#1FEDERAL South Dakota Economy and Agricultural Conditions 1933 INSURANCE EPOSIT CORPORATION Division of Insurance and Research Kansas City Regional Operations Branch May 1, 2018#2. Disclaimer The views expressed herein are those of the author and presenter and do not necessarily reflect official positions of the Federal Deposit Insurance Corporation. Some of the information used was obtained from publicly available sources that are considered reliable. However, the use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation. 2 FDIC#3• Presentation Agenda High-level overview of bank conditions Agricultural economy and farm bank conditions • South Dakota and Sioux Falls economies FDIC#4South Dakota Banking Profile 30,000-Ft. Elevation#5South Dakota ranks 29th among all states by number of FDIC-insured institutions. SD, 68 (29th) Number of FDIC-Insured Institutions 100 200 300 400 500 0 Source: FDIC, 4Q2017. FDIC#6South Dakota is characterized by a large share of rural community banks concentrated in ag lending. Percent of Banks Considered Farm Banks 90 80 70 60 50 40 30 20 10 0 0 10 20 NE ♦IA ND SD KS MT MN IL ΟΜΟ MO ►OK 30 40 FDIC 50 60 Percent of Banks With Total Assets Under $100 Million Source: FDIC, 4Q2017, all insured institutions by state.#7South Dakota banks have strong earnings and capital, but also higher agricultural and wholesale funding exposures. Ag Loans to FDIC Pretax Tier 1 Total Risk- Wholesale Return on Net Interest Leverage Loans to Based Funds to Assets Margin Capital Assets Capital Total Assets South Dakota 1.45 3.89 10.96 72.7 265.8 16.81 U.S. 1.18 3.69 10.51 68.8 27.4 14.27 SD Ranking 5 15 7 14 3 10 Source: FDIC, 4Q2017. Notes: Ratios are median values for South Dakota and U.S. South Dakota ranking is based on states ordered highest to lowest (descending order).#8Agriculture#9These primary takeaways from my December 2016 visit remain relevant nearly 2.5 years later. Coming off a decade of high returns, the U.S. agricultural sector has been weak since 2014, and conditions are expected to remain that way for the next few years. • Farm bank asset quality is starting to weaken from historically strong levels, but the transmission mechanism can be slow. Persistently weak agricultural conditions may result in problems for some farm banks, but a repeat of the agricultural crisis of the 1980s is unlikely. FDIC 6#102018 is forecast to be the fifth year of this ag down- cycle with the lowest net farm income since 2006. South Dakota: Net Farm Income Bil. $ US: Net Farm Income Bil. $ FDIC LO 5 4 3 2 140 - 120 - 100 - 80 - 60 1 .40 08 09 10 11 12 13 14 15 16 17 18 Source: United States Department of Agriculture/Haver Analytics#11Corn and soybean prices received by South Dakota farmers have been flat; wheat increased in 2017. Prices Received by Farmers Dollars Per Bushel 9 8 7 6 65 4 3 T 2 1 0 2012 -Corn (Left Axis) -Wheat (Left Axis) -Soybeans (Right Axis) FDIC Prices Received by Farmers Dollars Per Bushel 16 14 12 10 8 6 4 2 0 2013 2014 2015 2016 2017 Source: USDA. Note: Marketing years#12Corn and soybean production has been strong but wheat suffered on drought conditions in 2017. FDIC Production, Millions of Bushels 300 Soybeans (Left Axis) 250 -Wheat (Left Axis) -Corn (Right Axis) 200 150 100 1,000 800 600 400 200 50 0 0 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: USDA. ----#13Wheat acreage is at an all-time low as South Dakota farmers increase corn and soybean acreage. Acres Planted Millions Soybeans 7 6 -Wheat -Corn 5 4 3 2 1 0 FDIC 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2015 2017 Source: USDA.