Our story
greenstone farm credit services 3515 West Road, East Lansing, MI 48823
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800- 444 -3276
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www.greenstonefcs.com
GreenStone Farm Credit Services annual report 2012
Printed in the U.S.A.
$670 Thousand in Charitable Contributions
97% Customer Satisfaction Rating
“ While it is important that we focus on financial metrics and sound risk management practices, we must never lose sight of the fact that first and foremost we are a people business! �
The paper used to create this report was produced with 100% hydropower at French Paper Company in Niles, Michigan. For more information visit www.frenchpaper.com
Dedication:
Message from the CEO and Board Chair
We are pleased to present the following summary of your association’s performance over the past year and believe you will agree that GreenStone Farm Credit Services continues to make great strides toward fulfilling its vision of “…being rural America’s first choice for financial services.” As a member of the national Farm Credit System,
Other significant milestones achieved this year
GreenStone‘s mission is “to promote the business
include:
success of our customers and the rural community by being the best at providing credit and financial services” in our marketplace. We do this through numerous facets which each play a significant role in who GreenStone is and add to the depth of our story. Undeniably, the leading characters are our more than 475 highly motivated and professional staff members located at our 37 offices throughout the state of Michigan and northeastern Wisconsin. Our employees focus on putting the needs of you, our members, first is
1. Record net earnings of $126.2 million. This surpassed last year’s record of $116.6 million. 2. Retained more than $6 billion of owned assets. 3. Exceeded more than $1 billion in capital (risk bearing capacity). 4. Returned a record cash patronage payment of $26.5 million to members from 2012 earnings. 5. Received a record customer satisfaction rating of 97 percent satisfied or very satisfied.
the foundation for your cooperative’s continued
While the board, management, and staff
success.
certainly played a key role in achieving this level
In spite of weather anomalies that included a record setting drought and spring freeze which nearly destroyed the entire Michigan fruit crop, the majority of our members were able to achieve record incomes as a result of higher commodity prices and insurance proceeds. As a result,
of performance, we also understand that it was a team effort that includes our members. Without your hard work, solid management of your businesses, and commitment to honor your financial responsibilities to us, none of these results would be possible.
GreenStone’s owned and managed loan volume
GreenStone is also fortunate to have one of the
increased 8.7 percent year over year, while the
most diverse agricultural territories in the entire
strength of our member’s financial positions also
Farm Credit System, with more than 300 different
improved. This contributed to an improvement in
commodities grown, and 23,000 customers with
the quality of our loan portfolio to 1.2 percent of
businesses and lending needs that span from
the loan volume in nonaccrual status, which is the
smaller, part-time operations to those that are
best it has been since 2007.
some of the largest of their kind in the nation.
Annual Report 2012
1
This breadth of diversity is another key to our
people. Our team members do not stop after
balanced results, and positions your association to
work hours. GreenStone initiated a new employee
be here for generations to come.
volunteer program in 2012 which allows staff
Of course, members who have been with
members paid time off for community service.
GreenStone since 2005 are very accustomed to our patronage program and the additional value it brings to your relationship with the association. Due to record earnings this year, the GreenStone board of directors has authorized a record $26.5 million in cash patronage to be paid to our members on March 19, 2013. This will bring the total amount of patronage paid since it began to more than $134.8 million! Part of GreenStone’s story is why you, and many of our members, choose us as your financial partner. While this decision was likely due to several factors, one of which was a competitive interest rate up front, the patronage payment each year is another part of the additional value GreenStone brings to the
Many individuals on our team are already heavily engaged in their local communities, but we believe this will allow them even more time to contribute if they choose. In 2012 alone, GreenStone employees recorded more than 3,000 hours of community service. In addition, GreenStone gave more than $670,000 in contributions to agricultural organizations, local philanthropies, FFA, 4-H, college scholarships, and much more. GreenStone is a large financial institution, but it is owned and governed by its customers and is very proud of its roots! While it is important that we focus on financial metrics and sound risk management practices, we must never lose sight of the fact that first and foremost we are a people
table that its competitors do not. GreenStone
business!
continues to provide more!
In closing, we thank you for your business and
As the chapters in this year of success continue,
wish you the best of success in 2013 and beyond.
we come to another matter that we are very proud of: the customer satisfaction ratings you give us year after year. Since the inception of GreenStone,
Sincerely,
our customer satisfaction ratings have consistently been in the low to mid 90 percent range of satisfied or very satisfied regarding the overall level of service you receive from us. This year, you rated us at an all-time record level of 97 percent. We are
Scott A. Roggenbuck
honored and humbled by your ratings and will not
Chairperson of the Board
rest on these results. You can be assured that we do not take this feedback lightly and will continue to look for ways to improve our service to you. Your level of satisfaction is critical to our long term success and we want to sincerely thank you for the business and trust you have placed in us to be your
David B. Armstrong ÂÂ
financial services provider of choice.
Chief Executive Officer
This strong sense of customer service is also exhibited by our team members in the service they provide to the many local communities
March 13, 2013
we serve. While financial markets, weather, risk management, and so on are all critical components of our industry, the reason we exist is to serve
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GreenStone Farm Credit Services
Highlights:
2012 Association Performance
More than financing, GreenStone is the culmination of hard work and commitment on the part of both customers and staff. GreenStone’s consistently strong financial performance proves a “partnership approach” to lending can yield superior results.
Members of more than
Number of employees
Total Assets (Owned and Managed In Billions)
Net Earnings (In Millions)
Total Loan Growth (Owned and Managed)
Cash Patronage to be paid in March 2013 (In Millions)
Annual Report 2012
23,000
475+ $6.4 $126.2 8.7% $26.5
3
FOOTNOTE 1: Overview GreenStone is more than just a lender. We pride
–including short, intermediate and long-term
ourselves on our customer focus and dedication
loans, equipment and building leases, life
to rural communities throughout Michigan and
insurance, crop insurance, accounting, tax, and
northeast Wisconsin. As one of America’s largest
appraisal services. GreenStone also specializes in
rural lenders, we take great pride in the diverse
residential and country home loans, and provides
customer base that we serve. From large and small
lending products for the purchase, improvement,
dairy operators in Wisconsin, to fruit producers in
construction or refinance of residences along with
Michigan, and rural homeowners throughout our
financing future home sites and recreational land.
territory, we are dedicated to providing exceptional
GreenStone is proud to be a leading agricultural
customer service to each of our more than 23,000 members.
lender focused on serving the financial needs of rural America. From loans to assist you with
Headquartered in East Lansing,
managing your agriculture operation, to financing
Michigan, GreenStone is the
your dream home, we are here to help you
country’s sixth largest
succeed.
