provide funds to retire such debt.
Additionally, if the Corporation does
not have sufficient funds, the U.S.
Treasury must retire the debt. The
Corporation is required to repay the
USS. Treasury as funds become available
from the payment of premiums.

On May 20, 1988, the FCA, at the
request of the Assistance Board, 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
for the sale of substantially all of the
remaining assets of the FLBJR. In
June 1990, the above parties
consummated the transactions
contemplated by the agreement. The
agreement 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.
Assistance given by the FAC to the
FLBJR totaled $388 million.

Asa result of the April 27, 1990
agreement, it is probable that the
Corporation will have to retire at least a
portion of the FAC bonds. It is not
clear, however, to what extent the
Corporation can rely on the availability
of the Trust Fund to pay a portion of
the FLBJR-related FAC bonds.

Availability of the Trust Fund is
dependent on the ability of other Farm
Credit banks to redeem preferred stock
purchased by the FAC with proceeds
from FAC bonds.

As of December 31, 1992 and 1991,
there were $419 million of FAC bonds
outstanding related to assistance
provided to four other System banks.
‘These bonds, also 15-year bonds, will
mature in 2003, 2004, and 2005.
During 1992, two of the four banks
(AgriBank FCB and the Omaha FCB)
placed the necessary funds in an
irrevocable trust with FAC to allow the
retirement of the related $240 million
of FAC bonds at maturity.

At the present time, the Corporation is
not aware of any information that
would indicate the two remaining FCBs
(Louisville FCB and the Spokane FCB)
will not be able to redeem their
preferred stock. If these FCBs cannot
redeem the stock so that the bonds can
be retired, the Trust Fund may be
exhausted prior to the maturity of the
FAC bonds that were issued in relation
to the FLBJR.. In addition, the Farm
Credit Banks and Associations Safety
and Soundness Act of 1992 expanded
the uses of the Trust Fund. The Trust
Fund may now be used to satisfy
System institution defaults on the
principal and interest of all other FAC
obligations. Therefore, because the
availability of the Trust Fund is
uncertain, the Corporation estimated
the present value of its liability for
payment of the entire $388 million of
15-year maturing debt to be
approximately $166 million and $156
million at December 31, 1992 and
1991, respectively. This liability is
accrued in the accompanying statements

19



Farm Credit System Insurance Corporation
Statements of Income and Expenses and Changes in Insurance Fund for the
Years Ended December 31, 1992 and 1991

(In Thousands)
1992 1991
Income
Premiums (Note 4) $ 73,902 $77,463
Interest Income 36,982 31,483
Realized Gain on Sale of Investment oi 6 216: =a
< Total Income $111,100 $108,946
Administrative Operating Expenses
(Note 8) $ 1,200 $1.5. 953.
Provision for Eligible Borrower Stock
(Note 5) 1,173 -
Provision for Estimated Insurance Obligations
(Note 5) 10,889 15,555
Net Income 97,838 92,438
Farm Credit Insurance Fund, Beginning of Year 390,622 298,184
Farm Credit Insurance Fund, End of Year $488,460 $390,622

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

13




Mission Statement

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

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

° Exercise its authorities to minimize exposure to the

Insurance Fund: and

* Promote safe and sound operations of a permanent system

jor delivery of credit to agricultural borrowers.


of financial condition. The $10.9
and $15.5 million provisions for
estimated insurance obligations for the
years ended December 31, 1992 and
1991, respectively, represent the
accrued increase in the Corporation’s
obligation for FLBJR-related FAC
bonds. The discount rate used for
1992 and 1991 was 7 percent.

The Corporation has also recorded a
liability for providing funds to ensure
the retirement of eligible borrower
stock of the Richmond, Texas, PCA
in Receivership. The amount of
eligible borrower stock to be retired at
December 31, 1992, was $1.17
million. On January 1, 1993, the
Corporation will have the legal
obligation to provide funds to ensure
the retirement of eligible borrower
stock in System institutions (see Note 1).

