Contents

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

1 Statement of the Chairman and CEO

2 Farm Credit Administration Organization and Mission

2 The FCA Board

6 FCA—The Agency

10 Agency Officials

14 Farm Credit System—An Overview of Events and Conditions

14 FCS Function and Structure

16 Financial Condition of the FCS

20 Borrowers Served

22 Funding for Other Lenders

23 FCS Market Share of Farm Debt

24 Farmer Mac Providing a Secondary Market

28 Maintaining a Dependable Source of Credit for Farmers and Ranchers

28 Serving Young, Beginning, and Small Farmers and Ranchers

36 Helping Farmers Through Federal and State Loan Guarantees

40 Risk-Based Examination and Supervisory Program

45 Challenges Facing Agriculture and the Rural Economy

52 Corporate Activity, Regulatory Guidance, and Other Agency Activities

52 Association Restructuring in FCS Slows While Bank Activity Increases

55 Regulations

59 Funding Activity

59 Data Reporting

59 Litigation

60 Oversight of Farmer Mac

66 Glossary

70 FCA Employee Benefits

74 Employees of the Farm Credit Administration

77 Appendix—Farm Credit Administration Strategic Plan Fiscal Years 2004–2009

98 Additional Information

Photo credits:

Bachrach, FCA Board Portrait and page 3.

Olive Rosen, page 27.
Farm Credit Administration Board

The Farm Credit Administration Board

Clockwise from center: Michael M. Reyna, Chairman and CEO; Douglas L. “Doug” Flory;

and Nancy C. Pellet.
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 1

Statement of the Chairman and CEO

January 2004

Michael M. Reyna

Chairman and CEO

Farm Credit Administration

My Fellow Citizens,

On behalf of my colleagues on the Farm Credit Administration Board of Directors and the men and

women of this agency, I invite you to review our 2003 Annual Report.

Our agency is congressionally mandated to ensure a dependable source of credit for agriculture and

rural America. We accomplish this mission in two important ways. First, we conduct on-site financial

safety and soundness examinations of each Farm Credit System (FCS or System) institution. These

examinations also focus on whether System institutions are meeting their public mandate to serve all

eligible borrowers having a basis for credit.

Secondly, we approve corporate charter changes and research, develop, and adopt rules, regulations,

and other guidelines that govern how System institutions conduct their business and interact with their

customers. If, in the conduct of its business, a System institution violates a law or regulation, or does

not meet safety and soundness standards, we can use our enforcement authorities to ensure the

problem is corrected promptly.

The System is a nationwide network of borrower-owned financial institutions and related service

organizations that provide credit to farmers, ranchers, and their cooperatives in all 50 states and Puerto

Rico. As the nation’s oldest government sponsored enterprise, the System serves a broad public

purpose by preserving liquidity and competition in rural credit markets during both good and bad

economic times.

During 2003, the System has had a solid record of performance. Capital levels have continued to

increase through retained earnings and stock purchases, and asset quality has remained high. Our

examinations have concluded that the System and each of its institutions are fundamentally sound in

all material respects. The System has knowledgeable and experienced managers at all levels and yearover-year earnings are up.

We will remain ever vigilant in our efforts to ensure that the System remains financially strong and

mission focused on agriculture and rural America for generations to come. We welcome your comments on ways we can continue to improve our operations and, hence, better fulfill our role and

responsibility. If you have questions, comments, and or concerns, please call me personally at

(703) 883-4005.

All the best, always!
Farm Credit Administration Organization

and Mission

The Farm Credit Administration (FCA or agency) is an independent agency within the

executive branch of the U.S. government responsible for regulating and supervising the

banks, associations, and related entities in the Farm Credit System, including the

Federal Agricultural Mortgage Corporation (Farmer Mac). The FCS is a nationwide

network of borrower-owned financial institutions that provide credit to farmers,

ranchers, and producers or harvesters of aquatic products, farm-related service businesses, rural homeowners, agricultural and aquatic cooperatives, and rural utilities.

Originally created by a 1933 executive order of President Franklin D. Roosevelt, today’s

FCA derives its powers and authorities from the Farm Credit Act of 1971, as amended

(Farm Credit Act or Act). The U.S. Senate Committee on Agriculture, Nutrition, and

Forestry and the U.S. House of Representatives Committee on Agriculture oversee the

FCA and the FCS.

FCA’s mission is to promote a safe and sound, competitive Farm Credit System to

finance agriculture and rural America as authorized by Congress. We do this in two

specific ways. First, we conduct examinations of Farm Credit System institutions to

monitor and oversee the safety and soundness of their ongoing activities. These

examinations also focus on whether System institutions are meeting their public

mandate to serve all eligible borrowers. Second, we approve corporate charter changes

and research, develop, and adopt rules, regulations, and other guidelines that govern

how System institutions conduct their business and interact with their customers.

If a System institution violates a law or regulation, or its operations are unsafe or

unsound, FCA may use its enforcement authority to ensure that the problem is corrected. FCA also protects the rights of borrowers, issues and changes the charters of

FCS institutions, reports to Congress on the financial condition and performance of the

FCS, and approves the issuance of System debt obligations.

The agency maintains its headquarters and a field office in McLean, Virginia. There are

also field offices in Bloomington, Minnesota; Dallas, Texas; Denver, Colorado; and

Sacramento, California.

The FCA Board

FCA policy and its regulatory agenda are established by a full-time, three-person Board,

whose members are appointed by the President of the United States with the advice and

consent of the Senate. They serve six-year terms and may not be reappointed after

serving full terms or more than three years of previous members’ terms. The President

designates one member as Chairman of the Board, who serves until the end of his own

term. The Chairman also serves as FCA’s Chief Executive Officer (CEO).

2 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003
Michael M. Reyna

Chairman and CEO

Michael M. Reyna is Chairman and CEO of the Farm Credit Administration, the independent federal agency responsible for

regulating and examining both the Farm Credit System and the Federal Agricultural Mortgage Corporation. As the primary

regulator of these two government-sponsored enterprises, Mr. Reyna was appointed to a six-year term on the three-member FCA

Board of Directors by then-President William J. Clinton on October 22, 1998; his term expires May 21, 2004.

Mr. Reyna also serves as a Member of the Board of Directors of the Farm Credit System Insurance Corporation. The Insurance

Corporation, which is an independent U.S. Government corporation, is responsible for ensuring the timely payment of principal and

interest on insured notes, bonds, debentures, and other obligations issued on behalf of Farm Credit System banks. The Insurance

Corporation was established on January 6, 1988, with enactment of the Agricultural Credit Act of 1987.

Before his appointment to the Board, Mr. Reyna served as the President’s Director of the U.S. Department of Agriculture’s (USDA)

Rural Development (formerly known as Farmers Home Administration) in California from November 1993 to October 1998. In

this capacity, Mr. Reyna was responsible for growing and managing a diversified portfolio of housing, business, and infrastructure

loans totaling more than $2.6 billion. He implemented a number of significant initiatives in California, including the Northwest

Economic Adjustment Initiative, the Rural Empowerment Zone-Enterprise Community program, the AmeriCorps program, and

several Reinventing Government initiatives.

Prior to his federal service, Mr. Reyna served at the state level for 11 years as a principal advisor to the California State Legislature,

working on financial service industry regulation and a wide range of issues, including housing, economic development, local

government finance, and political reform. He was an appointed member of several local commissions, including the Sacramento

City Planning Commission, which he served as Chairman in 1993. In addition, he was a founding board member of Meadowview

Community Action, a local nonprofit agency. While attending graduate school in Texas, Mr. Reyna served as a private consultant to

Governor Bill Clements’ long-range strategic planning effort known as the Texas 2000 Project. In this capacity, he developed and

implemented a computer-based simulation model that estimated employment and population trends in Texas through the year

2000.

Mr. Reyna is the recipient of the LBJ School Alumni Association’s Distinguished Public Service Award for 2003. In 1998 and 1999,

he received awards from the California Rural Builders’ Council, the Rural California Housing Corporation, the California Coalition

for Rural Housing, and the Valley Small Business Corporation, in recognition of his leadership and commitment to rural America.

In 1996, Mr. Reyna received Vice President Al Gore’s Hammer Award for helping reinvent the USDA Rural Development Business

and Industry Loan Guarantee Program. The California State Senate and Assembly also acknowledged him for his many contributions while on staff.

Mr. Reyna, a native of Texas, holds a bachelor’s degree in business administration from the University of Texas at Austin and a

master’s degree in public policy from the LBJ School of Public Affairs at the University of Texas. He and Karen, his wife of 23 years,

have two sons.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 3
4 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Douglas L. “Doug” Flory

Board Member

Douglas L. “Doug” Flory was appointed to the three-member FCA Board by President George W. Bush on August 1, 2002, for a

term that expires October 13, 2006. He also serves as Chairman of the Board of Directors of the Farm Credit System Insurance

Corporation. He was elected to this position in December 2002.

Mr. Flory brings extensive experience in production agriculture, agribusiness, and both commercial bank and Farm Credit lending

to his position on the FCA Board. His farming operation includes Bunker Hill Farm where he annually produces 120,000 tom

turkeys. He is also 50-percent owner of S & F, L.L.C., a general livestock, grain, and hay farm covering 1,300 owned and leased

acres in Virginia’s Augusta County.

Before his appointment to the FCA Board, Mr. Flory was a member of the board of directors of AgFirst Farm Credit Bank in

Columbia, South Carolina, and a director of Farm Credit of the Virginias, ACA, in Staunton, Virginia. He also served as a member

of the Farmer Mac Appraisal Standards Committee.

He was executive vice president of Dominion Bank from 1971 to 1988, and also president, CEO, and director of Dominion Farm

Loan Corporation. During his banking career, he chaired the Virginia Bankers Association Committee on Agriculture and was a

member of the Executive Committee of the American Bankers Association’s agricultural division. From 1989 to 1992, he was

executive vice president, chief operating officer, and a member of the board of WLR Foods, Inc., a publicly traded poultry food

company (now part of Pilgrim’s Pride).

Mr. Flory has served on several governing boards for the Commonwealth of Virginia. He was appointed to the Virginia Agricultural

Council, a state advisory board, and the Virginia Agriculture Credit Committee, which he chaired. He also served on the Virginia

Agricultural Development Authority, which uses “aggie bonds” to finance Virginia farmers.

Mr. Flory has been an active participant in agriculture industry associations. He has served as President of the Virginia Turkey

Association and as president and director of the Rockingham County Fair Association. He also served as a director of the Virginia

Poultry Federation, the Virginia Agribusiness Council, the Virginia Beef Cattle Association, and the Virginia Sheep Association.

Mr. Flory, a native of Augusta County, Virginia, attended Bridgewater College in Bridgewater, Virginia, and earned a bachelor’s

degree from Virginia Polytechnic Institute and State University in Blacksburg. He did graduate work at James Madison University

and is a graduate of the Maryland–Virginia School of Bank Management at the University of Virginia. He and his wife Avery are

the parents of two daughters and a son.
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 5

Nancy C. Pellett

Board Member

Nancy C. Pellett was appointed to the three-member Farm Credit Administration Board by President George W. Bush on November

14, 2002, for a term that expires May 21, 2008. She also serves as a member of the Board of Directors of the Farm Credit System

Insurance Corporation.

Ms. Pellett brings to her position on the FCA Board extensive experience in production agriculture and agribusiness. In partnership with her husband, she managed a family-owned cattle farm from 1966 until her appointment to the FCA Board. She served as

vice president and secretary of Prairie Hills, Ltd., a feedlot, cow-calf, and row crop operation in Atlantic, Iowa, from 1979 until 2002.

Ms. Pellett was president and treasurer of Fredrechsen Farms, Ltd., a family-owned swine and row crop operation in Walnut, Iowa,

for more than 20 years.

A long-time beef industry leader, Ms. Pellett has held state and national leadership positions in cattlemen’s industry organizations.

As a member of the National Cattlemen’s Beef Association she has served as the Chairman of the Check-Off Division, Chairman of

the Consumer Marketing Group, and most recently as a member of the Cattlemen’s Beef Board. She also has been President of the

Iowa Beef Industry Council.

She is a partner in Premium Quality Foods, Inc., based in Red Oak, Iowa, which markets branded fresh beef and pre-cooked beef

entrees. Previously she served as president and consumer marketing director for the company.

Ms. Pellett served a six-year term as a member of the Board of Regents for the State of Iowa, which oversees the three state universities, as well as the University of Iowa Hospital and its affiliated clinics. She was also selected as a member of the Governor’s Student

Aid Commission. She is currently on the Iowa State University (ISU) Foundation Board of Governors and has been a member of

the advisory committees for the College of Agriculture and the College of Family and Consumer Sciences. She is past president of

the ISU Alumni Association and was awarded the Alumni Medal in 1987. The Pellett family was honored as the “Family of the

Year” by ISU in 1997.

Dedicated to the future of agriculture, she has worked with 4-H and FFA at the local and state levels, and has served on the Iowa 4-

H Foundation Board. She is a founding member of the 4-H/FFA “Sale of Champions” Committee for the Iowa State Fair.

A native of Walnut, Iowa, she holds a B.S. from Iowa State University at Ames. She and her husband have four children. The Pellett

family received the “Friends of Youth Award” in 2000 from the Knights of AkSarBen, a foundation that supports education, youth

programs, and rural development in Nebraska and western Iowa. Together with a son and daughter-in-law, Ms. Pellet and her

husband operate a fifth-generation family farm in Atlantic, Iowa.
6 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

FCA — The Agency

The 284 full- and part-time employees1 of the Farm Credit Administration work

together to ensure that the Farm Credit System remains a dependable source of credit

for agriculture and rural America. In summertime, they are supported in FCA’s offices

by interns who gain valuable government and business experience.

The following paragraphs explain the role of each of the agency’s offices.

The FCA Board approves the policies, regulations, charters, and enforcement activities

that ensure a strong Farm Credit System. The Board also provides for the examination

and supervision of the FCS, including Farmer Mac, and oversees the FCS Building

Association’s (FCSBA) activities.

The Secretary to the Board ensures that the FCA Board complies with all public

disclosure laws, coordinates a smooth flow of information to the Board members. The

office also ensures that rulemaking documents comply with Federal Register publication

requirements; maintains and issues the FCA Handbook, containing the agency’s

regulations, policy statements, Bookletters, and applicable statutes; and is responsible for

the direct data entry of FCA’s portion of the Unified Agenda of Federal Regulatory and

Deregulatory Actions.

The Office of the Chief Executive Officer enforces the rules, regulations, and orders of

the FCA Board and is responsible for planning, organizing, directing, coordinating, and

controlling agency operations.

The Office of the Chief Operating Officer plans, organizes, and directs a wide range

of agency functions. It manages the day-to-day operations of the agency and serves as

liaison to the FCA Board for development of regulations and Board policies. The office

also supervises the development and implementation of operating and performance

plans and budgets to ensure streamlined and efficient operations.

The Office of the Ombudsman serves as a neutral and confidential resource for

institutions of the Farm Credit System and other parties relative to inquiries or complaints they may have with respect to actions of the agency; acts to facilitate the

resolution of problems or complaints in a fair, impartial, and timely manner; and

provides recommendations to the Chairman and Chief Executive Officer to improve

agency policies, procedures, and practices based on investigation or analysis of inquiries

and complaints.

1. As of September 30, 2003.
The Office of Congressional and Legislative Affairs directs all agency congressional

relations activities, informs and advises the FCA Board and senior management of

developments and issues affecting the agency and/or System, drafts testimony, and

coordinates all agency communication with Congress. The office conducts briefings

and provides information and educational materials to Members of Congress and their

staffs and monitors and analyzes information obtained from multiple sources.

The Office of Communications and Public Affairs manages the production of all

agency information disseminated to the agency’s various audiences, including FCS

institutions and borrowers, Congress, the media, other federal agencies, employees, and

the public. It provides information to external audiences through news releases,

information brochures and fact sheets, the annual FCA Performance and Accountability

Report, and other publications. The office manages media relations regarding agency

activities and content of FCA’s Web site and provides graphic design and duplicating

services to the agency. OCPA also coordinates special meetings, briefings for international visitors, field hearings, and other special events.

The Office of Examination provides regulation and oversight of FCS institutions

through examination, supervisory programs, and regulatory standards that promote safe

and sound operations. It also ensures that FCS institutions comply with applicable laws

and regulations, directs a program of examination policy formulation, and manages the

agency’s enforcement activities.

The Office of the General Counsel provides the FCA Board and staff with legal

counsel, as well as guidance on general corporate, personnel, ethics, and administrative

matters. The office supports the agency’s development and promulgation of regulations,

civil litigation, enforcement of applicable laws and regulations, and implementation of

conservatorships and receiverships. The office also handles Freedom of Information Act

requests and matters pertaining to the Privacy Act.

The Office of the Inspector General provides independent and objective oversight of

agency programs and operations through audits, inspections, investigations, and the

review of proposed legislation and regulations.

The Office of Policy and Analysis manages all regulation and policy development

activities that ensure the safety and soundness of the FCS and supports the FCS’s

mission as a dependable source of credit and related services for agriculture and rural

America. The office monitors economic trends and emerging risk factors that affect the

System and its customers and collects and analyzes data from FCS institutions. The

office also manages the chartering and other corporate approvals for System institutions, as well as other statutory and regulatory approval activities on behalf of the FCA

Board.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 7
The Office of the Chief Administrative Officer oversees and administers the agency’s

Human Resources Management Program. It also provides administrative services that

include payroll, training, contracting and procurement, and mail, supply, and property

management.

The Office of the Chief Information Officer oversees all activities related to planning,

managing, and administering FCA’s information technology. It provides office automation software, database administration, systems development, customer assistance, and

network, Web, and e-business services. The office also provides records management

and library services.

The Office of the Chief Financial Officer provides financial services to the agency,

including preparation of the budget, financial reporting, and financial systems operations.

The Office of Secondary Market Oversight provides for the examination and general

supervision of Farmer Mac’s activities to ensure the corporation’s safety and soundness

and promotes accomplishment of its public policy purpose as authorized by Congress.

The Equal Employment Opportunity (EEO) Program directs the agency’s efforts to

achieve and manage a diverse workforce and encourages awareness of and respect for

diversity in the workplace. The office works to prevent employment discrimination,

handles employee discrimination complaints, and sponsors training and seminars on

EEO issues.

Figure 1 shows FCA’s organizational structure as of September 30, 2003.

8 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 9

Figure 1

Farm Credit Administration

Organizational Structure

As of September 30, 2003
Agency Officials

10 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Jeanette C. Brinkley is Secretary to the FCA Board. She joined FCA in November 1982 as secretary in the

Office of Administration. During her tenure with FCA, Ms. Brinkley has worked in the Office of Examination

and Supervision, the Office of Congressional and Public Affairs, and the Office of the Chief Operating Officer.

In 1995, she began working for the Office of the Board as the administrative specialist to the Secretary to the

FCA Board.

Carl A. Clinefelter is Director of the Office of the Ombudsman.2

 Before assuming this position in March 2003,

he was director of the Office of Secondary Market Oversight. Since joining FCA in October 1980, Mr.

Clinefelter has served as a regional supervisory officer in the Office of Supervision, as an associate regional

director in the Office of Examination and Supervision, as acting director of the Office of Special Supervision

and Corporate Affairs, and as assistant director of the Office of Policy and Analysis. Concurrent with the latter

position, he served as Executive Assistant for FCA Board Member Doyle L. Cook. Before joining FCA, he was

employed by the Federal Intermediate Credit Bank of New Orleans as assistant vice president.

Hal C. DeCell III is Director of Congressional and Legislative Affairs and Acting Director of Communications

and Public Affairs. Before joining FCA in August 2000, he had served as the Assistant Secretary for Congressional and Intergovernmental Relations for the Department of Housing and Urban Development since 1995.

Mr. DeCell came to Washington in 1976 and served on the staff of the House Committee on Veterans Affairs.

The following year, he joined the staff of Mississippi Congressman Jamie L. Whitten, Chairman of the House

Appropriations Committee and the Agriculture Subcommittee, and served as press secretary, legislative director,

chief of staff, and administrative assistant. He also served as associate staff to the House Appropriations

Committee.

Michael V. Dunn became Director of the Office of Policy and Analysis in January 2001 after briefly serving as a

member of the FCA Board. Prior to joining FCA, he was the Under Secretary of Agriculture for Marketing and

Regulatory Programs at the U.S. Department of Agriculture. Mr. Dunn also served as the Acting Under

Secretary for Rural Economic and Community Development and as Administrator of the Farmers Home

Administration at USDA. He has been a loan officer and vice president of the Farm Credit Banks of Omaha,

Nebraska, and has served as a member of the professional staff of the Senate Agriculture Committee, specializing in agricultural credit.

2. Carl A. Clinefelter served as Director of the Office of Secondary Market Oversight until he was named Ombudsman on March 3, 2003.
W. B. Erwin is the Chief Financial Officer. Before joining FCA in June 2000, he served as assistant chief

financial officer for Systems for the Department of Housing and Urban Development. From 1989 to 1997, he

was director of the Office of Finance for the U.S. Patent and Trademarks Office. He has also worked for the

Navy, the Air Force, the Treasury Department, the U.S. Government Printing Office, and the Social Security

Administration. His private industry experience comes from his tenure at Caterpillar and Cummins. Mr. Erwin

is a certified public accountant, certified management accountant, and a certified government financial manager.

Eric Howard is the Equal Employment Opportunity Manager. He joined FCA in 1986 as an examiner in FCA’s

Oklahoma City Field Office. In 1991, he became a policy analyst for the Policy and Risk Analysis Division in

the Office of Examination in McLean, Virginia. Mr. Howard became a senior policy analyst for the Regulation

and Policy Division of the Office of Policy and Analysis in 1997.

Cheryl Tates Macias was named Chief Operating Officer in July 2000. Prior to joining FCA, she served as

Special Assistant to the President and Associate Director of the White House Office of Presidential Personnel.

From 1995 to 1999, Ms. Macias worked for the U.S. Department of Agriculture, where she served as Director of

the Office of Intergovernmental Relations, Deputy Assistant Secretary for Congressional Relations, and Acting

Assistant Secretary of Congressional Relations. She was director of FCA’s Office of Congressional and Public

Affairs from 1993 to 1995. Ms. Macias spent 17 years on Capitol Hill, during which she served as the senior

member of the domestic issues staff for the House Select Committee on Hunger.

Thomas G. McKenzie is Director of the Office of Secondary Market Oversight.3

 He is responsible for the

examination, supervision, and regulation of the Federal Agricultural Mortgage Corporation. Farmer Mac

provides a secondary market for agricultural real estate and rural housing mortgage loans and helps provide

greater liquidity to agricultural lenders. Mr. McKenzie joined the agency in 1979, and has served as the

Director of FCA’s Office of Policy and Analysis and held Regional and Division Director positions in the

Office of Examination and the former Office of Supervision. He also headed the agency’s regional offices of

examination in Denver and Atlanta, where he oversaw the agency’s field offices in Albany, New York, Atlanta,

Dallas, Denver, and Sacramento, California. He began his federal government FCA as a management

specialist and advisor for the Agricultural Bank of Saudi Arabia in Riyadh. Before joining FCA he was a

Regional Manager for a Federal Land Bank; a Manager and CEO of a Federal Land Bank Association; and a

financial analyst for a Bank for Cooperatives, where he began his career in agricultural credit in 1971.

3. Thomas G. McKenzie served as Director of the Regulation and Policy Division, Office of Policy and Analysis, until he was named Director of the Office of Secondary

Market Oversight on March 3, 2003.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 11
Charles R. Rawls is the FCA General Counsel. Prior to joining FCA in March 2003, he was General Counsel

and Vice President for legal, tax, and accounting at the National Council of Farmer Cooperatives. During the

consideration of the 2002 farm bill, he served as the General Counsel of the Senate Committee on Agriculture,

Nutrition, and Forestry. From 1998 until 2001, he was General Counsel for the United States Department of

Agriculture. Before that he was Chief of Staff to the Deputy Secretary of Agriculture from 1993 to 1998.

From 1988 to 1993 he was legislative director and then administrative assistant to Congressman Martin

Lancaster. From 1985 to 1988 he was Associate General Counsel of the House Committee on Agriculture. He

was Counsel to the House Agriculture Subcommittee on Forests, Family Farms, and Energy from 1983 until

1985.

Philip J. Shebest is the Chief Administrative Officer.4

 He joined FCA in 1990 as a senior attorney in the Office

of General Counsel. Mr. Shebest became the Director of the Human and Administrative Resources Division in

1996 and in 2000 was selected as Chief Administrative Officer. Prior to joining FCA, Mr. Shebest was a senior

attorney-advisor in the Chief Counsel’s Office of the Drug Enforcement Administration from 1985 until 1990.

From 1981 through 1984, he held the rank of Lieutenant in the Judge Advocate General Corps of the U.S. Navy

and was stationed in Washington, D.C., as an appellate litigation attorney.

Roland E. Smith is Chief Examiner and Director of the Office of Examination. He joined FCA in 1979 as an

examiner in the St. Louis Field Office. In 1984, he was promoted to associate regional director. He also

managed FCA’s Oklahoma City Field Office and later the Denver Field Office before he became FCA’s Chief

Examiner in October 1996. Mr. Smith began his professional career with the Farm Credit System in 1974 as a

loan officer for the Production Credit Association in Greenville, North Carolina. He later served as a loan

officer and credit reviewer for the Farm Credit Banks of Columbia, South Carolina.

12 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

4. Philip J. Shebest also served concurrently as General Counsel until March 3, 2003
Stephen G. Smith became the Inspector General in January 2001. He joined FCA in 1981 as a technical

specialist. He became an examiner in 1984 and later served as staff assistant for the Chief Examiner. In 1989,

he was named associate regional director for the agency’s Albany, New York, Field Office. He later served as

Senior Staff Director for the Chief Examiner, and was then named Director of the Technical and Operations

Division. In 1993, he assumed new responsibilities as Director of the Information Resources Division. He was

named Chief Information Officer in 1996, directing all technology and information operations for FCA. Before

joining the agency, he worked at the North Central Jersey Farm Credit Associations.