association in the Farm Credit System. The organization provides financial services to the agricultural industry
GreenStone Customer Density by County 466 - 854 271 - 465 133 - 270 39 - 132 2 - 38
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GreenStone Farm Credit Services
Forward:
Delivering Results
We know you have many choices when selecting a lender, and we are honored you have given us the opportunity to serve you. At GreenStone, you are more than just a customer, you are a member of our cooperative and we are proud to be your partner in success! Since 2000, we have worked with an independent
satisfaction rating of 97 percent, the best rating in
third-party to complete a customer satisfaction
the 13 year history of the survey. The survey also
survey. This survey helps us evaluate how we
showed that 93 percent of those surveyed would
are doing in the eyes of our most important
return to GreenStone for their future lending needs.
stakeholder—our members. A random selection
As a cooperative, ensuring our members have the
of members from GreenStone’s traditional, agriconsumer, and commercial customer segments participate in this annual survey.
financial tools they need to be successful is essential to our mission. Everyone at GreenStone is humbled by these phenomenal results. It continues to be
While 2012 was an outstanding financial year
our pleasure to serve you, and we look forward to
for GreenStone, we also received record setting
working with you—in the good times and the more
results on our annual customer satisfaction
challenging times—for many years to come!
survey. GreenStone achieved a remarkably high
CUSTOMER SATISFACTION RESULTS 100 90
96%
94%
94%
95%
97%
2008
2009
2010
2011
2012
80 70 60 50
“GreenStone’s customer satisfaction rate of 94 to 97 percent satisfied during the last five years is simply off the charts,” said Dr. Robert Myers, Project Director, from Advantage Research and Analysis. “Typical customer satisfaction rates at other financial institutions are in the 65 to 85 percent range, with anything above 80 percent generally regarded as an excellent performance. GreenStone’s consistent customer satisfaction rates in the mid 90 percent range are truly exceptional.”
Annual Report 2012
5
Chapter 1:
Diversity in Membership
Diversity has been a key component to GreenStone’s success throughout the cooperative’s 95-plus year history. GreenStone members are involved in the production of more than 300 different commodities in more than 90 counties in Michigan and northeast Wisconsin. With more than 23,000 members in our two-state
as the customers we serve. This variety within
territory, GreenStone serves customers of all sizes.
our assets allows us to weather the challenges
From rural home owners who enjoy the pace of
faced by our members effectively, maintaining the
a country lifestyle, to family farmers who help
integrity of our organization and allowing us to
feed their local communities, to large commercial
adapt to changing market conditions to meet our
processing operations, our portfolio is as diverse
customers needs.
VOLUME SHARE BY CUSTOMER SEGMENT
MEMBERS GROSS FARM INCOME
1 9%
6%
13%
% 35
15 %
% 11
5%
4%
42 %
1
20%
2 6
Traditional Agriculture
Commercial
<$100K
$100K-250K
$250K-500K
Capital Markets
AgriConsumers
$500K-1M
$1M-3M
$3M+
GreenStone Farm Credit Services
42%
Total loan volume held by traditional farm customers
Chapter 2:
Member Perspectives
By maintaining solid relationships with our customers, GreenStone has remained a strong and viable lender during the ebbs and flows of the ever-changing marketplace. Our rich tradition of lending to rural America is showcased in the following customer profiles. From roadside produce stand operators, to large organic producers and rural home owners, every GreenStone customer comes with a unique story of their own.
PAUL BUBLITZ — Age: 29
Commodity/Farm Type: Specialty/Roadside
Farm Location: Bay City, MI
Years Farming: 11
GreenStone Branch: Bay City
Size of Farm: 100 acres
DAVE CHENEY— Age: 48
Commodity/Farm Type: Cash Crop
Farm Location: Mason, MI
Years Farming: 30 years, 18 as farm owner
GreenStone Branch: Mason
Size of Farm: 1,850 acres
SCOTT JONELY — Age: 46
Commodity/Farm Type: Dairy
Farm Location: Weyauwega, WI
Years Farming: 27
GreenStone Branch: Clintonville
Size of Farm: 500 cows, 700 acres
BRIAN AND MARY PAT KIESSLING — Age: Brian 49, Mary Pat 46
Category Represented: AgriConsumer
Home Location: Traverse City, MI GreenStone Branch: Traverse City JIM SATTELBERG—
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Age: 58
Commodity/Farm Type: Organic Cash Crop
Farm Location: Caro, MI
Years Farming: 38
GreenStone Branch: Caro
Size of Farm: 2,600 acres, all organic
GreenStone Farm Credit Services
Paul Bublitz — Tell us about your farm: I recognized that there was a desire by local people to connect with farmers producing their food and that led me to start Paul’s Produce. My dad has a large cash crop farm that I worked on growing up, but I never enjoyed riding in a tractor all day. I saw a need early-on for agri-tourism and that drove me to operate the way I do. Operating a road side retail produce stand has allowed me to open my doors to the community and showcase my operation. Why do you choose to do business with GreenStone? When you’re 18 years old and operate a retail store, it is not easy to find a lender that understands your business. It was nice to build a relationship with a lender that understands how you operate and how the agriculture industry works.
Dave Cheney — Tell us about your farm: Our family farm was founded in 1861 and milked between 50 and 60 cows until my father, Richard, purchased the farm from my grandfather, Ludell, in 1969. My dad transitioned to swine while my grandfather remained involved in working on the farm. Our swine operation grew to around 240 head, and was farrow to finish. I bought the farm in 1997, and served as president of Michigan Pork Producers Association from 2007-2009. I maintained the swine farm until 2010 and have now transitioned to a cash crop operation raising corn, soybeans, and wheat. Why do you choose to do business with GreenStone? Originally I worked with a local bank but began shopping around for cheaper interest rates in the late 1990s. GreenStone offered lower rates and a Farm Cash Management Account that ties my line of credit directly to an interest earning account. With the Farm Cash Management Account I was able to use it as a primary account for my business. The staff in the Mason branch assisted with customization of statements for my account, making it easy for me to use it on a regular basis. With online banking, that has been a tremendous help as well. When I go into the office, I am talking with someone who knows farming. The local bank might have a lender with some farm experience, but GreenStone’s staff know the industry inside and out.
“ When I go into the office, I am talking with someone who knows farming. The local bank might have a lender with some farm experience, but GreenStone’s staff know the industry inside and out.”
