2015 Farm Bank Performance Report Key Findings

2015 Farm Bank Performance Report Key Findings The banking industry is the nation s most important supplier of credit to agriculture providing nearly 50 percent of all farm loans in the U.S. $170 billion in December 2015. Small loans made up almost half of bank farm and ranch lending with nearly $75 billion in small and micro farm and ranch loans on the books at the end of 2015. The 1,976 farm banks recorded strong asset quality and capital levels in 2015 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. Farm banks asset quality further strengthened in 2015. Noncurrent loans (loans 90 days or more past due or in nonaccrual status) declined to a pre-recession level of 0.47 percent of total loans. As a group, farm banks, remained well-capitalized through 2015, as these banks continued to raise equity capital levels a more conservative form of capital. Farm banks increased farm lending by 7.9 percent, or $7.3 billion, in 2015 and held $100.3 billion in farm loans at year-end. In 2015, farm banks increased employment by 2.9 percent, adding more than 2,500 jobs, and employed more than 90,000 rural Americans. Since 2007, employment at farm banks has risen 20.5 percent. Over 97 percent of farm banks were profitable in 2015, with 63 percent reporting an increase in earnings. Based on solid 2015 performance, farm banks are well positioned to meet the needs of their customers in 2016. The ABA definition of farm bank has changed over the production of this report. In 2012, ABA made the decision to include institutions, previously excluded, with more than $1 billion in assets as these institution grew in number and importance to our country s farmers and ranchers. In addition, due to changing reporting requirements, ABA began to include savings and loan associations in the production of this report as data became available. American Bankers Association 2

Table of Contents Performance Review... 4 Regional Summary Northeast... 10 South... 11 Cornbelt... 12 Plains... 13 West... 14 ABA Agricultural Banking Experts... 15 American Bankers Association 3

2015 Farm Bank Performance Report The U.S. banking industry is a major provider of credit to agriculture with more than $170 billion in farm loans extended nearly 50 percent of the total farm credit outstanding in the U.S. as of year-end 2015. Moreover, the U.S. banking industry is a major source of credit to small farmers. Banks reported holding nearly $75 billion in small farm loans with $20 billion in micro farm loans at the end of 2015. 1 The number of outstanding small farm loans totaled 1.2 million with the vast majority over 790,000 loans under $100,000. In 2015, the agricultural sector continued a strong performance despite signs of slowing down and, as a result, farm banks posted solid results. 2 Farm banks reported improved asset quality, strengthened balance sheets and solid earnings in 2015. In addition, farm banks, as a group, remained well-capitalized through 2015. The U.S. Department of Agriculture (USDA) is forecasting net farm income to decline to $54.8 billion in 2016. If realized, this would be the lowest level since 2002, but farm banks are wellprepared for possible turbulence in the agricultural sector. Farm banks have benefited from several years of strong agricultural sector performance and have, during these years, increased their quality and quantity of capital while strengthening their balance sheets. This paper examines the 2015 performance of the 1,976 banks that specialize in lending to agriculture. These farm banks have 8,432 offices and employ over 90,000 workers. Employment at farm banks increased by 2.9 percent in 2015. Since the end of 2007, employment at farm banks is up 20.5 percent. The majority of farm banks are small institutions. The median sized farm bank had $113 million in assets. However, there were forty-two farm banks with more than $1 billion in assets. 1 A small farm loan is defined as a loan with an original value of $500,000 or less. A micro 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 the industry average, in 2015 this was 15.51 percent. Studies before 2012 did not include banks with more than $1 billion in assets nor savings and loan associations.

Farm Banks Grow Agricultural Loan Portfolios Farm lending posted solid growth during 2015. Total farm loans at farm banks increased by 7.9 percent to $100.3 billion in 2015, up from $94.6 billion in 2014. Over one in every three dollars lent by a farm bank is an agricultural loan. Farm real estate loans grew at a faster rate than farm production loans. Outstanding farmland loans rose by 9.1 percent, or $4.2 billion, to $50.6 billion. Farm production loans grew at a pace of 6.6 percent, or $3.1 billion, to a total of $49.8 billion. Farm banks are a major source of credit to small farmers holding more than $47.8 billion in small farm loans with $11.5 billion in micro farm loans at the end of 2015. The number of outstanding small farm loans at farm banks totaled 761,192 with the vast majority more than 496,200 loans with origination values less than $100,000. In addition, the overall loan portfolio for farm banks experienced solid growth in 2015 rising 7.5 percent to $278.1 billion compared to overall banking industry growth of 6.4 percent over the year. One area of concern for farm bankers and their supervisors has been the rapid appreciation in farmland values in some areas of the country. Federal Reserve Chairman Janet Yellen remarked before the House Financial Services Committee that the Federal Reserve s monetary policy, known as Quantitative Easing, has spurred asset prices, including farm land. Yellen remarked that, land prices suggest a greater degree of overvaluation [relative to stock market prices], but noted that she is not concerned with bubble-like activity. 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 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. Furthermore, according to Federal Reserve surveys, after several years of large increases in farmland values, farm bankers have indicated that farmland values have edged down from recent peaks in several states while year-over-year value gains have moderated in others. Bankers expect this trend to continue into 2016, and expect slightly larger adjustments in the coming year as the sector returns to a new normal. American Bankers Association 5

