In 2017, the agriculture sector continued its strong performance despite signs of slowing down, and as a result, farm banks posted solid results. Farm banks reported solid asset quality and a strengthened balance sheet in 2017. In addition, farm banks, as a group, remained well- capitalized through 2017.

U.S farm banks increased agricultural lending by nearly 6%, or $5.9 billion, to $106 billion in 2017, according to the American Bankers Assn.’s (ABA) annual "Farm Bank Performance Report."

Asset quality remained healthy at the nation’s 1,847 farm banks as non-performing loans fell to a pre-recession level of 0.52% of total loans. ABA defines farm banks as banks whose ratio of domestic farm loans to total domestic loans is greater than or equal to the industry average.

“We’re starting to see the effects of a weaker ag sector, but farm banks are still strong and ready to assist their farm and ranch customers,” said Brittany Kleinpaste, ABA vice president, economic policy and research. “Banks continue to meet the credit needs of both large and small farms and remain the largest supplier of agricultural credit in the U.S.” 

More than 96% of farm banks were profitable in 2017, with more than 55% reporting an increase in earnings.

Farm banks also continued to build high-quality capital throughout 2017. Equity capital at farm banks increased 5.6% to $48.4 billion, while Tier 1 capital increased by $2.1 billion to $45.7 billion. Farm banks have built strong, high-quality capital reserves and are well-insulated from risks associated within the agriculture sector.

Related:Cautious optimism seen on ag economic conditions

In 2017, farm banks added more than 1,600 jobs, a 1.9% increase, and employed more than 88,000 rural Americans. Since 2007, employment at farm banks has risen 25.3%.

Kleinpaste noted that the entire banking industry – not just farm banks – provides farmers and ranchers with the credit they need. At the end of 2017, banks held $180 billion in farm and ranch loans. The U.S. banking industry is also a major source of funding to small farmers, with more than $76 billion in small and micro farm and ranch loans on the books at the end of 2017. A small farm loan is a loan with an original value of $500,000 or less, and a micro farm loan is a loan with an original value of $100,000 or less.

Farmland pressured

The report noted that 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 Bank’s monetary policy, known as quantitative easing, has spurred asset prices, including farmland.

“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 report noted. 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.

According to Federal Reserve surveys, after several years of large increases in farmland values, farm bankers 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% of lenders reported lower farm land values in 2017, while an additional 66% of respondents reported no change in land values. “The majority (60%) of respondents expect no further change in land values through the first half of 2018. However, 38% did note an expectation for declining farmland values, with just over half expecting the decline to be between zero to 10% over the next year,” the report stated.

Over the last several years, farmland loans at farm banks have represented around half of total farm loans.

Regional insight

Farm banks in the Corn Belt region increased farm loans in 2017 by 6.6%, or $2.9 billion, from the year before to $46.4 billion. Agricultural production loans rose 5.9% from the year before to $21.2 billion, while farmland loans increased 7.2% to $25.2 billion. There are 873 farm banks in the Corn Belt region, and these banks maintained profitability in 2017. The median return on equity was 9.1%, while the median return on assets at 1.0%.

The 705 farm banks in the Plains region increased their farm loans by 5.1%, or $2.0 billion, from the year before to more than $40.3 billion in 2017. Agricultural production loans rose 2.5% from the year before to $21.4 billion, while farmland loans increased 8.3% to $18.9 billion.

The 64 farm banks in the West region increased farm loans by 2.9%, or $280 million, from the year before to $9.8 billion in 2017. Agricultural production loans rose slightly from the year before to $4.5 billion, while farmland loans increased 5.1% to $5.3 billion.

The 13 farm banks in the Northeast region reported a 19.0% increase in farm loans from a year ago, rising to $1.2 billion, largely influenced by one institution. Agricultural production loans rose 7.6% from a year ago to $245 million, while farmland loans increased 22.5% to $909 million.

The 192 farm banks in the South region increased farm loans by 7.9%, or $610 million, from a year ago, rising to $8.3 billion in 2017. Agricultural production loans rose by 5.6% from a year ago to $2.2 billion, while farmland loans rose by 8.9% to $5.5 billion.

Read the full report.