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1100 Farm Credit Drive Mahomet, IL 61853 217.590.2200

www.fcsillinois.com

Annual Report

2012


2012 ASSOCIATION HIGHLIGHTS

A Year of Growth

& Dedication to Stockholder Success

Growing to Serve

Farm Families & Illinois Agriculture The Association’s loan portfolio (owned & managed) grew 13.3% in 2012 – from $3.045 billion on 12/31/2011 to $3.450 billion on 12/31/2012. The Association set a record for new mortgage loans in 2012 by originating nearly $833 million in new mortgage loans. More than $124 million of those loans closed during the month of

December. Even with this significant growth, the acceptable credit quality of the portfolio was at 99.3% and the Association’s permanent capital ratio registered 14.67% on 12/31/2012. Overall, the results of operations provided net earnings of $63 million. Over the past decade the loan portfolio has nearly tripled in size —

from $1.167 billion in 2002 to $3.450 billion in 2012. Farm Credit Services of Illinois insured 1.2 million net acres of MultiPeril Crop Insurance with premiums totaling $49.1 million in 2012; CropHail insurance premiums were at $3.1 million.

Association’s Loan Portfolio Owned and Managed on 12/31 $4.000 $3.500

(in billions of dollars)

$3.000 $2.500 $2.000 $1.500 $1.000 $0.500 $0.000 2002

2003

2004

2005

2006

2007

www.fcsillinois.com

2008

2009

2010

2011

2012


Association Structure

8,560 Stockholders • 14 Directors • 200 Employees • 15 Regional Offices Serving farm families, rural landowners, and agribusinesses in the southern 60 counties of Illinois

Iroquois Iroquois

Watseka

Watseka

Ford Vermilion

Ford

Champaign Vermilion

Logan

De Witt

MAHOMET Champaign

Piatt

Logan

De Witt

Cass Morgan

Cass

Lincoln

Sherman

Menard

Greene Jacksonville Scott

Calhoun

Douglas

Moultrie

Christian Shelby Decatur

Sangamon Springfield

Macoupin

Edgar

CHAMPAIGN Macon

Decatur

Morgan

Jacksonville

Scott

Piatt

Macon

Menard

Paris Edgar

Coles

Moultrie

Douglas

Coles

Christian

Paris

Taylorville

Sangamon

Clark

Shelby

Taylorville Greene

Cumberland

Montgomery

Macoupin

Carlinville

Jerseyville

Jersey

Effingham

Carlinville

Jasper

Shelbyville

Montgomery

Effingham

Effingham

Hillsboro

Vandalia

Madison

Highland

Lawrence

Newton Clay

Lawrenceville

Richland

Lawrence

Marion

Wayne Way

Clinton

St. Clair

Jefferson Jeffferson

Washington Monroe

Crawford

Richland

Effingham

Marion Clinton

St. Clair

Jasper

Clay

Bond

Highland

Crawford

Cumberland

Fayette

Bond

Madison

Clark

Charleston

Fayette

Calhoun

Edwards Wabash

Lawrenceville

Wayne

Edwards

Wabash

Belleville Jefferson

Washington

Perry

Monroe

Hamilton

Mt. Vernon

Nashville

Red Bud

Franklin Perry

White

Hamilton

Albion

White

MT.VERNON

Randolph Red Bud

Franklin

Jackson

Gallatin

Saline

Williamson Benton

Jackson

Harrisburg Saline

Williamson

Union

Johnson Union

Alexander Alexander

Pulaski

Pope Harrisburg

Gallatin

Hardin

Johnson

Massac Massac

2012 Board of Directors & Director Regions

Region 1

Region 3

Region 2


Association Leadership Board of Directors As a cooperative, Farm Credit’s customer stockholders elect 12 of their peers as directors to the board. Two additional directors are appointed as outside directors. The 2012 board of directors (pictured on bottom of previous page) are : Front (L to R): Lance Beery, Shelby County; Mark Miller, Chair, Macon County; Karen Neff, Vice Chair, St. Clair County; and Wes Durbin, Shelby County. Center (L to R): Dale Crawford, Moultrie County; and Larry Hasheider, Washington County. Back (L to R): Jack Crumrin, Clark County; Kevin Miller, Effingham County; Dennis Frey, Hamilton County; Wm. David Champion, Jr., outside director with Eastern Illini Electric Cooperative; J. Dale Edwards, Sangamon County; Kent Brinkmann, Clinton County; Jack Hastings, Clay County; and K. Bridget Schneider, outside director with Lincoln Financial Securities Corp.

Region One John K. Rundquist, Montgomery County; Keith Allen Strohmeier, Macoupin County; and Steve A. Carls, Morgan County. Region Two Gary R. Wachtel, Effingham County; O. Eugene Barkley, Edgar County; and James Kent Krukewitt, Champaign County. Region Three Glenn F. Stumpf, Monroe County; Dean Shields, Jackson County; and Robert E. Thurston, Pulaski County. Stockholders who may be interested in candidacy for either the board of directors or the nominating committee are encouraged to directly contact a current member of the nominating committee.

Stockholders Advisory Councils Every year an advisory meeting is held in each of the three Director Regions. The Stockholders Advisory Council meetings provide

Senior Management The senior management team is comprised of (pictured right from L to R): Steve Ray, Senior Vice President & Chief Financial Officer; Aaron Johnson, Senior Vice President, Operations; Dave Owens, President & Chief Executive Officer; Tom Tracy, Senior Vice President, Operations; and Don Olson, Executive Vice President & Chief Credit Officer.

Nominating Committee The following individuals were elected to serve as the 2013 Nominating Committee:

opportunities for customers to engage directly with directors and the senior management team to provide candid feedback about the marketplace; review the cooperative’s

governance; and discuss important issues facing Illinois agriculture and Farm Credit. The 2012 Stockholders Advisory Council members included: Region One Scott Brockelsby, Christian County; Dereke Dunkirk, Christian County; Tom Hieronymus, Dewitt County; Dave Kirkland, Macoupin County; Ron Kuhlmann, Cass County; Don Ladage, Sangamon County; Steven Leesman, Logan County; Ted Mies, Sangamon County; Craig Moore, Macon County; Mike & Linda Potthast, Bond County; David Smith, Greene County; and Mike Stacey, Macon County. Region Two Phillip Cramer, Jasper County; Brian Crawford, Moultrie County; Michael Cunningham, Vermilion County; David Haase, Iroquois County; Reid Ingram, Edgar County; Stanley Jansen, Effingham County; J.D. Kuhns, Douglas County; Kent Littlejohn, Clark County; Gary Scherer, Richland County; and Steven Sunkel, Edgar County. Region Three Leon Adams, Jefferson County; Lee Berberich, Wabash County; Pam Danner, Jefferson County; Sandy Frick, Jefferson County; Ellery & Garrett Hawkins, Monroe County; Phil Healy, White County; Bryan Henrichs, Clinton County; Kirk Liefer, Randolph County; Ben Moye, Gallatin County; Brian Rinderer, Madison County; Bob Thurston, Pulaski County; Kerry & Kaleb Treece, Union County; Rolland Vandeveer, Marion County; and David & Clare Wiskamp, St. Clair County.


Farm Credit’s Commitment to Serving Stockholders

Farm Credit College

Farm Credit College programs are facilitated to equip stockholders with information, skills, and strategies to help participants reach their potential in managing successful farm businesses which have the capacity and structure to pass family ownership from generation to generation.

March 19, Champaign: “Surviving Family Farming Whitewater” by Dr. Don Jonovic with Family Business Management Services in Cleveland OH and “Estate Planning 101” by Curt Ferguson with Estate Planning Center in Salem IL.

In 2012, four Farm Credit College workshops were held:

November 28, Effingham: “Farm Financial Analysis 101” by Dr. Mike Gunderson with Purdue University in West Lafayette IN and Steve Witges, Farm Credit Regional Vice President for the Effingham, Highland, and Red Bud regional offices.

Farm Credit college

Facilitating Stockholder Success

December 6, Springfield: “Beyond Outlook: Managing Crop Price Risks” by Dr. Steve Johnson with Iowa

State University in Ames IA and “Commodity Marketing Lessons” by Andy Shissler with Roach Ag Marketing in Downers Grove IL. December 13, Jacksonville: “Farm Business Ownership & Family Succession” by Dr. Ron Hanson of Nebraska University in Lincoln NE.

Grill Events & Meals in the Field than 40 Farm Credit Grill Events were that day. Farm Credit also delivered a held. Thanks, in part, to an annual farm safety message and a Farm First financial partnership with the Illinois Aid Kit to each host family. Pork Producers Association, more than 7,500 pork burgers and other pork products were served to Illinois farm families throughout the year.

Farm Credit puts five giant grills to work throughout the year in hosting Farm Credit Grill Events at grain elevators, ag equipment dealerships, farm supply stores, field demonstration plots, and customer appreciation events. In 2012, more

In recognition of the annual National Farm Safety & Health Week, 87 farm families received complimentary “Meals in the Field” from Farm Credit Services of Illinois’ local offices September 17-21, 2012. In total, 1,315 individuals received hot lunches delivered by Farm Credit staff to farmers wherever they were working


Ladies Appreciation Bus Trips Farm Credit regional offices hosted 18 different “Ladies Bus Trips” for farm women stockholders and guests. Farm Credit staff host these day-long trips which are either recreational or educational in nature. More than 1,300 farm women participated in the 2012 Ladies Bus Trip programs.

Drought Relief Program

The Drought of 2012 – along with periods of record heat during the growing season – took a significant

toll on crop yields and feed costs throughout the Association’s 60-county service area. To ease the economic impact of the drought, Farm Credit announced relief assistance initiatives for stockholders including provisions for an interestfree operating loan – for up to $100,000 – during the traditional harvest months of September, October, and November. Additionally, Farm Credit offered to restructure existing loans to defer current

loan payments for farmers facing unexpected cash flow shortages because of the drought. In July and early August, Farm Credit hosted twelve “Drought Discussion” informational meetings throughout central and southern Illinois. More than 1,200 farmers participated in these meetings and heard a crop insurance industry expert explain the processes and proper procedures for submitting and receiving crop insurance claims.

STATEMENT FROM PRESIDENT AND CEO DAVE OWENS “As a cooperative business, our overriding concern is for the financial viability of our customer stockholders. Although many grain farmers manage these weather-related risks through crop insurance, there will still be some financial impact and possible cash flow challenges. We hope these relief programs provided a bit of respite from the sobering realities of the drought and heat stress damage in the fields. Farm Credit is genuinely mindful of both the economic and emotional struggle farmers faced this year. Our commitment is to stand with them during both the prosperous and the challenging times in agriculture.”


Farm Credit’s Commitment to Rural Youth Credit Agriculture Scholarship Farm Twenty-six $1,000 Farm Credit Agricultural Scholarships were awarded in the spring of 2012 to high school seniors who are pursuing agricultural careers. The 2012 Farm Credit Scholars were: Mr. Kane Austin of Jefferson County and Mt. Vernon Township High School; Mr. Bradley Braddock of Marion County and Patoka High School; Mr. Conner Builta of DeWitt County and Blue Ridge High School; Mr. Jacob Burrus of Cass County and Triopia Junior-Senior High School; Ms. Ellen Childress of Coles County and

Farm Credit Agriculture Scholarship

Oakland High School; Ms. Olivia Geiger of Madison County and Highland High School; Ms. Courtney Gerstenecker of Clinton County and Carlyle High School; Mr. William “Billy” Hatfield of Hamilton County and Wayne City High School; Ms. Lauren Henebry of Sangamon County and Tri-City High School;

Ms. Hannah Herzing of Jefferson County and Waltonville High School; Ms. Jessica Hummel of Iroquois County and Central High School; Mr. Blake Kiselewski of Jefferson County and Woodlawn High School; Ms. Sarah Kramer of Fayette County and South Central High School; Mr. Ryan Meinhart of Jasper County and Newton Community High School; Mr. Jacob Meisner of Macoupin County

Illinois FFA State Convention Farm Credit Services of Illinois and 1st Farm Credit Services team-up in coordinating and sponsoring the Press Area and Media Booth at the Illinois FFA State Convention in Springfield each year. Shown in the photo are the 2012-2013 Illinois State FFA Officer team elected during the 2012 Convention.

and Southwestern High School; Mr. Nicholas Paulsmeyer of Menard County and PORTA High School; Mr. Matthew “Tyler” Pokojski of Marion County and Christ Our Rock Lutheran High School; Ms. Emily Rogier of Madison County and Highland High School; Ms. Megan Rothe of Jersey County and Southwestern High School; Ms. Alexandria “Alex” Russell of Shelby County and CowdenHerrick High School; Ms. Kaylee Salm of Iroquois County and Donovan Senior High School; Mr. Michael “Mike” Shively of Iroquois County and Paxton-Buckley-Loda High School; Ms. Devyn Spear of Coles County and Mattoon High School; Ms. Jessica Telgmann of Shelby County and StewardsonStrasburg High School; Mr. James “Jim” Tobin of DeWitt County and Blue Ridge High School; and Mr. Derek Whalen of Morgan County and Waverly High School.


Farm Credit Community Improvement Grants

The Farm Credit Community Improvement Grants program encourages young people involved in 4-H clubs and FFA chapters to develop plans to implement improvement projects in their local community. In 2012, Farm Credit awarded thirty-four $250 Community Improvement Grants to the following

4-H clubs and FFA chapters to assist them with their respective project:

(Christian Co) • Liberty 4-H Club (Bond Co)

76 Clovers 4-H Club (White Co) •

Chapter (Williamson Co) • Maroa Livestock

A-C Central FFA Chapter (Cass Co) •

4-H Club (Macon Co) • Milford FFA Chapter

All School 4-H Club (Champaign Co) •

(Iroquois Co) • Omega Shamrocks 4-H Club

Blue Ribbon 4-H Club (Edwards Co) •

(Marion Co) • Patoka Panthers 4-H Club (Marion

Bone Gap Cardinals 4-H Club (Edwards

Co) • Southwestern FFA Chapter (Macoupin

Co) • Centralia FFA Chapter (Marion

Co) • Starr Shooters 4-H Club (Montgomery Co)

• Long Creek Critters 4-H Club (Macon Co) • Mad Hatters 4-H Club (White Co) • Marion FFA

Co) • Clover Cadets 4-H Club (Macoupin Co)

• Sugar Creek Pioneers 4-H Club (Sangamon

• Enfield Blue Ribbon 4-H Club (White Co) •

Co) • Town & Country 4-H Club (Sangamon

G.J. Beavers 4-H Club (Jackson Co) • Gallatin

Co) • Triopia FFA Chapter (Morgan Co) • Unity

County FFA Chapter (Gallatin Co) • Golden

(Tolono) FFA Chapter (Champaign Co) • Urbana

Eagles 4-H Club (Monroe Co) • Green Genes

FFA Chapter (Champaign Co) • Waterloo FFA

4-H Club (Macoupin Co) • Green Wolves 4-H

Chapter (Monroe Co) • West Side 4-H Club

Club (Christian Co) • Island Grove 4-H Club

(Sangamon Co) • Whitetail Warriors 4-H Club

(Sangamon Co) • Lads and Lassies 4-H Club

(Pope Co) • Winchester FFA Chapter (Scott Co)

Farm Credit’s Commitment to Employees

Farm Credit recognizes people (both employees and customer stockholders) as the Association’s most valuable assets and the most important reason for experiencing business success. And because of that philosophy, Farm Credit puts a priority on developing longterm relationships – both with the customers we serve and with the employees who serve them. Careers

with Farm Credit are professionally and personally rewarding to individuals who share a passion for agriculture. In a survey of employees in 2012, staff were asked to rate the overall satisfaction with their Farm Credit careers. A record 94% of staff indicated they were “very satisfied” with the remaining 6% indicating they were “satisfied” with their Farm Credit career.

Of the 200 Farm Credit employees as of 12/31/2012: • 20% have been employed at Farm Credit at least 25 years • 66% were raised on a farm • 50% are former 4-H members • 37% are former FFA members


A Farm Credit Legacy THE FARM CREDIT ENDOWMENTS An everlasting legacy to

ILLINOIS

AGRICULTURE

The Association’s One-Million Dollar Farm Credit Agriculture Endowments initiative established in December 2010 earned nearly $40,000 of cumulative income to support the following programs during 2012.


TABLE OF CONTENTS Farm Credit Services of Illinois, ACA MESSAGE FROM THE CHAIRPERSON OF THE BOARD AND CHIEF EXECUTIVE OFFICER ............................................................. 1 CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA ........................................................................................ 2 MANAGEMENT’S DISCUSSION AND ANALYSIS .................................................................................................................................... 3 REPORT OF MANAGEMENT .................................................................................................................................................................. 11 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING .................................................................................................. 12 REPORT OF AUDIT COMMITTEE .......................................................................................................................................................... 13 INDEPENDENT AUDITOR'S REPORT .................................................................................................................................................... 14 CONSOLIDATED FINANCIAL STATEMENTS ........................................................................................................................................ 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................................................................................................................... 19 DISCLOSURE INFORMATION REQUIRED BY REGULATIONS ............................................................................................................ 36 VOLUNTARY CONDITIONAL ADVANCE PAYMENTS PROGRAM ........................................................................................................ 40 YOUNG, BEGINNING, AND SMALL FARMERS AND RANCHERS ........................................................................................................ 41

AgriBank, FCB’s (AgriBank) financial condition and results of operations materially impact members' investment in Farm Credit Services of Illinois, ACA. To request free copies of the AgriBank and combined AgriBank and Affiliated Associations’ financial reports contact us at 1100 Farm Credit Drive, Mahomet, Illinois 61853, (217) 590-2200, or through our website www.fcsillinois.com. You may also contact AgriBank at 30 East 7th Street, Suite 1600, St. Paul, MN 55101, (651) 282-8800, or by e-mail at agribankmn@agribank.com. The AgriBank and combined AgriBank and Affiliated Associations’ financial reports are also available through AgriBank’s website at www.agribank.com. To request free copies of our Annual or Quarterly Reports contact us as stated above. The Annual Report is available on our website approximately 75 days after the end of the calendar year and members are provided a copy of such report 90 days after the end of the calendar year. The Quarterly Reports are available on our website approximately 40 days after the end of each calendar quarter.


