District Connected District Annual Report AgriBank, FCB and Affiliated Associations

Transcription

1 District Connected 2013 District Annual Report AgriBank, FCB and Affiliated Associations

2 TABLE OF CONTENTS AgriBank, FCB and Affiliated Associations Combined Five-Year Summary of Selected Financial Data... 1 Management's Discussion and Analysis... 2 Report of Managment Independent Auditor s Report Combined Financial Statements Notes to Combined Financial Statements Disclosure Information Required by Regulations Young, Beginning and Small Farmers and Ranchers Risk Factors Additional copies of the annual or quarterly reports may be requested free of charge by contacting AgriBank, FCB at 30 East 7 th Street, St. Paul, MN , (651) , or via to financialreporting@agribank.com. These reports are also available through AgriBank s website at To request free copies of the annual or quarterly reports contact us as stated above. The annual report is available on our website approximately 75 days after the end of the calendar year and members are provided a copy of such report 90 days after the end of the calendar year. The quarterly reports are available on our website approximately 40 days after the end of each calendar quarter.

3 Combined Five-Year Summary of Selected Financial Data AgriBank, FCB and Affiliated Associations (Dollars in thousands) Combined Statement of Condition Data Loans $82,770,309 $77,089,134 $68,349,565 $65,035,081 $60,245,483 Allowance for loan losses 236, , , , ,002 Net loans 82,533,997 76,826,204 68,049,057 64,628,735 59,859,481 Investment securities - AgriBank, FCB 11,555,272 10,987,313 9,688,571 9,997,892 8,866,278 Investment securities - Affiliated Associations 1,968,260 2,275,266 2,262,747 2,033,809 1,877,871 Other property owned 33,379 67, ,260 94,491 55,821 Other assets 4,238,549 3,352,060 3,023,040 3,017,500 3,165,286 Total assets $100,329,457 $93,508,679 $83,136,675 $79,772,427 $73,824,737 Obligations with maturities of one year or less $25,327,384 $25,863,061 $22,700,685 $23,791,456 $22,692,372 Other obligations with maturities greater than one year 57,888,051 52,717,155 47,002,090 43,723,027 40,289,214 Subordinated notes with maturities greater than one year 600, , , , ,000 Total liabilities 83,815,435 79,180,216 70,302,775 68,114,483 63,481,586 Perpetual preferred stock 350, Protected borrower equity ,056 2,716 3,391 At-risk borrower equity 265, , , , ,049 Allocated surplus 339, , , , ,864 Unallocated surplus 15,838,875 14,324,793 12,875,783 11,576,553 10,350,806 Accumulated other comprehensive loss (314,550) (583,324) (594,096) (433,529) (480,959) Noncontrolling interest 34,864 22,082 6, Total shareholders' equity 16,514,022 14,328,463 12,833,900 11,657,944 10,343,151 Total liabilities and shareholders' equity $100,329,457 $93,508,679 $83,136,675 $79,772,427 $73,824,737 Combined Statement of Income Data Net interest income $2,512,287 $2,311,454 $2,172,337 $2,052,135 $1,828,414 Reversal of (provision for) credit losses 28,537 (33,907) (23,637) (189,913) (320,374) Provision for income taxes (50,145) (39,116) (55,726) (50,901) (29,411) Other expenses, net (660,289) (519,042) (553,180) (374,249) (579,279) Net income $1,830,390 $1,719,389 $1,539,794 $1,437,072 $899,350 Combined Key Financial Ratios Return on average assets 1.93% 1.98% 1.91% 1.91% 1.26% Return on average shareholders' equity 11.93% 12.56% 12.47% 12.98% 9.16% Net interest income as a percentage of average earning assets 2.71% 2.73% 2.76% 2.79% 2.64% Shareholders' equity as a percentage of total assets 16.46% 15.32% 15.44% 14.61% 14.01% Net (recoveries) charge-offs as a percentage of average loans (0.00%) 0.09% 0.18% 0.28% 0.25% Allowance for loan losses as a percentage of loans 0.29% 0.34% 0.44% 0.62% 0.64% Debt to shareholders' equity (:1) Permanent capital ratio (AgriBank only) 22.1% 21.1% 20.9% 20.6% 18.4% Total surplus ratio (AgriBank only) 18.5% 17.4% 17.3% 16.7% 14.3% Core surplus ratio (AgriBank only) 11.4% 10.4% 10.1% 10.0% 8.2% Net collateral ratio (AgriBank only) 106.4% 106.0% 106.2% 105.8% 105.6% Net Income Distributed Cash patronage paid in the current year $1,492 $5,404 $428 $374 $336 Cash patronage to be paid in the next fiscal year 238, , , ,902 93,457 Total cash patronage refunds to members $240,435 $214,586 $199,854 $175,276 $93,793 Stock patronage issued in the current year $492 $474 $361 $377 $333 Stock patronage to be issued in the next fiscal year Total stock patronage refunds to members $913 $826 $695 $945 $675 Preferred stock dividends paid in the current year $3,131 $ -- $ -- $ -- $ -- Preferred stock dividends to be paid in the next fiscal year 2, Total preferred stock dividends $5,806 $ -- $ -- $ -- $ -- Net surplus allocated under nonqualified patronage program $61,598 $54,967 $40,015 $36,409 $27,206 Redemption of surplus allocated under nonqualified patronage program 25,027 42,694 14,509 1,262 1,642 1

4 Management s Discussion and Analysis AgriBank, FCB and Affiliated Associations The following commentary reviews the financial condition and results of operations of AgriBank, FCB (AgriBank) and affiliated Associations (the District) and provides additional specific information. The accompanying combined financial statements and notes to the combined financial statements also contain important information about our financial condition and results of operations. The Farm Credit System The Farm Credit System (the System) is a nationwide network of borrower-owned lending institutions and specialized service organizations. Farm Credit provides more than $201 billion in loans, leases and related services to farmers, ranchers, rural homeowners, aquatic producers, timber harvesters, agribusinesses and agricultural and rural utility cooperatives. Congress established the System in 1916 to provide a reliable source of credit for the nation's farmers and ranchers. Today, the System provides more than one-third of the credit needed by those who live and work in rural America. Farmers, ranchers, agribusiness, rural homeowners and rural utilities depend on the System s funding and services to produce the high-quality food and agricultural products enjoyed in the United States and around the globe. The Farm Credit mission is to provide a reliable source of credit for American agriculture by making loans to qualified borrowers at competitive rates and providing insurance and related services. Nearing our 100th anniversary, the System has: Assets in excess of $260 billion Nearly 500,000 member-borrowers More than 13,000 employees Coverage in every county in all 50 states plus Washington D.C. and Puerto Rico At December 31, 2013, the System was comprised of three Farm Credit Banks, one Agricultural Credit Bank and 82 Associations across the nation. System entities have specific lending authorities within their chartered territories. System Banks and Associations are subject to examination and regulation by an independent federal agency, the Farm Credit Administration (FCA). The Federal Farm Credit Banks Funding Corporation (the Funding Corporation) issues a variety of Federal Farm Credit Banks Consolidated Systemwide Debt Securities with broad ranges of maturities and structures on behalf of the System Banks. The Farm Credit System Insurance Corporation insures the timely payment of principal and interest on insured notes, bonds, and other obligations issued on behalf of System Banks. 2

5 The Farm Credit System 2013 Annual Information Statement, issued by the Funding Corporation, includes additional information about the System, its funding activities and its combined financial results. You can obtain a copy of that report by contacting the Funding Corporation or visiting its website. Their contact information is located at the end of this annual report. AgriBank and Affiliated Associations AgriBank is primarily owned by 17 affiliated Farm Credit Associations. AgriBank and affiliated Associations are collectively referred to as the District. AgriBank and affiliated Associations have more than $100 billion in assets. The District covers America s Midwest, a 15-state area stretching from Wyoming to Ohio and Minnesota to Arkansas. More than half of the nation s cropland is located within the AgriBank District. In this position with its prime location in America s agricultural heartland, AgriBank and affiliated Associations are respected partners for rural America based on their exceptional expertise in production agriculture. Basis of Presentation The combined financial statements and related financial information found in this Annual Report include the accounts of AgriBank and affiliated Associations and related entities. These financial statements are presented on a combined basis due to the financial and operational interdependence of the District entities. This interdependence results, in part, from the fact that AgriBank serves as an intermediary between the financial markets and the retail lending activities of the affiliated Associations. As a result, the loans made by the Associations to the borrowers are substantially funded by Systemwide debt securities issued by AgriBank. AgriBank s ability to repay the Systemwide debt securities is dependent upon the ability of the Association borrowers to repay their loans. In the combined financial statements, the accounts of the individual District entities are combined and all significant intra-district transactions and balances are eliminated. Risk Management Risk is inherent in our business and sound risk management practices are a fundamental component of our operations. AgriBank s prudent and disciplined approach to risk management includes a formal enterprise risk management structure established to identify emerging risks and evaluate risk implications of the decisions and actions of AgriBank and others. While these practices vary by entity, the overreaching goals of our collective enterprise risk management practices are to: effectively assess, prioritize, monitor and report key organizational risks enhancing our ability to achieve our business objectives; embed a risk-aware culture throughout the District; identify and implement strategies to mitigate risk where appropriate; and ensure we are adequately compensated for the risks that we take. 3

6 Information on some of the major types of risk inherent in our business follows: Credit risk is the risk of loss arising from a borrower or counterparty failing to perform on an obligation. Our primary sources of credit risk are our lending activities, investment portfolios and derivative contracts. We are also exposed to credit risk under our joint and several liability for Systemwide debt securities. Interest rate risk is the risk that changes in interest rates may adversely affect operating results and financial condition. Our interest rate risk arises primarily from financing fixed rate instruments that can be prepaid, adjustable rate loans with interest rate caps and decisions related to the investment of our equity. Substantially all of interest rate risk is managed by AgriBank. Liquidity risk is the risk of loss arising from the inability to meet obligations when they come due without incurring excessive costs. Our primary source of liquidity is access to the debt markets, which could be temporarily disrupted or available only by paying a high rate of interest. A secondary source of liquidity is provided by AgriBank s investment portfolio. Events or concerns in a particular sector could result in segments of AgriBank s investment portfolio becoming illiquid or liquid only at a severe discount to carrying value. Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems, errors by employees or external events. Reputation risk is the risk of loss resulting from events, real or perceived, that shape the image of the Farm Credit System or any of its entities. Such risks include the impact of investors perceptions about agriculture, the reliability of System financial information, or the overt actions of any System Institution. These risks, and the methods we use to manage them, are discussed in the following sections. The Board of Directors of each of the entities within the District oversee risk management by adopting policies to guide the organization s risk tolerance and by monitoring performance against established risk limits. Within each Board s risk framework and limits, management establishes controls to guide the day-to-day risk management activities of the organization. Each Board, through its Audit Committee, also monitors risk management and policy compliance through the Internal Audit function. Forward-Looking Information This Annual Report includes, and our representations may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services and assumptions underlying these projections and statements. These projections and statements are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections and statements may address, among other things, business strategy, competitive strengths, goals, market and industry developments and the growth of our businesses and operations. The words anticipate, believe, estimate, expect, intend, outlook and similar expressions, as they relate to the District or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the District with respect to future events and are subject to certain risks, uncertainties and assumptions, 4

7 including the risk factors described in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and actual results may differ from those in the forward-looking statements as a result of various factors. The information contained in this Annual Report, including without limitation, the information under Management s Discussion and Analysis identifies important factors that could cause such differences, including but not limited to a change in the U.S. agricultural economy, overall economic conditions, changes in market rates of interest, and the effect of new legislation or government regulations or directives. However, actual results and developments may differ materially from our expectations and predictions due to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties include, but are not limited to: political, legal, regulatory, financial markets and economic conditions and developments in the United States and abroad; economic fluctuations in the agricultural, international and farm-related business sectors; weather-related, disease and other adverse climatic or biological conditions that periodically occur and which impact agricultural productivity and income; changes in U.S. government support of the agricultural industry and the System as a governmentsponsored enterprise, as well as investor and rating agency reactions to events involving the U.S. government, other government-sponsored enterprises and other financial institutions; actions taken by the Federal Reserve System in implementing monetary policy; credit, interest rate and liquidity risk inherent in our lending activities; changes in our assumptions for determining the allowance for loan losses, other than temporary impairment and fair value measurements; and industry outlooks for agricultural conditions. Refer to additional discussion in the Risk Factors section at the end of this report. Critical Accounting Policies Our combined financial statements are reported based on accounting principles generally accepted in the United States of America (GAAP) and require that significant judgment be applied to various accounting, reporting and disclosure matters. We use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of significant accounting policies, refer to Note 2 of the accompanying combined financial statements. The following is a summary of certain critical accounting policies: Allowance for loan losses The allowance for loan losses is our best estimate of the amount of losses on loans in our portfolio as of the date of the financial statements. We determine the allowance for loan losses based on a periodic evaluation of our loan portfolio, which considers loan loss history, estimated probability of default, estimated loss severity, portfolio quality and current economic and environmental conditions. Refer to the Loan Portfolio Analysis of the Allowance for Loan Losses section for further discussion. Valuation methods We apply various valuation methods to assets and liabilities that often involve judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as certain investment securities. However, for those items for which an observable active market does not exist, management utilizes significant estimates and assumptions to value such items. These valuations require the use of 5

8 various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, loss severity rates, third party prices, costs of servicing and liquidation values. The use of different assumptions could produce significantly different results. Financial Overview Our financial performance reflected strong earnings and continued loan growth for We recorded record net income of $1.8 billion in 2013, an increase of $111.0 million, or 6.5%, from the record level set one year ago. The most significant drivers were an increase in net interest income of $200.8 million and reduction in provision for credit losses of $62.4 million. These positive variances were partially offset by an increase in non-interest expenses of $123.5 million (primarily salaries and employee benefits and System insurance expenses) and a decrease in non-interest income of $17.7 million (primarily from the non-recurring distributions received from the System s Allocated Insurance Reserve Accounts (AIRAs) received in 2012, partially offset by an increase in loan prepayment and fee income). Refer to the Results of Operations section for further discussion. Loan Portfolio Components of Loans (in millions) As of December 31, Accrual loans: Real estate mortgage $47,314.7 $43,388.4 $37,783.6 $35,110.6 $32,663.8 Production and intermediate term 21, , , , ,425.2 Agribusiness 6, , , , ,640.2 Rural residential real estate 2, , , , ,995.9 Other 3, , , , ,367.6 Nonaccrual loans ,152.8 Total loans $82,770.3 $77,089.1 $68,349.6 $65,035.1 $60,245.5 The other category is primarily comprised of communication and energy related loans, finance leases and loans originated under our Mission Related Investment authority, as well as loans to AgriBank s other financial institutions (OFIs). All of these other categories exhibited growth during District loans totaled $82.8 billion at December 31, 2013, a $5.7 billion, or 7.4%, increase from December 31, The increase in total loans from prior year was primarily due to continued strong business activity in the real estate mortgage sector driven by demand for cropland as well as continued activity in large multiple lender credits (agribusiness sector). In addition, consistent with prior year, operating loans increased temporarily in December, followed by significant repayments in January, as borrowers increased their operating lines to purchase 2014 production inputs, primarily for tax-planning strategies. In addition to the changes noted above, our loan portfolio exhibits some seasonality relating to the patterns of operating loans made to crop producers. Operating loans are normally at their lowest levels during the winter months because of repayments following the harvest and then increase in the spring and throughout the rest of the year as borrowers fund operating needs. 6

9 Beginning in April 2011, AgriBank began participating in the AgDirect program, which is included within the production and intermediate term sector. Under this program, AgriBank purchases 100% loan participation interests in retail equipment financing loans from AgDirect LLP (LLP), a limited liability partnership. At December 31, 2013, the LLP was owned by six District affiliated Associations and seven Associations from outside the District. The LLP is included within the combined financial statements. In 2013, AgriBank began administering the AgriHedge product which certain affiliated Associations offered to their borrowers. The AgriHedge product is a simple, effective way for farmers to hedge their crop revenue by allowing them to establish a hedge price on their corn, soybeans or wheat combining an operating loan from an affiliated Association with a third-party commodity swap product. This product combination enables the farmer to hedge commodity price risk without the typical upfront cash flows for fees and on-going margin calls (including costs of borrowing) of a traditional swap product. Fees incurred are paid by the farmer when the contract is settled and cash is received or paid. Eligible participants must meet certain credit criteria, and the hedges must be for their own crop. The net impact to our financial statements was negligible for the year ended December 31, Credit Risk Management The eligible borrowers, to whom we are authorized to make loans or participate in loans made to, are specified under the Farm Credit Act. As a result, our loan portfolio is concentrated in the agricultural industry. Earnings, loan growth and credit quality of our loan portfolio can be affected significantly by the general state of the economy primarily as it affects agriculture and users of agricultural products. We actively manage our credit risk through various policies and standards, including our loan committees reviewing significant loan transactions. Underwriting standards include analysis of five credit factors: repayment capacity, capital position, collateral, management ability and loan terms. These standards vary by agricultural industry and are updated to reflect current market conditions. Many of the credits in our portfolio are large and complex and we do not use standardized credit scoring on these loans. Loans under $250 thousand comprise 90.1% of District customers by number and 36.5% of our loans by dollar amount. Associations generally use statistically validated scorecards to evaluate smaller credits. We use credit factors to evaluate, identify and disclose risk in our loan portfolio based on the FCA s Uniform Classification System, which categorizes loans into five categories (credit quality). We assign each loan in our loan portfolio within one of the following credit quality classifications: Acceptable assets are non-criticized assets representing the highest quality. They are expected to be fully collectible. This category is further differentiated into various probabilities of default; Other Assets Especially Mentioned (Special Mention) assets 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; and Loss assets are considered uncollectible. 7

10 Credit Quality of Loans (in millions) As of December 31, 2013 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $46, % $ % $ % $48, % Production and intermediate term 21, % % % 22, % Agribusiness 6, % % % 7, % Rural residential real estate 2, % % % 2, % Other 3, % % % 3, % Total loans $80, % $1, % $1, % $83, % (in millions) As of December 31, 2012 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $42, % $ % $1, % $44, % Production and intermediate term 20, % % % 21, % Agribusiness 5, % % % 6, % Rural residential real estate 2, % % % 2, % Other 3, % % % 3, % Total loans $74, % $1, % $2, % $77, % (in millions) As of December 31, 2011 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $36, % $ % $1, % $38, % Production and intermediate term 18, % % % 19, % Agribusiness 5, % % % 5, % Rural residential real estate 2, % % % 2, % Other 2, % % % 2, % Total loans $64, % $1, % $2, % $69, % (in millions) As of December 31, 2010 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $33, % $1, % $1, % $36, % Production and intermediate term 17, % % % 18, % Agribusiness 5, % % % 6, % Rural residential real estate 2, % % % 2, % Other 2, % % % 2, % Total loans $60, % $2, % $2, % $65, % (in millions) As of December 31, 2009 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $31, % $1, % $1, % $33, % Production and intermediate term 15, % % 1, % 17, % Agribusiness 4, % % % 5, % Rural residential real estate 1, % % % 2, % Other 2, % % % 2, % Total loans $55, % $2, % $3, % $60, % Note: Accruing loans include accrued interest receivable. The credit quality of our loan portfolio has improved over the past five-year period and remains strong at December 31, 2013 with 98.0% of our portfolio in the acceptable and special mention categories. This was compared to 97.4%, 96.8%, 95.5% and 94.8% at December 31, 2012, 2011, 2010 and 2009, respectively. 8

11 Overall, we expect District credit quality to remain at acceptable levels. Agriculture has experienced mostly positive economic conditions over the past decade. However, agriculture is a cyclical industry and we may experience a downturn in credit quality within one or more sectors of our portfolio with the continued level of volatility in commodity prices. In addition to the FCA s Uniform Classification System, we also use a two-dimensional loan rating model that incorporates a 14-point probability of default scale to identify and track the probability of borrower default and a separate six-tier scale addressing loss given default over a period of time. Each of the probability of default rating categories carries a distinct percentage of default probability. The 14-point probability of default scale provides for granularity of the probability of default, especially in the acceptable ratings. There are nine acceptable categories that range from a borrower of the highest quality to a borrower of minimally acceptable quality. The range of probabilities of default between one and nine is very narrow and would reflect almost no default to a minimal default percentage. The probability of default increases more rapidly as a loan moves from a nine to a 10 and increases significantly as a loan moves to an 11. A 12 or worse rating indicates that default is almost certain. The six-tier scale for loss given default measures the expected loss severity based upon the adequacy of the collateral supporting the loan. A substantial portion of the loan portfolio is collateralized, which reduces our exposure to credit losses. Additionally, credit policies reduce credit risk with emphasis placed on repayment capacity rather than exclusively on the underlying collateral. Although FCA regulations allow real estate mortgage loans of up to 85% of appraised value, underwriting standards generally allow only 65%. While underwriting exceptions on loan to appraised value are granted, they are often structured with additional principal payments in the early years. Refer to further discussion within the Land Values portion of the Agricultural Conditions section of this report. Borrower and commodity concentration lending limits have been established to manage credit exposure. The lending limit to a single borrower, as set out in the affiliated Associations General Financing Agreement (GFA) with AgriBank, is generally 15% of each Association s permanent capital. AgriBank s lending limit, as determined by its Board of Directors, is 15% of AgriBank s lending and leasing limit base. In addition, we have an internal District limit exposure to a single credit risk, although not required by regulations. We reduce credit risk in the loan portfolio through government guarantee programs. At December 31, 2013, $1.7 billion of loans contained various levels of guarantees under such programs. Certain affiliated Associations have entered into a Standby Commitment to Purchase Agreement with the Federal Agricultural Mortgage Corporation (Farmer Mac), a System institution, to help manage credit risk. If a loan covered by the agreement goes into default, subject to certain conditions, the affiliated Associations have the right to sell the loan to Farmer Mac. This agreement remains in place until the loan is paid in full. The net investment of loans subject to the purchase agreement was $651.7 million, $454.2 million and $346.8 million at December 31, 2013, 2012 and 2011, respectively. The affiliated Associations paid Farmer Mac commitment fees totaling $3.2 million, $2.4 million and $2.5 million in 2013, 2012 and 2011, respectively. These amounts are included in Other operating expenses in the Combined Statements of Comprehensive Income. Sales of loans to Farmer Mac under this agreement have been minimal with $4.3 million occurring in No loans have been sold to Farmer Mac under this agreement in 2013 or

12 One affiliated Association has reduced risk in their loan portfolios through the use of credit default swaps in connection with synthetic securitizations. The amount of loans under credit default swaps was $339.5 million at December 31, Beginning in 2013, one affiliated Association had loans held for sale under a rural residential mortgage program to provide qualified borrowers with additional options for financing rural properties at competitive interest rates. Loans closed under this program will be sold to and securitized by Farmer Mac. At December 31, 2013, loans held for sale including related accrued interest receivable totaled $4.5 million which is included in Other assets on the Combined Statements of Condition. In conjunction with this program, the affiliated Association entered into forward commitments to sell to-be-announced (TBAs) securities classified as derivatives not designated as hedging instruments (other derivative products). The forward commitments are used to economically hedge the interest rate risk in its rural residential real estate loan activities. At December 31, 2013, the fair value of these forward commitments totaled $18 thousand which is included in Derivative assets on the Combined Statements of Condition. We also manage credit risk through loan participations. We diversify our portfolio and limit our exposure to an individual borrower or commodity through buying and selling loans to other institutions within or outside of the Farm Credit System. Managing loans through participations also allows us to manage growth and capital primarily to improve geographic or commodity diversification. Portfolio Maturities Contractual Maturities of Loans (in thousands) Over One One Year Through Over Five As of December 31, 2013 or Less Five Years Years Total Real estate mortgage $5,187,919 $17,813,603 $24,685,461 $47,686,983 Production and intermediate term 11,282,978 9,924, ,755 22,118,298 Agribusiness 3,437,873 2,148,814 1,416,936 7,003,623 Rural residential real estate 191, ,963 1,680,507 2,626,429 Other 1,732, , ,608 3,334,976 Total loans $21,832,992 $31,467,050 $29,470,267 $82,770,309 Total of loans due after one year with: Fixed interest rates $35,887,123 Variable and adjustable interest rates 25,050,194 10

13 Portfolio Diversification Loan concentrations exist when amounts loaned to multiple borrowers engaged in similar activities, or within close proximity, would cause them to be similarly affected by economic or other conditions. The tables below illustrate commodity and geographic distribution of the District s portfolio as of December 31, 2013: District Portfolio Commodity Distribution State Distribution Crops 49% Iowa 12% Cattle 9% Illinois 10% Dairy 8% Minnesota 9% Investor real estate 5% Nebraska 8% Pork 5% Indiana 6% Food products 4% Michigan 6% Residential real estate 4% Ohio 6% Timber 3% Wisconsin 6% Poultry 2% Missouri 5% Ethanol 1% South Dakota 5% Other 10% North Dakota 4% 100% Tennessee 4% Arkansas 3% Kentucky 3% Wyoming 1% Other states 12% 100% The commodity and geographic concentrations have not changed materially from prior years. While the District has concentrations in crops, these crops represent staple commodities of agriculture corn, soybeans and wheat. There is further concentration in crops to some extent in the investor real estate loans. These loans are typically made for the purchase of land that is rented for crop production. There is also diversification of these crops geographically with multiple states being significant producers of these important crops. It is important to note that the commodity distribution represents the primary commodity of the borrower. Many of the crop producers may also have livestock operations or other forms of diversification. Certain affiliated Associations have diversified the concentration in agricultural production through rural residential real estate and part-time farmer loans as well as agribusiness loans. Rural residential real estate, investor real estate and part-time farmer borrowers (agri-consumers) generally have significant off-farm sources of income, and therefore, are less subject to cycles in agriculture. These borrowers have been more susceptible to changes in the general economy, and the condition of the general economy will influence the credit quality of these segments of the portfolio. It is important to note the counter-cyclical diversification effect of grain and livestock production. High grain prices are generally favorable to crop producers; however, livestock producers are adversely affected through higher feed costs. Conversely, low grain prices are generally negative to crop producers but tend to improve the profitability for those livestock producers who purchase most or all of their feed. Extreme volatility in commodity prices can negatively impact all District producers. 11

14 The ten largest customers as of December 31, 2013 represented 3.0% of total loans (including accrued interest receivable). Small loans (less than $250 thousand) account for 90.1% of District customers by number and 36.5% of our loans by dollar amount. Credit risk on small loans is usually reduced by non-farm income sources. Loans under $250 thousand are generally evaluated using statistically validated scorecards. The scorecards widely used by District institutions are related to operating, intermediate term (generally for farm equipment), agricultural mortgage and home mortgage loans. At December 31, 2013, we had 354 thousand scored loans, or 59.3% by number of loans of the portfolio representing $17.0 billion, or 20.4% of total loans (including accrued interest receivable), of which only 0.7% were delinquent. Of the ten largest customers, 100% of these loans were classified as acceptable. Within these ten largest customers there are concentrations in three significant industries: timber at 35.5%; food products at 22.1%; and pork at 12.1% Agricultural Conditions The United States Department of Agriculture (USDA) projects United States aggregate net farm income (NFI) to increase by $16.7 billion over 2012 levels to a record $130.5 billion in Despite the projected increase in NFI, projected 2013 aggregate net cash income (NCI) is projected to decline by $4.3 billion, or 3.2%, from $134.4 billion in 2012 to $130.1 billion in The contrast in directional change in NFI and NCI is primarily due to an increase of $20.6 billion (from a decrease of $8.1 billion in 2012 to an increase of $12.5 billion in 2013) in the change in value of inventories, a component of NFI but not part of NCI. Value of inventory reflects the significantly higher crop yields in The farm sector s debt-to-asset ratio is currently forecasted at a record low 10.6% for The projected improvement in debt-to-asset ratio is primarily driven by a $94.8 billion, or 4.1%, increase in the projected value of farm real estate to a record aggregate value of $2.4 trillion. The USDA projects net farm income to fall 26.6% in 2014 to $95.8 billion, the lowest level since 2010 but $8 billion above the previous 10-year average. The forecasted decrease in net farm income is largely driven by expected lower crop receipts and a projected 45% decline in government payments under the Agricultural Act of Lower commodity prices for soybeans, and especially corn, are expected to substantially reduce the profitability of crop producers in Many crop producers have strengthened their financial and liquidity positions over the past several years including 2012 when the impact of the drought was significantly mitigated by multi-peril crop insurance. However, the high prices for corn, soybeans and other feed grains through the first half of 2013 placed pressure on livestock, poultry, ethanol and dairy producers who rely on these inputs. The 2013 harvest season is complete and has resulted in the largest corn crop on record and the third largest soybean crop. This has resulted in significant reductions in commodity prices for corn and other feed grains, and to a lesser extent, soybeans. These lower commodity prices are expected to have some negative impact on crop producers as the current projected market year average corn price of $4.50 per bushel is slightly above the USDA s projected breakeven price of $4.10 per bushel to cover both operating and allocated overhead costs for the 2013 crop. However, these lower prices generally will be positive for producers and processors who purchase these commodities as inputs in the production of livestock, poultry, dairy products and ethanol. The Agricultural Act of 2014 (Farm Bill) was signed into law on February 7, This new Farm Bill will govern an array of federal farm and food programs, including commodity price and support payments, farm credit, agricultural conservation, research, rural development and foreign and domestic food programs for five years. The new Farm Bill eliminates $23 billion in mandatory Federal spending, representing a significant reduction in the U.S. government farm policy support. The Farm Bill repeals direct payments and limits producers to risk 12

15 management tools that offer protection when they suffer significant losses, such as insurance. The Farm Bill provides continued support for crop insurance programs, strengthens livestock disaster assistance and provides dairy producers with a voluntary margin protection program without imposing government-mandated supply controls. 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 affiliated Associations throughout the District. The District s most recent real estate market value survey indicated that District real estate value change ranged from a low of -5.7% to a high of 38.4% for the twelve-month period ending June 30, The low end of the range was primarily driven by agriculture land whose value in the past was driven upward by non-agricultural influences. At the present time, this specific area is going through a downward adjustment due to land values transitioning back to agriculture value. The high end of the range was primarily driven by strong net income being generated in most sectors of agriculture, particularly crop production. The USDA s annual Land Values Summary released in August 2013 reported that in the Northern Plains, Corn Belt and Lakes States regions, cropland value increased 25.0%, 16.1% and 13.9%, respectively, from the previous year. Qualitative surveys of lending officers compiled by the Federal Reserve Banks of Chicago, Kansas City, Minneapolis and St. Louis as of the end of the third quarter 2013 also indicated sharply increasing farmland values. The Federal Reserve Banks surveys cited year-over-year increases in the average value of non-irrigated cropland of 9% to 20%. Declining land values are a potential lending risk following periods of sustained, rapid land value increases. Nominal and real (inflation-adjusted) agricultural land values have increased in proportions greater than other asset classes such as stocks and urban residential and commercial land during the last decade, but District agricultural land values have, for the most part, escaped the valuation declines that other assets suffered during the 2008 financial crisis. This is largely because the agricultural sector, particularly crop farming, has remained profitable throughout the economic crisis period, and demand for agricultural land has remained very strong. Lower commodity prices for corn, soybeans and other feed grains, however, are expected to adversely affect land values. AgriBank District credit risk policies focus on loan repayment capacity in addition to conservative loan-to-value levels on the collateral that secures loans. Although FCA regulations allow real estate mortgage loans of up to 85% of appraised value, our underwriting standards generally limit lending to no more than 65% at origination. Due to very strong land values in much of our District, many affiliated Associations have implemented risk management practices that incorporate loan-to-appraised value thresholds below the 65% level. In addition, many District lenders impose lending caps per acre based on the land s sustainable income-producing capacity. While underwriting exceptions on loan-to-appraised-value are sometimes granted, in such cases loans are typically structured with shorter amortization schedules and/or additional principal payments in the early years to reduce risk. 13

16 Specific Industry Conditions Specific conditions for our District retail portfolio primary commodity exposures are discussed below. The commodity information was obtained from USDA National Agricultural Statistics Service publications as of January 31, Comparative amounts are the most recently published information, if revised and/or published. The commodity information for eggs was obtained from the Midwest Urner Barry report as of December 31, /31/ /31/ /31/ /31/ /31/2009 Crops Overall (Index) Corn ($ per bushel) Soybeans ($ per bushel) Wheat (all, $ per bushel) Cattle (all, $ per hundredweight) Pork (all, $ per hundredweight) Dairy ($ per hundredweight) Broilers ($ per pound) Eggs ($ per dozen) Rice ($ per hundredweight) Cotton ($ per pound) Crops As of December 31, 2013, crops represented 49% of the AgriBank District loan portfolio with 0.9% adversely classified. Corn AgriBank 12-month industry outlook: neutral to negative. Key factors: The January 2014 USDA World Agricultural Supply and Demand Estimates (WASDE) report reflects 95.4 million acres planted and 87.7 million acres harvested in Yield is projected to rebound sharply from the drought-reduced bushels per acre in 2012 to the current forecast of bushels per acre in Despite increased domestic and export demand, the ending-stocks-to-use ratio is projected to increase from 7.4 percent in to 12.4 percent in The projected large increase in ending supplies results in a sharply lower forecasted farm price of $4.40 per bushel in compared to $6.89 per bushel in Soybeans AgriBank 12-month industry outlook: neutral. Key factors: The January 2014 WASDE report reflects 76.5 million acres planted and 75.9 million acres harvested in The harvest yield is projected to increase 8.8 percent from 39.8 bushels per acre in 2012 to 43.3 bushels per acre in Despite a rebound in exports, the ending-stocks-to-use ratio for is projected to remain consistent with the historically low 4.5 percent in USDA price forecasting models project a $1.90 per bushel decline, or 13.2%, in the farm price from a record $14.40 per bushel in to $12.50 per bushel in

17 Wheat AgriBank 12-month industry outlook: neutral. Key factors: According to the January 2014 WASDE report, harvested acreage for wheat (all classes) reflects a decline of 3.7 million acres, or 7.6%, in 2013 due to significant abandonment in the hard red winter wheat class. However, total wheat production (all classes) is projected to decline by only 136 million bushels in 2013 due to the projected yield of 47.2 bushels per acre which is roughly 2% higher than the 46.3 bushel yield in The ending-stocks-to-use ratio is projected to decline from 29.7 percent in to 25.3 percent in USDA forecasts a decline in the market year average price from $7.77 per bushel in to $6.80 per bushel in due to significant production increases in other major exporting nations. Despite the outlook for lower U.S. corn, soybean and wheat prices, credit quality in the AgriBank District s crops portfolio of corn, soybeans and wheat are expected to remain stable given the strong earnings and balance sheet positions producers achieved over the past several years. Livestock Industry Cattle As of December 31, 2013, cattle represented 9% of the AgriBank District loan portfolio with 2.0% adversely classified. Cow-Calf AgriBank 12-month industry outlook: positive. Key factors: The beef cow herd continues to contract, reducing the available feeder cattle numbers. With continued strong demand from cattle feeders for the limited supply, feeder cattle prices are expected to remain near historic highs well into The cost of feed, especially hay, has declined due to better hay production in Drought conditions have waned in much of the U.S. cattle ranching territory through 2013, resulting in generally improved pasture conditions and overall feedstock availability and reduced overall feed costs. Strong demand for feeder cattle, lower overall feed costs and expectations of solid profits for 2014 are causing a slowing of the rate of beef cow slaughter, and also reducing the level of beef heifers being placed in feedlots. As a result of these factors, the number of beef cows is expected to begin stabilizing in 2014 and possibly expand in Credit quality in the AgriBank District s cow-calf portfolio is expected to modestly improve based on projected solid profits in Cattle Feedlots AgriBank 12-month industry outlook: neutral. Key factors: The high cost for feeder cattle will continue well into 2014 due to the declining beef cow herd and smaller calf crop. Over capacity in the feeding sector increases competition for the limited supply of 15

18 feeder cattle. Also, there has been a reduction in imported feeder cattle from Mexico due in part to three years of drought conditions, reducing their available cattle inventory. Increased U.S. corn production in 2013 has reduced overall feed costs, offsetting high feeder cattle prices. Despite strong fed cattle prices, cattle feeders are projected to show cash losses in The outlook for the first half of 2014 is more positive due to lower feed costs but the margins are expected to tighten in late This industry requires strong risk management practices to remain successful in this tight margin environment. The record high price of retail beef products combined with reduced beef production and competition from other proteins continues to drive down per capita beef consumption. Beef exports are projected to be up slightly in 2013, an important factor for supporting strong fed cattle prices. However, high beef prices and limited supplies are challenging export markets. The current high credit quality in the AgriBank District s cattle feedlot portfolio is expected to remain fairly stable with the possibility of a modest decline. District lenders have been disciplined in client selection, financing operations that generally are of higher quality with strong risk management practices. Dairy As of December 31, 2013, dairy represented 8% of the AgriBank District loan portfolio with 5.4% adversely classified. AgriBank 12-month industry outlook: positive. Key factors: Dairy producers faced the combination of declining milk prices and high feed costs during early 2013, which produced generally disappointing operating results. However, the second half of 2013 was more favorable primarily due to the sizeable corn crop of 2013, which has reduced feed prices and kept milk prices strong. Overall, 2013 should prove modestly profitable for most dairy producers. The outlook for 2014 is favorable, based on current factors that include: record-high exports of dairy products, relatively low stocks of warehoused dairy products and generally lower feed costs. These dynamics have created an environment in which most dairy producers are generating record margins over feed cost. Credit quality in the AgriBank District s dairy portfolio is expected to remain stable or improve in Pork As of December 31, 2013, pork represented 5% of the AgriBank District loan portfolio with 1.9% adversely classified. AgriBank 12-month industry outlook: positive. Key factors: Increased U.S. corn production in 2013, as noted above, has also been a positive factor for the pork industry. Declines in corn and soybean meal prices have helped reduce overall feed and production costs. Pork cutout prices remained at or near all-time highs in As feed costs have receded, positive operating margins returned during the second half of 2013 and into

