2003 Annual Report • Farm Credit System Insurance Corporation
 
Protecting Investors in 


Agriculture and Rural America
 

— F ARM CREDIT S YSTEM I NSURANCE C ORPORATION —
 
FCSIC 

Mission Statement 

The Farm Credit System Insurance Corporation, 


a government-controlled, independent entity, shall:
 

• Protect investors in insured Farm Credit System
 

obligations and taxpayers through sound
 

administration of the Farm Credit Insurance Fund,
 

• Exercise its authorities to minimize Insurance
 

Fund loss, and
 

• Help ensure the future of a permanent system for
 

delivery of credit to agricultural borrowers.
 

Table of Contents 

4 Board of Directors 

9 2003 Ends on a High Note 

10 Insurance Corporation Selected Statistics 

11 Investors and the Farm Credit System 

18 Insurance Fund Management 

23 Risk Management 

24 Financial Assistance and Receivership 

25 Strategic Goals and Performance Measures 

28 Report of Independent Public Auditors 

30 Financial Statements 

33 Notes to the Financial Statements 

43 Income and Expenses by Year 

44 Corporate Staff 

44 References 
May 10, 2004 

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 2003. 

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

corporation established to ensure the timely payment of principal and interest 

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

Insurance Fund at December 31, 2003, was $1.82 billion. The Corporation 

collected $105 million in insurance premiums from Farm Credit System banks 

for 2003, and expects to incur $2.7 million in operating costs in 2004. 

Sincerely, 

Douglas L. “Doug” Flory 

Chairman 

The President of the United States Senate 

The Speaker of the United States House of Representatives 

Farm Credit System Insurance Corporation ■ 3 
BOARD OF DIRECTORS 

The Farm Credit System Insurance 

Corporation (Corporation or 

FCSIC), is managed by a threemember board of directors composed 

of the members of the Farm Credit 

Administration (FCA) Board. 

The FCA is the independent 

Federal agency responsible for the 

regulation and examination of the 

Farm Credit System, a nationwide 

financial cooperative that lends to 

agriculture and rural America. 

The Chairman of the Corporation’s 

Board of Directors must be an FCA 

Board Member other than the 

Chairman of the FCA Board. 

Douglas L. “Doug” Flory
 

Douglas L. “Doug” Flory, Chairman of 

FCSIC, was appointed to the threemember FCA Board by President Bush 

on August 1, 2002, for a term that 

expires October 13, 2006. He was elected 

Chairman on December 4, 2002. 

Mr. Flory brings to his position extensive 

experience in production agriculture, 

agribusiness, and both commercial bank 

and Farm Credit lending. His farming 

operation includes being half-owner of 

S & F, L.L.C., a general livestock, grain, 

poultry and hay farm of 1,800 owned and 

leased acres in Augusta County, Virginia. 

Prior to his appointment to the FCA 

Board, Mr. Flory was a member of the 

board of directors of AgFirst Farm 

Credit Bank in Columbia, South 

Carolina, and a director of Farm Credit 

of the Virginias, ACA. 

4 ■ Farm Credit System Insurance Corporation 
Mr. Flory was executive vice president of 

Dominion Bank from 1971 to 1988, and 

president, CEO, and director of 

Dominion Farm Loan Corporation. He 

chaired the Virginia Bankers Association 

Committee on Agriculture and was a 

member of the Executive Committee of 

the American Bankers Association’s 

agricultural division. From 1989 to 1992, 

he was executive vice president, chief 

operating officer, and a member of the 

board of WLR Foods, Inc., a publicly 

traded poultry food company (which is 

now part of Pilgrim’s Pride). Mr. Flory 

also served on several governing boards 

for the State of Virginia, including the 

Virginia Agricultural Council, a state 

advisory board, and the Virginia 

Agriculture Credit Committee, which he 

chaired. He also served as chairman of 

the Virginia Agricultural Development 

Authority, which uses “aggie bonds” to 

finance Virginia farmers. 

Throughout his career, Mr. Flory has 

been an active participant in agricultural 

industry associations. He was president of 

the Virginia Turkey Association and 

president and director of the Rockingham 

County Fair Association. He also served 

as a director of the Virginia Poultry 

Federation, the Virginia Agribusiness 

Council, the Virginia Beef Cattle 

Association, and the Virginia Sheep 

Association. A native of Augusta County, 

Virginia, Mr. Flory attended Bridgewater 

College in Bridgewater, Virginia, and 

earned a bachelor’s degree from Virginia 

Polytechnic Institute and State University 

in Blacksburg. He did graduate work at 

James Madison University and is a 

graduate of the Maryland-Virginia School 

of Bank Management at the University of 

Virginia. He and his wife, Avery, are the 

parents of two daughters and a son. ■ 

Farm Credit System Insurance Corporation ■ 5 
Michael M. Reyna
 

Michael M. Reyna became a member 

of the Corporation’s Board in October 

1998 and served as Chairman from 

November 1998 to January 2000, when 

he was appointed by President Clinton 

as the Chairman of the Farm Credit 

Administration. 

Prior to joining the Board, he served as 

President Clinton’s director of USDA 

Rural Development (formerly known 

as Farmers Home Administration) in 

California from November 1993 to 

October 1998. In this capacity, Mr. 

Reyna was responsible for growing and 

managing a diversified portfolio of 

housing, business, and infrastructure 

loans totaling more than $2.6 billion. 

He implemented a number of significant 

initiatives in California on behalf of the 

Clinton-Gore Administration, including 

the Northwest Economic Adjustment 

Initiative, the Rural Empowerment 

Zone-Enterprise Community program, 

the AmeriCorps program, and several 

Reinventing Government Initiatives. 

Previously, Mr. Reyna served for 11 years 

as a principal advisor to the California 

State Legislature, working on financial 

service industry regulation and a wide 

range of issues including housing, 

economic development, local government 

finance, and political reform. He was also 

an appointed member of several local 

commissions, including the Sacramento 

City Planning Commission, of which he 

served as Chairman in 1993. While 

serving as a private consultant to the 

Texas 2000 Project, an initiative of the 

Governor’s Office of Budget and 

Planning, he developed and implemented 

a computer-based simulation model of 

the Texas economy, which estimated 

employment and population trends 

through the year 2000. 

Mr. Reyna holds a bachelor’s degree in 

business administration from the 

University of Texas at Austin and a 

master’s degree in public policy and 

administration from the LBJ School of 

Public Affairs at the University of Texas. 

He and his wife, Karen, have two sons. ■ 

6 ■ Farm Credit System Insurance Corporation 
Nancy C. Pellett
 

Nancy C. Pellett was appointed to the 

FCA and FCSIC Boards by President 

George W. Bush on November 14, 2002, 

for a term that expires May 21, 2008. 

Ms. Pellett brings extensive experience in 

production agriculture and agribusiness 

to her position on the Board. For 23 

years she was vice president and secretary 

of Prairie Hills, Ltd., a feedlot, cow-calf, 

and row crop operation in Atlantic, Iowa. 

She was president and treasurer of 

Fredrechsen Farms, Ltd., a family-owned 

swine and row crop operation in Walnut, 

Iowa, for more than 20 years. 