‘The Corporation actively monitors the
creditworthiness and financial position
of the insured System banks. Other
than obligations that have occurred as
a result of closing out the FLBJR and
having to provide funds to retire the
eligible borrower stock at the
Richmond PCA in Receivership, as
described above, Corporation
management is not aware of any
events or circumstances which would
require a liability for estimated
insurance obligations to be recorded.

Note 6—1992 Act

The Farm Credit Banks and
Associations Safety and Soundness Act
was enacted in 1992, (1992 Act)
amending the Farm Credit Act of
1971. One provision of the 1992 Act
requires the Federal Intermediate
Credit Bank of Jackson (FICB),
Mississippi, to merge with the Farm
Credit Bank (FCB) of Texas unless
the FICB merges voluntarily with
another FCB by June 30, 1993. The
deadline can be extended one time by
FCA to no later than October 31,
1993, provided the parties to the
merger submit to FCA evidence of a
good faith intent to merge. If the
FICB fails to merge by the deadline
or any extension, the FICB is required
to merge with the Farm Credit Bank
of Texas subject to terms and
conditions determined by an
arbitrator. In the event of an
arbitrated merger, the Corporation is
required to expend amounts necessary
to facilitate the merger. Such
assistance would be in amounts not to
exceed that required to maintain the
book value per share of stockholders’
equity at the same value reflected on
the most recent audited financial
statements of the FICB and the FCB
of Texas, prior to, or effective with,
the date of the merger. The
Corporation is also required to
guarantee any loss to the merged
bank, caused by the default of any
association that was a stockholder of
the FICB immediately prior to the
merger or its successor, on any
obligation of principal or interest
owed to the merged bank. In the
event such assistance is necessary, the
Corporation would determine the
terms and conditions.

20

The 1992 Act also authorizes the
FCA to require the FICB to merge
with an FCB at any time prior to the
completion of the required merger if
the FCA determines that the FICB is
being operated in an unsafe and
unsound manner. In the event of an
FCA-directed merger resulting from
unsafe and unsound conditions, the
Corporation is required to expend
amounts necessary to facilitate the
merger including guaranteeing the
other insured System bank against loss
resulting from its merger or
consolidation with the FICB. In the
event such assistance becomes
necessary, the Corporation would
determine the terms and conditions.

On February 3, 1993, the FCA
received a letter of intent to merge
from the FICB and the FCB of
Columbia, South Carolina. On
February 10, 1993, the FCA Board
approved an extension of the
voluntary merger deadline to October
31, 1993. At this time, Corporation
management is not aware of any
events or circumstances which would
prevent this merger from occurring, or
that any assistance from the
Corporation will be required.

The 1992 Act expanded the
Corporation’s liability for defaults of
System institutions on payments
related to FAC bonds. Previously, the
Corporation had only been required
(1) to satisfy defaults on the
repayment of Treasury-paid interest
and (2) to purchase preferred stock of
an assisted institution when the
institution does not retire it at the
maturity of the FAC bonds issued to
purchase it. The 1992 Act made the
Corporation responsible for defaults of
System institutions on obligations


References

For additional information about the System, its financial condition and performance, and activities of the FCA, 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 two 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 five 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

Reports for previous years are subject to availability, but copies ate available for inspection.

22


Note 3—Investments

At December 31, 1992, investments in U.S. Treasury obligations consisted of the

following:
(In Thousands)

Book Value

U.S. Treasury Notes $ 83,364
3,606

44,951

90,982

3,632

92,464

a 44,696
85,164

$561,100

Market Value

$ 84,879
3,670
45,212
94,978
3,799
98,353
44,828
91,269
456
6,443
1,809
99,463
4,453

$579,612

Face
Rate

7.250%
7.250%
7.250%
8.000%
8.000%
8.875%
8.875%
7.875%
7.875%
7.875%
8.500%
8.500%
8.500%

Maturity
Date

715193
7/15/93,
7ASI93,
7NSI94
7IN5194
7INSI95
TINSIOS
7/5196
7115196
7115/96
75/97
75/97
75197

At December 31, 1991, the Corporation’s investment portfolio consisted of U.S.
Treasury notes and bills with a book value of $454.5 million and a market value of

$476.3 million.

