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CONFIDENTIAL SUMMARY OF OPERATIONS OF !EHE WflTflfiAT? INIBEMBDIAffl CREDIT BANKS FOB THE YEAR ENDED DECEMBER 31, & The results of operations of the Federal intermediate credit banks for the year 193& having been completed and reviewed, it is believed that the following brief summary may prove to be of interest* The law under which the Federal intermediate credit banks operate was not amended daring the past year. However, certain provisions of the Farm Credit Act of 19351 which was approved in June of that year and affected the 1935 operations of the banks for only a few months, became more fully effective daring 1936. For instance, the Act just mentioned authorized the credit banks to issue consolidated debentures, "upon which all twelve banks would be jointly and severally liable* Although only consolidated debentures have been issued since October 15t 1935* it was not until September 15* 1936, that all debentures outstanding were of this type. It is our belief, based upon experience to date, that this change in the form of the debentures has improved their marketability and influenced' favorably the cost basis upon which they have been sold* Again it can be said that the credit "banks have benefited from the most satisfactory debenture market since their organization, this being the fourth successive year for which this statement could be made* All issues during I936 bore an interest rate of l££ per annum, and were sold on a substantially lower average yield basis than ever before, each issue having been heavily oversubscribed* Continued progress has been made towards broadening the debenture market, both geographically and among different types of investors* Die other amendment to the law, approved in June of 19351 which became more fully operative during 1936, was that under which it became possible for the "banks for cooperatives to make commodity loans to farmers1 cooperative associations, and to rediscount such loons with the credit banks* She total of loans to cooperative associations and discounts of such loans for the banks for cooperatives during 1936 amounted to $3^,026,396* Of this amount, only $3175^*650 represented loans made directly by the credit banks* Of the aggregate amount of loans discounted, a substantial portion represented loans made to associations of national or broad regional scope by the Central Bank for Cooperatives located in Washington, D« C*, and rediscounted by it with the Federal Intermediate Credit Bank of Baltimore which, under a plan put into operation in 1936* offered to other credit banks the privilege of participation in such discounts* - 2 The "banks extended credit during I936, aggregating $381,660,510, as compared with $l+ll|-, 156,107 during 1935* The amount of paper haiw died for privately capitalized financing institutions was $106,205,652 in 1936, as compared with $116,909,172 in I935, a decrease of $10,703,520. There was a decrease, also, in the amount of loans made to farmers' cooperative associations and in such loans discounted for the banks for cooperatives, the total of both types having been $3^,^26,396 in I936, against $5^,01+2,1+35 during 1935. No paper was discounted during the year for the regional agricultural credit corporations while, in 1935t $32,53^,185 was advanced to these institutions* A substantial increase occurred, however, in the vol~ ume of paper handled for production credit associations, the amount having been $21+1,1+28,1+62 in 1936, as compared with $210,670,315 during 1935* Substantial liquidation of loans and discounts occurred during the latter part of the year, the net total outstanding dropping from a month-end peak of $199,509,832 on July 31, I936, to $170,653,072 on December 31, 1936, This resulted from a high percentage of liquidation in crop production loans due to generally improving conditions and price levels and a greater than normal liquidation in livestock loans due partially to drought conditions in some of the principal livestock areas, but due, as well, to satisfactory prices, particularly those which have prevailed for wool. Substantially improved prices in certain specialized crop areas, such as those producing potatoes and hops contributed towards greater I936 liquidation of loans for the production of such commodities discounted by several of the banks. During the year, total cash repayments received amounted to $255,966,613, and the aggregate amount of new credit extended was $274,146,789, excluding renewals of $107,513,721. Although net income from operations of the banks in I935 was coivsidered generally satisfactory, it was substantially greater in I936. Such income increased from $596,735.21 in I935 to $1,022,025 in 1936, (Net income from operations represents the difference between iiw terest earned on loans, discotints, etc., and the total