Investors Investors

in

and

Agriculture Rural

America

2000 Annual Report

Protecting

Farm Credit System Insurance Corporation

growth

strength

confidence 
Protect investors in insured 

Farm Credit System obligations and

taxpayers through sound

administration of the Insurance Fund

Exercise authorities to minimize 

loss to the Insurance Fund 

Help ensure the future of a 

permanent system for delivery of credit to

agricultural borrowers CONTENTS

1 Insurance Corporation

Highlights

2 Message from the Chair

3 Investor Protection and the

Farm Credit System

4 Strategic Goals and

Performance Measures

6 Board of Directors

8 Insurance Fund

Management

14 Risk Management

18 Report of Independent

Public Accountants

20 Financial Statements

23 Notes to Financial

Statements

33 Corporate Officers
1

• The Insurance Fund grew 6 percent in 2000. 

• Operating costs were low at 0.1 percent of average assets for the year.

• An insurance risk study of recent trends in agriculture and financial

services to that sector was completed.

Insurance Corporation Highlights

Total Assets

Total Liabilities

Insurance Fund Balance

OPERATIONS:

Revenues

Operating Expenses

Insurance Expense

Net Income

Insurance Fund as a Percentage

of Adjusted Insured Debt

1999

$ 1,534

160

1,374

127.2

1.6

10.4

115.2

1.99%

2000

$ 1,626

171

1,455

93.8

1.8

11.1

80.9

1.98%

1998

$ 1,408

149

1,259

99.5

1.5

9.7

88.3

1.94%

Selected Financial Statistics

($ in millions)

98

$1,408

$1,534

$1,626

99 00

TOTAL ASSETS

$ millions

1000

0

2000

98

$1,259

$1,374

$1,455

99 00

INSURANCE FUND BALANCE

$ millions

1000

0

1500
2

Message from the Chair

The Corporation closed the books on another successful year. The

Insurance Fund grew to $1.45 billion, strengthening the Corporation’s

ability to protect investors in Farm Credit System debt obligations. For

most of the year, the Insurance Fund was above the statutory secure

base amount of 2 percent. In December, the Fund fell slightly below the

secure base amount as a result of seasonal growth in insured debt

outstanding.

The Farm Credit System earned over $1 billion in net profits for the

eighth consecutive year. Loan volume grew 7.5 percent. Asset quality

remained strong despite weaknesses in agriculture. Earnings allowed

System institutions to build capital, with both surplus and total capital

increasing as a percentage of System total assets. 

My focus as Chair continues to be maintaining investor confidence in

System debt securities. This is essential to ensure that System institutions have access to the capital markets at a reasonable cost. The

Insurance Fund provides an extra cushion for investors, to ensure that

they are repaid. During 2000, investors purchased $389 billion in debt

securities to finance System lending to agriculture and rural America.

I am also committed to promoting safe banking practices for Farm Credit

System institutions. The outlook for agriculture in 2001 continues to

reflect uncertainty and the economy has begun to slow. These are

challenging times for lenders which require heightened discipline. The

Corporation will continue evaluating risks the System faces, to minimize

the Insurance Fund’s potential loss exposure through early detection.

I wish to thank my fellow Board Member, Michael M. Reyna, and the

dedicated staff of the Corporation for their contributions during the past

year. I invite you to visit our Web site at www.fcsic.gov. 

Ann Jorgensen

May 2001
3

Investor Protection and the Farm Credit System

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

1971 (the Act), is to ensure the repayment of investors who purchase the

bonds and notes issued by the System’s banks. Investors provide the

funds the System lends to agriculture and rural America. 

This year, System loan volume grew 7.5 percent to $75 billion from 

$70 billion in 1999. Asset quality remained sound at most institutions

despite poor conditions in agriculture. Significant government assistance

continued to stabilize farm income. On a combined basis, the System

continued to produce strong earnings and added to capital levels. 

Insured Debt Outstanding

Farm Mortgage Loans

Agricultural Production Loans 

Loans to Agricultural Cooperatives

International Loans

Loans to Rural Utilities

Rural Home Loans

Net Income

Nonperforming Assets as a % of Loans 

and Other Property

Surplus (excluding Insurance Fund) 