Over the last several years, farmland loans at farm banks have risen as a percent of total farm loans, however, this trend has slowed. In 2015, very few farm banks were overly concentrated in farm real estate loans relative to Tier 1 capital. The majority of farm banks had a farmland concentration ratio of under 200 percent a level that has not raised supervisory concerns. Deposits Grow at Farm Banks The loan-to-deposit ratio for farm banks rose from 76.3 percent at the end of 2014 to 78.3 percent at the end of 2015. Farm banks continue to have ample ability to meet the future demand for credit for qualified farm and ranch customers. Farm banks have posted solid deposit growth over the last several years. In 2015, deposits at farm banks increased $16.1 billion, or 4.8 percent, to $355.0 billion. This deposit growth is comparable to deposit growth of 2.7 percent for the overall banking industry over the same time frame. As a result of the strong deposit growth, the median deposit per employee at a farm bank in 2015 is slightly more than $3.9 million down slightly from 2014 as growth in employment at farm banks outpaced deposit growth. Farm Banks Continue to Build Capital Equity capital at farm banks increased 4.9 percent to $47.7 billion in 2015 while Tier 1 capital increased by $3.0 billion to $44.3 billion. 3 Since the end of 2007, farm banks have added $19.5 billion in equity capital and $19.3 billion in core capital. Farm banks have built strong high-quality capital reserves and are wellinsulated from risks associated with the agricultural sector. The median Tier-1 leverage ratio for farm banks rose by 26 basis points during 2015 to 10.45 percent; and is now 52 basis points above the leverage ratio before the recession began at the end of 2007. 4 3 Equity capital is invested capital; it consists of the funds invested in a bank on a long-term basis. Such capital is obtained by issuing preferred or common stock, or retaining a portion of earnings. 4 Tier-1 leverage ratio is Tier-1 capital divided by total average assets for leverage capital purposes. American Bankers Association 6

Asset Quality Strengthens at Farm Banks Like most banks, farm banks saw an increase in noncurrent loans during the recession. However, since the recession, farm banks have experienced improved asset quality as farmers and ranchers benefited from the strong farm economy. Noncurrent loans (loans 90 days or more past due and in nonaccrual status) stood at $2.4 billion at year-end 2015. The median noncurrent loan ratio fell by four basis points to 0.47 percent. This compares favorably to an industry noncurrent loan ratio of 1.56 percent. While farm and ranch customers continue to repay their loans, early delinquencies did rise in 2015, possibly reflecting weaker farm incomes and reduced cash flow among farmers. According to various Federal Reserve District Banks, farm bankers reported only a modest deterioration in credit conditions despite the drop in farm income. In addition, commercial banks continue to report low delinquency rates on agricultural loans. Farm banks reported holding $1.9 billion in loans 30 to 89 days past due; up 12.1 percent from 2014. The median 30 to 89 days past due loan ratio rose four basis points over the year to 0.53 percent. This is relative to an industry ratio of 0.73 for all loan categories. Farm Banks Post Solid Earnings Farm banks posted solid earnings in 2015, reporting total net income of $4.4 billion. More than 97 percent of all farm banks were profitable in 2015, while 63 percent reported an increase in earnings compared to a year earlier. Interest income at farm banks rose during 2015 by 4.7 percent to $15.8 billion. Noninterest income at farm banks also rose over the year, by 8.9 percent to $3.0 billion. In comparison, interest income for the entire banking industry rose 1.9 percent and noninterest income rose 2.2 percent over the same timeframe. While interest expenses fell during 2015 by 2.4 percent to $1.6 billion, noninterest expenses rose 11.5 percent to $11.5 billion. Salary and employee benefits at farm banks grew by 6.6 percent to $6.2 billion. Salaries and employee benefits represented 53.6 percent of all noninterest expenses in 2015. As farm banks continue to struggle with the piling on of new regulations, the median return on average assets (ROA) for farm banks held steady at 1.02 percent in 2015. However, more than two-fifths of all farm banks had an ROA in 2015 in excess of 1.12 percent near pre-recession levels. American Bankers Association 7

