AgChoice Farm Credit, ACA THIRD QUARTER 2018

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1 AgChoice Farm Credit, ACA THIRD QUARTER 2018 TABLE OF CONTENTS Report on Internal Control Over Financial Reporting... 2 Management s Discussion and Analysis of Financial Condition and Results of Operations... 3 Consolidated Financial Statements Consolidated Balance Sheets... 7 Consolidated Statements of Income... 8 Consolidated Statements of Comprehensive Income... 9 Consolidated Statements of Changes in Members Equity Notes to the Consolidated Financial Statements CERTIFICATION The undersigned certify that we have reviewed the quarterly report of AgChoice Farm Credit, ACA, that the report has been prepared under the oversight of the Audit Committee of the Board of Directors and in accordance with all applicable statutory or regulatory requirements, and that the information contained herein is true, accurate, and complete to the best of our knowledge and belief. Darrell L. Curtis Chief Executive Officer Terry A. Davis Chief Financial Officer Shawn D. Wolfinger Chairman of the Board November 8, 2018 AgChoice Farm Credit, ACA 1

2 AgChoice Farm Credit, ACA Report on Internal Control Over Financial Reporting The Association s 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. This process provides 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. The Association s management has completed an assessment of the effectiveness of internal control over financial reporting as of. In making the assessment, management used the framework in Internal Control Integrated Framework (2013), 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 s management concluded that as of, the internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on this assessment, the Association s management determined that there were no material weaknesses in the internal control over financial reporting as of. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the 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. Darrell L. Curtis Chief Executive Officer Terry A. Davis Chief Financial Officer November 8, 2018 AgChoice Farm Credit, ACA 2

3 AgChoice Farm Credit, ACA Management s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) The following commentary reviews the financial condition and results of operations of AgChoice Farm Credit ACA, (Association) for the period ended. These comments should be read in conjunction with the accompanying financial statements, notes to the financial statements, and the 2017 Annual Report of the Association. The accompanying consolidated financial statements were prepared under the oversight of the Audit Committee of the Board of Directors. Information in any part of this Quarterly Report may be incorporated by reference in answer or partial answer to any other item of the Quarterly Report. LOAN PORTFOLIO The Association provides funds to farmers, rural homeowners and farm-related businesses for financing of short- and intermediate-term loans and long-term real estate mortgage loans. The Association s loan portfolio is diversified over a range of agricultural commodities, including dairy, livestock, poultry, forest products, and various crops, and also includes part-time farm and rural home loans. Farm size varies, and many of the borrowers in the region have diversified farming operations. This factor, along with the numerous opportunities for non-farm income in the area, impacts the level of dependency on a given commodity. Loans as of totaled $1,903,583, an increase of $50,832 as compared to $1,852,751 at December 31, Net loans outstanding at, were $1,889,613 as compared to $1,839,259 at December 31, Net loans accounted for 96.8 percent of total assets at, as compared to 96.2 percent of total assets at December 31, The increase in loans was a result of an increase in local service area loans, an increase in participations purchased and a decrease in participations sold, offset by a decrease in nonaccrual loans. There is an inherent risk in the extension of any type of credit. Portfolio credit quality continues to be maintained at an acceptable level, and credit administration remains satisfactory. Nonaccrual volume decreased from $20,158 at December 31, 2017 to $12,100 at, mainly due to paydowns and a transfer of a customer to accrual status offset by a few small transfers to nonaccruing status. The Association continues efforts to work out of nonaccrual accounts or to assist such operations to return to accrual status. Association management maintains an allowance for loan losses in an amount considered sufficient to absorb possible losses in the loan portfolio based on current and expected future conditions. The allowance for loan losses was $13,970 and $13,492 at and December 31, As a further means to reduce credit risk, the Association had $614 and $506 in a reserve for unfunded loan commitments at and December 31, 2017, respectively, which is classified as a liability on the Consolidated Balance Sheets. These reserves were considered by management to be adequate to cover possible losses. RESULTS OF OPERATIONS For the three months ended Net income for the three months ended, totaled $9,668 an increase of $233 compared to $9,435 for the same period in This increase resulted primarily from higher net interest income, offset by a larger provision for allowance for loan loss, lower noninterest income and higher noninterest expense. Net interest income increased by $987 for the three months ended compared to the same period in This increase resulted from an increase of $2,520 in interest income on accruing loans and investment securities and an increase of $288 in interest income on nonaccruing loans, offset by an increase of $1,821 in interest expense. The provision for loan losses was $502 in the third quarter of 2018 as compared to a provision of $172 in the same period for General reserves increased during the third quarter of 2018 compared to the same period in 2017, primarily due to changes in credit quality. The increase in general reserves was offset partially by a decrease in specific reserves. Noninterest income for the three months ended September 30, 2018 decreased by $371 to $3,799, compared to $4,170 for the same period of This decrease resulted primarily from lower loan fees and lower gains on the sale of premises and equipment, offset by higher patronage refunds. Noninterest expense for the three months ended September 30, 2018, increased $100, compared to the same period of This increase is due to higher personnel costs, offset by lower FCSIC premiums. AgChoice Farm Credit, ACA 3

