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.

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

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.

Cash and Cash Equivalents—Cash and
cash equivalents include investments in
U.S. Treasury obligations with original
maturities of 90 days or less.

Investments in U.S. Treasury
Obligations—An investment portfolio is
maintained as required by section 5.62
of the Act. 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.
Investments are held to maturity and
stated at cost, adjusted for amortization
of premiums and accretion of discounts.
Premiums and discounts are amortized
or accreted using the straight-line
method, which approximates the
interest method, over the terms of the
respective issues.

The Financial Accounting Standards
Board has issued Statement of Financial
Accounting Standard Number 115,
Accounting for Certain Investments in
Debt and Equity Securities, which the
Corporation plans to adopt in 1994.
Upon adoption, management anticipates
that the Corporation will continue to
classify the investments as held to
maturity and carry them at amortized
cost. This is consistent with the
Corporation’s investment policy and its
positive intent and ability to hold its
investments to maturity.

15


Effective January 1, 1994, the Farm
Credit Bank of Louisville merged with
AgriBank, FCB. Concurrent with the
merger, the Corporation approved the
Farm Credit Bank of Louisville’s early
redemption of the assistance preferred
stock held by FAC and the termination
of the assistance agreement.

Also during 1993, the Farm Credit Bank
of Spokane announced its intention to
merge with the Farm Credit Bank of
Omaha. The Corporation has approved
the Farm Credit Bank of Spokane’s
request for early retirement of its
assistance, which will effectively
terminate the assistance oversight
responsibilities of the Corporation as
successor to the Farm Credit System
Assistance Board.

The Corporation is currently developing
revised financial assistance procedures
in line with its authority to employ
assistance as a future means of helping
troubled institutions.

Receivership Capability

The Corporation has developed a
program for managing receiverships and
conservatorships. To contain costs
while providing the mandated capacity
to deal effectively with any potential
receiverships and conservatorships, the
Corporation has qualified a pool of
private sector vendors who can be called
upon to provide specialized support if
the need arises. These contractual
arrangements effectively leverage
permanent staff resources while
maintaining low overhead during
periods of limited activity.


Note 5—Financial Assistance to System Banks

and Estimated Insurance Obligations

Financial Assistance to Certain System
Banks

The 1987 Act required that the FCA
charter the Farm Credit System
Assistance Board (Assistance Board) and
the FAC (see Note 1) for the purpose of
carrying out a program to provide
assistance to System institutions
experiencing financial difficulty. In
order to raise funds to provide this
assistance, the FAC had the authority to
issue debt obligations with a maturity of
15 years. Subject to Assistance Board
approval, these funds were used by the
FAC to purchase preferred stock issued
by an institution experiencing financial
difficulty.

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
was provided to the Federal Land Bank
of Jackson in Receivership.

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 $75 million and
$72.7 million at December 31, 1993 and
1992, 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

19





Liability for Estimated Insurance
Obligations—The liability for estimated
insurance obligations is the present
value of estimated probable insurance
payments to be made in the future based
on the Corporation’s analysis of
economic conditions of insured System
banks. (Also see Note 5.)

The insured System banks’ primary
lending markets are borrowers engaged
in farming, ranching, and producing or
harvesting of aquatic products, and their
cooperatives. Financial weaknesses in
these market segments and the effect of
general market conditions on the
insured System banks’ borrowers could
adversely affect the banks’ financial
condition and profitability. Insured
System banks also face risks from
changing interest rate environments and
the need to maintain ongoing access to
financial markets. Adverse changes in
the financial condition and profitability
of insured System banks resulting from
increased levels of credit, financial, or
other risks could occur in the future
which would have a material effect on
the liability for estimated insurance
obligations.

16

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 12.9 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
$59,015 in 1993 and $55,000 in 1992.


and other assumptions underlying the
Corporation’s estimate of its liability for
FLBJR-related FAC bonds.

Other Financial Assistance Provided to
System Institutions by the FAC

The 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 does 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

22

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
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 and 1993, all System banks
made their annual annuity payments as
scheduled. The Corporation closely
monitors the performance of System
banks and is not aware of any events or
circumstances which will prevent
System banks from meeting their FAC
obligations.


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.

