FARM CREDIT SYSTEM INSURANCE CORPORATION

McLean, Virginia

FINANCIAL STATEMENTS

December 31, 2012 and 2011
TABLE OF CONTENTS

PAGE

INDEPENDENT AUDITOR’S REPORT ....................................................................................................................1

INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER  

FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS  

BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN  

ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS.........................................................................3

FINANCIAL STATEMENTS.....................................................................................................................................5

Statements of Financial Condition ................................................................................................................6

Statements of Income and Expenses and Changes in Insurance Fund .........................................................7

Statements of Cash Flows..............................................................................................................................8

Notes to the Financial Statements................................................................................................................9
1 

CliftonLarsonAllen LLP 

www.cliftonlarsonallen.com 

INDEPENDENT AUDITOR’S REPORT

Board of Directors

Farm Credit System Insurance Corporation

McLean, Virginia

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

which comprise the statements of financial position as of December 31, 2012 and 2011, and the related

statements of income and expenses and changes in insurance fund, and cash flows for the years then

ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

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 internal control relevant to the preparation and fair

presentation of financial statements that are free from material misstatement, whether due to fraud or

error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted

our audits in accordance with auditing standards generally accepted in the United States of America and the

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

Comptroller General of the United States. Those standards require that we plan and perform the audit to

obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the

financial statements. The procedures selected depend on the auditors’ 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, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal

control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of

accounting policies used and the reasonableness of significant accounting estimates made by management,

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

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

audit opinion.
2

Opinion

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

financial position of Farm Credit System Insurance Corporation as of December 31, 2012 and 2011, and the

results of its operations and its cash flows for the years then ended in accordance with accounting principles

generally accepted in the United States of America.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated April 11, 2013 on

our consideration of Farm Credit System Insurance Corporation's internal control over financial reporting

and on our tests of its compliance with certain provisions of laws, regulations, contracts, and other matters.

The purpose of that report is to describe the scope of our testing of internal control over financial reporting

and compliance and the result of that testing, and not to provide an opinion on internal control over

financial reporting or on compliance. That report is an integral part of an audit performed in accordance

with Government Auditing Standards in considering Farm Credit System Insurance Corporation’s internal

a 

control over financial reporting and compliance.

Calverton, Maryland

April 11, 2013
3 

CliftonLarsonAllen LLP 

www.cliftonlarsonallen.com 

Independent Auditor’s Report on Internal Control Over Financial  

Reporting and on Compliance and Other Matters Based on an Audit of Financial  

Statements Performed in Accordance with Government Auditing Standards

To the Board of Directors  

Farm Credit System Insurance Corporation

McLean, Virginia

We have audited, in accordance with the auditing standards generally accepted in the United States of

America and the standards applicable to financial audits contained in Government Auditing Standards issued

by the Comptroller General of the United States, the financial statements of Farm Credit System Insurance

Corporation, which comprise the statement of financial condition as of December 31, 2012, 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, and have issued our report thereon dated April 11, 2013.

Internal Control Over Financial Reporting

In planning and performing our audit of the financial statements, we considered Farm Credit System

Insurance Corporation's internal control over financial reporting (internal control) to determine the audit

procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the

financial statements, but not for the purpose of expressing an opinion on the effectiveness of Farm Credit

System Insurance Corporation’s internal control. Accordingly, we do not express an opinion on the

effectiveness of Farm Credit System Insurance Corporation’s internal control.

A deficiency in internal control exists when the design or operation of a control does not allow management

or employees, in the normal course of performing their assigned functions, to prevent, or detect and

correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of

deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of

the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A

significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe

than a material weakness, yet important enough to merit attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the first paragraph of this

section and was not designed to identify all deficiencies in internal control that might be material

weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any

deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses

may exist that have not been identified.
4 

Compliance and Other Matters

As part of obtaining reasonable assurance about whether Farm Credit System Insurance Corporation's

financial statements are free from material misstatement, we performed tests of its compliance with

certain provisions of laws, regulations, and contracts, 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 Government Auditing Standards.

Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of internal control and

compliance and the result of that testing, and not to provide an opinion on the effectiveness of the

entity’s internal control or on compliance. This report is an integral part of an audit performed in

accordance with Government Auditing Standards in considering the entity’s internal control and

a 

compliance. Accordingly, this communication is not suitable for any other purpose.