MESSAGE FROM THE CHAIRPERSON OF THE BOARD AND CHIEF EXECUTIVE OFFICER

Dear Farm Credit Customer: Each year when we prepare our annual report to stockholders, we like to take a look back at the year just ended and identify those significant events that formed the basis for the results of our operations for the year. While there were many significant events and issues that developed for 2012 including political unrest, high commodity prices, high land values, volatility, and uncertainty to name a few, nothing was as significant as the drought. Weather is, of course, just one of the ongoing risks involved in agricultural production. Conditions are never what we would like for them to be, but a drought as serious as the 2012 occurrence was a shock to us all. Weather conditions, wet or dry, that negatively impact our yields by 25% to 50% are serious, but to experience a 75% loss or even a total loss is unthinkable. The drought of 2012 was brutal and brought to light just how much risk there is in agriculture. Fortunately, many producers were covered by some level of crop insurance. University of Illinois statistics indicate 80% of farm operators in Illinois had purchased some level of insurance. While that percentage has increased over the past years, it still leaves the other crop producers, livestock operators and dairies without coverage. Many other agricultural related businesses that process or distribute grain were also negatively impacted. Rainfall over much of our territory remains well below average. Hopefully this will correct later this winter and into the spring. Insurance was a lifesaver for many, but it is only one tool to manage financial risk. Fortunately, most operations had very good equity and working capital positions going into the drought. It is important to maintain those positions ongoing since we never know when another disaster will emerge. Whenever we experience adversity, your Board of Directors and management ask what the association can do to assist our stockholders. The cooperative cannot make it rain and we cannot restore a failed crop, but there are measures we can take to help. As the drought unfolded it was clear cash flows would be affected. Cash flow is needed to pay bills and loan payments. In August the Board of Directors approved a program that would grant deferral of principal and interest payments if cash flows were not adequate to service the loans. The board also authorized an interest rate holiday, or zero interest, for the months of September, October, and November on all operating loans up to $100,000. We know these measures were appreciated and we are thankful the association had the financial strength to provide this measure of assistance. Our mission is to serve agriculture and provide exceptional value to the association owners at all times. The association continues to post exceptional financial performance. The drought, high farmland prices and the concern over increases in capital gain taxes all contributed to strong loan demand during 2012. In fact, the association has been fortunate to have experienced several years of exceptional portfolio growth. The overall loan portfolio of owned and managed loans totaled $3.5 billion at the end of 2012. That’s an exceptional growth of $405.2 million or 13.3%. In just a short period of ten years the association has grown by nearly 300%. The growth in the association portfolio has not come at the expense of credit quality. To the contrary, the association portfolio credit quality of 99.3% at December 31, 2012 is an extraordinary accomplishment. We have been conservative in our lending practices and this has positioned the association very well for any future adversity. The association's success is a direct reflection of the owners’ success and your willingness to fully utilize the cooperative’s services. Mutual benefits and value added is the reason cooperatives are so successful. Once again, we are pleased to provide you with an exceptional report of your cooperative’s operations for 2012. The most significant financial accomplishments for the year were favorable portfolio growth, strong net earnings, and excellent credit quality as mentioned above. Loan demand was strong for much of the year and picked up considerably during the fourth quarter. For the year, the association originated nearly $833 million of new mortgage loans which set a new record. Most of that growth originated through our local branch offices. We experienced unusually strong loan demand during the month of December with more than $124 million of farm mortgage loans closed and more than $36 million of growth in the operating and equipment loans during that month alone. Several factors contributed to the record net earnings for the year; exceptional portfolio growth, a favorable interest rate environment, outstanding portfolio quality, operating efficiency, a refund of Farm Credit System Insurance premiums and strong earnings by the district bank. Overall, the results of operations provided net earnings of $63.0 million. We are constantly reminded of how fortunate we are to be involved in Midwest agriculture. While there remains considerable stress, volatility, and uncertainty in much of the agricultural economy, your association is safe, sound and standing strong. The consistent quality of our loan portfolio, our strong capital position and the efficiency of our operations puts us in a very enviable position. We are constantly mindful that our strength and viability comes from you, our stockholders. Your Board of Directors, management, and our professional staff are all dedicated to you and this exceptional cooperative. Together we are well positioned to manage our way through difficult times. On behalf of the board of directors and staff we want to thank you for your continued support. We are truly blessed and there is much to be thankful for! Sincerely,

Mark B. Miller Chairperson of the Board Farm Credit Services of Illinois, ACA

David M. Owens Chief Executive Officer Farm Credit Services of Illinois, ACA

March 6, 2013

1


CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

Farm Credit Services of Illinois, ACA (Dollars in thousands)

2 0 12

2011

2010

2009

2008

S t a t e m e nt o f C o ndit io n D a t a Lo ans

$ 3 ,16 0 ,2 5 6

$ 2,711,179

$ 2,479,533

$ 2,117,061

3 ,7 6 4

4,246

6,538

9,753

5,805

3 ,15 6 ,4 9 2

2,706,933

2,472,995

2,107,308

1,959,254

8 7 ,19 4

80,315

79,685

76,004

77,814

--

48

--

961

7

6 0 ,4 13

56,320

55,153

46,616

42,644

$ 3 ,3 0 4 ,0 9 9

$ 2,843,616

$ 2,607,833

$ 2,230,889

$ 2,079,719

$ 2 ,7 12 ,5 7 3

$ 2,315,400

$ 2,136,514

$ 1,821,408

$ 1,707,239

2 ,7 12 ,5 7 3

2,315,400

2,136,514

1,821,408

1,707,239

14

20

27

31

41

8 ,2 3 1

7,944

7,705

7,325

7,156

5 8 3 ,2 8 1

520,252

463,587

402,125

365,283

A llo wance fo r lo an lo sses Net lo ans Investment in A griB ank, FCB Other pro perty o wned Other assets To tal assets Obligatio ns with maturities o f o ne year o r less To tal liabilities P ro tected members' equity Capital sto ck and participatio n certificates Unallo cated surplus To tal members' equity To tal liabilities and members' equity

$ 1,965,059

5 9 1,5 2 6

528,216

471,319

409,481

372,480

$ 3 ,3 0 4 ,0 9 9

$ 2,843,616

$ 2,607,833

$ 2,230,889

$ 2,079,719

$ 7 2 ,8 2 9

$ 67,386

$ 61,170

$ 49,920

$ 45,618

S t a t e m e nt o f Inc o m e D a t a Net interest inco me (Reversal o f) pro visio n fo r lo an lo sses

(632)

617

(2,823)

5,839

3,723

P atro nage inco me

15 ,3 5 4

14,429

17,000

12,527

9,045

Other expense, net

2 3 ,16 4

21,852

16,455

18,394

12,888

2 ,6 2 2

2,681

3,076

1,372

1,255

$ 6 3 ,0 2 9

$ 56,665

$ 61,462

$ 36,842

$ 36,797

P ro visio n fo r inco me taxes Net inco me Ke y F ina nc ia l R a t io s Return o n average assets

2 .2 %

2.2%

2.7%

1.8%

1.8%

Return o n average members' equity

11.3 %

11.4%

14.0%

9.5%

10.4%

Net interest inco me as a percentage o f average earning assets M embers' equity as a percentage o f to tal assets Net charge-o ffs as a percentage o f average lo ans

2 .6 %

2.8%

2.8%

2.6%

2.4%

17 .9 %

18.6%

18.1%

18.4%

17.9%

--

A llo wance fo r lo an lo sses as a percentage o f lo ans

0 .1%

0.1% 0.2%

-0.3%

0.1% 0.5%

-0.3%

P ermanent capital ratio

14 .7 %

15.1%

14.9%

14.2%

13.7%

To tal surplus ratio

14 .4 %

14.8%

14.6%

13.9%

13.3%

Co re surplus ratio

14 .4 %

14.8%

14.6%

13.9%

13.3%

No income was distributed to members in the form of cash patronage, dividends, stock, or allocated surplus during the five years presented.

Consolidated Five-Year Summary of Selected Financial Data

2


MANAGEMENT’S DISCUSSION AND ANALYSIS Farm Credit Services of Illinois, ACA

The following commentary reviews the consolidated financial position and consolidated results of operations of Farm Credit Services of Illinois, ACA and its subsidiaries and provides additional specific information. The accompanying consolidated financial statements and notes to the consolidated financial statements also contain important information about our financial position and results of operations. The Farm Credit System The Farm Credit System (System) is a nationwide system of cooperatively owned banks and associations established by Congress to meet the credit needs of American agriculture. At December 31, 2012, the System consisted of three Farm Credit Banks, one Agricultural Credit Bank, and 82 customer owned cooperative lending institutions (associations). The System serves all 50 states, Washington D.C., and Puerto Rico. This network of financial cooperatives is owned and operated by the rural customers the System serves – the American farmer and rancher. AgriBank, FCB (AgriBank), a System bank, and its affiliated associations are collectively referred to as the AgriBank Farm Credit District (AgriBank District or the District). Farm Credit Services of Illinois, ACA is one of the affiliated associations in the District. The Farm Credit Administration (FCA) is authorized by Congress to regulate the System banks and associations. The Farm Credit System Insurance Corporation (Insurance Corporation) ensures the timely payment of principal and interest on Systemwide debt obligations, the retirement of protected borrower capital at par or stated value, and is used for other specified purposes.

Forward-Looking Information This Annual Report includes forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Words such as "anticipate", “believe", "estimate", "may", “expect”, “intend”, and similar expressions are used to identify such forward-looking statements. These statements reflect our current views with respect to future events. However, actual results may differ materially from our expectations due to a number of risks and uncertainties which may be beyond our control. These risks and uncertainties include, but are not limited to:       

political, legal, regulatory, financial, and economic conditions and developments in the United States (U.S.) and abroad, economic fluctuations in the agricultural and farm-related business sectors, unfavorable weather, disease, and other adverse climatic or biological conditions that periodically occur and impact agricultural productivity and income, changes in U.S. government support of the agricultural industry and the System as a government-sponsored enterprise, as well as investor and rating agency actions relating to events involving the U.S. government, other government-sponsored enterprises, and other financial institutions, actions taken by the Federal Reserve System in implementing monetary policy, credit, interest rate, and liquidity risk inherent in our lending activities, and changes in our assumptions for determining the allowance for loan losses, other than temporary impairment, and fair value measurements.

Loan Portfolio Total loans were $3.2 billion at December 31, 2012, an increase of $449.1 million from December 31, 2011. The components of total loans are outlined in the following table (in thousands): A s o f December 31 Real estate mo rtgage P ro ductio n and intermediate term A gribusiness Other

2 0 12

2011

2010

$ 1,7 5 5 ,4 3 0

$ 1,426,717

8 13 ,7 10

772,253

$ 1,245,892 740,707

4 6 2 ,3 9 2

429,188

466,725 23,173

12 7 ,4 12

78,254

No naccrual

1,3 12

4,767

3,036

To tal lo ans

$ 3 ,16 0 ,2 5 6

$ 2,711,179

$ 2,479,533

The other category is primarily comprised of communication, energy, and rural residential real estate related loans as well as loans originated under our Mission Related Investment authority. The increase in total loans from December 31, 2011 is primarily due to strong market for land sales partially driven by concerns over potential tax law changes. We offer variable, fixed, capped, indexed, and adjustable interest rate loan programs to our borrowers. We determine interest margins charged on each lending program based on cost of funds, market conditions, and the need to generate sufficient earnings.

3


As part of a separately maintained pool, we have sold participation interests in real estate loans to AgriBank. The total participation interests in this pool were $289.8 million, $333.7 million, and $384.8 million at December 31, 2012, 2011, and 2010, respectively. Portfolio Distribution We are chartered to serve certain counties in Illinois. Approximately 5.2% of our total loan portfolio was in Champaign County at December 31, 2012. No other counties had more than a 5.0% concentration. Agricultural concentrations exceeding 5.0% of our portfolio included: corn and soybeans 63.4%, landlords 9.9%, production and services 7.1%, and livestock 5.3%. Additional concentration information is included in Note 3. Our production and intermediate term loan portfolio shows some seasonality. Borrowings increase throughout the planting and growing seasons as farmers’ operating and capital needs rise. These loans are normally at their lowest levels during the winter months because of operating loan repayments following harvest. Agricultural and Economic Conditions National Extensive drought in the U.S., particularly in the Midwest, has reduced crop yields, resulting in increased crop prices. Multi-peril crop insurance (MPCI) will generally mitigate the economic impact of the drought for most crop producers. These insurance policies range in coverage levels from catastrophic and yield protection (at the lower end) to revenue protection (at the higher end). The MPCI policies are sold and serviced through private insurance companies designated by the United States Department of Agriculture (USDA) to provide insurance coverage. These companies share the risk of loss by reinsuring with large reinsurance companies. In addition, the USDA and its Federal Crop Insurance Corporation reinsures a portion of the risk along with the other private reinsurance companies. The USDA has reported that 84.0% of corn and soybean acres (collectively) were covered under MPCI in 2012. This is modestly lower than the 88.0% and 85.0% for corn and soybeans, respectively, covered in 2011. The majority of these policies provide for revenue protection. In addition, many crop producers have strengthened their financial positions over the past several years and are expected to withstand the financial impact of the drought. However, increased prices for corn and soybeans and other grains are placing pressure on livestock, poultry, ethanol, and dairy producers who rely on these inputs. Some producers have mitigated a portion of this risk by locking in prices for these inputs for 2012. However, some users of corn and soybeans in our portfolio will be unable to avoid some level of losses as we move into 2013. Local The 2012 crop season was a record for much of the country, but not in a good way. In 2012, we experienced one of the worst droughts in our nation’s history. This drought impacted our entire 60 county territory with the southern portion of the state being hit excessively hard with the drought. This drought set the table for a large volume of crop insurance claims throughout our territory. This drought also put pressure on the markets to slow demand and prices climbed to high levels. More recently prices have fallen and moderated slightly with the probability of a good crop year ahead in 2013. Analysts are predicting commodity prices to settle near pre-drought prices with a good 2013 growing season. However, due to three consecutive years of smaller U.S. corn harvests, stocks remain low. With much adversity in the 2013 growing season, prices could climb to record highs again, all leading towards a volatile year in commodity prices. Land values have continued to rise, as they have for the past several years throughout our territory, reaching record high values. A large increase in the turnover of land was seen in the fourth quarter of 2012 due to uncertainty with the 2013 tax laws. Congress recently extended the 2008 farm bill for nine months and narrowly avoided the “fiscal cliff” by extending the Bush-era tax cuts for most Americans. Further debate over spending cuts, entitlement reform, as well as further discussion on taxes, and the debt ceiling limit were delayed until later in 2013. If Congress fails to reach an agreement on these issues demand for commodities could dwindle. Look for Congress to put pressure on the new farm bill to cut costs and include deficit savings. Analysis of Risk The following table summarizes risk assets including accrued interest receivable and delinquency information (dollars in thousands): A s o f December 31

2 0 12

2011

2010

Lo ans: $ 1,3 12

$ 4,767

$ 3,036

A ccruing restructured

No naccrual

--

84

48

A ccruing lo ans 90 days o r mo re past due

--

--

3

1,3 12

4,851

3,087

To tal risk lo ans Other pro perty o wned To tal risk assets Risk lo ans as a percentage o f to tal lo ans To tal delinquencies as a percentage o f to tal lo ans

--

48

--

$ 1,3 12

$ 4,899

$ 3,087

--

0.2%

0.1%

0 .1%

--

0.1%

Our risk assets have decreased from December 31, 2011 and remain at acceptable levels. Total risk loans as a percentage of total loans remains well within our established risk management guidelines. The decrease in nonaccrual loans was due to the payoff of a large nonaccrual participation loan. Nonaccrual loans remained at an acceptable level at December 31, 2012, and represented a negligible portion of our total portfolio. At December 31, 2012, 59.8% of our nonaccrual loans were current.

4


Portfolio Credit Quality The credit quality of our portfolio improved during 2012. Adversely classified loans decreased to 0.7% of the portfolio at December 31, 2012, from 1.0% of the portfolio at December 31, 2011. Adversely classified loans are loans we have identified as showing some credit weakness outside our credit standards. We have considered portfolio credit quality in assessing the reasonableness of our allowance for loan losses. In certain circumstances, we use government guarantee programs to reduce the risk of loss. At December 31, 2012, $24.3 million of our loans were, to some level, guaranteed under these government programs. Analysis of the Allowance for Loan Losses The allowance for loan losses is an estimate of losses on loans in our portfolio as of the financial statement date. We determine the appropriate level of allowance for loan losses based on the periodic evaluation of factors such as loan loss history, probability of default, estimated severity of loss given default, portfolio quality, and current economic and environmental conditions. The following table presents allowance coverage, charge-off, and adverse asset information: A s o f December 31

2011

2 0 12

2010

A llo wance as a percentage o f: Lo ans

0 .1%

0.2%

0.3%

No naccrual lo ans

2 8 6 .9 %

89.1%

215.3%

To tal risk lo ans

2 8 6 .9 %

87.5%

211.8%

--

0.1%

4 .7 %

5.8%

Net charge-o ffs as a percentage o f average lo ans A dverse assets to risk funds

-15.2%

The increase in our allowance as a percentage of nonaccrual loans and as a percentage of total risk loans is primarily due to the decrease in our nonaccrual loan volume. In our opinion, the allowance for loan losses was reasonable in relation to the risk in our loan portfolio at December 31, 2012. Additional loan information is included in Notes 3, 10, 11, 12, and 13.

Results of Operations The following table illustrates profitability information (dollars in thousands): Fo r the year ended December 31

2 0 12

Net inco me

2011

2010

$ 6 3 ,0 2 9

$ 56,665

Return o n average assets

2 .2 %

2.2%

$ 61,462 2.7%

Return o n average members' equity

11.3 %

11.4%

14.0%

Changes in these ratios relate directly to:   

changes in income as discussed below, changes in assets as discussed in the Loan Portfolio section, and changes in members’ equity as discussed in the Capital Adequacy section.

