The Director’s Role

A Guide to Leading Your 

Institution Effectively

for the Directors of Farm Credit System Institutions

Farm Credit Administration

| 1

Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Introduction: The Farm Credit System, FCA, and FCSIC . . . . . . . . . . . . . . . . . . . . . . . 5

The Farm Credit System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Farm Credit Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The Farm Credit System Insurance Corporation . . . . . . . . . . . . . . . . . . . . . . . . 9

A System institution’s board of directors: Its structure and composition . . . . . . . . . 13

Diversity and inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Outside directors and other appointed directors . . . . . . . . . . . . . . . . . . . . . . . 13

Financial experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Board committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

A System institution’s board of directors: Its responsibilities and roles . . . . . . . . . . 19

Ensuring mission achievement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Providing business planning and strategic direction . . . . . . . . . . . . . . . . . . . 21

Making policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Providing oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Setting internal controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Governing IT activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Setting compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Standards of conduct for directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Conflicts of interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

FCA’s examination, supervision, and enforcement authorities and activities . . . . . 39

Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Supervision and enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Conclusion: Some guiding principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Appendix A: Financial condition and key financial ratios . . . . . . . . . . . . . . . . . . . . . 49

Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Sensitivity to interest rate risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Appendix B: FCA Supervision and Enforcement Authority . . . . . . . . . . . . . . . . . . . . 61

Conditions imposed in writing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Written agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Directives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Cease and desist orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Civil money penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Removals, suspensions, and prohibitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Conservatorship/receivership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Preface | 3

Preface

T

hroughout this document, “we” refers to the Farm Credit 

Administration, and “you” refers to a director on a Farm 

Credit System (FCS or System) bank or association board. 

Although the guidance was developed primarily for the 

directors of the boards of FCS banks and associations, 

much of it also applies to directors of the Federal Agricultural 

Mortgage Corporation (Farmer Mac) and the service organizations of 

the FCS.

To be elected or appointed to the board of a System institution is an honor. It is an 

expression of stockholder or board confidence in your ability to oversee the institution’s safe and sound operation for the benefit of its member-borrowers. However, 

that honor carries numerous responsibilities.

We have published this booklet to provide you with guidance and information 

related to your duties, responsibilities, relationships, and liabilities as a director of 

an FCS institution. However, this booklet does not address all issues that may arise 

during your tenure as a director, and it is no substitute for legal counsel. You should 

seek counsel from an attorney or another qualified advisor to address specific 

circumstances.

The Director’s Role has been revised and updated several times over the years. 

The current edition was published in spring 2021. If you have any questions regarding the content of this booklet, please contact us at the following address:

Office of Congressional and Public Affairs 

Farm Credit Administration

1501 Farm Credit Drive 

McLean, Virginia 22102-5090

Telephone: 703-883-4056

Facsimile: 703-790-3260

Email: info-line@fca.gov

Additional information about FCA and the System is available on our website at 

www.fca.gov.

Introduction: The Farm Credit System, FCA, and FCSIC | 5

Introduction: The Farm Credit System, 

FCA, and FCSIC

Y

our bank or association is part of a nationwide network 

of financial institutions known as the Farm Credit System 

(FCS or System). Each chartered institution is a federal 

instrumentality. The System is regulated by the Farm 

Credit Administration (FCA) and has its debt obligations 

insured by the Farm Credit System Insurance Corporation (FCSIC).

System institutions are responsible for carrying out the mandates of the Farm Credit 

Act of 1971, as amended (Farm Credit Act). This act provides for a farmer-owned 

cooperative credit system that extends credit and related services to farmers, ranchers, producers or harvesters of aquatic products, and other eligible borrowers.

The Farm Credit System

In 1916, Congress created the System to operate under a cooperative structure and 

gave it a public mission of providing long-term and affordable credit services to agriculture and rural America.

A cooperative structure allows the System’s farmer-borrowers to own and control 

the System. This important feature sets the System apart from most other commercial lenders.

The System is guided by the following seven cooperative principles shared by 

other co-ops around the world. The roots of these principles can be traced back to 

Rochdale, England, where the first modern cooperative was founded in 1844.

• Voluntary and open membership. Cooperatives are voluntary organizations, 

open to all people able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political, or religious 

discrimination.

• Democratic member control. Cooperatives are democratic organizations controlled by their members. Because each member has only one vote — regardless 

of the amount of stock owned or business conducted with the cooperative — 

members participate equally in setting policies and making decisions.

• Members’ economic participation. Members contribute to, and democratically 

control, the capital of the cooperative. This arrangement benefits members 

according to the amount of business they conduct with the cooperative rather 

than the amount of money they invest in it.
6 | Introduction: The Farm Credit System, FCA, and FCSIC

• Autonomy and independence. Cooperatives are autonomous, self-help 

organizations controlled by their members. When a co-op enters into agreements with other organizations or raises capital from external sources, it does 

so based on terms that ensure democratic control by its members and the 

autonomy of the cooperative.

• Education, training, and information. Cooperatives provide education and 

training for members, elected representatives, managers, and employees so 

they can contribute effectively to the development of their cooperatives. 

• Cooperation among cooperatives. Cooperatives serve their members most 

effectively by working together through local, regional, national, and international structures.

• Concern for community. While focusing on member needs, cooperatives 

work for the sustainable development of communities through policies and 

programs accepted by the members.

In 2010, the FCA board issued a policy statement (FCA-PS-80) reaffirming its support 

for, and commitment to, the core cooperative principles of member-ownership, 

member-control, and member-benefit as part of the cooperative business model of 

the System and the fulfillment of its public policy mission. You can read this policy 

statement on our website at www.fca.gov.

As a director of a System institution, you should understand the distinctive 

cooperative principles and philosophies your institution follows, and you should be 

aware of the implications of these principles and philosophies.

The Farm Credit Administration

The Farm Credit Administration is an independent federal agency under the executive branch of the U.S. government. FCA is responsible for ensuring that System 

institutions and Farmer Mac are safe, sound, and dependable sources of credit and 

related services for all creditworthy and eligible persons in agriculture and rural 

America. We fulfill this mission in two primary ways:

• Developing policies and regulations to help ensure the safety and soundness of 

System institutions 

• Examining institutions to ensure that they operate in a safe and sound manner 

and comply with applicable laws and regulations

In addition, we offer guidance and resources to help System institutions fulfill their 

mission.

FCA is governed by a three-member board appointed by the president of the 

United States with the advice and consent of the Senate. Our headquarters are in 

McLean, Virginia. We also have field offices in Bloomington, Minnesota; Dallas, 

Texas; Denver, Colorado; and Sacramento, California.
Introduction: The Farm Credit System, FCA, and FCSIC | 7

The System is guided by the following 

seven cooperative principles shared 

by other co-ops around the world:

1. Voluntary and open membership.

2. Democratic member control. 

3. Members’ economic participation. 

4. Autonomy and independence.

5. Education, training, and 

information. 

6. Cooperation among cooperatives. 

7. Concern for community. 

FCA regulations

FCA’s goal is to provide a regulatory environment that helps 

the System to safely and soundly offer high-quality, reasonably 

priced credit and related services. The regulations we issue 

have the full force and effect of law.

As a director, you will need to be familiar both with the laws 

that apply to the System and with FCA regulations. You can 

read the full text of the Farm Credit Act and other laws that 

apply to the System on our website at www.fca.gov.

Periodically we propose changes to our regulations and 

publish the pending actions on our website. Most regulatory 

actions are open to public comment for a prescribed time. As 

a director of a System institution, you may wish to comment 

on a proposed action. You may do so from the FCA website. 

We welcome and encourage your input.

How will you know when we’ve taken a regulatory action? 

We publish notices of all FCA regulatory actions in the Federal 

Register, which is the official daily publication for rules, 

proposed rules, and notices of federal agencies and organizations, as well as for executive orders and other presidential documents.

We also announce any regulatory actions we plan to take in news releases 

we issue following the monthly meetings of the FCA board. We email these news 

releases to the board chairs and managers of each System institution and post them 

on our website at www.fca.gov. For some proposed regulatory actions, we also issue 

fact sheets along with the news releases and post them on our website. 

We publish agendas and dates for board meetings a week in advance in the 

Federal Register and on our website. To be notified when we post meeting announcements, news releases, and other content to our website, go to www.fca.gov

and subscribe for news and updates from FCA.

Guidance provided by FCA

In addition to regulations, FCA also issues guidance to System institutions in the following forms: 

• Policy statements. Board policy statements express the broad policy goals and 

positions of the FCA board and are published in the Federal Register.

• Bookletters. Bookletters communicate enhanced interpretations of our regulations as well as our policy positions on specific issues.

• Informational memorandums. These communications discuss current issues 

facing the System or provide instructions for required reports.

• Frequently asked questions. Our website features FAQs on many regulatory 

topics.
8 | Introduction: The Farm Credit System, FCA, and FCSIC

• FCA Examination Manual. The FCA Examination Manual contains concepts, 

guidelines, and procedures for the examination of FCS banks, associations, and 

service corporations.

We distribute most of these documents by email to the board chairs and managers 

of System institutions and post them on our website at www.fca.gov.

Although these various forms of guidance provide valuable information, they 

do not have the force and effect of law and regulations. Rather, the guidance is 

designed to help System institutions comply with applicable laws and regulations 

and to improve communication between FCA and System staff.

Examination

At least once every 18 months, FCA examines your institution to ensure that it does 

the following:

• Operates in a safe and sound manner

• Complies with applicable laws and regulations

• Continues to fulfill its congressionally mandated mission

As part of every examination, we prepare a Report of Examination that details our 

examination activities and conclusions. We first present this report to your institution in writing and later present it orally to your board and management.

Our examinations and oversight strategies focus on your institution’s financial 

condition and any material existing or potential risk, as well as on the ability of your 

board and management team to direct operations. Our examiners evaluate your 

institution’s compliance with laws and regulations. They also evaluate whether your 

institution has fulfilled its mission to serve the credit and related services needs of 

all eligible borrowers, including young, beginning, and small farmers and ranchers.

If your institution violates a law or regulation or operates in an unsafe or unsound 

manner, we use our supervisory and enforcement authorities to achieve appropriate 

corrective action. These authorities are discussed later in this booklet.

Financial reports

Like all other System institutions, your institution submits financial data to FCA 

every quarter through the Uniform Call Report. Almost all the data submitted 

through the Uniform Call Report are available to the public through the FCA website. From the data we receive, we generate and publish on our website three types 

of financial reports. These reports allow you to compare your institution’s financial 

performance with that of other institutions.

• Uniform performance report. This report provides a condensed balance sheet 

and income statement for each institution, as well as information on the institution’s capital, assets, earnings, liquidity, and sensitivity to interest rate risk. 

Four reporting periods are represented — the current quarter, the same quarter 

12 months earlier, and the two most recent year-ends.
Introduction: The Farm Credit System, FCA, and FCSIC | 9

• Uniform peer performance report. This report provides a comparison of one 

institution with a group of institutions of similar asset size. With this report, 

you can assess your institution’s overall performance, capital adequacy, asset 

quality, earnings, and liquidity.

• Six-quarter trend report and six-year trend report. These reports provide 

information from six consecutive reporting periods.

From our website, you may also generate institution comparison reports of up to six 

institutions. In addition, you may generate reports by district, as well as Systemwide 

reports by type of lender. 

Most reports are available for active and inactive institutions back to March 1989. 

However, Uniform Peer Performance Reports go back only to 1993.

YBS reports 

Your institution, like other System institutions, also submits a YBS report to FCA. 

This annual report describes your institution’s lending and related-service activities 

to young, beginning, and small farmers and ranchers.

You may view YBS data on our website by individual institution, by district, or 

across the System. The YBS reports present data for only one reporting period and 

go back to 1999.

Other resources provided by FCA

You may find the following resources, available at www.fca.gov, helpful while 

serving as a director. If you do not have access to the internet, call 703-883-4056 to 

request paper copies of these resources, as well as copies of the Director’s Role.

• FCA Annual Reports. These reports provide information about FCA and the 

financial condition and performance of the Farm Credit System. 

• The Role of Farm Credit System Nominating Committees. This brochure 

describes the responsibilities of bank and association nominating committees 

in the director nomination process.

The Farm Credit System Insurance Corporation

As a board director, you should also be familiar with the Farm Credit System Insurance Corporation (FCSIC) and its importance to System investors. FCSIC is a federal 

government-controlled corporation created by Congress in the wake of the agricultural credit crisis of the 1980s to renew investor faith in the financial integrity of the 

System. 

FCSIC is administered by a board of directors made up of the same individuals 

serving on the FCA board. The chair of the FCSIC board of directors is elected by the 

other directors and may not serve concurrently as chair of the FCA board.

FCSIC insures the timely payment of principal and interest on obligations issued 

jointly by FCS banks to investors. If an FCS bank is unable to make a payment to 
10 | Introduction: The Farm Credit System, FCA, and FCSIC

investors on a Systemwide debt security, FCSIC will pay investors out of the Farm 

Credit Insurance Fund, which FCSIC administers. It has built and maintains the 

Farm Credit Insurance Fund by collecting insurance premiums from FCS banks. 

