MISSISSIPPI LAND BANK, ACA Quarterly Report Third Quarter

Transcription

1 MISSISSIPPI LAND BANK, ACA 2013 Quarterly Report Third Quarter For the Quarter Ended September 30, 2013

2 REPORT OF MANAGEMENT The undersigned certify that we have reviewed this report, that it has been prepared in accordance with all applicable statutory or regulatory requirements, and that the information contained herein is true, accurate and complete to the best of his or her knowledge and belief. 2

3 MISSISSIPPI LAND BANK, ACA MANAGEMENT S DISCUSSION AND ANALYSIS The following commentary reviews the financial performance of the Mississippi Land Bank, ACA (Agricultural Credit Association), referred to as the Association, for the quarter ended September 30, These comments should be read in conjunction with the accompanying financial statements and the December 31, 2012 Annual Report to Stockholders. The Association is a member of the Farm Credit System (System), a nationwide network of cooperatively owned financial institutions established by and subject to the provisions of the Farm Credit Act of 1971, as amended (Act), and the regulations of the Farm Credit Administration (FCA) promulgated thereunder. The consolidated financial statements comprise the operations of the ACA and its wholly-owned subsidiaries. The consolidated financial statements were prepared under the oversight of the Association s audit committee. Significant Events: During the third quarter, the collateral for a nonaccrual participation loan was sold, resulting in a charge-off of approximately $61,000. In addition, as a result of valuation analyses received during the quarter, the Association recorded a charge-off of $798,000 related to one nonaccrual participation loan. See Note 2 to the consolidated financial statements, Loans and Allowance for Loan Losses, included in this quarterly report. Loan Portfolio: Total loans outstanding at September 30, 2013, including nonaccrual loans and sales contracts, were $515,834,829 compared to $497,681,585 at December 31, 2012, reflecting an increase of 3.7 percent. Nonaccrual loans as a percentage of total loans outstanding were 0.5 percent at September 30, 2013, compared to 0.7 percent at December 31, The Association recorded $0 in recoveries and $871,548 in charge-offs for the quarter ended September 30, 2013, and $0 in recoveries and $0 in charge-offs for the same period in The Association s allowance for loan losses was 0.1 percent and 0.1 percent of total loans outstanding as of September 30, 2013, and December 31, 2012, respectively. Risk Exposure: High-risk assets include nonaccrual loans, loans that are past due 90 days or more and still accruing interest, formally restructured loans and other property owned. The following table illustrates the Association s components and trends of high-risk assets. September 30, 2013 December 31, 2012 Amount % Amount % Nonaccrual $ 2,823, % $ 3,349, % 90 days past due and still accruing interest 509, % 297, % Formally restructured 899, % 943, % Other property owned, net 731, % 1,599, % Total $ 4,963, % $ 6,189, % Results of Operations: The Association had net income of $1,429,035 and $4,669,226 for the three and nine months ended September 30, 2013, as compared to net income of $1,923,109 and $6,197,600 for the same period in 2012, reflecting a decrease of 25.7 and 24.7 percent, respectively. Net interest income was $3,706,179 and $11,000,952 for the three and nine months ended September 30, 2013, compared to $3,553,892 and $10,397,531 for the same period in

4 September 30, September 30, Average Average Balance Interest Balance Interest Loans $ 504,232,703 $ 17,196,608 $ 467,715,795 $ 17,213,973 Interest-bearing liabilities 428,541,055 6,195, ,641,715 6,816,442 Impact of capital $ 75,691,648 $ 69,074,080 Net interest income $ 11,000,952 $ 10,397,531 Yield on loans Cost of interest-bearing liabilities Interest rate spread Net interest income as a percentage of average earning assets Average Yield 4.56% Average Yield 4.92% 1.93% 2.28% 2.63% 2.64% 2.92% 2.97% September 30, 2013 vs. September 30, 2012 Increase (decrease) due to Volume Rate Total Interest income - loans $ 1,342,744 $ (1,360,109) $ (17,365) Interest expense 510,772 (1,131,558) (620,786) Net interest income $ 831,972 $ (228,551) $ 603,421 Interest income for the three and nine months ended September 30, 2013, decreased by $23,738 and $17,365, or 0.4 and 0.1 percent, respectively, from the same period of 2012, primarily due to declines in yields on earning assets offset by an increase in average loan volume. Interest expense for the three and nine months ended September 30, 2013, decreased by $176,025 and $620,786, or 7.8 and 9.1 percent, respectively, from the same period of 2012 due to a decrease in interest rates, partially offset by an increase in average debt volume. Average loan volume for the third quarter of 2013 was $517,268,109, compared to $481,494,832 in the third quarter of The average net interest rate spread on the loan portfolio for the third quarter of 2013 was 2.57 percent, compared to 2.62 percent in the third quarter of The Association s return on average assets for the nine months ended September 30, 2013, was 1.19 percent compared to 1.70 percent for the same period in The Association s return on average equity for the nine months ended September 30, 2013, was 7.10 percent, compared to percent for the same period in Liquidity and Funding Sources: The Association secures its lendable funds from the Farm Credit Bank of Texas (Bank), which obtains its funds through the issuance of Systemwide obligations and with lendable equity. The following schedule summarizes the Association s borrowings. September 30, December 31, Note payable to the Bank $ 440,434,849 $ 424,633,740 Accrued interest on note payable 680, ,181 Total $ 441,114,984 $ 425,372,921 The Association operates under a general financing agreement (GFA) with the Bank. The current GFA is effective through September 30, The primary source of liquidity and funding for the Association is a direct loan from the Bank. The outstanding balance of $440,434,849 as of September 30, 2013, is recorded as a liability on the Association s balance sheet. The note carried a weighted average interest rate of 1.85 percent at September 30, The indebtedness is collateralized by a pledge of substantially all of the Association s assets to the Bank and is governed by a general financing agreement. The increase in note payable to the Bank and decrease in related accrued interest payable since December 31, 2012, is due to the increase in the Association s outstanding loan volume, offset by a decrease in weighted average interest rate. The Association s own funds, which represent the amount of the Association s loan portfolio funded by the Association s equity, were $70,811,715 at September 30, The maximum amount the Association may borrow from the Bank as of September 30, 2013, was $519,392,753 as defined by 4

