FOCUS ON FUNDAMENTALS. Strength and Stability for Farm Credit Associations

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1 FOCUS ON FUNDAMENTALS Strength and Stability for Farm Credit Associations AGRIBANK 2018 QUARTERLY REPORT SEPTEMBER 30, 2018 FA R M C R E D I T B A N K

2 Copies of Quarterly and Annual Reports are available upon request by contacting AgriBank, FCB, 30 E. 7th Street, Suite 1600, St. Paul, MN or by calling (651) Reports are also available at Management s Discussion and Analysis AgriBank, FCB (Unaudited) The following commentary is a review of the financial condition and results of operations of AgriBank, FCB (AgriBank or the Bank). This information should be read in conjunction with the accompanying Financial Statements, the Notes to the Financial Statements and the 2017 Annual Report. AgriBank is part of the customer-owned, nationwide Farm Credit System. Under Farm Credit's cooperative structure, AgriBank is primarily owned by 14 local Farm Credit Associations, which provide financial products and services to rural communities and agriculture. AgriBank obtains funds and provides funding and financial solutions to those Associations. The AgriBank District covers a 15-state area stretching from Wyoming to Ohio and Minnesota to Arkansas. Chief Executive Officer Transition In March 2018, Jeffrey R. Swanhorst was named as chief executive officer (CEO) of AgriBank effective April 2, Previously as chief credit officer, Mr. Swanhorst was responsible for all AgriBank credit functions and served on various System committees. Retiring CEO William J. Thone remained with AgriBank through June 30, 2018 on a consulting basis to ensure a smooth leadership transition. Forward-Looking Information Any forward-looking statements in this Quarterly Report are based on current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from expectations due to a number of risks and uncertainties. More information about these risks and uncertainties is contained in our 2017 Annual Report. AgriBank undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Financial Overview Net income increased $34.5 million, or 8.6 percent, to $434.3 million for the nine months ended September 30, 2018, compared to the same period of the prior year. The increase in net income was primarily due to an increase in non-interest income. The increase in non-interest income was primarily attributable to increased mineral income and contributions from a non-recurring distribution from the Farm Credit System Insurance Corporation (FCSIC) received during Return on assets ratio (ROA) of 55 basis points in 2018 remained above our 50 basis point target. This ratio includes the impact of a non-recurring distribution from the FCSIC. We anticipate meeting our 50 basis point target at year end. Loan portfolio credit quality remained strong with 99.5 percent of our total loan portfolio in the acceptable category. Credit quality of our retail loan portfolio (accounting for approximately 9 percent of our total loan 1

3 portfolio) moderated slightly to 94.7 percent acceptable as of September 30, 2018, compared to 95.1 percent acceptable at December 31, Robust capital levels ensure we are well-positioned to manage the cyclicality that is characteristic of the agricultural market. Refer to the Loan Portfolio and Funding, Liquidity and Shareholders Equity sections for further discussion. Economic Conditions Interest Rate Environment U.S. economic activity is expected to continue advancing at a moderate pace and the U.S. economy is forecasted to grow at 2.9 percent in 2018 and 2.5 percent in U.S. economic growth should continue to be driven by consumer and investment spending. Consumer spending has remained strong due to consumer confidence, which is at elevated levels. Investment spending has increased considerably in 2018, partially due to the Tax Cuts and Jobs Act legislation that was passed in late Investment spending is also expected to increase in 2019, but at a somewhat slower pace than In addition, slower export growth due to the effects of the ongoing trade disputes with China, is expected to moderate economic growth in The Federal Open Market Committee (FOMC) of the Federal Reserve continues to move forward with the process of normalizing the level of interest rates and continues winding down its balance sheet. After the 25 basis point (bp) rate increase in September 2018, the target range for the federal funds rate stands at 2.00 to 2.25 percent. The path for the federal funds rates is expected to remain data-dependent and, according to Federal Reserve communications, anticipated economic conditions will warrant only gradual increases in policy rates. The consensus forecast of economists suggests that the FOMC will increase the federal funds rate by an additional 25 bps before the end of 2018 to a target range of 2.25 to 2.50 percent. The U.S. Treasury yield curve has flattened due to the Federal Reserve s increases to short term rates and due to a decline in inflation expectations, which has constrained long term rates from moving significantly higher. Economists expect U.S. Treasury rates to move higher by the end of 2018 with the 2-year and 10-year rates approaching 2.89 and 3.17 percent respectively. We manage interest rate risk consistent with policies established by the AgriBank Board of Directors and limits established by AgriBank s Asset/Liability Committee (ALCO) (refer to Interest Rate Risk Management section of the 2017 Annual Report). Agricultural Conditions The U.S. Department of Agriculture s Economic Research Service (USDA-ERS) has forecasted 2018 U.S. net farm income to decrease $9.8 billion, or 13 percent to $65.7 billion from the latest 2017 estimate of $75.5 billion. The decline in the forecasted 2018 net farm income is largely driven by increased expenses, primarily due to increases in production, labor costs and interest expense. The latest 2018 forecast does not include the USDA Market Facilitation Program (MFP) payments, which will likely improve the forecast by $2 billion to $4 billion. U.S. farm sector working capital has declined in recent years and is expected to continue to decline in 2018, perpetuated by diminished levels of cash and other short-term assets, sustained low commodity prices and growing short-term debt. While 2018 net farm income and working capital are expected to decline, a healthy U.S. economy is expected to support domestic demand for most agricultural commodities in the foreseeable future. The primary area of risk will remain the export component of the demand for U.S. agricultural commodities, with a stronger dollar 2