as a % of Total Assets

2000

$ 76.8

34.0

17.5

9.5

2.5

6.3

2.0

1.42

1.2%

12.0%

1999

$ 72.2

32.4

16.7

8.7

2.6

5.1

1.5

1.23

1.6%

11.6%

Farm Credit System Statistics

($ in billions) 1998

$ 68.4

30.9

17.4

9.5

2.3

4.7

1.4

1.25

2.1%

11.1% 98

$68.4 $72.2

99 00

INSURED DEBT

OUTSTANDING

$ billions

40

20

10

30

50

70

60

0

80 $76.8

Repayment

of

the

in

Investors

Ensure

Farm 

Credit

System

Obligations
4

Strategic Goals and Performance Measures

Help ensure

the Future of a

Credit System 

to Serve

Agriculture

and

Rural

America
Performance Measures

INSURANCE FUND MANAGEMENT

• Assess insurance premiums as 

necessary

• Achieve investment return comparable

with peer group of Treasury Bond Funds

• Maintain the 2 percent secure base

amount

RISK MANAGEMENT

• Detect risk by screening institutions

• Identify institutions requiring special

examinations 

• Evaluate potential insurance losses 

RECEIVERSHIP/CONSERVATORSHIP

CAPABILITY

• Complete processing of 90 percent of

all claims in specified period

• Manage operating costs and asset

recovery rates comparable with other

Federal insurers

2000 Results

Reviewed premium rates twice

See graph on the right 

Above 2 percent throughout most of

2000, 1.98 percent at yearend

Evaluated System institutions posing risk

Completed one special examination

Evaluated loss allowance quarterly

No current receivership/conservatorship

activity

Corporate readiness maintained through

training and evaluation of contractor

capabilities

5

The Corporation has three broad goals and performance measures to

evaluate the effectiveness of operations:

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

amount.

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

• Maintain the capability to manage receiverships or conservatorships.

5.99

Corporation

Treasury Funds

5.53 6%

3%

0%

AVERAGE

INVESTMENT

YIELD
6

Board of Directors

Ann Jorgensen

Ann Jorgensen became a member ofthe Corporation’s Board in May 1997

and was elected as the Chair in January

2000. She brings to her position extensive experience in production agriculture

and accounting. She started farming in

partnership with her husband in 1963.

Their farming enterprise now includes a

cropping operation, Jorg-Anna Farms,

and a hog operation, Timberland Hogs

Ltd. She has worked as a tax accountant

and as a licensed commodity broker. In

1981, she started Farm Home Offices, 

a mail order catalog company, which

marketed farm management products to

help farmers improve their financial and

production management systems. She

served on a number of governing boards

for the State of Iowa, including six years

as a member of the Board of Regents.

The Board of Regents is responsible for

the state’s three universities, including

the University of Iowa Hospital, a worldrenowned teaching hospital, and its

affiliated clinics. She was inducted into

the Iowa Volunteer Hall of Fame in 1989.

She and her husband were recognized

by Farm Futures magazine in 1983 as 

the owners of one of the Top 10 Best

Managed Farms. In 1997, she was one of

the national agricultural leaders named

by Alpha Zeta, the national honorary

agricultural fraternity, to its Centennial

Honor Role. She was named a member

of the Farm Foundation’s Bennett

Agricultural Round Table in June 2000.

This provides a forum for discussion 

and dialogue among agricultural,

agribusiness, government, academic,

and interest group leaders on issues of

importance to agriculture and rural

America. A native of Iowa, she holds a

B.A. from the University of Iowa.

The Farm Credit System Insurance Corporation (Corporation)

is managed by a three-member board of directors composed of the

members of the Farm Credit Administration (FCA) Board. The Chair of the

Corporation’s Board of Directors, however, must be an FCA Board

Member other than the Chair of the FCA Board. Currently, one position

on the Board is vacant.
7

Michael M. Reyna

Michael M. Reyna became a member of the Corporation’s Board in

October 1998 and served as Chairman

from November 1998 to January 2000,

when he was designated by President

Clinton as the Chairman of the Farm

Credit Administration. Prior to joining 

the Board, he served as President

Clinton’s director of USDA Rural

Development (formerly known as

Farmers Home Administration) in

California from November 1993 to

October 1998. In this capacity, Mr. Reyna

was responsible for growing and managing a diversified portfolio of housing,

business, and infrastructure loans totaling

more than $2.6 billion. He implemented a

number of significant initiatives in

California on behalf of the Clinton-Gore

Administration, including the Northwest

Economic Adjustment Initiative, the Rural

Empowerment Zone-Enterprise

Community program, the AmeriCorps

program, and several Reinventing

Government Initiatives. Previously, Mr.

Reyna served as a principal advisor to the

California State Legislature for 11 years,

working on financial service industry regulation, and a wide range of issues

including housing, economic development, local government finance and

political reform. In the early 1980s, while

serving as a private consultant to the

Texas 2000 Project, an initiative of the

Governor’s Office of Budget and

Planning, he developed and implemented

a computer-based simulation model of

the Texas economy which estimated

employment and population trends

through the year 2000. He was an

appointed member of several local

commissions, including the Sacramento

City Planning Commission, of which he

served as Chairman in 1993. Mr. Reyna

holds a bachelor’s degree in business

administration from the University of

Texas at Austin and a master’s degree in

public policy and administration from the

LBJ School of Public Affairs at the

University of Texas. He and his wife,

Karen, have two sons.
8

Insurance Fund Management

The Insurance Fund grew to $1.45 billion, an increase of 6 percent during

the year. The Insurance Fund represents the Corporation’s equity, the

difference between its total assets of $1.62 billion and its total liabilities,

including insurance obligations of $171 million. 