5 the GFA. The indebtedness continues in effect until the expiration date of the GFA, which is September 30, 2015, unless sooner terminated by the Bank upon the occurrence of an event of default, or by the Association, in the event of a breach of this agreement by the Bank, upon giving the Bank 30 calendar days prior written notice, or in all other circumstances, upon giving the Bank 120 days prior written notice. Under the Act, the Association is obligated to borrow only from the Bank unless the Bank approves borrowing from other funding sources. The Bank and FCA regulations have established limitations on the Association s ability to borrow funds based on specified factors or formulas relating primarily to credit quality and financial condition. At September 30, 2013, the Association s note payable was within the specified limitations previously mentioned. In addition to borrowing limits, the financing agreement establishes certain covenants including limits on leases, investments, other debt, and dividend and patronage distributions; minimum standards for return on assets and for liquidity; and provisions for conducting business, maintaining records, reporting financial information, and establishing policies and procedures. Remedies specified in the financing agreement associated with the covenants include additional reporting requirements, development of action plans, increases in interest rates on indebtedness, and reduction of lending limits or repayment of indebtedness. The liquidity policy of the Association is to manage cash balances to maximize debt reduction and to increase accrual loan volume. This policy will continue to be pursued during As borrower payments are received, they are applied to the Association s note payable to the Bank. The Association will continue to fund its operations through direct borrowings from the Bank, capital surplus from prior years and borrower stock. It is management s opinion that funds available to the Association are sufficient to fund its operations for the coming year. Capital Resources: The Association s capital position increased by $4,592,255 at September 30, 2013, compared to December 31, The Association s debt as a ratio of members equity was 4.99:1 as of September 30, 2013, compared to 5.14:1 as of December 31, Under regulations governing minimum permanent capital adequacy and other capitalization issues, the Association is required to maintain a minimum adjusted permanent capital of 7.0 percent of risk-adjusted assets as defined by the FCA. The Association s permanent capital ratio at September 30, 2013, was 15.3 percent, which is in compliance with the FCA s minimum permanent capital standard. The Association s core surplus ratio and total surplus ratio at September 30, 2013, were 14.8 and 14.8 percent, respectively, which is in compliance with the FCA s minimum surplus standard. Significant Recent Accounting Pronouncements: In December 2011, the Financial Accounting Standards Board (FASB) issued guidance entitled Balance Sheet Disclosures About Offsetting Assets and Liabilities. 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 offset associated with an entity s recognized assets and recognized liabilities. The requirements apply to recognized financial instruments and derivative instruments that are offset in accordance with the rights of offset set forth in accounting guidance and for those recognized financial instruments and derivative 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 retrospectively for all comparative periods and is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance did not impact financial condition or results of operations but resulted in additional disclosures. In February 2013, the FASB issued guidance, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The guidance requires entities to present either parenthetically on the face of the financial statements or in the notes to the financial statements, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The guidance is effective for public entities for annual periods beginning after December 15, 2012, and for nonpublic entities for annual periods beginning after December 15, The Association has adopted this guidance, which did not impact the financial condition or results of operations but resulted in additional disclosures which are included in Note 6 Employee Benefit Plans. Relationship with the Farm Credit Bank of Texas: The Association s financial condition may be impacted by factors that affect the Bank. The financial condition and results of operations of the Bank may materially affect the stockholder s investment in the Association. The Management s Discussion and 5

