Testimony of the Honorable Dallas P. Tonsager

Chairman and Chief Executive Officer

Farm Credit Administration

Before the Subcommittee on Agriculture, Rural Development, 

Food and Drug Administration, and Related Agencies

U.S. House of Representatives Committee on Appropriations

March 11, 2019

Mr. Chairman and Members of the Subcommittee, I am Dallas P. Tonsager, board chairman and 

CEO of the Farm Credit Administration (FCA or agency). On behalf of my colleagues on the FCA 

board, Jeffery S. Hall of Kentucky and Glen R. Smith of Iowa, and all the dedicated men and women 

of the agency, I am pleased to provide this testimony. Before I discuss the agency’s role, 

responsibilities, and budget request, I would like to thank the subcommittee staff for its assistance 

during the budget process. 

Congress established and structured the Farm Credit System (FCS or System) to provide farmers 

and rural communities access to financial institutions where they have a voice in the decisionmaking process to ensure the financial needs of rural America are addressed. The System is made 

up of banks, associations, and service corporations, the Federal Farm Credit Banks Funding 

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

FCA was created to ensure the financial viability of the System and to ensure that the institutions 

follow their legal obligations. Because the System institutions and Farmer Mac are uniquely 

structured, FCA has developed regulatory and oversight approaches that are designed to fit these 

structures. In the case of Farmer Mac, that includes a separate FCA office, the Office of Secondary 

Market Oversight. As a result of the collective efforts of the System and Farmer Mac — under the 

supervision of FCA — U.S. agriculture and rural utilities receive hundreds of billions of dollars in 

financing every year. In carrying out its important mission, FCA does not receive a federal 

appropriation. Our administrative expenses come from funds that are assessed and collected 

annually from the government-sponsored enterprises we regulate and examine — the System and 

Farmer Mac. 

For fiscal year (FY) 2020, we are submitting a proposed total budget request of $76,690,000. Our 

proposed budget for FY 2020 includes current and prior-year assessments of $76,000,000 from 

System institutions, including Farmer Mac, and $690,000 from anticipated reimbursable work for 

the Farm Credit System Insurance Corporation, the U.S. Department of Agriculture, and the 

National Consumer Cooperative Bank. Of this budget amount, 86.8 percent is for salaries, benefits, 

and related personnel costs. 

A key factor driving the FY 2020 budget is our need to hire and train qualified individuals to replace 

the many employees — especially examiners — who have begun to retire. Our examiner 

commissioning program takes five years to complete. Approximately a third of our examination staff 

is eligible to retire within the five-year planning horizon, and half of the non-examination staff is 

eligible to retire during the same planning horizon. We must ensure that our staff has the skills it 

needs to address changes in the agricultural industry and the complexities of agricultural finance. 

Also, we continue to dedicate more resources to acquire technology. We anticipate a continued 

increase in the use of technological and data tools by agency staff. And we need to invest in 

cybersecurity and automating manual processes. The funding we have requested for FY 2020 will 

help us hire, train, and retain the people we need to properly examine, oversee, and regulate the 

System.

MISSION OF THE FARM CREDIT ADMINISTRATION

As directed by Congress, FCA’s mission is to ensure 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 accomplish our mission in two important ways. 
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First, we protect the safety and soundness of the FCS by examining and supervising all FCS 

institutions, including Farmer Mac, and ensuring that the institutions comply with applicable laws 

and regulations. Our examinations and oversight strategies focus on an institution’s financial 

condition and any material existing or potential risks, as well as on the ability of its board and 

management to direct its operations. We also evaluate each institution’s compliance with laws and 

regulations and evaluate whether it serves all eligible borrowers, including young, beginning, and 

small farmers and ranchers. If a regulated institution violates a law or regulation or operates in an 

unsafe or unsound manner, we use our supervisory and enforcement authorities to ensure 

appropriate corrective action is taken. 

