F A R M C R E D I T S Y S T E M I N S U R A N C E C O R P O R A T I O N
 

1997 ANNUAL REPORT
 
 

Mission Statement 

As an independent entity, the Farm 

C redit System Insurance Corporation shall: 

P rotect investors in insured Farm Cre d i t 

System obligations and taxpayers thro u g h 

sound administration of the Farm Cre d i t 

Insurance Fund (Insurance Fund); 

E x e rcise its authorities to minimize loss to 

the Insurance Fund; and 

Help ensure the future of a permanent system 

for delivery of credit to agricultural borro w e r s . 

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F a rm Credit System Insurance Corporation 

Date, 1998 

G e n t l e m e n : 

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 1997. 

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. I am particularly pleased to announce that early in 1998, the 

Insurance Fund attained its statutory secure base amount of 2 percent of insure d 

debt outstanding ($1.17 billion). Achievement of this milestone strengthens the 

Insurance Fund’s ability to protect investors. 

The report discusses the Corporation’s operations for 1997, including management 

of the Insurance Fund, the level of insured debt outstanding and risk management 

activities. Also included are the 1997 audited financial statements. The 

Corporation expects to incur $1.77 million in operating costs during calendar 

year 1998. On January 30, 1998, the Corporation collected $71.2 million in 

p remiums from the insured Farm Credit System banks. 

S i n c e re l y , 

Doyle L. Cook 

C h a i rm a n 

The President of the United States Senate 

The Speaker of the United States House of Repre s e n t a t i v e s 

McLean, Vi rginia 22102 

(703) 883-4380 

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BOARD OF DIRECTORS
 

The Farm Cre d i t 

System Insurance 

C o r p o r a t i o n 

(Corporation) is managed by a 

t h ree-member board of dire c t o r s 

composed of the members of 

the Farm Credit Administration 

(FCA) Board. The Chairman of 

the Corporation’s Board of 

D i rectors, however, must be an 

FCA Board Member other than 

the Chairman of the FCA Board. 

Doyle L. Cook joined the Corporation’s Board 

in October 1994 and was elected Chairman in 

M a rch 1995. He brings to this position 33 

years of experience in agricultural lending, 19 

of which were with various Farm Cre d i t 

System institutions. Preceding his appointment to the Board, Mr. Cook served as 

P resident and Chief Executive Officer of the 

F a rm 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 Merc a n t i l e 

Exchange Lender Advisory Committee. 

P reviously, he served as President and Chief 

Executive Officer of Farm Credit Services of 

Mid-America, Senior Vice President for Cre d i t 

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, 

w h e re he worked in credit, marketing, 

finance, and general management for 13 years 

b e f o re 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 

A r k a n s a s . 

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Marsha Pyle Mart i n , a member of the 

Corporation’s Board since October 1994, is 

also Chairman and Chief Executive Off i c e r 

of the Farm Credit Administration. She 

brings to her position 35 years of experience 

in agriculture and agricultural finance. The 

Texas native, who holds a B.A. from Te x a s 

Woman’s University and an M.S. from Te x a s 

A&M University, joined the Federal 

I n t e rmediate Credit Bank of Texas in 1970 

and in 1979 earned the distinction of being 

the first woman appointed to a senior off i c e r 

position in the Farm Credit System. During 

her career with the Farm Credit Bank of 

Texas she gained broad management experience, providing leadership and dire c t i o n 

for the bank’s corporate relations, legal, 

operations and supervision, management 

i n f o rmation, human re s o u rces, marketing, 

and public and legislative affairs departments. She has held leadership positions 

with various agricultural councils and advisory committees in the State of Texas. In 

1995, she received the Academy of Honor in 

Agricultural Credit, awarded the Texan making the most significant contribution to agricultural credit. She holds the Te x a s 

Woman’s University Distinguished Alumna 

Aw a rd for 1996 and was the 1990 re c i p i e n t 

of the Cooperative Communicators 

Association’s H.E. Klinefelter Aw a rd, the 

association’s highest honor, in recognition of 

her distinguished contributions to cooperative communications. 

Ann Jorg e n s e n became a member of the 

Corporation’s Board in May 1997. She 

brings to her position extensive experience 

in production agriculture and accounting. 

She started farming in partnership with her 

husband in 1963. Their farming enterprise 

now includes a cropping operation, Jorg ­

Anna Farms, and a hog operation, 

Timberland Hogs Ltd. She has worked as a 

tax accountant and as a licensed commodity 

b ro k e r. In 1981, she started Farm Home 

O ffices, a mail-order catalog company, 

which markets farm management pro d u c t s 

to help farmers improve their financial and 

p roduction management systems. She 

served on a number of governing boards for 

the State of Iowa, including 6 years as a 

member of the Board of Regents. The 

B o a rd of Regents is responsible for the 

state’s three universities, including the 

University of Iowa Hospital, a world 

renowned teaching hospital, and its aff i l i a ted clinics. She is a co-author of a pro d u cer’s guide entitled The Farmer’s Guide to 

Total Resource Management and is the 

author of a book Put Paperwork in its Place. 