These premiums are calculated using a statutorily defined formula. Premium rates 

are generally based on each bank’s pro rata share of insured debt. 

Congress directed FCSIC to build the Farm Credit Insurance Fund to a “secure 

base amount,” defined as 2% of the aggregate of all outstanding insured obligations 

of FCS banks, adjusted downward by certain percentages of the System’s government-guaranteed loans and investments. FCSIC may collect from 0 to 20 basis points 

annually on adjusted insured debt outstanding and may also assess a risk surcharge 

of up to 10 basis points on nonaccrual loans and other-than-temporarily impaired 

investments. 

For current information about the Farm Credit Insurance Fund’s secure base 

amount and insurance premium rates, go to the FCSIC website at www.fcsic.gov or 

contact FCSIC by phone at 703-883-4380.

FCSIC may also provide financial assistance (subject to certain limits) if FCS banks 

and direct-lender associations experience significant financial difficulty. This assistance may include the following:

• Providing loans or contributions

• Purchasing assets and debt securities

• Assuming liabilities

• Facilitating consolidations and mergers

In addition, FCSIC will be the conservator or receiver of any FCS bank or association 

that is placed into conservatorship or receivership by the FCA board. Another responsibility of FCSIC is to ensure the retirement of eligible borrower stock at par 

value.
Introduction: The Farm Credit System, FCA, and FCSIC | 11
 
A System institution’s board of directors: Its structure and composition | 13

A System institution’s board of directors: 

Its structure and composition

A System institution’s board of directors, like that of any 

other corporate organization, oversees the management 

of the institution. In performing its duties, your board is 

to follow your institution’s bylaws and FCA rules. 

When determining the size and selection of your board, your bylaws 

should address the following:

• The number of directors on the board

• The length of the directors’ terms

• The qualifications director-candidates must meet 

• How directors are elected and removed

Your board’s size should be large enough to provide adequate voting stockholder 

representation and to ensure that it has the skill set needed to address the 

challenges the institution faces, both current and projected. It must also be small 

enough to get meaningful input from each director and to avoid developing the 

rubber-stamp mentality frequently associated with larger boards.

Diversity and inclusion 

The Farm Credit Act, in furtherance of the System’s cooperative structure, expects 

an institution’s board of directors to reflect its borrowing base. This includes representing not only the geographic areas and commodities financed by the institution, 

but also the age, race, and gender of existing and potential borrowers. 

Outside directors and other appointed directors

Although the board of a System institution is primarily composed of stockholderelected directors, each FCS bank and association is required by the Farm Credit Act 

to have at least one outside director. FCA regulations further require FCS banks and 

medium-to-larger associations to have no fewer than two outside directors. The regulations allow associations with $500 million or less in total assets to have just one 

outside director. However, if the board of an association with over $500 million in 

total assets is so small that the addition of a second outside director would result in 

less than 75% stockholder-elected representation on the board, the association is 

exempt from the requirement to have a second outside director. 
14 | A System institution’s board of directors: Its structure and composition

Outside directors are valuable because they provide an independent and objective 

perspective to the board’s deliberations. They also provide the board with valuable 

technical expertise. FCA regulations discuss the independence requirements your 

institution must follow when selecting outside directors. These regulations also address specific requirements for eligibility, number, terms of office, and removal.

In addition, as explained in the bookletter “Farm Credit Bank and Association 

Appointed Directors” (BL-009 Revised), FCA has not objected when FCS bank 

and association boards of directors have appointed a limited number of voting 

stockholders to serve as directors to add diversity or to acquire needed skills that 

cannot otherwise be acquired by election or through use of the statutory authority 

to appoint outside directors. Directors appointed for these purposes are known as 

“other appointed directors.”

However, in keeping with cooperative principles, the majority of the directors on 

an institution’s board must be elected by the collective action of voting stockholders. 

While the board may add more than the minimum number of outside directors and 

use other appointed directors, under no circumstances may stockholder-elected 

board representation drop to less than 60%. In other words, the combined total 

number of outside directors and other appointed directors serving on a board may 

never exceed 40% of the total number of directors on the board. A board’s quorum 

level should also ensure elected directors compose the main part of the quorum 

to further protect the shareholders’ voices and the cooperative structure of the 

institution.

Financial experts

Your board must have at least one director who is a financial expert. Boards of directors for associations with $500 million or less in total assets may satisfy this requirement by retaining a financial advisor to counsel the board. The financial advisor is 

not a member of the board but must report to the board of directors and must not be 

affiliated with the external auditor or institution management.

So who exactly is a financial expert? A financial expert is someone recognized 

for having education or experience in accounting, internal accounting controls, 

or in preparing or reviewing financial statements for financial institutions or large 

corporations. The financial expert for your institution should have experience with 

accounting and financial reporting issues similar to issues that could reasonably be 

expected to arise in your institution’s financial statements.

If you need help determining whether someone has the qualifications to be considered a financial expert, see “Financial Expert Determination,” a decision tree on 

our website at www.fca.gov.

Board committees

Matters that require detailed review or analysis may best be addressed by a committee of the board rather than by the full board. A board committee is composed 

of a smaller group of directors acting as an extension of the board. Its purpose is to 

focus the efforts of its members on a particular subject and thus assist the board in 
A System institution’s board of directors: Its structure and composition | 15

carrying out its fiduciary duties and managing workload. Your institution’s board is 

required to form two types of committees:

• Audit committee

• Compensation committee

Boards may identify other areas that also could better be handled by committee. 

Many institutions have optional committees, such as an executive committee, a governance committee, a credit committee, or a risk committee.

While your institution also is required to have a nominating committee, the nominating committee is a 

stockholder committee — not a board 

committee. Nominating committees 

are key to the director election process 

and are discussed later in this booklet.

Board committees provide good opportunities for directors. You can gain 

specialized knowledge of your institution’s business by serving on a committee. In fact, you may wish to serve on 

one committee for a while, then rotate 

to serve on another. Rotating committee assignments allows you to broaden 

your knowledge and understanding of 

your institution’s operations.

Audit committee

The primary purpose of the audit 

committee is to help the board of directors oversee internal controls over 

financial reporting. Board members 

selected for the audit committee should 

be well qualified and able to operate 

independently of management. FCA 

regulations require that this committee 

report only to your board and not to 

your institution’s management team. 

Processes should be in place to verify 

that audit committee members have 

the knowledge and independence they 

are required by regulation to have.

Guidelines for board committees

Draft a charter. When creating a board committee, draft a 

charter defining the committee’s mission, authorities, responsibilities, reporting expectations, size, and duration. Standing 

committees address continuing areas of responsibility, while 

ad hoc committees may be set up to handle special projects — 

for example, mergers or joint management agreements.

Provide committees with support and resources. Ensure 

that each board committee receives the support and resources 

it needs to carry out its duties.

Identify the knowledge and skills that committee members 

need. To effectively address the issues before the committee, 

its members may need to have specific technical knowledge 

and experience.

Provide training and access to experts. For board committees requiring specialized skills or knowledge, ensure that 

committee members receive any necessary training and have 

access to third-party experts.

Require reports. Require regular reports from each board 

committee to ensure that your board can make decisions in a 

timely manner.

Review committee recommendations. If a board decision 

is made based on a board committee recommendation, be 

sure the committee has done its work responsibly and that 

its recommendations are reasonable. Establishing a board 

committee to handle certain matters does not normally relieve 

your board of any accountability for decisions related to those 

matters.
16 | A System institution’s board of directors: Its structure and composition

These are some of the regulatory requirements regarding the composition of the 

audit committee:

• The audit committee must be composed solely of directors, and it must have at 

least three directors.

• The committee must have at least one member who is a financial expert. 

Boards of directors for associations with $500 million or less in total assets may 

satisfy this requirement by retaining an advisor for the audit committee who is 

a financial expert. 

• Members of the audit committee must have some knowledge of public and corporate finance, financial reporting and disclosure, or accounting procedures.

Aside from these requirements, your board has considerable discretion in defining 

the qualifications it wants each audit committee member to have. Your institution 

should provide a training program in appropriate financial areas for any directors 

who do not have sufficient financial knowledge to serve on an audit committee. We 

encourage all directors to receive ongoing training and development to enhance 

their knowledge and skills.

According to FCA regulation, your institution’s audit committee has the following 

responsibilities:

• To oversee the preparation of financial reports and your institution’s system 

of internal controls, including controls relating to compliance with applicable 

laws and regulations

• To hire, and oversee the work of, the external auditor, ensuring that the auditor 

objectively assesses your institution’s financial reporting practices while minimizing undue management influence in the review of financial reports and 

accounting procedures

• To recommend actions needed to provide full and accurate disclosure of your 

institution’s operations in the most transparent manner possible

• To maintain records of audit committee meetings for at least three fiscal years

Compensation committee

The purpose of the compensation committee is to ensure that your institution’s compensation policies and procedures encourage improved or continued performance, 

while not jeopardizing the goals and objectives of business and capital plans nor 

adversely affecting safe and sound credit decisions. Your institution’s compensation 

policies should address not only the salaries provided to senior officers and employees, but other benefits as well, including compensation programs. If the CEO’s 

performance evaluation is tied to compensation, the compensation committee may 

also be responsible for completing the CEO’s performance evaluation and making a 

report to the full board. 
A System institution’s board of directors: Its structure and composition | 17

Requirements regarding the composition of the compensation committee include 

the following:

• The committee must have at least three members, and all committee members 

must be members of the institution’s board of directors.

• Each member of the compensation committee must be free from any relationship that would interfere with his or her independent judgment as a committee 

member.

A board committee performing the duties of the compensation committee, with a 

charter that satisfies compensation committee requirements, may fill the role of a 

compensation committee, even if it is not called a compensation committee.

The compensation committee has the following regulatory responsibilities:

• To review the compensation plans and policies for senior officers and 

employees

• To approve the overall compensation program for senior officers

• To maintain records of committee meetings, including attendance, for at least 

three fiscal years

FCA bookletter “Compensation Committees” (BL-060) provides additional information and guidance on the structure, operations, and oversight of the compensation 

committee. 

Stockholder-controlled nominating committee

The nominating committee is not a committee of the board; rather, it is a committee 

of stockholders who own voting stock. It is responsible for identifying, evaluating, 

and nominating candidates for election to the board of directors of an FCS bank or 

association. 

The nominating committee’s independence from the influence of the board and 

management is critical to the success of your financial cooperative and the preservation of stockholder control. For more information, see the following resources on 

our website at www.fca.gov: 

• “The Role of Farm Credit System Nominating Committees”

• “Guidance on Farm Credit Bank and Association Nominating Committees” 

(BL-043 Revised) 

Please note that the nominating committee is not the sole source of nominations for 

open director seats: The Farm Credit Act specifically provides for nominations from 

the floor. Floor nominations come after the nominating committee has presented 

director-nominees but before ballots are prepared.
 
A System institution’s board of directors: Its responsibilities and roles | 19

A System institution’s board of directors: 

Its responsibilities and roles

Good board governance is a commitment you and your 

fellow directors make to your role as representatives 

of your institution’s shareholders and to a set of values 

and ethical conduct. In a cooperative, good governance 

starts with the directors’ acknowledgement that the 

shareholders are the owners.

Together, you and your fellow board members are accountable to shareholders and 

investors for the following:

• Understanding your institution’s operations

• Providing competent management for your institution

• Establishing systems and processes that support safe and sound operations

• Diligently and impartially performing your duty as directors

• Exercising independent judgment while remaining loyal to your institution’s 

interests

The board establishes policies and strategies that govern how your institution 

carries out its business and ensures that those strategies and policies are implemented. You and your fellow board members should select and evaluate competent 

senior management and monitor and assess their performance. 

The board delegates day-to-day operations to management but remains responsible for ensuring the institution operates within prescribed policies, in compliance 

with laws and regulations, and in a safe and sound manner. 

What are the specific responsibilities of a board of directors? The board of directors is responsible for the following:

• Establishing policies

• Providing strategic direction

• Hiring the CEO and providing for a plan of succession

• Overseeing activities performed by management 

• Overseeing all major functions of the institution

• Ensuring that information and disclosures to investors and shareholders are 

accurate, understandable, and reliable
20 | A System institution’s board of directors: Its responsibilities and roles

The board’s effectiveness will depend, in part, on how well you and your fellow 

board members know your institution. Together, you must have the knowledge and 

skills to carry out your duties; therefore, you must diligently strive to understand the 

operations of your institution and seek training where needed. You should also understand the industry and the community in which your institution does business. 

The effectiveness of your board will also depend on how well you work together to 

identify and address issues.

Both agricultural production and the financial services sector within which the 

System operates experience continual change. Generally, these changes create additional risks for institution operations and for institution borrowers. Your board 

has both fiduciary and regulatory obligations to continually reevaluate its skill set in 

light of these changes.