Doug Valcour is the Chief Information Officer. He joined FCA in 1988 as a computer specialist in the Office of

Resources Management. In 1990, he became chief of the Systems Development Branch, and he was named

associate director of the Information Resources Division and team leader of the Technology Team in 1997.

Before joining FCA, Mr. Valcour was a computer specialist for the U.S. Department of Energy from 1986 until

1988. From 1983 to 1986, he was a computer programmer and analyst for the Veterans Administration.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 13
14 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Farm Credit System — An Overview of Events

and Conditions

FCS Function and Structure

The Farm Credit System is a network of

borrower-owned cooperative financial

institutions and related service organizations. It is the largest single agricultural

lender in the country and serves all 50

states and the Commonwealth of Puerto

Rico. Created by Congress in 1916 to

provide American agriculture with a

dependable source of credit, it is the

oldest of the five government-sponsored

enterprises (GSEs).

FCS institutions provide credit and

financially related services to farmers,

ranchers, producers or harvesters of

aquatic products, and farmer-owned

cooperatives. They also make loans for

agricultural processing and marketing

activities, rural housing, certain farmrelated businesses, agricultural and aquatic

cooperatives and rural utilities, and

foreign and domestic entities in connection with international agricultural trade.

The System raises its loan funds by selling

securities in the national and international

money markets, subject to approval by the

Farm Credit Administration. These

securities are not guaranteed by the U.S.

government. The funds are channeled as

loans to rural America through the FCS

lending institutions.

As of September 30, 2003, the System was

composed of 105 banks and associations.

Six Farm Credit banks provide loan funds

to 84 Agricultural Credit Association

(ACA) parent organizations,5

 two ACAs

without subsidiaries, and 13 Federal Land

Credit Associations (FLCAs). ACAs make

short-, intermediate-, and long-term loans;

FLCAs make only long-term loans.

One of the six banks is an Agricultural

Credit Bank (ACB), which has a nationwide charter to make loans to agricultural

and aquatic cooperatives and rural

utilities, as well as to other persons or

organizations having transactions with or

owned by such cooperatives. The ACB

finances U.S. agricultural exports and

imports and provides international

banking services for farmer-owned

cooperatives. In addition to making loans

to cooperatives, the ACB provides loan

funds to five ACA parent organizations,

which serve New York, New Jersey,

Connecticut, Rhode Island, Maine,

Massachusetts, New Hampshire, Vermont,

Alaska, Oregon, Washington, Montana,

and Idaho.

In addition to the banks and associations

described above, FCA examines and

regulates the following three entities:

The Federal Farm Credit Banks Funding Corporation (Funding Corporation),

which markets debt securities that the

banks sell to raise loan funds. The

Funding Corporation is owned by the

System banks.

The Farm Credit System Financial

Assistance Corporation,6

 chartered in

1988, which provided needed capital to

the System through the sale of $1.3 billion

in 15-year bonds to the capital markets

and the purchase of preferred stock. This

stock was issued by certain System

institutions that received financial

assistance as authorized by the Farm

Credit System Assistance Board.7

5. The ACA is the parent company with two wholly

owned subsidiaries, a Production Credit Association (PCA) and a Federal Land Credit Association. Although legally separated, the ACA, PCA,

and FLCA operate an integrated lending business

with loans made through the subsidiaries appropriate to the authority of each subsidiary. The

ACA, PCA, and FLCA are jointly and severally liable on the full amount of the indebtedness to the

bank under the bank’s General Financing Agreement. In addition, the three associations agree to

guarantee each other’s debts and obligations,

pledge their respective assets as security for the

guarantee, and share each other’s capital. The

three institutions have a common board and

management and a common set of shareholders.

Under the Farm Credit Act, the FLCA is exempt

from federal income taxes.

6. The Farm Credit System Financial Assistance

Corporation (FAC) will continue in existence

until no later than two years following the maturity and full payment of its outstanding debt securities, which mature, at the latest, in June 2005.

The board of directors of the FAC consists of the

board of directors of the Funding Corporation.

7. The Farm Credit System Assistance Board was

created by the Agricultural Credit Act of 1987 to

provide assistance to financially troubled FCS

banks, protect the stock of System borrowers, restore FCS banks to economic viability, and preserve their ability to provide credit at reasonable

and competitive rates. Farm Credit System Assistance Board terminated on December 31, 1992.
The Federal Agricultural Mortgage

Corporation,8 which provides a secondary market arrangement for agricultural

real estate and rural housing mortgage

loans and provides greater liquidity and

lending capacity to agricultural lenders.

Under the Farmer Mac I program, Farmer

Mac guarantees prompt payment of

principal and interest on securities

representing interests in, or obligations

backed by, mortgage loans secured by first

liens on agricultural real estate or rural

housing; it also purchases or commits to

purchase qualified loans or securities

backed by qualified loans directly from

lenders. Under the Farmer Mac II

program, it guarantees securities backed

by the “guaranteed portions” of farm

ownership and operating loans, rural

business and community development

loans, and certain other loans guaranteed

by the U.S. Department of Agriculture.

FCA also examines and regulates the

following five service corporations

organized under Section 4.25 of the Farm

Credit Act:9

AgVantis, Inc., which provides technology-related and other support services to

the associations affiliated with U.S.

AgBank, FCB, a successor to the Farm

Credit Bank of Wichita. AgVantis, which

was chartered by FCA on August 3, 2001,

is owned by the bank and its affiliated

associations.

The Farm Credit Finance Corporation

of Puerto Rico, which uses tax incentives

offered to investors to provide low-interest

funding (other than that from the

Funding Corporation) to the Puerto Rico

Farm Credit, ACA.

The Farm Credit Leasing Services

Corporation (Leasing Corporation),

which provides equipment leasing services

to eligible borrowers, including agricultural producers, cooperatives, and rural

utilities. The Leasing Corporation is

owned by two System banks—CoBank,

ACB, and AgFirst Farm Credit Bank.

Farm Credit Financial Partners, Inc.,

which provides support services to four of

the five associations affiliated with

CoBank, ACB, and six of the 13 associations affiliated with the Western Farm

Credit Bank.

The FCS Building Association, which

acquires, manages, and maintains facilities

to house FCA’s headquarters and field

office staff. The FCSBA was formed in

1981 and is owned by the FCS banks.

The FCA Board oversees the FCSBA’s

activities on behalf of its owners.

8. Farmer Mac is established in law as a part of the

Farm Credit System. However, Farmer Mac has

no liability for the debt of any other System institution, and the other System institutions have

no liability for Farmer Mac debt. Farmer Mac is

organized as an investor-owned corporation, not

a member-owned cooperative. Investors in voting stock may include commercial banks, insurance companies, other financial organizations,

and FCS institutions. Non-voting stock may be

owned by any investor. Farmer Mac is regulated

by the Farm Credit Administration through the

Director of the Office of Secondary Market Oversight, who reports to the FCA Board on matters

of policy.

9. Section 4.25 of the Farm Credit Act provides that

one or more FCS banks and/or associations may

organize a service corporation to perform functions and services on their behalf. These federally chartered service corporations are prohibited

from extending credit or providing insurance

services.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 15
16 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

When Congress established the Farm

Credit System as a government-sponsored

enterprise, its purpose was to provide a

permanent, reliable source of credit and

related services to agriculture and aquatic

producers, their cooperatives, and related

businesses in rural America. Congress

intended the farmer-owned cooperative

FCS to improve the income and wellbeing of American farmers and ranchers.

It further encouraged farmer- and

rancher-borrower participation in the

management, control, and ownership of

these cooperative institutions to help them

remain focused on serving their members’

needs.

The System meets a broad public need by

preserving liquidity and competition in

rural credit markets in both good and bad

economic times. The accomplishment of

this public goal benefits all eligible

borrowers, including young, beginning,

small, family, minority, female, and

socially disadvantaged farmers, as well as

rural home purchasers.

FCA’s regulations, policy statements,

examinations, chartering activities, and

other regulatory activities discussed in

later chapters of this report support and

facilitate the accomplishment of the

System’s mission by ensuring that FCS

institutions operate in a safe and sound

manner without undue risk to taxpayers,

investors in System securities, or its

borrower-stockholders.

The sections in this chapter first assess the

System’s financial strength and then its

service to rural America. Our discussion

relies on commonly used measures,

including trends in volume by a variety of

loan types, volume of funding for nonSystem rural lenders and participations

with other lenders, and the System’s share

in the marketplace. Discussion in the

next chapter also covers lending activity

and programs that benefit young, beginning, and small farmers and ranchers and

the use of government guarantee programs in supporting loans to farmers

unable to meet normal underwriting

requirements.

Financial Condition of the FCS10

Farm Credit System loan volume increased at a moderate pace after two years

of rapid growth (see “Borrowers Served”

on page 20). Nonaccrual loans increased

slightly over the 12-month period ended

September 30, 2003, but asset quality

remained high. Interest rates remained

near 45-year lows throughout the last year,

ensuring low interest expense but also

reducing profitability. Continued high

levels of government payments to the

agricultural sector supplemented borrower

incomes (see page 45 for discussion of

risks to the rural economy).

10. The information presented in this section includes that pertaining to all Farm Credit Banks

and the Agricultural Credit Bank and their affiliated associations. The FCS institutions provided

the data used in the overall FCS analysis to the

FCA or to the Federal Farm Credit Banks Funding Corporation. The analysis in this report is

based on publicly available information and, except where noted, is based on the 12-month period ended September 30, 2003. See Tables 2 and

3 for System measures of financial condition.
Asset Quality

Loan volume grew moderately, and loan

quality remained high for the year ended

September 30, 2003. Gross loans increased by 3.9 percent to $91.3 billion.

Nonperforming loans11 were essentially

unchanged at approximately 1.4 percent

of gross loans. Nonaccruing loans were

1.17 percent of gross loans compared with

1.14 percent last September (see Figure 2).

The allowance for loan losses as a percentage of gross loans stayed at 2.3 percent.

At September 30, 2003, the allowance for

loan losses represented 171 percent of

nonperforming loans compared with 172

percent a year earlier. Delinquencies

(accrual loans 90 or more days past due)

remained minimal.

11. Nonperforming loans consist of nonaccrual

loans, accruing restructured loans, and accrual

loans 90 or more days past due.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 17

Figure 2

Farm Credit System Nonperforming Loans Remain Low

As of September 30

Source: Federal Farm Credit Banks Funding Corporation, Quarterly Information Statements, Third Quarter.
18 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Earnings

Though it remains near last year’s all-time

high, the System’s $1.3 billion in net

income for the nine months ended

September 30, 2003, was $31 million lower

than that for the same period the previous

year (see Figure 3). The Systemwide net

interest margin declined to 2.62 percent as

of September 30, 2003, from 2.76 percent

a year earlier. Noninterest expense for the

first nine months of 2003 increased by

$65 million (7.7 percent) to $905 million.

Noninterest income for the first nine

months of 2003 was $291 million compared with $270 million for the same

period last year. Provisions for income

taxes for the first nine months of 2003

were $94 million, up $26 million from the

same period in 2002.

Capital12

The System continues to build capital

through increased loan volume and

earnings. Total capital ($18.2 billion)

increased proportionally to asset growth

and, as a percentage of total assets ($115.2

billion), remained at nearly 15.8 percent

on September 30, 2003 (see Figure 4).

Accumulated surplus alone now represents

more than 12.7 percent of System assets

and 80 percent of total capital.

Permanent capital ratios (PCR) at System

associations ranged from a low of 10.0

percent to a high of 28.8 percent—all well

above the 7 percent minimum regulatory

requirement. For System banks, PCRs

ranged from 13.5 percent to 22.9 percent.

All institutions also exceeded their

minimum regulatory requirement core

surplus ratio (3.5 percent) at September

30, 2003. 12. In addition to accumulated surplus and borrower

stock, total capital includes perpetual preferred

stock, restricted capital, and accumulated other

comprehensive income. It does not include mandatorily redeemable term preferred stock or protected capital. Restricted capital ($2.0 billion at

September 30, 2003) represents the total assets

under the control of the Farm Credit System Insurance Corporation, including assets that have

been identified for estimated insurance obligations and the Farm Credit Insurance Fund balance. Accumulated Other Comprehensive Income (negative $243 million at September 30,

2003) for the System consisted mostly of unrealized holding losses on available-for-sale securities. One System bank had outstanding $225 million of Mandatorily Redeemable Term Preferred

Stock. Such stock is not included in “total capital” though it qualifies for certain regulatory capital purposes. Protected capital ($30 million at

September 30, 2003) consists of borrower stock,

participation certificates, and allocated equities

that were outstanding as of January 6, 1988, or

were issued or allocated before October 8, 1988.

Protection of certain borrower capital is provided

under the Farm Credit Act, which requires FCS

institutions, when retiring protected borrower

capital, to retire such capital at par or stated value

regardless of its book value.

Source: Federal Farm Credit Banks Funding Corporation, Quarterly Information Statements, Third Quarter.

Figure 3

Farm Credit System Net Income Near All-Time High

Nine months ended September 30
Funding

The System funds its loans with a combination of consolidated Systemwide debt

and capital. The par value of outstanding

Systemwide debt increased by $6.5 billion

(7.6 percent) while gross loans outstanding increased by $3.4 billion (3.9 percent).

The incremental debt of $3.1 billion and

the increase in capital of $1.1 billion were

used to fund added investments for

liquidity.13

Because of lower interest rates over the

last few years, the System was able to

retire and reissue substantial portions of

its callable debt, resulting in high levels of

debt securities issuance during 2001 and

early 2002. Since then, the System has

gradually extended the maturity date of

its debt. The longer debt maturities,

reduced volume of callable debt, and

moderating loan demand have combined

to reduce the amount of debt issued. For

the 12 months ended September 30, 2003,

the System issued $307 billion in insured

debt securities14 compared with $448

billion for the prior 12 months. The

System’s average remaining maturity for

all outstanding insured debt increased to

2.3 years at September 30, 2003, compared

with 1.8 years at September 30, 2002. The

weighted average yield for the insured

debt continued to decline, falling from

3.35 percent at September 30, 2002, to

2.70 percent at September 30, 2003.

13. System banks, as part of an ongoing effort to assure their collective ability to meet their obligations under their mutual agreements concerning

joint and several liability on Systemwide debt, have

adopted a Common Liquidity Standard (Standard) This Standard requires each bank to maintain a minimum of 90 days of liquidity assuming

no access to the capital markets.

14. Payment of principal and interest on Systemwide

debt securities is insured by the Farm Credit System Insurance Corporation’s Farm Credit Insurance Fund to the extent provided in the Farm

Credit Act. A small amount of outstanding FCS

debt, $528 million at September 30, 2003, was issued by individual banks of the FCS. These individual banks are solely liable for this uninsured

debt.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 19

Figure 4

Farm Credit System Capital Grows, Stable as Percentage of Assets

As of September 30

Source: Federal Farm Credit Banks Funding Corporation, Quarterly Information Statements, Third Quarter.
20 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Table 1

Farm Credit System Gross Loans Outstanding, 1998–2003

As of September 30

Dollars in Millions

Percentage

Change

Loan from

Category 1998 1999 2000 2001 2002 2003 1998

Long-Term

Real Estate1 $32,009 $34,218 $35,549 $39,722 $44,782 $48,852 52.6

Short- and

Intermediate-Term2 18,162 18,616 18,917 21,397 23,328 23,990 32.1

Domestic

Cooperatives3 13,768 14,549 15,908 16,298 16,774 15,595 13.3

International 2,171 2,274 2,583 2,679 3,033 2,865 32.0

Total $66,110 $69,657 $72,957 $80,096 $87,917 $91,302 38.1

1. Includes rural home loans and various loans classified as “other.”

2. Includes a portion of loans classified as “lease receivable” and various loans classified as “other.”

3. Includes loans to rural utilities, rural water and waste facilities, and a portion of loans

classified as “lease receivable.”

Source: Federal Farm Credit Banks Funding Corporation, Quarterly Information Statement, Third Quarter.

Borrowers Served

The System fulfills its overall mission by

utilizing its authority to lend to agriculture and rural America. Through changes

in law since the System’s original authorization in 1916, System lending authorities

have evolved to include providing:

· long-term agricultural real estate loans,

including rural home loans,

· short- and intermediate-term agricultural loans,

· loans to producers and harvesters of

aquatic products,

· loans to certain farmer-owned agricultural processing facilities and farmrelated businesses,

· loans to farmer-owned agricultural

cooperatives,

· loans that finance agricultural exports

and imports, and

· loans for rural utilities.

Nationwide, the System had $91.3 billion

in gross loans outstanding as of September 30, 2003 (see Table 1). Agricultural

producers represented by far the largest

borrower group with $72.8 billion, or

nearly 80 percent of the total dollar

amount of loans outstanding.15 As

required by law, all borrowers are also

stockholder-owners of System institutions.

The System has more than 695,000 loans

and approximately 453,000 stockholders.

Approximately 83 percent of the stockholders are farmers with voting stock.

Based on USDA farmer numbers, about

18 percent of all U.S. farmers are stockholders of System institutions.

15. Some of this total consists of loans to rural

homeowners and leases.
More than one-half of the System’s total

loan volume outstanding (53.5 percent)

was in long-term real estate loans, 26.3

percent in short- and intermediate-term

loans to agricultural producers, and 17.1

percent to cooperatives. International

loans (export financing) represented 3.1

percent of the System’s loan portfolio. As

of December 31, 2002, rural home loans

made up about 2.6 percent of total loans

(these are part of long-term real estate

loans in Table 1).16 Loans to finance rural

utilities (included in cooperative loans)

were about 8 percent of overall loan

volume; this segment had increased

roughly 80 percent over the prior five

years. Lease receivables (included in both

the domestic cooperatives and the shortand intermediate-term categories) have

dipped and accounted for less than 2

percent of the overall System portfolio.

The aggregate amount of total loans

outstanding at FCS banks and associations (net of intra-System lending) grew

by $3.4 billion, or 3.9 percent, during the

year ended September 30, 2003, and by

$25.2 billion, or 38.1 percent, over the

past five years. Volumes in all loan

categories were above the levels of five

years ago, but during the past year there

were volume declines for domestic

cooperatives and international loans. The

total number of members served by FCS

associations increased by 3.1 percent, and

gross loan volume increased by 8.1

percent during year ended September 30,

2003. Of the 99 FCS associations, 37

experienced double-digit loan volume

growth, and 11 experienced drops in loan

volume for the past year. One association

registered a double-digit decline as a

result of securitizing mortgage loans that

totaled $733 million with the Federal

Agricultural Mortgage Corporation.

Without this third-quarter shift in assets

from loans to securities, the association

would have experienced a double-digit

loan growth, and Systemwide association

volume would have increased by 9.2

percent. The number of loans increased

in 38 states, indicating that the System

continued to show a strong commitment

to its mission of service to agriculture and

rural communities even during a time

when many farmers were plagued by

adverse weather and faced variable market

conditions.

The System’s increased loan volume over

the past 12 months stems from long-term

real estate loans (up $4.1 billion or 9.1

percent) and short- and intermediate-term

loans (up $0.7 billion or 2.8 percent).

Farm-related business and marketing and

processing loans continue to be among

the fastest growing subcomponents of

these lending categories. Loan participations and syndications with non-System

lenders also continued to grow (up by

more than 22 percent over the 12 months

ended September 30, 2003; see Figure 5).

However, lease receivables contracted

again this past fiscal year (down 5.5

percent for the Leasing Corporation over

the past 12 months).

Several factors have facilitated the System’s

strong loan growth. The funding environment has allowed the System to offer

favorable interest rates. Mergers among

System institutions have also allowed

them to provide a wider array of services

and products. System institutions have

mounted effective campaigns marketing

these opportunities. And with strong

capital positions, a number of System

institutions have used participations and

syndications, both within and outside the

System, as a way of utilizing their capital

16. More detailed loan category breakouts are reported at calendar year-end for agricultural and

cooperative lending; this includes rural home

lending, domestic cooperatives, rural utilities,

lease receivables, farm related businesses, other

financing institutions, and other.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 21
22 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

base while achieving portfolio diversification and risk reduction. At the same time,

slower growth in agricultural lending by

commercial banks suggests that many

have either decided to reduce their

exposure to the risk of agricultural

lending or they have found more attractive financing opportunities in other types

of commercial lending.

Funding for Other Lenders

Other Financing Institutions

Under the Farm Credit Act, System banks

may further serve the credit needs of rural

America by providing funding and

discounting services to non-System

lending institutions known as “other

financing institutions” (OFIs). OFIs

include commercial banks, thrifts, credit

unions, trust companies, agricultural

credit corporations, and other specified

agricultural lenders. System banks can

fund and discount short- and intermediate-term loans for OFIs that are significantly involved in lending to agricultural

and aquatic producers and demonstrate a

need for additional funding to meet the

credit needs of eligible borrowers. As of

September 30, 2003, the number of OFIs

served by the System stood at 25, a drop

of five institutions from a year earlier.

However, both the number and volume of

FCS loans outstanding to OFIs increased

in 2003 by 25 percent and 2 percent,

Figure 5

Greater Collaboration with Non-FCS Lenders Through

Participations1

As of September 30

1. Includes gross amount (principal only) of loan participations and loan syndications purchased from non-Farm

Credit System institutions.

Source: Call Reports received from the Farm Credit System and Federal Farm Credit Banks Funding Corporation,

Quarterly Information Statements, Third Quarter.
17. Currently, System institutions combine data on

participations and syndications in the Call Reports they submit to the agency.

18. Market share percentages are for farm business

debt and are based on U.S. Department of Agriculture annual year-end estimates; the historical

series by lender was revised in October 2003.

USDA also periodically surveys debt sources used

by farm cooperatives. According to the most recent survey (1997), the System provided about 54

percent of the funds borrowed by those cooperatives surveyed. Market share information is not

routinely available on the non-farmer segments

of the System’s lending activity—namely, its financing of rural homeowners, marketing and

processing firms, rural utilities, and international

farm commodity sales.

respectively. Loan volume to OFIs now

represents 1.28 percent of the System’s

short- and intermediate-term loans, down

from 1.44 percent in 2001.

Participations and Syndications with

Outside Sources Continue to Rise

Under conditions prescribed by the Farm

Credit Act, System banks and associations

have authority to participate with commercial banks or other financing institutions in making loans to agriculture and

rural America. Financial institutions

primarily use loan participations and

syndications to reduce interest rate risk

and credit risk, but they also use them to

enhance capital, earnings, and liquidity.

Agricultural credit providers with high

commodity concentrations frequently use

participations and syndications to

diversify their portfolios or to fund large

loans when they have insufficient capital.

System participations and syndications

with non-FCS lenders grew by more than

$1.1 billion, or 22 percent, to $6.1 billion

during the year ended September 30,

2003, and by $4.6 billion, or 310 percent,

over the past five years (see Figure 5).17

Participations and syndications from nonSystem institutions continue to expand

rapidly as a share of the System’s loan

portfolio, rising from just 2.2 percent of

gross loans in 1998 to 6.7 percent in 2003.

Changes in participation rules in recent

years, as well as favorable market conditions, likely contributed to the increasing

collaboration between System and nonSystem lenders, thereby expanding the

availability of credit to rural America.

FCS Market Share of Farm Debt

Following a second year of strong growth,

the Farm Credit System’s December 31,

2002, share of total farm business debt

jumped to 29.8 percent from 26.1 percent

at year-end 2000 (see Figure 6).18 The

System’s market share of total farm debt

reached a low of 23.9 percent in 1994,

following a cyclical high of 33.6 percent at

year-end 1982. During the later half of

the 1990s, both the System and commercial banks generally experienced small

gains in market share. Market share for

“individuals and others” as well as USDA’s

Farm Service Agency (FSA) direct lending

has declined. Meanwhile the market share

for life insurance companies has remained

relatively stable. Although commercial

banks continued to have the largest

market share during 2002, their share has

declined over the past two years, dropping

by 2.0 percentage points to 40.0 percent.

As of year-end 2002, the System held 36.6

percent of the market in real-estatesecured farm debt, up by 2.4 percentage

points during the year. In the nonrealestate market, the System held 21.9

percent, which was up by one-half of a

percentage point from the previous year.

Year-end 2003 loan volume and market

share estimates were not available for this

report. However, FCS loan data through

the third quarter showed a slowing in the

System’s year-over-year farm real-estate

loan growth (9.1 percent) and continuing

slow (2.8 percent) growth in its nonrealestate loan volume. (The figures include

some loan volume not counted by USDA

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 23
as farm business debt.) Yearly loan

growth patterns reported for commercial

banks’ agricultural lending through the

second quarter (7.3 percent for real-estate

loans and –3.9 percent for nonreal-estate

loans) suggest some decline in nonrealestate market share in 2003 for commercial banks.19

Farmer Mac Providing a

Secondary Market

Farmer Mac was created to provide a

secondary market arrangement for

agricultural real estate and rural housing

mortgage loans and greater liquidity and

lending capacity to agricultural lenders.

In USDA’s estimates of farm sector debt

by lender, Farmer Mac’s purchases of farm

real estate loans (about $2.5 billion as of

June 30, 2003) from various lenders are

included as a subcategory of the roughly

$40 billion provided by Individuals and

Others. Farmer Mac also plays an

increasing role in the farm debt market

through its Long-Term Standby Commitment to Purchase (LTSPC or Standby)

product, introducted in 1999. Using the

LTSPC, a financial institution acquires a

Farmer Mac guarantee for an annual fee

on a loan pool that the institution retains.

While Farmer Mac’s LTSPC product is

available to agricultural lenders generally,

System institutions accounted for all the

($2.8 billion) Standby products volume as

of June 30, 2003.20

Since not all farm mortgages are eligible

for Farmer Mac funding, Farmer Mac

calculates market share achievement by

estimating the portion of the total farm

real estate debt market that would qualify

as “eligible” mortgages under Farmer

Mac’s underwriting criteria. Viewing

activity in this manner, Farmer Mac

estimates outstanding program volume

($5.6 billion) to be about 12 percent of

the eligible farm real estate debt market.

