FARM CREDIT SYSTEM INSURANCE CORPORATION
 

2004 ANNUAL REPORT
 

FCSIC
 

MISSION STATEMENT 

The Farm Credit System Insurance Corporation, a 

government-controlled, independent entity, shall: 

• Protect investors in insured Farm Credit System 

obligations and taxpayers through sound 

administration of the Farm Credit 

Insurance Fund, 

• Exercise its authorities to minimize Insurance Fund 

loss, and 

• Help ensure the future of a permanent system for 

delivery of credit to agricultural borrowers. 

TABLE OF CONTENTS 

4 Board of Directors 

9 New Insurance Risk Tool 

10 Selected Financial Statistics 

11 The Farm Credit System 

18 Insurance Fund Management 

23 Risk Management 

23 Financial Assistance and Receivership 

25 Strategic Goals and Performance Measures 

28 Report of Independent Public Auditors 

30 Financial Statements 

33 Notes to the Financial Statements 

44 Corporate Staff 

44 References 

2 Farm Credit System Insurance Corporation 
April 29, 2005 

Gentlemen: 

In accordance with the provisions of section 5.64(a) of the Farm Credit Act of 1971 as 

amended, the Farm Credit System Insurance Corporation is pleased to submit its annual 

report for calendar year 2004. 

This report highlights the Corporation’s role as the independent Federal corporation 

established to ensure the timely payment of principal and interest to investors in Farm 

Credit System debt securities. The balance in the Insurance Fund at December 31, 

2004, was $1.94 billion. The Corporation collected $47 million in insurance premiums 

from Farm Credit System banks for 2004, and expects to incur $2.5 million in operating 

costs in 2005. 

Sincerely, 

Douglas L. “Doug” Flory 

Chairman 

The President of the United States Senate 

The Speaker of the United States House of Representatives 
BOARD OF DIRECTORS 

The Farm Credit System Insurance Corporation is managed by a 

three-member board of directors composed of the members of 

the Farm Credit Administration (FCA) Board. The FCA is the 

independent Federal agency responsible for the regulation and 

examination of the Farm Credit System, a nationwide financial 

cooperative that lends to agriculture and rural America. The 

Chairman of the Corporation’s Board of Directors must be an 

FCA Board Member other than the Chairman of the FCA Board. 

4 Farm Credit System Insurance Corporation 
Douglas L. “Doug” Flory 

Douglas L. “Doug” Flory, Chairman of FCSIC, 

was appointed to the three-member FCA Board 

by President Bush on August 1, 2002, for a term 

that expires October 13, 2006. He was elected 

Chairman on December 4, 2002. 

Mr. Flory brings to his position extensive 

experience in production agriculture, 

agribusiness, and both commercial bank and 

Farm Credit lending. His farming operation 

includes being half-owner of S & F, L.L.C., 

a general livestock, grain, poultry and hay farm 

in Augusta County, Virginia. Prior to his 

appointment to the FCA Board, Mr. Flory 

was a member of the board of directors of 

AgFirst Farm Credit Bank in Columbia, South 

Carolina, and a director of Farm Credit of the 

Virginias, ACA. 

Mr. Flory was executive vice president of 

Dominion Bank from 1971 to 1988, and 

president, CEO, and director of Dominion Farm 

Loan Corporation. He chaired the Virginia 

Bankers Association Committee on Agriculture 

and was a member of the Executive Committee 

of the American Bankers Association’s 

agricultural division. From 1989 to 1992, he was 

executive vice president, chief operating officer, 

and a member of the board of WLR Foods, Inc., 

a publicly traded poultry food company. 

Mr. Flory also served on several governing 

boards for the State of Virginia, including the 

Virginia Agricultural Council, a state advisory 

board, and the Virginia Agriculture Credit 

Committee, which he chaired. He also served 

as chairman of the Virginia Agricultural 

Development Authority, which uses “aggie 

bonds” to finance Virginia farmers. 

Throughout his career, Mr. Flory has been an 

active participant in agricultural industry 

associations. He was president of the Virginia 

Turkey Association and president and director of 

the Rockingham County Fair Association. He 

also served as a director of the Virginia Poultry 

Federation, the Virginia Agribusiness Council, the 

Virginia Beef Cattle Association, and the Virginia 

Sheep Association. 

A native of Augusta County, Virginia, Mr. Flory 

attended Bridgewater College in Bridgewater, 

Virginia, and earned a bachelor’s degree from 

Virginia Polytechnic Institute and State University 

in Blacksburg. He did graduate work at James 

Madison University and is a graduate of the 

Maryland-Virginia School of Bank Management 

at the University of Virginia. He and his wife, 

Avery, are the parents of two daughters and 

a son. 

Farm Credit System Insurance Corporation 5 
Nancy C. Pellett 

Nancy C. Pellett was appointed to the FCA 

and FCSIC Boards by President George W. 

Bush on November 14, 2002, for a term that 

expires May 21, 2008. Ms. Pellett brings 

extensive experience in production agriculture 

and agribusiness to her position on the Board. 

For 23 years she was vice president and 

secretary of Prairie Hills, Ltd., a feedlot, cowcalf, and row crop operation in Atlantic, Iowa. 

She was president and treasurer of 

Fredrechsen Farms, Ltd., a family-owned 

swine and row crop operation in Walnut, 

Iowa, for more than 20 years. 

A long-time leader in the beef industry, Ms. 

Pellett has held state and national leadership 

positions in a range of cattlemen’s industry 

organizations. As a member of the National 

Cattlemen’s Beef Association, she served as 

the Chairman of the Check-Off Division, 

Chairman of the Consumer Marketing Group, 

and most recently as a member of the 

Cattlemen’s Beef Board. She also served as 

President of the Iowa Beef Industry Council. 

Ms. Pellett was a partner in Premium Quality 

Foods, Inc., based in Red Oak, Iowa, which 

markets branded fresh beef and precooked 

beef entrees. She served as president and 

director of consumer marketing for the 

company. 

Ms. Pellett served a six-year term as a 

member of the Board of Regents for the State 

of Iowa, which oversees the three state 

universities, as well as the University of Iowa 

Hospital and its affiliated clinics. She was also 

selected as a member of the Governor’s 

Student Aid Commission. She is currently on 

the Iowa State University (ISU) Foundation 

Board of Governors and has been a member 

of the Advisory Committees for the College 

of Agriculture and the College of Family and 

Consumer Sciences. 

Ms. Pellett’s dedication to the future of 

agriculture is reflected in her personal 

involvement with 4-H and Future Farmers of 

America at the local and state levels. She has 

served on the Iowa 4-H Foundation Board 

and is a founding member of the 4-H/FFA 

“Sale of Champions” Committee for the Iowa 

State Fair. 

A native of Walnut, Iowa, Ms. Pellett holds a 

B.S. from ISU at Ames. She is also past 

President of the ISU Alumni Association, and 

was awarded the Alumni Medal in 1987. The 

Pellett family was honored as “Family of the 

Year” by the University in 1997. The family 

also received the “Friends of Youth Award” in 

2000 from the Knights of AkSarBen, a 

foundation supporting education, youth 

programs, and rural development in Nebraska 

and western Iowa. She and her husband have 

four children. Together with a son and 

daughter-in-law, Ms. Pellet and her husband 

operate a fifth generation family farm in 

Atlantic, Iowa. 

6 Farm Credit System Insurance Corporation 
Dallas P. Tonsager 

Dallas P. Tonsager was appointed to the FCA 

and FCSIC Boards by President Bush on 

December 1, 2004, for a term that expires May 

21, 2010. Mr. Tonsager brings extensive 

experience as an agricultural leader and 

producer to his position on the FCSIC Board, as 

well as a commitment to promoting and 

implementing innovative development strategies 

to benefit rural residents and their communities. 