4 The provision for income taxes was $42 for the third quarter of 2018 compared to $89 for the third quarter of For the nine months ended Net income for the nine months ended, totaled $29,753, as compared to $26,730 for the same period in Net interest income increased $2,504 for the nine months ended, as compared to the same period one year ago. Interest income on accruing loans and investment securities increased $7,283, interest income on nonaccruing loans increased by $291 and interest expense increased $5,070 as compared to the same period in The increase in interest income on accruing loans and interest expense is primarily related to an increase in loan volume. Increased general reserves due to loan volume growth, offset by decreases in specific reserves during 2018 resulted in a provision for loan losses of $820, compared to a provision for loan losses of $897 in Noninterest income for the nine months ended September 30, 2018, totaled $12,988, as compared to $11,904 for the same period of 2017, an increase of $1,084. This increase resulted primarily from the following factors: an insurance premium refund of $1,268, an increase of $99 in general patronage due to loan volume growth, an increase of $178 in Business Management Services revenue offset by a decrease of $78 in patronage on participations sold due to a decline in volume sold, a decrease in CPP pool patronage of $66 and a decrease of $67 in fee income on participations purchased. Noninterest expense for the nine months ended September 30, 2018, increased $614, compared to the same period of This increase was primarily due to higher personnel costs, director s, purchased services, training and travel expenses offset by lower data processing, furniture and equipment, public and member relations, and FCSIC expenses. The provision for income taxes was $195 for the nine months ended as compared to $167 for the same period last year. FUNDING SOURCES The principal source of funds for the Association is the borrowing relationship established with the Bank through a General Financing Agreement. The General Financing Agreement utilizes the Association s credit and fiscal performance as criteria for establishing a line of credit on which the Association may draw funds. The Bank advances funds to the Association in the form of notes payable. The notes payable are segmented into variable rate and fixed rate sections. The variable rate note is utilized by the Association to fund variable rate loan advances and operating funds requirements. The fixed rate note is used specifically to fund fixed rate loan advances made by the Association. The total notes payable to the Bank at, was $1,521,774 as compared to $1,487,719 at December 31, This increase resulted from an increase in loan volume and patronage paid, offset by cash generated from Association 2018 earnings and the receipt of the 2017 patronage refunds from other Farm Credit institutions. CAPITAL RESOURCES Total members equity at increased by $21,893 to $409,693 from the December 31, 2017 total of $387,800. The increase is primarily attributed to year-to-date 2018 net income. Total capital stock and participation certificates were $8,189 on, compared to $11,020 on December 31, This decrease resulted from the retirement of preferred stock. Farm Credit Administration (FCA) regulations require all Farm Credit institutions to maintain certain minimum regulatory capital ratios. As of, the Association was well above the minimum regulatory ratios for all capital adequacy ratios: Minimum Requirement Capital Conservation Buffer* Minimum Requirement with Capital Conservation Buffer Capital Ratios as of Ratio Risk-adjusted ratios: CET1 Capital 4.5% 0.625% 5.125% 18.42% Tier 1 Capital 6.0% 0.625% 6.625% 18.42% Total Capital 8.0% 0.625% 8.625% 19.11% Permanent Capital Ratio 7.0% 0.0% 7.0% 18.55% Non-risk-adjusted: Tier 1 Leverage Ratio 4.0% 1.0% 5.0% 19.87% UREE Leverage Ratio 1.5% 0.0% 1.5% 19.99% * - The capital conservation buffers have a 3 year phase-in period and will become fully effective January 1, Risk-adjusted ratio minimums will increase 0.625% each year until fully phased in. There is no phase-in period for the tier 1 leverage ratio. AgChoice Farm Credit, ACA 4