Second, we develop policies and regulations that govern how System institutions and Farmer Mac 

conduct their business and interact with customers. Our policy and regulation development are 

focused on protecting safety and soundness; implementing the Farm Credit Act; providing minimum 

requirements for lending, related services, investments, capital, and mission; and ensuring 

adequate financial disclosure and governance. The policy development program includes approval of 

corporate charter changes, System debt issuance, Farmer Mac’s secondary market operations, and 

other financial and operational matters. 

EXAMINATION PROGRAMS FOR FCS BANKS, ASSOCIATIONS, AND FARMER MAC

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

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

the System. We base our examination and supervision strategies on institution size, existing and 

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

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

entire System including Farmer Mac. Given the increasing complexity and risk in the agricultural 

and rural utility financial system and the human capital challenges at FCA, we continue to 

implement initiatives to improve operations, increase examination effectiveness, and enhance staff 

expertise in key examination areas.

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

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

report on its overall condition. In Farmer Mac’s case, the examination is annual. FCS institutions 

and Farmer Mac are required to have effective loan underwriting and loan administration processes 

to properly manage assets and liabilities, to establish high standards for governance, and to provide 

transparent disclosures to shareholders. Our examination and supervision program promotes

accountability in FCS institutions by working to ensure institutions identify and manage risks. 

Currently, we are closely watching real estate values because lower grain prices and a rise in longterm interest rates are pushing land prices down in certain sections of the country. When necessary, 

we use our enforcement powers to require institutions to change their policies and practices to 

correct unsafe or unsound conditions, weak business practices, or violations of law or regulations.

To assess the safety and soundness of each regulated institution, we use our Financial Institution 

Rating System (FIRS). This system provides a framework of ratings to help examiners evaluate 

significant financial, asset quality, and management factors. FIRS ratings range from 1 for a very 

sound institution to 5 for an institution that is likely to fail. As the chart on the following page 

indicates, the System remains financially strong overall. Currently, institutions are well capitalized, 

and the FCS and Farmer Mac do not pose material risk to investors in FCS and Farmer Mac debt, to 

the Farm Credit System Insurance Corporation, or to FCS institution and Farmer Mac stockholders. 

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

are experiencing stress and require special supervision. We have increased supervisory oversight at 

a number of institutions and dedicated additional resources in particular to the five institutions rated 

3 or lower. Although these institutions represent less than 2.0 percent of System assets and do not 

materially affect the System’s consolidated performance, they require significantly greater agency 

resources to oversee. Factors causing the stress include ongoing weakness in specific agricultural 

sectors as well as institution-specific issues in loan underwriting, risk identification, internal 

controls, and board oversight and governance. As of September 30, 2018, four FCS institutions 
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were under supervisory actions, but no FCS institutions were under formal enforcement actions, in 

conservatorship, or in receivership.

FCS Financial Institution Rating System (FIRS) composite ratings

Source: FCA's FIRS Ratings Database.

Note: This chart reflects ratings for only the System’s banks and direct-lending associations; it does not include ratings for the System’s service corporations, Farmer 

Mac, or the Federal Farm Credit Banks Funding Corporation. Also, the numbers in the bars indicate the number of institutions by FIRS rating.

REGULATORY AND CORPORATE ACTIVITIES

Regulatory activities — Congress has given the FCA board statutory authority to prescribe 

regulations to ensure that FCS institutions comply with the law and operate in a safe and sound 

manner. We are committed to developing balanced, flexible, and legally sound regulations. Current 

regulatory projects outlined in the agency’s fall 2018 Unified Regulatory Agenda include the 

following: 

Clarifying and strengthening standards-of-conduct regulations

Clarifying or changing the amortization limits for agricultural credit associations and 

production credit associations 

Clarifying and correcting regulatory capital and related regulations

Revising the criteria in the regulations for reinstating nonaccrual loans

Clarifying the disclosure and servicing requirements in the borrower rights regulations

Evaluating regulations to reduce regulatory burden

Revising the eligibility criteria for outside directors

Revising the appraisal regulations for current credit and economic conditions

Requesting input on young, beginning, and small farmer programs and reporting

Revising the regulations on private flood insurance to conform with the Biggert-Waters Flood 

Insurance Reform Act of 2012

We are also considering other regulatory projects, including a project that would consider whether 

System associations may purchase, as investments, portions of ineligible loans from commercial 

lenders that have a 100 percent unconditional guarantee by the U.S. Department of Agriculture.