In partnership with his brother, he owns 

Plainview Farm in Oldham, South Dakota, a 

family farming operation that includes corn, 

soybeans, wheat, and hay. Mr. Tonsager served 

as Executive Director of the South Dakota 

Value-Added Agriculture Development Center 

in Huron from 2002 until his appointment to 

the FCA Board, where he coordinated initiatives 

to better serve producers interested in 

developing value-added agricultural projects. 

Services provided by the Center include project 

facilitation, feasibility studies, business planning, 

market assessment, technical assistance, and 

education. 

In 1993, Mr. Tonsager was selected by President 

Clinton to serve as the South Dakota State 

Director for Rural Development for the U.S. 

Department of Agriculture. The Federal agency 

promotes rural economic development, and 

helps individuals, communities, and businesses 

obtain financial and technical assistance for a 

variety of needs. Mr. Tonsager oversaw a 

diversified portfolio of housing, business, and 

infrastructure loans in South Dakota totaling 

more than $100 million. In 1999, he was 

recognized as one of two Outstanding State 

Directors in the nation by then USDA Under 

Secretary Jill Long Thompson. His term 

concluded in February 2001. 

A long-time member of the South Dakota 

Farmers Union, Mr. Tonsager served two terms 

as President of the organization, from 1988 to 

1993. He served on the board of the National 

Farmers Union Insurance from 1989 to 1993, 

and he was a member of the advisory board of 

the Commodity Futures Trading Commission 

from 1990 to 1993. 

Raised on a dairy farm in South Dakota, Mr. 

Tonsager is a graduate of South Dakota State 

University where he earned a B.S. in agriculture 

in 1976. From 1988 to 1993, Mr. Tonsager was 

a board member of Green Thumb Inc., a 

nationwide job training program for senior 

citizens. He currently serves on the board of the 

Lutheran Social Services of South Dakota. He 

and his wife, Sharon, have two sons and a 

daughter-in-law. 

Farm Credit System Insurance Corporation 7 
8 Farm Credit System Insurance Corporation 
New Insurance Risk Tool
 

Congress directed the Corporation to build the 

Fund to a “secure base amount” defined as 2 

percent of insured obligations, or another 

percentage that the Board determines is 

actuarially sound based on current risk levels and 

the level of outstanding insured obligations. In 

2003, the Corporation began research into the 

development of an actuarial approach to 

analyzing the adequacy of the Insurance Fund. 

During 2004, the Corporation added Dynamic 

Capital Adequacy Testing (DCAT) to its risk 

management practices. Over the next several 

years the Corporation will test this model as an 

additional internal risk monitoring tool. This will 

allow us to gain experience and identify any 

policy implications for future Board 

consideration. The DCAT model was developed 

in consultation with Mercer Oliver Wyman, an 

international risk management consulting firm, 

and is a best practice for making capital adequacy 

assessments in the insurance industry. It allows 

the Corporation to better quantify sources of 

risk, focusing management and the Board on 

areas where the Fund is most vulnerable. The 

Corporation will continue using its other risk 

management tools, in concert with the DCAT 

model, to monitor and evaluate risk. This tool 

may also be used to assist in developing 

insurance premium rates and evaluating risks and 

emerging trends. 

The model uses examination findings, key ratios, 

financial indicators, as well as current and 

historical data to forecast the likelihood of 

defaults. Loss claims to the Insurance Fund can 

arise when an insured bank defaults on 

repayment of its insured debt obligations to 

investors. Monte Carlo simulation techniques, an 

analytical method used to imitate a real life 

system, are used to generate a range of 

potential Insurance Fund loss claims over 

a 10-year time horizon. Each run of the model 

algorithm, allows for 20,000 simulations to 

develop the solvency probability distribution. 

The dynamic nature of the model allows staff to 

perform sensitivity testing of the key assumptions 

including: 

• System balance sheet growth over time, 

• Regulatory CAMEL institutional risk ratings, 

• Insured bank capital levels, 

• Insurance premium rates, and 

• Insurance Fund investment returns. 

The use of a DCAT model has several 

advantages when making assessments of 

Insurance Fund adequacy. First, the model 

generates a range of potential losses, not just a 

single result such as would occur with scenario 

testing. Second, the loss model recognizes the 

potential for loss events that have a low 

likelihood but would significantly stress the 

Insurance Fund if they did occur. 

Farm Credit System Insurance Corporation 9 
 

Farm Credit System Insurance Corporation 

Selected Financial Statistics 

($ in millions) 2004 2003 2002 

Balance Sheet: 

Total Assets $ 2,164.0 $ 2,033.2 $ 1,838.8 

Total Liabilities 224.5 210.2 196.3 

Insurance Fund Balance 

Allocated Insurance 

Reserve Accounts 39.9 39.9 0 

Unallocated Insurance 

Fund Balance 1,899.3 1,783.1 1,642.5 

Operations: 

Revenues 133.1 196.5 123.0 

Operating Expenses 2.3 2.2 1.9 

Insurance Expense 14.7 13.7 13.6 

Net Income 116.1 180.6 107.5 

2,200 

($ in millions) 

Total Assets 

+6.4% 

2,000 

1,800 $1,838.8 

1,600 

$2,033.2 

$2,164.0 

+7.0% 

+10.6% 

2002 2003 2004 

10 Farm Credit System Insurance Corporation 
The Farm Credit System
 

Structure and Funding 

The System is owned by the rural customers it 

serves including farmers, ranchers and other 

agricultural producers. There are 96 Farm 

Credit System associations that lend directly to 

these borrowers/owners and provide a 

consistent source of agricultural and rural credit 

throughout the United States and the 

Commonwealth of Puerto Rico. Five Farm 

Credit System banks provide funding to the 

associations within their chartered territories. 

The banks receive their funding through the 

issuance of Federal Farm Credit Banks 

Consolidated Systemwide Debt Securities. 

These securities are issued by the Federal Farm 

Credit Banks Funding Corporation. The Funding 

Corporation distributes these securities in the 

capital markets via a Selling Group of selected 

investment and dealer banks to raise the funds 

needed by the System. 

Investor Protection 

The Corporation’s primary purpose, as defined 

by the Farm Credit Act of 1971, as amended 

(the Act), is to ensure the repayment of 

investors who purchase the bonds and notes 

issued by the System’s banks. Investors provide 

the funds the System lends to agriculture and 

rural America. 

Regulatory Oversight 

The Farm Credit Administration (FCA) is the 

safety and soundness regulator responsible for 

the examination, supervision and regulation of 

each Farm Credit institution. The FCA is an 

independent agency in the Executive branch of 

the United States Government. The FCA 

derives its broad authorities from the Act; these 

include examination and enforcement authorities 

similar to those of commercial bank regulators. 

The U.S. Senate Committee on Agriculture, 

Nutrition and Forestry and the U.S. House of 

Representatives Committee on Agriculture 

oversee the Corporation, the FCA and the 

System. 

Farm Credit System Insurance Corporation 11 
Selected financial statistics for the Farm Credit System on a combined basis are presented below: 

($ in billions) 2004 2003 2002 

Insured Debt Outstanding $100.0 $94.6 $89.6 

Farm Mortgage Loans 50.4 46.5 43.5 

Agricultural Production Loans 21.1 21.1 20.5 

Loans to Agricultural Cooperatives 8.3 9.0 8.9 

International Loans 2.6 2.8 3.1 

Loans to Rural Utilities 7.1 7.2 7.7 

Rural Home Loans 2.6 2.3 2.3 

Other Loans 4.3 4.3 4.1 

Net Income 2.991 1.83 1.77 

Nonperforming Loans as a 

Percentage of Total Loans 0.8% 1.3% 1.3% 

1. Includes a one time loss reversal of $1.167 billion, net of taxes. Excluding this amount, net income would have been 

$1.825 billion for 2004 

12 Farm Credit System Insurance Corporation 
 

Insured and Other Obligations 

The Corporation insures Systemwide and 

Consolidated bonds, notes, and other 

obligations issued by the System banks through 

the Federal Farm Credit Banks Funding 

Corporation. Last year, insured debt outstanding 

rose by more than 5.7 percent to $100 billion. 