5 If the capital ratios fall below the minimum regulatory requirements, including the buffer amounts, capital distributions (equity redemptions, dividends, and patronage) and discretionary senior executive bonuses are restricted or prohibited without prior FCA approval. REGULATORY MATTERS On May 10, 2018, the Farm Credit Administration adopted a final rule that amends the regulations governing investments of System banks and associations. The final rule strengthens eligibility criteria for the investments the banks may purchase and hold. It also implements Section 939A of the Dodd-Frank Act by removing references to and requirements for credit ratings and substitutes the eligibility requirement with other appropriate standards of credit worthiness. In addition, it grants associations greater flexibility regarding the risk management purposes for investments and limits the type and amount of investments that an association may hold. Only securities that are issued by, or are unconditionally guaranteed or insured as to the timely payment of principal and interest by, the U.S. government or its agencies are eligible for association risk management purposes. An association may purchase and hold investments not to exceed 10 percent of its 90-day average daily balance of outstanding loans on the last business day of the quarter. The final rule will become effective January 1, RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Please refer to Note 1, Organization, Significant Accounting Policies, and Recently Issued Accounting Pronouncements, in the Notes to the Financial Statements, and the 2017 Annual Report to Shareholders for recently issued accounting pronouncements. Additional information is provided in the following table. The following Accounting Standards Updates ASUs were issued by the Financial Accounting Standards Board (FASB) but have not yet been adopted: Summary of Guidance Adoption and Potential Financial Statement Impact ASU Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Replaces multiple existing impairment standards by establishing a single The Association has begun implementation efforts by establishing a crossdiscipline framework for financial assets to reflect management s estimate of current expected credit losses (CECL) over the complete remaining life of the financial assets. Changes the present incurred loss impairment guidance for loans to a CECL governance structure. The Association is currently identifying key interpretive issues, and assessing existing credit loss forecasting models and processes against the new guidance to determine what modifications may be required. model. The Association expects that the new guidance will result in an increase in its The Update also modifies the other-than-temporary impairment model for allowance for credit losses due to several factors, including: debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. Eliminates existing guidance for purchased credit impaired (PCI) loans, and 1. The allowance related to loans and commitments will most likely increase to cover credit losses over the full remaining expected life of the portfolio, and will consider expected future changes in macroeconomic conditions, requires recognition of an allowance for expected credit losses on these financial assets. 2. An allowance will be established for estimated credit losses on any debt securities, Requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. 3. The nonaccretable difference on any PCI loans will be recognized as an allowance, offset by an increase in the carrying value of the related loans. Effective for fiscal years beginning after December 15, 2020, and interim The extent of the increase is under evaluation, but will depend upon the nature periods within those fiscal years. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after and characteristics of the Association s portfolio at the adoption date, and the macroeconomic conditions and forecasts at that date. December 15, The Association expects to adopt the guidance in first quarter AgChoice Farm Credit, ACA 5

6 ASU Leases (Topic 842) Requires lessees to recognize leases on the balance sheet with lease liabilities The practical expedients allow entities to largely account for existing leases and corresponding right-of-use assets based on the present value of lease consistent with current guidance, except for the incremental balance sheet payments. recognition for lessees. Lessor accounting activities are largely unchanged from existing lease The Association has started its implementation of the Update which has accounting. included an initial evaluation of leasing contracts and activities. The Update also eliminates leveraged lease accounting but allows existing As a lessee the Association is developing its methodology to estimate the rightof-use assets and lease liabilities, which is based on the present value of lease leveraged leases to continue their current accounting until maturity, termination or modification. payments but does not expect a material change to the timing of expense Also, expands qualitative and quantitative disclosures of leasing recognition. arrangements. Given the limited changes to lessor accounting, the Association does not expect Requires adoption using a modified cumulative effect approach wherein the material changes to recognition or measurement, but the implementation guidance is applied to all periods presented. A recent amendment provides an process and the impact will continue to be evaluated. additional (and optional) transition method to adopt the new leases standard. The Association is evaluating existing disclosures and may need to provide Under this new transition method, an entity initially applies the new leases additional information as a result of adopting the Update. standard at the adoption date and recognizes a cumulative-effect adjustment to The Association expects to adopt the guidance in first quarter 2019 using the the opening balance of retained earnings in the period of adoption. optional modified retrospective method and practical expedients for transition. Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Note: Shareholder investment in the Association is materially affected by the financial condition and results of operations of AgFirst Farm Credit Bank. Copies of AgFirst s annual and quarterly reports are available upon request free of charge by calling ext. 2764, or writing Matthew Miller, AgFirst Farm Credit Bank, P.O. Box 1499, Columbia, SC Information concerning AgFirst Farm Credit bank can also be obtained at their website, Copies of the Association s annual and quarterly reports are also available upon request free of charge by calling , ext or writing Terry Davis, AgChoice Farm Credit, ACA, 300 Winding Creek Blvd., Mechanicsburg, PA, 17050, or accessing the website The Association prepares a quarterly report within 40 days after the end of each fiscal quarter, except that no report need be prepared for the fiscal quarter that coincides with the end of the fiscal year of the institution. AgChoice Farm Credit, ACA 6