In accordance with the Act, the annual
premium due from each insured System
bank for the calendar year is equal to the
sum of: (1) the annual average principal
outstanding for the year on loans made
by the bank that are in accrual status,
other than the guaranteed portions of
Government-guaranteed loans,
multiplied by 0.0015; (2) the annual
average principal outstanding for the
year on loans made by the bank that are
in nonaccrual status multiplied by
0.0025; (3) the annual average principal
outstanding for the year on the
guaranteed portions of Federal
Government-guaranteed loans of the
bank that are in accrual status,
multiplied by 0.00015; and (4) the
annual average principal outstanding for
the year on the guaranteed portions of
State government-guaranteed loans of

18

the bank that are in accrual status,
multiplied by 0.0003.

Each insured System bank will continue
to make these annual premium
payments until the aggregate amount in
the Insurance Fund exceeds the secure
base amount. The 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 other such
percentage or amount 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 premium to a
percentage necessary to maintain the
level of the Insurance Fund at the secure
base amount. At December 31, 1993, the
Insurance Fund was 1.3 percent of
insured obligations outstanding.


Farm Credit System Insurance Corporation - Statements of Cash Flows
for the Years Ended December 31, 1993 and 1992 ($ in thousands)

1993 1992
Cash Flows from Operating Activities
Net Income $153,543 $ 97,838
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
(Increase) Decrease in Accrued Interest

Receivable (3,809) (2,918)
(Increase) Decrease in Premiums Receivable 1 175
(Increase) Decrease in Other Assets 7 9
Net Amortization and Accretion of Investments 9,662 6,844
Realized Gains on Sale of Investments _— (216)
Increase (Decrease) in Accounts Payable

and Accrued Expenses 38 52
Increase (Decrease) in Refund Payable to

System Banks _— (1,403)
Increase (Decrease) in Liability for Eligible
Borrower Stock, Richmond PCA (1,171) 1,173
Increase (Decrease) in Liability for Estimated
Insurance Obligations (39,444) 10,889
Net Cash Provided by Operating Activities 118,827 112,443

Cash Flows from Investing Activities
Payments for Purchase of U.S. Treasury

Obligations (251,182) (243,953)
Proceeds from Sale and Redemption of
U.S. Treasury Obligations 132,051 130,773
Net Cash Used in Investing Activities (119,131) (113,180)
Net Decrease in Cash and Cash Equivalents (304) (737)
Cash and Cash Equivalents, Beginning of Year 832 1,569
Cash and Cash Equivalents, End of Year $ 528 $ 832

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

13


Maturity Schedule $ Millions % of Portfolio
1 Day to 1 Year $106 15.8
1 Year to 2 Years 135 20.0
2 Years to 3 Years 118 17.6
3 Years to 4 Years 158 23.6
4 Years to 5 Years 154 23.0
Total $671 100.0

At December 31, 1993, the portfolio’s
market value exceeded book value by
$20 million. This appreciation resulted
from some of the Corporation’s longer
term investments which were purchased
when market interest rates were
significantly higher than they were in
1993. The weighted average portfolio
maturity at yearend was 2.7 years.

Insured and Other Obligations

Obligations insured by the Corporation
are statutorily defined as any note,
bond, debenture, or other obligation
issued on behalf of System banks under
subsection (c) or (d) of section 4.2 of the
Act, 12 U.S.C. 2153. Section 4.2(c)
authorizes a System bank to join with
any or all banks organized and operating
under the same title of the Act to issue
consolidated notes, bonds, debentures,

or other obligations. Section 4.2(d)
authorizes a System bank to join with
the other banks of the System to issue
Systemwide notes, bonds, debentures,
or other obligations. Insured obligations
are issued through the Federal Farm
Credit Banks Funding Corporation on
behalf of the System banks. The
outstanding principal and interest
balances of insured obligations at
December 31 for the past 4 years are
shown in the following graph.

