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Financial Institution Letter
Agricultural Loans

SUBJECT: Analysis and Classification of Agricultural Credits

The FDIC recently issued its examiners the attached memorandum providing general policy direction on analyzing and classifying agricultural credits. While the guidelines reaffirm earlier policy guidance on this subject, certain issues have been expanded or clarified.

The memorandum emphasizes the need for examiners to be objective, realistic and fair in their assessment of agricultural credits. While examiners must be alert to, and critical of, operational and managerial weaknesses in banks, they must also recognize when an institution is taking reasonable steps to deal with external risk factors that are largely beyond the institution's control, such as weather conditions or commodity prices. The guidance stresses that actions taken by bank management to address such situations, when done in a prudent manner with proper risk controls and management oversight, should be recognized and fairly portrayed in oral and written communications regarding the examination findings. This does not imply, however, that analytical or classification standards should be compromised. Rather, it means that the bank's response to these challenges will be considered in supervisory decisions.

When determining the level of risk in a specific lending relationship, the relevant factual circumstances must be reviewed in their totality. Such factors as the borrower's historical performance and financial strength, the value of any collateral, and other sources of repayment must be considered. The guidance also emphasizes that, even if a loan is adversely classified, examiners will not and should not call for such specific bank action as foreclosure or sale of collateral. Such a decision is, properly, the prerogative of bank management.

The attached memorandum is provided for your information. If you have any questions, please contact your Division of Supervision regional office.

Nicholas J. Ketcha Jr.


Distribution: FDIC-Supervised Banks (Commercial and Savings)

Attachment for FIL-61-96

TO: Regional Directors
FROM: Nicholas J. Ketcha Jr.
SUBJECT: Analysis and Classification of Agricultural Credits

1. Purpose

To provide guidance to examiners and Regional Office staffs on the analysis and classification of agricultural credits.

2. Discussion

A Regional Director memorandum on this subject was issued June 11, 1984 (Transmittal number 105), and has been the Division's primary source of policy guidance. Although it is no longer formally outstanding, many examiners and others continue to apply its principles when analyzing agricultural loans. Given the substantial period that has elapsed since that memorandum was distributed, it is prudent to update and reissue guidelines on this important segment of commercial bank lending. In general, the provisions of the 1984 memorandum remain valid today. However, certain matters are clarified and expanded upon to provide more complete examiner guidance. The revised policy document is included as an attachment to this memorandum. The material will be incorporated into the DOS Manual of Examination Policies at a subsequent update.

This is also an opportune time to reiterate two other points. First, on a number of occasions in the past when natural disasters or other external factors caused financial difficulties for bank borrowers, the Corporation expressed support for the efforts of banks to work constructively with their customers. We have said that when these constructive efforts, such as loan restructuring or extended terms of repayment, are done in a prudent and well-informed manner and with proper risk controls and management oversight, we will not criticize these practices. This remains the FDIC's position. Second, the Interagency Statement of Policy on the Allowance or Loan and Lease Losses states that one of the factors banks must consider in their estimates of credit losses is changes in national and local economic and business conditions and developments, including the condition of various market segments. As you know, some bank borrowers in limited geographic areas of the country are experiencing economic hardships because of drought and low cattle prices. For the banks so affected, those climatic and economic factors should be taken into account in their reserve adequacy analyses.

3. Action

This memorandum and attachment are effective upon receipt and should be distributed to all safety and soundness examiners and Assistants.

Last Updated: August 9, 1996