Testimony of the Honorable Dallas P. Tonsager

Board 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

February 28, 2017

Chairman Aderholt, Ranking Member Bishop, and Members of the Committee, I am 

Dallas P. Tonsager, board chairman and CEO of the Farm Credit Administration. On 

behalf of my colleagues on the FCA board, Jeffery S. Hall of Kentucky and Kenneth A. 

Spearman of California, and all the dedicated men and women of the agency, it is a 

privilege to appear before you today.

FCA is an independent agency responsible for examining and regulating the banks, 

associations, and related entities of the Farm Credit System (FCS or System), including 

the Federal Agricultural Mortgage Corporation (Farmer Mac). The banks and associations 

of the FCS form a nationwide network of borrower-owned financial institutions that 

provide competitive credit to all creditworthy farmers, ranchers, and other eligible 

borrowers.

FCA does not receive a federal appropriation. We pay our administrative expenses from 

funds that are assessed and collected annually from the institutions we regulate. 

Congress provides oversight of our administrative expenses and sets an annual cap on 

our expenses.

Our budget 

For fiscal year (FY) 2017, our budget request was for $70.4 million. Under the continuing 

resolution, the agency has been operating under the cap established by Congress in FY 

2016 of $65.6 million. As a result of the cap, we have had to delay hiring actions, reduce 

travel and relocations, and delay the execution of information technology projects. These 

items allow us to more fully meet our mission in FY 2017, so we would like to 

respectfully request that the cap be increased to $68 million. This will allow us to move 

forward with targeted IT investments and to meet pressing human capital needs.

For both FY 2017 and 2018, three factors are driving our budget. The first factor is our 

need to hire, train, and retain qualified individuals to replace the many employees —

especially examiners — who are eligible to retire. Over the past few years, some of our 
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seasoned employees have retired, and we expect many more to retire over the next few 

years. To meet our mission of examining and regulating the System, we must hire 

qualified people, train them well, and offer competitive compensation so that we can 

retain them after they are trained. We would like to note that one of our means of hiring 

examiners is the Pathways summer internship program, which is an express exemption 

to the President’s hiring freeze.

The second factor is the challenge presented by changes in the organization and 

structure of the Farm Credit System. As System institutions continue to merge and grow 

in size and complexity, the skill level required to examine and oversee them has 

increased. As a result, we have to dedicate more resources to hiring, training, and 

retaining the staff we need. Furthermore, we must ensure that our employees have the 

technology and data tools they need to do their jobs effectively. Information technology,

data management, and IT security become more critical to our examination and 

evaluation of risk as institutions become larger and more complex.

And the third factor is the growing challenge facing the farm economy. Farm income has 

dropped every year for the past three years, and it appears it will drop again in FY 2017. 

As a result, credit quality has begun to slip among farm lenders, including System 

institutions. Because examining and supervising lending institutions requires more staff 

resources in periods of economic stress, we require more funding to meet our current 

human capital needs. 

FCA mission

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

source of credit and related services for agriculture and rural America. We accomplish 

this mission in two important ways. 

First, we protect the safety and soundness of the FCS by examining and supervising all 

FCS institutions, including Farmer Mac, and we ensure that they comply with applicable 

laws and regulations. If a System institution violates a law or regulation or operates in 

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

require appropriate corrective action. 

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

their business and interact with customers. Our policies and regulations protect System 
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safety and soundness; implement the Farm Credit Act; provide minimum requirements 

for lending, related services, investments, capital, and mission; and ensure adequate 

financial disclosure and governance. 

Through the oversight and leadership of the House and Senate Agriculture Committees, 

many important reforms were made to the Farm Credit Administration and the FCS as a 

result of the agricultural credit crisis of the 1980s. These reforms included restructuring 

FCA as an independent arm’s-length regulator with formal enforcement powers, 

providing borrower rights to System borrowers with distressed loans, and establishing 

the Farm Credit System Insurance Corporation to protect System investors. Since then, 

the Farm Credit System has restored its financial health and the public trust. Using our 

authority as an arm’s-length regulator, we help the System maintain that public trust by 

ensuring that its institutions adhere to safety and soundness standards. 

Farm Credit System mission

The FCS is a government-sponsored enterprise (GSE) created by Congress in 1916 to 

provide American agriculture with a dependable source of credit. The System’s banks 

and associations form a nationwide network of cooperatively organized lending 

institutions that are owned and controlled by their borrowers, serving all 50 states and 

the Commonwealth of Puerto Rico. 