From 2000 through 2004, insured debt 

outstanding grew at an average annual rate of 

approximately 6.8 percent. 

Insured Debt Outstanding 

($ in billions) +5.7% 

$100 

100 

90 

80 

70 

60 

$76.8 

+6.4% $81.1 

+5.6% $89.6 

+10.5% $94.6 

+5.6% 

2000 2001 2002 2003 2004 

Other obligations include remaining Farm Credit 

System Financial Assistance Corporation (FAC) 

bonds and eligible borrower stock. From 1988 

to 1992, the FAC provided assistance to the 

Farm Credit System, issuing $1.26 billion in debt 

to cover these costs. The Corporation by law 

must use the Insurance Fund to satisfy any FACissued bond defaults. The remaining $325 

million issue of FAC bonds outstanding are due 

in June of 2005. The Corporation estimates its 

obligation to the FAC at December 31, 2004, to 

be $224 million. (See Note 5 to the financial 

statements.) 

The Corporation also must ensure the
 

retirement of eligible System borrower stock at
 

par value. This stock was outstanding before
 

October 6, 1988. At yearend 2004, eligible
 

borrower stock outstanding at System
 

institutions totaled $23 million, down from 


$28 million at yearend 2003.
 

Other Obligations 

($ in millions) 

1000 

$829 $819 $811 

800 

600 

$353 $348 400 

200 

0 

2000 2001 2002 2003 2004 

FAC Bonds Eligible Borrower Stock 

Farm Credit System Insurance Corporation 13 
Farm Credit System Capital 

Today there are four Farm Credit Banks and one 

Agricultural Credit Bank (banks), which lend 

funds to 96 affiliated associations. These 

associations make loans to rural homeowners, 

farmers, ranchers and other agricultural entities. 

The Agricultural Credit Bank also lends to 

agricultural cooperatives and rural utilities. At 

yearend 2004, there was $100 billion in insured 

debt outstanding; and the Corporation had $2.2 

billion in assets, $0.22 billion in insurance 

liabilities, and an unallocated Insurance Fund 

balance of $1.9 billion. 

Over the past five years, the Farm Credit 

System associations have been building capital 

through net income earned and retained at the 

associations. The rise in capital at the 

associations reduces the credit exposure the 

banks have on loans to each of their affiliated 

associations. 

Since 2000, combined association capital has 

increased 53 percent from $9.26 billion to 

$14.17 billion at yearend 2004. 

Association Capital 

($ in billions) 

15 

12 

9 

6 

3 

0 

2000 2001 2002 2003 2004 

14 Farm Credit System Insurance Corporation 
 

Since 2000, combined bank capital plus the 

Insurance Fund has increased 25 percent from 

$7.5 billion to $9.38 billion at yearend 2004. 

The primary source of funds to repay 

Systemwide Debt Securities is the System’s 

borrowers, with each borrower required to 

have certain minimum levels of net worth and, 

in most cases, collateral posted in connection 

with loans made to the borrower. These 

borrowers make payments on their loans to the 

lending bank or association. Lending associations 

in turn make payments on their wholesale loans 

from their affiliated bank. Both the banks, which 

ultimately repay Systemwide Debt Securities, 

and the associations have substantial amounts of 

capital as further protection and sources of 

support for the repayment of the outstanding 

debt. If a bank participating in an issue of 

Systemwide Debt Securities were unable to 

repay its portion of that security, the Insurance 

Fund would be required to make that payment. 

In the event the assets of the Insurance Fund 

were exhausted, the provisions of joint and 

($ in billions) 

15 

12 

9 

6 

3 

0 

2000 2001 2002 2003 2004 

Bank Capital Plus the Insurance Fund 

Bank Capital Insurance Fund 

Farm Credit System Insurance Corporation 15 
several liability of all banks would be triggered, 

which means the financial resources of the other 

banks would be used to repay the defaulting 

bank’s portion of the debt issuance. 

As a percentage of outstanding debt, bank capital 

plus the Insurance Fund decreased from 9.8 

percent in 2000 to 9.4 percent in 2004. The 

reason for the decline is that the rate of growth 

in outstanding debt outpaced growth in bank 

capital and the Insurance Fund. 

Bank Capital Plus the Insurance Fund As a Percentage of Insured Debt 

12% 

9.8% 9.8% 10% 

9.2% 9.5% 9.4%

8% 

6% 

4% 

2000 2001 2002 2003 2004 

16 Farm Credit System Insurance Corporation 
Additional Elements of Strength 

The System has additional risk management 

tools that protect investors. The banks have 

entered into the Contractual Interbank 

Performance Agreement (CIPA). This agreement 

measures the financial condition and 

performance of each System bank using various 

ratios considering capital, asset quality, earnings, 

interest-rate risk, and liquidity. CIPA contains 

economic incentives whereby financial penalties 

are applied if the performance standard is not 

met. 

The banks and the Funding Corporation have 

also entered into a Market Access Agreement 

(MAA) that establishes conditions for each bank’s 

continued participation in the debt market. If a 

bank fails to meet agreed-upon performance 

measures, including capital and collateral ratios, 

their participation in future debt issues could be 

limited or curtailed. The criteria used under the 

MAA are the CIPA scores and two capital ratios. 

The System also has in place a Common 

Minimum Liquidity Standard. The standard 

requires each bank to maintain a minimum of 90 

days of liquidity on a continuous basis, assuming 

no access to the capital markets. All banks have 

exceeded this liquidity standard since June 30, 

2003. 

These measures, in conjunction with bank 

capital and the Insurance Fund, provide 

protection for investors who purchase 

Systemwide bonds and notes. 

Farm Credit System Insurance Corporation 17 
CORPORATE ASSETS 

TOTALED $2.2 BILLION 

AT YEAREND 2004. 

Insurance Fund Management 

Revenues and Expenses 

In 2004, net income declined 36 percent to 

$116 million, down from $181 million in 2003, 

due to reduced insurance premiums and lower 

earnings on investments. Premium rates on 

accrual loans were lowered from 12 basis points 

in 2003 to just under 5 basis points in 2004. 

Premiums were assessed at 10 basis points 

during January to June of 2004 and zero basis 

points from July to December. 

The Board reviews premium accrual rates 

semiannually. Five factors are considered: 

1. The level of the unallocated Insurance Fund 

relative to the secure base amount, 

2. Projected losses to the Insurance Fund, 

3. The condition of the System, 

4. The health of the agricultural economy, and 

5. Risk in the financial environment. 

Although the Corporation ensures repayment to 

investors who purchase System debt, by law it 

collects premiums based on the loans made by 

System banks and associations. Premium rates 

may vary by type of loan. (See Note 4 to the 

Corporation’s financial statements.) 

18 Farm Credit System Insurance Corporation 
 

Interest income dropped 4.8 percent in 2004, 

down from $91 million in 2003 to $87 million, 

primarily due to low market interest rates. The 

average portfolio yield was 4.22 percent, down 

from 4.93 percent at yearend 2003. 

Type of Loan	 Premium Range 

(in basis points) 

Accrual 

Nonaccrual 

Federal Government-guaranteed 

accrual 

State government-guaranteed 

accrual 

Government-sponsored 

enterprise guaranteed accrual 

($ in millions)
 

120
 

100
 

80
 

60
 

40
 

0
 

0 – 15 

0 – 25 

0 – 1.5 

0 – 3 

0 – 15 

Insurance expenses grew to $14.7 million from 

$13.7 million in 2003. The increase was due to 

the annual provision for the insurance obligation 

to repay the FAC for assistance-related bonds 

that will mature in 2005. (See Note 5 to the 

financial statements.) 

The Corporation’s operating costs as a percent 

of total assets dropped half a basis point, falling 

from 11 basis points on assets to 10.5 basis 

points on assets for 2003 and 2004, 

respectively. Operating costs for 2004 were 

slightly under the three-year average, from 2002 

to 2004, of 10.6 basis points. Fixed costs for 

staff, travel, rent, and miscellaneous expenses 

were $1.6 million of the $2.3 million total for 

the year. The remaining expenses of $0.7 

million were for contract services. 

