Farm Credit System Insurance Corporation

2001 Annual Report

Protecting Investors 

in Agriculture 

and Rural America

>>>>
CONTENTS 

2 Selected Financial Statistics

3 Investor Protection and the Farm Credit System

4 Strategic Goals and Performance Measures

6 Board of Directors

8 Insurance Fund Management

14 Risk Management

18 Report of Independent Public Accountants

20 Financial Statements

23 Notes to Financial Statements

33 Corporate Officers

33 References

>>>>

Mission

MISSION STATEMENT

AS AN INDEPENDENT ENTITY, THE FARM CREDIT SYSTEM INSURANCE CORPORATION SHALL:

• PROTECT INVESTORS IN INSURED FARM CREDIT SYSTEM OBLIGATIONS AND TAXPAYERS

THROUGH SOUND ADMINISTRATION OF THE FARM CREDIT INSURANCE FUND;

• EXERCISE ITS AUTHORITIES TO MINIMIZE LOSS TO THE INSURANCE FUND; AND

• HELP ENSURE THE FUTURE OF A PERMANENT SYSTEM FOR DELIVERY OF CREDIT TO

AGRICULTURAL BORROWERS.
PAGE 1

May 15, 2002

Gentlemen:

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

1971, as amended, the Farm Credit System Insurance Corporation is pleased to

submit its annual report for calendar year 2001.

The report highlights the Corporation’s role as the independent Federal

corporation established to ensure the timely payment of principal and interest

to investors in Farm Credit System debt securities. The balance in the Insurance

Fund at December 31, 2001, was $1.53 billion. No insurance premiums were

collected for 2001. The Corporation expects to incur $2.29 million in operating

costs in 2002.

Sincerely,

Ann Jorgensen

Chair

The President of the United States Senate

The Speaker of the United States House of Representatives
PAGE 2

Total Assets

Total Liabilities

Insurance Fund Balance

OPERATIONS:

Revenues

Operating Expenses

Insurance Expense

Net Income

Insurance Fund as a Percentage

of Adjusted Insured Debt

2000

$ 1,626

171

1,455

93.8

1.8

11.1

80.9

1.98%

2001

$ 1,718

183

1,535

94.1

2.1

11.9

80.1

1.98%

1999

$ 1,534

160

1,374

127.2

1.6

10.4

115.2

1.99%

($ in millions)

99

$1,718

$1,534

$1,626

00 01

TOTAL ASSETS

$ in millions

1000

0

2000

99

$1,535

$1,374

$1,455

00 01

INSURANCE FUND BALANCE

$ in millions

1000

0

1500

>>>>

2001

SELECTED FINANCIAL STATISTICS
PAGE 3

The Corporation’s primary purpose, as defined by the Farm Credit Act of 1971 

(the Act), is to ensure the repayment of investors who purchase the bonds and

notes issued by the System’s banks. Investors provide the funds the System lends

to agriculture and rural America. 

In 2001, System loan volume grew 10 percent to $82.6 billion. Asset quality

remained sound at most institutions despite poor conditions in agriculture.

Significant government assistance continued to stabilize farm income. On a

combined basis, the System produced strong earnings and added to capital levels. 

Farm Credit System Statistics

($ in billions)

2001 2000

Insured Debt Outstanding $ 81.1 $ 76.8

Farm Mortgage Loans 37.7 34.0

Agricultural Production Loans 20.0 17.5

Loans to Agricultural Cooperatives 8.6 9.5

International Loans 2.8 2.5

Loans to Rural Utilities 7.3 6.3

Rural Home Loans 2.6 2.0

Net Income 1.79 1.42

Nonperforming Assets as a percentage of 1.2% 1.2%

Loans and Other Property

Surplus (excluding Insurance Fund) 12.5% 12.0%

as a percentage of Total Assets

1999

$ 72.2

32.4

16.7

8.7

2.6

5.1

1.5

1.23

1.6%

11.6%

99

$81.1

00 01

INSURED DEBT OUTSTANDING

$ in billions

40

20

10

30

50

70

60

0

80 $76.8 $72.2

>>>> INVESTOR PROTECTION AND THE FARM CREDIT SYSTEM
Protecting Investors 

in Agriculture 

and Rural America

>>>>

STRATEGIC

PAGE 4
The Corporation has three broad goals and performance measures to evaluate

the effectiveness of operations:

• Manage the Insurance Fund to maintain the 2 percent secure base amount.

• Detect, evaluate and manage risks to the Insurance Fund.

• Maintain the capability to manage receiverships or conservatorships.

