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NOTE.-The estimate for 1959 is $3,375,000 which reflects no change from 1958.

STATUS OF PROGRAM Creation and purpose.—The Federal intermediate credit banks were created by the Agricultural Credits Act of 1923 (12 U. S. C. 1021, 1022). They serve as banks of discount for agriculture, extending credit to various types of financing institutions. They do not make loans directly to individuals or accept deposits of funds other than as collateral security. Their lending operations are financed primarily by the sale of consolidated collateral trust debentures. The Government assumes no liability for the debentures and other obligations of the Federal intermediate credit banks.

Under the provisions of the Farm Credit Act of 1956, which merged the 12 production credit corporations in the 12 Federal intermediate credit banks effective January 1, 1957, the credit banks have assumed the functions formerly carried out by the production credit corporations of supervising and providing services to local production credit associations which make short and intermediate-term loans to farmers and stock men. With minor exceptions, all assets, liabilities and functions of the production credit corporations were transferred to the respective credit banks.

Although the production credit corporations and intermediate credit banks were maintained as separate corporate entities through December 31, 1956, for comparative purposes all budget schedules have been prepared as though the mergers had occurred on June 30, 1956.

Management and supervision.--Each bank operates through its own corporate management, under the direction of a board of directors composed of the members of the district farm credit board who are, ex officio, the directors of the three farm credit banks of the district. The operations of the intermediate credit banks are supervised by the Deputy Governor and Director of short-term credit service, who is responsible to the Governor of the Farm Credit Administration.

The affairs of each of the 497 production credit associations are administered under the direction of their respective boards of directors, generally consisting of five members elected by and from the membership of the associations. The associations are under the supervision of the intermediate credit banks and, in turn, the Farm Credit Administration. Sources of funds

1. Capital funds.--As of January 1, 1957, upon merger of the production credit corporations in the credit banks, the banks had total net worth of $150,471,704, consisting of $87,405,000 of class A stock held by the Governor of the Farm Credit Administration on behalf of the United States (including $27,405,000 transferred from the production credit corporations) and $63,066,704 of permanent surplus (including $12,744,283 transferred from the production credit corporations). No part of the surplus may be distributed as patronage refunds or dividends. Within the 60-day period following January 1, 1957, and in accordance with the provisions of the 1956 act, the production credit associations, subscribed to approxi. mately $13.1 million of class B stock of the banks. One-third of this amount was paid at the time of subscription, one-third on December 31, 1957, and the remainder is payable on or before December 31, 1958.

Class A stock is being retired out of the proceeds of class B stock purchases by production credit associations and from net earnings of the banks. Net earnings of the banks remaining after provision for reserves and payment of franchise

taxes are distributed each fiscal year as patronage refunds in the form of class B stock to production credit associations and F. certificates to other financing institutions. By June 30, 1957, class A stock in the amount of $4,501,130 had been retired. At June 30, 1957, the capital funds of the credit banks amounted to $150,687,290, composed of $82,903,870 of class A stock held by the Governor, $4,588,245 in class B stock owned by production credit associations, $21,690 in participation certificates issued to other financing institutions, and $63,173,485 in retained earnings. Pursuant to the Farm Credit Act of 1956, the Federal intermediate credit banks revolving fund of $40 million, which was established in 1934 (12 U. S. C. 1131i (e)) to provide additional capital to the Federal intermediate credit banks if needed, will be increased eventually to $70 million as the last $30 million of the Government's investment in class A stock of the banks is retired. 2. Borrowing.—The banks finance their lending activities principally through the issuance and sale to the investing public of consolidated collateral trust debentures and by direct borrowings from commercial banks and other available sources (12 U. S. C. 1041 et seq.). The banks are authorized also to rediscount eligible paper with the Federal Reserve banks; however, these facilities have not been used for a number of years. The aggregate amount of debentures and other similar obligations which may be outstanding on behalf of any bank may not exceed 10 times its surplus and paid-in capital (12 U. S. C. 1041). During the 12 months ended June 30, 1957, the peak ratio of such obligations to capital and surplus ranged among the banks from 4.7 to 1 to 9.9 to 1, and was 6.4 to 1 for the system as a whole. (a) Debentures.—Debentures are required to be secured by the assignment and deposit with farm loan registrars of cash, notes, and other obligations representing loans and discounts, and United States securities, at least equal in amount to the amount of debentures outstanding. The total amount of unmatured debentures outstanding at June 30, 1957, was $923,850,000. (b) Notes payable.—The banks supplement their debenture financing from time to time by means of short-term loans from commercial banks and from other banks of the farm credit system which may have surplus funds available. The banks had $29 million of such obligations outstanding at June 30, 1957.

