Notes To FINANCIAL STATEMENTS

Farm Credit System Insurance Corporation—Notes to the Financial
Statements as of December 31, 1995 and December 31, 1994

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 (Act) (insured
obligations). Each bank in the Farm Credit
System (System) participating in insured
obligations is an insured System bank. At
December 31, 1995, there were 8 insured
System banks and 158 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 has the responsibility to
expend amounts to the extent 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. Treasury-
guaranteed 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 balances outstanding at December 31,
1995, for each of the components of the
Corporation’s insurance responsibilities were
$58.5 billion of insured obligations, $1.3
billion of FAC bonds (of which $0.6 billion in
repayments have been provided for), and
$161 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.

The Corporation, in its sole discretion, is
authorized to expend amounts to provide
financial assistance to certain insured
institutions.

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.

15


CORPORATION OPERATING EXPENSES
AS A PERCENTAGE OF ASSETS

Percent

0.3

1991

1992 1993 1994 1995

Risk Management

The Corporation's program to identify and
manage risk to the Insurance Fund minimizes
the Fund’s exposure to potential losses
through early detection. Corporation staff
uses special examination procedures to
evaluate the condition of weaker System
institutions. FCA examination staff performs
these special examinations on a reimbursable
basis. In addition, the Corporation assesses
risk exposure to the Insurance Fund through
its ongoing review and analysis of the
financial condition of System institutions,
corporate actions approved by FCA for
System institutions, Reports of Examination
of System institutions, and by serving as a
nonvoting participant on FCA’s enforcement
committee. Corporation staff also monitors
the development of legislative, judicial,
regulatory and economic trends that could
impact the various risks to the Insurance
Fund.

During 1995, the Corporation completed
development of an insurance risk simulation
model that is now being used, along with
other monitoring tools, to help evaluate
insurance risk. The model’s input parameters
include financial characteristics of the
insured System banks, such as capital levels
and allowances for loan losses, operating
expenses, interest rates and loan volume
relationships. Output from the model
provides a measure of the relative changes in
aggregate insurance risk and an estimated
probability of Insurance Fund adequacy
against prescribed insurance claims
scenarios. The model is designed to perform
sensitivity analyses by varying input
assumptions.

Financial Assistance and
Receivership Capability

The Insurance Corporation is authorized to
provide assistance to a Farm Credit System
institution to prevent default, restore it to
normal operations, or to facilitate a merger or
consolidation. At the present time, no
assistance agreements are outstanding.

The Corporation has developed a program for
managing receiverships and conservatorships
should the need arise. To contain costs while
providing the statutorily mandated capacity
to deal effectively with any potential
receiverships or conservatorships, the
Corporation has qualified a pool of private
sector vendors who can be called upon to



Note 4 — Premiums

Each System bank which issues insured
obligations under subsection (c) or (d) of
section 4.2 of the Act is an insured System
bank and is required to pay premiums to the
Corporation.

In accordance with the Act, the annual
premium due from each insured System bank
for the calendar year is equal to the sum of: (1)
the annual average principal outstanding for
the year on loans made by the bank that are in
accrual status, other than the guaranteed
portions of Government-guaranteed loans,
multiplied by 0.0015; (2) the annual average
principal outstanding for the year on loans
made by the bank that are in nonaccrual status
multiplied by 0.0025; (3) the annual average
principal outstanding for the year on the
guaranteed portions of Federal Government-
guaranteed loans of the bank that are in
accrual status, multiplied by 0.00015; and (4)
the annual average principal outstanding for
the year on the guaranteed portions of state
government-guaranteed loans of the bank that
are in accrual status, multiplied by 0.0003.

Beginning in 1996, the Corporation may, in its
sole discretion, reduce the premiums by a
percentage uniformly applied to all System
banks. Each insured System bank will
continue to make annual premium payments
until the aggregate amount in the Insurance
Fund exceeds the secure base amount. The
secure base amount is equivalent to 2 percent

of the aggregate outstanding insured obligations
of all insured System banks (adjusted
downward by a percentage of the guaranteed
portions of principal outstanding on
Government-guaranteed loans in accrual status)
or such other percentage or amount determined
by the Corporation, in its sole discretion, to be
actuarially sound. When the amount of the
Insurance Fund exceeds the secure base
amount, the Corporation is required to reduce
the premiums, but it still must ensure that
reduced premiums are sufficient to maintain the
level of the Insurance Fund at the secure base
amount. At December 31, 1995, the Insurance
Fund was 1.6 percent of adjusted insured
obligations outstanding.