Performance Measures 2001 Results AVERAGE INVESTMENT

YIELD 2001

6% 5.72

5.35

3%

0%

Corporation

Treasury Funds

INSURANCE FUND MANAGEMENT

• Assess insurance premiums as Reviewed premium rates twice

necessary Approved assessing premiums in 2002

• Achieve investment return comparable See graph on the right 

with peer group of Treasury Bond Funds

• Maintain the 2 percent secure base amount Ranged from 1.97 to 2.0 percent 

throughout most of 2001, 1.98 percent 

at yearend

RISK MANAGEMENT

• Detect risk by screening institutions Evaluated System institutions

Completed special analyses of new forms 

of capital and derivatives

• Identify institutions requiring special Participated in examinations of two 

examinations System banks

• Evaluate potential insurance losses Evaluated loss allowance quarterly

RECEIVERSHIP/CONSERVATORSHIP CAPABILITY

• Complete processing of 90 percent of all No current receivership/conservatorship

claims in specified period activity

• Manage operating costs and asset recovery Corporate readiness maintained through

rates comparable with other Federal insurers training

Help ensure

the Future of

a Credit

System to

serve

Agriculture

GOALS AND PERFORMANCE MEASURES and Rural

America

PAGE 5
>>>>

Ann Jorgensen became a member of hospital, and its affiliated clinics. She was

the Corporation’s Board in May 1997 and was inducted into the Iowa Volunteer Hall of

elected as the Chair in January 2000. She Fame in 1989. She and her husband were

brings to her position extensive experience recognized by Farm Futures magazine in

in production agriculture and accounting. 1983 as the owners of one of the Top 10 Best

She started farming in partnership with her Managed Farms. In 1997, she was one of the

husband in 1963. Their farming enterprise national agricultural leaders named by Alpha

now includes a cropping operation, Jorg- Zeta, the national honorary agricultural

Anna Farms, and a hog operation, fraternity, to its Centennial Honor Role. She

Timberland Hogs Ltd. She has worked as a was named a member of the Farm

tax accountant and as a licensed commodity Foundation’s Bennett Agricultural Round

broker. In 1981, she started Farm Home Table in June 2000. This provides a forum for

Offices, a mail order catalog company, which discussion and dialogue among agricultural,

marketed farm management products to help agribusiness, government, academic, and

farmers improve their financial and interest group leaders on issues of

production management systems. She served importance to agriculture and rural America.

on a number of governing boards for the A native of Iowa, she holds a B.A. from the

State of Iowa, including six years as a University of Iowa.

member of the Board of Regents. The Board

of Regents is responsible for the state’s three

universities, including the University of Iowa

Hospital, a world-renowned teaching

PAGE 6

BOARD 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 Chair of the Corporation’s Board of Directors, however, must be an FCA Board Member other

than the Chair of the FCA Board. Currently, one position on the Board is vacant. 
Michael M. Reyna became a member development, local government finance and

of the Corporation’s Board in October 1998 political reform. In the early 1980s, while

and served as Chairman from November 1998 serving as a private consultant to the Texas

to January 2000, when he was designated by 2000 Project, an initiative of the Governor’s

President Clinton as the Chairman of the Office of Budget and Planning, he developed

Farm Credit Administration. Prior to joining and implemented a computer-based

the Board, he served as President Clinton’s simulation model of the Texas economy

director of USDA Rural Development which estimated employment and population

(formerly known as Farmers Home trends through the year 2000. He was an

Administration) in California from November appointed member of several local

1993 to October 1998. In this capacity, Mr. commissions, including the Sacramento City

Reyna was responsible for growing and Planning Commission, of which he served as

managing a diversified portfolio of housing, Chairman in 1993. Mr. Reyna holds a

business, and infrastructure loans totaling bachelor’s degree in business administration

more than $2.6 billion. He implemented a from the University of Texas at Austin and a

number of significant initiatives in California master’s degree in public policy and

on behalf of the Clinton-Gore administration from the LBJ School of Public

Administration, including the Northwest Affairs at the University of Texas. He and his

Economic Adjustment Initiative, the Rural wife Karen, have two sons.

Empowerment Zone-Enterprise Community

program, the AmeriCorps program, and

several Reinventing Government Initiatives.

Previously, Mr. Reyna served as a principal

advisor to the California State Legislature for

11 years, working on financial service

industry regulation, and a wide range of

issues including housing, economic

PAGE 7
>>>>

Strength

Revenues and Expenses

Net income was $80 million in 2001, a insurance liability, were partially offset by

decrease of 1 percent from the previous year. increased investment income. The mix of

The small decline in net income was a result corporate revenues has changed over the

of several factors. The absence of insurance past several years with interest from

premium revenues and higher expenses, investments rather than premiums now

including the accrual for an estimated representing the primary source of revenue.

PAGE 8

INSURANCE FUND MANAGEMENT

0

1,600

1,700

1,400

1,200

1,000

800

600

400

200

$ in millions

1997 1998 1999 2000 2001

(TOTAL ASSETS VS. INSURANCE FUND EQUITY)

Total Assets Insurance Fund

GROWTH IN THE INSURANCE FUND

In 2001, the Fund grew to $1.53 billion, an increase of 6 percent. 

The Insurance Fund represents the Corporation’s equity, the difference between its total 

assets of $1.72 billion and its total liabilities, including insurance obligations, 

of $183 million.
Expenses totaled $14 million in 2001. This million. The remaining expenses of $0.6

included an expense of $12 million for the million were for contract services, of which

annual provision for the liability to repay $0.3 million was for the cost to convert to

the Farm Credit System Financial Assistance new accounting software during the year.

