LD

The FCSIC in the Future

The FCSIC projects that it will incur approximately $898,000 in operat-
ing costs in 1991. Following is the implementation plan for the FCSIC
to ensure it is fully operational by January 1, 1993.

FCSIC Preliminary Development Plan
Implementation Strategy to Achieve FCSIC’s Full Operations by 1993

Objective Completion Target
Adopt Organizational Regulations and Select Completed

the Chairman

Inventory Applicable Legislation; Assess Completed
Requirements; and Develop Legislative Agenda

Develop/ Adopt Bylaws Completed
Select CEO Completed
Design Draft Organizational Structure Completed
Adopt Proposed Premium Regulations Completed
Adopt Final Premium Regulations Ist Quarter 1991
Collect Premiums for 1989 & 1990 1st Quarter 1991
Develop Interim Staffing Plan as Prescribed Ist Quarter 1991
Develop Investment Policy ‘1st Quarter 1991
Develop Organizational Plan 2nd Quarter 1991
Develop Strategic Plan and Mission Statement 2nd Quarter 1991
Design and Plan an Operating Budget 3rd Quarter 1991
Define Relationship with FCA and Services 4th Quarter 1991
Provided, Including Examination Services

Develop Strategy to Monitor Assistance Board’s 4th Quarter 1991

Assistance Agreements for Implementation
Sufficiently in Advance of 12/31/92

Develop and Implement Policies and 4th Quarter 1991
Procedures for Risk Management, Financial
Operations, and Administration

Collect Premiums for 1991 Ist Quarter 1992
Define Receiver/Conservator Responsibilities 4th Quarter 1992
Full Implementation 4th Quarter 1992


13

in 1993, the FCA must
appoint the FCSIC as
the receiver or conser-
vator for any FCS in-
stitution placed in re-
ceivership or
conservatorship.

As of December 31,
1990, 12 FCS institu-
tions were in receiv-
ership. The FCSIC is
not the receiver for
any of these institu-
tions. No FCS institu-
tions are in
conservatorship.

5. Providing assistance
to financially distressed
FCS institutions.

Beginning January 1,
1993, the FCSIC will
have the authority to
provide assistance to
troubled FCS institu-
tions. The FCSIC
may, in its sole discre-
tion and on such
terms and conditions
as it may prescribe,

provide assistance to
FCS institutions by
purchasing assets,
making loans, or as-
suming the liabilities
of an institution. The
FCSIC may take such
action in order to pre-
vent an institution
from being placed in
receivership, to re-
store an institution to
normal operation, or
to reduce certain
other risks to the
FCSIC. The amount
of such assistance
may not exceed an
amount determined
by the FCSIC to be
the cost of liquidating
the institution.



ihe

Statements Of Cash Flow For The Year Ended December 31,1990 And
The Period From Inception To December 31, 1989

(In Thousands)

1990 1989
Cash Flows from Operating Activities
Net Income (Loss) ($ 42,538) $ 80,923
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Increase in Premiums Receivable (72,000) (65,000)
Increase in Accrued Interest Receivable = (2,583)
Net Amortization and Accretion (2,820) (1,893)
Increase in Accounts Payable and Accrued
Expenses 40 118
Increase in Liability for Estimated Insurance
Obligations 140,000 ES
Net Cash Provided by Operating Activities 22,682 11,565
Cash Flows from Investing Activities:
Net Increase in Investments in
U.S. Treasury Obligations _ (246,542)
Net Cash Used in Investing Activities eae (246,542)
Cash Flows from Financing Activities:
Initial Funding from U.S. Treasury iis 259,799
Net Cash Provided by Financing Activities id 259,799
Net Increase in Cash and Cash Equivalents 22,682 24,822
Cash and Cash Equivalents, Beginning of Period 24,822 oa
Cash and Cash Equivalents, End of Period $ 47,504 $ 24,822

The accompanying notes are an integral part of these statements,






26

Note 2—Summary of
Significant Account-
ing Policies

Accounting Principles
and Reporting Prac-
tices—The accounting
and reporting policies
of the FCSIC conform
to generally accepted
accounting principles
and, as such, the fi-
nancial statements
have been prepared
using the accrual ba-
sis of accounting.

