to meet the credit needs of agriculture and rural America in the 21st century, and identify any regulatory barriers that may impede OFI access to FCS funding. Participations Another way the System provides funding to other lenders in agriculture and rural America is through loan participations. System institutions can buy and sell participations with non-FCS institutions, including commercial banks. Participation activity helps small agricultural banks facing capital constraints or high commodity concentration risks to better serve their customers. Some FCS institutions with high commodity concentrations use participations as a tool to help diversify the concentration risk inherent in their lending territory. The use of participations between System and non-System lenders continues to grow as shown in Figure 4. Participations represented 5.1 percent of total loans in the System as of September 30, 2001, versus 1.9 percent five years earlier. In April 2000, FCA adopted regulations that removed out-of-territory consent for loan participations, a change that further encouraged growth in participation activity, particularly at the association level. FCS institutions reported $4.1 billion" in outstanding participations purchased from non-System lenders as of September 30, 2001, compared with $3.3 billion a year earlier, an increase of $882 million, or 27 percent, in the past year. This increased level of participation activity illustrates the System's use of available authorities to diversify risk in their portfolios and better serve their 14. This includes $1.8 billion in participations purchased under "similar entity" authorities. Under the Farm Credit Act, an FCS bank or an association may participate, subject to certain restric tions, with a non-FCS lender in loans to a "sirailar entity that is not eligible to borrow directly for purposes similar to those for which an eligible borrower could obtain financing from the 19 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Note: "Individuals & Others" includes trade credit, seller financing of real estate, and Farmer Mac. 15. Market share percentages are for farm business debt and are based on US Department of Agriculture annual year-end estimates. USDA also periodically surveys debt sources used by farm cooperatives According to the most recent survey (1997), the System provided about 54 percent of the funds borrowed by those cooperatives sur FCS Market Share of Farm Debt Reflecting its continuing service to agriculture and rural America, the Farm Credit System's year-end 2000 share of total farm debt edged higher, to 26.4 percent from 26.2 percent at year-end 1999. Market share of total farm debt reached a low of 24.4 percent in 1994 and a high of 34.0 percent at year-end 1982. Over the past six years, both the System and commercial banks have had small gains in market share. Market share for Farm Service Agency (FSA) direct lending has declined, while the market share for insurance companies and individuals and others has remained stable (see Figure 5). During 2000, the market share held by commercial banks grew somewhat faster than the System, adding nearly a full percentage point to reach 41.6 percent. Market share held by FSA and individuals and others declined slightly while insurance company market share stayed level. As of year-end 2000, the System held 32.5 percent of the market in real estate secured farm debt, up 0.3 percent during the year. In the non-real-estate market, the System held 19.4 percent, which was unchanged from the previous year. Yearend 2001 loan volume and market share estimates were not available as this report was being compiled, but FCS information through the third quarter showed strong growth in volume of loans to farmers, suggesting the System is gaining market share in the both the long- and short-term markets in 2001. 3 Excludes loans past due 90 days or more 4. Nonperforming Loans are defined as Noraccural Loans, Accruing Restructured Loans, and Accrual Loans 90 or More Days Past Due. 5. Total capital includes mandatorily redeemable preferred stock, protected borrower stock, and restricted capital (amount in Parm Credit Insurance Fund) 6 Income ratios are annualized. 8. As of October 1, 2001, the FCS was composed of only direct-ender associations. All FLBAs became FLCAs or consolidated with PCAs to form ACAs by October 1, 2000. 9. Cannot be derived through summation of above categories because of intradistrict and intra-System eliminations. Source: Call Reports received from the Farm Credit System and the Federal Farm Credit Banks Reports to investors of the Farm Credit System. Credit System $99,140,000 $80,096,000 $781,000 $2,031,000 $16,022,000 $1,808,000 $12,114,000 $15,938,000 1. Aggregations of district data may not equal totals due to eliminations. 2. Excludes accumulated other comprehensive income. 3. Total Net Worth (Capital) includes capital stock and participation certificates, preferred stock, mandatorily redeemable preferred stock, protected borrower stock, earned net worth, accumulated other comprehensive income, and restricted capital or amount in Farm Credit Insurance Fund (for Farm Credit Systern total only). Source: Call Reports received from the Farm Credit System and the Federal Farm Credit Banks Reports to Investors of the Farm Credit: System. FARM CREDIT ADMINISTRATION PERFORMANCE AND ACCOUNTABILITY REPORT FY 2001 Maintaining a Dependable Source of Credit for Farmers and Ranchers As a lending cooperative that makes loans primarily in agriculture, the Farm Credit System must accept risk in order to benefit its borrower shareholders and meet its public mission. Nevertheless, for FCS institutions to maintain their presence in the marketplace as a dependable source of credit and financially related services for agricultural producers, risk levels must be properly managed and controlled. Therefore, we examine and supervise each institution according to its risk. This riskbased examination and supervisory program requires examiners to determine how existing or emerging issues facing an institution or the agricultural industry affect the nature and extent of risks in that institution. On the basis of that risk evaluation, our examiners then establish examination plans and actions. Some risks are inherent to lending, and lending to a single industry such as agriculture is particularly risky. However, the simple existence of risk is not necessarily reason for concern. When our examiners discover unwarranted risks, they communicate with management and the board of directors to determine actions needed to mitigate or eliminate such risks. Appropriate actions for the institution may include reducing risk exposures, increasing capital, and/or strengthening risk management. To evaluate whether an institution is meeting its public mission, our examiners determine whether the institution is operating in compliance with the laws and regulations and whether the institution is responsive to the credit needs of all types of agricultural producers having a basis for credit. As a part of that mission, directlender associations are obligated to credit and related services needs of young, beginning, and small farmers and ranchers. Further, System borrowers have special rights not provided by other financial institutions. For example, if System borrowers have financial difficulties and their operations become "distressed," they have the right to apply to restructure their loans well before a foreclosure proceeding. Accordingly, if our examiners discover that an FCS institution does not have a satisfactory YBS farmer and rancher program or has not complied with FCA Borrower Rights or other Federal consumer protection regulations, the board of that institution is required to take immediate corrective actions and provide evidence that the actions were effective. Serving Young, Beginning, and Small Farmers and Ranchers The Farm Credit Administration believes that providing financially sound and constructive credit and related services to borrowers identified as young, beginning, or small farmers and ranchers should be a high priority for the System. Loans to YBS borrowers help ensure a smooth transition of agribusiness to the next generation and a strong customer base for the FCS Transitions cut of and into capital-intensive farming are ongoing, but the process involves decisions compounded by the volatile nature of agricultural production and markets. Thus, lenders prudently weigh the risks and rewards of extending credit to new clients by assessing their long-term earnings potential and risk management ability. Various state and Federal programs provide interest rate breaks and/or guarantees to help lenders make the 23 |