Corporation (FAC) for certain assistance The Corporation operates with a small core

related bonds which mature in 2005. staff and utilizes contractors with specialized

See Note 5 to the financial statements. expertise when necessary. This approach

keeps operating costs low while offering the

Operating costs were $2.1 million. The flexibility to leverage resources. Operating

Corporation’s fixed costs for staff, travel, costs during the year were 0.13 percent of

rent, and miscellaneous expenses were $1.5 average assets.

PAGE 9

0

1997 1998 1999 2000 2001

CORPORATION REVENUES 1997–2001 

Interest Premiums

$ in millions

100

80

60

40

20
>>>>

The Secure Base Amount Premium Assessment

The secure base amount is 2 percent of The Board reviews the need for premium

outstanding insured obligations and was assessments on a semiannual basis in

established by the Act. When the Insurance September and March. Premiums may be

Fund is at or above this level, the assessed on four classes of loans:

Corporation is required to reduce insurance

premium rates as necessary to maintain the • Accrual loans (non-government guaranteed

Fund at the 2 percent level. The Insurance balance) – from zero to 15 basis points;

Fund began the year at 1.98 percent, • Nonaccrual loans – from zero to 25 basis

attained 2 percent in the first quarter, points;

then trended below due to growth in • Federal Government-guaranteed accrual

insured debt. loans – from zero to 1.5 basis points; and

• State government-guaranteed accrual loans

– from zero to 3 basis points.

(See Note 4 to the Corporation’s financial

statements.)

PAGE 10

INSURANCE FUND MANAGEMENT

1.8

2.1

2.0

1.9

31-DEC-97

30-JUN-98

31-DEC-98

30-JUN-99

31-DEC-99

30-JUN-00

31-DEC-00

30-JUN-01

31-DEC-01

INSURANCE FUND RELATIVE TO THE 2% SECURE BASE AMOUNT AT DECEMBER 31, 2001

Percent
Five factors are considered in setting Investments

premium rates: Investments and cash grew 6 percent during

the year to $1.69 billion at December 31,

• Level of the Insurance Fund relative to the 2001. Funds are invested in U.S. Treasury

secure base amount; securities in accordance with the Act and

• Projected losses to the Insurance Fund; the Corporation’s Investment Policy. The

• Condition of the System; Policy’s objectives seek the maximum return

• Health of the agricultural economy; and consistent with the Corporation’s liquidity

• Risk in the financial environment. needs and a minimum exposure to loss of

principal. The average portfolio yield for

Premium rates for 2001 were set at zero for 2001 was 5.72 percent, down from 5.99

all loans at the September 2000 Board percent the prior year. The drop in

meeting when the Insurance Fund was above investment yield resulted from the

the 2 percent level. At its March 2001 reinvestment of maturing investments in the

review, the Board evaluated each of the lower interest rate environment that

policy factors and left premium rates at zero prevailed throughout the year.

for the balance of the year. As a result, no

premium revenues were accrued in 2001 The Corporation maintains an investment

compared with $1.0 million in 2000. strategy of purchasing a ladder of maturities

Because the Insurance Fund continued to and holding investments to maturity. The

trend below the secure base during the year, Investment Policy provides for the portfolio

the Board at its September review approved to be divided into a liquidity pool and an

a resumption of insurance premiums investment pool. The purpose of the

beginning in January 2002. Premiums will be liquidity pool is to maintain some short-term

assessed on accrual loans at a rate of 3 basis investments while investing the balance of

points and on nonaccrual loans at a rate of the portfolio in longer-term maturities of up

25 basis points. No premiums will be to 10 years.

assessed on Federal or state government

guaranteed loans.

PAGE 11
>>>>

The chart below shows the balances and investors through the Federal Farm Credit

maturities of the liquidity pool and Banks Funding Corporation on behalf of

investment pool at December 31, 2001. The System banks.

weighted average portfolio maturity at

yearend was 3 years. The Corporation is also required by statute

to use the Insurance Fund to satisfy any

Insured and Other defaults related to FAC-issued bonds and to

Obligations ensure the retirement of eligible borrower

During the year, insured obligations stock. These obligations declined slightly in

outstanding at System banks grew by 5.6 2001, resulting from the continued

percent to $81 billion. Since 1997, insured retirement of eligible borrower stock. At

debt outstanding has grown at an average yearend, eligible borrower stock outstanding

annual rate of 6.5 percent. The Corporation at System institutions totaled $44 million,

insures Systemwide and Consolidated notes, down from $54 million in 2000. 

bonds and other obligations issued under the

Act. Insured obligations are issued to

PAGE 12

INSURANCE FUND MANAGEMENT

LIQUIDITY POOL

INVESTMENT POOL

TOTAL

Two Years or Less $ 554 33

Two Years to Five Years 883 52

Five Years to Ten Years 253 15

$1,690 100%

Investment Portfolio

$ MILLIONS % OF PORTFOLIO
The remaining issues of FAC bonds million of assistance bonds still outstanding.