Note 5 — Financial Assistance to
System Banks and Estimated
Insurance Obligations

Financial Assistance to Certain
System Banks

The 1987 Act required that the FCA charter the
Farm Credit System Assistance Board
(Assistance Board) and the FAC (see Note 1) for
the purpose of carrying out a program to provide
assistance to System institutions experiencing
financial difficulty. In order to raise funds to
provide this assistance, the FAC had the
authority to issue debt obligations with a
maturity of 15 years. Subject to Assistance
Board approval, these funds were used by the
FAC to purchase preferred stock issued by an
institution experiencing financial difficulty.

19




Note 2 — Summary of Significant
Accounting Policies

Accounting Principles and Reporting
Practices — The accounting and reporting
policies of the Corporation conform to
generally accepted accounting principles and,
as such, the financial statements have been
prepared using the accrual basis of
accounting. The preparation of financial
statements in conformity with generally
accepted accounting principles requires
management to make estimates and
assumptions that affect the reported amount
of 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.

Investments in U.S. Treasury Obligations —
An investment portfolio is maintained as
required by section 5.62 of the Act. 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. In 1994 the
Corporation adopted Statement of Financial
Accounting Standard (SFAS) Number 115,
“Accounting for Certain Investments in Debt

16

and Equity Securities.” The Corporation
classified its investments as held to maturity
and carried them at cost, adjusted for
amortization of premiums and accretion of
discounts in 1995 and 1994. This is
consistent with the Corporation’s investment
policy and its positive intent and ability to
hold its investments to maturity. Premiums
and discounts are amortized or accreted using
the straight line method, which approximates
the interest method, over the terms of the
respective issues. Management reviews the
portfolio classifications at least quarterly in
accordance with the Corporation’s Investment
Policy to ensure the classifications are
consistent with Corporation liquidity
requirements and SFAS 115.

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 insured System banks’
borrowers could adversely affect the banks’
financial condition and profitability. Insured
System banks also face risks from changing


institutions, and to pay operating expenses of
the Assistance Board.

Previously, the Corporation had only been
required: (1) to satisfy defaults on the
repayment of Treasury-paid interest; and (2)
to purchase the preferred stock of an assisted
institution when the institution did not retire
the stock at the maturity of the FAC bonds
issued to purchase it. The 1992 Act made the
Corporation responsible for defaults by
System institutions on obligations related to
the remaining $454 million of FAC bonds and
related interest if such amounts cannot be
recovered from defaulting institutions by the
FAC or the Treasury, as the case may be,
within 12 months.

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 Capital Preservation
Agreement-related FAC bonds aggregating
$417 million and Treasury-paid 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 1995, 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 FAC obligations.

22

The Corporation actively monitors the
creditworthiness and financial position of the
insured System banks. Other than obligations
that have occurred as a result of resolving the
FLBJR, as described above, management is
not aware of any events or circumstances at
this time which would require a liability for
estimated insurance obligations to be
recorded.

Note 6 — Operating Lease

On September 2, 1993, the Corporation’s lease
agreement with the Farm Credit System
Building Association for office space and
furniture rental was modified to extend the
term to September 30, 1996. The agreement
requires payment of an annual base rent for
office space, with fixed annual increases of 2
percent. The Corporation recorded $76,146
and $64,280 in operating expenses related to
the lease in 1995 and 1994, respectively. The
remaining minimum future payment under
the terms of the lease is $53,289 for 1996.

Note 7 — Related Parties

The Corporation purchases services from the
FCA under an Inter-Agency Agreement. Such
services include examination, administrative,
and legal support services. The Corporation
had payables due to the FCA of $62,479 at
December 31, 1995, and $70,951 at December
31,1994. The Corporation purchased
services for 1995 which totaled $263,479
compared with $300,064 for 1994.