By regulation, your board must have director training policies and programs that 

meet your institution’s needs. If you are a new director, you must receive training 

in all aspects of the institution’s operations within one year of your election to the 

board. Even if you are not a new director, you must take training periodically to update your knowledge and skills.

Also, FCA regulations require that your board have a policy that identifies the desirable qualifications for directors. The policy must explain why those qualifications 

are desired, must be periodically updated, and must be provided to the institution’s 

nominating committee. 

The following sections discuss seven important roles that the board of every Farm 

Credit System institution should fulfill:

• Ensuring mission achievement

• Providing business planning and strategic direction

• Making policy

• Providing oversight

• Setting internal controls

• Governing information technology activities

• Setting compensation

Ensuring mission achievement 

One of the board’s most important roles is ensuring that the institution accomplishes its mission, goals, and objectives. The mission of the Farm Credit System 

is clearly described in the Farm Credit Act: to improve 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.”

To fulfill this mission, your institution must function under cooperative principles. Core cooperative principles include member benefits, member ownership, and 
A System institution’s board of directors: Its responsibilities and roles | 21

member control. The guidelines in the box below will help to ensure that your institution adheres to these cooperative principles.

Providing business planning and 

strategic direction 

Another important role for the board is 

to provide business planning and strategic direction. The business planning 

process enables the board to identify 

strategies to achieve its vision. Because 

effective planning is essential to institutional health, all directors need to be 

fully involved in the planning process. 

Planning can be used as a tool to chart 

progress and to maintain sound operations during periods of uncertainty 

and change. Planning is vital to the 

long-term success of your institution 

because it translates the board’s vision 

into measurable goals with strategies to 

achieve them.

At its core, business planning is the 

process of determining where your 

institution is, where it would like to be, 

and how it plans to get there. The planning process should be dynamic and 

ongoing. It involves detailing strategies 

for attaining the short-term, sometimes routine, goals of business operations, as 

well as long-term goals. 

A good business plan consists of two parts:

• Strategic plan, which focuses on the long-term deployment of resources to 

achieve institutional goals and meet the needs of stockholders and the broader 

agricultural community. The strategic plan states the board’s overall philosophy 

and its vision of the institution’s future.

• Operational plan, which concentrates on short-term actions. This plan helps 

institutions achieve long-term goals by translating them into specific, measurable targets.

The purpose of the business plan is to identify the areas selected for strategic development, allocate resources, and provide the basis on which business decisions can 

be made and performance can be measured.

Several strategies may be involved in achieving a goal. If, for example, the goal is 

to attain a certain net worth position, the business plan would incorporate strategies 

to retain capital, increase earnings, and grow assets. Your board should ensure that 

Guidelines for adhering to cooperative principles

Promote stockholder participation. Actively seek and encourage stockholder participation in setting the direction for 

the institution.

Study the cooperative principles of your institution. Understand the distinctive cooperative principles and philosophies 

your institution holds and be aware of their implications for 

member benefit, member ownership, and member control.

Promote service to all eligible and creditworthy borrowers.

Ensure that your institution offers credit for all types of agriculture practiced within its chartered territory by developing 

plans and policies that extend the full range of System benefits 

to all types of eligible borrowers. The System’s cooperative 

benefits, ownership, and control should be available for all 

types of producers, including underrepresented groups. And 

remember that programs for young, beginning, and small 

farmers are specifically required.
22 | A System institution’s board of directors: Its responsibilities and roles

its strategies and the use of institution resources will 

reasonably accomplish the intended purposes. See the 

guidelines for planning in the box to the left.

Capital adequacy planning

FCA regulations require your institution’s board of 

directors to establish, adopt, and maintain formal written capital adequacy plans as part of its financial plans. 

Your board is responsible for assessing capital needs 

and setting capital goals. Capital should be sufficient 

to ensure your institution’s stability and viability, support asset growth, and contribute to your institution’s 

earnings base. As a director, you are responsible for 

ensuring that your institution has sufficient capital to 

accomplish its mission and achieve its capital goals. 

Your board is also responsible for governing your institution’s capital distributions.

Appendix A discusses capital planning in greater detail. We also encourage you to review the capital management section of our Examination Manual (EM-11.2). 

Human capital and marketing planning

FCA regulations that govern operating and strategic 

business planning require System institutions to develop human capital and marketing plans that promote 

diversity and inclusion. The human capital plan is to include strategies and actions for how the institution will 

strive for diversity and inclusion within its workforce 

and management. 

Each direct-lending institution is required to have a 

marketing plan that shows how the institution will help 

meet the System’s objective of being responsive to all 

types of agricultural producers who are creditworthy 

and eligible for System funding. 

The marketing plan must describe the institution’s 

chartered territory by market segment, including 

demographic and geographic characteristics and the 

types of agriculture practiced in the territory. It should 

also contain strategies and actions for marketing the 

institution’s products and services to all eligible and 

creditworthy persons, with specific outreach toward 

diversity and inclusion within each market segment. 

Finally, FCA regulations require each institution to 

report annually to its board of directors on the progress 

Guidelines for planning

Identify strengths and weaknesses. Identify 

your institution’s internal strengths and weaknesses, as well as any external opportunities 

and threats. A thorough understanding of 

your institution’s operating environment allows your board to design goals and strategies 

to best meet the mission of your institution.

Identify the resources and capabilities your 

institution needs. Determine what financial 

and human resources, as well as what technological and organizational capabilities, your 

institution will need to achieve the board’s 

long-term vision and goals.

Identify, analyze, and address risk. By doing 

so, you can discover the causes of these risks 

and how they may affect future performance. 

Also, defining risk helps you make projections 

and determine the financial resources you’ll 

need to address those risks. Once risks are defined, the board may require management to 

explore various methods for managing your 

institution’s exposure to these risks.

Establish reporting requirements. You will 

need to have reporting requirements for each 

component of your plan and review your 

institution’s performance at least quarterly 

to evaluate the appropriateness of both the 

strategic and operational components. As 

part of the review, consider new opportunities, changes in the operating environment, 

and external developments to decide whether 

adjustments to the strategic direction are 

needed.

Establish contingency plans. In case actual 

results vary from planned goals and objectives, you will need to have contingency plans 

to get your institution back on track.
A System institution’s board of directors: Its responsibilities and roles | 23

it has made in accomplishing the strategies and actions in its human capital plan 

and marketing plan.

We encourage you to review sections EM-31.2, EM-31.4, and EM-31.5 of our Examination Manual for further discussion on this topic. 

Making policy

As a board member, you have the role of setting policy for your institution. When 

making policy, boards should consider the following:

• Has your institution established all the policies required by statute or 

regulation?

• What policies are needed to address specific institutional programs or 

activities?

• Does your institution’s charter or bylaws identify areas requiring policy 

direction?

• Should policies be developed related to industry standards, emerging issues, 

and guidance provided by FCA and other authoritative sources?

The board typically establishes broad guidelines for a given policy but then delegates the responsibility of working out the detailed aspects of the policy to a board 

committee or to management. After providing policy guidance, management has 

the task of drafting the procedures to implement the board’s policy. For guidelines 

on developing effective policies, see the box on the following page.

No matter how policies are developed, they are ultimately approved by the board, 

and the board remains responsible for them. Before approving policies, you and 

your fellow board members must ensure that they are appropriate for your institution and supportive of strategic objectives. And since the board is ultimately responsible for the success of your institution, board-approved policies must provide 

sound direction to management.

In addition, the board should periodically evaluate whether policies are accomplishing their intended goals and objectives. The board should schedule a review of 

certain policies at board meetings or designate a committee to review policies on a 

regular basis. There may be times when an immediate review of a policy is required 

because of changes in law, regulations, the business environment, or the institution’s business performance or risk profile. Also, your institution’s internal auditor 

should evaluate the effectiveness of these policies and procedures.

The board must ensure that policies adequately direct and control the business 

affairs of the institution. That’s why the board should reevaluate and revise policies 

as necessary. The board is also responsible for ensuring that policies are thoroughly 

followed at all levels of the institution. One way to do this is to create a policy manual that serves as a single authoritative reference. For more complicated policies 

and procedures, training programs may be helpful.
24 | A System institution’s board of directors: Its responsibilities and roles

Guidelines for effective policies

Define the purpose of the policy. A statement of purpose clearly articulates the policy’s 

goals.

Identify your policy objectives. Policy objectives may be simple statements that require 

your institution to comply with a specific law, regulation, or business practice. Objectives 

may also be linked to specific business plan goals related to capitalization, earnings, asset 

growth, or interest rates; or the objectives may address expectations related to the management of investments or other assets, interest rate risk, liquidity, asset quality, or liabilities.

Determine your operating parameters. Each policy should specify the parameters within 

which management and staff are expected to operate, and these parameters should be 

consistent with sound business practices, FCA regulations, applicable laws, and generally 

accepted accounting principles. The parameters should protect the safety and soundness 

of your institution by controlling risk in a way that is compatible with your institution’s 

risk-bearing capacity and considers its effect on earnings and capital. 

Delegate appropriately. Each policy that requires specific action by committees, officers, or 

employees of the organization should clearly define which authorities are delegated by the 

full board and which are retained by the board or by a board committee. For example, the full 

board might adopt a policy that establishes parameters for concentrations of risk in various 

portfolio segments or limits on loan size in relation to your institution’s capital base. In such 

instances, the CEO may be authorized to approve loans up to a certain amount within the 

established limits, whereas loans in excess of the limits might require approval or review by 

the board. The board must ensure that delegated and retained authorities are appropriate 

and that the board is neither abdicating its authority nor unnecessarily restricting the institution’s operations. Since the board remains responsible for actions taken by others under its 

delegated authorities, it should include reporting and controls within any delegation.

Identify exceptions to board policy. Unexpected and urgent matters may arise that require 

management to act immediately and to exercise greater authority than it has been delegated 

by the board. The board’s policy should clearly define a process to handle such contingencies; the policy should also set the consequences if the board determines the action was 

inappropriate.

Define reporting requirements. Each policy should clearly define the requirements management must meet when reporting to the board. The policy should specify what is to be 

reported, how frequently reports should be issued (monthly, quarterly, semiannually, etc.), 

and who is responsible for generating the report. These reports to the board enable you and 

your fellow board members to evaluate a policy’s effectiveness and impact, as well as to remain informed of your institution’s operations. The reports should also include actions taken 

under delegated authorities and actions taken as exceptions to policy.
A System institution’s board of directors: Its responsibilities and roles | 25

Providing oversight

Although the board and management are both involved in directing the operations 

of the institution, the board of directors has ultimate responsibility for providing 

strong oversight of your institution’s performance. Executive sessions are an effective way for you and your fellow board members to address your oversight responsibilities. These sessions occur in connection with regularly scheduled meetings, 

but institution officers or staff are not present. This approach facilitates open and 

candid discussion among directors.

To provide effective oversight, your board must do the following:

• Ensure that your institution accomplishes its mission

• Perform self-evaluations and adhere to ethical principles

• Maintain a proper relationship with management

• Evaluate your institution’s business and financial performance

• Assess your institution’s operational performance and asset quality

The board should also ensure that your institution’s operations are transparent and 

that the reports and disclosures to stockholders, investors, and the public are truthful.

Evaluating business and financial performance

Evaluating your institution’s business and financial performance involves more than 

just looking at the amount of earnings; it also involves determining the quality of the 

earnings and the institution’s ability to sustain those earnings. To evaluate the quality of earnings, you need to understand your institution’s entire financial and credit 

operations, as well as the relationships among operating statistics.

Likewise, to evaluate your institution’s financial and credit operations, you need to 

understand the relationships among interest-earning assets, interest-bearing liabilities, capital, and off-balance-sheet items such as derivatives. To understand these relationships, you should receive training in all aspects of your institution’s business.

Quality earnings result from fundamental institutional strengths, such as the 

ability to do the following:

• Identify and manage risks

• Identify quality assets that can weather adversity

• Control expenses

• Apply effective asset-liability management, proper loan pricing, and knowledge 

of your institution’s operating environment

Your board should evaluate your institution’s business carefully, looking behind the 

numbers to verify that earnings are not artificially inflated by delays in charge-offs, 

insufficient provisions for loan losses, and other factors. Regular reports by your 

institution’s audit committee, as well as FCA examination reports and reports by 

independent public accountants and internal reviewers, may help you ensure the 
26 | A System institution’s board of directors: Its responsibilities and roles

reliability of reports to the board, shareholders, investors, and the public. CEO and 

chief financial officer attestations on financial reports are designed to help ensure 

accuracy in financial reporting.

You and your fellow board members should be able to discern poor operating performance; however, you may not all have enough experience in complex financial 

matters to independently evaluate your institution’s financial performance. For this 

reason, directors have the authority to enlist the help of an independent financial 

expert. (See “Financial Experts” on page 14.) We also strongly encourage you to 

seek training under the institution’s director training program to enhance or reinforce your financial knowledge and skills.