17



1988 =—:1989. 1990 1991-1992

($ billions)
Systemwide obligations $51.9 $53.8 $53.1 $52.1 $52.1
Consolidated bank obligations 15 15 1.0 7 7
Interest payable 11 11 2. 7 5

Toul $54.5 $56.4 $55.0 $53.5 $533

The Corporation is also required by
statute to use the Insurance Fund to
(a) satisfy System institution defaults on
obligations related to the issuance of

z bonds by the Farm Credit System
Financial Assistance Corporation (FAC)
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 were:

1988 1989 1990 1991. 1992

($ billions)
FAC Assistance $7 $8 $1.3 $13 $1.3
Eligible Borrower Stock BS. PILZ 1D 7 A

During the fourth quarter of 1992, the
Corporation established a liability of
$1.17 million to ensure the expected
retirement of eligible borrower stock
outstanding at an association
receivership in ‘Texas. Since the Farm
Credit System Assistance Board
(Assistance Board) was in the process of
terminating, the Corporation’s Board
determined that providing the necessary
funds to retire this stock would be an
early obligation of the Corporation
following January 1, 1993 (see Note 5).
The Corporation developed the _
necessary procedures and, following
verification of the stockholder balances,
the Board approved, in January 1993,
the expenditure of funds to fulfill this
obligation.



Board of Directors

Gary C. Byrne, Chairman of the
Corporation, is a former
Administrator of the Rural
Electrification Administration
(REA) and Governor of the Rural
Telephone Bank. As
Administrator of the REA, he
managed an agency that approved
more than $62 billion in loans to
2,116 rural electric and telephone
utilities in 47 states and several
US. territories and possessions.

A native of California, Mr. Byrne
served as Chairman of the Bank
of Alex Brown in Sacramento and
also served as President and Chief
Executive Officer of the Alex
Brown Financial Group, a
multibank holding company. He
holds a B.A. from the University
of the Redlands, and a Ph.D.
from the University of North
Carolina.

Harold B. Steele, Chief Executive
Officer and Member of the
Corporation’s Board, is also
Chairman and Chief Executive
Officer of the Farm Credit
Administration. From 1970 to
1983 he served as President and
Chief Executive Officer of the
315,000-member Illinois Farm
Bureau Federation, and from
1971 to 1973 he also served on
the board of the American Farm
Bureau Federation. Mr. Steele
was also a director of the
Midwest Financial Group, a 19-
bank holding company. He and
his son are engaged in the
production of pork and grain on
a 1,000-acre farm in Princeton,
Illinois. Mr. Steele attended the
University of Illinois College of
Agriculture. During World War
Il, serving as an infantry captain
in the U.S. Army, he was
awarded the Silver Star and the
Purple Heart.

Billy Ross Brown, a Member of
the Corporation’s Board and
former Chairman of the
Corporation, served as a director
of Production Credit Associations
in the Fifth Farm Credit District
for 20 years, 9 of them as
Chairman of the Board of
Directors of the Oxford
(Mississippi) Production Credit
Association. He is a prominent
farmer, cattleman, and
conservationist, has been active in
a number of state and national
agricultural and conservation
organizations, and has been
honored by the Mississippi
Association of Conservation
Districts and the U.S. Forest
Service. In 1985, he was
inducted into the Hall of Fame
by the Mississippi Agriculture and
Forestry Museum. Mr. Brown
received a bachelor’s degree in
business administration from the
University of Mississippi.