The following table summarizes the changes in components of net income (in thousands): Year ended December 31 2011

2 0 12 Net interest inco me (Reversal o f) pro visio n fo r lo an lo sses

$ 7 2 ,8 2 9

$ 67,386 617

(632)

Increase (decrease) in net inco me 2010 $ 61,170 (2,823)

2 0 12 v s 2 0 11 $ 5 ,4 4 3 1,2 4 9

2011vs. 2010 $ 6,216 (3,440)

P atro nage inco me

15 ,3 5 4

14,429

17,000

925

(2,571)

Other inco me, net

12 ,3 7 3

10,154

13,590

2 ,2 19

(3,436)

Operating expenses

3 5 ,5 3 7

32,006

30,045

( 3 ,5 3 1)

(1,961)

2 ,6 2 2

2,681

3,076

59

$ 6 3 ,0 2 9

$ 56,665

$ 61,462

$ 6 ,3 6 4

P ro visio n fo r inco me taxes Net inco me

5

395 ($ 4,797)


Net Interest Income Net interest income was $72.8 million for the year ended December 31, 2012. The following table quantifies changes in net interest income (in thousands): 2 0 12 v s 2 0 11 Changes in vo lume

$ 10 ,3 14

Changes in rates

( 4 ,9 3 5 )

Changes in no naccrual inco me and o ther

64

Net change

$ 5 ,4 4 3

2011vs. 2010 $ 8,277 (1,915) (146) $ 6,216

Net interest income included income on nonaccrual loans that totaled $850 thousand, $786 thousand, and $2.7 million in 2012, 2011, and 2010, respectively. Nonaccrual income is recognized when:   

received in cash, collection of the recorded investment is fully expected, and prior charge-offs have been recovered.

Net interest margin (net interest income divided by average earning assets) was 2.6%, 2.8%, and 2.8% in 2012, 2011, and 2010, respectively. We expect margins to compress in the future as interest rates rise and competition increases. (Reversal of) Provision for Loan Losses The variance in the provision for loan losses is related to our estimate of losses in our portfolio for the applicable years. This variance was mainly due to the payoff of a large nonaccrual participation loan during 2012. Refer to Note 3 for additional discussion. Patronage Income We received patronage income based on the average balance of our note payable to AgriBank. AgriBank’s Board of Directors sets the patronage rate. We recorded patronage income of $7.6 million, $6.3 million, and $7.6 million in 2012, 2011, and 2010, respectively. Changes in our note payable to AgriBank and patronage rate changes caused the variances in the patronage income amounts. The patronage rates paid by AgriBank were 32 basis points, 31 basis points, and 42 basis points in 2012, 2011, and 2010, respectively. Since 2008 we have participated in the asset pool program with AgriBank in which we sell participation interests in certain real estate loans. As part of this program we received patronage income in an amount that approximated the net earnings of loans. Net earnings represents the net interest income associated with these loans adjusted for certain fees and costs specific to the related loans as well as adjustments deemed appropriate by AgriBank related to the credit performance of the loans, as applicable. In addition, we received patronage income in an amount that approximated the wholesale patronage had we retained the volume. Patronage declared on these pools is solely at the discretion of the AgriBank Board of Directors. We recorded asset pool patronage income of $7.8 million, $8.1 million, and $9.4 million in 2012, 2011, and 2010, respectively. The patronage recorded included $443 thousand and $451 thousand of our share of the distribution from the Allocated Insurance Reserve Accounts (AIRA) related to the asset pool program in 2012 and 2010, respectively. These reserve accounts were established in previous years by the Insurance Corporation when premiums collected increased the level of the Farm Credit Insurance Fund beyond the required 2% of insured debt. No such distribution was received in 2011. Other Income The change in other income was primarily due to the increase in AIRA distribution, which is a result of our share of distributions from AIRA. We received $2.6 million during 2012 and $2.1 million during 2010. There was no distribution in 2011. The increase in AIRA distribution was partially offset by decreases in multi-peril crop insurance income and fee income.

6


Operating Expenses The following presents a comparison of operating expenses by major category and the operating rate (operating expenses as a percentage of average earning assets) for the past three years (dollars in thousands): Fo r the year ended December 31

2 0 12

Salaries and emplo yee benefits

2011

2010

$ 2 1,0 9 9

$ 18,695

$ 16,983

2 ,2 2 0

2,116

1,710

750

735

498

Occupancy and equipment

2 ,7 3 4

2,358

2,268

A dvertising and pro mo tio n

1,6 0 0

1,500

2,514

750

689

608

FCS insurance

1,2 0 2

1,262

978

Other

5 ,18 2

4,651

4,486

$ 3 5 ,5 3 7

$ 32,006

$ 30,045

1.3 %

1.3%

1.4%

P urchased and vendo r services Co mmunicatio ns

Examinatio n

To tal o perating expenses Operating rate

The operating expense increases were primarily related to increases in salaries and benefits from hiring more employees and costs associated with building two new branch offices in 2012. Provision for Income Taxes The variance in provision for income taxes is related to our estimate of taxes based on taxable income. Refer to Note 8 for additional discussion.

Funding and Liquidity Funding We borrow from AgriBank under a note payable, in the form of a line of credit, as described in Note 6. During 2012, our average balance was $2.3 billion with an average interest rate of 1.4%. Our average balance during 2011 was $2.0 billion with an average interest rate of 1.6% and during 2010 our average balance was $1.8 billion with an average interest rate of 1.9%. Our other source of lendable funds is from unallocated surplus. The repricing attributes of our line of credit generally correspond to the repricing attributes of our loan portfolio which significantly reduces our market interest rate risk. Liquidity Our approach to sustaining sufficient liquidity to fund operations and meet current obligations is to maintain an adequate line of credit with AgriBank. At December 31, 2012, we had $901.4 million available under our line of credit. We generally apply excess cash to this line of credit.

Capital Adequacy Total members’ equity increased $63.3 million during 2012 primarily due to net income for the period and an increase in capital stock and participation certificates outstanding. Members’ equity position information follows (dollars in thousands): A s o f December 31

2 0 12

M embers' equity

2011

2010

$ 5 9 1,5 2 6

$ 528,216

$ 471,319

Surplus as a percentage o f members' equity

9 8 .6 %

98.5%

98.4%

P ermanent capital ratio

14 .7 %

15.1%

14.9%

To tal surplus ratio

14 .4 %

14.8%

14.6%

Co re surplus ratio

14 .4 %

14.8%

14.6%

Our capital plan is designed to maintain an adequate amount of surplus and allowance for loan losses which represents our reserve for adversity prior to impairment of stock. We manage our capital to allow us to meet member needs and protect member interests, both now and in the future. At December 31, 2012, our permanent capital, total surplus, and core surplus ratios exceeded the regulatory minimum requirements. Additional discussion of these regulatory ratios is included in Note 7.

7


In addition to these regulatory requirements, we establish an optimum permanent capital target. This target allows us to maintain a capital base adequate for future growth and investment in new products and services. The target is subject to revision as circumstances change. As of December 31, 2012, our optimum permanent capital target was 16%. The changes in our capital ratios reflect changes in capital and assets. Refer to the Loan Portfolio section for further discussion of the changes in assets. Additional members’ equity information is included in Note 7.

Initiatives We are involved in a number of initiatives designed to improve our credit delivery, related services, and marketplace presence. ProPartners Financial We have an alliance with nine other Farm Credit association partners to provide producer financing for agribusiness companies under the trade name, ProPartners Financial (ProPartners). In September 2012, Northwest Farm Credit Services (Northwest) joined the alliance resulting in expanded agribusiness client programs in which ProPartners loans can be originated. The addition of Northwest increased our financial strength, processing capacity, technology, expertise, and geographic diversity to support our clients’ growth. ProPartners is directed by representatives from participating associations and has employees in California, Illinois, Indiana, Kansas, Minnesota, Missouri, North Dakota, Tennessee, and Washington. The income, expense, and loss sharing arrangements are based on each association’s participation interest in ProPartners’ volume. Each association’s allocation is established according to a prescribed formula which includes risk funds of the associations. We had $67.1 million, $69.7 million, and $61.8 million of ProPartners volume at December 31, 2012, 2011, and 2010, respectively. We also had $69.4 million of available commitment on ProPartners loans at December 31, 2012. AgDirect We participate in the AgDirect trade credit financing program which includes origination and re-financing of agricultural equipment loans through independent equipment dealers. The program is facilitated by another AgriBank District association through a limited liability partnership in which we are partial owners. Farm Cash Management We offer Farm Cash Management to our members. Farm Cash Management links members’ revolving lines of credit with an AgriBank investment bond to optimize members’ use of funds. Agriculture and Rural Community Bond Program We participate in the Agriculture and Rural Community Bond Program authorized during 2006 by the FCA in order to meet the changing needs of agriculture and rural America by making investments that support farmers, ranchers, agribusinesses, and their rural communities and businesses. These investments will help to increase their well-being and prosperity by providing an adequate flow of capital into rural areas. We had $49.4 million, $38.5 million, and $20.6 million of volume under this program at December 31, 2012, 2011, and 2010, respectively.

Relationship with AgriBank Borrowing We borrow from AgriBank to fund our lending operations in accordance with the Farm Credit Act. Approval from AgriBank is required for us to borrow elsewhere. A General Financing Agreement, as discussed in Note 6, governs this lending relationship. Cost of funds under the General Financing Agreement includes:   

a marginal cost of debt component, a spread component, which includes cost of servicing, cost of liquidity, and bank profit, and a risk premium component, if applicable.

The marginal cost of debt approach simulates matching the cost of underlying debt with substantially the same terms as the anticipated terms of our loans to borrowers. This methodology substantially protects us from market interest rate risk. In the periods presented, we were not subject to the risk premium component.

8


Investment We are required to invest in AgriBank capital stock as a condition of borrowing. This investment may be in the form of purchased stock or stock representing previously distributed AgriBank surplus. As of December 31, 2012, we were required to maintain a stock investment equal to 2.5% of the average quarterly balance of our note payable to AgriBank plus an additional 1.0% on growth that exceeded a targeted rate. AgriBank’s current bylaws allow AgriBank to increase the required investment to 4.0%. However, AgriBank currently has not communicated a plan to increase the required investment. In addition, we are required to hold AgriBank stock equal to 8.0% of the quarter end asset pool program participation loan balance. At December 31, 2012, $37.9 million of our investment in AgriBank consisted of stock representing distributed AgriBank surplus and $49.3 million consisted of purchased investment. For the periods presented in this report, we have received no dividend income on this stock investment and we do not anticipate any in future years. Although it is not a direct association investment in AgriBank, AgDirect, LLP that facilitates the AgDirect trade credit financing program, is required to own stock in AgriBank in the amount of 6.0% of the AgDirect program participation outstanding loan balance at quarter end plus 6.0% of the expected balance to be originated during the following quarter. We, in turn, are required to own the same amount of stock in AgDirect, LLP. Patronage We receive different types of discretionary patronage from AgriBank. AgriBank’s Board of Directors sets the level of patronage for each of the following:  

patronage on our note payable with AgriBank, and patronage based on the balance and net earnings of the pool of loans sold to AgriBank.

Patronage income on our note payable with AgriBank was received in the form of cash and AgriBank stock. Purchased Services We purchase various services from AgriBank including certain:    

financial and retail systems, support, and reporting, technology services, insurance services, and internal audit services.

The total cost of services we purchased from AgriBank was $838 thousand, $851 thousand, and $801 thousand in 2012, 2011, and 2010, respectively. Beginning in January 2012, benefits, human resource information systems, payroll, and workforce management services were purchased from Farm Credit Foundations (Foundations), which resulted in a decrease in total cost of services purchased from AgriBank. Impact on Members’ Investment Due to the nature of our financial relationship with AgriBank, the financial condition and results of operations of AgriBank materially impact our members’ investment. To request free copies of the AgriBank and the combined AgriBank and Affiliated Associations’ financial reports contact us at 1100 Farm Credit Drive, Mahomet, Illinois 61853, (217) 590-2200, or through our website www.fcsillinois.com. You may also contact AgriBank at 30 East 7th Street, Suite 1600, St. Paul, MN 55101, (651) 282-8800, or by e-mail to agribankmn@agribank.com. The reports are also available through AgriBank’s website at www.agribank.com. To request free copies of our Annual or Quarterly Reports contact us as stated above. The Annual Report is available on our website no later than 75 days after the end of the calendar year and members are provided a copy of such report no later than 90 days after the end of the calendar year. The Quarterly Reports are available on our website approximately 40 days after the end of each calendar quarter.

9


Relationship with Other Farm Credit Institutions Capital Markets Group In 2012, we participated in the Illinois Capital Markets Group operating as a joint venture with another Illinois Farm Credit Association. Effective January 1, 2013, an additional AgriBank District Farm Credit Association joined the joint venture and will operate as the Capital Markets Group. The Capital Markets Group will focus on generating revenue and loan volume for the financial benefits of all three participating associations. Loans purchased are accounted for by the respective associations. Management for each association has direct decision-making authority over the loans purchased and serviced for their respective association. The business arrangement provides an additional means for diversifying each participant’s portfolio, helps reduce concentration risk, and positions the participants for continued growth. Insight Technology Unit We participate in the Insight Technology Unit (Insight) with certain other AgriBank District associations to facilitate the development and maintenance of certain technology systems essential to providing credit to our borrowers. Insight is governed by representatives of each participating association. The expenses are shared pro rata based on the number of loans and leases of each participant. Investment in Other Farm Credit Institutions We have a relationship with CoBank, ACB (CoBank), a System bank, which involves purchasing or selling participation interests in loans. As part of this relationship, our equity investment in CoBank was $39 thousand, $13 thousand, and $1 thousand at December 31, 2012, 2011, and 2010, respectively. CoBank provides direct loan funds to associations in its chartered territory and also makes loans to cooperatives and other eligible borrowers. In December 2011, we entered into an agreement to participate in the AgDirect trade credit financing program. A limited liability partnership was established in the second quarter of 2011 to facilitate this program. Our investment in AgDirect, LLP, was $2.8 million and $593 thousand at December 31, 2012 and 2011, respectively. We had no investment at December 31, 2010. In addition, we have a relationship with Foundations which involves purchasing benefit, human resource information systems, payroll, and workforce management services. Foundations was operated as part of AgriBank prior to January 1, 2012 when it formed a System service corporation and thus is no longer operated as part of Agribank. As of December 31, 2012, our investment in Foundations was $29 thousand. The total cost of services we purchased from Foundations was $127 thousand in 2012.

10


REPORT OF MANAGEMENT Farm Credit Services of Illinois, ACA

We prepare the consolidated financial statements of Farm Credit Services of Illinois, ACA (the Association) and are responsible for their integrity and objectivity, including amounts that must necessarily be based on judgments and estimates. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements, in our opinion, fairly present the financial condition of the Association. Other financial information included in the Annual Report is consistent with that on the consolidated financial statements. To meet our responsibility for reliable financial information, we depend on accounting and internal control systems designed to provide reasonable but not absolute assurance that assets are safeguarded and transactions are properly authorized and recorded. Costs must be reasonable in relation to the benefits derived when designing accounting and internal control systems. Financial operations audits are performed to monitor compliance. PricewaterhouseCoopers LLP, our independent auditors, audit the consolidated financial statements. They also conduct a review of internal controls to the extent necessary to comply with generally accepted auditing standards in the United States of America. The Farm Credit Administration also performs examinations for safety and soundness as well as compliance with applicable laws and regulations. The Board of Directors has overall responsibility for our system of internal control and financial reporting. The Board of Directors and its Audit Committee consults regularly with us and meets periodically with the independent auditors and other auditors to review the scope and results of their work. The independent auditors have direct access to the Board of Directors, which is composed solely of directors who are not officers or employees of the Association. The undersigned certify we have reviewed the Association’s Annual Report and it has been prepared in accordance with all applicable statutory or regulatory requirements and the information contained herein is true, accurate, and complete to the best of our knowledge and belief.

Karen Neff Chairperson of the Board Farm Credit Services of Illinois, ACA

David M. Owens Chief Executive Officer Farm Credit Services of Illinois, ACA

Steven D. Ray Chief Financial Officer Farm Credit Services of Illinois, ACA

March 6, 2013

11


REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Farm Credit Services of Illinois, ACA

The Farm Credit Services of Illinois, ACA (the Association) principal executives and principal financial officers, or persons performing similar functions, are responsible for establishing and maintaining adequate internal control over financial reporting for the Association’s consolidated financial statements. For purposes of this report, “internal control over financial reporting” is defined as a process designed by, or under the supervision of the Association’s principal executives and principal financial officers, or persons performing similar functions, and effected by its Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting information and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and 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 Association, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial information in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Association, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Association’s assets that could have a material effect on its consolidated financial statements. The Association’s management has completed an assessment of the effectiveness of internal control over financial reporting as of December 31, 2012. In making the assessment, management used the framework in Internal Control — Integrated Framework, promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on the assessment performed, the Association concluded that as of December 31, 2012, the internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on this assessment, the Association determined that there were no material weaknesses in the internal control over financial reporting as of December 31, 2012.