Although there are no ratios or computer model results that guarantee success, 

certain accepted business ratios can be guides to the success or failure of your institution. Your board needs solid financial data and should ensure that analyses are 

performed to provide an accurate picture of your institution’s financial and operating performance. In considering your institution’s performance, ask yourself the 

following questions:

• Is management meeting the targets established in the business plan? If not, 

why?

• Is the level of earnings consistent or erratic?

• Do earnings result from successful implementation of strategies or from questionable accounting practices?

• Are earnings an accurate portrayal of your institution’s financial picture, or are 

they distorted by an incomplete evaluation of asset quality or potential losses?

• Is too much emphasis placed on short-term financial performance indicators 

rather than on long-term indicators?

• Are findings from internal and external audits and reviews routinely delivered 

to the board or the audit committee?

• Does the charter of the audit committee provide the committee with adequate 

authority and clearly describe its responsibilities? Is there adequate financial 

expertise on the committee?

As a director, you are not expected to have all the answers, but you should ask questions and ensure that you receive responsible answers. The guidelines on the following page will help.

Assessing operational performance and asset quality

The principal assets of your institution are the loans it makes. The quality and 

performance of those assets are of paramount importance to your institution. The 

numbers of performing, criticized, adversely classified, restructured, high-risk, 

past-due, and nonearning assets reflect the quality of assets and directly affect your 

institution’s overall operational performance and condition.
A System institution’s board of directors: Its responsibilities and roles | 27

Guidelines for evaluating business and financial 

performance

Be proactive. Don’t wait until problems arise to ask key management employees questions regarding your institution’s 

condition and performance. Ask them periodically.

Attend every board meeting. Arrive prepared, having reviewed all available information in advance.

Ask questions. Ensure that you fully understand the documents and transactions you are asked to approve and the risks 

associated with the transactions.

Make informed decisions. If something is confusing, get a satisfactory explanation from management or an outside expert 

— and insist that all decisions be well documented.

Insist that you receive appropriate financial information. 

You will need this information to evaluate your institution’s 

performance. This guideline is particularly important if you are 

a member of the audit committee. 

Make sure you’re getting the right amount of information. 

Management should provide you with the right amount of information. More isn’t always better because too much detailed 

information and too many reports can keep you from focusing 

on the key issues. At the same time, too little information can 

leave unanswered questions.

Verify that the audit committee has adequate financial 

expertise. Your board relies on the audit committee’s financial 

expertise to help it conduct its fiduciary responsibilities to 

stockholders.

Require regular reports from the audit committee. The full 

board should receive regular financial reports, including key 

financial ratios and data on operational performance.

Be sure you understand financial and asset-quality ratios.

You will need to understand the significance of these ratios, as 

well as trends. Appendix A of this booklet discusses several key 

financial ratios to help you understand and track your institution’s financial performance.

Poor asset quality may reflect weaknesses in the institution’s loan portfolio 

management practices, which require 

prompt corrective action. Loan portfolio management involves the systems, 

processes, and controls the board and 

management use to plan, direct, organize, and control lending operations. 

Some of the key components of an 

effective portfolio management system 

include the following:

• Strategic portfolio planning, including stress testing

• Lending policies and procedures

• Loan underwriting direction

• A reliable risk identification 

program

• Clearly defined risk parameters for 

various portfolio concentrations 

• An internal credit and collateral 

review program

While not all-inclusive, the guidelines 

on the following page will help you 

evaluate your institution’s loan portfolio 

management practices.

Any institution can encounter problem credits. Sometimes they result 

from a breakdown within the institution, which requires quick board action 

to address the problem that led to 

increased risk. Sometimes they result 

from unforeseen circumstances beyond 

the institution’s control, such as disruptions in the agricultural economy or 

natural disasters.

Whatever the cause, it is important 

to give problem credits close attention. 

A correction or collection plan should 

be put in place for each troubled credit. 

Occasionally, your board may wish to 

approve the individual plan and receive 

periodic progress reports if there is 
28 | A System institution’s board of directors: Its responsibilities and roles

potential for large losses. But in all instances, your board should ensure that plans 

are put into place and that those plans — as well as applicable regulations — are 

followed.

A neglected problem credit is more likely to result in a loss than one that is well 

administered. Although deviations from acceptable asset quality may occur periodically, you and your fellow board members are ultimately accountable for ensuring 

that lending programs preserve and enhance your institution’s tier 1 capital and further the System’s public policy mission regardless of the operating environment.

Guidelines for evaluating portfolio management practices

Review lending policies and underwriting standards. Ensure that appropriate 

lending policies and underwriting standards are in place for your institution and are 

periodically updated to reflect current credit conditions.

Evaluate stress testing. Ensure that management conducts portfolio stress testing 

to predict portfolio risks under a variety of conditions.

Consider risk concentrations. Provide clear direction for managing risk concentrations and ensure that processes and controls are in place.

Review the results of internal credit reviews. Closely monitor the findings of the 

internal credit review and any weaknesses discovered in lending processes and practices. This includes monitoring corrective actions to address audit findings. Monitoring the results of internal credit reviews is particularly important for board members 

who also serve on the audit committee.

Ask questions about quality or volume changes. Require management to fully 

explain any variation in the quality or volume of loans to ensure that you understand 

the reason for any changes in your institution’s position. Asset quality statistics 

should clearly and concisely show both the institution’s current position and its historical trends. For example, monitor credit classifications, risk ratings, nonaccrual 

volume, and distressed loan servicing/restructuring activity.
A System institution’s board of directors: Its responsibilities and roles | 29

Performing self-evaluations and adhering to ethical principles 

You and your fellow directors are responsible for evaluating your effectiveness as a 

board in (1) achieving safe and sound operations and (2) operating within applicable 

laws and regulations. FCA regulations require annual board evaluations, as well as 

strategies for correcting any identified weaknesses. Your board needs a systematic 

approach for evaluating its own performance and that of each of its committees. 

The board evaluation should assess the full range of the board’s governance 

capabilities, including the work of committees, for both existing and projected circumstances. Board evaluations are ideally performed in connection with the annual 

planning and review of your institution and its management. Board evaluations are 

also a useful tool for identifying board training and development needs.

Finally, developing a code of ethics will help ensure that you and your fellow 

board members provide proper oversight of your institution, especially if you do the 

following:

• Review the code on a periodic basis

• Distribute the code to all appropriate parties

• Prominently display and adhere to the code

Sound ethics, adherence to standards of conduct, an effective whistleblower program, and sufficient director training and expertise are all essential to effective 

oversight.

Maintaining a proper relationship with management

The board has the ultimate responsibility for the affairs of your institution. To fulfill 

this responsibility and protect your institution’s future, the board must make sure 

that day-to-day operations are properly managed. At all times, you and your fellow 

directors must ensure that management is carrying out your institution’s mission 

and goals. Although your board may delegate certain authorities to the institution’s 

officers, take care that the delegation is not too broad, and make sure it has appropriate standards and oversight. Also, remember that no delegation will relieve you 

and your fellow board members of your legal responsibilities for the outcome.

Generally, a sound and successful operation is led by a good management team. 

That’s why the board’s duty in hiring and retaining effective managers is one of the 

most critical elements to the institution’s success. The quality and strength of your 

institution’s management may be the difference between success and failure during 

difficult economic times or swings in the rural economy. 

The guidelines on the next page may help you and your fellow board members 

ensure that your institution is properly managed. 
Guidelines for ensuring proper management

Hire a CEO who has integrity and the right experience. When hiring the CEO, consider each candidate’s integrity, education, technical competence, and lending and management experience. 

Promote cooperative principles to your management team. Ensure that management not only understands 

the cooperative philosophy and principles upon which your institution is based but is committed to implementing 

them.

Instill an ethical culture. Ensure that your management team establishes a strong ethical culture for your institution. Be sure that the team understands that the reputation of your individual institution affects the reputation of 

the System as a whole.

Promote a positive and professional work environment. Make sure that management maintains a professional 

work environment. Make sure that the institution abides by applicable antidiscrimination laws and regulations. 

Also make sure that proper procedures are in place to report and investigate allegations of violations of antidiscrimination laws and regulations.

Establish clear performance standards and measures. Provide clear performance standards and measures to 

ensure that managers fully understand the board’s performance expectations and are accountable for fulfilling 

those expectations.

Institute a formal process for performance management. Consider using the compensation committee, or 

another board committee, to institute a formal process to evaluate management performance and ensure that 

periodic evaluations are a part of the ordinary course of business. When evaluating management, you may wish 

to use the following performance measures:

• Your institution’s business success and fulfillment of its public policy mission 

• Your institution’s compliance with applicable laws and regulations

• Management’s responsiveness to board directives

• The timeliness, quality, and accuracy of management’s recommendations and reports to the board

• The degree to which management adheres to the institution’s business plan

• The degree to which your institution’s objectives have been achieved

• Actual versus projected performance

• Comparisons with similar institutions

• FCA reports of examination, internal and external audit reports, and internal business performance and 

credit quality indicators

Do not ignore poor performance or wrongdoing by management. If performance expectations are not being 

met, deal with the situation immediately. Although timely and effective communication may prevent serious 

problems from developing, occasionally the board will find it necessary to discipline or dismiss managers for poor 

performance, dishonesty, conflicts of interest, or other reasons. All such actions should be properly documented 

in the institution’s official records. 

Develop a succession plan for the CEO. Review contingency plans annually and include succession planning for 

the other critical management levels, including the chief financial officer, the chief credit officer, the general counsel, and the chief information officer. If no individual in your institution is identified to succeed the CEO, the board 

should at least identify a competent and experienced temporary replacement in case there is an unexpected CEO 

vacancy.
A System institution’s board of directors: Its responsibilities and roles | 31

Setting internal controls

FCA emphasizes the need for strong internal controls at System institutions, including controls in the areas of credit, operations, information technology, internal 

controls over financial reporting (ICFR), and other areas. Effective internal controls 

provide reasonable assurance that the following objectives will be achieved: 

• Operational objectives (such as financial performance goals and protecting 

assets against loss)

• Reporting objectives (including internal and external financial and 

nonfinancial reporting that is reliable, timely, transparent, and in compliance 

with laws and policies)

• Compliance objectives (which involve adhering to laws and regulations)

FCA regulations require each System institution board of directors to adopt an internal control policy that provides direction in establishing effective control over and 

accountability for operations, programs, and resources. Without an effective system 

of internal controls, your institution could be exposed to fraud, financial loss, legal 

consequences, additional regulatory expectations, and reputation risk. 

Three lines of defense. There are three core lines of defense in an institution’s risk 

management strategy:

• The first line of defense is operational management, consisting of business and 

process staff whose activities create and/or manage the risks facing the institution. Their actions can either facilitate or prevent the achievement of an organization’s objectives. 

• The second line of defense involves the risk management and compliance functions that monitor risks and support the controls that management oversees. 

Inadequacies here can delay discovery of risks.

• The third line of defense, internal audit, provides independent assurance to the 

board and senior management concerning the effectiveness of management of 

risk and control.

Each line plays a distinct role within your institution’s governance framework. For 

more information, we encourage you to read the Institute of Internal Auditors position paper, “Three Lines of Defense in Effective Risk Management and Control”; the 

paper is available on the institute’s website at https://na.theiia.org.

Internal audit and review. An effective internal audit and review program is an 

essential component of an institution’s internal control system. The internal audit 

and review program evaluates and provides assurances on the effectiveness of 

the institution’s internal controls, risk management, and governance processes. 

The board is accountable for establishing, overseeing, and maintaining an effective internal audit program. This means the board or audit committee should be 

involved in internal audit planning and scoping, oversight of corrective actions 

and audit progress, and the selection of the chief internal audit staff and any thirdparty internal audit firms. 
32 | A System institution’s board of directors: Its responsibilities and roles

Financial reporting. The importance and relevance of ICFR to stakeholders, investors, regulators, audit committees, management, and auditors continue to grow. 

Management is responsible for monitoring compliance with FCA regulations to ensure the institution has established and maintains adequate ICFR.

ICFR enhances the quality of reporting by identifying potentially damaging practices within your institution. And as noted earlier, your audit committee is responsible for oversight and review of your institution’s system of internal controls over financial reporting.

It has been shown that ICFR improves when the audit committee, management, 

and the auditor acknowledge the importance of ICFR and work together to improve 

the institution’s ICFR. In addition, the Federal Farm Credit Banks Funding Corporation has the unique responsibility of reporting consolidated Systemwide financial information, which includes information about ICFR, to investors and the public. This 

financial information is key to maintaining a sound reputation and investor 

confidence in Systemwide debt.

Governing IT activities

The pervasive use of technology in System institutions has created a critical 

dependence on information technology 

(IT); as a result, institutions must address IT operational issues. Boards of 

directors of System institutions are responsible for planning and maintaining 

an effective and secure IT enterprise 

framework. 

The guidelines in the box to the left 

can help you and your fellow board 

members ensure that IT at your institution is properly managed.

Setting compensation

As a corporate entity, your institution 

will have a compensation program for 

senior officers and employees. The 

purpose of the program is to establish 

parameters for rewarding performance 

without compromising your institution’s safety, soundness, and mission. 

