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Banks Face Headwinds as Farm Income Remains Low

With farm income weak, bankers may worry about their ag loans. Should you worry about your bank? So far, the answer for most is no.

The American Bankers Association (ABA) follows the performance of farm banks, which are defined as banks with more than 15.5% of outstanding credit going to agriculture. The number of such banks has dropped from 2,500 a decade before to about 2,000 last year. The remaining banks have doubled lending in 10 years to $100 billion.

“The farming industry has seen consolidation just as the banking industry has,” says Brittany Kleinpaste, director of economic policy and research for the ABA. The 2015 Farm Bank Performance Report shows that 97% of all farm banks were profitable last year and are well capitalized. Most are relatively small, with an average of $113 million in assets. 

“Farm banks have long-established relationships with their local farmers,” says Kleinpaste. “Banks are finding ways to maintain those relationships despite the changing economy.” 

In 2015, Wells Fargo was the nation’s largest ag lender, with more than $8 billion in loans to farmers and ranchers. However, that’s less than 1% of all of the bank’s loans, so ABA doesn’t consider Wells Fargo a farm bank.

Smaller country banks know the ag economy well, and they are cautious, Kleinpaste says. Equity capital at farm banks grew 5% last year to $47.7 billion, up by $19.5 billion since 2007. Farm bankers have increased reserves for losses, and they’re making sure they have options for farm borrowers, including restructuring loans when necessary, says Kleinpaste.

In 2015, farm banks reported a 12% increase in late loans (30 to 89 days past due) compared with 2014. The ratio of past-due loans to all loans remained low, however, at about 0.5%. The ratio for all loan categories is 0.73%.

The Federal Reserve Bank of Kansas City reported more troubling statistics in its Ag Credit Survey in August. Almost 15% of bankers reported denying more than 10% of  2016 operating loan applications, three times as many bankers as in 2015. 

Cortney Cowley, an economist who coauthored the Kansas City Fed’s report, says there are still bright spots. There seems to be little relationship between late repayments and noncurrent loans, where the loan payment is more than 90 days past due or not accruing interest. Delinquency rates for consumer and commercial loans are higher.

The debt-to-asset ratio of agriculture, tracked by the USDA, is much better today than it was in the 1980s, says Cowley. That ratio peaked in 1985 at 22%. Last year, it was 12.7%. The USDA expects it to top 13% this year.

Bankers are also using more loan guarantees backed by USDA’s Farm Service Agency. Demand for guaranteed operating loans is up 22% over last year, and guaranteed real estate loans are up 27%, says Jim Radintz, deputy administrator for Farm Loan Programs at FSA. “There are some nervous lenders out there, and they are looking to use the guaranteed program with customers at the edge of what they would allow,” Radintz says. 

FSA also makes loans directly to farmers. All of those loans – direct and guaranteed – make up about 5% of the total agricultural credit market, serving about 110,000 farmers and ranchers who otherwise would have difficulty getting financing. “To those 110,000 folks, what we do is critical,” Radintz says

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