2008 Annual Report

Farm Credit System Insurance Corporation

Protecting Investors in Agriculture and Rural America
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.
Contents

Board of Directors 2

2008 – Year in Review 6

Selected Financial Statistics 9

The Farm Credit System 10

Insurance Fund Management 15

Risk Management 22

Financial Assistance and Receivership 24

Strategic Goals and Performance Measures

and the President’s Management Agenda 25

Reports of Independent Public Auditors 29

Financial Statements 34

Notes to the Financial Statements 37

Income and Expenses 42
Protecting Investors in Agriculture and Rural America
April 30, 2009

Dear Mr. President and Madam Speaker:

In accordance with section 5.64 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 2008.

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 insured Farm Credit System debt securities. The balance in the Farm Credit 

Insurance Fund at December 31, 2008, was $2.9 billion. The Corporation collected 

$243 million in insurance premiums from Farm Credit System banks for 2008, earned 

$76 million in investment income during the same period, and expects to incur 

$3.2 million in operating costs in 2009. 

Sincerely, 

Nancy C. Pellett

Chairman

The President of the United States Senate

The Speaker of the United States House of Representatives
Farm Credit System Insurance Corporation

2

Board of Directors

The Farm Credit System Insurance Corporation (FCSIC or Corporation) is managed by a threemember board of directors comprised of the same three individuals who compose the Farm 

Credit Administration (FCA) Board. However, the same member may not serve as chairman 

of both entities. The FCA is the independent Federal agency responsible for the regulation 

and examination of the Farm Credit System (FCS or System). The FCS is a nationwide financial 

cooperative that lends to agriculture and rural America.
Protecting Investors in Agriculture and Rural America

3

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 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. She 

is past president of the ISU Alumni Association and 

was awarded the Alumni Medal in 1987. The Pellett 

family was honored as the “Family of the Year” by the 

university in 1997.

Dedicated to the future of agriculture, Ms. Pellett worked 

with 4-H at the local and State levels and served on the 

Iowa 4-H Foundation board. She is a founding member 

of the 4-H/FFA “Sale of Champions” committee for the 

Iowa State Fair.

A native of Walnut, Iowa, she holds a B.S. from Iowa 

State University at Ames. She and her husband Jim have 

four children. The Pellett family received the “Friends of 

Youth Award” in 2000 from the Knights of AkSarBen, a 

foundation that supports education, youth programs, and 

rural development in Nebraska and western Iowa. 

Nancy C. Pellett is Chairman of the Board of Directors 

of the Corporation. She also serves as a member of the 

FCA Board. Prior to becoming Chairman of FCSIC, 

Ms. Pellett served as Chairman and CEO of FCA for 

four years.

Ms. Pellett has extensive experience in production 

agriculture and agribusiness. In partnership with her 

husband, she managed Prairie Hills, Ltd., a feedlot, cowcalf, and row-crop operation in Atlantic, Iowa, from 1966 

until her appointment to the Board. While she serves 

her term, her husband Jim, son, and daughter-in-law 

continue to operate this fifth-generation family farm.

In addition, for more than 20 years, she served as 

president and treasurer of Fredrechsen Farms, Ltd., a 

family-owned swine and row-crop operation in Walnut, 

Iowa.

A long-time beef industry leader, Ms. Pellett has held 

State and national leadership positions in cattle industry 

organizations. As a member of the National Cattlemen’s 

Beef Association, she has served as chairman of the 

Check-Off Division, as chairman of the Consumer 

Marketing Group, and most recently as a member of the 

Cattlemen’s Beef Board. She has also been president of 

the Iowa Beef Industry Council.

She is a partner in Premium Quality Foods, Inc., which 

markets precooked beef entrees. Previously, she served 

as president and consumer marketing director for the 

company.

Nancy C. Pellett
Farm Credit System Insurance Corporation

4

From 2000 to 2006, he was on the Federal Reserve 

Bank of Chicago Advisory Council on Agriculture, 

Labor, and Small Business. Part of this time he also 

served on the Country Mutual Fund Trust Board, an 

investment fund of the Illinois Farm Bureau and its 

Country Financial organization.

Other boards Mr. Strom has served on include Northern F.S., Inc., a farm service and supply cooperative 

serving farmers in Northern Illinois; AgriBank, FCB; 

and the Farm Credit Council, the national trade 

organization representing the Farm Credit System in 

Government affairs.

Mr. Strom has served in several capacities with the 

Illinois Farm Bureau. He also served on his county 

Farm Bureau board. He was a member of the State 

Young Farmer Committee from 1981 to 1985. For 

his overall involvement in agriculture, he received an 

Outstanding Young Farmer Award. 

In his community of Kane County, Illinois, which lies 

at the edge of suburban Chicago, Mr. Strom helped 

develop a farmland preservation program. The original Strom Family Farm was the first to be dedicated 

to permanent agricultural use under the program.

Mr. Strom studied agriculture business a Kishwaukee 

College and business administration at Northern Illinois University. He was a member of the Illinois Agricultural Leadership Program Class of 1988. His community involvement includes having served as vice 

president of his local K–12 school district, chairman 

of his church council, 4-H parent leader, and coach of 

boys’ and girls’ sports teams. Mr. Strom owns a thirdgeneration family farm in Illinois that produces corn 

and soybeans. He and his wife, Twyla, have two sons, 

a daughter, and a daughter-in-law.

Leland A. Strom is Chairman of the Board and CEO 

of the Farm Credit Administration. Mr. Strom was 

appointed to a six-year term on the FCA Board by 

President George W. Bush on December 12, 2006, and 

was designated Chairman and CEO on May 22, 2008. 

His term expires on October 13, 2012. 

Mr. Strom also serves as a member of the board of 

directors of the Farm Credit System Insurance Corporation (FCSIC), which is responsible for ensuring the 

timely payment of principal and interest on obligations issued on behalf of Farm Credit System banks. 

Before being named FCA Chairman and CEO, he had 

served as chairman of the board of directors of FCSIC 

since December 2006.

For more than 30 years he has been active in the 

agriculture industry. He served for more than 25 

years on the board of 1st Farm Credit Services, an 

FCS institution in Illinois, holding various positions, 

including chairman. During the agriculture crisis of 

the 1980s, he was selected to sit on the Restructuring 

Task Force of the Sixth Farm Credit District.

Leland A. Strom
Protecting Investors in Agriculture and Rural America

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Dallas P. Tonsager was appointed to the FCA Board by 

President George W. Bush on December 1, 2004, for a 

term that expires May 21, 2010, and serves as a member 

of the Board of Directors of the Corporation. 

Mr. Tonsager brings to his position extensive experience 

as an agriculture leader and producer, and a commitment 

to promoting and implementing innovative development 

strategies to benefit rural residents and their communities. 

As executive director of the South Dakota Value-Added 

Agriculture Development Center in Huron from 2002 

until his appointment to the FCA Board, he coordinated 

initiatives to better serve producers interested in 

developing value-added agricultural projects. Services 

provided by the center include project facilitation, 

feasibility studies, business planning, market assessment, 

technical assistance, and education.

In 1993, he was selected by President William J. Clinton 

to serve as the State director in South Dakota for rural 

development for the U.S. Department of Agriculture. 

Mr. Tonsager oversaw a diversified portfolio of housing, 

business, and infrastructure loans in South Dakota 

totaling more than $100 million. In 1999, he was 

recognized as one of two outstanding State directors 

in the nation by then-USDA Under Secretary Jill Long 

Thompson. His term concluded in February 2001. 

