2018 Annual Report 

Protecting Investors in 

Agriculture and Rural America 
 

 

 

Who we are

Mission Statement 

Te 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. 
July 9, 2019 

Dear Mr. President and Madam Speaker: 

In accordance with section 5.64 of the Farm Credit Act of 1971, as amended, the Farm 

Credit System Insurance Corporation is pleased to submit its annual report for calendar 

year 2018. Tis report highlights our role as the independent federal corporation established 

to ensure the timely payment of principal and interest to investors in insured Farm Credit 

System debt securities. 

Te balance in the Farm Credit Insurance Fund as of December 31, 2018, was $4.95 billion. 

In 2018, we earned $212.5 million in insurance premiums from Farm Credit System banks, 

and $73.1 million in investment income. In 2019, we expect to incur $4.3 million in 

operating costs. 

FCSIC is proud of the role we play in supporting the safety and soundness of the Farm 

Credit System, and we are committed to faithfully fulflling our mission. 

Sincerely, 

Jefery S. Hall 

Chairman 

Te President of the United States Senate 

Te Speaker of the United States House of Representatives 
 

Contents 

Message from the Chairman .................................................................................................................................... 3

Board of Directors...................................................................................................................................................... 4

Jefery S. Hall .................................................................................................................................................... 5

Glen R. Smith ................................................................................................................................................... 6

In Memoriam: Dallas P. Tonsager ................................................................................................................ 7

Independent Auditor’s Report ................................................................................................................................ F1

Financial Statements ................................................................................................................................................. F4

Notes to the Financial Statements ......................................................................................................................... F7

2018 — Year in Review ............................................................................................................................................. 8

Te Farm Credit System .......................................................................................................................................... 11

Insurance Fund Management................................................................................................................................. 18

Investments ................................................................................................................................................................ 24

Risk Management ..................................................................................................................................................... 26

Financial Assistance and Resolutions ................................................................................................................... 32

Management Assurances ......................................................................................................................................... 33

Compliance with the Federal Civil Penalty Infation Adjustment Act Improvements Act of 2015 ......... 34

Performance Management Program ...................................................................................................................... 35

Glossary ...................................................................................................................................................................... 38

Acronyms and Abbreviations ................................................................................................................................. 40

Corporate Staf .......................................................................................................................................................... 41

Contact Information ................................................................................................................................................. 41

Banks Insured by FCSIC ......................................................................................................................................... 42

Additional Information ............................................................................................................................................ 43
 

3

Message from the Chairman 

I am pleased to present the 2018 Annual Report of the Farm Credit System Insurance Corporation. It 

is gratifying to note that, for the 29th consecutive year since we began issuing fnancial statements, our 

independent public auditor has issued unmodifed or unqualifed opinions on those statements. In 2017, 

we expanded our audit coverage to include an audit of our internal control over fnancial reporting. T e 

enclosed opinion letter indicates that the fnancial statements of the Farm Credit Insurance Fund, of which 

we are stewards, are fairly and accurately presented and FCSIC maintained efective internal control over 

f nancial reporting. 

FCSIC’s net income for 2018 was $282.0 million, compared with $394.8 million for the previous year. T e 

Insurance Fund balance as of December 31, 2018, was $4.95 billion, compared with $4.85 billion at yearend 2017. 

At the end of 2017, our Insurance Fund exceeded the statutory secure base amount and we transferred 

$175.8 million to the allocated insurance reserves accounts (AIRAs). In accordance with the Farm Credit 

Act of 1971, as amended, the FCSIC board subsequently voted to disburse the AIRAs to System banks 

and the holders of the Financial Assistance Corporation (FAC) stock. Te payment of $13.1 million to 

the holders of the FAC stock, originally issued with $55.8 million par value, fully retired the FAC stock in 

March 2018. 

Revenue from insurance premiums paid by Farm Credit System banks was $212.5 million for 2018, 

compared with $340.8 million for 2017. Premium revenue decreased because assessment rates went down 

from 15 basis points in 2017 to 9 basis points in 2018. Interest income for 2018 totaled $73.1 million, 

compared with $57.7 million in 2017. 

At the end of 2018, our Insurance Fund exceeded the statutory secure base amount and we transferred 

$66.1 million to the AIRAs. In accordance with the Farm Credit Act of 1971, as amended, the FCSIC 

board subsequently voted to disburse the AIRAs to the System banks in March 2019. 

In accordance with the requirements of the Federal Managers’ Financial Integrity Act of 1982, 

management conducts an annual assessment of FCSIC’s internal controls. Te 2018 assessment found that, 

in the reviewed areas, internal controls comply with the standards prescribed by the U.S. Government 

Accountability Ofce and provide reasonable assurance that program objectives are being met. 

We will continue to carry out our mission and work in 2019 to achieve our strategic goals and objectives. 

We are mindful of our public trust and will ensure that investors, Congress, the Farm Credit System, and 

other regulatory agencies receive timely and accurate information on issues concerning the Insurance 

Fund. 

Sincerely, 

Jefery S. Hall 
4

Board of Directors 

Te Farm Credit System Insurance Corporation (FCSIC or the Corporation) is managed by a threemember board of directors comprising the same three individuals who make up the Farm Credit Administration (FCA) board. However, the same member may not serve as chair of both entities. FCA is the 

independent federal agency responsible for the regulation and examination of the Farm Credit System 

(System), a nationwide network of fnancial cooperatives that lend to agriculture and rural America. 

Currently, the two members of the board of directors are Chairman Jefery S. Hall and Glen R. Smith. We 

are sad to report that, in May 2019, Board Member Dallas P. Tonsager passed away. He served two terms 

on both the FCSIC board of directors and the FCA board — frst, from 2004 to 2009 and again from 2015 

to 2019. He served as chairman of the FCSIC board from 2015 to 2016 and as chairman and CEO of the 

FCA board from 2016 to 2019. 

Farm Credit System Insurance Corporation 
 

 

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Jefery S. Hall 

Jefery S. Hall is chairman of the board of directors of FCSIC. He was 

elected to this position on November 29, 2016. Mr. Hall has served on the 

FCSIC board and on the FCA board since his appointment by President 

Barack Obama on March 17, 2015. He is serving a term that expired on 

October 13, 2018. 

Before coming to FCSIC and FCA, Mr. Hall was president of T e Capstone Group, an association management and consulting frm that he 

cofounded in 2009. From 2001 to 2009, he was the state executive director 

for the U.S. Department of Agriculture’s (USDA’s) Farm Service Agency 

in Kentucky. In that role, he was responsible for farm program and farm 

loan program delivery and compliance. 

From 1994 to 2001, Mr. Hall served as assistant to the dean of the University of Kentucky, College of Agriculture, advising the dean on state and 

federal legislative activities and managing a statewide economic development initiative called Ag-Project 2000. 

Mr. Hall also served as a senior staf member in the ofce of U.S. Senator Mitch McConnell from 1988 to 

1994. During that time, he was the legislative assistant for agriculture, accountable for internal and external issue management. 

Before joining Senator McConnell’s staf, Mr. Hall served on the staf of the Kentucky Farm Bureau Federation. Over his 30-year career in agriculture, he has held leadership positions in the following nonprof ts: 

the Kentucky Agricultural Council, the Agribusiness Industry Network, the Louisville Agricultural Club, 

the Kentucky Agricultural Water Quality Authority, and the Governor’s Commission on Family Farms. 

Mr. Hall was raised on a family farm in southern Indiana, which has been in his family for nearly 200 

years. He is currently a partner in the farm with his mother and sister. Mr. Hall received a Bachelor of 

Science degree from Purdue University. 

Protecting Investors in Agriculture and Rural America 
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Glen R. Smith 

Glen R. Smith was appointed to the Farm Credit System Insurance 

Corporation board of directors and Farm Credit Administration 

board by President Donald Trump on December 8, 2017. Mr. Smith 

will serve a term that expires May 21, 2022. 

Mr. Smith is a native of Atlantic, Iowa, where he was raised on a 

diversifed crop and livestock farm. His farm experience started at 

a very early age, afer his father was involved in a disabling farm 

accident. He graduated from Iowa State University in 1979 with a 

Bachelor of Science in agricultural business and accepted a position 

with Doane Agricultural Services as state manager of the company’s 

farm real estate division. 

In 1982, Mr. Smith and his wife, Fauzan, moved back to his hometown and started farming and developing his ag service business. 

Today, their family farm, Smith Generation Farms Inc., has grown 

to encompass about 2,000 acres devoted to corn, soybeans, hay, and 

a small beef cow herd. 

Mr. Smith is co-owner and founder of Smith Land Service Co., an 

ag service company that specializes in farm management, land appraisal, and farmland brokerage, serving about 30 Iowa counties. From 2001 to 2016, he was also co-owner and manager of S&K Land Co., an 

entity involved in the acquisition, improvement, and exchange of Iowa farmland. 

Mr. Smith has served on numerous community, church, and professional boards. He was elected to the 

Atlantic Community School Board of Education on which he served for nine years; during most of this 

time, he served as either president or vice president. 

In 1990, he earned the title of Accredited Rural Appraiser from the American Society of Farm Managers 

and Rural Appraisers. In 2000, he served as president of the Iowa chapter of that organization. He is a lifelong member of the Farm Bureau, Iowa Corn Growers Association, Iowa Soybean Association, and Iowa 

Cattlemen’s Association. 

Te Smiths have four grown children and three grandchildren. Tree of their children are involved in 

production agriculture. Teir son Peter has assumed managerial responsibilities for both the family farm 

and business. 

Farm Credit System Insurance Corporation 
7

In Memoriam: Dallas P. Tonsager 

June 24, 1954 – May 21, 2019 

Protecting Investors in Agriculture and Rural America 
 

8

2018 — Year in Review 

FCSIC’s 25-Year Anniversary of Full Operations 

FCSIC is a federal government-controlled corporation established by the Agricultural Credit Act of 1987. 

Our frst year of full operations was 1993. Tat year, the Insurance Fund grew to $642.0 million, insuring $53.7 billion in System debt. We had a nine-member core staf and relied on a mixture of public- and 

private-sector contractors for support services. 

Twenty-fve years later, the Insurance Fund is over seven times larger at $4.95 billion, insuring $282.5 billion of System debt. Yet we have continued to operate efectively with a small staf of 11 since 2013. We 

continue to leverage our resources by purchasing support services from public- and private-sector contractors to ensure the efcient administration of our programs. 

Over the past three years, FCSIC’s operating costs remained unchanged at $3.7 million. Our operating 

costs as a percentage of total assets represented 7 basis points for 2018, an improvement of 1 basis point 

over 2017. In September 2018, the board of directors approved budgets for 2019 and 2020. Te 2019 budget is $4.3 million, an increase of 2.9 percent over the 2018 budget. 

Legislative Initiative Achieved 

As part of our strategic plan, we pursued a legislative initiative to enhance the Corporation’s receivership and conservatorship authorities. We achieved our principal goal to ensure that FCSIC’s authorities 

are commensurate with those of other federal receivers and conservators. In December 2018, Congress 

enacted the Agriculture Improvement Act of 2018 (2018 Farm Bill), which clarifed and updated FCSIC’s 

statutory authorities to act as receiver or conservator for a System institution. 

Congress stated its intent in the 2018 Farm Bill Conference Report that FCSIC’s authorities be “functionally equivalent to the parallel authorities of the Federal Deposit Insurance Corporation.” T is legislation 

will improve our ability to protect investors and reduce the cost of resolving a troubled System institution. 

