Evaluate the adequacy of agricultural loan policies. Consider whether:

• Policies address agricultural loan structuring.

• Loan maturities reflect the purpose and source of repayment.

• Requirements are specified for annual operating lines and capital purchase loans.

• Carry-over debt is amortized.

• How credit enhancements are used to support credit underwriting:

  • Farm Service Agency programs.

  • SBA programs.

  • State-level programs.

  • Personal guarantees.

• Collateral margins are established for specific types of agricultural lending, such as:

  • Crops.

  • Livestock (cattle, poultry, hogs, exotic animals).

  • Machinery and equipment.

  • Real estate.

• How agricultural exceptions are defined, identified, monitored, and controlled.

• Whether the policy establishes concentration guidelines for the agricultural portfolio and whether the policy outlines actions to be taken when policy limits are exceeded.

• Whether all credit risk exposures (off-balance-sheet activity, contingent liability, related personal debt, etc.) are captured and included in the borrower’s relationship for credit risk management purposes.

• Whether the policy establishes guidance for monitoring hedging strategies, forward contracting, third-party contracts, and timing of cash market sales.

• Whether the policy addresses and identifies potential environmental concerns.

Does the board review and approve the agricultural loan policies annually?

• Does it evaluate existing policies to determine if they are compatible with market conditions?

• Does it ensure policies are consistent with the bank’s strategic direction and risk tolerance?

Evaluate how polices, procedures and plans affecting the agricultural portfolio are communicated. Consider:

• Whether management has clearly communicated objectives and risk limits for the agricultural portfolio to the board of directors and whether the board has approved these goals.

• Whether communication to key personnel in the agricultural department is clear and timely.

Determine whether management information systems provide timely, useful information to evaluate risk levels and trends in the agricultural portfolio.

Assess the process to ensure the accuracy and integrity of agricultural loan data.

Determine the effectiveness of processes to monitor compliance with the agricultural policy. Consider:

• Approval and monitoring of policy limit exceptions.

• The volume and type of exceptions, including any identified in the loan sample.

• Internal loan review, audit, and compliance process findings.

Assess the underwriting process for agricultural lending. Consider:

• The appropriateness of the approval process.

• The quality of credit analysis.

Evaluate the accuracy and integrity of the internal risk-rating processes. Consider:

• Whether risk ratings appropriately consider any added support derived from the self-liquidating nature of certain types of agriculture collateral.

• Findings from the loan sample.

• The role of loan review.

Determine whether there are processes to monitor strategic and business plans for the agricultural portfolio. Consider:

• The impact on earnings and capital if agricultural portfolio business plans and strategies are executed.

• Requirements for federal or state sponsored programs.

Assess the process to ensure compliance with applicable laws, rulings, regulations, and accounting guidelines.

• Consider specialized lending programs sponsored by the Farm Service Agency or state agriculture departments.

Evaluate the effectiveness of processes used to monitor collateral. Consider:

• For livestock, are inspections performed, at a minimum, annually?

  • Is there a breakdown by sex, breed, and number in each category?

  • Is the condition of the animal noted?

  • Are published livestock prices used to prepare cash flow projections?

• For crop loans, are inspections of growing crops performed as the loans are advanced?

  • Does the bank monitor local/regional crop yields?

  • Are published commodity prices used for cash flow projections?

  • If published commodity prices are not used, does the bank document the support for their prices?

• Does the bank have adequate processes to monitor farm land values and commodity prices?

• Are periodic inspections conducted for capital assets, machinery, and equipment?

• Does the bank have processes to verify the perfection of liens and the adequacy of insurance coverage?

The examiner reviewing the agricultural lending portfolio should review the LPM examiner’s findings to determine whether additional analysis is required for issues related to agricultural lending pertaining to:

• Problem credit administration.

• Collections.

• Charge offs.

Review the methodology for evaluating and maintaining the Allowance for Loan and Lease Losses.

• Consider whether the portfolio is analyzed as a separate pool or further segmented by loan type (crop loans, livestock loans, etc.) or geographic area.

• Is the methodology reasonable based on historical experience and current trends?

Verify that the bank has an effective process to periodically evaluate internal controls. (Note: The lack of an effective process may require examiners to conduct additional testing.)

Evaluate the adequacy of internal controls within the agricultural lending department. Consider:

• Segregation of duties:

• Are delinquent account collection requests and past due notices checked to the trial balances that are used to reconcile agricultural loan subsidiary records with general ledger accounts, and are they handled only by persons who do not also handle cash?

• Is the preparation and posting of interest records performed or reviewed by persons who do not also handle cash or issue official checks or drafts singly?

• Are the functions of receiving and releasing collateral to borrowers and of making entries in the collateral register performed by different employees?

• Are collection notices handled by someone not connected with loan processing?

• Is negotiable collateral held under joint custody?

Evaluate the adequacy of the agricultural lending staff in terms of level of expertise and number of assigned personnel. Consider:

• Whether staffing levels will support current operations or any planned growth.

• Staff turnover.

• The staff’s previous agricultural lending and workout experience.

• Specialized training provided.

• Assess the average account load per lending officer. Consider reasonableness in light of the complexity and condition of the officer’s portfolio.

• Assess how senior management and the board of directors periodically evaluate agricultural lenders’ understanding of and conformance with the bank’s stated credit culture and loan policy. If there is no process, determine the impact on the management of credit risk.

Assess the performance management and compensation programs for agricultural lending personnel. Consider whether these programs measure and reward behaviors that support strategic and risk tolerance objectives for the portfolio.

Evaluate the adequacy of management information systems (MIS) available for the agricultural portfolio. Consider whether:

• Reports identify and provide sufficient data about the performance of loans with underwriting and policy exceptions.

• Reports provide sufficient detail about portfolio segments and concentrations, including carryover debt.

• Reports provide sufficient information to ensure collateral inspections are conducted in a timely manner.

• Reports provide adequate information to comply with the reporting requirements for any federal and state agriculture programs.

Determine the effectiveness of the loan review system in identifying risk in the agricultural portfolio. Consider:

• Scope, coverage, and frequency of reviews.

• Comprehensiveness and accuracy of findings/recommendations.

• Adequacy and timeliness of follow-up.

Determine the effectiveness of the audit and compliance review functions. Consider the following:

• Scope, coverage, and frequency of reviews.

• Comprehensiveness and accuracy of findings/recommendations.

• Ongoing monitoring activities.

• Adequacy and timeliness of corrective actions if violations or deficiencies were identified.

Determine whether management has an effective internal control system for documentation exceptions and collateral monitoring.

Evaluate the effectiveness of control systems that monitor compliance with the requirements of government agricultural lending programs.

Determine the responsiveness of control systems to identified internal weaknesses in policy, process, personnel, or controls for agricultural lending.