1999

Annual Report

Farm Credit System Insurance Corporation

Protecting Investors in Agriculture and Rural America
an 

The Farm Credit System Insurance

Corporation was established by the

Agricultural Credit Act of 1987 as

independent U.S. Government-controlled

corporation. The Corporation’s primary

purpose is to ensure the timely payment of

principal and interest on insured notes,

bonds, and other obligations issued on behalf

of the seven Farm Credit System banks. 

The System is a privately owned, nationwide financial cooperative that lends to 

agriculture and rural America. By ensuring

the repayment of System debt securities to

investors, the Corporation helps to keep a

dependable source of funds for farmers,

ranchers, and other System borrowers.

In accordance with the Government

Performance and Results Act of 1993, this

report discusses the Corporation’s operations

for 1999, including management of the

Insurance Fund, the level of insured debt

outstanding, and risk management activities.

The key performance measures used to 

evaluate the success of operations are also

highlighted.
Contents

1

2 A Message from the Chair

3 Investor Protection and the 

Farm Credit System

4 Insurance Corporation Highlights

5 Strategic Goals and Performance Measures

6 Board of Directors

8 Mission Statement

9 Insurance Fund Management

15 Risk Management

16 Other Corporation Activities

17 Report of Independent Accountants

19 Financial Statements

22 Notes to Financial Statements

31 Corporate Officers 

32 References
During my tenure as Chair, my focus will be on the Corporation’s 

primary mission — to protect investors in System debt securities.

Maintaining investor confidence is essential to ensuring that System

institutions have continuing access to capital markets at a reasonable

cost. Last year, investors purchased $321 billion in insured debt—

funds the System used to finance the nation’s agricultural producers

and their cooperatives. 

The first line of investor protection to buffer losses is the System’s

own capital and reserves. The Insurance Fund provides an extra 

cushion to ensure that investors are repaid on a timely basis should an

insured System bank be unable to do so. Overall, both the System

and the Insurance Corporation entered the new millennium in sound

financial condition.

This was a year of significant progress for the Insurance Corporation and the Farm Credit System. The Corporation reached a 

milestone with more than $1.5 billion in assets under management.

The Insurance Fund finished the year at $1.37 billion, just slightly

below the 2 percent secure base amount as required by statute. 

The System achieved a high level of financial performance, earning 

more than $1.0 billion in net profits for the seventh consecutive year,

while growing more than 5 percent. Asset quality remained sound at

most System institutions and capital levels have improved for the past

12 years.

I wish to thank my colleague on the Board, Michael Reyna, and 

the dedicated staff of the Corporation for their contributions during

the year.

Ann Jorgensen

May 2000

A Message from the Chair

2
3

Farm Credit System Statistics 1999 1998

($ in billions)

Insured Debt Outstanding $ 72.2 $ 68.4

Farm Mortgage Loans 32.4 30.9

Agricultural Production Loans 16.717.4

Loans to Agricultural Cooperatives 8.79.5

International Loans 2.6 2.3

Rural Utilities Loans 5.1 4.7

Rural Home Loans 1.5 1.4

Net Income 1.23 1.25

Nonperforming Assets as % of Loans 1.6% 2.1%

and Other Property

Surplus (excluding Insurance Fund) 11.6% 11.1% 

as % of Total Assets

Investor Protection and 

the Farm Credit System

The Corporation’s mission is defined 

by the Farm Credit Act of 1971 as

amended (the Act). It is to ensure

the repayment of investors who purchase 

the bonds and notes issued by the System’s

banks. Investors provide funds the System

uses to lend to agriculture and rural America.

Sound management of the Insurance Fund

helps maintain investor confidence. Investor

willingness to purchase System debt ensures

ready access to the nation’s capital markets 

to serve the credit needs of agricultural 

producers and their cooperatives. 