A long-time leader in the beef industry, 

Ms. Pellett has held state and national 

leadership positions in a range of 

cattlemen’s industry organizations. As a 

member of the National Cattlemen’s Beef 

Association, she served as the Chairman 

of the Check-Off Division, Chairman of 

the Consumer Marketing Group, and 

most recently as a member of the 

Cattlemen’s Beef Board. She also served 

as President of the Iowa Beef Industry 

Council. Ms. Pellett was a partner in 

Premium Quality Foods, Inc., based in 

Red Oak, Iowa, which markets branded 

fresh beef and pre-cooked beef entrees. 

She served as president and director of 

consumer marketing for the company. 

Ms. Pellett served a six-year term as a 

member of the Board of Regents for the 

State of Iowa, which oversees the three 

state universities, as well as the University 

of Iowa Hospital and its affiliated clinics. 

She was also selected as a member of the 

Governor’s Student Aid Commission. She 

is currently on the Iowa State University 

(ISU) Foundation Board of Governors 

and has been a member of the Advisory 

Committees for the College of 

Agriculture and the College of Family 

and Consumer Sciences. 

Ms. Pellett’s dedication to the future of 

agriculture is reflected in her personal 

involvement with 4-H and Future 

Farmers of America at the local and state 

levels. She has served on the Iowa 4-H 

Foundation Board and is a founding 

member of the 4-H/FFA “Sale of 

Champions” Committee for the Iowa 

State Fair. 

A native of Walnut, Iowa, Ms. Pellett 

holds a B.S. from ISU at Ames. She is also 

past President of the ISU Alumni 

Association, and was awarded the Alumni 

Medal in 1987. The Pellett family was 

honored as “Family of the Year” by the 

University in 1997. The family also 

received the “Friends of Youth Award” in 

2000 from the Knights of AkSarBen, a 

foundation supporting education, youth 

programs, and rural development in 

Nebraska and western Iowa. She and her 

husband have four children. Together 

with a son and daughter-in-law, Ms. Pellet 

and her husband operate a fifth generation 

family farm in Atlantic, Iowa. ■ 

Farm Credit System Insurance Corporation ■ 7 
Investors provide the funds 

the System lends to agriculture 

and rural America. 

8 ■ Farm Credit System Insurance Corporation 
2003 ENDS ON A HIGH NOTE 

INSURANCE FUND SURPASSES 2 PERCENT 

At year end, the Insurance Fund 

exceeded the secure base amount. 

The Insurance Fund represents the 

Corporation’s equity, the difference 

between total assets and total 

liabilities (including insurance 

obligations). The secure base amount 

established by the Farm Credit Act of 

1971, as amended (Act), is 2 percent 

of all outstanding insured obligations 

or another percentage that the Board 

determines is actuarially sound. 

The Insurance Fund dropped below 

the secure base in early 2001 due to 

rapid System loan growth. As a result, 

the Board increased the premium rate 

to 12 basis points for accrual loans. 

This, combined with interest income, 

was instrumental in reaching the 

2 percent goal at year end 2003. 

This is the first time the Corporation 

has closed the year at the secure base 

amount. It is also the first time funds 

have been placed in the Allocated 

Insurance Reserve Accounts (AIRAs). 

Eventually, the AIRAs are to be distributed to System Banks and institutions that hold stock in the Farm 

Credit System Financial Assistance 

Corporation (FAC). However, 

the AIRAs remain part of the 

Insurance Fund and, therefore, may 

be used for statutorily authorized 

insurance purposes. (See Notes 4 and 

5 to the financial statements.) 

Insurance Fund Relative to 2% Secure Base Amount By Quarter 

2.04 

2.02 

2.00 

1.98 

1.96 

1.94 

1.92 

1.90 

Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 

Farm Credit System Insurance Corporation ■ 9 
INSURANCE CORPORATION SELECTED STATISTICS
 

($ in millions) 

Balance Sheet: 

Total Assets 

Total Liabilities 

Insurance Fund Balance 

Allocated Insurance 

Reserve Accounts 

Unallocated Insurance 

Fund Balance 

Operations: 

Revenues 

Operating Expenses 

Insurance Expense 

Net Income 

2003 

$2,033.2 

210.2 

39.9 

1,783.1 

196.5 

2.2 

13.7 

180.6 

2002 

$1,838.8 

196.3 

-

1,642.5 

123.0 

1.9 

13.6 

107.5 

2001 

$ 1,717.7 

182.8 

-

1,534.9 

94.1 

2.1 

11.9 

80.1 

0 

500 

1000 

1500 

2000 

($ in millions) 

$1,717.7 

Total Assets 

$1,838.8 

$2,033.2 

2001 2002 2003 

10 ■ Farm Credit System Insurance Corporation 
INVESTORS AND THE FARM CREDIT SYSTEM
 

The Corporation’s primary purpose, funds the System lends to agriculture 

as defined by the Act, is to insure the and rural America. 

repayment of investors who purchase 

the bonds and notes issued by the Selected financial statistics for the 

System’s Banks. Investors provide the Farm Credit System on a combined 

basis are presented below: 

Combined Farm Credit System Statistics 

($ in billions) 2003 2002 2001 

Insured Debt Outstanding $94.6 $89.6 $81.1 

Farm Mortgage Loans 46.5 43.5 37.7 

Agricultural Production Loans 21.1 20.5 20.0 

Loans to Agricultural Cooperatives 9.0 8.9 8.6 

International Loans 2.8 3.1 2.8 

Loans to Rural Utilities 7.2 7.7 7.3 

Rural Home Loans 2.3 2.3 2.6 

Other Loans 4.3 4.1 3.6 

Net Income 1.83 1.77 1.79 

Nonperforming Loans as a 

Percentage of Total Loans 1.3% 1.3% 1.2% 

Insured Debt Outstanding 

($ in billions) 

100 $94.6 $89.6 $81.1 

80 

60 

40 

20
 

0
 

Farm Credit System Insurance Corporation ■ 11 

2001 2002 2003 
Insured and Other Obligations
 

The Corporation insures Systemwide 

and Consolidated bonds, notes, and 

other obligations issued by the 

System Banks through the Federal 

Farm Credit Banks Funding 

Corporation. Last year, insured debt 

outstanding rose by more than five 

percent to $94.6 billion. From 1999 

through 2003, insured debt 

outstanding grew at an average 

annual rate of approximately 

7.8 percent. 

($ in billions) 

100 

95 

90 

85 

80 

75 

70 

65 

60 

Other Corporation obligations 

include remaining FAC bonds and 

eligible borrower stock. From 1988 

to 1992, the FAC provided assistance 

to the Farm Credit System, issuing 

debt to cover these costs. The 

Corporation, by law, must use the 

Insurance Fund to satisfy any FACissued bond defaults. 

Insured Obligations 

$72.2 

+5.5% 

$76.8 

+6.4% 

$81.1 

+5.6% $89.6 

+10.5% 

+5.6% 

$94.6 

1999 2000 2001 2002 2003 

12 ■ Farm Credit System Insurance Corporation 
FAC obligations declined in 2003 

because a $450 million bond issue 

matured in July of 2003. There is a 

final $325 million issue of FAC bonds 

outstanding, which is due in June of 

2005. The Corporation estimates its 

obligation to FAC at December 31, 

2003, to be $210 million. (See Note 

5 to the financial statements.) 

