Farm debt at commercial banks increased at a steady pace in the first quarter of this year as liquidity remained strong, according to the Federal Reserve Bank of Kansas City.
Balances on real estate and non-real estate farm loans increased 7 percent and 3 percent, respectively, from a year ago. According to the KC Fed, the increase pushed non-real estate debt balances up from a year ago as real estate debt remained high.
Loan performance remained strong as non-accruing loan balances fell. For the third straight year, delinquencies on both real estate and non-real estate loans dropped to just 1 percent in the first quarter.
In the first quarter of the year, liquidity pressures in banking caused a broad drop in lending as ag banks increased cash reserves with brokered and large time deposits. Though the outlook for the U.S. farm economy has moderated in recent months, finances remain healthy with support from historically high incomes in recent years.
“Higher production costs have pushed up credit needs for some borrowers, while many others have utilized cash holdings to supplement loan balances and reduce interest expenses,” the K.C. Fed stated.
- The sharp rise in interest rates at ag banks increased unrealized losses on securities holdings to high levels. “Through the first quarter, sound liquidity eased some of the ongoing risks and continued to support the ability of farm lenders to meet credit demands,” the report stated.
- The net interest margin at ag banks increased to more than 3 percent, its highest mark since early 2021, and returns on average assets also grew. “The rise in benchmark interest rates over the past year supported considerable growth to interest income that boosted earnings, but higher funding costs have curbed net interest margins in recent months,” the KC Fed stated.
- Despite an increase in funding costs, interest income grew 300 percent over the past year, offsetting an increase in all expense categories.