Moreover, if a sizable System association fails, or several smaller System associations
fail, it is also possible that indirect losses to the Insurance Fund may result from association
liquidations. For example, the liquidation of a considerable amount of agricultural loans in a
relatively short period of time may cause a general decline in loan and collateral values
throughout the district, creating higher levels of risk in the remaining association direct notes.
Moreover, because the bank loses a significant source of revenue and capital, it might not be
able to increase the cost of funds to the remaining associations to make up for lost revenue
while simultaneously increasing their investment requirement to remain adequately capitalized.
Without providing assistance to the sizable troubled association to prevent financial contagion,
other associations could fail or the bank itself could fail, potentially creating losses to the
Insurance Fund. A similar scenario could result with the failure of several smaller associations
during a period of severe stress in agriculture. A temporary cash infusion to the bank could
counteract the effects of financial contagion, stabilize the district, and help avoid a bank failure.
The Corporation would consider structuring assistance so that it would recoup the cost
associated with providing assistance. Therefore, if indirect losses can be reasonably estimated,
the Corporation may consider such losses in its least-cost test and assistance determination.

The third step of the least-cost test is to determine the type and amount of assistance.
The cost of providing assistance will depend upon the structure of the assistance. For example,
the Corporation's purchase of distressed assets from a troubled System institution may costthe
Insurance Fund more than providing the institution a loan with a repayment plan.'6 Moreover,
if other System institutions are willing to contribute some of their funds to the troubled System
institution to reduce the cost of providing assistance, the Corporation will factor this amount into
its least-cost test and assistance determination.

The final step in the least-cost test is to compare the cost of liquidation to the cost of
providing assistance. If the cost of providing assistance from the Insurance Fund is less than the
cost of liquidating a troubled System institution (to the Insurance Fund), the Corporation’s
Board of Directors, in its discretion, may approve assistance to the troubled System institution.
As required by statute, the Corporation shall use the information it receives during its least-cost
determination to evaluate the alternatives, document the evaluation and the assumptions on
which the evaluation is based, and retain the documentation for not less than 5 years.

Assistance Agreements

If the Corporation provides assistance, it will enter into an agreement with the System
institution receiving assistance. The terms and conditions of the agreement will be determined
on a case-by-case basis and may include limits on (or prior approval of) the types or amounts of
activities the institution can engage in while assistance is outstanding. For example, assistance
agreements might include repayment terms and limits on concentration risk, patronage and
dividend payments, executive compensation, and certain types of expenses. Assistance
agreements may also provide the Corporation the right to have a representative attend the
institution's board meetings. Each assistance agreement will be subject to the Corporation's


The second step of the least-cost test is for the Corporation to reasonably estimate
whether the liquidation of the troubled System institution(s) creates a loss to the Insurance
Fund. Since the Insurance Fund has been primarily established to insure the timely payment of

principal and interest on System bank insured debt obligations, '° 4 loss to the Insurance Fund
occurs when a System bank defaults on an insured obligation, and the Corporation must use
the Insurance Fund to pay the obligation. " Accordingly, to meet the least-cost test, the
Corporation must be able to reasonably estimate whether the troubled System institution's
failure will impair a bank's ability to pay its insured debt obligations.

A loss to the Insurance Fund may result from direct and/or indirect losses. Direct losses
include the estimated losses to the Insurance Fund from the liquidation of a troubled System
institution. Indirect losses to the Insurance Fund include the consequent effects of liquidating a
troubled System institution. For example, if the troubled System institution is a bank, there is a
direct loss to the Insurance Fund if the Corporation reasonably estimates that the net present
value of the bank's assets’ is less than its insured debt obligations. '* If the Corporation can
reasonably estimate that the liquidation of a troubled System bank subsequently causes one or
more of the remaining System banks to default on insured debt obligations, there is an indirect
loss to the Insurance Fund. Direct losses to the Insurance Fund can be reasonably estimated by
the Corporation, but indirect losses to the Insurance Fund may be difficult for the Corporation to
reasonably estimate. Consequently, it will be incumbent upon the remaining System banks to
provide the Corporation with sufficient information and analysis to demonstrate that indirect
losses to the Insurance Fund will result from the bank liquidation. For example, when a severe
financial crisis exists, a System bank liquidation might cause the remaining System banks to be
shut out of the debt market.'* In a less extreme scenario, a System bank liquidation might
substantially increase the cost of funds to the remaining System banks. In either scenario, for
indirect costs to be considered, the Corporation must have sufficient information so that it can
reasonably estimate the indirect loss associated with the bank liquidation. If indirect losses can
be reasonably estimated, the Corporation may consider such losses in its least-cost test and
assistance determination.

