Despite conditions in the farm economy, the FCS (Farm Credit System) remains fundamentally safe and sound and is well positioned to manage this downturn. The depth and duration of market weakness is unknown, but it will continue to present challenges for the system until markets rebound.
While the current credit stress level in the system’s loan portfolio is well within its risk-bearing capacity, asset quality is expected to decline modestly in 2017 from relatively strong levels in 2016. Moderate loan growth, adequate capital and reliable access to debt capital markets are supporting the overall condition of the FCS.
The system continues to grow at a moderate pace. As of Sept. 30, 2016, gross loans totaled $242.1 billion, up $15.3 billion or 6.7 percent from Sept. 30, 2015. Real estate mortgage lending was up $9.5 billion or 9.2 percent as demand for cropland continued in 2016.
Overall, real estate mortgage loans represent 46.7 percent of the system’s loan portfolio. Production and intermediate-term lending increased by $0.2 billion or 0.3 percent from the year before, and agribusiness lending increased by $2.6 billion or 7.7 percent.
The system also continues to enhance its capital base, which strengthens its financial position as low or negative farm returns increase financial stress on borrowers. As of Sept. 30, 2016, system total capital equaled $52.4 billion, up from $48.9 billion the year before. The system’s total capital-to-assets ratio was 16.7 percent as compared with 16.8 percent a year earlier. Moreover, 82 percent of total capital is in the form of earned surplus.
The increase in total capital is due in large part to the system’s strong earnings performance. For the first nine months of calendar year 2016, the system reported net income of $3.6 billion compared with $3.5 billion for the same period the previous year.
Credit quality in the system’s loan portfolio continues to be strong. Relative to total capital, nonperforming assets represented 3.9 percent as of Sept. 30, 2016. For historical comparison, nonperforming assets represented 11.6 percent of capital at year-end 2010. …
As required by law, system borrowers own stock or participation certificates in system institutions. The FCS had approximately 1.3 million loans and 513,000 stockholders in 2016. Of these stockholders, 86 percent were farmers or cooperatives with voting stock.
The remaining 14 percent were nonvoting stockholders, including rural homeowners and other financing institutions that borrow from the system.
The USDA’s latest data (as of Dec. 31, 2015) show that the system’s market share of farm debt was 41 percent, compared with 43 percent for commercial banks. …
This year, because of the additional stress in the farm economy, we are emphasizing the need for system institutions to do everything they can within the bounds of safety and soundness to help borrowers in difficulty. We encourage them to seek the best possible outcome for every borrower.
System institutions can use their vast agricultural, financial and business expertise to help borrowers develop strategies to weather the storm.
We are encouraging system institutions to monitor their portfolios carefully for early signs of borrower stress. When they identify struggling borrowers, we urge the institutions to reach out to them before their situations become dire — while they still have options. In doing so, system institutions can successfully fulfill their congressional mission of meeting the credit needs of our farmers and ranchers even in challenging times like these.
Dallas P. Tonsager is chairman and CEO of the Farm Credit Administration. These comments are from his testimony last month to the House Agriculture Committee. Full text of his comments is at http://bit.ly/2nwzg9X.