In 1999, System lending to agriculture

continued to grow. Loans outstanding rose

to $70 billion from $68 billion. Asset quality

remained good at most System institutions

despite weak conditions in agriculture resulting from low commodity prices and reduced

export sales. The System continued to 

generate solid earnings and build capital.

The table below presents selected financial

statistics for the System.
Insurance Corporation Highlights

4

• During the second quarter of 1999, the 

Insurance Fund again reached the secure 

base amount of 2 percent of adjusted 

insured debt outstanding. 

• The Insurance Fund grew 9 percent in 

1999 and was slightly below the secure 

base amount at yearend.

• Insurance premium rates for accrual 

loans were reduced to zero beginning 

in January 2000.

• Operating costs remained low at 

0.1 percent of average assets.

Selected Financial Statistics 1999 1998

($ in millions)

Total Assets $ 1,534 $ 1,408

Total Liabilities 160 149

Insurance Fund Balance 1,374 1,259

Operations:

Revenues 127.3 99.5

Operating Expenses 1.6 1.5

Insurance Expense 10.4 9.7

Net Income 115.3 88.3

Insurance Fund as % of 1.99% 1.94%

Adjusted Insured Debt
Strategic Goals and Performance Measures

5

Corporate Performance Measures 1999 Results

Insurance Fund Management

• Maintain the 2 percent secure base amount 1.99%

• Achieve investment return comparable Average Investment Yield 

with peer group of Treasury Bond Funds

Risk Management 

• Detect risk by screening institutions Evaluated institutions posing risk 

• Identify institutions requiring special Completed one special 

examinations examination

• Evaluate potential insurance losses Evaluated insurance loss 

allowance quarterly 

Receivership/Conservatorship Capability

• Complete processing of 90 percent of No current receivership/

all claims in specified period conservatorship activity 

• Manage operating costs and asset Corporate readiness maintained 

recovery rates within experienced through training and evaluation

norms of contractor capabilities 

0%

3%

6% 5.75% 5.25% Corporation

Treasury Funds

The Corporation’s Strategic Plan has three broad goals:

1. Effectively manage the Insurance Fund to achieve and maintain the 2 percent 

secure base amount (SBA).

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

3. Maintain the capability to manage any receiverships or conservatorships.

Each goal has performance measures designed to evaluate the overall effectiveness 

of operations.
Board of Directors

6

Ann Jorgensen

Ann Jorgensen became a member of the

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, JorgAnna 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 world-renowned teaching

The Farm Credit System Insurance Corporation

is managed by a three-member board of directors 

composed of the members of the Farm Credit

Administration Board. The Chair of the Corporation’s

Board of Directors, however, must be an FCA Board

Member other than the Chairman of the FCA Board.

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 Roll.

A native of Iowa, she holds a B.A. from the

University of Iowa.

Michael M. Reyna

Michael M. Reyna became a member of the

Corporation’s Board in October 1998 and

served as Chairman from November 1998 

to January 2000, when he was appointed by

President Clinton as the Chairman of the

Farm Credit Administration. Prior to 

joining the Board, he served as President

Clinton’s director of USDA Rural Develop-
7

ment (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. While serving as a private consultant

In January 2000, Board Member 

Marsha Pyle Martin passed away, leaving

one vacant position on the Board.

to the Texas 2000 Project, an initiative of the

Governor’s Office of Budget and Planning,

he developed and implemented a computerbased 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.
Mission Statement

As an independent entity, the Farm Credit System Insurance 

Corporation 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 loss to the 

Insurance Fund; and

Help ensure the future of a permanent system for 

delivery of credit to agricultural borrowers.

The Corporation uses the Farm Credit Insurance Fund to carry

out its mission. The money comes from investment earnings on

the assets in the Insurance Fund and insurance premiums assessed

on System banks.

8
Insurance Fund Management

9

Revenues 

Corporate revenues

include income from

investments and insurance

premiums. Total revenues

for 1999 were $127 

million. Revenues were

28 percent greater than in

1998 as a result of higher

levels of investment

income and insurance 

premium rates in effect

during the year. 