In addition to salaries, the compensation program should also address other 

benefits, including the following:

Guidelines for IT 

Approve IT plans. Approve IT-related plans, policies, and 

major expenditures while ensuring that management has an 

effective IT strategy that aligns with the overall enterprise 

strategy.

Understand your institution’s IT infrastructure and risks.

Learn about your institution’s IT infrastructure and its components and be aware of key IT topics, such as IT security 

policies, data center concepts and activities, and IT-related 

risks. Be aware of key IT development and acquisition projects 

and how they support and affect overall corporate strategies, 

objectives, and short- and long-term budgets.

Implement an IT control framework. Insist that your institution implement an IT control framework, including IT policies 

and procedures that are designed to ensure your institution’s 

safety and soundness and compliance with law, regulations, 

and accepted practices essential for a functioning IT system.

Require reporting. Require regular reporting on IT system 

functionality and security, including periodic reporting by your 

institution’s chief security officer, to the board or a committee 

of the board (such as the audit or risk committee).

Include IT security and operations in the internal audit review. Ensure that your institution’s internal audit and review 

program includes IT security and IT operations (e.g., vendor 

management and business continuity plans) within its audit 

scope and dedicates sufficient resources to these activities.
A System institution’s board of directors: Its responsibilities and roles | 33

• Perquisites

• Short- and long-term incentives

• Deferred compensation 

• Retirement and pension programs, including supplemental pension programs 

for senior officers

• Executive employment and severance agreements 

• Succession planning, change-of-control provisions, and retention bonuses

Your institution must follow the regulatory requirements for compensation and for 

disclosing information about it. You can use the guidelines below to create an effective compensation program.

Guidelines for effective compensation programs

Define your philosophy, objectives, and practices for compensation. Ensure that 

these practices comply with federal, state, and local laws governing employer and 

employee relationships. 

Make sure salaries reflect the relative value of each position to your institution.

Consider using salary surveys to compare compensation rates for similar positions in 

comparable organizations. Be diligent and prudent in your decisions regarding compensation programs.

Monitor earnings. Make sure that your institution has sufficient earnings to cover 

both its compensation program and other costs of operations.

Consider the future impact of your compensation program. If your institution provides deferred compensation to officers or employees, be sure you understand the 

future financial impact of funding the deferred compensation and address the impact 

it will have in the institution’s long-term financial planning.

Make sure your compensation program supports overall goals. Do not allow 

compensation policies and plans to adversely affect the overall goals, objectives, or 

mission of your institution. Keep this in mind especially when considering incentive 

programs. 

Watch out for reputation risk. Pay attention to any reputation risks that your institution’s compensation program might create for the institution. Particularly during 

difficult economic times, be mindful of how the public and Congress might perceive 

your institution’s compensation program.
 
Standards of conduct for directors | 35

Standards of conduct for directors

As a member of the board of directors, you owe fiduciary 

duties to your institution and its members. These duties 

are typically described as the duties of due care, obedience, and loyalty. In other words, as a director you are 

expected to diligently carry out your duties in good faith 

and in the best interest of your institution and its members, while 

exercising unbiased, independent judgment. 

In addition, if you are an elected director, you face another challenge because you 

yourself are a borrower of your institution. Therefore, you must be objective when 

you take actions that may affect your interests as a borrower and consider recusing 

yourself from any decision that is too personal to your interests.

When acting in an official capacity, your personal interest and those of your 

family and your associates must be subordinate to the best interest of the institution 

and the collective interest of its members. You should evaluate issues in terms of the 

institution’s resources and capabilities, the reasonableness of risk and returns, any 

potential adverse effects on the institution and its members, and the requirements 

of the Farm Credit Act. In addition, your decision-making process is best served 

when you carefully consider all reasonably available and relevant facts and then 

reach a conclusion that you honestly and reasonably believe is in the best interest of 

the institution and its members.

While, in many situations, you may rely upon the advice of officers or experts and 

on information in business records for making an informed decision, you should 

only do so when you fully understand the issue and have no reason to doubt the 

supplied information. 

As a director of a System institution, you may be held personally liable and 

subject to monetary penalties or other sanctions if you do any of the following:

• Engage in unsafe or unsound practices

• Fail to comply with statutory or regulatory mandates

• Breach a fiduciary duty (or permit another person to do so)

You may be held responsible either alone or jointly with other board members in 

FCA enforcement actions and in lawsuits brought by shareholders or investors. You 

can also be held liable for intentional torts (legal wrongs), such as fraud or misrepresentation, when third persons are injured, even though you took the actions on 

behalf of your institution. 
36 | Standards of conduct for directors

However, allowances for honest error will be made. As a director, you may make 

decisions in good faith that you believe will benefit the institution and its members. 

Even if a decision turns out to be wrong and brings hardships to the institution, you 

may be able to avoid criticism provided the board can show it made that decision on 

the basis of its own evaluation of available information. That’s why documenting the 

board’s decision-making process is so important. Also, do not hesitate to seek legal 

counsel on matters affecting your role as director.

As a director, you have a specific responsibility to keep certain information confidential. Your role as director gives you access to sensitive business information for 

the institution at which you serve. You will also have access to individual borrower 

information. It is your responsibility to keep that information from release unless 

specifically authorized.

Conflicts of interest

As a director, you are expected to maintain high standards of industry, honesty, 

integrity, impartiality, and conduct when performing your duties. To maintain these 

standards, you must avoid conflicts of interest. In fact, to be prudent, you should 

avoid even the appearance of a conflict of interest. 

How can you avoid a conflict of interest or the appearance of one? Before acting 

on any business matter for your institution, ask yourself if you (or members of 

your family or any close associates) could personally gain from the matter or could 

appear to personally gain from it. If the answer to the question is yes, consult with 

your institution’s legal counsel and/or the standards of conduct officer to determine 

what to do. You will likely be advised to refrain from considering or voting on the 

matter and to refrain from trying to influence the votes of others on the matter.

In addition, as part of your responsibilities, you are required to make annual 

disclosures of certain personal information. You must disclose in your institution’s 

annual report any outside business affiliations in which you serve as a director or 

senior officer. You must also disclose cash and noncash compensation received from 

third parties when you are acting in your official capacity. Noncash compensation 

includes gifts such as coffee, T-shirts, meals, unreimbursed payments for trips, and 

use of property. However, according to FCA regulations, you do not need to disclose 

noncash compensation if its annual aggregate value is less than $5,000.
Standards of conduct for directors | 37

FCA’s examination, supervision, and enforcement authorities and activities | 39

FCA’s examination, supervision, and 

enforcement authorities and activities

Examination Congress requires FCA to examine every System institution 

at least once every 18 months. We fulfill this requirement 

by conducting a statutory compliance examination, but 

we may also conduct other examinations as necessary. 

An examination is an objective assessment of whether your institution is operating in a safe and sound manner and in compliance with laws and regulations. Examination reports do not diminish your role as a director in overseeing 

your institution’s operations. Rather, they are tools to help you monitor your institution’s safety and soundness and its compliance with laws and regulations.

As discussed below, rather than applying the same level of examination to every 

institution, we use an approach tailored to each institution based on its degree of 

risk, the adequacy of its governance and internal control systems, and other factors. This approach results in a more effective and efficient examination process. 

Well-managed, sound institutions do not require the same amount of examination 

and oversight as do more complex institutions or those that are troubled.

During the examination, our examiners may find weaknesses in your institution’s 

operations and control processes or in its compliance with laws and regulations. 

If so, these findings will be included in the examination report and discussed with 

your board at the board meeting. 

The examination report is a discussion of your institution’s condition, operation, 

and compliance with laws and regulations. It also identifies any matters requiring 

attention. An examination report is confidential and protected from release by law. 

If release of an examination report, or part of its contents, is necessary, your institution must first obtain specific written consent from the legal department at FCA. 

In addition to the formal examination report, FCA may issue interim activity letters 

throughout the examination period; these letters are also considered to be examination reports and should be treated as such.

As a director, you have a duty to address report findings, to take appropriate 

corrective actions in a timely manner, and to ensure that underlying causes of problems found during examinations are addressed and resolved. During subsequent 

examinations, FCA will evaluate the effectiveness of your board’s efforts to resolve 

any problems noted in previous examinations.

At the board meeting near the end of the examination process, our examiners will 

present their findings and respond to any questions you and your colleagues have. 
40 | FCA’s examination, supervision, and enforcement authorities and activities

You will get the most out of a board meeting with FCA examiners if you thoroughly 

read the examination reports and any accompanying correspondence before the 

meeting so that you are prepared to ask questions.

Sometimes you may not agree with all of the examiners’ conclusions; however, 

you should always make sure you understand and fully consider the basis for the 

conclusions and how failure to resolve concerns could affect the safety and soundness of your institution.

Your institution’s management is generally invited to take part in meetings with 

examiners, but each meeting should also provide an opportunity for the board 

members to meet in executive session with exam staff only.

After an examination, your board will receive an overall numerical rating of your 

institution. The system that FCA examiners use to determine a rating is called the 

Financial Institution Rating System (FIRS). It is similar to the rating system other 

federal banking regulators use. Also, on a quarterly basis, we evaluate your institution’s capital, assets, management, earnings, liquidity, and sensitivity to changes in 

interest rates. (These six characteristics are referred to collectively as CAMELS.) FCA 

examiners may update your institution’s FIRS rating as part of this quarterly evaluation or at any other time, as needed.

In addition to assigning an overall numerical rating to your institution, our examiners assign a FIRS rating for each of the CAMELS components. These ratings, which 

range from one to five (with one being the best), are explained in section EM-1.3 of 

the FCA Examination Manual, which is located on the FCA website. We provide you 

and your fellow board members with the rating results to give you additional perspective on the condition of the institution you lead, but we urge you to focus on the 

basis for the ratings assigned and not on the ratings themselves.

Risk-based examination approach

Historically, risks for System institutions have been concentrated in traditional lending activities. However, the complexity of institutions’ consolidated risk exposure 

has increased over the years because System institutions now offer a wide variety 

of lending products. In addition, System institutions serve more diverse geographic 

areas and rely on electronic delivery systems. In light of this increased complexity, 

institution management must evaluate the different types of risk exposure the institution has and control and manage each risk according to its significance. Consolidated risk assessments should be a fundamental part of managing the institution.

Because risks vary considerably from institution to institution, FCA uses a riskbased examination and supervisory approach. Our examiners do not attempt to 

restrict risk-taking when it is conducted in a safe and sound manner and in compliance with laws and regulations. They do, however, seek to determine whether 

institution management identifies, understands, and controls the risks assumed by 

the institution. As an organization grows more diverse and complex, its risk management processes must keep pace. When risk is not properly managed, we will direct 

an institution’s board and management to take corrective action. In all cases, our 

primary concern is for the institution to operate in a safe and sound manner, to comply with laws and regulations, and to maintain capital commensurate with its risk.
FCA’s examination, supervision, and enforcement authorities and activities | 41

FCA mainly evaluates institution risk by how it affects capital and earnings. From 

an examination and supervisory perspective, risk is the potential that events, expected or unexpected, may have an adverse impact on your institution’s capital or 

earnings.

The existence of risk — even high risk — is not necessarily a reason for concern 

when it is effectively managed. To put risks in perspective, examiners will evaluate 

whether the risks your institution undertakes are, either individually or collectively, 

warranted. Generally, a risk is warranted when it is identified, understood, measured, monitored, and controlled, and when your institution is backed by adequate 

capital to withstand the financial distress that the risk could cause. Unwarranted 

risks (those that do not meet these criteria) will need examination and supervisory 

attention. Examiners will inform your institution of the need to mitigate or eliminate excessive risks. Appropriate institution actions may include reducing exposure, 

increasing capital, or strengthening risk management processes.

We discuss below seven categories of risk. These categories are not mutually 

exclusive; any product or service may expose the institution to multiple risks. In 

addition, the categories can be interdependent; increased risk in one category can 

increase risk in other categories.

Credit risk: The current and prospective risk to earnings or capital arising from a 

borrower’s failure to meet the terms of any contract with the institution or arising 

from a borrower’s failure to perform as agreed. This risk is found in all activities 

where success depends on counterparty, issuer, or borrower performance. It arises 

whenever institution funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off 

the balance sheet.

Interest rate risk: The current and prospective risk to earnings or capital arising 

from movements in interest rates. This risk primarily arises from the following:

• Differences between the timing of rate changes and the timing of cash flows 

(repricing or maturity mismatch risk)

• Changing rate relationships among different yield curves affecting various 

products (basis risk)

• Changing rate relationships across the spectrum of maturities (yield curve risk)

• Interest-related options embedded in assets and liabilities (options risk)

Liquidity risk: The current and prospective risk to earnings or capital arising from 

an institution’s inability to meet its obligations on time without incurring unacceptable losses. This risk includes the inability to manage unplanned decreases or 

changes in funding sources. It also arises from the failure to recognize or address 

changes in market conditions that affect the institution’s ability to liquidate assets 

quickly and with minimal loss in value. Sufficient liquidity is essential to accommodate expected and unexpected balance sheet fluctuations and to provide funds for 

growth.
42 | FCA’s examination, supervision, and enforcement authorities and activities

Operational risk: The current and prospective risk to earnings and capital arising 

from problems with service or product delivery. This risk transcends all divisions, 

products, and services in a financial institution. Operational risk is a function of 

internal controls, information technology, employee integrity, and operating processes. This type of risk arises daily in all financial institutions when transactions 

are processed and services are provided.

