Farm Credit System Insurance Corporation 

2005 Annual Report 

Farm Credit System Insurance Corporation 

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. 
Farm Credit System Insurance Corporation 

Contents
 

2 

6 

7 

8 

16 

21 

22 

23 

26 

28 

31 

37 

38 

39 

Board of Directors 

2005 Highlights 

Selected Financial Statistics 

The Farm Credit System 

Insurance Fund Management 

Risk Management 

Financial Assistance and Receivership 

Strategic Goals, Performance Measures 

and the President’s Management Agenda 

Reports of Independent Public Auditors 

Financial Statements 

Notes to the Financial Statements 

Income and Expenses 

Corporate Staff 

References 
Protecting Investors in Agriculture and Rural America 
April 17, 2006 

Gentlemen: 

In accordance with the provisions of section 5.64(a) of the Farm Credit Act 

of 1971, as amended, the Farm Credit System Insurance Corporation is 

pleased to submit its annual report for calendar year 2005. 

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

corporation established to ensure the timely payment of principal and interest to investors in Farm Credit System debt securities. The balance in the 

Insurance Fund at December 31, 2005, was $2.06 billion. The Corporation 

collected $49 million in insurance premiums from Farm Credit System banks 

for 2005, and expects to incur $2.6 million in operating costs in 2006. 

Sincerely, 

Douglas L. “Doug” Flory 

Chairman 

The President of the United States Senate 

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

Board of Directors
 

The Farm Credit System Insurance Corporation . . .
 

. . . is managed by a three-member board of 

directors composed of the members of the 

Farm Credit Administration (FCA) Board. 

The FCA is the independent Federal agency 

responsible for the regulation and 

examination of the Farm Credit System, a 

nationwide financial cooperative that lends 

to agriculture and rural America. The 

Chairman of the Corporation’s Board of 

Directors must be an FCA Board Member 

other than the Chairman of the FCA Board. 

2 
Farm Credit System Insurance Corporation 

Douglas L. “Doug” Flory
 

Douglas L. “Doug” Flory, Chairman of FCSIC, was 

appointed to the three-member FCA Board by President 

Bush on August 1, 2002, for a term that expires October 

13, 2006. He was elected Chairman on December 4, 

2002. 

Mr. Flory brings to his position extensive experience in 

production agriculture, agribusiness, and both commercial 

bank and Farm Credit lending. His farming operation 

includes being half-owner of S & F, L.L.C., a general 

livestock, grain, poultry, and hay farm in Augusta 

County, Virginia. Prior to his appointment to the FCA 

Board, Mr. Flory was a member of the board of directors 

of AgFirst Farm Credit Bank in Columbia, South Carolina, and a director of Farm Credit of the Virginias, ACA. 

Mr. Flory was executive vice president of Dominion Bank 

from 1971 to 1988, and president, CEO, and director of 

Dominion Farm Loan Corporation. He chaired the 

Virginia Bankers Association Committee on Agriculture 

and was a member of the Executive Committee of the 

American Bankers Association’s agricultural division. 

From 1989 to 1992, he was executive vice president, chief 

operating officer, and a member of the board of WLR 

Foods, Inc., a publicly traded poultry food company. 

Mr. Flory also served on several governing boards for 

the State of Virginia, including the Virginia Agricultural 

Council, a state advisory board, and the Virginia Agriculture Credit Committee, which he chaired. He also 

served as chairman of the Virginia Agricultural Development Authority, which uses “aggie bonds” to finance 

Virginia farmers. 

Throughout his career, Mr. Flory has been an active 

participant in agricultural industry associations. He was 

president of the Virginia Turkey Association and president and director of the Rockingham County Fair 

Association. He also served as a director of the Virginia 

Poultry Federation, the Virginia Agribusiness Council, 

the Virginia Beef Cattle Association, and the Virginia 

Sheep Association. 

A native of Augusta County, Virginia, Mr. Flory attended 

Bridgewater College in Bridgewater, Virginia, and earned 

a bachelor’s degree from Virginia Polytechnic Institute 

and State University in Blacksburg. He did graduate 

work at James Madison University and is a graduate of 

the Maryland-Virginia School of Bank Management at 

the University of Virginia. He and his wife, Avery, are 

the parents of two daughters and a son. 

3 
Farm Credit System Insurance Corporation 

Nancy C. Pellett
 

Nancy C. Pellett was appointed to the FCA and FCSIC 

Boards by President George W. Bush on November 14, 

2002, for a term that expires May 21, 2008. Ms. Pellett 

brings extensive experience in production agriculture and 

agribusiness to her position on the Board. For 23 years 

she was vice president and secretary of Prairie Hills, Ltd., 

a feedlot, cow-calf, and row crop operation in Atlantic, 

Iowa. She was president and treasurer of Fredrechsen 

Farms, Ltd., a family-owned swine and row crop operation in Walnut, Iowa, for more than 20 years. 

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

held state and national leadership positions in a range of 

cattlemen’s industry organizations. As a member of the 

National Cattlemen’s Beef Association, she served as the 

Chairman of the Check-Off Division, Chairman of the 

Consumer Marketing Group, and most recently as a 

member of the Cattlemen’s Beef Board. She also served 

as President of the Iowa Beef Industry Council. Ms. 

Pellett was a partner in Premium Quality Foods, Inc., 

based in Red Oak, Iowa, which markets branded fresh 

beef and precooked beef entrees. She served as president 

and director of consumer marketing for the company. 

Ms. Pellett served a six-year term as a member of the 

Board of Regents for the State of Iowa, which oversees 

the three state universities, as well as the University of 

Iowa Hospital and its affiliated clinics. She was also 

selected as a member of the Governor’s Student Aid 

Commission. She is currently on the Iowa State University (ISU) Foundation Board of Governors and has been 

a member of the Advisory Committees for the College of 

Agriculture and the College of Family and Consumer 

Sciences. 

Ms. Pellett’s dedication to the future of agriculture is 

reflected in her personal involvement with 4-H and 

Future Farmers of America at the local and state levels. 

She has served on the Iowa 4-H Foundation Board and 

is a founding member of the 4-H/FFA “Sale of Champions” Committee for the Iowa State Fair. 