Expenses

Corporation expenses totaled $12 million in

1999. Insurance expense was $10.4 million 

consisting entirely of the annual provision for

the liability to repay the Farm Credit System

Financial Assistance Corporation (FAC). 

(See Note 5 to the Corporation’s financial statements.)

The Corporation operates with a small 

core staff and uses contractors with specialized expertise when necessary. Using 

external resources offers the Corporation

flexibility while keeping

operating costs low. 

For example, the FCA

provides examination 

and certain administrative services to the

Corporation on a 

reimbursable fee basis.

The Corporation also 

has contracts with other

Federal agencies for 

specialized services should

the need arise. 

Operating costs for

1999 were $1.6 million. Of this amount, the

Corporation’s fixed costs for staff, travel,

rent, and miscellaneous expenses totaled 

$1.3 million. Purchased services represented

the balance of operating expenses of $0.3

million; this includes amounts reimbursed 

to the FCA and other contractors.

Operating costs represented 0.11 percent

of average assets, level with 1998. This 

ratio has improved over the past five years,

declining from 0.14 percent in 1995.

The Corporation’s net income in 1999 was 

$115 million, an increase of 31 percent from 1998.

Premiums of $45 million

Premiums

Interest Income of $82 million

Interest Income

35%

65%

1999 Revenues
10

Growth in the 

Insurance Fund

During 1999, the

Insurance Fund grew to

$1.37 billion, a 9 percent

increase from 1998. 

The Insurance Fund represents the Corporation’s

equity, i.e., the difference

between its total assets

($1.53 billion) and its

total liabilities, including

its insurance obligations

($160 million). 

The Secure Base

Amount 

The Act established the

secure base amount for

the Insurance Fund as 2

percent of outstanding

insured obligations or

such other percentage

determined by the

Corporation, in its sole discretion, 

to be actuarially sound. When the Insurance

Fund is at or above the

secure base amount, the

Corporation is required

to reduce insurance 

premium rates to the

level needed to maintain

the Fund at the secure

base amount.

Because the secure

base amount is a 

percentage of insured

debt outstanding, it 

fluctuates depending

upon System funding

trends. The Insurance

Fund began the year at

1.94 percent and reached

the secure base amount

at the end of the second

quarter. It remained

slightly above the secure

base amount through the

third quarter and

dropped slightly below

at yearend to 1.99 percent due to an increase

in insured debt in December. 

0

200

400

600

800

1000

1200

1400

1600

1,020

899

1,039

1,169

1,310

1,170

1,408

1,534

1,259

1,374

Insurance Fund

Total Assets

Jan 1996

Jan 1997

Jan 1998

Jan 1999

Jan 2000

$ in millions

Growth in the Insurance Fund

1.6%

Jun '96

Dec '96

Jun '97

Dec '97

Mar '98

Jun '98

Dec '98

Jun '99

Dec '99

1.7%

1.8%

1.9%

2.1%

2.0%

Insurance Fund Relative to 2%

Secure Base Amount
11

Premium Assessment 

Premium revenues increased to $45 million

in 1999 from $20 million in 1998 because of

higher premium rates in effect during the

year. The Board reviews insurance premiums

on a semiannual basis. Premiums can be

assessed on four classes of System loans when

the Fund is below the 2 percent secure base

amount:

• Accrual loans (non-government 

guaranteed balance) – from zero to 

15 basis points;

• Nonaccrual loans – from zero to 

25 basis points;

• Portions of Federal Governmentguaranteed accrual loans – from zero 

to 1.5 basis points; and

• Portions of state governmentguaranteed accrual loans – from zero

to 3 basis points.

(See Note 4 to the Corporation’s financial statements.)

Consistent with the Act, the Corporation

adopted a Policy Statement on Adjustments

to Insurance Premiums in 1996 that sets out

the five factors the Board will consider in

determining whether to adjust premiums:

• 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.