Note 3—Investments

At December 31, 1995, and at December 31, 1994, investments in U.S. Treasury obligations
consisted of the following:
($ in thousands)

Gross Gross Estimated
Amortized Unrealized — Unrealized Market
Cost Gains Losses Value
December 31, 1995
U.S. Treasury Notes $914,643 $15,296 ($596) $929,343
December 31, 1994
U.S. Treasury Notes $786,132 $625 ($31,760) $754,997

The amortized cost and estimated market value of U.S. Treasury obligations at December 31,
1995, by contractual maturity, are shown below.
($ in thousands)

Estimated
Amortized Market
Cost Value
Due in one year or less $179,185 $180,535
Due after one year through five years 735,458 748,808

$914,643 $929,343

18


Farm Credit System Insurance Corporation

Statements of Income and Expenses and Changes in Insurance Fund
for the Years Ended December 31, 1995 and 1994

($ in thousands)

1995 1994
Income
Premiums (Note 4) $ 79,394 $ 76,526
Interest Income 54,688 46,389
Total Income $134,082 $122,915
Expenses
Administrative Operating Expenses
(Note 7) $ 1,379 $ 1,482
Provision for Estimated Insurance Obligations
(Note 5) (14,329) 8,890
Net Income 147,032 112,543
Farm Credit Insurance Fund, Beginning of Year 754,546 642,003
Farm Credit Insurance Fund, End of Year $901,578 $754,546

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

13


will have to pay in 2005 to ensure the
repayment of the FAC bonds that were issued
to provide the FLBJR-related assistance.

Also, early in 1995 the Federal Land Bank of
Jackson Receivership was closed and the
remaining assets were transferred to the FAC.
Modification of the FAC Trust Fund
investment strategy and the closing of the
FLBJR provided for substantial additional
funds to repay the FLBJR FAC bonds. Asa
result, management made a sizable reduction
in its estimate of the Corporation’s liability to
the FAC in the first quarter of 1995 (see Note 5
to the Corporation’s financial statements).

Corporation Revenues

The Corporation’s revenues are derived from
two sources, premiums collected from
insured System banks and interest income
earned on the Corporation’s investment
portfolio. Total revenues increased 9 percent,
from $123 million in 1994 to $134 million in
1995. Revenues for the past 5 years are
depicted in the following graph.

CORPORATION REVENUES

$134

$123

$115

$itt

$109

0 20 40 60 80 100 120 140 160
$ Millions

Ml Premiums I Interest Income

Premium Collection and Secure
Base Amount

Premium revenue increased by 4 percent in
1995 to $79.4 million, reflecting growth in the
volume of System loans outstanding.
Premiums are collected annually from System
banks based on the retail loan volume at each
bank and its related associations (see Note 4 to
the Corporation’s financial statements).


CorPORATE OFFICERS

Mary A. Creedon .......ccccceseeeseseneeeeeeees Chief Operating Officer
Dennis M. Pittman... Director of Risk Management
Bodare J CUNY asst tcescciaitessateiisinka tis assessed Chief Financial Officer
Dorothy L. Nichols! sssccomenasnomncasmenasnnasy General Counsel
C. Richard Pftzin ger .ccscssisernsessiecae Asset Assurance Manager
Floyd Fithian oo... ccscceseseeseseseeeeseeeseees Secretary to the Board

Corporate Office:

Farm Credit System Insurance Corporation
1501 Farm Credit Drive

McLean, VA 22102

(703) 883-4380

Fax (703) 790-9088


Boarp oF DIRECTORS

The Farm Credit System Insurance Corporation (Corporation) is managed by a three-member
board of directors composed of the Members of the Farm Credit Administration (FCA) Board.
The Chairman of the Corporation’s Board of Directors, however, must be a Board Member other
than the Chairman of the FCA Board. One position on the Board of Directors is vacant following

the March 31, 1995 resignation of Gary C. Byrne.

Doyle L. Cook joined the Corporation’s
Board in October 1994 and was elected
Chairman in March 1995. He brings to this
position 33 years of experience in
agricultural lending, 19 of which were with
various Farm Credit System institutions.
Preceding his appointment to the Board,
Mr. Cook served as President and Chief
Executive Officer of the Farm Credit Bank
of Spokane and as an active participant on
various committees of the banks of the Farm
Credit System, a director of the Federal
Agricultural Mortgage Corporation, and a
member of the Chicago Mercantile
Exchange Lender Advisory Committee.
Previously, he served as President and Chief
Executive Officer of Farm Credit Services of
Mid-America, Senior Vice President for
Credit for the Federal Intermediate Credit
Bank of Texas, and Senior Vice President of
the Federal Intermediate Credit Bank of
Louisville. He began his career with
Ralston Purina where he worked in credit,
marketing, finance, and general
management for 13 years before joining the
Farm Credit System. Mr. Cook, a native of
Star City, Arkansas, holds a B.S. in
agricultural business and an M.S. in
agricultural economics from the University
of Arkansas.