She was honored as the Outstanding Yo u n g 

Woman for the State of Iowa in 1976 and 

was inducted into the Iowa Volunteer Hall 

of Fame in 1989. She and her husband 

w e re recognized by F a rm Futur e s m a g a z i n e 

in 1983 as the owners of one of the Top 10 

Best Managed Farms. In 1997, she was one 

of the national agricultural leaders named by 

Alpha Zeta, the national honorary agricultural fraternity, to its Centennial Honor Roll. A 

native of Iowa, she holds a B.A. from the 

University of Iowa. 

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Corporate Off i c e r s 

M a ry Creedon Connelly 

Chief Operating Off i c e r 

Dennis M. Pittman 

D i rector of Risk Management 

Alan J. Glenn 

Chief Financial Off i c e r 

D o rothy L. Nichols 

General Counsel 

C. Richard Pfitzinger 

Asset Assurance Manager 

Floyd Fithian 

S e c retary to the Board 

Corporate Off i c e 

F a rm Credit System Insurance
 

C o r p o r a t i o n
 

1501 Farm Credit Drive
 

McLean, VA 22102
 

(703) 883-4380
 

FAX (703) 790-9088
 

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O V E RV I E W
 

The Farm Credit System 

Insurance Corporation was 

established by the Agricultural 

C redit Act of 1987 (1987 Act) as an independent U.S. Govern m e n t - c o n t rolled corporation. The Corporation’s primary purpose is 

to ensure the timely payment of principal 

and interest on insured notes, bonds, 

and other obligations issued on behalf of 

F a rm Credit System (System) banks. 

The System is a privately owned, nationwide financial cooperative that lends to agric u l t u re and rural America. 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 yeare n d 

1997, there were eight insured System banks 

paying premiums to the Corporation. 

Significant highlights for 1997 include: 

●	 G rowth in the Insurance Fund to $1.17 

b i l l i o n ; 

●	 Reduction of insurance premiums on 

accrual loans by 20 percent; 

●	 Adoption of a five-year Strategic Plan; 

●	 Revision of criteria for Corporation 

allowance for insurance loss pro c e d u re ; 

a n d 

●	 Review of Corporation contingent contracts for conservator and re c e i v e r s h i p 

s u p p o r t . 

The System finished 1997 in strong condition, having experienced annual growth in 

i n s u red obligations outstanding of $2 billion 

or 3.5 percent. Levels of capital also 

i n c reased Systemwide, and asset quality 

remained high. The System, with $78 billion 

in assets on a combined basis, achieved 

$1.27 billion in net income. Surplus as a 

p e rcentage of total assets (excluding the 

Insurance Fund) increased from 10.1 percent in 1996 to 10.8 percent at yeare n d . 

System asset quality also improved, with 

n o n p e rf o rming assets decreasing from 1.6 

p e rcent of total loans and other pro p e r t y 

owned in 1996 to 1.4 percent at yeare n d . 

During the first quarter of 1998, the Insurance 

Fund attained its secure base amount of 2 

p e rcent of adjusted insured debt outstanding. 

Achievement of this milestone strengthens the 

Insurance Fund’s ability to protect investors. 

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C h a rt 1

G rowth in the Insurance Fund
 

Corporation Revenues
 

C h a rt 2
 

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INSURANCE FUND MANAGEMENT
 

G rowth in the Insurance Fund 

The Corporation’s net income in 1997 was 

$132 million. The Insurance Fund grew to 

$1.17 billion at yearend, an increase of 13 

p e rcent from 1996. Since its inception in 

1989, the Insurance Fund has increased 4.5 

times in value (see Chart 1). The Insurance 

Fund re p resents the Corporation’s equity, 

i.e., the diff e rence between its total assets 

($1.309 billion) and its total liabilities, 

including its insurance obligations ($139 mill i o n ) . 

The Corporation’s principal liability for 

insurance obligations at December 31, 1997, 

was $139 million, which re p resents the liability to repay the Farm Credit System 

Financial Assistance Corporation (FAC) for 

financial assistance to the Federal Land 

Bank of Jackson in Receivership. 

Corporation Revenues 

The Corporation’s revenues are derived 

f rom two sources, premiums collected fro m 

i n s u red System banks and interest income 

e a rned on the Corporation’s investment 

portfolio. Total revenues decreased 3 percent, from $147 million in 1996 to $142 million in 1997. This reduction was the re s u l t 

of a decision by the Corporation’s Board to 

d e c rease insurance premiums. Revenues for 

the past five years are depicted in Chart 2. 

P remium Collection and 

S e c u re Base Amount 

The Corporation earned $71.2 million in 

p remium revenue in 1997, a 17 perc e n t 

d e c rease that reflects the effect of a re d u ction in insurance premium rates appro v e d 

by the Corporation’s Board in January 1997. 

The Corporation’s Board sets insurance 

p remium rates on a semiannual basis in 

a c c o rdance with its Policy Statement on 

Adjustments to Insurance Premiums. The 

Policy sets out the following five factors the 

B o a rd will consider in determining whether 

to adjust pre m i u m s : 

●	 Level of the Insurance Fund relative to the 

s e c u re base amount; 

●	 Any projected losses to the Insurance 

F u n d ; 

●	 Condition of the System; 

●	 Health of the agricultural economy; and 

●	 Any risks in the financial enviro n m e n t . 