6 Analysis and Notes to Financial Statements contained in the 2012 Annual Report of Mississippi Land Bank, ACA more fully describe the Association s relationship with the Bank. The Texas Farm Credit District s (District) annual and quarterly stockholder reports, as well as those of the Bank, are available free of charge, upon request. These reports can be obtained by writing to Farm Credit Bank of Texas, The Ag Agency, P.O. Box , Austin, Texas 78720, or by calling (512) Copies of the District s quarterly and annual stockholder reports also can be requested by at fcb@farmcreditbank.com. The annual and quarterly stockholder reports for the Bank and the District are also available on its website at The Association s quarterly stockholder reports are also available free of charge, upon request. These reports can be obtained by writing to Mississippi Land Bank, ACA, P.O. Box 667, Senatobia, Mississippi , or by calling (662) Copies of the Association s annual and quarterly stockholder reports can also be found on the Association s website, or can be requested by ing Jessica.Stanford@farmcreditbank.com. 6

7 MISSISSIPPI LAND BANK, ACA CONSOLIDATED BALANCE SHEET September 30, 2013 December 31, (unaudited) 2012 ASSETS Cash $ 84,849 $ 106,795 Loans 515,834, ,681,585 Less: allowance for loan losses 498, ,423 Net loans 515,336, ,969,162 Accrued interest receivable 9,643,721 7,783,042 Investment in and receivable from the Farm Credit Bank of Texas: Capital stock 8,049,675 8,049,675 Other 347,987 5,148,885 Other property owned, net 731,537 1,599,037 Premises and equipment 3,231,534 3,422,454 Other assets 506, ,530 Total assets $ 537,931,854 $ 523,293,580 LIABILITIES Note payable to the Farm Credit Bank of Texas $ 440,434,849 $ 424,633,740 Guaranteed obligations to government entities 4,012,938 3,662,966 Accrued interest payable 680, ,181 Drafts outstanding 504,108 3,535,770 Patronage distributions payable 76 2,000,052 Other liabilities 2,463,159 3,477,537 Total liabilities 448,095, ,049,246 MEMBERS' EQUITY Capital stock and participation certificates 2,798,410 2,725,505 Unallocated retained earnings 87,387,890 82,718,664 Accumulated other comprehensive income (loss) (349,711) (199,835) Total members' equity 89,836,589 85,244,334 Total liabilities and members' equity $ 537,931,854 $ 523,293,580 The accompanying notes are an integral part of these combined financial statements. 7

8 MISSISSIPPI LAND BANK, ACA CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) Quarter Ended Nine Months Ended September 30, September 30, INTEREST INCOME Loans $ 5,796,866 $ 5,820,604 $ 17,196,608 $ 17,213,973 INTEREST EXPENSE Note payable to the Farm Credit Bank of Texas 2,090,687 2,266,712 6,195,656 6,816,442 Net interest income 3,706,179 3,553,892 11,000,952 10,397,531 PROVISION FOR LOAN LOSSES 577, ,276 1,003, ,179 Net interest income after provision for loan losses 3,128,557 3,375,616 9,997,680 10,199,352 NONINTEREST INCOME Income from the Farm Credit Bank of Texas: Patronage income 39,057 41, , ,649 Loan fees 25,209 50,532 98, ,644 Financially related services income 773 1,002 2,245 2,483 Gain (loss) on other property owned, net 51,616 (6,031) 273,330 (12,716) Gain on sale of premises and equipment, net ,924 17,817 48,767 Other noninterest income , ,364 Total noninterest income 117, , , ,191 NONINTEREST EXPENSES Salaries and employee benefits 1,241,555 1,019,376 3,919,782 3,205,530 Insurance Fund premiums 103,822 48, , ,764 Travel 97,484 85, , ,534 Advertising 87,533 94, , ,921 Occupancy and equipment 76,405 79, , ,043 Purchased services 58,367 50, , ,020 Supervisory and exam expense 42,517 44, , ,627 Training 39,586 40, ,805 70,567 Communications 20,176 20,761 59,799 58,991 Public and member relations 18,839 22, , ,077 Directors' expense 12,629 8, , ,249 Other insurance expense 7,824-80,186 73,975 Other noninterest expense 25,020 28,707 83, ,567 Total noninterest expenses 1,831,757 1,542,567 5,853,262 4,874,865 Income before income taxes 1,414,429 1,934,803 4,678,440 6,207,678 Provision for (benefit from) income taxes (14,606) 11,694 9,214 10,078 NET INCOME 1,429,035 1,923,109 4,669,226 6,197,600 Other comprehensive income: Change in postretirement benefit plans (49,959) (11,768) (149,876) (35,304) COMPREHENSIVE INCOME $ 1,379,076 $ 1,911,341 $ 4,519,350 $ 6,162,296 The accompanying notes are an integral part of these combined financial statements. 8