#14The U.S. cattle herd is expanding at its fastest pace in decades, pressuring prices. Beginning Stocks: Animal Numbers Cattle, United States 1000 Heads Prices Received by Farmers: Steers & Heifers US$/Cwt 140000 130000 120000 110000 100000 90000 рали 175 150 125 - 100 - 75 - 50 80000 25 70 75 80 85 90 95 00 05 10 15 Source: United States Department of Agriculture/Haver Analytics FDIC#15South Dakota farmers have received nearly $750 million in crop program payments the last three years. Crop Program Payments Dollars (Millions) 300 ■Fixed Direct Payments 250 ■Price Loss Coverage (PLC) Payments Agricultural Revenue Coverage (ARC) Payments 200 ■Total PLC+ARC 150 100 50 0 -50 2010 2011 2012 2013 2014 2015 2016 2017 Source: USDA. FDIC#16Drought conditions in the Northern Plains have subsided but have intensified in the Southwest. SL SL Intensity and Impacts None DO (Abnormally Dry) D1 (Moderate Drought) D2 (Severe Drought) D3 (Extreme Drought) D4 (Exceptional Drought) Source: The National Drought Mitigation Center University of Nebraska-Lincoln SL SL SL SL SL SL SE Delineates dominant impacts S - Short-Term impacts, typically less than 6 months (e.g. agriculture, grasslands) L-Long-Term impacts, typically greater than 6 months (e.g. hydrology, ecology) FDIC#17The summer weather outlook for South Dakota is for average temperatures and precipitation. FDIC Jul-Aug-Sep 2018 THREE-MONTH OUTLOOK TEMPERATURE PROBABILITY 2.5 MONTH LEAD VALID JAS 2018 MADE 19 APR 2018 EC 卷 Source: The National Drought Mitigation Center University of Nebraska-Lincoln Jul-Aug-Sep 2018 EC THREE-MONTH OUTLOOK PRECIPITATION PROBABILITY LEAD 2018#18FDIC South Dakota led all states in farmland price appreciation between 2004 to 2014. Average Value of 1.3 1.7 3.3 2.2 1.3 1.4 3.4 1.4 1.6 3.2 1.3 3.1 1.8 1.6 1.4 2.4 2.1 1.6 1.4 2.3 1.6 Farm Real Estate 2014 As a Multiple of 2004 Less Than 1.5 1.5 to 2.0 2.0 to 3.0 Greater than 3.0 Source: USDA (Haver Analytics). Note: Inflation adjusted values. 1.3 1.1 1.2 1.9 1.7 1.6 1.4 1.1 1.3 1.1 1.1 1.8 1.21 0.9 1.2 0.90.9 0.91.1#19After years of strong gains, farmland values have fallen only modestly. Percent 40 35 30 25 20 15 10 5 0 -5 -10 2004 -Non-irrigated cropland ―Rangeland 2006 2008 2010 2012 2014 2016 Source: South Dakota State University. FDIC#20Farmland sales activity remains low, supporting land values. Chart 3: Volume of Farmland Sales Diffusion Index* 140 130 120 110 100 90 80 70 60 Diffusion Index* 140 130 120 110 זי 100 90 80 70 60 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 *Bankers responded to each item by indicating whether the volume of land sales increased, decreased, or remain the same. The index numbers are computed by subtracting the percentage of bankers who responded "decreased" from the percentage who responded "increased" and adding 100. Source: Federal Reserve Bank of Kansas City. FDIC#21One-third of respondents in 2017 SDSU land values report indicated liquidity/financial stress as reasons for selling. FDIC Graph 2. The Most Important Reasons Among Buyers for Purchashing Land in the Area 2017 Graph 3. The Most Important Reasons for Sellers Offering Land for Sale in the Area 2017 26% 6% 35% 33% ■ Expansion Location Investment Other 32% 4% 12% Retirement ■Estate Sales High Land Values Increased Liquidity/ Reduce Financial Stress ■ Other 44% 8% Fig 5. Reasons for buying farmland Fig 6. Reasons for selling farmland Other 8% Seller Market/ Cap Gain 6% Other 5% Commodity prices 15% Estate 24% Debt & Cash Flow 5% Expansion 38% Ag Profit/ Farming 10% Hunting/ Recreation 3% Low Interest Rate 8% Investment 18% 13 High Land Price 31% Retire/ Farmer Exit 29%#22A sizeable share of farms have insufficient cash-flow to service debt. Term Debt Coverage (Times) 7 6 TDC1 indicates insufficient current cash- flow to service intermediate and long-term debt payments. 5 4 3 2 1 0 -1 20% 40% 60% 80% 100% 20% Net Farm Income Percentile 2012 40% 60% 80% 100% Net Farm Income Percentile Source: FINBIN database, University of Minnesota. Note: States limited to Illinois, Minnesota, Nebraska, North Dakota, and South Dakota. 2016 FDIC#23The share of South Dakota farm banks reporting ag loan delinquencies/charge-offs has risen. Share of Farm Banks Percent FDIC 90 -Reporting Agricultural Loan Delinquencies -Reporting Agricultural Loan Charge-Offs 80 70 60 50 -- 40 30 20 10 0 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: FDIC, 4Q2017, South Dakota.