Testimony of the Honorable Glen R. Smith

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. Senate Committee on Appropriations

February 12, 2020

Mr. Chairman and Members of the Subcommittee, I am Glen R. Smith, board chairman and 

CEO of the Farm Credit Administration (FCA or agency). On behalf of my board colleague

Jeffery S. Hall of Kentucky 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 

decision-making process to ensure the financial needs of rural America are addressed. The 

System is made up of banks, associations, and several service corporations, including the 

Federal Farm Credit Banks Funding Corporation.

Congress also established the Federal Agricultural Mortgage Corporation (Farmer Mac) to 

increase access to affordable credit for American agriculture and rural communities. Farmer 

Mac provides a secondary market for agricultural real estate mortgage loans, rural housing 

loans, and rural utility cooperative loans. 

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) 2021, we are submitting a proposed total budget request of $81,010,000. 

Our proposed budget for FY 2021 includes current and prior-year assessments of $80,400,000 

from System institutions, including Farmer Mac, and $610,000 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, 86.5% is for salaries, 

benefits, and related personnel costs. 

A key factor driving the FY 2021 budget is our need to hire and train qualified individuals to 

replace the many employees — especially examiners and risk analysts — who have begun to 

retire. Our examiner commissioning program takes three to 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 
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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 and implement technology. We anticipate a continued increase in 

the use of technological, business intelligence, and data tools by agency staff. As the pace of 

technological change increases, we also need to invest in cybersecurity and automating manual 

processes. The funding we have requested for FY 2021 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. 

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 
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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. 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). The FIRS provides a framework of ratings to help examiners 

evaluate significant financial, asset quality, and management factors in a consistent way across 

the System. 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 these institutions and dedicated additional resources in particular to 

the seven institutions rated 3 or lower. Although these institutions represent less than 2.5% 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, 2019, five FCS institutions 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.
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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 2019 Unified Regulatory 

Agenda include the following: 

• Revising investment eligibility to include certain obligations unconditionally guaranteed 

by the USDA

• Clarifying or changing the amortization limits for agricultural credit associations and 

production credit associations

• Revising the criteria for reinstating nonaccrual loans

• Revising the eligibility criteria for outside directors

• Clarifying and correcting regulatory capital and related regulations

• Clarifying the disclosure and servicing requirements in the borrower rights regulations

• Clarifying and strengthening standards-of-conduct regulations

• Revising the appraisal regulations for current credit and economic conditions

• Revising the regulations on compensation of bank directors

• Following up on the input we received on young, beginning, and small farmer programs 

and reporting

• Revising the questions-and-answers guidance on flood insurance

• Reviewing the cooperative principles and practices at System institutions

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 better-capitalized institutions with broader, more diversified asset bases, both by 

geography and commodity. As of December 31, 2019, the System had 68 direct-lender 

associations, 4 banks, 5 service corporations, and 2 special-purpose entities.

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% of one full-time-equivalent staff 

position, to complete the RBIC assignments during a fiscal year.

Condition of the FCS

The FCS continues to be fundamentally safe and sound, and it remains well positioned to 

respond to the credit needs of U.S. agriculture. For FY 2019, the System reported strong 

financial results, including steady earnings, higher capital levels, and manageable portfolio 

credit risk. FCS banks had reliable access to debt capital markets and maintained liquidity 

levels well above the 90-day regulatory minimum.
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2019 was a difficult year for many U.S. farmers and ranchers. Trade uncertainties, large 

commodity supplies, and weather extremes affected farm prices and reduced producer returns 

for key commodities. Several years of declining producer cash flows have depleted working 

capital and elevated borrowing needs. Although crop insurance indemnities, farm programs, 

and Market Facilitation Program payments have provided some financial protection, the level of 

support varies by region and commodity.

With large global supplies and “normal” weather, major crop prices in 2020 are expected to 

remain low. This could limit attractive price opportunities for U.S. farmers. Livestock and dairy 

returns are likely to be generally positive in the near term but could be further supported by 

trade developments. High-cost producers and those with significant leverage will continue to 

face significant financial pressure. 

The System grew at a modest pace for the 12 months ending September 30, 2019. Gross 

loans equaled $276.1 billion, up $11.1 billion or 4.2% from a year ago. Real estate mortgage 

lending was up $5.9 billion or 4.8%. Farmland values are generally steady, with some notable 

regional weaknesses and strengths. This has allowed borrowers to restructure their balance 

sheets to boost working capital levels. In total, real estate mortgage loans represent about 

47% of the System’s loan portfolio. Production and intermediate-term lending increased by 

$2.4 billion or 4.7% from the year before, and agribusiness lending for processing and 

marketing increased by $2.8 billion or 11.6%. 

The System also continues to benefit from a strong capital base, which enhances its riskbearing capacity at a time when System borrowers in certain agricultural sectors face 

significant financial stress. As of September 30, 2019, System total capital equaled $62.4 

billion, up from $58.2 billion a year before. The System’s total capital-to-assets ratio was 

17.6% as compared with 17.4% a year earlier. Overall, 79.1% 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 2019, the System reported net income of $4.1 billion 

compared with $4.0 billion for the same period the previous year. Net interest margin was 

2.41% compared with 2.45% during the first nine months of 2018.

Despite the challenges facing agriculture, credit quality in the System’s loan portfolio is sound. 

As of September 30, 2019, nonperforming assets totaled $2.5 billion, or just 0.92% of gross 

loans. Relative to total capital, nonperforming assets represented 4.1% at quarter-end. In 

comparison, nonperforming assets represented 11.6% 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.

With a balance of $5.1 billion as of the third quarter 2019, 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, 2019, the System’s liquidity position equaled 177 days, 

significantly above the 90-day regulatory minimum required for each FCS bank.
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Condition of Farmer Mac

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. 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 debt. 

As measured using generally accepted accounting principles (GAAP), net income available to 

common stockholders in FY 2019 (ended September 30) was down 8.59% from FY 2018 to 

$84.1 million. The decrease was due to an after-tax decrease in the fair value of undesignated 

financial derivatives, an after-tax decrease in net interest income, and an after-tax increase in 

operating expenses.

Core earnings, a non-GAAP measure based more on cash flow, were up by 10.1% over FY 

2018 to $89.7 million. Core earnings differ from net income primarily by excluding the effects 

of fair value fluctuations that are expected to have no impact on Farmer Mac’s financial 

condition, leading to a more cashflow-based depiction of the financial performance of Farmer 

Mac. The increase was primarily driven by an after-tax increase in net effective spread. The 

increase was partially offset by increases in operating expenses related to technology and 

business infrastructure investments, and increased staffing. 

Net effective spread for the third quarter of 2019 decreased to 90 basis points, down from 93 

basis points for the same quarter 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, 2019, Farmer Mac’s core capital 

totaled $793.3 million, which exceeded its statutory requirement of $608.4 million. The total 

portfolio of loans, guarantees, and commitments grew 7.1% to $20.9 billion. In FY 2019, the 

quantity and quality of Farmer Mac’s capital remained satisfactory relative to its risk profile.

Credit quality in all program business lines remained satisfactory. Credit risk was manageable, 

and adversely classified volume remained stable. As of September 30, 2019, substandard 

loans were 3.9% of total direct credit exposure, up 0.8% from a year earlier. Loans more than 

90 days delinquent increased to 0.81% compared with 0.53% 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 
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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 2021 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.