Annual Report 2012
9
Scott Jonely — Tell us about your farm: My family operates a fourth generation dairy in Weyauwega, Wisconsin. My dad has been farming for more than 40 years, and we are currently working with GreenStone to execute a plan to transition the farm to myself. With restructuring of loans and the transition planning, GreenStone’s staff has helped guide our operation through the process of transitioning to the fourth generation of our family. Why do you choose to do business with GreenStone? The financial services officers we have done business with have been easy to work with and knowledgeable with what we are doing. The support staff has also been wonderful to work with. The interest rates offered by GreenStone are a lot better than what was offered by other lenders. With the size of loans we are working with, interest rates make a big difference. GreenStone’s credit line allows us to make interest on direct deposited milk checks which brings a little extra money in for our operation.
Brian and Mary Pat Kiessling — Why do you choose to do business with GreenStone? A couple of years ago we were trying to finance with another local lender. The market was changing and we were trying to take advantage of interest rates going down. We were basically told that they would not be able to help us, but suggested that we talk to GreenStone because we owned 88 acres. What sets the cooperative apart from other lenders? Our financial services officer was great! He never gave up when working on our transaction. He was very persistent when trying to get our transaction done. He was always great about communicating with us and keeping us updated; we never felt left in the dark during the five months it took to get our deal done. How has GreenStone helped you accomplish your goals? GreenStone was able to lock us in at a lower interest rate which gives us a sense of security after having an adjustable rate with our previous lender.
Jim Sattelberg — Tell us about your farm: Back in the early 2000s, my sons decided they wanted to be involved in farming, long-term. We decided to transition to an organic operation because we found a market demand for organic crops and the opportunity to have a consistently successful operation was there. Our key to success has been getting the right team, and key team members, involved in our farm. We hire people that are the best at what they do; we are not afraid to allow them to manage their area of expertise. Why do you choose to do business with GreenStone? We started doing business with GreenStone because they had the best rates at the time we were looking for financing. I really like the service I get, they understand agriculture and that is important to me. Commercial banks don’t have the understanding of how agriculture works. GreenStone recognizes that producers have good years and bad years, and they understand the cash flow of a complex operation.
10
GreenStone Farm Credit Services
FOOTNOTE 2: Growth GreenStone continues to experience consistent growth because of the success of our members. The prosperity of our members is important to us, and we take great pride in helping provide each member with resources to help them succeed. While we have grown, our cooperative structure allows us to remain strong and focused on providing exceptional customer service to each of our members. The growth and strength of GreenStone directly benefits you as well, with a record patronage payout of $26.5 million to be paid in March 2013.
Annual Report 2012
MEMBERS
LOAN GROWTH
NET EARNINGS
2010
20,000+
4.8%
$93.5 million
2011
21,000+
4.7%
$116.6 million
2012
23,000+
8.7%
$126.2 million
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FOOTNOTE 3:
Patronage Program
At GreenStone, we are only as successful as our members, and that is why we feel it is important to share our success. Through our unique patronage program, GreenStone’s members are able to take advantage of the overall financial success of the cooperative. With record earnings of $126.2 million in 2012, GreenStone will issue a record patronage payment of $26.5 million to members who have utilized qualified products. The patronage payment represents 21 percent of the cooperative’s net earnings. With the addition of this year’s patronage payout, GreenStone has paid more than $134.8 million in patronage to members since the inception of the patronage program in 2005.
PATRONAGE PAID TO CUSTOMERS (in millions) YEAR 2005
$12.5 $13.8
2006
$15.0
2007 $13.5
2008 2009 2010 2011 2012
12
$12.0 $18.2 $23.3
$26.5
GreenStone Farm Credit Services
Chapter 3:
More than Financing
At GreenStone, our story is based on agriculture, and that means we know the challenges and uncertainty producers face year-in and year-out. We have been there to help our members in good times and tough times for more than 95 years. When adversity strikes, our staff is proactive and works hard to assist affected members. When Mother Nature arrived with devastating
can help alleviate the impact of unexpected
weather for fruit producers in early 2012,
events. Crop insurance is a cost-effective way
GreenStone worked with Michigan lawmakers
to help manage your operationâ&#x20AC;&#x2122;s risk. With
to help draft legislation providing low-interest
a team of more than 30 full-time employees
loans to affected producers. While producers
serving members, GreenStone is a leader in the
were praying for rain during a drought stricken
crop insurance industry. Whether you require
summer, we were there to restructure loans
coverage for row crops or specialty crops, we
and keep members from falling behind.
can help!
While many factors cannot be controlled by producers, a sound risk management strategy
39.6
2,994
Million dollars in indemnity claims paid to GreenStone customers in 2012
Crop insurance claims processed in 2012
35
1.4
Full-time crop insurance experts with more than 100 years of combined experience
Million acreages insured with GreenStone in 2012
Acknowledgement:
More than Words
With 37 locations throughout Michigan and northeast Wisconsin, GreenStone is rooted in the rural communities we serve. We know being a good neighbor means being there
GreenStone’s CoreFour Values are a driving force
to support one another in good times and tough
behind our dedicated employees and their efforts
times, and lending a helping hand whenever we
within their communities. The cooperative’s
can. That is one of the reasons GreenStone takes
leadership team encourages employees to get
such an active role in supporting local charities
involved within their communities and supports their
and organizations that work tirelessly to make our
involvement by providing each staff member with
communities a better place to call home.
paid time off to participate in such activities. Whether
Throughout 2012, GreenStone contributed more
it means volunteering time or donating money, our
than $670,000 to various community groups; young, beginning and small farmer initiatives; youth programs; and multi-cultural organizations; and supported a wide range of causes that are important
475-plus employees are committed to supporting the communities that support GreenStone. In 2012, our staff volunteered more than 3,000 hours supporting a diverse group of organizations and causes.
to our members. Volunteer Focus:
Cheryl also serves as a member
volunteering at Ele’s Place in
of the Ele’s Place volunteer
Cheryl Carlton has been with
2010 along with her daughter,
committee which allows her to
GreenStone for five years,
Becky. As a family greeter,
help in the recruitment of new
and currently works in the
Cheryl spends two hours at Ele’s
volunteers, as well as coordinate
organization’s legal department.
Place each Wednesday night
their training. She also assists
She is a perfect example of
getting to know the families.
with planning of special events
an employee putting the
Learning about the journey that
and fundraisers for the facility.
cooperative’s CoreFour Values
has brought each family to the
into action. When Cheryl
center is an honor for her.
“Working with the new
isn’t working hard to service GreenStone’s more than 23,000 members, she is spending her spare time making a difference working with Lansing, Michigan based Ele’s Place; a nonprofit, community-based organization dedicated to creating awareness of and support for grieving children and their families.
