2011 Farm Bank Performance Report

Transcription

1 2011 Farm Bank Performance Report

2 American Bankers Association 1

3 2011 Farm Bank Performance Report Key Findings The 2,185 farm banks recorded strong asset quality and improved earnings in 2011 through serving their communities and sticking to traditional banking practices: a focus on the fundamentals of credit, solid underwriting standards, and knowledge of the customer s business. The U.S. banking industry is the nation s most important supplier of credit to agriculture providing more than 50 percent ($130 billion) of all farm loans. Small loans made up a majority of bank farm and ranch lending with nearly $67 billion in small and micro-small farm and ranch loans on the books at the end of In 2011, farm banks increased employment by 1.65 percent, adding more than 1,400 jobs, and employed 86,984 rural Americans. Farm banks increased farm loans by 5.6 percent, or $3.8 billion, in 2011 and held $72.3 billion in farm loans at year end. Over 95 percent of farm banks were profitable in 2011, with 65 percent reporting an increase in earnings. Ninety nine percent of farm banks were well-capitalized in 2011, the highest capital rating given by bank regulators. The definition of farm bank changed in this report compared to earlier reports. Previous studies excluded institutions that had more than $1 billion in assets. ABA made the decision to include institutions with more than $1 billion in assets as they are major lenders to farmers and ranchers and are growing in number. American Bankers Association 2

4 American Bankers Association 3

5 Table of Contents Performance Review... 5 Regional Summary Northeast South Cornbelt Plains West ABA Agricultural Banking Experts American Bankers Association 4

6 2011 Farm Bank Performance Report The U.S. banking industry is the major provider of credit to agriculture with almost $130 billion in farm loans extended (over 50 percent of the total farm credit outstanding in the United States), as of year-end Moreover, the U.S. banking industry is a major source of credit to small farmers. The banking industry reported holding approximately $66.8 billion in small farm loans with $20.9 billion in micro-small farm loans at the end of The number of outstanding small farm loans totaled almost 1.1 million with the vast majority almost 781,000 loans under $100,000. The agricultural sector continues to outperform the broader national economy and, as a result, farm banks 2 posted solid performance for The Department of Agriculture is forecasting that net farm cash income set a nominal record at almost $110 billion on the strength of high commodity prices and good harvest, 19 percent above the prior record attained in This has translated into a solid performance on the part of our nation s farm banks. Farm banks reported a strong increase in earnings and improved asset quality in In addition, farm banks, as a group, remained well-capitalized through According to the Federal Reserve Bank of Kansas City, there were four farm bank failures through the first three quarters of In comparison, 9 farm banks failed in This paper examines the 2011 performance of the 2,185 banks that specialize in lending to agriculture. These 2,185 farm banks have 7,534 offices and employ 86,984 workers. Employment at farm banks has increased by 1.65 percent in Since the end of 2007, employment at farm banks is up 7.8 percent or 6,327 employees. The majority of farm banks are small institutions. The median sized farm bank had $90.6 million in assets. However, there were 30 farm banks in our definition with more than $1 billion in assets. Farm Banks Post Solid Earnings Gains Farm banks posted strong earnings for 2011, reflecting the overall strength of the agricultural economy. Income before taxes and extraordinary items totaled $4.5 billion, 25.3 percent higher than in This was the second year in a row that pre-tax earnings for farm banks had increased. Over 95 percent of all farm banks were profitable in 2011 and approximately 69 1 A small farm loan is defined as a loan with an original value of $500,000 or under. A micro-small farm loan is a loan with an original value of $100,000 or less. 2 Farm banks are defined by the American Bankers Association as banks whose ratio of domestic farm loans to total domestic loans greater than or equal to percent for Previous studies did not include banks that specialized in serving agriculture that had more than $1 billion in assets. American Bankers Association 5