Marsha Pyle Martin, a Member of the
Corporation’s Board since October 1994, is
also Chairman and Chief Executive Officer
of the Farm Credit Administration. She
brings to her position 34 years of
experience in agriculture and agricultural
finance. The Texas native, who holds a
B.A. from Texas Woman’s University and an
M.S. from Texas A&M University, joined the
Federal Intermediate Credit Bank of Texas
in 1970 and in 1979 earned the distinction
of being the first woman appointed to a
senior officer position. During her career
with the Farm Credit Bank of Texas she
gained broad management experience,
providing leadership and direction for the
bank’s corporate relations, legal, operations
and supervision, management information,
human resources, marketing, and public and
legislative affairs departments. She has held
leadership positions with various agricultural
councils and advisory committees in the State
of Texas, including the Texas Agricultural
Loan Mediation Program Advisory Board, the
Texas Department of Commerce’s Credit
Advisory Committee, the Board of Directors of
‘Texas Agricultural Lifetime Leadership, and
the Texas Agricultural Cooperative Council. In
1990, she received the Cooperative
Communicators Association’s H.E. Klinefelter
Award, the association’s highest honor, in
recognition of her distinguished contributions
to cooperative communications.



Farm Credit System Insurance Corporation—Statements of Cash Flows

for the Years Ended December 31, 1995 and 1994
($ in thousands)

1995
Cash Flows from Operating Activities
Net Income $147,032
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:

(Increase) in Accrued Interest Receivable (1,549)
(Increase) in Premiums Receivable (2,836)
Decrease (Increase) in Other Assets 5

Net Amortization and Accretion of Investments 12,090
(Decrease) Increase in Accounts Payable

and Accrued Expenses (37)
(Decrease) in Liability for Eligible Borrower
Stock, Richmond PCA (2)
(Decrease) Increase in Liability for Estimated
Insurance Obligations (14,326)
Net Cash Provided by Operating Activities 140,377

Cash Flows from Investing Activities
Payments for Purchase of U.S. Treasury

Obligations (311,432)
Proceeds from Redemption of
U.S. Treasury Obligations 170,832
Net Cash Used in Investing Activities (140,600)
Net Change in Cash and Cash Equivalents (223)
Cash and Cash Equivalents, Beginning of Year 530
Cash and Cash Equivalents, End of Year $ 307

1994
$112,543
(3,451)
(2,475)
(6)

12,902

64

8,890

128,467

(245,388)

116,923

(128,465)

2

528

$ 530

The accompanying notes are an integral part of these financial statements

14


CorPoRATE ACTIVITIES

Insurance Fund Management

Growth in the Insurance Fund

The Corporation had net income for 1995 of
$147 million. The Insurance Fund balance at
December 31, 1995, was $902 million, an
increase of 19 percent from 1994. The
Insurance Fund represents the Corporation’s
equity, i.e., the difference between its total
assets ($1,023 million) and its total liabilities,
including its insurance obligations ($121
million). The following graph depicts the
growth in the Corporation’s total assets and
the Insurance Fund.

GROWTH IN THE INSURANCE FUND

(Total Assets vs. Insurance Fund Equity)
$ Millions:

1,200

1,000

800

600

400

200 b

te

ol = oh L E
May-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96

Mi Total Assets Wl Insurance Fund

The Corporation’s principal liability for
insurance obligations at December 31, 1995,
was $121 million, which represents the
liability to repay the Farm Credit System
Financial Assistance Corporation (FAC) for

financial assistance to the Federal Land Bank
of Jackson in Receivership (FLBJR). This
liability was revised significantly downward
in 1995.

Early in 1995, management took advantage of
an exceptional opportunity presented by the
continuing gains in the financial strength of
System banks and the peaking of the interest
rate cycle. The System’s financial progress
and the provision for early repayment of all of
the FAC open bank assistance provided
additional evidence that use of the FAC Trust
Fund (Trust Fund) for purposes other than
repaying the long-term FAC assistance
provided to the Federal Land Bank of Jackson
was unlikely. Corporation management
initiated a dialogue with the FAC seeking to
explore ways to modify its strategy for the
investment of the Trust Fund’s assets in order
to increase earnings and reduce the burden on
the Insurance Fund. Prior to 1995, the FAC
had invested Trust Fund assets in short-term
Treasury bills to maintain a high degree of
liquidity.