Compliance risk: The current and prospective risk to earnings or capital arising 

from violations of, or noncompliance with, laws, regulations, prescribed practices, or ethical standards. Compliance risk also arises when the laws or rules governing areas such as consumer lending and borrower rights are inappropriately 

applied. This risk exposes the institution to fines, civil money penalties, payment of 

damages, and the voiding of contracts. Compliance risk can lead to the following:

• Diminished reputation

• Customer flight

• Limited business opportunities

• Lessened expansion potential 

• Inability to enforce a contract

• Litigation

Compliance risk is often overlooked because it blends into operational risk and 

transaction processing. A portion of compliance risk is sometimes referred to as 

legal risk. Legal risk is not just risk from the failure to comply with consumer protection laws; it encompasses all laws, as well as prudent ethical standards and contractual obligations. It also includes the exposure to litigation from all aspects of the 

financial services industry.

Strategic risk: The risk to earnings or capital arising from the following:

• Inadequate direction and control

• Imprudent business decisions

• Failure to achieve goals and objectives

• Failure to follow policy direction 

• Failure to respond to industry or regulatory changes

This risk is a function of the compatibility of the board’s strategic goals, strategies 

to achieve those goals, and accountability for achieving the goals. The resources 

needed to carry out business strategies are both tangible and intangible; they include communication channels, operating systems, delivery networks, and managerial capabilities. An institution’s internal characteristics must be evaluated against 

the impact of economic, technological, competitive, regulatory, and other changes.

Reputation risk: The risk to earnings and capital arising from negative public opinion. Negative public opinion can affect your institution’s ability to maintain credibility as a viable institution, as well as its ability to establish new relationships with 
FCA’s examination, supervision, and enforcement authorities and activities | 43

other financial institutions. It can also affect your institution’s ability to continue 

serving existing customers or to attract new customers. For example, even simple 

activities like out-of-territory lending can create reputation risk for System institutions, particularly when those activities are not properly monitored or their impact 

to your overall operations is not given proper consideration. 

Although sometimes difficult to quantify, reputation risk can expose your institution to litigation, financial loss, or a decline in the customer base. The potential for 

reputation risk exposure is always present; therefore, the board and management 

must be very cautious in dealing with customers and the community. 

Supervision and enforcement

FCA’s supervision and enforcement authorities are similar to those of other federal 

financial regulatory agencies. These authorities provide us with the power to ensure 

that System institutions and their related entities comply with laws and regulations 

and operate in a safe and sound manner. As a director of a System institution, you 

should be aware that you could be held personally liable in a formal regulatory 

enforcement proceeding for your actions as a director.

We use three supervision levels to differentiate our supervisory programs: 

• Normal Supervision is used for institutions that have a satisfactory risk profile, 

where the board and management have demonstrated the ability to take corrective actions in the normal course of operations.

• Special Supervision is used to remediate weaknesses in institutions that have 

significant weaknesses but where the board and management are considered 

willing and able to carry out corrective actions.

• Enforcement Supervision is used when an institution’s risk profile is unsatisfactory and the board and management are considered unable or unwilling to 

carry out the necessary corrective actions. 

Each situation is unique and requires a customized supervisory solution. 

Congress granted FCA enforcement authorities to ensure that System institutions, 

boards, management, and related parties comply with laws and regulations and 

operate in a safe and sound manner. These authorities enable us to impose rehabilitative or punitive enforcement measures on boards of directors, officers, and other 

individuals. 

We may use these enforcement authorities when a violation of law, rule, or regulation exists. We may also use them when an institution, director, officer, or individual engages in an unsafe or unsound practice. Enforcement actions include entering 

into written agreements; issuing cease and desist orders; assessing civil money 

penalties; and removing or suspending officers, directors, and others, or prohibiting 

them from participating in the affairs of a System institution. 

Appendix B provides additional information on supervision levels and each type 

of supervisory or enforcement action available.

Conclusion: Some guiding principles | 45

Conclusion: Some guiding principles

Successfully serving as a director on the board of an FCS 

bank or association can be challenging, but following 

these guiding principles will help you face the challenges. 

Know the law and regulations. Read and understand the Farm Credit 

Act and FCA regulations. (Ask your management to provide the information or download it from the FCA website.)

Act as a fiduciary. As a fiduciary, you must think and act independently and in the 

best interest of your institution. Always remember that you are the stockholders’ 

representative and are serving their collective best interests. You should evaluate 

issues in terms of the institution’s resources and capabilities, the reasonableness 

of risk and returns, and any potential adverse effects on your institution and its 

stockholders.

Become well informed. Read financial statements and reports to the board, reports 

from management, and Reports of Examination with a critical eye. If something is 

not clear or needs further explanation, ask questions. Always ask yourself whether 

you have enough information to make an informed decision, and if you do not, find 

out where you can get the information you need. It is your responsibility to be well 

informed about the institution, its business environment, and current market practices before taking action as a director.

Delegate wisely. Business demands and legal standards that govern your institution’s 

board require you to serve with dedication and vigilance. We cannot overemphasize 

the point that, although you may delegate assignments, you may never delegate 

your responsibilities as a director. While you are encouraged, and in some cases required, to use board committees, the committees do not relieve you of your individual responsibility for the decisions you make or for acting to ensure that institution 

operations are delegated to people who merit confidence. 

Avoid conflicts of interest. Be familiar with the FCA regulations addressing conflicts of interest and standards of conduct. Before you act on a business matter for 

the institution, ask yourself if you (or members of your family or other close associates) stand to personally gain from a matter. If so, consult with your institution’s 

legal counsel and its standards of conduct officer to determine how to deal with the 

conflict. You may need to recuse yourself from the board deliberations and the vote 

on the matter. When in doubt, the prudent course is often to disclose the conflict 

and abstain from voting on or discussing the matter. 
46 | Conclusion: Some guiding principles

Make use of counsel. Do not hesitate to seek legal counsel when considering internal investigations, application of the business judgment rule, or other matters affecting your role as director.

Select and retain competent management. The most important factor in the 

success of an institution is the quality of its management. Mismanagement is almost 

always the cause when a serious problem arises or an institution fails. You must stay 

keenly aware of management’s activities. Your early detection of managerial problems can mean the difference between the success and failure of your institution.

Understand the “why” behind your institution’s actions. If a matter is before the 

board for a decision or management is providing a briefing to the board about 

actions it is taking, be sure you not only understand what is being decided but more 

importantly why the action is being taken. Understanding the “why” uncovers the 

motivations behind the action and provides a clearer understanding of the potential 

impacts of the action.

Be attentive to risk. You must be aware of the various risks confronting your institution, the magnitude of those risks, and management’s ability to limit risk-taking 

to an acceptable level consistent with the board’s strategy. To manage those risks, 

you and your board must establish a system that is adequate for the size and complexity of your institution’s operations. Ideally, the board and management will work 

together to ensure that risk is adequately identified, measured, monitored, and controlled. Risk management is a continual process involving the whole organization, 

but larger institutions may want to establish a separate, independent risk management function. 

Although there are laws and regulations to guide the System in providing the highest-quality financial support and related services to a critically important segment of 

the economy, it ultimately falls to each institution’s board of directors to conduct the 

institution’s affairs in a responsible manner. As a director, you must understand the 

legal and regulatory mandates that govern the System and make sure that policies 

are put in place to uphold those mandates while allowing your institution to thrive 

and serve its members. Your integrity must be unimpeachable and your dedication 

to the job unfailing.

Underlying these principles is the assumption that you are making an honest 

effort to deal fairly with the institution, to comply with all laws and regulations, and 

to follow sound practices.

As the regulator of the System, FCA stands ready to help you understand and 

perform your duties. We welcome your comments and questions.
Conclusion: Some guiding principles | 47

Appendix A: Financial condition and key financial ratios | 49

Appendix A: Financial condition and 

key financial ratios 

T

o fulfill your fiduciary duties, you should have an in-depth 

understanding of your institution’s financial condition and 

risk position. You can acquire this understanding by reviewing regular reports showing your institution’s financial 

performance. These reports can help you do the following:

• Assess your institution’s financial condition

• Determine whether the risk taken by your institution is consistent with the 

board’s philosophy

• Identify potential warning signs in current operations

Financial reports should present information regarding current operations and 

financial trends in the areas of credit risk, earnings, liquidity risk, and interest rate 

risk. They should periodically discuss financial results with regard to the goals and 

objectives of your institution’s budget and business plan. They should also periodically include comparisons with the financial reports of peer institutions. If the 

financial reports indicate that the institution is failing to meet a budget or business 

planning goal or if there is a significant difference between the financial reports of 

your institution and the reports of its peers, management should explain. For financial information to be useful, it must be accurate, timely, concise, and presented in 

an easily understood format.

FCA provides two reports that you may find particularly helpful: The Uniform 

Performance Report (UPR) and the Uniform Peer Performance Report (UPPR). As 

described on pages 8 and 9 of this booklet, these reports are based on the Call Report data that your institution submits to FCA each quarter. The UPR and the UPPR 

include various data and financial ratios in the areas of capital, asset quality, earnings, liquidity, and sensitivity. For more information, read the report descriptions on 

the FCS Call Reports page on the FCA website. 

There are two levels of access to the UPR and the UPPR — a private one and a 

public one. Your institution has a password that allows access to the private versions 

of your institution’s UPR and UPPR.

You may wish to require management to periodically provide you with your institution’s private version of the UPR and UPPR. Because individual financial ratios can 

be calculated using various methodologies, the ratios presented in the UPR and the 
50 | Appendix A: Financial condition and key financial ratios 

UPPR could differ from the ratios that your institution’s management provides to the 

board. You should ask management to explain any significant differences.

In addition to the UPR and the UPPR, the Six-Quarter Trend Report and the SixYear Trend Report may also be useful. These reports are similar to the UPR and the 

UPPR but provide different time perspectives (six quarters or six years of data and 

ratios) to help you evaluate trends in the various ratios over an extended period.

FCA’s Examination Manual section EM-1.3, “Financial Institution Rating System,” 

discusses how FCA assigns ratings to individual institutions. The ratings include the 

component ratings for capital, assets, management, earnings, liquidity, and sensitivity (CAMELS), and a composite rating. The FIRS Guide, which is included in EM-1.3, 

provides more specific information about ratings, including the characteristics of 

each rating and the financial ratio benchmarks that our examiners use when assigning the composite and component ratings.

Financial ratios (whether those internal to your institution or those in the UPR, 

the UPPR, and the FIRS Guide) are useful indicators of risk and performance in 

multiple areas of operations. The sections below discuss the primary examination 

areas with reference to some of the more important financial ratios that boards use 

to monitor their institutions. Most of the ratios noted in this appendix are included 

in the UPR and the UPPR, and many are used in the FIRS Guide.

Capital

As a director, you are responsible for ensuring that your institution has sufficient 

capital to accomplish its mission, goals, and objectives. Capital provides a cushion 

to absorb losses, provides assurance to investors and stockholders regarding your 

institution’s stability and viability, supports asset growth, and contributes to your 

institution’s earnings base. 

You should understand both the quantity and quality of your institution’s capital. 

Primary components of the capital base should be stable and readily available to absorb losses. You should also understand and monitor the primary risk exposures to 

capital — most notably credit risk — and be ready to adjust capital strategies as necessary. Finally, you should understand the relationship between asset growth and 

capital accumulation (the “sustainable growth rate”) and any related management 

strategies to maintain capital levels. For further discussion of capital adequacy, see 

section EM-11.1 of our Examination Manual.

Capital planning is critical to ensuring safe and sound operations and viability. 

FCA regulations require your institution’s board of directors to establish, adopt, 

and maintain formal written capital adequacy plans as part of its financial plans. 

Capital planning considers events and circumstances that may place demands on 

your institution’s resources and develops strategies to meet these demands. Capital 

planning begins with an internal assessment of capital needs. This internal assessment includes stress testing. The results of the assessment will then help your board 

establish capital goals for your institution.
Appendix A: Financial condition and key financial ratios | 51

Capital adequacy goals

Your board is required to set capital adequacy goals — or “key capital measures” — 

for each of the measures defined in FCA regulation part 628, subpart B. These goals 

should ensure capital is sufficient for the following:

• Protecting against adversity

• Surviving unexpected losses

• Providing for the institution’s continued financial viability

• Providing for the growth necessary to meet the needs of borrowers

While regulations define minimum capital ratios and related conservation buffers, 

the minimum standards specified by the regulations are not meant to be adopted as 

the optimal capital goals in your institution’s capital adequacy plan.