cost of operations, including interest on debentures, operating expenses, examiner* tion expense and General Agent*s expenses paid by the credit banks.) This increase in net income from operations was accomplished notwithstanding a decrease (from $H,028,3C9 to $3,787,199) in gross income from loan operations. This favorable showing was due primarily to substantial reductions in operating expenses and the cost of borrowed funds. All the banks effected operating economies during the year; some of them quite substantially, and others to a lesser extent. It seems apparent, however, that additional economies will be possible in some of the banks. Even those which accomplished material reductions in 1936 will endeavor to effect further economies in 1937. Doring 1936 the debenture and other interest costs amounted to. $837,108. Although these costs were lower in amount than for 1935 > and were at a lower average rate than ever before, they still represented a substantial part of the banks1 total expenses* Since the cost of these funds to the banks is large and may fluctuate widely, it is obvious that the most careful attention mast be given at all times to the maintenance of sound credit policies, as well as to the most advantageous fiscal policy in order that the banks may maintain loan and discount rates at the lowest possible point, in the interest of low credit costs to farmers and stockmen* At the same time, it is essential that every effort be made to assure the. banks of an operating income adequate to cover all debenture and other interest costs, operating expenses and ordinary losses, leaving other income, including that on securities owned, to, accumulate as a safeguard against extraordinary contingencies and as an additional margin of protection to the holders of debentures* She fiscal policy under which the credit banks operated in 1935 took into account the following basic factors: 1* Coordination of debenture maturities with the maturities of loans and discounts; 2* Issuance of debentures with nine and twelve month maturities to finance the probable minimum amount of outstanding loans and discounts during the annual cycle, with shorter maturities to provide funds for the seasonal peaks* 3* Present and prospective short-term money rates* Xhis policy was reviewed during the June conference of credit bank presidents in Washington and the conclusion was readied that its application had produced good results and should be continued. The consolidated balance sheet at December 31, 1936, shows that the twelve banks are in excellent financial condition* In addition to paid-in capital of $70,000,000, and paid-in surplus of $30,000,000, they had earned surplus of $8,38f>,596* Loans and discounts (net) amounted to $170,653,072, or 66«9$ of total assets, while cash, and securities consisting of United States Government obligations (direct and fully guaranteed), carried at par, amounted to $82,090,620, or 32*2$ of such total* Debentures were outstanding in the amount of $11+31950,000. The net gain from all sources during the year was $2,423,813, after writing off all premium on securities purchased, charging off all known losses and providing full reserves for doubtful assets, including reserves amounting to more tha# $1,000,000 in two of the banks against possible losses due primarily to drought conditions• — lj. ~ She amounts of these reserves were determined on a "basis which would provide more than would he needed for the purpose indicated* This net gain in 1936 compares with $2,56^,903 in 1935* The hanks are going into the new year well equipped and with the prospect of conditions favorable to an even more complete fulfillment of their primary functions as banks of discount for agriculture. With each recent succeeding year, it has been possible for the.banks to show marked improvement over the preceding year's accomplishments* Nevertheless, there is opportunity, through careful study, to bring to light other means by which the banks can increase their field of usefulness and improve their methods* As will be observed in an earlier part of this report, our business with privately capitalized institutions is decreasing* This is due in some degree, perhaps, to the competition of other lenders and substantial liquidation brought about by drought conditions# While it will be the continuing policy of the credit banks to work closely and in full cooperation with the production credit corporations and associations, we mast not overlook the fact that the Act under which we operate makes our credit facilities available to various other types of organizations* Under the law, the other types of institutions which are eligible to rediscount paper with the credit banks are national and State banks, trust companies, agricultural credit corporations, incorporated livestock loan cogtpanies, savings instituitions, cooperative