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STATEMENT OF HAROLD A. MILES CONCERNING FEDERAL INTERMEDIATE

CREDIT BANKS

Mr. WHITTEN. We will have Mr. Miles' statement at this time.

Mr. Miles. This statement provides information concerning the functions and operations, together with the related financial requirements, of the 12 Federal intermediate credit banks. Each bank operates under the direction of a district board of directors, subject to examination and general supervision by the Farm Credit Administration. All interest costs and operating expenses of the banks are paid out of their corporate funds.

ORGANIZATION AND FUNCTIONS The Federal intermediate credit banks, which were established by the Agricultural Credits Act of 1923, serve as banks of discount for agriculture and do not make loans directly to individuals. These banks are an increasingly important factor in furnishing a continuing supply of short- and intermediate-term credit to finance farmers and stockmen. They discount agricultural and livestock paper for and make loans to production credit associations, agricultural credit corporations, livestock loan companies, commercial banks, and similar local financing institutions, with their endorsement. The credit banks are the only source from which the 497 production credit associations borrow to meet the credit requirements of their stockholder-members; and approximately 100 other agricultural credit organizations finance most, if not all, of their agricultural loans by borrowing from or rediscounting paper with the

banks. In order to more effectively utilize surplus cash which arises from time to time in the farm credit system, the intermediate credit banks were authorized by the Farm Credit Act of 1956 to make loans to and to borrow from the Federal land banks as well as the banks for cooperatives.

Since January 1, 1957, the banks have had the added responsibility of supervising and supplying assistance to the production credit associations which, prior to that date, were supervised by the production credit corporations. It is estimated that these associations will extend over $134 billion of credit to farmers and stockmen during fiscal 1959, and will have upward of $1 billion of loans outstanding at the end of that period.

LENDING OPERATIONS The banks' volume of business is governed primarily by the demand for credit which, in turn, is a reflection of general agricultural and economic conditions, volume of agricultural production, the level of production costs, crop yields, prices of agricultural commodities, and other factors over which the banks have no control. The volume of credit extended by the banks has increased sharply during the past 10 years. The $2,286 million of credit extended in fiscal year 1957 was greater than in any prior year in the history of the banks, and was more than twice the amount of credit extended in 1947 (10 years earlier). The 1959 budgets of the banks are based upon an estimated loan volume of $2,500 million for the year, of which $1,172 million is expected to be handled during the first 6 months. Continued high farm operating costs in relation to the level of commodity prices, together with unfavorable growing and harvesting conditions in some areas, tend to maintain credit needs at a high level.

FINANCIAL REQUIREMENTS

The paid-in capital of the Federal intermediate credit banks, toso with their accumulated surplus reserves, constitute the capital

ase upon which they finance their lending operations. Lending funds are obtained by the banks through the issuance and sale to the investing public of consolidated collateral trust debentures and by other borrowings, and thus do not affect Treasury expenditures. Liability on the part of the United States Government for the debentures and other obligations of the credit banks is expressly denied in the law. No Federal intermediate credit bank may have outstanding at any time debentures or similar obligations in excess of 10 times its surplus and paid-in capital. The peak debt-to-capital ratios ranged among the banks from 4.7 to 1 to 9.9 to 1 during the year ended June 30, 1957, and was 6.4 to 1 for the 12 banks.

As of January 1, 1957, upon merger of the production credit corporations in the credit banks, the banks had total networth of $150,471,704 consisting of $87,405,000 of class A stock held by the Governor of the Farm Credit Administration on behalf of the United States and $63,066,704 of permanent surplus. No part of this surplus may be distributed as patronage refunds or dividends. The foregoing figures do not include subscriptions by production credit associations to class B stock in the banks or any payments received thereon. As required by the 1956 act, the associations subscribed to class B stock in the credit banks as of January 1, 1957, in the total amount of approximately $13.1 million, of which one-third was paid at the time of the subscription, one-third by December 31, 1957, and the remainder is payable on or before December 31, 1958.

