FARM CREDIT ADMINISTRATION News September/October 1999 • Vol. 1, No. 8 FCA Expects Farm Credit System Financial Condition To Remain Sound During Next 12 Months Under the “most likely” scenario associations had total assets of although increasing, have not for the agricultural environment, the $2,703 million at June 30, 1999, and escalated as they did in the 1980s. Farm Credit System (FCS or System) were about 6.2 percent of total assets System institutions have higher is expected to remain financially of all direct lending associations. An capital and loan loss reserves levels sound during the next 12 months, association’s risk funds include at- than in the 1980s and are in a better according to a recent Stress Analysis risk capital, surplus, and allowance position to absorb risks,” he added. Report prepared by FCA’s Office of for losses. These eight associations “Although conditions today are Examination. would not materially impair the different than those of the 1980s, Chief Examiner Roland Smith safety and soundness of the System several factors pose risks to System said, “While the results of this stress or their funding banks. institutions,” Smith said. These test are relatively positive, FCA factors include the continuing low remains cautious on these projec- commodity prices, poor yields in tions, particularly over the 24-month drought stressed areas, and uncer- ‘worst case’ scenario. The actual FCS institutions are in a tainty regarding the future of Federal financial condition of the System better position today to farm programs. While Congress is will be influenced by external factors absorb risks than they were likely to act this year to provide aid affecting agriculture that the System to farmers, the safety net for farmers institutions can not control. These in the 1980s. is shrinking. Government assistance external factors include low com- to farmers will be essential to relieve modity prices, export demand, the stress in 1999. weather conditions, and the competi- Copies of the report are available tion.” “Today’s economic environment from FCA’s Office of Congressional Under “worst case” conditions differs from the one that led to the and Public Affairs, 1501 Farm Credit projected at June 30, 2001, eight agricultural crisis of the 1980s,” Drive, McLean, VA 22101-5090; associations would have adverse Smith said. “Interest rates are low phone, 703-883-4056; e-mail, info- assets in proportion to risk funds and stable, farm debt levels are email@example.com. greater than 90 percent. These eight moderate, and real farmland values, Chairman Martin Addresses National Agricultural Credit Committee On September 13, FCA Board Chairman Marsha Pyle Martin addressed almost 50 representatives of regulatory agencies and banking organizations at the National Agricultural Credit Committee’s semi-annual conference in Chicago. The conference was hosted by the Federal Reserve Bank of Chicago. The committee also holds a confer- ence in Washington, D.C., during April each year. Martin emphasized the need for change in the world of agricultural finance to accommodate the changes taking place in agriculture, the financial marketplace, related technological innovations, and the rise in partnerships and alliances. She specifically encouraged more alliances and partnerships between Farm Credit System institutions and commercial banks. Martin concluded her remarks by highlighting the increasing globalization and concentration within agriculture and the significance of integrated markets. She also quoted Fed Chairman Alan Greenspan on the importance of agricultural trade to domestic agriculture and the U.S. economy. Page 2 • September/October 1999 FCA Newsline Debate on Allowance for Loan Losses Expected to Have No Significant Effect on Farm Credit System Institutions Farm Credit Administration ing issues and to strongly encourage • In an increasing risk environment, Chief Examiner Roland Smith the parties involved to work together a conservative approach should be recently discussed his expectations to resolve their differences. Conse- used to establish an adequate but regarding the effect on Farm Credit quently, the Federal regulatory not an excessive ALL; System institutions of the Financial agencies and the SEC released a joint Accounting Standards Board (FASB) statement in July agreeing on the • The ALL evaluation process guidance on accounting for allow- important principles of establishing usually results in a range of ance for loan losses (ALL). and maintaining an allowance for estimated losses that can be “Despite the lengthy discussions loan losses. considered acceptable, yet the the FASB statements have generated The American Institute of amount selected must be based on among banking and securities Certified Public Accountants is management’s best estimate within regulators, I do not expect a signifi- scheduled to issue a final rule later the range; cant change in the FCS institutions’ this year in an