Subsequently, the FAC revised its investment
strategy for the Trust Fund to extend
investment maturities into 5-year zero
coupon U.S. Treasury securities. The
lengthening of maturities resulted in the FAC
locking in significantly higher interest rates
for the Trust Fund’s investments. The
increased investment returns, which the Trust
Fund will receive on these investments, lower
the amount of money that the Insurance Fund


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 was provided
to the Federal Land Bank of Jackson in
Receivership.

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 purchased with the proceeds of the FAC
bonds), 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 FAC Trust
Fund (Trust Fund) represents the funds
received from System institutions’ purchase
of stock in the FAC. The Trust Fund totaled
approximately $83 million and $78 million at
December 31, 1995 and 1994, respectively. If
the Trust Fund is not sufficient to retire the
debt, then the Corporation must purchase
preferred stock from the FAC to provide funds
to retire such debt. 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

20

payment of premiums. At December 31,
1995, 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.
The final amount of assistance provided to the
FLBJR by the FAC totaled $374 million.

Estimated Insurance Obligation

The Corporation estimated the present value
of its liability to provide funds for payment of
the $374 million of 15-year maturing debt to
be approximately $122 million and $136
million at December 31, 1995 and 1994,
respectively. This liability is reflected in the
accompanying statements of financial


ee
PPort

Farm Credit ¢ n insur orporation



The Corporation’s investment policy permits flexibility to make investments with maturities
from 0 to 5 years. There must be a minimum of 15 percent and a maximum of 25 percent
invested in any maturity range. At December 31, 1995, the actual portfolio maturities at

amortized cost were:

Maturity Schedule
1 Day to 1 Year

1 Year to 2 Years

2 Years to 3 Years

3 Years to 4 Years

4 Years to 5 Years

Total

$ Millions % of Portfolio
$179 19
225 25
224 25
147 16
140 15
$915 100.0

At December 31, 1995, the portfolio’s market
value exceeded book value by $15 million.
This appreciation resulted from some of the
Corporation’s longer term investments that
were purchased when market interest rates
were significantly higher than in 1995. The
weighted average portfolio maturity at
yearend was 2.4 years.

Insured and Other Obligations

Obligations insured by the Corporation are
statutorily defined as any note, bond,
debenture, or other obligation issued on
behalf of insured System banks under
subsection (c) or (d) of section 4.2 of the Act,
12 U.S.C. 2153. Section 4.2(c) authorizes a
System bank to join with any or all banks
organized and operating under the same title
of the Act to issue consolidated notes, bonds,
debentures, or other obligations. Section
4.2(d) authorizes a System bank to join with

the other banks of the System to issue
Systemwide notes, bonds, debentures, or
other obligations. Insured obligations are
issued through the Federal Farm Credit Banks
Funding Corporation on behalf of the System
banks. The outstanding principal and interest
balances of insured obligations at December
31 for the past 5 years are shown in the
following graph.

INSURED OBLIGATIONS
; (Principal and Interest)
$ Billions
60

59
58
57
56
55
54
53}
52H
‘61

1991 1992 1993 1994 1995



Premium revenue is accrued at December 31,
1995, representing the estimated premiums
that were earned but not yet collected for
calendar year 1995; these premiums were
collected on January 31,1996. All insured
System banks will continue to pay insurance
premiums until the aggregate amount in the
Insurance Fund reaches the secure base
amount. The secure base amount is 2 percent
of the insured obligations issued and
outstanding by all System banks or such other
percentage determined by the Corporation, in
its sole discretion, to be actuarially sound.

Investment of Insurance Fund
Assets

The Corporation had cash and investments of
$915 million at December 31, 1995, up 16
percent from yearend 1994. Funds are
invested in U.S. Treasury securities in
accordance with section 5.62 of the Farm
Credit Act of 1971, as amended (Act), 12
U.S.C. 2277a-11 and the Corporation’s
investment policy. The policy provides that
the Corporation will seek the maximum
return consistent with its liquidity needs and
a minimum exposure to loss of principal. The
average portfolio yield for 1995 was 6.12
percent compared with 6 percent for 1994.

Asa measure of investment management
performance, the Corporation’s average yield
was compared with the interest yield of five
comparable investment funds available in the
private sector. These funds were selected

6

because they invest in short-term U.S.
Treasury securities. This comparison for the
past 5 years is shown in the following table.