Calverton, Maryland

April 11, 2013
5 

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

6 

Farm Credit System Insurance Corporation 

Statements of Financial Condition 

As of December 31, 2012 and 2011 

(Dollars in thousands)

 

2012 2011

Assets 

 

 

 Cash and cash equivalents $ 5,079 $ 1,101

 Investments in U.S. Treasury Obligations (Note 3) 3,196,211 3,266,285

 Accrued interest receivable 12,667 26,264

 Premiums receivable (Note 4) 84,266 98,699

Total assets $ 3,298,223 $ 3,392,349

Liabilities and Insurance Fund 

 Accounts payable and accrued expenses (Note 6) $ 287 $ 385

Total liabilities 287 385

 Farm Credit Insurance Fund 

 

 Allocated Insurance Reserves Accounts 

 

 Allocated in 2012 0 221,851

 Unallocated Insurance Fund Balance 3,297,936 3,170,113

 

Total Insurance Fund 3,297,936 3,391,964

Total liabilities and Insurance Fund $ 3,298,223 $ 3,392,349
The accompanying notes are an integral part of these financial statements. 

7 

Farm Credit System Insurance Corporation 

Statements of Income and Expenses and Changes in Insurance Fund 

For the years ended December 31, 2012 and 2011 

(Dollars in thousands)

 

 

 

2012 2011

Income 

 

 Premiums (Note 4) $ 84,298 $ 97,257

 Interest income 46,842 72,616

Total income 131,140 169,873

Expenses 

 

 Administrative operating expenses (Note 6) 3,317 3,255

Total Expenses 3,317 3,255

Net Income 127,823 166,618

Farm Credit Insurance Fund – beginning of year 3,391,964 3,225,346

 

Payments to AIRAs Accountholders 221,851 0

Farm Credit Insurance Fund – end of year $ 3,297,936 $ 3,391,964

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

8 

Farm Credit System Insurance Corporation

Statements of Cash Flows 

For the years ended December 31, 2012 and 2011 

(Dollars in thousands)of Contents 

2012 2011

Cash flows from operating activities 

 

 Net income $ 127,823 $ 166,618

 

 Adjustments to reconcile net income to net cash 

 provided by operating activities: 

 

 

 (Increase) decrease in premium receivable 14,433 (18,730)

 

 (Increase) decrease in accrued interest receivable 13,597 (4,720)

 

 Net amortization and accretion of investments 25,957 26,681

 

 Increase (decrease) in accounts payable and 

 accrued expenses (98) 

 

46

 

 Net cash provided by operating 

 activities 181,712 

 

169,895

 

Cash flows from investing activities 

 

 Payments for purchase of U. S. Treasury Obligations (1,653,663) (1,291,379)

 

 Proceeds from maturity of U.S. Treasury Obligations 1,697,780 972,754

 

 Net cash provided by (used in) investing 

 activities 44,117 (318,625)

 

Cash flows from financing activities 

 

 Payment to AIRAs Accountholders (221,851) 0

 

 Net cash used in financing activities (221,851) 0

 

Net change in cash and cash equivalents 3,978 (148,730)

 

Cash and cash equivalents, beginning of year 1,101 149,831

 

Cash and cash equivalents, end of year $ 5,079 $ 1,101
This information is an integral part of the accompanying financial statements. 

9 

Notes to the Financial Statements 

Note 1 — Insurance Fund: Statutory Framework

The Agricultural Credit Act of 1987 (1987 Act) 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 (Farm Credit Act), (insured obligations). 

Each bank in the Farm Credit System (System) participating in insured obligations is an insured 

System bank. At December 31, 2012, there were four insured System banks and 82 direct lender 

associations. 

The Corporation is managed by a board of directors consisting of the same individuals as the Farm 

Credit Administration (FCA) Board except that the Chairman of the FCA Board may not serve as 

the Chairman of the Corporation’s Board of Directors. 

The Corporation must spend the amounts necessary to: 

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

default by an insured System bank; 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 certain insured institutions. 

The balances outstanding at December 31, 2012, for each of the components of the Corporation’s 

insurance responsibilities were $197.5 billion of insured obligations, and $2 million of eligible 

borrower stock. 

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

banks will be required to make payments under joint and several liability, as required by section 4.4 

(a)(2) of the Farm Credit Act. 