If the troubled System institution is an association, the Corporation must be able to
reasonably estimate that the troubled System association's failure causes a loss to the
Insurance Fund for there to be a basis for providing assistance. The funding bank would need
to provide the Corporation with information to support the association request for assistance.
If the Corporation reasonably estimates that the net present value ofthe association's assets!”
is less than the amount of its direct note with its funding bank, there would be a loss to the
bank. If the Corporation reasonably estimates that the funding bank can sufficiently absorb this
loss, there would be no loss to the Insurance Fund and, consequently, no basis for the
Corporation to provide assistance to the troubled System association. However, if the
Corporation reasonably estimates that the loss on the direct note is significant enough that the
funding bank may default on its insured debt obligations, the Corporation may provide
assistance to the troubled System association.


Board of Directors' approval. While assistance agreements are outstanding, the Corporation
will use its examination authority to ensure compliance with the agreement. Moreover, the
Corporation will require the System institution receiving assistance to certify and publicly
disclose compliance with the agreement requirements, including the disclosure of any instances
of material noncompliance with the agreement.

DATED THIS 14TM DAY OF JUNE 2018
BY ORDER OF THE BOARD OF DIRECTORS

DALE L. AULTMAN
SECRETARY TO THE BOARD

"Section 5.61 (a) of the Actuses the terms "insured System bank" and "bank" but the Act also specifies
under section 5.61(e), 12 U.S.C. 2277a-10(e), that such terms also include production credit associations
and other associations making direct loans under the authority provided under section 7.6 of the Act, 12
U.S.C. 2279b. Consequently, the terms "troubled System institution," "troubled System bank," or
“troubled System association" are used to refer to those institutions specified in sections 5.61(a) and
5.61(e) of the Act, 12 U.S.C. 2277a-10(a) and 2277a-10(e).

?u Qualifying" means the troubled System institution is: (1) In receivership, (2) in danger of being placed
in receivership, or (3) an institution that, when severe financial conditions exist that threaten the stability
of a significant number of System institutions or of System institutions possessing significant financial
resources, requires assistance to lessen the risk to the Corporation posed by such System institution
under such threat of instability. See Act, section 5.61(a)(2)(B), 12 U.S.C. 2277a-10(a)(2)(B).

3The Corporation is not authorized to purchase voting stock from the troubled System institution. See
Act, section 5.61(a)(3)(F), 12 U.S.C. 2277a-10(a)(3)(F).

4The cost of liquidation shall be made as of the earliest of: (1) The date on which a conservator is
appointed for the institution, (II) the date on which a receiver is appointed for the institution, or (Ill) the
date on which the Corporation makes any determination to aid the institution. See Act, section
5.61(a)(3)(C), 12 U.S.C. 2277a-10(a)(3)(C).

*See Act, sections 5.58(8) and 5.59, 12 U.S.C. 2277a-7(8) and 2277a-8. The Corporation will accord such
other System institutions as the Corporation determines to be appropriate the opportunity to submit
information relating to the determination. See Act, section 5.61(a)(3)(A), 12 U.S.C. 2277a-10(a)(3)(A).

See Act, section 5.61(a)(3)(B), 12 U.S.C. 2277a-10(a)(3)(B). In addition, in regard to requests for stand-
alone assistance, the Corporation must evaluate the adequacy of managerial resources of the troubled
System institution. The Corporation is authorized to determine the continued service of any director or


POLICY STATEMENT

Farm Credit System Insurance Corporation

FARM CREDIT SYSTEM INSURANCE CORPORATION
POLICY STATEMENT CONCERNING ASSISTANCE
(BM 14-JUN-18-02)

Effective Date: June 14, 2018

EffectonPrevious Action: Replaces “Policy Statement Concerning Stand-Alone Assistance"
[BM-11-APR-13-02]

Source of Authority: Part E of Title V of the Farm Credit Act of 1971, as Amended (Act);
12 U.S.C. §§ 2277a-2277a-14. Bylaws of the Farm Credit System
Insurance Corporation [BM-12-SEP-06-05).