7 AgChoice Farm Credit, ACA Consolidated Balance Sheets September 30, December 31, (dollars in thousands) (unaudited) (audited) Assets Cash $ 717 $ 16 Investments in debt securities: Held to maturity (fair value of $2,207 and $2,371, respectively) 2,166 2,205 Loans 1,903,583 1,852,751 Allowance for loan losses (13,970) (13,492) Net loans 1,889,613 1,839,259 Accrued interest receivable 9,573 7,027 Equity investments in other Farm Credit institutions 23,980 24,009 Premises and equipment, net 14,267 11,299 Other property owned Accounts receivable 9,544 27,171 Other assets 1,540 1,424 Total assets $ 1,951,476 $ 1,912,436 Liabilities Notes payable to AgFirst Farm Credit Bank $ 1,521,774 $ 1,487,719 Accrued interest payable 4,023 3,500 Patronage refunds payable ,593 Accounts payable 3,923 5,384 Other liabilities 11,822 6,440 Total liabilities 1,541,783 1,524,636 Commitments and contingencies (Note 8) Members' Equity Capital stock and participation certificates 8,189 11,020 Retained earnings Allocated 161, ,489 Unallocated 240, ,361 Accumulated other comprehensive income (loss) (68) (70) Total members' equity 409, ,800 Total liabilities and members' equity $ 1,951,476 $ 1,912,436 The accompanying notes are an integral part of these consolidated financial statements. AgChoice Farm Credit, ACA 7

8 AgChoice Farm Credit, ACA Consolidated Statements of Income (unaudited) For the three months For the nine months ended September 30, ended September 30, (dollars in thousands) Interest Income Loans $ 25,291 $ 22,483 $ 72,741 $ 65,165 Investments Total interest income 25,325 22,517 72,843 65,269 Interest Expense Notes payable to AgFirst Farm Credit Bank 11,968 10,147 33,866 28,796 Net interest income 13,357 12,370 38,977 36,473 Provision for loan losses Net interest income after provision for loan losses 12,855 12,198 38,157 35,576 Noninterest Income Loan fees Fees for financially related services ,607 1,448 Patronage refunds from other Farm Credit institutions 3,119 3,152 9,248 9,293 Gains (losses) on sales of rural home loans, net 6 17 Gains (losses) on sales of premises and equipment, net Gains (losses) on other transactions 12 4 (41) 40 Insurance Fund refund 1,268 Other noninterest income Total noninterest income 3,799 4,170 12,988 11,904 Noninterest Expense Salaries and employee benefits 4,427 4,206 14,036 12,952 Occupancy and equipment ,006 1,056 Insurance Fund premiums ,610 (Gains) losses on other property owned, net (4) Other operating expenses 1,811 1,679 5,149 4,929 Total noninterest expense 6,944 6,844 21,197 20,583 Income before income taxes 9,710 9,524 29,948 26,897 Provision for income taxes Net income $ 9,668 $ 9,435 $ 29,753 $ 26,730 The accompanying notes are an integral part of these consolidated financial statements. AgChoice Farm Credit, ACA 8

9 AgChoice Farm Credit, ACA Consolidated Statements of Comprehensive Income (unaudited) For the three months For the nine months ended September 30, ended September 30, (dollars in thousands) Net income $ 9,668 $ 9,435 $ 29,753 $ 26,730 Other comprehensive income net of tax Employee benefit plans adjustments Comprehensive income $ 9,669 $ 9,435 $ 29,755 $ 26,731 The accompanying notes are an integral part of these consolidated financial statements. AgChoice Farm Credit, ACA 9

10 AgChoice Farm Credit, ACA Consolidated Statements of Changes in Members Equity (unaudited) Capital Accumulated Stock and Retained Earnings Other Total Participation Comprehensive Members' (dollars in thousands) Certificates Allocated Unallocated Income (Loss) Equity Balance at December 31, 2016 $ 11,049 $ 161,489 $ 181,537 $ (57) $ 354,018 Comprehensive income 26, ,731 Capital stock/participation certificates issued/(retired), net (75) (75) Dividends declared/paid 23 (23) Patronage distribution adjustment 6 6 Balance at September 30, 2017 $ 10,997 $ 161,489 $ 208,250 $ (56) $ 380,680 Balance at December 31, 2017 $ 11,020 $ 161,489 $ 215,361 $ (70) $ 387,800 Comprehensive income 29, ,755 Capital stock/participation certificates issued/(retired), net (2,840) (2,840) Dividends declared/paid 9 (9) Patronage distribution Cash (5,000) (5,000) Patronage distribution adjustment (22) (22) Balance at $ 8,189 $ 161,489 $ 240,083 $ (68) $ 409,693 The accompanying notes are an integral part of these consolidated financial statements. AgChoice Farm Credit, ACA 10