19 Recent futures prices have allowed producers the opportunity to contract favorable margins on their pork production for the majority of The discovery of Porcine Epidemic Diarrhea Virus in the United States in early 2013 negatively impacted the industry from a production standpoint but has also limited overall supply, bolstering pork prices. The disease has no effect on meat quality but is a production restriction issue and can have a material negative impact on individual producers. Credit quality in the AgriBank District s pork industry portfolio is expected to remain stable or show gradual improvement. Reduced production costs will improve profitability and should keep credit quality on a positive trend. Poultry Industry As of December 31, 2013, poultry represented 2% of the AgriBank District loan portfolio with 6.1% adversely classified. Broilers AgriBank 12-month industry outlook: neutral. Key factors: Although production levels have increased year-over-year, the current size of the U.S. breeder flock remains below pre-recession levels, which should limit significant expansion in broiler production until mid-2014, and support continued strong broiler pricing. Feed costs have dropped sharply primarily due to greater corn supplies and lower corn prices following the 2013 harvest. Demand for broiler meat is expected to remain strong due to continued high pork and beef prices. Credit quality in the AgriBank District s broiler portfolio is expected to improve or remain stable in Turkeys AgriBank 12-month industry outlook: positive. Key factors: In response to industry oversupply and price decreases in 2012, turkey production is estimated to have dropped by 2.6% in 2013 according to the most recent USDA WASDE report. This production decrease should result in higher turkey prices for Feed costs have dropped sharply primarily due to greater corn supplies and lower corn prices following the 2013 harvest. Turkey exports were down 3.9% in 2013 but are expected to increase 1.7% in Credit quality in the AgriBank District s turkey portfolio is expected to improve or remain stable in Eggs AgriBank 12-month industry outlook: neutral. Key factors: The egg layer flock size is projected to reach million by year-end 2014, an increase of 0.2% yearover-year. Projections for 2014 estimate production increasing 1.5% over Increased egg production may result in modestly reduced shell egg and liquid egg prices in

20 Profit margins should improve as feed costs have moderated due to increased corn supply. Also, egg consumption is projected to increase by 1.8%. Political and social pressures regarding animal welfare persist, resulting in continued uncertainty regarding future layer housing requirements. Credit quality in the AgriBank District s egg layer portfolio is expected to remain stable in Other Concentrations Timber and wood products As of December 31, 2013, timber and wood products represented 3% of the AgriBank District loan portfolio with 1.2% adversely classified. AgriBank 12-month industry outlook: neutral to positive. Key factors: Housing starts are showing continued improvement, which is fostering optimism in the industry. Total seasonally adjusted housing starts at the end of November 2013 were at 1,091,000, well above the 2009 low of 554,000 housing starts. Building permits continue to increase. U.S. total building permits for November 2013 were 1,007,000, well above the 2009 low of 583,000. Housing affordability is stable. Conventional 30-year mortgage rates are near their historic lows, staying below 5% since May Average sales price for new houses sold has returned to historically high levels. November 2013 average sales price for a new home was $340,300. The historical high was $329,400 during March Consumer confidence improved as the U.S. economy gained momentum and unemployment declined. Pent up demand for housing combined with economic improvement creates the potential for increased demand for lumber and lumber products, leading to improvements in timber company performance. Credit quality in the AgriBank District s timber and wood products portfolio is expected to improve or remain stable in Ethanol As of December 31, 2013, ethanol represented 1% of the AgriBank District loan portfolio with 9.7% adversely classified. AgriBank 12-month industry outlook: neutral. Key factors: Ethanol production margins have improved substantially since the harvest of the 2013 corn crop. A drawdown in ethanol inventories in conjunction with lower corn prices with stable ethanol prices are the primary drivers for improved margins. On November 15, 2013, the Environmental Protection Agency released a Notice of Proposed Rulemaking for the 2014 Renewal Fuel Volume Obligations. Overall, the level of mandated ethanol will continue with 10% fuel blends. Higher level blending (E15) is expected to be minimal. Overall, 18

21 mandated blending of 13 billion gallons of conventional ethanol is expected in This is a reduction from the prior mandated level of 14.4 billion gallons. Future domestic ethanol demand is expected to be at 10% of domestic gasoline demand. Therefore, total domestic gasoline demand is expected to limit demand for ethanol. Credit quality in the AgriBank District s ethanol portfolio is expected to improve or remain stable in Other: Although not significant from a District-wide perspective, certain affiliated Associations have significant concentrations in rice, cotton and sugar beets. Competitive Conditions Competition historically is from small commercial banks, insurance companies, large banks, manufacturers/suppliers and captive finance companies. In general, community banks continue to be very competitive, and insurance companies and regional/national banks are increasingly more competitive particularly on the highest quality larger credits. Associations market shares vary greatly, with Farm Credit dominating the market in certain Association s territories, while in other territories the competition holds significant market share positions. In our traditional markets, affiliated Associations have historically been most competitive in falling interest rate environments because Farm Credit cost of funds declines more rapidly than that of our competitors. In a rising rate environment, our cost of funds tends to increase more quickly than competitors, resulting in significant competitive pressure and narrowing spreads. Many affiliated Associations saw decreased spreads in Most affiliated Associations anticipate spreads will narrow in 2014 from increased competition which could be exacerbated if there was also an increase in interest rates. Increases in interest rates would create a challenging competitive environment in which the affiliated Associations may not be able, or choose not, to maintain current spreads. Refer to further discussion within the Net Interest Income portion of the Results of Operations section of this report. Analysis of Risk Assets Risk assets are comprised of nonaccrual loans, accruing restructured loans and accruing loans 90 days or more past due (risk loans) and other property owned. Components of Risk Assets (in millions) As of December 31, Nonaccrual loans $626.4 $700.8 $884.9 $959.8 $1,152.8 Accruing restructured loans Accruing loans 90 days or more past due Total risk loans ,195.2 Other property owned Total risk assets $715.3 $834.7 $1,033.7 $1,083.1 $1,251.0 Risk loans as a % of total loans 0.82% 0.99% 1.33% 1.50% 1.96% Delinquencies as a % of total loans 0.44% 0.65% 0.74% 0.94% 1.39% Note: Accruing loans include accrued interest receivable. 19

22 The decrease in risk assets in 2013 was primarily due to the decrease in nonaccrual loans primarily related to repayments and settlement of a large participated dairy credit. The decrease in other property owned was primarily due to the write-down of a large timber credit and disposals. The decrease in risk assets in 2012 from 2011 was due primarily to the decrease in nonaccrual loans related to repayments. The decrease in other property owned was primarily due to the sale of a commercial dairy, a large tract of timber and a lumber concentration yard business at one affiliated Association. The decrease in risk assets in 2011 from 2010 was due primarily to decreases in nonaccrual loans related to a customer in accrual status purchasing the assets of a large dairy customer whose loans were previously in nonaccrual status. The decrease in total risk assets in 2010 from 2009 was due to the decrease in nonaccrual loans as various large customers loans transferred to accrual status during the fourth quarter of These customers were in the pork, dairy and ethanol industries. The increase in other property owned was primarily due to one affiliated Association acquiring a large timber operation during Total risk loans as a percentage of total loans remains within acceptable limits. Nonaccrual loans represented 0.8% of total loans at December 31, At December 31, 2013, 67.0% of nonaccrual loans were current as to principal and interest. Our accounting policy generally requires loans past due 90 days to be transferred into nonaccrual status. Based on management's analysis, all accruing loans 90 days or more past due were adequately secured and in the process of collection and, as such, were eligible to remain in accruing status. The following table sets forth interest income that would have been recognized if nonaccrual and restructured loans had been fully performing: (in thousands) For the year ended December 31, 2013 Interest income which would have been recognized under original contract terms $44,195 Less: interest income recognized 34,138 Interest income not recognized $10,057 Cash received on nonaccrual loans is applied to reduce the recorded investment in the loan asset, except in those cases where the collection of the recorded investment is fully expected and the loan has no unrecovered prior charge-offs. 20

23 Analysis of Allowance for Loan Losses The allowance for loan losses is an estimate of losses on loans in our portfolio as of the financial statement date. We determine the appropriate level of allowance for loan losses based on the periodic evaluation of factors such as loan loss history, estimated probability of default, estimated loss severity, portfolio quality and current economic and environmental conditions. Allowance Coverage Ratios As of December 31, Allowance as a % of: Loans 0.29% 0.34% 0.44% 0.62% 0.64% Nonaccrual loans 37.73% 37.52% 33.96% 42.34% 33.49% Total risk loans 34.66% 34.29% 32.65% 41.10% 32.30% Net (recoveries) charge-offs as a % of average loans (0.00%) 0.09% 0.18% 0.28% 0.25% Adverse loans as a % of risk funds* 9.96% 14.03% 16.89% 24.65% 29.80% *Risk funds includes total capital and allowance for loan losses. Allowance for Loan Losses Activity (in thousands) For the year ended December 31, Balance at beginning of year $262,930 $300,508 $406,346 $386,002 $211,254 Charge-offs: Real estate mortgage (21,246) (28,538) (30,938) (60,411) (49,388) Production and intermediate term (12,621) (46,079) (33,922) (84,104) (32,001) Agribusiness (900) (1,036) (54,701) (27,749) (63,872) Rural residential real estate (6,293) (7,038) (6,044) (8,798) (5,569) Other (1,722) (260) (16,518) (8,858) (4,422) Total charge-offs (42,782) (82,951) (142,123) (189,920) (155,252) Recoveries: Real estate mortgage 9,304 8,477 6,306 2,991 2,987 Production and intermediate term 31,121 9,141 12,537 9,476 3,538 Agribusiness 2, ,399 6,753 2,612 Rural residential real estate Other Total recoveries 43,310 18,216 22,648 20,351 9,626 Net recoveries (charge-offs) 528 (64,735) (119,475) (169,569) (145,626) (Reversal of) provision for loan losses (27,146) 27,157 13, , ,374 Balance at end of year $236,312 $262,930 $300,508 $406,346 $386,002 We determine the amount of allowance that is required by analyzing risk loans individually and all other loans by grouping them into loan segments sharing similar risk characteristics. For each segment of loans that were not individually evaluated for impairment we use a two-dimensional loan risk rating model that incorporates a 14-point rating scale to identify and track the probability of borrower default and a separate six-point scale addressing the loss given default. An allowance is recorded for the loan segments collectively evaluated using the combination of estimated probability of default and estimated loss given default assumptions. These estimated losses may be adjusted for relevant current environmental factors. These factors may vary by the different segments reflecting the risk characteristics of each segment and as these factors change, earnings are impacted. Risk loans are analyzed individually to establish specific allowances. We record a specific 21

24 allowance, if appropriate, to reduce the carrying amount of the risk loan to the lower of book value or the net realizable value of collateral. The allowance for loan losses totaled $236.3 million at December 31, 2013, a decline from $262.9 million at December 31, The decline in the allowance for loan losses was primarily driven by net reversals of provision for loan losses of $27.1 million, partially offset by net recoveries of $0.5 million. The net recoveries were primarily related to the settlement and subsequent recoveries related to a large participated dairy credit. The reversal of provision for credit losses reported in the Combined Statements of Comprehensive Income includes reversals of provision expense for unfunded commitments and unfunded letters of credit of $0.6 million and $0.8 million, respectively. The reserves for unfunded commitments and letters of credit are recorded in Other liabilities on the Combined Statements of Condition. Allowance for Loan Losses by Loan Category (in thousands) As of December 31, Amount % Amount % Amount % Amount % Amount % Real estate mortgage $86, % $94, % $107, % $170, % $115, % Production and intermediate term 87, % 91, % 124, % 145, % 131, % Agribusiness 37, % 48, % 47, % 68, % 123, % Rural residential real estate 8, % 11, % 12, % 12, % 8, % Other 16, % 16, % 8, % 8, % 8, % Total allowance for loan losses $236, % $262, % $300, % $406, % $386, % AgriBank and affiliated Associations management believe the allowance for loan losses is reasonable in relation to the risk in the portfolios at December 31, Investment Portfolio and Liquidity Liquidity Risk Management The System continues to have reliable access to the debt capital markets to support its mission of providing credit to farmers, ranchers and other eligible borrowers. During 2013, investor demand for Systemwide debt securities remained favorable. AgriBank is responsible for meeting the District's funding, liquidity and asset/liability management needs. Access to the unsecured debt capital markets remains the primary source of liquidity. AgriBank also maintains a secondary source of liquidity through the investment portfolio. AgriBank s liquidity policy and FCA regulations require maintaining a minimum of 90 days of liquidity on a continuous basis. The days of liquidity measurement refers to the number of days of maturing debt covered by liquid investments. AgriBank operated with a minimum liquidity target of 125 days for As of December 31, 2013, AgriBank had sufficient liquidity to fund all debt maturing within 161 days. Year-end liquidity was 22 days higher than prior year primarily due to a greater than anticipated amount of incoming cash received late on the last day of the year, which resulted in a larger than anticipated cash balance at year end. Due to timing and market conditions, this additional cash was not able to be invested in overnight federal funds. At December 31, 2013 AgriBank had $1.1 billion in cash which was an increase of $734.6 million over the prior year. 22

25 Frequency AgriBank also maintains a contingency plan that addresses actions that would be considered 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 liquid investments. The composition of the liquidity investment portfolio is structured to 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 mortgagebacked securities, 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, asset-backed securities and non-agency mortgage-backed securities. At December 31, 2013 AgriBank held qualifying assets in excess of each incremental level to meet the liquidity coverage intervals. Daily Liquidity Position for 2013 Frequency of Days Liquidity < Liquidity Coverage Range Cumulative Debt Maturities (in millions) Bonds and Notes As of December 31, 2013 Amount Cumulative debt maturing in: 15 days $3, days 6, days 9, days 10,792.1 One year 24,001.1 One to five years 66,612.0 Five to ten years 78,153.2 More than ten years 82,

26 AgriBank Investment Securities All investment securities held by AgriBank are classified as available-for-sale (AFS). Composition of AFS Investment Securities (in millions) As of December 31, Mortgage-backed securities: Government collateralized mortgage obligations $2,854.7 $2,453.0 $2,291.9 $2,071.6 $1,151.0 Agency collateralized mortgage obligations 1, , , , ,408.9 Agency pass through Non-agency Total mortgage-backed securities 4, , , , ,490.5 Commercial paper and other 3, , , , ,482.6 U.S. Treasury securities 2, , , , ,159.3 Asset-backed securities: Automobile Equipment Home equity Student loans Total asset-backed securities U.S. Agencies Total $11,555.3 $10,987.3 $9,688.6 $9,997.9 $8,866.3 AgriBank s investment portfolio grew in 2013 in order to maintain its desired level of liquidity coverage in conjunction with the growth in its loan and debt portfolios. With the exception of AgriBank s asset-backed securities (ABS) and mortgage-backed securities (MBS), the majority of securities mature within one year. The expected average life is 1.4 years for ABS and 3.5 years for MBS at December 31, A floating rate of interest is carried by 15% of ABS and 69% of MBS. During 2013 and 2012, AgriBank increased its level of investments within the automobile and equipment ABS segments as these segments offer volume, cash flows and risk profiles favored from a strategic perspective. The characteristics of these ABS segments (liquidity, risk, spread and cash flows) complement the existing investment and loan portfolios. Targeting these segments has changed the repricing characteristics of the ABS portfolio mix from predominately floating rate to predominately fixed rate. Commercial paper and other investment securities have also increased as the overall investment portfolio has increased. The continued activity in this segment was due to the desire to have the timing, availability and diversity of those types of investments and their short-term cash flows to meet regulatory liquidity requirements. 24

27 The market for investment securities is materially affected by conditions in the global financial markets and general economic conditions that may change suddenly and dramatically. Unfavorable or uncertain economic and market conditions, caused by declines in economic growth, business activity, investor confidence, limitations on the availability or increases in the cost of credit and capital and increases in inflation or interest rates may adversely affect our business and profitability. AgriBank s Asset-Liability Committee (ALCO) and Investment Credit Risk Committee oversee the credit risk in AgriBank s investment portfolio. AgriBank manages investment portfolio credit risk by investing only in securities that are liquid, of high quality and whose risks are well understood. At purchase all securities must meet eligibility requirements as permitted by FCA regulations and related to rating categories assigned by one or more Nationally Recognized Statistical Rating Organizations. These requirements vary by asset class but require either the highest or second highest ratings. Issues in the residential mortgage market and downgrades of certain bond insurance companies during the 2008 financial crisis increased the credit risk in this sector of their investment portfolio. AgriBank continually monitors the credit risk in this portfolio. 25

28 Fair Value of AFS Investment Securities by Credit Rating (in millions) Eligible Ineligible (2) As of December 31, 2013 AAA/Aaa A1/P1/F1 A2/P2/F2 Split Rated (1) AA/Aa A BBB BB B CCC/Caa CC/Ca C and below Total Mortgage-backed securities $ -- $ -- $ -- $4,085.5 $16.6 $22.2 $24.7 $8.4 $26.1 $58.6 $18.4 $33.8 $4,294.3 Commercial paper and other -- 2, ,827.1 U.S. Treasury securities , ,623.6 Asset-backed securities U.S. Agencies Total $599.4 $2,850.6 $ -- $7,800.6 $21.0 $23.2 $26.2 $13.0 $47.4 $113.1 $24.4 $36.4 $11,555.3 (1) Investments that received the highest credit rating from at least one rating organization. (2) Investments that received the indicated rating as the highest rating from at least one rating organization. Split-rated agency and U.S. government securities are due to the 2011 downgrade of the U.S. government and the related U.S. agency or guaranteed securities. AgriBank does not believe these downgrades reflect deterioration in credit quality of these securities. At December 31, 2013, AgriBank had securities that, because the ratings were downgraded below AAA, were no longer eligible under FCA regulations. The fair value of all ineligible investment securities totaled $304.8 million, including $181.6 million on which we have taken impairment charges. Effective January 1, 2013, securities that become ineligible no longer require formal FCA approval to hold beyond six months and can be included in the net collateral ratio provided certain conditions are met, including the security was eligible at the time it was purchased. These conditions were met for all ineligible securities, and AgriBank s current intent is to hold these securities. In addition to the ineligible securities discussed above, AgriBank held eligible split-rated home equity ABS and student loan ABS with a fair value of $8.8 million that were downgraded below AAA by at least one rating agency. There are no eligible split-rated securities on which AgriBank has taken impairment. There were no home equity ABS or non-agency MBS on credit watch negative. Federal funds were also eligible with $511.6 million rated F1 and $400.0 million rated F2 by Fitch at December 31,

29 Even though credit quality has somewhat improved during 2013, AgriBank continues to closely analyze and monitor its home equity ABS and nonagency MBS, which are detailed in the table below: (in millions) As of December 31, 2013 As of December 31, 2012 As of December 31, 2011 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value First liens $93.2 $1.8 $10.4 $84.6 $117.7 $ -- $20.1 $97.6 $163.9 $ -- $51.7 $112.2 Second liens Wrapped ABS Total home equity asset-backed securities $111.1 $8.1 $11.8 $107.4 $139.3 $5.1 $23.7 $120.7 $190.4 $3.7 $58.0 $136.1 Alt-A non-agency MBS - floating $8.2 $1.3 $0.2 $9.3 $12.0 $1.1 $1.5 $11.6 $16.9 $0.8 $4.2 $13.5 Alt-A non-agency MBS - fixed Alt-A non-agency MBS - ARM Jumbo non-agency MBS - floating Jumbo non-agency MBS - fixed Jumbo non-agency MBS - ARM Total non-agency mortgage-backed securities $202.0 $11.2 $4.4 $208.8 $244.8 $6.5 $10.8 $240.5 $300.9 $0.8 $47.9 $253.8 Total of above segments $313.1 $19.3 $16.2 $316.2 $384.1 $11.6 $34.5 $361.2 $491.3 $4.5 $105.9 $389.9 (in millions) As of December 31, 2010 As of December 31, 2009 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value First liens $237.9 $ -- $51.1 $186.8 $334.6 $ -- $74.4 $260.2 Second liens Wrapped ABS Total home equity asset-backed securities $271.9 $1.8 $63.7 $210.0 $391.0 $6.3 $98.9 $298.4 Alt-A non-agency MBS - floating $22.0 $0.4 $6.6 $15.8 $30.5 $ -- $8.9 $21.6 Alt-A non-agency MBS - fixed Alt-A non-agency MBS - ARM Jumbo non-agency MBS - floating Jumbo non-agency MBS - fixed Jumbo non-agency MBS - ARM Total non-agency mortgage-backed securities $376.9 $0.5 $63.0 $314.4 $511.0 $ -- $129.0 $382.0 Total of above segments $648.8 $2.3 $126.7 $524.4 $902.0 $6.3 $227.9 $

30 The general market conditions for home equity ABS and non-agency MBS markets have improved in The net unrealized loss position on this segment of the investment portfolio has decreased significantly over the past five years reflecting improvements in the underlying housing data driving the performance of these securities, paydowns of principal and the recognition of prior other than temporary impairment. The impact of other than temporary impairment was not a significant contributor to the improvement in the change in the unrealized loss in At December 31, 2013, this sector reflected a net unrealized gain position for the first time since As demonstrated in the housing-related ABS and MBS sectors, the liquidity of AgriBank s investment portfolio can be greatly influenced by factors such as U.S. and global economic conditions and liquidity. Accordingly, there is no guarantee AgriBank s investments could be sold easily or at acceptable prices. In addition, because of the inherent uncertainty and judgment involved in estimating the fair value of investment securities that may not have an active market, the fair value at which AgriBank carries their investment securities may differ significantly from the values that would be realized if the securities were to be sold. AgriBank evaluates all investment securities in an unrealized loss position for other-than-temporary impairment (OTTI) on a quarterly basis. As a result of these evaluations, AgriBank recognized $1.9 million in impairment losses during 2013, representing $0.4 million on a newly impaired MBS and $1.5 million additional impairment on previously impaired securities. No other securities were in an other-than-temporary loss position at December 31, AgriBank has not significantly changed its methodology for identifying securities on which AgriBank performs its cash flow analysis nor has AgriBank significantly changed its methodology for determining fair value during AgriBank continually evaluates its assumptions used in estimating fair value and impairment and adjusts those assumptions as appropriate. The impairments in 2013 reflect the deterioration of credit performance. The impairment losses recorded in 2013 decreased significantly from prior years due to declining balances and stable or improving credit performance on underlying loans. Subsequent improvements in these impairments are recognized as investment income over the remaining life of the securities. Impairment Recorded by Type (in millions) For the year ended December 31, Impairment on non-agency MBS $1.3 $11.2 $11.0 $15.8 $10.1 Impairment on home-equity ABS Total impairment $1.9 $25.5 $23.3 $16.0 $51.8 Reflected in non-interest income in 2010 was a $7.6 million gain from the sale of previously impaired securities. AgriBank recorded $16.6 million of impairment expense in prior years on these securities. 28

31 Affiliated Association Investment Securities Investment securities held by certain affiliated Associations are classified as held-to-maturity (HTM). Composition of HTM Investment Securities (in thous ands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2013 Cost Gains Losses Value Yield Government guaranteed instruments $1,688,870 $20,060 $28,875 $1,680, % Farmer Mac mortgage-backed securities 272,384 1,764 5, , % ARC bonds 2, , % Other investments 4,250 * * * * Total $1,968,260 $21,848 $33,974 $1,951, % (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2012 Cost Gains Losses Value Yield Government guaranteed instruments $1,968,661 $21,922 $34,217 $1,956, % Farmer Mac mortgage-backed securities 302,650 5, , % ARC bonds % Other investments 3,235 * * * * Total $2,275,266 $27,318 $34,329 $2,265, % (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2011 Cost Gains Losses Value Yield Government guaranteed instruments $1,915,583 $19,195 $36,578 $1,898, % Farmer Mac mortgage-backed securities 340,181 7, , % Investment notes in a trust of equipment loans 1, , % ARC bonds 3, , % Other investments 1,885 * * * * Total $2,262,747 $26,591 $36,773 $2,250, % (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2010 Cost Gains Losses Value Yield Government guaranteed instruments $1,593,872 $19,721 $32,396 $1,581, % Farmer Mac mortgage-backed securities 386,935 7,136 1, , % Investment notes in a trust of equipment loans 38,238 1, , % ARC bonds 13, , % Other investments 1,234 * * * * Total $2,033,809 $28,409 $34,487 $2,026, % (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2009 Cost Gains Losses Value Yield Government guaranteed instruments $1,359,322 $9,933 $22,146 $1,347, % Farmer Mac mortgage-backed securities 459,431 9,037 7, , % Investment notes in a trust of equipment loans 41, , % ARC bonds 15, , % Other investments 503 * * * * Total $1,876,339 $20,003 $29,916 $1,865, % * Not applicable due to the nature of the investment. 29

32 The affiliated Association investment portfolios were evaluated for OTTI. As a result of its evaluations, one affiliated Association recognized $14 thousand and $570 thousand of impairment losses during 2012 and 2011, respectively. No securities were other-than-temporarily impaired in 2013, 2010 or Other Earning Assets Other earning assets are comprised of successor-in-interest contracts from involvement with the federal government s tobacco buy-out program by one affiliated Association. The volume was $74.0 million, $144.2 million, $210.9 million, $272.0 million and $321.1 million at December 31, 2013, 2012, 2011, 2010 and 2009, respectively. These amounts include both principal and interest income receivable. This affiliated Association has not purchased any contracts since The final payments on these contracts were received in January 2014 and the affiliated Association holds no further interests in these assets. Results of Operations We recorded record earnings of $1.8 billion in Profitability Information (dollars in millions) For the year ended December 31, Net income $1,830.4 $1,719.4 $1,539.8 Return on average assets 1.93% 1.98% 1.91% Return on average shareholders' equity 11.93% 12.56% 12.47% Changes in Significant Components of Net Income (in millions) Prior Year Increase Increase (Decrease) in (Decrease) in For the year ended December 31, Net Income Net Income Net interest income $2,512.3 $2,311.5 $2,172.3 $200.8 $139.2 Reversal of (provision for) credit losses 28.5 (33.9) (23.6) 62.4 (10.3) Non-interest income (17.7) 72.7 Salaries and employee benefits (626.5) (537.8) (515.0) (88.7) (22.8) Other operating expenses (302.2) (284.5) (267.2) (17.7) (17.3) Farm Credit System insurance expense (69.7) (32.2) (36.4) (37.5) 4.2 Loss on debt extinguishment (4.0) (0.8) (0.3) (3.2) (0.5) Net impairment losses recognized in earnings (1.9) (25.5) (23.3) 23.6 (2.2) Provision for income taxes (50.1) (39.1) (55.7) (11.0) 16.6 Net income $1,830.4 $1,719.4 $1,539.8 $111.0 $

33 Net Interest Income Changes in Net Interest Income (in millions) For the year ended December 31, 2013 vs vs Increase (decrease) due to: Volume Rate Total Volume Rate Total Interest income: Loans $299.9 $(188.2) $111.7 $238.8 $(230.5) $8.3 Investments 11.6 (22.9) (11.3) 7.0 (11.6) (4.6) Other earning assets (3.6) 0.1 (3.5) (3.5) -- (3.5) Total interest income (211.0) (242.1) 0.2 Interest expense: Systemwide debt securities and other (79.8) (69.8) Net change in net interest income $228.1 $(27.3) $200.8 $172.5 $(33.3) $139.2 Information regarding the average daily balances (ADB), average rates earned and paid and components of net interest income (NII) on our portfolio follows: (in millions) For the year ended December 31, ADB Rate NII ADB Rate NII ADB Rate NII Interest earning assets: Accrual loans $77, % $3,173.6 $70, % $3,057.1 $64, % $3,045.1 Nonaccrual loans % % % 40.3 Investment securities and federal funds 14, % , % , % Other earning assets % % % 11.0 Total earning assets 92, % 3, , % 3, , % 3,243.1 Interest bearing liabilities 78, % , % , % 1,070.8 Interest rate spread $14, % $12, % $11, % Impact of equity financing 0.17% 0.20% 0.24% Net interest margin 2.71% 2.73% 2.76% Net interest income $2,512.3 $2,311.5 $2,172.3 Net interest margin has decreased by two basis points over the prior year due to a three basis point decline in the impact of equity financing, partially offset by a one basis point increase in interest rate spread. Equity financing represents the benefit of non-interest rate bearing funding, which was lower due to continued low interest rates. The slight increase in interest rate spread was primarily due to increased spreads on converted fixed rate loans, reflecting the affiliated Associations ability to re-price borrowers loans at lower interest rates and increased spreads. Net interest income continues to be strong and reflects the positive impact of our funding actions as we proactively took advantage of the favorable interest rate environment and the increased volume of fixed rate loans. Due to rising intermediate rates, our ability to enhance net interest income through callable debt replacement activity along with the pace of refinancing activity by customers has diminished. Over time, as the interest rate environment and our product mix changes, the positive impact on net interest income we have experienced over the last several years from calling and refinancing debt securities and the short-term positive impact of adding fixed rate loan volume may diminish, but could be offset by improved earnings on equity in a rising rate environment. In general, operating loans, which are typically variable rate, have the highest spreads. Longer term fixed rate loans generally carry narrower spreads. As the product mix 31

34 between operating and real estate or intermediate term loans changes, the interest rate spreads we earn may change accordingly. Changes in loans are further discussed in the Loan Portfolio section of this report. Reversal of (Provision for) Credit Losses The reversal of provision for credit losses was $28.5 million in 2013, compared to provision for credit losses of $33.9 million and $23.6 million in 2012 and 2011, respectively. The amounts reflect the change in the estimated losses in the loan portfolio during the periods. The reversal of provision for loan losses recorded during 2013 was primarily related to reversals of specific reserves and subsequent recoveries of charge-offs on a large participated dairy credit as well as generally improved credit quality. These reversals were partially offset by provision for loan losses primarily due to an establishment of a general reserve related to a portion of exposure to farm land values at one affiliated Association and loan growth within the District loan portfolios. Included in the reversal of credit losses were reversals of provision expense for unfunded commitments and unfunded letters of credit of $0.6 million and $0.8 million, respectively. The reserves for unfunded commitments and letters of credit are recorded in Other liabilities on the Combined Statements of Condition. The provision for credit losses in 2012 was primarily related to additional specific reserves on the same large participated dairy credit cited above and establishment of a general reserve related to drought conditions, partially offset by strong collateralization of the portfolios and continued improvement in credit quality. Comparatively, the provision for credit losses in 2011 was primarily related to the establishment of provision expense for unfunded commitments at one affiliated Association. Refer to the discussion of the allowance for loan losses in the Analysis of the Allowance for Loan Losses section of this report. Non-interest Income Components of Non-Interest Income (in thousands) For the year ended December 31, Financially related services $144,850 $151,603 $149,930 Allocated insurance reserve accounts distribution -- 79, Mineral income 82,199 76,701 45,990 Loan prepayment and fee income 85,075 45,782 56,413 Miscellaneous income and other gains (losses), net: Operating lease income 18,738 18,240 20,070 Loan servicing fee income 10,364 11,738 11,297 Other property owned losses, net (11,637) (23,974) (6,577) Derivative fair value adjustments (652) (12,665) 1,166 Other 15,092 15,251 10,728 Total $344,029 $361,741 $289,017 Financially related services primarily consist of multi-peril and other crop insurance income. The decrease from 2012 was due to a decrease in crop insurance commissions. The volume of crop insurance coverage has increased throughout the District but, due to changes in the crop insurance program, commission rates have dropped and resulted in lower fee income. 32

35 We received $79.1 million in 2012 as our share of non-recurring distributions from the AIRAs. There were no such distributions in 2013 or These reserve accounts were established by the Farm Credit System Insurance Corporation when premiums collected increased the level of the insurance fund above the required 2% of insured debt. Mineral income was earned from mineral rights, with lease bonus and royalty income continuing to remain strong, specifically in the Williston Basin in western North Dakota. The increase reflects the continued relatively high level of energy prices resulting in continued demand for exploration rights, and production activities, on these properties. Loan prepayment and fee income primarily represents fee income not subject to deferral. The increase was primarily related to three large prepayment fees totaling $22.9 million during Other property owned losses, net in 2013 was primarily due to a $10.6 million write-down on a large timber credit at one affiliated Association. During 2012, the losses were primarily due to an $8.5 million write-down on the same large timber credit and various write-downs at another affiliated Association. During 2011, the losses were primarily due to valuation write-downs, increases in operating expenses and losses on sales of other property owned. During 2013, the derivative fair value adjustment expense primarily related to credit valuation adjustments (CVA) of $0.7 million. During 2012, losses on derivatives were primarily due to losses related to receive-fixed swaps that were de-designated as hedging instruments. This loss was partially offset by an $8.2 million gain recorded on the hedged instrument recorded in net interest income. The interest rate swaps and the previously hedged debt instruments both matured in Refer to Note 18 for further discussion. Salaries and Employee Benefits, Other Operating Expenses and Farm Credit System Insurance Expense Various Components of Non-interest Expenses (in thousands) For the year ended December 31, Salaries and employee benefits $626,539 $537,781 $514,960 Other operating expenses: Purchased services 40,093 39,043 35,053 Occupancy and equipment 89,472 84,243 82,801 Examination expense 19,305 19,772 18,923 Other 153, , ,494 Farm Credit System insurance expense 69,658 32,220 36,368 Total $998,484 $854,467 $818,599 Operating rate 1.1% 1.0% 1.0% The increase in salaries and employee benefits in 2013 was primarily driven by the following: A $65.7 million increase in salary expense primarily due to annual merit increases and incentive payments as well as an increase in head count by 173 full-time equivalents, or 3.1%, from December 31, A $23.1 million increase in employee benefits expense driven primarily by: i) an increase in the pension expense of $11.7 million reflecting the impact of the decline in the discount rate used 33

36 during 2013 for expense purposes, and the continued amortization of losses on plan assets in 2008, ii) an increase in medical insurance expenses of $6.1 million due to the rising cost of medical care and iii) an increase in the defined contribution plan expense of $3.0 million reflecting the increase in staffing (all new employees are in the defined contribution plan). The increase in Farm Credit System insurance expense was due to changes in the premium rates. The rates used in 2013, 2012 and 2011 were 10 basis points, five basis points and six basis points, respectively. The operating rate is total operating expenses divided by average earning assets. The operating rate has increased in 2013 but remained relatively stable with operating expenses increasing at approximately the same rate as loan volume growth. Loss on Debt Extinguishment During 2013, 2012 and 2011, AgriBank transferred $20.0 million, $10.0 million and $15.0 million, respectively, of debt at fair value to other System Banks to restructure liabilities. These transfers resulted in $4.0 million, $0.8 million and $0.3 million, respectively, of losses on debt extinguishment. These transactions were for the purpose of asset/liability rebalancing due to large prepayments of loans. These losses were more than offset by the receipt of fee income on the loan prepayment in the years of the transfers. Net Impairment Losses Recognized in Earnings AgriBank evaluates all investment securities in an unrealized loss position quarterly and determined that certain securities were in other-than-temporary loss positions at December 31, AgriBank determined underlying credit issues in housing-related mortgages that support these securities may result in them not collecting all principal and interest contractually due. As a result of its evaluations, AgriBank recognized $1.9 million in impairment losses during 2013 compared to $25.5 million and $23.3 million in 2012 and 2011, respectively. The total of losses recognized through earnings life to date on impaired securities was $127.9 million. AgriBank estimates that the future expected principal and interest shortfall on its impaired securities will be significantly less than the likely impairment required to be recorded under GAAP. Since January 1, 2007, of the $127.9 million of OTTI, AgriBank has incurred actual principal cash shortfalls of $15.7 million on impaired securities. However, many of the investments were structured so that realized losses are recognized when the investment matures. AgriBank has identified an additional $28.5 million of losses on impaired securities where projected cash flows within the transaction structure imply AgriBank will not recover the amortized cost basis of these securities. Affiliated Associations also evaluate all investments in an unrealized loss position quarterly. As a result of its evaluations, one affiliated Association recognized $14 thousand and $570 thousand in impairment losses during 2012 and 2011, respectively. No securities were other-than-temporarily impaired in Refer to Note 4 for further discussion on impairment losses. Provision for Income Taxes The increase in provision for income taxes from the prior year was primarily related to increased income in taxable entities. Refer to Note 11 for further discussion. 34

37 Interest Rate Risk Management Interest rate risk is the risk that changes in interest rates may adversely affect operating results and financial condition. Interest rate risk arises primarily from financing fixed rate loans that can be prepaid, adjustable rate loans with interest rate caps and decisions related to the investment of our equity. While AgriBank manages substantially all of the District s interest rate risk, the affiliated Associations manage retail spread compression risk. Spread compression is the risk that changes in the cost of funds cannot be offset by similar changes in the retail rates charged to customers. AgriBank s primary method of managing interest rate risk is to issue debt with similar terms as the assets originated by the affiliated Associations. Because a substantial portion of those assets are pre-payable, AgriBank issues a significant amount of callable debt. AgriBank s ability to effectively manage interest rate risk relies on its ability to issue debt with terms and structures that match the asset terms and structures. AgriBank also utilizes derivatives to manage interest rate risk and reduce funding costs. AgriBank manages exposure to changes in interest rates under policies established by its Board of Directors and guidelines established by its ALCO. Policies and guidelines limit maximum exposure to net interest income and economic value of equity changes for specified changes in market interest rates. A full analysis of interest rate risk is completed monthly. Through these analyses, appropriate funding strategies are developed to manage the sensitivity of net interest income and economic value of equity to changes in interest rates. AgriBank s primary analytical techniques used to analyze interest rate risk are outlined below: Interest rate gap analysis, which compares the amount of interest sensitive assets to interest sensitive liabilities repricing in selected time periods under various interest rate and prepayment assumptions. Net interest income sensitivity analysis, which projects net interest income in each of the next three years given various rate scenarios. Economic value of equity sensitivity analysis, which estimates the economic value of assets, liabilities and equity given various rate scenarios. The assumptions used in AgriBank s analyses are monitored routinely and adjusted as necessary. Assumptions about loan prepayment behavior are the most significant to the results. Prepayment speeds are estimated as a function of rate levels, age and seasoning. AgriBank monitors and tracks actual prepayment history and considers adjustments to the assumed prepayment speeds based on the historical observed experience. AgriBank uses third-party data for prepayment assumptions on ABS and MBS. Policy limits related to interest rate sensitivity assume interest rates for all maturities change immediately in the same direction and amount (a parallel shock). AgriBank also routinely reviews the impact of a gradual change over one year in interest rates in the same direction and same amount (a parallel ramp). Periodically, AgriBank reviews forward market value risk profiles, multi-year net interest income projections and the impact of varying the amount of change in rates at different maturities (a twist, flattening or steepening of the yield curve). AgriBank s policies establish a maximum variance from our base case in a plus or minus 200 basis point change in rates, except when the U.S. Treasury three-month rate is below 4%, when the minus scenario is limited to one-half of the U.S. Treasury three-month rate. Interest rate gap analysis compares interest sensitive assets and liabilities in defined time segments. The repricing characteristics of wholesale loans are modeled to reflect the characteristics of the underlying retail loans at the affiliated Associations. The following table is based on the known repricing dates of certain assets and liabilities and the assumed or estimated repricing dates of others under an implied forward rate scenario. 35