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 — Summary of Significant Accounting Policies 

Accounting Principles and Reporting Practices—The accounting and reporting policies of the 

Corporation conform to accounting principles generally accepted in the United States of America 

(GAAP) and, as such, the financial statements have been prepared using the accrual basis of 

accounting. The preparation of financial statements in conformity with GAAP requires 

management to make estimates and assumptions that affect the reported amount of assets and 

liabilities and disclosure of contingent assets and liabilities at the date of the financial statements 

and the reported amount of revenues and expenses during the reporting period. Actual results could 

differ from those estimates.
This information is an integral part of the accompanying financial statements. 

10 

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, 2012, the Corporation held 

$4.9 million in overnight Treasury Certificates maturing on January 2, 2013, with an investment rate 

of zero percent, and $178,885 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 FASB ASC 320 (formerly 

Statement of Financial Accounting Standard No. 115) and carries them at amortized cost. 

Amortization of premium and accretion of discount on investments has been computed under the 

interest method since 2002. Fair value of investments is estimated based on quoted market prices for 

those or similar instruments. 

Liability for Estimated Insurance Obligations—The liability for estimated insurance obligations is 

the present value of estimated probable insurance payments to be made in the future based on the 

Corporation's analysis of economic conditions of insured System banks. 

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

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

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

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

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

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

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

would have a material effect on the liability for estimated insurance obligations. 

The Corporation actively monitors the creditworthiness and financial position 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. 

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

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

they are earned. 

Retirement Plan—All permanent Corporation employees are covered by the Civil Service 

Retirement System (CSRS) or the Federal Employees Retirement System (FERS). The 

Corporation's contribution during 2012 to the CSRS plan was 8.5 percent of base pay. For those 

employees covered by FERS, the Corporation's contribution was 10.7 percent of base pay. In 

addition, for FERS-covered employees, the Corporation automatically contributes 1 percent of base 

pay to the employee's Thrift Savings Plan account, matches the first 3 percent contributed by the 

employee, and matches one-half of the next 2 percent contributed by the employee. Retirement plan 

expenses amounted to $264,533 in 2012 and $249,895 in 2011. 
This information is an integral part of the accompanying financial statements. 

11 

Note 3 — Investments

In addition to the amounts referenced in Note 2, Cash and Cash Equivalents, at December 31, 2012 

and 2011, investments in U.S. Treasury obligations which are carried at amortized cost consisted of 

the following: 

($ in thousands) Amortized 

Cost 

Gross 

Unrealized 

Gains 

Gross 

Unrealized 

Losses 

Estimated 

Market 

Value 

December 31, 2012 

U.S. Treasury Notes $ 3,196,211 $ 41,496 $ (433) $ 3,237,274 

December 31, 2011 

U.S. Treasury Notes $ 3,266,285 $ 56,045 $ (581) $ 3,321,749 

The amortized cost and estimated market value of U.S. Treasury obligations at December 31, 2012, 

by contractual maturity, are shown below. 

($ in thousands) 

 

Amortized 

Cost 

Estimated 

Market 

Value 

Due in one year or less $ 625,019 $ 629,800 

Due after one year through five years 2,294,540 2,322,353 

Due after five years through ten years 276,652 285,121

 $ 3,196,211 $ 3,237,274
This information is an integral part of the accompanying financial statements. 

12 

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 Food, Conservation, and Energy Act of 2008 amended the Farm Credit Act of 1971 (12 

U.S.C. § 2001 et seq.) to generally assess premiums based on each bank's pro rata share of 

insured debt (rather than on loans), aligning premiums with what FCSIC insures. The changes 

were implemented beginning July 1, 2008. Now FCSIC may collect from 0 to 20 basis points 

annually on adjusted insured debt outstanding. The amendments also authorize a risk 

surcharge of up to 10 basis points on non-accrual loans and on other-than-temporarily 

impaired investments. The amendments reduce 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 deduct similar percentages of such 

guaranteed loans and investments when calculating the secure base amount (SBA). The 

amendments clarify that FCSIC may collect premiums more frequently than annually. 