19. Agricultural Finance Databook, Board of Governors of the Federal Reserve System, Statistical Release E.15 (125), Third Quarter 2003.

20. The guaranteed amounts by Farmer Mac are reported in USDA’s farm business debt estimates as

being provided by the originating lender. This is

also how some $8 billion in FSA-guaranteed loans

are treated; i.e., the share reported for USDA/FSA

is just for its direct lending activity.

24 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Figure 6

Total Farm Business Debt, Market Shares, 1982–2002

As of December 31

Note: “Individuals & Others” includes trade credit, seller financing of real estate, Commodity Credit Corporation

storage and drying facility loans, and loans sold to Farmer Mac. Loan volume guaranteed by Farmer Mac, as

well as by the USDA Farm Service Agency, is treated as being with the originating lender or purchaser of the

loan, not the guarantor agency.

Source: USDA, Economic Research Service. Market shares based on revised farm balance sheet debt estimates by

lender on USDA Web site as of October 20, 2003.
Table 2

Farm Credit System Major Financial Indicators

Year to Date as of September 30

Dollars in Thousands

Farm Credit System Banks1 1999 2000 2001 2002 2003

Gross Loan Volume $63,920,055 $65,967,226 $72,046,891 $78,644,139 $81,819,994

Accruing Restructured Loans2 $202,910 $179,596 $356,916 $433,659 $14,475

Accrual Loans 90 or More Days Past Due $15,321 $11,539 $18,529 $41,731 $31,698

Nonaccrual Loans $438,057 $493,983 $236,356 $411,164 $419,528

Nonperforming Loans/Gross Loans3 1.03% 1.04% 0.85% 1.13% 0.57%

Cash and Marketable Investments $13,389,314 $14,361,173 $15,266,188 $15,833,066 $19,894,923

Capital/Assets4 7.80% 7.55% 7.51% 7.04% 6.62%

Unallocated Retained Earnings/Assets 3.99% 4.01% 3.89% 3.95% 3.60%

Net Income $379,919 $438,813 $487,314 $575,863 $449,593

Return on Assets5 0.66% 0.73% 0.74% 0.82% 0.59%

Return on Equity5 8.32% 9.55% 9.48% 11.06% 8.93%

Net Interest Margin 1.35% 1.21% 1.20% 1.18% 1.00%

Operating Expense Rate6 0.48% 0.41% 0.38% 0.35% 0.33%

Associations Excluding Federal Land Bank Associations7

Gross Loan Volume $42,759,760 $50,030,496 $57,482,274 $65,232,842 $70,492,872

Accruing Restructured Loans2 $74,164 $81,519 $86,714 $80,255 $95,326

Accrual Loans 90 or More Days Past Due $38,502 $22,707 $36,535 $48,071 $44,940

Nonaccrual Loans $418,474 $443,610 $545,193 $587,629 $651,100

Nonperforming Loans/Gross Loans3 1.24% 1.10% 1.16% 1.10% 1.12%

Capital/Assets8 16.40% 16.86% 16.38% 15.94% 16.00%

Unallocated Retained Earnings/Assets 13.14% 14.03% 13.98% 13.69% 13.95%

Net Income $485,716 $639,383 $866,295 $780,488 $929,011

Return on Assets5 1.44% 1.64% 1.94% 1.57% 1.70%

Return on Equity5 8.78% 9.73% 11.98% 9.70% 10.63%

Net Interest Margin 3.05% 2.98% 2.86% 2.72% 2.72%

Operating Expense Rate6 1.65% 1.57% 1.47% 1.41% 1.49%

Total Farm Credit System9

Gross Loan Volume $69,657,000 $72,957,000 $80,096,000 $87,917,000 $91,302,000

Accruing Restructured Loans2 $127,000 $123,000 $105,000 $98,000 $113,000

Accrual Loans 90 or More Days Past Due $52,000 $34,000 $55,000 $90,000 $75,000

Nonaccrual Loans $857,000 $937,000 $781,000 $1,000,000 $1,070,000

Nonperforming Loans/Gross Loans3 1.49% 1.50% 1.17% 1.35% 1.38%

Bonds and Notes $70,902,000 $74,369,000 $80,974,000 $87,913,000 $94,002,000

Capital/Assets10 15.23% 15.52% 15.80% 15.83% 15.76%

Surplus/Assets 11.52% 11.98% 12.22% 12.52% 12.67%

Net Income $934,000 $1,048,000 $1,295,000 $1,371,000 $1,340,000

Return on Assets5 1.47% 1.57% 1.78% 1.75% 1.58%

Return on Equity5 9.72% 10.18% 11.41% 11.01% 10.08%

Net Interest Margin 2.75% 2.74% 2.79% 2.76% 2.59%

1. Includes Farm Credit Banks, the former Bank for Cooperatives, and the Agricultural Credit Bank.

2. Excludes loans 90 days or more past due .

3. Nonperforming Loans are defined as Nonaccural Loans, Accruing Restructured Loans, and Accrual Loans 90 or More Days Past Due.

4. Capital excludes madatorily redeemable preferred stock.

5. Income ratios are annualized.

6. Operating expenses divided by average gross loans.

7. As of October 1, 2000, the FCS was composed of only direct-lender associations. All FLBAs became FLCAs or consolidated with PCAs

to form ACAs by October 1, 2000.

8. Capital excludes protected borrower capital.

9. Cannot be derived through summation of above categories because of intradistrict and intra-System eliminations used in the Reports to Investors.

10. Capital includes restricted capital (amount in Farm Credit Insurance Fund), excludes mandatorily redeemable preferred stock and protected borrower capital.

Source: Call Reports received from the Farm Credit System and the Federal Farm Credit Banks Reports to Investors of the Farm Credit System.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 25
26 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Table 3

Farm Credit System Major Financial Indicators, By District1

As of September 30, 2003

Dollars in Thousands

Allowance Cash

Gross for and

Total Loan Nonaccrual Loan Marketable Capital Total

Assets Volume Loans Losses Investments Stock2 Surplus3 Capital4

Farm Credit System Banks

Wichita $6,408,794 $5,050,457 $5,222 $31,292 $1,266,852 $139,975 $322,668 $442,673

Texas 7,303,011 6,091,143 10,187 9,835 1,173,986 113,790 276,649 393,162

Western 9,172,114 7,958,002 0 5,200 1,159,039 281,131 230,355 479,933

AgFirst 16,100,666 12,279,074 32,558 33,951 3,650,419 249,083 653,479 883,537

AgriBank 33,938,618 26,978,732 77,971 70,687 6,718,927 826,731 1,177,249 1,984,546

CoBank 29,484,002 23,462,586 293,590 434,933 5,925,700 1,531,831 1,041,647 2,591,868

Total $102,407,205 $81,819,994 $419,528 $585,898 $19,894,923 $3,142,541 $3,702,047 $6,775,719

Associations

Wichita $5,640,158 $5,486,128 $71,021 $159,012 $24,609 $38,766 $1,103,132 $1,144,005

Texas 6,832,808 6,705,499 42,884 167,120 13,035 112,099 1,019,902 1,132,001

Western 9,475,818 8,405,734 111,894 140,540 720,204 143,806 1,230,421 1,359,241

AgriBank 31,396,970 30,018,939 252,558 626,171 31,683 180,752 4,846,728 5,041,909

AgFirst 12,896,980 12,620,506 87,587 282,544 14,818 173,515 1,804,824 1,900,708

CoBank 7,628,887 7,256,066 85,156 175,349 17,416 49,616 1,193,269 1,239,624

Total $73,871,621 $70,492,872 $651,100 $1,550,736 $821,765 $698,554 $11,198,276 $11,817,488

Total Farm

Credit System $115,239,000 $91,302,000 $1,070,000 $2,145,000 $21,118,000 $1,528,000 $14,598,000 $18,166,000

1. Aggregations of district data may not equal totals due to eliminations.

2. Includes capital stock and participation certificates, excludes madatorily redeemable preferred stock and protected borrower capital.

3. Includes allocated and unallocated surplus.

4. Includes capital stock, participation certificates, perpetual preferred stock, surplus, accumulated other comprehensive income, and restricted capital (amount in

the Farm Credit Insurance Fund, for Farm Credit System total only). Excludes mandatorily redeemable preferred stock and protected borrower capital.

Source: Call Reports received from the Farm Credit System and the Federal Farm Credit Banks Reports to Investors of the Farm Credit System.
FCA Board . . .

Listening to the

Public

In June 2003, the Farm Credit Administration Board held a public meeting at the agency’s

headquarters in McLean, Virginia, on whether to revise current FCA regulations governing

eligibility and scope of financing for farmers, ranchers, and aquatic producers and harvesters

who borrow from Farm Credit System (FCS) institutions. The Board also heard comments on

whether the agency’s definition of “moderately priced” rural housing should be revised.

At the meeting, FCA Chairman Michael M. Reyna and Board Members Nancy C. Pellett and

Douglas L. “Doug” Flory heard testimony from a diverse group of speakers from across the

country. Those testifying included farmers, agricultural lenders, FCS borrowers, government

officials, and the public.

The recommendations ranged from no modifications of current regulations to suggestions that

would require changes to the Farm Credit Act. The testimony presented at the meeting is

posted on FCA’s Web site at www.fca.gov.
28 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Maintaining a Dependable

Source of Credit for Farmers and

Ranchers

As federally chartered agricultural lending

cooperatives, the institutions of the Farm

Credit System are single-purpose lenders

exposed to risk in making loans to benefit

their borrower-stockholders and meet

their public mission. While the FCS

benefits from preferred access to the

capital markets as a government-sponsored enterprise, the federal government

does not subsidize it directly.

For FCS institutions to maintain their

presence in the marketplace as a dependable source of credit and financially

related services for rural America, they

must operate profitably as well as manage

and control risk. Accordingly, FCA

continues to deploy examination and

supervisory resources based on the risk in

each institution. This “risk-based”

examination and supervisory program

requires examiners to determine how

certain existing or emerging issues facing

an institution or the agriculture industry

affect the nature and extent of risks in

that institution. Based on that risk

evaluation, examiners then establish

examination plans and actions.

To evaluate whether an institution is

meeting its public mission, examiners

determine whether the institution is

operating in compliance with the laws and

regulations and whether the institution is

responsive to the credit needs of all types

of agricultural producers having a basis

for credit. As a part of that mission,

direct-lender associations are obligated to

establish programs that respond to the

credit and related services needs of young,

beginning, and small farmers and ranchers (YBS).

Serving Young, Beginning, and

Small Farmers and Ranchers

Providing financially sound and constructive credit and related services to borrowers identified as young, beginning, and

small farmers and ranchers is a legislated

mandate and a high priority for the

System. Loans to YBS borrowers help

ensure a smooth transition of agribusiness

to the next generation and a continued

strong and diversified customer base for

the FCS.

The percentage of retirement age farm

operators has risen during the last two

decades, suggesting an increased importance for the Farm Credit System’s role in

helping young and beginning farmers

finance the purchase of land sold by those

who are exiting the business. USDA

estimates that more than one-fourth of

U.S. farmers and one-half of farm

landlords are at least 65 years old, much

higher percentages than for the overall

U.S. labor force.

Transitions out of and into the capitalintensive farming business involve credit

decisions that are compounded by the

volatile nature of agricultural production

and markets. System lenders prudently

weigh the risks and rewards of extending

credit to new customers by assessing their

long-term earnings potential and risk

management ability.

Congress, through its statutory provisions,

and FCA see the Farm Credit System as

being in a unique position to develop YBS

programs that coordinate with other

governmental programs, spread risks, and
take a longer-term perspective in lending

to YBS borrowers. Many borrowers are

assisted by the various state and federal

programs that provide interest rate

reductions and/or guarantees to help

commercial lenders and FCS institutions

reduce credit risks for borrowers. Without

such concessions and guarantees, credit to

some YBS borrowers would not be

extended due to repayment risks.

Section 4.19 of the Farm Credit Act and

FCA Regulation 614.4165(a) require each

System bank and association board to

have a program in place for furnishing

sound and constructive credit and

financially related services to YBS borrowers. YBS programs are to be made

available in coordination with other

System institutions and other government

and private sources of credit. In addition,

each institution is required to report

yearly on operations and achievements

under its YBS program.

In establishing its YBS program, each

institution may use a variety of tools to

carry out its commitment to YBS lending.

For example, associations may offer less

stringent underwriting standards or

reduced interest rates that make it easier

for potential YBS borrowers to qualify for

loans. Some institutions establish special

risk pools in which capital is set aside to

support YBS lending. Other programs

provide for coordination with federal or

state sources to obtain guarantees on

loans to qualifying YBS borrowers. Many

YBS programs provide for financial or

leadership training or related services for

YBS borrowers. In addition, associations

donate to or sponsor special events for

local, regional, and national young or

beginning farmer groups.

Each institution conducts a demographic

analysis to help establish appropriate YBS

lending goals and to provide a benchmark

for measuring changes in penetration of

the potential YBS market within its

territory. The institution’s marketing plan

for YBS borrowers often involves the

targeting of potential YBS borrowers

through Web site advertising, as well as

other media.

FCA Activities for YBS Oversight

Over the past five years, the agency has

taken the following actions designed to

provide additional emphasis and guidance

to System institutions as they lend to YBS

borrowers.

The FCA Board, in December 1998,

adopted a policy statement (FCA-PS-75)

on YBS farmers and ranchers. The policy

statement emphasizes the need for each

System institution to renew its commitment to be a reliable, consistent, and

constructive lender for YBS borrowers.

To implement the policy statement and

improve our ability to analyze and report

on the System’s service to all YBS borrowers, we issued a Bookletter (BL-040) to the

System in December 1998 that provided

new YBS reporting definitions and

reporting procedures that were fully

phased in by January 1, 2001.

On March 8, 2002, the General Accounting Office (GAO) issued a report on the

FCA’s oversight of the System’s special

mission to serve YBS farmers and ranchers.21 The GAO recommended that the

agency strengthen its oversight role of the

System’s YBS lending, promote YBS

compliance, and highlight the System’s

efforts to provide service to YBS farmers

and ranchers by:

21. Farm Credit Administration: Oversight of Special Mission to Serve Young, Beginning, and Small

Farmers Needs to Be Improved, GAO-02-304,

March 8, 2002.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 29
30 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

1. Promulgating a regulation that outlines

specific activities and standards that

constitute an acceptable program to

implement the YBS statutory requirement,

2. Ensuring that examiners follow the

guidance and complete the appropriate

examination procedures related to YBS

and adequately document the work

performed and conclusions drawn

during examinations, and

3. Publicly disclosing the results of

examinations for YBS compliance for

individual System institutions.

The FCA is committed to addressing the

recommendations contained in the GAO

report and has taken the following

actions.

During fiscal year 2003, FCA continued to

follow a comprehensive YBS examination

program and issued guidance for System

institutions in the form of a YBS-related

self-audit program. The guidance

encourages System institutions to adopt

clearly stated policies for serving YBS

borrowers and to develop and use a

variety of management controls over

program operations to help ensure the

effectiveness of their YBS programs. A

subsequent GAO report of this area found

FCA’s lead sheet for YBS examinations to

be a “useful tool for FCA in examining

institutions for compliance with the

special mission requirement of serving

YBS farmers and ranchers.”

FCA encourages System institutions to

evaluate their performance in YBS lending

by analyzing their lending markets and

assessing their own market penetration.

 If this assessment suggests that an

association needs to penetrate the YBS

market further, we encourage the

association’s board of directors to develop

new programs, strengthen existing

programs, or provide added incentives to

contribute to the success of their marketing programs to these farmers. Thus,

FCA’s oversight increases awareness of the

mission in this area and prompts associations to provide added resources to serve

this market segment. FCA also has

recently developed a mission-related

performance measure for YBS programs

that is based on an evaluation of the

effectiveness of every direct-lender

association’s YBS program. This measure

allows us to evaluate our success in

ensuring that associations maintain

adequate YBS lending programs.

On September 23, 2002, the agency

initiated a rulemaking process on the

subject of YBS by publishing an Advance

Notice of Proposed Rulemaking

(ANPRM) that sought public comment.

Specifically, we sought input on ways to

improve the development of guidelines for

YBS programs, measure the System’s YBS

performance to ensure that the System is

fulfilling its mission, and provide adequate

reporting and disclosure to the public on

the System’s compliance with its YBS

mission. We received 65 comment letters

by the close of the comment period on

December 23, 2002.
During FY 2003, three additional events

occurred:

· In addition to issuing an ANPRM, we

held a public meeting in Kansas City

on November 13, 2002. The purpose

of the hearing was to provide a

further opportunity for the public to

comment on whether additional YBS

regulatory guidance was necessary to

accomplish the System’s mission. We

heard testimony from 24 interested

parties at the Public Hearing.

· The agency published a proposed

rule on September 15, 2003. The

proposed rule would amend existing

regulations to provide clear, meaningful, and results-oriented guidelines for

the YBS policies and programs of the

System’s institutions. It would also

provide for enhanced reporting and

disclosure to the public on the

System’s performance and compliance

with its statutory YBS mission. While

the proposed rule provides for

additional guidance, it also allows

System direct-lender associations the

flexibility to design YBS programs

unique to the needs of their territories and within their risk-bearing

capacities. The proposed YBS

regulation was open for public

comment until November 14, 2003,

and then reopened for a further 60-

day comment period on November

20, 2003.

· In 2003, the Chairman’s Commendation awards were presented to those

System institutions with the most

effective programs for serving the

needs of YBS borrowers. At the 20th

Annual Farm Credit Council Meeting

on January 20, 2003, the awards were

presented to three associations, Farm

Credit Services of North Dakota,

ACA, First Ag Credit, FCS, and

Southwest Georgia Farm Credit, ACA.

Recognition was based on a number

of criteria, including the extent to

which the institution offers an

education component; provides for

extensive outreach; makes effective

use of financial incentives, such as

differential loan underwriting

standards and lower fees or interest

rates; year-over-year increase in

program activity; overall YBS

program effectiveness, and participation with government-guaranteed

lending programs, including those

sponsored by USDA’s Farm Service

Agency. AgFirst Farm Credit Bank

also was recognized for its recently

completed video profiling YBS

lending in the bank’s district.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 31
32 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

YBS Loans and Commitments

Outstanding

YBS loans and loan commitments

outstanding provide a view of loans on

the books of System institutions at the

end of the year. As of year-end 2002,22

17.1 percent of the number of the System’s

loans outstanding to farmers and ranchers

were to young borrowers, defined as those

35 years old or younger (see Table 4).

Beginning borrowers (those with 10 or

fewer years of farming experience)

accounted for 21.2 percent of loans.

Loans to small farmers (those with annual

sales under $250,000) accounted for 57.0

percent of loans.23 The corresponding

percentage figures for the total dollar

volume of loans outstanding were 12.7,

18.0, and 30.1 percent. The System’s 2002

percentages in each of these categories

were slightly higher than in 2001. Average

loan sizes for YBS loans outstanding

varied from $65,965 for small farmers to

$105,655 for beginning farmers.

YBS Loans and Commitments Made

Loans and commitments made provide a

view of lending activity during the year,

providing a measure of the System’s

current performance in serving YBS

borrowers. FCS institutions made 130,245

loans to small farmers in 2002, 57.2

percent of the number of all new loans

made to farmers that year. A total of $9.5

billion in loans was made to small farmers

in 2002, 28.9 percent of the dollar volume

of loans made during the year. The

average loan size of small farmer loans

made during 2002 was $72,818. Due to

the much greater credit needs of larger

farmers, the average size for all System

farm loans made was about twice the

average for small farmer loans. (See Table

5 for corresponding percentages and

averages for young and beginning farmers.)

Table 4

Loans Outstanding at December 31, 2002, Benefiting Young,

Beginning, and Small Farmers and Ranchers1

Number Percentage Volume Percentage Average

of of Total of Loans of Total Loan

Loan Type Loans Number ($ millions2

) Volume Size

Young Farmers and Ranchers 114,458 17.1 $10,577 12.7 $92,411

Beginning Farmers and Ranchers 141,868 21.2 $14,989 18.0 $105,655

Small Farmers and Ranchers, by Loan Size

$50,000 or less 229,471 63.7 $ 4,506 64.5 $ 19,637

$50,001–$100,000 81,921 59.9 5,786 60.4 70,624

$100,001–$250,000 55,039 49.4 8,122 47.8 147,562

More than $250,000 14,407 24.0 6,709 13.5 465,649

Total Loans to Small

 Farmers and Ranchers 380,838 57.0 $ 25,122 30.1 $ 65,965

1. A young farmer is defined as 35 years old or younger when the loan is made; a beginning farmer has 10 years or

fewer farming or ranch experience; a small farmer is one who typically generates less than $250,000 in annual

sales of agricultural or aquatic products. Since the totals are not mutually exclusive, one cannot add across young,

beginning, and small categories to count total YBS lending.

2. Volume figures are rounded to the nearest thousandth.

Source: Annual Young, Beginning, and Small Farmer Reports submitted by each Farm Credit System lender through

the Farm Credit banks.

22. System data on service to YBS farmers and ranchers cover the calendar year and are reported at

year- end. The 2003 data will be available in April

2004.

23. YBS data are reported for individual Y, B, or S categories. It is not meaningful to add two or three

YBS categories together since the categories are

not mutually exclusive. Depending on borrower

characteristics, a borrower may be counted in two

or even all three categories (e.g., many borrowers

are likely to fall into all three categories (young,

beginning, and small). The data on loan numbers are not the same as counting the number of

farmers since it is not unusual for individual member-borrowers to have multiple loans.
Assessment of YBS Results for

Individual Associations and the System

Individual associations vary significantly

in their YBS lending results. No single

association has the highest System

percentage in all three or even two of the

YBS categories. Table 6 shows the wide

dispersion in results for individual

associations using percent-of-loan

numbers for each YBS category for loans

made and for outstanding loans. A

similar dispersion in results occurs in the

loan volume data.

The range in association results for the

number of loans to small farmers is much

greater than for young or beginning

farmers (from a low of 10.2 percent of

loans made to a high of 91.7 percent).

For young farmers, the range is considerably smaller, from 5.6 percent to 31.7

percent, while for beginning farmers the

range is from 8.1 percent to 72.0 percent.

In general, we would expect loan portfolios to have the highest percentage in the

“small” category. USDA classifies about

91 percent of all farms as small based on

the same definition for a small farm as

used for YBS reporting. Additional detail

is available for individual associations,

districts, and for the System on FCA’s Web

site at www.fca.gov.

Significant differences in results between

institutions are to be expected given the

significant differences in typical-size

farming operations and in farmer demographics across the United States. These

differences make comparisons between

individual associations difficult to assess.

For example, in 2002, California farms

had average annual sales of $311,000,

compared with $22,000 in Tennessee, only

7 percent of the California average. It is

no surprise that results for small farmer

portfolio concentrations in these states

tend to reflect these differences. In

addition, Census of Agriculture data show

that the average age of farmers varies

considerably from state to state.

Table 5

Loans Made During 2002 Benefiting Young, Beginning,

and Small Farmers and Ranchers1

Number Percentage Volume Percentage Average

of of Total of Loans of Total Loan

Loan Type Loans Number ($ millions2

) Volume Size

Young Farmers and Ranchers 35,765 15.7 $3,820 11.6 $105,816

Beginning Farmers and Ranchers 44,075 19.4 $5,460 16.6 $123,885

Small Farmers and Ranchers, by Loan Size

$50,000 or less 76,236 67.8 $1,541 65.0 $ 20,216

$50,001–$100,000 27,713 57.8 1,972 60.4 71,148

$100,001–$250,000 20,095 49.0 3,038 48.6 151,158

More than $250,000 6,201 23.6 2,934 14.0 473,114

Total Loans to Small

 Farmers and Ranchers 130,245 57.2 $9,484 28.9 $ 72,818

1. A young farmer is defined as 35 years old or younger when the loan is made; a beginning farmer has 10 years or

fewer farming or ranch experience; a small farmer is one who typically generates less than $250,000 in annual

sales of agricultural or aquatic products. Since the totals are not mutually exclusive, one cannot add across

young, beginning, and small categories to count total YBS lending.

2. Volume figures are rounded to the nearest thousandth.

Source: Annual Young, Beginning, and Small Farmer Reports submitted by each Farm Credit System lender through

the Farm Credit banks.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 33
34 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Other factors such as the competitiveness

of the local lending market and the

availability of the USDA Farm Service

Agency guarantees also probably play a

role in individual association results.

However, institutions with young, beginning, or small farmer or rancher portfolio

percentages at the low end of the range

are carefully reviewed during the examination process to assess the role of local

demographic or economic factors versus

the role of management in determining

YBS outcomes. The trend in YBS results

within an institution will become an

especially important factor in assessing

the success of YBS programs. Examination follow-up focus will be on those cases

where improvements by management can

play a key role.

For the first time, we are able to make

year-to-year comparisons in System YBS

lending activities, comparing the results

for 2002 with those for 2001, the first year

that the new reporting requirements were

mandatory. All YBS performance factors

increased on a Systemwide basis in 2002

compared with 2001. However, while this

overall result was favorable, many individual institutions experienced declines in

their percentages for the various YBS

measures. For example, out of 104

associations, 57 showed declines in their

percentage of loans made to young

farmers; 41 showed declines for beginning

farmers, and 40 showed declines for loans

to small farms. It is important to note,

however, that comparisons over only two

years do not establish a firm trend. In

addition, results are affected by on-going

YBS examinations that have, in many

cases, resulted in examiners requiring that

associations correct deficiencies in their

YBS reporting and, in some cases, restate

their 2001 and 2002 results.

Table 6

Wide Range in YBS Program Results by Association, 20021

Range by Association Overall

Program Loans Low High Average

Young Outstanding 2.8 27.9 17.1

Made 5.6 31.7 15.7

Beginning Outstanding 4.0 54.9 21.2

Made 8.1 72.0 19.4

Small Outstanding 4.6 92.5 57.0

Made 10.2 91.7 57.2

1. A young farmer is defined as 35 years old or younger when the loan is made; a beginning farmer has 10 years or

fewer farming or ranch experience; a small farmer is one who typically generates less than $250,000 in annual

sales of agricultural or aquatic products.