A long-time member of the South Dakota Farmers 

Union, Mr. Tonsager served two terms as president of 

the organization from 1988 to 1993. He served on the 

board of National Farmers Union Insurance from 1989 

to 1993, and he was a member of the advisory board 

of the Commodity Futures Trading Commission from 

1990 to 1993.

From 1988 to 1993, Mr. Tonsager was a board member 

of Green Thumb, Inc., a nationwide job training program 

for senior citizens. He currently serves on the board of 

Lutheran Social Services of South Dakota.

Mr. Tonsager grew up on a dairy farm near Oldham, 

South Dakota. In partnership with his brother, he owns 

Plainview Farm in Oldham, a family farming operation 

that includes corn, soybeans, wheat, and hay. Mr. 

Tonsager is a graduate of South Dakota State University 

where he earned a B.S. in agriculture in 1976. He and 

his wife, Sharon, have two sons and a daughter-in-law.

Dallas P. Tonsager
Farm Credit System Insurance Corporation

6

2008 – Year in Review

Change in Premium Assessments 

Beginning July 1, 2008, the Corporation implemented the new premium authorities granted by the 

Food, Conservation, and Energy Act of 2008 (FCE 

Act or 2008 Farm Bill) which amended the Farm 

Credit Act of 1971 (12 U.S.C. § 2001 et seq.) to generally assess premiums based on each bank’s pro rata 

share of insured debt (rather than on loans), aligning premiums with what the FCSIC insures. Now 

the FCSIC may collect from 0 to 20 basis points 

annually on adjusted insured debt outstanding. The 

amendments retained a risk surcharge of up to 

10 basis points on nonaccrual loans and added a 

surcharge of up to 10 basis points on other-thantemporarily impaired investments. The amendments 

reduce the total insured debt on which premiums 

are assessed by 90 percent of Federal Governmentguaranteed loans and investments and 80 percent of 

State Government-guaranteed loans and investments, 

and deduct similar percentages of such guaranteed 

loans and investments when calculating the secure 

base amount (SBA). The amendments also clarify 

that the FCSIC may collect premiums more frequently than annually. 

In addition, the Farm Credit Act no longer specifies 

how the System banks pass premiums to associations and other financing institutions, although it 

requires that the banks do so in an equitable manner. This change allows the banks flexibility in allocating premium costs to associations. The amendments clarify that, in addition to the FCSIC’s regulatory authority under Title V of the Farm Credit Act, 

the FCSIC has authority to adopt rules and regulations concerning provisions in Title I of the Farm 

Credit Act related to how banks pass along the 

cost of insurance premiums. Finally, the amendments change Farm Credit Act provisions regarding 

certified statements and simplify the formula for 

payments from the Farm Credit Insurance Fund 

Allocated Insurance Reserves Accounts (AIRAs) to 

allow more immediate distribution of excess Insurance Fund balances to insured banks and Financial 

Assistance Corporation stockholders. 

Volatile Economic Environment

The Farm Credit System experienced another year of 

substantial growth in 2008, with continued asset and 

income growth. The credit quality of System loans 

remains generally good, and the System’s liquidity 

increased to 177 days at December 31, 2008. However, stresses in the general economy have had an 

impact on the System, leading to increased writedowns of investments and other assets. Accordingly, 

we are watching the following trends closely: 

	 •	 Net farm income in 2009 is forecast to

decline from 2008 record levels, but to 

remain above the 10-year average. Most 

crop prices are expected to be substantially 

lower, as are milk prices, while cash receipts 

for cattle, hogs, and broilers are anticipated 

to be higher. Farm expenses, including most 

manufactured inputs, feed, fertilizer, fuel, 

and services, such as repairs and transportation, are forecast to decline for the first 

time since 2002. However, the reduction in 

expenses may not make up for the reduction 

in gross income, leaving net income and output below the record levels achieved over the 

past two years.

	 •	 The Federal Government’s response to the

current economic turmoil has had and may 

continue to have unintended consequences 

for the System’s funding costs, at times 

limiting the System’s ability to issue debt at 

competitive prices and terms. While the 

System continues to have regular and flexible 

access to short-term debt markets, issuance 

of securities with longer maturities has been 

reduced and the cost of such term issuances 

has increased. The first chart highlights 

the widening of spreads paid by the System 

versus benchmark Treasury securities. The 

second chart shows the yield curve comparison between System securities and a number 

of competing issuers including other GSE 

agencies, Treasury, instruments insured by 

the Federal Deposit Insurance Corporation 

(FDIC), and highly rated commercial bank 

instruments. 
Protecting Investors in Agriculture and Rural America

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FCS Instruments Basis Points Spread Over Treasuries

Sources: Federal Farm Credit Banks Funding Corporation and Bloomberg.

FCS, Other GSE Agencies, Bank, Treasury, and FDIC-Insured Debt Yield Curve 

Comparison as of 12/31/2008

Sources: Federal Farm Credit Banks Funding Corporation and Bloomberg.

Issuers of FDIC-insured debt pay 50 to 100 basis points for the guarantee. FDIC-insured data as of 1/8/09.
Farm Credit System Insurance Corporation

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	 •	 The Federal Reserve has predicted continued

weak economic growth for 2009, forecasting 

that 2008 and 2009 will be the slowest period 

of growth since 1981- 82. Unemployment is 

expected to increase in 2009; however, inflation is predicted to decline from its 2008 

rate. Personal consumption expenditures are 

forecast to rise only slightly in 2009. Business fixed investments are expected to decline, 

while industrial production is forecast to 

remain flat. The Federal Reserve also predicts 

that the housing sector will bottom-out by 

mid-2009, with housing starts improving but 

at the slowest pace since 1959. The dollar is 

predicted to increase in value, while the trade 

deficit declines.

Although the Federal Reserve and other economic 

analysts have made predictions about the 2009 economy, numerous policy and legislative stimulus initiatives, combined with current market volatility, make 

the future difficult to forecast. The Federal Reserve 

continues to use the discount window to provide 

loans to financial institutions and has expanded the 

types of collateral accepted. In addition, the Federal 

Reserve has announced that it will employ all of its 

available tools, including buying mortgage-related 

bonds, longer-term Treasury bonds, corporate debt, 

and consumer loans.

The Treasury Department, together with the FDIC, 

has also implemented numerous programs to support the financial sector. Treasury has been providing 

capital infusions to numerous banks, including the 

very largest. The FDIC created a Temporary Liquidity Guarantee Program, guaranteeing the newly issued 

senior unsecured debt of banks, thrifts, and certain 

holding companies, and providing full coverage of 

non-interest-bearing deposit transaction accounts, 

regardless of dollar amount. The FDIC is also helping qualified homeowners to modify their mortgages. 

Fannie Mae and Freddie Mac, whose mission is to 

provide liquidity and stability to the U.S. housing 

and mortgage markets, are offering loan modification programs. It is too early to evaluate the longterm consequences of these significant governmental 

interventions. 

FCSIC Website Redesign

During 2008, the Corporation began to redesign its 

corporate website, including the look, content and 

organization of information. This redesign is part 

of the Corporation’s e-Government efforts to provide 

increased transparency and greater access to information. The efficient, effective, and consistent use of 

Federal agency public websites is important to promote a more citizen-centered Government as outlined 

in the E-Government Act of 2002 (Pub. L. No. 107-

347). Federal agency public websites are information 

resources funded in whole or in part by the Federal 

Government and operated by an agency, contractor, 

or other organization on behalf of the agency. They 

present Government information or provide services 

to the public or a specific non-Federal user group and 

support the proper performance of an agency function. Federal agency public websites are also information dissemination products as defined in Office 

of Management and Budget (OMB) Circular A-130, 

“Management of Federal Information Resources.” 