INSURED OBLIGATIONS
(Principal & Interest)



OVERVIEW

The Farm Credit System Insurance
Corporation (Corporation) was
established by the Agricultural Credit
Act of 1987 (1987 Act) as an
independent U.S. Government-
controlled corporation. The
Corporation’s purpose is to ensure the
timely payment of principal and interest
on insured notes, bonds, and other
obligations issued on behalf of Farm
Credit System (System) banks. The Farm
Credit System is a nationwide system of
banks and affiliated associations which
serve borrowers and related entities in the
agricultural sector. By ensuring the
repayment of System securities to
investors, the Corporation helps to
maintain a dependable source of funds to
the farmers, ranchers, and other
borrowers of the Farm Credit System.
The 1987 Act provided for all System
banks to be insured effective January 6,
1989; at yearend 1993, there were 13
insured System banks.

Highlights of the first year of full
operations include:

® Growth of $154 million in the
Insurance Fund to $642 million;

© First payout for insurance claims;

© Early retirement of financial
assistance by one System bank and
the successful merger of another
System bank without the need for
financial assistance;

© Continued decline in eligible
borrower stock obligations to $241
million; and

© Commencement of a study to
develop a methodology for
evaluating risks to the Insurance
Fund.


Boarp OF DIRECTORS

The Corporation is managed by a three-member board of directors comprised of the
Members of the Farm Credit Administration (FCA) Board. The Chairman of the
Corporation’s Board, however, must be a Board Member other than the Chairman of
the FCA Board. There is currently one vacancy on the Board of Directors.

Gary C. Byrne, Chairman of the
Corporation, is a former Administrator
of the Rural Electrification
Administration (REA) and Governor of
the Rural Telephone Bank. As
Administrator of the REA, he managed
an agency that approved more than $62
billion in loans to 2,116 rural electric
and telephone utilities in 47 States and
several U.S. territories and possessions.
A native of California, Mr. Byrne served
as Chairman of the Bank of Alex Brown
in Sacramento and also as President and
Chief Executive Officer of the Alex
Brown Financial Group, a multibank
holding company. He holds a B.A. from
the University of Redlands and a Ph.D.
from the University of North Carolina.

Billy Ross Brown, a Member of the
Corporation’s Board and former
Chairman of the Corporation, is also
Chairman and Chief Executive Officer of
the Farm Credit Administration. He
served as a director of Production Credit
Associations in the Fifth Farm Credit
District for 20 years, 9 of them as
Chairman of the Board of Directors of
the Oxford (Mississippi) Production
Credit Association. He is a prominent
farmer, cattleman, and conservationist,
has been active in a number of State and
national agricultural and conservation
organizations, and has been honored by
the Mississippi Association of
Conservation Districts and the U.S.
Forest Service. In 1985, he was inducted
into the Hall of Fame by the Mississippi
Agriculture and Forestry Museum. Mr.
Brown received a bachelor’s degree in
business administration from the
University of Mississippi.



Notes To FINANCIAL STATEMENTS

Farm Credit System Insurance Corporation—Notes to the Financial
Statements as of December 31, 1993 and December 31, 1992

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 insuring
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 (Act) (insured
obligations). Effective January 6, 1989,
each bank in the Farm Credit System
(System) participating in insured
obligations became an insured System
bank. 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:

14

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 balances outstanding at December
31, 1993, for each of the components of
the Corporation’s insurance
responsibilities were $53.7 billion of
insured obligations, $1.3 billion of FAC
bonds (of which $0.5 billion in
repayments have been provided for),
and $241 million of eligible borrower
stock.


CORPORATION REVENUES

Millions

Premium Collection and Secure
Base Amount

Premium revenue has been stable since
1990. Premiums are collected annually
from System banks based on each
bank’s, and its related associations’,
retail loan volume (see Note 4). The
Corporation had accrued $74 million on
December 31, 1993, representing the
estimated premiums that were earned
but not yet collected for calendar year
1993; these premiums were collected on
January 31, 1994. Each insured System
bank will continue to make annual
premium payments until the aggregate
amount in the Insurance Fund reaches
the secure base amount, at which time
premiums will be reduced to a level

4

adequate to maintain the Fund at the
secure base amount. The secure base
amount is a percentage of the insured
obligations issued and outstanding by
all System banks (see Note 4).

Investment of Insurance
Fund Assets

The Corporation had cash and
investments of $671 million at
December 31, 1993. Funds are invested
in U.S. Treasury securities in accordance
with 12 U.S.C. 2277a-11 and the
Corporation’s investment policy. The
policy provides that the Corporation
will seek the maximum return
consistent with its liquidity needs and a
minimum exposure to loss of principal.
The average portfolio yield for 1993 was
6.28 percent compared with 6.63
percent for 1992. The lower average
yield for 1993 resulted from lower
interest rates prevailing in 1993.