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

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

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

commodity. As of December 31, 2018, the System had 69 direct-lender associations, 4 banks, 5 

service corporations, and 2 special-purpose entities.
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Rural business investment companies — The 2002 Farm Bill created the Rural Business 

Investment Program for leveraged rural business investment companies (RBICs) and gave the 

secretary of agriculture the authority to license and examine them. The 2008 Farm Bill modified the 

program to allow for nonleveraged RBICs and to permit System institutions to form and invest in 

nonleveraged RBICs. Under an interagency agreement with USDA, we will review and provide 

recommendations for seven RBIC applications over a five-year timeframe. We agreed to expend no 

more than 1,800 hours, or 90 percent of one full-time-equivalent staff position, to complete the 

RBIC assignments during a fiscal year.

CONDITION OF THE FCS

The FCS remains fundamentally safe and sound and is well positioned to withstand the current risk 

environment facing U.S. agriculture. System borrowers will be challenged by strong global 

competition, rising interest rates, low cash grain prices, and uncertain agricultural trade policies. 

While the current credit stress level in the System’s loan portfolio is well within its risk-bearing 

capacity, asset quality is expected to decline in 2019 from relatively strong levels in 2018. Factors 

supporting the overall condition of the FCS continue to be stable earnings, a strong capital base, 

and reliable access to debt capital markets.

The System grew at a modest pace in 2018. As of September 30, 2018, gross loans totaled $263.6 

billion, up $12.5 billion or 5.0 percent from September 30, 2017. Real estate mortgage lending was 

up $5.7 billion or 4.8 percent as demand for cropland continued in 2018. Overall, real estate 

mortgage loans represent almost 47 percent of the System’s loan portfolio. Production and 

intermediate-term lending increased by $1.4 billion or 2.7 percent from the year before, and 

agribusiness lending for processing and marketing increased by $2.7 billion or 12.8 percent.

The System also continues to benefit from a strong capital base, which enhances its risk-bearing 

capacity at a time when System borrowers in certain agricultural sectors face increasing financial 

stress. As of September 30, 2018, System total capital equaled $58.2 billion, up from $55.5 billion a 

year before. The System’s total capital-to-assets ratio was 17.4 percent as compared with 17.3 

percent a year earlier. Overall, 80.1 percent of total capital is in the form of retained earnings. 

The increase in total capital is due in large part to the System’s strong earnings performance. For 

the first nine months of calendar year 2018, the System reported net income of $4.0 billion

compared with $3.7 billion for the same period the previous year. Net interest margin was 2.45 

percent compared with 2.47 percent during the first nine months of 2017. 

Credit quality in the System’s loan portfolio continues to be good. As of September 30, 2018, 

nonperforming assets totaled $2.4 billion, or just 0.92 percent of gross loans. Relative to total 

capital, nonperforming assets represented 4.2 percent at quarter-end. For historical comparison, 

nonperforming assets represented 11.6 percent of capital at year-end 2010. 

The System continues to have reliable access to the debt capital markets. Investor demand for all 

System debt products remains positive, allowing the System to continue to issue debt on a wide 

maturity spectrum at competitive rates. Risk spreads and pricing on System debt securities 

remained favorable relative to corresponding U.S. Treasuries. 

With a balance of $4.9 billion as of the third quarter 2018, the Farm Credit Insurance Fund further 

strengthens the System’s financial condition. Administered by the Farm Credit System Insurance 

Corporation, this fund protects investors in Systemwide consolidated debt obligations. System 

banks also maintain liquidity reserves to ensure they can withstand market disruptions. As of 

September 30, 2018, the System’s liquidity position equaled 171 days, significantly above the 90-

day regulatory minimum required for each FCS bank.