38 Prepayment estimates for loans are assumed consistent with AgriBank s standard prepayment assumptions. Callable debt is reflected at the first call date it is expected to be exercised given implied forward rates. Various assets and liabilities may not reprice according to the assumptions and estimates used. The analysis provides a static view of AgriBank s interest rate sensitivity position and does not capture the dynamics of balance sheet, interest rate and spread changes in different interest rate environments including the active role of management of AgriBank s assets and liabilities. Interest Rate Gap Position (in millions) AgriBank, FCB (Bank Only) Repricing Intervals As of December 31, 2013 Year 1 Year 2 Year 3 Year 4 Year 5 Over 5 Years Total Earning assets: Prepayable loans $33,942 $6,967 $5,835 $5,341 $3,963 $14,562 $70,610 Other loans ,270 3,067 Investments and federal funds 9,918 1, ,467 Total earning assets 44,239 8,792 6,633 5,891 4,352 16,237 86,144 Callable debt 1,585 1,305 4,390 4,851 3,868 14,180 30,179 Other debt 43,485 4,916 1, ,704 52,210 Effect of interest rate swaps and other derivatives (201) (337) (187) (128) Total rate-sensitive liabilities 44,869 5,884 5,221 5,422 4,263 16,730 82,389 Interest rate sensitivity gap $(630) $2,908 $1,412 $469 $89 $(493) $3,755 Cumulative gap $(630) $2,278 $3,690 $4,159 $4,248 $3,755 Cumulative gap as a % of earning assets -1.4% 4.3% 6.2% 6.3% 6.1% 4.4% Net interest income (NII) sensitivity analysis is used to measure the sensitivity of net interest income to immediate changes in interest rates and to gradual changes in interest rates occurring over one year. AgriBank Board policies establish limits for a plus or minus 200 basis point change in rates, except when the U.S. Treasury three-month rate is below 4%, when the minus scenario is limited to one-half of the U.S. Treasury three-month rate. Because of the low interest rates at December 31, 2013, the down 200 scenario is limited to a down four basis point change. NII Sensitivity Analysis Basis Point Interest Rate Change As of December 31, 2013 Down 4 Up 100 Up 200 Immediate Change (Shock): District NII sensitivity 0.0% 1.7% 2.4% AgriBank NII sensitivity -0.9% 2.1% -0.6% AgriBank and District thresholds -15.0% -15.0% Gradual Change (Ramp): AgriBank NII sensitivity 3.2% 3.0% 36

39 Economic value of equity (EVE) sensitivity analysis is used to measure the effect of changes in interest rates on the estimated value of equity. The EVE measures the degree to which the economic value of our assets and liabilities change given a change in interest rates. EVE Sensitivity Analysis Basis Point Interest Rate Change As of December 31, 2013 Down 4 Up 100 Up 200 Immediate Change (Shock): AgriBank EVE sensitivity 0.0% -2.7% -5.7% AgriBank policy constraints -12.0% -12.0% District EVE sensitivity 0.1% -3.2% -6.3% District thresholds -15.0% -15.0% AgriBank operates in a relatively conservative position with regard to its Board policy constraints for both EVE and NII. AgriBank monitors, reports and controls interest rate risk associated with long-term fixed rate lending. Approximately 23% of the District loan portfolio has contractual fixed rate greater than 10 years and is freely prepayable; another 4% of the District loan portfolio has contractual fixed rate greater than 10 years and carry fees for prepayments. Prepayment fees assessed by AgriBank are structured to not penalize the borrower when prepayments would be beneficial to AgriBank (generally, when interest rates have risen). Almost all of these loans are structured with amortizing principal payments. AgriBank s historical experience indicates minimum prepayment speeds of 6% to 7% have occurred in its freely prepayable loan portfolio. AgriBank s current loan pricing and risk measurement uses a 5% minimum prepayment speed. Amortization and minimum prepayments result in at least 50% of the principal being paid off within 10 years. AgriBank routinely monitors the risk exposure on its long-term fixed rate lending, including gap analysis of an up 1000 basis point shock, which would drive prepayments to a minimum level. In addition, AgriBank regularly runs stress test scenarios with minimum prepayment speeds of 3% and 4% to measure the impact of unexpected lengthening of the cash flows and duration of long term fixed rate loans. Derivative Financial Instruments AgriBank uses derivative financial instruments to reduce funding costs, improve liquidity and manage interest rate sensitivity. AgriBank does not hold or issue derivatives for trading purposes. The types and uses of derivatives used by AgriBank are outlined below: Receive-fixed swaps are used by AgriBank to convert interest payments on fixed rate bonds into floating rates. These transactions enable them to improve liquidity, obtain lower funding cost or to hedge basis risk; Pay-fixed swaps including forward starting swaps, are used by AgriBank primarily to create lower cost synthetic fixed rate funding or to hedge future debt issuance costs; Swaps with floors are used by AgriBank to hedge cash flow exposure to falling rates on floating rate assets. Caps and swaps with caps are used by AgriBank to hedge cash flow risk in caps sold with retail loans or embedded in investments, or to cap interest rates on floating rate debt; Pay-fixed swaptions (option to enter into a pay-fixed swap) are used by AgriBank to hedge future debt issuance costs; and 37

40 Corridors are used by AgriBank to limit net interest costs on floating rate or rolling short term debt in rising rate scenarios by using a purchased cap and a sold cap with a higher strike rate. Derivative activities are guided by AgriBank s Board policy and monitored by AgriBank s ALCO. The ALCO is responsible for approving strategies that are developed through analysis of data derived from financial simulation models and other internal and industry sources. The resulting strategies are incorporated into AgriBank s overall interest rate risk management strategies. By using derivative instruments, AgriBank is subject to credit and market risk. If a counterparty is unable to perform under a derivative contract, AgriBank s credit risk equals the net amount due to AgriBank. Generally, when the fair value of a derivative contract is positive, AgriBank has credit exposure to the counterparty, creating credit risk for AgriBank. When the fair value of the derivative contract is negative, AgriBank does not have credit exposure, however, there is a risk of nonperformance under the terms of the derivative transaction. The fair value of derivatives includes CVA which resulted in decreases in the fair value of derivative assets of $0.1 million and $0.3 million at December 31, 2013 and 2011, respectively, and an increase in the fair value of derivative assets of $0.6 million at December 31, The CVA reflects credit risk of each derivative counterparty to which AgriBank has exposure, net of any collateral posted by the counterparty and an adjustment for AgriBank s credit worthiness where the counterparty has exposure to AgriBank. The change in the CVA for the year is included in Miscellaneous income and other gains (losses), net on the Combined Statements of Comprehensive Income. AgriBank may enter into over-the-counter (OTC) derivative transactions directly with a counterparty that may also clear such transactions through a futures commission merchant (FCM) with a clearinghouse or a central counterparty (CCP). When the swap is cleared by the two parties, the single bilateral swap is divided into two separate swaps with the CCP becoming the counterparty to both of the initial parties to the swap. CCPs have several layers of protection against default including margin, member capital contributions and FCM guarantees of their customers transactions with the CCP. FCMs also pre-qualify the counterparties to all swaps that are sent to the CCP from a credit perspective, setting limits for each counterparty and collecting initial and variation margin daily from each counterparty for changes in the value of cleared derivatives. The margin collected from both parties to the swap protects against credit risk in the event a counterparty defaults. The initial and variation margin requirements are set by and held for the benefit of the CCP. Additional initial margin may be required and held by the FCM, due to its guarantees of its customers trades with the CCP. The Dodd-Frank Act requires the centralized clearing of certain OTC swaps by swap dealers and major swap participants, as well as certain other market participants, including financial institutions. Currently, instrument types that must be cleared will primarily be interest rate swaps and credit default swaps. Many end users of swaps, including certain banks, credit unions and Farm Credit System institutions with less than $10 billion in assets, qualify for an exemption from clearing if the swap is used to hedge commercial risk. The U.S. Commodity Futures Trading Commission has also established a clearing exemption for certain swaps entered into by cooperatives. All Farm Credit System institutions qualify for this Cooperative Exemption, and therefore will be able to elect the clearing exemption for any swap that meets the criteria stipulated in the exemption. This exemption does not cover all swaps that are executed by Farm Credit System institutions, and is generally limited to transactions entered into in connection with loans to members. As a result, AgriBank centrally cleared three interest rate swaps in December 2013 with a notional amount of $225 million. At December 31, 2013, initial margin pledged to counterparties was $5.9 million and variation margin pledged by counterparties was $1.6 million. 38

41 For OTC derivative transactions entered into before mandatory clearing, and for derivative transactions that qualify for the Cooperative Exemption, AgriBank may enter into derivative transactions directly with counterparties under bilateral master agreements. AgriBank executes its bilateral derivative transactions only with non-customer counterparties that have an investment-grade or better credit rating from a rating agency. AgriBank manages credit risk by monitoring the credit standing and managing levels of exposure to individual counterparties. AgriBank anticipates performance by all of its counterparties. AgriBank enters into master agreements that contain netting provisions, which allow them to offset amounts they owe the counterparty on one derivative contract to amounts owed to them by the same counterparty on another derivative contract. These provisions allow AgriBank to require the net settlement of covered contracts with the same counterparty in the event of default by the counterparty on one or more contracts. All of AgriBank s derivative transactions are supported by collateral arrangements with counterparties. At December 31, 2013, 2012 and 2011, AgriBank had cash collateral pledged by counterparties of $24.2 million, $22.3 million and $103.1 million, respectively. At December 31, 2013 and 2012, AgriBank also had $12.3 million and $19.1 million of securities posted as collateral from counterparties. AgriBank did not have any securities posted as collateral at December 31, As counterparty credit ratings are downgraded, AgriBank lowers the credit exposure level at which collateral must be pledged, therefore reducing its exposure to counterparty risk. AgriBank Derivative Credit Loss Exposure by Credit Rating (in millions) Years to maturity Maturity Exposure Less than One to Over Distribution Collateral Net of As of December 31, 2013 one year five years five years Netting Exposure Pledged Collateral Moody's Credit Rating Aa3 $4.0 $5.8 $7.9 $(16.3) $1.4 $ -- $1.4 A (4.1) 49.6 (22.0) 27.6 A (2.8) 11.6 (0.3) 11.3 Baa (14.2) -- Total $19.7 $48.3 $32.0 $(23.2) $76.8 $(36.5) $40.3 Derivative credit loss exposure represents the exposure to credit loss on derivative instruments, which is estimated by calculating the cost, on a present value basis, to replace all outstanding derivative contracts in a gain position and does not include cleared derivatives. Within each maturity category, contracts in a loss position are netted against contracts in a gain position with the same counterparty. If the net position within a maturity category with a particular counterparty is a loss, no amount is reported. Maturity distribution netting represents the impact of netting of derivatives in a gain position and derivatives in a loss position for the same counterparty across different maturity categories. Derivative instruments are discussed further in Notes 2, 17 and 18 to the accompanying financial statements. 39

42 Expected Maturities of AgriBank Derivative Products and Other Financial Instruments (in millions) 2019 and Fair As of December 31, thereafter Total Value Bonds and Notes: Fixed rate $12,765 $7,212 $5,692 $5,560 $4,249 $15,248 $50,726 $49,811 Average interest rate 0.7% 0.9% 1.1% 1.2% 1.6% 2.5% 1.4% Variable rate 11,236 11,798 7, ,163 31,214 Average interest rate 0.2% 0.2% 0.2% 0.3% 0.1% 0.2% 0.2% Subordinated notes Average interest rate % 9.1% Total bonds and notes $24,001 $19,010 $13,067 $6,060 $4,474 $15,777 $82,389 $81,662 Derivative Instruments: Receive fixed swaps Notional value $1,150 $700 $200 $100 $ -- $ -- $2,150 $75 Weighted average receive rate 2.4% 2.0% 5.2% 5.0% % Weighted average pay rate 0.6% 1.1% 2.1% 3.1% % Pay fixed swaps Notional value ,200 7 Weighted average receive rate 0.4% 1.2% % 4.3% 3.7% Weighted average pay rate 4.4% 4.3% % 2.9% 3.2% Amortizing pay fixed swaps Notional value Weighted average receive rate 0.4% % Weighted average pay rate 4.8% % Floating for floating swaps Notional value ,350 (7) Weighted average receive rate 0.4% 1.1% 2.3% 3.2% 3.9% % Weighted average pay rate 0.8% 1.3% 2.7% 3.4% 4.2% % Total derivative instruments $1,391 $1,250 $400 $500 $250 $925 $4,716 $75 Total weighted average rates on swaps: Receive rate 2.1% 1.6% 3.8% 3.6% 3.9% 4.3% 2.8% Pay rate 0.7% 1.7% 2.4% 3.3% 4.2% 2.9% 2.0% The table was prepared based on implied forward variable interest rates as of December 31, 2013 and, accordingly, the actual interest rates to be received or paid will be different to the extent that the variable rates fluctuate from December 31, 2013 implied forward rates. Affiliated Association Derivative Products One affiliated Association uses forward commitments to sell TBAs at specified prices to economically hedge the interest rate risk on loans held for sale and interest rate lock commitments. The TBAs are measured in terms of notional amounts. The notional amount is not exchanged and is used as a basis on which interest payments are determined. 40

43 Other Risks Operational Risk Operational risk represents the risk of loss resulting from our operations. Operational risk includes risks related to fraud, processing errors, breaches of internal controls and natural disasters. Operational risk is inherent in all business activities, and the management of this risk is important to the achievement of our objectives. We manage operational risk through established internal control processes and disaster recovery plans. We maintain systems of controls with the objectives of providing proper transaction authorization and execution, proper system operations, safeguarding of assets and reliability of financial and other data. We maintain a strong control environment including independent audit committees, codes of ethics for senior officers and key financial personnel and anonymous whistleblower programs. We maintain and routinely test disaster recovery plans with the goal of ensuring on-going operations after a disaster. All District entities document, test and evaluate controls supporting financial reporting consistent with that required by Sarbanes-Oxley Section 404. All significant processes supporting the internal controls over financial reporting are covered by this effort. This effort supports strong control environments through increased awareness, documentation and testing of key controls. Individual District entities with assets greater than $1.0 billion at the preceding calendar year-end also include a report of management s assessment of internal controls over financial reporting for the current year. Each of these management reports expressed that internal controls over financial reporting were effective and there were no material weaknesses at December 31, AgriBank also receives Statement on Standards for Attestation Engagements No. 16, Reporting on Controls at a Service Organization reports covering the internal controls for various information technology systems. Reputation Risk Reputation risk is defined as the negative impact resulting from events, real or perceived, that shape the image of the Farm Credit System or any of its entities. Such risks include impacts related to investors perceptions about agriculture, the reliability of the System financial information or overt actions by any System institution. A Farm Credit System Reputation Committee develops proactive risk mitigation strategies, and actively monitors and manages this risk with all System entities. Joint and Several Liability We have credit risk because AgriBank is jointly and severally liable for all Systemwide debt issued. Under joint and several liability, if another System Bank is unable to pay its obligations as they come due, the other Banks in the System would ultimately be called upon to fulfill those obligations. Total Systemwide debt at December 31, 2013 was $207.5 billion. The existence of the Farm Credit Insurance Fund (Insurance Fund), the Contractual Interbank Performance Agreement (CIPA) and the Market Access Agreement (MAA) help to mitigate this risk. The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance Corporation) to administer the Insurance Fund. The Insurance Fund is used: to insure the timely payment of principal and interest on Farm Credit Systemwide debt obligations; to insure the retirement of protected borrower capital at par or stated value; and for other specified purposes. At the discretion of the Insurance Corporation, the Insurance Fund is also available to provide assistance to certain troubled System institutions and for the operating expenses of the Insurance Corporation. Each System 41

44 Bank has been required to pay premiums into the Insurance Fund until the assets in the Insurance Fund equal 2% (the secure base amount) of the aggregated insured obligations adjusted to reflect the reduced risk on loans or investments guaranteed by federal or state governments. The percentage of aggregate obligations can be changed by the Insurance Corporation, at its sole discretion, to a percentage it determines to be actuarially sound. When the amount in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is required to reduce premiums and under certain circumstances is required to transfer excess funds to establish AIRAs. The Insurance Corporation may also distribute all or a portion of these reserve accounts to the System Banks. During 2012, we received $79.1 million as our share of non-recurring distributions from the AIRAs. These reserve accounts were established by the Insurance Corporation when premiums collected increased the level of the insurance fund above the required 2% of insured debt. There were no such distributions in 2013 or The basis for assessing premiums is insured debt outstanding. Nonaccrual loans and impaired investments are assessed a surcharge while guaranteed loans and investments are deductions from the premium base. AgriBank, in turn, assesses premiums to the affiliated Associations each year based on similar factors. The Insurance Corporation does not insure any payments on AgriBank s or affiliated Association s subordinated notes, preferred stock, at-risk common stock or at-risk participation certificates. To the extent AgriBank must fund its allocated portion of another System Bank s portion of the Systemwide debt securities due to default, AgriBank s earnings and total shareholders equity would be negatively impacted. AgriBank, together with all System Banks and the Federal Farm Credit Banks Funding Corporation, have entered into the CIPA. This agreement establishes agreed-upon standards of District financial condition and performance to achieve and maintain. AgriBank, and each of the other System Banks, exceeded the minimum performance measures at December 31, AgriBank, together with all System Banks and the Federal Farm Credit Banks Funding Corporation, have entered into the MAA. This agreement establishes criteria and procedures for the Banks to provide information and, under specific circumstances, restricting or prohibiting participation in issuances of Systemwide debt securities. The agreement is intended to identify and resolve individual Bank financial problems in a timely manner. AgriBank, and each of the other System Banks, are in compliance with all aspects of the agreement at December 31, If a System Bank fails to meet the MAA performance criteria, it will be placed into one of three categories. Each category gives the other System Banks progressively more control over debt issuances at a System Bank that has declining financial performance under the MAA performance criteria. A Category I Bank is subject to additional monitoring and reporting requirements; a Category II Bank s ability to participate in issuances of Systemwide debt securities may be limited to refinancing maturing debt obligations; and a Category III Bank may not be permitted to participate in issuances of Systemwide debt securities. 42

45 Unincorporated Business Entities (UBEs) Certain circumstances, including the limitation of legal liability, may warrant the need for certain affiliated Associations to establish separate entities to acquire and manage complex collateral. A more detailed discussion of affiliated Associations UBEs can be found in their respective Annual Reports. Shareholders Equity We believe a sound capital position, with its foundation in surplus, is critical to long-term financial stability. We maintain adequate capital to protect against unanticipated losses as well as to meet our growth needs. Total shareholders equity at December 31, 2013 was $16.5 billion, compared to $14.3 billion and $12.8 billion at December 31, 2012 and 2011, respectively. Total shareholders equity increased $2.2 billion in 2013 resulting primarily from net income, issuances of non-cumulative perpetual preferred stock and a reduction in accumulated other comprehensive losses, partially offset by increased patronage distributions. Select Capital Ratios Regulatory As of December 31, minimums Shareholders' equity to assets 16.46% 15.32% 15.44% 14.61% 14.01% Surplus and allowance to risk loans (:1) Surplus to total shareholders' equity 97.97% % % % % Permanent capital ratio (AgriBank only) 7.0% 22.1% 21.1% 20.9% 20.6% 18.4% Total surplus ratio (AgriBank only) 7.0% 18.5% 17.4% 17.3% 16.7% 14.3% Core surplus ratio (AgriBank only) 3.5% 11.4% 10.4% 10.1% 10.0% 8.2% Net collateral ratio * 104.0% 106.4% 106.0% 106.2% 105.8% 105.6% * Farm Credit Administration regulations require AgriBank to maintain a net collateral ratio of at least 103.0%. However, AgriBank is required by the FCA to maintain a higher minimum of 104.0% during the period in which AgriBank has subordinated notes outstanding. At December 31, 2013, AgriBank and each affiliated Association exceeded regulatory minimum capital ratios, which are further discussed in Note 10 to the accompanying financial statements. Strong earnings and issuances of non-cumulative perpetual preferred stock allowed AgriBank and affiliated Associations to maintain strong regulatory capital ratios. On October 29, 2013, AgriBank issued $250 million of Series A non-cumulative perpetual preferred stock, representing 2.5 million shares at $100 per share par value, resulting in net proceeds of $246.1 million. The net proceeds reflect issuance costs from underwriting, auditor and attorney fees. Dividends on the Series A preferred stock, if declared by AgriBank s Board in its sole discretion, are non-cumulative and are payable quarterly in arrears beginning on January 1, Dividends will accrue at a fixed annual rate of 6.875% from the date of issuance through December 31, 2023, and beginning January 1, 2024 will accrue at an annual rate equal to three-month U.S. Dollar LIBOR rate, reset quarterly, plus 4.225%. The Series A preferred stock is not mandatorily redeemable at any time. However, the Series A preferred stock will be redeemable at par value plus accrued and unpaid dividends, in whole or in part, at AgriBank s option, quarterly beginning January 1, In addition, the Series A preferred stock will be redeemable in whole, at AgriBank s option, at any time upon the occurrence of certain defined regulatory events. This series may be held or transferred in blocks having an aggregate par value of $25 thousand and an investor must hold at least 250 shares. AgriBank used the net proceeds from the issuance for general corporate purposes. For regulatory capital purposes, 43

46 AgriBank s Series A preferred stock is included in permanent capital, total surplus and core surplus, subject to certain limitations. Refer to Note 10 in the accompanying financial statements for further discussion. On May 30, 2013, an affiliated Association, AgStar Financial Services, ACA (AgStar), issued $100 million of Series A-1 non-cumulative perpetual preferred stock, representing 100 thousand shares at $1 thousand per share par value, resulting in net proceeds of $96.3 million. The net proceeds reflect issuance costs from underwriting, auditor and attorney fees. Dividends on the Series A-1 preferred stock, if declared by AgStar s Board in its sole discretion, are non-cumulative and are payable quarterly in arrears beginning on August 15, Dividends will accrue at a fixed rate of 6.75% from the date of issuance through August 14, 2023, and beginning August 15, 2023 accrue at an annual rate equal to three-month U.S. Dollar LIBOR rate, reset quarterly, plus 4.58%. This series may be held or transferred in blocks having an aggregate par value of not less than $250 thousand and an investor must hold at least 250 shares. The net proceeds from the issuance were used to increase regulatory capital, pursuant to current FCA regulations, for continued business development and general corporate purposes. For regulatory capital purposes, the Series A-1 preferred stock is included in permanent capital, total surplus and core surplus, subject to certain limitations. Refer to Note 10 in the accompanying financial statements for further discussion. Capital Plan and Regulatory Requirements Each institution s Board of Directors establishes a formal capital plan that addresses its capital targets in relation to its risk. The capital plans assess the capital level and composition necessary to assure financial viability and to provide for growth. These plans are updated at least annually and are approved by the institutions Board of Directors. At a minimum, the plans considers factors such as credit risk and allowance levels, quality and quantity of earnings, sufficiency of liquid funds, operational risk, interest rate risk and growth in determining optimal capital levels. We model economic capital requirements which measure total enterprise risk looking at credit, interest rate and operational risk. Patronage Distributions and Dividends Payment of patronage and/or dividends is generally allowed under affiliated Association bylaws if the distribution is in accordance with applicable laws and regulations, including the FCA capital adequacy regulations. Affiliated Associations designated $238.5 million, $208.6 million and $199.1 million of earnings for patronage during 2013, 2012 and 2011, respectively. In response to adverse weather conditions and the impact on Wisconsin farm families, a special, one-time patronage distribution of $5.2 million was paid in cash in 2012 by one affiliated Association. Additionally, one affiliated Association has a nonqualified patronage program that allocated surplus of $61.6 million, $55.0 million and $40.0 million in 2013, 2012 and 2011, respectively. Nonqualified patronage of $25.0 million, $42.7 million and $14.5 million was redeemed during 2013, 2012 and 2011, respectively. Certain affiliated Associations attribute to shareholders all income in excess of the qualified patronage program. It is communicated to shareholders that this amount will not be redeemed and as such, is not considered allocated surplus. 44

47 AgriBank also pays patronage, substantially all of which was eliminated in combination except $2.8 million, $1.6 million and $1.4 million at December 31, 2013, 2012 and 2011, respectively, to OFIs and Associations outside of the District. Dividends on AgriBank s non-cumulative perpetual preferred stock are payable quarterly on the first day of January, April, July and October, beginning on January 1, There was $2.7 million of preferred stock dividends accrued at December 31, 2013 which were paid in cash in January Dividends on AgStar s non-cumulative perpetual preferred stock are payable quarterly in arrears on the fifteenth day of February, May, August and November, beginning on August 15, There was $3.1 million of preferred stock dividends paid in cash during There were no dividend distributions made during 2012 or Accumulated Other Comprehensive Income (Loss) AgriBank s investment portfolio is held primarily for liquidity purposes; accordingly, it is considered availablefor-sale and is carried at fair value. Unrealized gains and losses on investment securities that are not otherthan-temporarily impaired are reported as a separate component of shareholders equity. Unrealized gains and losses related to the non-credit component of other-than-temporarily impaired investment securities are also reported as a separate component of shareholders equity. During 2013 the change in net unrealized losses on all investment securities totaled $24.0 million of other comprehensive loss, reflecting unrealized losses from increases in interest rates, partially offset by net impairment losses reclassified into earnings and continued pay downs. AgriBank s derivative portfolio includes certain derivatives designated as cash flow hedges. Unrealized gains and losses on the effective portion of cash flow hedges are reported as a separate component of shareholders equity. During 2013 the change in net unrealized gains on cash flow derivatives totaled $97.8 million of other comprehensive income. The majority of cash flow derivatives are hedging rising long-term interest rates. As rates have increased during 2013 the value of our cash flow swaps have increased, reducing the accumulated other comprehensive loss. The unfunded status of our pension and post-employment benefit plans is recognized as a liability on our Combined Statements of Condition. To record the unfunded liability, we adjust any prepaid assets or accrued liabilities that were recorded at the individual District entity level and recognize the offset as a separate component of shareholders equity. During 2013, the change in net unrealized gains recognized in other comprehensive income for pension and post-employment liabilities totaled $195.0 million. The reduction in accumulated other comprehensive loss was primarily related to an increase in the discount rate used to value the liability. Refer to Notes 2 and 12 for further discussion. 45

48 Report of Management AgriBank, FCB and Affiliated Associations We prepare the accompanying combined financial statements of AgriBank, FCB and affiliated Associations and are responsible for their integrity and objectivity, including amounts that must necessarily be based on judgments and estimates. The combined financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The combined financial statements, in the opinion of management, present fairly the financial condition of AgriBank, FCB and affiliated Associations. Other financial information included in the Annual Report is consistent with that in the combined financial statements. To meet its responsibility for reliable financial information, management depends on the accounting and internal control systems designed to provide reasonable but not absolute assurance that assets are safeguarded and transactions are properly authorized and recorded. Costs must be reasonable in relation to the benefits derived when designing accounting and internal control systems. Financial operations audits are performed to monitor compliance. PricewaterhouseCoopers LLP, our independent auditors, audit the combined financial statements. They also conduct a review of internal controls to the extent necessary to comply with generally accepted auditing standards in the United States of America. The Farm Credit Administration also performs examinations for safety and soundness as well as compliance with applicable laws and regulations. AgriBank s Board of Directors has overall responsibility for AgriBank s system of internal controls and financial reporting. The Board of Directors and its Audit Committee consults regularly with management and meets periodically with the independent auditors and other auditors to review the scope and results of their work. The independent auditors have direct access to the Board of Directors, which is composed solely of directors who are not officers or employees of AgriBank or the affiliated Associations. The undersigned certify that they have reviewed the combined AgriBank, FCB and affiliated Associations' December 31, 2013 Annual Report and it has been prepared in accordance with all applicable statutory and regulatory requirements and the information contained herein is true, accurate and complete to the best of their knowledge and belief. Richard H. Davidson Chairman of the Board of Directors AgriBank, FCB L. William York Chief Executive Officer AgriBank, FCB Brian J. O Keane Executive Vice President, Banking and Finance and Chief Financial Officer AgriBank, FCB March 14,

49 Independent Auditor's Report To the Boards of Directors and Members of AgriBank, FCB and Affiliated Associations: We have audited the accompanying combined financial statements of AgriBank, FCB and affiliated Associations (the District), which comprise the combined statements of condition as of December 31, 2013, 2012 and 2011, and the related combined statements of comprehensive income, of changes in shareholders equity and of cash flows for the years then ended. Management's Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the District's preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of AgriBank, FCB and the affiliated Associations at December 31, 2013, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. March 14, 2014 PricewaterhouseCoopers LLP, 225 South Sixth Street, Suite 1400, Minneapolis, MN T: (612) , 47

50 Combined Statements of Condition AgriBank, FCB and Affiliated Associations (Dollars in thousands) As of December 31, Assets Loans $82,770,309 $77,089,134 $68,349,565 Allowance for loan losses 236, , ,508 Net loans 82,533,997 76,826,204 68,049,057 Investment securities - AgriBank, FCB 11,555,272 10,987,313 9,688,571 Investment securities - Affiliated Associations 1,968,260 2,275,266 2,262,747 Other earning assets 74, , ,945 Cash 1,162, , ,862 Federal funds 911, , ,976 Accrued interest receivable 824, , ,969 Premises and equipment, net 408, , ,019 Deferred tax assets, net 15,023 10,919 7,806 Assets held for lease, net 608, , ,467 Derivative assets 74,706 70, ,444 Other property owned 33,379 67, ,260 Debt issuance costs 35,249 53,769 53,700 Cash collateral pledged to counterparties 4, Other assets 119, , ,852 Total assets $100,329,457 $93,508,679 $83,136,675 Liabilities Bonds and notes $81,889,124 $77,135,855 $68,262,968 Subordinated notes 600, , ,000 Accrued interest payable 197, , ,457 Derivative liabilities ,345 17,466 Deferred tax liabilities, net 159, , ,798 Accounts payable 155, , ,386 Patronage payable 239, , ,760 Post-employment liability 310, , ,395 Cash collateral pledged by counterparties 24,170 22, ,120 Other liabilities 239, , ,425 Total liabilities 83,815,435 79,180,216 70,302,775 Commitments and contingencies Shareholders' equity Perpetual preferred stock 350, Protected borrower equities ,056 Capital stock and participation certificates 265, , ,382 Allocated surplus 339, , ,516 Unallocated surplus 15,838,875 14,324,793 12,875,783 Accumulated other comprehensive loss (314,550) (583,324) (594,096) Noncontrolling interest 34,864 22,082 6,259 Total shareholders' equity 16,514,022 14,328,463 12,833,900 Total liabilities and shareholders' equity $100,329,457 $93,508,679 $83,136,675 The accompanying notes are an integral part of these combined financial statements. 48

51 Combined Statements of Comprehensive Income AgriBank, FCB and Affiliated Associations (Dollars in thousands) For the year ended December 31, Interest income Loans $3,205,350 $3,093,608 $3,085,483 Investment securities and other earning assets 134, , ,664 Total interest income 3,340,167 3,243,278 3,243,147 Interest expense 827, ,824 1,070,810 Net interest income 2,512,287 2,311,454 2,172,337 (Reversal of) provision for credit losses (28,537) 33,907 23,637 Net interest income after (reversal of) provision for credit losses 2,540,824 2,277,547 2,148,700 Non-interest income Financially related services 144, , ,930 Allocated insurance reserve accounts distribution -- 79, Mineral income 82,199 76,701 45,990 Loan prepayment and fee income 85,075 45,782 56,413 Miscellaneous income and other gains (losses), net 31,905 8,590 36,684 Total non-interest income 344, , ,017 Non-interest expense Salaries and employee benefits 626, , ,960 Other operating expenses 302, , ,271 Farm Credit System insurance expense 69,658 32,220 36,368 Loss on debt extinguishment 3, Impairment losses recognized in earnings: Total other-than-temporary impairment losses 4,659 38,271 31,423 Portion of loss recognized in other comprehensive income (2,776) (12,786) (8,137) Net impairment losses recognized in earnings 1,883 25,485 23,286 Total non-interest expense 1,004, , ,197 Income before income taxes 1,880,535 1,758,505 1,595,520 Provision for income taxes 50,145 39,116 55,726 Net income $1,830,390 $1,719,389 $1,539,794 Other comprehensive income (loss) Investments available-for-sale: Not-other-than-temporarily-impaired investments $(15,291) $23,435 $16,072 Other-than-temporarily-impaired investments (8,667) 53,901 13,721 Derivatives and hedging activity 97,754 6,362 (91,425) Employee benefit plans activity 194,978 (72,926) (98,935) Total other comprehensive income (loss) 268,774 10,772 (160,567) Comprehensive income $2,099,164 $1,730,161 $1,379,227 The accompanying notes are an integral part of these combined financial statements. 49

52 (Dollars in thousands) Capital Accumulated Perpetual Protected Stock and Other Preferred Borrower Participation Allocated Unallocated Comprehensive Noncontrolling Stock Equities Certificates Surplus Surplus Income (Loss) Interest Total Balance at December 31, 2010 $ -- $2,716 $247,194 $265,010 $11,576,553 ($433,529) $ -- $11,657,944 Noncontrolling interest equity investment 6,259 6,259 Net income 1,539,794 1,539,794 Other comprehensive loss (160,567) (160,567) Patronage (200,549) (200,549) Surplus allocated under nonqualified patronage program 40,015 (40,015) -- Redemption of allocated surplus under nonqualified patronage program (14,509) (14,509) Capital stock/participation certificates issued 24,698 24,698 Capital stock/participation certificates retired (660) (18,510) (19,170) Balance at December 31, 2011 $ -- $2,056 $253,382 $290,516 $12,875,783 $(594,096) $6,259 $12,833,900 Noncontrolling interest equity investment 15,823 15,823 Net income 1,719,389 1,719,389 Other comprehensive income 10,772 10,772 Patronage (215,412) (215,412) Surplus allocated under nonqualified patronage program 54,967 (54,967) -- Redemption of surplus allocated under nonqualified patronage program (42,694) (42,694) Capital stock/participation certificates issued 29,689 29,689 Capital stock/participation certificates retired (1,751) (21,253) (23,004) Balance at December 31, 2012 $ -- $305 $261,818 $302,789 $14,324,793 $(583,324) $22,082 $14,328,463 Noncontrolling interest equity investment 12,782 12,782 Net income 1,830,390 1,830,390 Other comprehensive income 268, ,774 Patronage (241,348) (241,348) Surplus allocated under nonqualified patronage program 61,598 (61,598) -- Redemption of surplus allocated under nonqualified patronage program (25,027) (25,027) Perpetual preferred stock issued 350,000 (7,556) 342,444 Perpetual preferred stock dividends (5,806) (5,806) Capital stock/participation certificates issued 24,077 24,077 Capital stock/participation certificates retired (6) (20,721) (20,727) Balance at December 31, 2013 $350,000 $299 $265,174 $339,360 $15,838,875 $(314,550) $34,864 $16,514,022 The accompanying notes are an integral part of these combined financial statements. Combined Statements of Changes in Shareholders' Equity AgriBank, FCB and Affiliated Associations 50

53 Combined Statements of Cash Flows AgriBank, FCB and Affiliated Associations (Dollars in thousands) For the year ended December 31, Cash flows from operating activities Net income $1,830,390 $1,719,389 $1,539,794 Depreciation on premises and equipment 36,911 35,249 33,514 (Gain) loss on sales of premises and equipment (2,829) (3,477) 51 Depreciation on assets held for lease 96,672 81,607 68,917 Gain on disposal of assets held for lease (1,729) (504) (1,820) (Reversal of) provision for credit losses (28,537) 33,907 23,637 Loss (gain) on other property owned 9,670 22,469 (6,201) Loss on debt extinguishment 3, Loss on derivative activities 400 4,884 5,139 Net impairment losses recognized in earnings 1,883 25,485 23,286 Gain on sale of investment securities (323) Amortization of premiums and discounts on loans and investments 45,934 42,617 38,667 Insurance refund related to Financial Assistance Corporation stock -- (5,546) -- Changes in operating assets and liabilities: Accrued interest receivable (30,945) 25,625 5,135 Other assets 4,058 19,866 (14,623) Accrued interest payable 2,783 (46,400) (42,903) Other liabilities 59,345 41,425 91,911 Net cash provided by operating activities 2,027,957 1,997,427 1,764,493 Cash flows from investing activities Increase in loans, net (5,704,849) (8,821,321) (3,494,590) Proceeds from sales of other property owned 47,021 38,842 46,736 Decrease in other earning assets, net 70,151 66,746 61,012 Increase in investment securities, net (330,760) (1,300,897) (745,478) Proceeds from the sale of investment securities ,351 Purchases of assets held for lease, net (198,786) (144,641) (102,067) Purchases of premises and equipment, net (82,308) (61,217) (74,298) Proceeds from insurance refund related to Financial Assistance Corporation stock -- 5, Net cash used in investing activities (6,199,531) (10,216,942) (3,513,334) Cash flows from financing activities Consolidated bonds and notes issued 240,287, ,777, ,723,578 Consolidated bonds and notes retired (235,463,202) (245,832,880) (237,615,419) Increase (decrease) in cash collateral pledged by counterparties 1,850 (80,800) (85,720) Increase in cash collateral pledged to counterparties (4,254) Patronage distribution paid (210,700) (204,830) (175,817) Redemption of surplus allocated under nonqualified patronage program (25,027) (42,694) (14,509) Capital stock/participation certificates issued, net 2,532 5,877 4,599 Proceeds from issuances of preferred stock, net 342, Perpetual preferred stock dividends paid (3,131) Increase in noncontrolling interest 12,782 15,823 6,259 Net cash provided by financing activities 4,940,553 8,637,978 1,842,971 Net increase in cash and federal funds 768, ,463 94,130 Cash and federal funds at beginning of year 1,305, , ,708 Cash and federal funds at end of year $2,074,280 $1,305,301 $886,838 Supplemental schedule of non-cash activities (Increase) decrease in derivative assets $(4,451) $70,189 $112,769 (Decrease) increase in derivative liabilities (18,164) 879 8,748 Decrease in bonds from derivative activity (74,739) (72,546) (24,953) Increase (decrease) in shareholders' equity from cash flow derivatives 97,754 6,362 (91,425) (Decrease) increase in shareholders' equity from investment securities (23,958) 77,336 29,793 Increase (decrease) in shareholders' equity from employee benefits 194,978 (72,926) (98,935) Loans transferred to other property owned 30,435 35,364 62,807 Preferred stock dividends accrued but not paid 2, Cash and stock patronage distributions payable to members 239, , ,760 Financed sales of other property owned (8,201) (19,477) (3,503) Stock patronage issued Supplemental Information Interest paid $825,097 $978,224 $1,113,713 Taxes paid 33,201 32,846 40,951 The accompanying notes are an integral part of these combined financial statements. 51