The Corporation’s investment policy
permits flexibility to make investments
with maturities from 0 to 5 years. There
must be a minimum of 15 percent and a
maximum of 25 percent invested in any
maturity range. At December 31, 1993,
the actual portfolio maturity groupings
were:


should occur, the Corporation is
required to repay the U.S. Treasury as
funds become available from the
payment of premiums.

On May 20, 1988, the FCA placed the
Federal Land Bank of Jackson and the
Federal Land Bank Association of
Jackson in receivership (collectively the
FLBJR) and appointed a receiver to
liquidate their assets. As of April 27,
1990, the FCA, the receiver of the
FLBJR, the FAC, the System banks, the
Assistance Board, and the Corporation
entered into an agreement which called
for the FAC to issue 15-year U.S.
Treasury-guaranteed bonds to purchase
preferred stock in the FLBJR. Upon the
maturity in 2005 of the FAC bonds used
to purchase preferred stock in the
FLBJR, the Corporation will provide
funds to repay the principal of these
debt obligations, to the extent that the
Trust Fund is not sufficient for such
purpose. Assistance given by the FAC
to the FLBJR totaled $388 million.

Estimated Insurance Obligation
The Corporation estimated the present
value of its liability to provide funds for

payment of the $388 million of 15-year

20

maturing debt to be approximately $127
million and $166 million at December
31, 1993 and 1992, 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
Statement of Financial Accounting
Standards 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 percent for 1993 and 7
percent for 1992). The fair value was
approximately $141 million and $166
million as of December 31, 1993 and
1992, respectively.

Provisions for changes in the
Corporation’s liability are reflected in
the statements of income and expenses
in the amount of ($39.4) million and
$10.9 million for the years ended
December 31, 1993 and 1992,
respectively. The ($39.4) million
provision for 1993 reflects a change in
management’s estimate of the liability.


FARM CREDIT SYSTEM
INSURANCE CORPORATION

ANNUAL REPORT

4993



For 1993, the Corporation’s budget was
$1.9 million. The following graph
illustrates how the budget is structured
to leverage resources through
contracting.

CONTRACT SERVICES REPRE
CORPORATE OPERA’

ENT 42% OF
UDGET

Contract Services
$0.8 Million

* Includes staff compensation, travel, rent and misc.

Actual expenses of $1.3 million were
significantly below budget. This
positive variance resulted principally
from the Corporation’s decision to
contract for accounting services rather

than to purchase its own system, and
lower FCA examination and legal
expenses due to the improving financial
condition of the Farm Credit System.

During 1993, the Clinton administration
issued guidelines for reinventing
government. The Corporation
voluntarily complied with this effort
and submitted its streamlining plan to
the Office of Management and Budget in
November. To implement this plan, the
Board amended the Corporation’s
Bylaws to abolish the Chief Executive
Officer position. This not only
eliminated a layer of management but
created a more streamlined structure in
which the Chief Operating Officer
reports directly to the Board. In
addition, in keeping with the
administration’s goal of reducing the
number of Federal employees, the
Corporation’s budget was revised to
eliminate a full-time staff position.



$ Billions

The Corporation is also required by
statute to use the Insurance Fund to:

(a) satisfy System institution defaults on
obligations related to FAC-issued bonds
under section 6.26(d)(3) of the Act, and
(b) ensure the retirement of eligible
borrower stock. The outstanding
balances of these obligations at
December 31 for the past 4 years are
illustrated in the following graph.

OTHER OBLIGATIONS

[HERB Fac Assistance Bonds
eS Eligible Borrower Stock

Other obligations declined from $2.5
billion in 1990 to $1.5 billion in 1993 as
a result of the steady retirement of
outstanding eligible borrower stock. In
addition, System banks have been
providing for the repayment of

outstanding FAC assistance bonds. At
December 31, 1993, the System had
provided for the repayment of
approximately $0.5 billion of the FAC
assistance bonds.