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

ISU at Ames. She is also past President of the ISU 

Alumni Association, and was awarded the Alumni 

Medal in 1987. The Pellett family was honored as 

“Family of the Year” by the University in 1997. The 

family also received the “Friends of Youth Award” in 

2000 from the Knights of AkSarBen, a foundation 

supporting education, youth programs, and rural development in Nebraska and western Iowa. She and her 

husband have four children. Together with a son and 

daughter-in-law, Ms. Pellet and her husband operate a 

fifth generation family farm in Atlantic, Iowa. 

4 
Farm Credit System Insurance Corporation 

Dallas P. Tonsager
 

Dallas P. Tonsager was appointed to the FCA and 

FCSIC Boards by President Bush on December 1, 2004, 

for a term that expires May 21, 2010. Mr. Tonsager 

brings extensive experience as an agricultural leader and 

producer to his position on the FCSIC Board, as well as 

a commitment to promoting and implementing innovative development strategies to benefit rural residents and 

their communities. 

In partnership with his brother, he owns Plainview Farm 

in Oldham, South Dakota, a family farming operation 

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

Tonsager served as Executive Director of the South 

Dakota Value-Added Agriculture Development Center in 

Huron from 2002 until his appointment to the FCA 

Board, where 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, Mr. Tonsager was selected by President Clinton 

to serve as the South Dakota State Director for Rural 

Development for the U.S. Department of Agriculture. 

The Federal agency promotes rural economic development, and helps individuals, communities, and businesses obtain financial and technical assistance for a 

variety of needs. 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 the 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. 

Raised on a dairy farm in South Dakota, Mr. Tonsager is 

a graduate of South Dakota State University where he 

earned a B.S. in agriculture in 1976. 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 the Lutheran Social 

Services of South Dakota. He and his wife, Sharon, 

have two sons and a daughter-in-law. 

5 
Farm Credit System Insurance Corporation 

2005 Highlights 

Significant events in 2005 featured substantial growth in insured debt outstanding and the payoff of the remaining 

Financial Assistance Corporation (FAC) bond. (For additional information, please see Note 5 to the Financial Statements.) 

Insured debt outstanding1 increased 14.3 percent during 2005 to $114.2 billion, the highest annual rate of growth in 24 

years. This was only the second year—the other being 2002 when insured debt outstanding grew 10.5 percent—that 

the annual rate of growth reached double digits during that period. 

On June 10, 2005, the Farm Credit System Insurance Corporation (the Corporation) paid $231 million towards the 

retirement of the final FAC bond, representing the Corporation’s remaining share of its outstanding obligation. The 

Agricultural Credit Act of 1987 required the Corporation to provide any funds necessary to retire this publicly held 

bond, a $325 million issue, which matured in June 2005. 

Mary Creedon Connelly, the Corporation’s Chief Operating Officer since 1991, retired after 33 years of Federal Government service. During her tenure, the Corporation developed strong risk management capabilities, implemented a 

process for establishing loss reserves, developed a model for evaluating the adequacy of the Insurance Fund, and 

obtained increased premium flexibility. In addition, the Farm Credit Insurance Fund crossed the $2 billion mark for 

the first time. Ms. Connelly set up an Investment Committee to actively invest the assets in the Insurance Fund. 

Dorothy Nichols, previously the Corporation’s General Counsel, succeeded Ms. Connelly as the Chief Operating 

Officer effective February 19, 2006. Ms. Nichols has been with the Corporation since 1995 and has more than 20 

years of bank regulatory and insurance experience. 

Growth in Farm Credit System Debt 1980–2005
 

(percent) 

19 20 

15 

10 

5 

0 

-5 

-10 

-15 

13 

2 

0 

-4 

-10 

-12 

3 

-3 

0 1 1 

8 

4 4 

9 

5 5 

7 

10.5 

6 5 

14 

-1 

-1 -2 

1980 

1985 

1990 

1995 

2000 

2005 

1. 	 Systemwide bonds, medium-term notes, and Systemwide notes at par that have been issued in accordance with the Farm Credit Act of 1971 and 

regulations and are outstanding as of the report date and includes the amount of accrued interest payable. 

6 
Farm Credit System Insurance Corporation 

Selected Financial Statistics
 

($ in millions) 2005 2004 2003 

BALANCE SHEET: 

Total Assets $2,061.8 $ 2,164.0 $2,033.2 

Total Liabilities 0.4 224.5 210.2 

Insurance Fund Balance

 Allocated Insurance Reserve Accounts 39.9 39.9 39.9

 Unallocated Portion of the Insurance Fund 2,021.5 1,899.3 1,783.1 

OPERATIONS: 

Revenues 130.6 133.1 196.5 

Administrative Operating Expenses 2.2 2.3 2.2 

Insurance Obligation Expense 6.2 14.7 13.7 

Net Income 122.2 116.1 180.6 

Total Assets
 

($ in millions) 

$2,061.8 

$2,164.0 

$2,033.2 

2003 2004 2005 

7 
Farm Credit System Insurance Corporation 

The Farm Credit System FCS

Structure and Funding 

The System is owned by the rural customers it serves 

including farmers, ranchers, and other agricultural 

producers. Ninety-six Farm Credit System associations 

lend directly to these borrowers/owners and provide a 

consistent source of agricultural and rural credit throughout the United States and the Commonwealth of Puerto 

Rico. Five Farm Credit System banks provide funding to 

the 96 associations within their chartered territories. The 

banks receive their funding through the issuance of 

Federal Farm Credit Banks Consolidated 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. 

Investor Protection 

The Corporation’s primary purpose, as defined by the 

Farm Credit Act of 1971, as amended (the Act), is to 

insure 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. 

Regulatory Oversight 

The Farm Credit Administration (FCA) is the safety and 

soundness regulator responsible for the examination, 

supervision, and regulation of each Farm Credit System 

institution. The FCA is an independent agency in the 

executive branch of the United States Government. The 

FCA derives its broad authorities from the Act; these 

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 Corporation, the FCA, and the 

System. 

Selected financial statistics for the Farm Credit System 

on a combined basis are presented on the following 

page. 

