By almost any measure, Illinois is one of the top agriculture-producing states in the country and its farmers borrow millions each year to finance their operations.
But credit unions in the state lend next to nothing in that space.
Agricultural loans at Illinois banks and thrifts totaled $4.85 billion at the end of the fourth quarter of 2016. That number has fluctuated in recent quarters from as low as $3.93 billion in the first quarter of 2014 to a high of $4.99 billion at the end of the fourth quarter of 2015, according to SNL Financial data. For Illinois credit unions, total agriculture loans at the end of the most recent quarter were only $11.2 million.
By comparison, credit unions in neighboring Indiana had $1.03 billion in ag loans at the end of the fourth quarter.
So why aren't Illinois credit unions making those loans?
The answer is many-pronged, said Tom Kane, president and CEO of the Illinois Credit Union League. Many credit unions in the state started out to serve a single employer, such as Citizens Equity First Credit Union, which was founded to serve the employees of Caterpillar. A bunch of others were formed for religious groups, he said.
At the same time, the Farm Credit System and Farm Credit Bank of Texas do such a good job that there is neither a market nor a need for the credit unions to get involved in ag lending. "And it's so specialized and so different from anything else credit unions do that they just don't want to get into it," he said.
Additionally, the farming business is cyclical, and loans to farmers tend to be large because farming is capital-intensive. Kane said large credit unions such as Citizens Equity would have the resources to do ag lending but many of them are already fully lent out in their regular book of business. Ag loans are considered business loans, so credit unions are also hindered by the statutory cap that limits total business loans to 12.25% of total assets or 175% of net worth. "They would rather take care of their members who are starting new businesses or things like that," he said.
Citizens Equity's President and CEO Mark Spenny is a farmer himself and uses the Farm Credit System for his own operation. Spenny related to Kane that ag lending is so specialized that credit unions would need to hire specific lenders to get involved and that can be difficult.
Kane said he recently spoke with a credit union in Indiana that does a lot of ag lending, and that conversation led to him broaching the topic with some Illinois credit unions. "But nobody has any appetite for it," he said. The largest credit unions in Illinois are in the urban areas and likely have no farmers in their fields of membership. The credit unions in the rural areas are smaller and likely do not have the resources to take on ag lending, Kane said.
But some Illinois community banks say ag loan demand is on the increase. Litchfield National Bank had more than $10.6 million in agricultural loans outstanding at the end of the fourth quarter of 2016. President and CEO Michael Fleming said in an interview the Litchfield, Ill.-based bank has seen more loan demand because it now takes more capital to operate farms and most farmers have less cash on hand after a couple of tough years. "Most are in good shape, but it is not uncommon for them to be terming out some operating loans over a longer term against land or machinery since they had some losses," he said.
Farmers are hoping for better commodity prices to turn things around to a profitable status, Fleming said. Many of the bank's projections this year show tight cash flows with little net income for farmers. Fleming said the bank recently had an exam and regulators took a close look at how the bank manages the overall risk rather than the risk in the individual credits.
"With rising rates, next year could be interesting if everything else stays the same," Fleming said.
From a regulatory perspective, credit unions can play in the ag space as long as the regulators are comfortable that the institutions understand what they are getting into, Kane said.
But Rebecca Osland, policy associate for the Illinois Stewardship Alliance, said farmers in the state are impeded by layers of regulation that add expense and complexity. The Alliance, a nonprofit that advocates for the state's farmers, is introducing four new bills this year in the state legislature that aim to streamline local food regulations, aiming to make it easier for farmers to grow their businesses.
Fleming said Litchfield has not yet seen any serious adverse fallout to lending from such regulation. "We do have some ag customers that get a lot of hassle from the Illinois EPA about confinement operations. While I understand the theory, some of it is over the top to the point it stops commerce," he said.