In the most recent Quarterly Banking Profile, the Federal Deposit Insurance Corporation noted asset quality deterioration at some farm banks (defined by the American Bankers Association as the 1,772 banks whose ratio of domestic farm loans to total domestic loans is greater than or equal to the industry average). The noncurrent rate for farm loans by farm banks—which include farmland real estate and agricultural production loans—increased 17 basis points during the quarter to 1.06%. However, with consistent increases in tier 1 and equity capital and a quality track record extending farm loans over the last decade, farm banks are well prepared to weather potential trouble on the horizon.
Farm banks remain healthy
Over the past decade, farm banks have enjoyed low delinquency rates relative to the broader industry. This has led to strong performance by farm banks, as described in ABA’s 2018 Farm Bank Performance Report. They have grown tier 1 and equity capital, expanded their loan portfolios and increased in asset size—all while enjoying relatively low volatility in asset quality. While noncurrent rates for farm loans increased this quarter, they are well below the average for the rest of the industry.
The FDIC expressed concern that declines in farm values may prove a risk for Ag Banks, citing a Kansas City Fed bulletin that indicated the “potential for lower farmland values moving forward”. This sentiment was echoed in the most recent ABA Agricultural Lender Survey, in which an increasing number of respondents, particularly in plains states, reported the expectation that farmland values will decline in the next twelve months. However, farm banks have historically demonstrated a comparative advantage in farmland lending, making quality farmland loans.
Farm banks make quality farmland loans
The increase in noncurrent rates at farm banks is most concentrated in farmland real estate loans, reaching 1.33% in the first quarter, a year-over-year increase of 13 basis points. However, the rate at farm banks is still well below the average noncurrent rate for farmland real estate at banks that do not specialize in agriculture. This speaks to the expertise, local knowledge and experience that defines the relationships of farm bankers with the agricultural community.
The stability of farmland value versus housing in the U.S. is part of the reason farm banks were able to weather the Great Recession relatively unscathed compared to nonfarm banks. While housing prices in the U.S. declined by close to 20% from their peak at the end of 2007 to the end of the recession, farmland values appreciated almost 10% in the same period. As a result, farm real estate proved a stable and safe asset over the past decade.
However, while farm banks have benefited from stable land values, they have also proven to have a comparative advantage in farmland lending—an advantage that became most evident during the last crisis. Despite the relative stability of farmland values compared to housing, farmland delinquencies at farm banks held steady compared to the rest of the industry. Farm banks have demonstrated remarkable resilience during turbulent financial conditions. With farm bank health and profitability strong in the first quarter of 2019, farm banks are well positioned to face potential volatility.