Testimony of 

The Honorable Nancy C. Pellett 

Chairman and Chief Executive Officer 

Farm Credit Administration 

Before the 

Committee on Agriculture 

United States House of Representatives 

June 2, 2004 

 Mr. Chairman, members of the committee, I am Nancy C. Pellett, Chairman and Chief 

Executive Officer of the Farm Credit Administration (FCA or agency). On behalf of my 

colleagues on the FCA Board, Doug Flory and Michael Reyna, I am pleased to be here this 

morning to discuss FCA’s oversight of the Federal Agricultural Mortgage Corporation, often 

referred to as Farmer Mac. Farmer Mac is one of two government-sponsored enterprises (or 

GSEs), which the FCA regulates, examines, and supervises. 

 Farmer Mac and the Farm Credit banks and associations are devoted to providing credit and 

financial services to agriculture and rural America. Our mission at FCA, through these two GSEs, 

is to ensure that a safe, sound and dependable source of credit is readily available at all times for 

farmers, ranchers, farmer-owned cooperatives, rural homeowners, and rural America. 

 This morning I would like to share with you information about FCA and, specifically, its role 

in the oversight and supervision of Farmer Mac. I will provide you with a brief overview of the 

organizations, Farmer Mac’s current financial condition and risk profile, and recent regulatory 

and oversight activity affecting Farmer Mac. 

THE FARM CREDIT SYSTEM

 To add perspective on our regulatory oversight of Farmer Mac, I would like to give you a very 

brief overview of our role overseeing the Farm Credit System banks and associations (FCS or 

System). The System has played a prominent role in financing American agriculture and rural 

America since Congress created the System’s first part, the Federal Land Banks, in 1916. The 

System is the oldest financial GSE in America, and is the only GSE that engages in retail lending. 

The 108 institutions of the FCS serve all 50 states and the Commonwealth of Puerto Rico. As of 

December 31, 2003, the System consisted of four Farm Credit Banks and one agricultural credit 

bank, 97 association lenders, and six subsidiary service corporations. The FCS banks also provide 

credit to 29 non-System financing institutions, known as OFIs, which include commercial and 

community banks and their affiliates. At year-end 2003, FCS banks and associations provided 

services to nearly 450,000 borrowers and held assets of just under $117 billion. 

FARMER MAC

 Our focus today, however, is on FCA’s oversight role of Farmer Mac. Farmer Mac is 

regulated by FCA through the Office of Secondary Market Oversight (OSMO), which 

was established in 1992 as required by the Farm Credit Act, as amended. OSMO 

provides for the examination and general supervision of Farmer Mac’s safe and sound 

performance of its powers, functions, and duties prescribed by the statute. The statute 

requires that OSMO constitute a separate office within the agency, reporting to the FCA 

Board and that its activities, to the extent practicable, be carried out by individuals not 
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responsible for the supervision of the banks and associations of the System. 

 Farmer Mac was created in response to the farm credit crisis of the mid-1980’s and 

subsequent calls from commercial rural bankers for a liquidity source similar to that 

provided for residential mortgages by the so-called housing GSEs, Fannie Mae and 

Freddie Mac. Amendments in 1996 to Farmer Mac’s authorizing legislation have 

allowed this GSE to grow its business and achieve economic viability, which was by no 

means certain in the first few years of its operation. To illustrate that point, the new 

authorities provided in the Farm Credit System Reform Act of 1996 (1996 Act), helped 

launch Farmer Mac’s first year of positive earnings in that year, when net income was 

$777,000. Net income generally has risen as rapidly as program growth since then and 

reached $25 million at year-end 2003, representing a 5-year average annual growth rate 

of 35 percent while program growth averaged 37 percent over the same period. 

 Farmer Mac is a stockholder-owned, federally chartered GSE established by Congress 

to provide a secondary market for agricultural real estate and rural home mortgages. 

Farmer Mac operates through a network of agricultural lenders, originators, and sellers, 

among them commercial banks, FCS banks and associations, life insurance companies 

and mortgage companies. Farmer Mac conducts its business primarily through two core 

programs, known as Farmer Mac I and Farmer Mac II. Under Farmer Mac I, Farmer 

Mac purchases, or commits to purchase, qualified loans, or obligations backed by 

qualified loans, that are not guaranteed by any instrumentality or agency of the United 

States. Under Farmer Mac II, Farmer Mac purchases the guaranteed portions of farm 

ownership and farm operating loans, rural business and community development loans, 

and certain other loans guaranteed by USDA. 