Agencies are required to manage Federal agency 

public websites as part of their information resource 

management program following guidance in OMB 

Circular A-130, “Guidelines for Ensuring and Maximizing the Quality, Objectivity, Utility, and Integrity 

of Information Disseminated by Federal Agencies.”

The Corporation contracted with FCA to provide 

technical assistance, including the design, organization, and programming of page layouts and other 

support to this effort. This project was substantially 

completed during the first quarter of 2009.
Protecting Investors in Agriculture and Rural America

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Farm Credit System Insurance Corporation

(Dollars in millions)

2008 2007 2006

BALANCE SHEET:

Total Assets $ 2,914.9 $ 2,598.9 $ 2,311.9

Total Liabilities 0.3 0.4 0.3

Insurance Fund Balance

 Allocated Insurance Reserves Accounts 39.9 39.9 39.9

 Unallocated Insurance Fund Balance 2,874.7 2,558.6 2,271.7

OPERATIONS:

Revenues 318.7 289.7 252.3

Operating Expenses 2.6 2.7 2.1

Insurance Expense -0- -0- -0-

Net Income 316.1 287.0 250.2

Selected Financial Statistics 
Farm Credit System Insurance Corporation

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The Farm Credit System

Structure and Funding 

The System is owned by the rural customers it 

serves, including farmers, ranchers and other agricultural producers. As of December 31, 2008, there 

were 90 FCS associations that lend directly to these 

owner-borrowers, providing a consistent source of 

agricultural and rural credit throughout the United 

States and the Commonwealth of Puerto Rico. Each 

association has its own chartered territory and is 

affiliated with one of the five FCS banks. The banks 

generally receive their funding through the issuance 

of Federal Farm Credit Banks Consolidated Systemwide Debt Securities (Systemwide debt securities). 

These securities are issued by the Federal Farm Credit 

Banks Funding Corporation (Funding Corporation). 

The Funding Corporation distributes these securities 

in the capital markets via a selling group of selected 

investment and dealer banks to raise the funds 

needed by the System.

Combined Farm Credit System Statistics

(Dollars in billions)

2008 2007 2006 

Insured Debt Outstanding1 $177.4 $155.3 $135.2

Production Agriculture:

 Real Estate Mortgage Loans 71.9 63.5 56.5

 Production and Intermediate-term Loans 37.5 32.3 28.7

Agribusiness Loans2 26.9 28.1 21.1

Communication Loans 4.5 3.4 3.3

Energy, Water and Waste Disposal Loans 9.4 7.5 6.3

Rural Residential Real Estate Loans 4.6 4.0 3.4

International Loans 4.1 2.1 2.2

Lease Receivables 1.9 1.7 1.5

Loans to Other Financial Institutions 0.6 0.4 0.4

Cash and Investments 43.8 36.5 33.1

Net Income 2.92 2.70 2.38

Nonperforming Loans as a Percentage of Total Loans 1.5% 0.4% 0.5%

1. Insured Debt Outstanding is based on System Institution call report information and reflects the book value of insured debt outstanding, 

excluding fair value adjustments plus accrued interest as of December 31, 2008.

2. At December 31, 2008, agribusiness loans consisted of loans to cooperatives of $12.2 billion, processing and marketing loans of $12.2 billion, 

and farm-related business loans of $2.5 billion.

Investor Protection

Investors provide the funds the System lends to agriculture and rural America. The Corporation’s primary purpose, as defined by the Farm Credit Act, is 

to insure timely payment of principal and interest on 

insured Systemwide debt securities to these investors. 

Regulatory Oversight

FCA is the safety and soundness regulator responsible for the examination, supervision, and regulation of each FCS institution. It is an independent 

agency in the Executive branch of the U.S. Government and derives its broad authorities from the Farm 

Credit Act. These authorities include examination 

and enforcement authorities similar to those of commercial bank regulators. The U.S. Senate Committee 

on Agriculture, Nutrition, and Forestry and the U.S. 

House of Representatives Committee on Agriculture 

oversee the FCSIC, FCA, and the FCS.
Protecting Investors in Agriculture and Rural America

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Insured Debt Outstanding Grew at an Average 

Annual Rate of 13.5% Over the Past 5 Years

(Dollars in billions)

Insured and Other Obligations

The Corporation insures Systemwide and consolidated 

bonds, notes, and other obligations issued by the 

System banks through the Funding Corporation. Last 

year, insured debt outstanding increased by more than 

14 percent to $177.4 billion. For the five-year period 

from 2004 to 2008, insured debt outstanding grew at 

an average annual rate of approximately 13.5 percent.

The Corporation is also required by statute to ensure 

the retirement of eligible borrower stock, as defined 

in section 4.9A of the Farm Credit Act, at par value. 

This stock, also known as protected borrower stock, 

was outstanding prior to October 6, 1988. At yearend 2008, eligible borrower stock outstanding at System institutions totaled $10 million, down from $11 

million at year-end 2007.

Farm Credit System Capital 

The primary source of funds to repay Systemwide 

debt securities is the System’s borrowers. Each borrower is required to have a minimum net worth and, 

in most cases, collateral posted in connection with his 

or her loan. The borrower makes payments on the 

loan to the lending bank or association. The lending 

association in turn makes payments to its affiliated 

bank on its loan. Both the banks, which ultimately 

repay Systemwide debt securities, and the associations exceed minimum capital regulatory requirements 

as protection and support for the repayment of the 

outstanding debt. If a bank was unable to repay its 

portion of a security, the Insurance Fund would make 

that payment. In the event the assets of the Insurance Fund were exhausted, the provisions of joint and 

several liability of all banks would be triggered, which 

Association Capital

(Dollars in billions)
Farm Credit System Insurance Corporation

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Association Capital as a Percentage of Total Assets

means the financial resources of the other banks 

would be used to repay the defaulting bank’s portion 

of the debt issuance. 

Since 2004, the amount of FCS bank capital and the 

balance in the Insurance Fund together has increased 

33 percent from $9.3 billion to $12.4 billion at yearend 2008. As a percentage of outstanding insured 

debt, bank capital plus the amount in the Insurance 

Fund decreased from 9.4 percent in 2004 to 7.0 percent in 2008. This decline occured because the rate 

of growth in outstanding debt outpaced growth in 

bank capital and the Insurance Fund.

Loan growth has been the principal reason for the 

System’s increased profitability over the past few years. 

Net interest income has increased, operating efficiency 

ratios have improved, and credit quality indicators 

have remained strong. However, this growth has 

placed, and may continue to place, pressure on System institutions’ capital ratios, requiring those institutions to continue to evaluate capital management 

strategies and to seek additional sources of capital. 

FCS associations have been building capital through 

net income they have earned and retained. Association capital helps reduce the credit exposure of the 

association’s affiliated bank. Since 2004, combined 

association capital has increased 35 percent, from 

$14.2 billion to $19.1 billion at year-end 2008. However, during this period, growth in association capital as a percentage of total assets has not kept pace 

with balance-sheet growth. Instead it fell from 17.7 

percent at year-end 2004 to 15.5 percent at year-end 

2008.
Protecting Investors in Agriculture and Rural America

13

Bank Capital Plus Insurance Fund

as a Percentage of Insured Debt

Bank Capital Plus Insurance Fund

(Dollars in billions)
Farm Credit System Insurance Corporation

14

Additional Protections

The System has additional risk management tools to 

protect investors. One such tool is the Contractual 

Interbank Performance Agreement (CIPA). All five 

System banks have entered into this agreement, which 

measures the financial condition and performance 

of each bank using ratios that consider capital, asset 

quality, earnings, interest rate risk, and liquidity. 