7 percent of farm banks reported an increase in their 2011 pre-tax earnings compared to a year earlier. Factors contributing to higher pre-tax earnings included lower provisioning for loan and lease losses and lower interest expenses. On the other hand, factors that negatively impacted pre-tax earnings for farm banks was lower interest income, lower noninterest income, and higher noninterest expense. Both interest income and interest expense fell during 2011 due to interest rates remaining at record low levels. However, interest income at farm banks fell at a slower pace than interest expenses. Interest income fell during 2011 by $174 million to $15.64 billion. In comparison, total interest expenses fell by almost $816 million between 2010 and 2011 to $3 billion. Noninterest income at farm banks fell by 2.4 percent during 2011 to $2.47 billion. On the other hand, noninterest expenses increased 3.2 percent to $9.6 billion. Salary and employee benefits at farm banks grew by 5.5 percent during Return on Assets for Farm Banks 2011 to $5.22 billion. Salaries and 1.0% employee benefits represent approximately 0.95% 54 percent of all noninterest expenses. 0.8% 0.6% 0.4% 0.2% 0.0% 0.87% 0.75% Farm Loans Post Solid Growth 0.80% Source: Federal Deposit Insurance Corporation 0.86% The median return on average assets (ROA) for farm banks (adjusted for Subchapter S) rose to 0.86 percent in 2011 from 0.80 percent in However, a quarter of all farm banks had an ROA for 2011 in excess of 1.12 percent. In addition, farm banks reported that on average operating profits per average employee increased $7.75 million or 19 percent from just below $40.6 million to $48.3 million. Farm banks grew their assets by 6.8 percent during 2011 to $364.4 billion at the end of the year up from $341 billion at the end of Farm lending posted solid growth during Total farm loans increased by 5.6 percent to $72.3 billion in 2011 from $68.5 billion in Thus, approximately one in every three dollars lent by a farm bank is an agricultural loan. Farm Loans $ Billions $80 Farm Production Loans Farmland Loans $72.3 $68.5 $64.4 $60.0 $60 $54.6 $40 $20 Farm real estate loans grew at a slower rate than farm production loans despite all of the reporting in 2011 that there is a bubble in $ Source: Federal Deposit Insurance Corporation American Bankers Association 6

8 farmland lending. At farm banks, the focus in 2011 seems to have been on farm production loans. Outstanding production loans grew at a pace of 6 percent, or $2 billion, to a total of $35.5 billion. Farmland loans rose by 5.3 percent, or $1.85 billion, to $36.8 billion. Excluding farm lending, other loans at farm banks were virtually unchanged in 2011 at $146 billion. So, the overall loan portfolio for farm banks experienced modest growth in 2011 rising 1.7 percent to $218.3 billion. Since asset growth outpaced loan growth, the loan to asset ratio for farm banks fell from 67 percent in 2008 to 59.9 percent in This is the third consecutive yearly decline in this ratio. Deposits Grow at Farm Banks Farm banks have posted solid deposit growth over the last several years. In 2011, deposits at farm banks increased $20 billion or 7.1 percent to $303.6 billion. As a result of the strong deposit growth, the median deposit per employee at a farm bank for 2011 is slightly more than $3.4 million up from $3.2 million in The Dodd-Frank Act extended unlimited deposit insurance coverage for noninterest bearing transaction accounts. At the end of 2011, farm banks reported holding 28,168 noninterest bearing transaction accounts with more than $20 billion in deposits. This influx of noninterest bearing deposits reflects the safety and soundness of farm banks, and the record income received by farmers and ranchers in With deposit growth outpacing loan growth at farm banks, the loan-to-deposit ratio for farm banks has fallen from percent at the end of 2008 to percent at the end of Farm banks have ample ability to meet the future demand for credit for qualified farm and ranch customers. Farm Banks Continue to Build Capital Equity capital at farm banks increased 10.9 percent to $40.4 billion in 2011 and core capital increased by almost $2.7 billion to $35.3 billion. Since the end of 2007, farm banks have added $10.6 billion in equity capital and $8.3 billion in core capital. The median Tier-1 leverage ratio 3 for farm banks rose by 18 basis points during 2011 to 9.77 percent; but is 14 basis points below their leverage ratio before the recession began at the end of Over 99 percent of all farm banks met the regulatory requirement of being well capitalized at the end of Asset Quality Improves at Farm Banks Like most banks, farm banks saw an increase in nonperforming loans during the recession. However, farm banks experienced an improvement in asset quality in 2011, as farm bank customers benefited from the strong farm economy. According to the various Federal Reserve District Banks, farm bank customers are requesting fewer loan renewals and extensions, and the repayment rate on farm loans remains strong. 3 Tier-1 leverage ratio is Tier-1 capital divided by total average assets. American Bankers Association 7