4 and ongoing uncertainty surrounding the future of U.S. trade policy. Major cash crops in the United States are projected to remain at elevated supply levels resulting from a combination of factors, including overall excellent crop conditions, tariffs and strong harvests in recent years. In addition to cash crops, pork and dairy are heavily dependent upon exports and most susceptible to foreign trade-related disruptions in The risk in the export component of the demand for U.S. agricultural commodities may be partially mitigated by MFP assistance to producers impacted by retaliatory tariffs. Continued low feed costs along with higher expected market prices in most major animal protein categories entering 2018 have driven increased production, giving rise to increased supply. This increased supply coupled with the expected impact of tariffs from China and other major importing countries are creating price challenges for producers, especially pork, as roughly one-fifth of domestically produced pork is exported. Producers who are able to realize cost-of-production efficiencies and market their farm products effectively are most likely to adapt to the current price environment. Optimal input usage, adoption of cost-saving technologies, negotiating adjustments to various business arrangements such as rental cost of agricultural real estate, and effective use of hedging and other price risk management strategies are all critical in yielding positive net income for producers. Updated Industry Conditions The following are industry conditions for which we have updated our outlook since December 31, For further analysis of industry conditions which have not experienced a change in outlook since December 31, 2017, refer to the Agricultural Conditions section of Management s Discussion and Analysis of the 2017 Annual Report. Soybeans A decline in the level of soybean prices, primarily due to the combined impact of high yields in 2018, large ending stocks and Chinese tariffs, has resulted in a downgrade to our industry outlook from neutral to negative. Dairy Producers in the industry have been operating at poor margins in 2018, and this is expected to continue in The margin challenges are due mainly to an increase in global supply suppressing prices, and tariffs from China and other major importing countries. Due to these factors, the industry outlook has been downgraded from neutral-to-negative to negative. Land Values The AgriBank District continues to monitor agricultural land values. We conduct an annual Benchmark Survey, completed by licensed real estate appraisers, of a sample of benchmark farms selected to represent the lending footprint of District Associations. The District s most recent real estate market value survey based on the twelve-month period ending June 30, 2018 indicated that the District real estate value changes ranged from a negative 6.5 percent to positive 12.5 percent. Land value increases continue to be most common in areas heavily influenced by livestock operations, off-farm income and areas with crop production other than the major crops of corn, soybeans and wheat. Conversely, modest declines in values were concentrated primarily in areas of corn, soybean and wheat production. The Federal Reserve Banks of Chicago, Kansas City and St. Louis reported on the change in farmland values from the end of the second quarter 2017 to the end of the second quarter 2018 in their respective districts. 3

5 These Federal Reserve district reports indicated overall farmland values ranging from a decrease of 4.0 percent to an increase of 3.0 percent. The USDA 2018 land value survey, based primarily on agricultural producer opinions, indicated farmland values and cropland values in the AgriBank District increased 1.4 percent and 0.2 percent, respectively, compared to 2017 survey results. Land values in the District are expected to remain stable or soften over the next year, primarily due to anticipated continued low levels of net farm income in 2018 and beyond and expected interest rate increases. Loan Portfolio Components of Loans September 30, December 31, (in thousands) Accrual loans: Wholesale loans $83,485,026 $79,960,907 Retail loans: Real estate mortgage $3,479,082 $3,910,060 Production and intermediate-term 3,642,027 3,710,514 Loans to other financing institutions (OFIs) 672, ,677 Other 160, ,727 Total retail loans 7,954,401 8,360,978 Nonaccrual loans 53,612 53,038 Total loans $91,493,039 $88,374,923 The Other category is primarily composed of agribusiness, communication and rural residential real estate loans. Loans totaled $91.5 billion at September 30, 2018, an increase of $3.1 billion, or 3.5 percent, from December 31, The increase in total loans was driven primarily by increased draws on wholesale loans. The increase in wholesale loans is due to an increase in real estate mortgage and agribusiness volume at District Associations. The credit quality of our total loan portfolio remained strong at 99.5 percent in the acceptable category at September 30, 2018, unchanged from December 31, Adversely classified loans were 0.3 percent at September 30, 2018 and December 31, As a majority of our loans are wholesale loans, we expect our credit quality will remain strong even as some District Associations experience further gradual declines in their retail credit quality. District Associations each have allowances for loan losses, earnings and capital that absorb their credit losses before they would impact our wholesale loans. Credit quality of our retail loan portfolio moderated slightly to 94.7 percent acceptable as of September 30, 2018, compared to 95.1 percent acceptable at December 31,