During 1999, the Corporation expanded

its review of premium rates to include input

from System institutions on trends in their

financial condition and expected loan growth.

The Corporation also changed the time

frame of the reviews to September and

March to accommodate the budget process

of System institutions. In September the

rates will be set for the coming year. In

March, the rates will be reviewed and 

adjusted, if necessary.

For the first half of 1999, insurance premium rates on accrual loans were set at 9 basis

points. This was an increase from 3 basis

points in 1998. This increase was approved

because the Insurance Fund had dropped to

1.94 percent at the beginning of the year as a

result of rapid growth in insured debt during

late 1998. Also the System faced increased

credit risk due to operating weaknesses 

experienced by some System borrowers. 

Premium rates on accrual loans were

reduced to 4.5 basis points for the second

half of 1999, when the secure base amount

was reached again. Insurance premium rates

were maintained at 25 basis points on 

nonaccrual loans and zero basis points on

government-guaranteed loans. 
Investment Portfolio

$ in millions

% of Portfolio

Liquidity Pool One Year or Less $ 281 19%

Investment Pool One Year to Five Years $ 94765%

Five Years to Ten Years $ 234 16%

Total $ 1,462 100%

12

Investment of Insurance Fund Assets

The Corporation had cash and investments 

totaling $1.46 billion at December 31, 1999, 

up 7.4 percent from yearend 1998. Funds

are invested in U.S. Treasury securities in

accordance with section 5.62 of the Act, 

and the Corporation’s Investment Policy.

Under the Policy, the Corporation seeks the

maximum return consistent with its liquidity

needs and with minimum exposure to loss of

principal. Investment revenues earned in

1999 were $82 million, up from $80 million

in 1998. The increase in investment income

resulted from a higher level of invested assets

during 1999. 

As a measure of investment management 

performance, the Corporation compares its

average yield with the average yield of seven 

similar U.S. Treasury investment funds in 

the private sector. The Corporation earned 

a competitive return on its investment 

portfolio (5.75 percent) during the year 

compared with the peer group (5.25 percent). 

Consistent with its Investment Policy, the

Corporation purchases a ladder of maturities 

and holds investments to maturity. The

Policy requires the portfolio to be divided

into a liquidity pool and an investment pool.

The liquidity pool may only be invested in

securities with maturities of one year or less

and must be no less than 15 percent or more

than 25 percent of total investments. The

investment pool consists of the balance of the

portfolio and may be invested in securities

with maturities from one to 10 years, with no

more than 25 percent of the investment pool

invested longer than five years.

The table below shows the balances and

maturities of the liquidity pool and investment pool at December 31, 1999. The

weighted average portfolio maturity at

yearend was 2.9 years. 
13

Insured Obligations

l and interest)

$72.2 in April. In addition,

System banks have been $68.4

providing funds to FAC

for the repayment of $62.9

other outstanding FAC

assistance bonds. At

December 31, 1999, the

1997 1998 1999 System had provided 

for the repayment of

approximately $0.4 

Obligations billion of the $0.9 billion

of FAC assistance bonds

AC Assistance Bonds still outstanding. Other

ligible Borrower Stock obligations also declined

$1.37

$1.09 as further retirement of

$ .93

outstanding eligible 

borrower stock occurred

1997 1998 1999 during the year. At

yearend, eligible 

borrower stock outstanding at System 

institutions totaled $64 million.

The Corporation’s principal liability for 

insurance obligations at December 31, 1999, 

was $159 million, which represents the liability to repay the FAC for financial assistance

to the Federal Land Bank of Jackson in

Receivership. This bank was closed in 1988.

The liability to the FAC for the related

financial assistance must be paid in 2005.

(See Note 5 to the Corporation’s financial statements.)

(Principa

Insured and Other 74 $ in billions

72

Obligations 70

68

The Corporation 66

64

insures Systemwide and 62 $60.7

Consolidated notes, 60 $58.5 58

bonds and other 56

obligations issued under 54

1995 1996

section 4.2 of the Act.