According to the Farm Credit Act of 1971, Congress created the System 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.” In fulfilling this 

mission, the System provides credit and other services to agricultural producers, aquatic 

producers or harvesters, and farmer-owned cooperatives. It also makes loans for 

agricultural processing and marketing activities, rural housing, farm-related businesses, 

rural utilities, and foreign and domestic companies involved in international agricultural 

trade. In addition, the System provides funding and discounting services to certain 

“other financing institutions” and forms partnerships with commercial banks to provide 

credit to agriculture and rural America through participations and syndications. 

In his opening statement at the subcommittee’s first hearing on February 15, Chairman 

Aderholt mentioned several themes to guide the subcommittee’s work in FY 2018. One of 
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those themes was investing in rural infrastructure. I was encouraged to hear this 

because I believe that the System plays an important role in supporting rural 

infrastructure, and one of my priorities as chairman of FCA is to encourage it to 

strengthen this role. 

In some cases, the System is authorized to lend directly to providers of rural 

infrastructure. Rural cooperatives providing electricity, water, wastewater treatment, and 

broadband service are among the System’s many customers. But the System also can 

support rural infrastructure through partnerships with other lenders, universities, and 

USDA. For example, it has partnered with other lenders to finance the construction of 

rural hospitals and nursing homes.

As part of the theme of investing in rural infrastructure, Chairman Aderholt also 

mentioned helping rural businesses to create unique economic opportunities. Here again 

the System already plays an important role. Simply by making loans to farmers, 

ranchers, and farm-related businesses, the System supports rural communities by 

providing economic opportunities for rural residents. The System also serves the credit 

needs of many farm-related businesses, including those involved in the processing and 

distribution of local foods. These businesses are important job sources in rural America. 

As a regulator, we pay careful attention to the System’s congressional mandate to serve 

the needs of young, beginning, and small farmers and ranchers. By offering competitive 

interest rates, flexible underwriting standards, and their expertise in the agricultural 

industry, System institutions make it possible for more people to enter farming and to 

stay in it. This is good for the producers, as well as for the rural communities in which 

they live.

So there is much the System is doing and can do to support rural communities — either 

though loans directly to eligible, creditworthy borrowers or through partnerships and 

participations with other lenders and organizations. 

The System has successfully fulfilled its mission for more than 100 years. It adds value 

to agriculture and rural America at all times, but it really proves its worth in difficult 

times. In early 2008, when commodity prices soared, operators of grain elevators could 

not find the financing they needed to operate, so System institutions stepped in to meet 

that need. If the System had not been there, those operators would have faced a 
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financial crisis. This was a classic example of a GSE doing exactly what Congress 

intended it to do. And I’m confident that the System will again prove its value by 

meeting the credit needs of farmers and ranchers during the current downturn in the 

farm economy. 

The farm economy and agricultural credit

After years of historic highs, farm income reached a peak in 2013, and it has been 

dropping every year since then. USDA does not expect this trend to reverse in 2017. It

forecasts net farm income to fall 9 percent in 2017 to $62.3 billion. That would be just 

half of the $123.7 billion in net farm income recorded for 2013. Crop and livestock sales 

and cash production expenses are expected to stay flat this year. At the same time, 

government payments, which rose 20 percent in 2016, are expected to fall 4 percent.

As a result of the growing stress in the farm economy, many farmers and ranchers are 

now having difficulty covering their costs, and this is beginning to reduce the quality of 

agricultural loans. While farm lenders, including the Farm Service Agency, continue to 

report that overall loan quality remains good, many loan performance indicators are now 

weaker. Nonaccrual rates for System farm mortgages stood at 0.76 percent as of 

September 30, 2016, up from 0.69 percent a year earlier. And nonaccrual rates for farm 

production loans were at 1.04 percent, up from 0.80 percent a year earlier.

Federal Reserve Bank surveys of commercial bankers in the fourth quarter of 2016 also 

suggest a worsening credit climate. According to the surveys, repayment rates on 

agricultural production loans have declined, and the number of renewals and extensions

has increased. 

Although lenders expect an increase in loan delinquencies and other indicators of loan 

repayment problems in 2017, they do not expect a large increase in problematic loans. 

With expectations for tight profit margins to continue through 2017, more farmers are 

likely to rebalance their farm balance sheets or change their operating structures to 

lower their production costs.