6 Components of Risk Assets September 30, December 31, (in thousands) Nonaccrual loans $53,612 $53,038 Accruing restructured loans 3,758 4,588 Accruing loans 90 days or more past due 1,041 8 Total risk loans 58,411 57,634 Other property owned Total risk assets $58,914 $57,712 Risk loans as a % of total loans 0.06% 0.07% Nonaccrual loans as a % of total loans 0.06% 0.06% Delinquencies as a % of total loans 0.06% 0.05% Note: Accruing loans include accrued interest receivable. Risk assets remain at acceptable levels, and total risk loans as a percentage of total loans remains within our established risk management guidelines. Risk loans are primarily concentrated in the real estate mortgage and production and intermediate-term sectors. At September 30, 2018, 57.0 percent of nonaccrual loans were current as to principal and interest, compared to 61.2 percent at December 31, Our accounting policy requires loans past due 90 days to be transferred into nonaccrual status unless adequately secured and in the process of collection. Based on our analysis, all accruing loans 90 days or more past due were eligible to remain in accruing status. Allowance Coverage Ratios Allowance as a percentage of: September 30, December 31, Loans 0.03% 0.03% Nonaccrual loans 47.65% 49.11% Total risk loans 43.73% 45.19% Adverse assets to capital and allowance for loan losses 4.03% 3.90% The allowance for loan losses is an estimate of losses on loans in our portfolio as of the financial statement date. We determine the appropriate level of allowance for loan losses based on the periodic evaluation of factors such as loan loss history, estimated probability of default, estimated loss severity, portfolio quality, and current economic and environmental conditions. As of September 30, 2018, the allowance decreased $503 thousand, compared to December 31, This reflects $3.0 million in net charge-offs significantly offset by $2.5 million of provision for loan losses as our retail credit quality declined slightly during the nine months ended September 30, Funding, Liquidity and Shareholders Equity We are responsible for meeting the District's funding, liquidity and asset/liability management needs. Access to the unsecured debt capital markets remains our primary source of liquidity. The System continues to have reliable access to the debt capital markets to support its mission of providing credit to farmers, ranchers and 5

7 other eligible borrowers. During the nine months ended September 30, 2018, investor demand for Systemwide Debt Securities remained favorable. We also maintain a secondary source of liquidity through a high-quality investment portfolio and other shortterm liquid assets. We manage liquidity for our operating and debt repayment needs through managing debt maturities, as well as forecasting and anticipating seasonal demands. We maintain maturing investments and bank balances of at least $500 million on hand each day to meet cash management and loan disbursement needs in the normal course of business. We manage intermediate and longer-term liquidity needs through the composition of the liquidity investment portfolio, which is structured to meet both regulatory requirements and our operational demands. Specifically, we provide at least 15 days of liquidity coverage from cash, overnight investments and U.S. Treasury securities less than three years in maturity. Other short-term money market investments, as well as government and agency mortgage-backed securities (MBS), are positioned to cover regulatory requirements for 30- and 90-day intervals. Additionally, a supplemental liquidity buffer provides days coverage in excess of 90 days from money market instruments greater than 90 days in maturity and asset-backed securities (ABS). At September 30, 2018, we held qualifying assets in excess of each incremental level to meet the liquidity coverage intervals. Our liquidity policy and Farm Credit Administration (FCA) regulations require maintaining minimum liquidity on a continuous basis of 120 days and 90 days, respectively. The days of liquidity measurement refers to the number of days that maturing debt is covered by liquid investments. As of September 30, 2018, we had sufficient liquidity to fund all debt maturing within 144 days. We maintain a contingency funding plan (CFP) that helps inform our operating and funding needs and addresses actions we would consider in the event that there is not ready access to traditional funding sources. These potential actions include borrowing overnight via federal funds, using investment securities as collateral to borrow, using the proceeds from maturing investments and selling our liquid investments. We size our investment portfolio using the CFP to cover estimated operating and funding needs for a minimum of 30 days with a targeted $500 million buffer. Total shareholders equity at September 30, 2018 was $5.9 billion, a $213.0 million increase from December 31, The increase was primarily driven by comprehensive income, which was substantially offset by patronage distributions declared, consistent with our capital plan. At September 30, 2018, we exceeded the regulatory minimum capital ratios. Refer to the Additional Regulatory Information section as well as Note 4 in the accompanying Financial Statements for further discussion of capital ratios. During the third quarter of 2018, we began issuing non-qualified patronage on certain retail patronage pools. Earnings from these pools will now be paid as nonqualified patronage and classified as allocated surplus on the Statements of Changes in Shareholders Equity. 6

