FARM CREDIT ADMINISTRATION PERFORMANCE AND ACCOUNTABILITY REPORT FY 2001 Philip J. Shebest' is the Chief Administrative Officer and is serving as Acting General Counsel. He joined FCA in 1990 as a senior attorney in the Office of General Counsel. Mr. Shebest became the Director of Human and Administrative Resources in 1996 and in 2000 was selected for the Chief Administrative Officer position. Prior to joining PCA, Mr. Shebest was a senior attorney-advisor in the Chief Counsel's Office of the Drug Enforcement Administration from 1985 until 1990. From 1981 through 1984, he held the rank of Lieutenant in the Judge Advocate General Corps, U.S. Navy, and was stationed in Washington, D.C., as an appellate litigation attorney. Roland E. Smith is Chief Examiner and Director of the Office of Examination. He joined FCA in 1979 as an Stephen G. Smith' is the Inspector General. He joined FCA in 1981 as a technical specialist. He became an examiner in 1984 and later served as Staff Assistant for the Chief Examiner. In 1989 he was named Associate Regional Director for the Agency's Albany, New York, Field Office. He later served as Senior Staff Director for the Chief Examiner, and was then named Director of the Technical and Operations Division. In 1993 he assumed new responsibilities as Director of the Information Resources Division. He was named Chief Information Officer in 1996, directing all technology and information operations for FCA. Before joining the Agency, he worked at the North Central Jersey Farm Credit Associations. Doug Valcour is the Chief Information Officer. He joined FCA in 1988 as a computer specialist in the Office of Kelly Mikel Williams was named Secretary to the Board in July 2000. Before joining FCA, he served in the White 9 3. Kathleen V. Buffon served as Acting General Counsel from September 10, 2000, to August 16, 2001. 4 Eldon W. Stoehr served as Inspector General until his retirement on December 15, 2000. Elizabeth Dean served as Acting Inspector General until Stephen G. Smith was narned Inspector General on January 12, 2001, 5. Doug Valcour was named Chief Information Officer (CIO) on April 15, 2001. Stephen G. Smith served as CIO until be was named Inspector General 6. The ACA is the parent company with two wholly owned subsidiaries, a Production Credit Association and a Federal Land Credit Association. Although legally separated, the ACA, PCA, and FLCA operate an integrated lending business with loans made through the subsidiaries appropriate to the authority of each subsidiary. The ACA, PCA, and FLCA are jointly and severally Hable on the full amount of the indebtedness to the bank under the bank's General Financing Agreement. In addition, the three associations agree to guarantee each other's debts and obligations, pledge their respective assets as security for the guarantee, and share each other's capital. The three institutions have a common board and management and a common set of shareholders. Under the Farm Credit Act, the FLCA is exempt Farm Credit System - Its Function and Structure The FCS is a network of borrower-owned cooperative financial institutions and related service organizations, which serves all 50 states and the Commonwealth of Puerto Rico, and is the largest single agricultural lender in the country. Created by Congress in 1916 to provide American agriculture with a dependable source of credit, it is the oldest of the Governmentsponsored enterprises (GSES). System institutions provide credit and related services to farmers, ranchers, producers or harvesters of aquatic products, and farmer-owned cooperatives. They also make loans for agricultural processing and marketing activities; rural housing; certain farm-related businesses; agricultural, aquatic, and public utility cooperatives; and foreign and domestic entities in connection with international trade. The System raises its loan funds by selling securities in the national and international money markets with FCA approval. These securities are not guaranteed by the U.S. Government. The funds are channeled to rural America through the FCS lending institutions. As of September 30, 2001, the System was composed of 125 banks and associations. Seven Farm Credit banks provide loan funds to 69 Agricultural Credit Association (ACA) parent organizations, nine ACAS, 15 Production Credit Associations (PCAs), and 25 Federal Land Credit Associations (FLCAs). ACAs make short-, intermediate-, and long-term loans; PCAs make short- and intermediate-term loans; and FLCAs make long-term loans. One of the banks is an Agricultural Credit Bank (ACB), which also makes loans to agricultural, aquatic, and public utility cooperatives, and other persons or organizations owned by or having transactions with such cooperatives. The ACB finances U.S. agricultural exports and provides international banking services for farmer-owned cooperatives. In addition