Corporate Revenues 

2000 2001 2002 2003 2004 

$93 $94 $93 

$1 $0 

$26 

$91 

$105 

$87 

$47 

Interest Premiums 

Farm Credit System Insurance Corporation 19 
Growth in the Insurance Fund 

and the Secure Base Amount 

In 2004, the total Insurance Fund and total 

assets grew 6.4 percent to $1.9 billion and $2.2 

billion, respectively. 

Over the last five years, the Corporation’s total 

assets have grown at an annual rate of 6.6 

percent. During this time period, the strongest 

one-year growth occurred in 2003 when total 

assets grew 10.6 percent. 

At yearend, the unallocated Insurance Fund was 

slightly below the secure base amount (SBA). 

The Insurance Fund represents the 

Corporation’s equity, the difference between 

total assets and total liabilities, including insurance 

obligations. The unallocated Insurance Fund is 

the portion of the Fund for which no specific use 

has been identified or designated by the 

Corporation. The SBA established by the Act is 

2 percent of all outstanding insured obligations 

or another percentage that the Board 

determines is actuarially sound. 

The unallocated Insurance Fund fell short of the 

SBA in 2004 due to higher growth in the month 

of December. Insured debt for the first eight 

months of 2004 grew at 4.1 percent (annualized 

basis), which was lower than the forecasted 

growth estimate of 5 to 9 percent and also 

below the five-year average growth rate of 

approximately 7 percent. As a result, at the 

September premium review, the Board 

decreased the premium accrual rate from 

10 basis points on accrual loans during the first 

six months of 2004 to 0 basis points for the 

Percentage Growth in Total Assets 

12.0% 

10.6% 

8.0% 7.1% 

4.0% 

0.0% 

6.4% 

2002 2003 2004 

20 Farm Credit System Insurance Corporation 
 

remainder of the year. The rates for other loan 

types remained unchanged. The overall growth 

rate of insured debt and percentage increase in 

the Insurance Fund—both unallocated and 

allocated—for 2004 were 5.7 percent and 6.4 

percent, respectively. 

For the first time, in 2003 the Corporation 

closed the year above the SBA. As a result, the 

Corporation was required by statute to transfer 

$39.9 million to the Allocated Insurance Reserve 

Accounts (AIRAs). By statute, the Corporation is 

required to use AIRAs first for Insurance Fund 

claim payments. The total Insurance Fund, 

including both the unallocated and allocated 

amounts, exceeded the SBA by $5 million and 

$14 million for yearend 2003 and 2004, 

respectively. 

Allocated Insurance Reserve 

Accounts 

The unallocated Insurance Fund finished the 

year below the SBA; therefore, no excess funds 

were transferred in 2004 to the AIRA accounts 

at yearend. By statute, at any yearend, if the 

unallocated Insurance Fund is over the SBA, the 

Corporation must recalculate the SBA using an 

average daily debt balance method. This amount 

is then subtracted from the yearend unallocated 

Insurance Fund balance, less projected insurance 

and operating expenses for the coming year, to 

determine the excess amount for transfer to the 

AIRAs. 

Separate AIRA accounts have been established 

for each bank and a special account for the 

holders of FAC stock. The first 10 percent of 

calculated excess funds are deposited to the FAC 

Insurance Fund Relative to 2% Secure Base Amount By Quarter 

2.05% 

2.01% 

2.00% 

1.97% 

1.95% 

1.90% 

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 

Unallocated Unallocated and Allocated 

Farm Credit System Insurance Corporation 21 
 

stockholders’ AIRA. The remaining 90 percent is 

prorated into the banks’ AIRAs. The earliest 

possible payout date is April 2006; however, any 

future AIRA payments are at the discretion of 

the Corporation’s Board. 

Investments 

Investments increased 10.5 percent during the 

year to $2.1 billion at December 31, 2004. 

Growth in Investment Portfolio 

($ in billions) 

0.0 

1.0 

2.0 

3.0 

$1.6 $1.7 $1.8 $1.9 $2.1 

2000 2001 2002 2003 2004 

The Corporation’s investment objective is to 

maximize returns consistent with liquidity needs 

and to minimize exposure to loss of principal. 

Funds are invested in U.S. Treasury securities in 

accordance with the Act and the Corporation’s 

Investment Policy. During 2004, the investment 

Farm Credit System Insurance Corporation 

yield dropped due to the lower interest rate 

environment that prevailed throughout the year. 

The average portfolio yield was 4.22 percent, 

down from 4.93 percent the prior year. 

The Corporation’s investment strategy is to 

purchase a ladder of maturities and hold them to 

maturity. The portfolio is comprised of a liquidity 

and an investment pool. The liquidity pool 

maintains a minimum of 20 percent of the 

portfolio in short-term securities, while the 

balance is invested in longer-term maturities of 

up to 10 years. The weighted average portfolio 

maturity at yearend was 2.63 years. The 

balances and maturities of the liquidity and 

investment pools at December 31, 2004, are 

illustrated in the following chart. 

Investment Portfolio Maturity Groups 

($ in millions) 

4 to 5 

Years 

30% 

$419 

20% 

$199 

10% 

$738 

35% 

$107 

5% 

3 to 4 

Years 

2 to 3 

Years 

5 to 10 

Years 

$626 

Investment Pool Liquidity Pool ( < 2 years) 

22 
Risk Management
 

The Corporation actively monitors and manages 

insurance risk. This program focuses on 

minimizing the Fund’s exposure to potential 

losses through early detection. Corporation staff 

regularly monitor key ratios and financial trends; 

weaker System institutions undergo special 

examination procedures as needed. 

The Corporation monitors trends in the 

System’s structure and activities, including 

consolidations and new forms of financing. For 

example, in 2004, staff analyzed trends in 

System bank investments including those held in 

other Government Sponsored Enterprises. Staff 

also analyzed the effect on insurance risk from 

the proposed termination of one of the largest 

associations. This transaction ultimately was 

withdrawn. 

The Corporation also assesses risk to the 

Insurance Fund through: 

• Review of corporate actions approved by 

FCA for System institutions, 

• Participation as a nonvoting member on 

FCA’s Regulatory Enforcement Committee, 

• Monitoring legislative, judicial, regulatory, 

and economic trends that could affect the 

agricultural or financial services industries, and 

• Using analytical models. 

The Corporation renewed its working 

relationship with Mercer Oliver Wyman in 2004 

to further the analysis conducted in 2003. Efforts 

focused on the development of a model to 

dynamically evaluate the adequacy of the 

Insurance Fund over a longer time period. As a 

result of this study, they concluded that the most 

significant factors affecting the Corporation’s 

insurance risk exposure were: 

1. System balance sheet growth, 

2. Risk profiles of the System’s insured banks 

and associations, and 

3. Capital levels at the five insured System 

banks. 

Financial Assistance and 

Receivership 

The Insurance Corporation is authorized to 

provide assistance to System institutions to 

prevent default, restore normal operations, or 

facilitate a merger or consolidation. At present, 

no assistance agreements are outstanding. When 

considering providing financial assistance, the 

statute requires the Corporation to ensure that 

it is the “least costly” method for resolving a 

troubled System institution. Financial assistance 

cannot be provided if the cost of liquidation is 

determined to be lower. 

There are no receiverships or conservatorships 

in the Farm Credit System. When appointed by 

the FCA, the Corporation has the statutory 

Farm Credit System Insurance Corporation 23 
responsibility to serve as receiver or conservator 

for System institutions. To fulfill this role and 

continue to operate with a small core staff, the 

Corporation uses contractors on an as-needed 

basis. These contractors provide knowledgeable 

and readily available resources, while allowing 

the Corporation to contain costs during periods 

of limited or no activity. 

Corporation staff maintains ongoing contact with 

the receivership staff of the Federal Deposit 

Insurance Corporation and the National Credit 

Union Administration to exchange information 

and stay abreast of best practices in receivership 

management. Periodically, the Corporation 

conducts readiness exercises to maintain its 

ability to serve in this capacity should the need 

arise. 