Currently, the System is in a safe and sound condition and no institution is in danger of failing. 

Payof of FAC Obligation 

In March 2018, the Corporation’s board of directors approved a payment of $175.8 million in excess insurance funds to System institutions. Of this amount, $13.1 million was used to retire the remaining stock 

that System institutions held in the Financial Assistance Corporation (FAC), which was established by 

the Agricultural Credit Act of 1987 to provide fnancial assistance to the System. FAC stockholders were 

System institutions that supplied a portion of the funds needed for the System’s survival during the 1980s 

farm crisis. 

In 1996, Congress directed FCSIC to allocate 10 percent of any excess insurance funds at the end of each 

calendar year to FAC stockholders, who held approximately $55.8 million in outstanding shares. T rough 

distributions of excess insurance funds over the years, FCSIC repaid this amount to FAC stockholders, 

fulflling its statutory obligation. With the retirement of this fnal $13.1 million in FAC stock, there are no 

more outstanding shares and the FAC stockholders account was closed. 

Farm Credit System Insurance Corporation 
 

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Management Changes 

In July 2018, C. Richard Pftzinger became the Corporation’s Chief Operating Ofcer, succeeding Dorothy 

L. Nichols. Mr. Pftzinger has been with the Corporation since 1992 and previously served as Director of 

Risk Management and Chief Financial Ofcer. He has more than 30 years of fnancial institution regulatory and insurance experience. 

Dorothy L. Nichols served with distinction as FCSIC’s second Chief Operating Ofcer since 2006. She 

joined FCSIC in 1995, serving as General Counsel. Ms. Nichols guided the Corporation through a period 

of signifcant growth. In 2006 the Insurance Fund totaled $2.3 billion, insuring System obligations of 

$135.2 billion. By 2018 the Insurance Fund had grown to $4.95 billion, insuring $282.5 billion of System 

obligations. To enhance FCSIC’s ability to help System banks in a liquidity crisis, Ms. Nichols led eforts 

that resulted in FCSIC obtaining a $10 billion line of credit agreement with the Federal Financing Bank, 

a government corporation within the U.S. Department of Treasury that provides funds to eligible federal 

agencies. During her 12-year tenure as Chief Operating Ofcer, she established many of the risk management practices we use today. She also chaired the FCSIC Investment Committee, which actively manages 

the Insurance Fund’s investments, which grew from $1.4 billion in 2006 to $4.4 billion in 2018. She retired 

in July 2018 with more than 36 years of federal government service. 

FCSIC also made several other senior management changes. In March, Andrew Grimaldi became Chief 

Financial Ofcer, replacing Emily Dean who retired afer serving FCSIC with distinction for f ve years. 

In September, Howard Rubin, who was serving as FCSIC’s General Counsel, became the new Chief Risk 

Ofcer, which includes the duties of the Director of Risk Management position. Lynn Powalski joined 

FCSIC as General Counsel in February 2019. 

Protecting Investors in Agriculture and Rural America 
 

 

  

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Table 1 

Selected Financial Statistics for the Farm Credit System Insurance 

Corporation 

(Dollars in Millions) 

BALANCE SHEET 2018 2017 2016 

$4,848.4 $4,453.5 Total assets 

Total liabilities

$4,954.2 

 0.4 

66.1 

4,887.8

 285.7

 3.7

 0

 $282.0 

0.7 0.6 

Insurance Fund balance

 Allocated insurance reserves accounts 175.8  0

 Unallocated Insurance Fund balance 4,671.9 4,452.9 

OPERATIONS 

Revenues 398.5 418.4 

Operating expenses 3.7 3.7 

Insurance expense  0 0 

Net income $394.8 $414.7 

Farm Credit System Insurance Corporation 
 

 

 

       

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Te Farm Credit System 

Structure and Funding 

Te Farm Credit System is a network of federally chartered, cooperative lending institutions owned by the 

agricultural and rural customers it serves, including farmers, ranchers, producers and harvesters of aquatic 

products, agricultural cooperatives, and farm-related businesses. As of January 1, 2019, the System had 4 

banks and 69 associations. Each association has its own chartered territory and is afliated with one of 

the four banks. See Table 2 for the combined fnancial statistics for the banks and associations. 

Table 2 

Combined Farm Credit System Statistics 

(Dollars in Billions) 2018 2017 2016

Insured debt outstanding1 $282.5 

124.9 

53.4 

46.1 

6.8 

22.4 

7.3 

6.6 

3.6 

0.8 

67.9 

5.3 

0.8% 

$266.0 $258.4 

Production agriculture:

 Real estate mortgage loans 119.5 114.5 

 Production and intermediate-term loans 51.7 50.3 

 Agribusiness loans2 42.2 39.6 

 Communication loans 6.3 6.0 

 Energy, water, and waste disposal loans 21.7 21.4 

 Rural residential real estate loans 7.3 7.2 

 Agricultural export loans 5.6 5.5 

 Lease receivables 3.7 3.5 

 Loans to other f nancing institutions 0.8 0.8 

 Cash and investments 61.8 62.6 

 Net income 5.2 4.8 

 Nonperforming loans as a percentage of total loans 0.8% 0.8% 

1. Insured debt outstanding is based on System institution call report information and refects the book value of insured debt outstanding plus accrued 

interest as of December 31, 2018, 2017, and 2016. (Book value excludes fair-value adjustments.) 

2. As of December 31, 2018, agribusiness loans consisted of loans to cooperatives of $17.6 billion, processing and marketing loans of $24.8 billion, and 

farm-related business loans of $3.7 billion. 

Protecting Investors in Agriculture and Rural America 
 

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Associations receive funding from their afliated bank and lend directly to their owner-borrowers, providing a consistent and reliable source of agricultural and rural credit throughout the United States, including 

the Commonwealth of Puerto Rico. One of the System banks (CoBank) also has nationwide authority to 

make retail loans to cooperatives and other eligible entities. 

Te banks obtain funds for their operations primarily through the sale of consolidated Systemwide debt 

securities. Te banks own and use the Federal Farm Credit Banks Funding Corporation (Funding Corporation) to issue Systemwide debt securities in the capital markets. As the fscal agent for the banks, 

the Funding Corporation partners with a select group of dealers to market and distribute the securities 

to investors throughout the world. Systemwide debt securities are the general unsecured joint and several obligations of the banks. Systemwide debt securities are not obligations of and are not guaranteed by 

the U.S. government. In addition, Systemwide debt securities are not the direct obligations of the System 

associations and, as a result, the capital of the associations may not be available to support principal and 

interest payments on Systemwide debt securities. 

Investor Protection 

Investors provide the funds that the System lends to agriculture and rural America. FCSIC’s primary 

purpose, as defned by the Farm Credit Act, is to insure the timely payment of principal and interest on 

Systemwide debt securities purchased by these investors. 

Regulatory Oversight 

FCA is the regulator of the Farm Credit System, responsible for the examination, supervision, and regulation of each System institution. FCA is an independent agency in the executive branch of the U.S. government and derives its authorities from the Farm Credit Act. Tese authorities include examination and 

enforcement authorities similar to those of commercial bank regulators. Te U.S. Senate Committee on 

Agriculture, Nutrition, and Forestry and the U.S. House of Representatives Committee on Agriculture 

oversee FCSIC, FCA, and the System. 

Insured Obligations 

FCSIC insures Systemwide and consolidated bonds, notes, and other obligations issued by System banks 

through the Funding Corporation under section 4.2(c) or (d) of the Farm Credit Act. Figure 1 shows that 

insured debt outstanding increased by 6.2 percent in 2018 to $282.5 billion, compared with an increase of 

2.9 percent in 2017. 

Farm Credit System Insurance Corporation 
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Figure 1 

Insured Debt Outstanding: 

Growth Averaged 6.4 Percent Over the Past Five Years 

(Dollars in Billions) 

Note: Insured debt outstanding is based on the call report information provided by System institutions and refects the book value of insured debt 

outstanding, plus accrued interest. (Book value excludes fair-value adjustments.) 

Protecting Investors in Agriculture and Rural America 
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Farm Credit System Capital 

Te primary source of funds to repay insured Systemwide debt securities is the System’s borrowers. Each 

borrower must have a minimum net worth and, in most cases, collateral posted to secure the loan. T e 

borrower makes payments on the loan to the lending bank or association, the lending association in 

turn makes payments on its loan to the lending bank, and the banks ultimately repay Systemwide debt 

securities. 

All the banks and associations currently exceed their minimum regulatory capital requirements as protection and support for the repayment of the outstanding insured debt. If a bank were unable to repay its 

portion of an insured Systemwide debt obligation, FCSIC would use the Insurance Fund to make the payment on its behalf. If the assets in the Insurance Fund were exhausted, the Farm Credit Act’s provisions 

for joint and several liability would be triggered, requiring the other System banks to repay the defaulting 

bank’s portion of the debt. 

As Figure 2 shows, the amount of System bank capital plus the balance in the Insurance Fund increased 

23 percent over the past fve years, from $19.6 billion at year-end 2014 to $24.2 billion at year-end 2018. 

However, bank capital plus the amount in the Insurance Fund as a percentage of insured debt outstanding decreased from 8.7 percent in 2014 to 8.5 percent in 2018 (see Figure 3). Without the Insurance Fund, 

bank capital as a percentage of insured debt was 6.9 percent and 6.8 percent at year-ends 2017 and 2018, 

respectively. 

Overall, the fnancial performance and condition of the System on a consolidated basis remain strong, 

although some institutions continue to experience stress from credit deterioration in certain agricultural 

sectors. (See trends in the Financial Institution Rating System (FIRS) in the “Risk Management” section 

beginning on page 26.) 

A bank’s credit exposure to borrowing associations is partially mitigated by the associations’ capital levels. 

Increases in System associations’ capital levels, the result of higher retention levels of strong association 

net incomes, further reduces credit risk. As Figure 4 shows, from 2014 to 2018, combined association 

capital increased $9.1 billion — an annual average increase of approximately 6.6 percent. Since 2014, the 

associations have collectively achieved solid earnings and preserved capital, causing association capital as 

a percentage of total association assets to increase to 19.5 percent in 2018 from 18.8 percent in 2014 (see 

Figure 5). 

Farm Credit System Insurance Corporation 
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Figure 2 

Bank Capital Plus Insurance Fund 

(Dollars in Billions) 

Figure 3 

Bank Capital Plus Insurance Fund as Percentage of Insured Debt 

Protecting Investors in Agriculture and Rural America 
16

Figure 4 

Combined Association Capital 

(Dollars in Billions) 

Figure 5 

Combined Association Capital as a Percentage of Total Association Assets 

Farm Credit System Insurance Corporation 
 

 

 

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Risk Management Tools 

Farm Credit System banks use risk management tools to protect investors. One tool is the Contractual 

Interbank Performance Agreement (CIPA). All System banks have entered into this agreement, which 

measures the fnancial condition and performance of each bank by using ratios that consider bank capital, 

asset quality, earnings, interest rate risk, and liquidity. Te CIPA contains triggers that f nancially penalize 

banks that do not meet performance standards. 

Te System banks and the Funding Corporation have also entered into the Market Access Agreement. 

Te Market Access Agreement establishes conditions for each bank’s continued participation in the debt 

market. If a bank fails to meet agreed-upon performance measures, it may be restricted from issuing debt. 