In addition, the Farm Credit Act no longer specifies how the Farm Credit System banks pass 

premiums to associations and other financing institutions, although it will require that the 

banks do so in an equitable manner. This change allows the banks flexibility in allocating 

premium costs to associations. The amendments clarify that, in addition to FCSIC's regulatory 

authority under Title V of the Farm Credit Act, FCSIC has the authority to adopt rules and 

regulations concerning provisions in Title I of the Farm Credit Act related to banks passing along 

the cost of insurance premiums. Finally, the amendments change Farm Credit Act provisions 

regarding certified statements and simplify the formula for payments from the Farm Credit 

Insurance Fund Allocated Insurance Reserves Accounts (AIRAs) to allow more immediate 

distribution of excess Insurance Fund balances to insured banks and the Farm Credit System 

Financial Assistance Corporation (FAC) stockholders. 

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. 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). 
This information is an integral part of the accompanying financial statements. 

13 

Insurance premium rates are reviewed semiannually. For 2012, the Board of Directors set premium 

rates at its January 19, 2012, meeting at 5 basis points on average adjusted insured debt and 

continued the assessment of the 10 basis point premium 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, 2012 meeting. The Board of Directors voted to 

maintain the premium accrual rate on average adjusted insured debt at 5 basis points and 

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

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

remainder of 2012. In 2012, outstanding insured obligations increased by $13.3 billion (7.2 

percent). At December 31, 2012, both of the unallocated Insurance Fund and the total Insurance 

Fund were 1.93 percent of adjusted insured obligations. 

On January 24, 2013, the Board of Directors set premium rates for 2013, increasing the premium 

rate on adjusted insured debt outstanding from 5 basis points to 10 basis points. The Board 

continued the 10 basis point premium on the average principal outstanding for nonaccrual loans and 

other-than-temporarily impaired investments. 

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 FAC. If at the end of any calendar year the unallocated Insurance Fund is at the SBA, the 

Corporation is to segregate any excess balances into these AIRAs. In 2011, the Corporation's Board 

revised the Policy Statement on the Secure Base Amount and Allocated Insurance Reserves 

Accounts which provides guidelines for implementing this statutory authority. If at the end of any 

calendar year, the aggregate of the amounts in the Insurance Fund exceeds the SBA, the 

Corporation shall allocate to the Allocated Insurance Reserves Accounts the excess amount 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. At year-end 2011, this resulted in the transfer of $221.85 million to the 

A1RAs. The amount was allocated as follows: 

FAC Stockholders (10%) $ 22.18 million 

Farm Credit System Banks (90%) $ 199.67 million 

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

Corporation's Board. AIRAs balances may be used to absorb any insurance losses and claims. 

Furthermore, the Board of Directors has discretion to limit or restrict the AIRAs payments. In 

accordance with the Corporation's policy statement, any AIRAs balances do not count in measuring 

the Insurance Fund's compliance with the SBA. 

In April 2012, after completion of the Corporation’s year-end audit, the Board of Directors authorized 

the payment of the $221.85 million transferred at year-end 2011 to the account holders. Payments 

were made in May 2012. 

At yearend 2012, the Insurance Fund was below the SBA by $119 million. Consequently no funds 

were available to transfer to the AIRAs. 
This information is an integral part of the accompanying financial statements. 

14 

Note 5 — Operating Lease 

On November 30, 2009, the Corporation executed a six year lease with the Farm Credit System 

Building Association for office space. The terms of the lease provide for an annual minimum base 

rent for the office space for the remaining term of $146,531 for 2013 and $150,899 for 2014. The 

Corporation recorded lease expense (including operating cost assessments) of $145,157 and 

$138,443 for 2012 and 2011, respectively. 

Note 6 — 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 had zero payables due 

to the FCA at December 31, 2012 and $92,330 at December 31, 2011. The Corporation 

purchased services for 2012 which totaled $401,176 compared with $336,387 for 2011. 

The Corporation provides assistance to the FCA under the same Interagency Agreement, 

recognizing revenue of zero for 2012 and 2011. At December 31, 2012, and 2011, the 

Corporation did not have any receivables from the FCA. 

Note 7 — Subsequent Events 

Management evaluated subsequent events through April 11, 2013, the date the financial 

statements were available to be issued. Events or transactions occurring after December 31, 2012, 

but prior to April 11, 2013, that provided additional evidence about conditions that existed at 

December 31, 2012, have been recognized in the financial statements for the year ended 

December 31, 2012. Events or transactions that provided evidence about conditions that did not 

exist at December 31, 2012, but arose before the financial statements were available to be issued 

have not been recognized in the financial statements for the year ended December 31, 2012.