14
to her community, Cheryl began
volunteers is something I find
“I can’t think of a better way to
particularly gratifying,” she
spend my Wednesday evenings.
said. “Seeing their faces after
The families get to know you
they have completed their first
and depend on you to be there
volunteer shift at Ele’s Place is a
to help them through their
joy, and knowing our volunteer
grieving process,” said Cheryl.
staff is making a difference in
“Volunteering at Ele’s keeps me
the lives of these families who
grounded. Knowing what these
have faced so much adversity is
families are going through helps
truly rewarding.”
me realize we need to live each
To learn more about Ele’s Place,
Born and raised in Lansing, and
day to its fullest with a positive
looking for a way to give back
attitude.”
visit www.elesplace.org.
GreenStone Farm Credit Services
Contents:
16
Consolidated Five-Year Summary of Selected Financial Data
17 Management’s Discussion and Analysis 25 Report of Management
26 Report on Internal Control Over Financial Reporting
27 Report of Audit Committee
28 Independent Auditor’s Report
29 Consolidated Financial Statements
33 Notes to Consolidated Financial Statements
50 Disclosure Information Required by Regulations
53 Funds Held Program
53 Young, Beginning, and Small Farmers and Ranchers
AgriBank, FCB’s (AgriBank) financial condition and results of operations materially impact members’ investment in GreenStone Farm Credit Services, ACA. To request free copies of the AgriBank and combined AgriBank and Affiliated Associations’ financial reports contact us at 3515 West Road, East Lansing, Michigan 48823, (800) 968-0061, or by e-mail to Travis.Jones@greenstonefcs.com, or through our website at www.greenstonefcs.com. You may also contact AgriBank at 30 East 7th Street, Suite 1600, St. Paul, MN 55101, (651) 282-8800, or by e-mail at agribankmn@agribank.com. The AgriBank and combined AgriBank and Affiliated Associations’ financial reports are also available through AgriBank’s website at www.agribank.com. To request free copies of our 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.
OUR STORY
Consolidated Five-Year Summary Of Selected Financial Data GreenStone Farm Credit Services, ACA (Dollars in thousands) STATEMENT OF CONDITION DATA Loans Allowance for loan losses Net loans Investment in AgriBank, FCB Investment securities Acquired property Other assets Total assets Obligations with maturities of one year or less Obligations with maturities greater than one year Total liabilities Protected members’ equity Capital stock and participation certificates Unallocated surplus Total members’ equity Total liabilities and members’ equity STATEMENT OF INCOME DATA Net interest income Provision for loan losses Patronage income Other expense, net (Benefit from) provision for income taxes Net income KEY FINANCIAL RATIOS Return on average assets Return on average members’ equity Net interest income as a percentage of average earning assets Members’ equity as a percentage of total assets Net charge-offs as a percentage of average loans Allowance for loan losses as a percentage of loans Permanent capital ratio Total surplus ratio Core surplus ratio OTHER Loans serviced for AgriBank, FCB Patronage distribution payable to members
2012
2011
2010
2009
2008
$5,726,832 41,964 5,684,868 151,615 40,757 31,928 118,901
$5,181,888 49,771 5,132,117 145,621 33,820 62,172 115,015
$4,878,869 43,293 4,835,576 143,560 9,120 49,644 112,785
$4,573,522 35,326 4,538,196 142,336 — 23,257 93,232
$4,563,309 28,624 4,534,685 129,889 — 6,739 88,812
$6,028,069
$5,488,745
$5,150,685
$4,797,021
$4,760,125
$75,392 4,903,770 4,979,162
$4,540,728 — 4,540,728
$62,244 4,234,600 4,296,844
$66,822 3,952,950 4,019,772
$91,015 3,941,836 4,032,851
3 19,742 1,029,162 1,048,907 $6,028,069
4 18,512 929,501 948,017 $5,488,745
5 17,599 836,237 853,841 $5,150,685
6 16,305 760,938 777,249 $4,797,021
8 15,295 711,971 727,274 $4,760,125
$162,095 10,045 26,005 54,469 (2,571) $126,157
$154,202 16,490 23,889 47,024 (1,990) $116,567
$138,459 35,495 29,296 34,317 4,453 $93,490
$125,245 38,853 20,309 45,839 (93) $60,955
$113,893 23,337 14,594 39,315 3,144 $62,691
2.2% 12.5%
2.2% 12.9%
1.9% 11.4%
1.3% 8.1%
1.4% 8.8%
3.0% 17.4% 0.3% 0.7% 14.6% 14.3% 14.3%
3.1% 17.3% 0.2% 1.0% 14.5% 14.1% 14.1%
3.0% 16.6% 0.6% 0.9% 13.8% 13.4% 13.4%
2.8% 16.2% 0.7% 0.8% 13.0% 12.7% 12.7%
2.6% 15.3% 0.1% 0.6% 12.7% 12.3% 12.3%
$ — $ — $ — $26,495 $23,313 $18,200
$84 $12,000
$109 $13,500
The patronage distribution to members accrued for the year ended December 31, 2012 will be distributed in cash during the first quarter of 2013. The patronage distributions accrued for the years ended December 31, 2011, 2010, 2009, and 2008 were distributed in cash during the first quarter of each subsequent year. No income was distributed to members in the form of dividends, stock, or allocated surplus during these periods.
16
GreenStone Farm Credit Services
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
Management’s Discussion and Analysis GreenStone Farm Credit Services, ACA The following commentary reviews the consolidated financial position and consolidated results of operations of GreenStone Farm Credit Services, ACA and its subsidiaries and provides additional specific information. The accompanying consolidated financial statements and notes to the consolidated financial statements also contain important information about our financial position and results of operations. THE FARM CREDIT SYSTEM The Farm Credit System (System) is a nationwide system of cooperatively owned banks and associations established by Congress to meet the credit needs of American agriculture. At December 31, 2012, the System consisted of three Farm Credit Banks, one Agricultural Credit Bank, and eighty-two customer owned cooperative lending institutions (associations). The System serves all 50 states, Washington D.C., and Puerto Rico. This network of financial cooperatives is owned and operated by the rural customers the System serves, primarily the American farmer and rancher. AgriBank, FCB (AgriBank), a System bank, and its affiliated associations are collectively referred to as the AgriBank Farm Credit District (AgriBank District or the District). GreenStone Farm Credit Services, ACA is one of the affiliated associations in the District. The Farm Credit Administration (FCA) is authorized by Congress to regulate the System banks and associations. The Farm Credit System Insurance Corporation (Insurance Corporation) ensures the timely payment of principal and interest on Systemwide debt obligations, the retirement of protected borrower capital at par or stated value, and is used for other specified purposes.