Outlook for 2016 Headwinds for The Farm Economy Both net cash and net farm income are forecast to decline for the third consecutive year after reaching historic highs during 2012-13. However, net cash income is projected to decline less than net farm income. 5 The USDA is forecasting net farm income in 2016 of $54.8 billion. This is down $3.0 percent from the 2015 forecast, reaching the lowest levels since 2002. Net farm cash income in 2016 is forecasted to be $90.9 billion. This is down 2.5 percent from the 2015 forecast. The expected declines driven by anticipated drops in crop and livestock receipts are moderate compared to the 38- and 27-percent reductions in net farm income and net cash income, respectively, that occurred in 2015. The USDA is forecasting that cash receipts will fall $9.6 billion, or 2.5 percent, in 2016, driven by a 4.3 percent drop in animal and animal product receipts and a smaller 0.9 percent decline in crop receipts. However, while overall cash receipts are declining, receipts for several commodities are expected to increase by at least 1 percent relative to the 2015 forecast levels. Notably, cash receipts for corn and soybeans historically the crops generating the highest crop cash receipts for U.S. famers are both expected to be fairly flat in 2016. A drop in overall production expenses is forecast for 2016, partially offsetting the decline in cash receipts. If realized, this will represent the second consecutive decline in production expenses, an infrequent event which last occurred in 1984-85. Notably, expenses for inputs that typically are produced by the farm sector itself, including feed, as well as livestock/poultry purchases, are expected to decline. In addition, expenses for fuels and oils are forecast to fall by 14.5 percent in 2016. In contrast, hired labor costs and interest expenses are forecast to increase by $1.5 billion, 5 percent, and $1.3 billion, 6.8 percent, respectively. The value of farm assets is expected to decrease by 1.6 percent in 2016 for a second consecutive year as commodities prices and farm income continue to decline. Sector assets increased rapidly from 2009 to 2015 as low borrowing costs, high commodity prices, and rising farm income created strong demand for farm assets, particularly real estate and vehicles/machinery. However, this trend began to shift in 2015. The value of real estate is forecast down by $28.8 billion, 1.2 percent, and the value of crops, animals/animal products and purchased inputs down by $12.9 billion, 6.7 percent, relative to 2015. The USDA expects farm sector debt to increase to $372.5 billion by the end of 2016, an increase of 2.3 percent over 2015 debt levels. Farm sector real estate debt is expected to increase by 1.1 percent to $207.3 billion, while non-real estate debt is expected to grow more quickly, rising 3.8 percent, to $165.2 billion. Farm banks have ample funds to meet the credit needs for qualified farm borrowers and reported growth in loan volumes to farmers suggesting that credit to the sector has not been curtailed. 5 Net farm income reflects only the earnings from production that occurred in the current calendar year. American Bankers Association 8

Northeast Median Top Bottom Number of Full-Time Employees 42 103 23 Total Assets ($ in Mil) $271.0 $445.1 $174.8 Total Loans & Leases ($ in Mil) $201.5 $267.8 $99.0 Total Deposits ($ in Mil) $222.6 $359.8 $143.3 Tier 1 Common Equity Risk-Based Capital Ratio 14.9% 22.3% 13.2% Tier 1 Leverage Ratio 11.0% 14.9% 10.4% Return on Average Assets 1.0% 1.2% 0.8% Return on Average Equity 8.4% 10.8% 6.3% Net Interest Margin 3.3% 3.7% 2.9% Total Interest Expense/Average Assets 0.5% 0.4% 0.7% Total Interest Income/Average Assets 3.6% 4.0% 3.1% Total Noninterest Income/Average Assets 0.3% 0.6% 0.2% Efficiency Ratio 55.7% 47.9% 63.0% Noncurrent Loans*/Total Loans 0.2% 0.1% 0.5% Net Charge-Offs/Average Loans 0.0% 0.0% 0.1% Loan Loss Reserves/Gross Loans 1.3% 1.5% 1.2% Farmland Loans/Total Loans & Leases 20.3% 29.7% 11.8% Agricultural Production Loans/Total Loans & Leases 5.3% 8.1% 3.8% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. The 10 farm banks in the Northeast region reported a 19.7 percent increase in farm loans from a year ago, rising to $651 million, largely influenced by one institution. (Excluding this institution, farm loans in the region increased 15.2 percent.) Agricultural production loans rose 7.3 percent from a year ago to $184 million, while farmland loans increased 21.4 percent to $466 million. Farm banks in the Northeast region were able to maintain profitability in 2015. The median return on assets decreased two basis points to 1.0 percent, while the median return on equity rose to 8.4 percent. The median Tier 1 risk-based capital ratio for farm banks in the Northeast region was 14.9 percent. The 10 Northeast farm banks employed 686 full-time employees in 2015, a three present increase from the previous year.