54 Notes to Combined Financial Statements AgriBank, FCB and Affiliated Associations NOTE 1 Organization and Operations Farm Credit System and District Organization and Operations AgriBank, FCB (AgriBank) and affiliated Associations (the District) comprise one of the four Districts of the Farm Credit System (the System), a nationwide system of cooperatively owned Banks and Associations, 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. At December 31, 2013, the System was comprised of three Farm Credit Banks, one Agricultural Credit Bank and 82 Associations across the nation. System entities have specific lending authorities within their chartered territories. We are chartered to provide agricultural financing in substantially all of Arkansas, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee, Wisconsin and Wyoming. Our chartered territory is referred to as the District. At December 31, 2013, the District had 17 Agricultural Credit Association (ACA) parent Associations, each of which has wholly owned Federal Land Credit Association (FLCA) and Production Credit Association (PCA) subsidiaries. The 17 affiliated Associations primarily own AgriBank. FLCAs are authorized to originate long-term real estate mortgage loans. PCAs are authorized to originate short-term and intermediate-term loans. ACAs are authorized to originate long-term real estate mortgage loans and short-term and intermediate-term loans either directly or through their FLCA and PCA subsidiaries. Affiliated Associations are also authorized to provide lease financing options for agricultural purposes and to purchase and hold certain types of investments. AgriBank is the primary funding source for all affiliated Associations. AgriBank raises funds principally through the sale of consolidated Systemwide bonds and notes to the public through the Federal Farm Credit Banks Funding Corporation. The Farm Credit Act sets forth the types of authorized lending activity, persons eligible to borrow and financial services that we can offer. We are authorized to provide, in participation with other lenders, credit and related services to eligible borrowers. Eligible borrowers include farmers, ranchers, producers or harvesters of aquatic products, rural residents and farm-related service businesses. The Farm Credit Act, as amended, also allows us to participate with other lenders in loans to similar entities. Similar entities are parties that are not eligible for a loan from a System lending institution but have operations that are functionally similar to the activities of eligible borrowers. We are also authorized to purchase and hold certain types of investments. Affiliated Associations offer various risk management services, including credit life, term life, credit disability, crop hail and multi-peril crop insurance to eligible borrowers as additional services. Certain affiliated Associations also offer farm records, fee appraisals, producer education, consulting, income tax planning and preparation services, retirement and succession planning and commodity price hedging. The Farm Credit Administration (FCA) is delegated authority by Congress to regulate the System Banks and Associations. The activities of the System Banks and Associations are examined by the FCA and certain actions by these entities require prior approval from the FCA. 52

55 The Farm Credit Act established the Farm Credit System Insurance Corporation (Insurance Corporation) to administer the Farm Credit Insurance Fund (Insurance Fund). The Insurance Fund is used: to insure the timely payment of principal and interest on Farm Credit Systemwide debt obligations; to insure the retirement of protected borrower capital at par or stated value; and for other specified purposes. At the discretion of the Insurance Corporation, the Insurance Fund is also available to provide assistance to certain troubled System institutions and for the operating expenses of the Insurance Corporation. Each System Bank is required to pay premiums into the Insurance Fund until the assets in the Insurance Fund equal 2% (the secure base amount) of the aggregated insured obligations adjusted to reflect the reduced risk on loans or investments guaranteed by federal or state governments. The percentage of aggregate obligations can be changed by the Insurance Corporation, at its sole discretion, to a percentage it determines to be actuarially sound. When the amount in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is required to reduce premiums and under certain circumstances is required to transfer excess funds to establish Allocated Insurance Reserves Accounts (AIRAs). The Insurance Corporation may also distribute all or a portion of these reserve accounts to the System Banks. The basis for assessing premiums is insured debt outstanding. Nonaccrual loans and impaired investment securities are assessed a surcharge, while guaranteed loans and investment securities are deductions from the premium base. AgriBank, in turn, assesses premiums to the affiliated Associations each year based on similar factors. Service Organizations The Banks in the System jointly own several service organizations. These organizations were created to provide a variety of services for the System. We have ownership interests in the following service organizations: Federal Farm Credit Banks Funding Corporation provides for the issuance, marketing and processing of Systemwide debt securities using a network of investment dealers and dealer banks and financial management and reporting services; Farm Credit Services Building Association owns and leases premises and equipment to the System's regulator, the FCA; and Farm Credit System Association Captive Insurance Company provides corporate insurance coverage to member organizations. Farm Credit Foundations (FCF) provides benefits and payroll services to AgriBank and the affiliated Associations in our District as well as certain other System entities. FCF operated as a part of AgriBank prior to January 1, FCF was formed as a service corporation effective January 1, The System entities using FCF as their payroll and benefits provider contributed an investment into the service corporation in January The District s share of this investment was $728 thousand at December 31, 2013 and In addition, the Farm Credit Council acts as a full-service federated trade association that represents the System before Congress, the Executive Branch and others and provides support services to System institutions on a fee basis. 53

56 NOTE 2 Summary of Significant Accounting Policies Our accounting policies conform to accounting principles generally accepted in the United States of America and prevailing practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles (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. Principles of Combination: The accompanying combined financial statements include the accounts of AgriBank and affiliated Associations and reflect the investments in service organizations in which we have partial ownership interests. These investments are carried on a cost plus allocated equities basis. No quoted market value is available for the investments in service organizations. All significant transactions and balances between AgriBank and affiliated Associations have been eliminated in combination. Combined financial statements of the District are presented because of the financial and operational interdependence of AgriBank and affiliated Associations. Loans: Long-term mortgage loan amortization terms range up to 40 years. Substantially all commercial loans are made for agricultural production or operating purposes and have maturities of 10 years or less. Loans are carried at their principal amount outstanding. Interest on loans is accrued and credited to interest income based upon the daily principal amount outstanding. Loan fees, net of related origination costs, are deferred and recognized over the life of the loan as a yield adjustment in net interest income. Loans are generally placed in nonaccrual status when principal or interest is delinquent for 90 days or more (unless well secured and in the process of collection) or circumstances indicate that full collection is not expected. When a loan is placed in nonaccrual status, unpaid interest accrued in the current year is reversed to the extent principal plus accrued interest before the transfer exceeds the net realizable value of the collateral. Any unpaid interest accrued in a prior year is capitalized to the recorded investment in the loan, unless the net realizable value is less than the recorded investment in the loan, then it is charged-off against the allowance for loan losses. Cash received on nonaccrual loans is applied to reduce the recorded investment in the loan asset except in those cases where the collection of the recorded investment is fully expected and the loan has no unrecovered prior charge-offs. Nonaccrual loans may be returned to accrual status when principal and interest are current, prior charge-offs have been recovered, the ability of the borrower to fulfill the contractual repayment terms is fully expected because the borrower has demonstrated payment performance and the loan is not classified doubtful or loss. In situations where, for economic or legal reasons related to the borrower s financial difficulties, we grant a concession for other than an insignificant period of time to the borrower that we would not otherwise consider, the related loan is classified as a troubled debt restructuring, also known as a restructured loan. A concession is generally granted in order to minimize economic loss and avoid foreclosure. Concessions vary by program and borrower and may include interest rate reductions, term extensions, payment deferrals or an acceptance of additional collateral in lieu of payments. In limited circumstances, principal may be forgiven. Loans classified as troubled debt restructurings are considered risk loans as discussed on the next page. 54

57 Loans that are sold as participations are transferred as entire financial assets, groups of entire financial assets, or participating interests in the loans. The transfers of such assets or participating interests are structured such that control over the transferred assets or participating interest have been surrendered and that all of the conditions have been met to be accounted for as a sale. Affiliated Association Loans Held for Sale: One affiliated Association had loans held for sale that include rural residential mortgages originated for sale. Loans held for sale are recorded at fair value and are included in Other assets on the Combined Statements of Condition. Loans are valued on an individual basis and gains or losses are recorded in Miscellaneous income and other gains (losses), net on the Combined Statements of Comprehensive Income. Direct loan origination costs and fees for loans held for sale are recognized in income at origination. Interest income on loans held for sale is calculated based upon the note rate of the loan and recorded in Interest income on the Combined Statements of Comprehensive Income. Allowance for Loan Losses: The allowance for loan losses is maintained at a level considered adequate by management to provide for probable and estimable losses as of the date of the financial statements. The allowance is based on a periodic evaluation of the loan portfolio by management in which numerous factors are considered, including loan loss history, estimated probability of default, estimated loss severity, portfolio quality and current economic and environmental conditions. The allowance for loan losses encompasses various judgments, evaluations and appraisals with respect to the loans and their underlying security that, by their nature, contain elements of uncertainty and imprecision. Changes in the agricultural economy, the U.S. economy and their impact on borrower repayment capacity will cause these various judgments, evaluations and appraisals to change over time. Accordingly, actual circumstances could vary significantly from the institutions expectations and predictions of those circumstances. Management considers the following factors in determining and supporting the levels of allowances for loan losses: the concentration of lending in agriculture, combined with uncertainties associated with farmland values, commodity prices, exports, government assistance programs, regional economic effects and weather-related influences. A loan is impaired when it is probable that all amounts due under the contractual terms of the loan agreement will not be collected. Loans in our portfolio that are considered impaired are analyzed individually to establish a specific allowance for impaired loans. Impairment is generally measured based on the net realizable value of the collateral. All risk loans are considered to be impaired loans. Risk loans include: nonaccrual loans; accruing restructured loans; and accruing loans 90 days or more past due. Specific allowances are recorded to reduce the carrying amount of the risk loan to the lower of book value or the net realizable value of collateral. When a loan is deemed to be uncollectible, the loan principal and prior year(s) accrued interest is charged-off against the allowance for loan losses. Subsequent recoveries, if any, are added to the allowance for loan losses. We determine the amount of allowance that is required by analyzing risk loans individually and all other loans by grouping them into loan segments sharing similar risk characteristics. For loans that were not individually evaluated for impairment we use a two-dimensional loan risk rating model that incorporates a 14-point rating scale to identify and track the probability of borrower default and a separate six-point scale addressing the loss given default. An allowance is recorded for the loan segments evaluated collectively for probable and estimable credit losses as of the financial statement date based on the loss probability and loss severity appropriate for its segment. These estimated losses may be adjusted for relevant current environmental factors. These factors may vary by the different segments reflecting the risk characteristics of each segment. As loss probability, loss 55

58 severity and environmental factors change, earnings are impacted. Risk loans are analyzed individually to establish specific allowances. We record a specific allowance, if appropriate, to reduce the carrying amount of the risk loan to the lower of book value or the net realizable value of collateral. Changes in the allowance for loan losses consists of provision activity, recorded as (Reversal of) provision for credit losses on the Combined Statements of Comprehensive Income, charge-offs and recoveries. The reserve for unfunded commitments and unfunded letters of credit is based on the best estimate of losses inherent in lending commitments and issued letters of credit made to customers but not yet disbursed. Factors such as the likelihood of disbursal and likelihood of losses given disbursement were utilized in determining this contingency. Changes in the reserve for unfunded commitments and unfunded letters of credit consist of provision activity, recorded as (Reversal of) provision for credit losses on the Combined Statements of Comprehensive Income. AgriBank Investment Securities: FCA regulations permit AgriBank to hold eligible investment securities for the purpose of maintaining a liquidity reserve, managing short-term surplus funds and managing interest rate risk. AgriBank s investment securities may not necessarily be held-to-maturity, and accordingly, have been classified as available-for-sale. These investments are reported at fair value, and unrealized holding gains and losses on investments that are not other-than-temporarily impaired are netted and reported as a separate component of shareholders equity (accumulated other comprehensive income (loss)). Changes in the fair value of investment securities are reflected as direct charges or credits to other comprehensive income, unless the security is deemed to be other-than-temporarily impaired. When other-than-temporary impairment exists and AgriBank does not intend to sell the impaired debt security, nor is AgriBank more likely than not to be required to sell the security before recovery, the loss is separated into credit-related and non-credit-related components. If a security is deemed to be other-than-temporarily impaired, the security is written down to fair value, the creditrelated component is recognized through earnings and the non-credit-related component is recognized in other comprehensive income. Purchased premiums and discounts are amortized or accreted using the interest method over the terms of the respective securities. Realized gains and losses are determined using the specific identification method and are recognized in current operations. Affiliated Association Investment Securities: FCA regulations authorize Associations to purchase and hold certain types of investments. As Associations have the positive intent and ability to hold these investments to maturity, they have been classified as held-to-maturity and are carried at cost adjusted for the amortization of premiums and accretion of discounts. If an investment is determined to be other-than-temporarily impaired, the carrying value of the security is written down to fair value. The impairment loss is separated into credit-related and non-credit-related components. The credit-related component is expensed through earnings in the period of impairment. The non-credit-related component is recognized in other comprehensive income and amortized over the remaining life of the security as an increase in the security s carrying amount. Cash: Cash, as included in the combined financial statements, represents cash on hand and deposits at banks. Federal Funds: Federal funds, as included in the combined financial statements, represent excess reserve funds on deposit at the Federal Reserve banks that are lent to other commercial banks. These transactions represent an investment of cash balances overnight in other financial institutions at the federal funds rate. Term federal funds would be a similar investment held for a period longer than overnight. Premises and Equipment: Premises and equipment are carried at cost less accumulated depreciation. Depreciation is generally provided on the straight-line method over the estimated useful life of the asset. Gains 56

59 or losses on disposition are reflected in current operations and are included in Miscellaneous income and other gains (losses), net on the Combined Statements of Comprehensive Income. Maintenance and repairs are charged to other operating expenses and improvements are capitalized. Internally developed software costs are capitalized and amortized over their estimated useful life. Other Property Owned: Other property owned, consisting of real and personal property acquired through foreclosure or deed in lieu of foreclosure, is recorded at fair value less estimated selling costs upon acquisition. Any initial reduction in the carrying amount of a loan to the fair value of the collateral received is charged to the allowance for loan losses. Revised estimates to the fair value less costs to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Related income and expenses from operations and carrying value adjustments are included in Miscellaneous income and other gains (losses), net on the Combined Statements of Comprehensive Income. In connection with past foreclosure and sale proceedings, AgriBank has retained certain mineral interests and equity positions in land from which it receives income from lease bonuses, rentals and leasing and production royalties. These intangible assets have no recorded value on the Combined Statements of Condition. AgriBank receives income from mineral and royalty holdings. All income received on these mineral rights is recognized in the period received and is included in Mineral income on the Combined Statements of Comprehensive Income. The Farm Credit Act requires that mineral rights acquired after 1985 through foreclosure be sold to the buyer of the surface rights in the land. Leases: Certain affiliated Associations have finance and operating leases. For finance leases, unearned finance lease income from lease contracts represents the excess of gross lease receivables plus residual receivables over the cost of leased equipment. Net unearned finance income is amortized to earnings using the interest method. The carrying amount of finance leases is presented in Loans on the Combined Statements of Condition and represents lease rent receivables net of the unearned income plus the estimated residual value. For operating leases, revenue is recognized as earned ratably over the term of the lease and depreciation and other expenses are charged against such revenue as incurred. The carrying amount of operating leases is presented as Assets held for lease, net on the Combined Statements of Condition and represents the asset cost net of accumulated depreciation. Post-Employment Benefit Plans: The AgriBank Farm Credit District has various post-employment benefit plans in which its employees participate. Expenses related to these plans are included in Salaries and employee benefits on the Combined Statements of Comprehensive Income. The defined contribution plan allows eligible employees to save for their retirement either pre-tax/post-tax or both with an employer match on a percentage of the employee s contributions. All employees hired after December 31, 2006 participate only in the defined contribution plan. Benefits are provided under this plan in the form of a fixed percentage of salary contribution in addition to the employer match. Employer contributions are expensed when incurred. Certain employees also participate in the defined benefit retirement plan. The plan is comprised of two benefit formulas. Employees hired prior to October 1, 2001 were on the final average pay formula. These employees were given a one-time option to convert to the cash balance formula or to remain on a final average pay formula. Between October 1, 2001 and December 31, 2006, all new benefits-eligible employees participated in the cash balance formula. Effective January 1, 2007, the defined benefit retirement plan was closed to new employees. The District plan utilizes the "Projected Unit Credit" actuarial method for financial reporting purposes and the "Entry Age Normal Cost" method for funding purposes. 57

60 Certain employees also participate in the nonqualified defined benefit pension restoration plan. This plan restores retirement benefits to certain highly compensated eligible employees that would have been provided under the qualified plan if such benefits were not above the Internal Revenue Code compensation or other limits. Certain health insurance benefits are provided to eligible retired employees according to the terms of those benefit plans. The anticipated cost of these benefits is accrued during the employees active service period. Income Taxes: AgriBank and the FLCAs are exempt from federal and other income taxes as provided in the Farm Credit Act. The ACAs and PCAs accrue federal and state income taxes where applicable. The ACAs and PCAs are exempt from certain state taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. Deferred tax assets are recorded if the deferred tax asset is more likely than not to be realized. If the realization test cannot be met, the deferred tax asset is reduced by a valuation allowance. Certain affiliated Associations have patronage programs. Provisions for income taxes are made only on the earnings not distributed as qualified patronage distributions. Patronage Program: AgriBank and certain affiliated Associations accrue patronage refunds when declared by their Boards of Directors. Entities with patronage programs accrue patronage refunds and pay the refunds in accordance with the declarations of their Boards of Directors, generally in the first quarter after year end. Noncontrolling Interest: Accounting guidance requires that noncontrolling interests be reported as a component of total equity. The noncontrolling interest represents the equity investments of Farm Credit entities outside the AgriBank District in the AgDirect program, which began in April 2011, and FCF which was formed January Under the AgDirect program, AgriBank purchases 100% loan participation interests in retail equipment financing loans from AgDirect LLP (LLP), a limited liability partnership. An affiliated Association (within our District) in the AgDirect program first purchases a participation interest in a retail installment sales contract originated by an equipment dealer at the point of sale. The Association sells a 100% participation interest to the LLP, which immediately sells a 100% participation interest to AgriBank. The LLP purchases an initial investment in AgriBank stock equal to 6% of the participation loan balance. The LLP does not hold any assets other than its investment in AgriBank which is eliminated in combination. The source of earnings for the LLP is from patronage paid by AgriBank, if any. Such patronage is paid at the sole discretion of the AgriBank Board of Directors. During 2013 and 2012, AgriBank s Board declared $12.7 million and $6.8 million, respectively, of discretionary patronage. This patronage approximated the net earnings of the program less a specified return on our capital. No such patronage was declared on the AgDirect program in 2011, as expenses exceeded income. Refer to Note 1 for further discussion of FCF. Combined Statements of Cash Flows: For purposes of reporting cash flows, cash includes cash and overnight federal funds. Cash flows on hedges are classified in the same category as the items being hedged. Derivative Instruments and Hedging Activity: AgriBank is party to derivative financial instruments, primarily interest rate swaps, interest rate caps, interest rate floors and swaptions, which are used to manage interest rate risk on assets, liabilities and anticipated transactions. In accordance with Financial Accounting Standards Board (FASB) guidance on Accounting for Derivative Instruments and Hedging Activities, derivatives are 58

61 recorded on the Combined Statements of Condition as assets and liabilities, measured at fair value and netted by counterparties pursuant to the provisions of master netting agreements. In accordance with the FASB guidance, changes in the fair values of derivatives are accounted for as gains or losses through earnings or as a component of other comprehensive income, in the Combined Statements of Comprehensive Income, depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. For fair value hedge transactions in which AgriBank is hedging changes in the fair value of an asset or liability, changes in the fair value of the derivative instrument are offset in net income in the Combined Statements of Comprehensive Income by changes in the fair value of the hedged item. For cash flow hedge transactions hedging the variability of cash flows related to a variable-rate asset or liability, changes in the fair value of the derivative instrument are reported in other comprehensive income in the Combined Statements of Comprehensive Income. The gains and losses on the derivative instruments reported in other comprehensive income are reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges is recognized in current period earnings. For derivatives not designated as a hedging instrument, the related change in fair value is recorded in current period earnings. AgriBank documents all relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value or cash flow hedges to: specific assets or liabilities on the Combined Statements of Condition; firm commitments; or forecasted transactions. For hedging relationships, AgriBank assesses effectiveness of the hedging relationship according to the FASB guidance. This guidance requires that prospective effectiveness tests be performed at inception and retrospective tests be performed on an ongoing basis until the maturity or termination of the hedge. For prospective testing, AgriBank performs a shock test of interest rate movements. Alternative tests may be performed if those tests appear to be reasonable relative to the hedge relationship that is being evaluated. For retrospective testing, AgriBank s procedure is to perform correlation and regression tests of the value change of the hedge versus the value change of the hedged item using weekly data. If the hedge relationship does not pass the minimum levels established for effectiveness tests, hedge accounting will be discontinued. AgriBank discontinues hedge accounting prospectively when it is determined that: a derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; the derivative expires or is sold, terminated, exercised or de-designated as a hedge; it is no longer probable that the forecasted transaction will occur; a hedged firm commitment no longer meets the definition of a firm commitment; or management determines that designating the derivative as a hedging instrument is no longer appropriate. When AgriBank discontinues hedge accounting for cash flow hedges, any remaining accumulated other comprehensive income or loss is amortized into earnings over the remaining life of the original hedged item. When AgriBank discontinues hedge accounting for fair value hedges, changes in the fair value of the derivative will be recorded in current period earnings, and the basis adjustment to the previously hedged item will be taken into earnings using the interest method over the remaining life of the hedged item. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the derivative is carried at its fair 59

62 value on the Combined Statements of Condition, recognizing changes in fair value in current period earnings. Refer to further discussion in Note 18. One affiliated Association is party to derivative financial instruments called to be announced securities (TBAs) to manage exposure to interest rate risk and changes in the fair value of forward loans held for sale and the interest rate lock commitments that are determined prior to funding. TBAs are measured in terms of notional amounts. The notional amount is not exchanged and is used as a basis on which interest payments are determined. The derivatives are recorded on the Combined Statements of Condition as assets or liabilities on a net basis measured at fair value. Fair Value Measurements: The FASB guidance on Fair Value Measurements describes three levels of inputs that may be used to measure fair value. Level 1 Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs include the following: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active so that they are traded less frequently than exchange-traded instruments, quoted prices that are not current, or principal market information that is not released publicly; inputs that are observable such as interest rates and yield curves, prepayment speeds, credit risks and default rates; and inputs derived principally from or corroborated by observable market data by correlation or other means. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These unobservable inputs reflect the reporting entity s own assumptions about assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Refer to Note 17 for further discussion on our fair value measurements. Recently Issued or Adopted Accounting Pronouncements: In February 2013, the FASB issued guidance, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The guidance requires entities to measure these obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, this guidance requires entities to disclose the nature and amount of the obligation as well as other information about those obligations. The new guidance is effective for interim and annual periods beginning on January 1, 2014 and should be applied retrospectively to obligations with joint and several liabilities that exist at January 1, Earlier adoption is permitted. The adoption of this guidance will not impact the financial condition or results of operations. 60

63 In February 2013, the FASB issued guidance, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. The guidance requires entities to present either parenthetically on the face of the financial statements or in the notes to the financial statements, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The guidance was effective for annual periods beginning after December 15, 2012, and interim periods within those annual periods. The adoption of this guidance did not impact the financial condition or results of operations, but resulted in additional disclosures. In December 2011, the FASB issued guidance entitled, Balance Sheet Disclosures about Offsetting Assets and Liabilities. In January 2013, the FASB issued clarifying guidance surrounding the scope of financial instruments covered under this guidance. The offsetting disclosures are applied only to derivatives, repurchase agreements and securities lending transactions. The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This includes the effect or potential effect of rights of setoff associated with an entity s recognized assets and recognized liabilities. The requirements apply to in-scope financial instruments that are offset in accordance with the rights of offset set forth in accounting guidance and for those financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset or not. This guidance is to be applied retrospectively for all comparative periods and was effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance did not impact financial condition or results of operations, but resulted in additional disclosures. NOTE 3 Loans and Allowance for Loan Losses Loans by Type (in thousands) December 31, 2013 December 31, 2012 December 31, 2011 Amount % Amount % Amount % Real estate mortgage $47,686, % $43,808, % $38,276, % Production and intermediate term 22,118, % 21,293, % 19,448, % Agribusiness 7,003, % 6,402, % 5,668, % Rural residential real estate 2,626, % 2,501, % 2,316, % Other 3,334, % 3,082, % 2,639, % Total loans $82,770, % $77,089, % $68,349, % The other category is primarily comprised of communication and energy-related loans, finance leases and loans originated under our Mission Related Investment authority, as well as loans to AgriBank s other financial institutions (OFIs). 61

64 Participations We may purchase or sell participation interests with other parties in order to diversify risk, manage loan volume and comply with FCA regulations or General Financing Agreement limitations. Participations Purchased and Sold (in thousands) Other Farm Credit Institutions Non-Farm Credit Institutions Total Participations Participations Participations Participations Participations Participations As of December 31, 2013 Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $862,927 $207,673 $2,245,710 $33,421 $3,108,637 $241,094 Production and intermediate term 530, ,758 3,663,849 51,918 4,194, ,676 Agribusiness 3,238, , , ,717 3,955, ,640 Rural residential real estate ,352 6,118 20,467 6,118 Other 1,713, ,357 10, ,723, ,357 Total loans $6,345,904 $1,683,711 $6,657,344 $288,174 $13,003,248 $1,971,885 (in thousands) Other Farm Credit Institutions Non-Farm Credit Institutions Total Participations Participations Participations Participations Participations Participations As of December 31, 2012 Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $830,665 $154,048 $2,033,790 $37,200 $2,864,455 $191,248 Production and intermediate term 565, ,183 3,080,414 43,839 3,645, ,022 Agribusiness 2,626, , , ,231 3,311, ,859 Rural residential real estate , , Other 1,497, ,082 18, ,515, ,082 Total loans $5,519,901 $967,949 $5,834,770 $380,318 $11,354,671 $1,348,267 (in thousands) Other Farm Credit Institutions Non-Farm Credit Institutions Total Participations Participations Participations Participations Participations Participations As of December 31, 2011 Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $756,174 $114,972 $1,837,541 $54,063 $2,593,715 $169,035 Production and intermediate term 518, ,375 2,573,324 45,354 3,092, ,729 Agribusiness 2,195, ,317 1,254, ,226 3,450, ,543 Rural residential real estate , , Other 1,100,590 45,396 33, ,133,906 45,396 Total loans $4,571,119 $839,060 $5,719,305 $392,701 $10,290,424 $1,231,761 Information in the preceding chart excludes loans entered into under our Mission Related Investment and leasing authorities. 62

65 Portfolio Diversification Loan concentrations exist when there are amounts loaned to multiple borrowers engaged in similar activities, or within close proximity, which would cause them to be similarly impacted by economic or other conditions. The tables below illustrate commodity and geographic distribution of the District s portfolio as of December 31, 2013: District Portfolio Commodity Distribution State Distribution Crops 49% Iowa 12% Cattle 9% Illinois 10% Dairy 8% Minnesota 9% Investor real estate 5% Nebraska 8% Pork 5% Indiana 6% Food products 4% Michigan 6% Residential real estate 4% Ohio 6% Timber 3% Wisconsin 6% Poultry 2% Missouri 5% Ethanol 1% South Dakota 5% Other 10% North Dakota 4% 100% Tennessee 4% Arkansas 3% Kentucky 3% Wyoming 1% Other states 12% 100% The commodity and geographic concentrations have not changed materially from prior years. The District may have multiple entities with loans to individual customers. At December 31, 2013, the 10 largest customers from a District perspective, had total loans including accrued interest receivable of $2.5 billion, or 3.0%. None of these loans were in nonaccrual status at December 31, Total loans plus any unfunded commitments represent the maximum potential credit risk; however, substantial portions of lending activities are collateralized. Accordingly, the credit risk associated with lending activities is less than the recorded loan principal. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management s credit evaluation of the borrower. Collateral held varies, but typically includes farmland and income-producing property, such as crops and livestock. Long-term real estate loans are secured by the first liens on the underlying real property. FCA regulations state that long-term real estate loans are not to exceed 85% (97% if guaranteed by a government agency) of the property s appraised value at origination. However, a decline in a property s market value subsequent to loan origination or advances, or other actions necessary to protect the financial interest of the lender in the collateral, may result in loan-to-value ratios in excess of the regulatory maximum. The District has an internally maintained database which uses market data to estimate market values of collateral for a significant portion of the real estate mortgage portfolio. An estimate of credit risk exposure is considered in the allowance for loan losses. 63

66 Portfolio Performance One credit quality indicator we utilize is the FCA Uniform Loan Classification System that categorizes loans into five categories. The categories are defined as follows: Acceptable assets are non-criticized assets representing the highest quality. They are expected to be fully collectible. This category is further differentiated into various probabilities of default; 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; and Loss assets are considered uncollectible. Credit Quality of Loans (in thousands) As of December 31, 2013 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $46,791, % $503, % $873, % $48,168, % Production and intermediate term 21,533, % 417, % 428, % 22,379, % Agribusiness 6,597, % 203, % 230, % 7,031, % Rural residential real estate 2,528, % 24, % 86, % 2,639, % Other 3,278, % 13, % 49, % 3,341, % Total loans $80,730, % $1,161, % $1,668, % $83,560, % (in thousands) As of December 31, 2012 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $42,612, % $533, % $1,107, % $44,253, % Production and intermediate term 20,760, % 260, % 532, % 21,552, % Agribusiness 5,900, % 289, % 239, % 6,429, % Rural residential real estate 2,389, % 22, % 102, % 2,513, % Other 3,013, % 9, % 65, % 3,087, % Total loans $74,675, % $1,114, % $2,046, % $77,836, % (in thousands) As of December 31, 2011 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $36,474, % $985, % $1,267, % $38,727, % Production and intermediate term 18,636, % 432, % 649, % 19,718, % Agribusiness 5,110, % 434, % 147, % 5,692, % Rural residential real estate 2,197, % 25, % 104, % 2,328, % Other 2,548, % 48, % 49, % 2,646, % Total loans $64,968, % $1,926, % $2,218, % $69,113, % Note: Accruing loans include accrued interest receivable. 64

67 Aging Analysis of Loans (in thousands) Days Not Past Due or Days or More Total Less than 30 Days Total As of December 31, 2013 Past Due Past Due Past Due Past Due Loans Accruing loans 90 days or more past due Real estate mortgage $118,857 $90,214 $209,071 $47,959,237 $48,168,308 $1,347 Production and intermediate term 58,982 35,955 94,937 22,284,494 22,379, Agribusiness 435 3,498 3,933 7,027,840 7,031,773 1 Rural residential real estate 26,555 10,508 37,063 2,602,719 2,639, Other 11,195 10,908 22,103 3,319,019 3,341, Total loans $216,024 $151,083 $367,107 $83,193,309 $83,560,416 $2,222 (in thousands) Days Not Past Due or Days or More Total Less than 30 Days Total As of December 31, 2012 Past Due Past Due Past Due Past Due Loans Accruing loans 90 days or more past due Real estate mortgage $142,573 $135,844 $278,417 $43,974,876 $44,253,293 $11,928 Production and intermediate term 62,754 50, ,989 21,439,558 21,552,547 6,670 Agribusiness 30,507 14,395 44,902 6,384,115 6,429, Rural residential real estate 29,750 15,292 45,042 2,468,614 2,513, Other 14,077 14,305 28,382 3,059,452 3,087,834 1,212 Total loans $279,661 $230,071 $509,732 $77,326,615 $77,836,347 $20,501 (in thousands) Days Not Past Due or Days or More Total Less than 30 Days Total As of December 31, 2011 Past Due Past Due Past Due Past Due Loans Accruing loans 90 days or more past due Real estate mortgage $147,278 $139,106 $286,384 $38,441,500 $38,727,884 $2,109 Production and intermediate term 69,127 70, ,310 19,579,317 19,718,627 1,078 Agribusiness 828 5,634 6,462 5,685,952 5,692, Rural residential real estate 34,525 20,338 54,863 2,273,297 2,328, Other 17,696 5,981 23,677 2,622,909 2,646,586 1,010 Total loans $269,454 $241,242 $510,696 $68,602,975 $69,113,671 $4,197 Note: Accruing loans include accrued interest receivable. 65

68 Impaired Assets Risk loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms. Interest income recognized and cash payments received on nonaccrual risk loans are applied as described in Note 2. Risk Loan Information (in thousands) As of December 31, Nonaccrual loans: Current as to principal and interest $419,473 $428,573 $561,771 Past due 206, , ,171 Total nonaccrual loans 626, , ,942 Accruing restructured loans 53,250 45,565 31,230 Accruing loans 90 days or more past due 2,222 20,501 4,197 Total risk loans $681,876 $766,895 $920,369 Volume with specific reserves $158,783 $175,035 $321,671 Volume without specific reserves 523, , ,698 Total risk loans $681,876 $766,895 $920,369 Specific reserves $48,661 $60,235 $95,541 For the year ended December 31, Income on accrual risk loans $3,122 $2,368 $2,387 Income on nonaccrual loans 31,820 36,503 40,288 Total income on risk loans $34,942 $38,871 $42,675 Average risk loans $761,801 $859,555 $1,015,553 Note: Accruing loans include accrued interest receivable. 66

69 Risk Assets by Loan Type (in thousands) As of December 31, Nonaccrual loans: Real estate mortgage $372,295 $419,837 $492,938 Production and intermediate term 158, , ,402 Agribusiness 28,412 38,817 71,370 Rural residential real estate 43,308 51,063 59,605 Other 23,673 19,003 11,627 Total nonaccrual loans $626,404 $700,829 $884,942 Accruing restructured loans: Real estate mortgage $42,007 $33,099 $18,683 Production and intermediate term 6,576 3,589 3,634 Agribusiness 4,178 4,398 4,514 Rural residential real estate Other -- 4,081 4,351 Total accruing restructured loans $53,250 $45,565 $31,230 Accruing loans 90 days or more past due: Real estate mortgage $1,347 $11,928 $2,109 Production and intermediate term 605 6,670 1,078 Agribusiness Rural residential real estate Other 269 1,212 1,010 Total accruing loans 90 days or more past due $2,222 $20,501 $4,197 Total risk loans $681,876 $766,895 $920,369 Other property owned $33,379 $67,836 $113,260 Total risk assets $715,255 $834,731 $1,033,629 Note: Accruing loans include accrued interest receivable. The decrease in risk assets in 2013 was primarily due to the decrease in nonaccrual loans primarily related to repayments within the normal course of business and settlement of a large participated dairy credit. The decrease in other property owned was primarily due to the write-down of a large timber credit and disposals in the normal course of business. The decrease in risk assets in 2012 from 2011 was due primarily to the decrease in nonaccrual loans related to repayments within the normal course of business. The decrease in other property owned was primarily due to the sale of a commercial dairy, a large tract of timber and a lumber concentration yard business at one affiliated Association. Nonaccrual loans represented 0.8% of total loans at December 31, At December 31, 2013, 67.0% of nonaccrual loans were current as to principal and interest. Our accounting policy generally requires loans past due 90 days to be transferred into nonaccrual status. Based on management's analysis, all accruing loans 90 days or more past due were adequately secured and in the process of collection and, as such, were eligible to remain in accruing status. Certain affiliated Associations have entered into a Standby Commitment to Purchase Agreement with the Federal Agricultural Mortgage Corporation (Farmer Mac), a System institution, to help manage credit risk. If a loan covered by the agreement goes into default, subject to certain conditions, the affiliated Associations have 67

70 the right to sell the loan to Farmer Mac. This agreement remains in place until the loan is paid in full. The net investment of loans subject to the purchase agreement was $651.7 million, $454.2 million and $346.8 million at December 31, 2013, 2012 and 2011, respectively. The affiliated Associations paid Farmer Mac commitment fees totaling $3.2 million, $2.4 million and $2.5 million in 2013, 2012 and 2011, respectively. These amounts are included in Other operating expenses on the Combined Statements of Comprehensive Income. Sales of loans to Farmer Mac under this agreement have been minimal with $4.3 million occurring in No loans have been sold to Farmer Mac under this agreement in 2013 or All risk loans are considered to be impaired loans. Additional Impaired Loan Information by Loan Type (in thousands) As of December 31, 2013 For the year ended December 31, 2013 Recorded Investment * Unpaid Principal Balance ** Related Allowance Average Impaired Loans Interest Income Recognized Impaired loans with a related allowance for loan losses: Real estate mortgage $68,318 $80,667 $18,316 $76,951 $ -- Production and intermediate term 61,362 68,184 22,114 47, Agribusiness 1,729 1, , Rural residential real estate 6,520 8,965 1,427 7, Other 20,854 21,344 6,274 19, Total $158,783 $180,893 $48,661 $155,841 $ -- Impaired loans with no related allowance for loan losses: Real estate mortgage $347,331 $448,053 $ -- $382,341 $19,523 Production and intermediate term 104, , ,102 9,218 Agribusiness 30,862 42, ,220 3,596 Rural residential real estate 37,277 51, ,825 1,694 Other 3,088 3, , Total $523,093 $711,275 $ -- $605,960 $34,942 Total impaired loans: Real estate mortgage $415,649 $528,720 $18,316 $459,292 $19,523 Production and intermediate term 165, ,973 22, ,712 9,218 Agribusiness 32,591 43, ,392 3,596 Rural residential real estate 43,797 60,035 1,427 47,974 1,694 Other 23,942 24,455 6,274 37, Total $681,876 $892,168 $48,661 $761,801 $34,942 68