Lendina operations 1. Type of credit.—The Federal intermediate credit banks operate as banks of discount and do not meke loans directly to individuals. They discount agricultural and livestock paper for, and make loans to, financing institutions to finance the seasonal production and marketing needs of farmers and stockmen. Maturities of most loans and discounts cover 1 production and marketing season, usually 1 year or less, although some loans and discounts carry maturities up to 5 years, the maximum permitted under the law. 2. Eligible borrowers.-Eligible borrowing and rediscounting institutions include production credit associations, National and State banks, agricultural credit corporations, livestock loan companies, and cooperative associations engaged in the making of loans to farmers. The banks are authorized also to make loans to and discount paper for any other Federal intermediate credit bank, any Federal land bank, or any bank for cooperatives organized under the Farm Credit Act of 1933. 3. Volume of business.-It is the function of the banks to finance eligible and acceptable paper in whatever volume may be offered by institutions qualified to receive credit from the banks. Their volume of business thus is governed primarily by the demand for credit which, in turn, is a reflection of general agricultural and economic conditions, volume of agricultural production, the level of production costs, crop and livestock yields, prices of agricultural commodities, and other factors over which the banks have no control. At June 30, 1957, outstanding loans and discounts totaled $999 million and consisted of $924,753,000 of credit to production credit associations, $71,747,000 to other agricultural credit corporations and commercial banks, and $2,500,000 to banks for cooperatives.

Supervision of production credit associations

The 497 production credit associations, serving farmers throughout the United States and Puerto Rico, obtain most of their lending funds by rediscounting farmers' notes with and by other borrowings from the Federal intermediate credit banks. Each of the 12 banks is responsible for the supervision of the associations in its district. This supervision covers all phases of association

activities, including a review and advisory service relating to business management, and other activities. The banks also supervise the annual credit examinations of the associations, made by employees of the banks, designated for that purpose by the Governor. Lending policies and practices of the associations are subject to rules and regulations d.o. by the Farm Credit Board in each district, approved by the Farm Credit Administration and administered by the banks. h loan which exceeds 15 percent of an association's capital and surplus, and all loans to association officers and directors, are subject to the prior approval of the bank. In guiding the associations in building sound local credit institutions, the banks emphasize (1) sound and constructive credit service to farmers; (2) efficient and economical operations; (3) sound fiscal and financial policies, with emphasis on adequate capital and reserves; (4) member-ownership of the associations; (5) training, and (6) decentralization of responsibilities. The banks work directly with the association directors and officers, largely through contacts at the association offices and at group meetings. These associations operate through about 1,600 offices and handle a loan volume of nearly $1% billion annually.

A onary of selected data relating to production credit associations is presented in table A.

Operating data

1. Lending activities.—The $2,286 million of credit extended by the credit banks in the fiscal year 1957 was greater than in any prior year in their history. It was $322 million (16.4 percent) greater than in 1956 and more than twice the amount of credit extended in 1947 (10 years earlier). The volume of credit to be extended during the first 6 months of fiscal year 1959 is estimated at $1,172 million. The actual volume may vary substantially from the amount estimated since the demand for credit is governed by conditions over which the banks have no control. It is expected, however, that demands upon the banks for seasonal, short- and intermediate-term credit will continue at a relatively high level through fiscal years 1958 and 1959. Continued high farm operating costs, in relation to the level of commodity prices, tend to maintain credit needs at a high level.

2. Financing activities.—To finance lending operations during the first 6 months of fiscal year 1959 the credit banks expect to issue consolidated debentures and borrow from commercial banks for short periods a total of $750 million. As expressly provided by law, the United States assumes no liability for the obligations of the banks.

3. Gross income.—The earnings of the banks are derived principally from interest on loans and discounts and income from investments in United States securities. Gross income from loans and discounts is estimated at $23,044,000 for the first 6 months of fiscal year 1959. For that period, income from United States securities owned by the banks is estimated at $1,289,000. On January 1, 1958, the loan and discount rates ranged among the 12 banks from 4 to 4% percent.

4. Erpenses.—The principal expenses of the banks consist of interest on outstanding debentures and other borrowings, administrative expenses, and payments to Farm Credit Administration for supervision and facilities furnished and examination (audit). All expenses of the banks, including those required in carrying out their supervisory functions, are paid out of their income. In this connection experience has demonstrated that if the associations are to maintain a sound and dependable credit service, build and maintain adequate capital and reserves, and continue to make progress toward complete member-ownership, supervision by the banks must be adequate to enable them to determine weaknesses in the early stages and to apply corrective measures promptly.

The budgets of the banks, and expenditures of funds thereunder, are authorized by the boards of directors of the several banks which are responsible for the conduct of the banks' business. Interest and other costs on borrowed money are estimated at $21,298,000 for the first half of 1959. The average rate of cost on debentures outstanding in 1957 was 3.61 percent per annum. This rate of cost is estimated by the banks at 4.35 percent for 1959 for budget purposes but is subject to change as prevailing short-term rates fluctuate in the investment markets.

5. Net income.—Net income of the banks for the first half of fiscal year 1959 is estimated at $1,149,200. This net income will be retained in undistributed earnings until the end of the fiscal year, at which time earnings for the entire year will be distributed by transfer to the reserve account, payment of franchise taxes to the Treasury, and payment of patronage refunds to production credit associations and other financing institutions, pursuant to section 103 of the Farm Credit Act of 1956.