Cash and Cash Equiva-
lents—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 port-
folio is maintained as
is required by section
5.62 of the Act. The
Act requires that
funds of the FCSIC,

not otherwise em-
ployed, shall be in-
vested in obligations
of the United States
or in obligations
guaranteed as to prin-
cipal and interest by
the United States. In-
vestments are stated
at cost, adjusted for
amortization of pre-
miums and accretion
of discounts. Premi-
ums 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 Obliga-
tions—The liability
for estimated insur-
ance obligations is the
present value of esti-
mated probable in-
surance payments,
net of anticipated pre-
miums, to be made in
the future based on
the FCSIC’s analysis
of economic condi-
tions of insured FCS
banks. The insured
FCS banks’ primary
lending markets are
borrowers in the
farming and marine
market segments.
Economic weaknesses
in these market seg-
ments and the effect
of general market
conditions on the in-
sured FCS banks’ bor-
rowers could result in
difficulties in certain
borrowers meeting
their obligations. As a
result, insured FCS
banks may experience


22

Statements Of Income And Expense For The Year Ended December

31, 1990 And The Period From Inception To December 31, 1989
(In Thousands)

1990 1989
Income
Premiums (Note 3) $ 72,000 $ 65,000
Interest Income 25,705 16,041
Total Income 97,705 81,041
Expenses
‘Administrative Operating Expenses 243 118
Provision for Estimated Insurance Obligations (Note 4) 140,000 _
Net Income (Loss) ($ 42,538) $ 80,923

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

Statements Of Changes In Insurance Fund For The Year Ended
December 31, 1990 And The Period From Inception To
December 31, 1989

(In Thousands)
1990 1989
Balance, Beginning of Period $340,722 =
Initial Funding from U.S. Treasury (Note 3) a $259,799
NetIncome (Loss) (42,538) 80,923
Balance, End of Period $298,184 $340,722

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


17

¢ Financial Manage-
ment—All financial
matters, including the
collection of premi-
ums, investments,
and monitoring the
Insurance Fund to en-
sure the FCSIC is able
to fulfill its statutory
responsibilities.

© Administration—
Bookkeeping, payroll,
and other administra-
tive functions.

¢ Receiverships and
Conservatorships—
Administration and
oversight of
receiverships and
conservatorships.

¢ Auditor—Monitor-
ing and auditing in-

ternal activities of the
FCSIC for compliance
with applicable laws,
rules, and regulations.

Other FCSIC func-
tions will be per-
formed by individu-
als serving in similar
capacities at the FCA.

These include a Gen-
eral Counsel, a Secre-
tary to the Board, a
Federal Register
Officer, a Freedom of
Information Officer, a
Privacy Act Officer, a
Contracting Officer,
an Equal Employ-
ment Opportunity
Officer, and an Ethics
in Government
Officer.



Harold B. Steele

is from Princeton, Illi-
nois, where he and
his son produce grain
and pork on a 665-
acre farm. In addition
to his farming inter-
ests, Mr. Steele has
been a member of the
board of directors of
the Midwest Finan-
cial Group, Inc., a
holding company
comprised of 19
member banks in
northern Illinois. He
was appointed by the
President to the Na-
tional Commission on
Agricultural Finance
and served as
chairman.

From 1970 through
1983, Mr. Steele
served as president of
the Illinois Farm
Bureau (IFB). As IFB
president, he served
as a full-time execu-
tive officer of the

state’s largest general
farm organization,
with 315,000 member
families. During that
period, he served as
president of the IFB-
affiliated group of in-
surance companies
and investment firms.
He also served on the
board of the Ameri-
can Farm Bureau Fed-
eration from 1971 to
1983. Mr. Steele
served as a member
of the board of direc-
tors of the National
Livestock Producers
Association and was
a member of the Na-
tional Livestock and
Meat Board.

During his career as
an agricultural pro-
ducer and leader, Mr.
Steele received many
awards and honors.
He was named Out-
standing Young
Farmer in Illinois by
the Jaycees in 1956. In
1970 he was named
Master Farmer by the
Prairie Farmer maga-
zine. The Land of Lin-
coln Award was pre-
sented to him in 1972
by the Illinois Pork
Producers Associa-
tion, and in 1984 he
received the Univer-
sity of Illinois Distin-
guished Service
Award.

During World War II,
Mr. Steele served his
country, rising to the
rank of captain in the
US. Army.

He attended the Uni-
versity of Illinois’
College of
Agriculture.


References

For additional infor-
mation about the
Farm Credit System,
its financial condition
and performance, and
activities of the Farm
Credit Administra-
tion, the following
publications are
recommended.

Farm Credit System
Annual Reports to In-
vestors and Quarterly
and Annual Informa-
tion Statements for
the current fiscal year
and the two preced-
ing 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 Admin-
istration 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 cop-
ies are available for
inspection.