outstanding will mature in 2003 ($450 The funds for retirement of the remaining

million) and 2005 ($325 million). System bonds will come from System banks, the FAC

banks continued making annual payments to Trust Fund and the Insurance Fund. The

FAC to provide funds for the repayment of Corporation’s estimate of its liability to FAC

the remaining bonds. At December 31, 2001, at December 31, 2001, was $182 million. See

the System had provided for the repayment Note 5 to financial statements.

of approximately $330 million of the $775

PAGE 13

0.00

2.00

1.50

1.00

0.50

OTHER OBLIGATIONS

$ in billions

1997 1998 1999 2000

FAC Assistance Bonds Eligible Borrower Stock

$1.37 $1.09

$.93 $.83

2001

$.82

58

82

78

74

70

66 

62

INSURED OBLIGATIONS

$ in billions

$62.9

1997

+8.7%

$68.4

1998

+5.5%

$72.2

1999

+6.4%

$76.8

2000

+5.6%

$81.1

2001
>>>> Exercise Authorities to

Minimize

Insurance Losses RISK

PAGE 14
PAGE 15

Confidence

MANAGEMENT

The Corporation’s program to identify and Financial Assistance and

manage risk to the Insurance Fund Receivership 

minimizes the Fund’s exposure to potential The Insurance Corporation is authorized to

losses through early detection. Special provide assistance to a System institution to

examination procedures are used to evaluate prevent default, restore it to normal

the condition of weaker System institutions. operations, or to facilitate a merger or

In addition, the Corporation assesses risk consolidation. At the present time, no

exposure to the Insurance Fund through its assistance agreements are outstanding.

ongoing review and analysis of the financial

condition of System institutions, operation The Corporation also has statutory

of analytical models, review of corporate responsibility to serve as receiver or

actions approved by FCA for System conservator for a System institution when

institutions, and by serving as a nonvoting appointed by the FCA. To fulfill this role and

participant on FCA’s Regulatory Enforcement continue to operate with a small core staff,

Committee. During the year, the Corporation the Corporation uses outside contractors on

monitored trends in the System’s structure a standby basis when necessary. This allows

and activities, including new forms of us to contain costs during periods of limited

financing. or no activity while providing access to the

resources necessary should the need arise. At

Corporation staff also monitor the the present time there are no receiverships

legislative, judicial, regulatory, and economic or conservatorships. The Corporation

trends that could affect the Insurance Fund. conducts periodic training to help its

For 2002, USDA forecasts a modest increase personnel maintain proficiencies should they

in U.S. agricultural exports. However, most be called upon to perform receivership

farm commodity prices are expected to responsibilities.

remain weak as the U.S. and global

economies slowly recover from the recession.

The Corporation will closely watch the effect

of these and other developments on System

borrowers.
FARM CREDIT SYSTEM INSURANCE CORPORATION

>>>> Protecting Investors 

in Agriculture 

and Rural America

FINANCIAL

PAGE 16
INFORMATION

PAGE 17
PAGE 18
PAGE 19
PAGE 20

>>>> FINANCIAL STATEMENTS

FARM CREDIT SYSTEM INSURANCE CORPORATION

Statements of Financial Condition as of December 31, 2001 and 2000

2001 2000

$ 2,849 $ 139,840

ations 1,687,165 1,457,618

27,654 27,044

1,040

7

OTAL ASSETS $ 1,717,668 $ 1,625,549

enses $ 332 $ 199

bligations 182,434 170,499

182,766 170,698

1,534,902 1,454,851

ANCE FUND $ 1,717,668 $ 1,625,549

($ in thousands)

ASSETS

Cash and Cash Equivalents

Investments in U.S. Treasury Oblig

(Note 3)

Accrued Interest Receivable

Premiums Receivable (Note 4)

Other Receivables

T

LIABILITIES AND INSURANCE FUND

Accounts Payable and Accrued Exp

(Note 7)

Liability for Estimated Insurance O

(Note 5)

Total Liabilities

Farm Credit Insurance Fund

TOTAL LIABILITIES AND INSUR

The accompanying notes are an integral part of these financial statements.
PAGE 21

INCOME

Premiums (Note 4)

Interest Income

Other Income

TOTAL INCOME

EXPENSES

Administrative Operating Expenses

(Note 7)

Provision for Estimated Insurance Obligations

(Note 5)

NET INCOME 

Farm Credit Insurance Fund, 

Beginning of Year

Farm Credit Insurance Fund, 

End of Year

2001

$

94,112

1

$ 94,113

$ 2,127

11,935

$ 80,051

1,454,851

$ 1,534,902

2000

$ 1,040

92,776

13

$ 93,829

$ 1,797

11,154

$ 80,878

1,373,973

$ 1,454,851

Statements of Income and Expenses and Changes in Insurance Fund 

for the Years Ended December 31, 2001 and 2000

($ in thousands)