CIPA financially penalizes banks that do not meet 

performance standards. 

The banks and the Funding Corporation have also 

entered into a Market Access Agreement (MAA) that 

establishes 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, its participation in future debt 

issues could be curtailed. The criteria used under the 

MAA are the CIPA scores and two capital ratios. 

The System also has a common minimum liquidity 

standard. The standard requires each bank to have 

enough liquidity to operate for at least 90 continuous days without access to the capital markets. At 

December 31, 2008, all banks exceeded the minimum 

90 days of liquidity.
Protecting Investors in Agriculture and Rural America

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Insurance Fund Management

Insurance Fund Relative to 2 Percent Secure Base Amount by Quarter*

(percent)

The Insurance Fund and the Secure 

Base Amount

In 2008, both the total Insurance Fund and total 

assets grew 12.2 percent to $2.9 billion. Over the last 

five years, the total Insurance Fund and total assets 

grew at an annual rate of 9.88 percent and 7.68 percent, respectively. In 2008, the Corporation did not 

accrue a provision for insurance obligations. 

The Insurance Fund represents the Corporation’s 

equity, the difference between total assets and total 

liabilities, including insurance obligations. The Insurance Fund is composed of an unallocated Insurance 

Fund (the assets in the Insurance Fund for which no 

specific use has been identified or designated) and an 

allocated Insurance Fund. Premiums are due until 

the unallocated portion of the Insurance Fund reaches 

the SBA. The SBA established by the Farm Credit 

Act is 2 percent of the aggregate outstanding insured 

obligations (adjusted to exclude a part of certain 

Government-guaranteed loans in accrual status and 

non-impaired investments) or another percentage that 

the Board determines to be actuarially sound. 

The unallocated Insurance Fund made progress 

towards the SBA in 2008 because of the change made 

to the Farm Credit Act that allowed the FCSIC Board 

to impose premiums ranging from 0 to 20 basis 

points on insured debt obligations rather than loans. 

During 2008, insured debt grew 14.4 percent, below 

the previous year’s rate of growth of 14.9 percent, 

but above the five-year average annual growth rate of 

13.5 percent. The unallocated Insurance Fund finished 2008 below the 2 percent SBA at 1.77 percent, 

or $371 million below the SBA. Including the AIRAs 

raises the level to 1.80 percent or $331 million below 

the SBA. 

* A change in the SBA calculation methodology was included in the FCE Act. The new methodology, which was implemented on July 1, 2008, 

allows the deduction of a portion of Federal and State-guaranteed investments from the SBA in a manner similar to that used for Federal and 

State-guaranteed loans. 

Insurance premiums are assessed with the objective of maintaining the SBA, which is defined in the Farm Credit Act as 2 percent of adjusted 

insured obligations. At year-end excess funds above the SBA are transferred to the AIRAs. The current $39.9 million AIRAs balance is recorded as part of the Insurance Fund and is available to satisfy insurance obligations until the Corporation disburses payment to the Farm 

Credit banks and FAC stockholders. 
Farm Credit System Insurance Corporation

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Premium Range

Type of Loan (in basis points)

Accrual 0 – 15

Nonaccrual 0 – 25

Federal Government-guaranteed accrual 0 – 1.5

State Government-guaranteed accrual 0 – 3

Government-sponsored enterprise-guaranteed accrual 0 – 15

Allocated Insurance Reserves 

Accounts 

Since unallocated Insurance Fund finished the year 

below the SBA, no excess funds were available for 

transfer to the AIRAs at December 31, 2008. Under 

the Farm Credit Act, if the unallocated Insurance 

Fund is above the SBA, at any year-end, the Corporation must transfer the excess amount, less projected 

insurance and operating expenses for the coming year, 

from the year-end unallocated Insurance Fund balance to the AIRAs.

In 2003, for the first time, the Corporation closed 

the year above the SBA. As a result, the statute then 

in effect required the Corporation to transfer $39.9 

million to the AIRAs. By statute, the Corporation 

is required to use AIRAs first for insurance claim 

payments. Separate AIRAs have been established for 

each bank and a special account has been established 

for the holders of Financial Assistance Corporation 

(FAC) stock. The first 10 percent of calculated excess 

funds is deposited to the AIRAs of FAC stockholders. 

The remaining 90 percent is prorated into the banks’ 

AIRAs. AIRA payments are made at the discretion of 

the Corporation’s Board. 

Premiums 

The Board reviews premium accrual rates as often 

as necessary but at least semiannually. The review 

focuses on five factors:

1. The level of the 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

5. Risks in the financial environment

The most important factor in determining premium 

rates for 2008 was the level of the Insurance Fund 

relative to the SBA. Continued growth in insured 

debt outstanding caused the Insurance Fund to trend 

further away from the SBA in the first half of 2008. 

As a result, the Board maintained the premium 

assessment at 15 basis points. By statute, this was the 

maximum rate that could be charged. (Note: 1 basis 

point (bp) = 1/100 of 1 percent.)

Although the Corporation insures repayment to 

investors who purchase insured System debt, until 

the amendments to the Farm Credit Act were implemented in July 2008, the FCSIC was limited to collecting premiums based on the loans made by System 

banks and associations. Allowable premium rates 

varied by type of loan. (See also Note 4 to the Corporation’s financial statements.) 

Premium Rates January 2008 - June 2008
Protecting Investors in Agriculture and Rural America

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Premium Range

Premium Rates July 2008 - December 2008 (in basis points)

Adjusted Insured Debt 0 – 20

Nonaccrual Loans 0 – 10

Other-than-temporarily Impaired Investments 0 – 10

Enactment of the FCE Act in 2008 amended the 

premium provisions of the Farm Credit Act to, among 

other things, base premiums on the outstanding 

insured debt obligations instead of loans, and permit 

the Corporation to collect a broader range of premiums on insured debt. 

As amended, the Farm Credit Act’s provisions assess 

premiums that are generally based on each System 

bank’s pro rata share of outstanding insured debt 

obligations (rather than on loans), aligning premiums 

with the obligations that the FCSIC insures. The 

amendments reduce the total insured debt obligations on which premiums are assessed by 90 percent of Federal Government-guaranteed loans and 

investments and 80 percent of State Governmentguaranteed loans and investments, and deduct similar 

percentages of such guaranteed loans and investments 

when calculating the SBA. If the Farm Credit Insurance Fund is below the SBA, the amended Farm 

Credit Act requires that each insured System bank 

pay the FCSIC a premium equal to (a) the adjusted 

average outstanding insured obligations multiplied by 

0.0020; and (b) the average principal outstanding on 

loans in nonaccrual status and average amount outstanding of other-than-temporarily impaired investments multiplied by 0.0010, subject to FCSIC’s power 

to reduce the premium in its sole discretion. Once 

the Insurance Fund attains the SBA, the law requires 

that premiums be reduced to the level necessary 

to maintain the Fund at the SBA (i.e., 2 percent of 

adjusted outstanding insured obligations).

The Board reviewed proposed changes to the premium process at their June 2008 meeting, and the 

new rates were made effective at the beginning of the 

next quarter, July 1, 2008. 

To help System institutions budget for 2009, the 

Board notified the System in September 2008 that 

the 2009 premium assessment rate would be 20 basis 

points. The Board also stated that there would be an 

additional surcharge of 10 basis points on the average principal outstanding for nonaccrual loans and 

the average amount outstanding for the other-thantemporarily impaired investments. 