9 MISSISSIPPI LAND BANK, ACA CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY (unaudited) Accumulated Capital Stock/ Other Total Participation Unallocated Comprehensive Members' Certificates Retained Earnings Income (Loss) Equity Balance at December 31, 2011 $ 2,600,035 $ 75,834,465 $ (47,072) $ 78,387,428 Comprehensive income - 6,197,600 (35,304) 6,162,296 Capital stock/participation certificates issued 552, ,990 Capital stock/participation certificates retired (443,745) - - (443,745) Balance at September 30, 2012 $ 2,709,280 $ 82,032,065 $ (82,376) $ 84,658,969 Balance at December 31, 2012 $ 2,725,505 $ 82,718,664 $ (199,835) $ 85,244,334 Comprehensive income - 4,669,226 (149,876) 4,519,350 Capital stock/participation certificates issued 339, ,740 Capital stock/participation certificates retired (266,835) - - (266,835) Balance at September 30, 2013 $ 2,798,410 $ 87,387,890 $ (349,711) $ 89,836,589 The accompanying notes are an integral part of these combined financial statements. 9

10 MISSISSIPPI LAND BANK, ACA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: The Mississippi Land Bank, ACA (Agricultural Credit Association), referred to as the Association, is a member-owned cooperative that provides credit and credit-related services to or for the benefit of eligible borrowers/stockholders for qualified agricultural purposes. The Association serves the counties of Alcorn, Attala, Benton, Bolivar, Calhoun, Chickasaw, Choctaw, Clay, Coahoma, DeSoto, Itawamba, Lafayette, Lee, Lowndes, Marshall, Monroe, Noxubee, Oktibbeha, Panola, Pontotoc, Prentiss, Quitman, Sunflower, Tallahatchie, Tate, Tippah, Tishomingo, Tunica, Union, Webster, Winston, and Yalobusha in the state of Mississippi. The Association is a lending institution of the Farm Credit System (System), which was established by Acts of Congress to meet the needs of American agriculture. The significant accounting policies followed and the financial condition and results of operations of the Association as of and for the year ended December 31, 2012, are contained in the 2012 Annual Report to Stockholders. These unaudited third quarter 2013 financial statements should be read in conjunction with the 2012 Annual Report to Stockholders. In December 2011, the Financial Accounting Standards Board (FASB) issued guidance entitled Balance Sheet Disclosures About Offsetting Assets and Liabilities. 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 offset associated with an entity s recognized assets and recognized liabilities. The requirements apply to recognized financial instruments and derivative instruments that are offset in accordance with the rights of offset set forth in accounting guidance and for those recognized financial instruments and derivative 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 retrospectively for all comparative periods and is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance will not impact financial condition or results of operations but will result in additional disclosures. In February 2013, the FASB issued guidance, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The guidance requires entities to present either parenthetically on the face of the financial statements or in the notes to the financial statements, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The guidance is effective for public entities for annual periods beginning after December 15, 2012, and for nonpublic entities for annual periods beginning after December 15, The adoption of this guidance did not impact the financial condition or results of operations but resulted in additional disclosures (See Note 6 Employee Benefit Plans. The accompanying consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial condition and results of operations and conform with generally accepted accounting principles, except for the inclusion of a statement of cash flows. Generally accepted accounting principles require a business enterprise that provides a set of financial statements reporting both financial position and results of operations to also provide a statement of cash flows for each period for which results of operations are provided. In regulations issued by FCA, associations have the option to exclude statements of cash flows in interim financial statements. Therefore, the Association has elected not to include a statement of cash flows in these consolidated financial statements. The consolidated financial statements comprise the operations of the ACA and its wholly-owned subsidiaries. The preparation of these consolidated financial statements requires the use of management s estimates. The results for the quarter ended September 30, 2013, are not necessarily indicative of the results to be expected for the year ended December 31, Certain amounts in the prior period s financial statements have been reclassified to conform to current financial statement presentation. NOTE 2 LOANS AND ALLOWANCE FOR LOAN LOSSES: A summary of loans follows: 10