 Farmer Mac has three classes of common stock: 

1. Class A Voting Common Stock which may only be held by banks, insurance 

companies, and other financial institutions that are not institutions of the FCS. By 

statute, no owner of Class A stock may hold more than 33 percent of the 

outstanding shares of Class A stock. At year-end 2003, one Class A stockholder, 

Zions Bancorporation, held over 31 percent (2 percentage points under the 

statutory limit). There are just over one million shares of Class A common stock 

outstanding. 

2. Class B Voting Common Stock which may only be held by institutions of the FCS 

and are not exchange-traded. There are no restrictions on the maximum purchase or holdings 

of Class B stock. Major Class B common stockholders of the FCS include: AgriBank, FCB, 

St. Paul, MN, (40 percent); U.S. AgBank, FCB, Wichita, KS, (20 percent), and AgFirst Farm 

Credit Bank, Columbia, SC, (17 percent). There are just over 500,000 Class B shares issued 

and outstanding. 

3. Class C Non-Voting Common Stock which has no ownership restrictions. The top 

holders of Class C non-voting stock is Zions Bancorporation (14.6 percent) as of April 

9, 2004, the record date for Farmer Mac’s most recent notice of annual meeting. 

Together, all Farmer Mac directors and executive officers owned 26.9 percent of 

Class C shares. Outstanding shares of Class C common stock were just over 10.5 

million at year-end. 

 Class A and Class C common stock are traded on the New York Stock Exchange 
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(NYSE) under the symbols “AGMa” for Class A and “AGM” for Class C shares. 

 The Farmer Mac Board of Directors (Board) is comprised of 15 members according to 

the statute. Five are elected by Class A common stock shareholders. Five are elected by holders 

of Class B common stock. The President of the United States appoints the remaining five, and 

one of these is appointed by the President as chairman. The Board has organized several standing 

committees and appoints other ad-hoc committees, which oversee Farmer Mac’s management and 

operations. 

 The recent General Accounting Office (GAO) report noted the potential difficulty 

Farmer Mac could have complying with the independence requirements in NYSE listing 

standards. Notably, in response to this, the Farmer Mac Board and, in particular, the 

Audit Committee have increased their activity in the areas of independent review and 

reporting processes in recent months. 

 Farmer Mac’s daily operations are led by its President and Chief Executive Officer 

(CEO) and a core team of five vice-presidents made up of the Chief Financial Officer, 

General Counsel, Controller, Vice President of Agricultural Finance (primarily a 

marketing/business development position), and the recently created position of VicePresident of Mortgage Servicing. The Corporation employs 36 people and all but one are 

located at the Washington, D.C. headquarters. 

FINANCIAL HIGHLIGHTS

 For the year ended December 31, 2003, Farmer Mac’s net worth increased 16 percent to $213 

million, up from $183.5 million at year-end 2002. Capital available to meet minimum and 

regulatory requirements were well above levels prescribed by the statute and FCA regulations. 

The minimum core capital required by statute was $142 million. Core capital available to meet 

this requirement was $216 million. Risk-based regulatory capital required at year-end 2003 was 

$39 million. Regulatory capital available to meet this requirement was $238 million. 

Operations and Program Portfolio

 Net income for the year was $25 million, an 18 percent increase over 2002. However, core 

earnings were relatively flat. 

 Loan purchase and credit guarantee activity grew just under 5 percent to $5.8 billion from $5.5 

billion at year-end 2002. Liquidity investments were $1.7 billion, up nearly 9 percent from a year 

earlier. 

 Farmer Mac’s Long-term Standby Purchase Commitment (Standby) program has become a 

significant part of its operations. Standby’s essentially are a guarantee of loans that are not 

purchased by Farmer Mac unless a specific event, such as a default of the loans, trigger such a 

response. Standby volume outstanding totaled $2.3 billion at the end of December 2003 and now 

represents over 40 percent of all (off- and on-balance sheet) Farmer Mac program activity. 

Portfolio Risk

 Nonperforming asset volume at year-end 2003 amounted to 1.39 percent of post-1996 

program volume outstanding, compared to 1.56 percent at December 31, 2002. These assets are 

measured against post-1996 activity because of the negligible risk in loans underlying assets 
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acquired before the 1996 legislative changes. The downward trend in nonperforming loans and 

delinquencies appears to be continuing in 2004. 

 The allowance for losses, the first buffer to Farmer Mac’s capital from loan losses, was $22.1 

million at year-end 2003, compared to $20.0 million as of December 31, 2002. Charge-offs on 

loans and real estate-owned during 2003 were $5.2 million, up from $4.1 million in 2002 and 

$2.2 million in 2001. In contrast, there were no charge-offs in 2000. Working with Farmer Mac 

and Farmer Mac’s outside accounting firm, FCA monitors charge-off activity. 

