FCA Info Memo - Financial Institution Rating System (FIRS) Summary

Informational Memorandum
Subject:	Financial Institution Rating System (FIRS) Summary
Date of Memorandum:	06/07/2000
Expiration Date:
Office:	OE
Signed By:	Smith, Roland
FCA Contact Person:	Holland, Tom
Contact Phone:	703-883-4484
List of Attachments:

INFORMATIONAL MEMORANDUM

June 7, 2000

To: Chairman, Board of Directors

Chief Executive Officer

Each Farm Credit System Institution

From: Roland E. Smith, Chief Examiner /s/

Office of Examination

Subject: Financial Institution Rating System (FIRS) Summary

Attached for your information are charts illustrating assigned composite FIRS ratings of Farm Credit System (FCS or System) institutions by type at May 31, 2000, and trends in composite and component FIRS ratings on a Systemwide basis from 1995 through May 31, 2000. These ratings are assigned by examiners and are an indication of the financial condition and overall operating soundness of the FCS. As illustrated by the attached charts, the FIRS ratings reflect a healthy System. For the first time since the Farm Credit Administration (FCA) began rating institutions, all System institutions are currently rated 1 or 2; there are no institutions rated 3 or worse.

Each institution is assigned a composite rating based on an evaluation of pertinent financial and operational criteria and principles. The rating is based on a scale of 1 through 5 in ascending order of supervisory concern. For example, a 1 represents the best level of condition and performance, and a 5 represents the weakest, most critically deficient level of performance and the highest level of FCA concern. In addition to the composite rating, all institutions [except Federal Land Bank Associations (FLBAs)] are assigned component ratings in six areas, including capital, assets, management, earnings, liquidity, and sensitivity to market risk. FLBAs are not assigned liquidity or sensitivity ratings.

Examiners use the FIRS to evaluate and categorize the safety and soundness of System institutions on an ongoing, uniform, and comprehensive basis. As you are aware, we extended the examination cycles of 1- and 2-rated associations with less than $1 billion in assets to 18-month intervals in 1998. As a part of that change, we enhanced the ongoing monitoring and oversight process to include the offsite review of FCS institutions’ performance. As such, the FIRS ratings assigned to System institutions continue to be reviewed each quarter and adjusted, as needed, to accurately reflect the condition of institutions.

While there is reason to be encouraged by the current FIRS ratings of institutions, we remain concerned because of the depressed commodity prices and rising interest rate environment. As you know, net farm income has been significantly supported by government assistance in 1999. While the assistance planned for 2000 will substantially benefit agriculture and help mitigate risk in the System in the short term, improved commodity prices for our principal export products and improved risk management tools at the producer level are essential for a longer-term solution to the problems facing agriculture.

If you have questions or comments regarding the attachments, please feel free to contact the Director of your respective Field Office, or me at (703) 883-4160, or send me an e-mail at

smithr@fca.gov

Attachments