2. The percentages shown are of total loan numbers outstanding as of December 31, 2002, and of total number of

loans made in 2002.

Source: Annual Young, Beginning, and Small Farmer Reports submitted by each Farm Credit System lender through

the Farm Credit banks.

Percentage of Total Loan Numbers2
YBS comparisons between FCS institutions and other lenders cannot be made

because other federal regulators do not

require reporting on young and beginning

farmer loans. While large banks are

required to report on small farm loans,

small farm lending is defined in terms of

loan size (a loan less than $500,000)

rather than in terms of the borrower’s

annual sales. In addition, because of

differences in data definitions and in data

collection methods, annual YBS data are

not comparable to Census of Agriculture

data, which are collected only once every

5 years.

YBS Programs

Annually, each FCS association responds

to the agency’s questionnaire on the

content of its YBS program. The questionnaire covers areas such as program

goals, board reporting, YBS credit provisions, use of government-guarantee

programs, and use of training or other

related services. By year-end 2002, the

number of institutions with specific YBS

goals had increased significantly to nearly

three-quarters of all associations. This

percentage is increasing, in part due to the

agency’s strong encouragement that all

institutions should have quantitative YBS

goals as a part of their YBS policies.

Goals were usually focused on specific

percentages of outstanding loans in each

young, beginning, or small farmer or

rancher category.

Another question asks about board

oversight through periodic reporting. The

agency is encouraging a quarterly reporting cycle to highlight the importance of

YBS activities at the board level and to

give boards the opportunity to take timely

corrective action if the association’s YBS

goals are not being realized. Nearly all

associations said that they reported to

their boards on YBS performance at least

annually, and more than 60 percent were

reporting quarterly or more often in 2002.

YBS programs at many System associations make loan qualification easier by

applying differential underwriting

standards or by allowing exceptions to

normal underwriting standards. The

differential underwriting standards often

include higher loan-to-market value ratios

or lower debt requirements for YBS

borrowers.

During 2002, 65 percent of the associations offered differential underwriting

standards, or exceptions, for YBS borrowers (up from 60 percent in 2001). Also,

some associations reduce the farmer’s cost

through lower interest rates or fees. More

than one-half had programs that offered

lower interest rates, and one-third offered

lower loan fees for YBS borrowers.

Both categories showed double-digit

percentage increases from 2001. One

institution waives its requirement that the

farmer’s income be at least 125 percent of

debt repayment requirements, and also

permits borrowers with limited equity (as

low as 20 percent of total assets) to

qualify. Another institution offers a “New

Generation Loan Program,” which

provides reduced interest-rate spreads for

the first five years and differential underwriting standards to accommodate the

financial needs of YBS loan applicants.

As subsequently noted, the Farm Service

Agency is the primary agency offering

government-guaranteed loans for farmers,

although a small portion of guaranteed

loans is made through the Small Business

Administration (SBA) and various state

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 35
36 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

programs. System lending institutions use

the FSA’s guaranteed lending program,

especially for YBS lending. About 60

percent of System FSA guarantees are for

YBS loans. During 2002, FSA guarantees

were utilized on nearly 24 percent of the

number of YBS loans made, equaling

almost 30 percent of new YBS guaranteed

loan volume.

Associations offer a wide range of training

programs or other services that benefit

YBS farmers and ranchers. The most

common training program focused on

leadership; 56 percent offered this training. Approximately 53 percent offered

training in business and financial management skills. Most associations also offer

other financial services programs, including estate planning, recordkeeping, tax

planning and preparation, and farm

business consulting. Sometimes associations discount or waive the cost of these

programs for YBS farmers and ranchers.

Other outreach activities are offered in

conjunction with organizations such as

state or national young farmer groups,

colleges of agriculture, state or national

cooperative association leadership

programs, and 4-H or local chapters of

the FFA. Many associations also provide

financial support for scholarships, FFA,

4-H, and other agricultural organizations.

Helping Farmers Through

Federal and State Loan

Guarantees

Use of USDA’s guaranteed farm loan

programs, administered by the Farm

Service Agency, has been increasing

among System institutions.24 The programs give lenders an opportunity to

reduce their credit risk while making

loans to borrowers who would not

otherwise meet the underwriting standards. The programs also make it easier

for lenders to continue financing existing

borrowers who may be relatively new to

farming or may be facing financial

hardship. A number of states also offer

various programs to assist such farmers,

including linked deposit accounts, Aggie

Bonds, and other low-interest programs,

as well as guarantees, direct loans, and

loan participation programs.25 While FSA

guarantees account for the vast majority

of government-guaranteed farm loans, the

following discussion includes results from

state agency farm loan guarantee programs.

The FCA encourages Farm Credit System

lenders to use government guarantee farm

lending programs to help expand YBS

lending and to meet the needs of other

eligible borrowers in the agricultural

community. Guaranteed loans reduce

lending risk and are given preferential

treatment in the application of risk rating

systems and in determining their regulatory capital ratios. Normally, loans

guaranteed by USDA or other U.S.

Government agencies that are performing

as expected are classified as Acceptable/

Performing loans. Also, even though

repayment problems or other credit

weaknesses may exist, examiners do not

take exception if the institution maintains

the loan in an accrual accounting status.

Further, institutions are not required to

maintain as much capital for guaranteed

loans (20 percent risk weight versus 100

percent for non-guaranteed loans) when

determining their regulatory capital ratios.

24. FSA typically guarantees 90 percent of the loan

principal. Borrowers qualifying for the program

must be unable to obtain sufficient credit elsewhere at reasonable rates and terms and must

meet minimum cash flow requirements. Lenders must pay a 1 percent guarantee fee that can be

passed on to the borrower.

25. See the Web site: www.stateagfinance.org for

more information and states offering programs.
Although System institutions take advantage of the FSA and state guarantee

programs to help a wide range of borrower types, the largest group of borrowers assisted is the System’s young, beginning, and small farmers and ranchers.

Slightly more than half the System’s YBS

loans carry FSA or state guarantees.

Over the five-year period ended September 30, 2003, total loans outstanding to

farmers with FSA or state guarantees

increased by $1.05 billion to $2.08 billion,

or 102 percent. As illustrated in Figure 7,

the System’s volume under guaranteed

loan programs is increasing relative to its

overall loan volume. As of September 30,

2003, 13,953 of the System’s loans to

farmers (2.87 percent of its volume) were

reported as having FSA or state guarantees, compared with 9,454 loans (2.08

percent of its volume) five years earlier.26

The System has also been steadily increasing its share of all FSA-guaranteed loans,

from 15.2 percent five years ago to 23.0

percent as of September 30, 2003. However, the System’s share of FSA guarantees

is below its overall market share of farm

debt.

Most (95) System associations participate

in the FSA or state guarantee programs,

with 77 institutions having 20 or more

loans in such programs. Use at individual

associations continues to vary widely; 27

associations had FSA- or state-guaranteed

volumes of more than 6 percent of their

total lending volume as of September 30,

2003. However, almost as many (26) had

guaranteed lending volumes of 1 percent

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 37

26. Loans to farmers include rural housing loans

(some of which are to non-farmers), marketing

and processing loans, farm-related business

loans, and miscellaneous loans. A small additional volume of federal guaranteed lending is

under other programs. The System also had $2.8

billion guaranteed by Farmer Mac under its

Long-Term Standby Commitment to Purchase

program as of June 30, 2003.

Figure 7

FCS Increases Use of Guaranteed Farm Loans, 1998–2003

As of September 30

Source: FCA Loan Account Reporting System.
38 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

or less of their outstanding loan volume.

Tables 7, 8, and 9 show the top 10

associations that participate in the FSA or

state guarantee programs ranked in three

ways: (1) number of guaranteed loans as

a percentage of total number; (2) dollar

value of guaranteed loans as a percentage

of total loan volume; and (3) guaranteed

loan dollar volume. Altogether 22

associations are each ranked in at least

one of the tables. The top 10 associations

in terms of dollar volume guaranteed

account for 43 percent of the System’s

FSA- or state-guaranteed loans. Almost

all these associations are FSA Preferred

Lenders.27

Institutions that are heavy users of the

FSA or state guarantee loan programs

note that guarantees reduce portfolio

credit risks and are especially helpful in

promoting lending to YBS borrowers.

These institutions have made the extra

effort to learn about the FSA and state

guarantee loan programs and to develop

procedures to participate in them. They

also typically have good relationships with

FSA and state agency personnel in their

areas. Competition for FSA’s funding for

the guaranteed loan programs has

increased significantly in recent years, but

not all available funds were exhausted this

past fiscal year. Roughly one-half of all

FCS associations increased their FSA- or

state-guaranteed lending volume by 10

percent or more. Even so, roughly onethird of all associations had either no

change or a decrease in their guaranteed

volume. On average, this group had less

than 2 percent of their loan volume under

FSA- or state-guaranteed programs,

suggesting that the System has significant

potential for expanded use of such

programs.

Table 7

Top 10 FCS Associations Ranked by Percentage of Number of Loans

with a USDA Farm Service Agency or State Guarantee

As of September 30, 2003

Number of Total Percentage

Guaranteed Number of of Total

District Association Loans Loans Number of Loans

AgriBank Delta ACA 23 175 13.1

Texas North Alabama FLCA 218 2,242 9.7

AgFirst Southwest Georgia ACA 202 2,190 9.2

Western Hawaii ACA 36 406 8.9

CoBank Maine ACA 85 959 8.9

Western Idaho ACA 59 673 8.8

Western Colusa-Glenn ACA 125 1,519 8.2

AgFirst AG CREDIT ACA 744 10,248 7.3

CoBank Yankee ACA 129 1,847 7.0

CoBank First Pioneer ACA 783 12,207 6.4

27. The FSA Preferred Lender Program allows better Source: FCA Loan Account Reporting System.

performing lenders to make efficient use of the

FSA guarantee program through reduced paperwork requirements.
Table 9

Top 10 FCS Associations Ranked by Dollar Volume of Loans

with a USDA Farm Service Agency or State Guarantee

As of September 30, 2003

Guaranteed Total Percentage

Loan Loan of Total Loan

District Association Volume Volume Volume

AgriBank GreenStone FCS, ACA $210,760 $2,748,621 7.7

CoBank First Pioneer ACA $110,248 $1,737,867 6.3

AgriBank Missouri ACA $88,173 $1,256,059 7.0

AgFirst Carolina ACA $80,245 $1,044,123 7.7

AgFirst AG CREDIT ACA $77,535 $601,913 12.9

CoBank Northwest FCS, ACA $68,532 $4,440,147 1.5

AgriBank AgCountry ACA $64,854 $1,080,615 6.0

AgriBank AgStar ACA $63,210 $2,424,683 2.6

AgFirst AgChoice ACA $60,375 $972,995 6.2

AgFirst MidAtlantic ACA $54,088 $1,451,004 3.7

Dollars in Thousands

Source: Guaranteed loan volume from FCA Loan Account Reporting System; total loan volume from Call Reports

received from the Farm Credit System.

Table 8

Top 10 FCS Associations Ranked by Percentage of Dollar Volume

with a USDA Farm Service Agency or State Guarantee

As of September 30, 2003

Guaranteed Total Percentage

Loan Loan of Total Loan

District Association Volume Volume Volume

AgriBank Delta ACA $4,247 $20,295 20.9

Texas North Alabama FLCA $52,050 $290,651 17.9

AgFirst AG CREDIT ACA $77,535 $601,913 12.9

AgFirst Southwest Georgia ACA $38,289 $343,846 11.1

AgriBank North Dakota ACA $39,054 $365,549 10.7

CoBank Maine ACA $17,009 $161,370 10.5

Western Idaho ACA $12,816 $128,017 10.0

AgFirst Valley ACA $14,351 $149,453 9.6

AgFirst Central Kentucky ACA $13,662 $150,894 9.1

AgriBank Western Arkansas ACA $49,278 $544,637 9.0

Dollars in Thousands

Source: Guaranteed loan volume from FCA Loan Account Reporting System; total loan volume from Call Reports

received from the Farm Credit System.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 39
40 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Risk-Based Examination and

Supervisory Program

Examinations of FCS institutions must be

consistent with agency authorities and

statutory requirements. Within those

parameters, the amount of examination

review and testing that an institution

receives depends on the level of institutional risk reflected by the institution’s

CAMELS-based rating [assigned under

FCA’s Financial Institution Rating System

(FIRS)].

The FIRS rating is the primary risk

designation FCA uses internally to

indicate the safety and soundness threats

in an institution. FCA discloses the

composite and component ratings to the

institution’s board to provide a better

sense of where the institution stands

relative to the seriousness of examination

issues. In addition, each report of

examination provides the institution

board a detailed assessment of

management’s performance, the quality of

assets, and the financial condition and

performance of the institution.

The FCA generally devotes fewer resources to institutions found to be in

compliance with statutory and regulatory

requirements and operating in a safe and

sound manner. The scope and depth of

examinations are based on statutory and

regulatory compliance, as well as the risk

identified, or reasonably anticipated, in

the institution. The factors that determine

the scope and depth of an examination

include: the effectiveness of the

institution’s internal controls, the examiners’ judgment in consideration of the

results of previous examinations, the

composite and component FIRS ratings,

changes that have taken place in the

institution since the preceding examination, and guidance provided by field and

senior management on areas of risk that

should be given special emphasis.

Finally, examiners review the work

performed by others, such as internal and

external auditors or reviewers. The degree

of reliance on this work is based upon the

examiners’ judgment of the competence

and independence of the auditors or

reviewers, as well as the scope of the audit

or review.

Meeting Statutory Examination

Requirements

The Farm Credit Act requires FCA to

examine each FCS institution at least once

every 18 months. However, we maintain

the flexibility to complete examination

activities at any time, as needed. FCA

examines System banks and direct-lender

associations with greater than $1 billion in

total assets at least once every 12 months

because of these institutions’ relative

importance to the overall financial

soundness of the System. FCA conducted

84 examinations in FY 2003, including

examinations of 74 FCS direct-lender

associations, three farm credit banks, three

service corporations, one Agricultural

Credit Bank, the FCS Financial Assistance

Corporation, Farmer Mac, and the

National Consumer Cooperative Bank,

which is not an FCS institution.28

The Small Business Administration and

the U.S. Department of Agriculture

continued to use the FCA’s examination

expertise in 2003. SBA contracted with

FCA to conduct examinations of financial

companies licensed by SBA to make

guaranteed loans to small businesses.

USDA contracted with FCA to conduct

examinations of financial companies

authorized by USDA to make guaranteed

loans under USDA’s Business and Industry

(B&I) Guaranteed Loan program. Also,

FCA examiners completed reviews of B&I

program operations at selected USDA

State Offices. While the safety and

soundness of the System remains the

primary objective of FCA, we believe the

continuing use of FCA examination

28. The National Consumer Cooperative Bank

(NCB) Act of 1978, as amended, provides for FCA

to examine and report on the condition of the

NCB. Since the passage of this law, FCA has conducted safety and soundness examinations of the

NCB and issued reports of examination to the

NCB’s board.
resources by SBA and USDA is a positive

reflection on the professionalism of FCA

examiners, and serves to broaden their

examination skills while increasing job

satisfaction and employee retention.

Measuring the System’s Safety and

Soundness

Using the FIRS, examiners evaluate the

risk in each bank and direct-lender

association at least every 90 days based on

quantitative and qualitative benchmarks

to ensure that assigned ratings reflect

current risk and conditions in the FCS.

The FIRS provides a general framework

for assimilating and evaluating all significant financial, asset quality, and management factors to assign a composite rating

to each institution on a scale of 1 to 5. A

1 rating means an institution is sound in

every respect. A rating of 3 means an

institution displays a combination of

financial, management, or compliance

weaknesses ranging from “moderately

severe” to “unsatisfactory.” A 5 rating

means there is an extremely high, immediate, or near-term probability of failure.29

Throughout FY 2003, FIRS ratings as a

whole continued to reflect the stable

financial condition of the Farm Credit

System, and, as Figure 8 reflects, the

overall trend in FIRS ratings continued to

be overwhelmingly positive. At September 30, 2003, there were nearly three times

as many 1-rated institutions (78, or 74

percent) than 2-rated institutions (28, or

26 percent). There were no 3-, 4-, or 5-

rated institutions at September 30, 2003.

The strength of FCS institutions displayed

by these ratings reflects a financially safe

and sound Farm Credit System, thanks in

part to government support program

payments, which allow many borrowers to

29. See the Glossary for a complete description of the

FIRS ratings.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 41

Figure 8

Farm Credit System FIRS Composite Ratings Steadily Improve

As of September 30

Note: FIRS ratings are based on capital, asset quality, management, earnings, liquidity, and sensitivity to market

risk. Ratings range from 1 (a sound institution) to 5 (an institution that is likely to fail).

Source: Farm Credit Administration Reports of Examination.
42 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

meet debt obligations during a period of

low market prices for many commodities.

The overall financial strength maintained

by the System reduces the risk to investors

in FCS debt, the Farm Credit System

Insurance Corporation, and FCS institution stockholders.

Identifying Potential Threats to Safety

and Soundness

Every six months, the FCA uses a financial forecasting model to identify and

evaluate prospective risk in institutions

over the upcoming 12- and 24-month

periods under “most likely” and “worst

case” scenarios, respectively. By evaluating

each institution’s financial condition and

performance under various scenarios, we

can identify institutions with emerging

risks. This evaluation helps FCA carry

out the risk-based supervision program to

ensure that FCS institutions address and

correct problems before irreparable harm

to their financial conditions occurs. Our

current financial forecasting analysis,

based on June 30, 2003, Call Report data,

projects that the financial condition of the

FCS will remain sound through June 30,

2004, and June 30, 2005, under “most

likely” and “worst case” scenarios, respectively. These projections rely heavily on

the expectation of continued government

support for agriculture.

FCA’s early warning system includes a

loan portfolio stress model to evaluate the

potential impact of interest rate changes

and a decline in borrower repayment

capacity on an institution’s earnings and

financial condition. In addition, we

perform an analysis of new money,

refinancing, and rollover trends to identify

the potential for transfer of risk from

other lenders to FCS institutions (especially during stressful times in agriculture). We also maintain a database of

FCS institutions’ underwriting standards

to analyze whether boards are properly

adjusting standards in response to

changing risk. During FY 2003, the

results of these analyses indicated the

System would remain financially sound

and well-positioned to meet its mission

through good and bad times.

Differential Supervision and

Enforcement

Some risks are inherent to lending, and

lending to a single industry such as

agriculture is particularly risky. If

examiners discover unwarranted risks,

they work with an institution’s management and board to establish a plan of

action to mitigate or eliminate such risks.

Appropriate actions may include reducing

exposures, increasing capital, or strengthening risk management.

When an individual institution is not

properly managing its risks or complying

with laws and regulations, FCA’s goal is to

use suitable means to influence the

institution’s board of directors to adjust its

practices. When examiners discover

unsafe or unsound conditions or violations of laws or regulations, we require,

through the report of examination, the

institution’s board to take corrective

actions. The board then must provide

FCA with a written response that addresses how the problems will be corrected, including specific time frames for

correction. Eighty-one percent of the

reports of examination issued in FY 2003

required corrective actions. This follows a

noticeable increase in 2002, when 39

percent of reports required corrective

actions, after a three-year declining trend

in required actions through 2001. While

the percentage of reports requiring

corrective actions is much higher than

during previous years, the requirements

were almost entirely in the areas of

regulatory compliance and YBS program

compliance. Regulatory compliance

includes such areas as E-commerce

regulation compliance, eligibility and

scope of financing, and consumer compliance.

FCA uses a three-tiered supervision

program (normal, special, and enforcement) to distinguish the risks and special

oversight needs of institutions. Institutions under normal supervision are

generally performing in a safe and sound

manner and in compliance with applicable laws and regulations. These institutions have demonstrated they can correct

identified weaknesses in the normal
course of business. Nonetheless, our

examinations may identify violations of

laws or regulations or potentially unsafe or

unsound practices that require corrective

actions. In addition, we regularly recommend to institution boards ways to

improve the efficiency or effectiveness of

their risk management processes and/or

controls to maintain financial stability.

This practice of requiring corrective

actions and recommending improvements

to processes and/or controls is critical to

our success in supervising regulatory

compliance and the safety and soundness

of FCS institutions.

For institutions displaying conditions that

are serious but do not necessarily critically

impair their safety and soundness, we

increase the concern from normal supervision to special supervision, and our

examination oversight increases accordingly. Special supervision gives the

institution’s board and management the

opportunity to correct the problems

discovered during the examination or

oversight process before irreparable harm

occurs. This process has been successful

where the institution’s board and management are both willing and able to correct

the identified problems. The institution is

allowed time to correct identified weaknesses before enforcement actions by the

agency become necessary.

A formal enforcement action may be

necessary if an institution engages in

unsafe or unsound practices, violates laws

or regulations, or exhibits excessive risk,

and its board and management are unable

or unwilling to correct the problems. FCA

uses its enforcement authority to ensure

that the operations of FCS institutions are

safe and sound, do not exhibit excessive

risk, and comply with laws and regulations. This authority includes the power

to enter into formal agreements, issue

orders to cease and desist, levy civil

money penalties, and suspend or remove

officers, directors, and any other persons

or forbid them from engaging in FCS

institutions’ affairs. If the FCA Board

votes to take an enforcement action, these

institutions perform under enforcement

supervision, and our examiners oversee

the institution’s performance to ensure

compliance with the enforcement action.

Working With Financially Stressed

Borrowers

Agriculture is a risky business that can be

affected by adverse weather, changes in

imports and exports, and local supply and

demand, sometimes causing borrowers

difficulty in repaying their loans. The

Farm Credit Act provides borrowers with

certain rights when they apply for loans

and when they have difficulty repaying

loans. For example, the Act requires FCS

institutions to consider restructuring an

agricultural loan before initiating foreclosure. The Act also provides an opportunity for borrowers to seek review of

certain credit and restructuring decisions.

If a loan is foreclosed, the Act provides

borrowers with the opportunity to buy

back their property at the fair market

value.

FCA adopted regulations to implement

the borrower rights provisions of the Act.

FCA also includes a review of borrower

rights compliance in its examination of

FCS institutions. Further, FCA receives

and reviews complaints from borrowers

regarding their borrower rights. Through

these efforts, FCA helps the FCS institutions ensure that every effort is made to

retain loans with improved prospects for

repayment and, at the same time, continue

to provide sound and constructive credit

and related services to farmers and all

types of agricultural producers.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 43
42 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•FY 2003

Kelly Broyles worked on a dairy farm while growing up, but chose to move to the city with his

wife, Gayle, after they married. But the pull of rural life proved too much. In 1996 the couple

returned to Kelly’s hometown and bought 10 polled Herefords and 434 acres of pasture land in

Hopkins County, Texas. By 1999, though they both had full-time jobs off the farm, the couple

had increased the herd to more than 75 cows and calves, and added two poultry houses to

their holdings.

In 2001, after attending a fishing show, the Broyles contacted AgriLand, FCS, seeking financing

for commercial catfish ponds on their property. Today, the five 10-acre ponds can hold more

than 10,000 fish per acre. The operation relies heavily on technology to monitor water conditions, oxygen levels, and to automatically measure and distribute food throughout the ponds

each evening. “When the oxygen level gets low, my computer calls me,” says Kelly.

Kelly and Gayle, who now farm full-time, attribute much of their success to the support of

Farm Credit. “We had such a positive experience dealing with AgriLand that we refinanced

our poultry houses with them. Now they handle the financing on all our enterprises,” says

Gayle. Kelly adds, “AgriLand is extremely committed to farmers and ranchers, and are doing a

good job to ensure the future of agriculture by providing us with the resources we need to

succeed.”

Texas Couple Goes

Back to the Farm . . .

with Help from Farm

Credit
Challenges Facing Agriculture and

the Rural Economy

Farm Credit System institutions, their

borrowers, and rural America face a

variety of risks that can affect their

performance and viability. The FCA

analyzes a wide range of risks to the

agricultural and financial sectors that

could pose significant challenges to

farmers and ranchers, their cooperatives,

their communities, and the institutions

that comprise the Farm Credit System.

While credit quality and capital positions

at System institutions remain adequate

and provide a strong buffer to protect

against losses, we have identified and are

monitoring the following principal risks.

Uneven Economic Recovery, Improved

Outlook for Rural America

Changing economic conditions, that is,

the forces of supply and demand, affect

the System’s borrowers by altering the

prices of goods and services they purchase and sell. Additionally, many farm

borrowers depend upon non-farm

employment and earnings to help service

their debt and support their households.

The current recovery, which began with

the end of the recession in November

2001, was characterized by uneven

growth, a lack of business investment,

minimal inflation, and rising unemployment through the first half of 2003. The

much-anticipated acceleration in the

recovery showed up in the third quarter

of 2003, as near-record low interest rates

and a series of tax cuts spurred consumer

spending for durable goods, like homes

and autos, in addition to nondurable

goods, like clothes and food. The labor

market also began to show signs of

improvement in the third quarter with

payrolls growing slightly, enough to lower

the unemployment rate to 5.9 percent.

The improved outlook for the U.S.

economy should provide a stimulus to

consumption of certain farm products,

particularly for meats, dairy, and various

high-valued horticultural products (wine

grapes, for example). The demand for

grains and protein feeds should also

improve as livestock inventories rise to

satisfy the increased consumption of

livestock products.

There are a number of risks to the current

recovery, including the sluggish job

market, concern over the sustainability of

consumer spending, and the twin deficits

in the trade account and the federal

budget. Job growth has been constrained

by a combination of factors including

technological advances that allow businesses to do more with less labor, the

migration of jobs overseas, and the high

cost of providing health insurance and

other benefits to employees. Thus,

meaningful recovery in the job market

may be slow, and it is likely to remain

uneven across regions and rural communities. This sluggishness is a cause for

concern for many farm families and

System borrowers, who have become

increasingly dependent on the non-farm

sector for the majority of their household

income. Today more than one-half of

farm operators and their spouses are

employed off the farm, and non-farm

income sources account for more than 90

percent of household income on average.