Te performance criteria used under the Market Access Agreement are the CIPA scores and the bank’s tier 

1 leverage and total capital ratios. 

Te Farm Credit Administration’s liquidity regulation requires the banks to efectively manage liquidity 

risk and maintain a three-tiered liquidity reserve to better withstand a liquidity crisis. Each System bank 

is authorized to hold eligible investments in an amount not to exceed 35 percent of its total outstanding 

loans for the purposes of maintaining a liquidity reserve, managing short-term surplus funds, and managing interest rate risk. 

Te liquidity reserve must always consist of readily marketable instruments that are sufcient to fund at 

least 90 days of the principal portion of on-balance sheet maturing obligations. Te liquidity reserve must 

consist of level 1 instruments to cover the principal portion of each bank’s on-balance sheet maturing 

obligations for the frst 15 days; level 1 and 2 instruments sufcient to cover days 16 to 30; and level 1, 

2, and 3 instruments to cover days 31 to 90. Level 1 instruments include cash, overnight money market 

investments, obligations of U.S. government agencies with a fnal remaining maturity of 3 years or less, 

non-System government-sponsored enterprise (GSE) senior debt securities that mature within 60 days 

and diversifed investment funds comprised exclusively of level 1 instruments. Level 2 instruments include 

obligations of U.S. government agencies with a fnal remaining maturity of more than 3 years, mortgagebacked securities that are fully guaranteed by a U.S. government agency as to the timely repayment of 

principal and interest, and diversifed investment funds comprised exclusively of level 1 and 2 instruments. 

Level 3 instruments include non-System GSE senior debt securities with maturities exceeding 60 days, 

mortgage-backed securities that are fully guaranteed by a GSE as to the timely repayment of principal and 

interest, money market instruments maturing within 90 days, and diversifed investment funds comprised 

exclusively of level 1, 2, and 3 instruments. All four System banks exceeded these requirements in 2018. 

Protecting Investors in Agriculture and Rural America 
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Insurance Fund Management 

Te Insurance Fund and the Secure Base Amount 

Te Farm Credit Insurance Fund represents FCSIC’s equity, the diference between total assets and total 

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

fund (the portion of the Insurance Fund for which no specifc use has been designated) and an allocated 

insurance fund (the portion of the Insurance Fund that has been transferred to the allocated insurance 

reserves accounts (AIRAs)). 

Te Farm Credit Act established the secure base amount as 2 percent of the aggregate outstanding insured 

obligations (adjusted to exclude 90 percent of federal government–guaranteed loans and investments and 

80 percent of state government–guaranteed loans and investments). Table 3 shows how the secure base 

amount is calculated. Te Act gives FCSIC the discretion to choose another percentage that we determine 

to be actuarially sound to maintain in the Insurance Fund taking into account the risk of insuring outstanding debt obligations. 

FCSIC’s premiums are set with the goal of reaching and maintaining the 2 percent secure base amount. 

However, if growth of insured debt is greater than forecasted when premium rates are established (or the 

Fund is used for some authorized purpose), the Insurance Fund will end the year below the secure base 

amount, and FCSIC will need to collect additional premiums in the following year to make up the shortfall. If growth of insured debt is less than forecasted when premium rates are set, then the Insurance Fund 

may end the year above the secure base amount. 

If the Insurance Fund exceeds the secure base amount at the end of any calendar year, FCSIC allocates 

the excess amounts, minus operating expenses and insurance obligations, to the AIRAs established by 

Congress for the beneft of the System banks and holders of FAC stock. Once FCSIC determines that the 

allocation is appropriate and that the AIRA funds are not otherwise needed, FCSIC may pay the amounts 

in the AIRAs to the account holders in accordance with the formula specifed in the Farm Credit Act. 

FAC stockholders receive 10 percent of any distribution until they have received $55.8 million under the 

terms of the Act. In 2010, FCSIC returned a total of $205.3 million to System institutions, with $20.5 million paid to FAC stockholders. In 2012, FCSIC returned a total of $221.9 million, with $22.2 million paid 

to FAC stockholders. In 2018, FCSIC returned a total of $175.8 million, with $13.1 million paid to FAC 

stockholders, completing the payof of outstanding FAC shares. 

Farm Credit System Insurance Corporation 
 

 

 

 

 

 

 

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Table 3 

Calculation of Secure Base Amount 

Results as of December 31, 2018 

(Dollars in Millions) 

Total principal and interest of debt outstanding 

Less: 

 90 percent federal government–guaranteed loans 

 80 percent state government–guaranteed loans 

 90 percent federal government–guaranteed investments 

 80 percent state government–guaranteed investments

Total dedution 

Adjusted insured debt 

Secure base amount (2.00%) 

Unallocated and allocated Insurance Fund balance 

Unallocated and allocated Insurance Fund 

as a percentage of adjusted insured debt 

12/31/2018

$282,543

(5,708)

(20)

(32,641)

5/31/2018 

$272,366 

(5,196) 

(22) 

(30,382) 

-

12/31/2017 

$266,008

(5,300)

(21)

(27,303)

-

(38,369) (35,600) (32,624)

244,174 236,766 233,384

4,883

4,954

2.03%

4,735 

4,787 

2.02% 

4,668

4,848

2.08%

Both total Insurance Fund and total assets increased by 2.2 percent to $4.95 billion in 2018. Insured debt 

outstanding grew $16.5 billion in 2018 (6.2 percent). Te Insurance Fund fnished 2018 at 2.03 percent, 

$70.4 million above the secure base amount (see Figure 6). Consequently, $66.1 million was transferred 

to the AIRAs. Te Insurance Fund fnished 2017 at 2.08 percent, $180.0 million above the secure base 

amount (see Figure 6). Consequently, $175.8 million was transferred to the AIRAs. 

Total Insurance Fund growth over the past fve years averaged 7.3 percent annually. As a result of our 

quarterly allowance for loss analysis, we did not accrue a provision for insurance obligations in 2018 (see 

Figure 7). 

Protecting Investors in Agriculture and Rural America 
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Figure 6 

Insurance Fund Relative to 2 Percent Secure Base Amount 

Figure 7 

Insurance Fund Balances 

(Dollars in Billions) 

Farm Credit System Insurance Corporation 
 

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Premiums 

Te FCSIC board reviews premium assessment rates as ofen as necessary but at least semiannually. T e 

review focuses on f ve factors:

 • Te level of the Insurance Fund relative to the secure base amount 

• Projected losses to the Insurance Fund 

• Te condition of the System 

• Te health of the agricultural economy 

• Risks in the f nancial environment 

Te Farm Credit Act requires premium assessments to be 20 basis points on adjusted insured debt outstanding unless they are reduced by the board of directors. Tere is a risk surcharge of up to 10 basis 

points on nonaccrual loans and on other-than-temporarily impaired investments. In addition, the Act 

reduces the total insured debt on which premiums are assessed. Te Act requires that premiums be based 

on outstanding insured debt obligations adjusted downward by 90 percent of federal government–guaranteed loans and investments and by 80 percent of state government–guaranteed loans and investments. 

Te FCSIC board set the assessment rate on adjusted insured debt at 9 basis points for 2018. T e most 

important factors in determining premium rates were the Insurance Fund balance and prospects for Systemwide debt growth during the year. Te unallocated Insurance Fund began 2018 at 2.00 percent of the 

secure base amount. 

During 2018, insured debt outstanding increased by 6.2 percent. Te Insurance Fund fnished 2018 above 

the 2 percent secure base level, at 2.03 percent of adjusted insured obligations or $70.4 million above the 

target level. 

Te board of directors continued the assessment rate on adjusted insured debt of 9 basis points for 2019. 

Te board also continued the risk surcharge of 10 basis points on nonaccrual loans and other-than-temporarily impaired investments. 

Protecting Investors in Agriculture and Rural America 
 

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Revenues and Expenses 

FCSIC operates with no annually appropriated funds. We collect insurance premiums from each Farm 

Credit System bank. Tese premiums and the income from our investment portfolio provide the funds 

necessary to fulfll our mission. 

Our revenues decreased by 28 percent to $285.7 million in 2018 from $398.5 million in 2017 (see Figure 

8). Revenues decreased primarily because of lower insurance premiums in 2018. Interest income increased 

27 percent in 2018 to $73.1 million from $57.7 million in 2017. 

Figure 8 

FCSIC Revenues 

(Dollars in Millions) 

To avoid duplication of efort and to minimize costs, we operate with a small core staf and use privateand public-sector contractors to leverage our ef orts. Te board of directors and management adopted this 

model as a cost-efective and efcient way to use available expertise, services, and resources to accomplish 

our mission. 

Our operating costs as a percentage of total assets represented 7 basis points for 2018, down from 8 basis 

points in 2017. Costs for staf salaries, travel, rent, and miscellaneous expenses were $2.9 million of the 

$3.7 million total for the year (see Figure 9). Te remaining expenses of $0.8 million were for contract 

services. 

Farm Credit System Insurance Corporation 
23

Figure 9 

FCSIC Operating Expenses 

(Dollars in Millions) 

Protecting Investors in Agriculture and Rural America 
24

Investments 

FCSIC’s investments decreased from $4.5 billion as of year-end 2017 to $4.4 billion as of year-end 2018 

(see Figure 10). Te decrease occurred primarily because an investment of $200.7 million matured on 

December 31, 2018, and the funds were placed in the overnight investment account and reclassif ed as 

“cash and cash equivalents.” In early 2019, the $200.7 million was invested in accordance with FCSIC 

board policy. 

Our primary investment objective is to ensure adequate liquidity of the Insurance Fund to meet our mission. Our secondary objective is to optimize the rate of return on our investment portfolio. Funds are 

invested in U.S. Treasury securities in accordance with the Farm Credit Act and our investment policy. 

We use benchmarks to enhance our ability to assess portfolio performance. T ree weighted-average 

Treasury yield benchmarks serve as primary benchmarks. Two Treasury index funds serve as secondary 

benchmarks. Tese index funds are considered secondary benchmarks because a portion of their returns 

is generated through trading. Te FCSIC Policy Statement Concerning Investments prohibits trading for 

capital gains purposes. 

In 2018, the average FCSIC investment portfolio yield was 1.56 percent, up from 1.31 percent the prior 

year. Te average yield for the primary benchmarks ranged from 1.50 percent to 2.30 percent. T e average 

yield for the secondary benchmarks ranged from 1.85 percent to 1.88 percent for 2018. Most benchmarks 

exceeded the average fund yield because of the rising rate environment in 2018. Unlike the benchmark 

portfolios, FCSIC is a hold-to-maturity investor and is precluded from trading for gain. 

In accordance with our investment policy, our portfolio is composed of a liquidity pool and an investment 

pool. Te liquidity pool consists of short-term Treasury securities maturing in 2 years or less. T e investment pool is composed of Treasury securities with maturities that vary from 2 to 10 years. Our investment policy requires the liquidity pool to be at least 20 percent of the portfolio. Te policy also states that 

securities maturing in 5 to 10 years must not exceed 20 percent of the portfolio. 

Te weighted-average maturity of the portfolio at year-end was 1.09 years. Te composition of the investment portfolio as of December 31, 2018, is shown in Figure 11. 