8 
Farm Credit System Insurance Corporation 

Combined Farm Credit System Statistics
 

($ in billions) 2005 2004 2003
 

9 

Insured Debt Outstanding $114.2 $100.0 $94.6 

Production Agriculture: 

Real Estate Mortgage Loans 52.7 48.7 46.5 

Production and Intermediate-term Loans 23.9 21.8 21.1 

Agribusiness Loans1 14.7 12.1 12.1 

Communication Loans 2.6 2.4 2.6 

Energy and Water/Waste Disposal Loans 5.5 4.8 3.9 

Rural Residential Real Estate Loans 3.0 2.5 2.3 

International Loans 2.3 2.6 2.8 

Lease Receivables 1.3 1.2 1.3 

Loans to Other Financial Institutions 0.4 0.4 0.3 

Cash and Investments 28.4 24.2 21.3 

Net Income 2.10 2.992 1.83 

Nonperforming Loans as a Percentage of Total Loans 0.56% 0.77% 1.28% 

1. At December 31, 2005, agribusiness loans consisted of loans to cooperatives of $8.8 billion; processing and marketing loans of $4.1 billion; and farmrelated business loans of $1.8 billion. 

2. Includes a one-time reversal of the allowance for loan losses of $1.167 billion, net of a related $95 million deferred tax expense. Excluding this amount, 

net income would have been $1.826 billion for 2004. 
$114.2 

$100.0 

$94.6 

$89.6 

$81.1 

+10.5% 

+5.6% 

+5.7% 

+14.3% 

Farm Credit System Insurance Corporation 

Growth in Insured Debt Outstanding Averaged 8.3% Over the Past 5 Years
 

($ in billions) 

120 

110 

100 

90 

+5.6% 

80 


70 


2001 2002 2003 2004 2005 


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 just over 14 

percent to $114.2 billion. For the five-year period, from 

2001 through 2005, insured debt outstanding grew at an 

average annual rate of approximately 8.3 percent. 

Other obligations included the remaining FAC bonds 

and eligible borrower stock. From 1988 to 1990, the 

FAC issued $1.261 billion in debt. The proceeds from 

this debt were used to provide financial assistance to the 

Farm Credit System, among other things. The Corporation by law must use the Insurance Fund to satisfy any 

FAC-issued bond to the extent monies in the FAC Trust 

Fund were insufficient. On June 10, 2005, the Corporation provided $231 million, representing the Corpor10 
$811 

$353 $348 

$17 

2002 2003 2004 2005 

FAC Bonds Eligible Borrower Stock 

Farm Credit System Insurance Corporation 

Other Obligations
 

($ in millions) 

1000 

$819 

800 

600 

400 

200 

0 

2001 

ation’s remaining share of its outstanding obligations to 

repay the $325 million issue of FAC bonds outstanding. 

The remaining $94 million was paid by the FAC Trust 

Fund and the FAC Assistance Fund, which provided $80 

million and $14 million, respectively. (See Note 5 to the 

financial statements.) 

The Corporation is also required by statute to ensure the 

retirement of eligible System borrower stock at par 

value. This stock, also known as protected borrower 

stock, was outstanding prior to October 6, 1988. At 

yearend, eligible borrower stock outstanding at System 

institutions totaled $17 million, down from $23 million 

at yearend 2004. 

11 
Farm Credit System Insurance Corporation 

Farm Credit System Capital 

At yearend 2005, there was $114.2 billion in insured debt 

outstanding, and the Corporation had $2.06 billion in 

assets, and an unallocated portion of the Insurance Fund 

balance of $2.02 billion. Over the past five years, the 

Farm Credit System associations have been building 

capital through net income earned and retained at the 

associations. The increase in capital at the associations 

reduces the credit exposure the insured banks have on 

loans to each of their affiliated associations. 

Since 2001 combined association capital has increased 51 

percent from $10.1 billion to $15.2 billion at yearend 

2005. 

Association Capital
 

($ in billions) 

18 

15 

12 

9 

6 

3 

0 

$10.1 

$10.9 

$12.1 

$15.2 

$14.2 

2001 2002 2003 2004 2005 

12 
Farm Credit System Insurance Corporation 

Since 2001, combined bank capital plus the Insurance 

Fund has increased 23 percent from $7.9 billion to $9.7 

billion at yearend 2005. 

The primary source of funds to repay Systemwide Debt 

Securities is the System’s borrowers, with each borrower 

required to have certain minimum levels of net worth 

and, in most cases, collateral posted in connection with 

loans made to the borrower. These borrowers make 

payments on their loans to the lending bank or association. Lending associations in turn make payments on 

their wholesale loans from their affiliated bank. Both 

the banks, which ultimately repay Systemwide Debt 

Securities, and the associations have substantial amounts 

of capital as protection and sources of support for the 

repayment of the outstanding debt. If a bank participating in an issue of Systemwide Debt Securities were 

unable to repay its portion of that security, the Insurance 

Fund would be required to 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 means the financial resources 

of the other banks would be used to repay the defaulting bank’s portion of the debt issuance. 

Bank Capital Plus the Insurance Fund
 

($ in billions) 

15 

12 

9 

6 

3 

0 

$1.5 

$6.4 

$1.6 

$6.6 

$1.8 

$7.2 

$1.9 $2.0 

$7.4 $7.7

2001 2002 2003 2004 2005 

Bank Capital Insurance Fund 

13 
Farm Credit System Insurance Corporation 

As a percentage of outstanding debt, bank capital plus 

the Insurance Fund decreased from 9.8 percent in 2001 

to 8.5 percent in 2005. This decline is due to the rate of 

growth in outstanding debt outpacing growth in bank 

capital and the Insurance Fund. 

Additional Elements of Strength 

The System has additional risk management tools that 

protect investors. The banks have entered into the 

Contractual Interbank Performance Agreement (CIPA). 

This agreement measures the financial condition and 

performance of each System bank using various ratios 

considering capital, asset quality, earnings, interest-rate 

risk, and liquidity. CIPA contains economic incentives 

whereby financial penalties are applied if the performance standard is not met. 

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, their participation in future debt 

issues could be limited or curtailed. The criteria used 

under the MAA are the CIPA scores and two capital 

ratios. 

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

12% 

10% 

8% 

6% 

9.8% 

9.2% 

9.5% 9.4% 

8.5% 

2001 2002 2003 2004 2005 


14 
Farm Credit System Insurance Corporation 

The System also has in place a Common Minimum 

Liquidity Standard. The standard requires each bank to 

maintain a minimum of 90 days of liquidity on a continuous basis, assuming no access to the capital markets. 

