Mission-Related Investments 

Update

August 12, 2010

Farm Credit Administration
Agenda

 Introduction

 Legal Framework

 Mission-Related Investments/Investments 

in Rural America

 Policy Background

 Types and Volume Trends

 Investments in Rural America by Type and Location 

 FCS Feedback

 Looking Ahead

2
Richard Katz

Senior Counsel

Office of General Counsel

Legal Framework

3
Statutory and Regulatory Authorities

• Section 15(15) and 3.0 (13)(A) of the Farm Credit Act authorizes System 

banks to invest in U.S. Government and government guaranteed 

obligations and other investments authorized by FCA

• Section 2.2(10) of the Farm Credit Act authorizes associations to invest 

their funds as approved by their funding bank under FCA regulations

• FCA investment regulations authorize System banks and associations to 

hold investments primarily for liquidity and risk management purposes 

• FCA regulation section 615.4140(e) authorizes FCS banks and associations 

to hold other investments that the FCA approves on a case-by-case basis

4
Mission Investments

• Subparts E and F of part 615 of the FCA regulations permit FCS to 

make the following types of mission oriented investments:

– Farmer Mac Securities

– Farmers’ notes

– USDA guaranteed obligations and certain other governmental 

obligations benefitting rural areas

– Certain municipal securities, agricultural equipment securities 

and asset-backed securities

– Other investments approved by the FCA on a case-by-case basis 

under section 615.5140(e) 

5
Pilot Investment Programs

• Since 2005, FCA approved “Investments in Rural America” pilot 

programs for all System institutions on either a district-wide 

and/or an institution-specific basis

• Programs established with an initial 3-year pilot period; continue 

until FCA Board acts to modify or terminate the programs 

• Conditions of Approval designed to ensure:

– Mission focus

– Obligations purchased are structured as investment securities

– Safe and sound investment management through investment 

portfolio, obligor, and maturity limits 

– Investments benefit rural communities and residents 

6
Legal & Policy Issues

• Size, nature, and method of rural community-based investing requires appropriate and 

meaningful investment criteria 

• Conditions of approval enforce the implied statutory distinction between loans and 

investments by: 

– Requiring that securities purchased be structured as investment securities 

commonly recognized in the debt markets as a vehicle for investment 

– Excluding any transaction more similar to a commercial loan transaction than to a 

traditional investment transaction

– Specifically prohibiting FCS from directly making or purchasing loans under the 

program

• May 1, 2008 written clarification to FCS provided additional guidance and a general 

framework for investment decisions

• Staff continues to study investments made under pilot programs, including mission 

focus, economic impact (e.g., jobs created/saved), effectiveness and appropriateness, 

level of risk, and financial impact 

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Laurie A. Rea, CFA

Associate Director

Office of Regulatory Policy

Mission-Related Investments/

Investments in Rural America

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Policy Basis for Mission-Related Investments

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1. Agriculture and rural communities are interdependent, as the 

vitality of rural communities is essential for the prosperity of 

agriculture

2. Congress recognized in the preamble and the Policy and 

Objectives in section 1.1 of the Act that the System’s mission 

is to provide a flexible flow of money to agriculture and rural 

areas

3. Rural communities provide the needed infrastructure and 

supply systems that allow agricultural producers to thrive

4. Farmers and ranchers depend on the off-farm income 

generated from jobs created and located in rural communities
Need For Investing in Rural Communities

• Greater public and private investment in rural communities is needed 

to abate:

– Persistent weak economic conditions in rural areas

– Lack of sufficient funding and credit availability for critical 

infrastructure and facilities which are needed to create jobs, sustain 

economic growth and retain youth and talent 

– Rural funding gaps caused by higher risks and lower returns

– State and Federal budget constraints

• Rural communities face a number of obstacles in raising funds:

– Inability or inconsistency of lenders to provide reasonable cost 

funding for costly essential infrastructure and community facilities

– Limited secondary market for certain segments of rural lending 

(e.g., business, infrastructure, low-moderate income housing) 