11 September 30, December 31, Loan Type Amount Amount Production agriculture: Real estate mortgage $ 460,820,286 $ 452,184,318 Production and intermediate term 33,281,948 23,143,217 Agribusiness: Processing and marketing 9,595,013 9,213,356 Farm-related business 4,414,964 5,142,830 Rural residential real estate 7,722,618 7,953,334 Agricultural export finance - 44,530 Total $ 515,834,829 $ 497,681,585 The Association purchases or sells participation interests with other parties in order to diversify risk, manage loan volume and comply with Farm Credit Administration regulations. The following table presents information regarding the balances of participations purchased and sold at September 30, 2013: Other Farm Credit Institutions Non-Farm Credit Institutions Total Participations Participations Participations Participations Participations Participations Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $ 10,952,595 $ 4,147,561 $ - $ 4,009,508 $ 10,952,595 $ 8,157,069 Agribusiness 3,743, ,743,011 - Total $ 14,695,606 $ 4,147,561 $ - $ 4,009,508 $ 14,695,606 $ 8,157,069 Nonperforming assets (including related accrued interest) and related credit quality statistics are as follows: September 30, December 31, Nonaccrual loans: Real estate mortgage $ 1,693,407 $ 754,145 Agribusiness 1,129,735 2,595,743 Total nonaccrual loans 2,823,142 3,349,888 Accruing restructured loans: Real estate mortgage 899, ,288 Total accruing restructured loans 899, ,288 Accruing loans 90 days or more past due: Real estate mortgage 509, ,187 Total accruing loans 90 days or more 509, ,430 Total nonperforming loans 4,232,237 4,590,606 Other property owned 731,537 1,599,037 Total nonperforming assets $ 4,963,774 $ 6,189,643 One credit quality indicator utilized by the Association is the Farm Credit Administration Uniform Loan Classification System that categorizes loans into five categories. The categories are defined as follows: Acceptable assets are expected to be fully collectible and represent the highest quality; Other assets especially mentioned (OAEM) assets are currently collectible but exhibit some potential weakness; Substandard assets exhibit some serious weakness in repayment capacity, equity and/or collateral pledged on the loan; Doubtful assets exhibit similar weaknesses to substandard assets; however, doubtful assets have additional weaknesses in existing factors, conditions and values that make collection in full highly questionable; and Loss assets are considered uncollectible. 11

12 The following table shows loans and related accrued interest as a percentage of total loans and related accrued interest receivable by loan type as of: September 30, December 31, Real estate mortgage Acceptable 98.7 % 98.4 % OAEM Substandard/doubtful Production and intermediate term Acceptable OAEM - - Substandard/doubtful Agribusiness Acceptable OAEM - - Substandard/doubtful Rural residential real estate Acceptable OAEM Substandard/doubtful Agricultural export finance Acceptable OAEM - - Substandard/doubtful Total loans Acceptable OAEM Substandard/doubtful % % The following tables provide an age analysis of past due loans (including accrued interest) as of: 12

13 September 30, Days Total Not Past Due or Days or More Past Less Than 30 Total Recorded Investment Past Due Past Due Due Days Past Due Loans >90 Days and Accruing Real estate mortgage $ 800,295 $ 1,675,156 $ 2,475,451 $ 467,175,965 $ 469,651,416 $ 509,488 Production and intermediate term ,848,267 33,848,267 - Processing and marketing - 1,129,735 1,129,735 8,548,324 9,678,059 - Farm-related business ,512,778 4,512,778 - Rural residential real estate 191, ,933 7,596,097 7,788,030 - Total $ 992,228 $ 2,804,891 $ 3,797,119 $ 521,681,431 $ 525,478,550 $ 509,488 December 31, Days Total Not Past Due or Days or More Past Less Than 30 Total Recorded Investment Past Due Past Due Due Days Past Due Loans >90 Days and Accruing Real estate mortgage $ 1,212,678 $ 581,656 $ 1,794,334 $ 457,570,980 $ 459,365,314 $ 171,187 Production and intermediate term ,503,014 23,503,014 - Processing and marketing - 2,584,080 2,584,080 6,709,777 9,293,857 - Farm-related business ,249,323 5,249,323 - Rural residential real estate 17, , ,354 7,865,235 8,008, ,243 Agricultural export finance ,530 44,530 - Total $ 1,229,789 $ 3,291,979 $ 4,521,768 $ 500,942,859 $ 505,464,627 $ 297,430 Note: The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges or acquisition costs, and may also reflect a previous direct write-down of the investment. A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor s financial difficulties grants a concession to the debtor that it would not otherwise consider. Troubled debt restructurings are undertaken in order to improve the likelihood of recovery on the loan and may include, but are not limited to, forgiveness of principal or interest, interest rate reductions that are lower than the current market rate for new debt with similar risk, or significant term or payment extensions. As of September 30, 2013, the total recorded investment of troubled debt restructured loans was $899,607, all of which was classified as accrual. There was no specific allowance for loan losses related to the loan based upon a current Net Realizable Value analysis. As of September 30, 2013, and December 31, 2012, there were no commitments to lend funds to borrowers whose loan terms have been modified in a troubled debt restructuring. The predominant form of concession granted for troubled debt restructuring includes principal or accrued interest reductions. At times, these terms might be offset with incremental payments, collateral or new borrower guarantees, in which case we assess all of the modified terms to determine if the overall modification qualifies as a troubled debt restructuring. The Association had no loans that met the accounting criteria as a troubled debt restructuring and that occurred from October 1, 2012, through September 30, 2013, and for which there was a payment default during that same period. A payment default is defined as a payment that is 30 days past due after the date the loan was restructured. Additional impaired loan information is as follows: 13