CONDITION OF THE FEDERAL AGRICULTURAL MORTGAGE CORPORATION

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

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

other secondary market products that are backed by agricultural real estate mortgages and rural 
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home loans, USDA-guaranteed farm and rural development loans, and rural utility cooperative 

loans. As mandated by statute, we have a separate office — the Office of Secondary Market 

Oversight — through which we regulate, examine, and supervise Farmer Mac’s operations. 

Farmer Mac is committed to enhancing the availability of reasonably priced credit to agriculture and 

rural America through its secondary market activities. Under specific circumstances defined by 

statute, Farmer Mac may issue obligations to the U.S. Treasury Department, not to exceed $1.5 

billion, to fulfill the guarantee obligations on Farmer Mac guaranteed securities. Farmer Mac is not 

subject to any intra-System agreements and, unlike System banks, is not jointly and severally liable 

for Systemwide debt obligations. Moreover, the Farm Credit Insurance Fund does not back Farmer 

Mac’s securities. As measured using generally accepted accounting principles (GAAP), net income 

available to common stockholders in FY 2018 (ended September 30) was up 15.0 percent from FY 

2017 to $92.0 million.1 The increase was due to an increase of $3 million in after-tax net interest 

income, a $5 million gain in fair values of financial derivatives, and the impact of the lower federal 

corporate income tax rate, which resulted in a $4.5 million decrease in income tax. The increases 

were partially offset by deferred tax asset remeasurements and adjustments to the allowance for 

loss.

Core earnings, a non-GAAP measure based more on cash flow, were up by 30.3 percent over FY 

2017 to $81.5 million. Core earnings differ from net income by excluding infrequent or unusual 

transactions that are not indicative of future operating results, leading to a clearer depiction of the 

financial performance of Farmer Mac. The increase was primarily driven by the decrease in income 

tax expense relating to the lowered federal corporate income tax rate in addition to a $6.7 million 

increase in net effective spread. The increase was partially offset by increases in operating expenses 

related to technology and business infrastructure investments, increased staffing, and new leases 

on office space. Net effective spread in FY 2018 increased to 93 basis points up from 92 basis points 

12 months earlier. Earnings were also up due to growth in program volume as well as continued 

improvements in LIBOR-based short-term funding costs for floating rate assets indexed to LIBOR. 

As of September 30, 2018, Farmer Mac’s core capital totaled $713.6 million, which exceeded its 

statutory requirement of $539.8 million. The total portfolio of loans, guarantees, and commitments 

grew 4.8 percent to $19.5 billion. 

Credit quality trends remained favorable, and credit quality in all program business lines remained 

satisfactory. Credit risk was manageable, and adversely classified volume remained stable. As of 

September 30, 2018, substandard loans were 3.1 percent of total direct credit exposure, down 0.2 

percent from a year earlier. Loans more than 90 days delinquent decreased to 0.53 percent 

compared with 1.01 percent in the prior year. 

CONCLUSION

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

Mac, remains financially sound and focused on serving agriculture and rural America. We will 

continue our commitment to excellence, effectiveness, and cost efficiency and will remain focused 

on our mission of ensuring that System institutions and Farmer Mac are safe, sound, and 

dependable sources of credit for agriculture and rural America. Our budget proposal identifies our 

goals and the performance measures we have developed to help ensure that we efficiently and 

effectively use our resources. It is our intent to stay within the constraints of our FY 2020 budget as 

presented while ensuring we attract and retain the staff needed to accomplish our mission. We will

continue our efforts to be good stewards of the resources entrusted to us. We are proud of our 

record and accomplishments.

 

1 All references to time periods and fiscal years refer to the federal government’s fiscal year, not Farmer Mac’s fiscal 

year, which corresponds to the calendar year.