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

FARM CREDIT SYSTEM INSURANCE CORPORATION

Statements of Cash Flows 

for the Years Ended December 31, 2001 and 2000

($ in thousands)

2001 2000

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income $ 80,051 $ 80,878

Adjustments to Reconcile Net Income to Net 

Cash Provided by Operating Activities:

(Increase) in Accrued Interest Receivable (610) (990)

Decrease in Premiums Receivable 1,040 44,456

Net Amortization and Accretion of Investments 19,094 16,211

Decrease (Increase) in Other Receivables 7 (4)

Increase (Decrease) in Accounts Payable 133 (22)

and Accrued Expenses

Increase in Liability for Estimated 11,935 11,154

Insurance Obligations

NET CASH PROVIDED BY OPERATING ACTIVITIES 111,650 151,683

CASH FLOWS FROM INVESTING ACTIVITIES

Payments for Purchase of U.S. Treasury Obligations (561,230) (234,916)

Proceeds from Maturity of U.S. Treasury Obligations 312,589 217,567

Net Cash Used in Investing Activities (248,641) (17,349)

Net Change in Cash and Cash Equivalents (136,991) 134,334

Cash and Cash Equivalents,

Beginning of Year 139,840 5,506

Cash and Cash Equivalents,

End of Year $ 2,849 $ 139,840

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

PAGE 22
Note 1 — Insurance Fund: 2. Satisfy, pursuant to section 6.26(d)(3)

Statutory Framework of the Act, defaults by System banks

on obligations related to the issuance

The Agricultural Credit Act of 1987 (1987 of U.S. Treasury-guaranteed bonds by

Act) established the Farm Credit System the Farm Credit System Financial

Insurance Corporation (Corporation) for the Assistance Corporation (FAC) (FAC

purpose of ensuring the timely payment of bonds) (see Note 5); and

principal and interest on notes, bonds,

debentures, and other obligations issued 3. Ensure the retirement of eligible

under subsection (c) or (d) of section 4.2 of borrower stock at par value.

the Farm Credit Act of 1971, as amended

(Act), (insured obligations). Each bank in The Corporation, in its sole discretion, is

the Farm Credit System (System) authorized to expend amounts to provide

participating in insured obligations is an financial assistance to certain insured

insured System bank. At December 31, 2001, institutions.

there were seven insured System banks and

114 direct lender associations. The balances outstanding at December 31,

2001, for each of the components of the

The Corporation is managed by a board of Corporation’s insurance responsibilities were

directors consisting of the same individuals $81 billion of insured obligations, $775

as the Farm Credit Administration (FCA) million of FAC bonds (of which $330 million

Board except that the Chairman of the FCA in repayments have been provided for), and

Board may not serve as the Chairman of the $44 million of eligible borrower stock.

Corporation’s Board of Directors.

If the Corporation does not have sufficient

The Corporation must spend the amounts funds to ensure payment on insured

necessary to: obligations, System banks will be required 

to make payments under joint and several

1. Ensure the timely payment of interest liability, as required by section 4.4(2) of 

and principal on insured obligations the Act.

in the event of default by an insured

System bank; 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.

PAGE 23

>>>> NOTES TO FINANCIAL STATEMENTS

FARM CREDIT SYSTEM INSURANCE CORPORATION
>>>>

Note 2 — Summary of Cash and Cash Equivalents—Cash and cash

Significant Accounting Policies equivalents include investments in U.S.

Treasury obligations with original maturities

Accounting Principles and Reporting of 90 days or less. At December 31, 2001,

Practices—The accounting and reporting the Corporation held $2.8 million in

policies of the Corporation conform to overnight Treasury certificates maturing on

accounting principles generally accepted in January 2, 2002, with an investment rate of

the United States of America (GAAP) and, as 1.63 percent.

such, the financial statements have been

prepared using the accrual basis of Investments in U.S. Treasury

accounting. The preparation of financial Obligations—Section 5.62 of the Act

statements in conformity with GAAP requires requires that funds of the Corporation, not

management to make estimates and otherwise employed, shall be invested in

assumptions that affect the reported amount obligations of the United States or in

of assets and liabilities, disclosure of obligations guaranteed as to principal and

contingent assets and liabilities at the date interest by the United States. The

of the financial statements, and the reported Corporation has classified its investments as

amount of revenues and expenses during the held to maturity in accordance with the

reporting period. Actual results could differ Statement of Financial Accounting Standard

from those estimates. (SFAS) No. 115 and carries them at amortized

cost. Premiums and discounts are amortized

or accreted using the straight-line method,

which approximates the interest method,

over the terms of the respective issues. Fair

value is estimated based on quoted market

prices for those or similar instruments.

PAGE 24

NOTES TO FINANCIAL STATEMENTS
Liability for Estimated Insurance Premiums—Annual premiums are recorded

Obligations—The liability for estimated as revenue during the period on which the

insurance obligations is the present value of premiums are based. All premiums are due

estimated probable insurance payments to be on or before January 31 of the year

made in the future based on the subsequent to the year in which they are

Corporation’s analysis of economic conditions earned.

of insured System banks. (Also see Note 5.)