The Corporation also must ensure 

the retirement of eligible System 

borrower stock at par value. This 

stock was outstanding prior to 

October 6, 1988. At year end, 

eligible borrower stock outstanding 

at System institutions totaled $28 

million, down from $36 million in 

2002. 

($ in millions) 

$927 1000 

800 

600 

400 

200 

0 

$353 

1999 2000 2001 2002 2003 

Other Obligations 

$829 $819 $811 

■ FAC Bonds ■ Eligible Borrower Stock 

Farm Credit System Insurance Corporation ■ 13 
Farm Credit System Capital
 

Today there are four Farm Credit 

Banks and one Agricultural Credit 

Bank (Banks), which lend funds to 

99 affiliated Associations. These 

Associations make loans to rural 

homeowners, farmers, ranchers and 

other agricultural entities. The 

Agricultural Credit Bank also lends to 

agricultural cooperatives and rural 

utilities. At year end 2003, there was 

$94.6 billion in insured debt 

outstanding; and the Corporation had 

$2.0 billion in assets, $0.2 billion in 

insurance liabilities, and an Insurance 

Fund balance of $1.8 billion. 

Over the past five years, the Farm 

Credit System Associations have been 

building capital through net income 

earned and retained at the 

Associations. The rise in capital at the 

Associations reduces the credit 

exposure that the Banks have on the 

loans to each of their affiliated 

Associations. 

Association Capital 

($ in billions) 

15 

12 

9 

6 

3 

0 

1999 2000 2001 2002 2003 

14 ■ Farm Credit System Insurance Corporation 
Bank capital increased $1.27 billion 

from 1999 to 2003 and remained 

above regulatory minimums. Since 

1999, the Insurance Fund balance 

increased $0.45 billion. 

Bank Capital Plus the Insurance Fund 

($ in billions) 

15 

12 

9 

6 

3 

0 

1999 2000 2001 2002 2003 

■ Insurance Fund ■ Bank Capital 

Bank capital plus the Insurance Fund, 

as a percentage of outstanding debt, 

decreased from 10.1 percent in 1999 

to 9.2 percent in 2002, as the growth 

in insured debt outstripped increases 

in Bank capital and Insurance Fund 

revenues. In 2003 the ratio improved 

to 9.5 percent due to the net income 

retained by the Banks, the issuance 

of preferred stock, and the collection 

of increased insurance premiums by 

the Corporation. 

Farm Credit System Insurance Corporation ■ 15 
Only the Banks are liable for the equity in the Bank. Generally, a Bank 

payment of the principal and interest can require the Association to hold 

on insured System debt, although between 4 and 6 percent of their loan 

each Bank’s bylaws require district as equity. 

Associations to purchase related 

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

12% 

10.1% 

10% 9.8% 9.8% 9.2% 9.5%

8% 

6% 

4% 

1999 2000 2001 2002 2003 

16 ■ Farm Credit System Insurance Corporation 
Additional Elements of Strength
 

The System has additional risk The System also established a 

management tools that protect Common Minimum Liquidity 

investors. The Banks have entered Standard. The standard requires each 

into the Contractual Interbank Bank to maintain a minimum of 90 

Performance Agreement (CIPA). days of liquidity on a continuous 

This agreement measures the financial basis, assuming no access to the 

condition and performance of each capital markets. All Banks have 

System Bank using various ratios exceeded this liquidity standard since 

considering capital, asset quality, June 30, 2003. 

earnings, interest-rate risk, and 

liquidity. CIPA established economic These measures, in conjunction with 

incentives whereby financial penalties Bank capital and the Insurance Fund, 

are applied if the performance provide direct protection for investors 

standard is not met. who purchase Systemwide bonds 

and notes. 

The Banks and the Funding 

Corporation have entered into a 

Market Access Agreement (MAA) 

that established conditions for each 

Bank’s continued participation in the 

debt market. If a Bank fails to meet 

agreed upon performance measures, 

including capital and collateral 

ratios, their participation in future 

debt issues could be limited or 

curtailed. The criteria used under 

the MAA are the CIPA scores and 

two capital ratios. 

Farm Credit System Insurance Corporation ■ 17 
Corporate assets 

exceeded $2 billion 

at year end 2003. 

18 ■ Farm Credit System Insurance Corporation 

INSURANCE FUND MANAGEMENT 

Growth in the Insurance Fund 

In 2003, the Insurance Fund grew 11 percent 

to $1.82 billion. Total assets, which also grew 

11 percent, surpassed the $2 billion mark, 

reaching $2.03 billion. 

AIRAs - First Transfer of Excess 

Insurance Fund Balance 

For the first time in its history, the Insurance 

Fund finished the year above the secure base 

amount. By statute, at any year end, if the 

Insurance Fund is over the secure base 

amount, the Corporation must recalculate the 

secure base amount using an average daily 

debt balance method. This amount is then 

subtracted from the year end Insurance Fund 

balance, less projected insurance and operating 

expenses for 2004, to determine the excess 

amount for transfer to the AIRAs. 

Separate AIRA accounts are then established. 

Ten percent of the excess funds are allocated 

to the FAC stockholders’ AIRA. The 

remaining 90 percent is prorated between 

the Banks. 

At December 31, 2003, the Corporation 

transferred $39.9 million to the AIRAs for the 

System Banks and FAC stockholders. The first 

possible payout date is April 2006; however, 

any AIRA payments are at the discretion of 

the Board. 

The statute also requires that the AIRAs be 

the first funds used for any Insurance Fund 

claim payments. 
Revenues and Expenses
 

Net income in 2003 climbed 68 

percent to $181 million, up from 

$108 million in 2002, due to an 

increase in insurance premiums. 

Premium rates on accrual loans rose 

from 3 basis points in 2002 to 12 

basis points in 2003. 

Due to the premium increase, the 

mix of corporate revenues changed 

in 2003. Over the past few years, 

interest from investments had been 

the primary source of revenue. Last 

year, premiums accounted for 53 

percent of the Corporation’s 

total revenue. 

Interest income dropped in 2003 

from $93 million to $91 million, 

primarily due to falling interest rates. 

The average portfolio yield was 4.93 

percent, down from 5.39 percent 

the prior year. 

Corporation Revenues 

($ in millions) 

250 

200 

150 

100 

50 

0 

1999 2000 2001 2002 2003 

■ Interest ■ Premiums 

Farm Credit System Insurance Corporation ■ 19 
Insurance expenses grew to $13.7 

million from $13.6 million in 2002. 

The increase was due to the annual 

provision for the insurance obligation 

to repay the FAC for assistancerelated bonds, which will mature in 

2005. (See Note 5 to the 

financial statements.) 

In 2003, the Corporation’s operating 

costs rose slightly from 10 basis 

Investments 

points on assets in 2002 to 11 basis 

points on assets in 2003. Fixed 

costs for staff, travel, rent, and 

miscellaneous expenses were $1.7 

million of the $2.2 million 

total for the year. The remaining 

expenses of $0.5 million were 

for contract services. 

Investments increased 6 percent during the year to $1.9 billion at 

December 31, 2003. 