The energy situation has become more

unsettled, and this could adversely affect

both households and businesses. Following supply cuts by the Organization of

Petroleum Exporting Countries (OPEC)

producers in the fall of 2003 and the tense

situation in the Middle East, which

pushed oil prices above $32 per barrel

with little prospect of declining anytime

soon. Low stock levels for heating oil

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 45
46 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

could lead to price spikes this winter,

depending on the severity of the weather.

A positive development on the energy

front, however, is the expected increase in

the demand for corn for ethanol production as a result of the ban on the fuel

additive methyl tertiary butyl ether in

California beginning in 2004, with other

states likely to follow.

Near-Record Low Interest Rates May

Rise in 2004

Movements in interest rates affect borrowers in a fairly predictable manner. The

effect on their lenders’ earnings and

competitive position is more complex

depending on how well they manage to

match their assets and liabilities. Shortterm interest rates reached their lowest

levels in almost half a century in 2003,

with the Federal Reserve’s Open Market

Committee (committee) cutting the

federal funds rate to 1 percent on June

25th and holding it at that level to

provide a boost to a lackluster recovery.

The committee indicated that its principal

concern for the foreseeable future is the

risk of inflation becoming undesirably low

and that it expects an accommodating

monetary policy to continue for a considerable period. The near-record low

interest rates provided significant debt

relief to some highly leveraged farm

operations and encouraged some refinancing. The wide use of variable-rate farm

loans may partially explain the lack of a

refinancing boom in the agricultural

sector compared with what occurred in

the housing market.

Low interest rates have likely encouraged

some borrowers to take on additional

debt. Such borrowers run the risk of

repayment problems should either farm

income or off-farm income decline.

Furthermore, if their debt is based on

variable rate loans, rising interest rates will

pose a repayment risk. While most

economists expect short-term rates to

remain relatively low into early 2004, rates

could rise later in the year in line with

increased economic activity.

Agricultural Income Improves in 2003,

Mixed Outlook in 2004

Overall, USDA forecasts that the earnings

prospects for U.S. farmers, ranchers, and

landlords improved significantly in 2003,

due to a combination of higher cash

receipts for both crops and livestock

products along with a sharp rise in

government payments. Reduced global

output in some key growing regions

combined with strong domestic and

foreign demand contributed to a general

strengthening of commodity prices. Even

with the higher prices, direct government

payments were expected to jump 80

percent to an estimated $19.7 billion in

2003, due primarily to a one-time

bunching of payments associated with

moving to the 2002 farm act. This helped

boost net cash income (the funds available to farm operators to meet family

living expenses and make debt payments)

to an estimated $65.1 billion for 2003, an

increase of nearly one-third from the 2002

level and a record high.

The financial condition of individual farm

households, however, shows some variation due to differences in commodity mix,

input use, government payments, and

weather conditions. With the exception of

tobacco and specialty crops (fruits, tree

nuts, vegetables, and nursery products),

income gains were expected for most crop

producers in 2003, particularly for

soybeans, rice, and cotton. Returns to

livestock producers were expected to be
up across the board for 2003, particularly

for beef, which benefited from reduced

supplies from Canada stemming from the

mad cow disease episode. Production

expenses were generally up for most

categories in 2003, led primarily by

double-digit increases for petroleum

products, fertilizer, and feeder livestock.

The exception was pesticides and interest

expense, which were little changed.

Income prospects for 2004 and beyond are

mixed. Near-term price prospects for

most major farm commodities, other than

dairy, have improved, while prices for

specialty crops remain mixed. The energy

situation noted earlier could bring a nearterm rise in production costs for farm

operators who use a high level of energy

inputs. However, an increased demand for

corn for ethanol production could boost

returns to corn growers, particularly in the

Midwest and the West, where much of the

ethanol facilities are located. Government

payments are expected to decline in 2004

but will likely continue to be a major

factor contributing to the ability of many

farm borrowers to make regular loan

payments. However, the mounting budget

deficit, forecast to reach a half a trillion

dollars in 2004, combined with international pressure to lower farm subsidies,

could lead to reduced government support

for the agricultural sector in the future.

This poses a particular risk to farm

families that concentrate on program crops

like grains, oilseeds, and cotton. Fortunately, as previously noted, credit quality

and capital positions at System institutions

remain adequate and provide a strong

buffer to protect against these future risks.

Farmland Values Continue to Rise,

Some Negative Factors Raise Concern

Farm real estate accounts for more than

80 percent of the value of all farm

business assets, and loans secured by such

assets account for nearly 61 percent of the

loan volume at FCS associations. The

value of farmland is generally based on

the income it generates, and, despite net

farm income remaining below its 1996

peak in recent years, farmland values

continued a strong upward trend. According to USDA, the average value of

farm real estate (all land and buildings on

farms), as of January 1, 2003, increased by

5 percent to $1,270 per acre from a year

earlier. The overall gain was the 16th

consecutive annual increase in U.S. farm

real estate values since the collapse during

the agricultural crisis of the mid-1980s.

The rising trend continued in 2003, as

quarterly surveys of agricultural bankers

by several Federal Reserve District Banks

reported solid year-over-year gains for

most types of crop and pasture land

through the second quarter.

The robust farmland market in the face of

weak market returns from farming raises

two questions—What’s behind the

increase? How long will it last? A host of

factors have contributed to the recent

increase in farmland values: strong

demand for land spurred by low interest

rates, investors looking for alternatives to

the stock market, the large infusion by the

government of farm support payments,

urban sprawl, and a scarcity of land for

sale in some areas. Competition for

farmland among farmers, developers, and

investors has more than offset weak

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 47
48 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

agricultural returns in recent years and,

thus, has generally strengthened the

balance sheet for the farm sector. Real

estate values have risen faster than real

estate debt for most years since the late

1980s, providing farmland owners with an

extra cushion to weather a short-term

decline in income or land values.

However, there are a number of negative

factors that are raising concerns among

farm lenders about the future collateral

value of farmland. Among these are the

somewhat slower than normal economic

recovery, the rising uncertainty about the

dependability of government support for

agriculture, and the prospect of rising

interest rates. Two factors are increasing

the risk that government payments may

decline: (1) the pressure from the World

Trade Organization (WTO), developing

countries, and environmental groups to

reduce agricultural subsidies in industrialized countries and (2) the surging budget

deficit. A spike in interest rates could

quickly cut developers’ and short-term

investors’ demand for farmland. While

farmland is less leveraged today and

farmers and lenders are in better financial

positions than during the agricultural

crisis of the mid-1980s, a decline in the

farm real estate markets would cause

financial stress for those farm borrowers,

whose cash flow might also be dropping

at the same time.

Agricultural Exports Approaching

Former Peak, Increased Competition

Ahead

The nation’s agricultural export picture

has brightened with exports forecast to

increase for the fifth consecutive year in

FY 2004 (October 1, 2003, through

September 30, 2004), by nearly 6 percent

to $59.5 billion. Improved global economic growth, reduced agricultural

output in some key countries, and a

weaker U.S. dollar are factors behind the

improved export outlook. Access to world

markets is critical to the financial health

of many System borrowers, particularly

for those producing items with high

proportions of their product typically

exported.

The 2004 forecast is about 1 percent

below the peak in fiscal year 1996, and

the risk to the favorable export picture is

substantial. Over the longer term, our

producers face growing competition in

other regions of the world, particularly

South America, Eastern Europe, the

former Soviet Union, China, and India,

where production continues to expand in

response to technological advances and

government support. The breakdown in

multilateral trade talks sponsored by the

WTO in Cancún, Mexico, in September

2003, is likely to delay the reduction in

trade barriers that are restricting U.S.

exports into some markets. Concerns

about biotechnology along with animal

health issues continue to pose a risk to the

further expansion of U.S. agricultural

sales abroad.

In addition, imports of agricultural

products, some of which compete directly

with U.S. production, are expected to rise

for the 17th consecutive year to a record

$48.5 billion, up 6 percent from 2003.

Rising imports, particularly for horticultural products, continue to put downward

price pressure on certain U.S. producers,

who have had to turn to the federal

government for assistance, primarily

through special purchase programs. U.S.

farmers are likely to face additional

competition in the future from developing

countries as those countries continue to
adopt new production technologies,

improve their infrastructure for moving

products to markets, and gain some trade

advantage through the depreciation of

their currencies relative to the U.S. dollar.

Pressure at the WTO talks from a newly

formed block of developing countries to

dismantle the $300 billion in annual

subsidies provided by developed countries

to their farmers, could lead to additional

competition for U.S. farmers for both the

domestic and export markets.

Food Safety a Top Priority

Food safety covers a wide range of issues.

Maintaining a safe and secure food system

is paramount to the health and well-being

of consumers here and abroad, as well to

the viability of the nation’s agricultural

sector. Microbial pathogens like E. Coli in

meat, animal diseases like mad cow

disease, and chemically tainted food can

result in serious health consequences and

cause serious disruptions to the food

supply. This can lead to significant

economic losses to farmers, their marketing and processing businesses, and their

cooperatives. Fortunately, the most recent

outbreak of a major food safety problem

did not involve U.S. producers.

The discovery in Canada on May 20,

2003, of a single cow infected with bovine

spongiform encephalopathy (BSE), or mad

cow disease, led USDA and a number of

countries to ban the imports of Canadian

ruminants and their products, thereby

bringing the lucrative Canadian beef trade

to a virtual halt. This resulted in significant income losses for their producers,

meat packers, and those involved in live

animal trade. The U.S. has stepped up its

surveillance and safety procedures in

recent years to reduce the possibility of

BSE and other hazards—microbial,

chemical, and physical—from entering the

United States. The more recent threats to

the nation’s food supply from terrorist

groups underscore the growing importance of ensuring food safety from the

farm gate to the dinner plate. The

financial health of U.S. farmers, ranchers,

and their credit providers depends on the

U.S. continuing to be recognized as a

world leader in food safety. While some

measures may impose a cost on producers, food processors and retailers are

willing to pay higher prices for commodities to ensure food safety.

Challenges Facing Agricultural

Cooperatives

With trends toward fewer farmers, vertical

integration in the food system, and an

increasingly global and competitive

market for all goods and services, concerns are being raised that the traditional

agricultural cooperative form is not

flexible enough. Unlike when the cooperative movement developed, today there

are relatively few fulltime farmers who can

join and contribute financial resources.

The high number of farmers at or nearing

retirement age means that many of today’s

farmers are likely more interested in

cashing out their stock than in investing

in more enterprises. Yet, as producers

seek additional income sources by shifting

away from traditional bulk commodity

lines and toward niche and value-added

products, the capital requirements grow.

In addition, effective marketing often

requires the cooperative to do considerable business with non-members to

provide adequate product lines. The

response by some farmer groups, as well

as by some existing cooperatives, has been

to form limited liability corporations or

hybrid cooperative organizations. These

organizations can provide incentives to

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 49
50 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

attract outside equity and or reduce the

tax obligations on nonmember business.

Add the recent demise of several large

agricultural cooperatives, and the question

of whether farmers need to consider

alternative business structures comes into

sharper focus.

Unlike other business structures, cooperatives are owned and controlled by the

people who use their services. As a result,

the cooperative operates for the mutual

benefit of their member-owners—

typically to enhance their income by

marketing their raw products or to lower

their costs for inputs or services. Most

agricultural producers have significant

investments in one or more cooperatives

and expect that their cooperatives will

remain viable market outlets or reliable

sources of inputs. But changes in their

memberships and the market place are

forcing many agricultural cooperatives to

redefine their core business, including

how best to organize and finance subunits

or auxiliary business entities. Farmers

must also deal with the issue of how

much control to give up if the decision is

to use outside sources of equity.

Governance is another structural issue

facing cooperatives. Although exempt

from the Sarbanes-Oxley Act of 2002,30

investors, lenders, and associated business

partners will be looking at the governance

practices of cooperatives and other small

businesses to see whether they are wellmanaged, financially viable, and transparent. A related challenge for the System is

whether special governance rules and/or

reporting requirements will be expected of

or imposed on government-sponsored

enterprises.

Over the years, Congress has sought to

preserve and enhance the benefits that

cooperatives bestow on farmers, their

domestic and foreign customers, and

America as a whole by enacting laws that

enable agricultural cooperatives to grow

and prosper. This includes policies that

grant cooperatives legal protections, tax

benefits, and other advantages not

conferred on investor-owned

agribusinesses. Two states have enacted

legislation to allow farmers and investors

the flexibility to form new types of hybrid

cooperatives in which farmers share

control/ownership with non-patron

investors. Several other states are expected to follow suit. Whether Congress

will grant these new forms the same

benefits as traditional cooperatives,

including eligibility for Title III financing

by the System, remains to be seen.

30. The Sarbanes-Oxley Act (Public Law 107-204)

was passed by Congress in 2002 to enhance the

oversight of publicly held corporations by establishing stronger reporting requirements. The

Securities and Exchange Commission has issued,

and continues to issue, regulations implementing provisions of the act.
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•FY 2003 49

Farm Credit Helps a

Young Farmer Build a

Solid Foundation in

Agriculture

Mike Job had just recently graduated from high school, when his parents decided to move . . .

out of state. The 17-year-old wanted a career in production agriculture, but his ambition far

outstripped his experience or his capital. With the help of friends, relatives, and Northern

California Farm Credit, Mike was able to plant 41 acres of rice that year. Ten years later, he

plants 200 acres of his own in rice, and custom-farms 800 acres for landowners in the

Richvale, California, area.

In 1998, when new laws and regulations prohibited rice farmers from spraying some herbicides

from the air, Mike and several friends took the initiative to build “ground rigs” to apply the

materials. Today, with financing from Farm Credit, the company ground sprays more than

4,000 acres per year in areas where crop dusting is not allowed. The firm also applies fertilizer

to more than 10,000 acres of land, before they are flooded and planted with rice.

Mike is the third generation in his family to farm, and he and his wife, Jennifer, hope to pass

on the love of agriculture to their sons Tyler and Tanner. “If you want it bad enough, you will

find a way to make it happen,” says Mike. With the help of a committed agricultural lender

like Northern California Farm Credit, the Jobs are making it happen today, and for the future.
31. FCA, in approving the ACA parent/subsidiary

structure, views the ACA and its wholly owned

operating subsidiaries as a single entity for most

regulatory and examination purposes based on

their common ownership and control and crossguarantees between and among the entities, with

each entity responsible for the debts of the others

and their capital and assets combined to absorb

any losses.

Corporate Activity, Regulatory

Guidance, and Other Agency

Activities

Of 86 ACAs, two have not yet adopted the

ACA parent/subsidiary structure. In

addition, 13 FLCAs, which are authorized

to provide long-term credit, continue as

independent associations. In FY 2003,

two ACAs with subsidiaries received FCA

and stockholder approval to merge on

January 1, 2004. On that date, the

number of associations will decline by one

to 98.

Summary of Activity

The number of corporate applications

submitted for FCA Board approval

declined from that of the previous year as

the pace of association restructuring

slowed. In contrast, bank-level restructuring activity increased. In FY 2003, we

analyzed and approved eight applications,

compared with 24 applications processed

during 2002. The applications processed

were for:

· two mergers of Farm Credit Banks,

with each merger involving two

banks,

· the reaffiliation of an association

from a Farm Credit Bank to an

Agricultural Credit Bank,

· a merger of two ACAs with subsidiaries,

· a restructuring of an ACA to establish

a PCA and an FLCA as wholly owned

subsidiaries of the ACA,

· a merger of a PCA and an FLCA into

an ACA with subsidiaries,

· a consolidation of two PCAs and an

FLCA to establish an ACA with

subsidiaries, and

· an amendment to the Articles of

Incorporation for a service corporation.

52 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Association Restructuring in FCS

Slows While Bank Activity

Increases

In FY 2003, the System continued streamlining its structure through mergers that

reduced the number of Farm Credit Banks

from six to four. At the association level,

activity slowed but continued toward a

single type of direct lender association—

an Agricultural Credit Association with

wholly owned Production Credit Association and Federal Land Credit Association

subsidiaries. As a result of this year’s

corporate activity, all remaining PCAs

were eliminated as independent, standalone, direct-lender associations when

they merged and became ACA subsidiaries. The ACA parent/subsidiary structure

is the most common structure in the

System and accounted for 85 percent of all

associations on September 30, 2003.31

Under this structure, the ACA and its

subsidiaries operate with a common board

of directors and joint employees and are

obligated on each other’s debts and

liabilities. The structure allows the ACA

to build capital more efficiently. Additionally, the structure enables customers to

be stockholders of one entity—the

ACA—and borrowers from either or both

subsidiaries. This arrangement provides

the ACA and its subsidiaries with greater

flexibility for serving its customers and

results in the efficient delivery of credit

and services to borrower-stockholders.

This section describes the changes in the

FCS structure that occurred during FY

2003.
The total number of associations decreased from 104 on September 30, 2002,

to 99 as of September 30, 2003. At the

bank level, mergers reduced the number

of Farm Credit Banks by two. One of the

two bank mergers took effect on October

1, 2003, the first day of the new fiscal

year; however, we have included this

merger in the report. Figure 9 depicts the

chartered territory of each FCS bank.

More details about specific corporate

applications in FY 2003 are available on

FCA’s Web site at www.fca.gov.

Bank Activity Involving AgAmerica,

FCB, AgriBank, FCB, and CoBank, ACB

Two significant restructurings were

completed on January 1, 2003, involving

three banks and two of the largest

associations in the System. Northwest

Farm Credit Services, an Agricultural

Credit Association (Northwest ACA), was

one of two stockholders of AgAmerica,

FCB (AgAmerica). It desired to become

affiliated with CoBank, ACB (CoBank),

which operates under both title I and title

III of the Act.32 The AgAmerica board

adopted a plan that facilitated Northwest

ACA’s reaffiliation with CoBank prior to

AgAmerica’s planned merger into

AgriBank, FCB (AgriBank). The voting

stockholders of CoBank and AgAmerica

voted to approve the reaffiliation following FCA Board approval. The territory

that Northwest ACA serves—the states of

Alaska, Idaho, Montana, Oregon, and

Washington, and parts of northern

California and western North Dakota

—is included in CoBank’s title I charter

authorities.

After Northwest ACA reaffiliated with

CoBank, AgAmerica (and its remaining

stockholder, Farm Credit Services of

America, ACA) merged into AgriBank on

January 1, 2003. This followed approval

by the voting stockholders of both banks

and the FCA Board. As a result of the

merger, AgriBank’s charter was amended

to include AgAmerica’s remaining territory—the states of Iowa, Nebraska, South

Dakota, and Wyoming. AgriBank’s

headquarters remain in St. Paul, Minnesota.

Bank Activity Involving Western Farm

Credit Bank and Farm Credit Bank of

Wichita

The FCA Board approved a proposed

merger of the Western Farm Credit Bank

(WFCB) into the Farm Credit Bank of

Wichita (FCBW) in May 2003. At the

time, the two banks were operating under

a joint management agreement, which had

been put in place on January 1, 2002.

Voting stockholders of the two banks

approved the merger, which took effect on

October 1, 2003. The FCBW, the continuing bank, is now known as U.S. AgBank,

FCB, and its headquarters remain in

Wichita, Kansas. The FCBW’s charter was

amended to include the territory served

by the WFCB—the states of Arizona,

California, Hawaii, Nevada, and Utah, 24

counties in Idaho, and three counties in

western Wyoming.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 53

32. Under title I, CoBank can provide services and

funds to local associations in Alaska, Idaho, Montana, New England, New York, New Jersey, Oregon, and Washington. These associations, in

turn, lend those funds to farmers, ranchers, producers, and harvesters of aquatic products, rural

residents for housing, and some agriculture-related businesses. Under title III, CoBank can lend

to and provide other financial services to farmerowned cooperatives, rural utilities (electric and

telephone), and rural sewer and water systems

within the United States including Puerto Rico.

It is also authorized to finance U.S. agricultural

exports and provide international banking services for farmer-owned cooperatives.
54 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Figure 9

Farm Credit System Banks Chartered Territories

As of September 30, 2003
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 55

Regulations

FCA routinely issues regulations and

policy statements to ensure that the Farm

Credit System complies with the law,

operates in a safe and sound manner, and

efficiently carries out its statutory mission.

The following paragraphs describe some

of our efforts during FY 2003.

Young, Beginning, and Small Farmers

and Ranchers Public Meeting and

Proposed Amendments

We held a public meeting in Kansas City,

Missouri, on November 13, 2002, to

consider whether regulatory changes were

needed to enhance the Farm Credit

System’s service to young, beginning, and

small farmers, ranchers, and producers or

harvesters of aquatic products. This

public meeting was another step in the

agency’s efforts to obtain public input,

which will help us ensure that the System

accommodates the current and evolving

needs of YBS farmers and ranchers for

credit and related services. The objective

of the meeting was to generate ideas on

ways to (1) develop clear, meaningful, and

results-oriented guidelines for System YBS

policies and programs, (2) measure the

System’s YBS performance to ensure that

the System is fulfilling its YBS statutory

mission, and (3) provide adequate

reporting and disclosure to the public on

the System’s compliance with its statutory

YBS mission.

We sought specific testimony on whether

(1) the FCA should require System YBS

programs to include special credit

treatment for YBS farmer and rancher

loans (including guarantees, concessionary

underwriting standards, loan fees, interest

rates, and differential loan covenants), (2)

the System currently offers appropriate

related services, such as farm business

consulting, recordkeeping, insurance, and

tax planning and preparation services to

YBS farmers and ranchers, (3) certain

types of marketing and outreach activities

best help promote YBS programs, (4)

certain types of System partnerships,

alliances, or other joint efforts best help

promote YBS programs, and (5) nonSystem lenders offer programs or services

to YBS farmers and ranchers that the

System could offer as well. (Public

Meeting Notice published October 18,

2002 [67 FR 64320])

Subsequent to the public meeting, we

proposed a rule that would amend our

YBS regulations. The proposed rule

attempts to balance the needs for additional guidance while allowing System

direct-lender associations the flexibility to

design YBS programs unique to the needs

of their territories and within their riskbearing capacities.

The proposed rule, among other things,

would (1) require Farm Credit bank

policies on YBS programs to focus on

ensuring that direct-lender associations

adopt YBS programs in fulfillment of the

explicit requirements of § 4.19 of the Act,

(2) establish minimum components that

each direct-lender association must have

in its YBS program, including a YBS

mission statement, quantitative targets,

qualitative goals, and risk management

methods to ensure safety and soundness,

(3) encourage direct-lender associations to

form YBS advisory committees to learn

more about the needs of YBS farmers and

ranchers, (4) require each association to

include YBS program quantitative targets

and qualitative goals in its operational

and strategic business plan, and (5)

require System banks and associations to
56 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

disclose YBS performance information in

their published annual reports. (Adopted

August 14, 2003; published September 15,

2003 [68 FR 53915] comment period

ended November 14, 2003) In response to

two requests, we took action to reopen the

rule to allow the public an additional 60

days to submit comments. (Reopening

adopted November 13, 2003; published

November 20, 2003 [68 FR 65417])

Other Financing Institutions

We proposed a rule that would amend our

regulations governing other financing

institutions and investments in farmers’

notes. The proposed rule is intended to

make affordable credit more available to

agriculture and rural America by increasing cooperation between System and nonSystem lenders. The proposed rule would

remove provisions in the existing OFI and

farmers’ notes regulations that impede the

flow of credit, but are not required by law,

or do not enhance safe and sound

operations. The rule also proposes related

amendments to our capital regulations.

The proposed rule will complement other

efforts we are exploring to increase the

flow of credit to agriculture and rural

America by promoting greater cooperation between System and non-System

lenders. System banks and associations

have many different powers that enable

them to act as a funding source for a wide

array of credit products that non-System

lenders offer their customers.

The proposed rule would make substantial revisions to our farmers’ notes

regulations. If adopted, the new rule will

expand the farmers’ notes program to

more non-System lenders, and allow all

System associations to invest, for the first

time, in both long- and short-term loans

between these other lenders and eligible

farmers and ranchers. The proposed rule,

in combination with other powers, would

give the System more avenues to meet the

varied funding needs of a wide variety of

non-System lenders that finance agriculture. The proposed rule would enhance

the ability of non-System lenders to access

any one or a combination of the System’s

funding programs, depending on their

individual needs. The proposed rule

would enhance the System’s ability to

fulfill its mission to finance agriculture

and other specified credit needs in rural

America by serving as a steady source of

funding and liquidity for other lenders.

The proposed rule could lower credit

costs and provide more credit options for

farmers, ranchers, aquatic producers and

harvesters, and other eligible rural

residents. (Proposed rule adopted July 10,

2003; published August 11, 2003 [68 FR

47502])

Distressed Loan Restructuring

We proposed a rule that would amend

portions of our borrower rights regulations governing (1) an applicant’s or

borrower’s right to review certain loan

decisions, (2) a borrower’s right to receive

notice when a loan becomes distressed

and the opportunity to request a restructuring of a distressed loan, and (3) the

right of first refusal to repurchase or lease

agricultural real estate following foreclosure or voluntary conveyance. Subsequent

to our initial publication of final borrower

rights rules on September 14, 1988, we

have observed differences in how FCS

institutions apply these regulations and

reviewed complaints from applicants and

borrowers regarding their rights. We also

have received comments from FCS

institutions and the public on our
borrower rights regulations in response to

a June 23, 1993, regulatory burden

solicitation. As a result of our deliberation, we believe the proposed rule clarifies

existing provisions, responds to comments, and reorganizes the rule into one

distinct section of our regulations. This

update will help agricultural borrowers

and FCS institutions better understand

the rights Congress afforded applicants

and borrowers of the System. (Adopted

December 20, 2002; published February 4,

2003 [68 FR 5595]; comment period

ended April 7, 2003)

Capital Amendments

We issued a final rule that amended

portions of our capital adequacy regulations. The final rule added a definition of

total liabilities for the net collateral ratio

calculation and limited the amount of

term preferred stock that may count as

total surplus. Two System banks petitioned us to limit the impact of new

accounting requirements for derivatives

when calculating their net collateral ratios.