In June 2008, we began purchasing Treasury infation protected securities (TIPS). TIPS have a stated rate 

of interest, payable semiannually, which is applied to the infation-adjusted principal. TIPS provide a hedge 

against infation, in terms of both yield and market value. TIPS have experienced monthly inf ation or 

defation adjustments, but the United States has not had an annual defationary environment since 1954, 

more than 60 years ago. Because of the volatility of the monthly returns on TIPS and the risk of loss 

resulting from defation, the FCSIC Investment Committee limits TIPS to no more than 20 percent of the 

portfolio. At year-end 2018, our TIPS investments totaled $85.1 million or 2 percent of the investment 

portfolio. 

Farm Credit System Insurance Corporation 
25

Figure 10 

FCSIC Investments 

(Dollars in Billions) 

Note: Total investments refected on this chart do not include overnight investments classifed as “cash and cash equivalents” from the balance sheet. 

Figure 11 

Investment Portfolio by Maturity as of December 31, 2018 

(Dollars in Millions) 

Note: Total investments refected on this chart include overnight investments classifed as “cash and cash equivalents” from the balance sheet. 

Protecting Investors in Agriculture and Rural America 
26

Risk Management 

FCSIC’s Risk Prof le 

FCSIC’s primary purpose is to insure the timely payment of principal and interest on Systemwide debt 

securities. Te System banks, through the jointly owned Federal Farm Credit Banks Funding Corporation, 

issue Systemwide debt securities, insured by FCSIC, to fulfll their mission. Anything impairing the System 

banks’ ability to repay their insured debt constitutes an insurance risk. To carry out our mission, FCSIC 

monitors conditions in the farm, rural, domestic, and global economies that afect the System’s ability to 

repay insured debt obligations. 

FCSIC’s Insurance Fund is exposed to a variety of risks, some inherent in insuring f nancial institutions 

and others specifc to the System. Examples of specifc events that could increase risk to the Insurance 

Fund include the following: 

• Material reduction in System bank capital

• Material adverse change in the System banks’ ability to access debt markets

• Catastrophic operational failure at a System institution related to a control defciency or cybersecurity breach

• Inadequate governance at a System institution such as a failed business strategy or mismanagement of the organization

• Signifcant, rapid, or unexpected credit deterioration resulting from adversity in the agricultural

sector

Major categories of risk monitored by FCSIC include the following: 

Credit risk — the risk of default on a debt that may arise from a borrower failing to make required payments. Credit risk includes consideration of loan concentrations and other broad elements of System institution portfolios. FCSIC primarily focuses on credit risk issues afecting the underlying agricultural borrowers’ ability to repay their debts to individual System institutions. Tese risks include the following: 

• Changes in farmland values

• Price volatility for agricultural commodities

• Changes in government support programs for agricultural producers

• Changes in supply and demand for U.S. agricultural products

• Changes in international trade and the value of the U.S. dollar

• Changes in production costs

• Changes in the domestic economy that afect incomes from of -farm jobs

• Weather conditions

• Environmental and regulatory costs

• Availability of agricultural workers

Farm Credit System Insurance Corporation 
 

27

Liquidity risk — the risk that an institution may be unable to meet short-term fnancial demands without unacceptable losses. Te System relies on its ability to regularly issue new debt obligations, in part to 

pay maturing obligations. Te System banks also hold liquidity investments that are available if needed. 

A signifcant disruption in the System banks’ ability to issue new debt obligations or sell liquidity investments would impair their ability to repay insured obligations. As further discussed on page 32, FCSIC has 

procedures in place to provide liquidity assistance to System banks if external market circumstances make 

it likely that the banks will be unable to repay maturing insured obligations. 

Interest rate risk — the risk that changes in interest rates may reduce the value of assets with a consequent negative impact on operating results and f nancial condition. 

Operational risk — the prospect of losses resulting from inadequate or failed procedures, controls, systems, or policies, including employee errors, systems failures, or fraud or other unauthorized activity. 

Operational risk also includes inadequate defenses against cyberthreats. 

Strategic risk — the risk that a failed business strategy, decision, or series of decisions leads to losses. 

Structural risk — the risk related to the design of the Farm Credit System. For example, as a lender to a 

single industry (agriculture), the System has a built-in concentration risk. Additionally, any changes to the 

System’s fundamental organization, such as an alteration in the supervisory relationship between System 

banks and associations, may create risk to the Insurance Fund. 

Reputational risk — the risk resulting from events that afect the reputation of the System or the agriculture industry. Such events may afect the System’s funding costs depending on market reaction. 

Political risk — the risk of loss of support from federal and state governments. Tis includes any change 

in government support for government-sponsored enterprises. 

Te Risk Environment 

Te U.S. economy continued to expand at a moderate pace in 2018. Te Bureau of Economic Analysis 

(U.S. Department of Commerce) reported that real gross domestic product (GDP) grew 2.9 percent in 

2018, compared with real GDP growth of 2.2 percent in 2017. Te labor market continued to show resilience nine years into the economic expansion as unemployment declined from 10 percent at its peak in 

October 2009 to 3.9 percent at year-end 2018. Infation rose throughout most of 2018 before tapering of 

at the end of the year. Te 12-month increase in the seasonally adjusted consumer price index was 1.95 

percent as of December 2018. 

Consumers benefted from a strong job market, lower tax base, and modest infation in 2018. Consumer 

spending increased 2.6 percent, contributing about 1.80 percent to real GDP growth. Tax law changes and 

a resurgence in the energy sector boosted capital investment in 2018. Business investment increased 5.9 

percent, contributing about 1.02 percent to real GDP growth. Government expenditures increased slightly, 

contributing 0.26 percent to real GDP growth. Net exports continued to be a drag on the economy, with a 

negative contribution of 0.21 percent to real GDP growth in 2018. 

Protecting Investors in Agriculture and Rural America 
28

Te Federal Open Market Committee (FOMC) of the Federal Reserve Board raised the target range for 

the federal funds rate four times in 2018, to between 2.25 percent and 2.50 percent as of December 2018. 

Te FOMC signaled a pause on further interest rate increases in early 2019 in view of slower global economic growth, trade uncertainties, and subdued inf ation. Te FOMC has also announced that it will end 

its operation to unwind its balance sheet in 2019. 

Agriculture continued to experience stress in 2018. Te expanding U.S. economy has helped farm 

household income but falling commodity prices in recent years have weighed on farm income. However, 

the U.S. Department of Agriculture (USDA) estimates in its February 2019 Farm Sector Income Forecast 

that net farm income will increase $6.3 billion (10.0 percent) from 2018 to $69.4 billion in 2019. Net cash 

farm income is forecasted to increase $4.3 billion (4.7 percent) to $95.7 billion. Te expected increase 

is primarily due to the increase in total farm cash receipts exceeding the increase in total production 

expenses. Te value of U.S. agricultural exports, according to USDA’s May 2019 reports, is expected to 

be $137.0 billion in 2019, down $4.5 billion from 2018, largely due to reductions in grains, oilseeds, and 

livestock and products. Te ongoing U.S.–China trade dispute is expected to shif trade patterns and 

diminish U.S. export prospects in 2019. 

Farmland values remained stable in 2018 despite the rising interest rate environment. Te USDA projects 

farm sector assets will rise 1.5 percent to $3.1 trillion in 2019 with most of that increase coming from a 

forecasted 1.8 percent increase in farm sector real estate, which comprises about 83.3 percent of farm sector assets. Farm sector debt is expected to grow by 3.9 percent to $426.7 billion during 2019. As a result, 

farm sector equity (assets minus debt) is expected to rise 1.1 percent in 2019 to $2.7 trillion. T e farm 

sector debt-to-asset ratio is expected to rise from 13.5 percent in 2018 to 13.9 percent in 2019 as some 

farmers continue to use their real estate equity to provide funds for operating activities. 

Te System reported net income of $5.3 billion for 2018, up 2.8 percent from $5.2 billion in 2017. Net 

interest margin was 2.46 percent for 2018 compared with 2.48 percent for 2017. Te net interest rate 

spread was 2.12 percent for 2018 compared with 2.25 percent in 2017. Te decrease in net interest rate 

spread was largely attributable to an increase in debt costs and lower lending spreads due to competitive 

pressures. 

Te System’s loan volume increased $13.2 billion or 5.1 percent to $271.9 billion at year-end 2018 compared with $258.8 billion at the end of 2017. Te growth was primarily due to increased real estate mortgages and agribusiness, production, and intermediate-term loans. 

System credit quality declined slightly in 2018. Nonaccrual loans increased $223 million, or 13.4 percent, 

to $1.9 billion at December 31, 2018. Te increase was primarily due to credit quality deterioration af ecting a limited number of loans in the agribusiness and rural power sectors. Te ratio of nonaccrual loans 

to total loans outstanding was 0.69 percent at December 31, 2018, up from 0.64 percent at December 31, 

2017 (see Figure 12). 

Farm Credit System Insurance Corporation 
29

Figure 12 

Nonaccrual Loans as a Percentage of Total Loans Outstanding 

Te allowance for loan losses was $1.7 billion at December 31, 2018, an increase of $117 million, or 7.3 

percent, above the $1.6 billion at December 31, 2017. Te allowance for loan losses represents the aggregate of each System entity’s individual evaluation of its allowance for loan losses requirements. Managements’ evaluations consider factors that include, among other things, loan loss experience, portfolio quality, 

and loan portfolio composition, collateral value, current agricultural production, and economic conditions. 

Although aggregated for the System’s combined fnancial statements, the allowance of each entity is specif c 

to that institution and is not available to absorb losses at other System entities. 

Te System continued to have reliable access to the debt markets to support its mission. Investor demand 

for Systemwide insured debt securities remained favorable across all products. Te System is a government-sponsored enterprise that continues to beneft from broad access to domestic and global capital 

markets providing a dependable source of competitively priced debt. 

FCA adopted a capital rule for banks and associations, efective January 1, 2017, which is comparable to 

the Basel III standardized approach adopted by the federal banking regulatory agencies. FCA’s regulatory 

minimums include a 4.5 percent common equity tier 1 risk-based capital ratio, a 6.0 percent tier 1 riskbased capital ratio, an 8.0 percent total risk-based capital ratio, and a 4.0 percent tier 1 leverage ratio, of 

which at least 1.5 percent must be composed of unallocated retained earnings (URE) and URE equivalents. 

Te risk-based capital ratios also include a 2.5 percent common equity tier 1 capital conservation buf er. 

Te tier 1 leverage ratio includes a 1.0 percent leverage bufer. As of December 31, 2018, all System institutions exceeded the regulatory minimum and buf er requirements. 

Protecting Investors in Agriculture and Rural America 
30

FCA authorizes each System bank to hold eligible investments in an amount not to exceed 35 percent of 

its total outstanding loans for the purposes of maintaining a liquidity reserve, managing short-term funds, 

and managing interest rate risk. Te liquidity reserve must consist of marketable investments that are suffcient to fund 90 days of on-balance-sheet maturing obligations. Te System reported a combined $64.8 

billion in cash and available-for-sale investments with a liquidity position of 182 days at year-end 2018 

compared with 175 days at year-end 2017. 

Te System banks are further required to maintain a three-tiered liquidity reserve, consisting of level 1 

instruments to cover each bank’s maturing obligations for the frst 15 days, level 1 and 2 instruments suffcient to cover days 16 to 30, and level 1, 2, and 3 instruments to cover days 31 to 90. All four System 

banks exceeded these requirements in 2018. 

Te System banks have established contingency funding plans to provide for events that could impede 

access to the debt markets. Te System banks also regularly perform credit and liquidity stress testing to 

determine their ability to withstand severe market events while continuing to fulfll their mission. 