P remiums are collected annually from all 

System banks based on the retail loan volume at each bank and its related associations. The Farm Credit Act of 1971, as 

amended (the Act) provides for insurance 

p remiums to be assessed on four classes of 

System loan assets. (For more inform a t i o n , 

see Note 4 to the Corporation’s financial 

s t a t e m e n t s . ) 

As noted, in January 1997, the Board 

reduced insurance premiums for the first 

half of the year. The rate on accrual loans 

was reduced from 15 to 12 basis points, a 20 

p e rcent reduction, and on Federal and state 

g o v e rnment-guaranteed accrual loans to 

z e ro. The Board left the premiums on 

nonaccrual loans at 25 basis points. At midy e a r, the Board aff i rmed these rates for the 

second half of 1997. 

P remium revenue is accrued at December 

31, 1997, re p resenting the estimated pre m iums that were earned but not yet collected 

for calendar year 1997; these pre m i u m s 

w e re collected on January 30, 1998. 

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F a rm Credit System Insurance Fund
 

in Relation to the Secure Base Amount
 

C h a rt 3 

Corporation Interest Yield Compared with 

Similar Bond Funds’ Interest Yi e l d 

C h a rt 4 

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Chart 3 illustrates the growth in the 

Insurance Fund toward the secure base 

amount since the Insurance Fund’s inception. At yearend 1997, the Insurance Fund 

was 1.99 percent of adjusted insured obligations outstanding. Because the secure base 

amount is a percentage of the amount of 

i n s u red debt issued and outstanding, it can 

fluctuate depending upon System bank 

funding tre n d s . The Corporation monitors 

t rends in System debt levels monthly. 

Allocated Insurance Reserve Accounts 

After the secure base amount is reached and 

maintained, the Act provides for the 

Corporation to annually determine and segregate any excess Insurance Fund balances 

into allocated insurance reserve accounts 

established for each System bank (90 percent) and stockholders of the FAC (10 perc e n t ) . 

This annual allocation is determined by 

the amount by which the Insurance Fund 

exceeds the secure base amount calculated 

on an average daily balance basis, after 

adjustment for estimated operating and 

insurance expenses for the immediately succeeding calendar year. Excess Insurance 

Fund balances may be paid to System banks 

and FAC stockholders beginning at least 

eight years after the aggregate Insurance 

Fund balance attains the secure base 

amount, but not before 2005. The law provides for this authority to be exercised at the 

sole discretion of the Corporation’s Board . 

Investment of Insurance Fund Assets 

The Corporation had cash and investments 

of $1.208 billion at December 31, 1997, up 

15 percent from yearend 1996. Funds are 

invested in U.S. Treasury securities in accordance with section 5.62 of the Act, 12 U.S.C. 

2277a-11, and the Corporation’s Investment 

Policy. The policy provides that the Corporation will seek the maximum re t u rn consistent with its liquidity needs and a minimum exposure to loss of principal. The 

average portfolio yield for 1997 was 6.06 

p e rc e n t . 

As a measure of investment management 

p e rf o rmance, the Corporation’s average 

yield was compared with the interest yield 

of seven comparable investment funds available in the private sector. These funds were 

selected because they also invest in shortt e rm U.S. Treasury securities. The comparison 

for the past five years is shown in Chart 4. 

The Corporation’s average yield over time 

has exceeded the peer group, primarily as a 

result of slightly longer weighted average 

portfolio maturity maintained by the 

Corporation. During periods of rising interest rates this diff e rential narrows, while the 

opposite occurs during periods of falling 

i n t e rest rates. 

The Corporation maintains an investment 

strategy of purchasing a ladder of maturities 

and holding investments to maturity in 

a c c o rdance with its Investment Policy. The 

Policy provides for the portfolio to be divided into a liquidity pool and an investment 

p o o l . 

In January 1998, the Board further reduced insurance pre m i u m 

rates on accrual loans to 3 basis points, a 75 percent re d u c t i o n , 

e ffective for the first half of 1998. This reduction reflected the 

continuing strong financial condition of the System and the 

near attainment of the Insurance Fund’s secure base amount 

(2 percent of insured obligations issued and outstanding.) 

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F a rm Credit System Insurance Corporation 

Investment Portfolio 

$ Millions % of Portfolio 

Liquidity Pool One Year or Less $ 2381 2 0 % 

Investment Pool One Year to Five Years $ 745 6 2 % 

Five Years to Ten Ye a r s $ 225 1 8 % 

To t a l $ 1 , 2 0 8 1 0 0 % 

1

Includes cash equivalents 

C h a rt 5 

I n s u red Obligations 

C h a rt 6 

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The liquidity pool may only be invested 

in U.S. Treasury securities with maturities of 

one year or less and must be no less than 

15 percent or more than 25 percent of total 

investments. The investment pool consists 

of the balance of the portfolio and may be 

invested in U.S. Treasury securities with 

maturities from one to 10 years, with the 

limit that no more than 25 percent of the 

investment pool may be invested longer 

than five years. 