David M. Owens Chief Executive Officer Farm Credit Services of Illinois, ACA

Steven D. Ray Chief Financial Officer Farm Credit Services of Illinois, ACA

March 6, 2013

12


REPORT OF AUDIT COMMITTEE Farm Credit Services of Illinois, ACA

The consolidated financial statements were prepared under the oversight of the Audit Committee. The Audit Committee is composed of the entire Board of Directors of Farm Credit Services of Illinois, ACA (the Association). The Audit Committee oversees the scope of the Association’s internal audit program, the approval and independence of PricewaterhouseCoopers LLP (PwC) as independent auditors, the adequacy of the Association’s system of internal controls and procedures, and the adequacy of management’s action with respect to recommendations arising from those auditing activities. The Audit Committee’s responsibilities are described more fully in the Internal Control Policy and the Audit Committee Charter. Management is responsible for internal controls and the preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. PwC is responsible for performing an independent audit of the consolidated financial statements in accordance with generally accepted auditing standards in the United States of America and to issue their report based on their audit. The Audit Committee’s responsibilities include monitoring and overseeing these processes. In this context, the Audit Committee reviewed and discussed the audited consolidated financial statements for the year ended December 31, 2012, with management. The Audit Committee also reviewed with PwC the matters required to be discussed by Statement on Auditing Standards No. 114, The Auditor’s Communication with Those Charged with Governance, and both PwC and the internal auditors directly provided reports on significant matters to the Audit Committee. The Audit Committee had discussions with and received written disclosures from PwC confirming its independence. The Audit Committee also reviewed the non-audit services provided by PwC, if any, and concluded these services were not incompatible with maintaining PwC’s independence. The Audit Committee discussed with management and PwC such other matters and received such assurances from them as the Audit Committee deemed appropriate. Based on the foregoing review and discussions, and relying thereon, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Annual Report for the year ended December 31, 2012.

Wm. David Champion, Jr. Chairperson of the Audit Committee Farm Credit Services of Illinois, ACA Lance Beery, Kent Brinkmann, Dale Crawford, Jack E. Crumrin, Wes Durbin, J. Dale Edwards, Dennis Frey, Larry Hasheider, Jack Hastings, Kevin Miller, Mark Miller, Karen Neff, and K. Bridget Schneider

March 6, 2013

13


Independent Auditor's Report

To the Board of Directors and Members of Farm Credit Services of Illinois, ACA, We have audited the accompanying consolidated financial statements of Farm Credit Services of Illinois, ACA (the Association) and its subsidiaries, which comprise the consolidated statements of condition as of December 31, 2012, 2011 and 2010, and the related consolidated statements of income, changes in members’ equity and cash flows for the years then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Association's preparation and fair presentation of the consolidated 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 Association'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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Farm Credit Services of Illinois, ACA and its subsidiaries at December 31, 2012, 2011 and 2010, 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.

March 6, 2013

PricewaterhouseCoopers LLP, 225 South Sixth Street, Suite 1400, Minneapolis, MN 55402 T: (612) 596 6000, www.pwc.com/us

14


CONSOLIDATED STATEMENTS OF CONDITION

Farm Credit Services of Illinois, ACA (in thousands) A s o f December 31

2 0 12

2011

2010

A SSET S Lo ans

$ 3 ,16 0 ,2 5 6

$ 2,711,179

3 ,7 6 4

4,246

6,538

3 ,15 6 ,4 9 2

2,706,933

2,472,995

Investment in A griB ank, FCB

8 7 ,19 4

80,315

79,685

A ccrued interest receivable

3 1,8 6 5

32,136

30,210

P remises and equipment, net

16 ,0 7 1

13,796

11,927

--

48

--

12 ,4 7 7

10,388

13,016

$ 3 ,3 0 4 ,0 9 9

$ 2,843,616

$ 2,607,833

A llo wance fo r lo an lo sses Net lo ans

Other pro perty o wned Other assets To tal assets

$ 2,479,533

LIA B ILIT IE S $ 2 ,6 9 5 ,5 8 5

$ 2,298,668

$ 2,120,817

A ccrued interest payable

No te payable to A griB ank, FCB

8 ,2 7 3

8,547

8,353

Deferred tax liabilities, net

18 5

191

576

8 ,5 3 0

7,994

6,768

2 ,7 12 ,5 7 3

2,315,400

2,136,514

--

--

--

Other liabilities To tal liabilities Co ntingencies and co mmitments M E M B E R S ' E Q UIT Y P ro tected members' equity

14

20

27

8 ,2 3 1

7,944

7,705

5 8 3 ,2 8 1

520,252

463,587

5 9 1,5 2 6

528,216

471,319

$ 3 ,3 0 4 ,0 9 9

$ 2,843,616

$ 2,607,833

Capital sto ck and participatio n certificates Unallo cated surplus To tal members' equity To tal liabilities and members' equity

The acco mpanying no tes are an integral part o f these co nso lidated financial statements.

Consolidated Financial Statements

15


CONSOLIDATED STATEMENTS OF INCOME

Farm Credit Services of Illinois, ACA (in thousands) Year ended December 31

2 0 12

Int e re s t inc o m e Int e re s t e xpe ns e Net interest inco me ( R e v e rs a l o f ) pro v is io n f o r lo a n lo s s e s Net interest inco me after (reversal o f) pro visio n fo r lo an lo sses

2011

2010

$ 10 5 ,4 15

$ 100,829

$ 95,224

3 2 ,5 8 6

33,443

34,054

7 2 ,8 2 9

67,386

61,170

(632)

617

7 3 ,4 6 1

66,769

63,993

(2,823)

O t he r inc o m e 15 ,3 5 4

14,429

17,000

Financially related services inco me

P atro nage inco me

6 ,6 4 9

7,379

7,774

Fee inco me

2 ,2 6 4

2,616

2,784

A llo cated insurance reserve acco unts distributio n

2 ,5 5 2

--

2,129

908

159

903

2 7 ,7 2 7

24,583

30,590

Salaries and emplo yee benefits

2 1,0 9 9

18,695

16,983

Other o perating expenses

14 ,4 3 8

13,311

13,062

To tal o perating expenses

3 5 ,5 3 7

32,006

30,045

Inco me befo re inco me taxes

6 5 ,6 5 1

59,346

64,538

2 ,6 2 2

2,681

3,076

$ 6 3 ,0 2 9

$ 56,665

$ 61,462

M iscellaneo us inco me, net To tal o ther inco me O pe ra t ing e xpe ns e s

P ro v is io n f o r inc o m e t a xe s Net inco me The acco mpanying no tes are an integral part o f these co nso lidated financial statements.

16


CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY

Farm Credit Services of Illinois, ACA (in thousands)

Capital P ro tected

Sto ck and

M embers'

P articipatio n

Unallo cated

M embers'

Equity

Certificates

Surplus

Equity

B alance at December 31, 2009

To tal

$ 31

$ 7,325

$ 402,125

$ 409,481

Net inco me Capital sto ck/participatio n certificates issued

--

--

61,462

61,462

--

900

--

900

Capital sto ck/participatio n certificates retired

(4)

(520)

--

(524)

B alance at December 31, 2010

27

7,705

463,587

471,319

Net inco me Capital sto ck/participatio n certificates issued

--

--

56,665

56,665

--

829

--

829

Capital sto ck/participatio n certificates retired

(7)

(590)

--

(597)

B alance at December 31, 2011 Net inco me Capital sto ck/participatio n certificates issued Capital sto ck/participatio n certificates retired B a la nc e a t D e c e m be r 3 1, 2 0 12

20

7 ,9 4 4

5 2 0 ,2 5 2

5 2 8 ,2 16

--

--

6 3 ,0 2 9

6 3 ,0 2 9

--

853

--

853

(6)

(566)

--

(572)

$ 8 ,2 3 1

$ 5 8 3 ,2 8 1

$ 14

The acco mpanying no tes are an integral part o f these co nso lidated financial statements.

17

$ 5 9 1,5 2 6


CONSOLIDATED STATEMENTS OF CASH FLOWS

Farm Credit Services of Illinois, ACA (in thousands) Year ended December 31

2 0 12

2011

2010

C a s h f lo ws f ro m o pe ra t ing a c t iv it ie s $ 6 3 ,0 2 9

$ 56,665

$ 61,462

Depreciatio n o n premises and equipment

Net inco me

884

763

763

(Gain) lo ss o n sale o f premises and equipment

( 7 4 1)

13

30

29

29

29

Depreciatio n o n assets held fo r lease (Reversal o f) pro visio n fo r lo an lo sses

(632)

Sto ck patro nage received fro m Farm Credit Institutio ns

( 3 ,7 6 9 )

Gain o n o ther pro perty o wned

(3)

617 (4,001) --

(2,823) (2,689) (866)

Changes in o perating assets and liabilities: A ccrued interest receivable Other assets A ccrued interest payable Other liabilities Net cash pro vided by o perating activities

(365)

(2,752)

(4,257)

17 5

3,192

(2,601)

(274)

194

(464)

530

841

(2,241)

5 8 ,8 6 3

55,561

46,343

C a s h f lo ws f ro m inv e s t ing a c t iv it ie s Increase in lo ans, net

( 4 4 7 ,9 0 5 )

(233,368)

(361,469)

(P urchases) redemptio ns o f investment in A griB ank, FCB , net

( 3 ,13 7 )

3,371

(992)

P urchases o f investment in o ther Farm Credit Institutio ns, net

( 2 ,2 6 6 )

(593)

P ro ceeds fro m sales o f o ther pro perty o wned

51

P urchases o f premises and equipment, net Net cash used in investing activities

--

-1,827

( 2 ,4 18 )

(2,645)

(3,358)

( 4 5 5 ,6 7 5 )

(233,235)

(363,992)

177,851

317,811

C a s h f lo ws f ro m f ina nc ing a c t iv it ie s Increase in no te payable to A griB ank, FCB , net

3 9 6 ,9 17

Capital sto ck and participatio n certificates retired, net

( 10 5 )

Net cash pro vided by financing activities

(177)

(162)

3 9 6 ,8 12

177,674

317,649

Net change in cash

--

--

--

Cash at beginning o f year

--

--

--

$ --

$ --

$ --

$ 707

$ 714

$ 780

3 19

305

241

2

--

1

634

826

856

--

48

--

$ 3 2 ,8 6 0

$ 33,249

$ 34,518

3 ,0 7 6

2,479

3,221

Cash at end o f year S upple m e nt a l s c he dule o f no n- c a s h a c t iv it ie s Sto ck financed by lo an activities Sto ck applied against lo an principal Sto ck applied against interest Interest transferred to lo ans Lo ans transferred to o ther pro perty o wned S upple m e nt a l inf o rm a t io n Interest paid Taxes paid

The acco mpanying no tes are an integral part o f these co nso lidated financial statements.

18


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Farm Credit Services of Illinois, ACA

NOTE 1: ORGANIZATION AND OPERATIONS System and District The Farm Credit System (System) is a nationwide system of cooperatively owned banks and associations established by Congress to meet the credit needs of American agriculture. At December 31, 2012, the System consisted of three Farm Credit Banks, one Agricultural Credit Bank, and 82 associations. AgriBank, FCB (AgriBank), a System bank, and its affiliated associations are collectively referred to as the AgriBank Farm Credit District (AgriBank District or the District). At December 31, 2012, the District consisted of 17 Agricultural Credit Associations (ACA) that each have wholly-owned Federal Land Credit Association (FLCA) and Production Credit Association (PCA) subsidiaries. FLCAs are authorized to originate long-term real estate mortgage loans. PCAs are authorized to originate short-term and intermediate-term loans. ACAs are authorized to originate long-term real estate mortgage loans and short-term and intermediate-term loans either directly or through their subsidiaries. Associations are authorized to provide lease financing options for agricultural purposes and are also authorized to purchase and hold certain types of investments. AgriBank provides funding to all associations chartered within the District. Associations are authorized to provide, either directly or in participation with other lenders, credit and related services to eligible borrowers. Eligible borrowers may include farmers, ranchers, producers or harvesters of aquatic products, rural residents, and farm-related service businesses. In addition, associations can participate with other lenders in loans to similar entities. Similar entities are parties that are not eligible for a loan from a System lending institution, but have operations that are functionally similar to the activities of eligible borrowers. The Farm Credit Administration (FCA) is authorized by Congress to regulate the System banks and associations. We are examined by the FCA and certain association actions are subject to the prior approval of the FCA and/or AgriBank. The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). The Insurance Fund is used:   

to ensure the timely payment of principal and interest on Farm Credit Systemwide debt obligations, to ensure the retirement of protected borrower capital at par or stated value, and for other specified purposes.

At the discretion of the Insurance Corporation, the Insurance Fund is also available to provide assistance to certain troubled System institutions and for the operating expenses of the Insurance Corporation. Each System bank is required to pay premiums into the Insurance Fund until the assets in the Insurance Fund equal 2% of the aggregated insured obligations adjusted to reflect the reduced risk on loans or investments guaranteed by federal or state governments. This percentage of aggregate obligations can be changed by the Insurance Corporation, at its sole discretion, to a percentage it determines to be actuarially sound. The basis for assessing premiums is debt outstanding with adjustments made for nonaccrual loans and impaired investment securities which are assessed a surcharge while guaranteed loans and investment securities are deductions from the premium base. AgriBank, in turn, assesses premiums to the associations each year based on similar factors. Association Farm Credit Services of Illinois, ACA and its subsidiaries, Farm Credit Services of Illinois, FLCA and Farm Credit Services of Illinois, PCA (the subsidiaries) are lending institutions of the System. We are a member-owned cooperative providing credit and credit-related services to, or for the benefit of, eligible members for qualified agricultural purposes in the counties of Alexander, Bond, Calhoun, Cass, Champaign, Christian, Clark, Clay, Clinton, Coles, Crawford, Cumberland, DeWitt, Douglas, Edgar, Edwards, Effingham, Fayette, Ford, Franklin, Gallatin, Greene, Hamilton, Hardin, Iroquois, Jackson, Jasper, Jefferson, Jersey, Johnson, Lawrence, Logan, Macon, Macoupin, Madison, Marion, Massac, Menard, Monroe, Montgomery, Morgan, Moultrie, Perry, Platt, Pope, Pulaski, Randolph, Richland, Saline, Sangamon, Scott, Shelby, St. Clair, Union, Vermillion, Wabash, Washington, Wayne, White, and Williamson in the state of Illinois. We borrow from AgriBank and provide financing and related services to our members. Our ACA holds all the stock of the FLCA and PCA subsidiaries. We, along with certain other System institutions, own AgDirect, LLP, which facilitates a trade credit financing program for its owners. We, along with certain other System institutions, own Farm Credit Foundations (Foundations) which provides benefit, human resource information systems, payroll, and workforce management services. We offer various risk management services, including crop hail and multi-peril crop insurance to our members.

19


NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting Principles and Reporting Policies Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (GAAP) and the prevailing practices within the financial services industry. Preparing financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements present the consolidated financial results of Farm Credit Services of Illinois, ACA and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Significant Accounting Policies Loans: Loans are carried at their principal amount outstanding net of any unearned income, cumulative charge-offs, unamortized deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. Loan interest is accrued and credited to interest income based upon the daily principal amount outstanding. Material fees, net of related costs, are deferred and recognized over the life of the loan as an adjustment to net interest income. Other loan fees are netted with the related origination costs and included as an adjustment to net interest income. The net amount of these fees and expenses are not material to the consolidated financial statements taken as a whole. We place loans in nonaccrual status when:  

principal or interest is delinquent for 90 days or more (unless the loan is well secured and in the process of collection) or circumstances indicate that full collection is not expected.

When a loan is placed in nonaccrual status, we reverse current year accrued interest to the extent principal plus accrued interest before the transfer exceeds the net realizable value of the collateral. Any unpaid interest accrued in a prior year is capitalized to the recorded investment of the loan. Any cash received on nonaccrual loans is applied to reduce the recorded investment in the loan, except in those cases where the collection of the recorded investment is fully expected and the loan does not have any unrecovered prior charge-offs. In these circumstances interest is credited to income when cash is received. Loans are charged-off at the time they are determined to be uncollectible. Nonaccrual loans may be returned to accrual status when:     

principal and interest are current, prior charge-offs have been recovered, the ability of the borrower to fulfill the contractual repayment terms is fully expected, the borrower has demonstrated payment performance, and the loan is not classified as doubtful or loss.

In situations where, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession for other than an insignificant period of time to the borrower that we would not otherwise consider, the related loan is classified as a troubled debt restructuring, also known as formally restructured. A concession is generally granted in order to minimize economic loss and avoid foreclosure. Concessions vary by program and borrower and may include interest rate reductions, term extensions, payment deferrals, or an acceptance of additional collateral in lieu of payments. In limited circumstances, principal may be forgiven. Loans classified as troubled debt restructurings are considered risk loans. Allowance for Loan Losses: The allowance for loan losses is an estimate of losses in our loan portfolio as of the financial statement date. We determine the appropriate level of allowance for loan losses based on periodic evaluation of factors such as:     

loan loss history, probability of default, severity of loss given default, portfolio quality, and current economic and environmental conditions.

Loans in our portfolio that are considered impaired are analyzed individually to establish a specific allowance for impaired loans. A loan is impaired when it is probable that all amounts due under the contractual terms of the loan agreement will not be collected. We generally measure impairment based on the net realizable value of the collateral. All risk loans are considered to be impaired loans. Risk loans include:   

nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due.

We record a specific allowance to reduce the carrying amount of the risk loan to the lower of book value or the net realizable value of collateral. When we deem a loan to be uncollectible, we charge the loan principal and prior year(s) accrued interest against the allowance for loan losses. Subsequent recoveries, if any, are added to the allowance for loan losses.