The following chart shows premium rates from 1999 

to June 30, 2008. Over the 9.5-year period, premiums 

ranged from 0 to 15 basis points, and averaged 7.29 

basis points. 
Farm Credit System Insurance Corporation

18

Accrual Loan Premiums Averaged 7.29 Basis Points 

from 1999 to June 30, 2008

From January 1, 2008, to June 30, 2008, premiums 

were assessed at 15 basis points annually on adjusted 

accrual loans plus 25 basis points on nonaccrual 

loans. 

From July 1, 2008, to September 30, 2008, premiums 

were assessed at 15 basis points on adjusted insured 

debt plus 10 basis points on the average nonaccrual 

loans and the average amount outstanding of otherthan-temporarily impaired investments. From October 1, 2008, to December 31, 2008, premiums were 

assessed at 18 basis points on adjusted insured debt 

plus 10 basis points on the average nonaccrual loans 

and the average amount outstanding of other-thantemporarily impaired investments. 

As a result of continued growth in insured debt, 

the Insurance Fund has remained below the 2 percent SBA. At December 31, 2008, the total Insurance Fund (including the AIRAs) was $331 million 

below the SBA. The FCSIC Board is committed to 

using the expanded authorities provided by the FCE 

Act to return the Insurance Fund to the SBA in a 

timely manner. In January 2009 the Board increased 

the insurance premium assessment rate on adjusted 

insured debt to 20 basis points for 2009. This is the 

maximum rate that can be charged. The Board also 

continued the assessment of 10 basis points on the 

average principal balance outstanding of nonaccrual 

loans and the average amount outstanding of otherthan-temporarily impaired investments. 

* Implementation of FCE Act provisions changed the method of premium assessment from loans to adjusted insured debt beginning 

July 1, 2008.
Protecting Investors in Agriculture and Rural America

19

Corporation Revenues

(Dollars in millions)

Revenues and Expenses

Net income in 2008 increased 10 percent to $316 million from $287 million in 2007. The increase in net 

income resulted from higher premiums. Because of 

a decrease in the rate of return on the U.S. Treasury 

securities held in the Corporation’s portfolio, interest 

income decreased 22 percent in 2008 to $76 million 

from $98 million in 2007. 

The Corporation’s operating costs as a percentage of 

its total assets represented 9 basis points for 2008. 

Fixed costs for staff, travel, rent, and miscellaneous 

expenses were $2.1 million of the $2.6 million total 

for the year. The remaining expenses of $0.5 million 

were for contract services.
Farm Credit System Insurance Corporation

20

Investments

Investments increased 11 percent during the year 

from $2.39 billion at December 31, 2007, to $2.65 billion at year-end 2008. 

The Corporation’s investment objective is to maximize returns consistent with liquidity needs and to 

minimize exposure to loss of principal. Funds are 

invested in U.S. Treasury securities in accordance with 

the Farm Credit Act and the Corporation’s Investment 

Policy. 

The average portfolio yield was 2.92 percent, down 

from 4.24 percent the prior year. The return on the 

Insurance Fund continued to outperform the benchmark index the Corporation uses to measure performance. This index is composed of Treasuries and 

private sector mutual funds with holdings of similar 

type and duration to the Corporation’s portfolio. The 

average return of the benchmark group was 2.41 percent for 2008.

In accordance with the Corporation’s Investment 

Policy, the portfolio is composed of a liquidity and an 

investment pool. The liquidity pool consists of shortterm Treasury securities maturing in less than two 

years. The investment pool is composed of Treasury 

securities with maturities that vary from 2 to 10 years. 

The FCSIC investment policy requires that at least 20 

percent of the portfolio shall be maintained in the 

liquidity pool, and a maximum of 25 percent may be 

invested in securities with maturities between 5 and 

10 years. The weighted average portfolio maturity 

at year-end was 2.17 years. The composition of the 

investment portfolio at December 31, 2008, is illustrated in the accompanying chart.

In June, the Corporation implemented the recommendation from Evaluation Associates’ (EA) study 

of FCSIC’s investment program to purchase Treasury 

Inflation-Protected Securities (TIPS). EA recommended purchasing TIPS as a way to improve diversity and add value to the Insurance Fund portfolio. 

At yearend TIPS investments totaled $490 million or 

Growth in Investment Portfolio

(Dollars in billions)

Investment Portfolio by Maturity

at December 31, 2008

(Dollars in millions)
Protecting Investors in Agriculture and Rural America

21

just over 18.5 percent of the Insurance Fund. This is 

below the FCSIC’s 20 percent target limit for TIPS. 

Investment returns on TIPs include two components, 

a fixed interest rate yield and a variable yield for 

inflation, based on the monthly consumer price index 

reported by the Bureau of Labor Statistics.

The Corporation, as part of its Strategic Plan, contracted with EA in 2008 to conduct a review of 

alternative U.S. Government instruments. The FCSIC 

retained EA to evaluate the merits and risks of investment in Ginnie Mae (GNMA) securities. The review 

included an evaluation of market size and liquidity, 

issuance trends, performance history, and performance outlook under various scenarios. The evaluation also included an analysis of performance of the 

GNMA segment versus U.S. Treasuries and a general 

assessment of what would be required if the FCSIC 

decided to pursue investing in this segment. EA concluded that the GNMA market could provide more 

attractive yield spreads than comparable Treasury 

securities. However, investment in GNMA securities would involve significantly higher administrative 

costs compared to the current Treasury program. In 

addition, EA raised concerns about the liquidity of 

the GNMA instruments given the scale of the current 

resale market. EA also noted that this issue may be 

compounded for the FCSIC by the significant level 

of GNMA securities currently held by System institutions as part of their liquidity pools. In consideration 

of these factors, the FCSIC is not currently investing 

in GNMA securities.
Farm Credit System Insurance Corporation

22

Risk Management

The Corporation actively monitors and manages 

insurance risk. This program focuses on minimizing 

the Fund’s exposure to potential losses through early 

detection. Corporation staff regularly monitors key 

ratios and financial trends; weaker System institutions 

undergo special examination procedures as needed. 

The Corporation monitors trends in the System’s 

growth, structure, financial performance, and condition through continual dialogue with FCA examiners 

and review of reports of examination. On a quarterly 

basis, the Corporation screens all System institutions 

against key performance criteria to identify institutions that may pose increasing insurance risk. The 

Corporation also assesses risk to the Insurance Fund 

by

	 •	 reviewing corporate actions approved by FCA

for System institutions

	 •	 monitoring legislative, judicial, regulatory, and

economic trends that could affect the agricultural or financial services industries 

	 •	 using analytical models, and

	 •	 participating as a nonvoting member on FCA’s

Regulatory Enforcement Committee.

During 2008, corporate staff monitored trends affecting agriculture and System institutions, including

	 •	 extreme volatility in commodity prices over

the course of the year and the effect on System institutions’ loan volumes

	 •	 deteriorating conditions in the nation’s fixed

income and other capital markets

	 •	 declining values of structured investment

securities reported by the System’s banks

	 •	 numerous Federal Government interventions

in the nation’s banking and other financial 

systems, and 

	 •	 trends in System institutions’ Financial Institution Rating System (FIRS) ratings as reflected 

in the graph below.

FCS Institution FIRS Ratings

As of January 1, 2009

Source: FCA
Protecting Investors in Agriculture and Rural America

23

Staff also participated in several interagency work 

groups examining System capital, investment authorities, and liquidity.