Currently, only Systemwide obligations have Other 

been issued and are 

outstanding. Insured 2.50 $ in billions F

obligations increased by E 2.00

5.6 percent in 1999 to $1.42 $1.39 1.50

$72 billion. Insured 1.00

obligations are issued .50

through the Federal 0

1995 1996

Farm Credit Banks

Funding Corporation on behalf of the

System banks. 

The Corporation is also required by

statute to use the Insurance Fund to satisfy

System institution defaults on obligations

related to FAC-issued bonds under section

6.26(d)(3) of the Act, and ensure the retirement of eligible borrower stock.

During 1999, other obligations declined 

significantly as the FAC called and retired

$157 million in high coupon assistance bonds
14

Allocated Insurance Reserve Accounts 

A 1996 amendment to the Act requires the

Corporation to establish reserve accounts for

each bank and the stockholders of the

Financial Assistance Corporation. 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). 

This annual allocation is determined by

the amount by which the Insurance Fund

exceeds the secure base amount calculated 

on an average daily balance basis, after

adjustment for estimated operating and

insurance expenses for the immediately 

succeeding calendar year. Excess Insurance

Fund balances may be paid to System banks

and FAC stockholders beginning no 

sooner than eight years after the aggregate

Insurance Fund balance attains the secure

base amount, but not before 2006. The law

provides for this authority to be exercised 

at the sole discretion of the Corporation’s

Board. Because the Insurance Fund was

below the secure base amount at yearend

1999, there were no excess balances to 

allocate. In December 1999 the Corporation’s Board issued a policy statement 

governing the operation of the AIRAs. 
Risk Management

15

to 

The Corporation’s program to 

identify and manage risk to the

Insurance Fund minimizes exposure

potential losses through early detection.

Special examination procedures are used to

evaluate the condition of weaker System

institutions. The majority of the fieldwork

for these examinations is performed by FCA

on a reimbursable basis. In 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, Reports of

Examination of System institutions, and by

serving as a nonvoting participant on FCA’s

Regulatory Enforcement Committee.

Corporation staff also monitor the development of legislative, judicial, regulatory, and

economic trends that could affect the

Insurance Fund. 

High levels of government payments

played a major role in 1998 and 1999 in

maintaining farm income during this period

of weak demand for agricultural commodities

and low prices. USDA forecasts for 2000

anticipate continuing weakness in agricultural

prices, export markets and lower farm

income. Whether government payments will

continue to buffer agricultural producers is

uncertain. The Corporation will monitor the

effect of such policy changes on System 

borrowers. 

Financial Assistance and Receivership 

The Insurance Corporation is authorized 

to provide assistance under certain circumstances 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 has a statutory responsibility to serve as receiver or conservator 

for a System institution when appointed by

the FCA. To fulfill this responsibility, the

Corporation uses outside contractors, 

including private firms and other Federal

agencies. This allows us to contain costs

during periods of limited or no activity while

providing the capacity to deal effectively with

potential receiverships or conservatorships.

At the present time, there are no institutions

in receivership or conservatorship. 

During 1999, Corporation staff evaluated 

the capability of several contractors to 

provide the kinds of specialized services to

maintain its readiness to serve as receiver or

conservator. In December the Corporation

conducted a training exercise that focused on

issues that arise in managing receiverships.
Other Corporation Activities

16

Corporate Internet Site

The Corporation launched a site on the

World Wide Web in 1999. The web site 

will provide customers and the public with

information about the Corporation as well 

as updates on the financial condition of the

Insurance Fund.

The new Internet site currently contains:

• The Corporation’s Mission Statement

• An overview of the Corporation

• A graph tracking the growth of the 

Insurance Fund

• The Corporation’s current regulations 

and policy statements

• Biographic information on the 

Board of Directors and a list of 

Corporate Officers

• Copies of press releases, the Strategic 

Plan, and Annual Report

• Links to other Internet sites

As development of our Internet site 

continues, we welcome input on the types 

of information and services that would be

useful.