Chart 5 shows the balances and maturities 

of the liquidity pool and investment pool at 

December 31, 1997. The weighted average 

portfolio maturity at yearend was 2.9 years. 

I n s u red and Other Obligations 

Obligations insured by the Corporation are 

statutorily defined as any note, bond, 

d e b e n t u re, 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 

o rganized and operating under the same 

title of the Act to issue consolidated notes, 

bonds, debentures, or other obligations. 

C u r rently, there are no consolidated notes, 

bonds or other obligations outstanding. 

Section 4.2(d) authorizes a System bank to 

join with the other banks of the System to 

issue Systemwide notes, bonds, debenture s , 

or other obligations. Insured obligations are 

issued through the Federal Farm Cre d i t 

Banks Funding Corporation on behalf of the 

System banks. The outstanding principal 

and accrued interest balances of insure d 

obligations at December 31 for the past five 

years are shown in Chart 6. 

I n s u red obligations increased by 3.5 percent in 1997. This increase was used primarily to finance higher levels of System 

loan and investment assets. 

The Corporation is also re q u i red by 

statute to use the Insurance Fund to satisfy 

System institution defaults on obligations 

related to FAC-issued bonds under section 

6.26(d)(3) of the Act and ensure the re t i rement of eligible borrower stock. The outstanding balances of these obligations at 

December 31 for the past five years are 

illustrated in Chart 7. 

During 1997, other obligations continued 

to decline as a result of the further re t i rement of outstanding eligible borrower stock. 

In addition, System banks have been providing funds to FAC for the repayment of 

the outstanding FAC assistance bonds. At 

December 31, 1997, the System had pro v i ded for the repayment of approximately $0.7 

billion of the $1.3 billion of FAC assistance 

bonds outstanding. 

Other Obligations
 

C h a rt 7 

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O p e r a t i o n s 

In 1997, the Corporation’s Board adopted a 

five-year strategic plan in accordance with 

the Government Perf o rmance and Results 

Act of 1993 (GPRA). The strategic plan 

focuses on the principal program re s p o n s ibilities of the Corporation and the Insurance 

Fund. Goals for each program area and 

related perf o rmance measures are linked in 

the plan with strategies and time horizons 

for attainment. 

The Corporation completed its fifth year 

of operations in 1997 and continues to operate with a small core staff of 10 employees. 

Its operations benefit from the re i n v e n t i n g 

g o v e rnment initiative that has contributed to 

s m a l l e r, more effective government. This 

initiative provided for the greater use of outs o u rcing to meet operating and specialized 

s t a ffing re q u i re m e n t s . While the Corporation has few permanent employees, it 

retains the critically important capability to 

oversee all aspects of any specialized work 

that might be perf o rmed by outside contractors. Examples of specialized work that 

might be outsourced when necessary, are 

asset management and disposition support, 

due diligence reviews, financial advisory 

services, and accounting and taxation serv i c e s . 

Because of the need to understand the 

potential impact of future events (e.g. dere gulation, globalization, consolidation, financial market innovation) on insured institutions, staff monitors emerging trends and 

periodically updates their analytical tools to 

add newly identified risk factors. This is 

particularly important when evaluating institutions’ viability or when determining the 

statutory “least cost” resolution to pro b l e m 

i n s t i t u t i o n s . 

The Corporation had $1.5 million in operating costs for 1997, an increase of 2.8 percent. Of this amount, the Corporation’s 

fixed costs for staff, travel, rent, and miscellaneous expenses totaled $1.3 million. 

Contract services re p resented the balance of 

operating expenses of $0.2 million. These 

expenses include amounts reimbursed to 

the FCA for examination and other support 

and amounts paid to contractors for serv i c e s . 

The Corporation’s 1997 operating costs 

re p resented 0.12 percent of average assets. 

This ratio has declined over the past five 

years as shown in Chart 8. 

Corporation Operating Expenses
 

as a Percentage of Assets
 

C h a rt 8 

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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. Special examination pro c e d u res are used to evaluate the 

condition of weaker System institutions. 

FCA perf o rms these examinations on a re i mbursable basis. In addition, the Corporation 

assesses risk exposure to the Insurance 

Fund through ongoing review and analysis 

of the financial condition of System institutions, operation of analytical models, re v i e w 

of corporate merger applications submitted 

to FCA, Reports of Examination, and by 

serving as a nonvoting participant on FCA’s 

Regulatory Enforcement Committee. Staff 

also monitors the development of legislative, 

judicial, regulatory, and economic tre n d s 

that could affect the Insurance Fund. 

During 1997, the Corporation adopted additional financial perf o rmance measures for its 

risk monitoring activities and its Insurance 

Fund Allowance for Loss guidelines. 

Financial Assistance and Receivership 

C a p a b i l i t y 

The Insurance Corporation is authorized to 

p rovide assistance to a System institution to 

p revent default, re s t o re it to normal operations, or to facilitate a merger or consolidation. At the present time, no assistance 

a g reements are outstanding. 