Regulations and Policy 

In June, we proposed a regulation that will 

provide a framework for exercising our statutory 

authority to regulate the payment of golden 

parachutes at troubled Farm Credit System 

institutions. The proposed regulation places 

limits on certain golden parachute payments to 

employees and agents who terminate their 

relationship with a troubled institution. It 

includes several exceptions to the limitations, 

including: payments under ERISA qualified plans, 

nonqualified “bona fide” deferred or 

supplemental compensation plans, payments 

made by reason of death or disability, payments 

to a “white knight,” payments required under 

state and Federal law, and payments made upon 

a change of control. The proposed regulation 

also covers indemnity payments. 

In August, we issued a joint letter with the Farm 

Credit Administration that establishes a limit on 

our special receivership and conservatorship 

powers. We agreed that the FCSIC, acting as 

receiver or conservator, would not exercise its 

authority to reclaim, recover or recharacterize 

as property of an institution in conservatorship 

or receivership any financial assets transferred in 

connection with a participation or securitization, 

as long as the transfer meets the necessary 

conditions for a “true sale” under generally 

accepted accounting principles. FCA has issued a 

proposed rule that would codify the position 

taken in the joint letter. 

24 Farm Credit System Insurance Corporation 
Strategic Goals and Performance Measures
 

Three broad goals with performance measures 

are used to evaluate the effectiveness of the 

Corporation’s operations. 

1. Manage the Insurance Fund to 

maintain the 2 percent secure base 

amount to protect investors 

The Corporation assesses the effectiveness of its 

performance by: 

• Reviewing premium rates semiannually and 

making necessary adjustments, and 

• Comparing the investment portfolio’s 

average yield to peer investment funds with 

similar quality and maturity. 

In 2004, the total Insurance Fund maintained the 

2 percent secure base amount. Premium rates 

were adjusted to a blended rate of 5 basis points 

for the year due to moderating growth. 

2. Detect, evaluate, and manage risks to 

the Insurance Fund to protect it from 

losses 

Program effectiveness is measured by: 

• Evaluating how promptly emerging risks are 

detected, 

• Determining the accuracy of the evaluation 

of risk, and 

• Appraising the extent of loss minimization, if 

applicable. 

The Corporation assesses the need for any 

insurance loss allowance quarterly. Also, the 

Corporation proactively screens the financials of 

all System institutions to detect risk and identify 

institutions that may require special 

examinations. As part of a program to evaluate 

risks, the Corporation is testing a model for 

dynamically evaluating the adequacy of the 

current Insurance Fund under various scenarios. 

3. Maintain the capability to manage 

receiverships and/or conservatorships 

The standards used to measure the effectiveness 

of receivership operations are: 

• Completing 90 percent of initial claims 

processed within a specified period, which 

will depend on the size and complexity of 

the failed institution, 

• Keeping operating costs comparable to 

other insurers, as a percentage of total 

assets, and 

• Keeping asset recovery values comparable 

to other insurers, as a percentage of asset 

values. 

No receiverships or conservatorships existed in 

the Farm Credit System in 2004. Corporation 

personnel are trained periodically to maintain 

readiness, ensuring proficiency in the 

performance of receivership responsibilities. 

Farm Credit System Insurance Corporation 25 
The President’s Management 

Agenda 

The Corporation is one of 35 agencies 

designated a significant Government entity for 

reporting purposes due to the size of the 

Insurance Fund. As a result, the Corporation is 

required to submit data for the Financial Report 

of the United States (FR) using the 

Governmentwide Financial Report System 

(GFRS) and the Federal Agencies’ Centralized 

Trial-Balance System (FACTS I). 

In 2001, President Bush established a policy for 

improving the management and performance of 

the Federal Government. “The President’s 

Management Agenda” focuses on five 

governmentwide goals to encourage improvements 

in specified areas of operations. The Corporation’s 

accomplishments in those five areas are: 

1. Strategic Management of 

Human Capital 

• Managed an organizational transition that 

filled three corporate officer positions while 

continuing to operate with a small, 

diversified staff focusing on core 

competencies. 

• Used the commercial marketplace to keep 

operating costs low and contracted for 

specialized expertise when needed. 

• Decreased compensation costs through 

staff transition and realignment. 

2. Competitive Sourcing 

• Continued the extensive use of 

competitively sourced contractor support to 

perform administrative functions including 

personnel, information systems, and 

financial systems support. 

• Selected a new contractor for financial 

management services. The selected 

contractor offers a fully compliant system 

that is expected to meet the financial 

services needs for the Corporation. The 

new vendor’s fee for system support and 

accounting services for 2005 will be 

approximately 20 percent below the 

previous contractor’s costs in 2004. 

26 Farm Credit System Insurance Corporation 
3. Improved Financial Performance 

• Managed an investment portfolio with an 

average yield of 4.22 percent, which 

compares favorably with the 2.5 percent 

return from similar private sector Treasury 

investment funds with durations of 10 years 

or less. 

• Actual 2004 expenses were under budget. 

4. Expanded Electronic Government 

• Implemented the eGovernment Initiative 

for electronic travel services (eTS) ahead of 

schedule. Conversion to eTS is required by 

September 30, 2006 for all Federal 

agencies. The Corporation began using eTS 

January 1, 2005. 

5. Budget and Performance Integration 

• Provided timely and accurate financial 

information on a quarterly basis to assist 

senior management and the Board in 

making informed decisions regarding 

strategic programs and key operations. 

• Evaluated programs on an ongoing basis to 

determine efficiency, and met new and 

growing demands without increasing 

permanent staff levels. 

Farm Credit System Insurance Corporation 27 
28 Financial Information 
Farm Credit System Insurance Corporation 29 
Financial Statements 

Farm Credit System Insurance Corporation 

Statements of Financial Condition 

as of December 31, 2004 and 2003 

($ in thousands) 

ASSETS 

Cash and Cash Equivalents 

Investments in U.S. Treasury 

Obligations (Note 3) 

Accrued Interest Receivable 

Premiums Receivable (Note 4) 

Other Receivables 

2004 

$ 2,279 

2,087,702 

27,505 

46,520 

0 

$ 

2003 

186 

1,899,095 

28,807 

105,079 

4 

TOTAL ASSETS $ 2,164,006 $ 2,033,171 

LIABILITIES AND INSURANCE FUND 

Accounts Payable and Accrued Expenses 

(Note 7) 

Liability for Estimated 

Insurance Obligations (Note 5) 

TOTAL LIABILITIES 

Farm Credit Insurance Fund 

Allocated Insurance Reserve Accounts 

Unallocated Insurance Fund Balance 

$ 371 

224,489 

224,860 

39,888 

1,899,258 

$ 361 

209,802 

210,163 

39,888 

1,783,120 

TOTAL INSURANCE FUND 1,939,146 1,823,008 

TOTAL LIABILITIES AND INSURANCE FUND $ 2,164,006 $ 2,033,171 

The accompanying notes are an integral part of these financial statements. 

30 Financial Information 
Statements of Income and Expenses and Changes in Insurance 

Fund for the Years Ended December 31, 2004 and 2003 

($ in thousands) 

2004 2003 

INCOME 

Premiums (Note 4) $ 46,520 $ 105,079 

Interest Income 86,567 91,405 

Other Income 0 20 

TOTAL INCOME $ 133,087 $ 196,504 

EXPENSES 

Administrative Operating Expenses 

(Note 7) $ 2,263 $ 2,218 

Provision for Estimated Insurance 

Obligations (Note 5) 14,686 13,725 

TOTAL EXPENSES $ 16,949 $ 15,943 

NET INCOME $ 116,138 $ 180,561 

Farm Credit Insurance Fund 

Beginning of Year 1,823,008 1,642,447 

Farm Credit Insurance Fund 

End of Year $ 1,939,146 $ 1,823,008 

The accompanying notes are an integral part of these financial statements. 