11 AgChoice Farm Credit, ACA Notes to the Consolidated Financial Statements (dollars in thousands, except as noted) (unaudited) Note 1 Organization, Significant Accounting Policies, and Recently Issued Accounting Pronouncements Organization The accompanying financial statements include the accounts of AgChoice Farm Credit, ACA and its Production Credit Association (PCA) and Federal Land Credit Association (FLCA) subsidiaries (collectively, the Association). A description of the organization and operations, the significant accounting policies followed, and the financial condition and results of operations for the Association as of and for the year ended December 31, 2017, are contained in the 2017 Annual Report to Shareholders. These unaudited interim consolidated financial statements should be read in conjunction with the latest Annual Report to Shareholders. Basis of Presentation In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary for a fair statement of results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed. Certain amounts in the prior period s consolidated financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no effect on the prior period net income or total capital as previously reported. The results of any interim period are not necessarily indicative of those to be expected for a full year. Significant Accounting Policies The Association s accounting and reporting policies conform with U.S. generally accepted accounting principles (GAAP) and practices in the financial services industry. To prepare the financial statements in conformity with GAAP, management must make estimates based on assumptions about future economic and market conditions (for example, unemployment, market liquidity, real estate prices, etc.) that affect the reported amounts of assets and liabilities at the date of the financial statements, income and expenses during the reporting period, and the related disclosures. Although these estimates contemplate current conditions and expectations of change in the future, it is reasonably possible that actual conditions may be different than anticipated, which could materially affect results of operations and financial condition. Management has made significant estimates in several areas, including loans and allowance for loan losses (Note 2, Loans and Allowance for Loan Losses), investment securities and other-than-temporary impairment (Note 3, Investments), and financial instruments (Note 6, Fair Value Measurement). Actual results could differ from those estimates. For further details of significant accounting policies, see Note 2, Summary of Significant Accounting Policies, from the latest Annual Report. Accounting Standards Updates (ASUs) Issued During the Period The following ASUs were issued by the Financial Accounting Standards Board (FASB) since the most recent year end: In August 2018, the FASB issued ASU Intangibles Goodwill and Other Internal-Use Software (Subtopic ): Customer s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this Update. The guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, for all entities. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. In August 2018, the FASB issued ASU Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. The amendments are part of the FASB s disclosure framework project. The project s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of each entity s financial statements. The amendments remove, modify or add certain disclosures contained in the financial statement footnotes related to fair value. Additionally, the guidance is intended to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and AgChoice Farm Credit, ACA 11

12 to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, Certain amendments should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Entities may early adopt the provisions in whole upon issuance or may early adopt any removed or modified disclosures upon issuance and delay adoption of the additional disclosures until their effective date. In July 2018, the FASB issued ASU Leases (Topic 842): Targeted Improvements. The amendments are intended to reduce costs and ease implementation of the leases standard for financial statement preparers. It addresses certain areas identified as possible sources of unnecessary cost or complexity in the standard. Specifically, the amendments provide an option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements and a practical expedient that permits lessors to not separate nonlease components from the associated lease component if certain conditions are met. For entities that have not adopted Topic 842 before the issuance of this Update, the effective date and transition requirements for the amendments related to separating components of a contract are the same as the effective date and transition requirements in ASU In July 2018, the FASB issued ASU Codification Improvements to Topic 842, Leases. The amendments affect narrow aspects of the guidance issued in ASU Specifically, the Update corrects, clarifies or changes inconsistent language to improve application of the guidance in ASU For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in ASU In July 2018, the FASB issued ASU Codification Improvements. The amendments affect a wide variety of Topics in the Codification. They apply to all reporting entities within the scope of the affected accounting guidance. The Board has an ongoing project on its agenda about improvements to clarify the Codification or to correct unintended application of guidance. Those items generally are not expected to have a significant effect on current accounting practice. The transition and effective date guidance is based on the facts and circumstances of each amendment. In February 2018, the FASB issued ASU Technical Corrections and Improvements to Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update include items brought to the Board s attention by stakeholders. The amendments clarify certain aspects of the guidance issued in Update The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update In February 2018, the FASB issued ASU Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and are intended to improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The Update also requires certain disclosures about stranded tax effects. The guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. ASUs Pending Effective Date For a detailed description of the ASUs below, see the latest Annual Report. Potential effects of ASUs issued in previous periods: In March 2017, the FASB issued ASU Receivables Nonrefundable Fees and Other Costs (Subtopic ): Premium Amortization on Purchased Callable Debt Securities. The guidance relates to certain callable debt securities and shortens the amortization period for any premium to the earliest call date. The Update will be effective for interim and annual periods beginning after December 15, 2018 for public business entities. Early adoption is permitted. The Association is in the process of evaluating what effects the guidance may have on the statements of financial condition and results of operations. AgChoice Farm Credit, ACA 12