South Median Top Bottom Number of Full-Time Employees 35 63 20 Total Assets ($ in Mil) $132.9 $231.0 $81.1 Total Loans & Leases ($ in Mil) $83.2 $148.7 $40.0 Total Deposits ($ in Mil) $112.8 $195.3 $70.9 Tier 1 Common Equity Risk-Based Capital Ratio 16.8% 21.3% 13.9% Tier 1 Leverage Ratio 11.1% 12.6% 9.7% Return on Average Assets 1.0% 1.3% 0.7% Return on Average Equity 8.2% 11.8% 5.8% Net Interest Margin 3.9% 4.3% 3.5% Total Interest Expense/Average Assets 0.4% 0.3% 0.5% Total Interest Income/Average Assets 4.0% 4.4% 3.6% Total Noninterest Income/Average Assets 0.6% 0.8% 0.4% Efficiency Ratio 67.2% 59.6% 75.1% Noncurrent Loans*/Total Loans 1.2% 0.5% 2.2% Net Charge-Offs/Average Loans 0.1% 0.0% 0.3% Loan Loss Reserves/Gross Loans 1.5% 1.9% 1.2% Farmland Loans/Total Loans & Leases 16.4% 22.1% 12.8% Agricultural Production Loans/Total Loans & Leases 5.9% 12.9% 2.8% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. The 211 farm banks in the South region increased farm loans by 10.3 percent, or $695 million, from a year ago rising to $7.4 billion in 2015. Agricultural production loans increased 14.0 percent from a year ago, to $2.2 billion, while farmland loans rose by 8.8 percent to $5.3 billion. Farm banks in the South improved profitability in 2015. The median return on equity rose by three basis points to 8.2 percent, while the median return on assets remained steady at 1.0 percent. The region s farm banks median Tier 1 risk-based capital ratio was 16.8 percent, representing healthy banks in the region. Farm banks in the South region employ over 11,800 men and women, an increase of 5.1 percent from the previous year.

Cornbelt Median Top Bottom Number of Full-Time Employees 24 46 13 Total Assets ($ in Mil) $113.4 $206.0 $62.1 Total Loans & Leases ($ in Mil) $71.8 $138.8 $35.7 Total Deposits ($ in Mil) $96.7 $178.0 $53.1 Tier 1 Common Equity Risk-Based Capital Ratio 15.1% 19.5% 12.7% Tier 1 Leverage Ratio 10.4% 12.1% 9.3% Return on Average Assets 1.0% 1.4% 0.7% Return on Average Equity 9.0% 12.3% 6.4% Net Interest Margin 3.5% 3.9% 3.2% Total Interest Expense/Average Assets 0.4% 0.3% 0.5% Total Interest Income/Average Assets 3.8% 4.1% 3.4% Total Noninterest Income/Average Assets 0.4% 0.7% 0.3% Efficiency Ratio 64.2% 56.4% 72.7% Noncurrent Loans*/Total Loans 0.5% 0.1% 1.2% Net Charge-Offs/Average Loans 0.0% 0.0% 0.2% Loan Loss Reserves/Gross Loans 1.3% 1.6% 1.0% Farmland Loans/Total Loans & Leases 20.0% 27.4% 14.6% Agricultural Production Loans/Total Loans & Leases 16.0% 25.6% 9.3% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. Farm banks in the Cornbelt region increased farm loans by 7.4 percent, or $3.1 billion, from a year ago to $44.3 billion in 2015. Agricultural production loans rose 5.8 percent from a year ago to $19.9 billion, while farmland loans increased 9.0 percent to $21.3 billion. There are 934 farm banks in the Cornbelt region. Farm banks in the Cornbelt region maintained profitability in 2015. The median return on equity was 9.0 percent, while the median return on assets rose one basis point to 1.0 percent. The region s median Tier 1 risk-based capital ratio rose 15 basis points over the year to 15.1 percent. Farm banks in the Cornbelt region employ more than 37,800 men and women, a 2.7 percent increase compared to 2014 employment levels.