Forward-Looking Information This Annual Report includes forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Words such as “anticipate”, “believe”, “estimate”, “may”, “expect”, “intend”, “could”, “should”, “will”, and similar expressions are used to identify such forward-looking statements. These statements reflect our current views with respect to future events. However, actual results may differ materially from our expectations due to a number of risks and uncertainties which may be beyond our control. These risks and uncertainties include, but are not limited to: • political, legal, regulatory, financial, and economic conditions and developments in the United States (U.S.) and abroad, • economic fluctuations in the agricultural and farm-related business sectors, • unfavorable weather, disease, and other adverse climatic or biological conditions that periodically occur and impact agricultural productivity and income, • changes in U.S. government support of the agricultural industry and the System as a government-sponsored enterprise, as well as investor and rating agency actions relating 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, and • changes in our assumptions for determining the allowance for loan losses, other than temporary impairment, and fair value measurements.
Annual Report 2012
Loan Portfolio Total loans were $5.7 billion at December 31, 2012, an increase of $544.9 million from December 31, 2011. The components of total loans for the prior three years were as follows (in thousands): As of December 31
2012
2011
2010
Real estate mortgage $3,264,589 $2,781,855 $2,524,666 Production and intermediate term 1,793,384 1,710,264 1,635,739 Agribusiness 321,097 322,168 357,571 Rural residential real estate 186,355 176,668 173,972 Finance leases 25,154 33,224 35,378 Other 66,149 65,258 58,248 Nonaccrual 70,104 92,451 93,295 Total loans
$5,726,832 $5,181,888 $4,878,869
The other category is comprised of communication and energy related loans as well as loans originated under our Mission Related Investment authority. As part of a separately maintained pool, we have sold participation interests in real estate loans to AgriBank. The total participation interests in this pool were $402.4 million, $457.1 million, and $507.6 million, at December 31, 2012, 2011, and 2010, respectively. Our year end owned and managed mortgage volume increased 10.7% over December 2011. The year end commercial loan and lease volume increased 4.1% when compared to December 2011. Combined, our growth in owned and managed loans for 2012 was 8.7%. This level of asset growth is higher than the 4.7% asset growth rate experienced in 2011. Loan asset growth exceeded 6.5% in all defined market segments, with the AgriConsumer and Traditional segments both increasing in excess of 10.0%. The Capital Markets segment experienced a 7.3% growth rate as compared to year end 2011. High demand for credit and overall favorable credit conditions in our Traditional Farm segment resulted in a growth rate of 10.7% in this key market segment, compared to 10.3% the previous year. Market demand was also solid in our AgriConsumer segment resulting in an asset growth rate of 11.5% compared to 6.2% in 2011. This is reflective of the improving economic conditions in our marketplace. Also, growth in all of our market segments was positively impacted by historically low interest rates. The outlook for overall portfolio growth for 2013 is not as optimistic as our experience in 2012. Increased competitive pressure is expected to create additional challenges to our growth in the Capital Markets and Commercial Producers segments. New entrants into the agricultural lending market will put pressure on our growth levels and returns in these segments. We expect moderate demand for expansion capital in some animal protein and dairy sectors in the second half of 2013. The level of this demand will depend on the progress and outlook for the 2013 grain crop as this will determine feed costs. The growing conditions in our chartered territory were more favorable than in many parts of the country in 2012. The exceptions to this were our many fruit commodities that were damaged by the early spring warm and freeze cycle as well as the extreme South and Southwest areas in Michigan where inadequate moisture was present during the growing season. We continue to see moderate pressure on land values and capital investment continues to be present in the marketplace. The general non-farm economic weakness that has been in place in our territory for the last several years is slowly giving way to improvement. This should continue to provide opportunities 17
OUR STORY
to return to expected growth rates in the AgriConsumer segment, like that experienced in 2012. We expect all market segments to show positive growth in 2013, with the Traditional and AgriConsumer segments providing the highest growth rates. However, the positive earnings experience in the Traditional segment will increase principal repayments to reduce growth rates from 2012 peak levels. We offer variable, fixed, capped, indexed, and adjustable interest rate loan programs and fixed interest rate lease programs to our borrowers. We determine interest margins charged on each lending program based on cost of funds, market conditions, and the need to generate sufficient earnings. PORTFOLIO DISTRIBUTION We are chartered to operate throughout Michigan and in certain counties in Wisconsin. Our portfolio is fairly evenly distributed among the territory with no material concentrations in any one county. This is evidenced by there being no individual county representing greater than 5% of our total loan volume at December 31, 2012. Commodities exceeding 5% of our portfolio included: dairy 22.9%, country home living 20.8%, and cash crops 20.0%. Additional commodity concentration information is included in Note 3. Our level of portfolio diversification has not changed materially over the last year and continues to be one of our portfolio strengths. Due mainly to our diversity in commodities and the varied operating cycles that those commodities experience, our commercial volume levels do not show significant levels of seasonality. AGRICULTURAL AND ECONOMIC CONDITIONS Extensive drought in the U.S., particularly in the Midwest, has reduced crop yields, resulting in increased crop prices. Multi-peril crop insurance (MPCI) will generally mitigate the economic impact of the drought for most crop producers. These insurance policies range in coverage levels from catastrophic and yield protection (at the lower end) to revenue protection (at the higher end). The MPCI policies are sold and serviced through private insurance companies designated by the United States Department of Agriculture (USDA) to provide insurance coverage. These companies share the risk of loss by reinsuring with large reinsurance companies. In addition, the USDA and its Federal Crop Insurance Corporation reinsures a portion of the risk along with the other private reinsurance companies. The USDA has reported that 84% of corn and soybean acres (collectively) were covered under MPCI in 2012. This is modestly lower than the 88% and 85% for corn and soybeans, respectively, covered in 2011. The majority of these policies provide for revenue protection. In addition, many crop producers have strengthened their financial positions over the past several years and are expected to withstand the financial impact of the drought. However, increased prices for corn and soybeans and other grains are placing pressure on livestock, poultry, ethanol and dairy producers who rely on these inputs. Some producers have mitigated a portion of this risk by locking in prices for these inputs for 2012. However, some users of corn and soybeans in our portfolio will be unable to avoid some level of losses as we move into 2013. The USDA is forecasting 2012 net farm income of $112.8 billion, down 4.3% from 2011 which was a record year. Despite gains in almost all sources of farm income, large increases in farm expenditures (especially for purchased feed) more than offset those price-led gains to farm income. This is a $29.5 billion, or 35.6%, increase above the previous five year average (2007-2011) of $83.3 billion. The impact of the 2012 drought was buffered by significant levels of crop insurance in conjunction with high commodity prices resulting in record income levels for the majority of our grain producers. Not every agriculture industry achieved positive net income in 2012. Ethanol, dairy, and the protein sector were negatively impacted by the high grain pricing in the second half of 2012, reducing or driving net income negative. Weather also negatively impacted the orchard industry in Michigan. Additionally, the general economy continued to challenge the timber, greenhouse, and nursery industries. 18