The Corporation continued to work with an insurance 

risk modeling tool initially developed in 2004 by the 

FCSIC’s contractor, Oliver Wyman. From its earlier 

work, Oliver Wyman concluded that the most significant factors affecting the Corporation’s insurance risk 

exposure were as follows:

1. System balance-sheet growth,

2. The financial condition and performance of 

the System’s insured banks and associations, 

3. Capital levels at the five insured System banks.

Modifications were made to this model to reflect the 

changes contained in the FCE Act to the FCSIC’s 

insurance premium authorities, as well as to allow the 

deduction of a portion of investments held by System 

institutions that are guaranteed by the Federal Government or one of the various State Governments. 

(See Note 4 in Notes to the Financial Statements.) 

Staff also initiated a project to explore the feasibility 

of adding an enhancement to address liquidity and 

investment market risks. This effort included consultation with several of the System’s banks to better 

understand their processes and data requirements.
Farm Credit System Insurance Corporation

24

Financial Assistance and Receivership

The 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. Before financial assistance may be provided, the 

statute requires the Corporation to ensure that the 

proposed assistance is the least costly method for 

resolving a troubled institution. Financial assistance 

cannot be provided if the cost of liquidation is determined to be lower. 

When appointed by FCA, the Corporation has the 

statutory responsibility to serve as receiver or conservator for System institutions. (There are no active 

receiverships or conservatorships currently in the 

System.) To maintain the capability to act as receiver 

or conservator while continuing 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. Corporation staff 

also maintains contact with the receivership staff of 

the FDIC and the National Credit Union Administration to exchange information concerning receivership 

management.

During the year, staff revised procedures for conservatorship planning and began a project to revise and 

update the FCSIC’s receivership manual. In addition, 

staff is conducting a series of meetings with representatives from the FDIC on best practices concerning 

financial assistance and receivership activities. Staff 

also performed the following:

	 •	 Developed a model staffing plan for potential

conservatorships or receiverships

	 •	 Reviewed sources for specialized contractor

expertise

	 •	 Began development of an institution resolution simulation training exercise
Protecting Investors in Agriculture and Rural America

25

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 SBA 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.

As a result of the premium enhancements authorized 

in the FCE Act, the Insurance Fund began to trend 

towards the 2 percent SBA. Throughout the year, the 

total Insurance Fund ranged from 1.65 percent to 1.80 

percent, finishing the year at 1.80 percent. 

Enactment of the FCE Act amended the premium 

provisions of the Farm Credit Act to, among other 

things, base premiums on outstanding insured debt 

obligations, instead of loans, and increased the maximum number of basis points that can be assessed 

annually from 15 to 20. These changes will permit 

the FCSIC to better manage the Insurance Fund’s 

progress towards the SBA.

The Farm Credit Act’s new provisions allow assessment of premiums that are generally based on each 

System bank’s pro rata share of outstanding insured 

debt obligations (rather than on loans), aligning premiums with the obligations that the FCSIC insures. 

The amendments also reduce the total insured debt 

obligations on which premiums are assessed by 90 

percent of Federal Government-guaranteed loans 

and investments and 80 percent of state governmentguaranteed loans and investments, and deduct similar 

percentages of such guaranteed loans and investments 

when calculating the secure base amount. If the 

Farm Credit Insurance Fund is below the SBA, the 

amended Farm Credit Act requires that each insured 

FCS bank pay the FCSIC a premium, equal to (a) 

the adjusted average outstanding insured obligations 

multiplied by 0.0020; and (b) the average principal 

outstanding on loans in nonaccrual status and average amount outstanding of other-than-temporarily 

impaired investments multiplied by 0.0010, subject to 

the FCSIC’s power to reduce the premium in its sole 

discretion. 

The statutory amendments also clarified that the 

FCSIC may collect premiums more frequently than 

annually. The amended Farm Credit Act provides 

that each insured System bank shall file with the 

Corporation a certified statement showing the amount 

of the premium due the Corporation from the bank. 

The Farm Credit Act mandates that each insured 

System bank shall pay to the Corporation the premium payments required under the statute not more 

frequently than once in each calendar quarter, in such 

manner and at such times as the Board of Directors 

shall prescribe. The certified statement is to be filed 

on a date to be determined in the sole discretion of 

the Corporation. Under existing regulations, the certified statement and payments for the preceeding year 

must be received by January 31. 

At its June 2008 meeting, the Corporation’s Board 

of Directors took action to implement the amendments of the Farm Credit Act’s premium provisions. 

The Board implemented the new premium rates and 

reduced the premiums pursuant to the Corporation’s 

authority under section 5.55(a) (3) of the Farm Credit 

Act, as amended by the FCE Act. Consistent with 

the Corporation’s past practice of generally adjusting 

premium rates quarterly, the new rates were made 

effective at the beginning of the next quarter, July 1, 

2008. 

The investment return on the Corporation’s portfolio 

of 2.92 percent exceeded the average return on the 

benchmark group (2.41 percent) that is used to measure performance. The benchmark group consists of 

Treasuries and private sector mutual funds that have 

the same characteristics as the Corporation’s investment objectives. 
Farm Credit System Insurance Corporation

26

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 any insurance loss allowance quarterly. The financials of all 

System institutions are proactively screened to detect 

risk and identify institutions that may require special 

examinations. In addition, the Corporation continued 

refinement of a model for dynamically evaluating the 

adequacy of the current Insurance Fund under various scenarios. 

3. Maintain the capability to manage receiverships 

and/or conservatorships.

Receivership operations are considered effective if the 

following standards are met. 

	 •	 Ninety percent of initial claims processed are

completed within a specified period, depending on the size and complexity of the failed 

institution.

	 •	 The ratio of operating costs to total assets is

comparable with that of other insurers. 

	 •	 The ratio of asset recovery values to asset values is comparable with that of other insurers.

No receiverships or conservatorships existed in the 

Farm Credit System in 2008. 

Corporation personnel are trained periodically to 

maintain readiness, ensuring proficiency in the performance of receivership responsibilities. The next 

receivership readiness exercise is scheduled for the 

second half of 2009.
Protecting Investors in Agriculture and Rural America

27

The President’s Management Agenda

3. Improved Financial Performance 

	 •	 Managed an investment portfolio with an

average yield that exceeded benchmarks. 

	 •	 Kept actual operating expenses below budgeted operating expenses because of (1) 

unexpended contingency funds to deal with 

potential insurance issues, (2) the use of 

cost-effective shared services, and (3) a staff 

vacancy during part of the year.

4. Expanded Electronic Government 

	 •	 Continued using e-mail, the Corporation’s

website and other electronic media to communicate with stakeholders.

	 •	 Redesigned and modernized the FCSIC

website.

 - Improved information quality and 

accessibility.

 - Expanded text areas to provide more 

background information, as well as charts 

and graphs.

 - Added a search facility and metadata to 

enhance the search process. Also added 

more pages to make commonly posted 

topics easier to find.

5. Budget and Performance Integration 

	 •	 Continued to provide timely and accurate

financial information to assist senior management and the Board in making decisions on 

strategic programs and key operations. 

	 •	 Evaluated programs on an ongoing basis to

determine efficiency, measuring results against 

Annual Performance and Strategic Plan objectives and reporting quarterly to the Board. 

Met new and growing demands without 

increasing permanent staff levels. 

	 •	 Received an unqualified opinion on the

Corporation’s financial statements from our 

external auditor. 

	 •	 The annual report on the FCSIC’s internal

control over financial reporting did not disclose any internal control weaknesses or any 

instances of noncompliance. 

The Corporation, one of 35 agencies designated as a 

significant Government entity for reporting purposes, 

is required to submit data for the Financial Report of 

the United States using the Government-wide Financial Report System and the Federal Agencies’ Centralized Trial-Balance System. 