#24Agricultural past-due loan ratios have increased sharply but are still low by historical measure. Median Ratio Percent -Median Past-Due & Nonaccrual Agricultural Loan Ratio -Median Agricultural Loan Annual Charge-Off Rate 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 FDIC 0.00 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: FDIC, 4Q2017, South Dakota, only farm banks reporting delinquent & charged-off ag loans.#25Why have we not seen ACI and past-due ratios increase more than they have at farm banks? Level FDIC Watch List ACI Ratio Time PDNA Ratio Abundance of farmland collateral Loan Restructurings#26When does collateral protection cease being abundant? Increase In Decline in Farmland Value Loan Balance 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% -50% 0% 50% 53% 56% 59% 63% 67% 71% 77% 83% 91% 100% 5% 53% 55% 58% 62% 66% 70% 75% 81% 88% 95% 105% 10% 55% 58% 61% 65% 69% 73% 79% 85% 92% 100% 110% 15% 58% 61% 64% 68% 72% 77% 82% 88% 96% 105% 115% 20% 60% 63% 67% 71% 75% 80% 86% 92% 100% 25% 63% 66% 69% 74% 78% 83% 89% 96% 30% 65% 68% 72% 76% 81% 87% 93% 100% 35% 68% 71% 75% 79% 84% 90% 96% 104% 109% 120% 104% 114% 125% 108% 118% 113% 123% 130% 135% 40% 70% 74% 78% 82% 88% 93% 100% 45% 73% 76% 81% 85% 91% 50% 75% 79% 83% 88% 97% 104% 112% 94% 100% 107% 115% 108% 117% 127% 121% 132% 145% 125% 136% 150% 140% Increase In Decline in Farmland Value Loan Balance 0% -5% -10% -15% 0% 65% 68% 72% 76% 81% 87% 93% 5% 68% 72% 76% 80% 85% 91% 98% 10% 72% 75% 79% 84% 89% 95% 102% 110% -20% -25% -30% -35% -40% -45% -50% 100% 108% 118% 105% 114% 124% 119% 130% 130% 137% 143% 15% 75% 79% 83% 88% 93% 100% 107% 115% 125% 136% 150% 20% 78% 82% 87% 92% 98% 104% 111% 120% 130% 142% 156% 25% 81% 86% 90% 96% 102% 108% 116% 125% 135% 148% 163% 30% 85% 89% 94% 99% 106% 113% 121% 130% 141% 154% 169% 35% 88% 92% 98% 103% 110% 117% 125% 135% 146% 160% 176% 40% 91% 96% 101% 107% 114% 121% 130% 140% 45% 94% 99% 105% 111% 118% 126% 135% 50% 98% 103% 108% 115% 122% 130% 139% 145% 157% 171% 150% 152% 165% 182% 189% 163% 177% 195% FDIC#27Liquidity and funds management are becoming an increasing challenge for farm banks. Percent (Median) 20 YOY Growth in Total Deposits YOY Growth in Total Loans -Wholesale Funding to Total Asset Ratio FDIC 15 10 5 0 -5 2000 2003 2006 2009 Source: FDIC, 4Q data, all banks in headquarterd in South Dakota. 2012 2015 2017#28$1 Trillion - total value of U.S. ag exports 2009 - 2016, the strongest period for U.S. ag exports in history. Top Products Soybeans & Soybean Products Corn FDIC $25.4 billion $9.2 billion Tree Nuts $7.6 billion Beef & Beef Products $6.1 billion Prepared Food $6.1 billion Fresh & Processed Fruit $6.1 billion Pork & Pork Products $5.6 billion Wheat $5.1 bilion Dairy Products $4.6 billion Poutry Meat & Products $3.8 bilion (Excludes eggs) $5 bilion $10 billion $15 billion $20 billion $25 billion Source: USDA/Foreign Agricultural Service.#29NAFTA trading partners are largest importers of U.S. agricultural products, followed by China. FY 2016 Top Destinations 1 Canada $20.3 billion 15.7% of total ag exports 2 China $19.2 billion 14.8% of total ag exports 3 Mexico $17.7 billion 13.6% of total ag exports 4 European Union $11.6 billion 9.0% of total ag exports 5 Japan $10.6 billion 8.2% of total ag exports Source: USDA/Foreign Agricultural Service. FDIC#30Value of Exports South Dakota Agricultural Export Value, 2016. Total Value of All Total Value of Commodity Production Agricultural Production $ Thous. Share (%) Share (%) Soybeans 1,307.0 12.74 56.56 Corn 502.6 4.90 19.69 Feeds and other feed grains 405.4 3.95 Wheat 272.4 2.66 59.68 Beef and veal 242.2 2.36 12.71 Soybean meal 233.9 2.28 Other oilseeds and products 222.7 2.17 Vegetable oils 178.7 1.74 Grain products, processed 169.7 1.65 Pork 140.3 1.37 35.09 Hides and skins 66.8 0.65 Dairy products 60.8 0.59 13.57 All Other Commodities 125.1 1.22 Total agricultural exports 3,927.6 38.29 Source: USDA. FDIC#31Nearly three-fourths of South Dakota agricultural