0

1,600

1,400

1,200

1,000

800

600

400

200

$ millions

JAN-96 JAN-97 JAN-98 JAN-99 JAN-00

TOTAL ASSETS VS. INSURANCE FUND EQUITY

Total Assets Insurance Fund

Revenues and Expenses

Corporate net income for 2000 declined

30 percent to $81 million, as insurance

premiums were reduced to zero for most

of the year. The decline in net income

from lower premiums was partially offset

by higher investment earnings during the

year. The mix of corporate revenues has

changed over the past several years 

with interest from investments now

representing the primary source of

income as the Insurance Fund has

attained the secure base amount.

Insurance premiums were $1 million in

2000, down from $45 million in 1999.

Investment interest increased to $93

million from $82 million in 1999. The

increase in investment income resulted

from more invested assets during the

year and a higher portfolio yield. 
9

Corporation expenses totaled $13 million

in 2000. Insurance expense was $11.1

million, consisting entirely of the annual

provision for the liability to repay the

Farm Credit System Financial Assistance

Corporation (FAC). See Note 5.

Operating costs were $1.8 million. Of this

amount, the Corporation’s fixed costs for

staff, travel, rent, and miscellaneous

expenses totaled $1.4 million. Contract

services represented the balance of

operating expenses of $0.4 million. 

The Corporation operates with a small

core staff and utilizes contractors with

specialized expertise when necessary.

This approach keeps operating costs low

while offering the flexibility to leverage

resources. 

Operating costs during the year were

0.11 percent of average assets, level with

1999. This efficiency ratio has improved

over the past five years, declining from

0.14 percent in 1995. 

The Secure Base Amount

The secure base amount is 2 percent of

outstanding insured obligations, which is

the amount established by the Act. When

the Insurance Fund is at or above this

level, the Corporation is required to

reduce insurance premium rates as

necessary to maintain the Fund at 

2 percent. 

Because it is a percentage of insured

debt outstanding, the secure base

amount fluctuates depending upon

System funding patterns. The Insurance

Interest Premiums

0

100

80

60

40

20

$ millions

1996 1997 1998 1999 2000

CORPORATION REVENUES 1996–2000
10

Insurance Fund Management

Fund began the year at 1.99 percent and

reattained the 2 percent level at the end

of the first quarter. The Fund stayed

above the secure base amount until

December. Due to growth in insured

debt, it finished the year at 1.98 percent. 

Premium Assessment

The Board reviews the need for premium assessments on a semiannual basis

in September and March. Premiums may

be assessed on four classes of System

loans: 

• Accrual loans (non-government

guaranteed balance) - from zero to 

15 basis points;

• Nonaccrual loans - from zero to 

25 basis points;

• Federal Government-guaranteed

accrual loans - from zero to 1.5 basis

points; and 

• State government-guaranteed accrual

loans - from zero to 3 basis points.

(See Note 4 to the Corporation’s financial

statements.)

Five factors are considered in setting

premium rates:

• Level of the Insurance Fund relative to

the secure base amount; 

• Any projected losses to the Insurance

Fund;

• Condition of the System;

• Health of the agricultural economy; and 

• Risk in the financial environment.

1.8

2.1

2.0

1.9

DEC-97 JUN-98 DEC-98 JUN-99 DEC-99 JUN-00 DEC-00

INSURANCE FUND RELATIVE TO THE 2% SECURE BASE AMOUNT

Percent
Liquidity pool

Investment Pool

Total

Two Years or Less $ 738 46

Two Years to Five Years 686 43

Five Years to Ten Years 173 11

$1,597 100%

Investment Portfolio

$ MILLIONS % OF PORTFOLIO

11

Premium rates for 2000 were set at zero

for all loans except nonaccruals at the

September 1999 Board meeting when

the Insurance Fund was above 2 percent.

At its March 2000 review, the Board

reduced the nonaccrual premium rate to

zero for the second half of the year 

following the Insurance Fund’s reattainment of the secure base amount. Due to

these lower rates, premium revenues

declined to $1.0 million during the year

from $45 million in 1999. 

In September 2000, premium rates for

2001 were set at zero as the Insurance

Fund remained above the secure base

amount. The level of Corporation investment earnings was projected to maintain

the Insurance Fund at the secure base

during 2001. Also, the System continued

to maintain its solid financial condition,

generating strong earnings and increasing capital levels despite weak conditions

in agriculture.

Investments

Investments and cash totaled $1.60

billion at December 31, 2000, up 9 percent

from yearend 1999. Funds are invested in

U.S. Treasury securities in accordance

with the Act and the Corporation’s

Investment Policy. The Policy’s objectives

seek the maximum return consistent with

the Corporation’s liquidity needs and a

minimum exposure to loss of principal.

The average portfolio yield for 2000 was

5.99 percent, up from 5.75 percent in 1999. 

The Corporation maintains an investment

strategy of purchasing a ladder of maturities and holding investments to maturity

in accordance with its Investment Policy.
12

Insurance Fund Management

The Policy provides for the portfolio to be

divided into a liquidity pool and an investment pool. The purpose of the liquidity

pool is to maintain some short-term

investments while investing the balance

of the portfolio in longer-term maturities

of up to 10 years. 