The Corporation has developed a program for managing receiverships and conservatorships. To contain costs while providing the statutorily mandated capacity to 

deal effectively with any potential re c e i v e rships or conservatorships, the Corporation 

has identified private firms and Federal 

agencies who can be called upon to pro v i d e 

specialized support if needed. These contingency arrangements effectively leverage 

p e rmanent staff re s o u rces while maintaining 

low overhead during periods of limited or 

no activity. 

In 1997, the Corporation developed 

guidelines for “pre - resolution” special examinations. These would be implemented if 

the Insurance Corporation were to become 

involved in resolving a troubled System 

i n s t i t u t i o n . 

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FINANCIAL STAT E M E N T S
 

Statements of Financial Condition as of December 31, 1997 and 1996 

($ in thousands) 

1 9 9 7 1 9 9 6 

A s s e t s 

Cash and Cash Equivalents $ 1,748 $ 9 5 9 

Investments in U.S. Treasury Obligations 

(Note 3) 1 , 2 0 6 , 4 3 2 1 , 0 5 1 , 7 0 9 

Accrued Interest Receivable 3 0 , 4 4 1 3 0 , 7 7 1 

P remiums Receivable (Note 4) 7 1 , 2 4 2 85,716 

Total Assets $ 1,309,863 $ 1,169,155 

Liabilities and Insurance Fund 

Accounts Payable and 

Accrued Expenses (Note 7) $ 164 $ 2 7 5 

Liability for Estimated Insurance 

Obligations (Note 5) 1 3 9 , 1 7 8 1 3 0 , 0 7 3 

F a rm Credit Insurance Fund 1 , 1 7 0 , 5 2 1 1,038,807 

Total Liabilities and Insurance Fund $ 1,309,863 $ 1,169,155 

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

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FINANCIAL STAT E M E N T S
 

Statements of Income and Expenses and Changes in Insurance Fund
 

for the Years Ended December 31, 1997 and 1996
 

($ in thousands)
 

1 9 9 7 1 9 9 6 

I n c o m e 

P remiums (Note 4) $ 7 1 , 2 4 2 $ 85,736 

I n t e rest Income 71,088 61,471 

Total Income $ 1 4 2 , 3 3 0 $ 147,207 

E x p e n s e s 

Administrative Operating 

Expenses (Note 7) $ 1,511 $ 1,469 

P rovision for Estimated Insurance 

Obligations (Note 5) 9 , 1 0 5 8,509 

Net Income $ 1 3 1 , 7 1 4 $ 137,229 

F a rm Credit Insurance Fund, 

Beginning of Y e a r $ 1,038,807 $ 9 0 1 , 5 7 8 

F a rm Credit Insurance Fund, 

End of Y e a r $ 1 , 1 7 0 , 5 2 1 $ 1,038,807 

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

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FINANCIAL STAT E M E N T S
 

Statements of Cash Flows
 

for the Years Ended December 31, 1997 and 1996
 

($ in thousands) 

1 9 9 7 

Cash Flows from Operating Activities 

Net Income 

Adjustments to Reconcile Net Income 

to Net Cash Provided by Operating Activities: 

D e c rease (Increase) in Accrued Interest Receivable 

D e c rease (Increase) in Premiums Receivable 

Net Amortization and Accretion of Investments 

( D e c rease) Increase in Accounts Payable 

and Accrued Expenses 

I n c rease in Liability for Estimated 

Insurance Obligations 

$ 1 3 1 , 7 1 4 

3 3 0 

1 4 , 4 7 4 

1 2 , 5 1 1 

( 1 1 1 ) 

9 , 1 0 5

Net Cash Provided by Operating Activities $ 168,023 

Cash Flows from Investing Activities 

Payments for Purchase of U.S. Tre a s u r y 

O b l i g a t i o n s 

P roceeds from Redemption of 

U.S. Treasury Obligations 

(403,332) 

2 3 6 , 0 9 8 

Net Cash Used in Investing Activities ( 1 6 7 , 2 3 4) 

Net Change in Cash and Cash Equivalents 7 8 9 

Cash and Cash Equivalents, 

Beginning of Year 9 5 9

Cash and Cash Equivalents, 

End of Y e a r $ 1,748 

1 9 9 6 

$ 137,229 

( 1 , 7 6 0 ) 

( 6 , 3 2 4 ) 

1 3 , 6 1 4 

6 4 

 8,509 

$ 1 5 1 , 3 3 2 

( 3 2 9 , 1 3 5 ) 

1 7 8 , 4 5 5 

( 1 5 0 , 6 8 0) 

6 5 2 

 307 

$ 9 5 9
 

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

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NOTES TO FINANCIAL STAT E M E N T S
 

As of December 31, 1997 and December 31, 1996 

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, 

d e b e n t u res, and other obligations issued 

under subsection (c) or (d) of section 4.2 of 

the Farm Credit Act of 1971 (Act) (insure d 

obligations). Each bank in the Farm Cre d i t 

System (System) participating in insure d 

obligations is an insured System bank. At 

December 31, 1997, there were eight 

i n s u red System banks and 155 direct lender 

a s s o c i a t i o n s . 