“Computers for Learning”

In April, the Corporation donated surplus

computers to education in accordance 

with the Clinton-Gore administration’s

“Computers for Learning” program. This

program is a unique partnership between 

Federal agencies, schools and non-profits

across the country to move surplus 

computers into our nation’s classrooms.

Several of the computers were donated to

“HEADS UP – A University Neighborhood

Initiative.” One of the missions of HEADS

UP is to provide low-income children in the

District of Columbia with academic and

computer skills. In 1999 more than 300 

children participated in after-school tutoring,

mentoring and summer learning programs.

The University Neighborhood Initiative was

founded in 1996 and has been awarded an

AmeriCorps grant from the Corporation for

National Service for its family-focused,

school-linked approach to community 

service. Other computers were donated to

Lanier Middle School in Fairfax, Virginia.


Statements of Financial Condition as of December 31, 1999 and 1998

($ in thousands)

1999 1998

ASSETS

Cash and Cash Equivalents $ 5,506 $ 61,959

Investments in U.S. Treasury Obligations 1,456,480 1,298,433

(Note 3)

Accrued Interest Receivable 26,054 27,511

Premiums Receivable (Note 4) 45,496 19,966

Other Receivables 3 —

TOTAL ASSETS $ 1,533,539 $ 1,407,869

LIABILITIES AND INSURANCE FUND

Accounts Payable and Accrued Expenses 221 178

(Note 7)

Liability for Estimated Insurance Obligations 159,345 148,921

(Note 5)

Total Liabilities 159,566 149,099

Farm Credit Insurance Fund 1,373,973 1,258,770

TOTAL LIABILITIES AND 

INSURANCE FUND $ 1,533,539 $ 1,407,869

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

Financial Statements

19
20

Statements of Income and Expenses and Changes in Insurance Fund

for the Years Ended December 31, 1999 and 1998

($ in thousands)

1999 1998

INCOME

Premiums (Note 4) $ 45,496 $ 19,972

Interest Income 81,719 79,545

Other Income 43 — 

TOTAL INCOME $ 127,258 $ 99,517

EXPENSES

Administrative Operating Expenses

(Note 7) 1,631 1,525

Provision for Estimated Insurance Obligations

(Note 5) 10,424 9,743

NET INCOME 115,203 88,249

Farm Credit Insurance Fund,

Beginning of Year 1,258,770 1,170,521

Farm Credit Insurance Fund,

End of Year $ 1,373,973 $ 1,258,770

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

Statements of Cash Flows for the Years Ended December 31, 1999 and 1998 

($ in thousands)

1999 1998

Cash Flows from Operating Activities

Net Income $ 115,203 $ 88,249

Adjustments to Reconcile Net Income

to Net Cash Provided by Operating Activities:

– Decrease in Accrued Interest Receivable 1,4572,930

– (Increase) Decrease in Premiums Receivable (25,530) 51,276

– Net Amortization and Accretion 

of Investments 15,21710,991

– (Increase) in Accounts Receivable (3) —

– Increase in Accounts Payable

and Accrued Expenses 43 14

– Increase in Liability for Estimated

Insurance Obligations 10,424 9,743

Net Cash Provided by Operating Activities 116,811 163,203

Cash Flows from Investing Activities

Payments for Purchase of 

U.S. Treasury Obligations (410,386) (336,871)

Proceeds from Redemption of 

U.S. Treasury Obligations 237,122 233,879

Net Cash Used in Investing Activities (173,264) (102,992)

Net Change in Cash and Cash Equivalents (56,453) 60,211

Cash and Cash Equivalents,

Beginning of Year 61,959 1,748

Cash and Cash Equivalents, End of Year $ 5,506 $ 61,959

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

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, 1999, there were seven insured System banks and 157

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, 1999, for each of the

components of the Corporation’s insurance responsibilities were $72.2

billion of insured obligations, $864 million of FAC bonds (of which

$386 million in repayments have been provided for), and $64 million

of eligible borrower stock.