Farm Credit System Insurance Corporation 31 
Financial Statements 

Farm Credit System Insurance Corporation 

Statements of Cash Flows 

for the Years Ended December 31, 2004 and 2003 

($ in thousands) 

2004 2003 

CASH FLOWS FROM 

OPERATING ACTIVITIES 

Net Income 

Adjustments to Reconcile Net Income 

to Net Cash Provided by Operating Activities: 

Decrease (Increase) in Premium Receivable 

Decrease (Increase) in Accrued Interest Receivable 

Net Amortization and Accretion of Investments 

Decrease (Increase) in Other Receivables 

Increase in Accounts Payable 

and Accrued Expenses 

Increase in Liability for Estimated 

Insurance Obligations 

$ 116,138 

58,559 

1,302 

21,443 

4 

11 

14,686 

$ 180,561 

(78,724) 

(165) 

25,200 

(4) 

100 

13,725 

TOTAL NET CASH PROVIDED BY 

OPERATING ACTIVITIES $ 212,143 $ 140,693 

CASH FLOWS FROM INVESTING ACTIVITIES 

Payments for Purchase of 

U.S. Treasury Obligations $ (496,266) $ ( 475,903) 

Proceeds from Maturity of 

U.S. Treasury Obligations 286,216 254,289 

TOTAL NET CASH USED IN 

INVESTING ACTIVITIES (210,050) (221,614) 

Net Change in Cash and Cash Equivalents 2,093 (80,921) 

CASH AND CASH EQUIVALENTS 

BEGINNING OF YEAR 186 81,107 

CASH AND CASH EQUIVALENTS 

END OF YEAR $ 2,279 $ 186 

The accompanying notes are an integral part of these financial statements. 

32 Financial Information 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

Note 1 — 


Insurance Fund: Statutory Framework
 

The Agricultural Credit Act of 1987 (1987 Act) 

established the Farm Credit System Insurance 

Corporation (Corporation) for the purpose of 

ensuring the timely payment of principal and 

interest on notes, bonds, debentures, and other 

obligations issued under subsection (c) or (d) of 

section 4.2 of the Farm Credit Act of 1971, as 

amended (Act), (insured obligations). Each bank 

in the Farm Credit System (System) participating 

in insured obligations is an insured System bank. 

At December 31, 2004, there were five insured 

System banks and 96 direct lender associations. 

The Corporation is managed by a board of 

directors consisting of the same individuals as the 

Farm Credit Administration (FCA) Board except 

that the Chairman of the FCA Board may not 

serve as the Chairman of the Corporation’s 

Board of Directors. 

The Corporation must spend the amounts 

necessary to: 

1.Ensure the timely payment of interest and 

principal on insured obligations in the event 

of default by an insured System bank; 

2.Satisfy, pursuant to section 6.26(d)(3) of the 

Act, defaults by System banks on obligations 

related to the issuance of U.S. Treasuryguaranteed bonds by the Farm Credit 

System Financial Assistance Corporation 

(FAC) (FAC bonds) (see Note 5); and 

3.Ensure the retirement of eligible borrower 

stock at par value. 

The Corporation, in its sole discretion, is 

authorized to expend amounts to provide 

financial assistance to certain insured institutions. 

The balances outstanding at December 31, 

2004, for each of the components of the 

Corporation’s insurance responsibilities were 

$100 billion of insured obligations, $325 million 

of FAC bonds (of which $15 million in 

repayments have been provided for), and $23 

million of eligible borrower stock. 

If the Corporation does not have sufficient funds 

to ensure payment on insured obligations, 

System banks will be required to make 

payments under joint and several liability, as 

required by section 4.4 (2) of the Act. 

Under section 5.63 of the Act, the Corporation 

is exempt from all Federal, state, and local taxes 

with the exception of real property taxes. 

Farm Credit System Insurance Corporation 33 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

Note 2 — 


Summary of Significant Accounting Policies
 

Accounting Principles and Reporting 

Practices 

The accounting and reporting policies of the 

Corporation conform to accounting principles 

generally accepted in the United States of 

America (GAAP) and, as such, the financial 

statements have been prepared using the 

accrual basis of accounting. The preparation of 

financial statements in conformity with GAAP 

requires management to make estimates and 

assumptions that affect the reported amount of 

assets and liabilities and disclosure of contingent 

assets and liabilities at the date of the financial 

statements and the reported amount of 

revenues and expenses during the reporting 

period. Actual results could differ from those 

estimates. 

Cash and Cash Equivalents 

Cash and cash equivalents include investments in 

U.S. Treasury obligations with original maturities 

of 90 days or less. At December 31, 2004, the 

Corporation held $2.23 million in overnight 

Treasury Certificates maturing on January 3, 

2005, with an investment rate of 1.65 percent. 

Investments in U.S. Treasury Obligations 

Section 5.62 of the Act requires that funds of 

the Corporation, not otherwise employed, shall 

be invested in obligations of the United States or 

in obligations guaranteed as to principal and 

interest by the United States. The Corporation 

has classified its investments as held to maturity 

in accordance with the Statement of Financial 

Accounting Standard (SFAS) No. 115 and carries 

them at amortized cost. Amortization of 

premium and accretion of discount on 

investments has been computed under the 

interest method since 2002. Fair value of 

investments is estimated based on quoted 

market prices for those of similar instruments. 

Liability for Estimated Insurance Obligations 

The liability for estimated insurance obligations is 

the present value of estimated probable 

insurance payments to be made in the future 

based on the Corporation’s analysis of economic 

conditions of insured System banks. (Also see 

Note 5.) 

The insured System banks’ primary lending 

markets are borrowers engaged in farming, 

ranching, and producing or harvesting of aquatic 

products, and their cooperatives. Financial 

weaknesses in these market segments and the 

effect of general market conditions on the 

System’s borrowers could adversely affect the 

banks’ financial condition and profitability. Insured 

System banks also face risks from changing 

interest rate environments and the need to 

maintain ongoing access to financial markets. 

Adverse changes in the financial condition and 

profitability of insured System banks resulting 

34 Financial Information 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

from increased levels of credit, financial, or other 

risks could occur in the future which would have 

a material effect on the liability for estimated 

insurance obligations. 

Premiums 

Annual premiums are recorded as revenue 

during the period on which the premiums are 

based. All premiums are due on or before 

January 31 of the year subsequent to the year in 

which they are earned. 

Retirement Plan 

All permanent Corporation employees are 

covered by the Civil Service Retirement System 

(CSRS) or the Federal Employees Retirement 

System (FERS). The Corporation’s contribution 

during 2004 to the CSRS plan was 8.5 percent 

of base pay. For those employees covered by 

FERS, the Corporation’s contribution was 10.7 

percent of base pay. In addition, for FERScovered employees, the Corporation 

automatically contributes 1 percent of base pay 

to the employee’s Thrift Savings Plan account, 

matches the first 3 percent contributed by the 

employee, and matches one-half of the next 2 

percent contributed by the employee. 

Retirement plan expenses amounted to 

$145,573 in 2004 and $141,245 in 2003. 

Farm Credit System Insurance Corporation 35 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

Note 3 — 

Investments 

At December 31, 2004 and 2003, investments in 

U.S. Treasury obligations consisted of the following: 

($ in thousands) 

December 31, 2004 

Amortized 

Cost 

Gross 

Unrealized 

Gains 

Gross 

Unrealized 

Losses 

Estimated 

Market 

Value 

U.S. Treasury Notes $2,087,702 $34,626 $(9,955) $2,112,373 

December 31, 2003 

U.S. Treasury Notes $1,899,095 $81,525 $(2,889) $1,977,731 

The amortized cost and estimated market value of U.S. Treasury obligations 

at December 31, 2004, by contractual maturity, are shown below. 