29

1990 and 1989, re-
spectively, for esti-
mated premiums
earned and to be re-
ceived from insured
FCS banks. The esti-
mated premium is
based on certain loan
information con-
tained in System in-
stitutions’ Call Re-
ports submitted to the
FCA. As of December
31, 1990, no premi-
ums have been col-
lected; however, these
premiums are due
March 29, 1991, In-
sured FCS banks have
recorded accruals for
premiums payable to
the FCSIC related to
these premiums.

Note 4—Financial
Assistance to Insured
FCS Banks

The Act required that
the FCA charter the
Farm Credit System
Financial Assistance

Corporation (FAC)
for the purpose of
carrying out a pro-
gram to provide capi-
tal to institutions of
the FCS that are expe-
riencing financial dif-
ficulty. In order to
raise funds to provide
this capital, the FAC
has the authority to
issue debt obligations
with a maturity of 15
years. The FAC can
then use these funds
to purchase preferred
stock in an institution
experiencing financial
difficulty. When this
15-year debt matures,
the institution can re-
deem, upon FCA ap-
proval, the preferred
stock so as to allow

the FAC to pay the
principal of the ma-
turing 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 re-
deem the preferred
stock pursuant to sec-
tion 6.26 of the Act if
doing so will prevent
the institution from
remaining viable and
competitive. If this
occurs, then the FAC
must use funds main-
tained in its Trust
Fund, to the extent
available, to retire the
debt. The FAC Trust
Fund totaled approxi-
mately $56 million


6

A Message from the Board of Directors of the FCSIC

We are pleased to
transmit the 1990 an-
nual report of the
Farm Credit System
Insurance Corpora-
tion (FCSIC). Since its
inception in 1988, the
FCSIC has been in its
formative phase. Ef-
forts are continuing to
prepare the FCSIC to
assume its full statu-
tory authorities,
which become effec-
tive on January 1,
1993. Until that time,
the FCSIC’s authori-
ties are limited. For
example, the FCSIC
cannot provide assis-
tance or make pay-
ments on defaulted
Farm Credit System
obligations. Congress
gave the FCSIC a pe-
riod of time to con-
template, plan for,
and implement its op-
erations. The FCSIC
will take full advan-
tage of that opportu-

nity to be well pre-
pared to assume its
full authorities

on the date Congress
specified.

Despite the fact that
the FCSIC Board of
Directors was with-
out a quorum for
nearly half of 1989
and 1990, much has
been accomplished.
These accomplish-
ments were facilitated
by research done by
Farm Credit Admin-
istration (FCA) staff
relating to the legisla-
tive history of the Ag-
ricultural Credit Act
of 1987, studying
similar Government

insurance corpora-
tions, and analyzing
organizational issues.
Following is a sum-
mary of the major ac-
complishments to
date:

The revolving fund
under the administra-
tion of the FCA was
transferred to the
Farm Credit Insur-
ance Fund and in-
vested in U.S.
Treasury securities.

¢ Regulations gov-
erning the organiza-
tion of the FCSIC
were adopted.

¢ Bylaws for the
FCSIC were approved
by the Board of
Directors.

° Proposed regula-
tions governing the
payment and collec-
tion of premiums
were adopted.


Farm Credit System Insurance Corporation

Billy Ross Brown
Chairman
(Shown on left) |

Harold B. Steele
Member of the Board
(Shown on right)

Curtis M. Anderson

Secretary

Anne E. Dewey

General Counsel



18

Relationship Between the FCSIC and the FCA

Among the principal
objectives of the FCSIC
is the protection of
funds invested in the
Systemwide and con-
solidated securities is-
sued by FCS institu-
tions to obtain loan
funds. The responsibili-
ties of the FCA in ex-
amining and regulating
the institutions of the
FCS further the goals of
the FCSIC. The overall
goal of each organiza-
tion is the same—to
provide for the safe and
sound operation of a
permanent system of
borrower-owned coop-
eratives that supply
credit for American.
agriculture.

Even for those func-
tions that concern the
ECSIC particularly, the
cooperation of the FCA
in carrying out those
functions is essential.
The FCSIC generally
must rely on the FCA
for the enforcement of
ts regulations. The
CSIC has no explicit

statutory grant of en-
forcement authority,
with minor exceptions.
In contrast, the FCA
has the authority to is-
sue an enforcement ac-
tion based on any vio-
lation of the statute or
regulations, including
those pertaining to the
FCSIC’s statutory and
regulatory provisions,
as well as to address
safety and soundness
issues.