9 Nonperforming loans (loans 90 days or more past due and in nonaccrual status) fell by $378 million during 2011 to $4.3 billion. The nonperforming loan ratio fell by 21 basis points to 1.97 percent. In addition, early delinquencies declined for the second year in a row. Farm banks reported holding $2 billion in loans 30 to 89 days past due. This is down from $2.3 billion in 2010 and $2.7 billion in As a result of the improvement in asset Source: Federal Deposit Insurance Corporation quality, loan loss provisions fell by $604 million to $1.15 billion in This was the second consecutive annual decline in provisions for loan and lease losses. A decrease in the provision for loan losses indicates management s expectation that future loan losses will decline. However, this decline followed an increase in loan loss provisions of over 80 percent in Therefore, though asset quality is indeed turning the corner, the rate of provisioning remains high by historical standards. Loan loss provisions at farm banks were approximately 0.75 percent of average loans, down from 0.99 percent in Total loan loss reserves $3.61 billion at year-end 2011 were up $100 million from As a result, the coverage ratio for farm banks stood at approximately 84 percent. Farm banks reported fewer loan losses in 2011, as net charge-offs declined by 27 percent to $1.07 billion. A Favorable Outlook for 2012 The outlook for the farm sector is very favorable for USDA is projecting net cash farm income for 2012 at $96.3 billion. This is down $12.5 billion (11.5 percent) from 2011, but would remain $15.9 billion above the 10-year average ( ) of $80.3 billion. USDA is estimating that crop receipts will rise in 2012, but livestock sales will experience a marginal decline. Total production expenses are expected to increase by $12.5 billion (3.9 percent) in 2012 to $333.8 billion a new record high. 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Nonperforming Loan Ratio 0.99% 1.42% 1.99% 2.18% Additionally, farm business balance sheets continue to improve due to strong farm income in 2011 and the appreciation in farmland values. Farm debt-to-asset ratio is projected to fall 20 basis points to 10.3 percent in % USDA expects farm sector debt to increase to $254.1 billion by the end of 2012, an increase of 3.8 percent over 2011 farm sector debt levels. Real estate debt is expected to increase by 5.4 percent, while non-real estate debt is expected to rise by 1.9 percent. Farm banks have ample funds to meet the credit needs for qualified farm borrowers at low interest rates. Despite the outlook for increased farm debt, farm banks will struggle to generate higher future earnings. Expectations are for net interest margins to remain under pressure and for top line American Bankers Association 8

10 revenue growth to remain weak. In addition, operating cost will rise as farm banks seek to comply with a more onerous regulatory environment. One area of concern for bank regulators has been the rapid appreciation in farmland values in some areas of the country. However, the run up in farmland values is not a credit related event. Farm banks are actively managing risk associated with agricultural lending. Underwriting standards on farm real estate loans are very conservative. The key consideration of farm bankers is the ability of their farm customers to repay their debts regardless of the collateral position of their customers. To help manage risk, farm banks regularly stress test their customers portfolios to see whether the loans will cash flow under different scenarios. Over the last several years, farmland loans at farm banks have risen as a percent of total farm loans. Despite this increase in farmland debt as a portion of total farm loans, at the end of 2011 very few farm banks were overly concentrated in farm real estate loans, as a percent of a bank s Tier-1 capital. Few Farm Banks Are Overly Exposed to Farmland (As a percent of Tier-1 Capital) Under 100% 100% - 200% 2.5% 200% - 300% 7.8% Over 300% 53.9% 35.8% Source: Federal Deposit Insurance Corporation American Bankers Association 9