71 (in thousands) As of December 31, 2012 For the year ended December 31, 2012 Recorded Investment* Unpaid Principal Balance ** Related Allowance Average Impaired Loans Interest Income Recognized Impaired loans with a related allowance for loan losses: Real estate mortgage $79,805 $108,370 $21,486 $82,255 $ -- Production and intermediate term 72, ,237 31,696 87, Agribusiness 3,862 7,550 1,468 19, Rural residential real estate 8,784 12,055 1,936 9, Other 9,606 10,062 3,649 6, Total $175,035 $257,274 $60,235 $205,660 $ -- Impaired loans with no related allowance for loan losses: Real estate mortgage $385,059 $481,570 $ -- $416,154 $16,350 Production and intermediate term 109, , ,463 11,200 Agribusiness 39,712 48, ,684 9,560 Rural residential real estate 43,009 54, ,245 1,735 Other 14,690 14, , Total $591,860 $805,813 $ -- $653,895 $39,141 Total impaired loans: Real estate mortgage $464,864 $589,940 $21,486 $498,409 $16,350 Production and intermediate term 182, ,752 31, ,215 $11,200 Agribusiness 43,574 56,543 1,468 59,197 $9,560 Rural residential real estate 51,793 66,183 1,936 55,672 $1,735 Other 24,296 24,669 3,649 23,062 $296 Total $766,895 $1,063,087 $60,235 $859,555 $39,141 (in thousands) As of December 31, 2011 For the As of December 31, 2011 Recorded Unpaid Principal Related Average Impaired Investment* Balance ** Allowance Loans Interest Income Recognized Impaired loans with a related allowance for loan losses: Real estate mortgage $108,666 $132,607 $25,423 $94,984 $ -- Production and intermediate term 151, ,401 47, , Agribusiness 45,033 52,854 17, , Rural residential real estate 11,924 15,193 2,785 10, Other 4,716 9,218 1,955 2, Total $321,671 $419,273 $95,541 $381,221 $ -- Impaired loans with no related allowance for loan losses: Real estate mortgage $405,064 $499,468 $ -- $418,581 $17,828 Production and intermediate term 102, , ,222 12,084 Agribusiness 30,851 47, ,839 9,911 Rural residential real estate 47,729 58, ,021 2,077 Other 12,272 20, , Total $598,698 $806,341 $ -- $634,332 $42,675 Total impaired loans: Real estate mortgage $513,730 $632,075 $25,423 $513,565 $17,828 Production and intermediate term 254, ,400 47, ,925 12,084 Agribusiness 75, ,833 17, ,454 9,911 Rural residential real estate 59,653 73,865 2,785 55,357 2,077 Other 16,988 29,441 1,955 14, Total $920,369 $1,225,614 $95,541 $1,015,553 $42,675 * The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges and acquisition costs and may also reflect a previous direct write-down of the investment. The recorded investment may be less than the unpaid principal balance as payments on non-cash basis nonaccrual loans reduce the recorded investment. ** Unpaid principal balance represents the contractual principal balance of the loan. Troubled Debt Restructurings Included within loans are troubled debt restructurings. These loans have been modified by granting a concession in order to maximize the collection of amounts due when a borrower is experiencing financial difficulties. When a restructured loan constitutes a troubled debt restructuring, these loans are included within our risk loans. All 69

72 risk loans are analyzed within our allowance for loan losses. We record a specific allowance to reduce the carrying amount of restructured loans to the lower of book value or net realizable value of collateral, if required. Troubled Debt Restructuring Activity (in thousands) Pre-modification Outstanding Post-modification Outstanding As of December 31, 2013 Recorded Investment* Recorded Investment* Troubled debt restructurings: Real estate mortgage $25,125 $25,579 Production and intermediate term 42,006 42,422 Agribusiness 6,521 5,821 Rural residential real estate 1,839 1,647 Other 15,493 15,493 Total loans $90,984 $90,962 (in thousands) Pre-modification Outstanding Post-modification Outstanding As of December 31, 2012 Recorded Investment* Recorded Investment* Troubled debt restructurings: Real estate mortgage $40,835 $40,839 Production and intermediate term 15,802 15,630 Rural residential real estate 1,863 1,745 Total loans $58,500 $58,214 (in thousands) Pre-modification Outstanding Post-modification Outstanding As of December 31, 2011 Recorded Investment* Recorded Investment* Troubled debt restructurings: Real estate mortgage $46,991 $47,432 Production and intermediate term 28,748 28,840 Agribusiness 99,035 99,035 Rural residential real estate 1,812 1,811 Other 1,914 1,914 Total loans $178,500 $179,032 * Pre-modification outstanding represents the recorded investment just prior to restructuring and post-modification outstanding represents the recorded investment immediately following the restructuring. The recorded investment is the face amount of the receivable increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment. The post-modification outstanding recorded investment may be higher than the pre-modification outstanding recorded investment, in certain segments, primarily due to the capitalization of certain charges upon restructuring. Troubled Debt Restructurings that Subsequently Defaulted within the Previous 12 Months (in thousands) Recorded Investment As of December 31, Troubled debt restructurings that subsequently defaulted: Real estate mortgage $1,639 $4,151 $18,949 Production and intermediate term 362 1,246 4,322 Agribusiness Rural residential real estate ,224 Total $2,001 $5,905 $24,577 At December 31, 2013, troubled debt restructurings outstanding totaled $191.3 million, of which $138.0 million were in nonaccrual status. At December 31, 2012, troubled debt restructurings outstanding totaled $163.5 million, of which $117.9 million were in nonaccrual status. At December 31, 2011, troubled debt restructurings 70

73 outstanding totaled $155.7 million, of which $124.5 million were in nonaccrual status. Additional commitments to lend to borrowers whose loans have been modified in a troubled debt restructuring totaled $2.4 million at December 31, Allowance for Loan Losses Changes in Allowance for Loan Losses (in thousands) For the year ended December 31, Balance at beginning of year $262,930 $300,508 $406,346 (Reversal of) provision for loan losses (27,146) 27,157 13,637 Charge-offs (42,782) (82,951) (142,123) Recoveries 43,310 18,216 22,648 Balance at end of period $236,312 $262,930 $300,508 AgriBank and affiliated Association management teams believe the allowances are adequate in relation to the probable losses in each portfolio as of December 31, The allowance for loan losses totaled $236.3 million at December 31, 2013, a decline from $262.9 million at December 31, The decline in the allowance for loan losses was primarily driven by net reversals of provision for loan losses of $27.1 million, partially offset by net recoveries of $0.5 million. The net recoveries were primarily related to the subsequent recoveries received on a large participated dairy credit. The reversal of provision for credit losses reported in the Combined Statements of Comprehensive Income includes reversals of provision expense for unfunded commitments and unfunded letters of credit of $0.6 million and $0.8 million, respectively. The reserves for unfunded commitments and letters of credit are recorded in Other liabilities on the Combined Statements of Condition. 71

74 Changes in Allowance for Loan Losses and Year End Recorded Investments by Loan Type (in thousands) Allowance for loan losses: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Other Total Balance at December 31, 2012 $94,385 $91,565 $48,434 $11,683 $16,863 $262,930 (Reversal of) provision for loan losses 3,871 (22,914) (12,650) 2,955 1,592 (27,146) Charge-offs (21,246) (12,620) (900) (6,293) (1,723) (42,782) Recoveries 9,303 31,122 2, ,310 Balance at December 31, 2013 $86,313 $87,153 $37,250 $8,864 $16,732 $236,312 At December 31, 2013: Ending balance: individually evaluated for impairment $18,316 $22,114 $530 $1,427 $6,274 $48,661 Ending balance: collectively evaluated for impairment $67,997 $65,039 $36,720 $7,437 $10,458 $187,651 Recorded investments in loans outstanding: Ending balance at December 31, 2013 $48,168,308 $22,379,431 $7,031,773 $2,639,782 $3,341,122 $83,560,416 Ending balance for loans individually evaluated for impairment $415,649 $165,897 $32,591 $43,797 $23,942 $681,876 Ending balance for loans collectively evaluated for impairment $47,752,659 $22,213,534 $6,999,182 $2,595,985 $3,317,180 $82,878,540 (in thousands) Allowance for loan losses: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Other Total Balance at December 31, 2011 $107,075 $124,448 $47,933 $12,789 $8,263 $300,508 Provision for loan losses 7,371 4,055 1,169 5,712 8,850 27,157 Charge-offs (28,538) (46,079) (1,036) (7,038) (260) (82,951) Recoveries 8,477 9, ,216 Balance at December 31, 2012 $94,385 $91,565 $48,434 $11,683 $16,863 $262,930 At December 31, 2012: Ending balance: individually evaluated for impairment $21,486 $31,696 $1,468 $1,936 $3,649 $60,235 Ending balance: collectively evaluated for impairment $72,899 $59,869 $46,966 $9,747 $13,214 $202,695 Recorded investments in loans outstanding: Ending balance at December 31, 2012 $44,253,293 $21,552,547 $6,429,017 $2,513,656 $3,087,834 $77,836,347 Ending balance for loans individually evaluated for impairment $464,864 $182,368 $43,574 $51,793 $24,296 $766,895 Ending balance for loans collectively evaluated for impairment $43,788,429 $21,370,179 $6,385,443 $2,461,863 $3,063,538 $77,069,452 (in thousands) Allowance for loan losses: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Other Total Balance at December 31, 2010 $170,547 $145,748 $68,915 $12,999 $8,137 $406,346 Provision for (reversal of) loan losses (38,840) 85 30,320 5,485 16,587 13,637 Charge-offs (30,938) (33,922) (54,701) (6,044) (16,518) (142,123) Recoveries 6,306 12,537 3, ,648 Balance at December 31, 2011 $107,075 $124,448 $47,933 $12,789 $8,263 $300,508 At December 31, 2011: Ending balance: individually evaluated for impairment $25,423 $47,525 $17,853 $2,785 $1,955 $95,541 Ending balance: collectively evaluated for impairment $81,652 $76,923 $30,080 $10,004 $6,308 $204,967 Recorded investments in loans outstanding: Ending balance at December 31, 2011 $38,727,884 $19,718,627 $5,692,414 $2,328,160 $2,646,586 $69,113,671 Ending balance for loans individually evaluated for impairment $513,730 $254,114 $75,884 $59,653 $16,988 $920,369 Ending balance for loans collectively evaluated for impairment $38,214,154 $19,464,513 $5,616,530 $2,268,507 $2,629,598 $68,193,302 Note: Accruing loans include accrued interest receivable. 72

75 NOTE 4 Investment Securities AgriBank Investment Securities All investment securities are classified as available-for-sale (AFS). AFS Investment Securities (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2013 Cost Gains Losses Value Yield Mortgage-backed securities $4,289,567 $30,242 $25,500 $4,294, % Commercial paper and other 3,826, ,827, % U.S. Treasury securities 2,621,937 2, ,623, % Asset-backed securities 707,868 8,107 11, , % U.S. Agencies 100,150 5, , % Total $11,546,267 $47,069 $38,064 $11,555, % (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2012 Cost Gains Losses Value Yield Mortgage-backed securities $4,138,378 $47,366 $12,232 $4,173, % Commercial paper and other 2,856, ,856, % U.S. Treasury securities 3,186,053 4, ,190, % Asset-backed securities 559,342 5,398 23, , % U.S. Agencies 214,233 11, , % Total $10,954,347 $69,091 $36,125 $10,987, % (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2011 Cost Gains Losses Value Yield Mortgage-backed securities $4,156,732 $33,316 $49,301 $4,140, % Commercial paper and other 2,123, ,123, % U.S. Treasury securities 2,924,353 8, ,933, % Asset-backed securities 284,500 3,633 58, , % U.S. Agencies 243,634 17, , % Total $9,732,942 $63,659 $108,030 $9,688, % Commercial paper and other is primarily corporate commercial paper, certificates of deposit and term federal funds. 73

76 Contractual Maturities of AFS Investment Securities (in thousands) Year of Maturity One Year One to Five to More Than As of December 31, 2013 or Less Five Years Ten Years Ten Years Total Mortgage-backed securities $ -- $26,200 $82,620 $4,185,489 $4,294,309 Commercial paper and other 3,827, ,827,095 U.S. Treasury securities 1,281,132 1,342, ,623,614 Asset-backed securities , , ,113 U.S. Agencies , ,141 Total $5,109,147 $2,070,062 $83,081 $4,292,982 $11,555,272 Weighted average yield 0.4% 1.4% 0.6% 1.1% 0.9% Expected maturities differ from contractual maturities because borrowers may have the right to prepay these obligations. The expected average life is 1.4 years for asset-backed securities (ABS) and 3.5 years for mortgagebacked securities (MBS) at December 31, Mortgage related securities totaling $107.5 million of housingrelated ABS and $4.2 billion of MBS have contractual maturities in excess of 10 years at December 31, Additional AFS Investment Security Information (in thousands) For the year ended December 31, Proceeds from sales $ -- $ -- $795,351 Realized gross gains on sales Realized gross losses on sales Impairment losses 1,883 25,485 23,286 The proceeds from sales in 2011 were primarily related to the sale of certain U.S. Treasury securities maturing in the second half of AgriBank liquidated these securities during the resolution of the U.S. debt ceiling negotiations in In addition, in December 2011, AgriBank sold investment securities, primarily certificates of deposit and commercial paper that had direct exposure to European financial institutions. As of December 31, 2013, 2012 and 2011, AgriBank had not pledged any investment securities or federal funds as collateral. The ratings of the securities held for maintaining a liquidity reserve, managing short-term surplus funds and managing interest rate risk must meet the applicable regulatory criteria to be considered eligible investments. Among the criteria are requirements related to rating categories assigned by one or more Nationally Recognized Statistical Rating Organizations (NRSRO). The credit rating requirements vary by asset class but generally require, at the time of purchase, asset-backed, mortgage-backed or commercial paper securities to be rated in the highest rating by one or more NRSRO, and corporate debt, or other money market securities to be rated in at least the second highest rating by one or more NRSRO. To achieve the ratings, asset-backed or mortgage-backed securities generally have some or all of the following characteristics: a guarantee of timely payment of principal and interest; a credit enhancement achieved through over collateralization; and the priority of payments of senior classes over junior classes. In cases where the security is collateralized by a loan pool, AgriBank performs analyses based on expected behavior 74

77 of the loans, whereby these loan performance scenarios are applied against each security s credit-support structure to monitor credit-enhancement sufficiency to protect the investment. If an investment security no longer meets the credit rating criteria, the security becomes ineligible. Prior to January 1, 2013, AgriBank was required to dispose of an investment security that became ineligible within six months, unless the FCA approved, in writing, a plan that authorized AgriBank to divest over a longer period of time. Effective January 1, 2013, securities that become ineligible no longer require formal FCA approval to hold beyond six months and can be included in the net collateral ratio, provided certain conditions are met, including the security was eligible at the time it was purchased. These conditions were met for all ineligible securities, and AgriBank s current intent is to hold these securities. The fair value of all ineligible investments totaled $304.8 million at December 31, 2013, including $181.6 million on which AgriBank has taken impairment charges. A summary of the AFS investment securities in an unrealized loss position presented by the length of time that the securities have been in a continuous unrealized loss position follows: (in thousands) Less than 12 months More than 12 months Fair Unrealized Fair Unrealized As of December 31, 2013 Value Losses Value Losses Mortgage-backed securities $2,058,316 $21,762 $160,398 $3,738 Commercial paper and other 1,378, U.S. Treasury securities 414, Asset-backed securities 417, ,075 11,577 Total $4,268,537 $22,749 $280,473 $15,315 (in thousands) Less than 12 months More than 12 months Fair Unrealized Fair Unrealized As of December 31, 2012 Value Losses Value Losses Mortgage-backed securities $377,826 $1,096 $308,222 $11,136 Commercial paper and other 665, U.S. Treasury securities 124, Asset-backed securities 84, ,812 23,687 Total $1,253,213 $1,302 $428,034 $34,823 (in thousands) Less than 12 months More than 12 months Fair Unrealized Fair Unrealized As of December 31, 2011 Value Losses Value Losses Mortgage-backed securities $269,359 $381 $642,583 $48,920 U.S. Treasuries 50, Commercial paper and other 1,272, Asset-backed securities 83, ,620 58,036 Total $1,676,493 $1,074 $783,203 $106,956 AgriBank evaluates its investment securities for other-than-temporary impairment (OTTI) on a quarterly basis. Factors considered in determining whether an impairment is other-than-temporary include: 1) the financial condition and near-term prospects of the issuer, 2) the financial condition of any financial guarantor, if applicable, 3) a current projection of expected cash flow compared to current net carrying value and contractual cash flow, 4) AgriBank s intent to sell the impaired security and whether they are more likely than not to be 75

78 required to sell the security before recovery and 5) AgriBank qualitatively considers other available information when assessing whether impairment is other-than-temporary. Based on the results of these evaluations, if it is determined that the impairment is other-than-temporary, the impairment is separated into credit-related and non-credit-related components. The credit-related component is recognized through earnings and the noncredit-related component is recognized in other comprehensive income or loss. The credit-related components of the other-than-temporary impairment losses were determined by projecting cash flows using cash-flow models that require certain assumptions. The significant inputs into the models include assumptions with regard to interest rates, default rates, prepayment speeds and loss severities. The assumptions are applied at the individual security and associated collateral pool level. Default rate assumptions are generally estimated using historical loss and performance information to estimate future defaults. Prepayment speed assumptions are based on historical prepayment rates. Loss severity assumptions are estimated based on underlying collateral type using research available from market research sources including broker/dealers and rating agencies as well as recent historical information. Assumptions Used As of December 31, 2013 Assumptions Used Default rate by range 0.0% % 0.0% % Prepayment rate by range 1.0% % 2.0% % Loss severity by range 38.2% % 65.0% % As of December 31, 2012 Assumptions Used Default rate by range 0.0% % 2.0% % Prepayment rate by range 0.8% % 2.0% % Loss severity by range 45.0% % 41.7% % As of December 31, 2011 Assumptions Used Mortgagebacked Mortgagebacked Mortgagebacked Asset-backed securities Asset-backed securities Asset-backed securities Default rate by range 0.0% % 0.0% % Prepayment rate by range 0.0% % 2.0% % Loss severity by range 45.0% % 44.5% % The unrealized losses primarily reflect concerns about the creditworthiness and liquidity of home equity related asset-backed and non-agency mortgage-backed securities. AgriBank determined that securities with a fair value of $181.6 million at December 31, 2013 were in an other-than-temporary loss position compared to securities with a fair value of $189.1 million and $162.2 million at December 31, 2012 and 2011, respectively. As a result of its evaluations, AgriBank has recognized $1.9 million in net impairment losses during 2013, reflecting a gross impairment charge of $4.7 million, net of $2.8 million related to the non-credit component which was recognized in other comprehensive loss. AgriBank has determined no other securities were in an other-thantemporary loss position at December 31,

79 The following represents the activity related to the credit-loss component for investment securities that have been written down for other-than-temporary impairment that has been recognized in earnings: (in thousands) For the year ended December 31, Credit-loss component, beginning of year $129,162 $103,680 $80,537 Additions: Initial credit impairment 357 4,770 4,463 Subsequent credit impairments 1,526 20,715 18,823 Reductions: For increases in expected cash flows (3,098) (3) (143) Credit-loss component, end of year $127,947 $129,162 $103,680 Affiliated Association Investment Securities Investments held by certain affiliated Associations are classified as held-to-maturity (HTM). HTM Investment Securities (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2013 Cost Gains Losses Value Yield Government guaranteed instruments $1,688,870 $20,060 $28,875 $1,680, % Farmer Mac mortgage-backed securities 272,384 1,764 5, , % ARC bonds 2, , % Other investments 4,250 * * * * Total $1,968,260 $21,848 $33,974 $1,951, % (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2012 Cost Gains Losses Value Yield Government guaranteed instruments $1,968,661 $21,922 $34,217 $1,956, % Farmer Mac mortgage-backed securities 302,650 5, , % ARC bonds % Other investments 3,235 * * * * Total $2,275,266 $27,318 $34,329 $2,265, % (in thousands) Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2011 Cost Gains Losses Value Yield Government guaranteed instruments $1,915,583 $19,195 $36,578 $1,898, % Farmer Mac mortgage-backed securities 340,181 7, , % Investment notes in a trust of equipment loans 3, , % ARC bonds 1, , % Other investments 1,885 * * * * Total $2,262,747 $26,591 $36,773 $2,250, % * Not applicable due to the nature of the investment 77

80 The investment portfolios were evaluated for OTTI. As a result of its evaluations, one affiliated Association recognized $14 thousand and $570 thousand of impairment losses during 2012 and 2011, respectively. No securities were other-than-temporarily impaired in Other Earning Assets Other earning assets are comprised of successor-in-interest contracts from involvement with the federal government s tobacco buy-out program by one affiliated Association. The volume was $74.0 million, $144.2 million and $210.9 million at December 31, 2013, 2012 and 2011, respectively. These amounts include both principal and interest income receivable. This affiliated Association has not purchased any contracts since The final payments on these contracts were received in January 2014 and the affiliated Association holds no further interest in these assets. NOTE 5 Premises and Equipment and Assets Held For Lease Premises and Equipment (in thousands) As of December 31, Land, buildings and improvements $437,603 $392,479 $359,437 Furniture, equipment and software 250, , ,430 Accumulated depreciation (279,122) (268,493) (248,848) Net premises and equipment $408,690 $360,464 $331,019 Certain affiliated Associations hold property for the purpose of agricultural leasing, primarily consisting of facilities and farm equipment. Net operating lease income was $18.7 million, $18.2 million and $20.1 million in 2013, 2012 and 2011, respectively. Assets held for lease, net totaled $608.8 million, $505.0 million and $441.5 million at December 31, 2013, 2012 and 2011, respectively. NOTE 6 Other Assets Other Assets (in thousands) As of December 31, Accounts receivable $59,089 $50,048 $74,298 Prepaid income taxes 20,936 23,230 21,270 Prepaid expenses 13,477 11,615 11,919 Other 25,660 23,911 24,365 Total other assets $119,162 $108,804 $131,852 78

81 NOTE 7 Bonds and Notes The System obtains funds for its lending operations primarily from the sale of Systemwide debt securities issued by the System Banks through the Federal Farm Credit Banks Funding Corporation. Systemwide bonds and discount notes are joint and several obligations of the System Banks (refer to Note 15 for further discussion). AgriBank's Participation in Systemwide Bonds and Notes (in thousands) As of December 31, Systemwide obligations: Bonds $77,825,310 $72,151,943 $65,148,797 Discount notes 3,157,860 4,198,304 2,520,635 Member investment bonds 905, , ,536 Total $81,889,124 $77,135,855 $68,262,968 Maturities and Weighted Average Interest Rate of AgriBank's Bonds and Notes (in thousands) Systemwide Obligations Member investment As of December 31, 2013 Bonds Discount notes bonds Total Year of maturity Amount Rate Amount Rate Amount Rate Amount Rate 2014 $19,937, % $3,157, % $905, % $24,001, % ,010, % ,010, % ,066, % ,066, % ,059, % ,059, % ,474, % ,474, % 2019 and thereafter 15,277, % ,277, % Total $77,825, % $3,157, % $905, % $81,889, % Discount notes are issued with maturities ranging from one to 365 days. The average maturity of discount notes at December 31, 2013 was 50 days. 79

82 Callable debt may be called on the first call date and generally is continuously callable thereafter. AgriBank's Bonds and Notes with Call Options (in millions) Maturing Callable As of December 31, 2013 Amount Amount Year of maturity / next call: 2014 $325 $29, , , , , , , Thereafter 9, Total $30,179 $30,179 Participation in Systemwide Debt Securities Certain conditions must be met before System Banks can participate in the issuance of Systemwide debt securities. As one condition of participation, System Banks are required by the Farm Credit Act and FCA regulation to maintain specified eligible assets, at least equal in value to the total amount of debt securities outstanding for which they are primarily liable. This requirement does not provide holders of Systemwide debt securities or bank bonds with a security interest in any assets of the System Banks. However, System Banks and the Federal Farm Credit Banks Funding Corporation have entered into a Market Access Agreement, which established criteria and procedures for the System Banks to provide certain information to the Federal Farm Credit Banks Funding Corporation and, under certain circumstances, for restricting or prohibiting an individual System Bank s participation in Systemwide debt issuances, thereby reducing other System Banks exposure to statutory joint and several liability. At December 31, 2013 AgriBank was, and as of the date of this report remains, in compliance with the conditions of participation in the issuance of Systemwide debt securities. As discussed in Note 15, only System Banks are statutorily liable for the payment of principal and interest on Systemwide bonds and notes. Refer to Note 21 for AgriBank-only financial data. Member Investment Bonds Member investment bonds, specifically authorized by the Farm Credit Act, are an alternative source of funding in which AgriBank sells bonds directly to District members and employees. Member investment bonds issued by AgriBank are offered primarily through the Farm Cash Management program, which links an affiliated Association members revolving line of credit with an AgriBank investment bond to optimize the member s use of their funds. Member investment bonds are an unsecured obligation of AgriBank and are not insured or guaranteed by any other entity. Insurance Fund The Farm Credit Insurance Fund (Insurance Fund) is available to insure the timely payment of principal and interest on consolidated bonds and notes of System Banks to the extent net assets are available in the Insurance Fund. At December 31, 2013, the assets of the Insurance Fund were $3.5 billion; however, due to the other authorized uses of the Insurance Fund, there is no assurance that the amounts in the Insurance Fund will be sufficient to fund the timely payment of principal, or interest on, insured debt securities in the event of default by any System Bank having primary liability for repayment of the debt. 80

83 Each System Bank is required to pay premiums, which may be passed on to the Associations, into the Insurance Fund until the assets in the Insurance Fund equal 2% (the secure base amount) of the aggregated insured obligations adjusted to reflect the reduced risk on loans or investments guaranteed by federal or state governments. When the amount in the Insurance Fund exceeds the secure base amount, the Insurance Corporation is required to reduce premiums and under certain circumstances is required to transfer excess funds to establish AIRAs. The Insurance Corporation may also distribute all or a portion of these reserve accounts to the System Banks. In 2012, we received $79.1 million as our share of non-recurring distributions from the AIRAs. Included in the $79.1 million was $5.5 million related to an interest in Farm Credit System Financial Assistance Corporation (FAC) stock. In prior years, AgriBank purchased all Farm Credit System FAC stock held by certain affiliated Associations. Legislation in 1987 had required certain affiliated Associations to purchase stock to capitalize the Farm Credit System FAC. There were no such distributions in 2013 or Debt Transfers During 2013, 2012 and 2011, AgriBank transferred $20.0 million, $10.0 million and $15.0 million, respectively, of debt at fair value to other System Banks to restructure liabilities. These transfers resulted in $4.0 million, $0.8 million and $0.3 million, respectively, of losses on debt extinguishment, and are reflected within Noninterest expense on the Combined Statements of Comprehensive Income. These transactions were for the purpose of asset/liability rebalancing due to large prepayments of loans. These losses were more than offset by the receipt of fee income on the loan prepayment in the years of the transfers. Short-term Borrowings AgriBank uses short-term borrowings as a source of funds. The following reflects short-term borrowings by category: (in thousands) Weighted Weighted Weighted Average Average Average Amount Interest Rate Amount Interest Rate Amount Interest Rate Systemwide discount notes: Outstanding as of December 31 $3,157, % $4,198, % $2,520, % Average during year 2,674, % 3,445, % 2,812, % Maximum month-end balance during year 3,167,761 4,227,686 3,179,348 Systemwide bonds: (*) Outstanding as of December 31 2,392, % 3,938, % 916, % Average during year 3,639, % 1,961, % 2,295, % Maximum month-end balance during year 4,513,497 3,938,174 3,880,614 * Represents bonds issued with an original maturity of one year or less. NOTE 8 Subordinated Notes In March 2010, AgStar Financial Services, ACA (AgStar), issued $100 million of unsecured subordinated notes due in 15 years with a fixed rate of 9.0% per annum, payable semi-annually. At December 31, 2013, the ending balance and year-to-date average balance was $100 million. AgStar may redeem all or some of the notes at any time on or after a date 10 years from the closing date. These notes are unsecured and subordinate to all other categories of creditors, including general creditors, and senior to all classes of shareholders. These notes are included in AgStar s permanent capital and total surplus regulatory capital ratios subject to limitations. 81

84 In July 2009, AgriBank issued $500 million of 9.125% unsecured subordinated notes due At December 31, 2013, the ending and year-to-date average balance was $500 million. These notes are unsecured and subordinate to all other categories of creditors, including general creditors, and senior to all classes of shareholders. Interest is payable semi-annually on January 15 and July 15 beginning on January 15, Interest is deferred if, as of the fifth business day prior to an interest payment date of the notes, any applicable minimum regulatory capital ratios are not satisfied. A deferral period may not last for more than five consecutive years or beyond the maturity date of the subordinated notes. During such a period, AgriBank may not declare or pay any dividends or patronage refunds, among certain other restrictions, until interest payments are resumed and all deferred interest has been paid. AgriBank has not deferred any interest since issuing subordinated notes. The subordinated notes are not Systemwide debt securities and are not obligations of any of the other System Banks. Payments on the subordinated notes are not insured by the Insurance Fund. NOTE 9 Other Liabilities Other Liabilities (in thousands) As of December 31, Escrow liability $60,727 $54,612 $67,895 Accrued salaries 51,910 48,025 39,994 Reserve for unfunded commitments 12,408 13,000 10,000 Other 114, ,058 90,536 Total other liabilities $239,463 $229,695 $208,425 82

85 NOTE 10 Shareholders Equity Description of Equities The following represents information regarding classes and number of shares of preferred and common stock and participation certificates outstanding. All shares and participation certificates are $5 par value, except the Series A and Series A-1 non-cumulative perpetual preferred stock, which have a par value of $100 and $1,000, respectively: (in whole numbers) Number of Shares As of December 31, Series A perpetual preferred stock 2,500, Series A-1 perpetual preferred stock 100, Protected nonvoting common stock 2,335 2,335 15,599 Protected voting common stock 8,831 10, ,495 At-risk voting common stock 43,405,701 42,898,899 42,841,581 At-risk nonvoting common stock 221, , ,286 Protected participation certificates 48,661 48,669 50,188 At-risk participation certificates 9,407,293 9,248,400 8,890,276 AgriBank has an authorized class of preferred stock which may be issued to investors in accordance with applicable rules of offering. This stock would be non-voting and may bear dividends. There are eight million shares authorized at $100 per share. During 2013, AgriBank s Board approved the issuance of up to $400 million of preferred stock, which it also received approval from the affiliated Associations, OFIs and the FCA. On October 29, 2013, AgriBank issued $250 million of Series A non-cumulative perpetual preferred stock (further discussed below). An affiliated Association, AgStar, is authorized to issue preferred stock up to $250 million in aggregate par value, in one or more series. Such preferred stock may be issued to qualified investors in accordance with AgStar s bylaws. This stock would be non-voting and may bear dividends, at the discretion of the AgStar Board. On May 30, 2013, AgStar issued $100 million of Series A-1 non-cumulative perpetual preferred stock (further discussed below). At-risk stock and participation certificates, which include all equities issued on or after October 6, 1988, may be retired only at the discretion of the Boards of Directors. Such equities are retired at the lower of book value or par value. The bylaws of the affiliated Associations generally permit stock and participation certificates to be retired at the discretion of the Board of Directors in accordance with the affiliated Associations' capitalization plan provided prescribed capital standards have been met. At December 31, 2013, all affiliated Associations exceeded these prescribed standards. Management at the affiliated Associations does not anticipate any significant changes in capital that would impact the normal retirement of stock. Stock preference upon liquidation or impairment follows the respective entities bylaws; however, protected stock will be retired at par value regardless of impairment. Each holder of voting common stock is entitled to a single vote in matters affecting their respective Association. Holders of nonvoting common stock and participation certificates have no voting rights. 83

86 Stock is transferable to other borrowers eligible to own such stock as long as allowed for in the bylaws of the District institutions, provided that the regulatory minimum capital requirements are met. Perpetual Preferred Stock On October 29, 2013, AgriBank issued $250 million of Series A non-cumulative perpetual preferred stock, representing 2.5 million shares at $100 per share par value, resulting in net proceeds of $246.1 million. The net proceeds reflect issuance costs from underwriting, auditor and attorney fees. This series may be held or transferred in blocks having an aggregate par value of $25 thousand to investors meeting the eligibility requirements and an investor must hold at least 250 shares. The net proceeds from the issuance were used for general corporate purposes. For regulatory capital purposes, AgriBank s Series A preferred stock is included in permanent capital, total surplus and core surplus, subject to certain limitations. Dividends on the Series A preferred stock, if declared by AgriBank s Board of Directors in its sole discretion, are non-cumulative and are payable quarterly in arrears on the first day of January, April, July and October, beginning on January 1, Dividends will accrue at a fixed annual rate of 6.875% from the date of issuance through December 31, 2023, and beginning January 1, 2024 will accrue at an annual rate equal to three-month United States Dollar LIBOR rate, reset quarterly, plus 4.225%. The Series A preferred stock is not mandatorily redeemable at any time. However, the Series A preferred stock will be redeemable at par value plus accrued and unpaid dividends, in whole or in part, at AgriBank s option, quarterly beginning January 1, In addition, the Series A preferred stock will be redeemable in whole, at AgriBank s option, at any time upon the occurrence of certain defined regulatory events. The Series A preferred stock is junior to any series of preferred stock AgriBank may issue in the future with priority rights. The Series A preferred stock is senior to AgriBank s outstanding capital stock. On May 30, 2013, an affiliated Association, AgStar, issued $100 million of Series A-1 non-cumulative perpetual preferred stock, representing 100 thousand shares at $1 thousand per share par value, resulting in net proceeds of $96.3 million. The net proceeds reflect issuance costs from underwriting, auditor and attorney fees. This series may be held or transferred in blocks having an aggregate par value of not less than $250 thousand and an investor must hold at least 250 shares. The net proceeds from the issuance were used to increase regulatory capital, pursuant to current FCA regulations, for continued business development and general corporate purposes. For regulatory capital purposes, the Series A-1 preferred stock is included in permanent capital, total surplus and core surplus, subject to certain limitations. Dividends on the Series A-1 preferred stock, if declared by AgStar s Board of Directors in its sole discretion, are non-cumulative and are payable quarterly in arrears on the fifteenth day of February, May, August and November, beginning on August 15, Dividends accrue at a fixed annual rate of 6.75% from the date of issuance through August 14, 2023, and beginning on August 15, 2023 accrue at an annual rate equal to the three-month United States Dollar LIBOR rate, reset quarterly, plus 4.58%. The Series A-1 preferred stock is not mandatorily redeemable at any time. However, the Series A-1 preferred stock will be redeemable at par value, in whole or in part, at AgStar s option, quarterly beginning on August 15, In addition, the Series A-1 preferred stock will be redeemable in whole, at AgStar s option, at any time upon the occurrence of certain defined regulatory events. The Series A-1 preferred stockholders do not have any voting rights, but may appoint two Board observers after six unpaid dividend payments. 84

87 AgStar s Series A-1 preferred stock is junior to any subordinated debt, existing and future debt obligations and any series of preferred stock issued in the future with priority rights. The Series A-1 preferred stock is senior to AgStar s outstanding common stock, participation certificates, preferred stock and patronage equities. Capitalization Requirements In accordance with the Farm Credit Act, each borrower is required to invest in capital stock (in the case of agricultural loans) or participation certificates (in the case of rural residence, farm related business or leases) of the respective Association as a condition of borrowing. The initial investment requirement varies by Association and ranges from the statutory minimum of 2% of the loan amount or one thousand dollars per borrower, whichever is less, to 5.0% of the loan amount. In addition, the affiliated Associations generally require the purchase of one participation certificate by each lease customer and non-stockholder customers who purchase financial services. Each affiliated Association s Board of Directors may increase, within the range outlined in their bylaws, the amount of initial investment, if necessary, to meet the affiliated Associations capital needs. A borrower normally acquires ownership of capital stock at the time a loan is made. Generally, the aggregate par value of the stock is added to the principal amount of the related loan transaction. A first lien is held on the stock or participation certificates owned by the borrowers. OFIs, as a condition of obtaining a loan from AgriBank, are required to hold Series A Participation Certificates in an amount determined by AgriBank s capital plan, currently equal to 2.5% of their loan commitment plus an additional 1.0% on increases in their commitments that exceeded a targeted rate. AgriBank s bylaws permit increasing the investment up to 4% with Board approval. AgriBank leveraged its preferred stock for the benefit of the District on March 5, 2014 when its Board approved an amendment to its capital plan which reduced the base required stock investment for OFIs from 2.5% to 2.25% effective March 31, Protection Mechanisms Protection of certain borrower capital is provided under the Farm Credit Act, which requires us to retire protected capital at par or stated value regardless of its book value. Protected borrower capital includes capital stock, participation certificates and allocated equities that were outstanding at January 6, 1988 or were issued or allocated before October 6, Borrower stock issued after October 5, 1988 is not subject to these protection provisions. If we are unable to retire protected borrower equity at par value or stated value, amounts required to retire this equity would be obtained from the Insurance Fund. Regulatory Capitalization Requirements and Restrictions FCA s regulations require each institution to maintain certain minimum capital ratios. We are prohibited from reducing capital by retiring stock or making certain other distributions to shareholders unless prescribed capital standards are met. No such prohibitions were in effect as of December 31, 2013 and management does not foresee any events that would result in this prohibition during Under FCA regulations, AgriBank and each affiliated Association are required to maintain a permanent capital ratio of at least 7%, a total surplus ratio of at least 7% and a core surplus ratio of at least 3.5%. In addition, AgriBank is required to maintain a net collateral ratio of at least 103%. However, AgriBank is required by the FCA to maintain a higher minimum of 104% during the period in which they have subordinated notes outstanding. The Farm Credit Act had defined permanent capital to include all capital except stock and other equities that may be retired upon the repayment of the stockholder s loan or otherwise at the option of the stockholder, or is otherwise not at risk. Risk-adjusted assets have been defined by regulations as the balance sheet assets and off- 85

