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. Senate Committee on Appropriations

May 23, 2017

Mr. Chairman and Members of the Subcommittee, 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, who passed away March 27, 2017, 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, it is my privilege to thank the 

subcommittee staff for its assistance during the budget process.

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

that are assessed and collected annually from the government-sponsored enterprises we 

regulate and examine — the Farm Credit System (FCS or System). 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). 

For fiscal year (FY) 2018, we are submitting a proposed total budget request of $73,225,000. 

Our proposed budget for FY 2018 includes current and prior-year assessments of $72,600,000

from System institutions, including Farmer Mac, and $625,000 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, 84.1 percent is for salaries, 

benefits, and related personnel costs.

A key factor driving the FY 2018 budget is our need to hire and train qualified individuals to 

replace the many employees — especially examiners — who have begun to retire. Approximately 

33.9 percent of our examination staff is eligible to retire within the five-year planning horizon, 

and 55.9 percent 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, changes in the organization and structure of the System itself are presenting challenges. As 

System institutions continue to merge and grow larger and more complex, we must dedicate 

more resources to acquire technology and hire skilled staff to examine and oversee these 

institutions. Furthermore, we must increase the use of technological and data tools used by 

agency staff. The funding we have requested for FY 2018 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 a safe, sound, and dependable source 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 
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and regulations and evaluate whether it serves all eligible borrowers, including young, beginning, 

and small farmers and ranchers. 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 ensure 

appropriate corrective action is taken.

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

business and interact with customers. Our policy and regulation development focuses on 

protecting System 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, and other financial and operational 

matters.

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. We 

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

entire System. Given the increasing complexity and risk in the System and 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 institution is 

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

report on its overall condition. FCS institutions 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 long-term 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 

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. At the present time, 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.

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

are experiencing stress that requires special supervision. Factors causing the stress include 

weaknesses in the nation’s economy and credit markets and a rapidly changing risk environment 

in certain agricultural segments. Also, in some cases, System institutions experience stress 

because their management fails to respond effectively to these risks and operational challenges. 

We have increased supervisory oversight at a number of institutions and dedicated additional 

resources in particular to the three institutions rated 3. Although these institutions represent 

about one percent of System assets and do not materially affect the System’s consolidated 

performance, they require significantly greater agency resources to oversee. 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.
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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

• 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. Generally, these mergers have resulted in more cost-efficient and 

better-capitalized institutions with broader, more diversified asset bases, both by geography and 
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commodity. As of January 1, 2017, the System had 73 direct-lender associations, 4 banks, 5 

service corporations, and 2 special-purpose entities.

CONDITION OF THE FCS

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

challenges facing U.S. agriculture during the current cyclical downturn. The depth and duration 

of market weakness is unknown, but this weakness 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. The small increase results 

primarily from slightly higher net interest income. The increase in net interest income stems 

from a higher level of average earning assets despite a 9-basis-point decline in the net interest 

margin to 2.47 percent.

Credit quality in the System’s loan portfolio continues to be strong. As of September 30, 2016, 

nonperforming assets totaled $2.1 billion, or 0.85 percent of gross loans, as compared with $1.8

billion, or 0.80 percent, for the same quarter a year ago. Relative to total capital, nonperforming 

assets represented 3.9 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 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. 

With a balance of just over $4.3 billion, 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, 

2016, the System’s liquidity position equaled 177 days, significantly above the 90-day regulatory 

minimum required for each FCS bank. 

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. As mandated by statute, we have a separate office — the Office of 
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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 in FY 2016

(ended September 30) was up 12.8 percent from FY 2015 to $53.7 million.1 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. In FY 2016, Farmer Mac experienced less fluctuation

in unrealized gains and losses in its derivative positions, and this led to more stable quarterly net 

income results compared with the prior year. Unrealized gains and losses are generally expected 

to reverse and converge to zero balances as the derivatives approach maturity. 

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. 

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, 2016, substandard loans were 2.2 percent of total direct credit 

exposure, matching the results of a year earlier. Loans more than 90 days delinquent reached an 

eight-year low of 0.31 percent compared with 0.67 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 a safe, sound, and dependable source 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 2018 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. 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.

 

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.