Issuu

REPORT TO SHAREHOLDERS

1ST QUARTER

2021

NOTICE TO STOCKHOLDERS The shareholders’ investment in Farm Credit of Southern Colorado, ACA is materially affected by the financial condition and results of operations of CoBank, ACB (CoBank). The 2020 CoBank Annual Report to Shareholders, and the CoBank quarterly shareholders’ reports are available free of charge by accessing CoBank’s website, www.cobank.com, or may be obtained at no charge by contacting us at:

Farm Credit of Southern Colorado, ACA 5110 Edison Avenue, PO Box 75640 Colorado Springs, Colorado 80970-5640 Phone Number: 800-815-8559

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) The following discussion summarizes the financial position and results of operations of Farm Credit of Southern Colorado (the Association) for the three months ended March 31, 2021, with comparisons to prior periods. You should read these comments along with the accompanying financial statements and footnotes and the 2020 Annual Report to Shareholders. The accompanying financial statements were prepared under the oversight of our Audit Committee. Economic and industry factors influencing agriculture and our territory during the first quarter of 2021 are improved commodity prices, improved yet persisting drought conditions, and continued government support through the Coronavirus Food Assistance Program (CFAP). Our lending territory spans over a very diverse region of south and eastern Colorado through the southern front range and into the San Luis Valley. The various commodities include cattle, corn, wheat, and hay crops, which represent the top four commodity concentrations in our association. Cattle is our largest commodity made up primarily of cow/calf, fed cattle and stockers. Prices for various classes of beef cattle have improved over the last quarter. Spot market live cattle were up approximately $5 from $110 to $115/cwt. Feeder cattle futures prices were also up about $5/cwt over the same period. Improved live cattle and feeder cattle futures prices translate into stronger prices for calves at the ranch as well. Corn futures prices for delivery in the first quarter were up about $0.40/bu. with similar increase for pricing new crop available this fall. Due to limited corn supplies, our territory is also experiencing a much stronger basis on corn than normal. Wheat markets were more volatile during the first quarter with prices up $0.50 to $6.80 at the end of February and down $0.90 to $5.90 by the end of March. Overall, cash wheat prices are still approximately $1.00/bu. higher than this same period in 2020. Producers have had opportunities to price all grains at profitable levels this past quarter. Hay prices are holding steady at $250/ton. Overall, futures prices for commodities grown in our territory have provided profitable marketing opportunities during the first quarter. Stronger commodity prices will support net farm income in 2021. Drought conditions throughout much of our territory have improved during the first quarter of 2021. A significant weather event in early March brought widespread snow and rain to the majority of our territory. While all of our territory is still experiencing drought conditions, the classifications have improved to United States Department of Agriculture’s (USDA) drought designations of Abnormally Dry (D0) to Severe Drought (D2). A majority of our territory was classified with a USDA drought designation of Extreme Drought (D3) at year-end. Counties in our territory west of I-25, especially in the San Luis and Wet Mountain Valley show the most improvement. The southeastern counties along the New Mexico border continue to show the most drought stress and continue to show USDA drought designations of D2 – D3. Portions of Kit Carson, Cheyenne, and Kiowa Counties in the northeast part of our territory have improved from USDA drought designation D3 down to D0 to Moderate Dry (D1) designation. Winter storms over the past month have benefited soil moisture conditions for producers planning to plant spring crops as well as the condition of the winter wheat crop, which has exited dormancy. Crop conditions for winter wheat are generally fair to good with a large amount of variation in crop condition throughout the territory. The dry winter conditions and recent moisture continue to affect the cow/calf operations. The winter weather and wet conditions during March influenced calving season. Producers are thankful for the moisture and its benefit for pasture conditions. USDA National Agricultural Statistics Service (NASS) reports pasture and range conditions as 58% very poor to poor condition with 42% fair to good condition. In general, producers have grazed through nearly all stockpiles of standing forage and have been feeding cattle through the winter. CFAP round three payments were disbursed in the first quarter of 2021. This program continues to benefit cash flows for producers throughout our territory. It provided strong support to cash flows during 2020 to producers impacted by COVID related market disruptions and is expected to be a valuable resource during 2021 as well. Many counties in our lending territory have returned to county control concerning the COVID pandemic management. This has resulted in the lifting of statewide mask orders and the return to business as usual for many of our communities. This is expected to be positive news for local economies. Real estate values in our territory have remained stable to increasing. We continue to compete with cash for recreational mountain ranch properties, and have seen strong demand for all types of rural property. Dry crop, pasture and irrigated land throughout our territory continue to trade at stable to increasing values. The COVID-19 pandemic remains a global public health crisis, although vaccines have been deployed and are in various stages based on specific areas of the United States. The United States economy continues to have