In response to the banks’ petition, we

added a definition of total liabilities to

exclude derivatives that are used by banks

to hedge against interest rate risk. We

believe such hedges should not negatively

affect a bank’s net collateral ratio because

these instruments protect a bank against

declines in net collateral. However,

derivatives that are not used as hedges are

included in our total liabilities definition.

We also limited the amount of term

preferred stock that a System institution

can count as total surplus. We believe

System institutions should not overly rely

on term preferred stock to meet regulatory capital requirements. (Adopted

March 28, 2003; published April 16, 2003

[68 FR 18532]; effective June 5, 2003.)

We also issued an interim final rule

amending our regulatory capital standards

to allow System institutions to use a lower

risk weighting for highly rated investments in non-agency asset-backed

securities (ABS) and mortgage-backed

securities (MBS) that have reduced

exposure to credit risk. We issued this

rule so that the capital requirements for

risk-weighting of highly rated non-agency

ABS and MBS investments would more

closely reflect an institution’s relative

exposure to credit risk and help achieve a

more consistent regulatory capital treatment with the other financial regulatory

agencies. (Adopted February 19, 2003;

published March 28, 2003 [68 FR 15045];

effective May 13, 2003.)

Scope of Lending

In response to two regulatory petitions, we

published an Advance Notice of Proposed

Rulemaking (ANPRM) soliciting comments on whether to revise our regulations governing eligibility and scope of

financing for farmers, ranchers, and

aquatic producers or harvesters who

borrow from System institutions that

operate under titles I or II of the Act.

Our ANPRM also requested comments on

whether we should modify our regulatory

definition of “moderately priced” rural

housing. We also held a public meeting

so that members of the public could

present testimony that responded to the

questions that we asked in the ANPRM.

After the public meeting, we granted a

petition from two trade associations to

extend the ANPRM comment period for

an additional 90 days. (Adopted April 25,

2003; published May 2, 2003 [68 FR

23425]; comment period extended July 29,

2003 [68 FR 44490]; comment period

ended October 29, 2003).

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 57
Effective Interest Rate Disclosure

We proposed to amend our regulations

governing disclosure of effective interest

rates (EIR) and related information on

loans. The proposed rule clarifies the

current rule as to when and how (1)

qualified lenders must disclose the EIR

and other loan information to borrowers,

(2) the cost of System borrower stock must

be disclosed to borrowers, and (3) loan

origination charges and other loan

information must be disclosed to borrowers. The rule would require System

institutions to use a discounted cash flow

method in determining the EIR to provide

meaningful disclosures to borrowers.

(Adopted December 20, 2002; published

February 4, 2003 [68 FR 5587])

Credit and Related Services

We proposed amendments to our regulations governing domestic and international

lending, certain intra-System agreements

concerning similar entity participation

transactions, provisions of general financing agreements, and related services.

These amendments are intended to

conform our regulations with recent

changes in the Act, address comments we

received requesting that the FCA reduce

regulatory burden, ensure compliance with

the Act, and clarify certain provisions in

our existing regulations. (Adopted April

10, 2003; published May 21, 2003 [68 FR

27757])

Regulatory Burden Solicitation

We published a notice seeking public

comment on the appropriateness of our

regulatory requirements on the System.

Our notice solicited comments on our

regulations and policies that may duplicate

other requirements, are ineffective, or

impose unnecessary burdens. The

solicitation continues our efforts to

improve the regulatory framework under

which System institutions operate. From

1988 through 1992, as part of our initial

effort to reduce regulatory burden, we

reduced, by more than 70 percent, the

number of matters that required our

“prior approval.” In 1993, we took the

additional step to identify ways to provide

relief by issuing a solicitation for public

comment on regulatory requirements that

are no longer necessary. We issued a

similar solicitation again in 1998. Both

solicitations resulted in the elimination of

many outdated and unnecessary regulatory requirements. (Adopted May 8, 2003;

published May 16, 2003 [68 FR 26551])

Civil Money Penalty

We amended the cost-of-living adjustment

provisions of our civil money penalty

(CMP) regulations. The amendment was

based on a clarification of the requirements of the Federal Civil Penalties

Inflation Adjustment Act of 1990, as

amended, provided to us and several

other agencies by the General Accounting

Office (Adopted October 10, 2002;

published November 14, 2002 [67 FR

68931]; effective November 15, 2002)

Loan Syndications

After we received several requests to

provide guidance about the scope of

System institutions’ authorities to engage

in syndications that non-System lenders

originate, we published a notice soliciting

public comment about the proper regulatory treatment of System loan syndication

transactions. We were seeking the public’s

input before responding to those requests.

(Notice published January 17, 2003 [68

FR 2540]) After the comment period

closed, we reopened the notice for an

additional 60 days of comment. (Reopening published February 25, 2003 [68 FR

8764]) Subsequently, we extended the

comment period twice to provide additional opportunities for comment.

(Extensions published April 21, 2003 [68

FR 19538] and June 25, 2003 [68 FR

37824])

58 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 59

Funding Activity

The FCS raises funds for loans through

the sale of debt securities, channeling

funds from capital market investors to

agriculture and rural communities by

bringing resources from Wall Street to

Main Street. Systemwide debt securities

are issued as discount notes, master notes,

bonds, designated bonds, or global debt

securities.

As required by the Farm Credit Act, the

System must obtain FCA approval for all

funding requests. For the 12 months

ended September 30, 2003, the FCS issued

$332 billion in debt, down from $448

billion issued during the same period in

2002 and $517 billion in 2001. Overall

issuance declined due to a decrease in

discount note issuance as Farm Credit

Banks extended the maturity of their debt

over the past year. This debt extension

was in response to a new internal minimum liquidity standard that each Farm

Credit Bank agreed to achieve.

Data Reporting

During the year, we maintained financial

and operational information about Farm

Credit System institutions that was easily

accessible to the public through the

agency’s Web site. We continued to

provide electronic access to each System

institution’s quarterly Call Report submission that provides financial and operational information in the form of a

balance sheet, an income statement, and a

series of supporting schedules. Along

with Call Report information, we provided public access to various analytical

reports33 and additional operational data

including:

· the Uniform Peer Performance

Report, which is a comparison report

of one FCS institution to a group of

FCS institutions of similar asset size,

· the Six-Quarter Trend Report and the

Six-Year Trend Report, which show

trend information for individual FCS

institutions,

· the Institution Comparison Report,

which is a comparison report of up to

six selected FCS institutions, and

· the YBS Report, which provides

annual data on the lending activities

of FCS institutions for young,

beginning, and small farmers and

ranchers.

In FY 2003, the agency began an effort to

re-evaluate the collection of loan level

data in a systematic and uniform manner

from all System institutions. The agency

currently collects loan level data consistent

with Loan Account Reporting SystemModified (LARS-M) requirements. LARSM, however, does not reflect significant

technological advancements in the

collection of loan level data by System

institutions that have occurred since

LARS-M was implemented in the early

1990s. As a result, the agency is considering how it can enhance the collection of

loan level data for regulatory and supervisory oversight purposes.

Litigation

Louisiana Federal Land Bank

Association, FLCA, et al., v. FCA

On July 29, 2003, the U.S. Court of

Appeals for the District of Columbia

Circuit substantially upheld FCA’s final

rule removing requirements for a Farm

Credit System institution to seek consent

from other System institutions when it

participates in loans made by non-System

lenders. The court ordered the case

remanded to FCA to respond to a

comment letter submitted by the plaintiffs.

The court refused to vacate the rule and

agreed with FCA that the rule was a

“logical outgrowth” of FCA’s proposed

rule to amend 12 C.F.R. § 614.4070.

33. The reports present information in various relational formats, including key financial ratios, percentages, and dollar amounts. The reports show

a condensed balance sheet and income statement,

as well as other areas on capital, assets, earnings

and profitability, and liquidity.
60 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Oversight of Farmer Mac

Farmer Mac is a stockholder-owned,

federally chartered instrumentality of the

United States created in 1988 to establish a

secondary market for agricultural real

estate and rural housing mortgage loans.

Farmer Mac conducts its business primarily

through two core programs, Farmer Mac I

and Farmer Mac II. Under the former,

Farmer Mac purchases, or commits to

purchase, qualified loans, or obligations

backed by qualified loans, that are not

guaranteed by any instrumentality or

agency of the United States. Under the

latter, Farmer Mac purchases the guaranteed portions of farm ownership and farm

operating loans, rural business and community development loans, and certain

other loans guaranteed by USDA.

Farmer Mac is regulated by FCA through

the Office of Secondary Market Oversight

(OSMO), which was established in 1992, as

required by Public Law 102-237. OSMO

provides for the examination and general

supervision of Farmer Mac’s safe and

sound performance of its powers, functions,

and duties. The statute requires that

OSMO constitute a separate office, reporting to the FCA Board, and that its activities, to the extent practicable, be carried

out by individuals not responsible for the

supervision of the banks and associations

of the FCS.

In FY 2003, the agency, through OSMO,

continued its comprehensive CAMELSbased34 examination and expanded

supervision of Farmer Mac’s operations

and condition for safety and soundness

and mission achievement. This work

included a comprehensive review of

Farmer Mac’s compliance with the riskbased capital regulations and ongoing

supervision of its operations and condition throughout the year. Table 10

summarizes Farmer Mac’s balance sheet at

the end of the third quarter for two years.

Capital

By statutory design, secondary market

government-sponsored enterprises, such as

Farmer Mac, operate with thin capital

margins relative to primary market

lenders. Accordingly, monitoring the

capital levels of Farmer Mac is a central

component of FCA’s oversight programs.

On September 30, 2003, Farmer Mac’s net

worth (i.e., Generally Accepted Accounting Principles (GAAP) equity capital) was

$204.1 million, compared with $195.5

million a year earlier. Net worth was 4.9

percent of on-balance sheet assets as of

September 30, 2003. When Farmer Mac’s

off-balance sheet program assets (i.e.,

guarantee obligations) are added to total

34. CAMELS is an acronym for the six general section headings of FCA examinations: capital, asset quality, management performance (including

the board of directors), earnings, liquidity, and

sensitivity to interest-rate risk.

Table 10

Farmer Mac Balance Sheet

As of September 30

Dollars in Millions

2002 2003 Growth Rate

Year-on-Year

Total Assets $4,037.0 $4,196.4 3.95%

Total Liabilities $3,841.5 $3,992.3 3.93%

Net Worth or Equity Capital $195.5 $204.1 4.40%

Source: Farmer Mac’s Third Quarter Security and Exchange Commission Form 10-Q.
on-balance sheet assets, capital coverage

declines to 2.8 percent. By comparison,

Farm Credit System capital (excluding the

FCSIC insurance fund) equates to roughly

15 percent of total assets. However,

another point of comparison is the

Federal National Mortgage Corporation’s

(Fannie Mae) 1.5 percent capital-toprogram assets ratio.

Farmer Mac’s core capital (the sum of the

par value of outstanding common stock,

the par value of outstanding preferred

stock, paid-in capital, and retained

earnings) remained above the statutory

minimum requirement, and its regulatory

capital (core capital plus the allowance for

losses) exceeded the required amount of

regulatory capital as determined by the

risk-based capital rule and stress test.

Farmer Mac’s core capital continued its

upward trend and at September 30, 2003,

totaled $206.4 million, exceeding the

statutory minimum capital requirement35

of $137.7 million by $68.7 million.

Farmer Mac’s regulatory capital (core

capital plus allowance and reserves for

losses) totaled $229.1 million at September 30, 2003, exceeding the regulatory

risk-based capital (RBC) requirement of

$45.4 million by $183.7 million. Table 11

sets forth an historical perspective on

capital and capital requirements at yearend for the prior four years and the

quarter ended September 30, 2003.

35. The statute requires 2.75 percent for on-balance

sheet assets and 0.75 percent capital coverage for

off-balance sheet obligations.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 61

Table 11

Comparison of Capital Positions Over Time

Dollars in Millions

December December December December September

1999 2000 2001 2002 2003

GAAP Equity $87.1 $132.7 $134.4 $183.5 $204.0

Core Capital $88.8 $101.2 $126.0 $183.9 $206.4

Statutory

Requirement $79.6 $96.9 $110.5 $137.2 $137.7

Regulatory

Requirement N/A N/A N/A $73.4 $45.5

Excess over Statutory or

Regulatory Requirement1 $9.2 $4.2 $15.5 $46.7 $68.7

Capital Margin

Excess > Minimum 11.6% 4.4% 14.0% 34.0% 49.9%

1. Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement or the

amount required by FCA regulations as determined by the Risk-Based Capital Stress Test model.

N/A=Not Applicable

Source: Farmer Mac’s Security and Exchange Commission Form 10-Q.
Throughout the past year, OSMO’s

supervisory activity was substantially

focused on capital planning and management. In the coming year, FCA also will

consider revisions to the risk-based capital

regulations that became effective in 2002.

Program Activity

Farmer Mac’s on- and off-balance sheet

program activity continued to increase,

reaching $5.6 billion on September 30,

2003, up $441 million from a year earlier

(see Figure 10). A significant portion of

Farmer Mac’s recent growth has come

from its Long-Term Standby Purchase

Commitment (LTSPC, or Standby)

product. Under Farmer Mac Standbys, a

financial institution pays an annual fee in

return for Farmer Mac’s commitment to

purchase loans in a specific pool under

certain specified conditions at the option

of the institution.

The Standby product largely drove the

rapid growth in off-balance sheet program

activity over the past four years. Standbys

grew from $862.8 million at December 31,

2000, to $2.174 billion at September 30,

2003, an increase of $1.3 billion, or 152

percent. Standby volume now dominates

program activity, making up 38.5 percent

of Farmer Mac’s total program activities.

62 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Figure 10

Farmer Mac Program Growth and Nonprogram Investments

and Cash Trends

December 2000 through September 2003

Source: Farmer Mac’s Security and Exchange Commission Form 10-Q.
Off-balance sheet program activity is

comprised ot Agricultural MortgageBacked Securities (AMBS) held by

investors (AMBS sold) and Standbys. At

the end of September 2003, 56.7 percent

of program activity was off-balance sheet

obligations (see Figure 11).

Asset Quality

On September 30, 2003, the portion of the

Farmer Mac I program portfolio that was

nonperforming was $84.6 million in loan

principle, or 1.74 percent of the principal

balance of all loans purchased, guaranteed, or committed to be purchased since

enactment of the Farm Credit System

Reform Act of 1996 (1996 Act).36 This

compares with $91.3 million, or 2.03

percent, on September 30, 2002.

Nonperforming assets are those that are

90 or more days past due, in foreclosure,

in bankruptcy, or real estate owned

(REO), i.e., property acquired by Farmer

Mac through foreclosure. REO at September 30, 2003, was $16.4 million, up

significantly from $3.7 million a year

earlier.

Farmer Mac attributes the increasing

trend in the total dollar amount of

nonperforming assets over the past four

years to the maturing of a significant

segment of its portfolio into its peak

default years. However, over the past two

years, nonperforming assets are trending

downward, reportedly due to that same

segment maturing beyond peak default

years.

On September 30, 2003, Farmer Mac’s

allowance for losses totaled $22.7 million,

compared with $19.1 million on September 30, 2002. Of the $22.7 million

allowance, $3.4 million represents specific

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 63

36. Farmer Mac assumes 100 percent of the credit risk

on post-1996 Act loans, whereas pre-1996 Act

loans are supported by mandatory 10 percent subordinated interests that mitigate Farmer Mac’s exposure. For that reason, pre-1996 loans are excluded from analysis for comparison purposes.

Figure 11

Farmer Mac’s Total Program Activity by Product

As of September 30, 2003

Source: Farmer Mac’s Third Quarter Security and Exchange Commission Form 10-Q.
allowances related to newly identified

under-collateralized nonperforming assets

during the fourth quarter of fiscal year

2003. Figure 12 sets forth the level of

Farmer Mac’s allowance and

nonperforming assets relative to outstanding post-1996 Act program volume. Post1996 Act volume is used in the chart in

consideration of the minimal risk associated with pre-1996 Act program activity.

FCA continues to monitor nonperforming

assets closely and OSMO’s examination

and supervisory function continues to

encourage Farmer Mac to improve risk

identification and management systems.

Earnings

GAAP net income for the nine months

ended September 30, 2003 was $20.1

million, up $1.6 million (8.2 percent) over

the same period last year. Core earnings37

for the first nine months of 2003 were

$17.2 million, an increase of 1.2 percent

over the same period in 2002. Net

interest income, which excludes guarantee

fee income from Standbys, was $28.2

million for the first nine months of 2003,

slightly lower than the same period in

2002, though higher guarantee fee income

of $1.1 million over last year offset the

decline. Nonprogram investments

accounted for 22 percent of interest

income for the three quarters ended

September 30, 2003, down from 25

percent for the first three quarters of 2002.

Table 12 sets forth trends in key income

components since December 2001.

New Product—AMBS Participation

Swap

Farmer Mac introduced a product into its

programs in July. The Participation Swap

product involves Farmer Mac’s purchase

64 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

37. Core earnings, reported for the first time for the

quarter ending March 31, 2003, is a non-GAAP

measure of financial results that excludes the effects of unrealized gains and losses on availablefor-sale securities and financial derivatives. Core

earnings are now reported by the other housing

GSEs and have been adopted in order to provide

the investing public with a less volatile measurement of earnings.

Figure 12

Allowance and Nonperforming Asset Trends

Source: Farmer Mac’s Security and Exchange Commission From 10-Q.
of a 100 percent participation in a pool of

loans in return for an AMBS. Farmer

Mac’s first contract under this new

program became effective on July 1, 2003.

The Participation Swap product is

economically identical to the Standby

program for Farmer Mac, but appears to

offer the opportunity for participating

FCS institutions to avoid insurance

premiums assessed by the Farm Credit

System Insurance Corporation. OSMO

will continue to monitor the development

of this program.

General Accounting Office Report on

Farmer Mac

During the 16 months between June 2002

and October 2003, the General Accounting Office conducted an in-depth study of

Farmer Mac’s risk management, mission

focus, and corporate governance, as well

Table 12

Comparison of Farmer Mac Statements of Operations

Dollars in Millions

Dec. 31, 2001 Dec. 31, 2002 Sept. 30, 2002 Sept. 30, 2003 Growth Rate

(12 months (12 months (9 months (9 months Yr-on-Yr

ended) ended) ended) ended) As of Sept. 30

Total Revenues $42.0 $49.9 $40.2 $41.8 4.0%

Total Expenses $26.3 $28.6 $21.6 $21.7 0.3%

Net Income $16.3 $21.3 $18.6 $20.1 8.2%

Core Earnings N/A $22.9 $17.0 $17.2 1.2%

N/A=Not Available

Source: Farmer Mac’s Security and Exchange Commission Form 10-Q.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 65

as FCA’s oversight function. The GAO

report, entitled “Farmer Mac: Some

Progress Made, but Greater Attention to

Risk Management, Mission, and Corporate

Governance Is Needed,” was released on

October 16, 2003. The report directs five

recommendations to FCA on topics such

as the data used to calculate the riskbased capital requirements, OSMO’s

offsite-monitoring methods, capital issues

surrounding the Farm Credit System’s use

of the Standby product, Farmer Mac’s lack

of a regulatory requirement to obtain a

credit rating, and assessing Farmer Mac’s

impact on agricultural real estate lending

markets. A letter communicating FCA’s

general agreement with the recommendations and actions taken, or planned to

address them, was sent to congressional

committees on December 11, 2003.
Glossary

66 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

A

Agricultural Credit Association (ACA)

— An ACA results from the merger of a

Federal Land Bank Association or a

Federal Land Credit Association and a

Production Credit Association and has the

combined authority of the two institutions. An ACA borrows funds from a

Farm Credit Bank or Agricultural Credit

Bank to provide short-, intermediate-, and

long-term credit to farmers, ranchers, and

producers and harvesters of aquatic

products. It also makes loans to these

borrowers for certain processing and

marketing activities, to rural residents for

housing, and to certain farm-related

businesses.

Agricultural Credit Bank (ACB) — An

ACB results from the merger of a Farm

Credit Bank and a Bank for Cooperatives

and has the combined authorities of those

two institutions. An ACB is also authorized to finance U.S. agricultural exports

and provide international banking

services for farmer-owned cooperatives.

CoBank is the only ACB in the Farm

Credit System.

B

Bank for Cooperatives (BC) — A BC

provides lending and other financial

services to farmer-owned cooperatives,

rural utilities (electric and telephone), and

rural sewer and water systems. It also is

authorized to finance U.S. agricultural

exports and provide international banking

services for farmer-owned cooperatives.

The last remaining BC in the Farm Credit

System, the St. Paul Bank for Cooperatives, merged with CoBank on July 1,

1999.

F

Farm Credit Act — The Farm Credit Act

of 1971, as amended, is the statute under

which the Farm Credit System operates.

The Farm Credit Act recodified all

previous acts governing the Farm Credit

System.

Farm Credit Bank (FCB) — FCBs

provide services and funds to local

associations that, in turn, lend those funds

to farmers, ranchers, producers and

harvesters of aquatic products, rural

residents for housing, and some agriculture-related businesses. On July 6, 1988,

the Federal Land Bank and the Federal

Intermediate Credit Bank in 11 of the 12

then existing Farm Credit districts merged

to become FCBs. The mergers were

required by the Agricultural Credit Act of

1987. As of September 30, 2003, there

were five FCBs: AgFirst Farm Credit

Bank; AgriBank, FCB; Farm Credit Bank

of Texas; Farm Credit Bank of Wichita;

and Western Farm Credit Bank.

Farm Credit Leasing Services Corporation (Leasing Corporation) — The

Leasing Corporation is a service entity

owned by two Farm Credit System

banks—CoBank, ACB, and AgFirst Farm
Credit Bank—to provide equipment

leasing and related services to eligible

borrowers, including agricultural producers, cooperatives, and rural utilities.

Farm Credit System Insurance Corporation (FCSIC) — The FCSIC was established by the Agricultural Credit Act of

1987 as an independent U.S. government

corporation. Its purpose is to ensure the

timely payment of principal and interest

on insured notes, bonds, and other

obligations issued on behalf of Farm

Credit System banks and to act as

conservator or receiver of FCS institutions. The FCA Board serves ex officio as

the Board of Directors for FCSIC; however, the chairman of the FCA Board is

not permitted to serve as the chairman of

the FCSIC Board of Directors.

FCA Financial Institution Rating

System (FIRS) — The FIRS is similar to

the Uniform Financial Institutions Rating

System used by other federal banking

regulators. However, it has been modified

by FCA to reflect the nondepository

nature of Farm Credit System institutions.

FIRS provides a general framework for

assimilating and evaluating all significant

financial, asset quality, and management

factors to assign a composite rating to

each System institution. The ratings,

which range from 1 to 5, are described

below.

Rating 1 — Institutions in this group are

basically sound in every respect; any

negative findings or comments are of a

minor nature and are anticipated to be

resolved in the normal course of business.

Such institutions are well managed,

resistant to external economic and

financial disturbances, and more capable

of withstanding the uncertainties of

business conditions than institutions with

lower ratings. These institutions exhibit

the best performance and risk management practices relative to the institution’s

size, complexity, and risk profile. As a

result, these institutions give no cause for

regulatory concern.

Rating 2 — Institutions in this group are

also fundamentally sound but may reflect

modest weaknesses correctable in the

normal course of business. The nature

and severity of deficiencies are not

considered material and, therefore, such

institutions are stable and able to withstand business fluctuations. Overall risk

management practices are satisfactory

relative to the institution’s size, complexity,

and risk profile. While areas of weakness

could develop into conditions of greater

concern, regulatory response is limited to

the extent that minor adjustments are

resolved in the normal course of business

and operations continue in a satisfactory

manner.

Rating 3 — Institutions in this category

exhibit a combination of financial,

management, operational, or compliance

weaknesses ranging from moderately

severe to unsatisfactory. When weaknesses relate to asset quality and/or

financial condition, such institutions may

be vulnerable to the onset of adverse

business conditions and could easily

deteriorate if concerted action is not

effective in correcting the areas of

weakness. Institutions that are in significant noncompliance with laws and

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 67
68 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

regulations may also be accorded this

rating. Risk management practices are

less than satisfactory relative to the

institution’s size, complexity, and risk

profile. Institutions in this category

generally give cause for regulatory

concern and require more than normal

supervision to address deficiencies.

Overall strength and financial capacity,

however, still make failure only a remote

possibility if corrective actions are

implemented.

Rating 4 — Institutions in this group

have an immoderate number of serious

financial or operating weaknesses. Serious

problems or unsafe and unsound conditions exist that are not being satisfactorily

addressed or resolved. Unless effective

actions are taken to correct these conditions, they are likely to develop into a

situation that will impair future viability

or constitute a threat to the interests of

investors, borrowers, and stockholders.

Risk management practices are generally

unacceptable relative to the institution’s

size, complexity, and risk profile. A

potential for failure is present but is not

yet imminent or pronounced. Institutions

in this category require close regulatory

attention, financial surveillance, and a

definitive plan for corrective action.

Rating 5 — This category is reserved for

institutions with an extremely high,

immediate or near-term probability of

failure. The number and severity of

weaknesses or unsafe and unsound

conditions are so critical as to require

urgent external financial assistance. Risk

management practices are inadequate

relative to the institution’s size, complexity,

and risk profile. In the absence of

decisive corrective measures, these

institutions will likely require liquidation

or some form of emergency assistance,

merger, or acquisition.

Federal Agricultural Mortgage Corporation (Farmer Mac) — Farmer Mac was

created with the enactment of the Agricultural Credit Act of 1987 to provide a

secondary market arrangement for

agricultural real estate and rural housing

mortgage loans and greater liquidity to

agricultural lenders.

Federal Farm Credit Banks Funding

Corporation (Funding Corporation) —

The Funding Corporation, based in Jersey

City, New Jersey, manages the sale of

Systemwide debt securities to finance the

loans made by Farm Credit System

institutions. The Funding Corporation

uses a network of bond dealers to market

its securities.