exports are sent to Mexico and Canada. Figure 1. Share of Total Agricultural Exports to NAFTA, 2016 10% 73% 44% 48% 61% 49% 73% 52% 16% 63% 61% 48% 80% 47% 49% 32% 45% 60% 35% 33% 20% 28% 41% 33% 46% 48% 36% 12% 35%21% 69% 29% 16% 26% 32% 27% 21% 45% 52% 58% 15% 25% 19% 21% 45% 7% B FARM BUREAU Source: USDA FAS, AFBF Calculations Percentage of Value 24% Less than 30% 30% to 50% Greater than 50% FDIC#32FDIC Chinese tariffs on U.S. soybeans could reshuffle global soybean trade. Argentina, Brazil, and U.S. Produce Nearly 90 Percent of Global Soybean Exports, and China Consumes More Than Two-Thirds of Their Shipments Share of Nation's Soybean Exports That Is Sent to China, by Value Producer Nation's Share of Global Soybean Production, by Nation Volume Nation's Share of Global Soybean Exports, by Volume Nation's Share of China's Imports of Soybeans, by Value Argentina 16 5 10 86 Brazil 33 43 46 76 United States 33 40 41 64 Total 82 88 97 70 Sources: USDA (Haver Analytics), The Observatory of Economic Complexity.#33- The 2018 farm bill – a big unknown. • Major sticking point - SNAP. • Minor adjustments to ARC and PLC. Conservation programs condensed. • Milk and cotton were addressed in the February spending bill. FDIC#34South Dakota Economy#35South Dakota employment growth has rebounded the past year, converging with the U.S. growth rate. Year-Over-Year Change Percent 4 2 0 -2 -4 2014 2015 .U.S. ND MN NE -IA -SD 2016 2017 2018 Source: Bureau of Labor Statistics (Haver Analytics). Note: Seasonally-adjusted monthly data. FDIC#36South Dakota's unemployment rate of 3.4 percent is the 14th lowest among the 50 states. HI: 2.1 4.9 7.2 5.9 NH: 2.6 2.6 VT: 2.9 2.9 5.3 DC: 5.9 Unemployment Rate Top 5 Below Median Above Median Bottom 5 Source: Bureau of Labor Statistics (Haver Analytics). Note: Three-month moving average ending March, 2017; U.S. 50 states and District of Columbia. FDIC#37An aging population will challenge future job growth in South Dakota. Working Age Population Retirement Age Population Percent of total Working Age (24-64) 53 17 ↓ 52 16 51 Retirement Age (>65) 15 50 49 48 2005 2007 2009 2011 2013 14 13 2015 Source: U.S. Census Bureau/American Community Survey (Haver Analytics). FDIC#38Sioux Falls Economy#39Sioux Falls has sustained a long, strong trend in population growth. Population, Thousands 260 220 180 140 100 1970 1980 00 Total Population Trend (1970-1990) 1990 2000 2010 Source: U.S. Census Bureau (Haver Analytics). FDIC#40Sioux Falls is among one of the fastest growing same-sized metropolitan areas. Population Change, 1990-2017 300 Naples-Immokalee-Marco Island, FL Sioux Falls, SD Olympia-Tumwater, WA Fort Collins, CO 250 200 150 100 50 90 95 100 105 Fargo, ND-MN Clarksville, TN-KY 110 115 120 Population Change, 2010-2017 Index: 2010 = 100 Source: U.S. Census Bureau (Haver Analytics). FDIC#41Sioux Falls has seen strong home price appreciation. FDIC Bakersfield, CA Las Vegas, NV Minneapolis Rapid City Bismarck Grand Forks Fargo St. Louis Springfield Sioux Falls Rochester Des Moines Wichita Kansas City Lincoln Sioux City Omaha 100 120 2006 Q1 2006Q1 2006Q2 Indexed Home Values 1Q2000 = 100 Indexed Value/QQ:YY as of 4Q:17 Value/QQ:YY as of 4Q:07 220 240 260 280 300 140 200 160 180 Source: Moody's Data Buffet, Core Logic, Case-Shiller Home Price Index.#42After declining in 2012 and 2013, housing affordability in Sioux Falls has been steady. 300 250 200 Sioux Falls, SD Fargo, ND-MN Minneapolis-St. Paul- 150 2009 2010 2011 2012 2013 2014 Bloomington, MN-WI 2015 2016 Source: National Association of Realtors (Haver Analytics). Note: Annual data. The Index equals 100 when the median family income is sufficient to purchase a median priced house. A reading over 100 indicates the percentage by which median family income is in excess of income necessary to purchase a median priced house. FDIC#43Any Final Questions or Comments? Rich Cofer FDIC Regional Manager Division of Insurance and Research - Kansas City Region 816-234-8066, [email protected]