Table 6

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outstanding loan volume. Tables 6, 7, and 8 show the top 10 associations that participate in the FSA program ranked in three ways: (1) number of guaranteed loans as a percentage of total number; (2) dollar value of guaranteed loans as a percentage of total loan volume; and (3) guaranteed loan dollar volume. Altogether, 22 associations are ranked in at least one of the tabies. The top 10 associations in terms of dollar volume account for 39 percent of the System's FSA guaranteed loans. Almost all of these associations are FSA preferred lenders."

Institutions that are heavy users of the guaranteed loan program note that guarantees reduce portfolio credit risks and are especially helpful in promoting lending to YBS borrowers. These institutions have made the extra effort to learn about the FSA guaranteed loan program and to develop procedures to participate in it. They also typically have good relationships with FSA personnel in their areas. A portion of FSA's funding for the guaranteed loan program has gone unused

in recent years. This plentiful supply of funds, as well as FSA's past focus on streamlining loan guarantee procedures, may lead to increases in System use of the program in the future. With the limited use of the FSA program by many associations, the System has significant potential for expanded use of this program.

Measuring the System's Safety and Soundness

The FCA Financial Institution Rating System (FIRS) provides a general framework for collecting and evaluating all significant financial, asset quality, and management factors to assign a composite rating to each institution on a scale of 1 to 5. We evaluate the risk in each bank and direct-lender association at least every 90 days on the basis of quantitative and qualitative benchmarks to ensure that assigned ratings reflect current risk and conditions in the FCS. A 1 rating means an institution is sound in every respect. A 3 rating means an institution displays a combination of financial, management, or

21 The FSA Preferred Lender Program, allows better performing lenders to make efficient use of the FSA guarantee program through reduced

compliance weaknesses ranging from moderately severe to unsatisfactory. A 5 rating means there is an extremely high immediate or near-term probability of failure.

Throughout FY 2001, FIRS ratings as a whole reflected the stable to improving financial conditions of FCS institutions and, as reflected in Figure 6, the overall trend in FIRS ratings continued to be overwhelmingly positive. By the end of the second quarter, there were several more 1-rated institutions (69, or 55 percent) than 2- and 3-rated institutions (56, or 45 percent). There was only one 3

rated institution, which had $19 million in total assets at September 30, 2001, which merged with another association on November 1, 2001. The strength of FCS institutions displayed by these ratings reflects a financially safe and sound Farm Credit System, which was achieved in part by government payments that allowed many borrowers to meet debt obligations during a period of low market prices for a number of commodities. The overall financial strength maintained by the System reduces the risk to investors in FCS debt, the Farm Credit System Insurance Corporation, and FCS institution stockholders.

When Bill Powers, owner of Badger Mountain Wines in Kennewick, Washington, stopped using chemical fertilizers in his orchards in 1987, he wasn't looking to "grow organic."

"We were just attempting to grow without chemicals," says the owner of the first and largest Washington State-certified organic vineyard and winery. As grape prices fell in the 1980s, Bill Powers began to crush his own grapes rather than lose money selling them to his regular buyers. The bulk wine was sold to customers on the East Coast, but in 1990, Powers started making his own wine with his son, Greg. as winemaker.

The family finds natural ways to fight pests that threaten the vines. Bill and Greg discovered a tiny wasp perfect for fighting leafhoppers, but couldn't find anyone selling them, so they had to learn how to build a population naturally.

"We've worked to encourage a habitat for natural predators," says Bill, "and to eliminate the habitat for pests." Their hands-on style is also evident in how they market their products. The wines are sold in distinctive blue-glass bottles that make them stand out among the hundreds of offerings in a store. And they also market their wines through a Web site.

Badger Mountain Wines also bottles and sells non-organic wines with grapes purchased from local vineyards. "We work closely with them to be sure we have the quality grapes we need. Working with them also reduces the risk. The chance of a freeze getting all the vineyards is slim," says Bill Powers. Working with Northwest Farm Credit Services has also reduced their risk, because the association focuses on serving producers and rural customers and knows the financial territory facing

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Identifying Potential Threats to Safety and Soundness

In addition to quarterly FIRS reviews, we use a semiannual financial forecasting model to identify and evaluate prospective risk in institutions over the upcoming 12 to 24 months under "most likely" and "worst case" scenarios, respectively. By evaluating each institution's financial condition and performance under various scenarios, we can identify institutions with emerging risk and the potential for

adverse performance. This evaluation enhances our ability to carry out our riskbased supervision program to ensure that the boards of directors of FCS institutions address and correct problems before irreparable harm occurs to an institution's financial condition. Our financial forecasting analysis, based on June 30, 2001, Uniform Call Report data, projects that the financial condition of the FCS will remain sound through June 30, 2002, and June 30, 2003, under "most likely" and "worst case" scenarios, provided government support to agriculture continues.

Other important aspects of our examination and supervisory program include a loan portfolio stress model to evaluate the potential impact of changes in interest rates and dedines in borrower repayment capacity on an institution's earnings and financial condition; an analysis of new money, refinancing, and rollover trends to identify the source of growth and the potential for transfer of risk from other lenders to FCS institutions (especially during stressful times in agriculture); and a database of PCS institutions' loan underwriting standards to analyze whether boards are properly adjusting standards in response to changing risk. During FY 2001, the results of these analyses indi

cated that the System would remain financially sound and well positioned to meet its public mission through good and bad times.

Meeting Statutory Examination Requirements

The Farm Credit Act requires FCA to examine each FCS institution at least once during each 18-month period." Nonetheless, in accordance with our risk-based examination program, we maintain the flexibility to complete examination activities at any time, as needed. Consis tent with this philosophy, we have maintained a policy of examining System banks and direct-lender associations with greater than $1 billion in total assets at least once every 12 months because of these institutions' relative importance to the overall financial soundness of the System. FCA conducted 106 examinations in FY 2001, including examinations of 93 FCS direct-lender associations, six Farm Credit Banks, two service corporations, one Agricultural Credit Bank, the FCS Pinancial Assistance Corporation, Farmer Mac, the FCS Building Association, and the National Consumer Cooperative Bank, which is not an FCS institution.2

The Small Business Administration and USDA also used FCA's examination expertise in 2001. SBA contracted with FCA to conduct examinations of financial companies licensed by SBA to make guaranteed loans to small businesses. USDA contracted with FCA to conduct examinations of financial companies licensed by USDA to make guaranteed loans under USDA's Business and Industry Guaranteed Loan program. While the safety and soundness of the System remains the primary objective of FCA, we

22. Federal Land Bank Associations (FLRAS) must be examined at least once every three years. However, during 2001 the remaining FBA in the System became Federal Land Credit Associa tions, which are direct-lender institutions subject to the 18-month frequency requirement. 23. FCA is required under the provisions of Section 115 of the National Consumer Cooperative Bank (NCB) Act of 1978, as amended, to examine and report on the condition of the NCB. Since the passage of this law, PCA has conducted an annual safety and soundness examination of the NCB and issued a Report of Examination to the NCB's board.