By giving the FCA
broad enforcement au-
thority and limiting the
FCSIC’s enforcement
authority to matters re-
lating to premium col-
lections, close coordina-
tion between the FCA
and the FCSIC was ap-
parently envisioned.
The mandate that the
same three Board mem-

bers serve each organi-
zation is further evi-
dence of the intentions
for a high degree of
joint responsibility and
cooperation.

The existing FCA ex-
amination process will
be relied on to protect
the interests of the
FCSIC. That process
will be reviewed to de-
termine the extent to
which the scope of ex-
aminations may require
supplementation to in-
corporate any addi-
tional needs of the
FCSIC. It is also impor-
tant that the indepen-
dent FCSIC point of
view is incorporated
into the FCA’s analysis
of matters that could
affect the FCSIC.
Coupled with the full
sharing of information
between the FCA and
the FCSIC, this will
maximize the resources
of both organizations
and minimize the regu-
latory burden on the

| FCS institutions.



Board of Directors

Billy Ross Brown
is a prominent
farmer, cattleman,
and conservationist
from Oxford, Missis-
sippi. In 1969, he was
elected to the board
of directors of the Ox-
ford Production
Credit Association
(PCA). He served as
chairman of the Ox-
ford PCA board from
1976 to 1985. From
1985 to 1990, he
served as a member
of the board of the
First South Produc-
tion Credit Associa-
tion in Jackson,
Mississippi.

Mr. Brown also has
been active in state
and national agricul-
ture and conservation
organizations.

He served as area
vice president for the
Mississippi Associa-
tion of Conservation
Districts for more
than 20 years and, for
more than 30 years, as
commissioner of the
Lafayette County Soil
and Water Conserva-
tion District. He also
served as chairman of
the Mississippi Soil
and Water Conserva-
tion Commission and
as a member of the
USS. Forest Service’s
National Advisory
Committee.

In recognition of his
work in conservation,
forestry, wildlife, and
agriculture, Mr.
Brown has received a
number of national
and state awards. In
1982 and 1988 he re-
ceived the Presiden-
tial Award from the
Mississippi Associa-
tion of Conservation
Districts, in 1985 he

was selected as a
member of the Hall of
Fame by the Missis-
sippi Agriculture and
Forestry Museum,
and in 1976 he was a
recipient of the U.S.
Forest Service’s 75th
Anniversary Award
for significant contri-
butions to forestry
and conservation.

Mr. Brown is a gradu-
ate of the University
of Mississippi with a
bachelor’s degree in
business
administration.


24

Notes to the Financial Statements

FCSIC Notes to the Financial Statements, December 31, 1990
and December 31, 1989

Note 1—Insurance
Fund: Statutory
Framework

The Agricultural
Credit Act of 1987
(the 1987 Act) estab-
lished the Farm
Credit System Insur-
ance Corporation
(FCSIC) for the pur-
pose of insuring the
timely payment of
principal and interest
on notes, bonds, de-
bentures, and other
obligations (insured
obligations) issued
under subsection (c)
or (d) of section 4.2 of
the Farm Credit Act
of 1971, as amended
(Act). All provisions

of the 1987 Act per-
taining to the FCSIC
have been incorpo-
rated into the Act. Ef-
fective January 6,
1989, each bank in the
Farm Credit System
(FCS) participating in
insured obligations
issued under subsec-
tion (c) or (d) of sec-
tion 4.2 of the Act be-
came an insured FCS
bank subject to the re-
quirements of and en-
titled to the benefits
of insurance under
Title V, Part E of the
Act. The FCSIC is
managed by a board
of directors consisting
of the same members
making up the Farm.
Credit Administra-
tion (FCA) Board ex-
cept that the chair-
man of the FCA
Board may not serve

as the chairman of the
FCSIC Board of
Directors.

The FCSIC is funded
from three sources:
(1) all amounts in the
revolving fund estab-
lished by section 4.0
of the Act were trans-
ferred to the FCSIC’s
account from the U.S.
Treasury, (2) the in-
terest earned from in-
vestments, and (3) an-
nual premium pay-
ments received from
insured FCS banks.




1G)

Operations of the FCSIC

The FCSIC was cre-
ated on January 6,
1988, the date of en-
actment of the Agri-
cultural Credit Act of
1987. Its corporate re-
sponsibilities are
similar to those of the
Federal Deposit In-
surance Corporation.
The FCSIC’s statutory
authorities and re-
sponsibilities include:

1. Insuring the timely
payment of interest and
principal on insured
notes, bonds, deben-
tures, and other obliga-
tions issued by Farm
Credit System (FCS)
banks.