The Corporation is managed by a board 

of directors consisting of the same individuals as the Farm Credit Administration (FCA) 

B o a rd except that the Chairman of the FCA 

B o a rd may not serve as the Chairman of the 

Corporation’s Board of Dire c t o r s . 

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 

b a n k ; 

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 

C redit System Financial Assistance 

Corporation (FAC) (FAC bonds) (see Note 

5); and 

3. Ensure the re t i rement of eligible borro w e r 

stock at par value. 

The Corporation, in its sole discretion, is 

authorized to expend amounts to pro v i d e 

financial assistance to certain insured institut i o n s . 

The balances outstanding at December 

31, 1997, for each of the components of the 

Corporation’s insurance responsibilities were 

$62.9 billion of insured obligations, $1.3 billion of FAC bonds (of which $0.7 billion in 

repayments have been provided for), and 

$109 million of eligible borrower stock. 

If the Corporation does not have suff icient funds to ensure payment on insure d 

obligations, System banks will be re q u i re d 

to make payments under joint and several 

l i a b i l i t y . 

Under section 5.63 of the Act, the Corporation is exempt from all Federal, state, 

and local taxes with the exception of re a l 

p roperty taxes. 

Note 2 

S u m m a ry of Significant Accounting Policies 

Accounting Principles and Reporting 

Practices — The accounting and re p o r t i n g 

policies of the Corporation conform to generally accepted accounting principles and, 

as such, the financial statements have been 

p re p a red using the accrual basis of accounting. The preparation of financial statements 

in conformity with generally accepted 

accounting principles re q u i res management 

to make estimates and assumptions that 

a ffect the reported amount of assets and liabilities at the date of the financial statements 

and the reported amount of revenues and 

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expenses during the reporting period. 

Actual results could differ from those estim a t e s . 

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 — Section 5.62 of the Act re q u i re s 

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 

a c c o rdance with the Statement of Financial 

Accounting Standard (SFAS) No. 115 and 

carries them at cost. Premiums and discounts are amortized or accreted using the 

straightline method, which approximates the 

i n t e rest method, over the terms of the 

respective issues. 

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. Insure d 

System banks also face risks from changing 

i n t e rest 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 

c redit, financial, or other risks could occur 

in the future which would have a material 

e ffect on the liability for estimated insurance 

o b l i g a t i o n s . 

P remiums — Annual premiums are re c o rded 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 

e a rn e d . 

R e t i rement Plan — All permanent Corporation employees are covered by the Civil 

Service Retirement System (CSRS) or the 

Federal Employees Retirement System 

( F E R S ) . 

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 

p e rcent of base pay. In addition, for FERSc o v e red 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 onehalf of the next 2 percent contributed by the 

e m p l o y e e . 

R e t i rement plan expenses amounted to 

$94,103 in 1997 and $88,843 in 1996. 

21 
 

 

 

 

 

 

 

Note 3 

I n v e s t m e n t s 

At December 31, 1997, and at December 31, 1996, investments in U.S. Tre a s u r y 

obligations consisted of the following: ($ in thousands) 

G ro s s G ro s s E s t i m a t e d 

December 31, A m o r t i z e d U n re a l i z e d U n re a l i z e d M a r k e t 

1 9 9 7 C o s t G a i n s L o s s e s Va l u e 

U.S. Tre a s u r y 

N o t e s $ 1 , 2 0 6 , 4 3 2 $ 1 9 , 0 6 9 ( $ 8 4 3 ) $ 1 , 2 2 4 , 6 5 8 

December 31, 

1 9 9 6 

U.S. Tre a s u r y 

N o t e s 

$ 1 , 0 5 1 , 7 0 9 $ 7 , 3 9 6 ( $ 3 , 6 11) $ 1 , 0 5 5 , 4 9 4 

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

December 31, 1997, by contractual maturity, are shown below. ($ in thousands) 

E s t i m a t e d 

A m o r t i z e d 

C o s t 

M a r k e t 

Va l u e 

Due in one year or less $ 2 3 6 , 5 9 4 $ 2 3 6 , 3 6 5 

Due after one year through five years 7 4 4 , 7 9 4 7 5 5 , 1 1 4 

Due after five years through 10 years 225,044 2 3 3 , 1 7 9 

$ 1,206,432 $ 1,224,658 

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Note 4 

P remiums 

Each System bank which issues insure d 

obligations under subsection (c) or (d) of 

section 4.2 of the Act is an insured System 

bank and is re q u i red to pay premiums to 

the Corporation. 

The Act establishes the range of insurance 

p remium rates that the Corporation’s Board 

may assess for any calendar year based on 

four classes of an insured bank’s loan assets. 

The four classes of assets and the range 

that may be assessed for each are: (1) average annual accrual loans outstanding (other 

than the guaranteed portions of Govern ­

ment-guaranteed accrual loans) for the year 

may be from zero to 0.0015; (2) average 

annual nonaccrual loans outstanding may 

be from zero to 0.0025; (3) average annual 

portions of Federal Govern m e n t - g u a r a n t e e d 

accrual loans may be from zero to 0.00015; 

and (4) average annual portions of state 

g o v e rnment-guaranteed accrual loans may 

be from zero to 0.0003. 