attempt to further accounting for ALL,” said Smith. clarify the issues surrounding the • The ALL evaluation and pertinent How to account for loan losses allowance for loan losses. The FASB analysis must be well documented has been a topic of recent debate. cleared the rulemaking project and applied consistently from year The FASB issued Statements No. 5, during a September 8, 1999, meeting. to year; and “Accounting for Contingencies,” and The Office of Examination’s No. 114, “Accounting by Creditors for (OE) position regarding the underly- • Given the current agricultural Impairment of a Loan,” in 1975 and ing principles on accounting for ALL environment, any significant 1993, respectively. Those Statements is highlighted below: change in ALL or the ALL process provide the general principles a by an FCS institution would creditor should apply to account for • The ALL accounting employed by prompt OE’s concern. impairment in a loan portfolio. the FCS institutions should comply The FASB provided further with Generally Accepted Account- As other Federal regulators, the guidance on accounting for ALL in ing Principles (GAPP); FCA requires all FCS institutions to its Viewpoints issue of April 1999. maintain their allowances in accor- That Viewpoints issue led to discus- • The process of establishing an dance with GAAP. The Office of sions among the FASB, the Securities adequate ALL involves a significant Examination will soon release an and Exchange Commission (SEC), degree of sound management Informational Memorandum for FCS and banking regulators. Earlier this judgment; institutions that outlines the Chief year, Congress held hearings to Examiner’s expectations on FCS clarify the loan loss reserve account- institutions’ accounting for ALL. The FCA Newsline is a publication of the Farm Credit Administration. It is published 10 times a year. Suggestions, comments or questions should be sent to: The Farm Credit Administration is Chairman and CEO the Federal agency responsible for Editor Marsha Pyle Martin the regulation and examination of Office of Congressional the Farm Credit System, a nation- and Public Affairs wide network of cooperatively Farm Credit Administration Board Members owned agricultural lending institu- 1501 Farm Credit Drive tions and their service organiza- McLean, VA 22102-5090 Ann Jorgensen tions. Phone: 703-883-4056 Michael M. Reyna Fax: 703-790-3260 E-mail: firstname.lastname@example.org Website: http://www.fca.gov FCA Newsline Page 3 • September/October 1999 Variety of Issues Discussed at FCA Examiner Conference FCA examiners from McLean headquarters and all field offices attended the Office of Examination’s (OE) biennial conference in San Diego, California, August 9-13. FCA Board Chairman Marsha Pyle Martin addressed the group and discussed her vision of the Farm Credit System and FCA. “In my discussions with direc- tors and officers throughout the System, I have frequently heard comments that FCA examinations add value to the FCS,” Martin told the examiners. “Anyone can follow a checklist, but your skills and experi- ence allow you to go much beyond Office of Examination Conference participants return for another session after a break. Pictured, that and to get at the root of any left to right, are Lynn Major, Sarah Kreger, Allen Moore, all from the McLean Field Office, and safety and soundness problems.” She Doug Wheeler, Dallas Field Office. concluded her remarks by noting the FCS has a great future in financing Besides breakout sessions on “wealth effect” and the resulting food and agriculture, and that FCA examination and credit issues, the spending patterns of individuals. examiners will be key to that future conference featured several outside The conference also featured success. speakers. Bruce Roland of three farmer/ranchers who serve on Board members Ann Jorgensen PricewaterhouseCoopers addressed the boards of Farm Credit System and Michael Reyna also attended the Year 2000 technology issues. He said institutions—John G. Nelson, III, conference and provided their regulatory personnel must take the Chairman of AgAmerica, FCB; insights on various issues during a steps necessary to become an Wayne Allen, Chairman of Sacra- panel discussion. They shared their integral part of the risk management mento Valley Farm Credit, ACA; and views on the future role of FCA and structure and process. John L. Guthrie, Chairman of the System and discussed the major Dr. Ed Seifried, professor of Western Farm Credit Bank. Each issues facing the Agency. economics and business at Lafayette provided his perspective on the “Role “The role of the regulator is College in Easton, Pennsylvania, of a Bank Director” and shared his changing,” said Jorgensen. “We must discussed “Economic Forecasts in the views and ideas on the FCS and continue to focus on safety and New Millenium.” He reviewed his FCA. They noted FCS directors soundness, but we also need to selected economic indicators and learned a