FCSIC INTEREST YIELD COMPARED WITH
SIMILAR BOND FUNDS’ INTEREST YIELD
Percent

1991 1992 1993 1994 1995

NFCSIC Interest Yield MiiTreasury Bond Funds

The Corporation’s average yield is higher than
the peer group, primarily as a result of the
slightly longer weighted average portfolio
maturity maintained by the Corporation
during the period. During 1995, the yield
difference narrowed as more of the peer
group’s shorter maturity portfolios were
reinvested at the higher interest rates
prevailing throughout 1994 and early 1995.
The Corporation maintains an investment
strategy of purchasing a ladder of maturities
and holding investments to maturity, while
several of the funds in the peer group trade
their securities before maturity.


OVERVIEW

The Farm Credit System Insurance
Corporation was established by the
Agricultural Credit Act of 1987 (1987 Act) as
an independent U.S. Government-controlled
corporation. The Corporation’s purpose is to
ensure the timely payment of principal and
interest on insured notes, bonds, and other
obligations issued on behalf of Farm Credit
System (System) banks. The System is a
nationwide system of privately owned banks
and affiliated associations that serve
borrowers and related entities in the
agricultural sector. By ensuring the
repayment of System debt securities to
investors, the Corporation helps to maintain a
dependable source of funds for the farmers,
ranchers, and other borrowers of the System.
The 1987 Act provided for all System banks to
be insured. At yearend 1995, there were 8
insured System banks.

During the past year, the System’s financial
condition continued to improve, increasing
the resources available to cushion any
potential loss to the Insurance Fund. The
System, with $71 billion in assets on a
combined basis, achieved $1.2 billion in net
income and increased its capital-to-assets
ratio from 13.2 percent to 13.6 percent at
yearend. System asset quality also improved
with nonperforming assets declining from 2.9
percent of total loans and other property
owned in 1994 to 2.1 percent at yearend.

Other significant highlights for 1995 include:

Growth in the Insurance Fund to $902
million, an increase of $147 million
from 1994;

Sizeable reduction in the Corporation’s
insurance liability to the Farm Credit
System Financial Assistance
Corporation (FAC);

Implementation of the insurance risk
simulation model; and

Implementation of additional screening
criteria for the Corporation’s allowance
for loss process.

The Farm Credit System Reform Act was
enacted in early 1996. Major provisions
affecting the Corporation include:

Repeal of the requirement for an
independent full-time Board of
Directors;

Flexibility to reduce insurance
premiums before reaching the secure
base amount, which is 2 percent of
outstanding insured obligations;

Authority to make refunds of excess
Insurance Fund balances beginning 8
years after reaching the secure base
amount but not before 2005; and

Changes in the Corporation’s authority
to provide financial assistance, adding
new cost test requirements.


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 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 to the CSRS
plan equals the 7 percent of base pay
contributed by employees covered by that
system. For those employees covered by
FERS, the Corporation’s contribution is 11.4
percent of base pay. In addition, for FERS-
covered 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
$79,382 in 1995 and $79,500 in 1994.

17


Income and Expenses
Farm Credit System Insurance Corporation

By Year

($ in thousands)

Income Expenses Net Income
Provision for Administrative Changes
Insurance and Operating in Insurance
Premiums Investment Obligations Expenses Fund
1989 $65,000 $16,041 = $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)* $1,278 $153,543
1994 $76,526 $46,389 $8,890 $1,482 $112,543
1995 $79,394 $54,688 ($14,329)? $1,379 $147,032

* 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.

® In 1995, this provision was adjusted to reflect a change in the FAC Trust Fund's investment strategy and the termination of the
FLB of Jackson receivership making available additional funds to reduce the Insurance Corporation's related FAC obligation.


CONTENTS

Board of Directors

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Management

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Legislation

Report of Independent
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Notes to
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provide specialized support if needed. These
contractual arrangements effectively leverage
permanent staff resources while maintaining
low overhead during periods of limited or no
activity.

National Performance Review

During early 1995, the Corporation participated
with Federal Government institutions in the
second phase of the National Performance
Review (NPR). In this phase of the NPR, all
Federal agencies reexamined their basic
missions and programs to ensure that they were
appropriate functions for government and were
operating efficiently. The Corporation also
reviewed its limited regulatory authorities for
opportunities to streamline and reduce
unnecessary regulations. The Corporation
issued a report in March 1995 recommending
amendment of the Farm Credit Act to modify
the requirement for a full-time three-member
Board of Directors separate from the FCA Board
which was authorized beginning in 1996.
Implementing a separate Board structure would
have significantly increased cost and staff levels
for the Corporation. Congress examined the
Corporation’s Board structure during its
consideration of the Farm Credit System Reform
Act of 1996 and included a provision repealing
the independent Board structure requirement
(see Legislation). The Corporation supports and
is guided by the central theme of the NPR of
ensuring that the Federal Government performs
functions which should be appropriately
performed by the government and does so in the
most cost-effective manner.