Class A stock is to be retired over a period of years out of the proceeds of purchases by production credit associations of class B stock in the banks, and from net earnings of the banks.

From January 1 to June 30, 1957, the Federal intermediate credit banks retired $4,501,130 of the class A Government-owned, capital stock. By June 30, 1958, a further substantial payment will be made to the Treasury in retirement of capital stock. These payments derive principally from payments made by production credit associations on their subscriptions to class B stock of the banks. When all class A stock is retired the banks will be wholly owned by the production credit associations. Net earnings of the banks will be distributed as patronage refunds in the form of class B stock to production credit associations and participation certificates to other financing institutions.

Pursuant to the Farm Credit Act of 1956, the Federal intermediate credit bank revolving fund of $40 million, which was established in 1934 to provide additional capital to the Federal intermediate credit banks if needed, will be increased eventually to $70 million as the last $30 million of the Government's investment in class A stock of the banks is retired.

SUPERVISION OF PRODUCTION CREDIT ASSOCIATIONS

On January 1, 1958, there were 497 production credit associations making short and intermediate-term loans to farmers and ranchers throughout the continental United States and Puerto Rico. These associations operate approximately 1,100 field offices in addition to the headquarters offices, and make loans amounting to about $134 billion annually. Each of the 12 intermediate credit banks is responsible for the op.” of the associations in its district. This supervision covers all phases of the associations’ activities and is carried out largely through the banks' officers and employees working with directors, officers, and employees of the associations. The banks place particular emphasis upon sound and constructive credit service to farmers and ranchers, efficient and economical operations, adequate capital and orvo, and an effective training program for association perSOInnel. Among the important supervisory responsibilities of the banks is the administration of rules and regulations prescribed by the Farm Credit Board of the district, with the approval of the Farm Credit Administration, governing lending policies and practices. Within limitations prescribed by law as to the maximum liability of a borrower to an association each production credit association has general authority to make loans upon the approval of its loan committee. Loans for larger amounts as well as loans to directors and officers require the further approval of the bank or its board of directors and, in some instances, the Farm Credit Administration. The law requires that each production credit association be examined at least once each year by examiners designated by the Governor of the Farm Credit Administration. Examinations of accounts, records, and financial assets are made by examiners employed by the Farm Credit Administration. The outstanding loans of each association are reviewed and classified as to quality by employees of the intermediate credit bank of the district, who are designated for that purpose by the Governor. These credit examinations include a comprehensive review of credit policies and practices followed by the associations, with special attention to weak loans as well as any unsound or ineffective credit and collection practices. Thus, credit examinations made by employees of the banks serve not only to complete the overall examination of the associations as contemplated by law, but they also provide an effective means by which the banks carry out an important phase of their supervisory responsibility and, at the same time, provide helpful assistance and guidance to the associations. The cost of examinations of the production credit associations is assessed against and paid by them. The Federal intermediate credit banks perform their supervisory work with production credit associations largely through employees especially trained in agricultural credit and in other phases of association operations. In addition to assisting associations in maintaining sound and constructive lending policies and practices, the banks advise with and assist association directors, officers, and employees in such matters as building and maintaining adequate capital resources, efficient, and economical management and operating procedures; effective safeguards for funds; maintenance of necessary accounts and records; and strengthening membership relations. Among other things the banks are responsible for prescribing minimum surplus requirements for associations, approving dividend payments, prescribing interest rates, regulating investments, and approv

ing compensation of association personnel. The banks also recommend to the Governor of the Farm Credit Administration any needed changes in association organization papers, bylaws, or regulations; the furnishing of additional capital out of the revolving fund available for that purpose; and the retirement of Government capital from any association which has resources available therefor.

OTHER FINANCING INSTITUTIONS

The Federal intermediate credit banks also maintain close contact with the financing institutions other than production credit associations to which they extend credit. Periodic examinations of agricultural and livestock credit corporations are made by the banks to determine their financial condition and the quality of their loans and discounts, as well as to see that they adhere to the terms of their agreements with the banks.