Growth in Investment Portfolio 

($ in billions) 

2.4 

2.2 

2.0 

1.8 

1.6 

1.4 

1.2 

1999 2000 2001 2002 2003 

20 ■ Farm Credit System Insurance Corporation 
Funds are invested in U.S. Treasury 

securities in accordance with the Act 

and the Corporation’s Investment 

Policy. The investment yield dropped 

slightly due to the lower interest rates 

that prevailed throughout the year. 

The average portfolio yield for 2003 

was 4.93 percent, down from 5.39 

percent the prior year. 

The Corporation’s investment 

strategy is to purchase a ladder of 

maturities and hold them to maturity. 

The portfolio is divided into a 

liquidity and an investment pool. 

The liquidity pool maintains a 

minimum of 20 percent of the 

portfolio in short-term securities, 

while the balance is invested in 

longer-term maturities of up to 

10 years. 

The weighted average portfolio 

maturity at year end was 3.2 years. 

The balances and maturities of the 

liquidity and investment pools at 

December 31, 2003, are illustrated 

in the following chart. 

The investment objective is to 

maximize returns consistent with 

liquidity needs and to minimize 

exposure to loss of principal. 

Investment Portfolio Maturity Groups 

($ in millions) 

$424 

22% 

$320 

17% 

$402 

21% 

$545 

29% 

$209 

11% 

3 to 4 

Years 

2 to 3 

Years 

4 to 5 

Years 

5 to 10 

Years 

< 2 Years 

■ Investment Pool ■ Liquidity Pool ( < 2 years) 

Farm Credit System Insurance Corporation ■ 21 
Premium Assessment
 

The Board reviews premium rates 

semiannually in March and 

September. Five factors are 

considered: 

1. The level of the unallocated 

Insurance Fund relative to the 

secure base amount, 

2. Projected losses to the Insurance 

Fund, 

3. The condition of the System, 

4. The health of the agricultural 

economy, and 

5. Risk in the financial environment. 

Although the Corporation ensures 

repayment to investors who purchase 

System debt, by law it collects 

premiums from System Banks and 

Associations based on their loan 

volume. Premium rates may vary by 

type of loan. (See Note 4 to the 

Corporation’s financial statements.) 

Type of Loan Premium Range 

(in basis points) 

Accrual 0 – 15 

Nonaccrual 0 – 25 

Federal Governmentguaranteed accrual 0 – 1.5 

State governmentguaranteed accrual 0 – 3 

Governmentsponsored enterprise 

guaranteed accrual 0 – 15 

22 ■ Farm Credit System Insurance Corporation 
RISK MANAGEMENT
 

The Corporation has a program to 

identify and manage insurance risk, which 

minimizes the Fund’s exposure to 

potential losses through early detection. 

Weaker System institutions undergo 

special examination procedures as needed. 

FCA staff perform the majority of the 

fieldwork for these examinations on a 

reimbursable basis. 

The Corporation also assesses risk to the 

Insurance Fund through: 

• Periodic review and analysis of the
 

financial condition of System
 

institutions,
 

• Analytical models, 

• Review of corporate actions approved 

by FCA for System institutions, and 

• Participation as a nonvoting member 

on FCA’s Regulatory Enforcement 

Committee. 

The Corporation monitors legislative, 

judicial, regulatory, and economic trends 

that could affect insurance risk. For 

example, in 2003, the Corporation 

analyzed capital trends and made 

recommendations to the FCA on Bank 

capital and the importance of leverage 

ratios. In addition, the Corporation 

coordinated efforts with FCA to 

comment on the American Institute of 

Certified Public Accountants’ (AICPA) 

draft Statement of Position on Allowances 

for Credit Losses. The Corporation also 

monitors trends in the System’s structure 

and activities, including consolidations 

and new forms of financing. 

During 2003, the Corporation contracted 

with Mercer Oliver Wyman to evaluate 

whether an actuarial model could be 

developed for the Insurance Fund. 

Mercer Oliver Wyman, a subsidiary of 

Marsh & McLennan, is a leader in 

developing risk management tools for the 

financial services industry. They evaluated 

the current solvency of the Insurance 

Fund and the risk characteristics of the 

Farm Credit System and concluded that 

an actuarial solvency determination was 

possible. They further concluded that the 

secure base amount of 2 percent was an 

actuarially sound solvency standard 

considering the current agricultural 

environment, regulatory risk ratings, 

and capital levels of the Farm Credit 

System institutions. 

The Corporation has contracted for 

follow-on work to evaluate the feasibility 

of using a range for the secure base 

amount and operating with a more stable 

insurance premium rate. In considering 

this issue, Mercer will be constructing a 

model with Corporation staff to 

dynamically evaluate the solvency of the 

Insurance Fund under a variety of 

scenarios. This model will incorporate 

best practices of the insurance industry 

Farm Credit System Insurance Corporation ■ 23 
for evaluating Insurance Fund adequacy 

considering: 

• Future loss claims of the Insurance 

Fund, 

• Growth in insured liabilities issued by 

the System’s Banks, 

• Alternative investment returns, 

• A range of insurance premium
 

assessments,
 

• The effect of allocations to the 

insurance reserve accounts (AIRAs), 

and the 

• Financial condition and performance 

of the System. 

This work is expected to be completed 

during 2004. 

FINANCIAL ASSISTANCE 

AND RECEIVERSHIP 

The Insurance Corporation is authorized 

to provide assistance to System 

institutions to prevent default, restore 

normal operations, or facilitate a merger 

or consolidation. At present, no assistance 

agreements are outstanding. 

During the year, the Corporation 

contracted with Andrew Davidson and 

Company to review and upgrade its Cost 

Test model. This model utilizes loanpricing techniques and is used by staff to 

evaluate the cost of providing financial 

assistance to any System institution. 

When considering providing financial 

assistance, the statute requires the 

Corporation to ensure that it be the 

“least costly” method for resolving a 

troubled System institution. Financial 

assistance cannot be provided if the cost 

of liquidation is determined to be lower. 

When appointed by the FCA, the 

Corporation has statutory responsibility 

to serve as receiver or conservator for 

System institutions. To fulfill this role 

and continue to operate with a small core 

staff, the Corporation uses contractors 

on an as-needed basis. These contractors 

provide knowledgeable and readily 

available resources, while allowing the 

Corporation to contain costs during 

periods of limited or no activity. At 

present, there are no active receiverships 

or conservatorships in the Farm 

Credit System. 

In June the Corporation conducted a 

receivership readiness exercise. As part 

of the program, a representative from the 

FDIC provided an update on recent 

receivership experiences and an overview 

of their claims and asset liquidation 

processes. In addition, several System 

representatives spoke about current asset 

management practices and the liquidation 

of credit problems. The Corporation’s 

Board and staff reviewed the roles and 

responsibilities of FCSIC and FCA in 

dealing with troubled institutions. 

24 ■ Farm Credit System Insurance Corporation 
STRATEGIC GOALS AND PERFORMANCE MEASURES
 

Three broad goals with performance 

measures are used to evaluate the 

effectiveness of the Corporation’s 

operations. 

1. Manage the Insurance Fund to 

maintain the 2 percent secure base 

amount to protect investors 

The Corporation assesses the effectiveness 

of its performance by: 

• Reviewing premium rates 

semiannually and making necessary 

adjustments, and 

• Comparing the investment portfolio’s 

average yield to peer investment 

funds with similar quality and 

maturity. 