In December 2000, the Board reviewed

the Policy and redefined the liquidity

pool, broadening its composition from

securities maturing within one year, to

include securities maturing within two

years or less. The percentage limits were

changed to eliminate the ceiling, while

increasing the required minimum for the

liquidity pool to 20 percent. These

changes were considered after evaluating the effect of recent declining trends

in the volume and number of maturities

of Treasury securities outstanding

resulting from Federal Government fiscal

surpluses. By modifying the policy limits,

management will have additional

flexibility to structure maturities in

response to the shrinking supply of

Treasury securities.

Investment maturities continue to be

limited to a maximum of 10 years, with

the portfolio percentage that can be

invested in maturities from 5 to 10 years

limited to 25 percent of the total

Investment Pool. 

The weighted average portfolio maturity

at yearend was 2.5 years. The liquidity

pool component includes $139 million in

cash equivalents. 

Insured and Other

Obligations

Insured obligations increased by 6.3 percent in 2000 to $76.8 billion, primarily to

finance increased lending to agricultural

borrowers. The Corporation insures

Systemwide and Consolidated notes,

bonds and other obligations issued

under the Act. Insured obligations are

issued to investors through the Federal

Farm Credit Banks Funding Corporation

on behalf of System banks.

The Corporation is also required by

statute to use the Insurance Fund to 

satisfy any defaults related to FAC-issued

bonds and to ensure the retirement of

eligible borrower stock. During 2000,

other obligations declined significantly as

the FAC called and retired $89 million in

high coupon assistance bonds. 

In addition, System banks continued

making annual payments to FAC to

provide funds for the repayment of 
13

other outstanding assistance bonds. 

At December 31, 2000, the System had

provided for the repayment of approximately $0.3 billion of the $0.8 billion of

assistance bonds still outstanding. Other

obligations also declined as further

retirement of outstanding eligible

borrower stock occurred during the year.

At yearend, eligible borrower stock

outstanding at System institutions 

totaled $54 million, down from $64

million in 1999.

The Corporation’s principal liability for

insurance obligations at December 31,

2000 was $170 million, which represents

the liability to repay the FAC for financial

assistance to the Federal Land Bank of

Jackson in Receivership. (See Note 5.)

$60.7

54

78

74

70

66

62

58

INSURED OBLIGATIONS $ billions

1996

$62.9

1997

$68.4

1998

$72.2

1999

$76.8

2000

0.00

2.00

1.50

1.00

0.50

OTHER OBLIGATIONS

$ billions

1996 1997 1998 1999 2000

Eligible Borrower Stock FAC Assistance Bonds

$1.39 $1.37 $1.09

$.93 $.83
14

Risk Management

I

n addition, the Corporation assesses

risk exposure to the Insurance Fund

through its ongoing review and analysis

of the financial condition of System

institutions, operation of analytical

models, review of corporate actions

approved by FCA for System institutions,

and by serving as a nonvoting participant

on FCA’s Regulatory Enforcement

Committee. Staff also monitor the

development of legislative, judicial,

regulatory, and economic trends that

could affect the Insurance Fund. 

During the year, the Corporation

completed a major initiative from its

strategic plan, updating the 1995 study

on insurance risk. The purpose of this

effort was to:

• Analyze the major trends that are

shaping agriculture and the financial

services sector that specializes in 

the industry;

• Identify risks that could generate 

losses to the Insurance Fund; and 

• Highlight strategic issues and options

to help maintain a strong insurance

program for the future.

To provide an independent perspective,

the Corporation contracted with KPMG

Consulting to perform the study. The

report included a catalog of the various

risks to the Insurance Fund, highlighted

potential issues and recommended

strategies for mitigation of risks.

Financial Assistance and

Receivership 

The Insurance Corporation is authorized

to provide assistance to a System

institution to prevent default, restore it to

normal operations, or to facilitate a

merger or consolidation. At the present

time, no assistance agreements are

outstanding.

The Corporation’s program to identify and manage risk to the Insurance

Fund minimizes the Fund’s exposure to potential losses through early

detection. Special examination procedures are used to evaluate the condition of weaker System institutions. FCA examination staff perform the

majority of the fieldwork for these examinations on a reimbursable basis.
15

The Corporation also has statutory

responsibility to serve as receiver or

conservator for a System institution

when appointed by the FCA. To fulfill this

role and continue to operate with a small

core staff, the Corporation uses outside

contractors on a standby basis when

necessary. This allows us to contain

costs during periods of limited or no

activity while providing access to the

resources necessary should the need

arise. At the present time, there are no

receiverships or conservatorships.