– Cost of credit enhancement and obtaining credit ratings limits use of 

tax exempt bonds and access to capital markets

– Limited availability of equity or “start-up” capital

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Mission-Related Investments

* Amounts in Thousands

** Includes Agribusiness

*** Estimated Secondary Market Purchases

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Investment Type

Total

Volume

3/31/10*

Total

Volume 

12/31/09*

Total

Volume 

12/31/08*

Annual

Change

Annual

Percent 

Change

Investments made under prior-approval authorities

Rural Housing Mortgage-Backed Securities $1,162,301 $1,242,526 $1,552,005 ($309,479) -19.9%

Rural Development Debt Securities** 631,757 635,195 477,445 157,750 33.0%

Credit-Linked Agricultural Notes 11,733 12,261 13,951 (1,690) -12.1%

Equity Investments 5,274 4,708 2,992 1,716 57.3%

Subtotal $1,811,065 $1,894,690 $2,046,393 ($151,703) -7.4%

Investments made under other regulatory authorities

Farmer Mac 1,433,330 1,267,409 1,461,320 (193,911) -13.3%

Tobacco Buyout 548,239 695,503 771,586 (76,083) -9.9%

USDA Guaranteed Paper*** 888,543 799,092 647,436 151,656 23.4%

Farmers' Notes 12,843 12,601 16,392 (3,791) -23.1%

Subtotal $2,882,956 $2,774,605 $2,896,734 ($122,129) -4.2%

Total all mission investments $4,694,021 $4,454,447 $4,943,127 ($273,833) -5.5%
Investments in Rural America

Objectives by Asset Class

Rural Housing Mortgage Securities 

 Improve the liquidity in the rural home financial markets to reduce rural 

home ownership costs 

Agribusiness Investments 

 Help agribusinesses obtain access to debt markets through collaboration 

with commercial banks and secondary market purchases 

Credit Linked Agricultural Notes

 Support agricultural lenders through purchase of notes linked to pools of 

long-term agricultural real estate loans 

Equity Investments 

 Support starter farmer and cooperative programs and rural entrepreneurs 

with seed capital

Rural Development Bonds

 Provide flexible flow of funds to rural America for rural development and 

infrastructure projects 

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Investments in Rural America by Asset Class

Total $1.8 billion

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Credit Linked Ag 

Notes

$11.7 million

0.7%

Equity

$5.3 million

0.3%

Rural Housing 

Mortgage 

Securities 

$1.2 billion

64%

RD Bonds

(e.g., IDBs, 

Revenue bonds)

$588.4 million

33% 

Agribusiness 

Senior Debt 

Securities 

$43.4 million

2%
Renewable Energy

$6,706

1%

Rural Lenders

$79,815

13%

Rural Housing

$11,625

2%

Infrastructure

$78,475

12%

Agribusiness

$43,378

7%

Community Facilities

$315,580

50%

Rural Business

$96,178

15%

Rural Development Investments by Purpose 

Total $631.8 million

* Amounts in Thousands 14
15

Location of Rural Development Investments
Investments by County Income Level

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Rural Development Debt Securities

Community Facilities 

• 59 projects totaling $315.6 million

• Investments support essential community facilities development (e.g., 

construction/expansion and modernization) and permanent financing including:

– Critical access hospitals, assisted living centers, disabled/disadvantaged 

citizens facilities and medical/health facilities

– Schools, libraries, childcare facilities, youth shelters/camps and public 

fairground facilities

– Fire and rescue stations, police stations, community centers, and public 

buildings

• Often sponsored by local governments and non-profits to provide cost effective 

essential human services

• Targeted investments in essential community facilities that advance the quality 

of life in rural communities

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Rural Development Debt Securities