Background

The Farm Credit System Insurance Corporation (Corporation), in its sole discretion, is
authorized under section 5.61(a) of the Farm Credit Act of 1971, as amended (Act), 12 U.S.C.
2277a-10(a), to provide, on such terms and conditions as the Corporation's Board of Directors
may prescribe: (1) Stand-alone assistance in the form of loans, asset or debt security purchases,
assumption of liabilities, or contributions: (a) To prevent the placing of the institution! into
receivership, (b) to restore the institution to normal operation, or (c) to reduce the risk to the
Corporation posed by the institution when severe financial conditions threaten the stability of a
significant number of other System institutions or System institutions possessing significant
financial resources; or (2) Assistance to facilitate a merger or consolidation of a "qualifying"?
troubled System institution with another System institution through loans, loan guarantees,
assetor debt security purchases, assumption of liabilities, contributions, or any combination
thereof. °

If the Corporation receives a request for assistance, it must compare the cost of
liquidation to the cost of providing assistance to determine the least costly alternative to the
Insurance Fund. * In making this discretionary determination, the Corporation is authorized to
gather any information necessary to perform the least-cost test.° After gathering all pertinent
information, the Corporation must: (1) Evaluate alternatives on apresent-value basis, usinga
reasonable discount rate, (2) document the evaluation and the assumptions on which the
evaluation is based, and (3) retain the documentation for not less than 5 years.®


senior ranking officer who serves in a policymaking role for the assisted System institution as a condition
of approving assistance. See Act, section 5.61(a)(3)(D), 12 U.S.C. 2277a-10(a)(3)(D).

The Corporation will determine which System institutions will provide this information.

®This value is computed by subtracting the present-value of the institution's liabilities from its assets.
Liabilities include estimated resolution expenses.

“The Corporation will request that FCA examiners collect the information.

10 See section 5.60(c)(I) of the Act, 12 U.S.C. 2277a-9(c)(I), which states, in part, "The Corporation shall
expend amounts in the Insurance Fund to the extent necessary to insure the timely payment of interest
and principal on insured obligations."

"This assumes that no other System institution is willing to voluntarily assist the defaulting bank to
avoid a payout from the Insurance Fund.

“The net present value of bank assets is the estimated present value of bank assets at liquidation less
estimated payments to creditors with a higher priority of claims than insured debt obligations and
estimated resolution expenses.

Conversely, there is no direct loss to the Insurance Fund if the Corporation reasonably estimates that
the net present value of the bank’s assets at liquidation is greater than its insured debt obligations.

“ina liquidity crisis situation, the Corporation would work with the System banks to ensure the
Insurance Fund was used to protect investors in insured debt obligations.

*’The net present value of association assets is the estimated present value of association assets at
liquidation less estimated payments to creditors with higher priority of claims than the funding bank and
estimated resolution expenses. In mostcases, receivership expenses will be paid out of the receivership
estate, so there would be no administrative cost to the Insurance Fund from the liquidation of the
association.

'°4n the event the Corporation exercises its discretion to provide assistance, in most cases assistance
would be provided to the funding bank, regardless of whether the troubled System institution is a bank or
an association. For example, the Corporation may provide the funding bank a collateralized loan,
purchase subordinated debt from the funding bank, or enter into a loss-sharing agreement with the
funding bank to either restore the funding bank or its affiliated association (or both) to normal operations.
If the assistance can be structured with a repayment feature, it is likely to be the least costly means of
providing assistance of all possible alternatives available to the Corporation.


