Limited Demand for Farm Loans, But Strong Profits for Ag Banks


Agricultural lending at commercial banks continued to decline but showed some signs of stabilizing in the third quarter. According to Call Report data, farm debt decreased at the slowest pace in 2 years. Non-real estate debt declined at a substantially slower rate than recent quarters and farm real estate loans increased slightly for the first time since mid-2019. Performance on agricultural loans also continued to improve rapidly, leading to a five-year low in delinquency rates. With support from stronger loan performance and lower interest expense, profitability for farm lenders remained near historic highs.

Prospects for farm income in 2021 remained strong heading into year-end alongside continued strength in agricultural commodity markets. Elevated commodity prices have boosted revenues for producers and supported a swift improvement in agricultural credit conditions and a surge in farmland values. At the same time however, input costs have risen considerably in recent months, which is likely to increase credit needs and weigh on profit margins going forward.

Third Quarter Commercial Bank Call Report Data

The balance of outstanding farm loans at commercial banks retracted further, but at a notably slower pace. Driven by a slight increase in farm real estate lending and a smaller decrease in non-real estate loans, total farm debt declined by the smallest percentage since 2019 (Chart 1). After dropping by an average pace of about 5% in the previous four quarters, farm loans decreased by less than 2 percent from a year ago.

Chart 1: Farm Debt Outstanding at Commercial Banks - is a line graph showing the percent change in farm debt from a year ago in every quarter from Q1 2000 to Q3 2021. It also includes lines showing the Total, Real Estate and Non-Real Estate farm loans.

The volume of delinquent agricultural loans continued to decline sharply alongside improved farm finances and subdued lending activity. The volume of delinquent farm real estate and production loans continued to decline substantially, dropping by 30% and 40% from a year ago, respectively (Chart 2). The quick turnaround in repayment issues led to the lowest rate of delinquency on farm loans for the third quarter since 2015.

Chart 2: Delinquent Farm Loans at Commercial Banks– is two individual charts. Left, Volume of Delinquent Farm Loans - is a line graph showing the percent change in delinquent real estate and non-real estate farm loans from a year ago of agricultural and non-agricultural banks with a year-over-year decrease in farm debt in every quarter from Q1 2000 to Q3 2021. It includes lines for real estate and non-real estate farm loans. Right, Farm Loan Delinquency Rate, Q3 – is a line graph showing the delinquency rate on real estate and non-real estate farm loans in the third quarter of every year from 2000 to 2021.

The improvement in farm loan performance was consistent for most lenders. Following several years of deteriorating loan performance for a growing number of banks, the share of agricultural banks with farm loan delinquency rates above 2% fell to the lowest level since 2016 (Chart 3). Similarly, less than 200 agricultural banks had delinquency rates above the national historic average in the third quarter; compared with about 300 a year ago.

Chart 3: Share of Agricultural Banks by Farm Loan Delinquency Rate, Q3– is a clustered column chart showing the percent of agricultural banks in Q3 2021 that had varying levels farm loan delinquency rates. There are columns for 2015, 2016, 2017, 2018, 2019, 2020 and 2021 and the levels of change include Below 2% and Above 2%.

Alongside strong loan performance, the financial performance of agricultural banks remained sound. Despite continued compression of net interest margins, profitability at agricultural banks remained near record highs (Chart 4, left panel). Strong growth in assets has held down interest margins despite an increase in the amount of net interest income (Chart 4, right panel). Net income increased nearly 20% from a year ago, which outpaced the growth in assets and drove a strong return on assets (ROAA) and supported the ability of banks to augment capital.

Chart 4: Select Financial Indicators at Agricultural Banks- is two individual charts. Left, Earnings Ratios - is a line graph showing the Net Interest Margin (NIM) and Return on Average Assets at agricultural banks in every quarter from Q1 2015 to Q3 2021. Right, Balance Sheet and Income Statement Amounts* – is a line graph showing the amount of various balance sheet and income statement items at the panel of 1,124 agricultural banks from the Q3 2021. It also includes lines showing the level of Total Assets, Equity Capital, Net Interest Income and Net Income as an index (Q1 2019=100) in every quarter from Q1 2019 to Q3 2021.

The fast growth in net income at agricultural banks has been driven by lower interest expenses, fewer provisions and higher noninterest income. Alongside lower benchmark interest rates, interest expenses for agricultural banks have declined considerably and accounted for the largest portion of the increase in net income from a year ago (Chart 5). Lower provisions expense and higher noninterest income also benefitted earnings and, together, those factors offset a sizeable increase in noninterest expenses.

Chart 5: Contribution to Change in Net Income at Agricultural Banks- is a stacked column chart showing the contribution of various income statement items to the total change in net income from a year ago at the panel of 1,124 agricultural banks from Q3 2021 in every quarter from Q1 2019 to Q3 2021. There are columns for Interest Income, Interest Expense, Noninterest Income, Noninterest Expense, Provisions, Income Tax and Other Income.

Data and Information

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