Contents

6
7
he
7
8
8

10
10

10

10
TI

12
15

22

Board of Directors

Overview

Corporation Activities
Insurance Fund Management
Premium Collection

Investment of Insurance

Fund Assets

Insured and Other
Obligations
Risk Management

Financial Assistance
Agreement Management

Receivership/Conservatorship
Capability

Highlights of 1992 Legislation

Report of Independent Public
Accountants

Financial Statements

Notes to Financial
Statements

References



Note 4—Premiums

Effective January 6, 1989, each
System bank participating in insured
obligations issued under subsection (c)
or (d) of section 4.2 of the Act
became an insured System bank and
was 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 on accrual status, other
than Federal Government-guaranteed
portions of these loans, multiplied by
0.0015; (2) the annual average
principal outstanding for the year on
loans made by the bank that are on
nonaccrual status multiplied by
0.0025; (3) the annual average
principal outstanding on the
guaranteed portions of Federal
Government-guaranteed loans of the
bank that are on accrual status,
multiplied by 0.00015; and (4) the
annual average principal outstanding
on the guaranteed portions of State
government-guaranteed loans of the
bank that are on accrual status,
multiplied by 0.0003.

Each insured System bank will
continue to make these 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 State and Federal
Government-guaranteed loans on
accrual status) or other such
percentage or amount determined by
the Corporation’s Board, 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 premium to a percentage necessary
to maintain the level of the Insurance
Fund at the secure base amount. At
December 31, 1992, the Insurance
Fund was 0.9 percent of insured
obligations outstanding.

Premiums receivable at December 31,
1990, were based on certain loan
information contained in System
institutions’ Call Reports submitted to
the FCA. The 1990 premiums, along
with those for 1989, were collected on
March 29, 1991. Based on the
resolution of certain issues related to
interpretation of requirements for the
treatment of certain classifications of
loans in the premium base, it was
determined that the System banks
overpaid 1989 and 1990 premiums by
a total of $1.4 million. This amount
was classified as “Refund Payable to
System Banks” in the accompanying
statement of financial condition as of
December 31, 1991.

18

Note 5—Estimated Insurance
Obligations and Financial
Assistance to 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 institutions of
the System 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. When this 15-year debt
matures, the institution can redeem,
upon FCA approval, the preferred
stock 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 the
retirement 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 maintained in its
Trust Fund, to the extent available, to
retire the debt. The FAC Trust Fund
(Trust Fund) represents the funds
received from the purchase of stock
by System institutions in the FAC.
The Trust Fund totaled approximately
$72.7 million and $70 million at
December 31, 1992 and 1991,
respectively. If the Trust Fund is not
sufficient to retire the debt, then the
Corporation must purchase the
preferred stock from the FAC to


Corporation funds may be used only
as authorized in the statute.
Sufficient liquidity must be
maintained to fulfill the
Corporation’s statutory obligations,
as well as to pay its operating
expenses.

Premium Collection

The Corporation assesses and
collects premiums from each insured
System’ bank. The premiums are
based on each bank’s. (and its related
associations’) retail loan volume (see
Note 4).

The Corporation had accrued $74
million on December 31, 1992,
representing the estimated premiums
that were earned but not yet
collected for calendar year 1992.
The Corporation collected these
premiums from each insured bank
on February 1, 1993.

Investment of Insurance Fund
Assets

The Insurance Fund grew to $488
million at December 31, 1992, an
increase of 25 percent. The
Insurance Fund represents the
Corporation’s equity (assets less
liabilities). Growth in the Fund
results from collection of premiums
and interest on investments. Accrual
and payment of expenses including
Corporation insurance obligations
reduce the size of the Insurance
Fund.

Total assets of the Corporation at
December 31, 1992, were $656
million—an increase of 19.8 percent
from December 31, 1991. Total
assets included cash and investments
of $562 million and accrued interest
and premiums receivable of $94
million. All funds not needed for
Corporation operations are invested
in U.S. Treasury securities in
accordance with 12 U.S.C. 2277a-11
and the Corporation’s investment

policy.

The policy’s primary objective is to
provide the Corporation with
adequate liquidity to meet its
statutory obligations. Secondarily,
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 Corporation
does not trade for capital gains

purposes.