Authorities to

Minimize

Exercise

Insurance

Losses

17

Financial Information
18
19
20

Financial Statements

ASSETS

Cash and Cash Equivalents

Investments in U.S. Treasury Obligations

(Note 3)

Accrued Interest Receivable

Premiums Receivable (Note 4)

Other Receivables

TOTAL ASSETS

LIABILITIES AND INSURANCE FUND

Accounts Payable and Accrued Expenses

(Note 7)

Liability for Estimated Insurance Obligations

(Note 5)

Total Liabilities

Farm Credit Insurance Fund

TOTAL LIABILITIES AND INSURANCE FUND

2000

$ 139,840

1,457,618

27,044

1,040

7

$ 1,625,549

$ 199

170,499

170,698

1,454,851

$ 1,625,549

1999

$ 5,506

1,456,480

26,054

45,496

3

$ 1,533,539

$ 221

159,345

159,556

1,373,973

$ 1,533,539

Statements of Financial Condition as of December 31, 2000 and 1999

($ in thousands)

Farm Credit System Insurance Corporation

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

Statements of Income and Expenses and Changes in Insurance Fund 

for the Years Ended December 31, 2000 and 1999

($ in thousands)

2000 1999

INCOME

Premiums (Note 4) $ 1,040 $ 45,496

Interest Income 92,776 81,719

Other Income 13 43

TOTAL INCOME $ 93,829 $ 127,258

EXPENSES

Administrative Operating Expenses $ 1,797 $ 1,631

(Note 7)

Provision for Estimated Insurance Obligations 11,154 10,424

(Note 5)

NET INCOME $ 80,878 $ 115,203

Farm Credit Insurance Fund,

Beginning of Year 1,370,973 1,258,770

Farm Credit Insurance Fund,

End of Year $ 1,454,851 $ 1,370,973

Farm Credit System Insurance Corporation

The accompanying notes are an integral part of these financial statements.
22

Financial Statements

Statements of Cash Flows 

for the Years Ended December 31, 2000 and 1999

($ in thousands)

2000 1999

Cash Flows from Operating Activities

Net Income $ 80,878 $ 115,203

Adjustments to Reconcile Net Income to Net 

Cash Provided by Operating Activities:

(Increase) Decrease in Accrued Interest (990) 1,457

Receivable

Decrease (Increase) in Premiums Receivable 44,456 (25,530)

Net Amortization and Accretion of Investments 16,211 15,217

(Increase) in Other Receivables (4) (3)

(Decrease) Increase in Accounts Payable (22) 43

and Accrued Expenses

Increase in Liability for Estimated 11,154 10,424

Insurance Obligations

Net Cash Provided by Operating Activities 151,683 116,811

Cash Flows from Investing Activities

Payments for Purchase of U.S. Treasury Obligations (234,916) (410,386)

Proceeds from Maturity of U.S. Treasury Obligations 217,567 237,122

Net Cash Used in Investing Activities (17,349) (173,264)

Net Change in Cash and Cash Equivalents 134,334 (56,453)

Cash and Cash Equivalents,

Beginning of Year 5,506 61,959

Cash and Cash Equivalents,

End of Year $ 139,840 $ 5,506

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

Farm Credit System Insurance Corporation
23

Note 1 — Insurance Fund:

Statutory Framework

The Agricultural Credit Act of 1987 (1987

Act) established the Farm Credit System

Insurance Corporation (Corporation) for

the purpose of ensuring the timely

payment of principal and interest on

notes, bonds, debentures, and other

obligations issued under subsection (c) or

(d) of section 4.2 of the Farm Credit Act

of 1971, as amended (Act), (insured

obligations). Each bank in the Farm Credit

System (System) participating in insured

obligations is an insured System bank. At

December 31, 2000, there were seven

insured System banks and 133 direct

lender associations.

The Corporation is managed by a board

of directors consisting of the same

individuals as the Farm Credit

Administration (FCA) Board except that

the Chairman of the FCA Board may not

serve as the Chairman of the

Corporation’s Board of Directors.

The Corporation has the responsibility to

expend amounts to the extent necessary

to:

1. Ensure the timely payment of

interest and principal on insured

obligations in the event of default by

an insured System bank;

2. Satisfy, pursuant to section

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

System banks on obligations 

related to the issuance of U.S.

Treasury-guaranteed bonds by the

Farm Credit System Financial

Assistance Corporation (FAC) (FAC

bonds) (see Note 5); and

3. Ensure the retirement of eligible

borrower stock at par value.

The Corporation, in its sole discretion, is

authorized to expend amounts to provide

financial assistance to certain insured

institutions.

The balances outstanding at December

31, 2000, for each of the components of

the Corporation’s insurance responsibilities were $76.8 billion of insured

obligations, $775 million of FAC bonds (of

which $314 million in repayments have

been provided for), and $54 million of

eligible borrower stock.

If the Corporation does not have

sufficient funds to ensure payment on

insured obligations, System banks will be

required to make payments under joint

and several liability, as required by

section 4.4(2) of the Act.

Under section 5.63 of the Act, the

Corporation is exempt from all Federal,

state, and local taxes with the exception

of real property taxes.

Notes to Financial Statements

Farm Credit System Insurance Corporation
24

Notes to Financial Statements

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 liabili

ties 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, 2000, the Corporation

held $139 million in overnight Treasury

Certificates maturing on January 2, 2001

with an investment rate of 5.99 percent.