Figure 13 shows a summary of composite year-end FIRS ratings for System banks and associations. Institutions with performance-related issues continued to receive greater examination scrutiny and supervisory 

attention from FCA. 

Farm Credit System Insurance Corporation 
31

Figure 13 

FIRS Composite Year-End Ratings for Banks and Associations 

of the Farm Credit System 

Source: FCA 

Protecting Investors in Agriculture and Rural America 
 

32

Financial Assistance and Resolutions 

FCSIC has statutory authority to provide “stand-alone assistance” to a System bank or association to (1) 

prevent the placing of the institution in receivership, (2) restore the institution to “normal operation,” or 

(3) reduce the risk to FCSIC posed by the institution when “severe fnancial conditions” threaten the stability of the banks. FCSIC may also provide assistance to facilitate mergers or consolidations. 

At present, no assistance agreements are outstanding. If a System institution needs f nancial assistance, 

FCSIC must ensure that the proposed assistance is the least costly means for resolving the institution’s 

problems; by law, FCSIC cannot provide fnancial assistance if the cost of liquidation is lower than the cost 

of providing assistance. 

FCSIC has procedures in place in the event System banks require liquidity assistance because severe 

fnancial conditions threaten the banks’ ability to repay maturing insured debt. Te procedures implement FCSIC’s Policy Statement Concerning Assistance. Along with the procedures, we developed a model 

assistance agreement, drafed necessary forms related to valuation of collateral and liquidity reserves, and 

entered into a collateral pledge agreement with each bank and a collateral custodian. We review the procedures annually to determine whether changes are needed. 

When appointed by FCA, FCSIC has the statutory responsibility to serve as receiver or conservator for 

System banks and associations. As conservator, we will operate the institution as a going concern. Upon 

appointment as receiver, we will take possession of a System institution to settle its business operations, 

collect the debts owed to it, liquidate its property and assets, pay its creditors, and distribute any remaining proceeds to stockholders. Te Agriculture Improvement Act of 2018 (2018 Farm Bill) clarif ed and 

updated FCSIC’s statutory authorities to act as receiver or conservator for a System institution. Congress 

stated its intent in the 2018 Farm Bill Conference Report that FCSIC’s authorities be “functionally equivalent to the parallel authorities of the Federal Deposit Insurance Corporation.” Te 2018 Farm Bill also provided new authority for FCSIC to create, and FCA to charter, a System bridge bank, which is an important tool for resolving a failed bank. Tere are no active receiverships or conservatorships in the System. 

We use contractors on an as-needed basis so that we can continue to operate with a small core staf while 

also maintaining our readiness to act as receiver or conservator. Tese contractors provide knowledgeable 

and readily available staf resources while allowing us to contain costs during periods of limited or no 

activity. 

Our staf also maintains contact with the resolution staf of the Federal Deposit Insurance Corporation 

and the National Credit Union Administration to stay informed about best practices and exchange information concerning receivership management. 

We have several board-approved policy statements that provide guidance related to resolution activities, 

including appraisal of real estate securing nonperforming assets, insurance of assets that come under our 

control, and environmental hazards assessments of real estate securing nonperforming assets. T e FCSIC 

board must review and approve policy statements every f ve years. 

Farm Credit System Insurance Corporation 
 

Farm Credit System Insurance 

Corporation 

Audited Financial Statements 

For the Years Ended December 31, 2018 and 2017 

The report accompanying these financial statements was issued by 

BDO USA, LLP, a Delaware limited liability partnership and the U.S. 

member of BDO International Limited, a UK company limited by 

guarantee. 
 

Farm Credit System Insurance Corporation 

Contents 

Independent Auditor’s Report F1 - F3

Financial Statements 

Statements of Financial Condition F4 

Statements of Income and Expenses and Changes in Insurance Fund F5 

Statements of Cash Flows F6 

Notes to the Financial Statements F7 - F13 

Management’s Report on Internal Control Over Financial Reporting F14 
 

Management’s Responsibility for the Financial Statements and Internal Control 

over Financial Reporting 

tel: 703-893-0300

Fax: 703-893-2766 

www.bdo.com 

8401 Greensboro 

Drive Suite 800

Mclean, VA 22012

Independent Auditor’s Report

 

Board of Directors 

Farm Credit System Insurance Corporation 

McLean, Virginia 

Report on the Financial Statements and Internal Control 

We have audited the accompanying financial statements of the Farm Credit System Insurance 

Corporation (FCSIC), which comprise the statement of financial condition as of December 31, 

2018, and the related statements of income and expenses and changes in Insurance Fund and cash 

flows for the year then ended, and the related notes to the financial statements. We also have 

audited FCSIC’s internal control over financial reporting as of December 31, 2018, based on the 

criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of 

Sponsoring Organizations of the Treadway Commission. 

Management is responsible for the preparation and fair presentation of these financial statements 

in accordance with accounting principles generally accepted in the United States of America; this 

includes the design, implementation and maintenance of effective internal control over financial 

reporting relevant to the preparation and fair presentation of financial statements that are free 

from material misstatement, whether due to fraud or error. Management is also responsible for 

its assessment about the effectiveness of internal control over financial reporting, which is 

included in the accompanying Management’s Report on Internal Control Over Financial Reporting. 

Auditor’s Responsibility 

Our responsibility is to express an opinion on these financial statements and an opinion on the 

entity’s internal control over financial reporting based on our audit. We conducted our audit in 

accordance with auditing standards generally accepted in the United States of America; the 

standards applicable to financial audits contained in Government Auditing Standards issued by 

the Comptroller General of the United States; and Office of Management and Budget (OMB) 

Bulletin No. 19-01, Audit Requirements for Federal Financial Statements. Those standards require 

that we plan and perform the audit to obtain reasonable assurance about whether the financial 

statements are free from material misstatement and whether effective internal control over 

financial reporting was maintained in all material respects. 

An audit of financial statements involves performing procedures to obtain audit evidence about 

the amounts and disclosures in the financial statements. The procedures selected depend on the 

auditor’s judgment, including the assessment of the risks of material misstatement of the 

financial statements, whether due to fraud or error. In making those risk assessments, the auditor 

considers internal control relevant to the entity’s preparation and fair presentation of the 

financial statements in order to design audit procedures that are appropriate in the 

circumstances. An audit of financial statements also includes evaluating the appropriateness of 

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part 

of the international BDO network of independent member firms. 

BDO is the brand name for the BDO network and for each of the BDO Member Firms. F1 
accounting policies used and the reasonableness of significant accounting estimates made by 

management, as well as evaluating the overall presentation of the financial statements. 

An audit of internal control over financial reporting involves performing procedures to obtain 

evidence about whether a material weakness exists. The procedures selected depend on the 

auditor’s judgment, including the assessment of the risk that a material weakness exists. An audit 

of internal control over financial reporting also involves obtaining an understanding of internal 

control over financial reporting and testing and evaluating the design and operating effectiveness 

of internal control over financial reporting based on the assessed risk. 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a 

basis for our audit opinion. 

Definition and Inherent Limitations of Internal Control over Financial Reporting 

An entity’s internal control over financial reporting is a process effected by those charged with 

governance, management, and other personnel, designed to provide reasonable assurance 

regarding the preparation of reliable financial statements in accordance with generally accepted 

accounting principles in the United States of America. An entity’s internal control over financial 

reporting includes those policies and procedures that (1) pertain to the maintenance of records 

that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the 

assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary 

to permit preparation of financial statements in accordance with generally accepted accounting 

principles in the United States of America, and that receipts and expenditures of the entity are 

being made only in accordance with authorizations of management and those charged with 

governance; and (3) provide reasonable assurance regarding prevention, or timely detection and 

correction of unauthorized acquisition, use, or disposition of the entity’s assets that could have 

a material effect on the financial statements. 

Because of its inherent limitations, internal control over financial reporting may not prevent, or 

detect and correct, misstatements. Also, projections of any assessment of effectiveness to future 

periods are subject to the risk that controls may become inadequate because of changes in 

conditions, or that the degree of compliance with the policies or procedures may deteriorate. 

Opinion 

In our opinion, the financial statements referred to above present fairly, in all material respects, 

the financial condition of the Farm Credit System Insurance Corporation as of December 31, 2018, 

and the results of its operations and its cash flows for the year then ended in accordance with 

accounting principles generally accepted in the United States of America. Also, in our opinion, 

the Farm Credit System Insurance Corporation maintained, in all material respects, effective 

internal control over financial reporting as of December 31, 2018 based on the criteria established 

in Internal Control-Integrated Framework (2013) promulgated by the Committee of Sponsoring 

Organizations of the Treadway Commission. 

F2 
Compliance and Other Matters 

As part of obtaining reasonable assurance about whether the Farm Credit System Insurance 

Corporation's financial statements are free from material misstatement, we also performed tests 

of its compliance with certain provisions of laws, regulations, contracts and grant agreements, 

noncompliance with which could have a direct and material effect on the determination of 

financial statement amounts. However, providing an opinion on compliance with those provisions 

was not an objective of our audit, and accordingly, we do not express such an opinion. The results 

of our tests disclosed no instances of noncompliance or other matters that are required to be 

reported under U.S. Government Auditing Standards and OMB Bulletin No. 19-01. 

Other Matter 

The 2017 financial statements of FCSIC were audited by other auditors, whose report dated 

February 9, 2018, expressed an unmodified opinion on those financial statements. 

McLean, Virginia 

February 11, 2019 

F3 
 

 

Farm Credit System Insurance Corporation 

Statements of Financial Condition 

(Dollars in thousands) 

December 31, 2018 2017 

Assets 

Cash and cash equivalents 

Investments in U.S. Treasury obligations 

Premiums receivable 

Accrued interest receivable 

Other receivables 

General property, plant, equipment, and software, net 

$ 287,767 

4,436,617 

212,524 

17,259 

-

60 

$ 1,613 

4,454,235 

340,565 

21,894 

30,012 

78 

Total assets $ 4,954,227 $ 4,848,397 

Liabilities and Insurance Fund 

Accounts payable and accrued expenses $ 367 $ 679 

Total liabilities 367 679 

Insurance Fund 

Allocated Insurance Reserves Accounts (AIRAs) 

Unallocated Insurance Fund 

66,061 

4,887,799 

175,832 

4,671,886 

Total Insurance Fund 4,953,860 4,847,718 

Total liabilities and Insurance Fund $ 4,954,227 $ 4,848,397 

See accompanying notes to the financial statements. 

F4 
 

Farm Credit System Insurance Corporation 

Statements of Income and Expenses and Changes in Insurance Fund 

(Dollars in thousands) 

Year ended December 31, 2018 2017 

Income 

Premiums $ 212,524 $ 340,762 

Interest income 73,141 57,720 

Total income 285,665 398,482 

Expenses 

Administrative operating expenses 3,691 3,668 

Total expenses 3,691 3,668 

Net income 281,974 394,814 

Insurance Fund - Beginning of year 4,847,718 4,452,904 

Payments to AIRAs accountholders (175,832) -

Insurance Fund - End of year $ 4,953,860 $ 4,847,718 

See accompanying notes to the financial statements. 