The Board established insurance pre m i u m 

rates for 1997 at 0.0012 for accrual loans, 

0.0025 for nonaccrual loans and zero for 

G o v e rnment-guaranteed loans. In January 

1998, the Corporation’s Board appro v e d 

insurance premium rates for the first half of 

1998 of 0.0003 for accrual loans, 0.0025 for 

nonaccrual loans and zero for Govern m e n t ­

guaranteed loans. 

The 1987 Act set a base amount for the 

Insurance Fund to achieve. The statutory 

s e c u re base amount is equivalent to 2 percent of the aggregate outstanding insure d 

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 

d e t e rmined by the Corporation, in its sole 

d i s c retion, to be actuarially sound. When 

the amount of the Insurance Fund exceeds 

the secure base amount, the Corporation is 

re q u i red 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, 1997, the Insurance Fund was 

1.99 percent of adjusted insured obligations 

o u t s t a n d i n g . 

Note 5 

Financial Assistance to System Banks and 

Estimated Insurance Obligations 

Financial Assistance 

to Certain System Banks 

The 1987 Act re q u i red that the FCA charter 

the Farm Credit System Assistance Board 

(Assistance Board) and the FAC (see Note 1) 

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 

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Assistance Board approval, these funds were 

used by the FAC to purchase pre f e r red stock 

issued by an institution experiencing financial diff i c u l t y . 

During the period from 1988 to 1992, 

assistance was provided to four open banks 

t h rough the purchase by the FAC of $419 

million in pre f e r red stock issued by these 

institutions. Similar assistance was pro v i d e d 

to the Federal Land Bank of Jackson in 

R e c e i v e r s h i p . 

Prior to the maturity of the related 15-year 

debt obligations, each institution can 

redeem its pre f e r red 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 

p re f e r red stock to the FAC is primarily 

responsible for providing funds for payment 

of the FAC bonds (through redemption of 

the pre f e r red stock purchased with the proceeds of the FAC bonds), the institution may 

be prohibited from redeeming, or may elect 

not to redeem, the pre f e r red 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 re t i re the 

debt. The FAC Trust Fund (Trust Fund) re presents the funds received from System institutions’ purchase of stock in the FAC. The 

Trust Fund totaled approximately $94 million and $89 million at December 31, 1997 

and 1996, respectively. If the Trust Fund is 

not sufficient to re t i re the debt, then the 

Corporation must purchase pre f e r red stock 

f rom the FAC to provide funds to re t i re such 

debt. If the Corporation does not have sufficient funds, the U.S. Treasury must re t i re 

the debt. If this should occur, the 

Corporation is re q u i red to repay the U.S. 

Treasury as funds become available fro m 

the payment of premiums. At December 31, 

1997, the only pre f e r red 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 

e n t e red into an agreement which called for 

the FAC to issue 15-year U.S. Treasury guaranteed bonds to purchase pre f e r red stock in 

the FLBJR. Upon the maturity of the FA C 

bonds used to purchase pre f e r red stock in 

the FLBJR in 2005, the Corporation will provide funds to repay the principal of these 

debt obligations, to the extent that the Tr u s t 

Fund is not sufficient for such purpose. 

In January 1995, the FLBJR was term i n a ted by the FCA and the receiver was disc h a rged after transferring the re m a i n i n g 

receivership assets to the FAC. The final 

amount of assistance provided to the FLBJR 

by the FAC totaled $374 million. 

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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 $139 million and $130 

million at December 31, 1997 and 1996, 

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 re c o rded. In 

a c c o rdance 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 

(5.8 percent for 1997 and 6.5 percent for 

1996). The fair value was appro x i m a t e l y 

$151 million and $135 million as of 

December 31, 1997 and 1996, re s p e c t i v e l y . 

P rovisions for changes in the Corporation’s 

liability are reflected in the statements of 

income and expenses in the amount of $9.1 

million and $8.5 million for the years ended 

December 31, 1997 and 1996, re s p e c t i v e l y . 

The Corporation cannot predict the 

e ffects of future events upon System operations and upon the amount of the Tr u s t 

Fund that will ultimately be available to 

reduce the Corporation’s liability for FLBJRrelated FAC bonds. The Corporation will 

annually reassess the likelihood of earlier 

use of the Trust Fund, changes in Tr u s t 

Fund earnings, and other assumptions 

underlying its estimate of the liability for 

F L B J R - related FAC bonds. 

Other Financial Assistance 

P rovided to System Institutions 

by the FA C 

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 Pre s e r v a t i o n 

A g reement accruals, to re t i re eligible borrower stock of certain liquidating System 

institutions, and to pay operating expenses 

of the Assistance Board. 

P reviously, the Corporation had only 

been re q u i red: (1) to satisfy defaults on the 

repayment of Treasury-paid interest; and 

(2) to purchase the pre f e r red stock of an 

assisted institution when the institution did 

not re t i re 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 re c o v e red from defaulting institutions by the FAC or the Tre a s u r y , 

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 

i n t e rest of other FAC obligations and 

re q u i red System banks to make annual 

annuity payments to the FAC to pro v i d e 

funds for the re t i rement of the Capital 

P reservation Agre e m e n t - related FAC bonds 

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a g g regating $417 million and Tre a s u r y - p a i d 

i n t e rest at maturity. The Corporation is also 

re q u i red to satisfy defaults on the annual 

payments to the FAC to permit the re p a yment of Treasury-paid interest. During 1992 

t h rough 1997, all System banks made their 

annual annuity payments as scheduled. The 

Corporation is not aware of any events or 

c i rcumstances which will prevent System 

banks from meeting their FAC obligations. 

