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Farm Banks Should Expect a Slowdown in Earnings, says ABA Report

 

May 16 - Economic recovery from the great recession has been slow, and farm banks continue to struggle with new regulations. Quantitative easing has led to rapid appreciation of farm values, causing concern that another bubble could be forming.

Despite the challenges, farm banks reported solid performance in 2013, according to the American Bankers Association 2013 Farm Bank Performance Report.

Indeed, in 2013 the agricultural sector outperformed the broader national economy, and as a result, farm banks posted solid results, reporting improved asset quality, strengthened balance sheets and solid earnings.

Key findings from the report include:

· Small loans made up almost half of bank farm and ranch lending with nearly $70 billion in small and micro-small farm and ranch loans on the books at the end of 2013.

· The 2,152 farm banks recorded strong asset quality and capital levels in 2013 by 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 continued to improve. Nonperforming loans (loans 90 days or more past due and in nonaccrual status) declined to 1.22 percent of total loans, close to pre-recession levels.

· As a group, farm banks remained well-capitalized through 2013. Over 99 percent were considered well-capitalized, the highest capital rating given by bank regulators.

· Farm banks increased farm lending by 9.1 percent, or $7.3 billion, in 2013 and held $87.8 billion in farm loans at year-end. Since 2007, employment at farm banks has risen 15.1 percent.

· In 2013, farm banks increased employment by 2.1percent, adding nearly 2,000 jobs, and employed over 91,900 rural Americans.

· Over 96 percent of farm banks were profitable in 2013, with over half reporting an increase in earnings.

Despite the positives, the ABA report cautioned about challenges for 2014. The projection for net farm cash income is $101.0 billion, down 21.7 percent from 2013 (but above the 10-year average 2004-2014). The USDA is forecasting that crop receipts will fall by more than 12 percent this year. Furthermore, reduced government farm payments will contribute to lower projected net farm income.

The bright spot will be livestock and dairy sales, forecasted to increase by 0.7 percent, said the ABA report.

The farm sector’s debt-to-asset ratio is projected to fall to 10.54 percent, while the debt-to-equity ratio is projected to remain steady at 11.78 percent in 2014. If realized, these would be the lowest values for both measures since 1954, confirming the strength of the farm sector’s solvency despite an expected slowdown.

The full report can be downloaded at http://www.aba.com/Press/Documents/2013FarmBankPerformancereport.pdf .


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