11 Northeast Includes 264 Farm Banks Median Top 25% Bottom 25% Total Assets ($ in Mil) $91.0 $167.0 $47.3 Total Deposits ($ in Mil) $76.6 $140.5 $38.1 Total Loans & Leases ($ in Mil) $50.8 $100.4 $24.2 Tier 1 Common Capital Ratio 9.9% 11.8% 8.8% Return on Average Assets* 0.8% 1.1% 0.5% Return on Average Equity* 7.6% 10.5% 4.9% Operating Profit per Employee ($ in Mil) $43.8 $67.5 $20.4 Net Interest Margin 4.0% 4.4% 3.6% Total Interest Expense/Average Assets 0.8% 1.1% 0.6% Total Interest Income/Average Assets 4.4% 4.8% 4.0% Total Noninterest Income/Average Assets 0.5% 0.8% 0.3% Total Noninterest Income (YTD $ in Mil) $0.4 $1.0 $0.2 Efficiency Ratio 65.1% 77.5% 57.1% Non-Performing Loans**/Gross Loans 1.0% 2.1% 0.2% Net Charge-Offs/Average Loans 0.2% 0.4% 0.0% Provision for Loan Losses/Average Loans 0.2% 0.5% 0.0% Loan Loss Reserves/Total Loans 1.5% 1.9% 1.1% Agricultural Production Loans/Gross Domestic Loans 14.0% 27.6% 8.4% Agric Prod & Agric RE Loans/Gross Domestic Loans 35.5% 47.9% 19.6% * ROA and ROE are adjusted for Sub-S corporations. Applicable incomes of such institutions are multiplied by.66 to reflect estimated after-tax income. ** Non-performing loans are defined as past 90 days due and loans in nonaccrual status. Farm banks in the Northeast region reported a 6.5 percent increase, $506.5 million, in farm loans from a year ago, to $8.3 billion in Agricultural production loans rose 5.5 percent from a year ago to $4.1 billion, while farmland loans increased 7.4 percent to $4.3 billion. Farm banks in the Northeast region reported improved profitability for The return on equity increased 64 basis points to 7.6 percent while return on assets rose by six basis points to 0.8 percent. The median Tier 1 common capital ratio for farm banks increased twenty basis points to 9.9 percent from the previous year period. Farm banks in the Northeast region employ over 10,000 men and women, a 2.0 percent increase from the previous year. American Bankers Association 10

12 South Includes 585 Farm Banks Median Top 25% Bottom 25% Total Assets ($ in Mil) $88.9 $169.6 $52.2 Total Deposits ($ in Mil) $76.6 $147.2 $44.4 Total Loans & Leases ($ in Mil) $48.7 $97.7 $26.9 Tier 1 Common Capital Ratio 9.8% 11.6% 8.8% Return on Average Assets* 0.9% 1.2% 0.6% Return on Average Equity* 8.0% 10.7% 5.2% Operating Profit per Employee ($ in Mil) $43.4 $67.4 $24.4 Net Interest Margin 4.0% 4.5% 3.6% Total Interest Expense/Average Assets 0.9% 1.1% 0.7% Total Interest Income/Average Assets 4.4% 4.9% 4.0% Total Noninterest Income/Average Assets 0.5% 0.7% 0.3% Total Noninterest Income (YTD $ in Mil) $0.4 $0.9 $0.2 Efficiency Ratio 65.2% 74.4% 55.8% Non-Performing Loans**/Gross Loans 0.9% 2.2% 0.2% Net Charge-Offs/Average Loans 0.2% 0.5% 0.0% Provision for Loan Losses/Average Loans 0.3% 0.5% 0.1% Loan Loss Reserves/Total Loans 1.5% 1.9% 1.2% Agricultural Production Loans/Gross Domestic Loans 17.1% 28.6% 8.9% Agric Prod & Agric RE Loans/Gross Domestic Loans 34.7% 50.3% 23.9% * ROA and ROE are adjusted for Sub-S corporations. Applicable incomes of such institutions are multiplied by.66 to reflect estimated after-tax income. ** Non-performing loans are defined as past 90 days due and loans in nonaccrual status. Farm banks in the South region increased farm loans by 4.3 percent, $722.2 million, from the year ago period to $17.4 billion in Agricultural production loans rose 3.8 percent from a year ago to $9.0 billion, while farmland loans increased 4.9 percent to $8.4 billion. Farm banks in the South reported improved profitability for Return on equity rose by 41 basis points to 8.0 percent, while return on assets increased three basis points to 0.9 percent. The region s farm banks median Tier 1 common capital ratio of 9.8 percent was a thirteen basis point higher than a year ago. Farm banks in the South region employ over 22,000 men and women, a slight increase of 0.9 percent from the previous year. American Bankers Association 11