We were very fortunate that severe drought conditions only touched a limited portion of Michigan and Northeast Wisconsin. In our association territory, 2012 crop yields varied from record setting levels in portions of Northeast Wisconsin and central Michigan to significant yield decreases in southern counties of Michigan. The early season frost in Michigan severely damaged orchard crop yields. For the most part, revenue losses were offset by crop insurance. The exception was the cherry industry, where crop insurance is only available to the sweet cherries. The hog and broiler industries were negatively impacted by grain prices as well. Operations with open market business models saw cash flows turn negative in the second half of the year. Fortunately, many of our large hog operations hedged margins through mid-2013. Broiler industry margins are projected to remain negative until the industry is able to reduce supply and renegotiate sale prices for their product. Broiler operations are forecasting negative cash flows well into the second half of 2013. For cash crop operations impacted by the drought, crop insurance with revenue protection mitigated a significant portion of the production losses. Michigan and Wisconsin farming operations have historically carried significant levels of crop insurance. USDA Risk Management Agency reports indicate that in 2011, 72% of the corn and soybean acres were covered, 83% of sugar beets, and 60% of all crop acreage having some form of crop insurance. 2012 coverage levels were similar. For operations not impacted by the drought, high commodity prices coupled with very good yields resulted in significant profit opportunities in 2012. General economic conditions of the U.S., and in particular the state of Michigan, continue to challenge industries tied to the housing sector (timber, nursery, and greenhouse) in our loan portfolio. Overall, the greenhouse industry experienced a solid year financially as the early warm spring temperatures provided early sales opportunities for many producers. There continues to be a wide range of financial results as this industry continues to consolidate and adjust business models to align with long term wholesale and retail delivery channels. The financial health of the nursery and timber industries will not improve until the U.S. housing market begins to recover to the historical average for the industry. The AgriConsumer market segment is showing signs of improvement and increased loan activity. The Bureau of Labor and Statistics reported the unemployment rate of Wisconsin improved from 7.1% to 6.6% year over year as of November 2012 and Michigan improved over this same period of time from 9.6% to 8.9%. While excess housing levels remain a challenge for the state of Michigan as a whole, we are starting to see pockets of improvement as existing home sales and new construction levels have started to gradually improve. Refinancing activity, due to low interest rates and new banking regulations, continues to be robust. Good quality land continues to sell very quickly. Land prices have experienced significant upward pressure over the past 16 months in the Michigan Thumb, the southwest corner of Michigan, and in portions of Northeast Wisconsin. Our annual study of real estate values documented an increase of 7% to 24% for bare farm land for the annualized period ending June 2012. A significant portion of our territory experienced greater than 20% increases in land values. We anticipate a continuation of upward pressure on land values throughout our territory in 2013. Marginal cropland and â&#x20AC;&#x153;Land in Transitionâ&#x20AC;? are experiencing moderate pricing pressure throughout our territory with the exception of North East Central Wisconsin. Recreational land prices decreased 10% and have dropped 45% since 2006. This reflects general economic conditions where disposable income to support purchases of hunting and recreational lands remains limited. The agriculture outlook for 2013 is for a reduction in net farm income over the previous two years. In general, agriculture will start 2013 with significant levels of liquidity in the form of cash and inventory. Weather and world economic conditions will once again have a significant influence on net income opportunities in 2013. Grain stock levels remain tight on the world market. Protein sector net income opportunities will be reduced GreenStone Farm Credit Services
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
as high feed costs and building inventories will continue to keep pressure on profit margins. World economic conditions are showing signs of softening. As reported in International Monetary Fund (IMF) World Economic Outlook (Oct. 9, 2012), advanced economies were projected to grow by 1.3% in 2012, compared with 1.6% last year and 3.0% in 2010, with public spending cutbacks and the still-weak financial system weighing on prospects. A major wildcard for 2013 will again be the Eurozone. The majority of Europe was in a recession in 2012 with Spain and Italy having replaced Greece as the center of attention and Germany’s economy having slowed to a 0.9% gross domestic product (GDP) growth rate in 2012. The worsening of economic conditions in Europe negatively impacted the economies in China and other developing countries as they are heavily reliant upon Europe for export sales. U.S. agriculture has a significant level of exports to China and other developing countries that are vulnerable to any contraction of economic growth beyond forecasted levels in 2013. The Chicago Federal Reserve (Nov 30, 2012) projected U.S. GDP growth, while remaining below historical averages, will improve from 1.7% in 2012 to 2.3% in 2013. The continued inability of Washington to bring certainty to core issues such as income tax reform, growing deficits and new regulation has businesses remaining cautious with new investment and expansion plans. Additional evidence of an economy that continues to underperform was the decision by the Federal Reserve in September to embark on a third round of quantitative easing. The Federal Reserve has signaled to the market that interest rates will likely remain low through mid-2015. ANALYSIS OF RISK The following table summarizes risk assets (accruing volume includes accrued interest receivable) and delinquency information (dollars in thousands): As of December 31
2012
2011
2010
$70,104 850
$92,451 238
$93,295 153
—
—
908
Total risk loans
70,954
92,689
94,356
Acquired property
31,928
62,172
49,644
$102,882
$154,861
$144,000
1.2%
1.8%
1.9%
0.7%
1.1%
1.6%
Loans: Nonaccrual Accruing restructured Accruing loans 90 days or more past due
Total risk assets Risk loans as a percentage of total loans Total delinquencies as a percentage of total loans
nonaccrual loans remained at an acceptable level at December 31, 2012. At December 31, 2012, 68.4% of our nonaccrual loans were current in their payment status. Accruing restructured loans increased slightly during 2012 from $238 thousand as of December 31, 2011 to $850 thousand as of December 31, 2012. At December 31, 2012, 100% of our accruing restructured loans were current in their payment status. There were no loans 90 days or more past due and still accruing interest at December 31, 2011 or at December 31, 2012. Acquired property inventory decreased from $62.2 million as of December 31, 2011 to $31.9 million as of December 31, 2012. This improvement was primarily due to the sale of a commercial dairy, a large tract of timber and a lumber concentration yard business with balances of $33.4 million in total at December 31, 2011. The sale of the large tract of timber and the lumber concentration yard business included losses of $562 thousand and $8.6 million, respectively. As of December 31, 2012, approximately $28.5 million, or 89.4%, of the acquired property portfolio was comprised of four large assets. These assets are related to the timber and greenhouse/nursery industries. The remaining $3.4 million primarily related to our AgriConsumer portfolio. PORTFOLIO CREDIT QUALITY The credit quality of our portfolio remained fairly stable throughout 2012. Adversely classified owned assets increased slightly from 3.7% of the portfolio at December 31, 2011 to 3.9% of the portfolio at December 31, 2012. Adversely classified assets are assets that we have identified as showing some credit weakness outside normal credit standards. The credit quality of our core market of traditional production farm loans remains very sound. Weaker borrowers in our timber, greenhouse/nursery, and grain elevator portfolios continued to be challenged financially during 2012. We have considered portfolio credit quality in assessing the reasonableness of our allowance for loan losses. The resulting level of credit quality, when combined with our earnings and addition to capital surplus, results in an adverse asset to risk funds ratio of 27.8%. Management believes the level of adverse assets is manageable. While this is an improvement over last year of 30.2% and the high water mark of 61.5% in October of 2009, it remains above our goal of maintaining this ratio at or below 25.0%. This ratio is a good measure of the association’s risk-bearing ability. In certain circumstances, we use government guarantee programs to reduce the risk of loss. At December 31, 2012, $314.3 million of our loans were, to some level, guaranteed under these programs.