banks, credit unions, cooperative associations of agricultural producers, organized tinder the laws of any State, or of the Government of the United States, and the banks for cooperatives * Some increase in the average cost of money in 1937 ore* 1936 may be expected* On the basis of present indications, it seems unlikely that such an increase would be sufficiently large to necessitate a change in the discount rate* Any increase in this item of cost, coupled with less rapid progress in effecting operating econo** mies as the minimum is approached, would render improbable operating results in 1937 a8 favorable as those obtained in 1936* in increased volume of business would, of course, tend to offset these factors * However, with continuing improvement in general conditions there will be increasing activity on the part of lenders and the banks mist not, regardless of operating results, deviate from sound credit policies* Experience tells us that the desire for volume too frequently leads to excessive and "unsound extension of credit* There will be found attached a condensed, consolidated financial statement for the years ended December 31# 1932 to 1936, inclusive* GSO- M* BKBNNAU, Intermediate Credit Commissioner, JEDERAL INTEH\fiDIA!Ea» CREDIT Condensed consolidated statements of condition as compiled by the Farm Credit Administration, Division of Finance and Research Dec. 31, 1936 Dec. 31, 1935 Dec. 31, 1934 Dec. 31,1933 Dec. 31,1932 ASSETS Loans and discounts (net): Financing institutions $146,698,732 $143,150,130 $155,347,438 $134,252,402 $83,517,764 Banks for cooperatives 22,313,575 • 8,046,501 Cooperative associations 1,640,765 2,731,280 3J3,969~171 15,210^549 9,865*615 Notes receivable (net). . ... 1,586,544 3,023,866 2,752,838 988,453 589,546 Cash on hand and in hanks 9,586,748 5,315,652 8,979,033 8,875,621 8,510,619 Cash deposited with the Treasurer of the Uaited States for retirement of matured debentures (principal and interest) • 50,708 U.S. Government obligations, direct and fully guaranteed (par value ). 73,215,000 73,260,000 73,566,625 32,619,900 6,702,250 Other securities (j>ax value) 53,000 77,440 15,000 Unamortized premium on securities 1/ 5^338 637,963 142,049 109,952 Accounts receivable "108,025 334,524 102,214 193,677 181,801 Accrued interest receivable 1,133,372 1,223,214 1,089,015 733,071 541,256 Furniture, fixtures and equipment (net J .. . ... .. 21 9,211 13,340 Prepaid and deferred expenses... 3,192 8,049 27,225 26,816 10,463 Other assets (net) 60,003 114,958 84,946 664,050 51,304 Capital stock subscription 28.000.000 callable from U.S. Treasury.. Total $255,085,882 $239,755,156 $273,449,446 $195,648,812 $137,171,832 LIABILITIES Debentures outstanding (unmatured): Individual _„ $68,955,000 $164,370,000 $128,185,000 $72,270,000 Consolidated $143,950,000 62,050,000 Matured debentures (principal and interest) 50,708 Bediscounts 349,421 310,021 Notes payable.. 1,000,000 Trust account s. 247,941 370,181 168,792 577~3ll 325,896 Accounts payable 9,616 5,795 690,514 682,497 Liability for cash collateral942,376 662,450 802,338 Deferred proceeds, loans and 397 discounts. 5,441 69,317 1,142,094 73,282 Accrued interest payable, not 1,312,873 848,472 yet due.... 829,902 813,005 580,970 Interest collected, not earned.-...™ 154,384 410,843 632,609 136,470 1,007,918 Unamortized premium on out347,059 standing debentures 525,514 505,327 525,347 170,997 Other liabilities 74,645 46,407 209,890 131,059 91,330 Capital stock: Paid in 70,000,000 70,000,000 70,000,000 60,000,000 32,000,000 Callable from U.S. Treasury. 28,000,000 Surplus Tjaid in._ -30,000^000 30,000"000 30,000,000 Surplus earned and reserve for contingencies — 8,385,596 5,961,783 2,166,094 3,396,879 3,579,367 1255,085,882 $239,755,156 $273,449,446 $195,648,812 $137,171,832 Total Condensed consolidated statements of earnings as compiled by the Farm Credit Administration, Division of Finance and Research Tear ended Year ended Tear ended Tear ended Tear ended Dec.31,1936 Dec.3l, 1935 Dec.31, 1934 Dec. 31,1933 Dec.31,1932 Net income, after a l l operating charges and expenses $3,805,955 $2,741,495 $2,872,041 $1,717,729 $1,293,233 Charge-off s and adjustment of 623,539 3,421,831 valuation reserves _~™_ 3,583,390 1,443,101 394,409 Less* Be coveries 347.756 217.817 528.861 319,083 60.959 Net. . . _ . _ _ _ „. „ „„. 1,382,142 176,592 3,054,529 304,456 3,074,075 Increase in surplus earned and reserve for contingencies—--.——. $2,42^,813 $2,564,903 •• $182,488 $1,413,273 •«$1,780,842 • Deposited with Federal Beserve Bank of jew York. ** Decrease. Digitized for 1/ FRASER Ifaamortized discount; unamortised premium on securities owned written off during December 1935, http://fraser.stlouisfed.org/ investments carried at the lower of pa* or cost on December 31, 1935 and December 31, 1936. Federal Reserve Bank of St. Louis
@FedFRASER