88 balance sheet commitments adjusted by various percentages ranging from 0% to 100%, depending on the level of risk inherent in the various types of assets. These ratios are calculated in accordance with FCA regulations and are discussed below: The permanent capital ratio, which is quarterly average permanent capital (generally shareholders equity and subordinated notes subject to certain limitations, excluding accumulated other comprehensive income and other deductions) as a percentage of quarterly average risk-adjusted assets. AgriBank s ratio was 22.1% at December 31, 2013; affiliated Association ratios ranged from 13.3% to 23.5%, with a weighted average of 15.5%. The total surplus ratio, which is quarterly average total surplus (generally unallocated surplus, perpetual preferred stock subject to certain limitations, subordinated notes subject to certain limitations, and allocated stock) as a percentage of quarterly average risk-adjusted assets. AgriBank s ratio was 18.5% at December 31, 2013; affiliated Association ratios ranged from 12.9% to 20.6%, with a weighted average of 15.2%. The core surplus ratio, which is quarterly average core surplus (generally unallocated surplus and perpetual preferred stock subject to certain limitations) as a percentage of quarterly average riskadjusted assets. AgriBank s ratio was 11.4% at December 31, 2013; affiliated Association ratios ranged from 12.5% to 20.6%, with a weighted average of 15.0%. The net collateral ratio, which is net collateral (generally net loans and investments) less an amount equal to that portion of the allocated investments of affiliated Associations that is not counted as permanent capital by AgriBank, divided by total liabilities as adjusted to exclude subordinated notes (subject to certain limitations as discussed below) and the fair value adjustment impact of certain derivatives. AgriBank s ratio was 106.4% at December 31, As noted above, the inclusion of perpetual preferred stock in regulatory capital ratios is subject to certain limitations. The amount of perpetual preferred stock to be counted as core surplus through December 31, 2013 is limited to one-third of core surplus outstanding reported at September 30, For 2014 and all subsequent periods, unless replaced by a new, higher limit, the limit to be counted as core surplus is equal to the greater of the then-existing limit or one-third of the average of the four quarters of core surplus outstanding for the previous year. The perpetual preferred stock will not be considered a liability for purposes of calculating the net collateral ratio. As noted above, the inclusion of AgriBank s subordinated notes in regulatory capital ratios is subject to certain limitations. The amount of subordinated notes eligible to be counted as permanent capital and total surplus may not exceed 50% of core surplus, and is reduced by 20% of the original amount at the beginning of each of the last five years of the term of the notes (beginning in July 2014). As noted above, the inclusion of AgStar s subordinated notes in regulatory capital ratios is subject to certain limitations. The amount of subordinated notes eligible to be counted as permanent capital and total surplus may not exceed 50% of core surplus, and is reduced by 20% of the original amount at the beginning of each of the last five years of the term of the notes (beginning in March 2015). The amount of third-party capital instruments, including perpetual preferred stock and subordinated debt, that may be counted in total surplus must not exceed the lower of 40% of permanent capital outstanding or 100% of core surplus outstanding, whichever is less. Third-party capital instruments that are not included in permanent capital and total surplus due to these limitations are required to be included as liabilities for the purpose of calculating the net collateral ratio. 86

89 FCA regulations require Associations and System Banks to agree upon a plan for allocating the Associations investments in System Banks for calculation of regulatory capital ratios. For the calculation of regulatory capital ratios at December 31, 2013, AgriBank s agreement with Associations is generally that each Association would count in its ratios any excess allocated investment over that required by AgriBank unless there is a specific agreement to count the investments differently. During 2010, one affiliated Association had an agreement with AgriBank to count $61.0 million of otherwise required investment in their regulatory capital ratios. This agreement expired January 1, Patronage Distributions and Dividends Payment of discretionary patronage and/or dividends is allowed under affiliated Association bylaws if the distribution is in accordance with applicable laws and regulations, including the FCA capital adequacy regulations. Affiliated Associations designated $238.5 million, $208.6 million and $199.1 million of earnings for patronage during 2013, 2012 and 2011, respectively. In response to adverse weather conditions and the impact on Wisconsin farm families, a special, one-time patronage distribution of $5.2 million was paid in cash in 2012 by one affiliated Association. Additionally, one affiliated Association has a nonqualified patronage program that allocated surplus of $61.6 million, $55.0 million and $40.0 million in 2013, 2012 and 2011, respectively. Nonqualified patronage of $25.0 million, $42.7 million and $14.5 million was redeemed during 2013, 2012 and 2011, respectively. Certain affiliated Associations attribute to shareholders all income in excess of the qualified patronage program. It is communicated to shareholders that this amount will not be redeemed and as such, is not considered allocated surplus. AgriBank also pays patronage, substantially all of which was eliminated in combination except $2.8 million, $1.6 million and $1.4 million at December 31, 2013, 2012 and 2011, respectively, to OFIs and Associations outside of the District. Dividends on AgriBank s non-cumulative perpetual preferred stock are payable quarterly on the first day of January, April, July and October, beginning on January 1, There was $2.7 million of preferred stock dividends accrued at December 31, 2013 which were paid in cash in January Dividends on AgStar s non-cumulative perpetual preferred stock are payable quarterly in arrears on the fifteenth day of February, May, August and November, beginning on August 15, There was $3.1 million of preferred stock dividends paid in cash during There were no dividend distributions made during 2012 or AgriBank and AgStar may not declare or pay any dividends or patronage refunds during a deferral period on subordinated notes. Also, they may not declare or pay any dividends or patronage refunds if less than the full amount of perpetual preferred stock dividends for the then current dividend period have been paid or declared and a sum sufficient for the payment thereof set aside. Additionally, they may not redeem, purchase, acquire or make a liquidation payment with respect to, any shares of capital stock (including borrower stock, participation certificates and preferred stock), other than exercising their statutory lien under the Farm Credit Act, which allows them to apply member stock and/or participation certificates to reduce the aggregate principal amount of outstanding loans. AgriBank and AgStar have not had any such restrictions since issuing perpetual preferred stock and subordinated notes. 87

90 Noncontrolling Interest The noncontrolling interest represents the equity investment of Associations and other entities outside the AgriBank District in AgDirect LLP and FCF, as described more fully in Note 2. NOTE 11 Income Taxes Provision for Income Taxes (in thousands) For the year ended December 31, Current: Federal $34,149 $13,970 $32,200 State 5,693 4,836 6,907 Total current 39,842 18,806 39,107 Deferred: Federal 15,353 19,976 16,771 State 1,185 1, Decrease in valuation allowances (6,235) (878) (1,080) Total deferred 10,303 20,310 16,619 Total provision for income taxes $50,145 $39,116 $55,726 The following table quantifies the differences between the provision for income tax and income taxes at the federal statutory rate. (in thousands) For the year ended December 31, Federal tax at statutory rate $658,189 $597,892 $542,477 State tax, net 4,690 3,555 4,618 Effect of non-taxable entities (538,396) (489,378) (431,243) Patronage distributions (66,434) (64,854) (55,022) Decrease in valuation allowances (6,235) (878) (1,080) Other, net (1,669) (7,221) (4,024) Total provision for income taxes $50,145 $39,116 $55,726 The difference in the statutory tax rate and the effective tax rate was primarily due to the tax exemption of AgriBank and the FLCA subsidiary earnings, and to a lesser extent patronage distributions. Deferred Income Taxes Tax laws require certain items to be included in our tax returns at different times than the items are reflected on our Combined Statements of Comprehensive Income. Some of these items are temporary differences that will reverse over time. We record the tax effect of temporary differences as deferred tax assets and liabilities netted on our Combined Statements of Condition. 88

91 Deferred Tax Assets and Liabilities (in thousands) As of December 31, Allowance for loan losses $35,466 $39,584 $42,944 Post-employment benefits accrual 5,928 5,840 5,992 Accrued pension asset (7,851) (8,739) (8,771) Leasing related, net (179,114) (165,717) (150,509) Accrued patronage income not received (5,689) (4,702) (5,119) AgriBank 2002 allocated stock (10,249) (10,296) (10,254) Depreciation (1,904) (2,751) (2,635) Valuation allowance (11,570) (17,805) (18,683) Net operating loss carryforwards 13,086 11,487 18,980 Other assets 19,831 21,401 16,659 Other liabilities (2,497) (2,562) (2,596) Net deferred tax liabilities ($144,563) ($134,260) ($113,992) Gross deferred: Tax assets $62,741 $60,465 $66,495 Tax liabilities (207,304) (194,767) (180,487) Deferred tax assets and liabilities are presented on the Combined Statements of Condition as $15.0 million of net deferred tax assets, representing the amount of deferred tax assets for affiliated Associations in a deferred tax asset position and $159.6 million of net deferred tax liabilities, representing the amount of deferred tax liabilities for affiliated Associations in a net deferred tax liability position at December 31, Under the current standards of accounting for income taxes, any deferred tax asset must be evaluated as to its realizable value. At December 31, 2013, three affiliated Associations have determined that, primarily due to the effect of patronage programs, there is insufficient certainty of having future taxable income and tax liabilities with which to realize tax savings from the reversal of these deferred tax assets. As a result, these affiliated Associations have booked valuation allowances against those deferred tax assets which reflect the current year s adjustments related to those allowances. At December 31, 2012 and 2011, four affiliated Associations had a deferred tax asset valuation allowance, which one affiliated Association reversed during the first quarter of Deferred income taxes have not been provided by the PCAs and ACAs on approximately $525.3 million of patronage distributions allocated from AgriBank before January 1, Such allocations, distributed in the form of stock, are subject to income tax only upon conversion to cash. Affiliated Associations management intent is to permanently maintain these investments in AgriBank. Additionally, deferred income taxes have not been provided by certain affiliated Associations on approximately $6.6 million of 2002 patronage allocations received from AgriBank. Those affiliated Associations Boards of Directors passed resolutions that, should this stock ever be converted to cash, creating a tax liability, an equal amount will be distributed to patrons at that time under the Associations patronage programs. Deferred income taxes have also not been provided on accumulated FLCA subsidiary earnings of $11.2 billion as it is the intention of the ACAs management to permanently maintain their investments in the FLCA subsidiaries or to distribute the earnings to members in a manner that results in no additional tax liability to the affiliated Associations. Other than distributions made under AgriBank s patronage programs, AgriBank has no plans to make distributions of unallocated retained earnings to affiliated Associations. Therefore, deferred taxes have not been provided by any affiliated Association on AgriBank s retained earnings. 89

92 Our income tax returns are subject to review by various U.S. taxing authorities. We record accruals for items that we believe may be challenged by these taxing authorizes. However, we had no uncertain income tax positions at December 31, In addition, we believe we are no longer subject to income tax examinations for years prior to Tax Related Matters At various times, affiliated Associations receive assessment letters from the IRS as a result of audits of prior year tax returns. There are no material assessments outstanding at December 31, NOTE 12 Employee Benefit Plans The Farm Credit Foundations Plan Sponsor and Trust Committees provide oversight of the benefit plans. These governance committees are comprised of elected or appointed representatives (senior leadership and/or Board of Director members) from the participating organizations. The Coordinating Committee (a subset of the Plan Sponsor Committee comprised of AgriBank District representatives) is responsible for decisions regarding retirement benefits at the direction of the AgriBank District participating employers. The Trust Committee is responsible for fiduciary and plan administrative functions. The funded status of the post-employment benefit plans is recorded at the District level only. Additional District-level financial information for these plans may be found in the District-Level Pension and Post- Employment Benefit Plans Disclosures section of this footnote. Pension Benefit Plans Pension Plan: Certain employees at AgriBank and affiliated Associations, with the exception of one affiliated Association, participate in the AgriBank District Retirement Plan, a District-wide multi-employer defined benefit retirement plan. The Department of Labor has determined the plan to be a governmental plan; therefore, the plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). As the plan is not subject to ERISA, the plan s benefits are not insured by the Pension Benefit Guaranty Corporation. Accordingly, the amount of accumulated benefits that participants would receive in the event of the plan s termination is contingent on the sufficiency of the plan s net assets to provide benefits at that time. This Plan is noncontributory and covers certain eligible District employees. The assets, liabilities and costs of the plan are not segregated by participating employers. As such, plan assets are available for any of the participating employers retirees at any point in time. Additionally, if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. Further, if a participating employer chooses to stop participating in the plan, the employer may be required to pay an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Because of the multi-employer nature of the plan, any individual employer is not able to unilaterally change the provisions of the plan. If an employee transfers to another employer within the same plan, the employee benefits under the plan transfer. Benefits are based on salary and years of service. There is no collective bargaining agreement in place as part of this plan. The defined benefit pension plan reflects a District-wide unfunded liability totaling $255.2 million at December 31, The pension benefits funding status reflects the net of the fair value of the plan assets and the projected benefit obligation at the date of these financial statements. The projected benefit obligation is the 90

93 actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered prior to the measurement date based on assumed future compensation levels. The projected benefit obligation of the District-wide plan was $1.0 billion, $1.1 billion and $934.8 million at December 31, 2013, 2012 and 2011, respectively. The fair value of the plan assets was $759.5 million, $640.1 million and $557.6 million at December 31, 2013, 2012 and 2011, respectively. The accumulated benefit obligation, which is the actuarial present value of the benefits attributed to employee service rendered before the measurement date and based on current employee service and compensation, exceeds pension plan assets. The accumulated benefit obligation for the District-wide plan was $864.2 million, $908.2 million and $788.0 million at December 31, 2013, 2012 and 2011, respectively. The funding status is subject to many variables including performance of plan assets and interest rate levels. Therefore, changes in assumptions could significantly affect these estimates. Costs are determined for each individual employer based on costs directly related to their current employees as well as an allocation of the remaining costs based proportionately on the estimated projected liability of the employer under this plan. Each employer recognizes their proportional share of expense and contributes a proportional share of funding. Total plan expense for participating employers included in Salaries and employee benefits on the Combined Statements of Comprehensive Income was $63.3 million, $52.7 million and $44.0 million for 2013, 2012 and 2011, respectively. Participating employers contributed $59.0 million, $51.3 million and $27.9 million to the plan in 2013, 2012 and 2011, respectively. Benefits paid to participants in the District were $49.8 million in 2013, of which $671 thousand was paid to senior officers who were actively employed during the year. While the plan is a governmental plan and is not subject to minimum funding requirements, the employers contribute amounts necessary on an actuarial basis to provide the plan with sufficient assets to meet the benefits to be paid to participants. The amount of the total District employer contributions expected to be paid into the pension plan during 2014 is $32.6 million. The amount ultimately to be contributed and the amount ultimately recognized as expense as well as the timing of those contributions and expenses, are subject to many variables including performance of plan assets and interest rate levels. These variables could result in actual contributions and expenses being greater than or less than the amounts reflected in the District financial statements. Nonqualified Retirement Plan: AgriBank and certain affiliated Associations participate in the District-wide nonqualified defined benefit Pension Restoration Plan. This plan restores retirement benefits to certain highly compensated eligible employees that would have been provided under the qualified plan if such benefits were not above the Internal Revenue Code compensation or other limits. The Pension Restoration Plan reflects an unfunded liability totaling $25.3 million at December 31, This plan is funded as the benefits are paid; therefore, there are no assets in the plan and the unfunded liability is equal to the projected benefit obligation. The projected benefit obligation of the Pension Restoration Plan was $25.3 million, $23.5 million and $16.6 million at December 31, 2013, 2012 and 2011, respectively. The accumulated benefit obligation for the Pension Restoration Plan was $19.8 million, $17.5 million and $13.6 million at December 31, 2013, 2012 and 2011, respectively. The amount of the pension benefits funding status is subject to many variables including interest rate levels. Therefore, changes in assumptions could significantly affect these estimates. Costs are determined for each individual employer based on costs directly related to their current employees. Total Pension Restoration Plan expense for participating employers included in Salaries and employee benefits on the Combined Statements of Comprehensive Income was $3.6 million, $2.4 million and $2.5 million for 2013, 2012 and 2011, respectively. The Pension Restoration Plan is unfunded and participating employers make annual 91

94 contributions to fund benefits paid to retirees covered by the plan. There were no benefits paid under the Pension Restoration Plan to senior officers who were actively employed during the year. Other Post-Employment Benefit Plans Retiree Medical Plans: District employers also provide certain health insurance benefits to eligible retired employees according to the terms of the benefit plans. The anticipated costs of these benefits are accrued during the period of the employee s active status. Post-employment benefit cost included in Salaries and employee benefits in the Combined Statements of Comprehensive Income were $1.2 million, $1.1 million and $1.4 million for 2013, 2012 and 2011, respectively. Retirement Savings Plans AgriBank and all affiliated Associations also participate in a defined contribution retirement savings plan. For employees hired before January 1, 2007, employee contributions are matched dollar for dollar up to 2.0% and 50 cents on the dollar on the next 4.0% on both pre-tax and post-tax contributions. The maximum employer match is 4.0%. For employees hired after December 31, 2006, District employers contribute 3.0% of the employee s compensation and will match employee contributions dollar for dollar up to a maximum of 6.0% on both pre-tax and post-tax contributions. The maximum employer contribution is 9.0%. In addition, one affiliated Association has a profit sharing component as part of the retirement savings plan. AgriBank and certain affiliated Associations also participate in the Nonqualified Deferred Compensation Plan. Eligible participants must meet one of the following criteria: certain salary thresholds as determined by the IRS, be either a chief executive officer or president of a participating employer or have previously elected pretax deferrals in 2006 under predecessor nonqualified deferred compensation plans. Under this plan, the employee may defer a portion of his/her salary, bonus and other compensation. Additionally, the plan provides for supplemental employer matching contributions related to any compensation deferred by the employee that would have been eligible for a matching contribution under the retirement savings plan if it were not for certain IRS limitations. Employer contributions and expenses are included in Salaries and employee benefits on the Combined Statements of Comprehensive Income under the retirement savings plans and were $29.5 million, $26.5 million and $23.4 million in 2013, 2012 and 2011, respectively. These expenses are equal to our cash contributions for each year. Additionally, AgriBank and certain affiliated Associations participate in the Pre-409A Frozen Nonqualified Deferred Compensation Plan. This plan serves the same purpose as the Nonqualified Deferred Compensation Plan. However, the plan was frozen effective January 1, As such, no additional participants are eligible to enter the plan and no additional employer contributions will be made to the plan. 92

95 Obligations and Funded Status (in thousands) As of December 31, 2013 Pension Benefits Other Benefits Change in benefit obligation Benefit obligation at beginning of year $1,106,122 $951,377 $849,537 $33,443 $30,618 $30,686 Service cost 29,328 26,032 24, Interest cost 44,949 46,044 44,174 1,337 1,465 1,588 Plan amendments (221) Actuarial (gain) loss (89,174) 129,370 75,624 (3,743) 2,294 (546) Benefits paid (51,313) (46,841) (42,047) (1,504) (1,493) (1,539) Benefit obligation at end of year $1,039,912 $1,106,122 $951,377 $30,126 $33,443 $30,618 Change in plan assets Fair value of plan assets at beginning of year $640,062 $557,600 $573,038 $ -- $ -- $ -- Actual return on plan assets 110,186 76,926 (1,824) Employer contributions 60,527 52,377 28,433 1,504 1,493 1,539 Benefits, premiums and expenses paid (51,313) (46,841) (42,047) (1,504) (1,493) (1,539) Fair value of plan assets at end of year $759,462 $640,062 $557,600 $ -- $ -- $ -- Funded status $(280,450) $(466,060) $(393,777) $(30,126) $(33,443) $(30,618) (in thousands) As of December 31, 2013 Pension Benefits Other Benefits Amounts recognized in the Statements of Condition consist of: Pension asset $ -- $ -- $ -- $ -- $ -- $ -- Pension liabilities 280, , ,777 30,126 33,443 30,618 Net amount recognized $(280,450) $(466,060) $(393,777) $(30,126) $(33,443) $(30,618) Amounts recognized in accumulated other comprehensive income consist of: Net loss (gain) $338,382 $531,512 $463,262 $(6,495) ($2,752) ($5,476) Prior service credit (5,859) (7,059) (8,318) (2,009) (2,704) (3,397) Total recognized in other comprehensive income $332,523 $524,453 $454,944 $(8,504) $(5,456) $(8,873) Weighted-average assumptions used to determine benefit obligations Discount rate 4.95% 4.15% 4.95% 4.95% 4.15% 4.95% Expected return on plan assets 8.00% 8.00% 8.00% n/a n/a n/a Rate of compensation increase 4.50% 4.50% 4.50% n/a n/a n/a The pension benefits funding status reflects the status based on the projected benefit obligation, which is the actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered prior to the measurement date based on assumed future compensation levels. The accumulated benefit obligation, which is the actuarial present value of benefits attributed to employee service rendered before the measurement date and based on current employee service and compensation, exceeds pension plan assets. The accumulated benefit obligation for the pension plans was $884.0 million, $925.7 million and $801.6 million at December 31, 2013, 2012 and 2011, respectively. 93

96 Components of Net Periodic Benefit Cost (in thousands) Pension Benefits Other Benefits For the year ended December 31, Net periodic benefit cost Service cost $29,328 $26,032 $24,089 $593 $559 $650 Interest cost 44,949 46,044 44,174 1,337 1,465 1,588 Expected return on plan assets (49,512) (47,177) (47,718) Amortization of prior service cost (1,200) (1,119) (1,056) (695) (695) (624) Recognized net actuarial loss (gain) 43,282 31,370 27, (222) (197) Net periodic benefit cost $66,847 $55,150 $46,522 $1,235 $1,107 $1,417 Other changes in plan assets and benefit obligations recognized in other comprehensive income Net loss (gain) $(149,848) $99,621 $125,164 $(3,743) $2,500 $(854) Prior service credit on plan amendments (221) Amortization of prior service benefit 1,200 1,119 1, Amortization of net (gain) loss (43,282) (31,370) (27,033) Total recognized in other comprehensive income $(191,930) $69,510 $99,187 $(3,048) $3,417 $(254) Total recognized in net periodic benefit cost and other comprehensive income $(125,083) $124,660 $145,709 $(1,813) $4,524 $1,163 Weighted-average assumptions used to determine net costs Discount rate 4.15% 4.95% 5.35% 4.15% 4.95% 5.35% Expected return on plan assets 8.00% 8.00% 8.25% n/a n/a n/a Rate of compensation increase 4.50% 4.50% 4.50% n/a n/a n/a The estimated net loss and prior service credit for the Pension Benefits plans that will be amortized from District accumulated other comprehensive income into net periodic benefit cost over the next year is an expense of $28.2 million. The estimated net gain and prior service credit for the Other Benefits plan that will be amortized from District accumulated other comprehensive income into net periodic benefit cost over the next year is income of $1.1 million. Future Cash Flows The amount of total District employer contributions expected to be paid into the plans during 2014 is $34.1 million for Pension Benefits and $1.8 million for Other Benefits. 94

97 The following benefit payments are expected to be paid by the District plans and reflect expected future service, as appropriate: Assumed Health Care Cost Trend Rates (in thousands) Pension Other As of December 31, 2013 Benefits Benefits Year: 2014 $50,500 $1, ,250 1, ,250 1, ,700 2, ,910 2, to ,270 10,919 For measurement purposes, a 7.5% rate of increase in the per capita cost of covered health care benefits is assumed for The rate is assumed to decrease gradually to 5% by the year 2018 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for the District: (in thousands) As of December 31, % Increase 1% Decrease Effect on total of service and interest cost components $21 $(19) Effect on accumulated postretirement benefit obligation 423 (385) Plan Assets During 2013, the Trustees employed a total return investment approach whereby a mix of equities, fixed income and real estate investments were used to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio was designed to contain a diversified blend of equity and fixed income investments. Furthermore, equity investments were diversified across U.S. and non-u.s. stocks as well as growth, value, small, mid and large capitalizations. During the fourth quarter of 2013, the Trust Committee adopted new investment policies that will guide plan investment strategies for The new policies incorporate a liability-based framework in which assets are managed to the unique liabilities of each plan. The overall objectives of these policies are intended to meet the benefit obligations for the plan beneficiaries and to earn a long-term rate of return consistent with the related cash flow profile of the underlying benefit obligations. 95

98 The execution of these policies permits the plans to pursue a well-defined risk management strategy that is designed to reduce investment risks as the funded status improves; this is achieved through a dynamically driven allocation process that measures assets and liabilities daily. To implement these policies, the plans have adopted a diversified set of portfolio management strategies to optimize the risk reward profile of the plans. Plan assets are divided into two primary component portfolios: A return-seeking portfolio that is invested in a diversified set of assets designed to deliver performance in excess of the underlying liability growth rate coupled with diversification controls regarding the level of risk. Equity exposures are expected to be the primary drivers of excess returns, but also introduce the greatest level of volatility of returns. Accordingly, the return-seeking portfolio will contain additional asset classes that are intended to diversify equity risk as well as contribute to excess return. A liability hedging portfolio that is primarily invested in intermediate-term and long-term investment grade corporate bonds in actively managed strategies that are intended to hedge interest rate risk. The portfolio will progressively increase in size as each plan s funded ratio improves. The use of selected portfolio strategies incorporating derivatives may be employed to improve the liability hedging characteristics or reduce risk. Finally, there is a managed liquidity portfolio that is composed of shortterm assets intended to pay periodic plan benefits and expenses. The largest subset will contain U.S. equities including securities that are both actively and passively managed to their benchmarks across a full spectrum of capitalization and styles. Non-U.S. equities will contain securities in both passively and actively managed strategies. Currency futures and forward contracts may be held for the sole purpose of hedging existing currency risk in the portfolio. Other investments that will serve as equity diversifiers will include high yield bonds: fixed income portfolio of securities below investment grade in non-u.s. issuers, global real estate securities: portfolio of diversified real estate investment trust securities and other liquid real estate related securities and hedge fund of funds. These portfolios combine income generation and capital appreciation opportunities from developed markets globally. Other investment strategies may be employed to gain certain market exposures, reduce portfolio risk and to further diversify portfolio assets. During 2013, the asset allocation policy of the pension plan provided a target of 70% of assets in equity securities, 25% in debt securities and 5% in real estate. For 2014, the asset allocation policy of the pension plan provides a target of 75% of assets in return-seeking investments and 25% of assets in liability hedging investments. Specifically, return seeking investments include: global equity securities, global real estate investment trust securities, hedge funds and high yield bonds; and liability hedging investments include high quality credit debt securities. Tactical tilts will be employed based on the asset consultant s medium term views and capital market assumptions, but will remain within stated policy ranges. The plan assets were reallocated to comply with the approved investment strategy during January Proceeding with the new strategies, portfolios will be measured and monitored daily to ensure compliance with investment policies. The expected long-term rate of return assumption is determined by the Coordinating Committee with input from the Trust Committee. Historical return information is used to establish a best-estimate range for each asset class in which the plans are invested. The most appropriate rate is selected from the best-estimate range, taking into consideration the duration of plan benefit liabilities and Coordinating Committee investment policies. 96

99 Fair Value of District Pension Plan Assets (in thousands) Fair Value Measurements as of December 31, 2013 Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $37,470 $ -- $ -- $37,470 Mutual funds: International funds 127, ,534 Bond funds , ,624 Real estate equity funds -- 33, ,201 Hedged equity funds ,014 16,014 Investment insurance contracts ,236 7,236 Trust funds: Domestic funds , ,531 Bond funds -- 55, ,499 Limited partnerships ,353 48,353 Total $165,004 $522,855 $71,603 $759,462 Hedged Equity Funds Fair Value Measurements using Level 3 Investment Insurance Contracts Limited Partnerships Total Beginning balance $14,087 $7,814 $40,791 $62,692 Actual return on plan assets: Still held at the reporting date 1, ,562 9,611 Sales -- (700) -- (700) Transfers in (out) of Level Ending balance $16,014 $7,236 $48,353 $71,603 (in thousands) Fair Value Measurements as of December 31, 2012 Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $10,208 $ -- $ -- $10,208 Mutual funds: International funds 112, ,222 Bond funds , ,915 Real estate equity funds -- 29, ,107 Hedged equity funds ,087 14,087 Investment insurance contracts ,814 7,814 Trust funds: Domestic funds , ,871 Bond funds -- 52, ,047 Limited partnerships ,791 40,791 Total $122,430 $454,940 $62,692 $640,062 Hedged Equity Funds Fair Value Measurements using Level 3 Investment Insurance Contracts Limited Partnerships Total Beginning balance $13,796 $8,369 $37,973 $60,138 Actual return on plan assets: Still held at the reporting date ,818 3,319 Sales -- (765) -- (765) Transfers in (out) of Level Ending balance $14,087 $7,814 $40,791 $62,692 97

100 (in thousands) Fair Value Measurements as of December 31, 2011 Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $22,650 $ -- $ -- $22,650 Mutual funds: International funds 84, ,325 Bond funds -- 79, ,765 Hedged equity funds ,796 13,796 Investment insurance contracts ,369 8,369 Trust funds: Domestic funds , ,358 Bond funds -- 80, ,364 Limited partnerships ,973 37,973 Total $106,975 $390,487 $60,138 $557,600 Hedged Equity Funds Fair Value Measurements using Level 3 Investment Insurance Contracts Limited Partnerships Total Beginning balance $13,552 $9,000 $39,661 $62,213 Actual return on plan assets: Still held at the reporting date (1,688) (1,219) Purchases Sales -- (858) -- (858) Transfers in (out) of Level Ending balance $13,796 $8,369 $37,973 $60,138 Plan assets are diversified into various investment types as shown in the preceding table. An investment consultant is utilized to ensure the diversification of assets. The assets are spread among numerous fund managers. Diversification is also obtained by selecting fund managers whose funds are not concentrated in individual stocks and, for the case of international funds, individual countries. Valuation Techniques: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets would be classified as Level 1. Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data would be classified as Level 2. In addition, assets measured at Net Asset Value (NAV) per share and that we have the ability to redeem at NAV per share at the measurement date are classified as Level 2. Unobservable inputs (e.g., a company s own assumptions and data) and assets measured at NAV per share which we do not have the ability to redeem at NAV per share at the measurement date would be classified as Level 3. All assets are evaluated at the fund level. Refer to Note 17 for a complete description of Fair Value Measurements. NOTE 13 Related Party Transactions In the ordinary course of business, we enter into loan transactions with officers, directors, their immediate family members and other organizations with which such persons may be associated. Such transactions are subject to special approval requirements contained in the FCA regulations and are made on the same terms, including interest rates, amortization schedules and collateral, as those prevailing at the time for comparable transactions with unrelated borrowers. 98

101 Total loans to such persons in the District amounted to $306.9 million at December 31, 2013, with $252.4 million of new loans made and $285.1 million of repayments during the year. In the opinion of management at the District entities, none of these loans outstanding at December 31, 2013 involved more than a normal risk of collectability. NOTE 14 Regulatory Enforcement Matters During 2013, the FCA completed reviews of certain areas specific to AgriBank and affiliated Associations. There are no regulatory enforcement actions or matters which require disclosure. NOTE 15 Commitments and Contingencies In the normal course of business, AgriBank and affiliated Associations have various contingent liabilities and commitments outstanding, primarily commitments to extend credit, which may not be reflected in the accompanying financial statements. We do not anticipate any material losses because of the contingencies or commitments. AgriBank and affiliated Associations may, from time to time, be named as defendants in certain lawsuits or legal actions in the normal course of business. At the date of these financial statements, management teams were not aware of any such actions. However, AgriBank and affiliated Association management cannot ensure that such actions or other contingencies will not arise in the future. While primarily liable for its portion of Systemwide bonds and notes, AgriBank is jointly and severally liable for the Systemwide bonds and notes of the other System Banks. The total bonds and notes of the System at December 31, 2013 were $207.5 billion. AgriBank, together with all System Banks and the Federal Farm Credit Banks Funding Corporation, have entered into the Contractual Interbank Performance Agreement (CIPA). This agreement establishes agreed-upon standards of District financial condition and performance to achieve and maintain. AgriBank, and each of the other System Banks, exceeded the minimum performance measures at December 31, AgriBank, together with all System Banks and the Federal Farm Credit Banks Funding Corporation, have entered into the Market Access Agreement (MAA). This agreement establishes criteria and procedures for the System Banks to provide information and, under specific circumstances, restricting or prohibiting participation in issuances of Systemwide debt securities. The agreement is intended to identify and resolve individual System Bank financial problems in a timely manner. AgriBank, and each of the other System Banks, is in compliance with all aspects of the agreement at December 31, If a System Bank fails to meet the MAA performance criteria, it will be placed into one of three categories. Each category gives the other System Banks progressively more control over a System Bank that has declining financial performance under the MAA performance criteria. A Category I Bank is subject to additional monitoring and reporting requirements; a Category II Bank s ability to participate in issuances of Systemwide debt securities may be limited to refinancing maturing debt obligations; and a Category III Bank may not be permitted to participate in issuances of Systemwide debt securities. 99

102 NOTE 16 Financial Instruments with Off-Balance-Sheet Risk AgriBank and affiliated Associations participate in financial instruments with off-balance sheet risk to satisfy the financial needs of borrowers. These financial instruments are in the form of commitments to extend credit and letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the financial statements. Commitments to extend credit are agreements to lend to a borrower as long as they are in compliance with conditions established in the contract. At December 31, 2013, we had commitments to extend credit of $24.1 billion. Standby letters of credit are agreements to pay a beneficiary if there is default on a contractual arrangement. At December 31, 2013, we had issued standby letters of credit of $517.2 million of which $3.0 million was included in Other liabilities on the Combined Statements of Condition at December 31, Refer to Note 17 for further discussion regarding standby letters of credit included on the Combined Statements of Condition. Commercial letters of credit are agreements to pay a beneficiary under specific conditions. At December 31, 2013, one affiliated Association had commercial letters of credit of $37 thousand. Commitments to extend credit and letters of credit generally have fixed expiration dates or other termination clauses, and we may require payment of a fee. If commitments and letters of credit remain unfulfilled or have not expired, they may have credit risk not recognized in the financial statements. Many of the commitments to extend credit and letters of credit will expire without being fully drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Certain letters of credit may have recourse provisions that would enable AgriBank and/or an affiliated Association, as a guarantor, to recover from third parties amounts paid under guarantees, thereby limiting its maximum potential exposures. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to borrowers, and the same credit policies are applied by management. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the borrower. NOTE 17 Fair Value Measurements Accounting guidance defines fair value, establishes a framework for measuring fair value and requires disclosures for certain assets and liabilities measured at fair value on a recurring and non-recurring basis. These assets and liabilities consist of investments available-for-sale, federal funds, derivative assets and liabilities, impaired loans, other property owned, collateral assets and liabilities and certain letters of credit. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This guidance establishes a fair value hierarchy for disclosure of fair value measurements to maximize the use of observable inputs. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Refer to Note 2 for a more complete description of these input levels. Accounting guidance also establishes a framework for measuring the fair value of other financial instruments that are not measured at fair value on the Combined Statements of Condition. These assets and liabilities consist of cash, investments held-to-maturity, non-impaired loans, other earning assets, bonds and notes, subordinated notes and commitments to extend credit and certain letters of credit. 100

103 Recurring Measurements The following represents a summary of the valuation techniques and inputs used to measure fair value on a recurring basis: Federal Funds: The fair value of federal funds is generally their face value, plus accrued interest, as these instruments are highly liquid, readily convertible to cash and short-term in nature. Investments Available-for-Sale: The fair value of substantially all AFS investment securities is determined from third-party valuation services that estimate current market prices. Level 2 inputs and assumptions related to third-party market valuation services are typically observable in the marketplace. Such services incorporate repayment assumptions and underlying mortgage-backed or asset-backed collateral information to generate cash flows that are discounted using appropriate benchmark interest rate curves and volatilities including LIBOR, Treasury and other Index benchmarks. Third-party valuations also incorporate information regarding broker/dealer quotes, available trade information, historical cash flows, credit ratings and other market information. Such valuations represent an estimated exit price, or price expected to be received by a seller in active markets to sell the investment securities to a willing participant. Level 3 inputs are based on the relatively illiquid marketplace for some investments and the lack of marketplace information available for significant inputs and assumptions to the valuation process. The fair value measurements of these assets are based on multiple factors including information obtained from third-party valuation services using both Level 2 and Level 3 inputs. Significant increases in volatilities, market spreads, default probabilities, loss severities and possibly prepayment speeds would result in significantly lower fair value measurements. Conversely, significant increases in dealer quotes and possibly prepayment speeds would result in significantly higher fair value measurements. Generally, a change in the assumption used for the probability of default may be accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. Accounting guidance requires us to provide quantitative information about significant unobservable inputs used in the fair value measurement for recurring and nonrecurring assets and liabilities within Level 3. However, a reporting entity is not required to create quantitative information if the unobservable inputs are not developed by the reporting entity. As the fair value is determined by third-party valuation services without adjustment by management, we have not reported this disclosure as these inputs are not reasonably available to us. The valuation process is described above. Derivative Assets and Liabilities: The fair value of AgriBank s derivative financial instruments is the estimated amount to be received to sell a derivative asset or paid to transfer a derivative liability in active markets among willing participants at the reporting date. Estimated fair values are determined through internal market valuation models. These models incorporate LIBOR swap curves, market volatilities and other inputs which are observable directly or indirectly in the marketplace. AgriBank compares internally calculated derivative valuations to broker/dealer quotes to substantiate the results. The fair value of one affiliated Association s TBAs is based on currently quoted market prices. 101