Our risk assets have decreased from December 31, 2011 and remain at acceptable levels. Total risk loans as a percentage of total loans remains well within our established risk management guidelines. Nonaccrual loan assets decreased from $92.5 million (1.8% of loans) as of December 31, 2011 to $70.1 million (1.2% of loans) as of December 31, 2012. This $22.4 million decrease in nonaccrual volume was primarily attributable to the partial charge-off and subsequent transfer to acquired property of a large greenhouse totaling $13.1 million at December 31, 2011. In addition, two separate large dairy relationships totaling $5.3 million at December 31, 2011 were sold or paid-off during 2012. Also, a $3.0 million charge-off related to a dairy participation loan was recorded during 2012. As of December 31, 2012, approximately 34% of the nonaccrual loan portfolio was comprised of greenhouse and nursery loans, 24% part-time farmers, 18% dairy, 9% rural housing, 9% general livestock farms, and 4% miscellaneous farm operations. The volume of
Annual Report 2012
19
OUR STORY
ANALYSIS OF THE 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, probability of default, estimated severity of loss given default, portfolio quality, and current economic and environmental conditions. The allowance for loan losses decreased $7.8 million from December 31, 2011 to December 31, 2012. The decrease in allowance for loan losses is primarily due to net charge-offs exceeding provision for loan losses. During 2012, $10.0 million of provision for loan losses was recorded, which was offset by $17.8 million of net charge-offs. The total net chargeoffs were primarily due to large charge-offs in dairy and greenhouse/ nursery industries. The following table presents allowance coverage, charge-off, and adverse asset information: As of December 31 Allowance as a percentage of: Loans Nonaccrual loans Total risk loans Net charge-offs as a percentage of average loans Adverse assets to risk funds
2012
2011
2010
0.7% 59.9% 59.1%
1.0% 53.8% 53.7%
0.9% 46.4% 45.9%
0.3% 27.8%
0.2% 30.2%
0.6% 45.0%
In our opinion, the allowance for loan losses was reasonable in relation to the risk in our loan portfolio at December 31, 2012. Additional loan information is included in Notes 3, 11, 12, 13, and 14.
Investment Securities In addition to loans, we hold investment securities. Investments include our share of securities made up of loans guaranteed by the Small Business Administration. Investment securities totaled $40.8 million, $33.8 million, and $9.1 million at December 31, 2012, 2011, and 2010, respectively. The investment portfolio is evaluated for other-than-temporary impairment. To date, we have not recognized any impairment on our investment portfolio. Additional investment securities information is included in Notes 5 and 14.
Results of Operations The following table illustrates profitability information (dollars in thousands): For the year ended December 31 Net income Return on average assets Return on average members' equity
2011
2010
$116,567 2.2%
$93,490 1.9%
12.5%
12.9%
11.4%
Changes in these ratios relate directly to: • changes in income as discussed in the following sections, • changes in assets as discussed in the Loan Portfolio and Investment Securities sections, and • changes in members’ equity as discussed in the Capital Adequacy section. The following table summarizes the components of net income (in thousands): For the year ended December 31
2012
2011
2010
Net interest income $162,095 Provision for loan losses 10,045 Patronage income 26,005 Financially related services income 9,665 Fee income 3,408 Acquired property net (loss) income (10,152) Allocated insurance reserve accounts distribution 5,209 Miscellaneous income, net 1,146 Operating expense 63,745 (Benefit from) provision for income taxes (2,571)
$154,202 $138,459 16,490 35,495 23,889 29,296 9,049 10,482 3,408 3,668 (753) 1,820
(1,990)
4,453
Net income
$116,567
$93,490
$126,157
— 1,808 60,536
4,842 1,190 56,319
The following table summarizes the changes in components of net income (in thousands): Increase (decrease) in net income Net interest income Provision for loan losses Patronage income Financially related services income Fee income Acquired property net (loss) income Allocated insurance reserve accounts distribution Miscellaneous income, net Operating expense Benefit from income taxes Total change in net income
20
2012 $126,157 2.2%
2012 vs. 2011 $7,893 6,445 2,116 616 — (9,399)
2011 vs. 2010 $15,743 19,005 (5,407) (1,433) (260) (2,573)
5,209 (662) (3,209) 581
(4,842) 618 (4,217) 6,443
$9,590
$23,077
GreenStone Farm Credit Services
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
NET INTEREST INCOME Net interest income was $162.1 million for the year ended December 31, 2012. The following table quantifies changes in net interest income (in thousands):
2012 vs. 2011
2011 vs. 2010
$11,828 (5,381)
$13,049 572
Changes in volume Changes in rates Changes in nonaccrual income and other Net change
1,446
2,122
$7,893
$15,743
Net interest income included income on nonaccrual loans that totaled $1.5 million, $2.3 million, and $1.2 million in 2012, 2011, and 2010, respectively. Nonaccrual income is recognized when: • received in cash, • collection of the recorded investment is fully expected, and • prior charge-offs have been recovered. Net interest margin (net interest income divided by average earning assets) was 3.0%, 3.1%, and 3.0% in 2012, 2011, and 2010, respectively. We expect margins to compress in the future as interest rates rise and competition increases. PROVISION FOR LOAN LOSSES The recorded provision for loan losses during 2012 of $10.0 million was primarily due to specific reserves and charge-offs necessary for loan relationships in the dairy, ethanol, and greenhouse/nursery industries. The variance in the provision for loan losses from 2011 is due to improved credit quality and a recovery on a large participated dairy loan relationship. Refer to Note 3 for additional discussion. PATRONAGE INCOME We received patronage income based on the average balance of our note payable to AgriBank. AgriBank’s Board of Directors sets the patronage rate. We recorded patronage income of $14.5 million, $13.2 million, and $16.8 million in 2012, 2011, and 2010, respectively. Changes in our note payable to AgriBank and patronage rate changes caused the variances in the patronage income amounts. The patronage rates paid by AgriBank were 32 basis points, 31 basis points, and 42 basis points in 2012, 2011, and 2010, respectively. Since 2008 we have participated