The condition of the farm economy depends in part on interest rate policy. Currently, 

interest rates on farm loans remain historically low, but an improving economy and labor 

market may prompt the Federal Reserve to make more incremental interest rate 
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increases during 2017. The average interest rate on all System loans held nearly steady 

at about 4 percent during 2016. 

Condition of the FCS

Despite conditions in the farm economy, the FCS remains fundamentally safe and sound 

and is well positioned to manage this downturn. The depth and duration of market 

weakness is unknown, but it will continue to present challenges for the System until 

markets rebound. 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 modestly in 

2017 from relatively strong levels in 2016. Moderate loan growth, adequate capital, and 

reliable access to debt capital markets are supporting the overall condition of the FCS.

The System continues to grow at a moderate pace. As of September 30, 2016, gross 

loans totaled $242.1 billion, up $15.3 billion or 6.7 percent from September 30, 2015. 

Real estate mortgage lending was up $9.5 billion or 9.2 percent as demand for cropland 

continued in 2016. Overall, real estate mortgage loans represent 46.7 percent of the 

System’s loan portfolio. Production and intermediate-term lending increased by $0.2 

billion or 0.3 percent from the year before, and agribusiness lending increased by $2.6 

billion or 7.7 percent.

The System also continues to enhance its capital base, which strengthens its financial 

position as low or negative farm returns increase financial stress on borrowers. As of 

September 30, 2016, System total capital equaled $52.4 billion, up from $48.9 billion 

the year before. The System’s total capital-to-assets ratio was 16.7 percent as compared 

with 16.8 percent a year earlier. Moreover, 82 percent of total capital is in the form of 

earned surplus. 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 2016, the System 

reported net income of $3.6 billion compared with $3.5 billion for the same period the 

previous year. 

Credit quality in the System’s loan portfolio continues to be strong. Relative to total 

capital, nonperforming assets represented 3.9 percent as of September 30, 2016. For 

historical comparison, nonperforming assets represented 11.6 percent of capital at yearend 2010. 
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The System continues to have reliable access to the debt capital markets. Investor 

demand for all System debt products has been positive, allowing the System to continue 

to issue debt on a wide maturity spectrum at very competitive rates. Risk spreads and 

pricing on System debt securities remained favorable relative to corresponding U.S. 

Treasuries. 

Another factor that makes System debt attractive to investors is the Farm Credit 

Insurance Fund, which has a balance of over $4.4 billion. 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, 2016, the System’s liquidity 

position equaled 177 days, significantly above the 90-day regulatory minimum required 

for each FCS bank.

As required by law, System borrowers own stock or participation certificates in System 

institutions. The FCS had approximately 1.3 million loans and 513,000 stockholders in 

2016. Of these stockholders, 86 percent were farmers or cooperatives with voting stock. 

The remaining 14 percent were nonvoting stockholders, including rural homeowners and 

other financing institutions that borrow from the System. USDA’s latest data (as of 

December 31, 2015) show that the System’s market share of farm debt was 41 percent, 

compared with 43 percent for commercial banks.

Federal Agricultural Mortgage Corporation

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

real estate and rural housing mortgage loans. Farmer Mac has authority to create and 

guarantee securities and other secondary market products that are backed by 

agricultural real estate mortgages and rural home loans, USDA-guaranteed farm and 

rural development loans, and rural utility cooperative loans. 

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. 
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As measured using generally accepted accounting principles (GAAP), net income in FY 

2016 (ended September 30) was up 12.8 percent from FY 2015 to $53.7 million. The 

increase was due primarily to unusual costs in the prior year associated with the 

redemption of $250 million of Farmer Mac II preferred stock. That redemption resulted in 

an $8.1 million one-time, after-tax loss recorded in the first quarter of FY 2015. 

Core earnings, a non-GAAP measure based more on cash flow, were up by 22.0 percent 

over FY 2015 to $52.9 million. The increase was primarily driven by actions that 

suppressed core earnings in the prior year. Despite a slight drop in net effective spread 

in FY 2016, earnings were up because of higher program loan volume, as well as higher 

guarantee and commitment fees. As of September 30, 2016, Farmer Mac’s core capital 

totaled $587.1 million, which exceeded its statutory requirement of $474.8 million. The 

total portfolio of loans, guarantees, and commitments grew 10.4 percent to $17.2 billion. 