All banks have exceeded this liquidity standard since 

June 30, 2003. 

These measures, in conjunction with bank capital and 

the Insurance Fund, provide protection for investors who 

purchase Systemwide bonds and notes. 

15 
Farm Credit System Insurance Corporation 

Insurance Fund Management
 

The Insurance Fund and the Secure Base 

Amount 

In 2005, the total Insurance Fund grew 6.3 percent to 

$2.06 billion. Approximately two thirds of this growth is 

attributable to investment income with the remainder 

from premiums. Total assets declined 4.7 percent, 

dropping from $2.16 billion at yearend 2004 to $2.06 

billion at December 31, 2005. This decline was due to 

the use of $231 million that had previously been set 

aside to retire a portion of the maturing FAC obligation. 

(See Note 5 to the financial statements.) 

The Insurance Fund represents the Corporation’s equity, 

the difference between total assets and total liabilities, 

including insurance obligations. Premiums are due until 

the assets in the Insurance Fund for which no specific 

use has been identified or designated (unallocated 

portion of the Insurance Fund) reach the “secure base 

amount“ (SBA). The secure base amount is defined in 

the Farm Credit Act as 2 percent of the aggregate 

outstanding insured obligations (adjusted to reflect the 

System’s reduced risk on loans guaranteed by the 

Federal or state governments) or such other percentage 

of the aggregate insured obligations as the Insurance 

Corporation in its sole discretion determines to be 

actuarially sound. 

The unallocated portion of the Insurance Fund continued 

to trend downward below the SBA in 2005 due to higher 

than anticipated growth in insured debt. During 2005, 

insured debt grew 14.3 percent, surpassing the forecasted growth range of 5 to 8 percent and doubling the 

preceding five-year average growth rate of approximately 7 percent. The unallocated portion of the Insurance Fund finished 2005 below the 2 percent SBA at 1.83 

percent or $191 million below the SBA. Including the 

Allocated Insurance Reserve Accounts (AIRAs) raises the 

level to 1.86 percent or $151 million below the SBA. 

Allocated Insurance Reserve Accounts 

The unallocated portion of the Insurance Fund finished 

the year below the SBA; therefore, no excess funds were 

Insurance Fund Relative to 2 Percent Secure Base Amount By Quarter
 

(percent) 

2.05 

2.00 

1.95 

1.90 

1.85 

1.80 

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 

Unallocated Portion of the Insurance Fund Unallocated and Allocated 

16 
Farm Credit System Insurance Corporation 

available for transfer to the AIRA accounts at December 

31, 2005. By statute, at any yearend, if the unallocated 

portion of the Insurance Fund is above the SBA, the 

Corporation must recalculate the SBA using an average 

daily debt balance method. This amount is then subtracted from the yearend unallocated portion of the 

Insurance Fund balance, less projected insurance and 

operating expenses for the coming year, to determine the 

excess amount for transfer to the AIRAs. 

In 2003, for the first time, the Corporation closed the 

year above the SBA. As a result, the Corporation was 

required to transfer $39.9 million to the AIRAs. By 

statute, the Corporation is required to use AIRAs first 

for insurance claim payments. Separate AIRA accounts 

have been established for each bank and a special 

account for the holders of FAC stock. The first 10 

percent of calculated excess funds are deposited to the 

FAC stockholders’ AIRA. The remaining 90 percent is 

prorated into the banks’ AIRAs. The earliest possible 

payout date is April 2006; however, any AIRA payments 

are 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, and 

5.	 Risks in the financial environment. 

Although the Corporation insures repayment to investors 

who purchase System debt, by law it is limited to 

collecting premiums on the loans made by System banks 

and associations. Allowable premium rates vary by type 

of loan. (See Note 4 to the Corporation’s financial 

statements.) 

Insurance Premium Rates
 

Type of Loan Premium Range (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 

17 
$87 $81 $91 $94 $93

$47 $49

$26 

$105 

Farm Credit System Insurance Corporation 

Corporation Revenues
 

($ in millions) 

120 

100 

80 

60 

40 

20 

$0 

2001 2002 2003 2004 2005 

Interest Income Premiums 

In September 2004, the Board, in order to allow System 

institutions to budget for the subsequent year’s premium, notified the System that the 2005 premium 

assessment rate for accrual loans would likely be in the 

3 to 6 basis points range as long as growth in insured 

debt for the year was at or below 7 percent. During the 

first six months of 2005, the Board set the premium 

assessment rate at 4 basis points and increased the 

assessment rate to 6 basis points, the high end of the 

range, for the second half of the year. The result was a 

blended premium assessment rate of 5 basis points on 

accrual loans for 2005. The rates for other loan types, 

25 basis points for nonaccrual loans and 0 basis points 

for Federal Government and state government-guaranteed loans, remained unchanged throughout the year. 

Revenues and Expenses 

Net income in 2005 increased 5.2 percent to $122 million, 

from $116 million in 2004. The increase in net income 

resulted from lower insurance obligation expense, 

partially offset by lower investment earnings. 

Interest income dropped 6.9 percent in 2005, down from 

$87 million in 2004 to $81 million, primarily due to the 

loss in interest income on the $231 million used to pay 

FCSIC’s portion of the FAC obligation in June 2005. 

Insurance expenses dropped to $6.2 million from $14.7 

million in 2004. Again, the decrease was due to the 

payoff of the remaining FAC obligation and the related 

reduction in the annual provision for the insurance 

obligation during the second half of 2005. (See Note 5 

to the financial statements.) 

18 

0 
Farm Credit System Insurance Corporation 

The Corporation’s operating costs as a percentage of 

total assets represented 0.11 basis points for 2005. Fixed 

costs for staff, travel, rent, and miscellaneous expenses 

were $1.7 million of the $2.2 million total for the year. 

The remaining expenses of $0.5 million were for contract 

services. 

Investments 

Investments decreased 4.8 percent during the year from 

$2.1 billion at December 31, 2004, to $2.0 billion at 

yearend 2005 due to the use of $231 million from the 

investment portfolio to fully repay the Corporation’s 

remaining share of the FAC obligation in June 2005. 

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 Act and the 

Corporation’s Investment Policy. 

The average portfolio yield was 3.96 percent, down from 

4.22 percent the prior year. However, the yield on the 

Insurance Fund continued to outperform the benchmark 

index the Corporation uses to measure performance. 