to making loans to cooperatives, the ACB provides loan funds to four ACA parent organizations, which serve New York, New Jersey, Connecticut, Rhode Island, Maine, Massachusetts, New Hampshire, and Vermont. In addition to the banks and associations described above, FCA examines and regulates the following three entities. The Federal Farm Credit Banks Funding Corporation (Funding Corporation) markets debt securities that the banks sell to raise loan funds. The Funding Corporation is owned by the System banks. The Farm Credit System Financial Assistance Corporation (FAC), chartered in 1988, provided needed capital to the System through the sale of $1.3 billion in 15-year bonds to the capital markets and the purchase of preferred stock. This stock was issued by certain System institutions that received financial assistance as authorized by the Farm Credit System Assistance Board. When it first opened in 1996, the Heartland Catfish processing plant located between the tiny Mississippi Delta towns of Itta Bena and Schlater -created 60 jobs for local residents. Today, more than 420 people work in the processing plant, turning fresh, farmraised catfish into high quality frozen products for the food service market. With financial backing from the Parm Credit System's First South ACA and commercial banks, Heartland is a vital partner for progress in a region of the country with an historically high unemployment rate. Heartland is owned by Tackett Fish Parms, a family-run operation that is the largest producer in the industry. One of the top four processors in the country, Heartland prepared 50 million pounds of catfish this year, up from 16 million pounds handled in its first year. "We have grown in order to meet our customers' needs," says Danny Walker, CEO of the company. "We have to put out a consistent, quality product," he notes. "Heartland's 100-plus lines of fish products adhere to rigid flavor guide lines." The company's success has meant additional growth for local catfish producers and more jobs for the region. Tackett Farms, which founded Heartland A recent $15 million expansion, partly financed by First South ACA, is the largest since the plant opened. The expansion incorporates design and technological innovations that increase efficiency and speed processing time. New loading bays mean fish can be delivered at both ends of the plant and trucks can off-load 30,000 pounds of fish in 10 minutes, a sixth of the usual time. Re-designed filleting tables and larger spiral freezers ensure freshness. The company combines high-tech equipment and a strong management style with a core business leadership team that encourages participation from all staff. Heartland's success is due in part to the commitment of the employees, many of whom participate as Group Leaders in the various sections of the plant. "Through teamwork, we have created a synergy" Walker says. "By building our operations from the ground up, we've learned the plant is one machine -one cohesive 7. Farmer Mac is established in law as a part of the Farm Credit System. However, Farmer Mac has no liability for the debt of any other Systern institution, and the other System institutions have no liability for Farmer Mac debt. Farmer Mac is organized as an investor-owned corporation, not a member-owned cooperative. Investors in voting stock may include commercial banks, insurance companies, other financial organizations, and PCS institutions. Nonvoting stock may be owned by any investor. Farmer Mac is regulated by the FCA through the Director, Office of Secondary Market Oversight, who reports to the PCA Board for policy 8. Section 4 25 of the Farm Credit Act provides that one or more FCS banks and/or associations may organize a service corporation to perform functions and services on their behalf. These federally chartered service corporations are prohibited from extending credit or providing insurance The Federal Agricultural Mortgage Corporation' provides a secondary market for agricultural real estate and rural housing mortgages. Farmer Mac guarantees prompt payment of principal and interest on securities representing interests in, or obligations backed by, mortgage loans secured by first liens on agricultural real estate or rural housing (the Farmer Mac I Program). It also guarantees securities backed by the "guaranteed portions" of farm ownership and operating loans, rural business and community development loans, and certain other loans guaranteed by the U.S. Department of Agriculture (the Farmer Mac II Program). Farmer Mac also purchases or commits to purchase qualified loans or securities backed by qualified loans directly from lenders through the Farmer Mac I program. FCA also examines and regulates the following five service corporations organized under Section 4.25 of the Farm Credit Act. AgVantis, Inc. provides technologyrelated and other support services