Testimony of the Honorable Jill Long Thompson

Chair and Chief Executive Officer

Farm Credit Administration

Before the Subcommittee on Agriculture, 

Rural Development, Food and Drug Administration, and Related Agencies

U.S. Senate Committee on Appropriations

March 4, 2014

Mr. Chairman and Members of the Subcommittee, I am Jill Long Thompson, Board Chair and Chief 

Executive Officer of the Farm Credit Administration (FCA or Agency). On behalf of my colleagues 

on the FCA Board, Kenneth A. Spearman of Florida and Leland A. Strom of Illinois, and all the 

dedicated men and women of the Agency, I am pleased to provide this testimony.

Before I discuss the Agency’s role, responsibilities, and budget request, it is my privilege to thank 

the Subcommittee staff for its assistance during the budget process. As the Subcommittee knows, 

FCA does not receive a Federal appropriation. The funds used by FCA to pay its administrative 

expenses are assessed and collected annually from the Government-sponsored enterprises we 

regulate and examine—the Farm Credit System (FCS or System) made up of banks, associations,

and service corporations, and the Federal Agricultural Mortgage Corporation (Farmer Mac). 

The Agency is submitting a proposed total budget request of $65,600,000 for fiscal year (FY) 2015. 

FCA’s proposed budget for FY 2015 includes funding from current and prior-year assessments of

$65,100,000 on System institutions, including Farmer Mac, and $500,000 from anticipated

reimbursable work for the Farm Credit System Insurance Corporation, the U.S. Department of 

Agriculture, and the National Consumer Cooperative Bank. Almost all this amount (approximately 

83 percent) goes for salaries, benefits, and related personnel costs.

A key factor driving the FY 2015 budget is the Agency’s need to hire and train qualified individuals 

to replace the many employees—especially examiners—who have begun to retire. We must ensure 

that our staff has the skills it needs to address changes in the agricultural industry and the 

complexities of agricultural finance. Also, changes in the organization and structure of the System 

itself are presenting challenges. As System institutions continue to merge and grow larger and more 

complex, the Agency must dedicate more resources and skilled staff to examining and overseeing 

these institutions. The funding we have requested for FY 2015 will allow us to hire and train the 

people we need to continue to properly examine, oversee, and regulate the System.

MISSION OF THE FARM CREDIT ADMINISTRATION

As directed by Congress, FCA’s mission is to ensure a safe, sound, and dependable source of

credit and related services for all creditworthy, eligible persons in agriculture and rural America. The 

Agency accomplishes its mission in two important ways. First, FCA protects the safety and 

soundness of the FCS by examining and supervising all FCS institutions, including Farmer Mac, 

and ensures that the institutions comply with applicable laws and regulations. Our examinations and 

oversight strategies focus on an institution’s financial condition and any material existing or potential

risks, as well as on the ability of its board and management to direct its operations. We also 

evaluate each institution’s compliance with laws and regulations and evaluate whether it serves all 

eligible borrowers, including young, beginning, and small farmers and ranchers. If a System 

institution violates a law or regulation or operates in an unsafe or unsound manner, we use our 

supervisory and enforcement authorities to ensure appropriate corrective action is taken. Second, 

FCA develops policies and regulations that govern how System institutions conduct their business 

and interact with customers. FCA’s policy and regulation development focuses on protecting 

System safety and soundness; implementing the Farm Credit Act; providing minimum requirements 

for lending, related services, investments, capital, and mission; and ensuring adequate financial 
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disclosure and governance. The policy development program includes approval of corporate charter 

changes, System debt issuance, and other financial and operational matters.

EXAMINATION PROGRAMS FOR FCS BANKS AND ASSOCIATIONS

To help ensure the safety and soundness of FCS institutions, FCA uses examination and 

supervision processes to address material and emerging risks at the institution level and across the 

System. The Agency bases its examination and supervision strategies on institution size, existing 

and prospective risk exposure, and the scope and nature of each institution’s business model. We 

monitor agricultural, financial, and economic risks that may affect groups of institutions or the entire 

System. Given the increasing complexity and risk in the System and human capital challenges at

FCA, we continue to implement a number of initiatives to improve operations, increase examination 

effectiveness, and enhance staff expertise in key examination areas.

The frequency and depth of examination activities vary based on risk, but each institution is 

examined at least once every 18 months and receives a summary of examination activities and a 

report on its overall condition. FCS institutions are required to have effective loan underwriting and 

loan administration processes, to properly manage assets and liabilities, to establish high standards 

for governance, and to provide transparent disclosures to shareholders. FCA’s examination and 

supervision program promotes accountability in FCS institutions by providing a framework to help 

institutions identify and manage risks. In addition, FCA is closely watching real estate values that 

have risen rapidly in certain sections of the country to ensure that FCS lending practices remain 

prudent. FCA may use its enforcement powers to effect changes in an institution’s policies and 

practices to correct unsafe or unsound conditions or violations of law or regulations.