F5 
Farm Credit System Insurance Corporation

 Statements of Cash Flows 

(Dollars in thousands) 

Year ended December 31, 2018 2017 

Cash flows from operating activities 

Net income 

Adjustments to reconcile net income to net cash 

provided by operating activities: 

Depreciation 

Net amortization and accretion of investments 

Decrease in premiums receivable 

Decrease (increase) in accrued interest receivable 

Decrease in other receivables 

(Decrease) increase in accounts payable and accrued 

expenses 

$ 281,974 

18 

3,627 

128,041 

4,635 

30,012 

(312) 

$ 394,814 

13 

11,849 

32,156 

(4,560) 

16,344 

118 

Net cash provided by operating activities 447,995 450,734 

Cash flows from investing activities 

Payments for purchase of U.S. Treasury obligations 

Proceeds from maturity of U.S. Treasury obligations 

Payment for purchase of depreciable assets 

(1,436,080) 

1,450,071 

-

(1,246,440) 

797,169 

(91) 

Net cash provided by (used in) investing activities 13,991 (449,362) 

Cash flows from financing activity 

Payment to AIRAs Accountholders (175,832) -

Net cash used in financing activity (175,832) -

Net change in cash and cash equivalents 286,154 1,372 

Cash and cash equivalents, beginning of year 1,613 241 

Cash and cash equivalents, end of year $ 287,767 $ 1,613 

See accompanying notes to the financial statements. 

F6 
Farm Credit System Insurance Corporation 

Notes to the Financial Statements 

Note 1: Organization and Summary of Significant Accounting Policies 

Farm Credit Insurance Fund (Insurance Fund): Statutory Framework 

The Agricultural Credit Act of 1987 established the Farm Credit System Insurance Corporation (the 

Corporation or FCSIC) 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 (the Farm Credit Act). Each bank in the Farm Credit System 

(System) participating in insured obligations is an insured System bank. At December 31, 2018, there 

were four insured System banks and 69 direct lender associations, unchanged from December 31, 

2017. 

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 amounts in the Insurance Fund necessary to: 

1. Ensure the timely payment of interest and principal on insured obligations; and 

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

Farm Credit Act. 

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

assistance to System banks and direct lender associations. The Corporation may also act as receiver 

or conservator of a System bank or association. 

As of December 31, 2018, there were $283 billion of insured obligations compared to $266 billion as 

of December 31, 2017, and less than $1 million of eligible borrower stock outstanding as of 

December 31, 2018 and 2017. 

If the Corporation does not have sufficient funds to ensure payment on insured obligations, System 

banks will be required to make payments under joint and several liability, as required by section 

4.4 (a)(2) of the Farm Credit Act. The insurance provided by the Insurance Fund is not an obligation 

of and is not guaranteed by the U.S. government. 

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

local taxes with the exception of real property taxes. 

Note 2: Basis of Accounting 

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. 

F7 
Farm Credit System Insurance Corporation 

Notes to the Financial Statements 

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, 2018, the Corporation held $287.6 million in overnight Treasury 

certificates maturing on January 2, 2019, with an interest rate of 2.39 percent, and $200 thousand 

in cash. At December 31, 2017, the Corporation held $1,413 thousand in overnight Treasury 

certificates maturing on January 2, 2018, with an interest rate of 1.18 percent, and $200 thousand 

in cash. 

Investments in U.S. Treasury Obligations 

Section 5.62 of the Farm Credit Act requires that funds of the Corporation, not otherwise employed, 

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

interest by the United States. The Corporation has classified its investments as held to maturity in 

accordance with Financial Accounting Standards Board Accounting Standards Codification 320, 

Investments - Debt and Equity Securities 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. 

Other Receivables 

The Corporation reports receivables for securities when investments mature at the end of an 

accounting period and proceeds are received in the following month. 

Premium Receivable – Concentration of Credit Risk 

The Farm Credit Act requires that the System banks pay premiums to FCSIC. The premium receivable 

balances consists of amounts due from the four System banks and as such are exposed to risks due 

to concentration. Historically, FCSIC has not experienced any losses related to premium receivable 

balances. FCSIC performs a quarterly analysis related to estimating an allowance for premium 

receivable which continues to indicate that no allowance is warranted. 

Liability for Estimated Insurance Obligations 

The liability for estimated insurance obligations is the present value of estimated probable insurance 

payments to be made in the future based on the Corporation's analysis of economic conditions of 

insured System banks. 

The insured System banks' primary lending markets are borrowers engaged in farming, ranching, and 

producing or harvesting of aquatic products, and their cooperatives. Financial weaknesses in these 

market segments and the effect of general market conditions on the System's borrowers could 

adversely affect the banks' financial condition and profitability. Insured System banks also face risks 

from changing interest rate environments and the need to maintain ongoing access to financial 

markets. Adverse changes in the financial condition and profitability of insured System banks 

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

would require a liability for estimated insurance obligations to be recorded. 

F8 
 

 

 

 

Farm Credit System Insurance Corporation 

Notes to the Financial Statements 

The Corporation actively monitors the creditworthiness and financial condition of the insured 

System banks. Management is not aware of any events or circumstances at this time which would 

require a liability for estimated insurance obligations to be recorded at December 31, 2018. 

Premiums 

Annual premiums are recorded as revenue during the 12-month period on which the premiums are 

based starting in January each year. All premiums are due on or before January 31st of the year 

subsequent to the year in which they are earned. 

Use of Estimates 

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. 

Note 3: Investments in U.S. Treasury Obligations 

In addition to the amounts referenced in Note 2, Cash and Cash Equivalents, at December 31, 2018 

and 2017, investments in U.S. Treasury obligations, which are carried at amortized cost, consisted 

of the following: 

(Dollars in thousands) 

Amortized 

Cost 

Gross 

Unrealized 

Gains 

Gross 

Unrealized 

Losses 

Estimated Fair 

Value 

December 31, 2018 

U.S. Treasury obligations $ 4,436,617 $ 311 $ (40,782) $ 4,396,146 

December 31, 2017 

U.S. Treasury obligations $ 4,454,235 $ 304 $ (35,858) $ 4,418,681 

The amortized cost and estimated fair value of U.S. Treasury obligations at December 31, 2018, by 

contractual maturity, are shown below: 

Amortized Estimated Fair 

(Dollars in thousands) Cost Value 

Due in one year or less $ 2,520,392 $ 2,510,255 

Due after one year through five years 1,866,752 1,837,080

Due after five years through ten years 49,473 48,811

$ 4,436,617 $ 4,396,146

F9 
Farm Credit System Insurance Corporation 

Notes to the Financial Statements 

The Corporation follows GAAP for measuring, reporting, and disclosing fair value. These standards 

apply to all assets and liabilities that are measured, reported, and/or disclosed on a fair value basis. 

The fair value of FCSIC's investments in U.S. Treasury obligations are estimated based on quoted 

market prices for those instruments. 

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

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

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

The Farm Credit Act requires FCSIC to assess premiums based on each bank's pro rata share of 

insured debt (rather than on individual loans). FCSIC may collect from 0 to 20 basis points annually 

on adjusted insured debt outstanding. The Farm Credit Act also authorizes a risk surcharge of up to 

10 basis points on non-accrual loans and on other-than-temporarily impaired investments. The Farm 

Credit Act reduces the total insured debt on which premiums are assessed by 90 percent of Federal 

government-guaranteed loans and investments and 80 percent of state government-guaranteed 

loans and investments and deducts similar percentages of such guaranteed loans and investments 

when calculating the secure base amount (SBA). 

The Farm Credit Act sets a base amount for the Insurance Fund to achieve. The statutory SBA 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 

certain government-guaranteed loans and investments) or such other percentage as determined by 

the Corporation in its sole discretion to be actuarially sound to maintain in the Insurance Fund taking 

into account the risk of insuring outstanding insured obligations. When the assets in the Insurance 

Fund for which no specific use has been designated exceed the SBA, the Corporation is required to 

reduce the premiums, but it still must ensure that reduced premiums are sufficient to maintain at 

the SBA the assets in the Insurance Fund for which no specific use has been designated (the 

unallocated Insurance Fund). 

Insurance premium rates are reviewed semiannually. For 2018, the board of directors set premium 

rates at its January 18, 2018 meeting at 9 basis points on average adjusted insured debt and 

continued the assessment of the 10 basis point surcharge on the average principal balance 

outstanding for nonaccrual loans and other-than-temporarily impaired investments. The board of 

directors again reviewed premiums at its June 14, 2018 meeting. The board of directors voted to 

maintain the premium accrual rate on average adjusted insured debt at 9 basis points and continued 

the assessment of the 10 basis point surcharge on the average principal balance outstanding for 

nonaccrual loans and other-than-temporarily impaired investments for the remainder of 2018. In 

2018, outstanding insured obligations increased by $16.5 billion (6.2 percent). At December 31, 

2018, the unallocated Insurance Fund and the total Insurance Fund were 2.00 percent and 2.03 

percent of adjusted insured obligations, respectively. 

For 2017, the board of directors set premium rates at its January 26, 2017 meeting at 15 basis points 

on average adjusted insured debt and continued the assessment of the 10 basis point surcharge on 

the average principal balance outstanding for nonaccrual loans and other-than-temporarily impaired 

investments. The board of directors again reviewed premiums at its June 8, 2017 meeting. The 

board of directors voted to maintain the premium accrual rate on average adjusted insured debt at 

15 basis points and continued the assessment of the 10 basis point surcharge on the average principal 

F10 
Farm Credit System Insurance Corporation 

Notes to the Financial Statements 

balance outstanding for nonaccrual loans and other-than-temporarily impaired investments for the 

remainder of 2017. In 2017, outstanding insured obligations increased by $7.6 billion (3 percent). 

At December 31, 2017, the unallocated Insurance Fund and the total Insurance Fund were 2.00 

percent and 2.08 percent of adjusted insured obligations, respectively. 

A 1996 amendment to the Farm Credit Act requires the Corporation to establish Allocated Insurance 

Reserves Accounts (AIRAs) for each System bank and an account for the stockholders of the Financial 

Assistance Corporation (FAC). If, at the end of any calendar year, the aggregate of the amounts in 

the Insurance Fund exceed the SBA, the Corporation is to allocate to the AIRAs any excess balances 

less the amount that the Corporation, in its sole discretion, determines to be the sum of the 

estimated operating expenses and estimated insurance obligations of the Corporation for the 

immediately succeeding calendar year. 

As the total Insurance Fund exceeded the 2 percent SBA at December 31, 2018, and December 31, 

2017, there was an allocation of $66.1 and $175.8 million, respectively, to the Farm Credit System 

banks AIRAs. 

At December 31, 2017, $175.8 million of AIRAs was allocated as follows: 

FAC Shareholders $ 13.1 million 

Farm Credit System banks $ 162.7 million 

With the $13.1 million payment from the 2017 AIRAs, FCSIC completed its statutory obligation to 

pay all outstanding FAC shares and the FAC stockholders’ AIRA accounts have been closed. At 

December 31, 2018 no such allocations of AIRAs were necessary. 

The AIRAs' balances are recorded as part of the Insurance Fund until approved for payment by 

the Corporation's board of directors. AIRAs’ balances may be used to absorb any insurance losses 

and claims. Furthermore, the board of directors have discretion to limit or restrict the AIRAs’ 

payments. In accordance with the Corporation's policy, any AIRAs' balances do not count in 

measuring the Insurance Fund's compliance with the SBA. 