Retirement Plan—All permanent

The insured System banks’ primary lending Corporation employees are covered by 

markets are borrowers engaged in farming, the Civil Service Retirement System (CSRS) 

ranching, and producing or harvesting of or the Federal Employees Retirement 

aquatic products, and their cooperatives. System (FERS).

Financial weaknesses in these market

segments and the effect of general market The Corporation’s contribution during 2001,

conditions on the System’s borrowers could to the CSRS plan was 8.5 percent of base

adversely affect the banks’ financial pay. For those employees covered by FERS,

condition and profitability. Insured System the Corporation’s contribution was 10.7

banks also face risks from changing interest percent of base pay. In addition, for FERSrate environments and the need to maintain covered employees, the Corporation

ongoing access to financial markets. Adverse automatically contributes 1 percent of base

changes in the financial condition and pay to the employee’s Thrift Savings Plan

profitability of insured System banks account, matches the first 3 percent

resulting from increased levels of credit, contributed by the employee, and matches

financial, or other risks could occur in the one-half of the next 2 percent contributed

future which would have a material effect on by the employee.

the liability for estimated insurance

obligations. Retirement plan expenses amounted to

$122,782 in 2001 and $107,851 in 2000.

PAGE 25
PAGE 26

>>>> NOTES TO FINANCIAL STATEMENTS

Note 3 — Investments

At December 31, 2001, and at December 31, 2000, investments in U.S. Treasury obligations

consisted of the following:

($ in thousands)

Amortized Gross Gross Estimated

Cost Unrealized Unrealized Market

Gains Losses Value

December 31, 2001

U.S. Treasury Notes $ 1,687,165 $ 69,565 ($ 2,684) $ 1,754,046

December 31, 2000

U.S. Treasury Notes $ 1,457,618 $ 31,783 ($ 1,535) $ 1,487,866

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

at December 31, 2001, by contractual maturity, are shown below. 

($ in thousands) Amortized Estimated

Cost Market Value

Due in one year or less $ 283,392 $ 287,976

Due after one year through five years 1,151,258 1,206,844

Due after five years through 10 years 252,515 259,226

$ 1,687,165 $ 1,754,046
Note 4 — Premiums, the Secure second half of 2001. In September 2001, the

Base and Excess Insurance Fund Corporation’s Board approved an assessment

Balances for 2002 of 3 basis points for accrual loans

and 25 basis points for nonaccrual loans.

Each System bank which issues insured Insurance premium rates are reviewed

obligations under subsection (c) or (d) of semiannually in March and September.

section 4.2 of the Act is an insured System

bank and may be required to pay premiums The Act sets a base amount for the

to the Corporation. Insurance Fund to achieve. The statutory

secure base amount is equivalent to 2

The Act establishes the range of insurance percent of the aggregate outstanding

premium rates that the Corporation’s Board insured obligations of all insured System

may assess for any calendar year based on banks (adjusted downward by a percentage

four classes of an insured bank’s loan assets. of the guaranteed portions of principal

The asset classes and the range that may be outstanding on Government-guaranteed

assessed for each are: (1) average annual loans in accrual status) or such other

accrual loans outstanding (other than the percentage as determined by the

guaranteed portions of Government- Corporation, in its sole discretion, to be

guaranteed accrual loans) for the year may actuarially sound. When the amount of the

be from zero to 0.0015; (2) average annual Insurance Fund exceeds the secure base

nonaccrual loans outstanding may be from amount, the Corporation is required to

zero to 0.0025; (3) average annual portions reduce the premiums, but it still must

of Federal Government-guaranteed accrual ensure that reduced premiums are sufficient

loans may be from zero to 0.00015; and (4) to maintain the level of the Insurance Fund

average annual portions of state government- at the secure base amount.

guaranteed accrual loans may be from zero to

0.0003. The Insurance Fund was below the secure

base amount during most of 2001, due to

Insurance premium rates for the first half of growth in insured obligations during the

2001 were set at the Board’s September 2000 year. At December 31, 2001, the Insurance

meeting at zero for all loan classes. In March Fund was 1.98 percent of adjusted insured

2001, the Corporation’s Board approved obligations outstanding.

maintaining premium rates at zero for the

PAGE 27
>>>>

A 1996 amendment to the Act requires the certain System banks experiencing financial

Corporation to establish reserve accounts for difficulty and for other statutory authorized

each System bank and an account for the purposes.

stockholders of the FAC. If at the end of any

calendar year the Insurance Fund is at the Financial Assistance to Certain 

secure base amount, the Corporation is to System Banks

segregate any excess balances into these

allocated insurance reserve accounts (AIRAs). During the period from 1988 to 1992,

In 1999, the Corporation’s Board adopted a assistance was provided to four open banks

Policy Statement on the Secure Base Amount through the purchase by the FAC of $419

and Allocated Insurance Reserve Accounts million in preferred stock issued by these

which provides guidelines for implementing institutions. Similar assistance totaling $374

this statutory authority. At December 31, million was provided to the Federal Land

2001, because the Insurance Fund was below Bank of Jackson in Receivership to facilitate

the 2 percent secure base amount, there its closing and liquidation. Subject to

were no excess balances to allocate. Assistance Board approval, these assistance

funds were used by the FAC to purchase

Note 5 — Financial Assistance preferred stock issued by an institution

to System Banks and Estimated experiencing financial difficulty.