In 2003, the Insurance Fund surpassed 

the 2 percent secure base amount; and 

the Corporation’s average investment 

yield was 4.93 percent, compared to 3.0 

percent for similar Treasury investment 

funds. Insurance premium rates for 

accrual loans remained at 12 basis points 

throughout the year. 

2. Detect, evaluate, and manage risks 

to the Insurance Fund to protect it 

from losses 

Program effectiveness is measured by: 

• Evaluating how promptly emerging 

risks are detected, 

• Determining the accuracy of the
 

evaluation of risk, and
 

• Appraising the extent of loss
 

minimization, if applicable.
 

The Corporation assesses the need for an 

insurance loss allowance quarterly. Also, 

the Corporation proactively screens the 

financials of all System institutions to 

detect risk and identify institutions that 

may require special examinations. There 

were no special examinations required 

in 2003. 

As part of the risk management program, 

the Corporation hired Mercer 

Oliver Wyman to create a model for 

evaluating the adequacy of the current 

Insurance Fund. 

Farm Credit System Insurance Corporation ■ 25 
3. Maintain the capability to manage 

receiverships and/or conservatorships 

The standards used to measure 

the effectiveness of receivership 

operations are: 

• Completing 90 percent of initial 

claims processing within a specified 

period, which will vary depending on 

the size and complexity of the claims; 

• Keeping operating costs comparable 

to other regulators, as a percentage 

of total assets; and 

• Keeping asset recovery values 

comparable to other regulators, as a 

percentage of asset values. 

No active receiverships or 

conservatorships existed in the Farm 

Credit System in 2003. 

Corporation personnel are trained 

periodically to maintain readiness, 

ensuring proficiency in the performance 

of receivership responsibilities. The most 

recent receivership staff training occurred 

in June 2003. 

The President’s 

Management Agenda 

In 2001, President Bush established a 

policy for improving the management 

and performance of the Federal 

Government. “The President’s 

Management Agenda” focuses on five 

government-wide goals to encourage 

improvements in specified areas of 

operations. The Corporation’s 

accomplishments in those five areas are: 

1. Strategic Management of 

Human Capital 

• Operated with a small staff and 

contracted for specialized expertise 

when necessary, keeping operating 

costs low, while offering the flexibility 

to leverage resources. 

• Planned for continuity in the 

transition of several key management 

positions. 

26 ■ Farm Credit System Insurance Corporation 
2. Competitive Sourcing 

• Continued the extensive use of
 

competitively sourced contractor
 

support to perform administrative
 

functions including personnel,
 

information systems, and financial
 

systems support.
 

3. Improved Financial Performance 

• Managed an investment portfolio 

with an average yield of 4.9 percent, 

which compares favorably with 3.0 

percent for similar Treasury 

investment funds. 

• Enhanced corporate model for setting 

premium rates. 

• Upgraded the Cost Test model, 

which is used to decide whether to 

provide assistance to a troubled 

institution or place it in receivership. 

4. Expanded Electronic Government 

• Distributed surveys and premium 

communications to System 

institutions by e-mail for faster and 

less expensive results. 

• Enlarged the Corporation’s shared 

electronic file system on current and 

historical issues to decrease 

redundancy in work efforts. 

• Maintained a Web site to provide 

quarterly financials, press releases, and 

requests for comments from 

interested parties. 

5. Budget and Performance Integration 

• Evaluated programs on an ongoing 

basis to determine efficiency, and met 

new and growing demands without 

increasing permanent staff levels. In 

2003, this resulted in the outsourcing 

of disaster recovery efforts and the 

development of several financial 

models. 

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

FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation 

Statements of Financial Condition 

as of December 31, 2003 and 2002 

($ in thousands) 

2003 2002 

ASSETS 

Cash and Cash Equivalents $ 186 $ 81,107 

Investments in U.S. Treasury 1,899,095 1,702,681 

Obligations (Note 3) 

Accrued Interest Receivable 28,807 28,642 

Premiums Receivable (Note 4) 105,079 26,355 

Other Receivables 4 _ 

TOTAL ASSETS $ 2,033,171 $ 1,838,785 

LIABILITIES AND INSURANCE FUND 

Accounts Payable and Accrued Expenses 

(Note 7) $ 361 $ 261 

Liability for Estimated 

Insurance Obligations (Note 5) 209,802 196,077 

TOTAL LIABILITIES 210,163 196,338 

Farm Credit Insurance Fund 

Allocated Insurance Reserve Accounts 39,888 _ 

Unallocated Insurance Fund Balance 1,783,120 1,642,447 

TOTAL INSURANCE FUND 1,823,008 1,642,477 

TOTAL LIABILITIES AND INSURANCE FUND $ 2,033,171 $ 1,838,785 

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

30 ■ Financial Information 
 

 

Statements of Income and Expenses and Changes in Insurance 

Fund for the Years Ended December 31, 2003 and 2002 

($ in thousands) 

2003 2002 

INCOME 

Premiums (Note 4) $ 105,079 $ 26,355 

Interest Income 91,405 93,499 

Other Income 20 18 

TOTAL INCOME $ 196,504 $ 119,872 

EXPENSES 

Administrative Operating Expenses 

(Note 7) $ 2,218 $ 1,906 

Provision for Estimated Insurance 

Obligations (Note 5) 13,725 13,643 

TOTAL EXPENSES $ 15,943 $ 15,549 

INCOME BEFORE CUMULATIVE 

EFFECT OF A CHANGE IN 

ACCOUNTING PRINCIPLE $ _ $ 104,323 

Cumulative effect on prior years 

(to December 31, 2001) of changing 

to a different amortization method (Note 2) $ _ $ 3,222 

NET INCOME 

Farm Credit Insurance Fund 

Beginning of Year 

$ 180,561 

1,642,447 

$ 107,545 

1,534,902 

Farm Credit Insurance Fund 

End of Year $ 1,823,008 $ 1,642,447 

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

Farm Credit System Insurance Corporation ■ 31 
FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation 

Statements of Cash Flows 

for the Years Ended December 31, 2003 and 2002 

($ in thousands) 

2003 2002 

CASH FLOWS FROM 

OPERATING ACTIVITIES 

Net Income 

Adjustments to Reconcile Net Income 

to Net Cash Provided by Operating Activities: 

Increase in Premium Receivable 

Increase in Accrued Interest Receivable 

Net Amortization and Accretion of Investments 

Increase in Other Receivables 

Increase (Decrease) in Accounts Payable 

and Accrued Expenses 

Increase in Liability for Estimated 

Insurance Obligations 

$ 180,561 

(78,724) 

(165) 

25,200 

(4) 

100 

13,725 

$ 107,545 

(26,355) 

(988) 

19,113 

-

(71) 

13,643 

NET CASH PROVIDED BY 

OPERATING ACTIVITIES $ 140,693 $ 112,887 

CASH FLOWS FROM INVESTING ACTIVITIES 

Payments for Purchase of 

U.S. Treasury Obligations $ (475,903) $ (317,372) 

Proceeds from Maturity of 

U.S. Treasury Obligations 254,289 282,743 

NET CASH USED IN 

INVESTING ACTIVITIES (221,614) (34,629) 

Net Change in Cash and Cash Equivalents (80,921) 78,258 

Cash and Cash Equivalents 

Beginning of Year 81,107 2,849 

Cash and Cash Equivalents 

End of Year $ 186 $ 81,107 

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

32 ■ Financial Information 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

Note 1 — 


Insurance Fund: Statutory Framework
 

The Agricultural Credit Act of 1987 

(1987 Act) established the Farm Credit 

System Insurance Corporation 

(Corporation) for the purpose of 

ensuring the timely payment of principal 

and interest on notes, bonds, debentures, 

and other obligations issued under 

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

Farm Credit Act of 1971, as amended 

(Act), (insured obligations). Each bank 

in the Farm Credit System (System) 

participating in insured obligations is an 

insured System bank. At December 31, 

2003, there were five insured System 

banks and 99 direct lender associations. 