numerous impediments to a full recovery across certain sectors of the economy. Unemployment levels remain high and economic output remains challenged. We have been focused on responding to this crisis and protecting the health and safety of our employees while continuing to serve our customers. We cannot predict the severity and the duration of the impact of the COVID-19 pandemic. The COVID-19 operating environment continues to cause uncertainty on the Association’s business, results of operations and financial condition. The U.S. government has continued to institute various programs in support of the COVID-19 recovery. In December 2020, Congress passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act, which, among other provisions, allocated additional funding for Paycheck Protection Program (PPP) loans and allows certain existing PPP borrowers to apply for additional loans or draws on existing loans. The Association obtained approval to participate as a lender in the PPP and successfully processed PPP loans for customers before the initial round of funding for the program was depleted. The association continues to work with customers to complete the forgiveness actions on the outstanding PPP loans in our portfolio. To date, we have assisted our customers to receive forgiveness for 46 of 52 round one PPP loans. In our continued effort to support producers through this challenging time, the association engaged World Trade Finance as a third party provider of PPP loans. World Trade Finance will fully serve our customers directly, underwriting and booking round two PPP loans. The impact of the U.S. government support programs and stimulus on the broader agriculture economy and our customers in particular is uncertain at this time. The COVID-19 pandemic has heightened many risks, including credit risk, liquidity risk, market risk, and operational risk. The effectiveness of our mitigation efforts and the extent to which COVID-19 affects our business, results of operations and financial condition may depend on factors beyond our control. LOAN PORTFOLIO Loans outstanding at March 31, 2021, totaled $1.17 billion, a decrease of $8.8 million, or 0.75%, from loans of $1.18 billion at December 31, 2020. The decrease was primarily driven by a decrease in our Capital Markets portfolio due to pay offs and pay downs of several loan complexes. RESULTS OF OPERATIONS Net income for the three months ended March 31, 2021, was $3.9 million, a decrease of $177 thousand, or 4.35%, from the same period ended one year ago. The decrease is primarily due to an increase in noninterest expense, a decrease in noninterest income, partially offset by an increase in net interest income. For the three months ended March 31, 2021, net interest income was $7.5 million, an increase of $166 thousand, or 2.27%, compared with the three months ended March 31, 2020. Net interest income increased as a result of an increase in average accrual loan volume, partially offset by a decrease in the return on our loanable funds due to lower interest rates. The provision for credit losses for the three months ended March 31, 2021, was $141 thousand, an increase of $12 thousand, or 9.30%, from the provision for credit losses for the same period ended one year ago. The provision for credit losses during the first quarter of 2021 was due to increases in the reserve for unfunded commitments and management reserve. Downgrades of credit facilities in the Core and Capital Markets portfolios attributed to the increase in reserves for unfunded commitments. The management reserve increase was due to a slightly higher concentration in stressed commodity categories and increased economic risk due to prolonged drought and COVID impacts. The provision for credit losses during the first quarter of 2020 was due to an increase in our management reserve as well as an increase in specific reserves on one loan. Noninterest income decreased $120 thousand during the first three months of 2021 compared with the first three months in 2020 primarily due to the absence of a 2021 Farm Credit Insurance Fund Distribution, and decreases in mineral income and other noninterest income partially offset by an increase in patronage distribution from Farm Credit institutions. In 2020, we received a refund of $227 thousand from the Farm Credit System Insurance Corporation (FCSIC) while no refund was received in 2021. The refund was our portion of excess funds above the secure base amount in the FCSIC Allocated Insurance Reserve Accounts. Refer to the 2020 Annual Report to Shareholders for additional information. Other noninterest income decreased $75 thousand primarily due to decreases in the Farm Credit System Captive Insurance distributions. In addition, in the first quarter of 2020 we recognized gains on the sale of vehicles while there were no sales of fixed assets in the first quarter of 2021. The increase in patronage from Farm Credit institutions of $245 thousand is due to an increase in our average net note payable with CoBank and average participation sold loan volume to CoBank.