14 September 30, 2013 December 31, 2012 Unpaid Unpaid Recorded Principal Related Recorded Principal Related Investment Balance a Allowance Investment Balance a Allowance Impaired loans with a related allowance for credit losses: Real estate mortgage $ 866,784 $ 1,954,804 $ 82,186 $ 329,800 $ 607,429 $ 127,000 Processing and marketing 452, , ,446 1,918,404 1,918, ,070 Total $ 1,319,180 $ 2,715,526 $ 308,632 $ 2,248,204 $ 2,525,833 $ 451,070 Impaired loans with no related allowance for credit losses: Real estate mortgage $ 2,218,178 $ 2,218,680 $ - $ 1,537,182 $ 1,537,197 $ - Processing and marketing 677, , , ,339 - Farm-related business - 13, ,096 - Rural residential real estate , ,736 - Total $ 2,895,518 $ 2,909,116 $ - $ 2,339,257 $ 2,352,368 $ - Total impaired loans: Real estate mortgage $ 3,084,962 $ 4,173,484 $ 82,186 $ 1,866,982 $ 2,144,626 $ 127,000 Processing and marketing 1,129,736 1,438, ,446 2,595,743 2,595, ,070 Farm-related business - 13, ,096 - Rural residential real estate , ,736 - Total $ 4,214,698 $ 5,624,642 $ 308,632 $ 4,587,461 $ 4,878,201 $ 451,070 a Unpaid principal balance represents the recorded principal balance of the loan. For the Three Months Ended September 30, 2013 September 30, 2012 Average Interest Average Interest Impaired Income Impaired Income Loans Recognized Loans Recognized Impaired loans with a related allowance for credit losses: Real estate mortgage $ 1,291,349 $ 2,880 $ 1,350,700 $ - Processing and marketing 452,395-1,258, Total $ 1,743,744 $ 2,880 $ 2,609,607 $ 68 Impaired loans with no related allowance for credit losses: Real estate mortgage 2,245,586 $ $ 21,926 $ 2,008,861 $ 23,455 Processing and marketing 677,340-90, Total $ 2,922,926 $ 21,926 $ 2,099,173 $ 23,516 Total impaired loans: Real estate mortgage $ 3,536,935 $ 24,806 $ 3,359,561 $ 23,455 Processing and marketing 1,129,735-1,349, Total $ 4,666,670 $ 24,806 $ 4,708,780 $ 23,584 14

15 For the Nine Months Ended September 30, 2013 September 30, 2012 Average Interest Average Interest Impaired Income Impaired Income Loans Recognized Loans Recognized Impaired loans with a related allowance for credit losses: Real estate mortgage $ 1,421,386 $ - $ 1,468,152 $ - Processing and marketing 651,170-1,259,043 (1,780) Total $ 2,072,556 $ - $ 2,727,195 $ (1,780) Impaired loans with no related allowance for credit losses: Real estate mortgage 2,035,768 $ $ 66,698 $ 1,982,039 $ 62,853 Processing and marketing 677,340-90,312 (1,585) Farm-related business - - 4,158 - Total $ 2,713,108 $ 66,698 $ 2,076,509 $ 61,268 Total impaired loans: Real estate mortgage $ 3,457,154 $ 66,698 $ 3,450,191 $ 62,853 Processing and marketing 1,328,510-1,349,355 (3,365) Farm-related business - - 4,158 - Total $ 4,785,664 $ 66,698 $ 4,803,704 $ 59,488 A summary of changes in the allowance for loan losses and period end recorded investment in loans is as follows: 15