The Corporation is managed by a board 

of directors consisting of the same 

individuals as the Farm Credit 

Administration (FCA) Board except that 

the Chairman of the FCA Board 

may not serve as the Chairman of the 

Corporation’s Board of Directors. 

The Corporation must spend the 

amounts necessary to: 

1.	 Ensure the timely payment of 

interest and principal on insured 

obligations in the event of default 

by an insured System bank; 

2.	 Satisfy, pursuant to section 

6.26(d)(3) of the Act, defaults by 

System banks on obligations 

related to the issuance of U.S. 

Treasury-guaranteed bonds by 

the Farm Credit System Financial 

Assistance Corporation (FAC) 

(FAC bonds) (see Note 5); and 

3. Ensure the retirement of eligible 

borrower stock at par value. 

The Corporation, in its sole discretion, is 

authorized to expend amounts to provide 

financial assistance to certain insured 

institutions. 

The balances outstanding at December 

31, 2003, for each of the components of 

the Corporation’s insurance 

responsibilities were $94.6 billion of 

insured obligations, $325 million of FAC 

bonds (of which $15 million in 

repayments have been provided for), and 

$28 million of eligible borrower stock. 

If the Corporation does not have 

sufficient funds to ensure payment on 

insured obligations, System banks will be 

required to make payments under joint 

and several liability, as required by section 

4.4 (2) of the Act. 

Under section 5.63 of the Act, the 

Corporation is exempt from all Federal, 

state, and local taxes with the exception 

of real property taxes. 

Farm Credit System Insurance Corporation ■ 33 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

Note 2 — 


Summary of Significant Accounting Policies
 

Accounting Principles and Reporting 

Practices 

The accounting and reporting policies of 

the Corporation conform to accounting 

principles generally accepted in the 

United States of America (GAAP) and, as 

such, the financial statements have been 

prepared using the accrual basis of 

accounting. The preparation of financial 

statements in conformity with GAAP 

requires management to make estimates 

and assumptions that affect the reported 

amount of assets and liabilities and 

disclosure of contingent assets and 

liabilities at the date of the financial 

statements and the reported amount of 

revenues and expenses during the 

reporting period. Actual results could 

differ from those estimates. 

Cash and Cash Equivalents 

Cash and cash equivalents include 

investments in U.S. Treasury obligations 

with original maturities of 90 days or less. 

At December 31, 2003, the 

Corporation’s cash and equivalents 

balance with Treasury was $186,505. 

Investments in U.S. Treasury Obligations 

Section 5.62 of the Act requires that 

funds of the Corporation, not otherwise 

employed, shall be invested in obligations 

of the United States or in obligations 

guaranteed as to principal and interest by 

the United States. The Corporation has 

classified its investments as held to 

maturity in accordance with the 

Statement of Financial Accounting 

Standard (SFAS) No. 115 and carries 

them at amortized cost. Amortization of 

premium and accretion of discount on 

investments has been computed under 

the effective interest method in 2003 and 

2002. In 2002, the Corporation changed 

its method of amortization to the 

effective interest method from the 

straight-line method to more precisely 

recognize interest income based on the 

effective yield of the investments. The 

effect of the change was to increase 

interest income by $31,000 in 2002. 

The cumulative effect of this change for 

years prior to January 1, 2002, was 

$3.2 million and is shown in the 

accompanying statements of income 

and expense for 2002. Fair value of 

investments is estimated based on 

quoted market prices for those or 

similar instruments. 

Liability for Estimated Insurance 

Obligations 

The liability for estimated insurance 

obligations is the present value of 

estimated probable insurance payments 

to be made in the future based on the 

Corporation’s analysis of economic 

conditions of insured System banks. 

(Also see Note 5.) 

34 ■ Financial Information 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

The insured System banks’ primary 

lending markets are borrowers engaged 

in farming, ranching, and producing or 

harvesting of aquatic products, and their 

cooperatives. Financial weaknesses in 

these market segments and the effect of 

general market conditions on the 

System’s borrowers could adversely affect 

the banks’ financial condition and 

profitability. Insured System banks also 

face risks from changing interest rate 

environments and the need to maintain 

ongoing access to financial markets. 

Adverse changes in the financial 

condition and profitability of insured 

System banks resulting from increased 

levels of credit, financial, or other risks 

could occur in the future which would 

have a material effect on the liability for 

estimated insurance obligations. 

Premiums 

Annual premiums are recorded as 

revenue during the period on which the 

premiums are based. All premiums are 

due on or before January 31 of the year 

subsequent to the year in which they 

are earned. 

Retirement Plan 

All permanent Corporation employees are 

covered by the Civil Service Retirement 

System (CSRS) or the Federal Employees 

Retirement System (FERS). The 

Corporation’s contribution during 2003, 

to the CSRS plan was 8.5 percent of base 

pay. For those employees covered by 

FERS, the Corporation’s contribution 

was 10.7 percent of base pay. In addition, 

for FERS-covered employees, the 

Corporation automatically contributes 1 

percent of base pay to the employee’s 

Thrift Savings Plan account, matches the 

first 3 percent contributed by the 

employee, and matches one-half of the 

next 2 percent contributed by the 

employee. 

Retirement plan expenses amounted to 

$141,245 in 2003 and $129,271 in 

2002. 

Farm Credit System Insurance Corporation ■ 35 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

Note 3 — 


Investments
 

At December 31, 2003 and 2002, investments in 

U.S. Treasury obligations consisted of the following: 

($ in thousands) 

December 31, 2003 

Amortized 

Cost 

Gross 

Unrealized 

Gains 

Gross Estimated 

Unrealized Market 

Losses Value 

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

December 31, 2002 

U.S. Treasury Notes $1,702,681 $125,398 — $1,828,079 

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

at December 31, 2003, by contractual maturity, are shown below. 

Amortized Estimated 

($ in thousands) Cost Market Value 

Due in one year or less $ 288,705 $ 293,269 

Due after one year through five years 1,401,735 1,474,906 

Due after five years through 10 years 208,655 209,556 

$ 1,899,095 $ 1,977,731 

36 ■ Financial Information 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

Note 4—Premiums, the Secure Base and 

Excess Insurance Fund Balances. 

Each System bank which issues insured 

obligations under subsection (c) or (d) of 

section 4.2 of the Act is an insured 

System bank and may be required to pay 

premiums to the Corporation. 

