Farm Credit Watch: In Reporting Record Income for 2018, the FCS May Be Underestimating Future Loan Losses

By Bert Ely

In its recently issued Annual Information Statement for 2018, the FCS reported after-tax profits for 2018 of $5.33 billion and $272 billion of loans outstanding at Dec. 31, 2018, up 5.1 percent from year-end 2017. The record profit the FCS reported for 2018, though, may reflect an underestimate of future loan losses arising from the financial stress America’s farmers and ranchers have been experiencing in recent years. A trade war that depresses agricultural exports will worsen the near-term outlook for farm finances, yet the FCS’s loan loss provision for 2018 was 27 percent lower than 2016’s loss provision despite a larger loan book.

What is especially puzzling has been the 1.7 percent decline (admittedly slight) in the amount of the FCS’s non-accrual and accruing restructured loans financing the core of production agriculture — real estate mortgage and production and intermediate-term loans — from the end of 2016 to the end of 2018; these two loan categories account for almost two-thirds of total FCS lending. That decline occurred even though the total amount of FCS lending in those two loan categories grew 8.3 percent from the end of 2016 to the end of 2018. Contradicting the decline in non-accrual and restructured loans is the FCS’s self-assessment of its loan quality, with less-than-acceptable loans totaling 7 percent of all loans outstanding at the end of 2018 compared to 6.6 percent at the end of 2017. Not surprisingly, two-thirds of the increase in less-than-acceptable loans was in real estate mortgages. Continuing weaknesses in ag commodity prices could worsen the performance of FCS’s real-estate mortgages.

Drilling deeper into the data, there were significant differences among the large FCS associations in the change in their nonperforming assets as a percent of total loans and other property owned from year-end 2016 to 2018, with some associations showing significant improvement over that two-year period while others exhibited credit deterioration. Given that each FCS association does its own accounting, one can reasonably wonder if some association managements are being overly optimistic about credit conditions in the territory they serve. One can then reasonably ask if the FCA is being rigorous enough in its examination of the associations’ credit-risk management. Time will soon tell.

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About Author

Bert Ely

Bert Ely is a consultant specializing in banking issues. He writes ABA's Farm Credit Watch.