letter from L. William York and Douglas A. Felton

Cultivating the NEXT CENTURY of Agriculture

Honoring Our Past, Preparing for the Future


Dear Stakeholders:

We are pleased to report another year of strong financial results. Strong, but moderating in a tougher environment — like the farm economy overall.

We are navigating a more challenging business cycle than we've seen in years; at the same time, we are marking the Farm Credit centennial. How appropriate — after all, since our start in 1916, we've been there through market ups and downs to support rural communities and agriculture by providing reliable, consistent credit and financial services. We have a history of adapting to help farmers, ranchers and other customers overcome challenges so that future generations will have ample opportunities.

Today we're in the midst of an agriculture efficiency cycle, when producers need to reduce operating costs to better align with current commodity prices. Lower commodity prices have contributed to slower growth in farmland values and falling net farm incomes. Interest rates are expected to rise, at least modestly, for the first time in a decade. Producers generally have entered this cycle with strong financial positions and risk management tools, as well as debt-to-equity ratios that are moderating, but manageable. Farm Credit was built for these conditions. Whatever economic cycles we face, we're committed to keeping capital flowing through rural America — capital that farmers need to make their businesses successful...which means more jobs and economic growth, leading to more vibrant communities.

Challenges for borrowers will remain pressing for the foreseeable future with increasing risk, uncertainty and volatility. As we pass our 100-year milestone, we are firmly focusing on the future. This forward-looking mindset requires creativity and a willingness to change so that we can continue to fulfill our time-honored mission. It requires reinforcing our strong financial foundation, collaborating more closely with the 17 affiliated Farm Credit Associations and the entire Farm Credit System, and achieving operational excellence so we can continue to support our customer-owners, efficiently and effectively.

Since our start in 1916, we've been there through market ups and downs to support rural communities and agriculture by providing reliable, consistent credit and financial services.
Financial Strength

Key indicators continued to moderate in 2015 as they had begun to do so during the previous year, bringing the agriculture industry more in line with historical levels. Even as the farm economy continued to slow down, AgriBank and affiliated Associations that comprise the AgriBank District turned in another year of strong earnings and sound credit quality. We expect the more challenging operating environment to continue into 2016, with earnings and credit quality continuing to return closer to long-term averages. AgriBank and affiliated Associations, as well as most individual borrowers, are in a strong position to manage through these challenges.

Several key financial measures reflect our strong performance for 2015:
  • AgriBank loan volume increased 6.8 percent from the previous year to $82.8 billion, reflecting growth in wholesale loans to affiliated Associations; and District loan volume increased 7.3 percent from the previous year to $95.0 billion, driven by affiliated Associations fulfilling the Farm Credit mission to support farmers, ranchers and other customers with reliable, consistent credit
  • Shareholders' equity increased 5.2 percent to $5.2 billion for AgriBank and increased 8.4 percent to $19.4 billion for the District, positioning the Bank and affiliated Associations to navigate through the current market cycle
  • District net income — the second-highest ever — decreased $56.7 million from the previous year to approximately $1.8 billion, while AgriBank net income decreased $89.7 million to $480.0 million. The changes reflect steady net interest income, which was more than offset by a decline in mineral income, as well as increased provision for loan losses.
  • AgriBank returned nearly $284 million in earnings to affiliated Farm Credit Associations in the form of patronage refunds
  • AgriBank net operating rate of 7.3 basis points increased from 7.2 basis points in 2014, reflecting strategic investments in processes, staffing and technology
AgriBank has consistently received high marks from third parties for financial strength, which is the foundation of our ability to fulfill our mission to meet the credit needs of rural communities and agriculture over the long term. In their latest reports, the top three credit rating agencies affirmed their strong ratings with stable outlooks for AgriBank (Fitch, AA-; Moody's, Aa3; Standard & Poor's, AA-).

AgriBank was named the safest bank in the United States in 2015 by Global Finance magazine, and earned a place on its "World's 50 Safest Banks" list for the third consecutive year. The ranking methodology includes total assets and an evaluation of long-term ratings from major rating agencies.

It's in the best interest of affiliated Associations that AgriBank remain strong and viable. The increasingly dynamic and volatile market environment requires sustained financial strength to ensure reliable access to capital, as earnings expectations, capital structure and regulatory capital requirements significantly influence AgriBank’s return on assets (ROA).

With support from affiliated Associations, AgriBank has adopted a new customer profitability model that will help ensure continued dependable, efficient and sustainable funding across the District. Under this new model, which took effect January 1, 2016, AgriBank has established a long-term target ROA of 50 basis points based on our current evaluation of the income the Bank needs in relation to our current risk profile. AgriBank earnings generally comprise a relatively small share of the combined earnings of the Bank and affiliated Associations. This model allows AgriBank to generate a targeted ROA relative to our risk profile with the majority of District income to be retained within affiliated Associations, which provide a stable source of capital to rural communities and agriculture.

AgriBank's capital position is another area where we have worked proactively with Associations to maintain financial strength, helping to keep the cost of borrowing as low as possible. The Bank's regulatory capital ratios all remain well within or above regulatory minimums and AgriBank-targeted levels. Our regulator, the Farm Credit Administration, has proposed new, higher capital requirements that are consistent with the Basel III capital regulations that were adopted for commercial banks in 2013. The final capital regulations are anticipated to be approved in 2016, with an anticipated effective date no earlier than January 1, 2017. When new capital regulations are finalized, we will reevaluate the capital plan and revise, as appropriate.

Farmers, ranchers and rural communities have placed their trust in Farm Credit for nearly 100 years. They can rest assured that AgriBank and affiliated Associations are taking the necessary steps to bolster our collective financial strength and stability so we can continue providing them with the competitive financial solutions they need.