Investments in U.S. Treasury Obligations—

Section 5.62 of the Act requires that

funds of the Corporation, not otherwise

employed, shall be invested in obligations of the United States or in obligations guaranteed as to principal and

interest by the United States. The

Corporation has classified its investments as held to maturity in accordance

with the Statement of Financial

Accounting Standard (SFAS) No. 115 and

carries them at amortized cost.

Premiums and discounts are amortized

or accreted using the straight-line

method, which approximates the interest

method, over the terms of the respective issues. Fair value is estimated based

on quoted market prices for those or

similar instruments.

Liability for Estimated Insurance

Obligations—The liability for estimated

insurance obligations is the present

- value of estimated probable insurance

payments to be made in the future

based on the Corporation’s analysis of

economic conditions of insured System

banks. (Also see Note 5.)

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 insured

System banks’ 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.
25

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 2000

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

$107,851 in 2000 and $103,319 in 1999.
26

Notes to Financial Statements

December 31, 2000

U.S. Treasury Notes

December 31, 1999

U.S. Treasury Notes

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

at December 31, 2000, by contractual maturity, are shown below. 

($ in thousands)

Amortized Estimated

Cost Market Value

Due in one year or less $ 313,273 $ 313,930

Due after one year through five years 971,356 989,869

Due after five years through 10 years 172,989 184,067

$ 1,457,618 $ 1,487,866

Amortized

Cost 

$ 1,457,618

$ 1,456,480

Gross

Unrealized

Gains

$ 31,783

$ 2,114

Gross

Unrealized

Losses

($ 1,535)

($19,170)

Estimated

Market

Value

$ 1,487,866

$ 1,439,424

Note 3 — Investments

At December 31, 2000, and at December 31, 1999, investments in U.S. Treasury obligations consisted of the following:

($ in thousands)
27

Note 4—Premiums, the Secure

Base and Excess Insurance Fund

Balances 

Each System bank which issues insured

obligations under subsection (c) or (d) of

section 4.2 of the Act is an insured

System bank and is required to pay

premiums to the Corporation.

The Act establishes the range of

insurance premium rates that the

Corporation’s Board may assess for any

calendar year based on four classes of an

insured bank’s loan assets. The four

classes of assets and the range that may

be assessed for each are: (1) average

annual accrual loans outstanding (other

than the guaranteed portions of

Government-guaranteed accrual loans)

for the year may be from zero to 0.0015;

(2) average annual nonaccrual loans

outstanding may be from zero to 0.0025;

(3) average annual portions of Federal

Government-guaranteed accrual loans

may be from zero to 0.00015; and 

(4) average annual portions of state

government-guaranteed accrual loans

may be from zero to 0.0003.

Insurance premium rates for 2000 were

set at the Board’s September 1999

meeting to zero for accrual and government-guaranteed loans, and to 0.0025 for

non-accrual loans. In March 2000, the

Corporation’s Board reduced the rate for

non-accrual loans to zero beginning July

1, 2000. In September 2000, the

Corporation’s Board approved retaining all

premium rates at zero for 2001. 

The Act sets a base amount for the

Insurance Fund to achieve. The statutory

secure base amount is equivalent to 2

percent of the aggregate outstanding

insured obligations of all insured System

banks (adjusted downward by a

percentage of the guaranteed portions 

of principal outstanding on Governmentguaranteed loans in accrual status) or

such other percentage as determined by

the Corporation, in its sole discretion, to

be actuarially sound. When the amount

of the Insurance Fund exceeds the

secure base amount, the Corporation is

required to reduce the premiums, but it

still must ensure that reduced premiums

are sufficient to maintain the level of the

Insurance Fund at the secure base

amount. 

The Insurance Fund was at or above the

secure base amount during most of

2000, but fell below at yearend due to

growth in insured obligations late in the

year. At December 31, 2000, the

Insurance Fund was 1.98 percent of

adjusted insured obligations outstanding.

A 1996 amendment to the Act requires

the Corporation to establish reserve

accounts for each System bank and an

account for the stockholders of the FAC.

If at the end of any calendar year the

Insurance Fund is at the secure base

amount, the Corporation is to segregate

any excess balances into these allocated

insurance reserve accounts (AIRAs). In

1999, the Corporation’s Board adopted a

Policy Statement on the Secure Base

Amount and Allocated Insurance Reserve
28

Notes to Financial Statements

Accounts which provides guidelines for

implementing this statutory authority. At

December 31, 2000, because the

Insurance Fund was below the 2 percent

secure base amount, there were no

excess balances to allocate.

Note 5 — Financial Assistance to

System Banks and Estimated

Insurance Obligations

The 1987 Act required that the FCA

charter the Farm Credit System

Assistance Board (Assistance Board) and

the FAC (see Note 1) to carry out a

program of financial assistance to the

Farm Credit System. In order to raise

funds to provide this assistance, the FAC

had the authority to issue debt

obligations with a maturity of 15 years.

