KC Fed Reports Banks’ Farm Lending Stabilizes

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arm debt at commercial banks showed signs of stabilizing at the end of 2021. Driven by a higher balance of both real estate and non-real estate loans, agricultural debt increased for the first time since 2019. While the pullback in lending abated, agricultural loan balances remained below the recent historic average. Farm real estate loans also increased slightly at agricultural banks, but production loans continued to decline and led to further reduction in the concentration of debt among those lenders. The low interest rate environment continued to pressure margins for lenders and sharp asset growth pushed capital ratios lower, but recent strength in earnings performance held overall returns for agricultural banks above the recent historic average.

A relatively strong outlook for the farm economy in 2022 appears likely to continue supporting improvements in agricultural credit conditions. Alongside broad strength in farm finances, delinquency rates on farm loans improved further through the end of the year and liquidity at agricultural banks reached a 20-year high. A rise in production expenses and a reduction in government aid could contribute to higher demand for farm loans in the year ahead and with abundant liquidity, agricultural banks seem to be well positioned to meet borrowers’ credit needs.

Fourth Quarter Commercial Bank Call Report Data

The balance of outstanding farm loans at commercial banks increased from a year ago, but remained subdued. Following about two years of steady declines, the balance of both real estate and non-real estate farm loans increased about 3% in the fourth quarter (Chart 1, left panel). Despite the slight increase from a year ago, non-real estate loans remained at a decade low after adjusting for inflation and real estate loans remained at about a 5-year low (Chart 1, right panel).

Chart 1: Farm Debt Outstanding at Commercial Banks - is two individual charts. Left, Change in Outstanding Loan Balances - is a line graph showing the percent change in farm debt from a year ago in every quarter from Q1 2010 to Q4 2021. It includes lines showing the Total, Real Estate and Non-Real Estate farm loans. Right, Outstanding Loan Balances, Q4 – is a line graph showing the volume of farm debt in billion dollars during the fourth quarter of every year from 2000 to 2021. It includes lines a line adjusted for inflation and a line not adjusted for inflation for both Real Estate and Non-Real Estate farm loans

Consistent and widespread declines in agricultural lending across commercial banks has led to lower concentrations of farm debt at agricultural banks. Farm real estate loan balances increased slightly at agricultural banks, but production loans continued to decline, pushing the share of farm debt held at lenders most concentrated in agriculture to the lowest level in about 10 years (Chart 2, left panel). After a sharp and persistent buildup in previous years, the recent pullback in non-real estate lending has also driven a reduction in the amount of farm debt per agricultural bank (Chart 2, right panel).

Chart 2: Farm Debt Outstanding at Agricultural Banks – is two individual charts. Left, Share of Debt at Commercial Banks, Q4 – is a line graph showing the percent of total outstanding farm debt at commercial banks held at agricultural banks during the fourth quarter of every year from 1980 to 2021. It includes lines showing the Total, Real Estate and Non-Real Estate farm loans. Right, Debt Per Agricultural Banks, Q4 – is a line graph showing the amount of debt per agricultural bank in million 2021 dollars during the fourth quarter of every year from 1980 to 2021. It includes lines showing the Total, Real Estate and Non-Real Estate farm loans.

Broad strength in farm finances continued to drive improvements in agricultural loan performance for all commercial lenders. Delinquency rates on real estate and non-real estate farm loans dropped by about 60 basis points and 50 basis points from a year ago, respectively (Chart 3). Rates of delinquency among both agricultural banks and non-agricultural banks reached the lowest levels since 2015.

Chart 3: Farm Loan Delinquency Rates, Q4 – is a line graph showing the percent of outstanding farm loans that were delinquent during the fourth quarter of every year from 2010 to 2021. It includes lines for real estate loans at non-agricultural banks, non-real estate loans at non-agricultural banks, real estate loans at agricultural banks and non-real estate loans at agricultural banks.

With tepid loan growth and surges in deposits, liquidity at agricultural banks also remained abundant. The loan-to-deposit ratio at agricultural lenders reached the lowest level in more than 20 years in the fourth quarter (Chart 4). The elevated level of funds has contributed to a sharp growth in assets for lenders and has also likely put downward pressure on interest margins.

Chart 4: Loan-to-Deposit Ratio at Agricultural Banks – is line graph showing the ratio of total loans-to-total deposits as a percent at agricultural banks in every quarter from 1985 to 2021. It includes a line for the quarter loan-to-deposit ratio and the four-quarter moving average.

Net interest margins for agricultural banks reached historic lows in the fourth quarter, but profits remained strong. The low interest rate environment put further downward pressure on margins, but support from lower interest expenses, fewer provisions and higher noninterest income during 2021 continued to drive strong returns (Chart 5, left panel). Alongside robust growth in assets that was consistent across commercial banks, the equity capital ratio for farm lenders dropped sharply below the 10-year average (Chart 5, right panel).

Chart 5: Select Financial Indicators at Agricultural Banks- is two individual charts. Left, Earnings Ratios, Q4 - is a line graph showing the Net Interest Margin (NIM) and Return on Average Assets at agricultural banks during the fourth quarter of every year from 1985 to 2021. It also includes a line showing the 10-year average of each ratio. Right, Equity Capital Ratio, Q4– is a line graph showing the Equity Capital Ratio at agricultural banks during the fourth quarter of every year from 1985 to 2021. It also includes a line showing the 10-year average.

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