8 Results of Operations Net income for the nine months ended September 30, 2018 was $434.3 million, an 8.6 percent increase, compared to $399.8 million for the same period in Our year-to-date return on assets ratio of 55 basis points allowed us to reduce the wholesale spread charged to District Associations for the second half of 2018, in order to achieve our 50 basis point target at December 31, The return on assets ratio includes the impact of a non-recurring distribution from the FCSIC in the first quarter of Changes in Significant Components of Net Income (in thousands) Increase (Decrease) in For the nine months ended September 30, Net Income Net interest income $443,650 $443,464 $186 Provision for loan losses 2,500 6,500 4,000 Non-interest income 86,183 55,272 30,911 Non-interest expense 93,035 92,455 (580) Net income $434,298 $399,781 $34,517 The increase in non-interest income was primarily due to increased mineral income driven by higher oil and gas prices and production compared to the prior year. Contributing further to the increase in non-interest income was the Allocated Insurance Reserve Accounts (AIRAs) distribution received from the FCSIC during the first quarter of The AIRAs were established by the FCSIC when premiums collected increased the level of the insurance fund beyond the required secured base amount of 2 percent of insured debt. Refer to the 2017 AgriBank Annual Report for additional information about the FCSIC. The decrease in provision for loan losses is primarily due to a moderating decline in credit quality during Changes in Net Interest Income (in thousands) For the nine months ended September 30, Increase (decrease) due to: Volume 2018 vs 2017 Rate Total Interest income: Loans $45,464 $278,247 $323,711 Investments 4,059 76,529 80,588 Total interest income 49, , ,299 Interest expense: Systemwide debt securities and other (34,022) (370,091) (404,113) Net change in net interest income $15,501 $(15,315) $186 The slight increase in net interest income was primarily attributable to loan volume, which was almost entirely offset by the net impact of increased interest rates. Higher interest rates in 2018 have led to increased interest expense on Systemwide Debt Securities, which was significantly offset by increased interest income from our wholesale loans to District Associations and other financing institutions (OFIs) and, to a lesser extent, investments. 7

9 Information regarding the year-to-date average daily balances (ADBs) and annualized average rates earned and paid on our portfolio follows: (in thousands) For the nine months ended September 30, ADB Rate NII ADB Rate NII Interest earning assets: Wholesale loans $80,342, % $1,461,581 $77,927, % $1,166,046 Retail accrual loans 7,986, % 246,571 7,703, % 219,421 Retail nonaccrual loans 55, % 3,710 53, % 2,683 Investment securities and federal funds 15,645, % 226,556 15,188, % 145,969 Total earning assets 104,029, % 1,938, ,872, % 1,534,119 Interest bearing liabilities 98,568, % 1,494,768 95,652, % 1,090,655 Interest rate spread $5,461, % $5,220, % Impact of equity financing 0.11% 0.08% Net interest margin 0.57% 0.59% Net interest income $443,650 $443,464 Net interest margin for the nine months ended September 30, 2018, decreased two basis points compared to the same period of the prior year. This decrease was primarily driven by the decreased interest rate spread. Equity financing represents the benefit of non-interest bearing funding and was up compared to the prior year due to higher equity volume and a higher level of interest rates. As anticipated, the positive contribution from funding actions has declined due to the current interest rate environment. Additional Regulatory Information Investment Securities Eligibility In May 2018, the FCA Board approved a final rule to revise the requirements governing the eligibility of investment securities for System Banks and Associations. The new regulation is intended to strengthen the eligibility criteria for investments that System Banks purchase and hold. Further, it removes references to and requirements for credit ratings and substitutes other appropriate standards of credit worthiness in compliance with section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulation is effective January 1, We are currently working to update policies, procedures and other documentation to ensure compliance by the effective date. We do not expect the regulation to have a material impact on our financial statements. 8

10 Certification The undersigned have reviewed the September 30, 2018 Quarterly Report of AgriBank, FCB, which has been prepared under the oversight of the Audit Committee and in accordance with all applicable statutory or regulatory requirements. The information contained herein is true, accurate and complete to the best of our knowledge and belief. Matthew D. Walther Jeffrey R. Swanhorst Jeffrey L. Moore Chair of the Board Chief Executive Officer Chief Financial Officer AgriBank, FCB AgriBank, FCB AgriBank, FCB November 9, 2018 November 9, 2018 November 9,

11 Statements of Condition AgriBank, FCB (unaudited) September 30, December 31, (in thousands) Assets Loans $91,493,039 $88,374,923 Allowance for loan losses 25,544 26,047 Net loans 91,467,495 88,348,876 Investment securities 14,530,983 14,386,455 Cash 226, ,599 Federal funds 858, ,300 Accrued interest receivable 626, ,826 Derivative assets 36,614 8,956 Allocated prepaid pension costs 41,392 38,834 Cash collateral posted with counterparties 20,092 29,730 Other assets 36,725 87,149 Total assets $107,844,120 $104,544,725 Liabilities Bonds and notes $101,345,572 $98,313,944 Accrued interest payable 406, ,978 Derivative liabilities 6,188 34,562 Cash collateral posted by counterparties 9, Accounts payable and other payables 205, ,388 Other liabilities 15,470 18,971 Total liabilities 101,989,198 98,902,843 Commitments and contingencies (Note 6) Shareholders' equity Perpetual preferred stock 250, ,000 Capital stock and participation certificates 2,376,302 2,345,655 Allocated surplus Unallocated surplus 3,259,541 3,132,653 Accumulated other comprehensive loss (31,092) (86,426) Total shareholders' equity 5,854,922 5,641,882 Total liabilities and shareholders' equity $107,844,120 $104,544,725 The accompanying notes are an integral part of these financial statements. 10