F11 
 

Farm Credit System Insurance Corporation 

Notes to the Financial Statements 

Note 5: Operating Lease 

The Corporation is committed under a ten-year lease with the FCS Building Association for office 

space expiring on November 30, 2025. The Corporation recorded lease expense (including operating 

cost assessments) of $144 thousand for 2018 and 2017. The following is a schedule by year of the 

future minimum lease payments required under this lease as of December 31, 2018: 

Years ending December 31, 

(Dollars in thousands) 

2019 

2020 

2021 

2022 

2023 

Thereafter 

$ 146 

149 

151 

155 

158 

311 

$ 1,070 

Note 6: Line of Credit 

On September 24, 2013, the Corporation entered into an agreement with the Federal Financing Bank 

(the FFB), a United States government corporation subject to the supervision and direction of the 

U.S. Treasury. Pursuant to this agreement, the FFB may advance funds to the Corporation when 

exigent market circumstances make it extremely doubtful that insured System banks will be able to 

pay maturing debt obligations. The Corporation will in turn use the funds advanced by the FFB to 

provide assistance to the System banks until market conditions improve. The agreement provides 

for a short-term revolving credit facility of up to $10 billion, is renewable annually and terminates 

on September 30, 2019, unless otherwise further extended. 

Under the agreement, each provision of funds by the FFB is subject to certain terms and conditions. 

The interest rate for each advance will be established by the FFB at the time the respective advance 

is made. Each advance cannot have a maturity date longer than twelve months and the maturity 

date cannot be later than the final termination date of the agreement. 

The Corporation paid no commitment fee to secure this line of credit. There were no amounts drawn 

on this line of credit during 2018 and 2017. 

Note 7: 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 

during 2018 and 2017 was 7 percent of base pay. For those employees covered by FERS, the 

Corporation's contribution was 13.7 percent of base pay for 2018 and 2017. 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. In 2015, the Corporation 

began a 401K plan for both CSRS and FERS employees. The Corporation automatically contributes 1 

F12 
Farm Credit System Insurance Corporation 

Notes to the Financial Statements 

percent of base pay to the employee's 401K account and matches the first 2 percent contributed by 

the employee. Retirement plan expenses amounted to $393 thousand in 2018 and $385 thousand in 

2017. 

Note 8: Related Parties 

The Corporation purchases services from the FCA under an Interagency Agreement. These include 

examination and administrative support services. The intention of the parties as stated in the 

agreement is that specified rates and fees will reimburse the party providing services for all 

reasonable costs associated with provision of the services. The Corporation purchased services for 

2018 which totaled $339 thousand, compared with $322 thousand for 2017. 

The Corporation may also provide services to the FCA under an Interagency Agreement; however, 

the Corporation provided no services and recognized no revenue for 2018 and 2017. At December 

31, 2018, and 2017, the Corporation did not have any receivables from the FCA. 

Note 9: Subsequent Events 

FCSIC evaluated subsequent events from the date of the statement of financial condition through 

February 11, 2019, the date at which FCSIC’s financial statements were issued. No material 

subsequent events were identified for either recognition or disclosure. 

F13 
SIC 

Farm Credit System Insurance Corporation 

Management's Report on Internal Control Over Financial Reporting 

The Farm Credit System Insurance Corporation's (FCSIC) internal control over financial reporting is 

a process effected by those charged with governance, management, and other personnel, designed 

to provide reasonable assurance regarding the preparation of reliable financial statements in 

accordance with generally accepted accounting principles in the United States of America. Our 

internal control over financial reporting includes those policies and procedures that (1) pertain to 

the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions 

and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as 

necessar.y to permit preparation of financial statements in accordance with generally accepted 

accounting principles and that receipts and expenditures of FCSIC are being made only in accordance 

with authorizations of FCSIC management and those charged with governance; and (3) provide 

reasonable assurance regarding prevention, or timely detection and correction, of unauthorized 

acquisition, use, or disposition of FCSIC's assets that could have a material effect on our financial 

statements. 

Management of FCSIC is responsible for designing, implementing, and maintaining effective internal 

control over financial reporting. Management assessed the effectiveness of FCSIC's internal control 

over financial reporting as of December 31, 2018 using the criteria established in the Internal 

Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the 

Treadway Commission (COSO). Based on that assessment, management concluded that as of 

December 31, 2018, FCSIC's internal control over financial reporting is effective, based on the COSO 

criteria. 

Internal control over financial reporting has inherent limitations. Internal control over financial 

reporting is a process that involves human diligence and compliance and is subject to lapses in 

judgement and breakdowns resulting from human failures. Internal control over financial reporting 

also can be circumvented by collusion or improper management override. Because of its inherent 

limitations, internal control over financial reporting may not prevent, or detect and correct, 

misstatements. Also, projections of any assessment of effectiveness to future periods are subject 

to the risk that controls may become inadequate because of changes in conditions, or that the 

degree of compliance with the policies or procedures may deteriorate. 

~ oward I. Rubin 

c=fficer/General Counsel 

February 11, 2019 

--

Chief Financial Officer 

F14 
 

33

Management Assurances 

March 14, 2019 

Te management of the Farm Credit System Insurance Corporation is responsible for managing risk and 

maintaining efective internal control to meet the objectives of the Federal Managers’ Financial Integrity 

Act (FMFIA). 

FCSIC is an independent U.S. government-controlled corporation. Our primary purpose is to ensure the 

timely payment of principal and interest on insured debt obligations issued on behalf of System banks. 

Te System is a nationwide government-sponsored enterprise of cooperative lending institutions owned 

by the agricultural and rural customers it serves. By protecting investors, we help maintain a dependable 

source of funds for the farmers, ranchers, and other borrowers of the System. 

FCSIC actively monitors and manages insurance risk to minimize the Farm Credit Insurance Fund’s 

exposure to potential losses. When appointed by the Farm Credit Administration, we also serve as 

receiver or conservator of any System bank or association. 

Our management has completed an assessment of the efectiveness of FCSIC’s enterprise risk 

management and internal control systems in efect during 2018 in accordance with guidelines provided 

by the Ofce of Management and Budget (OMB) in consultation with the comptroller general (OMB 

Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control). T e 

objective of these controls and systems is to provide reasonable assurance that 

• obligations and costs comply with applicable laws; 

• all assets are safeguarded against waste, fraud, unauthorized use, and mismanagement; 

• revenues and expenditures applicable to our operations are recorded and accounted for 

properly; and

 • fnancial and statistical reports are reliable, complete, and timely. 

On the basis of established guidelines and the assessment performed, we concluded that as of December 

31, 2018, the internal control over fnancial reporting was efective and meets the objectives of FMFIA. 

In addition, as stated in the accompanying report, FCSIC’s independent auditor, BDO, indicated that 

the fnancial statements of the Farm Credit Insurance Fund as of December 31, 2018, of which we are 

stewards, are fairly presented in all material respects. BDO also conducted testing on the ef ectiveness 

of FCSIC’s internal control over fnancial reporting and issued an opinion that it was efective in all 

material aspects. 

Protecting Investors in Agriculture and Rural America 
 

Farm Credit System Insurance Corporation

34

Compliance with the Federal Civil Penalty 

Infation Adjustment Act Improvements Act of 

2015 

FCSIC has authority under section 5.65(c) of the Farm Credit Act (12 U.S.C. §2277a-14) to impose civil 

money penalties against a Farm Credit System bank that willfully fails or refuses to fle any certif ed statement or pay any required premium. 

In addition, section 5.65(d) of the Farm Credit Act provides that, except with the prior written consent 

of FCA, it shall be unlawful for any person convicted of any criminal ofense involving dishonesty or a 

breach of trust to serve as a director, ofcer, or employee of any System institution and authorizes FCSIC 

to recover penalties for a willful violation of this prohibition. Sections 5.65(c) and (d) provide for a penalty of not more than $100 for each day during which the violation continues. 

Te Federal Civil Penalties Infation Adjustment Act Improvements Act of 2015 (the 2015 Act) amended 

the Federal Civil Penalties Infation Adjustment Act of 1990 (28 U.S.C. §2461 note) to provide for regular 

evaluation of civil penalties and required every applicable federal agency to adopt, through an interim f nal 

rule, a one-time “catch-up” adjustment to be efective no later than August 1, 2016, and annual adjustments thereaf er. 

FCSIC published, on January 26, 2018, a fnal rule making the annual adjustment required by the 2015 

Act that increased our civil money penalties to not more than $205 for each day during which a violation continues (83 FR 3563). On February 7, 2019, we published a fnal rule making the required annual 

adjustment that increased our civil money penalties to not more than $210 for each day during which a 

violation continues (84 FR 2437). 

Farm Credit System Insurance Corporation 
35

Performance Management Program 

FCSIC’s mandate is to ensure the timely payment of principal and interest on insured Farm Credit System 

debt securities and to serve as receiver or conservator when appointed by the Farm Credit Administration 

board. To fulfll our mandate, we have three fundamental program goals: 

• Manage the Insurance Fund to protect investors 

• Monitor, evaluate, and report insurance risk 

• Maintain the capability to manage assistance requests, receiverships, and conservatorships 

Performance Measures 

1. Manage the Farm Credit Insurance Fund to maintain the secure base amount to provide protection 

for investors and taxpayers against identif ed risks 

We adjust insurance premium assessments when appropriate and manage assets to optimize investment 

returns to build and maintain the Insurance Fund at the statutory 2 percent secure base amount. At the 

same time, we must maintain appropriate liquidity to carry out our mission. 

We assess the efectiveness of our performance in achieving this goal through the following: 

• Reviewing semiannually the need for adjustments to insurance premium assessments 

• Measuring investment performance by comparing the portfolio’s average yield with peer investment funds that have similar investment parameters for quality and maturity 

• Comparing the level of the Insurance Fund every month with the secure base amount and 

reporting the results to the board of directors 

Our ability to maintain the Insurance Fund at the secure base amount may be afected by events beyond 

our control, such as insurance losses. 

2. Monitor, evaluate, and report risks that could generate losses to the Insurance Fund 

We measure progress toward this program goal by how promptly we detect emerging problems and how 

efectively we minimize insurance losses. We use fnancial indicators to monitor conditions and trends, and 

we analyze and report data before losses become likely. In periods when there are insurance claims or the 

probability of claims, the ratio of estimated losses to actual losses helps measure our ability to assess prospective loss exposure. 

As guidance, our management uses criteria specifed in our policy for allowance for losses and in the 

Financial Accounting Standards Board’s Accounting Standards Topic 450, Contingencies. Timely evaluation 

of the Insurance Fund’s risk exposure is critical to preserving the Insurance Fund’s solvency. We use FCA 

reports of examination to evaluate risks to the Insurance Fund. When necessary, we independently examine 

and require information from System institutions. 

Protecting Investors in Agriculture and Rural America 
36

3. Maintain the capability to manage assistance requests, receiverships, and conservatorships 

FCSIC has statutory authority to provide fnancial assistance to System institutions, including loans. Any 

assistance agreement is subject to the board’s approval. We have a policy statement on assistance and we 

have adopted procedures for providing assistance in a liquidity crisis. We measure efectiveness by periodically testing our procedures and updating our policy statement, so we remain ready to provide f nancial 

assistance in a timely and cost-ef ective manner. 

FCSIC is required to serve as receiver or conservator of System banks and associations when appointed by 

FCA. Tis program goal requires us to maintain readiness through periodic staf training and evaluation 

of support capabilities. We must ensure that we have the resources we need to manage receiverships or 

conservatorships in case the need arises. 

We use the following measures to determine the efectiveness of our receivership operations: 

• Timeliness of initial processing of all claims (Processing should occur within a period of time 

warranted by the size and complexity of each case.) 