20


An allowance is recorded for probable and estimable credit losses as of the financial statement date for loans that are not individually assessed as impaired. We use a two-dimensional loan risk rating model that incorporates a 14-point rating scale to identify and track the probability of borrower default and a separate 6-point scale addressing the loss given default. The combination of estimated default probability and loss given default is the primary basis for recognition and measurement of loan collectability of these pools of loans. Changes in the allowance for loan losses consist of provision activity, recorded in “(Reversal of) provision for loan losses” on the Consolidated Statements of Income, recoveries, and charge-offs. Investment in AgriBank: Accounting for our stock investment in AgriBank is on a cost plus allocated equities basis. Premises and Equipment: The carrying amount of premises and equipment is at cost, less accumulated depreciation. Calculation of depreciation is generally on the straight-line method over the estimated useful lives of the assets. Gains or losses on disposition are included in “Miscellaneous income, net” on the Consolidated Statements of Income. Depreciation and maintenance and repairs expenses are included in “Other operating expenses” on the Consolidated Statements of Income and improvements are capitalized. Other Property Owned: Other property owned, consisting of real and personal property acquired through foreclosure or deed in lieu of foreclosure, is recorded at fair value less estimated selling costs upon acquisition. Any initial reduction in the carrying amount of a loan to the fair value of the collateral received is charged to the allowance for loan losses. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Related income, expenses, and gains or losses from operations and carrying value adjustments are included in “Miscellaneous income, net” on the Consolidated Statements of Income. Leases: We have finance and operating leases. Under finance leases, unearned income from lease contracts represents the excess of gross lease receivables plus residual receivables over the cost of leased equipment. We amortize net unearned finance income to earnings using the interest method. The carrying amount of finance leases is included in “Loans” on the Consolidated Statements of Condition and represents lease rent receivables net of the unearned income plus the residual receivable. We recognize operating lease revenue evenly over the term of the lease in “Miscellaneous income, net” on the Consolidated Statements of Income. We charge depreciation and other expenses against revenue as incurred. The carrying amount of operating leases is included in “Others assets” on the Consolidated Statements of Condition and represents the asset cost net of accumulated depreciation. Post-Employment Benefit Plans: The District has various post-employment benefit plans in which Association employees participate. The defined contribution plan allows eligible employees to save for their retirement either pre-tax, post-tax, or both, with an employer match on a percentage of the employee’s contributions. We provide benefits under this plan in the form of a fixed percentage of salary contribution in addition to the employer match. Employer contributions are expensed when incurred. Certain employees also participate in the defined benefit retirement plan of the District. The plan is comprised of two benefit formulas. At their option, employees hired prior to October 1, 2001 are on the cash balance formula or on the final average pay formula. Between October 1, 2001 and December 31, 2006, all new benefits-eligible employees are on the cash balance formula. Effective January 1, 2007, the defined benefit retirement plan was closed to new employees. The District plan utilizes the "Projected Unit Credit" actuarial method for financial reporting purposes and the "Entry Age Normal Cost" method for funding purposes. Certain employees also participate in the non-qualified defined benefit Pension Restoration Plan of the AgriBank District. This plan restores retirement benefits to certain highly compensated eligible employees that would have been provided under the qualified plan if such benefits were not above the Internal Revenue Code compensation or other limits. We also provide certain health insurance benefits to eligible retired employees according to the terms of those benefit plans. The anticipated cost of these benefits is accrued during the employees’ active service period. Income Taxes: The ACA and PCA accrue federal and state income taxes. Deferred tax assets and liabilities are recognized for future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. Deferred tax assets are recorded if the deferred tax asset is more likely than not to be realized. If the realization test cannot be met, the deferred tax asset is reduced by a valuation allowance. The expected future tax consequences of uncertain income tax positions are accrued. The FLCA is exempt from federal and other taxes to the extent provided in the Farm Credit Act. Statements of Cash Flows: For purposes of reporting cash flow, cash includes cash on hand. Fair Value Measurement: The Financial Accounting Standards Board (FASB) guidance on “Fair Value Measurements” describes three levels of inputs that may be used to measure fair value. Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 — Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs include the following:    

quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active so that they are traded less frequently than exchange-traded instruments, the prices are not current or principal market information is not released publicly, inputs that are observable such as interest rates and yield curves, prepayment speeds, credit risks, and default rates, and inputs derived principally from or corroborated by observable market data by correlation or other means.

21


Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These unobservable inputs reflect our own assumptions about assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Recently Issued or Adopted Accounting Pronouncements In December 2011, the FASB issued guidance entitled, “Balance Sheet – Disclosures about Offsetting Assets and Liabilities.” In January 2013, the FASB issued clarifying guidance surrounding the scope of financial instruments covered under this guidance. The offsetting disclosures are only applied to derivatives, repurchase agreements, and securities lending transactions. The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities. The requirements apply to in scope financial instruments that are offset in accordance with the rights of offset set forth in accounting guidance and for those financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset or not. This guidance is to be applied retroactively for all comparative periods and is effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of this guidance will have no impact on our consolidated financial condition or consolidated results of operations. In September 2011, the FASB issued guidance entitled, “Compensation – Retirement Benefits – Multiemployer Plans.” The guidance is intended to provide more information about an employer’s financial obligations to multiemployer pension and post-employment benefit plans which should help financial statement users better understand the financial health of significant plans in which the employer participates. For non-public entities, the disclosures are effective for annual reporting periods ending on or after December 15, 2012. The adoption of this guidance did not have any impact on our consolidated financial condition or consolidated results of operations, but resulted in additional disclosures in Note 9. In June 2011, the FASB issued guidance entitled, “Presentation of Comprehensive Income.” The guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement – referred to as the Statement of Comprehensive Income – or in two separate, but consecutive, statements. The guidance is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. For non-public entities, the guidance is effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The adoption of the guidance did not have any impact on our consolidated financial condition or consolidated results of operations. If, in future periods, we have other comprehensive income, expanded financial statement presentation will be required. In May 2011, the FASB issued guidance entitled, “Fair Value Measurement – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).” The guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The amendments include the following:   

Application of the highest and best use valuation premise is only relevant when measuring the fair value of nonfinancial assets. An exception to the requirement for measuring fair value when a reporting entity manages its financial instruments on the basis of its net exposure, rather than its gross exposure, to market risks such as interest rate risk and credit risk of counterparties. Expansion of the disclosures about fair value measurements. New disclosures are required about the use of a nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best use.

The amendments are to be applied prospectively. For non-public entities, the amendments are effective for annual periods beginning after December 15, 2011. The adoption of this guidance did not have any impact on our consolidated financial condition or consolidated results of operations and did not result in additional disclosures at this time. In April 2011, the FASB issued guidance entitled, “A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The guidance provides additional clarification to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The guidance is effective for non-public entities for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. The adoption of this guidance did not have a significant impact on our consolidated financial condition or consolidated results of operations and did not result in additional disclosures. NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following (dollars in thousands): 2011

2 0 12 A s o f December 31 Real estate mo rtgage

A mo unt

A mo unt

%

$ 1,7 5 5 ,8 7 1

5 5 .6 %

2010 %

A mo unt

%

$ 1,427,633

52.7%

$ 1,247,201

50.3%

P ro ductio n and intermediate term

8 14 ,5 5 4

2 5 .8 %

772,926

28.5%

741,560

29.9%

A gribusiness

4 6 2 ,4 18

14 .6 %

432,366

15.9%

467,599

18.9%

Other

12 7 ,4 13

4 .0 %

78,254

2.9%

23,173

0.9%

To tal

$ 3 ,16 0 ,2 5 6

10 0 .0 %

$ 2,711,179

100.0%

$ 2,479,533

100.0%

The other category is comprised of communication, energy, and rural residential real estate related loans as well as loans originated under our Mission Related Investment authority.

22


Portfolio Concentrations We have concentrations with individual borrowers, within various agricultural categories, and within our chartered territory. At December 31, 2012, volume plus commitments to our ten largest borrowers totaled an amount equal to 5.4% of total loans and commitments. Our agricultural concentrations at December 31, 2012, were as follows:

The agricultural concentrations have not changed materially from prior years. We are chartered to operate in certain counties in Illinois. Approximately 5.2% of our total loan portfolio was in Champaign County at December 31, 2012. No other counties comprised more than 5.0% of our loan portfolio. While these concentrations represent our maximum potential credit risk as it relates to recorded loan principal, a substantial portion of our lending activities are collateralized. This reduces our exposure to credit loss associated with our lending activities. We consider credit risk exposure in establishing the allowance for loan losses. Participations We may purchase or sell participation interests with other parties in order to diversify risk, manage loan volume, or comply with FCA Regulations or General Financing Agreement (GFA) limitations. The following table presents information regarding participations purchased and sold (in thousands):

A s o f D e c e m be r 3 1, 2 0 12 Real estate mo rtgage

Other Farm

No n-Farm

A griB ank, FCB

Credit Institutio ns

Credit Institutio ns

To tal

P articipatio ns

P articipatio ns

P articipatio ns

P articipatio ns

P urchased

So ld

$ --

( $ 2 8 9 ,8 2 3 )

P urchased $ 5 3 ,4 10

So ld

P urchased

So ld

( $ 3 2 1)

$ 11,7 6 5

$ --

P urchased

So ld

$ 6 5 ,17 5

( $ 2 9 0 ,14 4 )

P ro ductio n and intermediate term

--

( 16 ,9 6 7 )

8 4 ,13 0

( 7 ,10 4 )

--

--

8 4 ,13 0

( 2 4 ,0 7 1)

A gribusiness

--

( 3 ,3 3 4 )

4 4 3 ,3 4 0

( 3 ,6 4 0 )

--

--

4 4 3 ,3 4 0

( 6 ,9 7 4 )

Other

--

--

--

7 7 ,6 2 6

$ 11,7 6 5

$ --

$ 6 7 0 ,2 7 1

( $ 3 2 1,18 9 )

To tal

$ --

-( $ 3 10 ,12 4 )

7 7 ,6 2 6 $ 6 5 8 ,5 0 6

-( $ 11,0 6 5 )

--

A s o f December 31, 2011 Real estate mo rtgage

$ --

($ 333,697)

$ 62,040

($ 340)

$ 1,670

$ --

$ 63,710

($ 334,037)

P ro ductio n and intermediate term

--

(20,133)

78,013

(7,200)

--

--

78,013

(27,333)

A gribusiness

--

(4,880)

417,162

(5,233)

--

--

417,162

(10,113)

Other

--

--

--

39,545

$ 1,670

$ --

$ 598,430

To tal

$ --

-($ 358,710)

39,545 $ 596,760

-($ 12,773)

Information in the preceding chart excludes loans entered into under our Mission Related Investment and leasing authority.

23

-($ 371,483)


Credit Quality and Delinquency One credit quality indicator we utilize is the FCA Uniform Loan Classification System that categorizes loans into five categories. The categories are defined as follows:     

Acceptable: loans are expected to be fully collectible and represent the highest quality, Other assets especially mentioned (OAEM): loans are currently collectible but exhibit some potential weakness, Substandard: loans exhibit some serious weakness in repayment capacity, equity, and/or collateral pledged on the loan, Doubtful: loans exhibit similar weaknesses to substandard loans; however, doubtful loans have additional weaknesses in existing factors, conditions, and values that make collection in full highly questionable, and Loss: loans are considered uncollectible.

The following table summarizes loans and related accrued interest classified under the FCA Uniform Classification System by loan type (dollars in thousands): Substandard/ A cceptable A s o f D e c e m be r 3 1, 2 0 12

OA EM

A mo unt

%

Do ubtful/Lo ss

A mo unt

%

To tal

A mo unt

%

A mo unt

%

$ 1,7 6 2 ,2 5 4

9 9 .3 %

$ 6 ,4 10

0 .4 %

$ 6 ,0 3 0

0 .3 %

$ 1,7 7 4 ,6 9 4

8 0 7 ,2 5 4

9 7 .7 %

15 ,7 0 3

1.9 %

3 ,0 0 1

0 .4 %

8 2 5 ,9 5 8

10 0 .0 %

A gribusiness

4 4 6 ,119

9 6 .2 %

3 ,2 18

0 .7 %

14 ,5 2 2

3 .1%

4 6 3 ,8 5 9

10 0 .0 %

Other

12 7 ,6 10

10 0 .0 %

--

12 7 ,6 10

10 0 .0 %

$ 3 ,14 3 ,2 3 7

9 8 .5 %

$ 2 5 ,3 3 1

$ 3 ,19 2 ,12 1

10 0 .0 %

Real estate mo rtgage P ro ductio n and intermediate term

To tal lo an po rtfo lio

--

--

0 .8 %

--

$ 2 3 ,5 5 3

0 .7 %

10 0 .0 %

A s o f December 31, 2011 $ 1,431,610

99.1%

$ 6,467

0.4%

$ 7,068

0.5%

$ 1,445,145

100.0%

P ro ductio n and intermediate term

Real estate mo rtgage

767,766

97.6%

2,817

0.4%

15,474

2.0%

786,057

100.0%

A gribusiness

408,913

94.3%

21,380

4.9%

3,420

0.8%

433,713

100.0%

78,392

100.0%

--

$ 2,686,681

97.9%

$ 30,664

Other To tal lo an po rtfo lio

--

8

1.1%

--

78,400

100.0%

1.0%

$ 2,743,315

100.0%

To tal

P ast Due

Lo ans

and A ccruing

$ 25,970

The following table provides an aging analysis of past due loans and related accrued interest by loan type (in thousands): No t P ast Due 30-89

90 Days

Days

o r M o re

To tal

A s o f D e c e m be r 3 1, 2 0 12

P ast Due

P ast Due

P ast Due

Real estate mo rtgage

$ 605

$ 34

$ 639

$ 1,7 7 4 ,0 5 5

$ 1,7 7 4 ,6 9 4

$ --

P ro ductio n and intermediate term

1,2 7 9

352

1,6 3 1

8 2 4 ,3 2 7

8 2 5 ,9 5 8

--

43

--

43

4 6 3 ,8 16

4 6 3 ,8 5 9

--

--

--

--

12 7 ,6 10

12 7 ,6 10

--

$ 1,9 2 7

$ 386

$ 2 ,3 13

$ 3 ,18 9 ,8 0 8

$ 3 ,19 2 ,12 1

$ --

A gribusiness Other To tal

o r Less than 30 Days P ast Due

90 Days

A s o f December 31, 2011 Real estate mo rtgage

$ 425

$ --

$ 425

$ 1,444,720

$ 1,445,145

$ --

279

512

791

785,266

786,057

--

A gribusiness

--

--

--

433,713

433,713

--

Other

--

1

1

78,399

78,400

--

$ 704

$ 513

$ 1,217

$ 2,742,098

$ 2,743,315

$ --

P ro ductio n and intermediate term

To tal

24


Risk Loans A loan is considered a risk loan if it is probable that we will be unable to collect all principal and interest according to the loan agreement. The following table presents risk loan information (in thousands). A s o f December 31

2011

2 0 12

2010

No naccrual lo ans: Current P ast due To tal no naccrual lo ans

$ 784

$ 4,193

$ 1,350

528

574

1,686

1,3 12

4,767

3,036

A ccruing restructured lo ans

--

84

48

A ccruing lo ans 90 days o r mo re past due

--

--

3

$ 1,3 12

$ 4,851

$ 3,087

Vo lume with specific reserves

$ 14 1

$ 3,254

$ 730

Vo lume witho ut specific reserves

1,17 1

1,597

2,357

$ 1,3 12

$ 4,851

$ 3,087

$ 12 9

$ 814

$ 459

To tal risk lo ans

To tal risk lo ans To tal specific reserves Fo r the year ended December 31 Inco me o n accrual risk lo ans Inco me o n no naccrual lo ans To tal inco me o n risk lo ans A verage reco rded investment

2 0 12

2011

2010

$5

$6

$ 60

850

786

2,692

$ 855

$ 792

$ 2,752

$ 3 ,0 4 4

$ 9,939

$ 16,126

The decrease in nonaccrual loans was due to the payoff of a large nonaccrual participation loan. Nonaccrual loans by loan type were as follows (in thousands): A s o f December 31

2 0 12

No naccrual lo ans: Real estate mo rtgage P ro ductio n and intermediate term A gribusiness To tal no naccrual lo ans

2011

2010

$ 443

$ 916

$ 1,309

843

673

853

26

3,178

874

$ 1,3 12

$ 4,767

$ 3,036

There were no loans 90 days or more past due and still accruing interest at December 31, 2012 and 2011. There were $3 thousand of production and intermediate term loans 90 days or more past due and accruing interest at December 31, 2010.

25


All risk loans are considered to be impaired loans. The following table provides additional impaired loan information (in thousands): F o r t he pe rio d e nde d D e c e m be r 3 1, 2 0 12

A s o f D e c e m be r 3 1, 2 0 12 Reco rded Investment 1

Unpaid P rincipal B alance2

Related A llo wance

A verage Impaired Lo ans

Interest Inco me Reco gnized

Impaired lo ans with a related allo wance fo r credit lo sses: Real estate mo rtgage

$ --

$ --

$ --

$ --

$ --

14 1

14 8

12 9

15 9

--

A gribusiness

--

--

--

--

--

Other

--

--

--

--

--

$ 14 1

$ 14 8

$ 12 9

$ 15 9

$ --

$ 442

$ 443

$ --

$ 974

$ 376

703

1,9 2 9

--

791

479

26

57

--

1,117

--

--

--

--

3

--

$ 1,17 1

$ 2 ,4 2 9

$ --

$ 2 ,8 8 5

$ 855

$ 442

$ 443

$ --

$ 974

$ 376

844

2 ,0 7 7

12 9

950

479

26

57

--

1,117

--

--

--

--

3

--

$ 1,3 12

$ 2 ,5 7 7

$ 12 9

$ 3 ,0 4 4

$ 855

P ro ductio n and intermediate term

To tal Impaired lo ans with no related allo wance fo r credit lo sses: Real estate mo rtgage P ro ductio n and intermediate term A gribusiness Other To tal To tal impaired lo ans: Real estate mo rtgage P ro ductio n and intermediate term A gribusiness Other To tal

Fo r the perio d ended December 31, 2011

A s o f December 31, 2011 Reco rded Investment 1

Unpaid P rincipal B alance2

Related A llo wance

A verage Impaired Lo ans

Interest Inco me Reco gnized

Impaired lo ans with a related allo wance fo r credit lo sses: Real estate mo rtgage

$ --

$ --

$ --

$ 23

P ro ductio n and intermediate term

160

159

132

301

--

3,094

3,244

682

7,623

--

$ 3,254

$ 3,403

$ 814

$ 7,947

$ --

$ 957

$ 1,012

$ --

$ 633

$ 639

556

1,977

--

825

56

84

546

--

534

97

$ 1,597

$ 3,535

$ --

$ 1,992

$ 792

$ 957

$ 1,012

$ --

$ 656

$ 639

716

2,136

132

1,126

56

3,178

3,790

682

8,157

97

$ 4,851

$ 6,938

$ 814

$ 9,939

$ 792

A gribusiness To tal

$ --

Impaired lo ans with no related allo wance fo r credit lo sses: Real estate mo rtgage P ro ductio n and intermediate term A gribusiness To tal To tal impaired lo ans: Real estate mo rtgage P ro ductio n and intermediate term A gribusiness To tal 1

The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, and acquisition costs and may also reflect a previous direct charge-off of the investment. 2 Unpaid principal balance represents the contractual principal balance of the loan.