Rural Lenders 

• 26 investment relationships with commercial banks totaling $79.8 million

• Investments in obligations issued by rural lenders that are secured by the issuer’s 

qualifying collateral (e.g., interests in one or more rural business or rural 

development loans)

• Commercial bank involvement in projects

– construction financing, credit enhancement for portion of public issuance, 

operating financing, trustee services, and other bank services 

• Benefits of rural lender partnerships—Rural communities obtain greater access to 

longer term funds and increase capacity to finance larger rural development 

projects

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Rural Development Debt Securities

Rural Business

• 34 investments totaling $96.2 million

• Key objective is to support businesses that create and retain jobs in rural 

areas

• Focus on manufacturing products in rural areas or providing services to 

rural residents rather than service to broad market of both urban and 

rural areas

• Often sponsored by economic development authorities, which help 

coordinate community priorities and rural interests

• Recently, we have seen investments coupled with SBA guarantees 

provided under the American Reinvestment and Recovery Act (ARRA)

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Rural Development Debt Securities

Rural Infrastructure 

• Investments in 8 projects totaling $78.5 million

• This segment supports projects that fund water, waste, utilities, 

transportation, and rural infrastructure projects in rural areas

• Examples include hydroelectric, water and sewer, and securities 

issued by economic development authorities on behalf of a 

government entity in support of rural economies

• Community impact – Investments helped preserve and create jobs 

and supported local inputs and provided communities with a key 

source of scarce financing during current economic downturn

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FCS Feedback

• Pilot Program Attributes

– Positive impact on rural communities and quality of life of 

rural residents (e.g., healthcare, schools, housing and highspeed internet)

– Earnings and portfolio diversification

– Provides an opportunity to build image as positive corporate 

citizens in rural areas

– Provides rural areas with a “patient” and “affordable” source 

of capital

– Improves infrastructure necessary for agricultural businesses 

to thrive

– Opportunities to seek out new partners and manage risk

– Rewarding and interesting 

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FCS Feedback (cont.)

• Pilot Program Challenges

– Too complex and timely to develop necessary partners with 

other (local governments, USDA, EDAs, etc..) to make it 

successful

– Other financial and credit related issues soften interest

– For some FCS institutions, hard to find viable investments 

that meet program mission objectives

– For others, investment opportunities exceed available capital 

– Uncertainty surrounding the pilot program and how long it 

will continue

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Investing in Rural America

• Capital and time intensive

• Requires multiple financial and government partners

• Rural communities often contract for essential services—

thus contractors need financing 

• Significant government support often needed to make 

projects viable

• Term financing is scarce and highly sought

• Rural communities and lenders seek credit enhancement 

providers for projects

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Key Observations

• FCS is building new and stronger relationships with USDA state 

and local offices, which have rekindled mutual mission objectives 

• System philosophy remains conservative with focus on projects 

with ample equity, government support, and credit 

enhancements

• Collaboration with commercial banks continues to increase and 

is having a positive affect on program and attitudes toward FCS 

• Private placements, such as Rural America Bonds, are becoming 

increasingly important for rural communities as financial markets 

remain soft and issuers face obstacles to access public capital 

markets

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Looking Ahead

Over the next 6-12 months we plan to: 

• Enhance our on-going reporting and oversight processes

• Further evaluate the economic impact of Investments in Rural 

America

• Consider changes to pilot program criteria to ensure 

effectiveness

• Monitor general economic conditions that are adding stress to 

some projects, which may necessitate adjustments to original 

projects and our oversight

• Continue to identify success stories and challenges 

• Participate in an open dialogue with USDA on non-leveraged 

RBICs, NMTCs, and secondary market sales of USDA guaranteed 

paper 

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Thank You

Questions?

Contact Information: 

Laurie A. Rea

Associate Director

Office of Regulatory Policy

Farm Credit Administration

Real@fca.gov

703.883.4232

Richard Katz

Senior Counsel

Office of General Counsel

Farm Credit Administration

Katzr@fca.gov

703.883.4085

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