12 Statements of Comprehensive Income AgriBank, FCB (unaudited) (in thousands) Three months Nine months For the periods ended September 30, Interest income Loans $606,579 $490,506 $1,711,862 $1,388,150 Investment securities 83,950 53, , ,969 Total interest income 690, ,804 1,938,418 1,534,119 Interest expense 545, ,172 1,494,768 1,090,655 Net interest income 145, , , ,464 Provision for loan losses 1,500 3,500 2,500 6,500 Net interest income after provision for loan losses 143, , , ,964 Non-interest income Mineral income 17,790 10,776 49,227 33,237 Business services income 5,549 4,923 16,885 14,496 Loan prepayment and fee income 6,989 1,470 10,229 6,096 Allocated Insurance Reserve Accounts income , Miscellaneous income and other (losses) gains, net (21) (603) 540 1,443 Total non-interest income 30,307 16,566 86,183 55,272 Non-interest expense Salaries and employee benefits 9,019 9,560 27,909 29,414 Other operating expenses 10,152 9,485 29,897 27,823 Loan servicing and other fees paid to District Associations 9,714 9,277 29,562 26,157 Farm Credit System insurance expense 1,855 3,146 5,667 9,061 Total non-interest expense 30,740 31,468 93,035 92,455 Net income $143,313 $132,230 $434,298 $399,781 Other comprehensive income (loss) Available-for-sale investment activity $(15,890) $(1,399) $(50,302) $20,291 Derivatives and hedging activity 23,543 3, ,540 (10,323) Employee benefit plan activity Total other comprehensive income 7,685 1,841 55,334 9,968 Comprehensive income $150,998 $134,071 $489,632 $409,749 The accompanying notes are an integral part of these financial statements. 11

13 Statements of Changes in Shareholders' Equity AgriBank, FCB Capital Accumulated Perpetual Stock and Other (unaudited) Preferred Participation Allocated Unallocated Comprehensive (in thousands) Stock Certificates Surplus Surplus (Loss) Income Total Balance at December 31, 2016 $250,000 $2,183,701 $ -- $3,132,432 $(80,030) $5,486,103 Net income 399, ,781 Other comprehensive income 9,968 9,968 Patronage (314,059) (314,059) Perpetual preferred stock dividends (12,891) (12,891) Capital stock/participation certificates issued 149, ,878 Balance at September 30, 2017 $250,000 $2,333,579 $ -- $3,205,263 $(70,062) $5,718,780 Balance at December 31, 2017 $250,000 $2,345,655 $ -- $3,132,653 $(86,426) $5,641,882 Net income 434, ,298 Other comprehensive income 55,334 55,334 Patronage (294,348) (294,348) Surplus allocated under nonqualified patronage program 171 (171) -- Perpetual preferred stock dividends (12,891) (12,891) Capital stock/participation certificates issued 44,479 44,479 Capital stock/participation certificates retired (13,832) (13,832) Balance at September 30, 2018 $250,000 $2,376,302 $171 $3,259,541 $(31,092) $5,854,922 The accompanying notes are an integral part of these financial statements. 12

14 Statements of Cash Flows AgriBank, FCB (unaudited) (in thousands) For the nine months ended September 30, Cash flows from operating activities Net income $434,298 $399,781 Adjustments to reconcile net income to cash flows from operating activities: Depreciation on premises and equipment 2,348 2,729 Provision for loan losses 2,500 6,500 Amortization of discounts on investments, net (68,024) (22,539) Amortization of discounts on debt and deferred debt issuance costs, net 50,525 66,473 Loss (gain) on derivative activities, net 7,113 (1,970) Insurance refund related to FCS Financial Assistance Corporation stock (3,376) -- Changes in operating assets and liabilities: Increase in accrued interest receivable (1,482,124) (1,185,159) Decrease in other assets 48,123 9,964 Increase in accrued interest payable 110,868 83,822 Increase (decrease) in other liabilities 2,306 (12,941) Net cash used in operating activities (895,443) (653,340) Cash flows from investing activities (Increase) decrease in loans, net (1,767,332) 2,313 Proceeds from sales of other property owned 30 1,405 Purchases of investment securities (2,759,307) (2,001,685) Proceeds from maturing investment securities 2,682,536 2,616,753 Purchases of premises and equipment, net (2,221) (2,571) Proceeds from insurance refund related to FCS Financial Assistance Corporation stock 3, Net cash (used in) provided by investing activities (1,842,918) 616,215 Cash flows from financing activities Bonds and notes issued 158,388, ,125,369 Bonds and notes retired (155,395,476) (130,032,668) Decrease in cash collateral posted with counterparties, net 9,638 3,372 Increase in cash collateral posted by counterparties 9, Variation margin settled on cleared derivatives, net 37,120 (12,952) Patronage distributions paid (390,500) (288,179) Preferred stock dividends paid (12,891) (12,891) Capital stock/participation certificates issued, net 30, ,878 Net cash provided by (used in) financing activities 2,676,562 (68,071) Net decrease in cash and federal funds (61,799) (105,196) Cash and federal funds at beginning of period 1,145,899 1,061,296 Cash and federal funds at end of period $1,084,100 $956,100 Supplemental non-cash investing and financing activities (Decrease) increase in shareholders' equity from investment securities $(50,302) $20,291 Interest capitalized to loan principal 1,354,231 1,093,032 Patronage and preferred stock dividends accrued 112, ,774 Supplemental non-cash fair value changes related to hedging activities (Increase) decrease in derivative assets $(62,749) $6,993 (Decrease) increase in derivative liabilities (42,790) 7,291 Decrease in bonds from derivative activity (11,695) (5,931) Increase (decrease) in shareholders' equity from cash flow derivatives 105,540 (10,323) Supplemental Information Interest paid $1,326,955 $940,360 The accompanying notes are an integral part of these financial statements. 13