In 2001, the Administration 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 provided below.

1. Strategic Management of Human Capital 

	 •	 Operated with a small core staff, contracting for specialized expertise when necessary, 

which kept operating costs low while offering 

flexibility to leverage resources. 

	 •	 Continued to provide cross-training to ensure

continuity of operations by empowering 

multiple staff members to fulfill a variety of 

critical roles in day-to-day operations. 

	 •	 Participated in the 2008 Federal Human Capital Survey (FHCS), which satisfied the annual 

requirement established by the National 

Defense Authorization Act of 2004 and 

provided agency metrics within the human 

capital accountability system. The FCSIC consistently scored higher than Government-wide 

averages on the 2008 FHCS in job satisfaction 

and leadership.

2. Competitive Sourcing 

	 •	 Continued the extensive use of competitively

sourced public and private sector contractor 

support to perform administrative functions, 

including personnel, information systems, and 

financial systems support. 
Farm Credit System Insurance Corporation

28
Protecting Investors in Agriculture and Rural America

29

Reports of Independent 

Public Auditors

Clifton Gunderson LLP




34

Farm Credit System Insurance Corporation

Statements of Financial Condition

As of December 31, 2008 and 2007

(Dollars in thousands)

2008 2007

Assets 

 

Cash and cash equivalents $ 61,991 $ 479,926

 

Investments in U.S. Treasury Obligations (Note 3) 2,588,890 1,906,452 

Accrued interest receivable 21,062 21,216 

 

Premiums receivable (Note 4) 242,970 191,341 

 

 Total assets $ 2, 914,913 $ 2,598,935

 

Liabilities and Insurance Fund 

 

Accounts payable and accrued expenses (Note 6) $ 290 $ 392 

 

Total liabilities 290 392 

 

Farm Credit Insurance Fund 

 Allocated Insurance Reserve Accounts 39,888 39,888 

 Unallocated Insurance Fund Balance 2,874,735 2,558,655 

 

Total Insurance Fund 2,914,623 2,598,543 

 

 Total liabilities and Insurance Fund $ 2,914,913 $ 2,598,935

 

The accompanying notes are an integral part of these financial statements.
35

Farm Credit System Insurance Corporation

Statements of Income and Expenses and Changes in Insurance Fund

For the years ended December 31, 2008 and 2007

(Dollars in thousands)

 

2008 2007

Income 

 

Premiums (Note 4) $ 242,970 $ 191,336

 

Interest income 75,736 98,352

Other Income 8 0 

 

 Total income $ 318,714 $ 289,688

 

Expenses 

 

Administrative operating expenses (Note 6) $ 2,634 $ 2,740

 

 Total expenses $ 2,634 $ 2,740

 

 Net income $ 316,080 $ 286,948

 

Farm Credit Insurance Fund – beginning of year $ 2,598,543 $ 2,311,595

Farm Credit Insurance Fund – end of year $ 2,914,623 $ 2,598,543

 

The accompanying notes are an integral part of these financial statements.
36

Farm Credit System Insurance Corporation

Statements of Cash Flows

For the years ended December 31, 2008 and 2007

(Dollars in thousands) 

2008 2007

Cash flows from operating activities 

 

Net income $ 316,080 $ 286,948

 

Adjustments to reconcile net income to net cash provided

by operating activities

 (Increase) decrease in premium receivable (51,629) (26,939) 

 

 (Increase) decrease in accrued interest receivable 154 (3,307) 

 

 Net amortization and accretion of investments 8,786 7,779

 

 Increase (decrease) in accounts payable and accrued expenses (103) 92

 

 Net cash provided by operating activities 273,288 264,573

 

Cash flows from investing activities 

 

Payments for purchase of U. S. Treasury Obligations $ (1,404,110) $ (893,404)

 

Proceeds from maturity of U.S. Treasury Obligations 712,887 407,918 

 Net cash (used) provided in investing activities (691,223) (485,486)

 

Net change in cash and cash equivalents (417,935) (220,913)

 

Cash and cash equivalents, beginning of year 479,926 700,839

 

Cash and cash equivalents, end of year $ 61,991 $ 479,926

 

The accompanying notes are an integral part of these financial statements.
37

Protecting Investors in Agriculture and Rural America

Notes to the Financial Statements

Note 1 — Insurance Fund: Statutory Framework

The Agricultural Credit Act of 1987 (1987 Act) established the 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, (insured obligations). Each bank in the System 

participating in insured obligations is an insured System bank. At December 31, 2008, there were five insured 

System banks and 90 direct lender associations.

The Corporation is managed by a board of directors consisting of the same individuals as the 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; and

2. Ensure the retirement of eligible borrower stock at par value under section 4.9A of the Farm Credit 

Act.

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, 2008, for each of the components of the Corporation’s insurance 

responsibilities were $177 billion of insured obligations, and $10 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 (a)(2) of the Farm 

Credit Act.

Under section 5.63 of the Farm Credit Act, the Corporation is exempt from all Federal, state, and local taxes 

with the exception of real property taxes.

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, 2008, the Corporation held $61.92 million in overnight Treasury Certificates maturing on January 2, 2009, with an investment rate of 0.11 percent, and $75,616 

in cash. 
Farm Credit System Insurance Corporation

38

Investments in U.S. Treasury Obligations—Section 5.62 of the Farm Credit 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 interest method since 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.

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.

The Corporation actively monitors the creditworthiness and financial position of the insured System banks. 

Management is not aware of any events or circumstances at this time which would require a liability for estimated insurance obligations to be recorded.

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 2008 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 $209,996 in 2008 and $197,331 in 2007.
Protecting Investors in Agriculture and Rural America

39

Note 3 — Investments

In addition to the amounts referenced in Note 2, Cash and Cash Equivalents, at December 31, 2008 and 2007, 

investments in U.S. Treasury obligations which are carried at amortized cost consisted of the following:

($ in thousands) 

 Gross Gross Estimated

Amortized Unrealized Unrealized Market 

Cost Gains Losses Value

December 31, 2008 

U.S. Treasury Notes $ 2,588,890 $ 82,037 $ (22,321) $ 2,648,606

December 31, 2007 

U.S. Treasury Notes $ 1,906,452 $ 18,842 $ (589) $ 1,924,705

The amortized cost and estimated market value of U.S. Treasury obligations at December 31, 2008, by contractual maturity, are shown below. 

($ in thousands)

 Estimated 

Amortized Market

Cost Value

Due in one year or less $ 863,432 $ 873,604

Due after one year through five years 1,675,690 1,718,618

Due after five years through ten years 49,768 56,384

 

$ 2,588,890 $ 2,648,606

Note 4—Premiums, the Secure Base Amount, and Excess Insurance Fund Balances

Each System bank which issues insured obligations under subsection (c) or (d) of section 4.2 of the Farm 

Credit Act is an insured System bank and may be required to pay premiums to the Corporation.

During the first half of 2008, the Farm Credit Act established 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) annual average accrual loans outstanding (other than the guaranteed portions of Government-guaranteed accrual loans) for the year may be 

assessed from zero to 0.0015; (2) annual average nonaccrual loans outstanding may be assessed from zero 

to 0.0025; (3) annual average guaranteed portions of Federal Government-guaranteed accrual loans may be 
Farm Credit System Insurance Corporation

40

assessed from zero to 0.00015; (4) annual average guaranteed portions of state government-guaranteed accrual 

loans may be assessed from zero to 0.0003; and (5) annual average guaranteed portions of Government Sponsored Enterprise (GSE) guaranteed loans in accrual status may be assessed from zero to 0.0015.

