A3O-Uncast«r Farming, Saturday, Dacambar 13,1986
Farm Credit President Responds To Ag Financial Situation
BY EVERETT NEWSWANGER
Managing Editor
LANCASTER, Pa. In a
response to the agricultural
situation, Gene L. Swackhamer,
president Farm Credit Banks of
Baltimore, told a press conference
here Wednesday the Farm Credit
System has been buffeted by an
unrelenting barrage of problems
and challenges as it attempts to
deal with delinquent farm loans.
The past two years have not been
fun for most managers; yet, an
impressive resiliency is
developing among loan officers
and staff. It is a resolve to adapt to
do the job. Financial stress has
taken a toll on both borrowers and
creditors and the race to recovery
is still undecided for many. Before
going further, however, it seems
appropriate to examine some facts
to keep the analysis objective.
BACKGROUND
Table I presents selected
financial data for the consolidated
Farm Credit System (FCS) from
December 31, 1964, through Sep
tember 30, 1966 a period of 21
months. There are several stories
in these numbers. Net loans out
standing have declined steadily
reflecting debt paydown and the
emergence and growth of non
performing loans classified as
nonaccrual, other high risk loans
and acquired property. At Sep-
Net Loans Outstanding
Nonaccrual Loans
Acquired Properties
Other High Risk Loans
90+ Days Delinquent
Total Capital
Stock
Surplus
Total Risk Funds
Loss Reserves
* Excludes PCAs
Nonaccrual Loans/Loans Outstanding
Loss Reserves/Loans Outstanding
Nonearning Loans (Nonaccrual) and
Acquired Property to Capital
High Risk Loans (Nonaccrual and Other
High Risk Loans) to Capital
High Risk Loans to Risk Funds
High Risk Loans to Surplus and
Loss Reserves
High Risk Loans to Loss Reserves
* v Comparable information not available
Net Loans Outstanding
Nonaccrual Loans
Acquired Properties
Other High Risk Loans
90+ Days Delinquent
Total Capital
Stock
Surplus
Total Risk Funds
Loss Reserves
* Excludes PCAs
** Comparable information not available
Nonaccrual Loans/Loans Outstanding
Loss Reserves/Loans Outstanding
Nonearning Loans (Nonaccrual) and
Acquired Property to Capital
High Risk Loans (Nonaccrual and Other
High Risk Loans) to Capital
High Risk Loans to Risk Funds
High Risk Loans to Surplus and
Loss Reserves
High Risk Loans to Loss Reserves
** Comparable information not available
tember 30, 1966, these categories
represented $13.8 billion or 19
percent of total assets outstanding.
The magnitude of that non-earning
drain coupled with increased build
up in loss reserves has eroded
surplus to $1.9 billion at September
30, a loss of $4.3 billion of capital
since December 31,1984.
Realizing that these numbers
may lack comparative per
spective, Table II contains some
ratios that measure exposure and
risk bearing capacity. With high
risk credit (nonaccrual and other
high risk loans) exceeding total
capital by 2:1 and non-earning
loans (nonaccrual) - and acquired
property exceeding capital by
1.4:1, it is not difficult to un
derstand why Congress passed the
1985 Farm Credit Act to reassure
investors and provide a
mechanism for the FCS to borrow
from the Treasury, and why
Congress passed the 1966 Farm
Credit Act to permit long-term
amortization of losses occurring
through 1988. Time and improved
agricultural profitability are
essential for a successful workout
of these problems.
THE STRATEGIC PLAN
As a specialized financial in
termediary for the agricultural
sector with only limited options for
loan and investment diver
sification to reduce risk, the FCS
TABLE I
FARM CREDIT SYSTEM FINANCIAL CONDITION
(BILLIONS)
9/30/86
$5B 2
80
1 1
4 7
1 2
6 3
1 9
10 0
3 7
TABLE II
FARM CREDIT SYSTEM FINANCIAL CONDITION
9/30/86
13 0%
6 0%
141 121 091 081 19 1
201 181 141 111
131 121 101 081
231 211 171 141
341 351 341 291
TABLE 111
BALTIMORE DISTRICT FINANCIAL CONDITION
(MILLIONS)
9/30/86 6/30/86 3/31/86
$2,692 7 $2,804 6 $2,859 8
68 6 54 9 44 1
71 77 89
77 5 1124 123 7
18 9 55 8 71 7
435 0 456 0 477 4
176 4 182 0 184 3
258 6 274 0 293 1
508 2 527 4 549 1
73 2 71 4 71 7
TABLE IV
BALTIMORE DISTRICT FINANCIAL CONDITION
9/30/86 6/30/86 3/31/86 12/31/85 12/31/84
2 5% 1 9% 1 5% 14% » *
2 7% 2 5% 2 5% 2 5%
17 1 14 1 111 111
34 1 37 1 35 1 33 1
29 1 32 1 31 1 28 1
44 1 48 1 46 1 43 1
201 231 231 211
Principal speakers at the Farm Credit Service press briefing this week in Lancaster
are (L to R) Dr. David Kohl, professor of agricultural economics at Virginia Polytechnical
Institute; Gene Swackhammer, president and CEO Farm Credit Banks of Baltimore and
James Ownes, president Lancaster Farm Credit Service.
has evolved a strategic business management and marginal cost
plan to contain, manage, and solve pricing to replace average cost
the problems of distressed credit, pricing.