We did not have any material commitments to lend additional money to borrowers whose loans were at risk at December 31, 2012.

26


Troubled Debt Restructurings Included within our loans are troubled debt restructurings, also known as formally restructured. These loans have been modified by granting a concession in order to maximize the collection of amounts due when a borrower is experiencing financial difficulties. Loans classified as troubled debt restructurings are considered risk loans. All risk loans are analyzed within our allowance for loan losses. The following table presents information regarding troubled debt restructurings that occurred during the year ended December 31 (in thousands): 2011

2 0 12 P re-mo dificatio n

P o st-mo dificatio n

P re-mo dificatio n

Outstanding

Outstanding

Outstanding

P o st-mo dificatio n Outstanding

Reco rded Investment

Reco rded Investment

Reco rded Investment

Reco rded Investment

Real estate mo rtgage

$ --

$ --

$ 142

P ro ductio n and intermediate term

382

390

64

64

--

--

7,237

7,237

$ 382

$ 390

$ 7,443

$ 7,443

A gribusiness To tal

$ 142

Pre-modification represents the recorded investment just prior to restructuring and post-modification represents the recorded investment immediately following the restructuring. The recorded investment is the face amount of the receivable increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, and acquisition costs and may also reflect a previous direct charge-off of the investment. We had troubled debt restructurings of $98 thousand and $3 thousand that defaulted during the years ended December 31, 2012 and 2011 in which the modifications were within 12 months of the beginning of the respective reporting period. These restructurings with a payment default occurred in the production and intermediate term loan category. Troubled debt restructurings outstanding at December 31, 2012 totaled $223 thousand, all of which were in nonaccrual status compared to $194 thousand at December 31, 2011 of which $110 thousand were in nonaccrual status. Additional commitments to lend to borrowers whose loans have been modified in a troubled debt restructuring were $10 thousand at December 31, 2012. Allowance for Loan Losses A summary of the changes in the allowance for loan losses follows (in thousands): Fo r the year ended December 31

2 0 12

B alance at beginning o f year

$ 4 ,2 4 6

(Reversal o f) pro visio n fo r lo an lo sses

2011 $ 6,538

(632)

617

Lo an reco veries

2 12

395

Lo an charge-o ffs

(62)

B alance at end o f year

$ 3 ,7 6 4

(3,304) $ 4,246

2010 $ 9,753 (2,823) 167 (559) $ 6,538

The decrease in allowance for loan losses is related to the reversal of specific allowance on a large nonaccrual account that paid off.

27


A summary of changes in the allowance for loan losses and period end recorded investments in loans by loan type follows (in thousands): Real estate mo rtgage

P ro ductio n and intermediate term

A gribusiness

Other

To tal

A llo wance fo r lo an lo sses: B alance at December 31, 2011 (Reversal o f) pro visio n fo r lo an lo sses

$ 844

$ 1,17 3

(603)

$ 2 ,19 3

78

(383)

$ 36 276

Lo an reco veries

--

208

4

--

Lo an charge-o ffs

--

(62)

--

--

$ 4 ,2 4 6 (632) 2 12 (62)

$ 241

$ 1,3 9 7

$ 1,8 14

$ 3 12

$ 3 ,7 6 4

Ending balance: individually evaluated fo r impairment

$ --

$ 12 9

$ --

$ --

$ 12 9

Ending balance: co llectively evaluated fo r impairment

$ 241

$ 1,2 6 8

$ 1,8 14

$ 3 12

$ 3 ,6 3 5

$ 1,7 7 4 ,6 9 4

$ 8 2 5 ,9 5 8

$ 4 6 3 ,8 5 9

$ 12 7 ,6 10

$ 3 ,19 2 ,12 1

B alance at December 31, 2012

Reco rded investments in lo ans o utstanding: Ending balance at December 31, 2012 Ending balance: individually evaluated fo r impairment

$ 442

$ 844

$ 26

$ --

$ 1,3 12

Ending balance: co llectively evaluated fo r impairment

$ 1,7 7 4 ,2 5 2

$ 8 2 5 ,114

$ 4 6 3 ,8 3 3

$ 12 7 ,6 10

$ 3 ,19 0 ,8 0 9

A llo wance fo r lo an lo sses: B alance at December 31, 2010 (Reversal o f) pro visio n fo r lo an lo sses Lo an reco veries

$ 3,007 (2,139) 10

Lo an charge-o ffs

(34)

$ 1,484

$ 1,961

62

2,744

138

247

(511)

$ 86

$ 6,538

(50)

617

--

395

(2,759)

--

(3,304)

$ 844

$ 1,173

$ 2,193

$ 36

$ 4,246

Ending balance: individually evaluated fo r impairment

$ --

$ 132

$ 682

$ --

$ 814

Ending balance: co llectively evaluated fo r impairment

$ 844

$ 1,041

$ 1,511

$ 36

$ 3,432

$ 1,445,145

$ 786,057

$ 433,713

$ 78,400

$ 2,743,315

B alance at December 31, 2011

Reco rded investments in lo ans o utstanding: Ending balance at December 31, 2011 Ending balance: individually evaluated fo r impairment

$ 957

$ 716

$ 3,178

$ --

$ 4,851

Ending balance: co llectively evaluated fo r impairment

$ 1,444,188

$ 785,341

$ 430,535

$ 78,400

$ 2,738,464

NOTE 4: INVESTMENT IN AGRIBANK At December 31, 2012, we were required by AgriBank to maintain an investment equal to 2.5% of the average quarterly balance of our note payable to AgriBank plus an additional 1.0% on growth that exceeded a targeted rate. At December 31, 2012, we were also required by AgriBank to maintain an investment equal to 8.0% of the quarter end balance of the participation interests in real estate loans sold to AgriBank under the asset pool program. The balance of our investment in AgriBank, all required stock, was $87.2 million, $80.3 million, and $79.7 million at December 31, 2012, 2011, and 2010, respectively. NOTE 5: PREMISES AND EQUIPMENT Premises and equipment consisted of the following (in thousands): A s o f December 31 Land, buildings, and impro vements Furniture and equipment Subto tal Less: accumulated depreciatio n To tal

2 0 12

2011

2010

$ 16 ,6 11

$ 16,218

5 ,4 8 9

3,845

4,624

2 2 ,10 0

20,063

17,493

( 6 ,0 2 9 ) $ 16 ,0 7 1

28

(6,267) $ 13,796

$ 12,869

(5,566) $ 11,927


NOTE 6: NOTE PAYABLE TO AGRIBANK Our note payable to AgriBank represents borrowings, in the form of a line of credit, to fund our loan portfolio. The line of credit is governed by a GFA and our assets serve as collateral. The total line of credit was $3.6 billion, $2.8 billion, and $2.8 billion at December 31, 2012, 2011, and 2010, respectively, and the outstanding principal under the line of credit was $2.7 billion, $2.3 billion, and $2.1 billion at December 31, 2012, 2011, and 2010, respectively. The interest rate is adjusted monthly and was 1.3%, 1.6%, and 1.7% at December 31, 2012, 2011, and 2010, respectively. The maturity date is July 31, 2013, for our note payable, at which time the note will be renegotiated. The GFA provides for limitations on our ability to borrow funds based on specified factors or formulas relating primarily to outstanding balances, credit quality, and financial condition. At December 31, 2012, and throughout the year, we were within the specified limitations and in compliance with all debt covenants. NOTE 7: MEMBERS’ EQUITY Capitalization Requirements In accordance with the Farm Credit Act, each borrower is required to invest in us as a condition of obtaining a loan. As authorized by the Agricultural Credit Act and our capital bylaws, our Board of Directors has adopted a capital plan that establishes a stock purchase requirement for obtaining a loan of 2.0% of the customer’s total loan(s) or $1 thousand, whichever is less. The purchase of one participation certificate is required of all customers to whom a lease is issued and of all non-stockholder customers who purchase financial services. The Board of Directors may increase the amount of required investment to the extent authorized in the capital bylaws. The borrower acquires ownership of the capital stock at the time the loan or lease is made. The aggregate par value of the stock is added to the principal amount of the related obligation. We retain a first lien on the stock or participation certificates owned by customers. Protection Mechanisms Under the Farm Credit Act, certain borrower equity is protected. We are required to retire protected borrower equity at par or stated value regardless of its book value. Protected borrower equity includes capital stock and participation certificates that were outstanding as of January 6, 1988, or were issued prior to October 6, 1988 as a requirement for obtaining a loan. If we were to be unable to retire protected borrower equity at par value or stated value, the Insurance Corporation would provide the amounts needed to retire this equity. Regulatory Capitalization Requirements Under capital adequacy regulations, we are required to maintain a permanent capital ratio of at least 7.0%, a total surplus ratio of at least 7.0%, and a core surplus ratio of at least 3.5%. The calculation of these ratios in accordance with FCA Regulations is discussed as follows:   

The permanent capital ratio is average at-risk capital divided by average risk-adjusted assets. At December 31, 2012, our ratio was 14.7%. The total surplus ratio is average unallocated surplus less any deductions made in the computation of permanent capital divided by average riskadjusted assets. At December 31, 2012, our ratio was 14.4%. The core surplus ratio is average unallocated surplus less any deductions made in the computation of total surplus and less any excess stock investment in AgriBank divided by average risk-adjusted assets. At December 31, 2012, our ratio was 14.4%.

We have an agreement with AgriBank which defines how our investment in AgriBank is allocated in calculating regulatory capital ratios. According to the agreement, we include in our ratios all of our investment in AgriBank that is in excess of the required amount. We no longer have any excess stock at December 31, 2012, 2011, or 2010, respectively. Description of Equities The following table presents information regarding classes and number of shares of stock and participation certificates outstanding as of December 31, 2012. All shares and participation certificates were issued with a $5.00 par value. Shares Outstanding Class A co mmo n sto ck (pro tected)

2 ,7 0 2

Class C co mmo n sto ck (at-risk)

1,6 3 6 ,4 9 5

P articipatio n certificates (at-risk)

9 ,5 8 5

Series 1participatio n certificates (pro tected)

8

Under our bylaws, we are also authorized to issue Class B and Class D common stock. The Class B common stock is at-risk and nonvoting with a $5.00 par value per share and the Class D common stock is at-risk and nonvoting with a $1,000 par value per share. Currently, no stock of these classes has been issued. Only holders of Class C common stock have voting rights. Our bylaws do not prohibit us from paying dividends on any classes of stock. However, no dividends have been declared to date.

29


Our bylaws generally permit stock and participation certificates to be retired at the discretion of our Board of Directors and in accordance with our capitalization plans, provided prescribed capital standards have been met. At December 31, 2012, we exceeded the prescribed standards. We do not anticipate any significant changes in capital that would affect the normal retirement of stock. In the event of our liquidation or dissolution, according to our bylaws, any remaining assets after payment or retirement of all liabilities will be distributed in the following order of priority:  

first, pro rata to all class of preferred stock (if any) at par value, second, to the holders pro rata of all classes of common stock and participation certificates at par value.

In the event of impairment, losses will be absorbed first by all classes of common stock and participation certificates then by preferred stock, if any, however, protected stock will be retired at par value regardless of impairment. All classes of stock are transferable to other customers who are eligible to hold such class as long as we meet the regulatory minimum capital requirements. Patronage Distributions The FCA Regulations prohibit patronage distributions to the extent they would reduce our permanent capital ratio below the minimum permanent capital adequacy standards. We do not foresee any events that would result in this prohibition in 2013. However, we do not have a patronage program to make such distributions. NOTE 8: INCOME TAXES Provision for Income Taxes Our provision for income taxes follows (dollars in thousands): Fo r the year ended December 31

2 0 12

2011

2010

Current: Federal State To tal current

$ 2 ,0 10

$ 2,344

$ 2,598

6 18

722

593

2 ,6 2 8

3,066

3,191

Deferred: Federal

(2)

(316)

State

(4)

(69)

(21)

(6)

(385)

(115)

To tal deferred P ro visio n fo r inco me taxes Effective tax rate

(94)

$ 2 ,6 2 2

$ 2,681

$ 3,076

4 .0 %

4.5%

4.8%

The following table quantifies the differences between the provision for income taxes and income taxes at the statutory rates (in thousands): Fo r the year ended December 31 Federal tax at statuto ry rate (34%)

2 0 12

2011

$ 2 2 ,3 2 2

$ 20,177

404

415

State tax, net Effect o f no n-taxable entity

( 2 0 ,13 1)

Other P ro visio n fo r inco me taxes

30

(17,925)

2010 $ 21,943 380 (19,259)

27

14

12

$ 2 ,6 2 2

$ 2,681

$ 3,076


Deferred Income Taxes Tax laws require certain items to be included in our tax returns at different times than the items are reflected on our Consolidated Statements of Income. Some of these items are temporary differences that will reverse over time. We record the tax effect of temporary differences as deferred tax assets and liabilities netted on our Consolidated Statements of Condition. Deferred tax assets and liabilities were composed of the following (in thousands): A s o f December 31

2 0 12

A llo wance fo r lo an lo sses

2011

2010

$ 357

$ 409

$ 449

P o stretirement benefit accrual

532

517

474

A ccrued incentive

344

316

165

A ccrued patro nage inco me no t received

(373)

(369)

(562)

A griB ank, FCB 2002 allo cated sto ck

(557)

(557)

(529)

A ccrued pensio n asset

( 2 9 1)

(319)

(400)

Other assets

16

--

Other liabilities Deferred tax liabilities, net

25

( 19 7 )

(204)

(198)

( $ 18 5 )

($ 191)

($ 576)

Gro ss deferred tax assets

$ 1,2 3 3

$ 1,258

$ 1,113

Gro ss deferred tax liabilities

( $ 1,4 18 )

($ 1,449)

($ 1,689)

A valuation allowance for the deferred tax assets was not necessary at December 31, 2012, 2011, or 2010. We have not provided for deferred income taxes on approximately $20.6 million of patronage allocations received from AgriBank prior to 1993. Such allocations, distributed in the form of stock, are subject to tax only upon conversion to cash. Our intent is to permanently maintain this investment in AgriBank. Additionally, we have not provided deferred income taxes on accumulated FLCA earnings of $510.5 million as it is our intent to permanently maintain this equity in the FLCA or to distribute the earnings to members in a manner that results in no additional tax liability to us. Our income tax returns are subject to review by various U.S. taxing authorities. We record accruals for items that we believe may be challenged by these taxing authorities. However, we had no uncertain income tax positions at December 31, 2012. In addition, we believe we are no longer subject to income tax examinations for years prior to 2009. NOTE 9: EMPLOYEE BENEFIT PLANS Pension and Post-Employment Benefit Plans Complete financial information for the pension and post-employment benefit plans may be found in the Combined AgriBank, FCB and Affiliated Associations 2012 Annual Report (District financial statements). The Farm Credit Foundations Coordinating and Trust Committees provide oversight of the District benefit plans. The governance committees are either elected or appointed representatives (senior leadership and/or Board of Director members) from the participating organizations. The Coordinating Committee is responsible for decisions regarding benefits at the direction of the participating employers. The Trust Committee is responsible for fiduciary and plan administrative functions. Pension Plan: Certain employees participate in the AgriBank District Retirement Plan, a District-wide multi-employer defined benefit retirement plan. The Department of Labor has determined the plan to be a governmental plan; therefore, the plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). As the plan is not subject to ERISA, the plan’s benefits are not insured by the Pension Benefit Guaranty Corporation. Accordingly, the amount of accumulated benefits that participants would receive in the event of the plan’s termination is contingent on the sufficiency of the plan’s net assets to provide benefits at that time. This Plan is noncontributory and covers eligible District employees. The assets, liabilities, and costs of the plan are not segregated by participating entities. As such, plan assets are available for any of the participating employers’ retirees at any point in time. Additionally, if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. Further, if we choose to stop participating in the plan, we may be required to pay an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Because of the multi-employer nature of the plan, any individual employer is not able to unilaterally change the provisions of the plan. If an employee moves to another employer within the same plan, the employee benefits under the plan transfer. Benefits are based on salary and years of service. There is no collective bargaining agreement in place as part of this plan. As disclosed in the District financial statements, the defined benefit pension plan reflects an unfunded liability totaling $442.6 million at December 31, 2012. The pension benefits funding status reflects the net of the fair value of the plan assets and the projected benefit obligation at the date of these consolidated financial statements. The projected benefit obligation is the actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered prior to the measurement date based on assumed future compensation levels. The projected benefit obligation of the District-wide plan was $1.1 billion, $934.8 million, and $834.2 million at December 31, 2012, 2011, and 2010, respectively. The fair value of the plan assets was $640.1 million, $557.6 million, and $573.0 million at December 31, 2012, 2011, and 2010, respectively. The amount of the pension benefits and funding status is subject to many variables including performance of plan assets and interest rate levels. Therefore, changes in assumptions could significantly affect these estimates. Costs are determined for each individual employer based on costs directly related to their current employees as well as an allocation of the remaining costs based proportionately on the estimated projected liability of the employer under this plan. We recognize our proportional share of expense and