The Act establishes the range of 

insurance premium rates that the 

Corporation’s Board may assess for any 

calendar year based on five classes of an 

insured bank’s loan assets. The asset 

classes and the range that may be assessed 

for each are: (1) average annual accrual 

loans outstanding (other than the 

guaranteed portions of Governmentguaranteed 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 Governmentguaranteed accrual loans may be from 

zero to 0.00015; (4) average annual 

portions of state government-guaranteed 

accrual loans may be from zero to 

0.0003; and (5) average annual portions 

of Government-sponsored enterprise 

guaranteed loans may be zero to 0.0015. 

Insurance premium rates are reviewed 

semiannually in March and September. 

For 2003, premium rates were set at the 

Board’s September 2002 meeting at 12 

basis points for accrual loans, 25 basis 

points for non-accrual loans and zero for 

Federal and state government guaranteed 

loans. The Board again reviewed 

premiums at its March 2003 meeting 

and left premium rates unchanged. 

Due to moderate growth in insured debt 

outstanding, in September 2003, the 

Board decreased the insurance premium 

rate on accrual loans to 10 basis points 

beginning January 1, 2004, and left rates 

unchanged on nonaccrual loans at 25 

basis points. In May 2002, Congress 

amended the Farm Credit Act to provide 

the Corporation’s Board with 

discretionary authority to reduce 

premium rates on certain loans that are 

guaranteed by Government-sponsored 

enterprises (GSEs). The Board decided 

not to exercise this authority in 2003. 

The Act sets a base amount for the 

Insurance Fund to achieve. The statutory 

secure base amount is equivalent to 2.0 

percent of the aggregate outstanding 

insured obligations of all insured System 

banks (adjusted downward by a 

percentage of the guaranteed portions of 

principal outstanding on Governmentguaranteed loans in accrual status) or 

such other percentage as determined by 

the Corporation, in its sole discretion, to 

be actuarially sound. When the amount 

of the Insurance Fund exceeds the secure 

base amount, the Corporation is required 

to reduce the premiums, but it still must 

ensure that reduced premiums are 

sufficient to maintain the level of the 

Insurance Fund at the secure base 

amount. 

Farm Credit System Insurance Corporation ■ 37 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

The Insurance Fund was below the 

secure base amount during most of 2003. 

At December 31, 2003, the Insurance 

Fund was 2.0 percent of adjusted insured 

obligations outstanding. A 1996 

amendment to the Act requires the 

Corporation to establish reserve accounts 

for each System bank and an account for 

the stockholders of the FAC. If at the 

end of any calendar year, the Insurance 

Fund is at the secure base amount, the 

Corporation is to segregate any excess 

balances into these Allocated Insurance 

Reserve Accounts (AIRAs). In 1999, 

the Corporation’s Board adopted a Policy 

Statement on the secure base amount 

and AIRAs, which provides guidelines for 

implementing this statutory authority. 

At December 31, 2003, because the 

Insurance Fund was at the 2.0 percent 

secure base amount, the Corporation 

determined that there were balances to 

allocate. To determine the amount to 

allocate, the statute requires the 

Corporation to recalculate the secure 

base amount on an average daily balance 

basis and compare that with the year end 

Insurance Fund balance adjusted 

downward by the Corporation’s 

estimated expenses for the following year. 

The amount of Insurance Fund balance 

to be allocated to the Allocated Insurance 

Reserve Accounts was determined to be 

$39.89 million as follows: 

FAC Stockholders (10%) $ 3.99 million 

Farm Credit 

System Banks (90%) $35.90 million 

$39.89 million 

The AIRA balances are recorded as part 

of the Insurance Fund until approved for 

payment by the Corporation’s Board. 

The statute provides that amounts in the 

AIRAs may not be paid prior to April 

2006 (eight years after the Insurance 

Fund first attained the secure base 

amount). The Corporation’s Board of 

Directors has discretion to adopt a later 

payment cycle. AIRA balances may be 

used to absorb any insurance losses 

and claims. 

Furthermore, the Board of Directors has 

discretion to limit or restrict the AIRA 

payments. In accordance with the 

Corporation’s policy statement, any AIRA 

balances do not count in measuring the 

Insurance Fund’s compliance with the 

Secure Base Amount. Consequently, the 

unallocated Insurance Fund balance was 

reduced to 1.96 percent of adjusted 

insured obligations at December 31, 

2003. 

38 ■ Financial Information 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

Note 5 — Financial Assistance to System Banks 

and Estimated Insurance Obligations 

The 1987 Act required that the FCA 

charter the Farm Credit System 

Assistance Board (Assistance Board) and 

the FAC (see Note 1) to carry out a 

program of financial assistance to the 

Farm Credit System. In order to raise 

funds to provide this assistance, the FAC 

had the authority to issue debt 

obligations with a maturity of 15 years. 

During 1988 to 1992, the FAC issued 

$1.261 billion in bonds. These funds 

were used for providing assistance to 

certain System banks experiencing 

financial difficulty and for other 

statutorially authorized purposes. From 

1998 through 2003, $936 million in 

FAC bonds have been retired, leaving 

one remaining issue of $325 million 

outstanding, which matures in June 

2005. Repayment of the remaining FAC 

bond in accordance with the Act is being 

provided for by the FAC Trust Fund, 

FAC Assistance Fund and the Insurance 

Corporation. 

Financial Assistance to Certain 

System Banks 

During the period from 1988 to 1992, 

assistance was provided to four open 

banks through the purchase by the FAC 

of $419 million in preferred stock issued 

by these institutions. Similar assistance 

totaling $374 million was provided to the 

Federal Land Bank of Jackson in 

Receivership to facilitate its closing and 

liquidation. Subject to Assistance Board 

approval, these assistance funds were used 

by the FAC to purchase preferred stock 

issued by an institution experiencing 

financial difficulty. 

Prior to the maturity of the related 15­

year debt obligations, each institution can 

redeem its preferred stock, pursuant to 

Section 6.26 of the Act, so as to allow 

the FAC to pay the principal of the 

maturing obligation. While an institution 

that issues preferred stock to the FAC is 

primarily responsible for providing funds 

for payment of the FAC bonds (through 

redemption of the preferred stock 

purchased with the proceeds of the FAC 

bonds), the institution may be prohibited 

from redeeming, or may elect not to 

redeem, the preferred stock pursuant to 

section 6.26 of the Act. If this occurs, 

then the FAC must use funds from its 

trust fund, to the extent available, to 

retire the debt. The FAC Trust Fund 

(Trust Fund) represents the funds 

received from System institutions’ 

purchase of stock in the FAC. The Trust 

Fund totaled approximately $74 million 

and $131 million at December 31, 2003 

and 2002, respectively. The Trust Fund is 

composed of zero coupon Treasury 

securities which mature in 2005 and have 

Farm Credit System Insurance Corporation ■ 39 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

a par value of $79 million. The FAC also 

must use funds from its Assistance Fund 

which totaled $15 million at December 

31, 2003, to retire the remaining FAC 

bond. If the FAC Trust Fund and 

Assistance Fund balances are not 

sufficient to retire the FAC debt, then 

the Corporation must purchase preferred 

stock from the FAC to provide funds to 

retire such debt. 

If the Corporation does not have 

sufficient funds, the U.S. Treasury must 

retire the debt. If this should occur, the 

Corporation is required to repay the U.S. 

Treasury as funds become available from 

the payment of premiums. At December 

31, 2003, the only preferred stock held 

by the FAC was associated with the 

assistance provided to the Federal Land 

Bank of Jackson. 