This index is composed of private sector mutual funds 

with holdings of similar type and duration to the 

Corporation’s portfolio. The average return of the 

benchmark group was 2.22 percent for 2005. 

Growth in Investment Portfolio
 

($ in billions) 

3.0 

2.0 

1.0 

0.0 

$1.7 $1.8 $1.9 

$2.1 $2.0 

2001 2002 2003 2004 2005 

19 
31% 

$622 

Farm Credit System Insurance Corporation 

The portfolio is composed of a liquidity and investment 

pool. The liquidity pool maintains a minimum of 20 

percent of the portfolio in short-term securities, while 

the balance is invested in longer-term maturities of up to 

10 years. The weighted average portfolio maturity at 

yearend was 2.09 years. The balances and maturities of 

the liquidity and investment pools at December 31, 2005, 

are illustrated in the following chart. 

Investment Portfolio Average Yield of 3.96% — $1.99 Billion at December 31, 2005
 

($ in millions) 5 to 10 

Years 

(Max. 25%) 3 to 4 

Years 5% 

$106 

10% 

$197 Less than 1 Year 33% 

$649 

2 to 3
 

Years
 

21% 

$415 

1 to 2 Years 

Investment Pool Liquidity Pool (Min. 20%) 

20 
Farm Credit System Insurance Corporation 

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 monitor key ratios and 

financial trends; weaker System institutions undergo 

special examination procedures as needed. 

The Corporation monitors trends in the System’s structure, financial performance, and condition through 

continuous 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 through: 

•	 Review of corporate actions approved by FCA 

for System institutions, 

•	 Participation as a nonvoting member on FCA’s 

Regulatory Enforcement Committee, 

•	 Monitoring legislative, judicial, regulatory, and 

economic trends that could affect the agricultural 

or financial services industries, and 

•	 Using analytical models. 

The Corporation continued to work with an insurance 

risk tool initially developed in 2004 by FCSIC’s contractor, Mercer Oliver Wyman (Mercer). From their work, 

Mercer concluded that the most significant factors 

affecting the Corporation’s insurance risk exposure were: 

1.	 System balance sheet growth, 

2.	 The financial condition and performance of the 

System’s insured banks and associations, and 

3.	 Capital levels at the five insured System banks. 

During the year, staff met with several groups of System 

officials to share the results of this phase of the effort 

and to obtain industry feedback. 

21 
Farm Credit System Insurance Corporation 

Financial Assistance 

and Receivership 

The Insurance Corporation is authorized to provide 

assistance to System institutions to prevent default, 

restore normal operations, or facilitate a merger or 

consolidation. At present, no assistance agreements are 

outstanding. When considering providing financial 

assistance, the statute requires the Corporation to ensure 

that it’s the “least costly” method for resolving a 

troubled System institution. Financial assistance cannot 

be provided if the cost of liquidation is determined to be 

lower. During the year, the Corporation field tested an 

update to its special examination procedures and Cost 

Test model at a healthy association to ensure its readiness for this responsibility. 

There are no active receiverships or conservatorships 

currently in the System. When appointed by the FCA, 

the Corporation has the statutory responsibility to serve 

as receiver or conservator for System institutions. To 

fulfill this role and continue to operate with a small core 

staff, the Corporation uses contractors on an as-needed 

basis. These contractors provide knowledgeable and 

readily available resources, while allowing the Corporation to contain costs during periods of limited or no 

activity. Corporation staff also maintains ongoing 

contact with the receivership staff of the Federal Deposit 

Insurance Corporation and the National Credit Union 

Administration to exchange information and stay abreast 

of best practices in receivership management. 

Early in 2005, the Corporation became involved in the 

dissolution of the Rural Telephone Bank pursuant to a 

request for advisory services from the United States 

Department of Agriculture’s Under Secretary of Agriculture for Rural Development. An interagency agreement 

to provide technical assistance to the Rural Telephone 

Bank as it considered dissolution strategies was executed. The Corporation assisted in developing the 

dissolution plan that addressed key issues, a timeline, 

and options for the dissolution. Corporation staff also 

helped prepare the presentation that bank staff used to 

brief their board of directors as they considered approving the transaction. In addition, FCSIC provided examples of key documents required for loan transfers and 

capital stock retirement. The Corporation received 

$19,000 in reimbursement for its consulting assistance. 

Regulations and Policy 

In December, we finalized a regulation that will provide 

a framework for exercising our statutory authority to 

regulate the payment of golden parachutes at troubled 

Farm Credit System institutions. The regulation places 

limits on certain golden parachute payments to employees and agents who terminate their relationship with a 

troubled institution. It includes several exceptions to the 

limitations, including: payments under the Employee 

Retirement Income Security Act qualified plans, 

nonqualified “bona fide” deferred or supplemental 

compensation plans, payments made by reason of death 

or disability, payments to a “white knight,” payments 

required under state and Federal law, and payments 

made upon a change in control. The regulation also 

covers indemnity payments. 

The Farm Credit Administration issued a regulation that 

amended the existing receivership and conservatorship 

regulations. These regulations provide FCSIC, which 

acts as receiver or conservator for Farm Credit System 

institutions, with special powers to reclaim assets of a 

failed institution. The new rule indicates that the 

Corporation, when acting as receiver or conservator, will 

not seek to reclaim, recover or recharacterize certain 

assets transferred as long as the transfer meets the 

necessary conditions for a “true sale” under generally 

accepted accounting principles. 

22 
Farm Credit System Insurance Corporation 

Strategic Goals, Performance Measures 

and the President’s Management Agenda 

Strategic Goals and Performance Measures 

Three broad goals with performance measures are used 

to evaluate the effectiveness of the Corporation’s operations. 

1.	 Manage the Insurance Fund to maintain the 2 

percent secure base amount to protect investors. 

The Corporation assesses the effectiveness of its performance by: 

•	 Reviewing premium rates semiannually and 

making necessary adjustments, and 

•	 Comparing the investment portfolio’s average 

yield to peer investment funds with similar 

quality and maturity. 