Insurance Obligations

Prior to the maturity of the related 15-year

The 1987 Act required that the FCA charter debt obligations, each institution can

the Farm Credit System Assistance Board redeem its preferred stock, pursuant to

(Assistance Board) and the FAC (see Note 1) Section 6.26 of the Act, so as to allow the

to carry out a program of financial assistance FAC to pay the principal of the maturing

to the Farm Credit System. In order to raise obligation. While an institution that issues

funds to provide this assistance, the FAC had preferred stock to the FAC is primarily

the authority to issue debt obligations with responsible for providing funds for payment

a maturity of 15 years. During 1988 to 1992, of the FAC bonds (through redemption of the

the FAC issued $1.26 billion in bonds. These preferred stock purchased with the proceeds

funds were used to provide assistance to of the FAC bonds), the institution may be

prohibited from redeeming, or may elect not

to redeem, the preferred stock pursuant to

PAGE 28

NOTES TO FINANCIAL STATEMENTS
section 6.26 of the Act. If this occurs, then entered into an agreement which called for

the FAC must use funds from its trust fund, the FAC to issue 15-year U.S. Treasuryto the extent available, to retire the debt. guaranteed bonds to purchase preferred

The FAC Trust Fund (Trust Fund) represents stock in the FLBJR. Upon the maturity in

the funds received from System institutions’ 2005 of the FAC bonds used to purchase

purchase of stock in the FAC. The Trust Fund preferred stock in the FLBJR, the

totaled approximately $123 million and $115 Corporation will provide funds to repay the

million at December 31, 2001 and 2000, principal of these debt obligations, to the

respectively. If the Trust Fund is not extent that the Trust Fund is not sufficient

sufficient to retire the debt, then the for such purpose. In January 1995, the

Corporation must purchase preferred stock FLBJR was terminated by the FCA and the

from the FAC to provide funds to retire such receiver was discharged after transferring the

debt. If the Corporation does not have remaining receivership assets to the FAC. 

sufficient funds, the U.S. Treasury must

retire the debt. If this should occur, the Estimated Insurance Obligation

Corporation is required to repay the U.S.

Treasury as funds become available from the The Corporation estimated the present value

payment of premiums. At December 31, of its liability to provide funds for payment

2001, the only preferred stock held by the of the $374 million non-callable 15-year

FAC was associated with the assistance maturing debt to be approximately $182

provided to the Federal Land Bank of million and $170 million at December 31,

Jackson. 2001 and 2000, respectively. This liability is

reflected in the accompanying statements of

On May 20, 1988, the FCA placed the Federal financial condition. The present value of this

Land Bank of Jackson and the Federal Land obligation is based on a discount rate of 7

Bank Association of Jackson in receivership percent to maturity, which was established

(collectively the FLBJR) and appointed a at the time this liability was originally

receiver to liquidate their assets. As of April recorded. In accordance with SFAS No. 107,

27, 1990, the FCA, the Receiver of the the fair value of this liability has been

FLBJR, the FAC, the System banks, the estimated by management using discount

Assistance Board, and the Corporation rates based upon U.S. Treasury securities of

similar durations (4.0 percent for 2001 and

5.1 percent for 2000). The fair value was

PAGE 29
>>>>

approximately $200 million and $184 million institutions, and to pay operating expenses

as of December 31, 2001 and 2000, of the Assistance Board. 

respectively. Provisions for changes in the

Corporation’s liability are reflected in the Previously, the Corporation had only been

statements of income and expenses in the required: (1) to satisfy defaults on the

amount of $11.9 million and $11.2 million repayment of Treasury-paid interest; and (2)

for the years ended December 31, 2001 and to purchase the preferred stock of an

2000, respectively. assisted institution when the institution did

not retire the stock at the maturity of the

The Corporation cannot predict the effects of FAC bonds issued to purchase it. The 1992

future events upon System operations and Act made the Corporation responsible for

upon the amount of the Trust Fund that will defaults by System institutions on

ultimately be available to reduce the obligations related to the remaining $454

Corporation’s liability for FLBJR-related FAC million of FAC bonds and related interest if

bonds. The Corporation will annually reassess such amounts cannot be recovered from

the likelihood of earlier use of the Trust defaulting institutions by the FAC or the

Fund, changes in Trust Fund earnings, and Treasury, as the case may be, within 12

other assumptions underlying its estimate of months.

the liability for FLBJR-related FAC bonds.