31


contribute a proportional share of funding. Total plan expense for participating employers was $52.7 million, $44.0 million, and $37.0 million for 2012, 2011, and 2010, respectively. Our allocated share of plan expenses included in “Salaries and employee benefits” on the Consolidated Statements of Income was $2.5 million, $2.0 million, and $1.7 million for 2012, 2011, and 2010, respectively. Participating employers contributed $51.3 million, $27.9 million, and $25.3 million to the plan in 2012, 2011, and 2010, respectively. Our allocated share of these pension contributions was $2.4 million, $1.4 million, and $1.2 million for 2012, 2011, and 2010, respectively. While the plan is a governmental plan and is not subject to minimum funding requirements, the employers contribute amounts necessary on an actuarial basis to provide the plan with sufficient assets to meet the benefits to be paid to participants. The amount of the total District employer contributions expected to be paid into the pension plans during 2013 is $57.2 million. Our allocated share of these pension contributions is expected to be $2.6 million. The amount ultimately to be contributed and the amount ultimately recognized as expense as well as the timing of those contributions and expenses, are subject to many variables including performance of plan assets and interest rate levels. These variables could result in actual contributions and expenses being greater than or less than the amounts reflected in the District financial statements. Retiree Medical Plans: District employers also provide certain health insurance benefits to eligible retired employees according to the terms of the benefit plan. The anticipated costs of these benefits are accrued during the period of the employee’s active status. Postretirement benefits included in “Salaries and employee benefits” on the Consolidated Statements of Income were $113 thousand, $137 thousand, and $143 thousand for 2012, 2011, and 2010, respectively. Our cash contributions were equal to the benefits paid and were $99 thousand, $102 thousand, and $106 thousand for 2012, 2011, and 2010, respectively. Nonqualified Retirement Plan: We also participate in a District-wide non-qualified defined benefit Pension Restoration Plan. This plan restores retirement benefits to certain highly compensated eligible employees that would have been provided under the qualified plan if such benefits were not above the Internal Revenue Code compensation or other limits. Costs are determined for each individual employer based on costs directly related to their current employees. Total Pension Restoration Plan expense for participating employers was $2.4 million, $2.5 million, and $1.7 million for 2012, 2011, and 2010, respectively. Our allocated share of plan expenses included in “Salaries and employee benefits” on the Consolidated Statements of Income was $177 thousand, $157 thousand, and $55 thousand for 2012, 2011, and 2010, respectively. The Pension Restoration Plan is unfunded and we make annual contributions to fund benefits paid to our retirees covered by the plan. Our cash contributions were equal to the benefits paid and were $29 thousand per year for 2012, 2011, and 2010, respectively. Retirement Savings Plan We also participate in a defined contribution retirement savings plan. For employees hired before January 1, 2007, employee contributions are matched dollar for dollar up to 2.0% and 50 cents on the dollar on the next 4.0% on both pre-tax and post-tax contributions. The maximum employer match is 4.0%. For employees hired after December 31, 2006, we contribute 3.0% of the employee’s compensation and will match employee contributions dollar for dollar up to a maximum of 6.0% on both pre-tax and post-tax contributions. The maximum employer contribution is 9.0%. Employer contribution expenses are included in “Salaries and employee benefits” on the Consolidated Statements of Income under the plan were $896 thousand, $781 thousand, and $683 thousand in 2012, 2011, and 2010, respectively. These expenses are equal to our cash contributions for each year. NOTE 10: RELATED PARTY TRANSACTIONS In the ordinary course of business, we may enter into loan transactions with our officers, directors, their immediate family members, and other organizations with which such persons may be associated. Such transactions are subject to special approval requirements contained in FCA Regulations and are made on the same terms, including interest rates, amortization schedules, and collateral, as those prevailing at the time for comparable transactions with other persons. In our opinion, none of these loans outstanding at December 31, 2012 involved more than a normal risk of collectability. The following table represents information on loans and leases to related parties (in thousands): 2 0 12

2011

2010

A s o f December 31: To tal related party lo ans and leases

$ 9 ,12 0

$ 8,870

$ 7,484

$ 5 ,5 5 6

$ 6,133

$ 4,177

5 ,8 2 2

6,142

3,153

Fo r the year ended December 31: A dvances to related parties Repayments by related parties

The composition of related parties can be different each year end primarily due to changes in the make-up of our Board of Directors. Advances and repayments to related parties at the end of each year are included in the preceding chart. We purchase various services from AgriBank including financial and retail systems, support, and reporting, technology services, insurance services, and internal audit services. The total cost of services we purchased from AgriBank was $838 thousand, $851 thousand, and $801 thousand in 2012, 2011, and 2010, respectively. We purchase benefit, human resource information systems, payroll, and workforce management services from Foundations. Foundations was operated as a part of AgriBank prior to January 1, 2012 when it formed a System service corporation. The System entities using Foundations’ services contributed an investment into the service corporation in January 2012. Our investment was $29 thousand at December 31, 2012. The total cost of services purchased from Foundations was $127 thousand in 2012.

32


NOTE 11: CONTINGENCIES AND COMMITMENTS In the normal course of business, we have various contingent liabilities and commitments outstanding which may not be reflected in the accompanying consolidated financial statements. We do not anticipate any material losses because of these contingencies or commitments. From time to time, we may be named as a defendant in certain lawsuits or legal actions in the normal course of business. At the date of these consolidated financial statements, we were not aware of any such actions that would have a material impact on our financial condition. However, such actions could arise in the future. We have commitments to extend credit and letters of credit to satisfy the financing needs of our borrowers. These financial instruments involve, to varying degrees, elements of credit risk not recognized in the financial statements. Commitments to extend credit are agreements to lend to a borrower as long as there is not a violation of any condition established in the loan contract. Standby letters of credit are agreements to pay a beneficiary if there is a default on a contractual arrangement. Commercial letters of credit are agreements to pay a beneficiary under specific conditions. At December 31, 2012, we had commitments to extend credit and unexercised commitments related to standby letters of credit of $920.9 million. Additionally, we had $4.0 million of issued standby letters of credit as of December 31, 2012. Commitments to extend credit and letters of credit generally have fixed expiration dates or other termination clauses and we may require payment of a fee. If commitments to extend credit and letters of credit remain unfulfilled or have not expired, they may have credit risk not recognized in the financial statements. Many of the commitments to extend credit and letters of credit will expire without being fully drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Certain letters of credit may have recourse provisions that would enable us to recover from third parties amounts paid under guarantees, thereby limiting our maximum potential exposure. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to borrowers and we apply the same credit policies. NOTE 12: FAIR VALUE MEASUREMENTS The FASB guidance on “Fair Value Measurement” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for the asset or liability. The guidance also establishes a fair value hierarchy, with three levels of inputs that may be used to measure fair value. Refer to Note 2 for a more complete description of the three input levels. Non-Recurring Basis We do not have any assets or liabilities measured at fair value on a recurring basis at December 31, 2012, 2011, or 2010. We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis. Information on assets measured at fair value on a non-recurring basis follows (in thousands): A s o f D e c e m be r 3 1, 2 0 12 Lo ans Other pro perty o wned A s o f December 31, 2011

Fair Value M easurement Using

Other pro perty o wned A s o f December 31, 2010

Level 3

$ --

$ --

$ 12

$ 12

$ 623

--

--

--

--

3

Fair Value M easurement Using Level 2

Level 3

To tal Fair Value

To tal Gains (Lo sses)

$ --

$ --

$ 2,561

$ 2,561

($ 355)

--

--

50

50

Fair Value M easurement Using Level 1

Lo ans Other pro perty o wned

To tal Gains (Lo sses)

Level 2

Level 1 Lo ans

To tal Fair Value

Level 1

Level 2

Level 3

To tal Fair Value

-To tal Gains (Lo sses)

$ --

$ 20

$ 264

$ 284

$ 3,083

--

--

--

--

866

Valuation Techniques Loans: Represents the carrying amount and related write-downs of loans which were evaluated for individual impairment based on the appraised value of the underlying collateral. When the value of the collateral, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value. Other property owned: Represents the fair value and related losses of foreclosed assets that were measured at fair value based on the collateral value, which is generally determined using appraisals or other indications based on sales of similar properties. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value. We did not hold any other property owned at December 31, 2012.

33


The fair value measurement would fall under level 2 of the hierarchy if the process uses independent appraisals and other market-based information. The fair value measurement would fall under level 3 of the hierarchy if the process requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the collateral, and other matters. NOTE 13: FAIR VALUE OF FINANCIAL INSTRUMENTS Quoted market prices are generally not available for our financial instruments. Accordingly, we base fair values on:     

judgments regarding future expected losses, current economic conditions, risk characteristics of various financial instruments, credit risk, and other factors.

These estimates involve uncertainties and matters of judgment and cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Estimating the fair value of our investment in AgriBank is not practical because the stock is not traded. As discussed in Notes 2 and 4, the investment is a requirement of borrowing from AgriBank. A description of the methods and assumptions used to estimate the fair value of each class of our financial instruments, for which it is practical to estimate that value, follows: Net loans: The estimate of the fair value of loan assets is determined by discounting the expected future cash flows using current interest rates. Current interest rates are estimated based on similar loans made or loans repriced to borrowers with similar credit risk. This methodology is used because no active market exists for the vast majority of these loans. Since the discount rates are based upon internal pricing mechanisms and other estimates, we cannot determine whether the fair values presented would equal the exit price negotiated in an actual sale. Furthermore, certain statutory or regulatory factors not considered in the valuation, such as the unique statutory rights of System borrowers, could render our portfolio unmarketable outside the System. We segregate the loan portfolio into pools of loans with homogenous characteristics for purposes of determining fair value of loans not individually impaired. Expected future cash flows and interest rates reflecting appropriate credit risk are separately determined for each individual pool. For fair value of loans individually impaired, we assume collection will result only from the sale of the underlying collateral. Fair value is estimated to equal the total net realizable value of the underlying collateral. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value. Note payable to AgriBank: Estimating the fair value of the note payable to AgriBank is determined by segregating the note into pricing pools according to the types and terms of the underlying loans funded. We discount the estimated cash flows from these pools using the current rate charged by AgriBank for additional borrowings with similar characteristics. Commitments to extend credit and letters of credit: Estimating the fair value of commitments and letters of credit is determined by the inherent credit loss in such instruments. The estimated fair value of our financial instruments is as follows (in thousands): 2011

2 0 12 Carrying A s o f December 31

A mo unt

2010

Carrying Fair Value

A mo unt

Carrying Fair Value

A mo unt

Fair Value

F ina nc ia l a s s e t s : Net lo ans

$ 3 ,15 6 ,4 9 2

$ 3 ,19 6 ,0 0 3

$ 2,706,933

$ 2,746,665

$ 2,472,995

$ 2,495,098

$ 2 ,6 9 5 ,5 8 5

$ 2 ,7 2 7 ,0 7 0

$ 2,298,668

$ 2,330,166

$ 2,120,817

$ 2,138,748

F ina nc ia l lia bilit ie s : No te payable to A griB ank Unre c o gnize d f ina nc ia l ins t rum e nt s : Co mmitments to extend credit and letters o f credit

( $ 1,15 6 )

34

($ 1,163)

($ 904)


NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly consolidated results of operations for the year ended December 31 follows (in thousands): 2 0 12 Net interest inco me (Reversal o f) pro visio n fo r lo an lo sses

First

Seco nd

$ 17 ,5 7 3

$ 18 ,0 9 3

( 116 )

(746)

Third $ 18 ,2 9 7

Fo urth $ 18 ,8 6 6

2 ,6 6 3

( 2 ,4 3 3 )

To tal $ 7 2 ,8 2 9 (632)

P atro nage inco me

3 ,2 2 1

3 ,6 4 3

3 ,3 3 5

5 ,15 5

15 ,3 5 4

Other expense, net

6 ,5 6 3

3 ,8 5 6

6 ,3 2 9

6 ,4 16

2 3 ,16 4

677

736

10 5

1,10 4

2 ,6 2 2

$ 13 ,6 7 0

$ 17 ,8 9 0

$ 12 ,5 3 5

$ 18 ,9 3 4

$ 6 3 ,0 2 9

P ro visio n fo r inco me taxes Net inco me 2011 Net interest inco me

First

Seco nd

Third

Fo urth

$ 16,486

$ 16,500

$ 16,737

318

672

3,704

(4,077)

P atro nage inco me

3,107

3,089

3,047

5,186

14,429

Other expense, net

6,492

4,824

5,631

4,905

21,852

488

633

416

1,144

2,681

$ 12,295

$ 13,460

$ 10,033

$ 20,877

$ 56,665

P ro visio n fo r (reversal o f) lo an lo sses

P ro visio n fo r inco me taxes Net inco me 2010 Net interest inco me P ro visio n fo r (reversal o f) lo an lo sses

First

Seco nd

$ 14,228

$ 15,015

Fo urth $ 16,526

$ 67,386 617

To tal $ 61,170

(1,182)

(2,704)

640

P atro nage inco me

3,393

3,130

3,016

7,461

17,000

Other expense, net

2,016

2,374

4,047

8,018

16,455

P ro visio n fo r inco me taxes Net inco me

423

Third $ 15,401

$ 17,663

To tal

(2,823)

617

411

940

1,108

3,076

$ 14,565

$ 16,542

$ 16,134

$ 14,221

$ 61,462

NOTE 15: SUBSEQUENT EVENTS We have evaluated subsequent events through March 6, 2013, which is the date the financial statements were available to be issued. There have been no material subsequent events that would require recognition in our 2012 Consolidated Financial Statements or disclosures in the Notes to Consolidated Financial Statements.

35


DISCLOSURE INFORMATION REQUIRED BY REGULATIONS Farm Credit Services of Illinois, ACA (Unaudited)

Description of Business General information regarding the business is discussed in Note 1 of this Annual Report. The description of significant business developments, if any, is discussed in the “Management's Discussion and Analysis" portion of this Annual Report. Description of Property The following table sets forth certain information regarding our properties: Lo catio n

Descriptio n

Usage

Belleville

Owned

Held f or Sale

Carlinville

Owned

Branch

Decat ur

Owned

Branch

Ef f ingham

Owned

Branch

Harrisburg

Owned

Branch

Highland

Owned

Branch

Jacksonville

Owned

Branch

Jerseyville

Leased

Branch

Lawrenceville

Owned

Branch

M ahomet

Owned

Headquart ers/ Branch

M t . Vernon

Owned

Branch

Paris

Owned

Branch Branch

Red Bud

Owned

Sherman

Owned

Branch

Taylorville

Owned

Branch

Wat seka

Owned

Branch

Legal Proceedings Information regarding legal proceedings is discussed in Note 11 of this Annual Report. We were not subject to any enforcement actions at December 31, 2012. Description of Capital Structure Information regarding our capital structure is discussed in Note 7 of this Annual Report. Description of Liabilities Information regarding liabilities is discussed in Notes 6, 8, 9, 11, and 13 of this Annual Report. Selected Financial Data The "Consolidated Five-Year Summary of Selected Financial Data” is presented at the beginning of this Annual Report. Management’s Discussion and Analysis Information regarding any material aspects of our financial condition, changes in financial condition, and results of operations are discussed in the "Management's Discussion and Analysis” portion of this Annual Report.

36


Board of Directors Information regarding directors who served as of December 31, 2012, including business experience in the last five years and any other business interest where a director serves on the board of directors or as a senior officer follows: Lance Beery, is a self-employed grain and livestock farmer. His current term on the board began January 2009 and expired in December 2012. He was reelected to the board of directors in January 2013 to a term that expires in December 2016. Kent Brinkmann, is a self-employed grain farmer and seed dealer. He serves as president of Carlyle FFA Alumni in Carlyle, IL, promoting agricultural issues and is vice president of Clinton County Extension Foundation in Breese, IL, promoting agricultural issues. His current term on the board began January 2009 and expires in December 2013. William David Champion, Jr., appointed director, is the President and CEO of the Eastern Illini Electric Cooperative in Paxton, IL. He serves as a director of the Board of Prairie Power Inc., an electricity wholesaler. He is also a director of Cooperative Balloon Assoc., LLC involved in the promotion of cooperative electricity. His current term on the board began January 2011 and expires in December 2014. Dale Crawford, is a self-employed grain farmer. He is a director and serves as treasurer on the Moultrie Co. Farm Bureau Board in Sullivan, IL, an agricultural advocacy group. He is also a director and serves as treasurer of the Moultrie-Sullivan County Jr. Fair. His current term on the board began January 2009 and expired in December 2012. He was reelected to the board of directors in January 2013 to a term that expires in December 2016. Jack E. Crumrin, is a self-employed grain and livestock farmer. His current term on the board began January 2011 and expires in December 2014. Wes Durbin, is a self-employed grain and livestock farmer. He serves as treasurer of the Shelby County Pork Producers. His current term on the board began January 2011 and expires in December 2014. J. Dale Edwards, is a self-employed grain and livestock farmer. He serves as a director for the Sangamon County Fair, the Tri City School Foundation, involved in school fund raising, and the Mechanicsburg Cemetery. He also serves as district tax assessor for the Illiopolis/Lanesville taxing district and as clerk for the Lanesville Township. His current term on the board began January 2010 and expires in December 2013. Dennis Frey, is a self-employed grain farmer. His current term on the board began January 2009 and expired in December 2012. He was reelected to the board of directors in January 2013 to a term that expires in December 2016. Larry Hasheider, is a self-employed grain and livestock farmer. He serves as vice chairman on the Illinois Corn Marketing Board which promotes world-wide use of corn. His current term on the board began January 2012 and expires in December 2015. Jack Hastings, is a self-employed grain and livestock farmer. He is also a real estate agent. He serves as the chairman of the Clay County Board of Review, a real estate tax assessment appeals board. His current term on the board began January 2010 and expires in December 2013. Kevin Miller, is a self-employed grain farmer. He is also a real estate agent. He serves on the Board of South American Soybean of Brazil as Compensation Committee chair. His current term on the board began January 2012 and expires in December 2015. Mark Miller, Chairperson of the Board, is a self-employed grain farmer and a seed dealer. He is a director of the Farmers Grain Co. of Central Illinois, a grain elevator. His current term on the board began January 2012 and expires in December 2015. Karen Neff, Vice-Chairperson of the Board, is a self-employed grain and livestock farmer and a project manager with UNISYS. Her current term on the board began January 2011 and expires in December 2014. K. Bridget Schneider, appointed director, is a financial consultant for Lincoln Financial Securities specializing in retirement planning. Her current term on the Board began February 2010 and expired December 2012. She was reappointed to the board of directors in January 2013 to a term that expires in December 2016. At the January 2013 board meeting the Board of Directors voted Karen Neff as Chairperson and Larry Hasheider as Vice-Chairperson of the Board and their terms will expire December 31, 2013. Pursuant to our bylaws, directors are paid a reasonable amount for attendance at board meetings, committee meetings or other special assignments. Directors are also reimbursed for reasonable expenses incurred in connection with such meetings or assignments. The Board of Directors has adopted a rate of $400 per day along with a $1,300 per quarter retainer fee except for the chairperson and vice-chairperson, whose retainer fee was $1,800 per quarter. In 2012, the Board members did not receive compensation for serving on a Board committee. Effective January 1, 2013 the rates will increase to $500 per day along with a $2,500 per quarter retainer fee except for the chairperson and vice-chairperson, whose retainer fees will increase to $3,500 and $3,000 per quarter, respectively.