Some of the key provisions of this 3. Establish differential pricing
plan are: with interest rates determined on
1. Position the Farm Credit the basis of competition, risk in-
System Capital Corporation to curred and the cost of delivery,
manage resource utilization within 4. Implement structural and
the FCS. organizational changes to adapt to
2. Implement asset/liability the declining agricultural credit
market.
5. Restructure nonaccrual loans
and move acquired properties to
reduce the non-earning asset
burden.
Each of the above points
represent a major change in
operations. The Farm Credit
System Capital Corporation,
organized on April 11, 1986, exists
to redeploy financial, resources
from strong banks and
associations to weak ones. Each of
its actions confronts the FCS with
the blunt reality that operationally
the System is a single entity
(assets protected by loss sharing;
debt protected by joint and several
liability; net worth protected by
capital assessment); yet,
organizationally and emotionally it
is a federation of autonomous
businesses with a common charter
the Farm Credit Act of 1971.
Average cost pricing worked
well under reasonably stable in
terest rates before financial
reform and deregulation, but could
not cope with the volatility of the
last seven years in financial
markets. The transition to
asset/liability management now
under way would be exceedingly
difficult for financial organizations
under “normal” conditions; it is
taxing under present conditions.
Yet, it is necessary to permit
marginal costs, differential
pricing. The downsizing of
agriculture to better bring
production in balance with demand
is affecting all agribusiness sup
pliers including creditors.
The FCS has made many
organizational and operational
changes since December 31, 1984,
with all district banks now having
some joint mangement, seven
districts with a majority of offices
in district-wide associations, and
two others in the process of
deciding on district-wide
associations. These changes have
helped eliminate redundant func
tions, have strengthened capital
bases and have pooled reserves;
yet, more will be needed to achieve
maximum efficiency in the
delivery of products and services.
Finally, of the five strategies
mentioned, a major effort is under
way to restructure nonaccrual
loans if compromise of interest and
principal results in a lower loss
and cost than foreclosure.
Emotionally, this too is a bitter pill
for good borrowers since it seems
to reward failure at the cost to
borrowers who have sacrificed to
keep loans current. It must be
presented strictly as a least cost
3/31/86
$64 9
59
1 0
5 1
1 9
7 9
4 7
3 2
11 1
3 2
6/30/86
$6l 5
7 6
1 0
4 7
1 6
7 0
46
24
10 5
35
3/31/86
9 0%
4 7%
6/30/86
12 0%
5 4%
12/31/84
12/31/85
$66 6
53
1 0
40
1 2
84
50
34
11 6
32
$77 1
1 4
3*
54'
11 8
56
62
13 1
1 3
12/31/85
8 0%
4 6%
12/31/84
2 0%
1 7%
12/31/85 12/31/84
$2,915 9 $3,112 8
42 7 17 3"
90 34
1128
55 7
474 8 478 7
187 7 220 5
287 1 278 2
548 4 551 3
73 6 72 6
2 3%
business decision to return loans to
an accruing basis which will inure
to the benefit of all borrowers and
the business in the long-run.
Will this strategic plan succeed?
Yes, I think that it will if collateral
values (primarily land) do not
deteriorate much further and if
agricultural businesses can reduce
operating losses. I realize that
these are big “IF’s”, but are not
unreasonable assumptions.
ACTION PLANS
To achieve the desired strategic
direction, the Farm Credit System
has implemented several action
plans. I will list only a few of the
key ones.
1. Adopted uniform credit stan
dards under policy direction of the
Farm Credit Corporation of
America (FCCA).
2. Instituted a model pricing plan
to insure competitive pricing
above minimum base spreads.
3. Instituted uniform information
standards for credit and financial
reporting under General Accepted
Accounting Practices including
loss reserve accumulations.
4. Established liquidity and in
vestment standards through
operations of the Farm Credit
System Funding Corporation.
5. Adopted standard forecasting
models for better system financial
and operational planning.
6. Executed assistance
agreements between the Capital
Corporation and six Federal Land
Banks to provide financial
resources to avoid stock im
pairment.
7. Adopted a uniform loan
restructuring policy for all FCS
entities.
8. Adopted a uniform acquired
property policy to insure fair and
equitable treatment of borrowers
in all regions.
FUTURE ISSUES
Change seldom comes easily. It
has not in the FCS and yet it is
occurring notwithstanding
litigation to test the validity of
FCA’s assessment regulations,
debate over the amount of power to
concentrate in FCCA, in dif
ferences on legislative and policy
issues with the government’s
regulator the Farm Credit
Administration.
It seems logical that public
policy debate will continue in 1987
regarding the possible role of the
Farm Credit System as a secon
dary mortgage market maker,
what system structure will best
serve the needs of agriculture, how
to best strengthen permanent
capital within the system and how
to mitigate the painful and costly
out-migration from agriculture of
insolvent farm businesses.
None of these are simple policy
issues. They are too important to
ignore and too important to leave
to chance solution. Each must be
addressed through our democratic
processes.
(Turn to Page A 18)