In 2005, the total Insurance Fund trended below the 2 

percent secure base amount. Throughout the year, the 

Insurance Fund ranged from 2.024 to 1.863, and finished 

the year at 1.863 due to higher than anticipated growth 

in insured debt. Premium rates were reviewed three 

times and adjusted from 4 to 6 basis points (an annual 

rate of 5 basis points), which represented the high end 

of the range communicated to the System for budgeting 

purposes. The Corporation’s investment yield of 3.96 

percent outperformed the index of similarly invested 

private sector funds used to benchmark investment 

performance, which returned 2.22 percent. 

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 Corporation proactively 

screens the financials of all System institutions to detect 

risk and identify institutions that may require special 

examinations. As an additional tool to evaluate risks, 

the Corporation continued development 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. 

The standards used to measure the effectiveness of 

receivership operations are: 

•	 Completing 90 percent of initial claims processed 

within a specified period, which will depend on 

the size and complexity of the failed institution, 

•	 Keeping operating costs comparable to other 

insurers, as a percentage of total assets, and 

•	 Keeping asset recovery values comparable to 

other insurers, as a percentage of asset values. 

No receiverships or conservatorships existed in the Farm 

Credit System in 2005. Corporation personnel are trained 

periodically to maintain readiness, ensuring proficiency 

in the performance of receivership responsibilities. The 

next receivership readiness exercise is scheduled for 

2007. 

The President’s Management Agenda 

The Corporation, one of 35 agencies designated a 

significant Government entity for reporting purposes, is 

required to submit data for the Financial Report of the 

United States using the Governmentwide Financial 

Report System and the Federal Agencies’ Centralized 

Trial-Balance System. 

23 
 

Farm Credit System Insurance Corporation 

In 2001, President Bush established a policy for improving the management and performance of the Federal 

Government. “The President’s Management Agenda” 

focuses on five governmentwide goals to encourage 

improvements in specified areas of operations. The 

Corporation’s accomplishments in those five areas are: 

1. 	 Strategic Management of Human Capital 

• 	 Continued to operate with a small core staff, 

contracting for specialized expertise when 

necessary, keeping operating costs low, while 

offering flexibility to leverage resources. 

• 	 Focused on staff cross-training to ensure continuity of operations by empowering multiple staff 

to be capable of fulfilling a variety of critical 

roles in day-to-day operations. 

• 	 Participated in the Federal Human Capital 

Survey satisfying the annual requirement established by the National Defense Authorization 

Act of 2004 and providing agency metrics within 

the human capital accountability system. 

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. 

• 	 Decreased contracting expenses for 2005 by 27 

percent from 2004, while contractor support 

increased. 

3. 	 Improved Financial Performance 

• 	 Managed an investment portfolio with an 

average yield exceeding benchmark. 

• 	 Actual Operating Expenses for 2005 were 12 

percent below Budgeted Operating Expenses. 

4. Expanded Electronic Government 

• 	 Used the Corporation’s Web site as the primary 

vehicle for providing information to our stakeholders, other government entities, and the public. 

• 	 Began sending all communications to the Farm 

Credit System electronically. 

• 	 Increased the participation rate of member institutions responding to the annual FCSIC System 

survey by 224 percent by sending and receiving 

the survey electronically. 

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 versus 

Annual Performance and Strategic plans 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 

independent external auditor. 

• 	 The annual report on the Corporation’s control 

over Reporting and Compliance issued by our 

independent external auditor did not disclose any 

internal control weaknesses or any instances of 

noncompliance. 

• 	 The agreed upon procedures performed by our 

independent external auditor in accordance with 

instructions provided by the U.S. Treasury with 

respect to Federal Intergovernmental Activity and 

Balances for FY 2005 did not disclose any exceptions. 

24 
Farm Credit System Insurance Corporation

25

Reports of Independent Public Auditors
 
Farm Credit System Insurance Corporation 

26 
Farm Credit System Insurance Corporation 

27 
Farm Credit System Insurance Corporation 

Financial Statements
 

FARM CREDIT SYSTEM INSURANCE CORPORATION

Statements of Financial Condition as of December 31, 2005 and 2004 

($ in thousands) 

20052004

ASSETS

Cash and Cash Equivalents $ 273,887 $ 2,279 

Investments in U.S. Treasury Obligations (Note 3) 1,715,586 2,087,702 

Accrued Interest Receivable 22,856 27,505 

Premiums Receivable (Note 4) 49,493 46,520 

Other Receivable - -

TOTAL ASSETS$2,061,822 2,061,8222,061,822 $2,164,006 2,164,0062,164,006

LIABILITIES AND INSURANCE FUND LIABILITIES AND INSURANCE FUND

Farm Credit Liabilities 

Accounts Payable and Accrued Expenses (Note 7) $ 440 $ 371 

Liability for Estimated Insurance Obligations (Note 5) - 224,489 

TOTAL LIABILITIES AL LIABILITIES 440224,860 224,860

Farm Credit Insurance Fund 

Allocated Insurance Reserve Accounts 39,888 39,888 

Unallocated Insurance Fund Balance 2,021,494 1,899,258 

TOTAL INSURANCE FUND AL INSURANCE FUND 2,061,382 2,061,3822,061,382 1,939,146 1,939,1461,939,146

TOTAL LIABILITIES AND INSURANCE FUND AL LIABILITIES AND INSURANCE FUND $2,061,822 2,061,8222,061,822 $2,164,006 2,164,0062,164,006

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

28 
Farm Credit System Insurance Corporation 

FARM CREDIT SYSTEM INSURANCE CORPORATION

Statements of Income and Expenses and Changes in Insurance Fund for the 

Years Ended December 31, 2005 and 2004 

($ in thousands) 

2005 2004 

INCOME

Premiums (Note 4) $ 49,393 $ 46,520 

Interest Income 81,253 86,567 

Other Income 20 -

TOTAL INCOME AL INCOME $ 130,666 $ 133,087 

EXPENSES EXPENSESEXPENSES

Administrative Operating Expenses (Note 7) $ 2,202 $ 2,263 

Provision for Estimated Insurance Obligations (Note 5) 6,228 14,686 

TOTAL EXPENSES AL EXPENSES $8,430$16,949

NET INCOME NET INCOME $122,236 122,236 $116,138 116,138

Farm Credit Insurance Fund - Beginning of Year $ 1,939,146 $ 1,823,008 

Farm Credit Insurance Fund - End of Year $ 2,061,382 $ 1,939,146 

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

29 
Farm Credit System Insurance Corporation 

FARM CREDIT SYSTEM INSURANCE CORPORATION

Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 

($ in thousands) 