REGULATORY ACTIVITY

 

 FCA examines and supervises Farmer Mac through authorities granted by Title VIII of the 

Farm Credit Act of 1971, as amended. As part of FCA’s oversight program, the agency requires 

Farmer Mac to report quarterly on financial performance consistent with regulatory requirements 

that are similar to the quarterly Call Reports required by other federal financial regulators. The 

agency promulgates regulations, examines all books and records, and ensures safe and sound 

operations of Farmer Mac through regulatory enforcement powers that are comparable with other 

federal financial regulators, though somewhat broader in the area of receivership authority than 

that of our counterpart, the Office of Federal Housing Enterprise Oversight (OFHEO). FCA, in 

contrast to OFHEO, has clear statutory authority to establish receivership regulations for the 

institutions it regulates, including Farmer Mac. The FCA has had receivership regulations in 

place for Farmer Mac since 1997. The statute provides the FCA Board broad enforcement 

powers. These powers are comparable to other federal financial regulators such as the 

Comptroller of the Currency and the Federal Deposit Insurance Corporation. 

 Unlike Fannie Mae and Freddie Mac, by statute, Farmer Mac must register with the 

Securities and Exchange Commission (SEC) and as a publicly traded corporation, also must 

comply with NYSE listing standards and requirements. As a publicly traded entity and SEC 

registrant, regulatory reporting and disclosure requirements are significant matters demanding 

constant vigilance for compliance by Farmer Mac’s compliance officer, executive management, 

and Board. 

Examination and Supervision

 The statute requires FCA to examine Farmer Mac’s operations once each year. In 

practice, FCA monitors activities and requires reports from all institutions it regulates on an ongoing basis, including Farmer Mac. We combine our offsite review and follow-up activities with 

onsite testing and verification procedures and produce an annual report of examination. OSMO 

and FCA examiners regularly meet with the Farmer Mac Board and executive management to 

discuss and resolve examination findings and recommendations and to ensure required regulatory 

reporting is accurate and appropriate. 

 Consistent with past practice and for safety and soundness reasons, FCA does not make public 

(1) institution-specific examination findings and recommendations, nor (2) enforcement actions 

taken against institutions it supervises. Therefore, I may not be able to fully address certain 

questions in open session that would pertain to examination findings or FCA’s supervisory 

activities resulting from the examination. Ongoing monitoring and oversight activities resulting 

from examination findings and recommendations are conducted through OSMO and are 

independent and separate from the oversight activities affecting other institutions of the Farm 

Credit System. 
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 The FCA has increased examination and oversight activities of Farmer Mac over the 

past 2 years. Numerous meetings and follow-up discussions have occurred with the 

Farmer Mac Board and management during 2003 as results from the 2002 examination 

were being addressed and as the 2003 examination was conducted. Examination scopes, both 

breadth and depth, were expanded significantly. Examiner resources applied to Farmer Mac’s 

oversight more than tripled from FY 2001 to those used during FY 2003. Use of outside 

consultants to assist OSMO in the examination and oversight of Farmer Mac also increased, 

including securing an outside accounting firm to advise and assist FCA examiners as the 2003 

examination was completed. 

 Throughout 2003, agency offsite monitoring and follow-up activities with Farmer Mac’s 

Board and management increased significantly over prior years. FCA’s increased examination 

and oversight activities respond specifically to the GAO report recommendations. Additional 

permanent budgeted resources also were increased for OSMO. In October 2002, a full-time 

Senior Policy Analyst was added to OSMO’s staff, and an Associate Director for Examination 

and Supervision is planned for FY 2004. 

 The most recent examination was concluded in December 2003. The examination was 

comprehensive, risk-based, and focused on what is referred to by federal financial 

regulators as a “CAMELS” assessment. A CAMELS assessment includes an in-depth 

analysis of the institution’s Capital, Assets, Management, Earnings, Liquidity, and 

Sensitivity to market risks. The 2003 examination also included an in-depth evaluation 

of Farmer Mac’s information technology, internal controls, and accounting treatment 

for nonperforming loans and real estate owned. We presented the agency’s 2003 

Report of Examination to the Farmer Mac Board at its February 2004 meeting and 

OSMO actively continues to follow-up with the Board, the Board’s Audit Committee, 

and executive management. 