104 Cash Collateral Pledged To/By Counterparties: Derivative contracts are supported by bilateral collateral agreements with counterparties requiring AgriBank or the counterparty to post either cash or investment securities as collateral in the event certain dollar thresholds of credit exposure are reached or in the case of cleared derivatives, the posting of initial and variation margins. The market value of cash collateral pledged to counterparties and by counterparties is the face value of the collateral pledged, as that approximates fair value. Standby Letters of Credit: Estimating the fair value of letters of credit is determined by the inherent credit loss in such instruments. Assets and Liabilities Measured at Fair Value on a Recurring Basis (in thousands) Fair Value Measurement Using Total Fair As of December 31, 2013 Level 1 Level 2 Level 3 Value Assets: Federal funds $ -- $911,644 $ -- $911,644 Investments available-for-sale: Mortgage-backed securities -- 4,085, ,801 4,294,309 Commercial paper and other -- 3,827, ,827,095 U.S. Treasury securities -- 2,623, ,623,614 Asset-backed securities , , ,113 U.S. Agency securities , ,141 Total investments available-for-sale -- 11,238, ,755 11,555,272 Derivative assets -- 74, ,706 Cash collateral pledged to counterparties 4, ,254 Total assets $4,254 $12,224,867 $316,755 $12,545,876 Liabilities: Cash collateral pledged by counterparties $24,170 $ -- $ -- $24,170 Derivative liabilities Standby letters of credit ,951 2,951 Total liabilities $24,170 $181 $2,951 $27,302 (in thousands) Fair Value Measurement Using Total Fair As of December 31, 2012 Level 1 Level 2 Level 3 Value Assets: Federal funds $ -- $744,548 $ -- $744,548 Investments available-for-sale: Mortgage-backed securities -- 3,933, ,500 4,173,512 Commercial paper and other -- 2,856, ,856,563 U.S. Treasury securities -- 3,190, ,190,648 Asset-backed securities , , ,974 U.S. Agency securities , ,616 Total investments available-for-sale -- 10,621, ,939 10,987,313 Derivative assets -- 70, ,255 Total assets $ -- $11,436,177 $365,939 $11,802,116 Liabilities: Cash collateral pledged by counterparties $22,320 $ -- $ -- $22,320 Derivative liabilities -- 18, ,345 Standby letters of credit ,750 3,750 Total liabilities $22,320 $18,345 $3,750 $44,

105 (in thousands) Fair Value Measurement Using Total Fair As of December 31, 2011 Level 1 Level 2 Level 3 Value Assets: Federal funds $ -- $299,976 $ -- $299,976 Investments available-for-sale: Mortgage-backed securities -- 3,887, ,741 4,140,747 Commercial paper and other -- 2,123, ,123,383 U.S. Treasury securities -- 2,933, ,933,150 Asset-backed securities -- 83, , ,873 U.S. Agency securities , ,418 Total investments available-for-sale -- 9,288, ,843 9,688,571 Derivative assets , ,444 Total assets $ -- $9,729,148 $399,843 $10,128,991 Liabilities: Cash collateral pledged by counterparties $103,120 $ -- $ -- $103,120 Derivative liabilities -- 17, ,466 Total liabilities $103,120 $17,466 $ -- $120,586 Fair Value Measurement Activity of Level 3 Instruments (in thousands) Investments Available-for-Sale Mortgage-backed Asset-backed Securities Securities Total Standby Letters of Credit Balance at December 31, 2010 $314,357 $224,648 $539,005 $ -- Total gains or losses realized/unrealized: Included in earnings (10,994) (12,292) (23,286) -- Included in other comprehensive income 15,387 7,288 22, Purchases -- 84,000 84,000 Settlements (65,009) (73,771) (138,780) -- Transfers in and/or out of Level 3 -- (83,771) (83,771) -- Balance at December 31, 2011 $253,741 $146,102 $399,843 $ -- Total gains or (losses) realized/unrealized: Included in earnings (11,195) (14,290) (25,485) (3,750) Included in other comprehensive income 42,796 36,259 79, Settlements (44,842) (42,632) (87,474) -- Transfers in and/or out of Level Balance at December 31, 2012 $240,500 $125,439 $365,939 $(3,750) Total gains or (losses) realized/unrealized: Included in earnings (1,318) (565) (1,883) 799 Included in other comprehensive income 11,088 14,613 25, Settlements (41,469) (31,533) (73,002) -- Transfers in and/or out of Level Balance at December 31, 2013 $208,801 $107,954 $316,755 $(2,951) We transferred $83.8 million of automobile asset-backed securities from Level 3 to Level 2 during 2011 due to adequate liquidity and sufficient observable marketplace data. There were no assets or liabilities transferred between levels during 2013 or

106 Non-Recurring Measurements The following represents a summary of the valuation techniques and inputs used to measure fair value on a non-recurring basis: Loans: Certain collateral dependent loans are measured at fair value on a non-recurring basis when they are evaluated for impairment under FASB guidance in which fair values are based upon the underlying collateral. Costs to sell represent transaction costs and are not included as a component of the fair value. Since the value of the collateral, less estimated costs to sell, was less than the principal balance of the loan, specific reserves were established for these loans. If the process uses independent appraisals and other market-based information, they fall under Level 2. If the process requires significant input based on management s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters, they fall under Level 3. Other Property Owned: Other property owned is measured at fair value on a non-recurring basis when the fair value for other property owned is based upon the collateral fair value. Costs to sell represent transaction costs and are not included as a component of the fair value. If the process uses independent appraisals and other market-based information, they fall under Level 2. If the process requires significant input based on management s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters, they fall under Level 3. Assets Measured at Fair Value on a Non-recurring Basis (in thousands) Fair Value Measurement Using Total Fair Total As of December 31, 2013 Level 1 Level 2 Level 3 Value Losses Loans $ -- $38,430 $96,165 $134,595 $(31,208) Other property owned ,714 34,714 (9,670) (in thousands) Fair Value Measurement Using Total Fair Total As of December 31, 2012 Level 1 Level 2 Level 3 Value Losses Loans $ -- $51,432 $71,739 $123,171 $(47,645) Other property owned ,549 70,549 (22,469) (in thousands) Fair Value Measurement Using Total Fair Total As of December 31, 2011 Level 1 Level 2 Level 3 Value Gains Loans $ -- $99,755 $139,407 $239,162 $19,336 Other property owned , ,790 6,201 Other Financial Instrument Measurements A description of the methods and assumptions used to estimate the fair value of each class of our financial instruments, measured at carrying amounts and not measured at fair value on the Combined Statements of Condition, follows: Cash: The carrying value is a reasonable estimate of fair value. Investments held-to-maturity: Investment securities held-to-maturity are valued using a discounted cash flow model based on the appropriate interest rate yield curve, prepayment rates, contractual investment information and credit classification. Loans: Because no active market exists for our loans, the fair value of loans that are not individually specifically impaired is estimated by segregating the loan portfolio into pools of loans with approximate homogeneous 104

107 characteristics. Expected future cash flows and interest rates reflecting appropriate credit risk are separately determined for each individual pool. The expected future cash flows are discounted using current interest rates at which similar loans would be made or repriced to borrowers with similar credit risk. In addition, loans are valued using the Farm Credit interest rate yield curve, prepayment rates, contractual loan information, credit classification and collateral values. As the discount rates are based upon internal pricing mechanisms and other management estimates, management has no basis to determine whether the fair values presented would be indicative of the exit price negotiated in an actual sale. Furthermore, certain statutory or regulatory factors not considered in the valuation, such as the unique statutory rights of System borrowers, could render our portfolio less marketable outside the System. Other Earning Assets: Other earning assets are valued using a discounted cash flow model based on the Farm Credit interest rate yield curve, prepayment rates, contractual investment information and credit classification. Bonds and notes: Systemwide debt securities are not all traded in the secondary market and those that are traded may not have readily available quoted market prices. Therefore, the fair value of the instruments is estimated by calculating the discounted value of the expected future cash flows. The discount rates used are based on the sum of quoted market yields for the Treasury yield curve and an estimated yield-spread relationship between Systemwide debt securities and Treasury securities. We estimate an appropriate yieldspread taking into consideration selling group member (banks and securities dealers) yield indications, observed new government-sponsored enterprise debt security pricing and pricing levels in the related U.S. dollar interest rate swap market. Subordinated notes: The fair value of obligations held by an affiliated Association is based on a discounted cash flow model based on the Farm Credit interest rate yield curve. The fair value of obligations held by AgriBank is based on an estimated fair value using credit spreads, market trends, interest rate risks and comparisons to similar institutions which we receive from an independent investment dealer. Commitments to extend credit and letters of credit: Estimating the fair value of commitments and letters of credit is determined by the inherent credit loss in such instruments based on rate of funding and credit loss factors. 105

108 Financial instruments measured at carrying amounts and not measured at fair value on the Combined Statements of Condition are summarized as follows: (in thousands) Total Carrying Fair Value Measurement Using Total Fair As of December 31, 2013 Amount Level 1 Level 2 Level 3 Value Assets: Cash $1,162,636 $1,162,636 $ -- $ -- $1,162,636 Investments held-to-maturity 1,968, ,845 1,334,039 1,951,884 Net loans 82,423, ,947,665 81,947,665 Other earning assets 74, ,185 74,185 Total assets $85,628,819 $1,162,636 $617,845 $83,355,889 $85,136,370 Liabilities: Bonds and notes $81,889,124 $ -- $ -- $81,024,774 $81,024,774 Subordinated notes 600, , ,648 Total liabilities $82,489,124 $ -- $ -- $81,768,422 $81,768,422 Unrecognized financial instruments: Commitments to extend credit and letters of credit $ -- $ -- ($25,910) ($25,910) (in thousands) Total Carrying Fair Value Measurement Using Total Fair As of December 31, 2012 Amount Level 1 Level 2 Level 3 Value Assets: Cash $560,753 $560,753 $ -- $ -- $560,753 Investments held-to-maturity 2,275, ,295 1,290,725 2,265,020 Net loans 76,703, ,984,790 77,984,790 Other earning assets 144, , ,519 Total assets $79,683,251 $560,753 $974,295 $79,423,034 $80,958,082 Liabilities: Bonds and notes $77,135,855 $ -- $ -- $77,635,287 $77,635,287 Subordinated notes 600, , ,853 Total liabilities $77,735,855 $ -- $ -- $78,406,140 $78,406,140 Unrecognized financial instruments: Commitments to extend credit and letters of credit $ -- $ -- ($23,907) ($23,907) (in thousands) Total Carrying Fair Value Measurement Using Total Fair As of December 31, 2011 Amount Level 1 Level 2 Level 3 Value Assets: Cash $586,862 $586,862 $ -- $ -- $586,862 Investments held-to-maturity 2,262, ,753 1,692,927 2,250,680 Net loans 67,809, ,165,185 69,165,185 Other earning assets 210, , ,986 Total assets $70,870,449 $586,862 $557,753 $71,078,098 $72,222,713 Liabilities: Bonds and notes $68,262,968 $ -- $ -- $69,004,618 $69,004,618 Subordinated notes 600, , ,858 Total liabilities $68,862,968 $ -- $ -- $69,742,476 $69,742,476 Unrecognized financial instruments: Commitments to extend credit and letters of credit $ -- $ -- ($24,815) ($24,815) 106

109 NOTE 18 Derivative and Hedging Activity Use of Derivatives AgriBank maintains an overall interest rate risk management strategy that incorporates the use of derivative products to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. AgriBank s goals are to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that movements in interest rates do not adversely affect the net interest margin. As a result of interest rate fluctuations, hedged fixed-rate liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate fluctuations is that the interest income and interest expense of hedged floating-rate liabilities will increase or decrease. The effect of this variability in earnings is expected to be substantially offset by gains and losses on the derivative instruments that are linked to these hedged assets and liabilities. AgriBank considers the use of derivatives to be a prudent method of managing interest rate sensitivity, as it prevents earnings from being exposed to undue risk posed by changes in interest rates. AgriBank enters into derivative transactions, particularly interest rate swaps, to lower funding costs, diversify sources of funding, alter interest rate exposures arising from mismatches between assets and liabilities, or better manage liquidity. AgriBank may also enter into derivatives with affiliated Associations as a service to enable them to transfer, modify or reduce their exposure to retail interest rate risk. AgriBank manages this risk by concurrently entering into offsetting agreements with non-system institutional counterparties or through a Central Counterparty (CCP or clearinghouse). Interest rate swaps allow AgriBank to raise long-term borrowings at fixed rates and swap them into floating rates that are lower than those available to AgriBank if floating rate borrowings were made directly. Under interest rate swap arrangements, AgriBank agrees with other parties to exchange, at specified intervals, payment streams calculated on a specified notional principal amount, with at least one stream based on a specified floating rate index. AgriBank may purchase interest rate options, such as caps, in order to offset the impact of rising interest rates on AgriBank s floating-rate debt and floors, in order to offset the impact of falling interest rates on related floating-rate assets. In December 2013, AgriBank cleared three cash flow swaps with a notional value of $225 million through a clearinghouse which is included in pay-fixed swaps in the following table. 107

110 AgriBank Derivative Instruments Activity (in notional amounts) Pay-Fixed Floating-forand Floating and Amortizing Amortizing Receive- Pay-Fixed Floating-for- Other (in millions) Fixed Swaps Swaps Floating Derivatives Total Balance at December 31, 2010 $6,290 $757 $1,950 $446 $9,443 Additions Maturities/amortization (1,940) (78) -- (246) (2,264) Balance at December 31, 2011 $4,750 $972 $2,250 $200 $8,172 Additions Maturities/amortization (1,500) (46) (500) (100) (2,146) Balance at December 31, 2012 $3,500 $1,076 $1,750 $100 $6,426 Additions Maturities/amortization (1,350) (185) (400) (100) (2,035) Balance at December 31, 2013 $2,150 $1,216 $1,350 $ -- $4,716 Other derivatives consisted of forward starting swaps, interest rate caps and swaptions. By using derivative products, AgriBank exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, AgriBank s credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes AgriBank, thus creating credit risk. When the fair value of the derivative contract is negative, AgriBank owes the counterparty and, therefore, AgriBank does not assume credit risk to that counterparty. To minimize the risk of credit losses, for bilateral derivatives, AgriBank deals only with non-customer counterparties that have an investment-grade or better credit rating from a rating agency and AgriBank monitors the credit standing and levels of exposure to individual counterparties. At December 31, 2013 AgriBank does not anticipate nonperformance by any of these counterparties. AgriBank typically enters into master agreements that contain netting provisions. These provisions allow AgriBank to require the net settlement of covered contracts with the same counterparty in the event of default by the counterparty on one or more contracts. All derivative contracts are supported by bilateral collateral agreements with counterparties requiring AgriBank or the counterparty to post collateral in the event certain dollar thresholds of exposure of one party to the other are reached. These thresholds vary depending on the counterparty s current credit rating. AgriBank may also clear derivative transactions through a futures commission merchant (FCM) with a clearinghouse or a central counterparty (CCP). When the swap is cleared by the two parties, the single bilateral swap is divided into two separate swaps with the CCP becoming the counterparty to both of the initial parties to the swap. CCPs have several layers of protection against default including margin, member capital contributions and FCM guarantees of their customers transactions with the CCP. FCMs also pre-qualify the counterparties to all swaps that are sent to the CCP from a credit perspective, setting limits for each counterparty and collecting initial and variation margin daily from each counterparty for changes in the value of cleared derivatives. The margin collected from both parties to the swap protects against credit risk in the event a counterparty defaults. The initial and variation margin requirements are set by and held for the benefit of the CCP. Additional initial margin may be required and held by the FCM, due to its guarantees of its 108

111 customers trades with the CCP. At December 31, 2013, initial margin pledged to counterparties was $5.9 million and variation margin pledged by counterparties was $1.6 million. AgriBank s derivative activities are monitored by its Asset-Liability Committee (ALCO) as part of the Committee s oversight of AgriBank s asset/liability and treasury functions. AgriBank s ALCO is responsible for approving hedging strategies that are developed within limits established by AgriBank s Board of Directors through analysis of data derived from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into overall interest rate risk-management strategies. One affiliated Association is party to derivative financial instruments called TBAs to manage exposure to interest rate risk and changes in the fair value of forward loans held for sale and the interest rate lock commitments that are determined prior to funding. TBAs are measured in terms of notional amounts. The notional amount is not exchanged and is used as a basis on which interest payments are determined. Accounting for Derivatives Fair-Value Hedges: For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. AgriBank includes the gain or loss on the derivative in the same line item (interest expense) as the offsetting gain or loss on the related hedged item. Gains and losses on derivatives representing hedge components excluded from the assessment of effectiveness are recorded in current period earnings in Miscellaneous income and other gains (losses), net in the Combined Statements of Comprehensive Income. Cash Flow Hedges: For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings (interest expense) in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing hedge components excluded from the assessment of effectiveness are recorded in current period earnings in Miscellaneous income and other gains (losses), net in the Combined Statements of Comprehensive Income. Derivatives not Designated as Hedges: For derivatives not designated as a hedging instrument, the related change in fair value is recorded in current period earnings in Miscellaneous income and other gains (losses), net in the Combined Statements of Comprehensive Income. 109

112 Financial Statement Impact of Derivatives The following tables present the gross fair value, offsetting and net exposure amounts of derivative assets and derivative liabilities. The fair value of derivative contracts are presented as Derivative assets and Derivative liabilities on the Combined Statements of Condition, and are presented net for counterparties with master netting agreements. (in thousands) Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value As of December 31, Assets Liabilities Assets Liabilities Assets Liabilities Derivatives designated as hedging instruments: Receive-fixed swaps $74,360 $ -- $149,085 $ -- $227,736 $ -- Pay-fixed and amortizing pay-fixed swaps 42,091 34,744 1,055 87, ,428 Floating-for-floating and amortizing floating-for-floating swaps -- 7, , ,829 Total derivatives designated as hedging instruments 116,451 41, ,140 98, , ,257 Derivatives not designated as hedging instruments: Receive-fixed swaps Other derivative products Total derivatives not designated as hedging instruments Credit valuation adjustments (127) (306) -- Total gross amounts of derivatives $116,342 $41,817 $150,758 $98,848 $227,536 $104,558 Gross amounts offset in Combined Statements of Condition (41,636) (41,636) (80,503) (80,503) (87,092) (87,092) Net amounts in Combined Statements of Condition $74,706 $181 $70,255 $18,345 $140,444 $17,466 (in thousands) As of December 31, Derivative assets, net $74,706 $70,255 $140,444 Derivative liabilities, net (181) (18,345) (17,466) Accrued interest on derivatives, net 4,911 12,740 18,990 Gross amounts not offset in Combined Statements of Condition: Cash collateral pledged by counterparties (24,170) (22,320) (103,120) Cash collateral pledged to counterparties 4, Securities posted as collateral from counterparties (12,356) (19,121) -- Net exposure amounts $47,164 $23,209 $38,848 The fair value of derivatives includes credit valuation adjustments (CVA). The CVA reflects credit risk of each derivative counterparty to which AgriBank has exposure, net of any collateral posted by the counterparty, and an adjustment for AgriBank s credit worthiness where the counterparty has exposure to AgriBank. The favorable CVA in 2012 is due to our counterparties exposure to AgriBank. The change in the CVA for the period is included in Miscellaneous income and other gains (losses), net on the Combined Statements of Comprehensive Income. Fair Value Hedges: AgriBank recorded gains of $15 thousand and $7.7 million in 2013 and 2012, respectively, and a loss of $7.0 million in 2011, related to receive-fixed swaps which are designated as fair value hedging instruments on the Statements of Comprehensive Income. The gains and losses on the derivative instruments are recognized in Interest expense on the Combined Statements of Comprehensive Income. 110

113 Cash Flow Hedges: The following table presents the amount of Other Comprehensive Income (OCI) recognized on derivatives. The gain (loss) on derivatives designated as hedges reclassified from accumulated other comprehensive income (AOCI) into income is included in Interest expense on the Combined Statements of Comprehensive Income. During the next 12 months, net losses in AOCI of approximately $8.9 million on derivative instruments that qualify as cash flow hedges are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to reduce net interest income related to the respective hedged items. (in thousands) For the year ended December 31, 2013 Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) and Amount Excluded from Effectiveness Testing Pay-fixed and amortizing pay-fixed swaps $93,526 $489 $20 Floating-for-floating and amortizing floating-for-floating swaps 4, Other derivative products -- (296) -- Total $97,947 $193 $20 (in thousands) For the year ended December 31, 2012 Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) and Amount Excluded from Effectiveness Testing Pay-fixed and amortizing pay-fixed swaps $5,905 $489 $22 Floating-for-floating and amortizing floating-for-floating swaps Other derivative products -- (393) -- Total $6,458 $96 $22 (in thousands) For the period ended December 31, 2011 Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) and Amount Excluded from Effectiveness Testing Pay-fixed and amortizing pay-fixed swaps $(84,865) $634 $85 Floating-for-floating and amortizing floating-for-floating swaps (5,931) 1, Other derivative products -- (1,534) -- Total $(90,796) $629 $85 Derivatives not Designated as Hedges: During 2013, AgriBank and one affiliated Association recorded $102 thousand of net gains, related to receive-fixed swaps and TBAs which are not designated as hedging instruments on the Combined Statements of Comprehensive Income. This was compared to AgriBank recording $13.6 million of net losses for 2012 and $25 thousand of net gains for 2011, related to receive-fixed swaps. The gains and losses on the derivatives instruments are recognized in Miscellaneous income and other gains (losses), net on the Combined Statements of Comprehensive Income. The losses during 2012 primarily represented swaps AgriBank purchased from another System Bank in October 2008 that became ineffective in March 2012, requiring that the market value of the swaps be recognized on a mark-to-market basis. These losses were partially offset by gains of $8.2 million recognized in Interest expense on the Combined Statements of Comprehensive Income, representing the amortization of the fair value adjustment recorded on hedged debt for the period the hedge was deemed effective. With the discontinuance of hedge accounting, the fair value adjustment is amortized to income over the remaining life of the hedged item using the effective interest method. These swaps matured in October

114 NOTE 19 Accumulated Other Comprehensive Income (Loss) Changes in Components of Accumulated Other Comprehensive Income (Loss) (in thousands) Not-other-than- Other-than- Derivatives Employee temporarily-impaired temporarily-impaired and Hedging Benefit Plans Investments Investments Activity Activity Total Balance at December 31, 2010 $(25,461) $(48,703) $(12,228) $(347,137) $(433,529) Other comprehensive income (loss) before reclassifications 11,931 (5,102) (90,796) (124,091) (208,058) Amounts reclassified from accumulated other comprehensive income (loss) 4,141 18,823 (629) 25,156 47,491 Net other comprehensive income (loss) 16,072 13,721 (91,425) (98,935) (160,567) Balance at December 31, 2011 $(9,389) $(34,982) $(103,653) $(446,072) $(594,096) Other comprehensive income (loss) before reclassifications 18,665 33,186 6,458 (102,260) (43,951) Amounts reclassified from accumulated other comprehensive income (loss) 4,770 20,715 (96) 29,334 54,723 Net other comprehensive income (loss) 23,435 53,901 6,362 (72,926) 10,772 Balance at December 31, 2012 $14,046 $18,919 $(97,291) $(518,998) $(583,324) Other comprehensive income (loss) before reclassifications (15,648) (10,193) 97, , ,697 Amounts reclassified from accumulated other comprehensive income (loss) 357 1,526 (193) 41,387 43,077 Net other comprehensive income (loss) (15,291) (8,667) 97, , ,774 Balance at December 31, 2013 $(1,245) $10,252 $463 $(324,020) $(314,550) In the third quarter 2013, AgriBank adjusted the accumulated other comprehensive income classifications of other-than-temporarily-impaired and not-other-than-temporarily-impaired investments to correct for a misclassification between these two categories. AgriBank has determined that the effect of this misclassification is immaterial for prior periods presented. Reclassifications out of Accumulated Other Comprehensive Income (Loss) (in thousands) Accumulated Other Comprehensive Income (Loss) Components Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Combined Statements of Comprehensive Income For the year ended December 31, Not-other-than-temporarily-impaired investments: Impairment losses $357 $4,770 $4,141 Net impairment losses recognized in earnings Other-than-temporarily-impaired investments: Impairment losses 1,526 20,715 18,823 Net impairment losses recognized in earnings Derivatives and hedging activity: Interest rate contracts (193) (96) (629) Interest expense Employee benefit plans activity: Prior service cost (1,895) (1,814) (1,680) Actuarial loss 43,282 31,148 26,836 41,387 29,334 25,156 Total reclassifications $43,077 $54,723 $47,491 Salaries and employee benefits 112

115 NOTE 20 Subsequent Events We have evaluated subsequent events through March 14, 2014, which is the date the financial statements were available to be issued. There have been no material subsequent events that would require recognition in our 2013 Combined Financial Statements or disclosure in the Notes to those Combined Financial Statements, except as noted below. On January 1, 2014, certain affiliated Associations sold $138.8 million of noncancelable operating leases and finance leases to Farm Credit Leasing. These entities simultaneously purchased an interest in the cash flows of the leases sold which resulted in a $1.0 million gain. AgriBank leveraged its preferred stock for the benefit of the District on March 5, 2014 when its Board approved an amendment to its capital plan which reduced the base required stock investment for OFIs from 2.5% to 2.25% effective March 31, NOTE 21 AgriBank Only Financial Data (in thousands) As of December 31, Loans $73,677,222 $69,698,631 $62,043,002 Allowance for loan losses 10,100 13,275 9,208 Net loans 73,667,122 69,685,356 62,033,794 Cash, federal funds and investment securities 13,541,108 12,071,431 10,417,633 Accrued interest receivable 344, , ,390 Other assets 173, , ,195 Total assets $87,725,991 $82,299,203 $73,110,012 Bonds and notes $81,889,124 $77,135,503 $68,262,550 Subordinated notes 500, , ,000 Other liabilities 415, , ,275 Total liabilities 82,804,673 78,043,422 69,303,825 Total shareholders' equity 4,921,318 4,255,781 3,806,187 Total liabilities and shareholders' equity $87,725,991 $82,299,203 $73,110,012 For the year ended December 31, Interest income $1,342,748 $1,406,600 $1,519,010 Interest expense 818, ,693 1,061,340 Net interest income 523, , ,670 (Reversal of) provision for loan losses (4,000) 7,400 8,551 Net interest income after (reversal of) provision for loan losses 527, , ,119 Net other income (35,745) (37,700) (15,799) Net income $563,586 $514,207 $464,

116 Payment of patronage and/or dividends is allowed under AgriBank bylaws if the distribution is in accordance with applicable laws and regulations, including FCA regulations. AgriBank s patronage distributions totaled $335.1 million, $313.2 million and $289.8 million for 2013, 2012 and 2011, respectively. No dividends were paid during 2013, 2012 or There was $2.7 million of preferred stock dividends accrued at December 31, 2013, which were paid in cash in January NOTE 22 Condensed Average Balance Sheets (Unaudited) Condensed Balance Sheets on an Average Daily Balance Basis (in thousands) As of December 31, Net loans $77,754,757 $70,579,638 $65,201,738 Cash, federal funds, investment securities and other earning assets 15,102,091 13,927,081 13,228,300 Accrued interest receivable 853, , ,770 Other assets 1,284,666 1,334,752 1,420,820 Total assets $94,995,405 $86,679,742 $80,695,628 Bonds and notes $77,794,044 $71,161,098 $66,534,352 Subordinated notes 600, , ,000 Other liabilities 1,262,941 1,233,810 1,212,124 Total liabilities 79,656,985 72,994,908 68,346,476 Shareholders' equity 15,338,420 13,684,834 12,349,152 Total liabilities and shareholders' equity $94,995,405 $86,679,742 $80,695,

117 NOTE 23 Quarterly Financial Information (Unaudited) Select Quarterly Financial Information (in thousands) 2013 First Second Third Fourth Total Interest income $814,301 $818,052 $845,824 $861,990 $3,340,167 Interest expense 207, , , , ,880 Net interest income 606, , , ,142 2,512,287 (Reversal of) provision for credit losses 1,822 (4,922) (9,614) (15,823) (28,537) Net other expenses 177, , , , ,434 Net income $427,946 $422,408 $499,846 $480,190 $1,830, First Second Third Fourth Total Interest income $798,959 $801,106 $819,738 $823,475 $3,243,278 Interest expense 252, , , , ,824 Net interest income 546, , , ,815 2,311,454 Provision for (reversal of) credit losses (16,561) (2,132) 40,737 11,863 33,907 Net other expenses 165,094 83, , , ,158 Net income $398,081 $483,466 $397,223 $440,619 $1,719, First Second Third Fourth Total Interest income $808,416 $811,248 $813,854 $809,629 $3,243,147 Interest expense 281, , , ,998 $1,070,810 Net interest income 526, , , ,631 $2,172,337 Provision for (reversal of) credit losses 25,022 13,136 17,118 (31,639) $23,637 Net other expenses 157, , , ,846 $608,906 Net income $344,142 $366,145 $397,083 $432,424 $1,539,

118 Disclosure Information Required by Regulations AgriBank, FCB and Affiliated Associations (Unaudited) (In whole dollars unless otherwise noted) Description of Business General information regarding the business is incorporated herein by reference from Note 1 to the combined financial statements included in this Annual Report. The description of significant business developments, if any, is incorporated herein by reference from the "Management's Discussion and Analysis" section included in this Annual Report. Description of Property Affiliated Associations own and lease various facilities across the District. These are described in the individual affiliated Association annual shareholder reports. AgriBank's headquarters is located in St. Paul, Minn. and is leased. Legal Proceedings Information regarding legal proceedings is incorporated herein by reference from Note 15 to the combined financial statements included in this Annual Report. Description of Capital Structure Information regarding capital structure is incorporated herein by reference from Note 10 to the combined financial statements included in this Annual Report. Description of Liabilities Information regarding liabilities is incorporated herein by reference from Notes 7, 8, 9, 10, 11, 12, 15, 16, 17 and 18 to the combined financial statements included in this Annual Report. Selected Financial Data "Combined Five-Year Summary of Selected Financial Data," included in this Annual Report, is incorporated herein by reference. Management's Discussion and Analysis "Management's Discussion and Analysis," included in this Annual Report, is incorporated herein by reference. 116

119 Board of Directors of AgriBank, FCB The Board of Directors is organized into the following committees to carry out Board responsibilities: The Audit Committee oversees financial reporting, the adequacy of our internal control systems, the scope of AgriBank s internal audit program, the independence of the outside auditors, the processes for monitoring compliance with laws and regulations and the code of ethics. The Audit Committee also oversees the adequacy of management s action with respect to recommendations arising from auditing activities; The Finance Committee monitors AgriBank s financial and capital planning, asset/liability management and funding and investment activities. Committee members serve as a resource to the Board by maintaining a more in-depth knowledge of AgriBank s financial activities; The Governance Committee addresses issues of Board governance and the Board s continuing efforts to strengthen and renew the Board, administers a process for maintaining and periodically reviewing board policies and administers a planning process focused upon achieving AgriBank s mission and maintaining a viable, competitive institution; The Human Resources Committee oversees and provides overall direction and/or recommendations for compensation, benefits and human resource performance management programs; and The Risk Management Committee oversees the integration of risk management activities throughout AgriBank s organization. Committee members review ongoing risk assessments of current and emerging risks to ensure adequate planning and resources are directed at managing the identified risks. The Committee also establishes and promotes an effective risk culture throughout AgriBank s organization. Information regarding AgriBank directors who served as of December 31, 2013, including business experience for the last five years, is presented below: Richard Davidson, Board chair, is a self-employed grain and livestock farmer in Washington Court House, Ohio. His current term began in 2013 and expires in Mr. Davidson serves on the Risk Management Committee and also serves on the Finance Committee. Mr. Davidson serves on the AgriBank District Farm Credit Council Board and serves on the Board of the Federal Agricultural Mortgage Corporation (Farmer Mac). Douglas Felton, Board vice chair, is a self-employed grain farmer in Northfield, Minn. His current term began in 2012 and expires in Mr. Felton serves on the Governance Committee. He is also a director of D&T Enterprise of Minnesota, Inc., Randolph, Minn., which is engaged in custom harvesting and is a director of Great Western Industrial Park, LLC, Cannon Falls, Minn., which is an industrial development company. He also serves on the AgriBank District Farm Credit Council Board, National Farm Credit Council Board, Washington, D.C., and is also the chair of the Farm Credit System s Coordinating Committee. Ed Breuer is a self-employed grain and livestock farmer in Mandan, N.D. His current term began in 2011 and expires in Mr. Breuer serves as the vice chair of the Governance Committee. He serves on the AgriBank District Farm Credit Council Board and is also a director of Farm Credit Services of Mandan, ACA, Mandan, N.D. Ernie Diggs is a self-employed crop farmer in Paris, Tenn. His current term began in 2012 and expires in Mr. Diggs serves on the Human Resources Committee. 117

120 Thomas Klahn is a self-employed grain farmer in Lodi, Wis. His current term began in 2013 and expires in Mr. Klahn serves on the Human Resources Committee. He serves on the AgriBank District Farm Credit Council Board and National Farm Credit Council Board, Washington, D.C. Natalie Laackman, appointed director, Wilmette, Ill., is chief financial officer and vice president of Finance of Global Information Systems and of the specialty channels division of The Kellogg Company, a multinational food manufacturing company. Her current term began in 2013 and expires in Ms. Laackman serves as vice chair and financial expert of the Audit Committee. Lyndon Limberg is a self-employed farmer in Gary, S.D. His current term began in 2011 and expires in Mr. Limberg serves on the Governance Committee and AgriBank District Farm Credit Council Board. Mr. Limberg also serves on the Board of the Antelope Valley Reformed Church in Gary, S.D. James McElroy is a self-employed grain farmer in Waverly, Ky. His current term began in 2010 and expires in Mr. McElroy serves on the Audit and Risk Management Committees. He is also on the Board of the Federal Agricultural Mortgage Corporation (Farmer Mac) and serves on the Audit, Governance and Marketing Committees of that organization. Mr. McElroy is also a director of Union County Soil and Conservation District in Morganfield, Ky., a natural resource conservation organization. Brian Peterson is a self-employed dairy and crop farmer in Trenton, Mo.. His current term began in 2012 and expires in Mr. Peterson serves on the Audit Committee. Mr. Peterson also serves on the Rural Dale Cemetery Association Board. Tim Rowe is a self-employed grain farmer in Elwood, Neb. His current term began in 2010 and expires in Mr. Rowe serves on the Finance Committee. He is also a director of All Point Cooperative in Gothenburg, Neb. John Schable is a self-employed grain farmer in Tuscola, Ill. His current term began in 2013 and expires in Mr. Schable serves as the chair of the Governance Committee and serves on the Risk Management Committee. John Schmitt is a self-employed grain and beef cattle farmer in Quincy, Ill. His current term began in 2011 and expires in Mr. Schmitt serves as vice chair of the Finance Committee. He is also a director of 1 st Farm Credit Services, ACA, Normal, Ill. and Adams County Illinois Farm Bureau. William Stutzman is a self-employed crop farmer in Blissfield, Mich. and President of Ogden Communications, Inc. His current term began in 2010 and expires in Mr. Stutzman serves as chair of the Audit Committee. He is also a director of GreenStone Farm Credit Services, ACA, Lansing, Mich., where he serves on its Audit Committee. He also serves on the Farm Credit Foundations Board, Farm Credit Foundations Plan Sponsor Committee, and as vice chair of the Farm Credit Foundations Coordinating Committee. Roy Tiarks is a self-employed grain and livestock farmer in Council Bluffs, Iowa. His current term began in 2013 and expires in Mr. Tiarks serves on the Finance Committee and serves on the Risk Management Committee. He is also a director of the Federal Farm Credit Banks Funding Corporation in Jersey City, N.J. Keri Votruba is a self-employed grain and livestock farmer in Hemingford, Neb. His current term began in 2012 and expires in Mr. Votruba serves as the chair of the Human Resources Committee. 118

121 Matt Walther is a self-employed crop and cow/calf herd and finished cattle farmer in Centerville, Ind. His current term began in 2011 and expires in Mr. Walther serves as chair of the Finance Committee. Leon Westbrock, appointed director, Alexandria, Minn., retired from CHS Inc., a U.S.-based diversified energy, grains and foods company owned by farmers, ranchers and cooperatives headquartered in Inver Grove Heights, Minn. His term began in 2011 and expires in Mr. Westbrock serves as the vice chair of the Human Resources and the Risk Management Committees. Thomas Wilkie, III, is a self-employed grain farmer and owner of a drainage supply company in Forrest City, Ark. His current term began in 2010 and expires in Mr. Wilkie serves on the Audit Committee and also serves as the chair of the Risk Management Committee. He also is a director of St. Francis County Farmers Association, Palestine, Ark. Mr. Wilkie also serves on the AgriBank District Farm Credit Council Board and is on the Board of the National Farm Credit Council, Washington, D.C. Information regarding days served and compensation paid during 2013 for each AgriBank director follows: Days Served Board Other Compensation Meetings Activities Paid in 2013 Richard Davidson $55,592 Douglas Felton ,642 Ed Breuer ,642 Timothy Clayton** ,898 Ernie Diggs ,592 Thomas Klahn ,642 Natalie Laackman* ,694 Lyndon Limberg ,592 James McElroy ,592 Brian Peterson ,592 Tim Rowe ,642 John Schable ,592 John Schmitt ,592 William Stutzman ,592 Roy Tiarks ,592 Keri Votruba ,642 Matt Walther ,592 Leon Westbrock ,592 Thomas Wilkie, III ,592 Total $1,005,906 * Elected to Board in 2013 ** Term expired in 2013 Days served in the preceding chart represent actual days at Board meetings and activities. Board members also spend additional time in preparation for meetings and in travel to and from meetings. The Board members receive an annual retainer which is paid quarterly for attendance at meetings and other official activities. Directors are also reimbursed for reasonable expenses incurred. 119