Notes to Financial Statements

as of December 31, 1999 and December 31, 1998
23

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.

Note 2 — Summary of Significant

Accounting Policies

Accounting Principles and Reporting

Practices — The accounting and reporting

policies of the Corporation conform to 

generally accepted accounting principles and,

as such, the financial statements have been

prepared using the accrual basis of accounting. The preparation of financial statements

in conformity with generally accepted

accounting principles 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, 1999,

the Corporation held $5.5 million in

overnight Treasury Certificates maturing on

January 3, 2000, with an investment rate of

2.7 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. 
24

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 to the

CSRS plan equals the 7 percent of base pay

contributed by employees covered by that

system. For those employees covered by

FERS, the Corporation’s contribution is 11.4

percent of base pay. In addition, for FERScovered 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

$103,319 in 1999 and $99,668 in 1998.
Amortized Gross Gross Estimated

Cost Unrealized Unrealized Market

Gains Losses Value

December 31, 1999

U.S. Treasury Notes $ 1,456,480 $ 2,114 ($ 19,170) $ 1,439,424

December 31, 1998

U.S. Treasury Notes $ 1,298,433 $ 43,360 ($ 570) $ 1,341,223

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

1999, by contractual maturity, are shown below. 

($ in thousands)

Amortized Estimated

Cost Market

Value

Due in one year or less $ 275,745 $ 276,139

Due after one year through five years 946,813 936,206

Due after five years through 10 years 233,922 227,079

$ 1,456,480 $ 1,439,424

Note 3 — Investments

At December 31, 1999, and at December 31, 1998, investments in U.S. Treasury obligations 

consisted of the following:

($ in thousands)

25
26

Note 4 — Premiums 

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 Governmentguaranteed accrual loans) for the year may

be from zero to 0.0015; (2) average annual

nonaccrual loans outstanding may be from

zero to 0.0025; (3) average annual portions of

Federal Government-guaranteed accrual

loans may be from zero to 0.00015; and (4)

average annual portions of state governmentguaranteed accrual loans may be from zero to

0.0003.

In February 1999, the Board established

insurance premium rates for 1999 at 0.0009

for accrual loans, 0.0025 for nonaccrual loans

and zero for Government-guaranteed loans.

In August 1999, the Corporation’s Board

approved reducing the rate for accrual loans

for the second half of 1999 to .00045 while

retaining the rates of .0025 for nonaccrual

loans and zero for Government-guaranteed

loans. In September, the Corporation’s

Board reduced rates on accrual loans to zero

beginning January 1, 2000, following the

Insurance Fund’s attainment of the secure

base amount at the end of the second quarter,

while retaining the other two rates.

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

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 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. In the second quarter of 1999, the Insurance Fund attained the

secure base amount for the first time since

the first quarter of 1998. At December 31,

1999, the Insurance Fund was 1.99 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 Insurance Fund balances

into these allocated insurance reserve

accounts (AIRAs). In December, the

Corporation’s Board adopted a final Policy

Statement on the Secure Base Amount and

Allocated Insurance Reserve Accounts which

provides guidelines for implementing this

statutory authority. At December 31, 1999,

because the Insurance Fund was slightly

below the secure base amount, there were no

excess balances to allocate.
27

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 $107

million and $101 million at December 31,

1999 and 1998, 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,

1999, the only preferred stock held by the

FAC was associated with the assistance provided to the Federal Land Bank of Jackson.

On May 20, 1988, the FCA placed the

Federal Land Bank of Jackson and the

Federal Land Bank Association of Jackson in

Receivership (collectively the FLBJR) and

appointed a receiver to liquidate their assets.