We received mineral income of $119 thousand during the first three months of 2021, which is distributed to us quarterly by CoBank. The decrease for the three months ended March 31, 2021, compared with first three months of 2020 is primarily the result of a significant drop in crude oil and natural gas prices and production volumes in the first quarter of 2021. During the first three months of 2021, noninterest expense increased $215 thousand to $4.7 million, primarily due to increases in FCSIC premium of $206 thousand, salaries and employee benefits expense of $180 thousand and purchased services from AgVantis of $62 thousand. The increase in FCSIC premium is due to an increase in our average net note payable to CoBank and an increase in the premium rate. Salaries and employee benefits expense increased due to an increase in staffing levels, partially offset by a decrease in pension expense. These increases were partially offset by a decrease in other noninterest expense of $223 thousand primarily due to decreased purchased services and public and member relations expenses. CAPITAL RESOURCES Our shareholders’ equity at March 31, 2021, was $269.5 million, an increase from $265.7 million at December 31, 2020. This increase is due to net income offset by net stock reductions. OTHER MATTERS In 2017, the United Kingdom’s Financial Conduct Authority announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations after 2021. As a result, it is uncertain whether LIBOR will continue to be quoted after 2021. We continue to analyze potential risks associated with the LIBOR transition, including financial, operational, legal, tax, reputational and compliance risks. At this time we are unable to predict whether or when LIBOR will cease to be available or if Secured Overnight Financing Rate (SOFR) or any other alternative reference rate will become the benchmark to replace LIBOR. Because we engage in transactions involving financial instruments that reference LIBOR, these developments could have a material impact on the Association and our borrowers. Management has documented a LIBOR transition plan to address the phase out of LIBOR rates in the future, including any updates to processes and loan servicing technology.

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

//signed// Mark Peterson Chairman of the Board May 4, 2021

//signed// Jeremy M Anderson CEO May 4, 2021

//signed// Shawna R Neppl CFO May 4, 2021

Farm Credit Southern Colorado, ACA

Consolidated Statement of Condition (Dollars in Thousands)

ASSETS Loans Less allowance for loan losses Net loans Cash Accrued interest receivable Investment in CoBank, ACB Investment in AgDirect Premises and equipment, net Prepaid benefit expense Other assets Total assets LIABILITIES Note payable to CoBank, ACB Advance conditional payments Accrued interest payable Patronage distributions payable Accrued benefits liability Reserve for unfunded commitments Other liabilities

March 31 2021

December 31 2020

UNAUDITED

AUDITED

1,168,861 3,885 1,164,976 1,758 13,115 35,249 1,015 12,756 4,214 2,324

1,177,690 3,826 1,173,864 4,615 15,925 35,213 963 12,934 4,491 5,303

1,235,407

1,253,308

942,701 19,125 1,151 151 558 2,207

958,757 15,047 1,216 7,500 153 476 4,503

Total liabilities

965,893

987,652

SHAREHOLDERS' EQUITY Preferred stock Capital stock Unallocated retained earnings

901 1,649 266,964

953 1,635 263,068

Total shareholders' equity

269,514

265,656

Commitments and Contingencies

Total liabilities and shareholders' equity

1,235,407

1,253,308

The accompanying notes are an integral part of these consolidated financial statements.

Farm Credit Southern Colorado, ACA

Consolidated Statement of Comprehensive Income (Dollars in Thousands)

UNAUDITED

For the three months ended March 31 2021 2020

INTEREST INCOME Loans

$ 11,360

$ 12,772

11,360

12,772

3,883 3

5,436 28

Total interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses

3,886 7,474 141 7,333

5,464 7,308 129 7,179

NONINTEREST INCOME Financially related services income Loan fees Patronage distribution from Farm Credit institutions Farm Credit Insurance Fund distribution Mineral income Other noninterest income

41 94 991 119 45

18 109 746 227 190 120

1,290

1,410

2,505 348 633 360 103 774

2,325 344 571 154 117 997

4,723 3,900 4

4,508 4,081 8

3,896

4,073

Total interest income INTEREST EXPENSE Note payable to CoBank, ACB Other

Total noninterest income NONINTEREST EXPENSE Salaries and employee benefits Occupancy and equipment Purchased services from AgVantis, Inc. Farm Credit Insurance Fund premium Supervisory and examination costs Other noninterest expense Total noninterest expense Income before income taxes Provision for income taxes Net income COMPREHENSIVE INCOME Amortization of retirement costs Total comprehensive income

3,896

4,144

The accompanying notes are an integral part of these consolidated financial statements.