Insurance Claims

In early 1993, the Corporation paid its
first insurance claims expense to
facilitate the retirement of eligible
borrower stock outstanding at the
Richmond, Texas, Production Credit
Association (PCA), which was placed in
receivership in 1989. The Corporation
paid 211 claims for $1.17 million; the
average claim was approximately
$5,500.

Operations

The Corporation operates with a core
staff of 9 employees. In order to
leverage this small staff and to comply
with a congressional mandate to avoid
unnecessary operating costs and
duplication of effort, the Corporation
relies on FCA for examination and legal
support. Other specialized services are
available through contractual
arrangements on an as-needed basis.


®
2

$ Million:

Corporate ACTIVITIES

Insurance Fund Management

Growth in the Insurance Fund

The Insurance Fund grew to $642
million at December 31, 1993, an
increase of 31 percent from December
31, 1992. The Insurance Fund
represents the Corporation’s equity, or
difference between total assets ($769
million) and liabilities, and insurance
obligations ($127 million). The
following graph depicts the growth in
the Corporation’s total assets and the
Insurance Fund.

Growth in the Insurance Fund
(Total Assets vs. Insurance Fund Equity)

800
700 4
600 4
500
4004
300 4
2004
100 4

0
5/89

T T T T
1/90 1/91 1/92 1/93 1/94

~~ Total Assets
—— Insurance Fund

The Corporation’s principal liability for
insurance obligations at December 31,
1993, was $127 million, which
represents the liability to repay the Farm
Credit System Financial Assistance
Corporation (FAC) for financial
assistance to the Federal Land Bank of
Jackson in Receivership. This expected
liability was revised significantly
downward at yearend 1993 to reflect
management’s expectation that the FAC
Trust Fund will be available to assist in
the repayment of FAC assistance (see
Note 5).

Corporation Revenues

The Corporation’s revenues are derived
from two sources, premiums collected
from insured System banks and interest
income earned on the Corporation’s
investment portfolio. Total Corporation
revenues have increased from $98
million in 1990 to $115 million in 1993.
While premium revenue has been
relatively stable during this period, total
revenue has increased as a result of the
growing contribution of investment
earnings, as depicted in the following
graph.



Note 3—Investments

At December 31, 1993, investments in U.S. Treasury obligations consisted of the

following:
($ in thousands)

Par Value Book Value Market Value
US. Treasury $ 90,000 $ 90,343 $ 92,137
Notes 3,600 3,611 3,685
11,304 11,547 11,572
90,000 91,493 96,441
41,021 43,247 43,957
85,000 85,117 91,933
425 425 460
6,000 5,994 6,489
24,693 26,321 26,707
1,644 1,775 1,840
90,395 97,531 101,186
4,047 4,374 4,530
30,963 33,911 34,659
200 219 224
487 535 545
20,194 20,079 20,674
136,468 154,047 153,484
$636,441 $670,569 $690,523

Face
Rate

8.000%
8.000%
8.000%
8.875%
8.875%
7.875%
7.875%
7.875%
7.875%
8.500%
8.500%
8.500%
8.500%
8.500%
8.500%
5.500%
8.250%

Maturity Date

T/N5/94
TNS/94
TN5/94
TINS/95
TNS/95
7/5/96
7/15/96
7/15/96
7/15/96
TNS/97
TN5/97
T/S/97
TNS/97
TNS/97
7/15/97
7/31/97
7/15/98

At December 31, 1993, the Corporation’s investment portfolio had gross unrealized
gains of $20.5 million and gross unrealized losses of $0.6 million. At December 31,
1992, the Corporation’s investment portfolio consisted of U.S. Treasury notes with a
book value of $561.1 million and a market value of $579.6 million, which included
gross unrealized gains of $18.6 million and gross unrealized losses of $0.1 million.

17



Liability for Eligible Borrower Stock -
Richmond PCA

At December 31, 1992, the Corporation
recorded a liability to ensure the
retirement of eligible borrower stock of
the Richmond, Texas, PCA in
Receivership. The amount of eligible
borrower stock to be retired at December
31, 1992, was $1.17 million. At
December 31, 1993, substantially all of
this liability had been paid.

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 and having
to provide funds to retire the eligible
borrower stock at the Richmond PCA in
Receivership, 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.