CHALLENGES FOR THE FUTURE

 The GAO Report issued in October 2003 included five recommendations for enhanced 

oversight of Farmer Mac by FCA. In addition to activities that were already underway 

while the GAO was conducting their study, the agency has taken action on several fronts 

in response to the GAO report, among which are the following: 

1. Non-Program Investment and Liquidity Proposed Rule—This proposed rule was 

approved by the FCA Board on April 22, 2004. Publication in the Federal Register is expected 

in June with a comment period of 90 days. The proposed rule would set limits, both minimum 

and maximum, on the amount and type of non-program liquidity investments that Farmer Mac 

would be permitted to hold. While GAO had no specific recommendations for FCA regarding 

Farmer Mac’s liquidity, we believe the proposed rule will help address the issues raised in the 

report with regard to liquidity planning and mission focus by Farmer Mac. 

2. Revised Risk-Based Capital Standards—We have a workgroup actively engaged in the 

development of a second proposed rule, which we expect will revise numerous aspects of the 

Risk-based Capital (RBC) Stress Test. The RBC stress test is required by statute and is used to 

calculate the amount of minimum regulatory capital required by Farmer Mac. By this fall, we 

expect the workgroup to provide recommendations to the FCA Board regarding any additional 

regulatory requirements for Farmer Mac to consider in the application of the RBC test and 

capital adequacy planning. I would also note that we are giving full consideration to the 

recommendations by GAO for the RBC stress test. 
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3. Offsite Monitoring and Reporting Requirements—Initial revisions to the Farmer 

Mac quarterly call reports (Call Reports) were implemented in March 2004, including 

conversion from hardcopy to electronic submission format, as well as numerous adjustments 

to Call Report schedules, some of which were specifically recommended by GAO in their 

comments regarding offsite monitoring of Farmer Mac. We are also evaluating the need for 

additional revisions or expansion of schedules, which will be implemented in 2005. Other 

reporting requirements have been implemented also. For example, OSMO recently required a 

detailed position-level report on Farmer Mac’s debt issuances, derivatives, and liquidity 

investments that are received on a more frequent schedule than the quarterly Call Reports. We 

believe these enhanced reporting requirements are necessary for the on-going oversight of 

Farmer Mac’s operations and go beyond the recommendations provided by the GAO report. 

4. Credit Rating Requirement for Farmer Mac—FCA has initiated work and committed 

resources for an analysis and evaluation of different approaches used by other GSE regulators 

that require their regulated entities to obtain credit ratings. We have asked staff to present 

options and recommendations to the FCA Board regarding GAO’s recommendation on this 

matter. We have also requested staff to consider other activities currently underway at the 

agency and at Farmer Mac that may affect the need for the agency to promulgate formal 

rules in this area. 

5. Assessment of Farmer Mac’s Impact on the Real Estate Market—The GAO report 

recommended we conduct an assessment of Farmer Mac’s impact on the agricultural real 

estate market. The GAO report also suggested Congress clarify the statute with regard to 

Farmer Mac’s mission. Staff has begun planning for this recommendation and will consider 

different approaches for conducting this assessment. Meanwhile, OSMO is developing a 

special “Mission Call Report” to help track Farmer Mac’s success in achieving its mission as 

currently defined in statute. 

 I would like to note that FCA supports the suggestions to Congress made in the GAO report. 

In particular, we support greater flexibility for the regulator to design and set minimum and 

regulatory capital standards in addition to those established by the Risk-Based Capital Stress Test. 

This would be consistent with authority granted to other financial institution regulators and our 

own authority to regulate capital needed by the Farm Credit System banks and associations. 

CONCLUSION 

 Farmer Mac has made progress since the 1996 legislative changes. Capital has increased to 

$213 million at year-end 2003 from $47 million at year-end 1996. Program growth has been 

robust impacting Farmer Mac’s risk profile and challenging management, operational systems, 

and internal controls. Both Farmer Mac and FCA are actively working to ensure these challenges 

are met. 

 In conclusion, Mr. Chairman, let me say that we are committed to Farmer Mac’s success and 

the achievement of its statutory purpose as a Congressionally-chartered GSE serving agriculture 

and rural America. It must be safe and sound at all times to do so. FCA continues to enhance its 

regulatory oversight of Farmer Mac, and I believe we are well positioned to address any 

challenges to ensure Farmer Mac has the capability to remain successful in the future. We remain 

committed to that goal and the achievement of our mission, “to ensure a safe, sound and 

dependable source of credit for agriculture and rural America.” 
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 Thank you for the opportunity to be here today and for your continued support of FCA and our 

mission of service to agriculture and rural America. I will be pleased at this time to answer any 

questions.