Farm Credit Southern Colorado, ACA

Consolidated Statement of Changes in Shareholders' Equity (Dollars in Thousands)

Preferred Stock

Capital Stock

Balance at December 31, 2019 Comprehensive income Stock issued Stock retired Preferred stock dividends Balance at March 31, 2020

$ 2,557

$ 1,487

20 (356) 10 $ 2,231

$ 1,508

Balance at December 31, 2020 Comprehensive income Stock issued Stock retired Balance at March 31, 2021

953

$ 1,635

(52) 901

73 (59) $ 1,649

UNAUDITED

Unallocated Retained Earnings $ 257,254 4,073

Accumulated Other Total Comprehensive Shareholders' Income/(Loss) Equity $

(290) 71

(219)

62 (41) (7) $ 261,320

$ 263,068 3,896

$ 266,964

The accompanying notes are an integral part of these consolidated financial statements.

$ 261,008 4,144 82 (397) 3 $ 264,840

$ 265,656 3,896 73 (111) $ 269,514

NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES A description of the organization and operations of Farm Credit of Southern Colorado, ACA (the Association), the significant accounting policies followed, and the financial condition and results of operations as of and for the year ended December 31, 2020, are contained in the 2020 Annual Report to Shareholders. These unaudited first quarter 2021 financial statements should be read in conjunction with the 2020 Annual Report to Shareholders. The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements and should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2020, as contained in the 2020 Annual Report to Shareholders. In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results for the interim periods. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2021. Descriptions of the significant accounting policies are included in the 2020 Annual Report to Shareholders. In the opinion of management, these policies and the presentation of the interim financial condition and results of operations conform with GAAP and prevailing practices within the banking industry. Recently Adopted or Issued Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (FASB) issued guidance entitled “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance provides optional expedients and exceptions for applying GAAP to contracts and other transactions affected by reference rate reform. The guidance simplifies the accounting evaluation of contract modifications that replace a reference rate affected by reference rate reform and contemporaneous modifications of other contracts related to the replacement of the reference rate. The optional amendments are effective as of March 12, 2020, through December 31, 2022. The impact of the adoption was not material to the Association’s financial condition or its results of operations. We have begun to apply the optional accounting expedients to loans as fallback language is incorporated into these agreements. In June 2016, the FASB issued guidance entitled “Measurement of Credit Losses on Financial Instruments.” The guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Credit losses relating to available-for-sale securities would also be recorded through an allowance for credit losses. For public business entities that are not U.S. Securities and Exchange Commission filers this guidance was to become effective for interim and annual periods beginning after December 15, 2020, with early application permitted. In November 2019, the FASB issued an update that amends the mandatory effective date for this guidance for certain institutions. The change resulted from a change in the effective date philosophy that extends and simplifies the adoption by staggering the dates between large public entities and other entities. As a result of the change, the new credit loss standard, for those institutions qualifying for the delay, becomes effective for interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Association qualifies for the delay in the adoption date. The Association continues to evaluate the impact of adoption on the Association’s financial condition and its results of operations.