20052004

CASH FLOWS FROM OPERATING ACTIVITIES TING ACTIVITIES

Net Income $ 122,236 $ 116,138 

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: 

(Increase) Decrease in Premium Receivable (2,973) 58,559 

Decrease in Accrued Interest Receivable 4,649 1,302 

Net Amortization and Accretion of Investments 17,378 21,443 

Decrease in Other Receivables - 4 

Increase in Accounts Payable Accrued Expenses 69 11 

(Decrease) Increase in Liability for Estimated Insurance Obligations (224,489) 14,686 

Total Net Cash Provided By Operating Activities $ (83,130) $ 212,143 

CASH FLOWS FROM INVESTING ACTIVITIES ASH FLOWS FROM INVESTING ACTIVITIES

Payments for Purchase of U. S. Treasury Obligations $ - $ (496,266) 

Proceeds from Maturity of U.S. Treasury Obligations 354,737 286,216 

Total Net Cash Used in Investing Activities $ 354,737 $ (210,050) 

Net Change in Cash and Cash Equivalents $ 271,607 $ 2,093 

Cash and Cash Equivalents - Beginning of Year $ 2,279 $ 186 

Cash and Cash Equivalents - End of Year $ 273,886 $ 2,279 

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

30 
Farm Credit System Insurance Corporation 

Notes to the Financial Statements 

AS OF DECEMBER 31, 2005, AND DECEMBER 31, 2004 

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, 2005, there were five insured System banks and 96 direct lender associations. 

The Corporation is managed by a board of directors consisting of the same individuals as the Farm Credit Administration (FCA) Board except that the Chairman of the FCA Board may not serve as the Chairman of the Corporation’s 

Board of Directors. 

The Corporation must spend the amounts necessary to: 

1.	 Ensure the timely payment of interest and principal on insured obligations in the event of default by an 

insured System bank; 

2.	 Satisfy, pursuant to section 6.26(d)(3) of the Act, defaults by System banks on obligations related to the 

issuance of U.S. Treasury-guaranteed bonds by the Farm Credit System Financial Assistance Corporation 

(FAC) (FAC bonds) (see Note 5); and 

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

The Corporation, in its sole discretion, is authorized to expend amounts to provide financial assistance to certain 

insured institutions. 

The balances outstanding at December 31, 2005, for each of the components of the Corporation’s insurance responsibilities were $114 billion of insured obligations and $16 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. 

31 
Farm Credit System Insurance Corporation 

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, 2005, the Corporation held $273.84 million in overnight Treasury 

Certificates maturing on January 3, 2006, with an investment rate of 3.46 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. 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. (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 System’s borrowers could adversely affect the banks’ financial condition and 

profitability. Insured System banks also face risks from changing interest rate environments and the need to maintain 

ongoing access to financial markets. Adverse changes in the financial condition and profitability of insured System 

banks resulting from increased levels of credit, financial, or other risks could occur in the future which would have a 

material effect on the liability for estimated insurance obligations. 

Premiums—Annual premiums are recorded as revenue during the period on which the premiums are based. All 

premiums are due on or before January 31 of the year subsequent to the year in which they are earned. 

Retirement Plan—All permanent Corporation employees are covered by the Civil Service Retirement System (CSRS) or 

the Federal Employees Retirement System (FERS). The Corporation’s contribution during 2005 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 $155,572 in 2005 

and $145,573 in 2004. 

32 
Farm Credit System Insurance Corporation 

Note 3—Investments 

At December 31, 2005 and 2004, investments in U.S. Treasury obligations consisted of the following: 

($ in thousands) 

Gross Gross Estimated 

Amortized Unrealized Unrealized Market 

Cost Gains Losses Value 

December 31, 2005 

U.S. Treasury Notes $ 1,715,586 $ 5,689 $ (28,426 ) $ 1,692,849 

December 31, 2004 

U.S. Treasury Notes $ 2,087,702 $ 34,626 $ (9,955) $ 2,112,373 

The amortized cost and estimated market value of U.S. Treasury obligations at December 31, 2005, by contractual 

maturity, are shown below. 

($ in thousands) 

Estimated 

Amortized Market 

Cost Value 

Due in one year or less $ 374,947 $ 376,538 

Due after one year through five years 1,234,252 1,212,862 

Due after five years through 10 years 106,387 103,449 

$ 1,715,586 $ 1,692,849 

33 
Farm Credit System Insurance Corporation 

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 Act is an insured 

System bank and may be required to pay premiums to the Corporation. 

The Act establishes the range of insurance premium rates that the Corporation’s Board may assess for any calendar 

year based on five classes of an insured bank’s loan assets. The asset classes and the range that may be assessed for 

each are: (1) average annual accrual loans outstanding (other than the guaranteed portions of Government-guaranteed 

accrual loans) for the year may be from zero to 15 basis points (0.0015); (2) average annual nonaccrual loans outstanding may be from zero to 25 basis points (0.0025); (3) average annual portions of Federal Government-guaranteed 

accrual loans may be from zero to 1.5 basis points (0.00015); and (4) average annual portions of state governmentguaranteed accrual loans may be from zero to 3 basis points (0.0003). 

Insurance premium rates are reviewed semiannually. For 2005, premium rates were set at the Board’s January 2005 

meeting at 4 basis points for accrual loans, 25 basis points for non-accrual loans, and zero for Federal and state 

government guaranteed loans. The Board did not exercise its discretionary authority to grant a lower rate for GSE 

guaranteed loans. The Board again reviewed premiums at its June and September 2005 meetings. At the September 

meeting the Board increased premiums on accrual loans to 6 basis points for the second half of 2005, the top of the 

previously announced guidance range and left other rates unchanged. This resulted in a blended rate of 5 basis 

points on accrual loans for 2005. The increase was due to the high growth in insured debt outstanding during the 

year. In 2005, outstanding insured obligations increased by $14.2 billion or 14.3 percent. At December 31, 2005, the 

unallocated portion of the Insurance Fund was 1.83 percent as a percentage of adjusted insured debt. Including the 

AIRAs raised the level to 1.86 percent. 

On January 19, 2006, the Board increased the premium rate for accrual loans to 15 basis points, the maximum allowed by statute. The rates for nonaccrual loans remained at 25 basis points and for Government-guaranteed loans 

zero basis points. Again, the Board did not exercise its discretionary authority to grant a lower rate for GSE-guaranteed loans. 