Even as the farm economy continued to slow down, AgriBank and affiliated Associations that comprise the AgriBank District turned in another year of strong earnings and sound credit quality.
Strategic Collaboration

AgriBank's vision is: "To be the best source of financial solutions and services through collaborative relationships serving agriculture and rural America." Four strategic imperatives continue to provide a roadmap to achieving our vision.

These are multi-year areas of focus that will enable us to achieve our vision to be Smart, Safe, Innovative and Collaborative:
  • Smart: Optimize the organization's effectiveness and impact in driving strategic vision
  • Safe: Enhance risk management capabilities
  • Innovative: Create and deliver value through enhanced products and services to meet District/System mission
  • Collaborative: Facilitate and support District and System effectiveness
Several initiatives are under way to facilitate greater collaboration among AgriBank, affiliated Associations and other Farm Credit entities to help us all more effectively fulfill our shared mission to support rural communities and agriculture.

From the District strategic planning process to more frequent meetings among affiliated Association CEOs, collaboration across the AgriBank District continues to grow. We, of course, exist to support the work of our customer-owners, the affiliated Associations, and to create value for the District. In 2016, we will create strategic relationship plans with each Association so we can more effectively and proactively engage with them and determine new opportunities to support them.

We have many opportunities for further collaboration with the Associations. For example, as a result of the District strategic planning process, we are exploring opportunities to unify back-office technology systems throughout the District. The general ledger and loan accounting systems, which are core operations to AgriBank and the affiliated Associations, are the initial focus of dedicated workgroups. Another workgroup is looking into how we enhance the delivery of business services AgriBank provides to affiliated Associations today. We are also facilitating the development of District centers of excellence that affiliated Associations will drive and manage in areas such as rural residential and consumer lending. Initiatives such as these hold opportunity for further collaboration and efficiencies across the System.

Greater collaboration across the System includes building the strongest possible working relationships between AgriBank and other Farm Credit entities in order to fulfill our shared mission and advance the interests of our Association customer-owners, the Farm Credit System, agriculture and rural communities.

As part of Farm Credit, the success of AgriBank and affiliated Associations is inextricably linked with the System. This connection manifests itself formally through joint and several liability, and informally through our shared reputation. Accordingly, AgriBank maintains an active leadership role and speaks with a strong voice at the System and industry levels. We are on the front lines of advocating to preserve the lending authorities that enable us to generate the income and create the portfolio diversification we need to stay safe and sound so that we can continue to provide a stable source of funding. AgriBank directors actively serve on the boards of FCC Services, the Farm Credit Banks Funding Corporation, Farm Credit Council and other organizations, and AgriBank executives and managers provide leadership on Farm Credit committees dedicated to issues such as internal controls, reputation management and risk management.

Collaboration across the AgriBank District continues to grow.
Operational Excellence

While AgriBank is pursuing a host of strategic initiatives, our strong core business operations are what enable us to deliver value to affiliated Associations day in and day out. Our core — our people, processes, systems and collaborative relationships — is rooted in operational excellence with a continuous improvement mindset that ensures our products and services remain relevant and integral to the success of affiliated Associations. This approach requires that we make strategic investments, which we strive to balance with expense management.

One area where AgriBank will be fostering greater operational excellence is to enhance internal controls across the District with the recently updated framework for the System Disclosure Program. Under the framework — agreed to by the Farm Credit System Presidents Planning Committee, Federal Farm Credit Banks Funding Corporation and the System Audit Committee — Farm Credit entities are enhancing the effectiveness of key controls over financial reporting. This framework is designed to support the System-level attestation, similar to that required by Sarbanes-Oxley Section 404.

We are committed to supporting affiliated Associations through this enhanced internal controls framework.

Our strong core business operations are what enable us to deliver value to affiliated Associations day in and day out.
Stewardship

Being a mission-based organization sets Farm Credit apart from other financial services providers. Our very purpose is to protect and grow rural communities and agriculture, and position them to succeed for the benefit of future generations.

This sense of stewardship extends to our role as a corporate citizen. In 2015, we contributed nearly $3.4 million to support rural communities and agriculture, as well as the communities where we live and work. This includes partnering with affiliated Associations and the Farm Credit System to support worthy programs. We provide grants to sponsor traditional and nontraditional agriculture in all of the 15 states affiliated Associations serve; fund projects in western North Dakota communities impacted by oil and mineral exploration and production; support education, youth development and other charitable causes through the national Farm Credit Gives program; help St. Paul-Minneapolis charities with a focus on addressing basic needs such as hunger; and match employee contributions. We are committed to supporting these important causes in 2016 with an eye on using available resources as wisely as possible.

Our commitment to stewardship applies to the Farm Credit System itself. A century ago, visionary leaders embarked on a bold idea: create a cooperative system of local lenders, owned and governed by its borrowers, to support rural communities and agriculture with reliable, consistent credit and financial services. From the Great Depression through the 1980s farm crisis to today, Farm Credit has stood by those customer-owners. Today, we are the premier funding source for farmers and ranchers throughout the country. This includes supporting young, beginning, small and minority farmers as well as established and growing operations. We understand rural communities and agriculture, and our mission is to support them.

Just as farmers plant new crops each season, we're committed to sowing new seeds and growing anew each year so rural communities and agriculture can continue to thrive, today and tomorrow. We are confident we will continue to fulfill our mission from our foundation of financial strength, provided we continue to work together, embrace high standards and stay true to our values.

AgriBank, affiliated Associations and Farm Credit — Cultivating the Next Century of Agriculture.



Douglas A. Felton
Chair, AgriBank


L. William York
CEO, AgriBank

We understand rural communities and agriculture, and our sole mission is to support them.