NOTE 2 - LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of loans follows. March 31, 2021

(dollars in thousands) Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Agricultural export finance Rural residential real estate Mission-related Total loans

726,373 191,113 164,270 71,483 14,800 25 797

1,168,861

December 31, 2020 $

717,970 204,402 171,557 72,769 10,140 27 825

$ 1,177,690

The Association purchases and sells participation interests with other parties in order to diversify risk, manage loan volume and comply with Farm Credit Administration regulations. The following table presents information regarding the balances of participations purchased and sold at March 31, 2021:

(dollars in thousands) Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Agricultural export finance Total

Other Farm Credit Institutions Purchased Sold $ 29,602 $ 58,652 34,157 159,792 71,483 14,800 $ 309,834 $ 58,652

Non-Farm Credit Institutions Purchased Sold $ 913 $ $ 913 $ -

Total Purchased Sold $ 30,515 $ 58,652 34,157 159,792 71,483 14,800 $ 310,747 $ 58,652

One credit quality indicator utilized by the Association is the Farm Credit Administration Uniform Loan Classification System that categorizes loans into five categories. The categories are defined as follows:     

Acceptable – assets are expected to be fully collectible and represent the highest quality. Other assets especially mentioned (OAEM) – assets are currently collectible but exhibit some potential weakness. Substandard – assets exhibit some serious weakness in repayment capacity, equity and/or collateral pledged on the loan. Doubtful – assets exhibit similar weaknesses to substandard assets; however, doubtful assets have additional weaknesses in existing factors, conditions and values that make collection in full highly questionable. Loss – assets are considered uncollectible.

The following table shows loans and related accrued interest classified under the Farm Credit Administration Uniform Loan Classification System as a percentage of total loans and related accrued interest receivable by loan type as of: March 31, 2021 Real estate mortgage Acceptable OAEM Substandard Doubtful Total Production and intermediate-term Acceptable OAEM Substandard Total Agribusiness Acceptable OAEM Substandard Total Rural infrastructure Acceptable OAEM Total Agricultural export finance Acceptable Total Rural residential real estate Acceptable Total Mission-related Substandard Total Total Loans Acceptable OAEM Substandard Doubtful Total

December 31, 2020

90.77% 6.06% 3.10% 0.07% 100.00%

89.55% 7.18% 3.19% 0.08% 100.00%

94.59% 2.78% 2.63% 100.00%

94.13% 3.47% 2.40% 100.00%

95.71% 3.56% 0.73% 100.00%

95.67% 3.63% 0.70% 100.00%

99.28% 0.72% 100.00%

99.27% 0.73% 100.00%

100.00% 100.00%

92.65% 4.77% 2.53% 0.05% 100.00%

91.85% 5.56% 2.54% 0.05% 100.00%

High risk assets consist of impaired loans and other property owned. These nonperforming assets (including related accrued interest) are as follows: March 31, 2021

(dollars in thousands) Nonaccrual loans Real estate mortgage Production and intermediate-term Mission-related

December 31, 2020

6,698 2 797

6,741 2 825

7,497

7,568

397 145

403 50

Total accruing restructured loans

542

453

Total impaired loans

8,039

8,021

Total nonaccrual loans Accruing restructured loans Real estate mortgage Production and intermediate-term

The Association had no accruing loans 90 days past due and no other property owned for the periods presented.

Additional impaired loan information is as follows:

(dollars in thousands) Impaired loans with a related allowance for loan losses: Real estate mortgage Mission-related Total Impaired loans with no related allowance for loan losses: Real estate mortgage Production and intermediate-term Agribusiness Total Total impaired loans: Real estate mortgage Production and intermediate-term Agribusiness Mission-related Total

March 31, 2021 Unpaid Recorded Principal Related Investment Balance Allowance

555 797 $ 1,352

$ 6,540 147 $ 6,687

$ 7,095 147 797 $ 8,039

620 916 1,536

$ $

1 600 601

8,213 145 119 8,477

8,833 145 119 916 $ 10,013

December 31, 2020 Unpaid Recorded Principal Related Investment Balance Allowance

$ $

1 600 601

555 825 1,380

6,589 52 6,641

7,144 52 825 8,021

620 931 1,551

1 600 601

8,241 49 119 8,409 8,861 49 119 931 9,960

1 600 601

Note: The recorded investment in the loan receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the loan receivable.