As of April 27, 1990, the FCA, the Receiver

of the FLBJR, the FAC, the System banks,

the Assistance Board, and the Corporation

entered into an agreement which called for

the FAC to issue 15-year U.S. Treasury-guaranteed bonds to purchase preferred stock in

the FLBJR. Upon the maturity of the FAC

bonds used to purchase preferred stock in the

FLBJR in 2005, the Corporation will provide

funds to repay the principal of these debt

obligations, to the extent that the Trust Fund
28

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 $159 million

and $149 million at December 31, 1999 and

1998, 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

(6.6 percent for 1999 and 4.8 percent for

1998). The fair value was approximately

$163 million and $171 million as of

December 31, 1999 and 1998, respectively.

Provisions for changes in the Corporation’s

liability are reflected in the statements of

income and expenses in the amount of $10.4

million and $9.7 million for the years ended

December 31, 1999 and 1998, respectively.

The Corporation cannot predict the

effects of future events upon System operations and upon the amount of the Trust Fund

that will ultimately be available to reduce the

Corporation’s liability for FLBJR-related

FAC bonds. The Corporation will annually

reassess the likelihood of earlier use of the

Trust Fund, changes in Trust Fund earnings,

and other assumptions underlying its 

estimate of the liability for FLBJR-related

FAC bonds.

Other Financial Assistance Provided to

System Institutions 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

Agreement-related FAC bonds aggregating

$417 million and Treasury-paid interest at 
29

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

1999, 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.

Early Redemption of Certain FAC Bonds

In November 1998 and April 1999,

System banks provided the necessary funds to

allow the FAC to call and retire early $397

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 base rent for office space for the

remaining term of $89,571 for 2000, $92,252

for 2001, $95,020 for 2002 and $98,134 for

2003. The Corporation recorded lease

expense of $87,854 and $85,859 for 1999 and

1998, 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 $90,526 at

December 31, 1999, and $55,819 at

December 31, 1998. The Corporation 

purchased services for 1999 which totaled

$177,625 compared with $152,185 for 1998.

The Corporation provided financial modeling assistance to the FCA under a related

Inter-Agency Agreement, recognizing revenue in 1999 of $42,439. At December 31,

1999, the Corporation had a receivable from

the FCA for $3,653.
30

INCOME AND EXPENSES FARM CREDIT SYSTEM INSURANCE 

CORPORATION BY YEAR 

($ in thousands)

NET 

INCOME EXPENSES INCOME

Premiums Investment Provision for Administrative Changes in

Insurance Operating Insurance 

Obligations Expenses Fund

1989 $65,000 $16,041 — $ 118 $ 80,923

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

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

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

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

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

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

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

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

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

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

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.
Corporate Officers

31

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

Vivian L. Portis Secretary to the Board

Corporate Office: Farm Credit System 

Insurance Corporation

1501 Farm Credit Drive

McLean, VA 22102

Tel: (703) 883-4380

Fax: (703) 790-9088

http://www.fcsic.gov
References

32

Farm Credit System Annual Reports to

Investors and Quarterly and Annual Information Statements for the current calendar

year and the two preceding calendar years.

These are available without charge from:

Federal Farm Credit Banks 

Funding Corporation

10 Exchange Place, Suite 1401

Jersey City, NJ 07302

(201) 200-8000

The Farm Credit Administration’s

Accountability Report for Fiscal Year 1999 

is available without charge from:

Farm Credit Administration

Office of Congressional and Public Affairs

1501 Farm Credit Drive

McLean, VA 22102-5090

(703) 883-4056

For additional information about the Farm Credit System, its financial 

condition and performance, and activities of the Farm Credit Administration, 

the following publications may be helpful.

Production of the 1999 Annual Report of the 

Farm Credit System Insurance Corporation coordinated by Anna Lacey 

with assistance from Rebecca Young and Christine Quinn.

Farm Credit System Insurance Corporation

1501 Farm Credit Drive

McLean VA 22102