Pub. 13 2018-2019 Issue 3

NEBRASKA BANKERS ASSOCIATION 25 important statutory limitation on FCS home loans — the home must be located in a rural area or in a town with a population of no more than 2,500. An open question is how well does MidAm comply with all of these restrictions, which in turn raises this question: How good a job does the FCA do in enforcing these restrictions, especially the requirement that FCS associations can only fi - nance “moderately priced dwellings” that are the homeowner’s “principal residence”? Based on reports I have received from bankers over the years as well as my own research, the FCS has financed rural estates with large houses as well as second homes and has financed homes in towns with a population exceeding 2,500. Especially problematic is MidAm’s willingness to finance a “weekend recreational retreat” and to provide “recreational land loans” that can be used for “hunting and fishing, horseback riding or other outdoor activities.” There is, of course, nothing agricultural about those properties; worse, a family’s second home may have been constructed on the property. None of this financing activity, of course, relates to agriculture and all of it can be provided by commercial banks. MidAm’s Rural 1st lending is the type of questionable FCS activity that the Senate and House Agriculture Committees should cast a critical eye on. Is the FCS adequately acknowledging credit-qual- ity problems? As ag lenders know all too well, financial distress among farmers has grown due to the falling crop prices and the conse- quent decline in farm net income. From a peak of $123 billion in 2013, net farm income is forecast to be about $60 billion this year. Retaliatory tariffs imposed by China and other importers of U.S. agricultural exports will drive agricultural prices and farmers’ income even lower. That financial stress will feed back to ag lenders, including the FCS, which will lead to deteriorating credit quality among some borrowers. This question therefore arises — is the FCS, and the FCA, being sufficient aggressive in recognizing emerging loan-quality problems, specifically those loans that should be placed on a nonaccrual status? On the surface, the FCS looks reasonably well-reserved for future loan losses, with its allowance for loan losses at June 30, 2018, equal to 67 percent of total non-performing assets, most of which were nonaccrual loans. However, that percentage was down from 79 percent at Dec. 31, 2017. Drilling deeper into the numbers, though, raises questions about the adequacy of the FCS’s loan-loss allowance and the assessment of its loan qual- ity, especially at some associations. Most telling, loans classified as substandard or doubtful rose during the first half of 2018, reaching 3.3 percent of total loans outstanding, up from 3.1 percent at the end of 2017. More troubling, at June 30, 2018, non-accrual loans equaled just 24 percent of substandard/ doubtful loans. While not every loan so classified should have a nonaccrual status, one can reasonably wonder if a sufficient number of FCS loans are on a nonaccrual status. More aggres - sively putting loans on such a status would, of course, reduce the FCS’s reported profits. Key numbers the FCS publishes for its 25 largest associa- tions — those with total assets exceeding $1.5 billion at June 30, 2018 — reveal quite a disparity between, one, nonperforming assets as a percent of gross loans and other property owned, and two, the loan loss allowance as a percent of gross loans — see table on page F-58 in the June 30, 2018, Quarterly In - formation Statement of the Farm Credit System. Even though agricultural conditions and crops grown vary greatly across the country, questions should be raised as to whether this disparity should be so great. For example, the nonperforming assets percentage of these associations at June 30, 2018, ranged from 0.19 percent of gross loans to 1.95 percent. The loan-loss allowance as a percent of nonperforming assets varied greatly, too, ranging from 216 percent down to 26 percent. Farm Credit Mid-America, discussed above, at 28 percent, was among the least well-reserved associations.  WALENTINE O’TOOLE, LLP When time is of the essence, experience counts. Walentine O’Toole blends confidence, experience and knowledge with the personal attention you can expect from a regional law firm. www.w alentineotoole .com 402.330.6300 11240 Davenport St . • Omaha, NE 68154-0125 To contact Bert Ely, email bert@ely-co.com , phone (703) 836-4101, or send mail to P.O. Box 320700, Alexandria, Va. 22320. If your bank belongs to the American Bankers Association (ABA), you can enjoy a free email subscription to Farm Credit Watch or you can read it monthly online at www.aba.com . To receive Farm Credit Watch by email or to manage your subscription, visit ABA Member Email Bulletins at www.aba.com/Tools/Ebulletins/Pages/ default.aspx. For other inquiries, please contact Barbara McCoy at the ABA at (800) BANKERS or bmccoy@aba.com.