The Agency uses its Financial Institution Rating System (FIRS) to assess the safety and soundness 

of each FCS institution. The system provides a framework of component and composite ratings to 

help examiners evaluate significant financial, asset quality, and management factors. FIRS ratings 

range from 1 for a sound institution to 5 for an institution that is likely to fail. As the chart below 

indicates, the System remains financially strong overall. At the present time, institutions are well 

Source: FCA’s FIRS Ratings Database. The above chart includes only the System banks and their affiliated direct-lender associations. It 

does not include Farmer Mac. The figures in the bars indicate the number of institutions by FIRS rating.
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capitalized, and the FCS does not pose material risk to investors in FCS debt, the Farm Credit 

System Insurance Corporation, or to FCS institution stockholders.

Although the System’s condition and performance remain satisfactory overall, several institutions

are experiencing stress that requires special supervision and, in some cases, enforcement actions. 

Factors causing the stress include weaknesses in the Nation’s economy and credit markets, a 

rapidly changing risk environment in certain agricultural segments, and, at times, management’s 

ineffective response to these risks or other operational challenges. We have increased supervisory 

oversight at a number of institutions and dedicated additional resources in particular to the nine

institutions rated 3 or worse. Although these institutions represent about 2 percent of System assets 

and do not materially affect the System’s consolidated performance, they require significantly 

greater Agency resources to oversee. As of September 30, 2013, eight FCS institutions were under 

formal enforcement actions, but no FCS institutions are in conservatorship or receivership.

REGULATORY AND CORPORATE ACTIVITIES

Regulatory Activities—Congress has given the FCA Board statutory authority to establish policy, 

prescribe regulations, and issue other guidance to ensure that FCS institutions comply with the law 

and operate in a safe and sound manner. The Agency is committed to developing balanced, 

flexible, and legally sound regulations. Current regulatory and policy projects include the following:

• Revising regulations on flood insurance to conform to the Biggert-Waters Flood Insurance 

Reform Act of 2012

• Revising the capital regulations to make them consistent with Basel III, as appropriate

• Revising regulations to implement requirements of the Dodd-Frank Act by adding margin 

and capital requirements for FCS institutions that engage in noncleared swaps and 

noncleared security-based swaps, and removing references to credit ratings in our 

regulations

• Revising the investment eligibility regulations for FCS institutions 

• Clarifying and strengthening standards-of-conduct regulations

• Clarifying and enhancing voting procedures related to tabulating votes, using teller 

committees, and distributing and handling ballots

• Revising regulations related to FCS bank and association mergers and consolidations

• Revising regulations related to investment eligibility and creditworthiness for Farmer Mac

• Revising the corporate governance requirements for Farmer Mac

• Revising regulations based on the solicited public input we received regarding regulations 

that may duplicate other requirements, are not effective in achieving stated objectives, are 

not based on law, or impose burdens that are greater than the benefits received

Corporate Activities—Because of mergers, the number of FCS institutions has declined over the 

years, but their complexity has increased, placing greater demands on both examination staff 

resources and expertise. Generally, these mergers have resulted in more cost-efficient and bettercapitalized institutions with broader, more diversified asset bases, both by geography and 

commodity. As of January 1, 2014, the System had 78 direct-lender associations, four banks, five 

service corporations, and two special-purpose entities.
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CONDITION OF THE FCS

The System remained fundamentally safe and sound in 2013 and is well positioned to withstand 

the continuing challenges affecting the general economy and agriculture. Total Generally 

Accepted Accounting Principles (GAAP) capital increased to $41.7 billion at September 30, 

2013, up from $38.5 billion a year earlier. The ratio of total capital to total assets increased to 

16.5 percent at September 30, 2013, compared with 16.1 percent the year before, as strong 

earnings allowed the System to continue to grow its capital base. Total GAAP capital includes 

the Farm Credit Insurance Fund of about $3.4 billion, which is restricted capital. The Fund is 

administered by the Farm Credit System Insurance Corporation, which is an independent 

Government-controlled corporation established by Congress to insure the timely payment of 

principal and interest on Systemwide and consolidated debt obligations. 

The System experienced moderate loan growth this year. There was a 4.8 percent increase in 

the System’s outstanding real estate loans from December 2012 to September 2013 due 

primarily to rising farmland values. Production loans declined 1.6 percent during the same 

period. In total, gross loans grew by 4.7 percent over the 12-month period ended September 30, 

2013, compared with 8.7 percent during the previous period. Nonperforming loans decreased 

modestly to $2.2 billion at the end of FY 2013, representing 5.4 percent of total capital, down 

from 7.4 percent a year earlier. However, although credit quality has been improving and is 

satisfactory overall, volatility in commodity prices, declining profit margins for grain producers, 

and the potential for a correction in farmland prices pose continued risks to some agricultural 

operators, creating the potential for a reversal of this trend.