Policy Statement

The Corporation will consider a request for assistance to a troubled System institution
under section 5.61(a) of the Act, 12 U.S.C. 2277a-10(a), upon receipt of an assistance proposal.
An assistance proposal can be submitted either directly from a troubled System institution,
from other System institutions seeking to acquire or assist a troubled System institution, or
from the System banks to stem a liquidity crisis. Upon receipt of an assistance proposal, if the
Corporation determines it is appropriate based on the facts and circumstances surrounding the
request, the Corporation will provide System institutions the opportunity to submit any
information, including information on the cost to the Farm Credit Insurance Fund (Insurance
Fund) of a liquidation. "The Corporation will then conduct a least-cost test to determine
whether the cost of providing assistance is less costly to the Insurance Fund than the cost of
liquidating a System institution. If the cost of providing assistance is less than the cost of
liquidation to the Insurance Fund, and the Corporation, in its sole discretion, approves
assistance, the Corporation will enter into an agreement with the System institution receiving
assistance.

Assistance Proposals

A System institution requesting assistance must submit a proposal to the Corporation. If
the proposal is for stand-alone assistance, the proposal must provide justification for the
assistance, including a detailed analysis of how such assistance will return the troubled System
institution to a financially viable, self-sustaining operation. If the proposed assistance is to
facilitate a merger, the proposal must demonstrate that the continuing System institution can
safely and soundly absorb the financial and operational impact that will result from the merger.
Moreover, the Corporation would consider FCA's preliminary approval of the proposed merger,
pending the least-cost determination to provide assistance. If a System institution or group of
System institutions submits an assistance proposal to resolve a troubled System institution or
stem a liquidity crisis or financial contagion within the System, the proposal must contain
sufficient information to demonstrate how the Corporation's assistance would be less costly to
the Insurance Fund than liquidating the troubled System institution(s).

Assistance proposals must contain information to help the Corporation compare the
cost of providing assistance to the cost of liquidating the troubled System institution as part of
its least-cost determination. Assistance proposals can include requests for loans, loan
guarantees, loss-sharing arrangements, asset or debt security purchases, assumption of
liabilities, or cash contributions. The Corporation will consider the nature of the financial
assistance requested on a case-by-case basis and may alter the form or amount of assistance as
part of its determination. The Corporation has identified the following minimum criteria to be
included in arequest for assistance and assistance proposals:

1) Financial condition and performance criteria to better understand the problem that
caused the need for assistance, including the rationale for seeking assistance;


2) The type and amount of assistance needed, as well as a reasonable repayment plan.
Assistance proposals must include fee arrangements with attorneys, accountants,
consultants, and other parties incident to the request for assistance (or projected
costs for these arrangements). The Corporation would not acquire or service assets
without a strong justification;

3) Reasonable projections to assess the future viability of the institution after
assistance has been provided. This would include earnings projections and a capital
restoration plan to achieve adequate capitalization. Earnings projections and the
capital restoration plan must include the impact of repayment of assistance;

4) A business plan that would implement written policies and procedures designed to
guide operations safely and soundly and to correct the problems that caused the
need for assistance. The plan must include an internal control system to monitor
ongoing performance with measurable criteria. The plan must also include an
operating budget, including compensation arrangements covering directors and
senior officers. Plans to continue the service and compensation of directors and
senior officers must be pre-approved by the Corporation before it provides
assistance and until assistance is repaid; and

5) Analysis of the effect of assistance on shareholders, uninsured creditors (e.g.,
impairment on subordinated debt), other System institutions and the financial
markets. If the troubled System institution is an association, the analysis must
include the impact on its funding bank's ability to continue meeting its insured
obligations.

The Corporation reserves the right to request additional information as needed to
conduct the least-cost test.

The Least-Cost Test

The Corporation will conduct a least-cost test to determine whether providing
assistance to a troubled System institution is less costly to the Insurance Fund than liquidating
the institution. The first step of the least-cost test is to determine the estimated liquidation
value of the troubled System institution. Sin making this determination, the Corporation shall
use its examination authority under section 5.59(b) of the Act, 12 U.S.C. 2277a-8(b), to collect
information from the troubled System institution to calculate the estimated liquidation value of
the troubled System institution. ® This information shall, at a minimum, include specific data
elements as determined by Corporation staff to conduct a present-value analysis of the
troubled System institution's assets, using a reasonable discount rate. As required by the Act,
the troubled System institution must provide the Corporation all information necessary to
perform a least-cost determination.