The 1992 Act also expanded the potential

Other Financial Assistance Provided to uses of the Trust Fund to satisfy System

System Institutions by the FAC institution defaults on the principal and

interest of other FAC obligations and

The Farm Credit Banks and Associations required System banks to make annual

Safety and Soundness Act of 1992 (1992 annuity payments to the FAC to provide

Act) expanded the Corporation’s funds for the retirement of the Capital

responsibility to insure defaults by System Preservation Agreement-related FAC bonds

institutions on payments related to other aggregating $417 million and Treasury-paid

assistance funded by FAC bonds. These FAC interest at maturity. The Corporation is also

bonds, aggregating $454 million, were issued required to satisfy defaults on the annual

to pay System Capital Preservation payments to the FAC to permit the

Agreement accruals, to retire eligible repayment of Treasury-paid interest. During

borrower stock of certain liquidating System 1992 through 2001, all System banks made

PAGE 30

NOTES TO FINANCIAL STATEMENTS
their annual annuity payments as scheduled. space. The terms of the lease provide for an

The Corporation is not aware of any events annual minimum base rent for office space

or circumstances which will prevent System for the remaining term of $95,020 for 2002

banks from meeting their FAC obligations. and $98,134 for 2003. The Corporation

recorded lease expenses (including operating

The Corporation actively monitors the cost assessments) of $99,175 and $95,357 for

creditworthiness and financial position of 2001 and 2000, respectively.

the insured System banks. Other than

obligations that have occurred as a result of Note 7 — Related Parties

resolving the FLBJR, as described above,

management is not aware of any events or The Corporation purchases services from the

circumstances at this time which would FCA under an Inter-Agency Agreement. These

require a liability for estimated insurance include examination and administrative

obligations to be recorded. support services. The Corporation had

payables due to the FCA of $100,350 at

Early Redemption of Certain December 31, 2001, and $58,086 at

FAC Bonds December 31, 2000. The Corporation

purchased services for 2001 which totaled

In November 1998, April 1999, and $535,075 compared with $220,595 for 2000.

September 2000, System banks provided the Included in 2001 purchased services is

necessary funds to allow the FAC to call and $350,000 for reimbursement of conversion

retire early $486 million of the $1.26 billion costs incurred by the FCA in implementing a

in FAC bonds issued during 1988 to 1992 new financial management system that FCA

(see Note 5, paragraph 1). Repayment of the used to provide accounting services to the

remaining FAC bonds in accordance with the Corporation.

Act is being provided for by System banks

and the Insurance Corporation. The Corporation provided financial advisory

assistance to the FCA under a related InterNote 6 — Operating Lease Agency Agreement, recognizing revenue in

2001 of $1,106 and in 2000 of $13,430. 

On November 20, 1997, the Corporation At December 31, 2001, and 2000, the

executed a new six-year lease with the Farm Corporation had a receivable from the FCA

Credit System Building Association for office for $369 and $7,709 respectively.

PAGE 31
PAGE 32

>>>> NOTES TO FINANCIAL STATEMENTS

Income and Expenses

Farm Credit System Insurance Corporation By Year

($ in thousands)

Premiums Investment Provision for Administrative Changes in 

Insurance and Operating Insurance

Obligations Expenses Fund

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

1990 $ 72,000 $ 25,705 $ 140,000 $ 243

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 $ 1,278 $ 153,543

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

1995 $ 79,394 $ 54,688 $ 1,379 $ 147,032

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

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

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

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

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

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

($ 42,538)

($ 39,444)1

($ 14,329)2

INCOME EXPENSES NET INCOME

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

obligation for assistance to the FLB of Jackson.

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

termination of the FLB Jackson receivership making available additional funds to reduce the Insurance Corporation’s

related FAC obligation.
Mary Creedon Connelly Chief Operating Officer

Dennis M. Pittman Director of Risk Management

Alan J. Glenn Chief Financial Officer

Dorothy L. Nichols General Counsel

C. Richard Pfitzinger Asset Assurance Manager

Kelly Mikel Williams Secretary to the Board

Copies of Farm Credit System Annual Copies of the Annual Performance and

Reports to Investors and Quarterly and Accountability Reports of the Farm 

Annual Information Statements may be Credit Administration (FCA) may be

obtained from: obtained from:

Federal Farm Credit Banks Office of Congressional and

Funding Corporation Public Affairs

10 Exchange Place Farm Credit Administration

Suite 1401 1501 Farm Credit Drive

Jersey City, NJ 07302 McLean, VA 22102-5090

(201) 200-8000 (703) 883-4056

Production of the 2001 Annual Report of the Farm Credit System Insurance Corporation

coordinated by Anna Lacey with assistance from Regena Rose and Christine Quinn.

PAGE 33

>>>> CORPORATE OFFICERS

>>>> REFERENCES
FARM CREDIT SYSTEM INSURANCE CORPORATION

1501 Farm Credit Drive

McLean, VA 22102

(703) 883-4380

www.fcsic.gov