What is Happening to Community Banks and Agricultural Lenders?
Agricultural Lending Institutions are Consolidating
Consolidation has been a trend in financial institutions for years, but no sector has experienced a greater amount of consolidation than banks in rural America. In the 1980’s there were approximately 15,000 community banks serving local communities – currently there are less than 5,000.
Since 2010, mergers increased from 173 per year to 273 per year. This has resulted in the loss of over 1,000 banks that had assets of less than $100 million. The acquiring bank is usually three to four times larger than the target bank. This trend has shown no indications of slowing down. More than 46% of community banks recently surveyed were planning a merger within the next twelve months.
Other institutions that make agricultural loans are acquiring agricultural lenders at a 90% ratio, with 10% of these banks moving out of agricultural lending as they are acquired. As discussed below, there is increased pressure on agricultural lenders to consolidate than on other lending institutions because of pressures that currently exist on farming and agricultural businesses.
The consolidating trend is not limited to private banks. The Farm Credit System has undergone a similar trend as Farm Credit institutions have reduced from 95 in 2010 to 78 in 2016. Arizona was not isolated from this trend as Farm Credit Services Southwest merged into Farm Credit West with certain credit decisions taken out of Arizona.
The rapid consolidation provides customers with less options to ensure the best rates and fewer alternatives if issues arise that would usually encourage a customer to find a different lending institution.
Debt to Earnings and Interest Expense to Earnings are Rising in the Agricultural Sector
Over the last decade, farm sector debt has grown by more than $130 billion dollars. Adjusted for inflation, farm debt levels are near their highest levels since 1984. Unfortunately, debt to assets ratios remain low compared to the farming sector historical. As debt to assets ratios remain low, banks will be less inclined to work with borrowers. Additional stress to borrowers is that in the farming sector, debt to assets ratios have been supported by real estate land values, but the value of the property is not based on its ability to service debt loads. As a result, debt to earnings and interest expense to earnings ratios are rising. While not yet at the crisis level of the early 1980’s, farmers find it more difficult to pay their bills as they become due which may require a restructure of their balance sheet.
Agricultural borrowers were helped by interest rates remaining low. However, if interest rates increase as the Federal Reserve has indicated, there will be increased pressure on these businesses, especially those with variable rate loans. Farms and agricultural ventures that are considered highly leveraged with their earnings as compared to their variable rate of debt should consider restructuring their loans before interest rates are increased.