The FCS earned $3.5 billion in the first nine months of 2013, a 10.8 percent increase from the 

same period in 2012. Return on assets remained favorable at 1.4 percent during this period. 

The System’s liquidity position increased to 202 days as of September 30, 2013, from 183 days 

a year later, remaining significantly above the 90-day regulatory minimum. The quality of the 

System’s liquidity reserves also improved in 2013.

Weather conditions in 2013 were mixed, resulting in a significant level of uncertainty throughout 

the growing season. A very wet spring led to delayed planting in the western Corn Belt. This 

was followed by abnormally dry to moderate drought conditions in parts of the Corn Belt. 

However, the 2013 corn harvest reached a record high, and the soybean crop was also among 

the largest on record. Grain and soybean prices have declined substantially as a result, 

providing needed relief to the protein, dairy, and ethanol sectors. After struggling with high input 

costs the past several years, these industries are now looking forward to a favorable profitability 

outlook. Grain and soybean producers, however, are expected to face thinner profit margins in 

2014 and this will likely put pressure on farmland prices in the Midwest and Plains states going 

forward.

USDA is expecting the data will show another year of strong farm income in 2013. Cash 

receipts in the crop sector are projected to be down about 3 percent while the livestock sector is 

expected to see a 6 percent gain. Another large crop in 2014 would put considerable pressure 

on producers of grain and soybeans and could lead to weakening farmland values. 

The System has benefited from the monetary policies that have helped foster historically low 

interest rates. Investor demand for System debt has remained favorable across the yield curve. 

Because of low interest rates, as well as very low risk premiums on newly issued System debt, 

the System was able to exercise the options on significant quantities of callable bonds to further 

reduce the cost of funds for the majority of FY 2013. However, the final quarter of FY 2013 saw 

a significant increase in interest rates for newly issued debt instruments with maturities of 1 year 

and longer. This fact greatly reduced the volume of exercised options on callable bonds and 

portends to be the case for FY 2014 and probably beyond. Despite this development, the 

System fully expects the capital markets will continue to meet its financing needs.
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FEDERAL AGRICULTURAL MORTGAGE CORPORATION

Congress established Farmer Mac in 1988 to create a secondary market for agricultural real estate 

and rural housing mortgage loans. Farmer Mac has authority to create and guarantee securities 

and other secondary market products that are backed by agricultural real estate mortgages and 

rural home loans, USDA-guaranteed farm and rural development loans, and rural utility cooperative 

loans. Through a separate office mandated by statute (Office of Secondary Market Oversight), the 

Agency regulates, examines, and supervises Farmer Mac’s operations. 

Farmer Mac is devoted to making funds available to agriculture and rural America through its 

secondary market activities. Under specific circumstances defined by statute, Farmer Mac may 

issue obligations to the U.S. Treasury Department, not to exceed $1.5 billion, to fulfill the guarantee 

obligations on Farmer Mac guaranteed securities. Farmer Mac is not subject to any intra-System 

agreements and is not jointly and severally liable for Systemwide debt obligations. Moreover, the 

Farm Credit Insurance Fund does not back Farmer Mac’s securities.

Farmer Mac made financial progress during FY 2013. GAAP net income was up from 2012, and 

core earnings, a measure based more on cash flow, were up by 1.2 percent to $51.2 million. As 

of September 30, 2013, Farmer Mac’s core capital totaled $578.4 million, which exceeded its 

statutory requirement of $389.5 million. The total portfolio of loans, guarantees, and 

commitments grew 10.6 percent to $13.8 billion.

Farmer Mac’s program-business portfolio shows stress in certain sectors, such as dairy, but

credit risk remains manageable. As of September 30, 2013, substandard loans were 3.8 percent

of total direct credit exposure, compared with 4.4 percent a year earlier. Loans more than 90 

days delinquent remained low, declining to 0.66 percent from 0.93 percent the year prior.

CONCLUSION

We at FCA remain vigilant in our efforts to ensure that the Farm Credit System, including Farmer 

Mac, remains financially sound and focused on serving agriculture and rural America. It is our intent 

to stay within the constraints of our FY 2015 budget as presented, and we continue our efforts to be 

good stewards of the resources entrusted to us. In addition, we have met all of the requirements of 

the GPRA Modernization Act that apply to our Agency. Our budget proposal identifies our goals and 

the performance measures we have developed to help ensure that we use our resources efficiently 

and effectively. We are proud of our record and accomplishments; and I assure you that the Agency 

will continue its commitment to excellence, effectiveness, and cost efficiency and will remain 

focused on our mission of ensuring a safe, sound, and dependable source of credit for agriculture 

and rural America. This concludes my statement. On behalf of my colleagues on the FCA Board

and at the Agency, I thank you for the opportunity to share this information.