13 Cornbelt Includes 641 Farm Banks Median Top 25% Bottom 25% Total Assets ($ in Mil) $91.5 $170.6 $49.6 Total Deposits ($ in Mil) $76.6 $147.6 $42.8 Total Loans & Leases ($ in Mil) $49.6 $105.4 $24.2 Tier 1 Common Capital Ratio 9.9% 11.5% 8.8% Return on Average Assets* 0.9% 1.1% 0.6% Return on Average Equity* 7.9% 10.6% 5.3% Operating Profit per Employee ($ in Mil) $45.1 $65.7 $24.6 Net Interest Margin 4.0% 4.4% 3.6% Total Interest Expense/Average Assets 0.8% 1.1% 0.6% Total Interest Income/Average Assets 4.4% 4.8% 4.0% Total Noninterest Income/Average Assets 0.5% 0.7% 0.3% Total Noninterest Income (YTD $ in Mil) $0.4 $1.0 $0.2 Efficiency Ratio 64.5% 73.9% 56.9% Non-Performing Loans**/Gross Loans 1.0% 2.2% 0.3% Net Charge-Offs/Average Loans 0.2% 0.5% 0.0% Provision for Loan Losses/Average Loans 0.2% 0.5% 0.1% Loan Loss Reserves/Total Loans 1.5% 2.0% 1.2% Agricultural Production Loans/Gross Domestic Loans 15.9% 28.1% 9.1% Agric Prod & Agric RE Loans/Gross Domestic Loans 33.6% 48.6% 21.8% * ROA and ROE are adjusted for Sub-S corporations. Applicable incomes of such institutions are multiplied by.66 to reflect estimated after-tax income. ** Non-performing loans are defined as past 90 days due and loans in nonaccrual status. Farm banks in the Cornbelt region increased farm loans by 6.6 percent, $1.3 billion, from a year ago to $21.6 billion in Agricultural production loans rose 7.2 percent from a year ago to $11.0 billion, while farmland loans increased 6.0 percent to $10.6 billion. Farm banks in the Cornbelt region experienced an improvement in 2011 profitability. The return on equity increased 67 basis points to 7.9 percent while return on assets increased seven basis points to 0.9 percent. The region s median Tier 1 common capital ratio of 9.9 percent was seven basis points higher compared to a year ago. Farm banks in the Cornbelt region employ over 26,000 men and women, a 2.9 percent increase compared to 2010 employment. American Bankers Association 12

14 Plains Includes 491 Farm Banks Median Top 25% Bottom 25% Total Assets ($ in Mil) $93.0 $174.4 $47.7 Total Deposits ($ in Mil) $78.2 $150.9 $38.8 Total Loans & Leases ($ in Mil) $54.1 $110.8 $25.1 Tier 1 Common Capital Ratio 10.2% 12.0% 9.0% Return on Average Assets* 0.9% 1.1% 0.6% Return on Average Equity* 7.9% 10.7% 5.0% Operating Profit per Employee ($ in Mil) $41.3 $65.9 $23.1 Net Interest Margin 4.0% 4.4% 3.6% Total Interest Expense/Average Assets 0.8% 1.1% 0.6% Total Interest Income/Average Assets 4.5% 4.8% 4.1% Total Noninterest Income/Average Assets 0.5% 0.8% 0.3% Total Noninterest Income (YTD $ in Mil) $0.4 $1.0 $0.2 Efficiency Ratio 64.8% 75.4% 56.8% Non-Performing Loans**/Gross Loans 0.9% 2.0% 0.2% Net Charge-Offs/Average Loans 0.2% 0.5% 0.0% Provision for Loan Losses/Average Loans 0.2% 0.5% 0.1% Loan Loss Reserves/Total Loans 1.5% 2.0% 1.2% Agricultural Production Loans/Gross Domestic Loans 16.3% 28.1% 8.3% Agric Prod & Agric RE Loans/Gross Domestic Loans 34.3% 54.7% 24.0% * ROA and ROE are adjusted for Sub-S corporations. Applicable incomes of such institutions are multiplied by.66 to reflect estimated after-tax income. ** Non-performing loans are defined as past 90 days due and loans in nonaccrual status. Farm banks in the Plains region increased their farm loans by 5.3 percent, $925.6 million, from a year ago to over $18.4 billion in Agricultural production loans rose 8.0 percent from a year ago to $8.3 billion, while farmland loans increased 3.1 percent to $10.1 billion. Farm banks in the Plains reported improved profitability for The return on equity increased fifty basis points to 7.9 percent, while return on assets rose by seven basis points to 0.9 percent. The farm banks had a median Tier 1 common capital ratio of 10.2 percent a thirteen basis point increase from the previous year. Farm banks in the Plains region employ over 20,000 men and women, a slight increase of 0.6 percent compared to American Bankers Association 13