On January 6, 1989,
each FCS bank be-
came an insured
bank. The insurance
extends to all consoli-
dated and System-
wide notes, bonds,
debentures, or other
obligations issued by

FCS banks. All of the
banks are jointly and
severally liable for
Systemwide obliga-
tions. For consoli-
dated obligations, the
joint and several li-
ability extends only to
the bank group, such
as the Banks for Co-
operatives, issuing
the obligation. Obli-
gations issued by in-
dividual institutions
are not insured. Be-
ginning on January 1,
1993, the FCSIC will
be authorized and re-
quired to make any
payments that would
be necessary as a re-
sult of a default by an
FCS bank on an in-
sured obligation. As
of December 31, 1990,
the FCS had $53.9 bil-
lion in insured obliga-
tions outstanding.

2. Satisfying FCS insti-
tution defaults on cer-
tain obligations related
to issuance of bonds by
the Farm Credit System
Financial Assistance
Corporation (FAC).

The FCSIC is obli-
gated to make pay-
ments to satisfy any
interest due on cer-
tain FAC obligations
which the FAC has
for 12 months been
unable to recover
from a defaulting FCS
institution. Further, if
an FCS institution
which has issued pre-
ferred stock to the
FAC is unable to re-
deem or does not re-
deem such stock, and
the FAC does not
have funds to satisfy
the principal of the
maturing obligation
related to that stock,
the FCSIC must pur-
chase the preferred
stock from the FAC.
Any FCS institution


10

Chronology of Significant Events

January 6, 1988 The Farm Credit System Insurance Corpora-
tion was established with the enactment of the
Agricultural Credit Act of 1987.

January 6, 1989 The resignation of Jim R. Billington was effec-
tive, leaving the FCSIC Board of Directors with-
out a quorum, Each FCS bank became insured.

May 5, 1989 Funds totaling $260 million were transferred
from a revolving fund administered by the

FCA to the Farm Credit Insurance Fund and
invested in United States Treasury securities.

October 12, 1989 Harold B. Steele joined the FCSIC Board of Di-
rectors, restoring a quorum.

February 27, 1990 Marvin R. Duncan was elected chairman of
the FCSIC Board of Directors. The Board of
Directors adopted bylaws.

August 28, 1990 The Board of Directors adopted proposed pre-
mium regulations and final organizational
regulations. The Board of Directors also ap-
proved reimbursement to the FCA for all ex-
penses incurred in order to operate the FCSIC.

September 18, 1990 The resignation of Marvin R. Duncan was ef-
fective, leaving the FCSIC Board of Directors
without a quorum.

October 30, 1990 Billy Ross Brown joined the FCSIC Board of
Directors, restoring a quorum.

December 18, 1990 Billy Ross Brown was elected chairman of the
FCSIC Board of Directors. An organziational
structure was approved.



ot

FAC bonds. Based on
this information, the
FCSIC estimated the
present value of its li-
ability, net of premi-
ums, for payment of
the $388 million of 15-
year maturing debt to
be approximately
$140 million at De-
cember 31, 1990. This
liability is reflected in
the accompanying
statement of financial
condition.

There are four other
FCBs with preferred
stock outstanding
and responsible,
therefore, for repay-
ment of FAC bonds.
As of December 31,
1990 and 1989, there
was $420 million and
$331 million, respec-
tively, of FAC bonds
and related preferred
stock outstanding.
These bonds, also 15-
year bonds, will ma-
ture prior to the 15-
year bonds issued in

relation to the FLBJR.
Asa result, if these
FCBs cannot redeem
the stock so that the
bonds can be retired,
the FAC Trust Fund
may be exhausted
prior to the maturity
of the FAC bonds that
were issued in rela-
tion to the FLBJR. At
the present time, the
FCSIC is not aware of
any information that
would indicate these
FCBs will not be able
to redeem such stock.

The FCSIC actively
monitors the credit-
worthiness and finan-

cial position of the in-
sured FCS banks.
Based on an assess-
ment by the FCSIC
Board of Directors,
other than obligations
that have occurred as
a result of closing out
the FLBJR as de-
scribed above, the
FCSIC is not aware of
any events or circum-
stances which would
require a liability for
estimated insurance
obligations to be
recorded.

Note 5—Investments

At December 31, 1990
and 1989, the FCSIC
investment portfolio
consisted of one U.S.
Treasury note matur-
ing on May 15, 1991.
The yield to maturity
is 8.125 percent. The
market value was
$251,711,000 and
$249,039,000 at De-
cember 31, 1990 and
1989, respectively.