15 Notes to Financial Statements AgriBank, FCB (Unaudited) NOTE 1 Organization and Significant Accounting Policies AgriBank, FCB (AgriBank) is part of the customer-owned nationwide Farm Credit System (the System or FCS), established by Congress and subject to the provisions of the Farm Credit Act of 1971, as amended. The System specializes in providing financing and related services to qualified borrowers for agricultural and rural purposes. AgriBank and its District Associations are collectively referred to as the District. At September 30, 2018, the District had 14 Agricultural Credit Associations (ACA). Each parent ACA has wholly owned Federal Land Credit Association and Production Credit Association subsidiaries. AgriBank serves as the intermediary between the financial markets and the retail lending activities of the District Associations. A description of our organization and operation, significant accounting policies followed, financial condition and results of operations as of and for the year ended December 31, 2017 are contained in the 2017 Annual Report. There have been no significant changes in our accounting policies since December 31, These unaudited third quarter 2018 Financial Statements should be read in conjunction with the Annual Report. The results for the nine months ended September 30, 2018 do not necessarily indicate the results to be expected for the year ended December 31, The accompanying Financial Statements contain all adjustments necessary for a fair presentation of the interim financial condition and results of operations and conform to accounting principles generally accepted (GAAP) in the United States of America and prevailing practices within the financial services industry. The preparation of Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in prior year s Financial Statements have been reclassified to conform to current year presentation. The Financial Statements include the accounts of AgriBank. The Financial Statements do not include the assets, obligations, or results of operations of District Associations. AgriBank operates as a single segment for reporting purposes. 14

16 Recently Issued or Adopted Accounting Pronouncements We have assessed the potential impact of accounting standards that have been issued by the Financial Accounting Standards Board (FASB) and have determined the following standards to be applicable to our business: Standard and effective date In May 2014, the FASB issued Accounting Standards Update (ASU) Revenue from Contracts with Customers." This guidance was effective for public business entities on January 1, In March 2017, the FASB issued ASU Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost. This guidance was effective for public business entities on January 1, In January 2016, the FASB issued ASU Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance was effective for public business entities on January 1, Description This guidance governs revenue recognition from contracts with customers and requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Financial instruments and other contractual rights within the scope of other guidance issued by the FASB are excluded from the scope of this new revenue recognition guidance. In this regard, a majority of contracts within the District are excluded from the scope of this new guidance. This guidance requires that an employer disaggregate the service cost component from the other components of net benefit cost. Specifically, the guidance requires non-service cost components of net benefit cost to be recognized in a non-operating income line item of the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The guidance is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments address certain aspects of recognition, measurement, presentation, and disclosure in the financial statements. Adoption status and financial statement impact We adopted this guidance on January 1, 2018, using the modified retrospective approach, as the majority of our revenues are not subject to the new guidance. The adoption of the guidance did not have any impact on the financial condition, results of operations or cash flows. We adopted this guidance on January 1, The adoption of the guidance did not impact our financial condition or cash flows, but did result in an immaterial change to the classification of certain items in the results of operations. The components of net periodic benefit cost other than the service cost component are included in the other operating expenses line item on the Statements of Comprehensive Income. As the change in classification was immaterial, there were no retroactive adjustments to the Statements of Comprehensive Income. There were no material changes to the financial statement disclosures. We adopted this guidance on January 1, The adoption of this guidance did not impact our financial condition, results of operations or cash flows. Financial statement disclosures related to the methods and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the statement of condition are no longer required and will be excluded from the 2018 Annual Report. 15

