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FDIC advises banks to exercise caution with agricultural loans

WASHINGTON — The Federal Deposit Insurance Corp. issued an advisory Tuesday warning banks to exercise caution in agricultural lending.

"As headwinds facing the agricultural economy persist, insured institutions must be prepared for agricultural borrowers to face financial challenges by employing appropriate governance, risk management, underwriting, and credit administration practices," the FDIC said in a letter to banks it supervises.

The FDIC said banks focusing on agricultural lending have benefited from the "boom" period between 2010 and 2015, with earnings remaining robust and loss rates remaining low.

But “cash flow margins for agricultural borrowers have become increasingly pressured by changes in supply and demand factors, poor weather conditions, and agricultural policy factors,” the FDIC wrote. “Given strained cash flow, debt service has been challenging for borrowers with even moderate levels of term indebtedness.”

The U.S. agricultural sector has been facing substantial headwinds since 2015.

In the third quarter of 2019, the FDIC's Quarterly Banking Profile pointed to an increase in the noncurrent loan rate among community banks' agriculture portfolios. The agency said the noncurrent rate of 1.27% for farm loans was the highest in all community bank categories.

To guard against undue risk, the FDIC recommended that depository institutions consider the “overall financial status” of farm loan borrowers. “Smaller farms and ranches [often] rely on principals’ personal wealth and resources, including off-farm wages, to support operations,” the agency said.

The FDIC also recommended that banks take a close look at whether borrowers are using secondary repayment sources such as crop insurance and hedging products, which “can reduce risks to the farming operation and the lending institution.”

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