Federal Intermediate Credit Bank

(FICB) — The Agricultural Credits Act of

1923 provided for the creation of 12

FICBs to discount farmers’ short- and

intermediate-term notes made by commercial banks, livestock loan companies,

and thrift institutions. The Farm Credit

Act of 1933 authorized farmers to

organize Production Credit Associations

(PCAs), which could discount notes with

FICBs. As a result, PCAs became the

primary entities for delivery of short- and

intermediate-term credit to farmers and

ranchers. On July 6, 1988, the FICB and

the Federal Land Bank in 11 of the 12

Farm Credit districts merged to become

Farm Credit Banks. The mergers were

required by the Agricultural Credit Act of

1987.
Federal Land Bank (FLB) — The Federal

Farm Loan Act of 1916 provided for the

establishment of 12 FLBs to provide longterm mortgage credit to farmers and

ranchers, and later to rural home buyers.

On July 6, 1988, the FLB and the Federal

Intermediate Credit Bank in 11 of the 12

Farm Credit districts merged to become

Farm Credit Banks. The mergers were

required by the Agricultural Credit Act of

1987.

Federal Land Bank Association (FLBA)

— FLBAs were lending agents for Farm

Credit Banks. FLBAs made and serviced

long-term mortgage loans to farmers and

ranchers, and rural residents for housing.

FLBAs did not own loan assets, but made

loans only on behalf of the Farm Credit

Bank with which they were affiliated. As

of October 1, 2000, there were no remaining FLBAs.

Federal Land Credit Association (FLCA)

— An FLCA is a Federal Land Bank

Association that owns its loan assets. An

FLCA borrows funds from a Farm Credit

Bank to make and service long-term loans

to farmers, ranchers, and rural residents

for housing.

G

Government-Sponsored Enterprise

(GSE) — A GSE is a federally chartered

corporation that is privately owned,

designed to provide a source of credit

nationwide, and limited to servicing one

economic sector. Each GSE has a public

or social purpose: to improve the

availability of credit to agriculture,

education, or housing. GSEs are usually

created because the private markets do

not satisfy purposes that the Congress

deems worthy—either to fill a credit gap

or to enhance competitive behavior in the

loan market. Each is given certain

features or benefits, called GSE attributes,

to allow it to overcome the barriers that

prevented purely private markets from

developing. Sometimes the public

assistance is only to get started; at other

times it is ongoing.

P

Production Credit Association (PCA) —

PCAs are Farm Credit System entities that

deliver only short- and intermediate-term

loans to farmers and ranchers. A PCA

borrows money from its Farm Credit

Bank to lend to farmers. As of January 1,

2003, there were no independent, standalone PCAs remaining. All PCAs are now

subsidiaries of ACA parent organizations.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 69
70 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

FCA Employee Benefits . . .

The Farm Credit Administration helps employees

balance their many

different responsibilities—work, family, and

community—with a

variety of benefits and

family-friendly programs.

The unique combination

of competitive salaries

and federal government

and agency benefits helps

employees build rewarding careers while enjoying

flexible and well-balanced

work lives. The 284

dedicated men and

women who work at our

offices across the country

are an integral part of

this public-spirited government agency, and

enjoy the following benefits.

Alternative Work Schedules

· Alternative work schedules that allow

full-time employees and their

managers to set work schedules that

help them balance work and family

needs.

· Flexible and compressed work

schedules that let employees work

nine or 10 hours per day so they can

enjoy “flex days” off.

· A flexible time band that allows

employees, with their supervisors’

approval, to choose the start and end

times for their workdays.

· Flexitour, which lets staff members

change their workday start times with

their supervisors’ approval.

· With a supervisor’s approval, an

employee may earn credit hours,

which can be used to accommodate

work and family responsibilities.

· Compensatory time, subject to

supervisors’ approval, for overtime.

Flexible Work Arrangements

· A Flexiplace Program that allows

employees to work from home, with

supervisory approval, to reduce traffic

congestion and pollution, avoid long

commutes and bad weather, and

accommodate family needs.

· Part-time job opportunities.
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 71

Family-Friendly Leave Policies

and Programs

· The Office of Personnel Management

(OPM) annual leave policy, which

includes 10 paid federal holidays each

year.

· The OPM sick leave policy. Full-time

employees earn four hours of sick

leave every two weeks.

· The FCA Leave Bank, which lets staff

donate annual and/or sick leave to a

general pool for use by other employees as needed for family or personal

medical emergencies.

· The Federal Leave Transfer Program,

which lets staff donate annual and/or

sick leave to other federal government

employees for medical emergencies.

Health, Wellness, and Fitness

Programs and Activities

· A wide range of federal government

health insurance plans. FCA pays

part of insurance premiums.

· Reimbursement of up to $150 for

annual physical examinations and

preventive tests.

· A $400 Life Cycle Account to help

employees pay for health-related

insurance, equipment, and activities.

· A fitness center in the McLean,

Virginia, headquarters.

· An Employee Assistance Program for

short-term crisis counseling and

guidance for employees and their

families.

· On-site defibrillators.

· Subsidized flu shots.

. . . A Strategy for Success
72 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Career and Self-Development

Opportunities · Individual Development Plans created

by employees and supervisors to plan

career goals and maximize training

opportunities.

· Educational seminars. · A Supervisory Development Program,

designed to provide supervisory

succession within the agency.

· Student loan repayment.

Awards and Recognition · Cash and time-off incentive awards

for exceptional work.

· Annual Peer Awards recognition in

which employees may nominate peers

who demonstrate FCA’s core values—

Caring, Communication, Diversity,

Excellence, Fairness, Responsibility,

Honesty, Initiative, Integrity, Respect,

Teamwork, Trust, and Coach of the

Year. Nominees and voting are

anonymous, making the awards based

on actions, not identities.

· Peer to Peer On-the-Spot Awards

allow employees to recognize and

reward fellow employees for exceptional work.

Transportation and Parking · Monthly transit subsidies for employees who use public transportation. · Free parking. · Travel compensation of $50 per night

for every night on eligible travel in

excess of 50 nights but less than 100

nights and $75 per night for every

night on eligible travel in excess of 99

nights.
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 73

Families with Children · A subsidy of up to 70 percent of child

care costs, depending on family

income.

· A pre-tax Flexible Spending Account

to help employees save money for

health care or child care. In FY 2003,

FCA contributed $750 to each

employee’s account.

Miscellaneous Work/Life

Initiatives · Business casual dress at the office. · The federal government’s group life

insurance program.

· The federal government’s Thrift

Savings Plan, a tax-deferred savings

and investment program to help build

retirement savings.

· An optional 401(k) plan to enhance

retirement savings.

· Long-term disability insurance. · Optional Federal Long-Term Care

Insurance Program.

· Federal government retirement

programs that provide annuities and

death benefits.

Relocation Services · Financial assistance for employees

who must change locations for the

agency because of new or changing

job responsibilities.
Amir Abdel-Wahab • Mark Adams • Susan Adams • Jack

Ahlstrom • Margaret Alexander • Douglas Alford • Jeremias

Alvarez • Dale Anderson • Kenneth Anderson • Michael

Anderson • Robert Andros • David Antolini • Daniel Arendt

• Brenda Armijo • Dale Aultman • Melissa Bannister • Mary

Beth Barbagallo • Dianna Becerra • Curtis Bednarz •

Kathleen Beery • Joseph Beltramo • William Benton •

Winston Black • Julie Blacklock • Irma Blankenship • David

Blanton • Karen Blue • Richard Bodine • Ronald Boehr • Melissa Boss • Jeanette Brinkley • Debra Buccolo

• Kathleen Buffon • Kathryn Burcham • Laura Burke • Joy Burr • Regina Cacciavillani • Gaye Calhoun •

Dennis Carpenter • Tong Ching Chang • Mary Chatman • Heriberto Chavarria

• Paul Cheng • Donald Clark • Carl Clinefelter • Pamela Cochran • Ernest Coggins

• Victor Cohen • Jennifer Cohn • Robert Coleman • Susan Coleman • Nicole

Conner • Joseph Connor • Louise Conoboy • Elvis Cordova • Raquel Corona •

Vickie Cosentino • Thomas Dalton • Damon D’Arienzo • April Davis • Elizabeth

Dean • Hal DeCell • Billy Decker • Sharee Derocher • Hal Derrick • Mildred

Dickens • William Dickinson • Vicki Dolezilek • Robert Donnelly • Lucille Dore

• Michael Duffy • Myles Duffy • Michael Dunn • William Dunn • Gaylon Dykstra

• Anjeanette Earhart • Darren

Edwards • James Enzler • W.B.

Erwin • Christine Evert • Tammy Fancher • Scott Fatula • Daniel Fennewald • John

Floyd • Leslie Fridley • Stephen Frimpong • Douglas Gandy • Walter Gardiner • Shirley

Garland • Mary Garver • Eugene Geschwend • Randy Gibson • Andy Gilliard • Thomas

Gist • Thomas Glenn • Sara Glover • Janet Goktepe • Marla Goodwin • Keta Gray •

Steven Green • Joan Greene • Ralph

Greenway • Kristen Grifka • Carl

Grilliot • Steven Guebert • Marla

Guiliano • David Hale • Deborah

Halling • Tim Halstrom • Scott Hanna • Gordon Hanson • Brian Harrington • Carol Harrod

• Edward Harshbarger • Gail Hart • Heidi Heinsohn • Terrence Helwig • Donnie Herrera

• Patricia Hickerson • Audrey Hicks • Damien Hill • Shirley Hixson • Betty Holden • Dorie

Holland • Thomas Holland • Gregory Hosford • Eric Howard • Melinda Huber • Bruce

A final word of thanks to our employees whose dedication to excellence and hard work contributed to the accomplishment of the

agency’s mission to ensure a dependable source of credit for agriculture and rural America.

74 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Employees of the Farm Credit Administration
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 75

Hudson • Jon Hutchinson • Michael Inlow • Andrew Jacob • Jaime Jacob

• Margaret Janssen • Linda Jew • Mark Johansen • Dawn Johnson • Erica

Johnson • Michael Johnson • Marc Jones • Jonathan Joy • Richard Katz •

Douglas Keins • Camille Keith • Steven Kim • Erica King • Tony Kirkham

• Jo Ann Kissal • Kenneth Klein • Deborah Kleinwachter • Clifton Kornegay

• Jeffrey Kostelecky • Mary Beth Krause •Sarah Kreger • David Kuhler •

Sara Kuncaitis • Douglas Kuplic • Wendy Laguarda • David Landry • Dana

Durst Lawrence • Michael Lee • Mark Leonard • Rosa Lerma • Robert

Lescano • David Lewandrowski • John Lightner • Jerry Lindlauf • Kay

Livingston • Robert

Loewe • Kamika Lucas •

Elna Luopa • Cheryl Tates Macias • Kelli MacLean • Michael MacLean • Sara Lynn

Major • Barry Mardock • Alan Markowitz • Lori Markowitz • Cecilia Martinez • Patrick

Mawyer • Lynn May • Kevin McAdoo • Mark McBeth • Veronica McCain • Laura

McFarland • Jeffrey McGiboney • Lori McGuin • Thomas McKenzie • Edna McLean •

Peter McLean • Daniel McLerran • Thomas McLey • Jacqueline Melvin • John Messing

• Mary Meyer • Charlotte Miller • Carlos Mireles • Steven Mitchell • Allen Moore •

John Moore • Vanessa Moreno • James Morris • Fred Mueller • Jody Muller • Rogelio

Munoz • Carmen Naderi • Pamilla Nemeth • Timothy Nerdahl • Nancy Nevin • Lun

Van Nguyen • Cynthia Nicholson • Kathleen O’Dowd • Joan Dec Ohlstrom • Douglas

Olivas • Orlando Olona • Beverly Olson • Shirley Olson • Rebecca Orlich • Robert Orrick • Eric Ovsiew • Brett Parris • Irene Parungo

• Roger Paulsen • Ricky Pederson • Vicki Perlstein • Leonard Peterson • Allen Pexa • Tuyen Pham • Joel Phelps • Carl Premschak • Thomas

Pugh • Jie Qiu • Christine Quinn • Shanon Ratliff • Charles Rawls • Laurie Rea • Kathleen Reddaway • Shawn Reeves • Tracy Reeves •

Robert Reinke • Manuel Reyes • Nicholas Riccobono • Thomas Risdal • James Ritter • Ricardo Rivera • Samuel Roberson • Eric Rodney

• Jessica Romero • Roberto Romero • Regena Rose • Howard Rubin • Louise Ruhf

• Claire Donovan Rusk • Ross Sargent • Aram

Sarhadian • Barbara Schlein • Ryan Schumacher •

James Schuyler • Earl Screven • Anita Sewell • Ralph

Shafer • Jeannie Shaffer • Philip Shebest • Linda

Sherman • Georgellen Shoger • Sarah Sholar •

Brenda Silka • Sweta Singh • Chester Slipek • Roland

Smith • Stephen Smith • Kim Snow • Rhonda

Spraktes • Werner Stadel • Dennis Stephen • David

Stephens • Robert Stricker • Joy Strickland • Donald

Sullivan • Deborah Sulton-Brown • Ruth Surface •

Robert Taylor • Patricia Telford • Rajkumar Thangavelu • Cheryl Thomas • Linda Thorne • Linda Toki •

Jessica Tomlinson • Arthur Townsend • Sadie Uomoleale • Doug Valcour • Ramiro Valdez • Gary Van Meter • Ronald Vannier • Gretchen

Vasquez • Jane Virga • John Von Reyn • Elton Waldrop • Jeffrey Walker • Sonny Wan • Joseph Washington • Lovi Washington • John

Weaver • Jean Weaver • Donna Weigel • Steven Weisz • Kenneth Wells • Douglas Wheeler • Linda White • Rebecca McLeod White •

Thomas Wild • Sharon Wilhite • Kelly Mikel Williams • Michael Wilson • James Wingfield • Gordon Wolfe • David Woltman • Nancy

Womack • Craig Wondra • Timothy Wooten • Dana Wyckoff • Wade Wynn • Mania Wysolmerski • Peng Xu • Nancy Yeager • David Young

• Woodrow Young • Gregory Yowell

Appendix

Farm Credit Administration

Strategic Plan

Fiscal Years 2004–2009

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 77
78 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

The Farm Credit Administration Board supports the efforts of the Farm Credit System to provide sound and

constructive credit to America’s farmers and ranchers and their cooperatives. We are proud of our past accomplishments and are confident of our future contributions to the continued success of the System in achieving its

mission. We recognize that changes in the agricultural and financial marketplace create both risks and opportunities. As we address these changes, we will work together with all our constituencies in a reasonable and responsible manner.

The following strategic plan will guide our regulatory and oversight efforts during the next 5 years.

Michael M. Reyna

Chairman and Chief Executive Officer

Douglas L. “Doug” Flory, Member

Nancy C. Pellett, Member

A Message from the FCA Board
I. Preamble 80

Introduction 80

Vision 81

Mission 81

Legislative Mandate 81

Program Activities 83

Guiding Philosophy 84

Core Values 84

II. Strategic Planning Process 85

III. Goals 86

IV. Key Factors Affecting Achievement of Goals and Objectives 88

Internal Factors 88

External Factors 89

V. Performance Matrix 91

Goal 1 91

Goal 2 92

Goal 3 93

VI. Strategic Program Evaluation 95

Internal Program Evaluations 95

External Program Evaluations 97

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 79

Contents
80 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Introduction

The Farm Credit Administration (FCA or agency) is an independent Federal agency

responsible for regulating and examining the agricultural government-sponsored

enterprises (GSEs) serving rural America. These are the Farm Credit System (FCS or

System) and the Federal Agricultural Mortgage Corporation1

 (Farmer Mac).

The FCS is a network of borrower-owned cooperative financial institutions and

affiliated service organizations that serves all 50 States and the Commonwealth of

Puerto Rico. The oldest of the financial GSEs, Congress provided for cooperative

organization of the FCS in 1916 as a means to achieve affordable and available

farm credit.

The FCS currently provides approximately $91 billion in loans to farmers,

ranchers, producers and harvesters of aquatic products, rural homeowners,

agricultural cooperatives, rural utility systems, and agribusinesses. Overall, the

FCS holds about 30 percent of the market share of agricultural credit.

Farmer Mac is a stockholder-owned, federally chartered instrumentality of the

United States. Through authorities granted in the Agricultural Credit Act of

1987, Farmer Mac was established in 1988 to create a secondary market arrangement for agricultural real estate and rural housing mortgage loans.

Farmer Mac provides secondary market services through a network of agricultural lenders, originators and sellers, among them commercial banks, FCS banks

and associations, life insurance companies, and mortgage companies. As of

yearend 2002, the volume of loans, either purchased or guaranteed, totaled over

$5.5 billion and represented an estimated 12 percent2

 of Farmer Mac’s eligible

agricultural mortgage market.

FCA also has statutory responsibility to examine the National Cooperative Bank, a nonSystem entity operating as a federally chartered, privately owned banking corporation.

Finally, FCA provides contract examination services to the Small Business Administration (SBA) and the United States Department of Agriculture (USDA).

Congressional oversight of the agricultural GSEs and FCA is provided by the U.S.

Senate Committee on Agriculture, Nutrition, and Forestry and the U.S. House of

Representatives Committee on Agriculture. FCA is funded by the institutions it

regulates or examines and receives no Federal tax dollars in the execution of its

mission.

1. Although technically a chartered institution of the

Farm Credit System, due to its unique and separate mission, we are distinguishing Farmer Mac

for strategic planning purposes.

2. Farmer Mac estimates market share based on the

assumption that 40 percent of the total agricultural real estate lending market is eligible for

Farmer Mac programs. Farmer Mac’s source for

total market data is the United States Department

of Agriculture.

Preamble
FCA is directed by a full-time, three-person board. Members are appointed by the

President with the advice and consent of the U.S. Senate. The President designates one

of the members as chairman of the board and chief executive officer (CEO) of the

agency. FCA Board members serve ex officio as the Board of Directors for the Farm

Credit System Insurance Corporation (FCSIC); however, the FCA Board chairman may

not serve as the chairman of the FCSIC Board.

Vision

The Farm Credit Administration is dedicated to maintaining a flexible regulatory

environment that meets current and future rural credit needs while ensuring safety and

soundness.

Mission

The Farm Credit Administration ensures a safe, sound, and dependable source of credit

and related services for agriculture and rural America.

Legislative Mandate3

Originally created by an executive order in 1933, the Farm Credit Administration

derives its authority and its responsibilities from the Farm Credit Act of 1971, as

amended (Act). Pursuant to section 5.8 of the Act, the management of the FCA is

vested in the FCA Board. Section 5.9 of the Act provides that:

The Board shall manage and administer, and establish policies for, the Farm

Credit Administration. It shall approve the rules and regulations for the implementation of this Act not inconsistent with its provisions; shall provide for the

examination of the condition of, and general regulation of the performance of

the powers, functions, and duties vested in, each institution of the Farm Credit

System; shall provide for the performance of all the powers and duties vested in

the Farm Credit Administration; and may require such reports as it deems

necessary from the institutions of the Farm Credit System.

Furthermore, section 5.17 of the Act authorizes the FCA to “exercise the powers conferred on it under [the enforcement provisions of the Act] for the purpose of ensuring

the safety and soundness of System institutions.” Section 5.17 of the Act also requires

FCA to make annual reports directly to Congress on the condition of the System and its

institutions, the manner and extent to which the purposes and objectives of the Act are

being carried out and, from time to time, recommend directly legislative changes.

3. At the request of Congress, the General Accounting Office (GAO), in the early 1990s, conducted

a comprehensive study about the cost and availability of credit in rural America. Congress required GAO to address, among other things,

whether the System should be granted new authorities to serve other credit markets in rural

America. The GAO report, released in March

1994, concluded that the System did not need new

statutory authorities in the near term, but ongoing structural changes in agriculture and rural

America could justify such changes in the longterm. GAO noted that over time, as agriculture

and rural America continued to change, the

System’s charter might need to be updated to ensure that the System is not hampered by outdated

restrictions in serving its existing customer base.

Additionally, if judged desirable in the context of

the Nation’s rural development agenda, the

System’s powers could be expanded so that it

could serve new customers.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 81
Section 1.1(a) of the Act sets out the policy and objectives for why Congress established the Farm Credit System.

It is declared to be the policy of the Congress, recognizing that a prosperous,

productive agriculture is essential to a free nation and recognizing the growing

need for credit in rural areas, that the farmer-owned cooperative FCS be designed

to accomplish the objective of improving the income and well-being of American

farmers and ranchers by furnishing sound, adequate, and constructive credit and

closely related services to them, their cooperatives, and to selected farm-related

businesses necessary for efficient farm operations.

Sections 1.11(b) and 2.4(b) of the Act authorize certain FCS lenders to make loans to

rural residents for single-family, moderately priced homes in rural areas where the

population does not exceed 2,500 inhabitants. Additionally, section 3.7 of the Act

authorizes title III banks to extend credit to entities that install, maintain, expand,

improve, or operate water and waste disposal facilities in rural areas where the population does not exceed 20,000 inhabitants, based on the latest decennial census of the

United States.

Section 701 of the Agricultural Credit Act of 1987 establishes the policy and objectives

for why Congress established Farmer Mac.

It is the purpose of this subtitle—

1. to establish a corporation chartered by the Federal Government;

2. to authorize the certification of agricultural mortgage marketing facilities by

the corporation;

3. to provide for a secondary marketing arrangement for agricultural real estate

mortgages that meet the underwriting standards of the corporation—

A. to increase the availability of long-term credit to farmers and ranchers

at stable interest rates;

B. to provide greater liquidity and lending capacity in extending credit to

farmers and ranchers; and

C. to provide an arrangement for new lending to facilitate capital market

investments in providing long-term agricultural funding, including funds

at fixed rates of interest; and

4. to enhance the ability of individuals in small rural communities to obtain

financing for moderate-priced homes.

82 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003
Program Activities

In order to ensure a safe, sound, and dependable source of credit and related services

for agriculture and rural America, FCA performs two basic functions:

· Issuing regulations and implementing public policy; and

· Identifying risk and taking corrective action.

Issuing Regulations and Implementing Public Policy: FCA is authorized to establish

regulations and policies and interpret the Act and other laws applicable to the FCS and

Farmer Mac. While keeping the public in mind, we place special emphasis on developing regulations using customer-focused techniques. These include advance notice of

proposed rulemaking (ANPRM), comment period reopenings and extensions, constituent/congressional committee meetings, public meetings, focus groups, town meetings,

and other unique approaches to gather a broad range of public input. We also review

and take action on corporate applications for mergers, consolidations, liquidations, and

other corporate restructurings of entities comprising the Farm Credit System.

Identifying Risk and Taking Corrective Action: FCA has statutory authority to

examine all institutions comprising the two agricultural GSEs, as well as the National

Cooperative Bank. The FCS, at October 1, 2003, was comprised of 5 Farm Credit

banks, 99 associations, the Federal Farm Credit Banks Funding Corporation, the Farm

Credit System Financial Assistance Corporation, and 5 service corporations.

We examine each institution at least once every 18 months and issue written examination reports that contain an evaluation of the overall condition and performance of

these institutions. Our examination program is risk-based, concentrating resources on

institutions with the greatest complexity and/or risk exposure. We continually identify,

evaluate, and proactively address risks faced by the institutions we examine.

We have authority to take an enforcement action if an institution, or any of its directors, officers, employees, or agents violates statutes or regulations or operates in an

unsafe or unsound manner.4

 Enforcement actions can result in written agreements,

orders to cease and desist, civil money penalties, and orders of removal, suspension, or

prohibition.

In addition to enforcement actions, we use a “special supervision” process to correct

problems before significant harm occurs in the institutions we examine. This process is

used for instances when the institution’s board and management are both willing and

able to correct the problems that threaten the institution’s safety and soundness. The

process allows the institution to correct identified weaknesses before more stringent

enforcement actions by the agency become necessary.

4. While FCA has authority to examine and take

corrective action against System institutions and

Farmer Mac, FCA only has authority to examine

the National Cooperative Bank.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 83
Agency personnel engage in a variety of activities that support FCA’s two basic functions. Such activities include long-range planning and budgeting; providing pertinent

information to the Federal Executive Branch, Congress, the institutions we regulate, and

the public; legal counsel; economic and financial analyses; management of information

and human resources and training; and administration of the performance, compensation, and benefits programs for FCA staff.

Guiding Philosophy

In the furtherance of our mission, we will adhere to the following guiding philosophy.

Specifically, we will:

· Remain a fair and effective regulator that provides our constituencies with timely,

accurate, and useful communications.

· Continue to achieve a balance between costs required to operate the agency and

the benefits that accrue to our stakeholders, but in no case will we compromise

safety and soundness.

· Continue to issue regulations that promote safety and soundness and the fulfillment of public mission, while minimizing regulatory burden on the institutions we

oversee.

· Continue to identify and eliminate, consistent with law and safety and soundness,

all regulations that are unnecessary, unduly burdensome, or not based on law.

· Continue to seek and fully consider the public’s perspective regarding regulatory

proposals.

· Continue our commitment to add value to everything we do and help our stakeholders meet the challenges and opportunities of the 21st century.

· Continue to be a forward thinking organization and promote good communications, teamwork, and a positive, productive, diverse, and family-friendly work

environment.

Core Values

The FCA Board endorses the following core values, adopted by its employees, which

guide and reflect the way the agency conducts business. We believe these core values

are essential to a positive and successful work environment.

Caring Initiative

Communication Integrity

Diversity Respect

Excellence Responsibility

Fairness Teamwork

Honesty Trust

84 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003
FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 85

Strategic Planning Process

The FCA Board began the creation of the agency’s Strategic Plan 2004–2009 by holding

a series of strategic planning sessions that sought input from farmers; the Farm Credit

Council and other System representatives; academics, economists, and finance specialists; the American Bankers Association; the Independent Community Bankers of

America; former FCA Board Chairmen; and FCA Senior Management as well as FCA

employees.

