2018 ICBA Regulator Panel Agricultural Lending

Transcription

1 2018 ICBA Regulator Panel Agricultural Lending March 15, 2018 Keith Osborne ADC Wichita Field Office 1

2 Agenda Agricultural Lending Risk Management Practices Risk Rating Agricultural Loans References Questions 2

3 Agricultural Lending Risk Management Practices WED Deputy Comptroller Kay Kowitt s May 2017 Agricultural Lending Letter discussed the following five key issues: 1. Loan Policies and Procedures / Underwriting Guidance 2. Concentration Reporting 3. Collateral Valuation 4. Stress Testing Portfolio Transaction 5. Problem Loan Management 3

4 Agricultural Lending Risk Management Practices WED Deputy Comptroller Kay Kowitt s May 2017 Agricultural Lending Letter: 1. Loan Policies and Procedures / Underwriting Guidance Loan terms by product type (term and amortization). Collateral requirements and acceptable LTV s. Financial reporting including projected cash flows, tax returns, balance sheets, income statements, AR aging and AP aging, hedging account statements, etc. Use of borrowing base certificate, define eligible collateral and advance rates. Use of financial covenants, reporting covenants, negative covenants, etc. Use of government guaranty programs. Concentrations of credit practices. Loan policy exception tracking. Stress testing. Financial analysis. Risk rating processes. 4

5 Agricultural Lending Risk Management Practices WED Deputy Comptroller Kay Kowitt s May 2017 Agricultural Lending Letter: 2. Concentration Reporting Board approved limits based on committed loan amounts. Sufficient concentration detail by loan type, collateral, and geography (if applicable). Measured against capital (as a percent of risk based capital). Periodic monitoring and risk analysis associated with concentrations. Periodic board reporting. 5

6 Agricultural Lending Risk Management Practices WED Deputy Comptroller Kay Kowitt s May 2017 Agricultural Lending Letter: 3. Collateral Valuation Periodic validation of lien status. Timely assessment of collateral values. Risk based, independent inspection process by qualified individuals or outside vendors. Current real estate appraisal, if applicable. 6

7 Agricultural Lending Risk Management Practices WED Deputy Comptroller Kay Kowitt s May 2017 Agricultural Lending Letter: 4. Stress Testing Risk based process. Normally completed at underwriting. Normally completed at annual renewals. Multi-variable stresses: Interest rates Commodity prices Expenses OCC s Agricultural Stress Testing Tool available on BankNet. 7

8 Agricultural Lending Risk Management Practices WED Deputy Comptroller Kay Kowitt s May 2017 Agricultural Lending Letter: 5. Problem Loan Management Credit analysis Carryover debt Amortize over a reasonable time period? Workout plans Can be risk based Completed on Special Mention, Substandard, and Doubtful loans Should include root cause of borrower problem(s) and relationship strategy (exit or retain) Actionable items and person responsible (lender, borrower, etc.), linked to root cause Specific timeframes Collateral (lien position, value, valuation source, and valuation date) Assigned risk rating and justification Assigned accrual status and support Frequently monitored, updated, reported to the board 8

9 OCC s Expectations: Risk Rating Agricultural Loans Prudently underwrite credit in compliance with board approved lending policies. Obtain sufficient credit and collateral information to make informed decisions. Analyze information prior to approving a new credit or renewing an existing credit. Document lender s analysis of the credit risk, risk mitigants, and rating justification in the credit memo. Assign accurate and timely risk ratings and accrual status. Periodically prepare and enforce problem loan memos with updated action plans, person(s) responsible, timeframes for completion, and progress. 9

10 Risk Rating Agricultural Loans There have been no material changes in the way OCC examiners risk rate agricultural loans. The risk rating definitions are the same. The Comptroller s Handbook - Agricultural Lending provides good guidance on appropriate loan structure, credit risk management practices, risk ratings, legal lending limits, and other pertinent topics. The Comptroller s Handbook Rating Credit Risk includes the same process and risk rating definitions examiners have used for decades. Lenders and examiners still have to use judgement. There are no hard and fast rules that apply to every credit and there are no benchmarks for what amount of carryover debt is deemed material. 10