The FCE Act of 2008 amended the Farm Credit Act to generally assess premiums based on each bank’s pro 

rata share of insured debt (rather than on loans), aligning premiums with what FCSIC insures. The changes 

were implemented beginning July 1, 2008. Now FCSIC may collect from 0 to 20 basis points annually on 

adjusted insured debt outstanding. The amendments also authorize a risk surcharge of up to 10 basis points 

on non-accrual loans and on other-than-temporarily impaired investments. The amendments reduce the total 

insured debt on which premiums are assessed by 90 percent of Federal Government-guaranteed loans and 

investments and 80 percent of state government-guaranteed loans and investments, and deduct similar percentages of such guaranteed loans and investments when calculating the SBA. The amendments clarify that 

FCSIC may collect premiums more frequently than annually.

In addition, the Farm Credit Act no longer specifies how the Farm Credit System banks pass premiums to 

associations and other financing institutions, although it will require that the banks do so in an equitable 

manner. This change allows the banks flexibility in allocating premium costs to associations. The amendments clarify that, in addition to FCSIC’s regulatory authority under Title V of the Farm Credit Act, FCSIC 

has authority to adopt rules and regulations concerning provisions in Title I of the Farm Credit Act related to 

banks passing along the cost of insurance premiums. Finally, the amendments change Farm Credit Act provisions regarding certified statements and simplify the formula for payments from the Insurance Fund AIRAs 

to allow more immediate distribution of excess Insurance Fund balances to insured banks and the Financial 

Assistance Corporation (FAC) stockholders. 

The Farm Credit 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 government 

guaranteed loans in accrual status and a similar percentage of government guaranteed investments that are not 

permanently impaired) or such other percentage as determined by the Corporation, in its sole discretion, to 

be actuarially sound. When the assets in the Insurance Fund for which no specific use has been designated 

exceed the secure base amount, the Corporation is required to reduce the premiums, but it still must ensure 

that reduced premiums are sufficient to maintain at the SBA the assets in the Insurance Fund for which no 

specific use has been designated (the unallocated Insurance Fund). 

Insurance premium rates are reviewed semiannually. For 2008, the Board set premium rates at its January 10, 

2008, meeting at 15 basis points for accrual loans, 25 basis points for nonaccrual loans and zero for Federal 

and state government-guaranteed loans, and did not exercise its discretionary authority to grant a lower rate 

for GSE-guaranteed loans. The Board again reviewed premiums at its June 10, 2008 meeting. The Board 

voted to set premiums at 15 basis points on adjusted insured debt outstanding for the third quarter of 2008 

and 18 basis points on adjusted insured debt outstanding for the fourth quarter of 2008. In addition, there 

was a 10-basis-point premium on the average principal outstanding for nonaccrual loans and on the average amount outstanding for any other-than-temporarily impaired investments. In 2008, outstanding insured 

obligations increased by $22 billion or 14.4 percent. At December 31, 2008, the unallocated Insurance Fund 

was 1.771 percent as a percentage of adjusted insured debt. At December 31, 2008, the total Insurance Fund, 

including the AIRAs was 1.796 percent. 
Protecting Investors in Agriculture and Rural America

41

On January 15, 2009, the Board set premium rates for 2009, increasing the premium rate on adjusted insured 

debt outstanding to 20 basis points, the maximum allowed by statute. The Board continued the 10-basispoint premium on the average principal outstanding for nonaccrual loans and other-than-temporarily impaired 

investments.

A 1996 amendment to the Farm Credit Act requires the Corporation to establish AIRAs for each System bank 

and an account for the FAC stockholders. If at the end of any calendar year the unallocated Insurance Fund 

is at the secure base amount, the Corporation is to segregate any excess balances into these AIRAs. In 1999, 

the Corporation’s Board adopted the Policy Statement on the Secure Base Amount and Allocated Insurance 

Reserve Accounts which provides guidelines for implementing this statutory authority. If at the end of any 

calendar year the amount in the unallocated Insurance Fund exceeds the 2 percent secure base target, the 

statute requires the Corporation to compare that amount with the year-end Insurance Fund balance adjusted 

downward by the Corporation’s estimated expenses for the following year. At year-end 2003, the Corporation 

transferred $39.89 million to the AIRAs. The amount was allocated as follows:

FAC Stockholders (10%) $ 3.99 million

Farm Credit System Banks (90%) $ 35.90 million

The AIRA balances are recorded as part of the Insurance Fund until approved for payment by the Corporation’s Board. 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. No AIRA payments were made during 2008 or 2007.

Note 5 — Operating Lease

On October 21, 2003, the Corporation executed a 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 $124,344 for 2009. The Corporation recorded lease expense (including operating cost 

assessments) of $125,866 and $125,695 for 2008 and 2007, respectively.

Note 6 — Related Parties

The Corporation purchases services from the FCA under an Interagency Agreement. These include examination and administrative support services. The intention of the parties as stated in the agreement is that specified rates and fees will reimburse the party providing services for all reasonable costs associated with provision 

of the services. The Corporation had payables due to the FCA of $57,419 at December 31, 2008 and $155,555 

at December 31, 2007. The Corporation purchased services for 2008 which totaled $134,639 compared with 

$337,187 for 2007.

The Corporation provides assistance to the FCA under the same Interagency Agreement, recognizing revenue 

of $7,750 for 2008 and zero for 2007. At December 31, 2008, and 2007, the Corporation did not have any 

receivables from the FCA.
Farm Credit System Insurance Corporation

42

Farm Credit System Insurance Corporation By Year

(Dollars in thousands)

Income and Expenses

Income Expenses Net Income

 

Provision for Administrative 

Insurance and Operating Changes in 

Year Premiums Investment Obligations Expenses Insurance Fund

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 $ 26,355 $ 93,499 $ 13,643 $ 1,906 $ 107,5453

2003 $ 105,079 $ 91,405 $ 13,725 $ 2,218 $ 180,561

2004 $ 46,520 $ 86,567 $ 14,686 $ 2,263 $ 116,138

2005 $ 49,393 $ 81,253 $ 6,228 $ 2,202 $ 122,236

2006 $ 164,417 $ 87,927 $ 0 $ 2,131 $ 250,213

2007 $ 191,336 $ 98,352 $ 0 $ 2,740 $ 286,948

2008 $ 242,970 $ 75,736 $ 0 $ 2,634 $ 316,080

 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 interest method. The 

cumulative effect on prior years of $3.2 million was included in 2002 net income.
Corporate Staff

Dorothy L. Nichols Chief Operating Officer

Alan J. Glenn Director of Risk Management

C. Richard Pfitzinger Chief Financial Officer

James M. Morris General Counsel

Phyllis Applebaum Financial Analyst

William Fayer Financial Analyst/Asset Assurance Manager

Jeremy Del Moral Financial Analyst

Pam Ngorskul Accountant

Anna Lacey Administrative Specialist

Molly Sproles Administrative Management Assistant

Contact Information

Copies of Farm Credit System Annual Reports to Investors and Quarterly and Annual Information Statements 

may be obtained from

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 and the 

FCA’s Annual Report on the Farm Credit System may 

be obtained from

Office of Congressional and Public Affairs

Farm Credit Administration

1501 Farm Credit Drive

McLean, VA 22102

(703) 883-4056

FCSIC Annual Report design by Linda Toki
Farm Credit System Insurance Corporation

1501 Farm Credit Drive

McLean, VA 22102

703-883-4380 Voice

703-790-9088 Fax

www.fcsic.gov