122 Senior Officers of AgriBank, FCB The senior officers of AgriBank, FCB at December 31, 2013 included: L. William York, Chief Executive Officer Ruth L. Anderson, Vice President, Business Services Patricia G. Jones, Vice President, Human Resources and Administration Jeffrey L. Moore, Senior Vice President, Finance Brian J. O Keane, Executive Vice President, Banking and Finance and Chief Financial Officer Jeffrey R. Swanhorst, Executive Vice President, Credit and Chief Credit Officer William J. Thone, Vice President and General Counsel Mr. York became chief executive officer in January Mr. York serves as a director of the National Council of Farmer Cooperatives and serves on the Board of the Federal Farm Credit Banks Funding Corporation. Ms. Anderson became vice president, Business Services in March Prior to this she served as director, Information Services for AgriBank beginning Ms. Jones became vice president, Human Resources and Administration in April Prior to joining AgriBank she served as head, HR NAFTA Technology for Syngenta. Prior to this she served as vice president Human Resources for Agriliance, a joint venture of Land O Lakes, Inc. and CHS, Inc. Mr. Moore became senior vice president, Finance in August Prior to this he served as vice president and controller for AgriBank beginning in Mr. O Keane joined AgriBank in September 2007 as senior vice president and chief financial officer. Mr. O Keane became executive vice president, Banking and Finance and chief financial officer in January Mr. Swanhorst became executive vice president, Credit and chief credit officer in August Prior to joining AgriBank he served as senior vice president of Credit for CoBank, ACB. Mr. Thone became vice president and general counsel in September AgriBank, FCB Senior Officer Compensation All senior officers, including the chief executive officer (CEO), are compensated with a mix of salary, short-term and long-term incentives as well as various AgriBank Farm Credit District post-employment benefit plans. The Human Resources Committee of the Board determines the appropriate levels and mix of short-term and longterm incentives in a responsible manner. Annual compensation for senior officers is intended to be competitive with annual compensation for comparable positions at peer organizations. The Human Resources Committee engages a consulting firm to conduct an independent review of external benchmark data on a regular basis for senior officers. Our compensation philosophy enables us to attract and retain highly qualified senior officers with the requisite skills and experience to achieve our desired business results, including our mission to ensure that safe, sound and reliable sources of credit and related services are provided to rural America. Salary: Senior officer base salaries reflect the officer s experience and level of responsibility. The base salary of the CEO is subject to review and approval by the Board. 120

123 Short-term Incentive Compensation: Annually, a short-term incentive compensation program is available to all employees, including senior officers, based upon AgriBank performance criteria established by the Board and personal objectives established by employees and their managers. The criteria for AgriBank performance objectives include: financial measures of net operating rate, adverse credit quality ratio and return on equity ratio as well as client measures of client satisfaction and performance. For 2014, the AgriBank performance objectives have been adjusted to replace the financial measure of net operating rate with an efficiency ratio. The short-term incentive compensation amounts are calculated after the end of the plan year (calendar year) and are generally paid out in a lump sum within 90 days of year-end. Long-term Incentive Compensation: The CEO and certain senior officers also receive long-term incentive compensation. The long-term incentive compensation amounts are determined based upon three-year performance criteria established by the Board. A new three-year plan is established each year. The criteria are based on AgriBank s performance and include three potential incentive levels based on cumulative net income, average return on assets and CIPA asset quality at the end of each three-year period. In addition, the Board, in its sole discretion, may increase or decrease the amount of any incentive calculated. The long-term incentive compensation amounts are calculated annually and are generally paid out in a lump sum within 90 days of the final three-year plan year. Additionally, long-term incentive compensation was provided to a new senior officer on a phased in basis during the initial three years of participation in the long-term incentive program. Annual long-term incentive amounts reflect long-term incentives earned in the applicable year based on an estimate of the total incentive over the three-year period. Perquisites: Perquisites may include compensation associated with any company-paid vehicles, group term life and long-term disability insurance premiums, taxable reimbursements and commuting assistance, as applicable. As of April 1, 2012, company-paid vehicles are no longer provided to any senior officers. The senior officers did not receive any additional noncash compensation during any year presented. Other: Other includes severance and a service award in 2013 and a sign-on bonus and service awards in Beginning in 2013, Other also includes any changes in the value of pension benefits. The change in value of the pension benefits is defined as the change in the vested portion of the present value of the accumulated benefit obligation from December 31, 2012 to December 31, 2013 for the AgriBank District Retirement Plan and Pension Restoration Plan, as applicable, as disclosed in Note 12 to the financial statements. This value is not reflected for 2012 or The Other category also includes employer contributions to the AgriBank District Retirement Savings Plan which is available to all employees, including senior officers. For comparability, disclosures for 2012 and 2011 have been modified to include these employer contributions. A significant component of the increase in Other in 2013 was due to a regulatory change in which Other included changes in the value of pension benefits (beginning in 2013). Another significant component of the increase in Other within the aggregate number of senior officers and highly compensated individuals was due to severance. Retirement Plans: The AgriBank District has various post-employment benefit plans which are generally available to all AgriBank employees, including the CEO and senior officers, based on dates of service to AgriBank and are not otherwise differentiated by position, unless specifically stated. Information regarding the postemployment benefit plans is incorporated herein by reference from Notes 2 and 12 to the financial statements included in this Annual Report. Senior officers and certain other individuals over a specified salary amount have an option to defer payments of their salary as well as payments under both the short-term and long-term incentive programs in accordance with applicable laws and regulations. Total amounts deferred by the CEO were $195 thousand, $241 thousand and $159 thousand during 2013, 2012 and 2011, respectively. Total amounts deferred by senior officers and other 121

124 highly compensated individuals (excluding the CEO) were $132 thousand and $5 thousand during 2013 and 2012, respectively. There were no amounts deferred by senior officers and other highly compensated individuals during Preceding deferral amounts for salary and short-term incentive compensation are disclosed in the year in which they are earned, while deferral amounts for long-term incentive compensation are reflected in the year of the final three year plan year. The 2013 amounts for incentive compensation deferred are estimated based on calculated incentives and deferral elections in place. Compensation paid to the Senior Officers and Highly Compensated Individuals (in thousands) Short-term Long-term Incentive Incentive Name of Individual Year Salary Compensation Compensation Perquisites Other *** Total CEO: L. William York 2013 $607 $533 $438 $13 $243 $1,834 L. William York ,446 L. William York ,203 Aggregate Number of Senior Officers (Count and compensation does not include CEO): 8 * 2013 $2,450 $1,200 $514 $61 $920 $5, ,750 1, ,353 7 ** , ,685 * Count and dollars include two Highly Compensated Individuals ** Count and dollars include amounts for our former Chief Credit Officer who retired in December *** A significant component of the increase in "Other" in 2013 was due to a regulatory change in which "Other" included changes in the value of pension benefits (beginning in 2013). Another significant component of the increase in "Other" within the aggregate number of senior officers and highly compensated individuals was due to severance. Farm Credit Administration (FCA) regulations require the disclosure of the compensation paid during the last three fiscal years to all senior officers included in the above table to AgriBank shareholders and shareholders of related institutions upon request. On October 3, 2012, FCA adopted a regulation that requires all System institutions to hold advisory votes on the compensation for all senior officers and/or the CEO when the compensation of either the CEO or the senior officer group increases by 15 percent or more from the previous reporting period. In addition, the regulation requires associations to hold an advisory vote on CEO and/or senior officer compensation when 5 percent of the voting stockholders petition for the vote and to disclose the petition authority in the annual report to shareholders. The regulation became effective December 17, 2012, and the base year for determining whether there is a 15 percent or greater increase was No affiliated Association has held an advisory vote based on a stockholder petition in On January 17, 2014, the President signed into law the Consolidated Appropriations Act which includes language prohibiting the FCA from using any funds available to to implement or enforce the regulation. In addition, on February 7, 2014, the President signed into law the Agricultural Act of A specific section of the law directs FCA to within 60 days of enactment of the law review its rules to reflect the Congressional intent that a primary responsibility of boards of directors of Farm Credit System institutions, as elected representatives of their stockholders, is to oversee compensation practices. On March 13, 2014, the FCA Board approved an interim final rule to remove all requirements related to advisory votes at FCS institutions. The interim final rule will become effective 30 days after publication in the Federal Register during which either body of Congress is in session. 122

125 Pension Benefits Attributable to Senior Officers and Highly Compensated Individuals (in thousands) Present Value Payments 2013 Years of of Accumulated Made During the Name of Individual Plan Credited Service Benefits Reporting Period CEO: L. William York AgriBank District Retirement Plan 23.9 $482 $ -- AgriBank District Pension Restoration Plan 23.9 $552 $ -- Aggregate Number of Senior Officers/Highly Compensated Individuals (Count and dollars do not include CEO): 4 AgriBank District Retirement Plan 30.0 $5,126 $ -- 4 AgriBank District Pension Restoration Plan 30.0 $27 $ -- Travel, Subsistence and Other Related Expenses Directors and senior officers are reimbursed for reasonable travel, subsistence and other related expenses associated with AgriBank and the District s business functions. AgriBank Directors were reimbursed for expenses in the amount of $251,147, $210,173 and $233,923 in 2013, 2012 and 2011, respectively. A copy of AgriBank s policy for reimbursing these costs is available by contacting AgriBank at the address provided in the Financial Statements section below. Transactions with Senior Officers and Directors Information regarding related party transactions is incorporated herein by reference from Note 13 to the combined financial statements included in this Annual Report. Involvement in Certain Legal Proceedings There were no events during the past five years that are material to evaluating the ability or integrity of any person who served as a director or senior officer of AgriBank on January 1, 2014 or at any time during Shareholder Privacy Shareholders nonpublic personal financial information is protected by FCA Regulations. AgriBank and the affiliated Associations directors and employees are restricted from disclosing information not normally contained in published reports or press releases about AgriBank, the affiliated Associations or their shareholders. Relationship with Qualified Public Accountant There were no changes in independent auditors since the last Annual Report to members and we are in agreement with the opinion expressed by the independent auditors. The total financial statement audit fees paid in the District during 2013 were $1.5 million. There were $3 thousand of non-audit related services related to the approval of AgriBank s issuance of preferred stock, which were pre-approved by AgriBank s Audit Committee. In addition, $240 thousand and $142 thousand of audit-related fees were paid, respectively, related to the issuance of comfort letters for the AgriBank and an affiliated Association, AgStar Financial Services, ACA, preferred stock offerings. There were no other audit, tax or non-audit related services paid in

126 Financial Statements The "Report of Management," Independent Auditor s Report," Combined Financial Statements and "Notes to Combined Financial Statements," included in this Annual Report, are incorporated herein by reference. Copies of the annual and quarterly reports are available free of charge upon request to AgriBank, 30 E. 7 th St., Suite 1600, St. Paul, MN , (651) or by at financialreporting@agribank.com. The reports are also available through AgriBank s website at The quarterly reports are available approximately 40 days following the end of each calendar quarter and the Annual Report is available approximately 75 days following the end of the year. Equal Employment Opportunity AgriBank and the affiliated Associations are equal opportunity employers. It is our policy to provide equal employment opportunity to all persons regardless of race, color, religion, national origin, sex, age, disability, veteran status, genetic information, sexual orientation, creed, marital status, status with regard to public assistance, membership or activity involving a local human rights commission, or any other characteristic protected by law. We comply with all state and local equal employment opportunity regulations. We conduct all personnel decisions and processes relating to our employees and job applicants in an environment free of discrimination and harassment. 124

127 Young, Beginning and Small Farmers and Ranchers (Unaudited) As part of the Farm Credit System s commitment to rural America, the affiliated Associations have specific programs in place to serve the credit and related needs of young, beginning and small farmers and ranchers in their territories. The definitions of young, beginning and small farmers and ranchers follow: Young: A farmer, rancher, or producer or harvester of aquatic products who is age 35 or younger as of the loan transaction date. Beginning: A farmer, rancher, or producer or harvester of aquatic products who has 10 years or less farming or ranching experience as of the loan transaction date. Small: A farmer, rancher, or producer or harvester of aquatic products who normally generates less than $250 thousand in annual gross sales of agricultural or aquatic products. It is important to note that a farmer/rancher may be included in multiple categories based on meeting specific definitions. A more detailed discussion of affiliated Association s programs for young, beginning and small farmers can be found in their respective Annual Reports. Young and Beginning Farmers and Ranchers Served by the AgriBank District (outstanding volume in thousands) Actual Number of As of December 31, 2013 Loans Volume Total District loans and commitments 639,433 $98,393,866 Loans and commitments to young farmers and ranchers 120,979 $13,925,406 % of loans and commitments to young farmers and ranchers 18.9% 14.2% Loans and commitments to beginning farmers and ranchers 157,478 $18,377,742 % of loans and commitments to beginning farmers and ranchers 24.6% 18.7% New Loans Made to Young and Beginning Farmers and Ranchers Served by the AgriBank District (volume in thousands) Actual Number of For the year ended December 31, 2013 New Loans Volume Total District new loans and commitments 254,957 $36,472,838 New loans and commitments to young farmers and ranchers 41,838 $5,143,823 % of new loans and commitments to young farmers and ranchers 16.4% 14.1% New loans and commitments to beginning farmers and ranchers 48,807 $5,699,997 % of new loans and commitments to beginning farmers and ranchers 19.1% 15.6% Small Farmers and Ranchers Served by the AgriBank District (outstanding volume in thousands) Loan Size $50 thousand $50 to $100 $100 to 250 Over $250 As of December 31, 2013 or less thousand thousand thousand Total Total District number of loans and commitments 341, , ,492 76, ,433 Number of loans and commitments to small farmers and ranchers 179,095 56,001 54,018 17, ,204 % of loans and commitments to small farmers and ranchers 52.4% 53.4% 46.4% 22.4% 47.9% Total District loans and commitments $6,212,462 $7,717,907 $18,626,539 $65,836,958 $98,393,866 Loans and commitments to small farmers and ranchers $3,240,933 $4,100,195 $8,395,827 $7,676,723 $23,413,678 % of loan and commitment volume to small farmers and ranchers 52.2% 53.1% 45.1% 11.7% 23.8% 125

128 New Loans Made to Small Farmers and Ranchers Served by the AgriBank District (volume in thousands) Loan Size $50 thousand $50 to $100 $100 to 250 Over $250 For the year ended December 31, 2013 or less thousand thousand thousand Total Total District number of new loans and commitments 152,226 31,798 35,582 35, ,957 Number of new loans and commitments to small farmers and ranchers 67,156 13,979 11,568 3,928 96,631 % of new loans and commitments to small farmers and ranchers 44.1% 44.0% 32.5% 11.1% 37.9% Total District new loans and commitments $2,404,700 $2,377,170 $5,758,208 $25,932,760 $36,472,838 Total new loans and commitments to small farmers and ranchers $1,039,508 $1,019,853 $1,798,719 $2,003,186 $5,861,266 % of loans and commitments to small farmers and ranchers 43.2% 42.9% 31.2% 7.7% 16.1% 126

129 Risk Factors AgriBank, FCB and Affiliated Associations In the course of conducting business operations, we are exposed to a variety of risks, some of which are inherent in the financial industry and others of which are more specific to our own business. The following discussion summarizes some of the more important risk factors that we face. This discussion is not exhaustive and there may be other risk factors that we face that are not described below. The risk factors described below, if realized, could negatively or positively affect our business, financial condition and future results of operations. AgriBank, FCB (AgriBank) and the other Banks in the Farm Credit System (the System) are liable for the debt of the System. AgriBank, along with the other Banks in the System, obtains funds for its lending activities and operations primarily from the sale by the Federal Farm Credit Banks Funding Corporation (the Funding Corporation) of Systemwide Debt Securities. The Systemwide Debt Securities are not obligations of and are not guaranteed by the United States of America or any agency or instrumentality thereof, other than the System Banks. Under the Farm Credit Act, each Bank is primarily liable for the portion of the Systemwide Debt Securities issued on its behalf. AgriBank is primarily liable for Systemwide Debt Securities AgriBank has issued. The Banks are also jointly and severally liable for interest payments on certain other debt securities issued individually by other Banks pursuant to Section 4.4(a)(1) of the Farm Credit Act (12 U.S.C. 2155(a)(1)) (the Co-Liability Statute ). However, the holders of outstanding subordinated debt that is subject to the Co-Liability Statute waived any right they may have pursuant to the Co-Liability Statute or otherwise to hold other Banks liable for interest payments on such subordinated debt. Additionally, each Bank is jointly and severally liable for the Systemwide Debt Securities issued on behalf of a Bank that is in default on its portion of the Systemwide Debt Securities and where the Farm Credit Insurance Fund (Insurance Fund) of Farm Credit System Insurance Corporation (FCSIC) is insufficient to cure the default. Although the Banks have established a system of mutual covenants and measures that are monitored on a quarterly basis, there is no assurance that these would be sufficient to protect a Bank from liability, should another Bank default and the Insurance Fund be insufficient to cure the default. The Insurance Fund is available from the FCSIC to ensure the timely payment by each Bank of its primary obligations on the Systemwide Debt Securities, and can also be used by the FCSIC for its operating expenses and for other mandatory and permissive purposes. Under the Farm Credit Act, before joint and several liability can be invoked, available amounts in the Insurance Fund would be utilized to make the payment on such obligations. There is no assurance, however, that the Insurance Fund will have sufficient resources to fund a Bank s defaulted payment of principal and interest on its portion of the Systemwide Debt Securities. If the Insurance Fund is insufficient, then the non-defaulting Banks must pay the default amount in proportion to their respective available collateral positions. Available collateral is collateral in excess of the aggregate of each Bank s collateralized obligations and is approximately equal to AgriBank s capital. The FCSIC does not insure any payments on the Series A Preferred Stock or any class of our common stock, preferred stock or subordinated debt. To the extent AgriBank must fund its allocated portion of another Bank s portion of the Systemwide Debt Securities as a result of its default on those securities, its earnings and capital would be reduced, possibly materially. 127

130 We are subject to regulation under the Farm Credit Act. AgriBank, along with the ACAs, FLCAs, PCAs, FCBs and related service organizations in the System, are subject to regulatory oversight and examination by the Farm Credit Administration (FCA) under the Farm Credit Act. A number of rules and regulations are imposed on the operations of the Banks under the Farm Credit Act. These rules and regulations currently include requirements to maintain regulatory capital at or above minimum levels for our permanent capital ratio, total surplus ratio, core surplus ratio and net collateral ratio. Although we currently meet these standards, if we were to fall below the prescribed standards, we would be precluded under the Farm Credit Act and FCA Regulations from paying patronage refunds or distributions or dividends on our preferred stock, including shares of Series A Preferred Stock. The FCA has broad discretionary authority to bring enforcement actions whenever we fall below these prescribed standards or when the FCA otherwise determines that our capital is insufficient, including, without limitation, the power to issue a capital directive or a cease and desist order. Our funding costs would increase if the System lost its status as a Government Sponsored Entity (GSE). The System is a GSE and, as a member of the System, we benefit from favorable debt-funding costs. Additionally, AgriBank s individual credit ratings are positively impacted by the GSE status of the System. The two largest housing GSEs, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, have been under increased public and Congressional scrutiny as a result of their significant operating losses and U.S. government efforts to strengthen their capital and provide liquidity for securities they issue. Congressional deliberations over structural reform related to these housing GSEs began in 2011 and are likely to continue for a number of years. The System has not been the subject of specific Congressional scrutiny, nor is it subject to the jurisdiction of the same Congressional committees as the housing GSEs. However, AgriBank believes there is at least some risk that further efforts to regulate GSEs could impact the System s status or erode some of the GSE-related benefits that it currently enjoys, including favorable funding costs and increased funding flexibility. Our funding costs could be negatively impacted by downgrades of the long-term U.S. sovereign credit rating and the System s long-term debt rating. As a member of the System, we have historically benefited from the favorable funding costs and funding flexibility associated with the debt securities issued through the Funding Corporation. AgriBank (as well as the other System Banks) is not legally authorized to accept deposits and therefore cannot use deposits as a funding source. Instead, AgriBank raises funds for its operations primarily through Systemwide Debt Securities issued on AgriBank s behalf by the Funding Corporation. The System is subject to periodic review by credit rating agencies. Any event that could have an adverse impact on the System s financial condition or results of operations may cause the rating agencies to downgrade, place on negative watch or change their outlook on the System s credit ratings. Also, changes in the credit ratings or credit ratings outlook of the U.S. government may influence changes in the System s credit ratings and credit ratings outlook given its status as a government-sponsored enterprise. In this regard, in August 2011, Standard & Poor s Ratings Services lowered its long-term sovereign credit rating for the U.S. to AA+ from AAA, and affirmed the A-1+ short-term rating. Their outlook on the long-term rating of the U.S. was negative. Consistent with such actions, Standard & Poor s Ratings Services lowered the long-term debt rating for the System to AA+ from AAA, affirmed its A-1+ short-term rating and revised their outlook on the longterm debt rating of the System to negative. Also in August 2011, Moody s Investors Service and Fitch Ratings affirmed the Aaa and AAA ratings of the U.S. and affirmed the System s Aaa and AAA long-term debt rating and our short-term debt as P-1 and F-1. However, Moody s Investors Service did change the ratings outlook of the U.S. and the System to negative. Similarly, in November 2011, Fitch Ratings, Inc. changed its outlook of the U.S. and the System from stable to negative. In June 2013, Standard & Poor s Ratings Services raised its 128

131 outlook on the U.S. sovereign rating to stable. Both Moody s Investors Service and Fitch Ratings maintain the triple-a ratings for U.S. government and agency securities. In July 2013, Moody s Investors Service updated the outlook of the U.S. government to stable from negative. In October 2013, Fitch Ratings updated the outlook of the U.S. government to rating watch negative. Notwithstanding these actions, to date we have continued to be able to access the funding necessary to support our lending and business operations. However, such actions and any future downgrades could negatively impact funding costs, earnings and funding flexibility for us and other System institutions. Our funding is dependent upon the System s ability to access the capital markets. The System s primary source of liquidity is the ability to issue Systemwide Debt Securities. This access has provided the System with a dependable source of low-cost debt. The System s ability to continue to issue Systemwide Debt Securities depends, in part, on the conditions in the capital markets at that time, which are outside the System s control. As a result, the System cannot make any assurances that it will be able to issue low-cost debt or issue any debt at all. If the System cannot issue low cost debt or cannot access the capital markets, the System s ability to access funding would be negatively impacted, which would have a negative effect on its financial condition and results of operations, which could be material. We are exposed to credit risk. In the course of our lending and investment activities, we are exposed to credit risk. Credit risk arises from changes in a borrower s or counterparty s ability or willingness to repay funds borrowed or meet agreed-to obligations, changes in collateral values and changes in prevailing economic environments. Some factors that can influence our credit risk exposure include, but are not limited to: a general slowdown in the global economy and the relationship of demand for, and supply of, U.S. agricultural commodities in a global marketplace; political or regulatory changes that disrupt or modify an established market; changes in farmland values; major international events, including a downturn in the world economy, military conflicts, political disruptions or trade agreements, which can affect, among other things, the price of commodities or products used or sold by our borrowers or their access to markets; continued weakness in the U.S. financial, housing and mortgage markets that may impact the carrying value of certain of our mortgage-related investment securities and the ability of our derivative counterparties to perform under the terms of their contracts; extreme seasonal or weather conditions (such as drought) or market-related risks that significantly affect agricultural production and commodity prices; the deteriorating credit quality or bankruptcy of market participants; changes in technology, regulations or shifts in demographics; changes in financial and credit markets, which could affect our ability to buy and sell loan exposures or issue debt; an outbreak of a wide-spread disease in human or livestock/poultry populations; federal subsidies for agriculture that may be reduced or eliminated, including the federal crop insurance program; and environmental conditions or laws impacting our lending activities. 129

132 We believe we maintain consistent and well-developed underwriting standards and industry-specific lending guidelines, which assist in managing credit risk. We also believe we maintain adequate allowance for credit losses inherent in the loan portfolio. Additionally, we are regulated by and believe we comply with standards set by the FCA. We minimize credit risk in our liquidity investment portfolio by investing primarily in securities issued or guaranteed by the U.S. government or one of its agencies. We employ many tools to manage credit risk exposures. While we believe these standards and tools are appropriate to manage our credit risk, there is no assurance that significant deterioration in credit quality will not occur, which would reduce our earnings, possibly materially. We are exposed to interest rate and counterparty risk. In the course of our lending and investment activities, we are subject to interest rate risk, which is defined as the risk of changes to future earnings or long-term market value of equity due to changes in interest rates. Interest rate risk arises from differences in timing between the contractual maturity, repricing characteristics and prepayments of its assets and the contractual maturity and repricing characteristics of the financing obtained to fund these assets. The risk can also arise from differences between the interest rate indices used to price our assets and the indices used to fund those assets. While AgriBank has asset/liability management policies, including risk limits, and strategies to actively manage the District s interest rate risk, including an Asset and Liability Committee composed of a cross-functional group of senior leaders, there can be no assurance that our interest rate risk management procedures will be effective or that changes in interest rates will not adversely impact our earnings and capital. We fund real estate mortgage loans and purchase mortgage-backed and asset-backed securities that are impacted by interest rates. Changes in interest rates can significantly impact the prepayment patterns of these assets and thus affect its earnings. AgriBank strives to manage or reduce this risk by match-funding debt securities issued to the maturities of its loans and investments and entering into interest-rate derivative transactions, and through the rebalancing of cash-flow mismatches of assets and liabilities. AgriBank s inability to match-fund debt securities to longer-term assets may increase the prepayment risks. AgriBank s overall interest rate risk management strategy incorporates the use of derivative financial instruments to enhance liquidity of its funding and to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility arising from maturity, repricing, prepayment and embedded option mismatches between AgriBank s assets and liabilities. By using derivative instruments, AgriBank is exposed to counterparty credit risk in the event of the failure by a counterparty to fulfill its performance obligations under a derivative contract. To minimize the risk of credit losses, AgriBank has developed credit risk management policies and procedures as well as counterparty credit requirements. AgriBank deals with either a central clearinghouse or with dealer counterparties that have an investment-grade or better credit rating from a major credit rating agency, and AgriBank closely monitors the credit standing and levels of exposure to individual counterparties. In addition, all derivative transactions are governed by master swap agreements, which include netting agreements. AgriBank s master agreements mitigate credit risk by requiring the net settlement of covered contracts with the same counterparty in the event of default by the other party. The net mark-to-market exposure represents the netting of the positive and negative exposures with that counterparty. The credit risk is further mitigated by setting threshold limits on the amount of uncollateralized net exposure to each respective counterparty determined by their credit rating. Collateral is normally exchanged on a weekly basis, but may be exchanged daily if needed. Even though we have a rigorous credit evaluation process and maintain collateral support annexes with AgriBank s derivative counterparties, the failure of a counterparty to perform on its obligations could reduce AgriBank s earnings. Furthermore, although AgriBank s credit evaluations take into account the possibility of default by a counterparty, AgriBank s ultimate exposure to a default by a counterparty could be greater than AgriBank s credit evaluation predicts. 130

133 We are exposed to risks associated with the agricultural industry. We are chartered to make loans as provided in the Farm Credit Act. Due to these statutory provisions, we have a significant concentration of lending to agricultural concerns. Earnings, loan growth and the credit quality of our lending portfolio can be impacted significantly by the general state of the agricultural economy. Regional agricultural economies within our territory can be impacted by weather, domestic and international demand for food and other agricultural products and other factors. Extreme seasonal conditions can substantially impact grain harvests and commodity prices and, ultimately, impact the credit quality of agricultural borrowers. In addition, declining land values are a potential lending risk following periods of sustained, rapid land value increases. Furthermore, the U.S. agricultural sector receives significant financial support from the U.S. government through payments authorized under federal legislation. While U.S. government support for agriculture has historically remained consistent, there is no assurance that such financial support will remain at current levels. The significant reduction or elimination of such support programs would have a negative impact on the credit quality of certain borrowers. As a result, our earnings could be reduced, possibly materially. Volatility in commodities prices, coupled with fluctuations in production expenses (including interest rates), may have an adverse impact on the cash flow and profitability of certain affiliated Associations borrowers as well as our participations, which, in turn, may negatively affect their ability to repay their loans. While certain borrowers are negatively impacted by these conditions, other borrowers may benefit. For example, decreased prices for grains will result in lower risk profiles for livestock producers, processors and marketers of grains and oilseeds, and borrowers that purchase corn or other grains for use in their products. However, grain farmers may be negatively impacted by lower prices. Volatility in the agricultural commodities market and the cost of farm inputs may adversely impact the credit quality of the System s loan portfolio and, as a result, negatively affect operating results. We may lend only to qualified borrowers in the agricultural and rural sectors and certain related entities and are subject to geographic lending restrictions. Unlike commercial banks and other financial institutions that lend to both the agricultural sector and other sectors of the economy, we are restricted solely to making loans and providing financial services to qualified, eligible borrowers in the agricultural and rural sectors and to certain related entities. In addition, we are subject to certain geographic lending restrictions. As a result, we do not have as much flexibility in attempting to diversify our loan portfolios as compared to commercial banks and other financial institutions. This concentration may limit our ability to offset adverse performance in one sector against positive performance in another sector like most diversified financial institutions. AgriBank is exposed to risks associated with its investments. AgriBank maintains a liquidity plan covering certain contingencies in the event AgriBank s access to normal funding mechanisms is not available. AgriBank purchases only high credit quality investments to best position its investment portfolio to be readily marketable and available to serve as a source of funding in the event of disruption of AgriBank s normal funding mechanisms. AgriBank s liquidity investment portfolio can also be used as collateral to borrow funds to meet obligations. 131

134 The majority of AgriBank s investment portfolio consists of securities issued or guaranteed by GSEs or the U.S. government, which remain liquid. The remainder of AgriBank s investment portfolio represents investments in commercial paper, federal funds, certificates of deposit, asset-backed securities, and non-agency mortgagebacked securities. In further support of AgriBank s liquidity, AgriBank has cash on deposit at the Federal Reserve Bank. In the past few years, the mortgage-backed securities and asset-backed securities markets have experienced considerable stress and reduced liquidity. Although this reduced liquidity has resulted primarily from investor concerns arising from increased delinquencies and foreclosures on subprime mortgage loans and the failure of several subprime and Alt-A mortgage lenders, it has not been limited solely to securities backed by those types of mortgage loans. Accordingly, if the markets for AgriBank s investments become less liquid, it may make it difficult for us to sell such investments if the need arises. In addition, because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of AgriBank s investments may differ significantly from the values that would have been used had a liquid market existed for the investments. We are subject to legal proceedings and legal compliance risks. We are subject to a variety of legal proceedings and legal compliance risks. We are at times reviewed by the FCA and other governmental authorities, which could lead to enforcement actions, fines and penalties or the assertion of private litigation claims and damages. While we believe that we have adopted appropriate risk management and compliance programs, legal and compliance risks will continue to exist and additional legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, will arise from time to time. We are subject to reputation risk. Reputation risk is the risk to earnings and capital arising from negative public opinion. Such risk encompasses the loss of confidence, trust and esteem among customers, investors, partners, policymakers, shareholders and other key stakeholders. Like all businesses, we are subject to a wide variety of reputation risks both within and outside our control, including credit difficulties with individual customers or industries, business disputes, lawsuits, credit market disruptions, regulatory events and public allegations of misconduct against associates. As a member of the System, we could also be indirectly impacted by events that damage the reputation of another System entity. The Board of Directors and our management regard our reputation as a critical asset and have implemented a number of policies, procedures and programs to ensure it is well protected. If market interest rates move contrary to our interest rate risk position, our earnings and the net present value of our interest-sensitive assets and liabilities will be adversely affected. We realize income primarily from the spread between interest earned on our loans and investments and the interest paid on borrowings. Also, it is expected that we will from time to time incur interest rate risk in the form of gaps in the interest rate sensitivities of our assets and liabilities, meaning that either our interestbearing liabilities will be more sensitive to changes in market interest rates than our interest earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, the gap will adversely affect earnings and the net present value of our interest-sensitive assets and liabilities. 132

135 We face intense competition from competitors, many of whom are substantially larger and have more capital and other resources than AgriBank and affiliated Associations. We face intense competition, primarily from mortgage banking companies, commercial banks, thrift institutions, insurance companies and finance companies. Many of these competitors in the financial services business are substantially larger and have more capital and other resources than AgriBank and affiliated Associations. Our future results may become increasingly sensitive to fluctuations in the volume and cost of their retail lending activities resulting from competition from other lenders and purchasers of loans. There can be no assurance that we will be able to continue to compete successfully in the markets served. An unfavorable change in U.S. tax laws or an adverse interpretation of existing tax laws could negatively impact our financial results. AgriBank and FLCAs are statutorily exempt from federal taxes. Certain Associations affiliates operate as nonexempt cooperatives. As such, they are eligible, under Subchapter T of the Internal Revenue Code, to deduct or exclude from taxable income amounts determined to be qualified patronage dividends. A change in U.S. tax law or an adverse interpretation of existing tax laws in a manner that reduces or eliminates these tax benefits or that is different from our application of such laws would negatively impact our results of operations. If the FCA promulgates reforms for System institutions that are similar to those provided for other financial institutions in the Dodd-Frank Act or promulgates a capital tier framework similar to the capital tiers and related requirements set forth in the Basel Accord or Basel III or regulations of other U.S. banking regulators, such actions could adversely impact System Banks and Associations, including AgriBank and affiliated Associations. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law on July 21, Under the Dodd-Frank Act, the federal banking agencies, the SEC, the Commodity Futures Trading Commission and a variety of other regulatory agencies are required to adopt a broad range of new rules and regulations that will significantly reform the supervision and regulation of the financial services industry. These federal agencies have been given significant discretion in drafting and implementing rules and regulations which are still being finalized, and consequently, much of the impact of the Dodd-Frank Act may not be known for many months or perhaps years. The Dodd-Frank Act largely preserves the authority of the FCA as the System s regulator by excluding System institutions from certain of the law s provisions. Although the System appears to be largely unaffected by the Dodd-Frank Act, it is possible that the FCA might choose to adopt by regulation some reforms for System institutions that are similar to those provided for other financial institutions in the Dodd-Frank Act. Should the FCA adopt similar reforms, it is not clear to what extent, if any, such reforms would impact System Banks (such as AgriBank) and their stockholders. Additionally, the Basel Committee on Banking Supervision (the Basel Committee) released consultative proposals in December 2009 aimed at strengthening global capital and liquidity regulations. The Basel Committee adopted revised versions of the consultative proposals as definitive frameworks in December 2010, and made further revisions in June 2011 and January This framework is often referred to as Basel III. In June 2012, the U.S. banking agencies released notices of proposed rulemakings that would substantially amend their regulatory capital requirements to, among other things, implement Basel III in the United States; and, in July 2013, these agencies approved final rules that largely adhere to their 2012 proposals. On July 8, 2010, the FCA published an Advance Notice of Proposed Rulemaking (ANPR) in the Federal Register, requesting comments as to whether the FCA should replace the existing regulatory capital requirements with a capital tier framework similar to the capital tiers and related requirements set forth in the Basel Accord (Basel I) that other federal financial regulatory agencies have adopted. In the ANPR, the FCA stated that it was important for the agency to consider the Basel III framework, because the other federal financial regulatory agencies were members of the Basel Committee and had encouraged the public to review and comment on 133

136 the Basel III proposal. The FCA asked commenters on the ANPR to review and consider the Basel III proposal. The FCA has not published a Notice of Proposed Rulemaking or engaged in further rulemaking since publishing the ANPR. Relationship with the Federal Agricultural Mortgage Corporation. Farmer Mac is a federally chartered corporation that was established to create a secondary market for agricultural mortgages and other loans. Since its formation, Farmer Mac s business model has evolved such that it now retains on its balance sheet agricultural mortgages and other loans similar to other System entities. Although Farmer Mac is statutorily defined as an institution of the System and is examined and regulated by the FCA, it is financially and operationally separate and distinct from the System, and neither AgriBank nor any other System entity, other than Farmer Mac itself, is liable for any debt or obligation of Farmer Mac, nor do the System s independent credit ratings apply to Farmer Mac, which has not been rated by any nationally recognized statistical rating organization. Further, the assets of the Insurance Fund do not support any debt or obligation of Farmer Mac. Except for contractual obligations arising from business transactions between Farmer Mac and certain System institutions, Farmer Mac is not liable for any debt or obligation of any other System entity, including Systemwide Debt Securities, either directly or on a joint and several basis. We believe that if Farmer Mac, as an institution of the System, were to experience financial difficulty, it could create financial, reputational and political risk to the System. 134

137 ww AgriBank Affiliated Associations as of January 1, st Farm Credit Services, ACA 2000 Jacobssen Drive Normal, IL (309) Hwww.1stfarmcredit.com AgCountry Farm Credit Services, ACA th St. S. Fargo, ND (701) Hwww.agcountry.com AgHeritage Farm Credit Services, ACA 119 E. Third St., Suite 200 Little Rock, AR (800) Hwww.agheritagefcs.com AgStar Financial Services, ACA 1921 Premier Drive Mankato, MN (507) Hwww.agstar.com Badgerland Financial, ACA 1430 North Ridge Drive Prairie du Sac, WI (800) Hwww.badgerlandfcs.com Delta Agricultural Credit Association 118 E. Speedway Dermott, AR (870) Farm Credit Midsouth, ACA 3000 Prosperity Drive Jonesboro, AR (870) Hwww.farmcreditmidsouth.com Farm Credit Services of America, ACA 5015 S. 118 th St. Omaha, NE (402) Hwww.fcsamerica.com Farm Credit Services of Mandan, ACA 1600 Old Red Trail Mandan, ND (701) Hwww.farmcreditmandan.com Farm Credit Mid-America, ACA 1601 UPS Drive Louisville, KY (502) Hwww.e-farmcredit.com Farm Credit Services of North Dakota, ACA th St. SW Minot, ND (701) Hwww.farmcreditnd.com Farm Credit Services of Western Arkansas, ACA 3115 W. 2 nd Court Russellville, AR (479) Hwww.myaglender.com FCS Financial, ACA 1934 E. Miller St. Jefferson City, MO (573) GreenStone Farm Credit Services, ACA 3515 West Road East Lansing, MI (800) Hwww.greenstonefcs.com Progressive Farm Credit Services, ACA 1116 N. Main St. Sikeston, MO (573) Hwww.progressivefcs.com United FCS, ACA 4401 Highway 71 S. Willmar, MN (320) Farm Credit Illinois, ACA 1100 Farm Credit Drive Mahomet, IL (217) Federal Farm Credit Banks Funding Corporation 10 Exchange Place, Suite 1401 Jersey City, New Jersey (201) Hwww.farmcredit-ffcb.com 135

138