15 West Includes 196 Farm Banks Median Top 25% Bottom 25% Total Assets ($ in Mil) $83.0 $137.2 $41.9 Total Deposits ($ in Mil) $71.1 $116.3 $36.1 Total Loans & Leases ($ in Mil) $44.4 $90.9 $21.5 Tier 1 Common Capital Ratio 10.0% 11.6% 8.8% Return on Average Assets* 0.9% 1.1% 0.6% Return on Average Equity* 8.4% 10.4% 5.9% Operating Profit per Employee ($ in Mil) $46.9 $69.4 $24.2 Net Interest Margin 4.1% 4.5% 3.7% Total Interest Expense/Average Assets 0.8% 1.0% 0.6% Total Interest Income/Average Assets 4.4% 4.9% 4.1% Total Noninterest Income/Average Assets 0.5% 0.7% 0.3% Total Noninterest Income (YTD $ in Mil) $0.4 $0.7 $0.1 Efficiency Ratio 63.8% 74.0% 56.1% Non-Performing Loans**/Gross Loans 0.8% 1.8% 0.3% Net Charge-Offs/Average Loans 0.1% 0.4% 0.0% Provision for Loan Losses/Average Loans 0.2% 0.5% 0.0% Loan Loss Reserves/Total Loans 1.4% 1.8% 1.1% Agricultural Production Loans/Gross Domestic Loans 18.8% 31.6% 9.8% Agric Prod & Agric RE Loans/Gross Domestic Loans 38.2% 53.8% 24.0% * ROA and ROE are adjusted for Sub-S corporations. Applicable incomes of such institutions are multiplied by.66 to reflect estimated after-tax income. ** Non-performing loans are defined as past 90 days due and loans in nonaccrual status. Farm banks in the West region increased farm loans by 5.7 percent, $332.2 million, from a year ago to $6.2 billion in Agricultural production loans rose 3.0 percent from a year ago to $2.8 billion, while farmland loans increased 8.2 percent to $3.3 billion. Farm banks in the West experienced improved profitability for The return on equity increased 107 basis points to 8.4 percent, while return on assets rose by eight basis points to 0.9 percent. The median Tier 1 common capital ratio for farm banks in the West region was 10.0 percent up fourteen basis points from a year ago. Farm banks in the West region employ over 6,000 men and women, a 2.2 percent increase from the previous year. American Bankers Association 14

16 ABA Center for Agricultural & Rural Banking ABA Agricultural Banking Experts John Blanchfield, Sr. VP, Center for Agricultural & Rural Banking Ryan Zagone, Director, Public Relations Vincent Barnes, Senior Counsel, Federal Legislative Operations Barbara McCoy, Website Administrator, Center for Agricultural & Rural Banking Cynthia Hall Watkins, Director, Federal Legislative Operations Keith Leggett, VP & Senior Economist, Economic Policy & Research Brittany Dengler, Research Associate, Economic Policy & Research Pat Dalton, Senior Editor, Member Communications Resources ABA Ag Banker Bert Ely's Farm Credit Watch ABA National Agricultural Bankers Conference American Bankers Association 15