to the associations affiliated with the Farm Credit Bank of Wichita. AgVantis, which was chartered by FCA on August 3, 2001, is owned by the bank and its affiliated associations. The Farm Credit Finance Corporation of Puerto Rico uses tax incentives offered to investors to provide low-interest funding (other than that from the Funding Corporation) to the Puerto Rico Farm Credit, ACA. The Farm Credit Leasing Services Corporation (Leasing Corporation) provides equipment leasing services to eligible borrowers, including agricultural producers, cooperatives, and rural utilities. The Leasing Corporation is owned primarily by two System banks CoBank, ACB and AgFirst Farm Credit Bank. The other banks are nonvoting stockholders. Farm Credit Financial Partners, Inc., provides support services to the four associations affiliated with CoBank, ACB and 8 of the 15 associations affiliated with the Western Farm Credit Bank. The FCS Building Association acquires, manages, and maintains facilities to house FCA's headquarters and field office staff. The FCSBA was formed in 1981 and is owned by the FCS banks. The FCA Board oversees the FCSBA's activities on behalf of its owners. FARM CREDIT ADMINISTRATION-PERFORMANCE AND ACCOUNTABILITY REPORT FY 2001 Farm Credit System An Overview of Existing 13 Congress established the Farm Credit System as a Government-sponsored enterprise. The purpose was to provide a permanent, reliable source of credit and related services to agricultural and aquatic producers, their cooperatives, and related businesses in rural America. Congress intended the farmer-owned cooperative FCS to improve the income and wellbeing of American farmers and ranchers. It further encouraged farmer- and rancher-borrower participation in the management, control, and ownership of these cooperative institutions to help them remain focused on serving members' needs. Eligible borrowers include all types of agricultural producers, their cooperatives, and rural homebuyers having a basis for credit. In addition, the System's lending authority extends to certain agricultural marketing and processing operations, farm-related businesses, rural utilities, and activities in support of international agricultural trade. The System serves a broad public need by preserving liquidity and competition in rural credit markets in both good and bad economic times. The accomplishment of this public goal benefits all eligible borrowers, including young and beginning farmers, small farmers, family farmers, minority farmers, women, and socially disadvantaged farmers. FCA's regulations, policy statements, examinations, chartering activities, and other regulatory activities discussed in later chapters of this report support and facilitate the accomplishment of the System's mission by ensuring that FCS institutions operate in a safe and sound manner without undue risk to taxpayers, investors in System securities, or System borrower-stockholders. The sections in this chapter first assess the System's financial strength and then its service to rural America. The discussion relies on commonly used measures, including trends in volume by a variety of loan types, volume of funding for nonSystem rural lenders and participations with other lenders, and the System's share in the marketplace. Discussion in the next chapter also covers lending activity and programs that benefit young, beginning, and small (YBS) farmers, and use of government guarantee programs in supporting loans to farmers not able to meet normal underwriting requirements. Financial Condition of the Parm Credit System' Farm Credit System loan volume increased with continued high asset quality over the 12 months ended September 30, 2001 (see Borrowers Served, page 16). Interest rates fell throughout 2001, ensuring low interest expense. Continued high levels of government payments ensured good loan repayment rates. The result of these favorable factors - high loan volume, low interest expense, and good loan repayment rates was continued strong earnings. As a cautionary note, interest rates were near 40-year lows in late 2001 and are likely to increase. Further, government payments to agricultural producers in 2001 are expected to continue at around 40 percent of net farm income. For those grain and fiber producers who benefit from these payments, continued low commodity prices, combined with a 9. The information presented in this section includes all Farm Credit Banks and the Agricultural Credit Bank and their affiliated associations. The FCS institutions provided the data used in the overall FCS analysis to FCA or to the Federal Farm Credit Banks Funding Corporation. The analysis in this section is based on publicly mailable information and, except where noted, is based on the 12-month period ended September 30, 2001. See Tables 2 and 3 on pages 21 and 22, respectively, for System measures of financial |