CREDIT PROBLEMS FACED BY BANKS

The cost-price squeeze has made it necessary for many farmers and stockmen who were able to operate with their own cash resources to turn to banks and other lenders for loans to finance production costs, and has made it more difficult for others to pay their obligations out of current income. Within the past few years large areas of the country have suffered extensive damage from such conditions as drought, floods, and freezes, some of which lasted for considerable periods. These adversities have caused low yields and partial or total crop failures, and their effect will be felt several years longer. The reduction in net farm income resulting from these and other unfavorable developments has created difficult credit and operating problems for the banks and associations in assisting borrowers to work out of their difficulties and to maintain their loans on a sound basis. Farmers and stockmen who are in a seriously extended debt position will require several years of more favorable conditions to recover.

ADMINISTRATIVE EXPENSES

The administrative expenses of the 12 banks are estimated at $1,693,000 for the 6 months ending December 31, 1958. The amount requested is at the same annual rate as the $3,375,000 available for 1958. All expenses of the banks are paid out of their income and not out of funds appropriated from the Federal Treasury.

In view of the increasing volume of agricultural paper the banks are being called upon to handle and the economic conditions presently facing agriculture, with their resulting credit problems, the $1,693,000 budgeted for administrative expenses for the 6 months ending December 31, 1958, is believed to be the minimum amount needed to enable the banks to continue to maintain their lending operations on a sound and constructive basis, and to provide effective supervision of the production credit associations, to see that the system continues as a source of sound and dependable short- and intermediate-term credit for farmers and stockmen.

Mr. WHITTEN. You might touch on the highlights of this subject, Mr. Miles, since the members of the subcommittee through the years

have been familiar with your operations. We would be glad for you to point out any highlights that you might like to discuss.

Mr. MILES. Mr. Chairman, the record of the short-term credit system, the intermediate credit banks, and production associations for 1957 has been one of substantial growth and represents greater service to the farmers of our country.

VOLUME OF LOANS

The production credit associations during the calendar year 1957 lent their members $1,731 million, which is the largest amount that they have lent in their history. That compared with $1,488 million the year before. The intermediate credit banks reached a peak in their loans and discounts last year of $1,013 million, which is the first time in the history of the banks that their loans and discounts exceeded $1 billion outstanding.

From the standpoint of the capital structure of the associations and the intermediate credit banks, I think you might be interested to know that as of the end of 1957, the farmers of the country had invested in their production credit associations $113.5 million and the Government's investment at that time was $1,700,000, making them better than 98 percent farmer-owned.

Since that time, as the Governor has mentioned, we have reinvested $2 million in some of the associations in this disaster area to make it possible for them to serve their territory. At the present time we have invested in the production credit associations $3,700,000.

As far as the intermediate credit bank is concerned, as of January 1, 1957, when the Farm Credit Act of 1956 became effective, the Government owned capital in the intermediate credit banks of $87,405,000, and there was created by that act, by taking the surplus of the corporations and the intermediate credit banks, a surplus of slightly over $63 million, giving the 12 banks a total net worth of a little over $150 million.

Since that time, the PCA's have invested through purchase in these banks a total of $8,742,000, and there has been retired to the Government a total of little over $4.5 million.

At the present time the farmers through their production credit associations own about 10 percent of the stock in the intermediate credit banks.

INTEREST RATES With regard to interest rates, you are all familiar with the fact that the cost of money until the last few months continued to increase. We reached a high as far as intermediate credit banks was concerned of 4.975 for the debentures we sold in October for November 1 delivery.

Since that time interest rates have reduced, until last month we sold our debentures and had to pay a total cost of 2.55 percent.

The discount rates of the intermediate credit banks, the rates they charge production credit associations, and other financial institutions, which is a wholesale rate, is as follows: Seven banks have a 4-percent discount rate; one has a 334-percent rate; one with 434; one 414; and one 412.

We expect the boards of those that are above 4 percent to act this week to reduce those rates. We do not expect that the rates this month would be less than about 334 percent.

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