37


Information regarding compensation for each director who served during 2012 follows: Number o f Days Served Other

To tal

B o ard

Official

Co mpensatio n

M eetings

A ctivities

P aid in 2012

B eery, Lance

12.0

19.0

B rinkmann, Kent

14.0

17.0

18,800

Champio n, William David Jr.

12.0

20.0

19,200

$ 18,800

Crumrin, Jack E.

14.0

22.0

20,800

Crawfo rd, Dale

14.0

20.0

20,000

Durbin, Wes

14.0

22.0

20,800

Edwards, J. Dale

14.0

9.0

15,600

Frey, Dennis

13.0

20.0

19,600

Hastings, Jack

14.0

18.0

19,200

Hasheider, Larry

14.0

12.0

16,800

M iller, Kevin

13.0

24.0

21,200

M iller, M ark

14.0

15.0

20,000

Neff, Karen

16.0

19.0

22,400

Schneider, K. B ridget

14.0

19.0

19,600

192.0

256.0

$ 272,800

To tal

Senior Officers The senior officers (and the date each began his/her current position) include: David M. Owens, Chief Executive Officer (July 2007) Donald J. Olson, Chief Credit Officer, Executive Vice President (August 2007) Steven D. Ray, Chief Financial Officer, Sr. Vice President (September 2007) Aaron S. Johnson, Sr. Vice President, Field Operations (January 2002) Tom Tracy, Sr. Vice President, Operations (August 2010) Mr. Owens previously served as the CFO of FCS of Illinois. Mr. Olson previously served as senior vice-president at FCS of Illinois. All of the senior officers have been with the Farm Credit System for the past five years, except Mr. Tracy. Mr. Tracy previously served as Chief Credit Officer of a community bank and then as a commercial lender with FCS of Illinois. Other business interests where a senior officer served as a director or senior officer include: David M. Owens, Chief Executive Officer, also serves on the Farm Credit Foundations Plan Sponsor Committee. Donald J. Olson, Chief Credit Officer, also is a managing member of Olson Acres, LLC, and a board member of ProPartners Financial. Steven D. Ray, Chief Financial Officer, also serves on the board of the Disabled Citizens Foundation. A summary of compensation earned by senior officers/highly compensated individuals follows (in thousands): Name o f

Deferred/

Individual

Year

David M . Owens, CEO

2 0 12

Salary $ 339

B o nus $ 203

P erquisites $9

Other $ --

To tal $ 551

David M . Owens, CEO

2011

314

189

9

--

512

David M . Owens, CEO

2010

290

174

9

--

473

A ggregate Number o f Senio r Officers/Highly Co mpensated Individuals, excluding CEO Fo ur

2 0 12

Five*

2011

766

290

11

--

1,067

Six

2010

978

331

14

--

1,323

$ 757

$ 306

$ 13

$ --

$ 1,0 7 6

*Lo ren Leskis retired effective 3/31/11. Co mpensatio n sho wn is thro ugh 3/31/11.

Members may request information on the compensation paid during 2012 to the individuals included in the preceding table. In accordance with FCA Regulations, an advisory vote on CEO and/or senior officer compensation is required when five percent of the voting stockholders petition for such vote. Although the advisory votes are non-binding, our Board of Directors will take into consideration the outcome of the vote when making future CEO and senior officer compensation decisions. Senior officer incentives are paid annually based on performance criteria established by our Board of Directors. The criteria include return on assets, loan volume, credit quality, personal objectives, and performance ratings. We calculate the incentives after the end of the plan year (the plan year is the calendar year). We pay out the incentives within 90 days of year end.

38


Transactions with Senior Officers and Directors Information regarding related party transactions is discussed in Note 10 of this Annual Report. Travel, Subsistence, and Other Related Expenses Directors and senior officers are reimbursed for reasonable travel, subsistence, and other related expenses associated with business functions. A copy of our policy for reimbursing these costs is available by contacting us at 1100 Farm Credit Drive, Mahomet, Illinois 61853, (217) 590-2200, or through our website www.fcsillinois.com. The total directors’ travel, subsistence, and other related expenses were $223 thousand, $147 thousand, and $144 thousand in 2012, 2011, and 2010, respectively. Involvement in Certain Legal Proceedings No events occurred during the past five years that are material to evaluating the ability or integrity of any person who served as a director or senior officer on January 1, 2013 or at any time during 2012. Member Privacy Farm Credit Administration Regulations protect members’ nonpublic personal financial information. Our directors and employees are restricted from disclosing information about our association or our members not normally contained in published reports or press releases. Relationship with Qualified Public Accountant There were no changes in independent auditors since the last Annual Report to members and we are in agreement with the opinion expressed by the independent auditors. The total fees paid during 2012 were $68 thousand. The fees paid were for audit services. Financial Statements The "Report of Management”, “Report on Internal Control Over Financial Reporting”, “Report of Audit Committee”, “Independent Auditor’s Report", "Consolidated Financial Statements”, and “Notes to Consolidated Financial Statements" are presented prior to this portion of the Annual Report. Credit and Services to Young, Beginning, and Small Farmers and Ranchers Information regarding credit and services to young, beginning, and small farmers and ranchers, and producers or harvesters of aquatic products is discussed in an addendum to this Annual Report. Equal Employment Opportunity We are an equal opportunity employer. It is our policy to provide equal employment opportunity to all persons regardless of race, color, religion, national origin, sex, age, disability, veteran status, genetic information, sexual orientation, creed, marital status, status with regard to public assistance, membership or activity involving a local human rights commission, or any other characteristic protected by law. We comply with all state and local equal employment opportunity regulations. We conduct all personnel decisions and processes relating to our employees and job applicants in an environment free of discrimination and harassment.

39


VOLUNTARY CONDITIONAL ADVANCE PAYMENTS PROGRAM Farm Credit Services of Illinois, ACA

The Association offers a Voluntary Conditional Advance Payments Program (VCAP) that provides for customers to make advance payments on designated real estate and intermediate term loans. The following terms and conditions apply to all VCAP funds unless the loan agreement, or related documents, between the Association and customer provide for other limitations. Payment Application Loan payments received by the Association before the loan has been billed will normally be placed into a VCAP account and applied against the next installment due. Loan payments received after the loan has been billed will be directly applied to the installment due on the loan and related charges, if any. Funds received in excess of the billed amount will be placed into a VCAP account unless the customer has specified the funds to be applied as a special prepayment of principal. When a loan installment becomes due, monies in the VCAP account for the loan will be automatically applied toward the installment on the due date. Any accrued interest on the VCAP account will be applied first. If the balance in the VCAP account does not fully satisfy the entire installment, the customer must pay the difference by the installment due date. Account Maximum The amount in VCAP may not exceed the unpaid principal balance of the loan. The following limits also apply: 

Multi Flex Option Loans - Up to 100% of the loan’s outstanding balance or the next payment amount, whichever is greater.

Flex Option Loans - No more than 10% of the loan’s original balance.

Exceptional Rate Option Loans - No more than 10% of the loan’s original balance.

Interest Rate Interest will accrue on the VCAP account at a simple rate of interest that may be changed by the Association from time to time. Currently, the rate paid is equal to the bill rate on the related loan. In no instances will the rate paid on the VCAP account exceed the bill rate on the related loan. Withdrawals Funds in the VCAP account may be available to be returned to Borrowers upon request. Members may request up to twelve withdrawals in any calendar year. The minimum withdrawal amount will be $500 or the balance in the VCAP account, whichever is less. Association Options In the event of default on any loan or if the Association discontinues their VCAP program, the Association may apply funds in the account to the unpaid loan balance and other amounts due, and shall return any excess funds to the customer. Uninsured Account VCAP is not a depository account and is not insured. In the event of liquidation of the Association, customers having balances in VCAP shall be notified according to regulations. Questions: Please direct any questions regarding VCAP to your local FCS representative.

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YOUNG, BEGINNING, AND SMALL FARMERS AND RANCHERS Farm Credit Services of Illinois, ACA

We have specific programs in place to serve the credit and related needs of young, beginning and small farmers and ranchers (YBS) in our territory. The definitions of YBS as developed by the Farm Credit Administration (FCA) follow:   

Young: A farmer, rancher, or producer or harvester of aquatic products who is age 35 or younger as of the loan transaction date. Beginning: A farmer, rancher, or producer or harvester of aquatic products who has 10 years or less farming or ranching experience as of the loan transaction date. Small: A farmer, rancher, or producer or harvester of aquatic products who normally generates less than $250,000 in annual gross sales of agricultural or aquatic products.

Young, Beginning, and Small Farmer Demographics We have used a special tabulation of the 2007 United States Department of Agriculture (USDA) Census of Agriculture as our source of demographic data for comparison to our performance in serving young, beginning, and small farmers and ranchers. This special tabulation included only those farms in our chartered territory that have debt and annual gross sales of at least $10,000. The following table is a comparison of our results compared to the 2007 USDA Census data for our territory: P ercentages by Number A s o f December 31, 2012

Yo ung

B eginning

Small

FCS o f Illino is

16.3%

17.0%

38.4%

2007 Census data

11.2%

16.4%

53.9%

As shown in the above table, based on year end numbers, our business activity with young and beginning farmers exceeds the demographics of the marketplace, whereas our business activity with small farmers is below the demographics of the marketplace. We have seen a trend of more and more small farmers’ incomes rising above the $250,000 threshold. Thus, our business activity with the small farmers continues to be below census data and it fell slightly below our targets as established in our 2012 business plan. Given the trend of generally higher farm revenues, we expect the percentage of small farmers in the next census data to decline from the 2007 levels. Mission Statement Our mission is to provide competitive and dependable credit and related services. This applies to all eligible customers, and specifically to young, beginning, and small farmers and ranchers. We will accomplish this mission by:     

providing discounted interest rates for up to a maximum period of five years through our YBS Loan Program for young and/or beginning farmers, making full use of guaranteed loan programs through the State of Illinois and the USDA Farm Service Agency, establishing both quantitative portfolio targets and qualitative goals for services offered, continuing to participate in numerous outreach programs which benefit YBS farmers, and fully utilizing a streamlined application and approval process for small loans.

Quantitative Targets and Qualitative Goals Quantitative targets and qualitative goals for YBS loans are established on an annual basis for the succeeding three years. The following targets and goals were established for 2012: Number o f New Number o f Lo ans Catego ry

Lo ans Clo sed

To tal Lo an P ercent o f

Outstanding Vo lume (000) To tal Lo ans

Yo ung Farmer

830

3,300

$ 275,000

B eginning Farmer

830

3,300

275,000

10.0%

3,000

10,000

600,000

40.0%

Outreach P ro gram - Go al fo r to tal number o f activities

70

Small Farmer

10.0%

As of December 31, 2012, all targets and goals for the YBS program were met with the exception of the percent of total loans to small farmers which was explained above.

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The following tables detail the level of new business generated in 2012 plus the level of business outstanding as of December 31, 2012, both by number of loans and by volume for young and beginning farmers and ranchers: Y o ung a nd B e ginning F a rm e rs a nd R a nc he rs – G ro s s N e w B us ine s s D uring T he Y e a r N um be r/ V o lum e o f Lo a ns N um be r P e rc e nt o f V o lum e of T o tal O ut s t a nding Lo a ns

C a t e go ry 1. To tal gro ss new lo ans and co mmitments made during the year

17,537

P e rc e nt o f T o tal

$ 1,726,459

2. To tal lo ans and co mmitments made to yo ung farmers and ranchers

2,231

12.7%

300,187

17.4%

3. To tal lo ans and co mmitments made to beginning farmers and ranchers

2,079

11.9%

268,484

15.6%

Y o ung a nd B e ginning F a rm e rs a nd R a nc he rs – N um be r/ V o lum e o f Lo a ns O ut s t a nding a t D e c e m be r 3 1 N um be r P e rc e nt o f V o lum e of T o tal O ut s t a nding Lo a ns

C a t e go ry 1. To tal lo ans and co mmitments o utstanding at year end

33,215

P e rc e nt o f T o tal

$ 6,913,186

2. Yo ung farmers and ranchers

5,427

16.3%

761,907

11.0%

3. B eginning farmers and ranchers

5,659

17.0%

795,060

11.5%

The following tables detail the level of new business generated in 2012 plus the level of business outstanding as of December 31, 2012, both by number of loans and by volume for small farmers and ranchers: S m a ll F a rm e rs a nd R a nc he rs - G ro s s N e w B us ine s s by Lo a n S ize N um be r/ V o lum e o f Lo a ns $0 $ 5 0 ,0 0 0

N um be r/ V o lum e 1. To tal number o f new lo ans and co mmitments made during the year

10,733

2. To tal number o f lo ans made to small farmers and ranchers during the year 3. Number o f lo ans to small farmers and ranchers as a % o f to tal number o f lo ans 4. To tal gro ss lo an vo lume o f all new lo ans and co mmitments made during the year 5. To tal gro ss lo an vo lume to small farmers and ranchers 6. Lo an vo lume to small farmers and ranchers as a % o f to tal gro ss new lo an vo lume

4,119 38.4% $ 133,220 $ 39,018 29.3%

$ 5 0 ,0 0 1 $ 10 0 ,0 0 0

$ 10 0 ,0 0 1 $ 2 5 0 ,0 0 0

1,405

1,640

537 38.2%

466 28.4%

$ 107,663

$ 280,022

$ 40,141 37.3%

$ 75,484 27.0%

$ 2 5 0 ,0 0 1 a nd gre a t e r 3,759 234 6.2% $ 1,205,554 $ 144,739 12.0%

S m a ll F a rm e rs a nd R a nc he rs - N um be r/ V o lum e o f Lo a ns O ut s t a nding by Lo a n S ize $0 $ 5 0 ,0 0 0

N um be r/ V o lum e O ut s t a nding 1. To tal number o f lo ans and co mmitments o utstanding at year end

13,557

2. To tal number o f lo ans to small farmers and ranchers 3. Number o f lo ans to small farmers and ranchers as a % o f to tal number o f lo ans 4. To tal lo an vo lume o utstanding at year end

7,309 53.9% $ 296,322

5. To tal lo an vo lume to small farmers and ranchers 6. Lo an vo lume to small farmers and ranchers as a % o f to tal lo an vo lume

$ 151,552 51.1%

$ 5 0 ,0 0 1 $ 10 0 ,0 0 0

$ 10 0 ,0 0 1 $ 2 5 0 ,0 0 0

6,976

7,800

2,861 41.0%

1,991 25.5%

$ 505,355 $ 204,020 40.4%

$ 1,240,535 $ 301,255 24.3%

$ 2 5 0 ,0 0 1 a nd gre a t e r 4,882 602 12.3% $ 4,870,974 $ 688,363 14.1%

Outreach Program Our annual marketing plan includes special emphasis on the young, beginning, and small farmer segments in the marketplace to promote our products and services and demonstrate our commitment to serving these market populations. In 2012, our Outreach programs for YBS farmers and rural youth include:   

Enlisting 10 young and beginning farmers to participate in three annual Stockholder Advisory Council meetings. Each meeting provided an opportunity for the young and beginning farmers to engage in conversations with senior management, board members, and other diverse stockholders related to Farm Credit's commitment to serving young and beginning farmers. Providing four Farm Credit College daylong educational workshops on Farm Succession Management and Estate Planning, Grain Commodity Marketing, and Farm Financial Analysis for stockholders. Nearly 100 young, beginning, and small farmers participated in these educational workshops. The Association co-sponsors the two-year Cultivating Master Farmers mentoring program. Cultivating Master Farmers is designed to unite different generations of Illinois farmers through the exchange of personal ideas, knowledge, and production experience. First started in 2005, the program brings together a group of young farmers with formerly recognized Prairie Farmer Master Farmers for an exchange of knowledge

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   

and ideas. The fourth Cultivating Master Farmers class (The Class of 2013) will graduate in July 2013 and recruitment and selection of the fifth class (The Class of 2015) will conclude in March 2013. Farm Credit Services of Illinois partners with the Illinois Farm Bureau's Young Leader program to support and engage with the young farmers who participate in this strong statewide program. Farm Credit staff speak at the Young Leaders State Conference and assist with various Young Leader competitions. The Association’s Farm Credit Agricultural Scholarship program awarded twenty-six $1,000 scholarships to high school seniors who began pursuing college educations and future careers related to agriculture in the fall 2012 semester. The Association’s Community Improvement Grants program awarded a $250 grant to thirty-four different 4-H clubs and FFA chapters who submitted a Community Improvement Project proposal that delivered visible and tangible value to their local community in 2012. The Association established a One Million Agriculture Endowment initiative in 2010 which included the creation of the following endowment funds that provide annual income to the respective programs: $350,000 farmdoc Sponsorship Endowment in the University of Illinois Department of Agricultural and Consumer Economics; $200,000 Illinois Agricultural Leadership Foundation Endowed Fund; $122,500 Southern Illinois University College of Agricultural Sciences Endowed Fund; $50,000 University of Illinois College of Agricultural, Consumer and Environmental Sciences Endowed Fund; $50,000 Illinois Farm Bureau Young Leaders Endowed Fund; $50,000 Illinois FFA Sponsorship Endowed Fund; and $50,000 Illinois 4-H Project Partner Endowed Fund. These funds produce approximately 4% of the endowment value as annual income to support these programs that serve young, beginning, and small farmers.

We participated in a total of 113 outreach activities in 2012, surpassing our goal of 70 for the year. Safety and Soundness of the Program In order to control our risk for loans approved under the young, beginning, and small farmer loan program, we have established specific lending limits and credit standards for clients who use the program.

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2012 Annual Report