During 1988 to 1992, the FAC issued

$1.26 billion in bonds. These funds were

used to provide assistance to certain

System banks experiencing financial

difficulty and for other statutory

authorized purposes.

Financial Assistance to 

Certain System Banks

During the period from 1988 to 1992,

assistance was provided to four open

banks through the purchase by the FAC

of $419 million in preferred stock issued

by these institutions. Similar assistance

totaling $374 million was provided to the

Federal Land Bank of Jackson in

Receivership to facilitate its closing and

liquidation. Subject to Assistance Board

approval, these assistance funds were

used by the FAC to purchase preferred

stock issued by an institution experiencing financial difficulty.

Prior to the maturity of the related 15-

year debt obligations, each institution

can redeem its preferred stock, pursuant

to Section 6.26 of the Act, so as to allow

the FAC to pay the principal of the

maturing obligation. While an institution

that issues preferred stock to the FAC is

primarily responsible for providing funds

for payment of the FAC bonds (through

redemption of the preferred stock

purchased with the proceeds of the FAC

bonds), the institution may be prohibited

from redeeming, or may elect not to

redeem, the preferred stock pursuant to

section 6.26 of the Act. If this occurs,

then the FAC must use funds from its

trust fund, to the extent available, to

retire the debt. The FAC Trust Fund (Trust

Fund) represents the funds received

from System institutions’ purchase of

stock in the FAC. The Trust Fund totaled

approximately $115 million and $107

million at December 31, 2000 and 1999,

respectively. If the Trust Fund is not

sufficient to retire the debt, then the

Corporation must purchase preferred

stock from the FAC to provide funds to

retire such debt. If the Corporation does

not have sufficient funds, the U.S.

Treasury must retire the debt. If this

should occur, the Corporation is required

to repay the U.S. Treasury as funds

become available from the payment of

premiums. At December 31, 2000, the

only preferred stock held by the FAC was
29

associated with the assistance provided

to the Federal Land Bank of Jackson.

On May 20, 1988, the FCA placed the

Federal Land Bank of Jackson and the

Federal Land Bank Association of

Jackson in receivership (collectively the

FLBJR) and appointed a receiver to

liquidate their assets. As of April 27,

1990, the FCA, the Receiver of the

FLBJR, the FAC, the System banks, the

Assistance Board, and the Corporation

entered into an agreement which called

for the FAC to issue 15-year U.S.

Treasury-guaranteed bonds to purchase

preferred stock in the FLBJR. Upon the

maturity in 2005 of the FAC bonds used

to purchase preferred stock in the FLBJR,

the Corporation will provide funds to

repay the principal of these debt

obligations, to the extent that the Trust

Fund is not sufficient for such purpose. In

January 1995, the FLBJR was terminated

by the FCA and the receiver was

discharged after transferring the remaining receivership assets to the FAC. 

Estimated Insurance Obligation

The Corporation estimated the present

value of its liability to provide funds for

payment of the $374 million non-callable

15-year maturing debt to be approximately

$170 million and $159 million at

December 31, 2000 and 1999, respectively. This liability is reflected in the

accompanying statements of financial

condition. The present value of this

obligation is based on a discount rate of

7 percent to maturity, which was

established at the time this liability was

originally recorded. In accordance with

SFAS No. 107, the fair value of this

liability has been estimated by

management using discount rates based

upon U.S. Treasury securities of similar

durations (5.1 percent for 2000 and 6.6

percent for 1999). The fair value was

approximately $184 million and $163

million as of December 31, 2000 and

1999, respectively. Provisions for changes

in the Corporation’s liability are reflected

in the statements of income and

expenses in the amount of $11.1 million

and $10.4 million for the years ended

December 31, 2000 and 1999,

respectively.

The Corporation cannot predict the

effects of future events upon System

operations and upon the amount of the

Trust Fund that will ultimately be available

to reduce the Corporation’s liability for

FLBJR-related FAC bonds. The

Corporation will annually reassess the

likelihood of earlier use of the Trust Fund,

changes in Trust Fund earnings, and other

assumptions underlying its estimate of

the liability for FLBJR-related FAC bonds.
30

Notes to Financial Statements

Other Financial Assistance Provided to

System Institutions by the FAC

The Farm Credit Banks and Associations

Safety and Soundness Act of 1992 

(1992 Act) expanded the Corporation’s

responsibility to insure defaults by

System institutions on payments related

to other assistance funded by FAC

bonds. These FAC bonds, aggregating

$454 million, were issued to pay System

Capital Preservation Agreement accruals,

to retire eligible borrower stock of

certain liquidating System institutions,

and to pay operating expenses of the

Assistance Board. 

Previously, the Corporation had only

been required: (1) to satisfy defaults on

the repayment of Treasury-paid interest;

and (2) to purchase the preferred stock

of an assisted institution when the

institution did not retire the stock at the

maturity of the FAC bonds issued to

purchase it. The 1992 Act made the

Corporation responsible for defaults by

System institutions on obligations related

to the remaining $454 million of FAC

bonds and related interest if such

amounts cannot be recovered from

defaulting institutions by the FAC or the

Treasury, as the case may be, within 

12 months.

