of its outstanding loans. That’s still a low number compared with household debt, which was 4.8% delinquent in the first quarter of this year, according to the New York Federal Reserve Bank. It was 11.9% past due at the end of 2009 (using a more stringent standard of repayments – late by 30 days or more). 

Bank president Blake Howsden says some late loans are typically cleared up by year end, partly because borrowers may be late in selling crops (which is one reason ABA considers loans noncurrent at 90 days, not 30). 

The bank specializes in making loans that are guaranteed by USDA’s Farm Service Agency. That means the bank’s actual risk is only between 5% and 10% of those more troubled loans.

“We’re so unique. We do FSA-guaranteed loans in 12 states,” says Howsden. The bank has specialized in that market for 30 years. 

“To me, agriculture is back to normal. I don’t see it as a distress time. I see it as normal,” Howsden says. That means the norm of frugality and caution about debt has returned.

Howsden expects record profits for his bank. Its ROA of 4.0% (first half 2017) is the strongest of the top five country banks.

Grant County State Bank in Carson, North Dakota, is another lender without noncurrent loans. It’s also in the state’s biggest pocket of exceptional drought, ranked as D4 on drought maps.

“Commodity prices have gotten a little better in our area, but we’re in the middle of a D4 drought,” says bank president John Schmid. 

On the plus side, spring wheat prices are strong, which will at least raise crop insurance payments. Recent rains boosted forage crops for livestock farmers. Two local ethanol plants keep the corn basis strong. “There’s diversification in our crop portfolio, which helps,” Schmid says. 

In Ashton, Nebraska, Claude Badura is president of Ashton State Bank. He is the family-owned bank’s fourth generation. His son, Chris, another bank director, represents the fifth.

It’s one of the smallest banks in Nebraska, with almost $22 million in assets. 

“There are a lot of banks that have customers that big,” says bank president Badura. To compete with bigger lenders, “it’s all customer service, and we’re doing that,” he says.

The bank’s capital appears adequate. It had a positive return on assets. It faces challenges, too. 

The bank is located in one of the poorest counties in the state, says Badura. Some of the area’s corn grows on hills once in pasture, and those farmers would love to have the flatter ground around Kearney to the south. 

“We need to have corn prices go up to about $4,” he says.

Last winter, with more than 7% of its loans past due, bank regulators ordered the bank to write off uncollectible loans, according to a report in the Omaha World Herald in March. 

“That’s all ag loans,” Badura says, adding that the bank no longer has loans 90 days or more past due. It does have nonaccrual loans, at about 4% of its outstanding loans. It has gotten all of the past-due loans down to about 5% by midyear.

“We’ve been in banking since 1908, and our intention is to keep going,” says Badura.

At the bottom of the list of five, Campbell County Bank of Herreid, South Dakota, is the biggest, with $103 million in assets, current loans, and the highest capital ratio of 22%.

Herreid, too, is in drought. “It’s hard. Most of the small grains have been put up for hay around here,” says Earl Mehlhaff, executive vice president. 

One reason loans are sound is that they’re smaller than during the boom after 2012. “It’s amazing where they’re at,” Mehlhaff says. 

In a few cases the bank has lengthened terms on machinery loans that borrowers thought they could pay in a year, he says. The bank has not extended terms on annual operating loans, however. 

“We haven’t chased anybody out. We’ve got them all here,” he says, adding what could be a motto for country bankers: “We work with them in the good years, and we work with them in the bad years.”

DIY Bank Exams

No, you can’t really be a do-it-yourself bank examiner in three easy lessons, but you can take a bank’s pulse with three measures from FDIC quarterly call reports. Here’s how:

  • Find a bank’s Risk-Based Capital Ratio. Look for Schedule RC-R Part I. It’s on line 41 listed as “Common equity tier 1 capital ratio.” FDIC wants it above 6.5.
  • Find past-due loans. Look for Schedule RC-N, line 9, for the total. Divide by total loans found on line 4.d of Schedule RC–Balance Sheet. The current average for farm banks is about 0.5%.
  • Calculate a loan-to-deposit ratio. This shows the bank’s ability to make loans, divide total loans (line 4.d of Schedule RC) by total deposits (line 13 of the same schedule).

KC Fed Sees Risks

Although most farm banks remain well capitalized and profitable, some red flags popped up in a report issued by the Omaha branch of Federal Reserve Bank of Kansas City last July: “Farm Lending Steady, but Risks Remain.”

Loan interest rates are rising, a result of Federal Reserve tightening as well as concern over farm-loan quality. 

“Bankers also have lengthened maturity periods as an additional risk-management strategy,” the study’s authors, economists Nathan Kauffman and Matt Clark, report. “The average maturity for nonreal estate farm loans, for example, has increased sharply since 2015 (Chart 6 in the report). After averaging about 23 months from 2007 to 2014, maturities as of the second quarter of 2017 have jumped to 35 months. Bankers likely have increased maturities to improve cash flow and financial flexibility in the near term.”

They also found that farm loan delinquency rates (a broader measure than the ABA measure of noncurrent loans) edged above 2% in the first quarter of 2017. Yet, they’re in line with the 10-year average for farm banks and far below the peak-topping 10% for all banks in 2010 as they began to recover from the Great Recession.

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