Once formulated, the draft FCA Strategic Plan was announced in the Federal Register

on October 21, 2003, and made available on FCA’s Web site, inviting public, industry,

and stakeholder comments. In addition, to meet the Government Performance and

Results Act requirements for congressional consultation, the draft plan was sent to the

House Committees on Agriculture, Appropriations, and Government Reform and the

Senate Committees on Agriculture, Nutrition, and Forestry; Appropriations; and

Governmental Affairs. We incorporated applicable comments received from the public

and our stakeholders.

The FCA Board considers the agency’s Strategic Plan 2004–2009 to be a dynamic

document. As such, we will work with our constituencies and other experts to annually

assess the plan’s continued relevance.
Goals

86 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

FCA has three strategic goals. Goals 1 and 2 are primarily external in nature while

Goal 3 is more internally focused. The goals are as follows:

Goal 1: Ensure the Farm Credit System and Farmer Mac fulfill their public mission

for agriculture and rural areas.

FCA continues to emphasize the public purpose and mission-related responsibilities of

the agricultural GSEs serving rural America while ensuring that they operate in a safe

and sound manner.

The challenges of financing agriculture in a safe and sound manner remain great. This

is particularly true given uncertain commodity prices, changing world competition and

public policy, continued concentration and integration in agriculture, and concerns

regarding safety and security of the food system, transition to the next generation of

farmers and ranchers, and improving producers’ income through value-added agriculture.

We will encourage system institutions to find and develop both public and private

partnerships and alliances with other financial service providers to address these

challenges through new and existing programs.

Goal 2: Evaluate risk and provide timely and proactive oversight to ensure the

safety and soundness of the Farm Credit System and Farmer Mac.

FCA’s examination and supervisory programs have been recognized for their high

quality and effective results. Goal 2 focuses on preserving and enhancing the integrity

of FCA’s examination and supervisory programs by making improvements to address

changing risks in the institutions we oversee. FCA will retain a well-trained, professional, and experienced examination staff to maintain a strong safety and soundness

perspective. We will stay abreast of changing market needs and customer forces, we will

have a cost effective examination process that makes full use of available technologies,

and we will take necessary supervisory action to proactively ensure safety and soundness of the System and Farmer Mac.

Goal 3: Implement the President’s Management Agenda.

The following five government-wide initiatives comprise the President’s Management

Agenda (PMA). We intend to implement to the extent practicable these initiatives in

the fulfillment of the agency’s mission.
Strategic Management of Human Capital

Consistent with the PMA, we will link the agency’s human capital needs and strategies

to our organizational mission, vision, core values, goals, and objectives. We will use

strategic workforce planning and flexible tools to recruit, retain, and reward our employees and continue to develop a high-performing workforce. This will maximize our

flexibility in accomplishing our mission effectively and efficiently.

Improved Financial Performance

The agency will continue to invest significant resources in maintaining a financial

management system that can produce accurate, reliable, and timely information to

support policy, budget, and operating decisions. Our system will also facilitate consistent and comparable trend analysis over time and better performance measurement.

Additionally, sustaining an unqualified audit opinion will continue to be the rule.

Expanded Electronic Government

We will advance E-government strategy by continuing to support projects that offer

performance gains across agency boundaries, such as e-regulation, e-signatures, and eprocurement. We will continue to expand our ability to electronically collect information from the System over the Internet, and we will expand the information that is

available to our constituents on our Web site. Finally, we will focus on compliance with

Section 508 of the Workforce Reinvestment Act to ensure our electronic and information

technology is accessible to people with disabilities. These and other initiatives will

enable the public to have greater access and participate more fully in the agency’s

decision-making process.

Budget and Performance Integration

The agency implemented performance budgeting with its fiscal year 2003 budget

submission. In future submissions, the agency will include high quality outcome

measures, accurately monitor the performance of programs, and integrate this presentation with associated costs. Using this information, programmatic costs and benefits will

be clearly identified. This will enable the agency to enhance its control over resources

used and better establish accountability for results.

Competitive Sourcing

The agency supports the idea that competition promotes innovation, efficiency, and

greater effectiveness. As such, we will continue to determine our “core competencies”

and then decide how to build internal capacity and to what extent to contract for

services from the private sector. This process will encourage the agency to focus on

continuous improvement and remove roadblocks to greater efficiency.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 87
Key Factors Affecting Achievement of Goals and

Objectives

88 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT• 2003

In developing this Strategic Plan, FCA identified a number of key factors that could

significantly affect achievement of one or more of the agency’s strategic and operational

goals. These factors have been grouped into the following two categories—internal and

external.

Internal Factors

1. Changing work force. The FCA work force is likely to change in the next 5 years, as

a growing number of employees will become eligible for retirement. Ongoing staff

retention is critical to the continued success of the agency and requires a careful

assessment of staffing needs, promotion opportunities, and recruiting, training, and

staff development efforts. Significant staff attrition would hamper the achievement

of Goals 1, 2, and 3 due to the loss of institutional memory and technical expertise.

2. Ensuring competitive compensation (salary and benefits). FCA is required by the

Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989

to seek to maintain employee compensation comparability with other Federal bank

regulatory agencies (FBRAs). Since the FCA compensation strategy defines “pay

comparability” as the average market rate paid by other FBRAs, the agency periodically conducts compensation surveys of the FBRAs to determine comparability.

Additionally, through the efforts of a work/life coordinator, the agency remains on

the forefront regarding the family-friendly programs available in the marketplace.

Offering a unique combination of competitive compensation and a flexible, wellbalanced work life should help employees build a rewarding career and desire to

remain employed by the agency, thus enhancing the achievement of

Goals 1, 2, and 3.

3. Continued migration to electronic-based systems. We will continue to look for ways

to streamline our operations and leverage efficiencies gained by moving from

paper-based systems to electronic workflow applications and records. The gained

efficiencies from this migration should allow more time and effort to be spent on

mission-critical tasks, which would enhance the achievement of Goals 1 and 2.

The agency will use technology to mitigate the loss of experienced staff and to

assist in knowledge transfer. This will further the achievement of Goal 3.

4. Changing work environment. We are currently experiencing a shift to an electronic

information-based society. This shift is changing the way we conduct our activities

and the way our customers communicate with us. Enhancing the agency’s ability

to communicate and share information with its constituents should promote

achievement of both Goals 1 and 2. Enhancing the ability of FCA employees to

fully utilize technology will also promote the achievement of Goals 1, 2, and 3.
5. Limited budget resources. Our program activities are primarily financed through

assessments on the institutions we regulate and/or examine. We realize we have a

fiduciary obligation to carry out our programs in a cost-effective and efficient

manner while still fulfilling our mission. Responsibly managing our resources

supports the achievement of Goal 3.

6. Impact of technological change on regulatory and examination techniques. The

Internet and related technology offer opportunities for the agency to streamline

regulatory and examination programs by enhancing the electronic exchange and

evaluation of information. The continued adoption of updated technology is

important to monitor and assess both safety and soundness and fulfillment of

public mission issues related to the achievement of Goals 1 and 2.

External Factors

1. Importance of GSE status. GSE status of the System and Farmer Mac helps maintain a safe, sound, and dependable source of credit and related services in agriculture and rural America. This is because GSE status facilitates a competitive source

of credit for eligible and creditworthy borrowers. Furthermore, it results in a

capital structure that is vital to the borrowers themselves and to the safety and

soundness of the System and Farmer Mac. A continuation of this status is a

significant contributor to the successful achievement of Goals 1 and 2.

2. Uncertain funding and implementation of farm policy. Due to increased competition

for Federal funds, farm program payments may be jeopardized. If farm program

payments were significantly reduced or eliminated, those agricultural lenders

having a concentration in program crops dependent on conservation or commodity

payments could face safety and soundness weaknesses. This scenario would result

in significant risks to the agency’s achievement of Goal 2.

3. Changing policy environment. The policy environment for FCA will continue to be

intertwined with ongoing changes in demographics and consumer preferences,

increased Federal budget pressures, and focus on GSEs and corporate accountability. With fewer people directly involved in the production of agricultural products,

there may be less grass-roots support for the needs of agriculture and rural

America. These factors create the potential for shifts in agriculture policies and

programs that may impact achievement of both Goals 1 and 2.

4. Structural changes in agriculture and rural areas. The farm sector is increasingly

reliant on off-farm income and government payments. In addition, many rural

counties in traditional farming communities are losing population and their rural

infrastructure is declining. Many producers are part-time farmers and rely on

additional business opportunities to improve their economic welfare. These

structural changes may impact policy actions relating to mission achievement in

Goal 1 and safety and soundness in Goal 2.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 89
5. Lack of investment equity in many rural areas. Some rural areas are suffering from

a loss of critical infrastructure, population, and business investment necessary to

support opportunities. Furthermore, much of the capital in rural areas is held in

the form of fixed assets and is not easily converted for investment purposes.

Therefore, there is a need for more flexible, innovative forms of capital that will

help rural areas reach their economic potential. This situation presents a challenge

to the achievement of Goal 1, and a continued decline in rural areas poses increased safety and soundness concerns that could impact the achievement of

Goal 2.

6. Uncertain economic conditions. Uncertain economic growth presents potential risks

that could affect the achievement of Goal 2. These risks include: (1) weak job

growth thus reducing the opportunities for off-farm employment for farm families;

(2) quickly rising interest rates that reduce borrower repayment capacity, especially

for those loans with variable rates; (3) a drop in farm real estate values due to

higher interest rates or a drop in farm income or government payments; and (4)

higher inflation and/or increases in energy costs that raise input costs and reduce

already thin margins of many producers.

7. Bilateral and multilateral trade agreements. The nature of trade agreements presents

risks and opportunities to both agricultural producers and their lenders. Those

with concentrations in tradable commodities could be particularly exposed to the

impacts of the agreements, thus adversely affecting the agency’s achievement of

Goal 2.

8. Heightened public concerns over food and water supply safety, and environmental

issues. Protecting the food chain, water supply, and environment from possible

terrorist threats is a major public concern in the current climate of world affairs.

Such concerns dramatically affect demand for food products; whereas, public

acceptance and confidence are vital aspects of food safety. Environmental stewardship is also an important issue. These public concerns might affect agricultural

lenders’ mission fulfillment as they relate to Goal 1 and they might raise additional

lending risks that could impact the achievement of Goal 2.

9. Global food production relative to changing demographics. Increasing foreign

competition will put additional pressure on profit margins for many U.S. producers.

Shifts in worldwide consumption patterns could provide marketing opportunities

and risks for producers. Failure by agricultural producers and their lenders to

appropriately respond to changing market conditions might impact the achievement of Goal 2.

10. Weather, pests, diseases, and other natural occurrences. Any of these factors could

enhance profitability or bring disaster to the various segments or commodity

groupings of agriculture. Favorable weather, effective insect control, and healthy

animals can increase producer profitability. Conversely, drought or floods, insect

infestation, and animal diseases could be devastating to profitability in many

segments of agriculture. The resulting financial difficulties could have significant

implications affecting safety and soundness (Goal 2). Similarly, these factors could

impact the achievement of Goal 1 based on the response by lenders in rural areas

to the increased risk.

90 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003
Performance Matrix

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 91

The strategic and operational goals listed in the following matrix reflect the agency’s

focus for future action. Means and strategies for each goal are those specific initiatives

that, in concert with the agency’s basic functions, achieve or advance agency goals over

the next 5 years. The results achieved by the agency through the goals and initiatives

identified in the Strategic Plan are reported through an integrated performance measurement system.

This system is based on three desired outcomes, or results, for the agency’s operations,

which are closely linked to the agency’s strategic and operational goals. Agency-level

performance measures have been developed for each outcome. The relationship

between the agency’s strategic and operational goals and its annual performance goals/

measures is illustrated in the following matrix.

Strategic Plan 2004–2009 Performance Matrix

Goal 1

Ensure the Farm Credit System and Farmer Mac fulfill their public mission for

agriculture and rural areas.

Desired Outcome

A flexible regulatory environment that enables the System and Farmer Mac to fulfill

their public mission.

Means and Strategies

1. Ensure FCS lenders and Farmer Mac fulfill their public mission by reaching out

to all potential customers.

2. Ensure all eligible customers have access and are treated equitably.

3. Enable the System and Farmer Mac to serve evolving customer needs by maintaining a flexible regulatory environment.

4. Emphasize regulatory activities related to young, beginning, and small (YBS)

farmers, ranchers, and producers or harvesters of aquatic products.

5. Emphasize Farmer Mac’s obligation to promote and encourage the inclusion of

qualified loans for small farms and family farmers in the agricultural mortgage

secondary market.

6. Encourage the System and Farmer Mac to use guarantee programs and work

with Federal and State agencies that offer such programs to streamline processes.

7. Encourage all System institutions and Farmer Mac to continue to include a

discussion in annual reports of how they are meeting their public mission.

8. Enable the agricultural GSEs to restructure themselves to best serve their

customers and rural America.

9. Ensure regulatory definitions reflect the changes in agriculture, rural areas, and

the financial marketplace.

10. Identify and eliminate, consistent with law and safety and soundness, all regulations that are unnecessary, unduly burdensome, or not based on law.
5. For purposes of performance measurement, the

term institutions does not include the National

Cooperative Bank and institutions that FCA examines on behalf of SBA and USDA on a contract basis.

6. Effective strategic business plans are those that

received a satisfactory rating from FCA examiners and comply with 12 CFR 618.8440.

7. FCA examiner reviews of consumer compliance

and borrower rights are absent any material deficiencies or weaknesses.

8. Supplemental approaches include ANPRM, comment period reopenings and extensions, constituent/congressional committee meetings, public

meetings, focus groups, town meetings, and other

unique approaches to gather a broad range of

public input.

9. An effective program is one that received a satisfactory rating from FCA examiners for the most

recent review of an institution’s YBS program.

92 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

11. Encourage partnerships between System and non-System lenders and Farmer

Mac that facilitate the flow of funds to agriculture and rural areas.

12. Publish best practices findings or establish guidelines when appropriate on FCAregulated institutions’ efficient and effective use of partnerships and other

relationships with non-FCA-regulated entities to facilitate the flow of funds to

agriculture and rural areas.

Performance Measures

1. Percentage of institutions5

 with effective strategic business plans6 for providing

constructive credit and related services to all potential customers. (100%)

2. The aggregate annual change in Farmer Mac’s program assets in relation to the

change in the total eligible agricultural mortgage market. (> 1.00)

3. Percentage of direct-lender institutions with satisfactory consumer compliance

and borrower rights examination ratings.7 (100%)

4. Percentage of instances in which the agency solicits public comment and input

on applicable regulatory initiatives using supplemental approaches8 to the notice

and comment rulemaking process. (40%)

5. Percentage of direct-lender institutions that have effective programs9 to furnish

sound and constructive credit and related services to YBS farmers, ranchers, and

producers or harvesters of aquatic products or that have acceptable corrective

action plans in place. (100%)

6. The aggregate annual change in the level of System and Farmer Mac participation in Federal and State guarantee programs in relation to the aggregate annual

change in total Federal and State guarantee programs. (> 1.00) 

Goal 2

Evaluate risk and provide timely and proactive oversight to ensure the safety and

soundness of the Farm Credit System and Farmer Mac.

Desired Outcome

Effective risk identification and timely corrective action.

Means and Strategies

1. Maintain an effective examination and oversight program through maintenance

of the Precommission Training Program and ongoing training of commissioned

examiners.

2. Develop regulatory guidance and examination procedures that keep pace with

evolving strategies used by the institutions comprising the two agricultural GSEs

in addressing the changing needs of their customers in rural areas.

3. Evaluate whether each FCS institution and Farmer Mac have established and are

maintaining proactive risk management practices commensurate with their

respective risk-bearing capacity.

4. Evaluate whether each direct-lender institution maintains systems that allow it to

analyze the characteristics of risk and borrower profiles in its loan portfolio.

Strategic Plan 2004–2009 Performance Matrix (cont.)
5. Evaluate whether management and board governance of FCA-regulated institutions is keeping pace with the increasing size and complexity of institutions’

operations.

6. Maintain early warning systems that allow timely identification of emerging risks

and related issues in FCS institutions.

7. Undertake research and analysis of emerging risks and related issues and incorporate the findings into examination and oversight programs.

Performance Measures

1. Number of institutions placed in receivership due to financial failure during the

previous 12 months. (None)

2. The total assets of FCS institutions with composite Financial Institution Rating

System (FIRS) ratings of “1” or “2” divided by the total assets of FCS institutions.

(90%) 

3. Percentage of FCS institutions with composite FIRS ratings of “3,” “4,” or “5” with

corrective action plans in place to address the underlying problems. (100%)

4. Percentage of direct-lender institutions with adverse assets to risk funds less than

100 percent. (100%)

5. Percentage of institutions complying with all regulatory capital ratio requirements (permanent capital ratio, total capital ratio, core surplus ratio, net collateral, risk-based capital). (100%)

6. Percentage of instances of non-compliance with laws or regulations resolved to

FCA’s satisfaction. (100%)

7. Percentage of FCA-regulated institutions that have effective audit and review

programs.10 (100%)

Goal 3

Implement the President’s Management Agenda (PMA).

Desired Outcome

Effective and efficient management of resources.

Means and Strategies

1. Strategically manage human capital.

2. Upgrade the agency’s financial management system.

3. Continue the expansion of electronic government.

4. Continue the evolution of budget and performance integration.

5. Give due consideration to competitive sourcing.

Performance Measures

1. The agency’s human capital goals and strategies support mission needs and the

PMA. (Yes)

2. Structure of agency is assessed at least once every 3 years to determine whether

changes are needed to better meet mission goals. (Yes)

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 93

Strategic Plan 2004–2009 Performance Matrix (cont.)

10. An effective audit and review program is one that

received a satisfactory rating from FCA examiners for the most recent review of an institution’s

internal controls.
3. Percentage of available authorities and programs that were used to expand

recruitment methods in an effort to enhance the pool of qualified applicants for

entry-level hiring to include more individuals in underrepresented groups.

(100%)

4. Percentage of vacancy announcements announced at multiple grade levels for

positions in FCA’s six most populous occupations in an effort to develop and

fully utilize employees’ potential. (100%) 

5. Percentage of vacant non-entry level positions filled from within. (60%)

6. Percentage of established career paths for FCA’s six most populous occupations

to allow for the internal advancement of high-potential candidates. (100%)

7. Percentage of staff adhering to Individual Development Plans annually. (85%)

8. Audit opinion on the agency’s annual financial statements as reported by the

agency’s external auditors. (Unqualified)

9. Number of material internal control weaknesses reported by the agency’s external

auditors. (None)

10. The number of business days after each month end that financial reports are

available to agency managers. (<7)

11. Percentage of newly developed FCA training courses that are available electronically. (50%)

12. Percentage of agency staff with broadband connectivity remotely. (25%)

13. Percentage of the agency’s Web pages and electronic devices that are section 508

accessibility compliant. (95%)

14. Availability of information technology resources and information to appropriate

users to provide communication and information collection and delivery in a

timely manner, as measured quarterly by reports on FCA’s network and Web

components. (97%)

15. Performance of an annual inventory of FCA’s commercial activities for evaluation

of outsourcing alternatives. (Yes)

94 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Strategic Plan 2004–2009 Performance Matrix (cont.)
Strategic Program Evaluation

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 95

A mix of internal and external program evaluations are employed to determine if FCA’s

programs are attaining their intended outcomes in a cost-effective manner.

Internal Program Evaluations

Internal Program Evaluations

The FCA uses an integrated process to ensure program objectives and goals are aligned,

focused, and assessed with accurate data. The data used to assess the agency’s progress

toward its strategic goals are evaluated from several perspectives to ensure appropriate

alignment, integrity, validity, and focus.

Senior Staff

Strategic program evaluation oversight begins with Senior Staff, which is led by the

Chief Operating Officer (COO). Senior Staff at the agency consists of all Office

Directors, the Secretary to the Board, the Equal Employment Opportunity Director, the

Executive Assistants to the CEO and COO, and the COO. Senior Staff meets weekly,

and as directed by the COO, to discuss agency programs and issues in an effort to

maintain strategic alignment with FCA Board approved strategic and annual performance goals.

Quarterly Performance Updates

Senior Staff provides a Quarterly Goal Report to the FCA Board on the status of the

agency’s annual performance measures and goals. Reports are provided to the Senior

Staff by the offices that have direct responsibility for data concerning program performance measures, such as the Office of Examination and the Office of Policy and

Analysis.

Monthly Management Reports

Monthly management reports are prepared by the respective offices and provided to

either the COO or the CEO, as appropriate. The reports address office accomplishments

and performance during the month. The CEO and COO review the reports for strategic

alignment and performance. The reports are consolidated and forwarded to the CEO

and FCA Board as a single agency-wide management report. The consolidated management report is used by the Senior Staff, along with quarterly reports, in the development

of the agency’s Annual Performance and Accountability Report.

Weekly Management Reports

Weekly management reports are prepared by the respective offices and provided to the

COO. The reports address office accomplishments and performance during the week.

The COO reviews the reports for strategic alignment and performance.

Strategic Plan

The Strategic Plan details long-term policy and management goals along with the level

of performance the agency will strive to achieve over the next 5 fiscal years. FCA’s

Strategic Plan is posted on the FCA Internet Web site for general public review.
96 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003

Annual Performance Plan

The Annual Performance Plan provides detailed information about how FCA will

implement initiatives contained in the FCA Strategic Plan and is posted on the FCA

Internet Web site for general public review.

Performance and Accountability Report

The Performance and Accountability Report provides detailed information about what

FCA does and how well it is meeting its mission and goals. This report is also available

on the FCA Internet Web site for general public review.

Office of the FCA Ombudsman

Through liaison with groups external to the agency, the FCA Ombudsman provides

feedback and recommendations to the FCA Board on program-level activities of the

FCA. The purpose is to influence positive change to the agency’s strategic management

process.

Management Control Plan (MCP)

Each agency office annually updates the MCP for their respective office and provides

the MCP to the Management Controls Officer. The MCP is used by the Management

Controls Officer for monitoring to ensure that all planned review work is completed

within established time frames. The MCP guides agency managers in evaluating,

improving, and reporting on internal controls in their programs and administrative

activities.

Office Annual Operating and Performance Plans

All offices within the agency prepare an Annual Operating and Performance Plan.

Assignments and delegated authorities are planned and monitored through management, with reporting and ongoing communication to ensure results. Primarily, internal

controls and reporting requirements are established for those program functions that

link the Annual Operating and Performance Plan to the agency’s Strategic Plan.

Similarly, the plans support the dedicated and highly professional staff needed to

accomplish the agency’s programs. Investments in training and continuing improvements in programs and practices are ongoing to achieve desired outcomes in assignments and responsibilities under FCA’s Strategic Plan.

Information Resources Management Oversight Committee

The Information Resources Management Oversight Committee (Committee) is responsible for oversight, evaluation, and alignment of the agency’s major information technology programs and initiatives. The Chief Information Officer serves as the Chair. All

offices in the agency are represented by a voting member. The Farm Credit System

Insurance Corporation is also represented by a non-voting member. The Committee is

cross-functional and meets monthly, serving as an advisory and recommending body to

the Senior Staff and the COO.
Quality Assurance Programs

The agency’s regulatory and examination functions maintain extensive quality assurance programs through a system of internal controls in accordance with the provisions

of Policies and Procedures Manual No. 1007, Evaluation of Internal Control Systems,

and the Office of Management and Budget (OMB) Circular A-123.

PART

Beginning with the fiscal year 2006 budget cycle, the agency will evaluate its programs

and management using the new Program Assessment Rating Tool (PART) developed by

OMB. The PART was established to enhance the practical use of performance information and to implement a systematic, consistent process for evaluating program performance.

External Program Evaluations

In addition to the FCA’s ongoing internal program evaluation efforts, we receive

program-level feedback from three primary sources:

Annual Independent Audit

An outside independent accounting firm conducts an annual Certified Public Accountant audit of FCA’s fiscal yearend financial statements to opine on the accuracy of the

financial data. This firm also provides senior management with conclusions regarding

the effectiveness of the agency’s program of financial controls.

Office of the Inspector General Reviews

The Office of the Inspector General (OIG) conducts targeted reviews of various aspects

of FCA operations every year. The results of these evaluations are used to further

enhance FCA’s strategic and annual performance planning processes. The OIG review

of the agency’s Loan Accounting and Reporting System is a recent example of a

program evaluation received from this source. Also, it conducts an ongoing formal

survey of all FCS institutions’ boards of directors as to the quality of FCA examination

and supervisory programs.

General Accounting Office (GAO)

The GAO conducts targeted reviews of FCA operations on a periodic basis. In addition

to providing agency specific results, it also provides an objective source of data for

benchmarking purposes. GAO’s review of FCA’s oversight of the System’s special

mission to serve Young, Beginning, and Small Farmers was a more recent example of a

program evaluation received from this source.

FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003 97
Additional Information

The Farm Credit Administration 2003 Annual Report is now available on FCA’s Web site

at www.fca.gov. While supplies last, printed copies of this publication may be obtained

without charge from:

Office of Communications and Public Affairs

Farm Credit Administration

1501 Farm Credit Drive

McLean, VA 22102-5090

Telephone: 703-883-4056

Fax: 703-790-3260

E-mail: info-line@fca.gov

The Federal Farm Credit Banks Funding Corporation prepares the financial press

releases, the System’s Annual and Quarterly Information Statements, and the System’s

combined financial statements contained therein, with the support of the System banks.

Copies are available on the Funding Corporation’s Web site at www.farmcredit-ffcb.com

or from:

Federal Farm Credit Banks Funding Corporation

10 Exchange Place

Suite 1401

Jersey City, NJ 07302

Telephone: 201-200-8000

The Farm Credit System Insurance Corporation publishes an annual report. Copies are

available on FCSIC’s Web site at www.fcsic.gov or from:

Farm Credit System Insurance Corporation

1501 Farm Credit Drive

McLean, VA 22102

Telephone: 703-883-4380

In addition, FCS banks and associations are required by regulation to prepare annual

and quarterly financial reports. Copies of these documents are available for public

inspection at FCA headquarters in McLean, Virginia.

98 FARM•CREDIT•ADMINISTRATION•ANNUAL•REPORT•2003
Office of Communications and Public Affairs