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Agricultural Lending Comptroller’s Handbook Safety and Soundness Capital Asset Sensitivity to Other Adequacy Quality Management Earnings Liquidity Market Risk Activities (C) (A) (M) (E) (L) (S) (O) Agricultural Lending Version 1.0, May 2014 Version 1.1, April 29, 2016 Version 1.2, January 27, 2017 Version 1.3, October 15, 2018 Version 1.4, March 30, 2020 Office of the Comptroller of the Currency Washington, DC 20219 Version 1.4 Contents Contents Introduction ..............................................................................................................................1 Overview ....................................................................................................................... 1 Business Description ............................................................................................... 2 Agricultural Lending Markets ................................................................................. 2 Authority and Limits ............................................................................................... 4 Risks Associated With Agricultural Lending ............................................................... 4 Credit Risk .............................................................................................................. 5 Production Risk ................................................................................................. 5 Market Volatility ............................................................................................... 6 Government Policies and Legal Risks .............................................................. 6 Limited Purpose Collateral ............................................................................... 7 Interest Rate Risk .................................................................................................... 7 Liquidity Risk ......................................................................................................... 7 Operational Risk ..................................................................................................... 7 Price Risk ................................................................................................................ 8 Compliance Risk ..................................................................................................... 8 Strategic Risk .......................................................................................................... 9 Reputation Risk ....................................................................................................... 9 Risk Management ....................................................................................................... 10 Loan Policy and Governance ................................................................................ 10 Staffing .................................................................................................................. 11 Underwriting ......................................................................................................... 11 Loan Structure ................................................................................................. 13 Financial Analysis ........................................................................................... 14 Risk Mitigation ............................................................................................... 16 Collateral Documentation ............................................................................... 18 Collateral Valuation .............................................................................................. 20 Crop and Livestock Valuation ........................................................................ 20 Machinery and Equipment .............................................................................. 22 Agricultural Real Estate .................................................................................. 22 Credit Administration ........................................................................................... 22 Ongoing Monitoring ....................................................................................... 22 Exception Monitoring ..................................................................................... 23 Concentrations ................................................................................................ 23 Environmental Issues ...................................................................................... 24 Audit and Loan Review Functions ....................................................................... 24 Allowance for Loan and Lease Losses ................................................................. 25 Risk Rating Agricultural Loans .................................................................................. 25 Crop Production Loans ......................................................................................... 26 Carryover Debt...................................................................................................... 27 Livestock Loans .................................................................................................... 27 Equipment Loans .................................................................................................. 28 Nonaccrual Status ................................................................................................. 28 Comptroller’s Handbook i Agricultural Lending Version 1.4 Contents Examination Procedures .......................................................................................................30 Scope ........................................................................................................................... 30 Quantity of Risk .......................................................................................................... 33 Quality of Risk Management ...................................................................................... 39 Conclusions ................................................................................................................. 46 Internal Control Questionnaire ................................................................................... 48 Verification Procedures .............................................................................................. 52 Appendixes..............................................................................................................................54 Appendix A: Quantity of Credit Risk Indicators ........................................................ 54 Appendix B: Quality of Credit Risk Management Indicators .................................... 56 Appendix C: USDA Guarantee Programs .................................................................. 58 Appendix D: Lending Limits ...................................................................................... 61 Appendix E: Glossary ................................................................................................. 64 References ...............................................................................................................................74 Table of Updates Since Publication ......................................................................................76 Comptroller’s Handbook ii Agricultural Lending Version 1.4 Introduction > Overview Introduction The Office of the Comptroller of the Currency’s (OCC) Comptroller’s Handbook booklet, “Agricultural Lending,” is prepared for use by OCC examiners in connection with their examination and supervision of national banks, federal savings associations, and federal branches and agencies of foreign banking organizations (collectively, banks). Each bank is different and may present specific issues. Accordingly, examiners should apply the information in this booklet consistent with each bank’s individual circumstances. When it is necessary to distinguish between them, national banks1 and federal savings associations are referred to separately. (Updated in version 1.3) The booklet discusses the general risks inherent in agricultural (Ag) lending and describes supervisory expectations and regulatory requirements for prudent risk management of this lending activity. It includes expanded examination procedures to guide examiners in evaluating the effect of Ag lending activities on the risk profile and financial condition of a bank. The glossary in appendix E contains definitions of terms used in the booklet or the Ag industry. (Updated in version 1.3) Overview Ag lending is a critical business line for many banks, especially those in rural areas. Bank credit has played an important role in farm activities throughout U.S. history. Most farms in the United States remain family-owned. Financing supplied by banks is essential to many individual farm operators and to the development of new Ag technologies and techniques. As with all forms of lending, Ag credit presents a unique set of risks. (Updated in version 1.3) Each region of the country has unique conditions reflected in the variety of commodities produced and marketed. Typically, there is at least some Ag product diversification within a region; because of the interrelationships between many farm products and activities, and their influence on surrounding communities, however, Ag concentrations represent a key risk for many community banks. Moreover, each Ag enterprise presents unique technologies, restrictions, and challenges for both the borrower and bank lender. The traditional role
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