The Corporation actively monitors the 

c reditworthiness 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 

c i rcumstances at this time which would 

re q u i re a liability for estimated insurance 

obligations to be re c o rd e d . 

Note 6 

Operating Lease 

On November 20, 1997, the Corporation 

executed a new six-year lease with the Farm 

C redit System Building Association for off i c e 

space. The terms of the lease provide for 

an annual base rent for office space for the 

six year term of $83,256 for 1998, $84,943 

for 1999, $89,571 for 2000, $92,252 for 2001, 

$95,020 for 2002 and $98,134 for 2003. The 

Corporation re c o rded $66,851 and $65,071 

for 1997 and 1996, re s p e c t i v e l y . 

Note 7 

Related Part i e s 

The Corporation purchases services fro m 

the FCA under an Inter-Agency Agre e m e n t . 

These include examination and administrative support services. The Corporation had 

payables due to the FCA of $22,093 at 

December 31, 1997, and $89,907 at 

December 31, 1996. The Corporation purchased services for 1997 which totaled 

$160,141 compared with $180,543 for 1996. 

26 
 

 

 

 

 

Income and Expenses
 

F a rm Credit System Insurance Corporation By Year
 

($ in thousands) 

I n c o m e E x p e n s e s Net Income 

P rovision for Administrative Changes in 

P re m i u m s I n v e s t m e n t I n s u r a n c e and Operating Insurance 

O b l i g a t i o n s E x p e n s e s F u n d 

1 9 8 9 $ 6 5 , 0 0 0 $ 1 6 , 0 4 1 – $ 1 1 8 $ 8 0 , 9 2 3 

1 9 9 0 $ 7 2 , 0 0 0 $ 2 5 , 7 0 5 $ 1 4 0 , 0 0 0 $ 2 4 3 ( $ 4 2 , 5 3 8 ) 

1 9 9 1 $ 7 7 , 4 6 3 $ 3 1 , 4 8 3 $ 1 5 , 5 5 5 $ 9 5 3 $ 9 2 , 4 3 8 

1 9 9 2 $ 7 3 , 9 0 2 $ 3 7 , 1 9 8 $ 1 2 , 0 6 2 $ 1 , 2 0 0 $ 9 7 , 8 3 8 

1 9 9 3 $ 7 4 , 1 0 0 $ 4 1 , 2 7 7 ( $ 3 9 , 4 4 4 )1 $ 1 , 2 7 8 $ 1 5 3 , 5 4 3 

1 9 9 4 $ 7 6 , 5 2 6 $ 4 6 , 3 8 9 $ 8 , 8 9 0 $ 1 , 4 8 2 $ 1 1 2 , 5 4 3 

1 9 9 5 $ 7 9 , 3 9 4 $ 5 4 , 6 8 8 ( $ 1 4 , 3 2 9 )2 $ 1 , 3 7 9 $ 1 4 7 , 0 3 2 

1 9 9 6 $ 8 5 , 7 3 6 $ 6 1 , 4 7 1 $ 8 , 5 0 9 $ 1 , 4 6 9 $ 1 3 7 , 2 2 9 

1 9 9 7 $ 7 1 , 2 4 2 $ 7 1 , 0 8 8 $9,105 $ 1 , 5 1 1 $ 1 3 1 , 7 1 4 

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

obligation for assistance to the FLB of Jackson. 

2In 1995, this provision was adjusted to reflect a change in the FAC Trust Fund’s investment strategy and the term ination of the FLB of Jackson receivership making available additional funds to reduce the Insurance Corporation’s 

related FAC obligation. 

27 
 

 

 

 

 

 

 

 

 

 

 

R E F E R E N C E S
 

For additional information about the Farm Credit System,
 

its financial condition and perf o rmance, and activities of the Farm Cre d i t
 

Administration, the following publications may be helpful.
 

F a rm Credit System Annual Reports 

to Investors and Quarterly and 

Annual Information Statements for 

the current calendar year and the 2 

p receding calendar years. These are 

available without charge fro m : 

Federal Farm Credit Banks 

Funding Corporation 

10 Exchange Place 

Suite 1401 

Jersey City, NJ 07302 

(201) 200-8000 

Annual Reports of the Farm Cre d i t 

Administration for the past 5 fiscal 

years. These are available without 

c h a rge fro m : 

F a rm Credit Administration 

O ffice of Congressional and 

Public Aff a i r s 

1501 Farm Credit Drive 

McLean, VA 22102-5090 

(703) 883-4056 

P roduction of the 1997 Annual Report of the
 

F a rm Credit System Insurance Corporation coordinated by
 

Anna Lacey with assistance from Barbara Shaffer and Christine Quinn.
 

28