13 In June 2016, the FASB issued ASU Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on financial instruments. It requires an organization to measure all expected credit losses for financial assets held at the reporting date. Financial institutions and other organizations will use forward-looking information to better estimate their credit losses. Additionally, the ASU amends the accounting for credit losses on available-forsale debt securities and purchased financial assets with credit deterioration. For public companies that are not SEC filers, it will take effect for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, The Association is in the process of evaluating what effects the guidance may have on the statements of financial condition and results of operations. In February 2016, the FASB issued ASU Leases (Topic 842). This Update, and subsequent clarifying guidance issued, requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Leases will be classified as either finance leases or operating leases. This distinction will be relevant for the pattern of expense recognition in the income statement. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early adoption is permitted. The Association is in the process of evaluating what effects the guidance may have on the statements of financial condition and results of operations. Accounting Standards Effective During the Period There were no changes in the accounting principles applied from the latest Annual Report, other than any discussed below. No recently adopted accounting guidance issued by the FASB had a significant effect on the current period reporting. See the most recent Annual Report for a detailed description of each of the standards below: In March 2017, the FASB issued ASU Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost related to the income statement presentation of the components of net periodic benefit cost for an entity s sponsored defined benefit pension and other postretirement plans. The amendments were effective January 1, 2018 for the Association. Adoption in 2018 did not have a material effect on the Association s financial statements, but did require reclassification of service costs to Other Operating Expenses. In February 2017, the FASB issued ASU Other Income Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic ): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The Update clarifies whether certain transactions are within the scope of the guidance on derecognition and the accounting for partial sales of nonfinancial assets, and defines the term in substance nonfinancial asset. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments were effective January 1, 2018 for the Association. Adoption in 2018 had no impact on the statements of financial condition and results of operations of the Association. In January 2017, the FASB issued ASU Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. They also support more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The ASU was effective January 1, 2018 for the Association. The amendments were applied prospectively. Adoption of the guidance in 2018 had no impact on the statements of financial condition and results of operations. In January 2016, the FASB issued ASU Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. The Update was intended to improve the recognition and measurement of financial instruments. The new guidance makes targeted improvements to existing GAAP. Transition Information The Association identified investment securities affected by this Update and adopted the guidance on January 1, The amendments related to equity securities without readily determinable fair values were applied prospectively to equity investments that existed as of the date of adoption. Application of the amendments did not require a cumulative effect adjustment. Adoption did not have an impact on the Association's financial condition or results of operations. The new standard did result in changes to certain disclosures. AgChoice Farm Credit, ACA 13

14 In May 2014, the FASB issued ASU Revenue from Contracts with Customers (Topic 606). This guidance changed the recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance also included expanded disclosure requirements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity s contracts with customers. Based on input received from stakeholders, the FASB issued several additional Updates that generally provided clarifying guidance where there was the potential for diversity in practice, or address the cost and complexity of applying Topic 606. Transition Information The Association identified ancillary revenues affected by this Update and adopted the guidance on January 1, The amendments were applied using the modified retrospective approach. The Association elected to only apply the guidance to contracts that were not completed at the date of initial application. Subtopics on gains and losses from the derecognition of nonfinancial assets, and on other assets and deferred costs-contracts with customers were adopted using the same transition options. Adoption did not have an impact on the Association's financial condition or results of operations. The new standard did result in enhanced disclosures about revenue (see Note 9, Revenue from Contracts with Customers). Note 2 Loans and Allowance for Loan Losses The Association maintains an allowance for loan losses at a level considered adequate by management to provide for probable and estimable losses inherent in the loan portfolio as of the report date. The allowance for loan losses is increased through provisions for loan losses and loan recoveries and is decreased through loan charge-offs and allowance reversals. A review of individual loans in each respective portfolio is performed periodically to determine the appropriateness of risk ratings and to ensure loss exposure to the Association has been identified. See Note 3, Loans and Allowance for Loan Losses, from the latest Annual Report for further discussion. Credit risk arises from the potential inability of an obligor to meet its repayment obligation. The Association manages credit risk associated with lending activities through an assessment of the credit risk profile of an individual obligor. The Association sets its own underwriting standards and lending policies that provide direction to loan officers and are approved by the board of directors. A summary of loans outstanding at period end follows: December 31, 2017 Real estate mortgage $ 902,819 $ 869,306 Production and intermediate-term 619, ,351 Loans to cooperatives 55,098 48,678 Processing and marketing 143, ,310 Farm-related business 39,344 38,881 Communication 80,149 78,911 Power and water/waste disposal 20,253 23,257 Rural residential real estate 20,365 19,432 International 18,245 11,964 Lease receivables 5, Total loans $ 1,903,583 $ 1,852,751 A substantial portion of the Association s lending activities is collateralized, and exposure to credit loss associated with lending activities is reduced accordingly. AgChoice Farm Credit, ACA 14