Examination programs for FCS banks and associations

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

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

across the System. 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. The frequency and depth of examination activities vary 

based on risk, but each institution is examined at least once every 18 months and 

receives a summary of examination activities and a report on its overall condition. When 

necessary, we use our enforcement powers to require institutions to change their policies 

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

To assess the safety and soundness of each FCS 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 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. 

Institutions are well capitalized, and the FCS does not pose material risk to investors in 

FCS debt, the Farm Credit System Insurance Corporation, or to FCS institution 

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

institutions are experiencing stress that requires special supervision. We have increased 

supervisory oversight at a number of institutions and dedicated additional resources in 

particular to the three institutions rated 3 or worse. As of September 30, 2016, four FCS 

institutions were under supervisory actions, but no FCS institutions were under formal 

enforcement actions, in conservatorship, or in receivership. 

Farm Credit System 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 

establish policy, prescribe regulations, and issue guidance 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 and 

policy projects include the following: 

Revising regulations on eligibility and creditworthiness of FCS institution 

investments

Clarifying and strengthening standards-of-conduct regulations
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Clarifying or changing the amortization limits for agricultural credit associations 

and production credit associations 

Revising regulations on eligibility and creditworthiness of Farmer Mac investments

Revising the criteria in the regulations for reinstating nonaccrual loans 

Reviewing stress testing done by System institutions

Reviewing cybersecurity requirements for System institutions

Clarifying the disclosure and servicing requirements in the borrower rights 

regulations

Evaluating regulations to reduce regulatory burden

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. As of January 1, 2017, the System had 

73 direct-lender associations, 4 banks, 5 service corporations, and 2 special-purpose 

entities.

Serving young, beginning, and small farmers and ranchers

As part of their mission to serve all eligible, creditworthy borrowers, System institutions 

are required to develop programs and make special efforts to serve young, beginning, 

and small (YBS) farmers and ranchers. In 2015, the pace of new lending to YBS farmers 

generally exceeded the pace of overall System lending to farmers. The number of loans 

made in 2015 to young, beginning, and small farmers increased by 5.1 percent, 7.5 

percent, and 6.7 percent, respectively, from 2014. Since the total number of farm loans 

made by the System was up by only 3.7 percent, the share of total System farm loans 

made to all three YBS categories rose from that of 2014. These results are encouraging 

given the high costs of starting a farm, the declining number of people entering 

agriculture, and the rising average age of farmers. 

To help YBS farmers qualify for credit in 2015, FCS associations offered differentiated 

loan underwriting standards for YBS borrowers or made exceptions to their regular 

standards. More than a third of associations provided concessionary loan fees, and more 

than half offered lower interest rate programs for YBS borrowers. Many associations 

partnered with state and federal programs to provide interest rate reductions, 

guarantees, or loan participations for YBS borrowers. 
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Working with financially stressed borrowers

Risk is an inherent part of agriculture, and the causes of risk are many: bad weather, 

changes in government programs, international trade issues, high interest rates, etc. 

These risks can sometimes make it difficult for borrowers to repay loans. To provide 

some protection from these risks, the Farm Credit Act gives System borrowers certain 

rights when they apply for loans and when they have trouble repaying loans. For 

example, the act requires FCS institutions to notify borrowers of the right to seek 

restructuring of loans before the institutions begin foreclosure. When a System 

institution acquires agricultural property through liquidation, the Farm Credit Act also 

provides borrowers the opportunity to buy or lease back their former properties. FCA 

enforces the borrower rights provisions of the Farm Credit Act and examines institutions 

to make sure they are complying with these provisions. We also receive and review 

complaints from borrowers who believe their rights have been denied. 

This year, because of the additional stress in the farm economy, we are emphasizing the 

need for System institutions to do everything they can within the bounds of safety and 

soundness to help borrowers in difficulty. If a farmer or rancher has a good chance of 

becoming successful again after the economy improves, we encourage the institution to 

help the borrower through the difficult period. We want to help ensure the best possible 

outcome for every borrower. 

Conclusion

We at FCA remain vigilant in our efforts to ensure that the Farm Credit System and 

Farmer Mac remain financially sound and focused on fulfilling their missions. While we 

are proud of our record and accomplishments, we remain committed to excellence, 

effectiveness, and cost efficiency, and we will remain focused on our mission of ensuring 

a safe, sound, and dependable source of credit and related services for all creditworthy 

and eligible persons in agriculture and rural America. This concludes my statement. On 

behalf of my colleagues on the FCA board and at the agency, I thank you for the 

opportunity to share this information.