The 1992 Act also expanded the potential uses of the Trust Fund to satisfy

System institution defaults on the

principal and interest of other FAC

obligations and required System banks

to make annual annuity payments to the

FAC to provide funds for the retirement

of the Capital Preservation Agreementrelated FAC bonds aggregating $417

million and Treasury-paid interest at

maturity. The Corporation is also required

to satisfy defaults on the annual

payments to the FAC to permit the

repayment of Treasury-paid interest.

During 1992 through 2000, all System

banks made their annual annuity

payments as scheduled. The Corporation

is not aware of any events or

circumstances which will prevent

System banks from meeting their FAC

obligations.

The Corporation actively monitors the

creditworthiness and financial position of

the insured System banks. 

Other than obligations that have

occurred as a result of resolving the

FLBJR, as described above, management is not aware of any events or

circumstances at this time which would

require a liability for estimated insurance

obligations to be recorded.
31

Early Redemption of Certain FAC Bonds

In November 1998, April 1999, and

September 2000, System banks provided

the necessary funds to allow the FAC to

call and retire early $486 million of the

$1.26 billion in FAC bonds issued during

1988 to 1992 (see paragraph 1, Note 5).

Repayment of the remaining FAC bonds

in accordance with the Act is being

provided for by System banks and the

Insurance Corporation. 

Note 6 — Operating Lease

On November 20, 1997, the Corporation

executed a new six-year lease with the

Farm Credit System Building Association

for office space. The terms of the lease

provide for an annual minimum base rent

for office space for the remaining term of

$92,252 for 2001, $95,020 for 2002 and

$98,134 for 2003. The Corporation

recorded lease expense (including operating cost assessments) of $95,357 and

$87,854 for 2000 and 1999, respectively.

Note 7 — Related Parties

The Corporation purchases services from

the FCA under an Inter-Agency

Agreement. These include examination

and administrative support services. The

Corporation had payables due to the FCA

of $58,086 at December 31, 2000, and

$90,526 at December 31, 1999. The

Corporation purchased services for 2000

which totaled $220,595 compared with

$177,625 for 1999. 

The Corporation provided financial

modeling assistance to the FCA under a

related Inter-Agency Agreement,

recognizing revenue in 2000 of $13,430

and 1999 of $42,439. At December 31,

2000, and 1999, the Corporation had a

receivable from the FCA for $7,709 and

$3,653, respectively.
32

Notes to Financial Statements

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Premiums

$ 65,000

$ 72,000

$ 77,463

$ 73,902

$ 74,100

$ 76,526

$ 79,394

$ 85,736

$ 71,242

$ 19,972

$ 45,496

$ 1,040

Investment

$ 16,041

$ 25,705

$ 31,483

$ 37,198

$ 41,277

$ 46,389

$ 54,688

$ 61,471

$ 71,088

$ 79,545

$ 81,719

$ 92,776

Provision for

Insurance

Obligations

—

$ 140,000

$ 15,555

$ 12,062

$ 8,890

$ 8,509

$ 9,105

$ 9,743

$ 10,424

$ 11,154

Administrative

and Operating

Expenses

$ 118

$ 243

$ 953

$ 1,200

$ 1,278

$ 1,482

$ 1,379

$ 1,469

$ 1,511

$ 1,525

$ 1,631

$ 1,797

Changes in 

Insurance

Fund

$ 80,923

$ 92,438

$ 97,838

$ 153,543

$ 112,543

$ 147,032

$ 137,229

$ 131,714

$ 88,249

$ 115,203

$ 80,878

Income and Expenses

Farm Credit System Insurance Corporation By Year

($ in thousands)

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.

($ 42,538)

($ 39,444)1

($ 14,329)2

INCOME EXPENSES NET INCOME
33

Corporate Officers

Mary Creedon Connelly Chief Operating Officer

Dennis M. Pittman Director of Risk Management

Alan J. Glenn Chief Financial Officer

Dorothy L. Nichols General Counsel

C. Richard Pfitzinger Asset Assurance Manager

Kelly Mikel Williams Secretary to the Board

Production of the 2000 Annual Report of the Farm Credit System Insurance Corporation

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

References

Copies of Farm Credit System Annual Copies of the Annual Accountability

Reports to Investors and Quarterly and Reports of the Farm Credit 

Annual Information Statements may be Administration (FCA) may be 

obtained from: obtained from:

Federal Farm Credit Banks Office of Congressional and

Funding Corporation Public Affairs

10 Exchange Place Farm Credit Administration

Suite 1401 1501 Farm Credit Drive

Jersey City, NJ 07302 McLean, VA 22102

(201) 200-8000 (703) 883-4056
Farm Credit System Insurance Corporation

1501 Farm Credit Drive

McLean, VA 22102

(703) 883-4380

www.fcsic.gov