17 Standard and effective date In August 2016, the FASB issued ASU Classification of Certain Cash Receipts and Cash Payments. This guidance was effective for public business entities on January 1, In February 2016, the FASB issued ASU "Leases." In July 2018, the FASB issued ASU Leases (Topic 842): Targeted Improvements. The guidance is effective for our first quarter of 2019 and early adoption is permitted. In August 2017, the FASB issued ASU Targeted Improvements to Accounting for Hedging Activities. This guidance is effective for public business entities for our first quarter of 2019 and early adoption is permitted. In August 2018, the FASB issued ASU Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement." This guidance is effective for public business entities for our first quarter of 2020 and early adoption is permitted. Description The guidance addresses specific cash flow issues with the objective of reducing the diversity in the classification of these cash flows. Included in the cash flow issues are debt prepayment or debt extinguishment costs and settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing. The guidance modifies the recognition and accounting for lessees and lessors and requires expanded disclosures regarding assumptions used to recognize revenue and expenses related to leases. When this guidance is adopted, a liability for lease obligations and a corresponding right-ofuse asset will be recognized on the Statements of Condition for all lease arrangements spanning more than 12 months. The guidance includes an optional transition method where an entity is permitted to apply the guidance as of the adoption date and recognize a cumulativeeffect adjustment to the opening balance of retained earnings. The guidance better aligns an entity s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in this guidance require an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This guidance also addresses the timing of effectiveness testing, qualitative and quantitative effectiveness testing and components that can be excluded from effectiveness testing. The guidance removes, adds and modifies certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. Adoption status and financial statement impact We adopted this guidance on January 1, The adoption of this guidance did not impact the financial condition or results of operations. Debt extinguishment costs were previously disclosed as operating cash flows and will be reported as financing cash flows as a result of this guidance. However, no debt extinguishment costs were incurred during the last three-year period. Therefore, no changes in the classification of cash flows were required as a result of this guidance. We have no plans to early adopt this guidance. Based on our review and analysis, this new guidance will not have a material impact on our financial condition, results of operations, and financial statement disclosures, and will have no impact on cash flows. We have no plans to early adopt this guidance. We expect an immaterial impact to our results of operations as all derivative gains and losses, for which hedge accounting is applied, will be recognized in interest expense on the Statements of Comprehensive Income. We expect modification to certain derivative-related financial statement disclosures. We do not expect an impact to our financial condition or cash flows. We are in the process of reviewing the accounting standard. Based on our preliminary review and analysis, we expect to modify certain fair value related disclosures. Prior to the effective date, we may adopt a portion of this guidance and remove certain fair value disclosures, as permitted by the guidance. 16

18 Standard and effective date In August 2018, the FASB issued ASU Customer s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This guidance is effective for public business entities for our first quarter of 2020 and early adoption is permitted. In August 2018, the FASB issued ASU Disclosure Framework Changes to the Disclosure Requirements for Defined Benefit Plans. This guidance is effective for public business entities for our first quarter of 2021 and early adoption is permitted. In June 2016, the FASB issued ASU Financial Instruments - Credit Losses." The guidance is effective for non-u.s. Securities Exchange Commission filers for our first quarter of 2021 and early adoption is permitted. Description The guidance clarifies that implementation costs incurred in a hosting arrangement that is a service contract should be accounted for in the same manner as implementation costs incurred to develop or obtain internal-use software. The guidance removes and adds certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Credit losses relating to available-for-sale securities would also be recorded through an allowance for credit losses. Adoption status and financial statement impact We are in the process of reviewing the accounting standard. Based on our preliminary review and analysis, this new guidance will not have a material impact on our financial condition, results of operations, cash flows and financial statement disclosures. We are in the process of reviewing the accounting standard. Based on our preliminary review and analysis, we expect to modify certain employee benefit plan related disclosures. Prior to the effective date, we may early adopt this disclosure guidance. We have no plans to early adopt this guidance. We have reviewed the accounting standard and are in the process of system selection and drafting disclosures. Significant implementation matters yet to be addressed include drafting of accounting policies and designing processes and controls. We are currently unable to estimate the impact on our financial statements. 17

19 NOTE 2 Loans and Allowance for Loan Losses Loans by Type September 30, 2018 December 31, 2017 (in thousands) Amount % Amount % Wholesale loans $83,485, % $79,960, % Retail loans: Real estate mortgage 3,495, % 3,928, % Production and intermediate-term 3,679, % 3,744, % Loans to other financing institutions (OFIs) 672, % 593, % Other 160, % 146, % Total retail loans 8,008, % 8,414, % Total loans $91,493, % $88,374, % The Other category is primarily comprised of agribusiness, communication and rural residential real estate loans. Participations We may purchase participations from and sell participations to others, primarily District Associations. We had no purchases outside the System in the periods presented. Also, we did not have any participation interests sold in the periods presented. Retail Loan Participations Purchased (in thousands) September 30, 2018 December 31, 2017 Real estate mortgage $3,495,002 $3,928,341 Production and intermediate-term 3,679,519 3,744,997 Other 160, ,791 Total loans $7,335,160 $7,820,129 Portfolio Performance The primary credit quality indicator we use is the Farm Credit Administration (FCA) Uniform Loan Classification System, which categorizes loans into five categories. The categories are defined as follows: Acceptable assets are non-criticized assets representing the highest quality. They are expected to be fully collectible. This category is further differentiated into various probability of default ratings. Other Assets Especially Mentioned (Special Mention) are currently collectible, but exhibit some potential weakness. These assets involve increased credit risk, but not to the point of justifying a substandard classification. Substandard assets exhibit some serious weakness in repayment capacity, equity and/or collateral pledged on the loan. Doubtful assets exhibit similar weaknesses as substandard assets. However, doubtful assets have additional weaknesses in existing factors, conditions and values that make collection in full highly questionable. Loss assets are considered uncollectible. 18