Determining capital needs

Your board of directors is charged with establishing these capital goals on the basis 

of your institution’s particular circumstances and risk profile. The board should 

assess your institution’s capital needs at least annually, taking into account the operating environment, portfolio risk, growth prospects, and other risks facing your 

institution. 

Stress testing is an essential element in capital adequacy planning. It helps establish and support the board’s risk appetite, define limits, adjust strategies, and 

develop action plans for various scenarios. You and your fellow board members 

must carefully monitor capital levels at your institution and hold management 

accountable for achieving the established capital goals. Management reporting 

should be sufficient to allow the board to monitor and understand key trends and 

issues related to capital and facilitate effective capital management decisions. 

Capital distribution programs

Your board is also responsible for governing your institution’s capital distribution 

programs. Capital distributions, which are subject to FCA regulatory prior-approval 

requirements, can significantly affect an institution’s overall capitalization. For this 

reason, you should never put decisions to declare capital distributions on automatic 

pilot. These decisions should be based on sufficient due diligence, and capital distributions should be readily adjusted when needed to achieve capital goals and adhere 

to regulatory requirements. 

In addition, your board should carefully manage member expectations to ensure capital distributions can be adjusted without significant reputation risk. For 

example, any advertisement of capital distributions as part of marketing messages 

should clearly disclose that distributions may vary based on changes in financial 

performance, capital requirements, asset growth, emerging risks, and other issues. 

More frequent patronage declarations, such as those made on a quarterly or semiannual basis, may also make it more difficult to manage member expectations and 
52 | Appendix A: Financial condition and key financial ratios 

reputation risk when adjusting distributions in response to evolving conditions. 

Patronage should typically be declared annually when financial and capital plans 

are updated.

Regulations require your capital plan to do the following:

• Address projected patronage payments and other actions that may decrease 

capital

• Identify the minimum timeframe within which certain equities may be redeemed and paid to borrowers 

We encourage you to review section EM-11.2 of our Examination Manual for further 

discussion of capital management. 

Key capital ratios/measurements

Regulatory capital ratios: FCA’s regulatory capital regime is largely consistent with 

the Basel III capital standards applied by other federal bank regulators except where 

the standards have been modified to accommodate the System’s cooperative structure. FCA has defined and set minimum regulatory levels for the following ratios:

• Common equity tier 1 capital ratio (CET1) (4.5%)

• Tier 1 capital ratio (6.0%)

• Total regulatory capital ratio (8.0%)

• Permanent capital ratio (7%)

• Tier 1 leverage ratio (4%, of which at least 1.5% must be composed of unallocated retained earnings and certain equities that are considered to be unallocated retained earnings equivalents) 

Capital ratios provide insight into the composition of capital, the financial strength 

of the institution, and the ability to fund future growth. 

The definitions of these ratios are discussed in the FCA regulations. The first 

four ratios generally express various components of capital as a percentage of 

risk-adjusted assets. CET1 is composed of the highest-quality capital components 

(e.g., unallocated retained earnings) — elements with the greatest staying power 

when institutions encounter financial trouble. 

The tier 1 leverage ratio is a measure of financial leverage. Unlike the other ratios, 

the asset values in this ratio are not risk adjusted. This ratio is designed to constrain 

the buildup of leverage in the System and serves as a capital floor to ensure that a 

minimum amount of capital is held by all institutions, regardless of risk. At least 

1.5% of the tier 1 leverage regulatory minimum of 4% must consist of unallocated 

retained earnings and certain equities that are considered to be unallocated retained earnings equivalents as defined in the regulations. This requirement ensures 

that capital includes more than just shareholder equities and external capital; it also 

ensures that there is a cushion of retained earnings to protect your members’ investments from loss.
Appendix A: Financial condition and key financial ratios | 53

FCA regulations also establish specified conservation buffers to be held above the 

defined regulatory minimums for each of these measures. If capital levels fall below 

the defined conservation buffers, the regulations impose limits on the patronage 

and certain management bonuses that can be paid. 

Adverse assets to total regulatory capital: This measure compares adverse assets 

and other property owned to the institution’s total regulatory capital ratio, which 

includes the adjusted allowance for credit losses. The ratio measures the risk-bearing 

capacity and threat to the institution’s capital base presented by the quality of assets. 

Criticized or nonaccrual assets can be substituted in the numerator of this ratio for 

alternative perspectives.

Potential warning signs that capital levels may not be adequate include the 

following:

• The capital position is either declining or is below the board’s optimal capital 

goal or below the capital levels approved in the business plan.

• Asset growth exceeds the institution’s capital growth.

• Criticized, adverse, and nonaccrual assets are increasing, indicating that portfolio risk is growing.

• Capital ratios are significantly below average capital ratios for peer institutions.

• Capital levels are approaching the institution’s minimum regulatory capital 

requirements or conservation buffers.

Earnings

An adequate and reliable earnings stream is fundamental to maintaining a safe and 

sound institution. Earnings represent your institution’s first line of defense against 

capital depletion due to credit losses, interest rate risk, and other risks. The viability 

of an institution often depends on its ability to earn an appropriate return on its 

assets and capital. Institutions with good earnings performance can grow, remain 

competitive, augment capital, and provide a return to shareholders through patronage distributions. 

As with capital, earnings should be understood in terms of both quantity and 

quality. High-quality sources of earnings are stable, recurring, sustainable over 

the long-term, controllable, and central to the institution’s principal business and 

mission. Interest income on loans is an example of a high-quality earnings source. 

Earnings should not be contingent on unusual, infrequent, or uncontrollable 

sources of revenue.

Your board’s philosophy on earnings should be clearly documented in your 

institution’s business and capital plans. Earnings philosophies and related strategies 

should address the composition of income, reflect the competitive environment, 

and address the need to generate an acceptable return on assets. 

System institutions generate most of their earnings from loans, so strategies for 

loan pricing and structure play a fundamental role in earnings performance. A 
54 | Appendix A: Financial condition and key financial ratios 

philosophy of maximizing interest rate spreads within competitive constraints, and 

then returning patronage refunds to members at year-end after capital needs have 

been satisfied, is typically consistent with a sound earn-it-first philosophy. Such 

a philosophy facilitates strong earnings performance, promotes the institution’s 

capacity to withstand adversity, provides more flexibility to manage capital, and is 

viewed favorably by external parties, particularly rating agencies and investors.

Clearly, earnings are directly related to pricing. FCA regulations require your 

board to take an active role in establishing your institution’s pricing strategies. Your 

board should establish pricing policies and set interest rates either on a case-by-case 

basis or through a board-established interest rate plan within which management 

must operate. The board and management should ensure the loan pricing program 

aligns with overall strategic business objectives and initiatives.

Your oversight of earnings should focus on the quantity, quality, and trend of 

earnings. Reductions in the quantity and quality of earnings are frequently related 

to excessive or inadequately managed credit risk or interest rate risk, inadequate 

loan pricing, or high operating costs. Keeping expenses under control contributes to 

the quality and durability of earnings. Profitability typically declines when expenses 

grow faster than sustainable revenue. 

Potential warning signs that earnings are weakening include the following:

• Budgeted amounts on income and expense items vary considerably.

• Return on assets, return on equity, or net interest margins are significantly different from prior periods.

• Earnings performance is inconsistent or unstable.

• Net interest income or net interest margin is declining.

• Key earnings ratios compare unfavorably with those of the peer group.

• Your institution is relying increasingly on earnings from low-quality sources or 

from sources that are not central to the institution’s principal business.

• Return on equity is significantly lower than asset growth, which indicates earnings are insufficient to capitalize growth even when all earnings are retained.

Management should provide reports to the board showing earnings trends and their 

key drivers; these reports should also describe performance relative to established 

plans and budgets. 

Key earnings ratios/measurements

Return on average assets: Either net income for the preceding 12 months or yearto-date net income (annualized) divided by average total assets for the period. This 

ratio measures how efficiently the institution uses its assets to generate earnings.

Net interest margin: Either net interest income for the preceding 12 months or 

annualized net interest income (interest income less interest expense) divided by average interest-earning assets for the period. This margin reflects funding costs, loan 

pricing, and investment practices.
Appendix A: Financial condition and key financial ratios | 55

Efficiency ratio: Total noninterest expenses for the preceding 12 months divided 

by the sum of the net interest income and noninterest income (noninterest income 

includes patronage income received) for the preceding 12 months. This ratio shows 

how many cents of overhead are spent to generate $1 of revenue.

Operating expenses to average loan items: Total operating expenses divided by 

average gross loans. This ratio measures operating efficiency in terms of the relationship between operating costs and loan assets.

Return on average equity: Year-to-date net income divided by average equity capital 

(net worth). This ratio shows the return on the stockholder’s investment.

Liquidity

Liquidity represents the ability of an institution to fund assets and meet obligations 

as they come due without incurring unacceptable losses or adversely affecting the 

institution’s daily operations and financial condition. Liquidity is critical to the ongoing viability of any business, and maintaining liquidity is one of management’s 

key responsibilities at a financial institution. Sufficient liquidity is essential to 

provide for expected and unexpected balance sheet fluctuations and to provide for 

contingencies. 

Potential warning signs that liquidity risk is increasing include the following:

• Real or perceived negative developments, which affect market perceptions of 

System or institution creditworthiness, have occurred in either the internal or 

external operating environment.

• Declines in asset quality have eroded the borrowing base margins of individual 

associations and adversely affected scores of district contractual interbank 

performance agreements (CIPAs).

• Financial performance or projections have declined, posing risk to covenant 

compliance with general financing agreements for associations or to CIPA 

scores and market access for banks.

• Rating agencies have downgraded, or announced that they may downgrade, the 

credit rating of the System or one of its institutions.

• Bank days-of-liquidity measures are approaching the regulatory minimum.

• The spread widens between the interest rates on System debt issuances and 

rates on comparable issuances from the Treasury or other government-sponsored enterprises.

Your board of directors should maintain policies and strategies for the management 

of liquidity, a liquidity crisis, or unanticipated funding events.

The System’s primary source of liquidity is its access to debt capital markets. FCS 

banks obtain funding for supporting their associations and liquidity from bonds sold 

to investors through the Federal Farm Credit Banks Funding Corporation (Funding 

Corporation). All four banks are jointly and severally liable on bonds issued through 
56 | Appendix A: Financial condition and key financial ratios 

the Funding Corporation and have implemented a market access agreement to promote fiscal responsibility and prudent management throughout the System. 

FCS banks also maintain secondary sources of liquidity by holding an inventory 

of high-quality, liquid investments managed in accordance with FCA regulations. 

Other sources of liquidity may include lines of credit from commercial lenders. 

While these lines of credit can provide an alternative source of liquidity in normal 

periods, they can become expensive or quickly dissipate in an adverse operating 

environment.

All System institutions, including associations, have a responsibility to maintain 

strong financial operations. Maintaining strong operations helps protect unfettered access to the debt markets and maintain the market’s perception of System 

creditworthiness. 

Because the main source of liquidity for an association is its funding bank, an 

association’s board must ensure its institution complies with the general financing 

agreement it holds with its funding bank. Failure to comply with the terms of the 

agreement could result in increased interest costs, fees, penalties, or restriction 

of funding. Each of these consequences could affect profitability and increase the 

association’s cost of borrowing and, ultimately, the credit cost to borrowers.

Banks and associations use very different principles of liquidity management. 

Bank liquidity needs are largely driven by liquidity demands at its affiliated associations. Therefore, a bank should seek to maintain sufficient cash flow to fund 

operations, service debts, meet commitments to fund direct loans to associations 

and loans to other borrowers, and provide for funding contingencies. 

Key liquidity ratios/measurements

Days of liquidity: The number of days of maturing obligations that could be funded 

by liquid investments at any given point. FCA requires FCS banks to maintain a 

liquidity reserve sufficient to fund 90 days of the principal portion of maturing obligations and other borrowings of the bank at all times.

Contractual interbank performance agreement score: A score that measures a 

district’s performance and risk. The CIPA is an agreement between all FCS banks 

and the Funding Corporation. The agreement defines the methodology for calculating the score and establishes minimum score requirements. The CIPA score incorporates measurements of capital, asset quality, earnings, liquidity, and interest rate 

risk sensitivity. The financial condition and performance of the bank and all district 

associations factor into each district’s CIPA score. 

Quality of assets supporting the direct loan: A measurement of the quality of 

assets that support the direct loan from the funding bank. This measurement, which 

applies only to associations, measures the amount of high-quality assets available 

to secure the direct loan with the institution’s funding bank. Additional measures of 

the quality of assets supporting an association’s direct loan include loans graded “acceptable” and “special mention” as a percentage of the direct loan, as well as accrual 

assets as a percentage of the direct loan.
Appendix A: Financial condition and key financial ratios | 57

Sensitivity to interest rate risk 

Sensitivity to interest rate risk (IRR) refers to the risk that interest rate changes 

could adversely impact an institution’s earnings and capital. IRR is an inherent risk 

for financial institutions, and it can become excessive if mismanaged. The institution’s IRR management program comprises the policies, procedures, and systems 

used to identify, measure, and manage this risk. The institution’s risk appetite, in 

combination with the effectiveness of the IRR management program, determines 

whether the level of exposure poses safety and soundness concerns.