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 l-year maturity. At

December 31, 1992, the actual
portfolio maturities were:

% of

Maturity Schedule $ Millions Portfolio
LDayto Year = $ 133 23.6
1 Year to 2 Yeas $ 95 16.9
2 Years to 3 Years $ 137 24.4
3 Years to 4Years  $ 91 163
4 Years to 5 Years $ 106 18.8
Total $ 562 100.0

At December 31, 1992, the
portfolio’s market value exceeded
book value by $18 million. This
appreciation resulted from some of
the Corporation’s longer term
investments, which were purchased
when market interest rates were
significantly higher than in 1992.
The weighted average portfolio
maturity at yearend was 2.4 years.
For 1992, the average portfolio yield
was 6.63 percent compared with
7.86 percent for 1991. The decline
in the average yield resulted from
investments at the significantly lower
interest rates prevailing in 1992 than
in 1991.

Insured and Other Obligations

Obligations insured by the
Corporation are statutorily defined
as any note, bond, debenture or
other obligation issued on behalf of
System banks under subsection (c)
or (d) of section 4.2 of the Act, 12
US.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. Issuance of insured
obligations is done 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
were:




Farm Credit System Insurance Corporation

1992
Annual Report



Report of Independent Public Accountants



Risk Management

Assessment of risk is a critical
requirement in order for the
Corporation to minimize Insurance
Fund loss exposure. Corporation staff
have implemented special examination
procedures utilizing FCA examiners to
evaluate the condition of weaker
System institutions (those institutions
with FCA ratings of 4 or 5 or other
institutions identified as likely to
expose the Insurance Fund to risk of
loss). The FCA Rating System is
based on the Uniform Financial
Institutions Rating System used by
other bank regulatory agencies to rate
financial institutions under their
supervision.

The Corporation utilizes FCA’s
monitoring systems and examination
reports. The Corporation also has
implemented a program for assessing
the impact of specific FCA prior
approval transactions on the Insurance
Fund. Such transactions have
included mergers and other
restructuring and financial assistance
between institutions.

Financial Assistance Agreement
Management

The Assistance Board terminated on
December 31, 1992. At that time,
the responsibility for managing the
Assistance Board’s agreements with the
two remaining assisted banks
transferred to the Corporation.
During 1992, Corporation staff
worked closely with the Assistance
Board in successfully preparing for
this transition. The Corporation has
implemented a program to continue

managing the assistance agreements
with the Farm Credit Banks of
Spokane and Louisville. Managing
compliance with these agreements
involves review and approval of bank
business plans, monitoring reports of
financial condition and performance
and periodic meetings with each
institution’s board and senior
management to assess overall progress
and compliance with the agreements.
The purpose of this effort is to
protect the Insurance Fund and
taxpayers by assuring repayment of
$178 million of Financial Assistance
Corporation debt.

Receivership/Conservatorship
Capability

Beginning January 1, 1993, the FCA
must appoint the Corporation to act
as conservator or receiver where one is
required. To prepare for this
contingency, the Corporation has
developed a program to utilize
contractor assistance to operate any
necessary receiverships or
conservatorships. By developing a
pool of eligible contractors, the
Corporation will preserve the ready
capability to perform this function
when needed, but not incur the
excessive cost associated with having
permanent Corporation staff dedicated
to this contingency.

10

Highlights of 1992
Legislation

The Farm Credit Banks and
Associations Safety and Soundness Act
of 1992 (1992 Act) included several

key provisions affecting the
Corporation. The legislation:

* Creates a full-time 3-member
Corporation Board
independent of the FCA
Board by 1996;

* Strengthens requirements for
System repayment of FAC
obligations and expands the
Corporation’s obligation to
satisfy defaults of System
banks in repaying FAC
obligations (see Notes 5
and 6);

* Requires the Federal
Intermediate Credit Bank of
Jackson (FICB) to merge
with a Farm Credit Bank
(FCB) and imposes potential
obligations on the
Corporation to provide
assistance to facilitate a
merger (see Note 6); and

* Mandates several General
Accounting Office studies to
investigate the feasibility of
granting the Corporation
new authority to assess
System association capital,
collect supplemental
premiums and establish a
risk-based premium structure.