16 Production and Rural Real Estate Intermediate Residential Mortgage Term Agribusiness Real Estate Total Allowance for Credit Losses: Balance at June 30, 2013 $ 745,157 $ 31,282 $ 12,371 $ 3,880 $ 792,690 Charge-offs (871,548) (871,548) Recoveries Provision for loan losses 594,430 (8,869) (7,302) (637) 577,622 Balance at September 30, 2013 $ 468,039 $ 22,413 $ 5,069 $ 3,243 $ 498,764 Balance at December 31, 2012 $ 335,203 $ 33,174 $ 334,963 $ 9,083 $ 712,423 Charge-offs (908,605) - (308,326) - (1,216,931) Recoveries Provision for loan losses 1,041,441 (10,761) (21,568) (5,840) 1,003,272 Balance at September 30, 2013 $ 468,039 $ 22,413 $ 5,069 $ 3,243 $ 498,764 Ending Balance: Individually evaluated for impairment $ 82,186 $ - $ 226,446 $ - $ 308,632 Collectively evaluated for impairment 385,853 22,413 (221,377) 3, ,132 Balance at September 30, 2013 $ 468,039 $ 22,413 $ 5,069 $ 3,243 $ 498,764 Balance at June 30, 2012 $ 464,849 $ 15,756 $ 32,891 $ 11,540 $ 525,036 Charge-offs Recoveries Provision for loan losses (12,035) 18, ,189 (657) 178,276 Balance at September 30, 2012 $ 452,814 $ 34,535 $ 205,080 $ 10,883 $ 703,312 Balance at December 31, 2011 $ 913,832 $ 3,237 $ 299 $ 75,353 $ 992,721 Charge-offs (369,907) - (13,096) (104,585) (487,588) Recoveries Provision for loan losses (91,111) 31, ,877 40, ,179 Balance at September 30, 2012 $ 452,814 $ 34,535 $ 205,080 $ 10,883 $ 703,312 Ending Balance: Individually evaluated for impairment $ 252,400 $ - $ 197,418 $ - $ 449,818 Collectively evaluated for impairment 200,414 34,535 7,662 10, ,494 Loans acquired with deteriorated credit quality Balance at September 30, 2012 $ 452,814 $ 34,535 $ 205,080 $ 10,883 $ 703,312 16

17 Production and Rural Real Estate Intermediate Residential Agricultural Mortgage Term Agribusiness Real Estate Export Finance Total Recorded Investments in Loans Outstanding: Ending Balance at September 30, 2013 $ 469,651,416 $ 33,848,267 $ 14,190,837 $ 7,788,030 $ - $ 525,478,550 Individually evaluated for impairment $ 3,102,503 $ - $ 1,129,735 $ - $ - $ 4,232,238 Collectively evaluated for impairment $ 466,548,913 $ 33,848,267 $ 13,061,102 $ 7,788,030 $ - $ 521,246,312 Loans acquired with deteriorated credit quality $ - $ - $ - $ - $ - $ - Ending Balance at September 30, 2012 $ 459,003,854 $ 21,695,192 $ 12,003,279 $ 8,435,726 $ 45,089 $ 501,183,140 Individually evaluated for impairment $ 1,350,700 $ - $ 1,918,404 $ - $ - $ 3,269,104 Collectively evaluated for impairment $ 457,653,154 $ 21,695,192 $ 10,084,875 $ 8,435,726 $ 45,089 $ 497,914,036 Loans acquired with deteriorated credit quality $ - $ - $ - $ - $ - $ - NOTE 3 CAPITAL: The Association s board of directors has established a Capital Adequacy Plan (Plan) that includes the capital targets that are necessary to achieve the institution's capital adequacy goals as well as the minimum permanent capital standards. The Plan monitors projected dividends, equity retirements and other actions that may decrease the Association s permanent capital. In addition to factors that must be considered in meeting the minimum standards, the board of directors also monitors the following factors: capability of management; quality of operating policies, procedures, and internal controls; quality and quantity of earnings; asset quality and the adequacy of the allowance for losses to absorb potential loss within the loan and lease portfolios; sufficiency of liquid funds; needs of an institution's customer base; and any other risk-oriented activities, such as funding and interest rate risk, potential obligations under joint and several liability, contingent and off-balance-sheet liabilities or other conditions warranting additional capital. At least quarterly, management reviews the Association's goals and objectives with the board. NOTE 4 INCOME TAXES: Mississippi Land Bank, ACA and its subsidiary, Mississippi, PCA (Associations), are subject to federal and certain other income taxes. The Associations are eligible to operate as cooperatives that qualify for tax treatment under Subchapter T of the Internal Revenue code. Under specified conditions, the Associations can exclude from taxable income amounts distributed as qualified patronage refunds in the form of cash, stock or allocated surplus. Provisions for income taxes are made only on those earnings that will not be distributed as qualified patronage refunds. During the nine months ended September 30, 2013, the Association did not participate in a patronage program. Deferred taxes are recorded at the tax effect of all temporary differences based on the assumption that such temporary differences are retained by the institution and will, therefore, impact future tax payments. A valuation allowance is provided against deferred tax assets to the extent that it is more likely than not (more than 50 percent probability), based on management s estimate, that they will not be realized. For the nine months ended September 30, 2013, and 2012, the Association carried a deferred tax asset of $317,818 and $314,451, respectively, with a full valuation allowance recorded against the asset. The subsidiary, Mississippi Land Bank, FLCA, is exempt from federal and other income taxes as provided in the Farm Credit Act of