20 Credit Quality of Loans (in thousands) As of September 30, 2018 Acceptable Special mention Substandard/Doubtful Total Wholesale loans $84,006, % $ $ $84,006, % Retail loans: Real estate mortgage 3,299, % 126, % 122, % 3,548, % Production and intermediate-term 3,529, % 67, % 108, % 3,705, % Loans to OFIs 676, % , % Other 155, % % 4, % 161, % Total retail loans 7,661, % 193, % 236, % 8,091, % Total loans $91,667, % $193, % $236, % $92,097, % As of December 31, 2017 Acceptable Special mention Substandard/Doubtful Total Wholesale loans $80,374, % $ $ $80,374, % Retail loans: Real estate mortgage 3,752, % 110, % 110, % 3,972, % Production and intermediate-term 3,574, % 82, % 105, % 3,762, % Loans to OFIs 596, % , % Other 141, % % 5, % 147, % Total retail loans 8,064, % 193, % 220, % 8,478, % Total loans $88,439, % $193, % $220, % $88,853, % Note: Accruing loans include accrued interest receivable. We had no loans categorized as loss at September 30, 2018 or December 31, Aging Analysis of Loans Days Not Past Due or Accruing loans (in thousands) Days or More Total Less than 30 Days Total 90 days or more As of September 30, 2018 Past Due Past Due Past Due Past Due Loans past due Wholesale loans $ -- $ -- $ -- $84,006,425 $84,006,425 $ -- Retail loans: Real estate mortgage 6,664 5,962 12,626 3,535,564 3,548, Production and intermediate-term 25,155 14,096 39,251 3,666,526 3,705,777 1,029 Loans to OFIs , , Other , , Total retail loans 32,136 20,058 52,194 8,039,249 8,091,443 1,041 Total loans $32,136 $20,058 $52,194 $92,045,674 $92,097,868 $1,041 19

21 Days Not Past Due or Accruing loans (in thousands) Days or More Total Less than 30 Days Total 90 days of more As of December 31, 2017 Past Due Past Due Past Due Past Due Loans past due Wholesale loans $ -- $ -- $ -- $80,374,997 $80,374,997 $ -- Retail loans: Real estate mortgage 7,482 6,046 13,528 3,958,951 3,972, Production and intermediate-term 21,953 10,718 32,671 3,729,863 3,762,534 8 Loans to OFIs , , Other , , Total retail loans 30,032 16,790 46,822 8,432,067 8,478,889 8 Total loans $30,032 $16,790 $46,822 $88,807,064 $88,853,886 $8 Note: Accruing loans include accrued interest receivable. Risk Loans Risk loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms. Risk Loan Information September 30, December 31, (in thousands) Nonaccrual loans: Current as to principal and interest $30,569 $32,455 Past due 23,043 20,583 Total nonaccrual loans 53,612 53,038 Accruing restructured loans 3,758 4,588 Accruing loans 90 days or more past due 1,041 8 Total risk loans $58,411 $57,634 Volume with specific reserves $32,635 $30,075 Volume without specific reserves 25,776 27,559 Total risk loans $58,411 $57,634 Specific reserves $5,922 $5,052 Note: Accruing loans include accrued interest receivable. For the nine months ended September 30, Income on accrual risk loans $192 $200 Income on nonaccrual loans 3,710 2,683 Total income on risk loans $3,902 $2,883 Average risk loans $60,835 $58,887 20

22 Risk Loans by Type September 30, December 31, (in thousands) Nonaccrual loans: Real estate mortgage $16,085 $18,491 Production and intermediate-term 37,492 34,483 Other Total nonaccrual loans $53,612 $53,038 Accruing restructured loans: Real estate mortgage $3,758 $4,588 Total accruing restructured loans $3,758 $4,588 Accruing loans 90 days or more past due: Real estate mortgage $12 $ -- Production and intermediate-term 1,029 8 Total accruing loans 90 days or more past due $1,041 $8 Total risk loans $58,411 $57,634 Note: Accruing loans include accrued interest receivable. We had no wholesale loans classified as risk loans at September 30, 2018 or December 31, All risk loans are considered to be impaired loans. Additional Impaired Loan Information by Loan Type As of September 30, 2018 For the nine months ended September 30, 2018 Recorded Unpaid Principal Related Average Impaired (in thousands) Investment (1) Balance (2) Allowance Loans Interest Income Recognized Impaired loans with a related allowance for loan losses: Real estate mortgage $2,620 $3,049 $697 $3,089 $ -- Production and intermediate-term 29,980 31,451 5,208 29, Other Total $32,635 $34,541 $5,922 $32,217 $ -- Impaired loans with no related allowance for loan losses: Real estate mortgage $17,235 $28,400 $ -- $20,316 $3,065 Production and intermediate-term 8,541 8, , Other Total $25,776 $37,117 $ -- $28,618 $3,902 Total impaired loans: Real estate mortgage $19,855 $31,449 $697 $23,405 $3,065 Production and intermediate-term 38,521 39,991 5,208 37, Other Total $58,411 $71,658 $5,922 $60,835 $3,902 21