10

Legislation

Major legislation affecting the Corporation was
enacted in early 1996. The Farm Credit System
Reform Act of 1996 (Act) includes several
major provisions that provide the Corporation
with additional authorities. The Act also
repeals the requirement for a independent
three-member full-time Board of Directors for
the Corporation which was authorized
beginning in 1996. The Corporation will
continue to be governed under its current
Board structure composed of the FCA Board
Members.

New authorities included in the Act include
the flexibility to reduce insurance premium
tates and to segregate Insurance Fund balances
in excess of the secure base amount for the
benefit of System banks and FAC stockholders.
Excess Insurance Fund balances may be paid
to System banks and FAC stockholders
beginning at least 8 years after the Insurance
Fund reaches the secure base amount, but not
before 2005. The law provides for these new
authorities to be exercised at the sole
discretion of the Corporation’s Board.

The law also provides the Corporation with the
authority to regulate “golden parachute”
arrangements and certain indemnification
payments made by troubled System institutions.
The Corporation’s authority to provide financial
assistance to open System institutions was
changed so that any assistance must be the “least
costly” approach of all alternatives available to
the Corporation in all cases.


FINANCIAL STATEMENTS

Farm

Credit System Insurance Corporation

Statements of Financial Condition as of December 31, 1995 and 1994
($ in thousands)

Assets

Cash and Cash Equivalents

Investments in U.S. Treasury Obligations
(Note 3)

Accrued Interest Receivable

Premiums Receivable (Note 4)

Other Assets

Total Assets

Liabilities and Insurance Fund

Accounts Payable and Accrued Expenses
(Note 7)

Liability for Eligible Borrower Stock,
Richmond PCA

Liability for Estimated Insurance Obligations
(Note 5)

Farm Credit Insurance Fund

Total Liabilities and Insurance Fund

1995 1994
$ 307 $ 530
914,643 786,132
29,011 27,463
79,392 76,556
_ 6
$1,023,353 $890,687
$ 211 $ 249
_ 2

121,564 135,890
901,578 754,546
$1,023,353 $890,687

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

12


MiIssION STATEMENT

As an independent entity, the Farm Credit System Insurance Corporation
shall:

e Protect investors in insured Farm Credit System obligations and
taxpayers through sound administration of the Farm Credit
Insurance Fund (Insurance Fund);

e Exercise its authorities to minimize loss to the Insurance Fund;
and

e Help ensure the future of a permanent system for delivery of
credit to agricultural borrowers.


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 Statement of Financial
Accounting Standards 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
(5.7 percent for 1995 and 7.9 percent for
1994). The fair value was approximately $136
million and $124 million as of December 31,
1995 and 1994, respectively.

Provisions for changes in the Corporation’s
liability are reflected in the statements of
income and expenses in the amount of ($14.3)
million and $8.9 million for the years ended
December 31, 1995 and 1994, respectively.
The ($14.3) million provision for 1995
reflected a change in management’s estimate
of the liability. Two events occurred in 1995
which caused management to reevaluate this
liability. The January, 1995, termination of
the FLBJR receivership resulted in the transfer
of surplus funds in the receivership estate to
the FAC, lowering the total amount of
financial assistance provided to the FLBJR.
The second event was the repositioning of the
FAC Trust Fund investment portfolio into
longer maturity investments.

Prior to the first quarter of 1995, the FAC had
invested the Trust Fund in short-term U.S.
Treasury securities to maintain a high degree
of liquidity. After consultation with

Corporation management, the FAC
lengthened the maturity of Trust Fund
investments by repositioning the portfolio
into 5-year zero coupon U.S. Treasury
securities. This change was made to achieve
additional interest earnings from the Trust
Fund’s assets which in 2005 are expected to
be available to reduce the amount that would
otherwise have to be paid by the Insurance
Fund to extinguish its FLBJR FAC liability.

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. The Corporation will annually
reassess the likelihood of earlier use of the
Trust Fund, changes in Trust Fund earnings,
and other assumptions underlying the
Corporation’s estimate of its liability for
FLBJkR-related FAC bonds.