• Te ratio of operating costs to total assets

 • Te ratio of actual asset recovery returns to net realizable asset values 

FCSIC has three major program areas with corresponding strategic goals and objectives. We have implemented performance measures to help us evaluate the efectiveness of these goals and objectives. It is 

important to note that some of these measures use management estimates that may be afected by the 

performance and condition of System institutions. Also, unforeseen events may have a material ef ect 

on performance measures over time. Figure 14 illustrates each program’s 2018 budget and expenditures, 

including program support. 

Figure 14 

2018 Budget and Expenditure by Program 

(Dollars in Millions) 

Farm Credit System Insurance Corporation 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

Te Government Performance and Results Act of 1993, as amended, requires all federal government 

organizations to report on the results of program performance. Performance results are included in regular 

reports to the board of directors and in our annual report. Information for each of the three major program areas is presented in Table 4. 

Table 4 

Strategic Goals and Objectives by Program Area 

FCSIC’s Mission Program Areas Strategic Goals Strategic Objectives For More

Information

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 Insurance Fund

loss.

Help ensure the future

of a permanent system

for delivery of credit to

agricultural borrowers.

Insurance Fund

management

Manage the Farm

Credit Insurance

Fund to maintain

the secure base

amount to provide

protection for investors and taxpayers

against identified

risks.

1.Manage the Insurance Fund to ensure

adequate liquidity whileoptimizing investment returns andensuring premium

collections and refunds reflect anticipated

changes in adjusted insured debt levels and 

potential insurance claims.

2.Use actuarial tools to evaluate the

adequacy of investor protections and risk

exposures to the Insurance Fund.

3. Ensure that System banks have

adequate temporary liquidity in 

situations where external market factors 

make normal debt market access 

extremely doubtful.

4. Communicate accurate and easily understood information about the

insurance program to the public, insured

investors, and System iinstitutions.

See pages

18-23 for

2018 results

Risk management Monitor, evaluate

and report risks

that could generate

losses to the Insurance Fund.

1.Use analytical models and other risk

management tools and processes to

identify and respond to potential risks to

the Insurance Fund. Conducttrend analysis 

on the System’s growth,funding needs, 

conditionand performance. Regularly 

reportto theboard of directors on 

identified risk exposures.

2.Monitor conditions in the agricultural

and financial sectors that may affect

insurance risk and integrate the resultsinto

theprocess for setting annual insur-ance 

premium rates.

See pages

26-31 for

2018 results

Receivership and Maintain the capa- See page 32

conservatorship bility to manage for 2018

readiness assistance requests,

receiverships and

conservatorships.

1. Subject to the provisions of the Farm

Credit Act, including the least-cost test,

provide assistance when appropriate to a

troubled System bank or association.

2. Ensure receiverships and conservatorships are managed to fulfill the purposes of 

the Farm Credit Act, protect creditors, and 

are terminated in an orderly andtimely

manner.

results

Protecting Investors in Agriculture and Rural America 
 

 

 

38

Glossary 

Farm Credit Act — Te Farm Credit Act of 1971, as amended, (12 U.S.C. §2001 et seq.) is the statute 

under which the Farm Credit System, FCSIC, and the Farm Credit Administration operate. 

Farm Credit Administration — FCA was established in 1933 to regulate the System. It is governed by 

a three-member presidentially appointed board. To ensure the safety and soundness of the System, FCA 

examines and supervises System institutions and develops regulations to govern them. 

Federal Farm Credit Banks Funding Corporation — Based in Jersey City, New Jersey, the Funding Corporation manages the sale of Systemwide debt securities to fnance the loans made by System institutions. 

It uses a network of bond dealers to market the System’s securities. 

Federal Open Market Committee — Tis committee of the Federal Reserve Board determines the direction of monetary policy. Te committee is composed of the board of governors, which has seven members, and fve Federal Reserve bank presidents. Te president of the Federal Reserve Bank of New York 

serves continuously, while the presidents of the other reserve banks rotate their service of one-year terms. 

Financial Institution Rating System (FIRS) — Te FIRS is similar to the Uniform Financial Institutions 

Rating System used by other federal banking regulators except that the FIRS refects the nondepository 

nature of System institutions. Te FIRS provides a general framework for assimilating and evaluating all 

signif cant fnancial, asset quality, and management factors to assign a composite rating to each System 

institution. Te ratings are described below. 

Rating 1 — Institutions in this group are basically sound in every respect; any negative f ndings or 

comments are of a minor nature and are anticipated to be resolved in the normal course of business. Such institutions are well managed, resistant to external economic and f nancial disturbances, 

and more capable of withstanding the uncertainties of business conditions than institutions with 

lower ratings. Each institution in this category exhibits the best performance and risk management 

practices for its size, complexity, and risk prof le. Tese institutions give no cause for regulatory 

concern. 

Rating 2 — Institutions in this group are fundamentally sound but may refect modest weaknesses 

correctable in the normal course of business. Because the nature and severity of def ciencies are 

not material, such institutions are stable and able to withstand business fuctuations. Overall risk 

management practices are satisfactory for the size, complexity, and risk profle of each institution 

in this group. While areas of weakness could develop into conditions of greater concern, regulatory response is limited to the extent that minor adjustments are resolved in the normal course of 

business and operations continue in a satisfactory manner. 

Rating 3 — Institutions in this category exhibit a combination of fnancial, management, operational, or compliance weaknesses ranging from moderately severe to unsatisfactory. When weaknesses relate to asset quality or fnancial condition, these institutions may be vulnerable to the 

onset of adverse business conditions and could easily deteriorate if weaknesses are not corrected. 

Institutions that are in signifcant noncompliance with laws and regulations may also be given this 

Farm Credit System Insurance Corporation 
 

 

39

rating. Risk management practices are less than satisfactory for the size, complexity, and risk profle of each institution in this group. Institutions in this category generally give cause for regulatory concern and require more than normal supervision to address defciencies. Overall strength 

and fnancial capacity, however, still make failure only a remote possibility if corrective actions are 

taken. 

Rating 4 — Institutions in this group have an immoderate number of serious fnancial or operating weaknesses. Serious problems or unsafe and unsound conditions exist that are not being 

satisfactorily addressed or resolved. Unless efective actions are taken to correct these conditions, 

they are likely to impair future viability or constitute a threat to the interests of investors, borrowers, and stockholders. Risk management practices are generally unacceptable for the size, complexity, and risk profle of each institution in this group. A potential for failure is present but is not yet 

imminent or pronounced. Institutions in this category require close regulatory attention, f nancial 

surveillance, and a defnitive plan for corrective action. 

Rating 5 — Tis category is reserved for institutions with an extremely high, immediate, or nearterm probability of failure. Te number and severity of weaknesses or unsafe and unsound conditions are so critical as to require urgent external fnancial assistance. Risk management practices 

are inadequate for the size, complexity, and risk profle of each institution in this group. In the 

absence of decisive corrective measures, these institutions will likely require liquidation or some 

form of emergency assistance, merger, or acquisition. 

Government-sponsored enterprise (GSE) — A GSE is typically a federally chartered corporation created 

by Congress that is privately owned, designed to provide a source of credit nationwide, and limited to 

servicing one economic sector. Each GSE has a public or social purpose. GSEs are usually created because 

the private markets did not satisfy a purpose that Congress deems worthy either to fll a credit gap or to 

enhance competitive behavior in the loan market. Each is given certain features or benefts (called GSE 

attributes) to allow it to overcome the barriers that prevented purely private markets from developing. T e 

System is the oldest f nancial GSE. 

Protecting Investors in Agriculture and Rural America 
 

40

Acronyms and Abbreviations 

AIRAs 

CIPA 

FAC 

Farm Credit Act 

FCA 

FCSIC 

FIRS 

FMFIA 

FOMC 

Funding Corporation 

GAAP 

GDP 

GSE 

OMB 

System 

TIPS 

URE 

USDA 

allocated insurance reserves accounts 

Contractual Interbank Performance Agreement 

Financial Assistance Corporation 

Farm Credit Act of 1971, as amended 

Farm Credit Administration 

Farm Credit System Insurance Corporation 

Financial Institution Rating System 

Federal Managers’ Financial Integrity Act 

Federal Open Market Committee 

Federal Farm Credit Banks Funding Corporation 

generally accepted accounting principles 

gross domestic product 

government-sponsored enterprise 

Ofce of Management and Budget 

Farm Credit System 

Treasury inf ation-protected securities 

unallocated retained earnings 

United States Department of Agriculture 

Farm Credit System Insurance Corporation 
 

41

Corporate Staf 

C. Richard Pftzinger 

Howard I. Rubin 

Andrew J. Grimaldi 

Lynn M. Powalski 

Wade Wynn 

Gregory J. Smith 

Tanya L. Renica 

Mark E. Bowen 

Matthew Morgan 

Barbara Loggins 

Molly Sproles 

Contact Information 

Farm Credit System Insurance Corporation 

1501 Farm Credit Drive 

McLean, VA 22102 

Voice: (703) 883-4380 

Fax: (703) 790-9088 

www.fcsic.gov 

Chief Operating Ofcer 

Chief Risk Ofcer 

Chief Financial Ofcer 

General Counsel 

Chief Investment Ofcer and Senior Risk Analyst 

Senior Resolution Specialist 

Accountant 

Accountant 

Financial Analyst 

Senior Administrative Specialist 

Administrative Management Assistant 

Protecting Investors in Agriculture and Rural America 
42

Banks Insured by FCSIC 

To obtain copies of quarterly and annual reports of a Farm Credit System bank and its af liated associations, please contact the bank directly. Te mailing addresses, website addresses, and telephone numbers of 

all four System banks are provided below. 

AgFirst Farm Credit Bank 

P.O. Box 1499 

Columbia, SC 29202-1499 

(803) 799-5000 

www.agf rst.com 

AgriBank 

30 E. 7th Street, Suite 1600 

St. Paul, MN 55101-4914 

(651) 282-8800 

www.agribank.com 

CoBank 

P.O. Box 5110 

Denver, CO 80217-5110 

(303) 740-4000 

www.cobank.com 

Farm Credit Bank of Texas 

P.O. Box 202590 

Austin, TX 78720-2590 

(512) 465-0400 

www.farmcreditbank.com 

Note: Information contained on these websites is not incorporated by reference into this annual report, 

and you should not consider information contained on these websites to be part of this annual report. 

Farm Credit System Insurance Corporation 
 

43

Additional Information 

To obtain Farm Credit System quarterly and annual information statements, contact the Federal Farm 

Credit Banks Funding Corporation at the following address: 

Federal Farm Credit Banks Funding Corporation 

101 Hudson Street 

Suite 3505 

Jersey City, NJ 07302 

(201) 200-8000 

Tese documents are also available on the Funding Corporation’s website at www.farmcreditfunding.com. 

To obtain copies of the Farm Credit Administration’s Annual Report on the Farm Credit System and the 

FCA Annual Performance and Accountability Report, contact FCA at the following address: 

Ofce of Congressional and Public Af airs 

Farm Credit Administration 

1501 Farm Credit Drive 

McLean, VA 22102 

(703) 883-4056 

Tese documents are also available on the FCA website at www.fca.gov. 

Protecting Investors in Agriculture and Rural America 
Farm Credit System Insurance Corporation 

1501 Farm Credit Drive 

McLean, VA 22102 

Voice: 703-883-4380 

Fax: 703-790-9088 

www.fcsic.gov