Amortized Estimated 

($ in thousands) Cost Market Value 

Due in one year or less $ 377,356 $ 380,847 

Due after one year through five years 1,602,963 1,624,771 

Due after five years through 10 years 107,383 106,755 

$ 2,087,702 $ 2,112,373 

36 Financial Information 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

Note 4—Premiums, the Secure Base Amount and 

Excess Insurance Fund Balances 

Each System bank which issues insured rate on accrual loans to zero basis points 

obligations under subsection (c) or (d) of section beginning July 1, 2004, and left other rates 

4.2 of the Act is an insured System bank and unchanged. The Board deferred setting 

may be required to pay premiums to the premium rates for 2005 until January 13, 2005, 

Corporation. when the Board set the rate for accrual loans at 

4 basis points. The rates for non-accrual loans 

The Act establishes the range of insurance remained at 25 basis points and for Governmentpremium rates that the Corporation’s Board guaranteed loans zero basis points. The Board 

may assess for any calendar year based on four did not exercise its discretionary authority to 

classes of an insured bank’s loan assets. The grant a lower rate for GSE-guaranteed loans. 

asset classes and the range that may be assessed 

for each are: (1) average annual accrual loans The Act sets a base amount for the Insurance 

outstanding (other than the guaranteed portions Fund to achieve. The statutory secure base 

of Government-guaranteed accrual loans) for amount is equivalent to 2.0 percent of the 

the year may be from zero to 0.0015; (2) aggregate outstanding insured obligations of all 

average annual nonaccrual loans outstanding insured System banks (adjusted downward by a 

may be from zero to 0.0025; (3) average annual percentage of the guaranteed portions of 

portions of Federal Government-guaranteed principal outstanding on Government-guaranteed 

accrual loans may be from zero to 0.00015; loans in accrual status) or such other percentage 

and (4) average annual portions of state as determined by the Corporation, in its sole 

government-guaranteed accrual loans may be discretion, to be actuarially sound. When the 

from zero to 0.0003. amount of the Insurance Fund exceeds the 

secure base amount, the Corporation is 

Insurance premium rates are reviewed required to reduce the premiums, but it still 

semiannually in March and September. For must ensure that reduced premiums are 

2004, premium rates were set at the Board’s sufficient to maintain the level of the Insurance 

September 2003 meeting at 10 basis points for Fund at the secure base amount. 

accrual loans, 25 basis points for non-accrual 

loans and zero for Federal and state government The unallocated Insurance Fund was below the 

guaranteed loans. Due to moderate growth in secure base amount during most of 2004. At 

insured debt outstanding, in September 2004, December 31, 2004, the unallocated Insurance 

the Board decreased the insurance premium Fund was 1.97 percent of adjusted insured 

Farm Credit System Insurance Corporation 37 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

obligations outstanding. A 1996 amendment to 

the Act requires the Corporation to establish 

reserve accounts for each System bank and an 

account for the stockholders of the FAC. If at the 

end of any calendar year, the Insurance Fund is 

at the secure base amount, the Corporation is 

to segregate any excess balances into these 

Allocated Insurance Reserve Accounts (AIRAs). 

In 1999, the Corporation’s Board adopted a 

Policy Statement on the secure base amount 

and AIRAs, which provides guidelines for 

implementing this statutory authority. 

At December 31, 2003, because the Insurance 

Fund was at the 2.0 percent secure base 

amount, the Corporation determined that there 

were balances to allocate. To determine the 

amount to allocate, the statute requires the 

Corporation to recalculate the secure base 

amount on an average daily balance basis and 

compare that with the yearend Insurance Fund 

balance adjusted downward by the 

Corporation’s estimated expenses for the 

following year. 

The amount of Insurance Fund balance to be 

allocated to the Allocated Insurance Reserve 

Accounts was determined to be $39.89 million 

as follows: 

FAC Stockholders (10%) $ 3.99 million 

Farm Credit 

System Banks (90%) $35.90 million 

$39.89 million 

The AIRA balances are recorded as part of the 

Insurance Fund until approved for payment by 

the Corporation’s Board. The statute provides 

that amounts in the AIRAs may not be paid prior 

to April 2006 (eight years after the Insurance 

Fund first attained the secure base amount). The 

Corporation’s Board of Directors has discretion 

to adopt a later payment cycle. AIRA balances 

may be used to absorb any insurance losses and 

claims. 

Furthermore, the Board of Directors has 

discretion to limit or restrict the AIRA payments. 

In accordance with the Corporation’s policy 

statement, any AIRA balances do not count in 

measuring the Insurance Fund’s compliance with 

the secure base amount. Consequently, the 

unallocated Insurance Fund balance was reduced 

to 1.96 percent of adjusted insured obligations 

at December 31, 2003. 

38 Financial Information 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

Note 5 — Financial Assistance to System Banks 

and Estimated Insurance Obligations 

The 1987 Act required that the FCA charter the 

Farm Credit System Assistance Board (Assistance 

Board) and the FAC (see Note 1) to carry out a 

program of financial assistance to the Farm 

Credit System. In order to raise funds to 

provide this assistance, the FAC had the 

authority to issue debt obligations with a 

maturity of 15 years. During 1988 to 1992, the 

FAC issued $1.261 billion in bonds. These funds 

were used to provide assistance to certain 

System banks experiencing financial difficulty and 

for other statutorially authorized purposes. From 

1998 through 2004, $936 million in FAC bonds 

have been retired, leaving one remaining issue 

of $325 million outstanding, which matures in 

June 2005. Repayment of the remaining FAC 

bond in accordance with the Act is being 

provided for by the FAC Trust Fund (Trust Fund), 

FAC Assistance Fund and the Insurance 

Corporation. (See Estimated Insurance Obligation 

on the following page.) 

Financial Assistance to Certain 

System Banks 

During the period from 1988 to 1992, 

assistance was provided to four open banks 

through the purchase by the FAC of $419 

million in preferred stock issued by these 

institutions. Similar assistance totaling $374 

million was provided to the Federal Land Bank 

of Jackson in Receivership to facilitate its closing 

and liquidation. Subject to Assistance Board 

approval, these assistance funds were used by 

the FAC to purchase preferred stock issued by 

an institution experiencing financial difficulty. 

Prior to the maturity of the related 15-year debt 

obligations, each institution can redeem its 

preferred stock, pursuant to Section 6.26 of the 

Act, so as to allow the FAC to pay the principal 

of the maturing obligation. While an institution 

that issues preferred stock to the FAC is 

primarily responsible for providing funds for 

payment of the FAC bonds (through redemption 

of the preferred stock), the institution may be 

prohibited from redeeming, or may elect not to 

redeem, the preferred stock pursuant to section 

6.26 of the Act. If this occurs, then the FAC 

must use funds from its Trust Fund, to the extent 

available, to retire the debt. The Trust Fund 

represents the funds received from System 

institutions’ purchase of stock in the FAC. The 

Trust Fund totaled approximately $79 million 

and $74 million at December 31, 2004 and 

2003, respectively. The Trust Fund is composed 

of zero coupon Treasury securities which 

mature in 2005 and have a par value of $79 

million. The FAC also must use funds from its 

Assistance Fund that totaled $15 million at 

December 31, 2004, to retire the remaining 

FAC bond. If the FAC Trust Fund and Assistance 

Fund balances are not sufficient to retire the FAC 

debt, then the Corporation must purchase 

preferred stock from the FAC to provide funds 

to retire such debt. 

Farm Credit System Insurance Corporation 39 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

If the Corporation does not have sufficient 

funds, the U.S. Treasury must retire the debt. If 

this should occur, the Corporation is required to 

repay the U.S. Treasury as funds become 

available from the payment of premiums. At 

December 31, 2004, the only preferred stock 

held by the FAC was associated with the 

assistance provided to the Federal Land Bank of 

Jackson. 

On May 20, 1988, the FCA placed the Federal 

Land Bank of Jackson and the Federal Land Bank 

Association of Jackson in Receivership 

(collectively the FLBJR) and appointed a receiver 

to liquidate their assets. As of April 27, 1990, 

the FCA, the receiver of the FLBJR, the FAC, 

the System banks, the Assistance Board, and the 

Corporation entered into an agreement which 

called for the FAC to issue 15-year U.S. 