On May 20, 1988, the FCA placed the 

Federal Land Bank of Jackson and the 

Federal Land Bank Association of Jackson 

in receivership (collectively the FLBJR) 

and appointed a receiver to liquidate their 

assets. As of April 27, 1990, the FCA, the 

Receiver of the FLBJR, the FAC, the 

System banks, the Assistance Board, and 

the Corporation entered into an 

agreement which called for the FAC to 

issue 15-year U.S. Treasury-guaranteed 

bonds to purchase preferred stock in the 

FLBJR. Upon the maturity in 2005 of 

the FAC bonds used to purchase 

preferred stock in the FLBJR, the 

Corporation will provide funds to repay 

the principal of these debt obligations, to 

the extent that the Trust Fund and the 

Assistance Fund are not sufficient for 

such purpose. In January 1995, the 

FLBJR was terminated by the FCA and 

the receiver was discharged after 

transferring the remaining receivership 

assets to the FAC. 

Estimated Insurance Obligation 

The Corporation estimated the present 

value of its liability to provide funds for 

payment of the $231 million non-callable 

15-year maturing debt to be 

approximately $210 million and $196 

million at December 31, 2003 and 2002, 

respectively. This liability is reflected in 

the accompanying statements of financial 

condition. The present value of this 

obligation is based on a discount rate of 

7 percent to maturity, which was 

established at the time this liability was 

originally recorded. In accordance with 

SFAS No. 107, the fair value of this 

liability has been estimated by 

management using discount rates based 

upon U.S. Treasury securities of similar 

durations (1.4 percent for 2003 and 1.7 

percent for 2002). The fair value was 

40 ■ Financial Information 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

approximately $227 million and $222 

million as of December 31, 2003 and 

2002, respectively. Provisions for changes 

in the Corporation’s liability are reflected 

in the statements of income and expenses 

in the amount of $13.7 million and 

$13.6 million for the years ended 

December 31, 2003 and 2002, 

respectively. 

The Corporation cannot predict the 

effects of future events upon System 

operations and upon the amount of the 

Trust Fund that will ultimately be 

available to reduce the Corporation’s 

liability for FLBJR-related FAC bonds. 

The Corporation will annually reassess 

the likelihood of earlier use of the Trust 

Fund, changes in Trust Fund earnings, 

and other assumptions underlying its 

estimate of the liability for FLBJR-related 

FAC bonds. 

Other Financial Assistance Provided 

to System Institutions 

From 1988 to 1998, the U.S. Treasury 

paid interest on certain FAC bonds 

totaling $440 million. System banks must 

repay Treasury for this obligation 

following the final maturity in 2005 of 

the last FAC bond issue outstanding. 

The 1992 Act also expanded the 

potential uses of the Trust Fund to satisfy 

System institution defaults on the 

principal and interest of other FAC 

obligations and required System banks to 

make annual annuity payments to the 

FAC to provide funds for the retirement 

of the Treasury-paid interest at maturity. 

The Corporation is also required to 

satisfy defaults on the annual payments to 

the FAC to permit the repayment of 

Treasury-paid interest. During 1992 

through 2003, all System banks made 

their annual annuity payments as 

scheduled. 

The Corporation is not aware of any 

events or circumstances which will 

prevent System banks from meeting their 

remaining FAC obligations. 

The Corporation actively monitors the 

creditworthiness and financial position of 

the insured System banks. Other than 

obligations that have occurred as a result 

of resolving the FLBJR, as described 

above, management is not aware of any 

events or circumstances at this time 

which would require a liability for 

estimated insurance obligations to be 

recorded. 

Farm Credit System Insurance Corporation ■ 41 
NOTES TO THE FINANCIAL STATEMENTS 

Farm Credit System Insurance Corporation — as of December 31, 2003 and December 31, 2002 

Note 6 — Note 7 — 

Operating Lease Related Parties 

On October 21, 2003, the Corporation 

executed a new six-year lease with the 

Farm Credit System Building Association 

for office space. The terms of the lease 

provide for an annual minimum base rent 

for office space for the remaining term of 

$118,938 for 2004, $120,019 for 2005, 

$121,100 for 2006, $122,181 for 2007, 

$123,262 for 2008 and $124,344 for 

2009. The Corporation recorded lease 

expense (including operating cost 

assessments) of $111,717 and $103,855 

for 2003 and 2002, respectively. 

The Corporation purchases services from 

the FCA under an Inter-Agency 

Agreement. These include examination 

and administrative support services. The 

Corporation had payables due to the 

FCA of $39,351 at December 31, 2003, 

and $1,650 at December 31, 2002. The 

Corporation purchased services for 2003 

which totaled $74,506 compared with 

$64,926 for 2002. 

The Corporation provided assistance to 

the FCA under a related Inter-Agency 

Agreement, recognizing revenue in 2003 

of $19,765 and in 2002 of $17,793. At 

December 31, 2003 and 2002, the 

Corporation had a receivable from the 

FCA of $4,515 and zero, respectively. 

42 ■ Financial Information 
 

INCOME AND EXPENSES
 

Farm Credit System Insurance Corporation By Year 

($ in thousands) 

Income Expenses Net Income 

Premiums Investment Provision for Administrative 

Insurance and Operating 

Obligations Expenses 

Changes in 

Insurance Fund 

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

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

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

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

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

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

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

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

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

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

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

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

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

2002 

2003 

$ 26,355 $ 93,499 

$ 105,079 $ 91,405 

$ 13,643 $ 1,906 

$ 13,725 $ 2,218 

$ 107,5453 

$ 180,561 

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

assistance to the FLB of Jackson. 

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

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

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

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

Farm Credit System Insurance Corporation ■ 43 
Corporate Staff
 

Mary Creedon Connelly Chief Operating Officer 

Alan J. Glenn Director of Risk Management 

C. Richard Pfitzinger Chief Financial Officer 

Dorothy L. Nichols General Counsel 

Phyllis Applebaum Financial Analyst 

William Fayer Financial Analyst 

Pam Ngorskul Accountant 

Anna Lacey Administrative Specialist 

Molly Sproles Clerical Assistant 

The year ended with transition in several management roles. 

Dennis Pittman, who had served with distinction as the Director 

of Risk Management since 1993, retired. Alan Glenn, formerly the 

Corporation’s Chief Financial Officer, assumed the role of Director 

of Risk Management. Rick Pfitzinger, who previously served as the 

Asset Assurance Manager, became the Chief Financial Officer. 

References 

Copies of Farm Credit System Annual Reports to Investors 

and Quarterly and Annual Information Statements may be 

obtained from: 

Federal Farm Credit Banks Funding Corporation 

10 Exchange Place, Suite 1401 

Jersey City, NJ 07302 

(201) 200-8000 

Copies of the Annual Performance and Accountability Reports of 

the Farm Credit Administration may be obtained from: 

Office of Communications and Public Affairs 

Farm Credit Administration 

1501 Farm Credit Drive 

McLean, VA 22102 

(703) 883-4056 

44 ■ Farm Credit System Insurance Corporation 
Farm Credit System Insurance Corporation 

1501 Farm Credit Drive 

McLean, VA 22102 

(703) 883-4380 - Voice 

(703) 790-9088 - Fax 

www.fcsic.gov