Note 6—Operating Lease

On September 2, 1993, the Corporation’s
lease agreement with the Farm Credit
System Building Association for office
space and furniture rental was modified
to extend the term to September 30,
1996. The agreement requires payment
of an annual base rent for office space,
with fixed annual increases of 2 percent.
The Corporation recorded $78,890 and
$75,132 in operating expenses related to
the lease in 1993 and 1992, respectively.
Remaining minimum future payments
under the terms of the lease are $70,556,
$66,786, and $50,826 for 1994, 1995,
and 1996, respectively.

Note 7—Related Parties

The Corporation purchases services
from the FCA under an Inter-Agency
Agreement. Such services include
examination, administrative, and legal
support services. The Corporation had
payables due to the FCA of $63,357 at
December 31, 1993, and $50,880 at
December 31, 1992. The Corporation
purchased services for 1993 which
totaled $326,347 compared with
$361,705 for 1992.

23


CONTENTS

Boardief Directors’ iti eter eeeereetrseeenetiees Page 1
Overview =i eeeesesenetteseeceeetseseeeteeaeeetensees Page 2
Corporate Activities —  sacacscsesessesseseeseeseeeseessseeseerees Page 3

Insurance Fund
Management

Risk Management

Report of Independent

Publi Accowiitartts =§«-«§ = asseussnsavsavsseosnersaneseeenvaviesrsvares Page 10
Financial Statements ———heeaeasecesescscssencnesserseessersesaeeses Page 11
Notes to

Financial Statements ... Page 14

References ... Page 24



REPORT OF INDEPENDENT PuBLic ACCOUNTANTS

10


Farm Credit System Insurance Corporation

Statements of Income and Expenses and Changes in Insurance Fund
for the Years Ended December 31, 1993 and 1992

($ in thousands)

Income
Premiums (Note 4)
Interest Income
Realized Gain on Sale of Investment

Total Income

Expenses
Administrative Operating Expenses
(Note 7)
Provision for Eligible Borrower Stock
(Note 5)
Provision for Estimated Insurance Obligations
(Note 5)

Net Income

Farm Credit Insurance Fund, Beginning of Year

Farm Credit Insurance Fund, End of Year

1993

$ 74,100
41,277

$115,377

$ 1,278
0
(39,444)

153,543

488,460

$642,003

1992
$ 73,902
36,982
216

$111,100

$ 1,200
1,173
10,889

97,838

390,622

$488,460

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

12


MissION STATEMENT

As an independent entity, the Farm Credit System Insurance Corporation
(Corporation) shall:

© Protect investors in insured Farm Credit System obligations and
taxpayers through sound administration of the Farm Credit
Insurance Fund (Insurance Fund);

© Exercise its authorities to minimize exposure to the Insurance
Fund; and

© Help ensure the future of a permanent system for delivery of
credit to agricultural borrowers.


From 1990 when the Corporation’s
liability was established, until December
31, 1992, the Corporation estimated its
ultimate liability for the FAC obligations
at the present value of the entire amount
of the underlying FLBJR preferred stock
assuming no funds would be available
in the Trust Fund. During these years,
the availability of the Trust Fund was
considered uncertain by management,
primarily because of the existence of the
preferred stock obligations of the other
four open System banks discussed
earlier, the options provided under the
Act regarding redemption of their
preferred stock, and related questions
regarding how amounts accumulated in
the Trust Fund might be used.

During 1993, management reevaluated
its estimated insurance obligation and
revised its estimate to reflect availability
of the full amount of the Trust Fund to
repay a portion of the FLBJR-related
FAC bonds. Significant developments
underlying management’s current
evaluation were the establishment of an
irrevocable trust by the Louisville FCB
for the early redemption of financial
assistance-related preferred stock and
the merger agreement entered into by
the Spokane FCB, which provides for

the establishment of a similar trust in
early 1994. Upon establishment of the
Spokane FCB trust, which management
has no reason to believe will not take
place, all four of the open FCBs to
which the FAC provided assistance
through the purchase of preferred stock
will have provided the funds necessary
to redeem their $419 million in
preferred stock.