15 The Association may purchase or sell participation interests with other parties in order to diversify risk, manage loan volume, and comply with Farm Credit Administration (FCA) regulations. The following tables present the principal balance of participation loans at periods ended: Within AgFirst District Within Farm Credit System Outside Farm Credit System Total Purchased Sold Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $ 14,365 $ 28,041 $ 6,653 $ $ $ $ 21,018 $ 28,041 Production and intermediate-term 38,409 9,693 41,600 9,148 80,009 18,841 Loans to cooperatives 92 55,078 55,170 Processing and marketing 40,453 42,300 82,753 Farm-related business Communication 8,204 72,154 80,358 Power and water/waste disposal 8,232 12,091 20,323 Rural residential real estate International 1,277 17,000 18,277 Lease receivables 5,082 5,082 Total $ 111,032 $ 38,168 $ 251,958 $ 9,148 $ $ $ 362,990 $ 47,316 December 31, 2017 Within AgFirst District Within Farm Credit System Outside Farm Credit System Total Purchased Sold Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $ 6,574 $ 27,578 $ 7,121 $ $ $ $ 13,695 $ 27,578 Production and intermediate-term 45,021 15,453 41,164 7,219 86,185 22,672 Loans to cooperatives 48,725 48,725 Processing and marketing 37,003 47,814 84,817 Farm-related business Communication 10,100 69,037 79,137 Power and water/waste disposal 8,698 14,648 23,346 Rural residential real estate International 12,000 12,000 Lease receivables Total $ 107,396 $ 43,525 $ 241,170 $ 7,219 $ $ $ 348,566 $ 50,744 A significant source of liquidity for the Association is the repayments of loans. The following table presents the contractual maturity distribution of loans by loan type at the latest period end: Due less than 1 year Due 1 Through 5 years Due after 5 years Total Real estate mortgage $ 23,345 $ 169,579 $ 709,895 $ 902,819 Production and intermediate-term 128, , , ,044 Loans to cooperatives 41,568 13,530 55,098 Processing and marketing 3, ,786 38, ,185 Farm-related business 8,206 19,266 11,872 39,344 Communication 7,958 61,418 10,773 80,149 Power and water/waste disposal 8,368 11,885 20,253 Rural residential real estate 662 2,522 17,181 20,365 International 6,868 11,377 18,245 Lease receivables 284 4,797 5,081 Total loans $ 171,741 $ 740,615 $ 991,227 $ 1,903,583 Percentage 9.02% 38.91% 52.07% % The recorded investment in a receivable is the face amount increased or decreased by applicable accrued interest, unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment. AgChoice Farm Credit, ACA 15