Overview

The Farm Credit System Insurance
Corporation (Corporation) is an
independent U.S. Government
controlled corporation. It is managed
by a board of directors comprised of
the Members of the Farm Credit
Administration (FCA) Board. The
Chairman of the Corporation’s Board,
however, must be a Board Member
other than the Chairman of the FCA
Board.

The Corporation’s mission is to
ensure the timely payment of
principal and interest on insured
notes, bonds, debentures and other
obligations issued on behalf of Farm
Credit System (System) banks. This
mission is accomplished through the
sound management of the Insurance
Fund and by the appropriate exercise
of the Corporation’s authority to
minimize the Insurance Fund’s
exposure to risk. By ensuring the
repayment of System securities to
investors, the Corporation contributes
to the maintaining of a dependable
source of funds to the farmers,
ranchers and other borrowers of the
Farm Credit System.

The Corporation completed its start-
up phase during 1992. Highlights of
the past year include:

¢ Growth of $98 million in the
Insurance Fund to $488
million;

¢ Hiring of permanent staff;

* Implementation of a risk
management system;

¢ Successful transition with
the Farm Credit System
Assistance Board; and

* Development of receivership
capability.

In the coming year, the Corporation
will focus on implementing provisions
of the Farm Credit Banks and
Associations Safety and Soundness Act
of 1992 (1992 Act) and maintaining
its program capabilities.

Corporation Activities
Insurance Fund Management

The Insurance Fund is managed to
ensure timely payment of principal
and interest on insured obligations.
Premiums are collected annually from
the insured System banks. Funds
received are invested in accordance
with the Farm Credit Act of 1971 as
amended (Act) and a Board-approved
corporate investment policy.



related to the repayment of all other
FAC bonds outstanding (aggregating
$0.45 billion) 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 required annual annuity-
type payments to be made to the FAC
by all System banks to permit the
repayment of Treasury-paid interest and
to permit the repayment of principal of
bonds issued related to System capital
preservation agreements. In addition,
assisted banks are now required to
make annual appropriations of earnings
to an unallocated surplus account
designated for the redemption of
preferred stock issued to the FAC.

The Corporation is required to satisfy
defaults on the annual payments to the
FAC to permit the repayment of
Treasury-paid interest.

Note 7—Operating Lease

On September 1, 1991, the
Corporation entered into an agreement
with the FCS Building Association to
lease office space for a term of 3 years.
The lease requires payment of an
annual: base rent plus the Corporation’s
proportionate share of operating
expenses. The base rent also will
increase based on a percentage of
change in the Consumer Price Index
on an annual basis. The Corporation
recorded $75,132 and $20,000 in
operating expenses related to the lease
in 1992 and 1991, respectively.
Remaining minimum future payments
under the terms of the lease are
$73,116 and $48,744 for 1993 and
1994, respectively.

Note 8—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 $50,880 at
December 31, 1992 and $50,066 at
December 31, 1991. The
Corporation’s total purchased services
for 1992 was $361,705 compared with
$767,836 for 1991. During most of
1991, the Corporation had no
permanent employees and purchased all
of its services from the FCA.

21





Farm Credit System Insurance Corporation

Statements of Cash Flows for the Years Ended December 31, 1992 and 1991

(In Thousands)

Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
(Increase) in Accrued Interest Receivable
Decrease in Premiums Receivable
(Increase) Decrease in Other Assets
Net Amortization and Accretion of Investments
Realized Gains on Sale of Investments
Increase (Decrease) in Accounts Payable
and Accrued Expenses
Increase (Decrease) in Refund Payable to
System Banks
Increase in Liability for Eligible
Borrower Stock, Richmond PCA
Increase in Liability for Estimated
Insurance Obligations