For the Three Months Ended March 31, 2021 Average Interest Income Impaired Loans Recognized

For the Three Months Ended March 31, 2020 Average Interest Income Impaired Loans Recognized

555 813

606 919

1,368

1,525

6,564 121 -

5 1 -

8,909 785 1

25 10 -

6,865

9,695

7,119 121 813

5 1 -

9,515 785 1 919

25 10 -

8,053

11,220

The following tables provide an age analysis of past due loans (including accrued interest). March 31, 2021

(dollars in thousands) Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Agricultural export finance Rural residential real estate Mission-related Total

30-89 Days Past Due $ 2,043 541 $2,584

90 Days or More Past Due $ 40 2 $

Total Past Due $ 2,083 543 -

Not Past Due or less than 30 Days Past Due $ 733,966 193,395 164,672 71,676 14,819 25 797

Recorded Investment in Loans Outstanding $ 736,049 193,938 164,672 71,676 14,819 25 797

$ 2,626

$1,179,350

$1,181,976

Recorded Investment Accruing Loans 90 Days or More Past Due $ $

December 31, 2020

(dollars in thousands) Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Agricultural export finance Rural residential real estate Mission-related Total

30-89 Days Past Due $ 1,732 596 150 $ 2,478

90 Days or More Past Due $ 39 $

Total Past Due $ 1,771 596 150 -

Not Past Due or less than 30 Days Past Due $ 728,471 206,770 171,925 72,927 10,153 27 825

Recorded Investment in Loans Outstanding $ 730,242 207,366 172,075 72,927 10,153 27 825

Recorded Investment Accruing Loans 90 Days or More Past Due $ -

$ 2,517

$ 1,191,098

$1,193,615

A summary of changes in the allowance for loan losses is as follows:

(dollars in thousands) Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Agricultural export finance Mission-related Total

Balance at December 31, 2020

Charge-offs

Recoveries

Provision for Loan Losses/ (Loan Loss Reversals)

Balance at March 31, 2021

$ 1,074 857 1,021 265 9 600

(58) 92 25 (2) 2 -

$ 1,016 949 1,046 263 11 600

$ 3,826

$ 3,885

(dollars in thousands)

Balance at December 31, 2019

Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Agricultural export finance Mission-related

Total

Charge-offs

Provision for Loan Losses/ (Loan Loss Reversals)

Recoveries

861 629 912 481 7 550

20 -

$ 3,440

15 19 83 (1) 50 166

Balance at March 31, 2020 $

876 648 1,015 480 7 600

$ 3,626

The Association maintains a separate reserve for unfunded commitments, which is included in Liabilities on the Association’s Consolidated Statement of Condition. The related provision for the reserve for unfunded commitments is included as part of the provision for credit losses on the Consolidated Statement of Comprehensive Income, along with the provision for loan losses. A summary of changes in the reserve for unfunded commitments follows: For the Three Months Ended March 31 2021 2020

(dollars in thousands) Balance at beginning of period Provision for/(Reversal of) reserves for unfunded commitments

476

558

Total

437 (37)

400

Additional information on the allowance for loan losses follows:

(dollars in thousands) Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Agricultural export finance Rural residential real estate Mission-related Total

Allowance for Loan Losses Ending Balance at March 31, 2021 Individually Collectively evaluated for evaluated for impairment impairment

Recorded Investments in Loans Outstanding Ending Balance at March 31, 2021 Individually Collectively evaluated for evaluated for impairment impairment

1 600

1,015 949 1,046 263 11 -

7,095 147 797

601

3,284

8,039

$ 1,173,937

728,954 193,791 164,672 71,676 14,819 25 -

(dollars in thousands)

Recorded Investments in Loans Outstanding Ending Balance at December 31, 2020 Individually Collectively evaluated for evaluated for impairment impairment

Allowance for Loan Losses Ending Balance at December 31, 2020 Individually Collectively evaluated for evaluated for impairment impairment

Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Agricultural export finance Rural residential real estate Mission-related Total

1 600

1,073 857 1,021 265 9 -

7,144 52 825

723,098 207,314 172,075 72,927 10,153 27 -

601

3,225

8,021

$ 1,185,594

A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Association recorded no new TDRs during the three months ended March 31, 2021 or March 31, 2020 The Association had no TDRs within the previous 12 months and for which there were subsequent payment defaults during the first three months of 2021 and 2020. Additional commitments to lend to borrowers whose loans have been modified in troubled debt restructurings were $1.1 million at March 31, 2021 and $1.2 million at December 31, 2020. The following table provides information on outstanding loans restructured in troubled debt restructurings at period end. These loans are included as impaired loans in the impaired loan table. Loans modified as TDRs (dollars in thousands) Real estate mortgage Production and intermediate-term Total

March 31, 2021

TDRs in Nonaccrual Status* March 31, 2021

December 31, 2020

397 145

403 50

542

453

* Represents the portion of loans modified as TDRs (first column) that are in nonaccrual status.