18 NOTE 5 FAIR VALUE MEASUREMENTS: FASB guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability. See Note 2 to the 2012 Annual Report to Stockholders for a more complete description. Assets and liabilities measured at fair value on a nonrecurring basis for each of the fair value hierarchy values are summarized below: September 30, 2013 Fair Value Measurement Using Level 1 Level 2 Level 3 Assets: Loans* $ - $ - $ 4,214,698 Other property owned ,537 December 31, 2012 Fair Value Measurement Using Level 1 Level 2 Level 3 Assets: Loans* $ - $ - $ 2,474,473 Other property owned - - 1,599,037 *Represents the fair value of certain loans that were evaluated for impairment under authoritative guidance Accounting by Creditors for Impairment of a Loan. The fair value was based upon the underlying collateral since these were collateral-dependent loans for which real estate is the collateral. The Association also participates in standby letters of credit to satisfy the financing needs of its borrowers. These letters of credit are irrevocable agreements to guarantee payments of specified financing obligations. At September 30, 2013, the Association had $98,617 in outstanding standby letters of credit, issued primarily in conjunction with participation loans. The fair value of these obligations at September 30, 2013, is based on the fees for the unexpired period remaining, which are negligible. Valuation Techniques As more fully discussed in Note 2 to the 2012 Annual Report to Stockholders, authoritative guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following represent a brief summary of the valuation techniques used for the Association s assets and liabilities. For a more complete description, see Notes to the 2012 Annual Report to Stockholders. Loans For certain loans evaluated for impairment under authoritative guidance, the fair value is based upon the underlying collateral since the loans were collateral-dependent loans for which real estate is the collateral. The fair value measurement process uses independent appraisals and other market-based information, but in many cases it also requires significant input based on management s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters. As a result, these fair value measurements fall within Level 3 of the hierarchy. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Other Property Owned Other property owned is generally classified as Level 3. The fair value is based upon the collateral value, which is generally determined using appraisals or other indications based on comparable sales of similar properties. Costs to sell represent transaction costs and are not included as a component of the asset s fair value. NOTE 6 EMPLOYEE BENEFIT PLANS: The following table summarizes the components of net periodic benefit costs of nonpension other postretirement employee benefits for the three months ended September 30: 18

19 Other Benefits Service cost $ 6,325 $ 5,810 Interest cost 17,024 17,194 Amortization of prior service (credits) costs (7,069) (8,896) Amortization of net actuarial (gain) loss 6,770 2,765 Net periodic benefit cost $ 23,050 $ 16,873 The following table summarizes the components of net periodic benefit costs of nonpension other postretirement employee benefits for the nine months ended September 30: Other Benefits Service cost $ 18,975 $ 17,430 Interest cost 51,071 51,582 Amortization of prior service (credits) costs (21,205) (26,688) Amortization of net actuarial (gain) loss 20,310 8,295 Net periodic benefit cost $ 69,151 $ 50,619 The Association s liability for the unfunded accumulated obligation for these benefits at September 30, 2013, was $1,778,525 and is included in Other Liabilities in the balance sheet. The structure of the District s defined benefit pension plan is characterized as multiemployer since the assets, liabilities and cost of the plan are not segregated or separately accounted for by participating employers (Bank and associations). The Association recognizes its amortized annual contributions to the plan as an expense. The Association previously disclosed in its financial statements for the year ended December 31, 2012, that it expected to contribute $92,201 to the District s defined benefit pension plan in As of September 30, 2013, $69,151 of contributions have been made. The Association's accumulated other comprehensive income (loss) relates entirely to its nonpension other postretirement benefits. Amortization of prior service (credits) cost and of actuarial (gain) loss are reflected in Salaries and employee benefits in the Consolidated Statement of Comprehensive Income. The following table summarizes the changes in accumulated other comprehensive income (loss) for the nine months ended September 30: Accumulated other comprehensive income (loss) at January 1 $ (199,835) $ 47,072 Amortization of prior service (credit) costs included in net periodic postretirement benefit cost 103, ,189 Amortization of actuarial (gain) loss included in net periodic postretirement benefit cost (253,378) (165,493) Accumulated other comprehensive income (loss) at September 30 $ (349,711) $ 11,768 NOTE 7 COMMITMENTS AND CONTINGENT LIABILITIES: The Association is involved in various legal proceedings in the normal course of business. In the opinion of legal counsel and management, there are no legal proceedings at this time that are likely to materially affect the Association. NOTE 8 SUBSEQUENT EVENTS: The Association has evaluated subsequent events through November 8, 2013, which is the date the financial statements were issued. There are no other significant events requiring disclosure as of November 8,