Other Financial Assistance
Provided to System Institutions
by the FAC

The 1992 Act expanded the Corporation’s
responsibility to insure defaults by System
institutions on payments related to other
assistance funded by FAC bonds. These FAC
bonds, aggregating $454 million, were issued
to pay System Capital Preservation
Agreement accruals, to retire eligible
borrower stock of certain liquidating System

21


Farm Credit System Insurance Corporation

April 29, 1996

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 (Corporation) is pleased to submit its annual report for
calendar year 1995.

The report highlights the Corporation’s role as the Federal entity that ensures the timely payment of
principal and interest to the investors in the Farm Credit System debt obligations. The balance in the
Farm Credit Insurance Fund at December 31, 1995, was $902 million. The Corporation expects to
incur $1.9 million in operating costs during calendar year 1996. On January 31, 1996, the Corporation
collected $79.4 million in premiums from the insured Farm Credit System banks.

Sincerely,

Corll Cork

Doyle L. Cook
Chairman

The President of the United States Senate
The Speaker of the United States House of Representatives

McLean, Virginia 22102
703/883-4380


REFERENCES

For additional information about the Farm Credit System, its financial condition and
performance, and activities of the Farm Credit Administration, the following
publications are recommended.

Farm Credit System Annual Reports to Investors and Quarterly and Annual
Information Statements for the current fiscal year and the 2 preceding fiscal years.
These are available without charge from:

Federal Farm Credit Banks
Funding Corporation

10 Exchange Place

Suite 1401

Jersey City, NJ 07302

(201) 200-8000

Annual Reports of the Farm Credit Administration for the past 5 fiscal years. These
are available without charge from:

Office of Congressional and
Public Affairs

Farm Credit Administration

1501 Farm Credit Drive

McLean, VA 22102-5090

(703) 883-4056

Production of the 1995 Annual Report of the Farm Credit System Insurance

Corporation coordinated by Anna Lacey with assistance from Barbara Shaffer and
Christine Quinn.

24


2.50

During 1995, the level of insured obligations
increased 8 percent. This increase was used
primarily to finance higher levels of System
loan and investment assets.

The Corporation is also required by statute to
use the Insurance Fund to: (a) satisfy System
institution defaults on obligations related to
FAC-issued bonds under section 6.26(d)(3) of
the Act; and (b) ensure the retirement of
eligible borrower stock. The outstanding
balances of these obligations at December 31
for the past 5 years are illustrated in the
following graph.

OTHER OBLIGATIONS

$ Billions

$1.45 $1.42

1991 1992 1993 1994 1995

ll Eligible Borrower Stock @§ FAC Assistance Bonds

Other obligations continued to decline during
1995 as a result of the further retirement of
outstanding eligible borrower stock. In
addition, System banks have been providing

for the repayment of outstanding FAC
assistance bonds. At December 31, 1995, the
System had provided for the repayment of
approximately $0.6 billion of the $1.3 billion
FAC assistance bonds outstanding.

Operations

The Corporation operated with a staff of 10
employees in 1995. The small staff leverages
its resources by using the Farm Credit
Administration for examination and certain
other services. Other specialized services are
available through contractual arrangements
on an as-needed basis. The Corporation had
$1.4 million in operating costs for 1995,
representing 0.14 percent of average assets.
Of this amount, the Corporation’s fixed costs
for its permanent staff, travel, rent, and
miscellaneous expenses totaled $1.0 million.
Contract services represented the balance of
operating expenses of $0.4 million. These
expenses include amounts reimbursed to the
FCA for examination and other support and
amounts paid to other contractors for
purchased services.

The Corporation’s operating costs as a
percentage of average assets have declined
over the past 5 years as shown in the
following graph.


REPORT OF INDEPENDENT PuBLic ACCOUNTANTS

a

Coopers & Lybrand LLP,
ers

Coo
| &Lybrand

2 professional services firm

Re; f Ini .ccountants

To the Board of Directors of the
Farm Credit System Insurance Corporation

We have audited the accompanying statements of financial condition of the Farm Credit System
Insurance Corporation as of December 31, 1995 and 1994, and the related statements of income
and expenses and changes in insurance fund, and cash flows for the years then ended. These
financial statements are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards and generally
accepted government auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of Farm Credit System Insurance Corporation as of December 31, 1995 and

1994, and the results of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.

loyen. ¢ Aibend L-L.P.

Washington, D.C.
February 2, 1996

11