IRR management differs between FCS banks and direct-lender associations. FCA 

regulations establish baseline expectations for IRR management programs at FCS 

banks and extend these requirements to any System institution with IRR that could 

lead to significant declines in net income or the market value of capital. 

Districts have centralized most asset-liability management functions at the 

funding bank and use transfer pricing to insulate associations from most IRR 

sources. Nonetheless, some districts allow greater flexibility in association funding 

strategies, which can expose them to greater IRR. 

Although senior management is responsible for day-to-day management of IRR, 

board directors at all System institutions should understand the sources and nature 

of IRR at their institutions. Your board should establish IRR policies and ensure procedures are in place for appropriate asset-liability management practices that reduce 

exposure to excessive levels of IRR. Your board should also provide oversight to ensure that management effectively identifies, measures, monitors, and controls IRR. 

Your institution’s IRR management processes should be commensurate with 

the risks managed, and your board policy should establish explicit limits on the 

institution’s IRR exposure. Your board policy should also provide guidance for the 

measurement and management of IRR. The FCA bookletter “Interest Rate Risk 

Management” (BL-072) provides guidance on establishing an effective IRR management framework and how it differs depending on IRR exposures.

Potential warning signs that your institution is overly sensitive to market risk or 

that IRR management is insufficient include the following:

• Net interest income shows significant volatility in response to market interest 

rate movements.

• Management is not operating within the board’s established limits for IRR 

exposure.

• The amount of, and trend in, IRR exposure is increasing.

• Your institution has a high or increasing volume of assets with unhedged embedded options. For example, fully prepayable fixed-rate loans or investments 

may pose a risk to earnings and equity when not hedged with callable funding 

or matched with transfer rates.

• Management reports fail to identify and quantify the major sources of IRR in a 

clear and timely manner.

• Your institution does not have an independent review or audit of the IRR management process.
58 | Appendix A: Financial condition and key financial ratios 

Key sensitivity ratios/measurements 

Simulations of net interest income and market value of equity: Income simulation 

is used to forecast how net interest income changes in response to changes in interest rates. Simulations of the market value of equity show possible changes in the 

market value of assets, liabilities, and off-balance-sheet items as a result of interest 

rate movements and the impact these changes have on an institution’s capital 

position. 

These two simulations show the percentage change in net interest income and 

market value of equity for a given change in market interest rates. All institutions 

are required to perform periodic simulations of net interest income. The market 

value simulation is especially important in large and complex institutions that 

manage significant sources of IRR. The reliability of the measurement system 

depends heavily upon the quality of the data and various assumptions used in the 

model; therefore, close attention to these areas is warranted.

Gap analysis: The difference between assets and liabilities that mature or reprice 

within a given time is known as the periodic gap. An institution’s gap position 

indicates how interest rate changes may affect its net interest income. Although 

gap reports can be useful in understanding IRR exposures, institutions with significant risk exposure or complex financial instruments should not rely solely on gap 

analysis for establishing IRR exposure limits or for measuring exposure against 

those limits.

Duration analysis: Duration is a measurement of the sensitivity of the value of an 

asset or liability to movements in interest rates. Duration measures such as the 

“duration of equity” or “duration gap” can be used to analyze the effects of interest 

rate changes on the value of an institution’s assets, liabilities, and capital position.
Appendix A: Financial condition and key financial ratios | 59
 
Appendix B: FCA Supervision and Enforcement Authority | 61

Appendix B: FCA Supervision and 

Enforcement Authority

We have three levels of supervision: normal, special, 

and enforcement. The following diagram identifies 

each level of supervision, listing the actions and documents associated with each level. It also identifies 

the typical FIRS ratings associated with each level.

As the diagram below shows, the level of supervision we use for your institution 

generally depends on your institution’s FIRS rating and its willingness and ability to 

address the problems identified. As the level of risk and concern increases, our level 

of supervision increases.

Enforcement

A legal process that requires 

FCA board approval.

For institutions typically rated 

3, 4, or 5.

Includes written agreements, 

cease & desist orders 

(including temporary orders), 

civil money penalties, 

removals & suspensions.

Special Supervision

A heightened supervision 

process to achieve corrective 

action before enforcement is 

needed.

For institutions typically rated 

2 or 3.

May include supervisory 

letters if corrective action 

or reporting is needed to 

address specific events or 

concerns.

Normal Supervision

The normal examination 

oversight process.

For institutions typically rated 

1 or 2.

May include supervisory 

letters if corrective action 

or reporting is needed to 

address specific events or 

concerns.

Levels of Supervision
62 | Appendix B: FCA Supervision and Enforcement Authority

For those institutions exhibiting conditions that are serious but do not necessarily 

critically impair the safety and soundness of the institution, we increase the level of 

supervision from normal to special. We generally use special supervision when any 

of the following conditions exists:

• The risk profile (relationship of risk to financial capacity) of an institution is 

considered to be weak and deteriorating, but its total condition does not justify 

a formal enforcement action.

• The condition of the institution or the practices it uses are unsatisfactory; if 

the unsatisfactory condition or practices are not promptly and sufficiently addressed, we may take formal enforcement action.

• The board and management recognize the weaknesses and concerns that were 

identified; they are willing and able to correct them; and their proposed actions 

are likely to resolve the concerns.

• The financial profile (that is, the earnings, liquidity, and quality of collateral 

in relation to direct loans) is at the lower end of the satisfactory range and is 

threatened by increasing risk in the loan or investment portfolios.

As part of the special supervision process, we will typically issue a supervisory letter 

to the institution’s board that identifies specific required corrective actions. We give 

the institution an opportunity to correct the problems to avoid the need for a formal 

enforcement action.

If conditions deteriorate, we may take formal enforcement action to establish 

managerial discipline and to put in place the controls needed to prevent further 

deterioration or the failure of the institution. We use enforcement supervision 

for institutions where a formal enforcement action is needed to correct unsafe 

or unsound conditions and practices or violations of law and regulations.

Examples of actions that could warrant enforcement supervision are as follows:

• The institution or a representative of the institution is deemed unable or 

unwilling to address a materially unsafe or unsound condition or practice, or a 

violation of law or regulation.

• The institution or representative is about to engage in a materially unsafe or 

unsound practice or is about to commit a willful or material violation of law or 

regulation that exposes the institution to significant risk.

• The institution or representative fails to comply with an enforcement document 

or is unwilling or unable to address a violation of a “condition imposed in 

writing” (see below).

Typically, the enforcement documents specify the steps the institution must take to 

correct problems described in Reports of Examination and the timeframe within 

which corrective measures must be taken.

The following sections identify and describe the various forms of supervisory and 

enforcement actions we may take.
Appendix B: FCA Supervision and Enforcement Authority | 63

Conditions imposed in writing

As part of approving an institution’s application request for some action requiring 

FCA consent, we may put in place “conditions imposed in writing” to address unsafe 

or unsound practices or violations of law, rule, or regulation. The most common 

types of application requests are merger or reorganization requests. In these cases, 

the conditions imposed in writing are referred to as supervisory conditions of 

merger or reorganization, and we impose them with the consent of the institution. 

These conditions are in addition to any “conditions of approval.” We can take enforcement actions for an institution’s failure to comply with conditions imposed in 

writing.

Written agreements

An agreement is a contract between the institution or an individual and FCA, which 

commits the institution or individual to taking the specified actions to correct a 

problem. We use written agreements when problems are not severe enough to 

warrant a more stringent action and when the board and management are able and 

willing to address the agreement’s requirements. The agreement is executed by an 

institution’s board of directors (or a specified individual) and an authorized representative of FCA. If an institution or individual fails to comply with an agreement, 

we may begin cease and desist proceedings.

Directives

The Farm Credit Act provides us with the authority to issue capital directives and 

directives for restructuring distressed loans. While directives are not considered 

enforcement documents, they are enforceable in the same manner and to the same 

extent as an effective and outstanding final cease and desist order.

Cease and desist orders

We issue an order to cease and desist to institutions and individuals when problems 

are severe. This order may also be used when the institution violates agreements or 

conditions that were imposed in connection with an application (such as a merger 

or reorganization application). We may issue an order to cease and desist in the 

following situations:

• An institution or person has engaged, is engaging, or is about to engage in an 

unsafe or unsound practice.

• An institution or person has violated, is violating, or is about to violate 

— a law, rule, or regulation;

— any condition imposed in writing by FCA in connection with the granting 

of any application or other request by the institution or a representative of 

the institution; or

— any written agreement with FCA.
64 | Appendix B: FCA Supervision and Enforcement Authority

An order to cease and desist either specifies affirmative actions that are necessary to 

correct illegal or unsafe practices or conditions, or requires that such practices be 

stopped, or both.

The FCA board decides whether to issue an order to cease and desist. The party 

to whom FCA issues this order may obtain review of the order by the appropriate 

U.S. Court of Appeals. If an order to cease and desist is not complied with, it can be 

enforced in federal district court, or a civil money penalty action can be initiated. 

An order to cease and desist remains in effect until terminated by the FCA board or 

a reviewing court.

We may issue a temporary order to cease and desist before a cease and desist proceeding is completed when a violation, threatened violation, or unsafe or unsound 

practice is likely to

• cause insolvency,

• cause substantial dissipation of assets or earnings,

• seriously weaken the condition of the institution, or

• seriously prejudice the interests of investors or shareholders before completion 

of a cease and desist proceeding.

The temporary order can require the institution or a specific party to stop the violation or practice described or to take corrective action. Unless the temporary order is 

set aside by court order, it is effective immediately upon being served on the party 

and remains in force until the effective date of a permanent order to cease and desist is issued or until charges are dismissed.

Civil money penalties

A civil money penalty (CMP) action requires an institution or individual to pay a 

monetary penalty. A CMP can be used alone or in conjunction with other administrative actions. We may assess a CMP against an institution or individual for violation of the Farm Credit Act, FCA regulations, or an order to cease and desist. By law, 

all CMP amounts are reviewed and adjusted each year. 

Before we determine whether to assess a CMP, the offending individual or institution has an opportunity to submit relevant information that addresses the violation. 

Once we review this information, the individual or institution will either receive a 

notice of assessment or be informed that no assessment will be imposed. If a notice to assess a CMP is issued, we can order the offending party to pay the penalty, 

but the party can seek review of the assessment by the appropriate U.S. Court of 

Appeals. Funds received under a CMP go to the U.S. Treasury.

Removals, suspensions, and prohibitions

To remove or suspend a director or officer or to prohibit him or her from participating in the conduct of the affairs of an institution, we must determine that the 

individual violated a law or regulation or an order to cease and desist, or that he or 
Appendix B: FCA Supervision and Enforcement Authority | 65

she engaged in an unsound practice or breached a fiduciary duty. We can take such 

action if any of the following occurred:

• The institution has suffered or probably will suffer substantial financial loss or 

other damage.

• The director or officer has received financial gain through a legal violation or 

unsound practice.

• The interests of the institution’s shareholders or investors in System obligations 

could be seriously affected. 

• The legal violation, unsound practice, or breach of fiduciary duty involves personal dishonesty or demonstrates willful or continuing disregard for the safety 

and soundness of the institution.

Directors, officers, or other persons participating in the conduct of the affairs of an 

institution can also be removed from a System institution if their conduct or actions 

with respect to another business or System institution

• have caused a substantial financial loss or other damage,

• show personal dishonesty or willful or continuing disregard for the entity’s 

safety or soundness, or

• show that the individual is unfit to participate in the conduct of the institution’s 

affairs.

The FCA board decides whether to remove the individual, and a removal order may 

be reviewed by the appropriate U.S. Court of Appeals. If necessary, we may suspend 

a director or officer pending completion of a removal proceeding. A suspension may 

be appealed to the appropriate U.S. District Court. Once in place, a removal or suspension order prohibits the person from participating in any manner in the affairs 

of the institution.

We can also remove or suspend an individual charged with or convicted of 

a crime that involved dishonesty or breach of trust and that was punishable by 

imprisonment for more than one year. We can also prohibit such an individual from 

further participation in any manner in the conduct of the affairs of the institution 

after showing that the person’s continued service is a threat to the interests of the 

institution’s shareholders or investors or threatens public confidence in the institution or the System. A suspension remains in effect until we terminate it or until the 

criminal charge is finally settled.

Conservatorship/receivership

If the FCA board determines that a situation is serious enough to require a conservator or receiver, the board may appoint, ex parte and without notice, a conservator 

or receiver. The FCA board is the only entity that may appoint a conservator or 

receiver.

Note: Supervision and enforcement activities related to Farmer Mac are the sole responsibility of the Office of Secondary Market Oversight.
Notes
Notes
Notes

1500/0421

For questions about this publication, contact:

Office of Congressional and Public Affairs

Farm Credit Administration

1501 Farm Credit Drive

McLean, VA 22102-5090

703-883-4056

info-line@fca.gov

www.fca.gov