30

and $38 million at De-
cember 31, 1990 and
1989, respectively. If
the FAC Trust Fund
is not sufficient to re-
tire the debt, then the
FCSIC must purchase
the preferred stock
from the FAC to pro-
vide funds to retire
such debt. Addition-
ally, if the FCSIC does
not have sufficient
funds, the U.S. Trea-
sury must retire the
debt. Then the FCSIC
is required to repay
the U.S. Treasury as
funds become avail-
able from the pay-
ment of premiums.

On May 20, 1988, the
FCA, at the request of
the Farm Credit Sys-
tem Assistance Board
(Assistance Board),
placed the Federal
Land Bank of Jackson
and the Federal Land
Bank Association of
Jackson in receiver-
ship (FLBJR) and ap-

pointed a receiver to
liquidate its assets. As
of April 27, 1990, the
FCSIC, the FCA, the
receiver of the FLB of
Jackson, the FAC, the
banks of the Farm
Credit System, and
the Assistance Board
reached an agreement
for the sale of sub-
stantially all of the re-
maining assets of the
FLBJR. In June 1990,
the above parties con-
summated the trans-
actions contemplated
by the agreement.
The agreement called
for the FAC to issue
15-year U.S. Trea-
sury-guaranteed debt
to purchase preferred
stock in the FLBJR.
Upon the maturity of
the FAC debt used to

purchase preferred
stock in the FLBJR,
the FCSIC will pro-
vide funds to repay
the principal of these
debt obligations, to
the extent that the
FAC Trust Fund is
not sufficient for such
purpose. Assistance
given by the FAC to
the FLBJR totaled
$388 million.

Asa result of this
agreement, it is prob-
able that the FCSIC
will have to retire at
least a portion of the
FAC debt. It is not
clear, however, to
what extent the
FCSIC can rely on the
availability of any
funds from the Trust
Fund. The availability
of the Trust Fund de-
pends on the ability
of other Farm Credit
banks to redeem pre-
ferred stock pur-
chased by the FAC
with proceeds from


¢ An organizational
structure was ap-
proved that will en-
sure the FCSIC’s con-
siderations are inde-
pendently taken into

account in actions by
the FCA.

With respect to the
organizational struc-
ture, we believe it is
essential to create a
structure that will en-
sure independence of
the FCSIC. However,
for reasons of
economy and effi-
ciency, to the extent
possible, the FCSIC
should continue to
rely on the FCA for
resources rather than
creating another bu-
reaucracy. We are
pleased that the
FCSIC has been able
to use the expertise

within the FCA and
we expect that prac-
tice to continue in
large part.

Over the next 2 years,
the FCSIC will com-
plete the develop-
ment of and imple-
ment a strategic plan
that will enable it to
assume its full statu-
tory role in 1993 ina
cost-effective,
efficient, and timely
fashion.

Mb Sia om

Chairman

dea ee

Member of the Board of Directors





2h

increased levels of
nonaccrual loans and
other nonperforming
assets which may ad-
versely affect their fi-
nancial condition and
profitability. There-
fore, adverse changes
in the financial condi-
tion and profitability
of insured FCS banks
could occur in the fu-
ture which would
have a material effect
on the liability for es-
timated insurance ob-
ligations.

Premiums—Annual
premiums are re-
corded as revenue
during the period on
which the premiums
are based. Premiums
increase the Insur-
ance Fund.

Administrative Operat-
ing Expenses—The
FCSIC has no em-
ployees or fixed as-
sets. FCA employees
assist in the adminis-
tering of the FCSIC.
As such, employee
salaries and the re-
lated costs for space
and services are allo-
cated to the FCSIC
based on time in-
curred or estimated
percentage use.

Note 3—Premiums

By statute, the annual
premium due from
each insured FCS
bank for the calendar
year is equal to the
sum of (1) the annual
average principal out-
standing for the year
on loans of the bank
that are in accrual sta-
tus, other than Goy-
ernment-guaranteed
portions of these

loans, multiplied by
0.0015; (2) the annual
average principal out-
standing for the year
on loans of the bank
that are in nonaccrual
status multiplied by
0.0025; (3) the annual
average principal out-
standing on the guar-
anteed portions of
Federal Government-
guaranteed loans that
are in accrual status,
multiplied by 0.00015;
and (4) the annual av-
erage principal out-
standing on the guar-
anteed portions of
State government-
guaranteed loans that
are in accrual status,
multiplied by 0.0003.
The 1989 calculation
excludes loans in
nonaccrual status.