The Act sets a base amount for the Insurance Fund to achieve. The statutory secure base amount is equivalent to 2.0 

percent of the aggregate outstanding insured obligations of all insured System banks (adjusted downward by a 

percentage of the guaranteed portions of principal outstanding on Government-guaranteed loans in accrual status) 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 secure base amount the assets in the Insurance Fund for which no specific use has been identified or 

designated (the unallocated portion of the Insurance Fund). 

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 unallocated portion of 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 Accounts which provides guidelines for implementing this statutory authority. If at 

34 
Farm Credit System Insurance Corporation 

the end of any calendar year the amount in the unallocated portion of the Insurance Fund exceeds the 2 percent 

secure base amount, the Corporation recalculates the secure base amount on an average daily balance basis and 

compares that amount with the yearend Insurance Fund balance adjusted downward by the Corporation’s estimated 

expenses for the following year. At yearend 2003, this resulted in the transfer of $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. The statute provides that amounts in the AIRAs may not be paid prior to April 2006 (eight years after the 

Insurance Fund first attained the secure base amount). The Corporation’s Board of Directors has discretion to adopt 

a later payment cycle. AIRA balances may be used to absorb any insurance losses and claims. 

Furthermore, the Board of Directors has discretion to limit or restrict the AIRA payments. In accordance with the 

Corporation’s policy statement, any AIRA balances do not count in measuring the Insurance Fund’s compliance with 

the Secure Base Amount. 

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 1990, the FAC issued $1.261 billion in bonds. These funds were used to provide assistance to certain System banks 

experiencing financial difficulty and for other statutorily authorized purposes. From 1998 through 2004, $936 million 

in FAC bonds have been retired, leaving one remaining issue of $325 million outstanding, which matured and was 

repaid on June 10, 2005. Repayment of the remaining FAC bond in accordance with the Act was provided for by the 

FAC Trust Fund, FAC Assistance Fund, and the Insurance Corporation. See Insurance Obligation below. 

Insurance Obligation 

On June 10, 2005, the FAC repaid its remaining outstanding issue of $325 million. Funding for the payment was 

provided as follows: 

FAC Trust Fund $ 80 million 

FAC Assistance Fund $ 14 million 

FCSIC $ 231 million 

Total $ 325 million 

35 
Farm Credit System Insurance Corporation 

The Corporation had estimated the present value of its liability to provide funds for payment of the $325 million noncallable 15-year maturing debt to be approximately $224 million at December 31, 2004. The present value of this 

obligation was 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 was estimated by management 

using discount rates based upon U.S. Treasury securities of similar durations (2.4 percent for 2004). The fair value 

was approximately $229 million as of December 31, 2004. 

Other Financial Assistance Provided to System Institutions 

From 1988 to 1998, the U.S Treasury paid interest on certain FAC bonds totaling $440 million. System banks repaid 

Treasury for this obligation on June 10, 2005, as required. The 1992 Amendment to the Act expanded the potential 

uses of the Trust Fund to satisfy System institution defaults on the principal and interest of other FAC obligations and 

required System banks to make annual annuity payments to the FAC to provide funds for the retirement of the 

Treasury-paid interest at maturity. The Corporation was required to satisfy defaults on the annual payments to the 

FAC to permit the repayment of Treasury-paid interest. 

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 Federal Land Bank of Jackson in Receivership, management is not aware of any events or circumstances at this time which would require a liability for estimated insurance obligations to be recorded. 

Note 6—Operating Lease 

On October 21, 2003, the Corporation executed a new six-year lease with the FCS 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 

$120,019 for 2005, $121,100 for 2006, $122,181 for 2007, $123,262 for 2008, and $124,344 for 2009. The Corporation 

recorded lease expense (including operating cost assessments) of $122,245 and $120,795 for 2005 and 2004, 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 $28,250 at December 31, 2005, and 

$1,687 at December 31, 2004. The Corporation purchased services for 2005 which totaled $109,589 compared with 

$70,332 for 2004. 

The Corporation provided assistance to the FCA under a related Inter-Agency Agreement, recognizing revenue in 

2005 of 1,125 and in 2004 of zero. At December 31, 2005 and 2004, the Corporation did not have any receivable from 

the FCA. 

36 
Farm Credit System Insurance Corporation 

Income and Expenses

Farm Credit System Insurance Corporation By Year 

($ in thousands) 

Income Expenses Net Income 

Provision for Administrative 

Insurance and Operating Changes in 

Premiums Investment Obligations Expenses Insurance Fund 

1989 $ 65,000 $ 16,041 — $ 118 $ 8,923 

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

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

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

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

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

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

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

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

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

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

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

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

2002 $ 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 

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 of 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. 

37 
Farm Credit System Insurance Corporation 

Corporate Staff
 

Mary Creedon Connelly* Chief Operating Officer 

Alan J. Glenn Director of Risk Management 

C. Richard Pfitzinger Chief Financial Officer 

Dorothy L. Nichols* General Counsel 

Phyllis Applebaum Financial Analyst 

William Fayer Financial Analyst/Asset Assurance Manager 

Gary Stover Financial Analyst 

Pam Ngorskul Accountant 

Anna Lacey Administrative Specialist 

Molly Sproles Clerical Assistant 

*	 In March 2006, Mary Creedon Connelly, who served with distinction as the Chief Operating Officer since 1991, retired. Dorothy Nichols, who served 

as General Counsel, became the Chief Operating Officer effective February 19, 2006. 

Acknowledgements: 

Linda M. Toki 

Anna Lacey 

Molly Sproles 

38 
Farm Credit System Insurance Corporation 

References
 

Copies of Farm Credit System Annual Reports to 

Investors and Quarterly and Annual Information 

Statements may be obtained from: 

Federal Farm Credit Banks Funding 

Corporation 

10 Exchange Place 

Suite 1401 

Jersey City, NJ 07302 

(201) 200-8000 

Copies of the Annual Performance and Accountability Reports of the Farm Credit Administration 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 

39 
Farm Credit System Insurance Corporation 

1501 Farm Credit Drive 

McLean, VA 22102 

703.883.4380 Voice 

703.790.9088 Fax 

www.fcsic.gov