Net Cash Provided by Operating Activities

Cash Flows from Investing Activities
Payments for Purchase of U.S. ‘Treasury
Obligations :
Proceeds from Sale and Redemption of
US. Treasury Obligations

Net Cash Used in Investing Activities
Net Decrease in Cash and Cash Equivalents

Cash and Cash Equivalents,
Beginning of Year

Cash and Cash Equivalents,
End of Year

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

14

1992
$ 97,838

(2,918)
175

9
6,844
(216)
52
(1,403)
1,173
10,889

112,443

(243,953)
130,773
(113,180)

(737)

1,569

1991

$ 92,438

(14,702)
62,743
(16)
2,239
(63)

1,403

15,555

159,597

(457,849)

252,317

(205,532)

(45,935)
47,504

$1,569


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.

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. Investments are stated at cost,
adjusted for amortization of premiums
and accretion of discounts. Premiums
and discounts are amortized or
accreted. using the straight-line
method, which approximates the
interest 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 (see Note 5.)

The insured System banks’ primary
lending markets are borrowers engaged
in farming, ranching and production
or harvesting of aquatic products and
their cooperatives. Economic
weaknesses in these market segments
and the effect of general market
conditions on the insured System
banks’ borrowers could result in
difficulties for certain borrowers to
meet their obligations. As a result,
insured System banks may experience
increased levels of nonaccrual loans
and other nonperforming assets which
may adversely affect their financial
condition and profitability. Therefore,
adverse changes in the financial
condition and profitability of insured
System banks 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 January 31
of the year subsequent to the year in
which they are earned.

Retirement Plan—A\l permanent full-
time Corporation employees are
covered by the Civil Service
Retirement System (CSRS) or the

Federal Employees Retirement System
(FERS).

16

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 12.9
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.

The retirement plan expenses
amounted to $55,000 in 1992 and
$23,000 in 1991.




Farm Credit System Insurance Corporation

1992
Annual Report



Financial Statements

Farm Credit System Insurance Corporation
Statements of Financial Condition as of December 31, 1992 and 1991
(In Thousands)

1992 1991
Assets a
Cash and Cash. Equivalents $ 832 $ 1,569
Investments in U.S. Treasury Obligations
(Note 3) 561,100 454,548
Accrued Interest Receivable 20,203 17,285
Premiums Receivable (Note 4) 74,082 74,257

Other Assets wh 16

Total Assets $656,224

Liabilities and Insurance Fund
‘Accounts Payable and Accrued Expenses

(Note 8) $ 147 $ 95
Refund Payable to System Banks (Note 4) us 1,403
Liability for Eligible Borrower Stock,

Richmond PCA (Note 5) 1,173 _—
Liability for Estimated Insurance Obligations

(Note 5) 166,444 155,555,
Farm Credit Insurance Fund 488,460 622

Total Liabilities and Insurance Fund $656,224 $547,675

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

12


Farm Credit System Insurance Corporation—Notes to the

Financial Statements as of December 31, 1992 and

December 31, 1991

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
insuring 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), Effective
January 6, 1989, each bank in the
Farm Credit System (System)
participating in insured obligations
became an insured System bank. The
Corporation is managed by a board of
directors consisting of the same
members making up 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.

Beginning on January 1, 1993, the
Corporation has the responsibility to
expend amounts to the extent necessary
to:

1. Insure 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.

At December 31, 1992, there were
balances outstanding of $53.3 billion of
insured obligations, $1.3 billion of
FAC bonds (of which $0.3 billion in
repayments have been provided for),
and $401 million of eligible borrower
stock.

If the Corporation does not have
sufficient funds to insure payment on
obligations in item (1), System banks
will be required to make payments
under joint and several liability.

Additionally, beginning on January 1,
1993, the Corporation, in its sole
discretion, is authorized to expend
amounts to provide financial assistance
to certain insured institutions. Prior to
January 1, 1993, the Corporation was
not authorized to make payments for
any purpose except to pay for operating
expenses of the Corporation.

15)