Same Loans, Different Cycle: A Look at Agricultural Lending
This blog is posted on behalf of CLA’s National Loan Review Services Leader, Erica Crain.
As seen in 2019, challenges in the farm economy go deeper than farm income. Balance sheets indicate unfavorable trends such as higher debt and lower working capital. As such, the regulators have reiterated the importance of strong underwriting and credit administration practices for banks and other financial institutions lending to farmers and other agriculture interests.
FDIC Highlights Ag Industry Weaknesses
The Federal Deposit Insurance Corporation (FDIC) stated in its Financial Institution Letter (FIL-5-2020) that the U.S. agricultural industry, after “robust economic conditions” from 2010-2015, has struggled with “low commodity prices, trade and tariff uncertainties, impacts from adverse weather conditions, and global supply and demand issues.”
The FIL continues on to say that institutions are encouraged to engage in “sound underwriting standards, strong credit administration practices, effective risk management strategies, and appropriate allowances for losses and capital levels through the credit cycle.” The agency states that banks should work “constructively with borrowers” experiencing financial difficulties to strengthen credit and mitigate losses.
Monitoring and Managing Credit Risk
As highlighted in the FDIC’s letter, we strongly believe that all financial institutions should develop:
- A system of effective internal controls, appropriate loan documentation practices, prudent underwriting practices, and a system of ongoing credit and asset quality reviews.
- Prudent risk management practices that focus on a borrower’s cash flow and repayment capacity. Careful consideration, but not over-reliance, should be given to collateral positions and credit enhancements.
- The system to properly identify and effectively manage credit concentrations. Strong risk identification and control practices should be in place as credit risk profiles elevate.
- A process to monitor and evaluate key cyclical and economic factors before and after making credit decisions.
- Reasonable debt restructuring approaches based on long-term viable business plans as lenders work to establish a plan with agricultural borrowers experiencing financial difficulties.
CLA’s Perspective
From our experience, many financial institutions have established a good foundation for servicing the needs of agricultural borrowers and monitoring such credits. However, given the ongoing uncertainty for what 2020 has in store for farmers, it is necessary to re-evaluate processes, controls, underwriting practices, and monitoring procedures to enhance early identification measures.
As mentioned in the FIL, a system of ongoing credit and asset quality reviews is essential. CLA’s Loan Review Team is here to help you evaluate your agricultural lending program and monitor your institution’s credits in light of the current environment.
Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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