NOTE 3 - CAPITAL A summary of select capital ratios based on a three-month average and minimums set by the Farm Credit Administration follows. As of March 31, 2021 Risk Adjusted: Common equity tier 1 ratio Tier 1 capital ratio Total capital ratio Permanent capital ratio Non-Risk Adjusted: Tier 1 leverage ratio Unallocated retained earnings and equivalents leverage ratio

As of December 31, 2020

Regulatory Minimums

Capital Conservation Buffer

Total

18.29% 18.29% 18.63% 18.42%

18.83% 18.83% 19.20% 18.97%

4.5% 6.0% 8.0% 7.0%

2.5% 2.5% 2.5% –

7.0% 8.5% 10.5% 7.0%

19.05%

19.65%

4.0%

1.0%

5.0%

19.89%

20.31%

1.5%

–

1.5%

If capital ratios fall below the regulatory minimum plus buffer amounts, capital distributions (equity redemptions, cash dividend payments, and cash patronage payments) and discretionary senior executive bonuses are restricted or prohibited without prior FCA approval.

The following tables present the activity in the accumulated other comprehensive income/loss, net of tax by component: For the Three Months Ended March 31 2021 2020

(dollars in thousands) Pension and other benefit plans: Beginning balance Amounts reclassified from accumulated other comprehensive income/loss Net current period other comprehensive income/(loss)

$ (290)

Ending balance

71 71

$ (219)

The following table represents reclassifications out of accumulated other comprehensive income/loss.

(dollars in thousands) Pension and other benefit plans: Net actuarial loss

Amount Reclassified from Accumulated Other Comprehensive Income/Loss For the Three Months Ended March 31 2021 2020

Total reclassifications

Location of Gain/Loss Recognized in Statement of Income Salaries and employee benefits

NOTE 4 - FAIR VALUE MEASUREMENTS Accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability. See Note 2 of the 2020 Annual Report to Shareholders for a more complete description. Assets measured at fair value on a recurring basis are summarized below:

(dollars in thousands) Assets held in nonqualified benefits trusts March 31, 2021 December 31, 2020

Fair Value Measurement Using Level 1 Level 2 Level 3 $ $

49 40

$ $

– –

$ $

– –

Total Fair Value $ $

49 40

The Association had no liabilities measured at fair value on a recurring basis at March 31, 2021 or December 31, 2020. Assets measured at fair value on a non-recurring basis for each of the fair value hierarchy values are summarized below: Fair Value Measurement Using Total Fair Level 1 Level 2 Level 3 Value (dollars in thousands) Loans March 31, 2021 $ – $ – $ 753 $ 753 $ – December 31, 2020 $ – $ 782 $ 782 With regard to impaired loans, it is not practicable to provide specific information on inputs as each collateral property is unique. System institutions utilize appraisals to value these loans and other property owned and takes into account unobservable inputs such as income and expense, comparable sales, replacement cost and comparability adjustments. The Association had no liabilities measured at fair value on a non-recurring basis at March 31, 2021 or December 31, 2020.

Valuation Techniques As more fully discussed in Note 2 of the 2020 Annual Report to Shareholders, accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following presents a brief summary of the valuation techniques used by the Association for assets and liabilities, subject to fair value measurement. Assets Held in Non-Qualified Benefits Trusts Assets held in trust funds related to deferred compensation and supplemental retirement plans are classified within Level 1. The trust funds include investments that are actively traded and have quoted net asset values that are observable in the marketplace. Loans Evaluated for Impairment For impaired loans measured on a non-recurring basis, the fair value is based upon the underlying collateral since the loans are collateral dependent loans for which real estate is the collateral. The fair value measurement process uses independent appraisals and other market-based information, but in many cases, it also requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters. These loans have fair value measurements that fall within Level 3 of the hierarchy. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. NOTE 5 - SUBSEQUENT EVENTS The Association has evaluated subsequent events through May 4, 2021, which is the date the financial statements were issued, and no material subsequent events were identified.