Plains Median Top Bottom Number of Full-Time Employees 21 42 11 Total Assets ($ in Mil) $100.5 $196.5 $52.1 Total Loans & Leases ($ in Mil) $56.4 $121.7 $28.3 Total Deposits ($ in Mil) $83.2 $164.7 $44.4 Tier 1 Common Equity Risk-Based Capital Ratio 15.2% 19.3% 12.4% Tier 1 Leverage Ratio 10.3% 11.9% 9.1% Return on Average Assets 1.0% 1.4% 0.7% Return on Average Equity 9.7% 13.2% 6.3% Net Interest Margin 3.6% 4.1% 3.2% Total Interest Expense/Average Assets 0.3% 0.2% 0.5% Total Interest Income/Average Assets 3.8% 4.2% 3.3% Total Noninterest Income/Average Assets 0.4% 0.7% 0.3% Efficiency Ratio 64.5% 56.0% 73.5% Noncurrent Loans*/Total Loans 0.3% 0.0% 0.9% Net Charge-Offs/Average Loans 0.0% 0.0% 0.1% Loan Loss Reserves/Gross Loans 1.3% 1.7% 1.0% Farmland Loans/Total Loans & Leases 16.8% 24.1% 11.2% Agricultural Production Loans/Total Loans & Leases 25.4% 40.5% 13.8% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. The 753 farm banks in the Plains region increased their farm loans by 8.0 percent, or $2.8 billion, from a year ago to more than $38.5 billion in 2015. Agricultural production loans rose 6.1 percent from a year ago to $21.9 billion, while farmland loans increased 10.5 percent to $16.6 billion. Farm banks in the Plains maintained profitability in 2015. The median return on equity remained steady at 9.7 percent, while the median return on assets rose one basis point to 1.0 percent. The region s farm banks had a median Tier 1 risk-based capital ratio of 15.2 percent a five basis point increase from the previous year. Farm banks in the Plains region employ nearly 33,000 men and women, an increase of 2.7 percent compared to 2014.

West Median Top Bottom Number of Full-Time Employees 34 93 16 Total Assets ($ in Mil) $151.2 $365.1 $69.7 Total Loans & Leases ($ in Mil) $88.1 $210.4 $43.0 Total Deposits ($ in Mil) $135.9 $323.8 $59.6 Tier 1 Common Equity Risk-Based Capital Ratio 16.1% 18.2% 13.4% Tier 1 Leverage Ratio 10.1% 11.5% 9.2% Return on Average Assets 1.1% 1.4% 0.7% Return on Average Equity 9.2% 12.9% 7.1% Net Interest Margin 3.9% 4.3% 3.4% Total Interest Expense/Average Assets 0.2% 0.1% 0.4% Total Interest Income/Average Assets 3.8% 4.3% 3.4% Total Noninterest Income/Average Assets 0.5% 0.7% 0.3% Efficiency Ratio 66.0% 55.9% 76.7% Noncurrent Loans*/Total Loans 0.7% 0.1% 1.1% Net Charge-Offs/Average Loans 0.0% 0.0% 0.1% Loan Loss Reserves/Gross Loans 1.6% 2.0% 1.2% Farmland Loans/Total Loans & Leases 14.2% 24.7% 10.6% Agricultural Production Loans/Total Loans & Leases 17.0% 28.9% 11.1% * Noncurrent loans are defined as past 90 days due and loans in nonaccrual status. The 68 farm banks in the West region increased farm loans by 7.0 percent, or $617 million, from a year ago to $9.5 billion in 2015. Agricultural production loans rose 10.0 percent from a year ago to $4.4 billion, while farmland loans increased 4.4 percent to $5.0 billion. Farm banks in the West improved profitability in 2015. The median return on equity rose 35 basis points to 9.2 percent, while return on assets rose three basis points to 1.1 percent. The median Tier 1 risk-based capital ratio for farm banks in the West region was 16.1 percent a 75 basis point increase from a year ago. Farm banks in the West region employ more than 6,700 men and women, up 1.3 percent from the previous year.

ABA Center for Agricultural & Rural Banking ABA Agricultural Banking Experts Steve Apodaca, Senior Vice President, Agricultural & Rural Banking Ed Elfmann, Vice President, Congressional Relations Sarah Grano, Senior Director, Public Relations Brittany Kleinpaste, Director, Economic Policy & Research Cynthia Hall Watkins, Director, Congressional Relations Barbara McCoy, Website Administrator, Center for Agricultural & Rural Banking Brian Nixon, Senior Editor, Member Communications Resources for Agricultural Banks ABA Ag Banker Bert Ely's Farm Credit Watch ABA National Agricultural Bankers Conference: November 13-16, 2016, Indianapolis, Ind. Agricultural Banks Performance Scorecard Farmer Mac Alliance