FCA Info Memo - FCA Rating System

Informational Memorandum
Subject:	FCA Rating System
Date of Memorandum:	03/02/1998
Expiration Date:
Office:	OE
Signed By:	Smith, Roland
FCA Contact Person:	Mardock, Barry
Contact Phone:	703-883-4456
List of Attachments:

INFORMATIONAL MEMORANDUM

March 2, 1998

To: Chairman, Board of Directors
Chief Executive Officer
Each Farm Credit System Institution

From: Roland E. Smith, Chief Examiner
Office of Examination

Subject: Farm Credit Administration Rating System

The Farm Credit Administration (FCA) Rating System has provided FCA examiners with a general framework for assimilating and evaluating all significant financial, asset quality, and management factors to assign composite ratings to each Farm Credit System (FCS or System) institution. Use of this rating system, which is outlined in Section 135 of the Examination Manual, has served the FCA well in ensuring uniformity in the evaluation of the main characteristics of all System institutions. Nevertheless, in an effort to ensure the rating system remains dynamic and reflects current levels of risk in the System, the Office of Examination is currently working on several enhancements. One such enhancement involves the establishment of quantifiable measures of performance for the capital, earnings, liquidity, and asset quality components of the rating system.

The Office of Examination has selected the following ratios in each of the above components considered to be key indicators of performance for direct lender associations. From an analysis of these key ratios, characteristics of risk typically associated with 1-rated, 2-rated, and 3-or-higher-rated institutions were determined. The following ratios were selected as key indicators:

*Capital* Adverse Assets/Risk Funds Criticized Assets/Risk Funds Permanent Capital Ratio Total Surplus Ratio Core Surplus Ratio Growth in Total Assets (last 12 months)	*Earnings* Return on Assets Net Interest Margin Operating Expenses/Average Loans Loanable Funds/Earning Assets Growth in Total Assets (last 12 months)
*Asset Quality* Adverse Assets/Risk Funds Criticized Assets/Risk Funds Growth in Total Assets (last 12 months) Past Due Loans/Total Loans Nonaccrual Loans/Total Loans OAEM Assets/Total Classified Assets Adverse Assets/Total Classified Assets	*Liquidity* Accrual Loans/Direct Loan Acceptable & OAEM Loans/Direct Loan Acceptable Loans/Direct Loan

The key indicators are not intended to replace examiner judgment in assigning ratings; rather, they provide additional quantifiable information from which examiners are to base their judgment. This judgment is of paramount importance in examining and assigning a rating to FCS institutions. Adequacy of management will continue to be emphasized through evaluating programs such as the internal credit review, board policy guidance, underwriting standards, and loan portfolio management.

As previously mentioned, the Office of Examination has established characteristics of risk typically associated with each composite rating. I plan to address the FCA Rating System and those characteristics at the upcoming information exchange meetings scheduled in Austin, Memphis, and Las Vegas. For those attending, I look forward to discussing this program with you at that time. Regardless, if you have any questions regarding the establishment of these quantifiable measures, please contact me or Barry Mardock at 703-883-4160. Also, please feel free to contact me on the Internet at my E-Mail address Smithr@FCA.gov.

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