Treasury-guaranteed bonds to purchase 

preferred stock in the FLBJR. Upon the maturity 

in 2005 of the FAC bonds used to purchase 

preferred stock in the FLBJR, the Corporation 

will provide funds to repay the principal of these 

debt obligations, to the extent that the Trust 

Fund is not sufficient for such purpose. In 

January 1995, the FLBJR was terminated by the 

FCA and the receiver was discharged after 

transferring the remaining receivership assets to 

the FAC. 

Estimated Insurance Obligation 

The Corporation estimated the present value of 

its liability to provide funds for payment of the 

$231 million non-callable 15-year maturing debt 

to be approximately $224 million and $210 

million at December 31, 2004 and 2003, 

respectively. This liability is reflected in the 

accompanying statements of financial condition. 

The present value of this obligation is based on a 

discount rate of 7 percent to maturity, which 

was established at the time this liability was 

originally recorded. In accordance with SFAS 

No. 107, the fair value of this liability has been 

estimated by management using discount rates 

based upon U.S. Treasury securities of similar 

durations (2.4 percent for 2004 and 1.4 percent 

for 2003). The fair value was approximately 

$229 million and $227 million as of December 

31, 2004 and 2003, respectively. Provisions for 

changes in the Corporation’s liability are 

reflected in the statements of income and 

expenses in the amount of $14.7 million and 

$13.7 million for the years ended December 

31, 2004 and 2003, respectively. The 

Corporation cannot predict the effects of future 

events upon System operations and upon the 

amount of the Trust Fund that will ultimately be 

available to reduce the Corporation’s liability for 

FLBJR-related FAC bonds. 

40 Financial Information 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

Other Financial Assistance Provided The Corporation actively monitors the 

to System Institutions creditworthiness and financial position of the 

insured System banks. Other than obligations 

From 1988 to 1998, the U.S. Treasury paid that have occurred as a result of resolving the 

interest on certain FAC bonds totaling $440 FLBJR, as described above, management is not 

million. System banks must repay Treasury for aware of any events or circumstances at this 

this obligation following the final maturity in June time which would require a liability for estimated 

2005 of the last FAC bond issue outstanding. insurance obligations to be recorded. 

The 1992 Act also expanded the potential uses 

of the Trust Fund to satisfy System institution 

defaults on the principal and interest of other 

FAC obligations and required System banks to 

make annual annuity payments to the FAC to 

provide funds for the retirement of the Treasurypaid interest at maturity. The Corporation is also 

required to satisfy defaults on the annual 

payments to the FAC to permit the repayment 

of Treasury-paid interest. During 1992 through 

2004, all System banks made their annual 

annuity payments as scheduled. The 

Corporation is not aware of any events or 

circumstances which will prevent System banks 

from meeting their remaining FAC obligations. 

Farm Credit System Insurance Corporation 41 
Notes to the Financial Statements 

Farm Credit System Insurance Corporation — as of December 31, 2004 and December 31, 2003 

Note 6 — 

Operating Lease 

On October 21, 2003, the Corporation 

executed a new six-year lease with the Farm 

Credit System Building Association for office 

space. The terms of the lease provide for an 

annual minimum base rent for office space for 

the remaining term of $118,938 for 2004, 

$120,019 for 2005, $121,100 for 2006, 

$122,181 for 2007, $123,262 for 2008 and 

$124,344 for 2009. The Corporation recorded 

lease expense (including operating cost 

assessments) of $120,795 and $111,717 for 

2004 and 2003, respectively. 

Note 7 — 

Related Parties 

The Corporation purchases services from the 

FCA under an Interagency Agreement. These 

include examination and administrative support 

services. The Corporation had payables due to 

the FCA of $1,687 at December 31, 2004, and 

$39,351 at December 31, 2003. The 

Corporation purchased services for 2004 which 

totaled $70,332 compared with $74,506 for 

2003. 

The Corporation provided assistance to the 

FCA under a related Interagency Agreement, 

recognizing revenue in 2003 of $19,765. At 

December 31, 2004 and 2003, the Corporation 

had receivables from the FCA of zero and 

$4,515, respectively. 

42 Financial Information 
Income and Expenses
 

Farm Credit System Insurance Corporation By Year 

($ in thousands) 

Income Expenses Net Income 

Premiums Investment Provision for Administrative 

Insurance and Operating 

Obligations Expenses 

Changes in 

Insurance Fund 

1989 $ 65,000 $ 16,041 0 $ 118 $ 80,923 

1990 $ 72,000 $ 25,705 $ 140,000 $ 243 ($ 42,538)

1991 $ 77,463 $ 31,483 $ 15,555 $ 953 $ 92,438 

1992 $ 73,902 $ 37,198 $ 12,062 $ 1,200 $ 97,838 

1993 $ 74,100 $ 41,277 39,444)1 ($ $ 1,278 $ 153,543 

1994 $ 76,526 $ 46,389 $ 8,890 $ 1,482 $ 112,543 

1995 $ 79,394 $ 54,688 14,329)2 ($ $ 1,379 $ 147,032 

1996 $ 85,736 $ 61,471 $ 8,509 $ 1,469 $ 137,229 

1997 $ 71,242 $ 71,088 $ 9,105 $ 1,511 $ 131,714 

1998 $ 19,972 $ 79,545 $ 9,743 $ 1,525 $ 88,249 

1999 $ 45,496 $ 81,719 $ 10,424 $ 1,631 $ 115,203 

2000 $ 1,040 $ 92,776 $ 11,154 $ 1,797 $ 80,878 

2001 $ 0 $ 94,112 $ 11,935 $ 2,127 $ 80,051 

2002 $ 26,355 $ 93,499 $ 13,643 $ 1,906 $ 107,5453 

2003 $ 105,079 $ 91,405 $ 13,725 $ 2,218 $ 180,561 

2004 $ 46,520 $ 86,567 $ 14,686 $ 2,263 $ 116,138 

1. In 1993, the FAC Trust Fund was initially considered available to pay a portion of the Insurance Corporation’s FAC obligation for 

assistance to the FLB of Jackson. 

2. In 1995, this provision was adjusted to reflect a change in the FAC Trust Fund’s investment strategy and the termination of the FLB 

Jackson receivership making available additional funds to reduce the Insurance Corporation’s related FAC obligation. 

3. In 2002, the Corporation changed its method of amortizing investment premiums and discounts from the straight line to the 

effective interest method. The cumulative effect on prior years of $3.2 million was included in 2002 net income. 

Farm Credit System Insurance Corporation 43 
Corporate Staff
 

Mary Creedon Connelly Chief Operating Officer 

Alan J. Glenn Director of Risk Management 

C. Richard Pfitzinger Chief Financial Officer 

Dorothy L. Nichols General Counsel 

Phyllis Applebaum Financial Analyst 

William Fayer Financial Analyst/Asset Assurance Manager 

Gary Stover Financial Analyst 

Pam Ngorskul Accountant 

Anna Lacey Administrative Specialist 

Molly Sproles Clerical Assistant 

References 

Copies of Farm Credit System Annual Reports to Investors 

and Quarterly and Annual Information Statements may be obtained from: 

Federal Farm Credit Banks Funding Corporation 

10 Exchange Place 

Suite 1401 

Jersey City, NJ 07302 

(201) 200-8000 

Copies of the Annual Performance and Accountability Reports of the Farm 

Credit Administration and the FCA’s Annual Report on the Farm Credit 

System may be obtained from: 

Office of Communications and Public Affairs 

Farm Credit Administration 

1501 Farm Credit Drive 

McLean, VA 22102 

(703) 883-4056 

44 Farm Credit System Insurance Corporation 
FARM CREDIT SYSTEM INSURANCE CORPORATION
 

1501 Farm Credit Drive
 

McLean, VA 22102
 

(703) 883-4380 - Voice 

(703) 790-9088 - Fax 

www.fcsic.gov