11 Crop Production Loans: Risk Rating Agricultural Loans Typical structure is 1-year operating line of credit. Production loans are generally self-liquidating. When cash flow analysis shows sufficient funds to cover operating debt (under reasonable structures), the loan is generally rated PASS. When production is insufficient to cover operating loans, the decision to classify should consider primary collateral, amount of carryover, number of years with carryover, overall financial strength of the borrower, government guaranty programs, crop insurance, and other sources of repayment. The portion of debt covered by liquid collateral, guaranteed by U.S. government or its agencies, or covered by crop insurance with a loss payee attached is generally rated PASS. [ Liquid includes cash, feed and grain, breeding and feeder livestock, and may include growing crops and receivables. Depends on how certain you are the crops will be harvested and who the receivable is from.] 11

12 Livestock Loans: Risk Rating Agricultural Loans Loans to finance the purchase of feeder livestock are expected to be self-liquidating and short-term. Unless borrower integrity is in question (i.e. sold collateral out of trust) or is in bankruptcy, any portion of a loan covered by livestock with a current inspection is considered PASS. [ Current varies by type of operation (i.e. annual for cow calf, potentially up to quarterly for feeder livestock operations). Depends on frequency of livestock turn.] Loans to finance the purchase of breeding livestock or dairy cattle are treated in a like manner; however, repayment is dependent on sale of calves or milk. 12

13 Risk Rating Agricultural Loans Term Equipment and/or Real Estate Loans: Term loans should be supported by, and repayment derived from, profitable operations, including custom work or off-farm income sources. Structured to ensure repayment well within the useful life of the collateral. If the term loan is paying as agreed according to a reasonable repayment program, and supported by documented CF analysis, generally the loan should be rated PASS. If the loan is not supported by profitable operations, a thorough analysis of repayment capacity should be done with consideration given to classifying the debt. 13

14 Classifying Carryover Debt: Risk Rating Agricultural Loans Some bankers use the terms Carryover and Carry-through. Carryover debt refers to restructured, short-term loans resulting from obligor s inability to liquidate production loans. Carryover debt must be serviced through future cash flow, sale of assets, or other sources with appropriate collateral support. By nature, carryover debt typically suggests a well-defined credit weakness. However, examiners will not automatically classify carryover debt. Carry-through refers more to the borrower s marketing practices. Due to the timing of sales, the borrower did not clean up the operating note at renewal. However, they have grain or livestock left to sell that would be sufficient to pay the operating note to $0. 14

15 Risk Rating Agricultural Loans Classifying Carryover Debt Depends on: The size of the carryover debt in relation to the size of the operation. The size of the carryover debt in relation to the borrower s net worth. The number of years the borrower has suffered operating losses. The cause of the carryover debt, and expectations for future cash flow. Whether the obligor is projected to be able to service the carryover debt in the next operating cycle, be amortized within a realistic timeframe, or be reasonably restructured based on the borrower s cash flow ability. Whether the borrower can sell other assets to pay off the carryover debt. Whether there are other sources of income the borrower could use to pay off the carryover debt (off-farm, custom work, trucking, etc.). 15

16 Family Living Expenses The following is a partial list of living expenses: Cable & Internet Cell Phone Charitable Contributions Clothing Education (College / Private Tuition) Entertainment & Travel Food (Groceries, Dining Out) Insurance (Auto, Health, Homeowner s, Life) Medical Expenses Savings / Retirement Taxes (Self-employed, Social Security, Personal Property, Real Estate) Utilities (Electricity, Gas, Sewer, Trash, Water) For most agricultural borrowers, this information is readily available to lenders when they also have the borrower s personal checking account. 16

17 References Comptroller s Handbook Agricultural Lending (May 2014) Comptroller s Handbook Rating Credit Risk (April 2001) OCC Bulletin Interagency Appraisal and Evaluation Guidelines Banking Circular 181 (Rev) Purchases of Loans In Whole Or In Part Participations (August 2, 1984) [Note: Effective October 30, 2013, this issuance applies to Federal Savings Banks.] Commercial Credit Risk OCCnet page CUA reports Stress test worksheets CRE Questionnaire Other guidance and links 17

18 Questions 18