lot from the crisis of the develop new and creative ideas on how to use them to predict eco- 1980s and are now quicker to how FCA can improve, and how we nomic recessions. Seifried pointed respond to problems. They also can enable the System to better serve out that two statistics are providing pointed out that FCS institutions agriculture and rural America.” strong positive signals for the today are technically stronger and Reyna said FCA’s single biggest economy—the Index of Leading more attuned to forecasting and asset is its staff. “It is important that Indicators and the interest rate long-range planning. we have a talented staff that, in spread between 10-year Treasury The conference concluded with addition to doing a good job of securities and 90-day T-bills. He FCA Chief Examiner Roland Smith examining and regulating, can spot said these indicators lead him to presenting awards to examiners and emerging trends and take advantage believe that an economic recession is support staff in recognition of their of the early warning systems we have not likely to occur before the end of contributions and achievements. developed.” 2000. Seifried also discussed the Page 4 • September/October 1999 FCA Newsline FCA Board Approves Regulatory Performance Plan The FCA Board recently approved FCA’s Regulatory Performance Plan for fiscal year 2000. The plan contains the projected schedule for regulation development during the fiscal year beginning October 1, 1999. The Agency has placed special emphasis on developing regulations using innovative customer-focused techniques. These include Advanced Notices of Proposed Rulemaking (ANPRM), Direct Final Rulemaking, Negotiated Rulemaking, Stream- lined Fast-track Rulemaking, and other methods of gathering additional information from clients and customers. To streamline the regulatory process, the FCA is also encouraging the public to submit comments on regulatory propos- als electronically. FY 2000 Regulatory Performance Plan Regulation Project/Date Type of Action Purpose October – December 1999 Flood Insurance Amendment Direct Final To remove regulatory reference to the Federal Emergency Manage- ment Agency’s standard flood hazard determination form and make other technical amendments needed. Stock Issuance Proposed To consider permitting Farm Credit System institutions, including service corporations, to issue additional amounts of certain classes of stock and allow service corporations to issue non-voting stock to non-System institutions. January – March 2000 Mission-Related Investments ANPRM To assist us in developing safety and soundness standards and other criteria for mission-related investment activity. We hope to gain valuable information in response to the ANPRM that will enable us to better address this issue through future regulatory initiatives. Mission-related investment activities are those that directly relate to agriculture, increase the flow of funds to farmers, ranchers, coopera- tives, and rural areas, or otherwise support the ongoing mission of the FCS. OFIs – Risk Weighting of Loans at FCBs ANPRM To consider revising the current risk-weighting requirements for OFI direct loans and other related changes necessary for the safety and soundness of Farm Credit Banks. Customer Choice Final To provide additional flexibility for borrowers to obtain financing from System institutions of their choice and to otherwise de-regulate lending restrictions on FCS entities. Regulatory Burden – Phase II Notice To address comments received from the Regulatory Burden Notice published in August 1998. Would specifically inform the public of the Agency’s rationale for retaining certain regulations due to statutory requirements or safety and soundness concerns. April – June 2000 Loan Participations & Purchases Proposed To remove regulatory restrictions affecting the System’s ability to purchase interests in eligible loans and address any technical changes necessary. Disclosure – Annual Report Proposed To consider eliminating the requirement that FCBs distribute their financial reports to the stockholders of their associations. Standards of Conduct Plain Language Revision Direct Final To revise existing Standards of Conduct regulations so they are written in “Plain Language.” July – September 2000 Borrower Rights Proposed To revise the borrower rights regulations to provide clarification and remove unnecessary burdens. Termination Regulations Final To establish regulations under which a bank or large association within the Farm Credit System can terminate its charter as provided in the Farm Credit Act of 1971, as amended. Mission-Related Investments Proposed To develop safety and soundness standards and other criteria for mission-related investment activity. Mission-related investment activities are those that directly relate to agriculture, increase the flow of funds to farmers, ranchers, cooperatives, and rural areas, or otherwise support the ongoing mission of the FCS.