Other significant developments during
1993 supporting management’s
consideration of the Trust Fund’s
availability included: (1) the continuing
annual annuity payments by System
banks required by the Farm Credit
Banks and Associations Safety and
Soundness Act of 1992 (1992 Act) to
provide for the repayment of Capital
Preservation Agreement-related FAC
bonds and Treasury-paid interest, and
(2) the improved financial condition of
System banks. The Corporation cannot
predict the effects of future events upon
System operations and upon the amount
of the Trust Fund that will ultimately
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,

21


Farm Credit System Insurance Corporation

May 31, 1994

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 1993, the first year the Corporation
was fully operational.

The aggregate amount in the Insurance Fund at December 31, 1993, was $642
million. The Corporation expects to incur $1.78 million in operating costs during
calendar year 1994. On January 31, 1994, the Corporation collected $74 million
in premiums from the insured Farm Credit System banks.

Sincerely,

AQ,

Gary C. Byrne
Chairman

The President of the United States Senate
The Speaker of the United States House of Representatives

McLean, Virginia 22102-0826
703/883-4380,


REFERENCES

For additional information about the System, its financial condition and
performance, and activities of the FCA, the following publications are
recommended.

Farm Credit System Annual Reports to Investors and Quarterly and Annual
Information Statements for the current fiscal year and the two preceding fiscal years.
These are available without charge from:

Federal Farm Credit Banks
Funding Corporation

10 Exchange Place

Suite 1401

Jersey City, NJ 07302

(201) 200-8000

Annual Reports of the Farm Credit Administration for the past five fiscal years.
These are available without charge from:

Office of Congressional and
Public Affairs

Farm Credit Administration

1501 Farm Credit Drive

McLean, VA 22102-5090

(703) 883-4056

Reports for previous years are subject to availability, but copies are available for
inspection.

24


Risk Management

The Corporation’s ongoing program to
identify and manage risk to the
Insurance Fund minimizes the Fund’s
exposure to potential losses through
early detection. Corporation staff have
developed special examination
procedures to evaluate the condition of
weaker System institutions. FCA
examination staff performs these special
examinations on a reimbursable basis.
In addition, the Corporation assesses
tisk exposure to the Insurance Fund
through its ongoing review and analysis
of the financial condition of System
institutions, corporate actions approved
by FCA for System institutions, Reports
of Examination of System institutions,
and by serving as a nonvoting
participant on FCA’s enforcement
committee. Corporation staff also
monitors the development of legislative,
judicial and regulatory issues that could
alter the various risks to the Insurance
Fund.

In the fourth quarter of 1993, the
Corporation initiated a study to develop
a methodology for evaluating the
adequacy of the Insurance Fund’s secure
base amount, and to identify and
quantify the various risk factors that

impact the Fund. This study is
expected to produce a dynamic model
that will enable staff to project the
appropriate level of the Insurance Fund
on an ongoing basis.

Assistance Agreement
Management

On January 1, 1993, the Corporation
assumed responsibility for managing
assistance agreements with the Farm
Credit Banks of Louisville and Spokane
from the Farm Credit System Assistance
Board, which ceased operations on
December 31, 1992. The Corporation
approves assisted banks’ business plans
and budgets and closely monitors their
financial performance. It has also
established a Credit Review Committee
to review assisted banks’ proposed
involvement in participation loans. In
1993, the committee reviewed
participation in loans with an aggregate
principal balance of $79.6 million. In
addition, the Corporation is required to
review and approve certain bank actions
which are not covered by the annual
business plans that may have an impact
on the bank’s ability to repay the
assistance.


FINANCIAL STATEMENTS

Farm Credit System Insurance Corporation
Statements of Financial Condition as of December 31, 1993 and 1992
($ in thousands)

1993 1992
Assets
Cash and Cash Equivalents $ 528 $ 832
Investments in U.S. Treasury Obligations
(Note 3) 670,569 561,100
Accrued Interest Receivable 24,012 20,203
Premiums Receivable (Note 4) 74,081 74,082
Other Assets 0 7
Total Assets $769,190 $656,224
Liabilities and Insurance Fund
Accounts Payable and Accrued Expenses
(Note 7) $ 185 $ 147
Liability for Eligible Borrower Stock,
Richmond PCA (Note 5) 2 1173
Liability for Estimated Insurance Obligations
(Note 5) 127,000 166,444
Farm Credit Insurance Fund 642,003 488,460

Total Liabilities and Insurance Fund $769,190 $656,224

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

11