Summary of operations--Federal intermediate credit banks Statement of sources

and application of funds

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FUNDS AFTLIED
Agricultural loans and discounts..
Investment in class A stock of production credit asso-

ciations..
Expense...
Net loss on sale of United States securities.
Franchise tax payable to Treasury.
Other...
Return of capital to Treasury..
Transfer of stock to Governor of FCA.
Stock called for retirement based on class B stook for

participation certificates issued.
Increase in selected working capital.
General fund financing:
Repayment of borrowings to the public:

Debentures
Notes payable.
Return of capital to the revolving fund appro-

priation...

Increase in cash with Treasury and in banks.
Trust fund financing:
Repayment of borrowings to the public:

Debentures

Notes payable
Increase in United States securities (par)
Increase in cash with Treasury and in banks.
Total funds applied..

FUNDS PROVIDED
Repayment of agricultural loans and discounts.
Retirement of class A stock investment in production

credit associations
Realization of other assets..
Income...
Issuance of class B stock to production credit associa-

tions
Decrease in selected working capital.
General fund financing:
Borrowings from the public:

Debentures.

Notes payable..
Capital from revolving fund appropriation..

Decrease in securities held (par).
Trust fund financing:
Borrowings from the public:

Debentures.

Notes payable
Decrease in cash with Treasury and in banks.

Total funds provided.

785, 970,000 146,000,000

125,000 12,871,200 2, 141, 804,000

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1, 367, 354,000

2, 186, 207, 530
2, 270,000

2, 726
33, 701, 674
4, 371, 510

176, 995

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PRODUCTION CREDIT ASSOCIATIONS The present capital structure of the production credit associations has been built up principally through purchases of capital stock by member-borrowers and by retained earnings. Each borrower is required to own class B stock equal to 5 percent of his loan. Many members also have purchased and continue to hold class A stock in their associations and many borrowers own class B stock in excess of the amounts required to support their loans.

The revolving fund in the United States Treasury established by the Farm Credit Act of 1933 for capitalizing the production credit corporations which, in turn, provided the initial and some supplementary capital for production credit associations was reduced by the Farm Credit Act of 1956 to $60 million and control thereof transferred to the Governor of the Farm Credit Administration. Since January 1, 1957, this revolving fund is available for purchase by the Governor on behalf of the United States of class A or class C stock of production credit associatiors, should the need therefor arise. Only $1,700,000 of this fund was invested in PCA capital stock at January 1, 1958.

Of the 497 associatiors, 455 were wholly member-owned as of December 31, 1957. On June 30, 1957, farmers and stockmen owned $105,822,000, percent, of the total capital stock of all production credit associations.

or 98.3

TABLE A.-Production credit associations, selected comparative data on offices,

personnel, loan activity, and capital (as of June 30, or for the year ended June 30)

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Number of production credit associations.
Number of production credit association offices, includ-

ing full- and part-time field offices.
Number of production credit association directors (esti-

mated)
Number of production credit association employees

(man-years).
Number of loans made.
Amount of loans made
Number of loans outstanding-
Amount of loans outstanding.
Capital and reserves:

Class A and C capital stock owned by production

credit corporations through Dec. 31, 1956, and by
Governor thereafter...
Class A and B capital stock owned by members.
Surplus..

Total capital stock and surplus.-----

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Mr. WHITTEN. We note that you have a new budget officer. We will be glad to have you introduce him for the record, and we would be glad for you in the record to give us some statement as to his background and experience. We are glad to welcome him to the committee.

At the same time, we express our regrets that Mr. Wilkinson is not here. We know he served your Administration well for many years and we were always glad to have him before the committee.

Mr. TOOTELL. Our budget officer is Mr. James Pitts, who is an oldtime career man in farm credit. How long have you been with Farm Credit?

Mr. PITTS. Twenty-five years.

Mr. TOOTELL. He not only continued the duties which he has had for a good many years, but he assumed the budget and accounting duties of Mr. Wilkinson' when Mr. Wilkinson retired last summer. We changed his title at that time to that of Comptroller.

Mr. Pitts is a native of Texas, and is one of the very capable and trusted employees of the Farm Credit Administration.

Mr. WHITTEN. You may proceed with your general statement and state how improved the farm situation is and what action you have taken to improve it. We do recognize that, through disaster and otherwise, there have been far more needs and demands on the Farm Credit Administration.

For many years the members of this subcommittee have thought this a very sound operation, a sound law, and a sound administration. I think that we might say the conditions that have faced us the last 2 or 3 years, and particularly in the last 12 months, might be taken as a test as to how good this system is when times of stress and strain come. We will listen to you with a little more than the usual interest today.

STATEMENT OF CHAIRMAN OF THE BOARD Mr. TOOTELL. We are glad to be back here before you. At least in the 2 previous years the Chairman of our Farm Čredit Board has come with us and has made a statement. Mr. C. H. Matthews from Texas is the present Chairman of the Board and he felt it was not worthwhile for him to make a separate trip in just for this meeting.

21494-58-pt. 4-3

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