Contents

A Message from the Board of Directors of FCSIC

10

Chronology of Significant Events

i

Operations of the FCSIC

14

The Farm Credit Insurance Fund

16

Organization of the FCSIC

18

Relationship Between the FCSIC and the FCA

19

The FCSIC in the Future

20

Report of Independent Public Accountants

21

Financial Statements

24

Notes to the Financial Statements

Oe

References



14

The Farm Credit Insurance Fund

To provide funds to
meet the FCSIC’s re-
sponsibilities, the law
provided for the
transfer of $260 mil-
lion from a revolving
fund to the Farm
Credit Insurance
Fund (Insurance
Fund) as the initial
capital of the FCSIC.
The revolving fund,
which had been un-
der the jurisdiction of
the FCA, consisted of
funds which were ini-
tially appropriated to
provide startup capi-
tal for FCS institu-
tions. Over time, the
startup capital was
retired and the funds
repaid and deposited
in the revolving fund.

Since the transfer to
the Insurance Fund,
the funds have been
invested in obliga-
tions of the U.S.
Treasury.

On January 6, 1989,
each FCS bank be-
came responsible for
paying annual premi-
ums to the FCSIC,
These premiums will
be deposited in the
Insurance Fund after
final regulations be-
come effective. The
annual premium rate
for collection is set by
law with the follow-
ing rates in effect:

¢ 15 basis points of
the annual average
principal outstanding
on loans in accrual
status, excluding the
guaranteed portions
of State and Federal
Government-guaran-
teed loans;

¢ 25 basis points of
the annual average

principal outstanding
on loans that are in
nonaccrual status (the
law provides that
premiums on
nonaccrual loans are
payable beginning
with calendar year
1990);

* 3 basis points of the
annual average prin-
cipal outstanding on
the guaranteed por-
tions of State govern-
ment-guaranteed
loans that are in
accrual status; and

* 1.5 basis points of
the annual average
principal outstanding
on the guaranteed
portions of Federal
Government-guaran-
teed loans that are in
accrual status.


16

Organization of the FCSIC

At its December 18,
1990 meeting, the
Board of Directors of
the FCSIC elected
Billy Ross Brown as
chairman. In that ca-
pacity, he will preside
at all meetings of the
Board, be responsible
for all procedural
matters arising at
Board meetings, and
certify all acts, orders,
and proceedings of
the Board.

To enable the FCSIC
to carry out its statu-
tory and regulatory
responsibilities, the
chairman is respon-
sible for identifying
the need for the de-
velopment of appro-
priate policies and for
assuring that any nec-
essary economic and
financial studies are
available to assist in
making policy deci-
sions. The chairman
also acts as a spokes-
man for and repre-

sentative of the Board
in its official relations
with other Govern-
ment agencies and
the FCS.

The Board also ap-
proved the FCSIC
corporate structure
and its relationship to
the FCA. The chief ex-
ecutive officer (CEO)
of the FCA, currently
Harold B. Steele, will
be the chief executive
officer of the FCSIC.

A chief operating offi-
cer may be desig-
nated. The CEO will

perform duties con-
sistent with and com-
parable to the respon-
sibilities discharged
as CEO of the FCA.
He will be respon-
sible for directing the
implementation of
policies and regula-
tions of the FCSIC
and for the execution
of administrative
duties.

One or more persons
will be appointed and
responsible for the
following functions:

© Risk Management—
The review of FCA
examination, cor-
porate, and regula-
tory activities to as-
sess and quantify the
risk to the Insurance
Fund.




AS)

Beginning on January
1, 1993, the FCSIC
will be required to ex-
pend amounts to the
extent necessary to:

If the FCSIC does not
have sufficient funds
to insure payment on
obligations in item

Millions Outstanding Dec. 31,

1. Insure the timely pay-
ment of interest and
principal on insured ob-
ligations,

2. Satisfy System Insti-
tution defaults on obli-
gations related to the is-
suance of bonds by the
Farm Credit System Fi-
nancial Assistance Cor-
poration (FAC) under
section 6.26(d)(3) of the
Act, and

3. Ensure the retirement
of eligible borrower
stock at par value.

Total

(1), FCS banks will be
1990 1989
$53,872 $55,895
808 394
1,392 1,683
$56,072 $57,972

required to make
payments under joint
and several liability.

If the FCSIC does not
have sufficient funds
to retire obligations in
item (2), the U.S.
Treasury must retire
those obligations. The
U.S. Treasury would
then be reimbursed
by the FCSIC as funds
become available
from the payment of
premiums.