16 The following table shows the recorded investment of loans, classified under the FCA Uniform Loan Classification System, as a percentage of the recorded investment of total loans by loan type as of: September 30, 2018 December 31, 2017 Real estate mortgage: Acceptable 95.09% 95.37% OAEM Substandard/doubtful/loss % % Production and intermediate-term: Acceptable 94.68% 93.83% OAEM Substandard/doubtful/loss % % Loans to cooperatives: Acceptable % % OAEM Substandard/doubtful/loss % % Processing and marketing: Acceptable % % OAEM Substandard/doubtful/loss % % Farm-related business: Acceptable 97.66% 97.39% OAEM Substandard/doubtful/loss % % September 30, 2018 December 31, 2017 Power and water/waste disposal: Acceptable % 90.44% OAEM Substandard/doubtful/loss % % Rural residential real estate: Acceptable 93.73% 92.75% OAEM Substandard/doubtful/loss % % International: Acceptable % % OAEM Substandard/doubtful/loss % % Lease receivables: Acceptable % 92.55% OAEM Substandard/doubtful/loss % % Total loans: Acceptable 95.71% 95.49% OAEM Substandard/doubtful/loss % % Communication: Acceptable 97.33% % OAEM 2.67 Substandard/doubtful/loss % % The following tables provide an aging analysis of the recorded investment of past due loans as of: 30 Through 89 Days Past Due Not Past Due or Less Than 30 Days Past Due Total Loans and Accrued Interest 90 Days or More Past Due Total Past Due Real estate mortgage $ 3,451 $ 788 $ 4,239 $ 903,444 $ 907,683 Production and intermediate-term 3,069 1,649 4, , ,417 Loans to cooperatives 55,184 55,184 Processing and marketing 143, ,865 Farm-related business ,432 39,600 Communication 80,186 80,186 Power and water/waste disposal 20,320 20,320 Rural residential real estate ,184 20,448 International 18,308 18,308 Lease receivables 5,100 5,100 Total $ 6,815 $ 2,574 $ 9,389 $ 1,903,722 $ 1,913, Through 89 Days Past Due December 31, 2017 Not Past Due or Less Than 30 Days Past Due Total Loans and Accrued Interest 90 Days or More Past Due Total Past Due Real estate mortgage $ 2,398 $ 342 $ 2,740 $ 869,914 $ 872,654 Production and intermediate-term 1,406 1,948 3, , ,918 Loans to cooperatives 48,743 48,743 Processing and marketing 137, ,913 Farm-related business ,508 39,037 Communication 79,031 79,031 Power and water/waste disposal 23,310 23,310 Rural residential real estate ,071 19,501 International 11,997 11,997 Lease receivables Total $ 4,529 $ 2,524 $ 7,053 $ 1,852,714 $ 1,859,767 AgChoice Farm Credit, ACA 16

17 Nonperforming assets (including related accrued interest as applicable) and related credit quality statistics at period end were as follows: December 31, 2017 Nonaccrual loans: Real estate mortgage $ 8,289 $ 11,802 Production and intermediate-term 3,620 8,072 Farm-related business 21 Rural residential real estate Lease receivables 49 Total $ 12,100 $ 20,158 Accruing restructured loans: Real estate mortgage $ 66 $ 324 Production and intermediate-term Total $ 220 $ 468 Accruing loans 90 days or more past due: Production and intermediate-term $ 303 $ Total $ 303 $ Total nonperforming loans $ 12,623 $ 20,626 Other property owned Total nonperforming assets $ 12,699 $ 20,652 Nonaccrual loans as a percentage of total loans 0.64% 1.09% Nonperforming assets as a percentage of total loans and other property owned 0.67% 1.11% Nonperforming assets as a percentage of capital 3.10% 5.33% The following table presents information related to the recorded investment of impaired loans at period end. Impaired loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms of the loan. December 31, 2017 Impaired nonaccrual loans: Current as to principal and interest $ 9,556 $ 16,346 Past due 2,544 3,812 Total $ 12,100 $ 20,158 Impaired accrual loans: Restructured $ 220 $ days or more past due 303 Total $ 523 $ 468 Total impaired loans $ 12,623 $ 20,626 Additional commitments to lend $ 400 $ 27 The following tables present additional impaired loan information at period end. Unpaid principal balance represents the contractual principal balance of the loan. Impaired loans: Recorded Investment Unpaid Principal Balance Related Allowance Three Months Ended Average Impaired Loans Interest Income Recognized on Impaired Loans Nine Months Ended Average Impaired Loans Interest Income Recognized on Impaired Loans With a related allowance for credit losses: Production and intermediate-term $ 83 $ 148 $ 45 $ 100 $ 4 $ 117 $ 7 Total $ 83 $ 148 $ 45 $ 100 $ 4 $ 117 $ 7 With no related allowance for credit losses: Real estate mortgage $ 8,355 $ 10,468 $ $ 9,974 $ 351 $ 11,753 $ 682 Production and intermediate-term 3,994 6,003 4, , Farm-related business Rural residential real estate Total $ 12,540 $ 16,777 $ $ 14,969 $ 527 $ 17,641 $ 1,024 Total: Real estate mortgage $ 8,355 $ 10,468 $ $ 9,974 $ 351 $ 11,753 $ 682 Production and intermediate-term 4,077 6, , , Farm-related business Rural residential real estate Total $ 12,623 $ 16,925 $ 45 $ 15,069 $ 531 $ 17,758 $ 1,031 AgChoice Farm Credit, ACA 17