Additionally, begin-
ning on January 1,
1993, the FCSIC, in its
sole discretion, will
be authorized to ex-
pend amounts to pro-
vide financial assis-
tance to certain in-
sured institutions.
Prior to January 1,
1993, the FCSIC may
not make payments
for any purpose ex-
cept to pay for oper-
ating expenses of the
FCSIC.




28

Each insured FCS
bank will continue to
make these annual
premium payments
until the aggregate
amount in the Insur-
ance Fund exceeds
the secure base
amount. The secure
base amount is
equivalent to 2 per-
cent of the aggregate
outstanding insured
obligations of all in-
sured FCS banks (ad-
justed downward by
a percentage of the
guaranteed portions
of State and Federal
Government-guaran-
teed loans in accrual
status) or other such
percentage or amount
determined by the
FCSIC Board, in its
sole discretion, to be
actuarially sound.
When the amount of
the Insurance Fund
exceeds the secure
base amount, the
FCSIC will reduce the

premium to a per-
centage necessary to
maintain the level of
the Insurance Fund at
the secure base
amount.

As stated previously,
the annual premium
due from an insured
FCS bank is based on
the annual average
principal outstanding
for the calendar year.
For a Farm Credit
Bank (FCB), this
means that the princi-
pal outstanding will
be based on direct
loans. In accordance
with the Act, the prin-
cipal outstanding on
loans made by an
FCB will be based on
(1) all loans made by
a Production

Credit Association

(PCA), or any other
association making
direct loans under au-
thority provided un-
der section 7.6 of the
Act, (2) loans made
by other financing in-
stitutions (OFIs)
which resulted from
funding provided
through the FCB and
which are pledged to
or discounted by the
FCB, and (3) direct
loans made by the
FCB, other than loans
to the entities de-
scribed in (1) and (2).

Effective January 6,
1989, each FCS bank
participating in in-
sured obligations is-
sued under subsec-
tion (c) or (d) of sec-
tion 4.2 of the Act be-
came an insured Sys-
tem bank and was re-
quired to pay premi-
ums to the FCSIC.
The FCSIC recorded
$72 million and $65
million in revenues in


12

which is unable to re-
deem any of its pre-
ferred stock issued to
the FAC must ulti-
mately repay

the FCSIC for its
purchase.

As of December 31,
1990, there were five
FCS institutions with
preferred stock out-
standing to the FAC,
totaling $808 million.

The first of the obliga-
tions which funded
the purchase of this
stock matures on July
21, 2003. With the ex-
ception of the stock
issued by the Federal
Land Bank of Jackson
in Receivership, dis-
cussed in the foot-
notes to the financial
statements, there is
presently no reason
for anticipating any
lack of redemption by
the respective
institutions.

3. To ensure the retire-
ment of each FCS

| institution's protected

borrower capital.

Protected borrower
capital includes bor-
rower capital stock,
Participation certifi-
cates, and allocated
equities which were
outstanding as of
January 6, 1988, or
which were issued or
allocated prior to Oc-
tober 6, 1988. This

capital has been
steadily declining as
loans to holders of
such capital have
been repaid. The
amount of this capital
which will be out-
standing in 1993,
when the FCSIC’s re-
sponsibility to ensure
retirement becomes
effective, is expected
to be a minimal
amount of its poten-
tial obligations. As of
September 30, 1990,
FCS institutions had
$1.4 billion in
protected capital
outstanding.

4. Acting as receiver or
conservator for FCS
institutions.

Prior to 1993, the
FCSIC may act as re-
ceiver or conservator
for an FCS institution
if so designated by
the FCA. Beginning


HS)

Premiums for 1989
and 1990 have been
accrued on the books
of FCS banks. These
are reported as pre-
miums receivable in
the financial state-
ments contained in
this report. Regula-
tions governing the
payment of premi-
ums have been pro-
posed and premium
payments for 1989
and 1990 are sched-
uled to be collected in
the first quarter of
1991. Premiums to be
collected in 1991
should be approxi-
mately $137 million.

Premiums will con-
tinue to be paid at the
rates specified by law
until the Insurance
Fund reaches the se-
cure base amount.
That is defined as 2
percent of aggregate
insured obligations
adjusted downward
by a percentage of the

guaranteed portions
of state and federally
guaranteed loans.
However, that per-
centage can be ad-
justed to other levels
based on what the
FCSIC determines is
actuarially sound.
When the secure base
amount is reached,
premiums must be re-
duced to a level that
will maintain that
amount.

Money of the FCSIC
not otherwise em-
ployed is invested in
obligations of the
United States or in
obligations guaran-
teed as to principal
and interest by the
United States. These
investments are dis-
cussed in the financial
statements.