in the asset pool program with AgriBank in which we sell participation interests in certain real estate loans. As part of this program we received patronage income in an amount that approximated the net earnings of loans. Net earnings represents the net interest income associated with these loans adjusted for certain fees and costs specific to the related loans as well as adjustments deemed appropriate by AgriBank related to the credit performance of the loans, as applicable. In addition, we received patronage income in an amount that approximated the wholesale patronage had we retained the volume. Patronage declared on these pools is solely at the discretion of the AgriBank Board of Directors. We recorded asset pool patronage income of $10.9 million, $10.7 million, and $12.5 million in 2012, 2011, and 2010, respectively. The patronage recorded included $587 thousand and $504 thousand of our share of the distribution from the Allocated Insurance Reserve Accounts (AIRA) related to the asset pool program in 2012 and 2010, respectively. These reserve accounts were established in previous years by the Insurance Corporation when premiums collected increased the level of the Farm Credit Insurance Fund beyond the required 2% of insured debt. No such distribution was received in 2011.
Annual Report 2012
We also received a partnership distribution resulting from our participation in the AgDirect trade credit financing program. The program is facilitated by another AgriBank District association through a limited liability partnership (AgDirect, LLP), in which we are a partial owner. AgriBank purchases a 100% participation interest in the program loans from AgDirect, LLP. We received patronage income in an amount that approximated our share of the net earnings of the loans in the program, adjusted for required return on capital and servicing and origination fees. Patronage is declared solely at the discretion of the AgriBank Board of Directors and is paid to AgDirect, LLP, which in turn distributes it to the participating associations. In 2012, we received patronage income of $508 thousand. No patronage was received in 2011 or 2010. NON-INTEREST INCOME The change in non-interest income is primarily due to the following: The increase in financially related services income is primarily due to growth in crop insurance commissions and tax service fees during 2012. The decrease in acquired property net (loss) income is primarily due to losses generated from the sale of a large tract of timber and a lumber concentration yard of $562 thousand and $8.6 million, respectively. The increase in AIRA distribution is a result of our share of distributions from AIRA of $5.2 million during 2012 and $4.8 million during 2010. There was no distribution in 2011. OPERATING EXPENSES The following presents a comparison of operating expenses by major category and the operating rate (operating expenses as a percentage of average earning assets) for the past three years (dollars in thousands): For the year ended December 31
2012
2011
2010
Salaries and employee benefits Purchased and vendor services Communications Occupancy and equipment Advertising and promotion Examination Farm Credit System insurance Other
$40,709 3,558 1,422 6,905 2,322 1,369 2,285 5,175
$38,106 2,868 1,438 6,615 2,219 1,314 2,576 5,400
$34,963 3,182 1,375 6,249 2,016 1,220 2,083 5,231
Total operating expenses
$63,745
$60,536
$56,319
1.2%
1.2%
1.2%
Operating rate
The increase in operating expenses is primarily related to increases in salaries and employee benefits. (BENEFIT FROM) PROVISION FOR INCOME TAXES The variance in (benefit from) provision for income taxes is related to our estimate of taxes based on taxable income. Patronage distributions to members reduced our tax liability in 2012, 2011, and 2010. Refer to Note 9 for additional discussion.
21
OUR STORY
Funding and Liquidity
Initiatives
FUNDING We borrow from AgriBank under a note payable, in the form of a line of credit, as described in Note 7. During 2012, our average balance was $4.5 billion with an average interest rate of 1.7%. Our average balance during 2011 was $4.3 billion with an average interest rate of 1.9% and during 2010 our average balance was $4.0 billion with an average interest rate of 2.2%. Our other source of lendable funds is from unallocated surplus. The repricing attributes of our line of credit generally correspond to the repricing attributes of our loan portfolio which significantly reduces our market interest rate risk. LIQUIDITY Our approach to sustaining sufficient liquidity to fund operations and meet current obligations is to maintain an adequate line of credit with AgriBank. At December 31, 2012, we had $1.1 billion available under our line of credit. We generally apply excess cash to this line of credit. We have a financial relationship with Federal Agricultural Mortgage Corporation (Farmer Mac), an institution of the System, to provide a standby commitment program for the repayment of principal and interest on certain loans. In the event of default, subject to certain conditions, we have the right to sell the loans identified in the agreement to Farmer Mac. This program remains in place until receipt of full payment. As of December 31, 2012, $11.8 million of our loans were in this program.
Capital Adequacy Total members’ equity increased $100.9 million during 2012 primarily due to net income for the period partially offset by patronage distribution accruals. Members’ equity position information is as follows (dollars in thousands): As of December 31 Members’ equity Surplus as a percentage of members’ equity Permanent capital ratio Total surplus ratio Core surplus ratio
2012
2011
2010
$1,048,907
$948,017
$853,841
98.1% 14.6% 14.3% 14.3%
98.0% 14.5% 14.1% 14.1%
97.9% 13.8% 13.4% 13.4%
Our capital plan is designed to maintain an adequate amount of surplus and allowance for loan losses which represents our reserve for adversity prior to impairment of stock. We manage our capital to allow us to meet member needs and protect member interests, both now and in the future. At December 31, 2012, our permanent capital, total surplus, and core surplus ratios significantly exceeded the regulatory minimum requirements. Additional discussion of these regulatory ratios is included in Note 8. In addition to these regulatory requirements, we establish an optimum permanent capital target range. This target allows us to maintain a capital base adequate for future growth and investment in new products and services. The target is subject to revision as circumstances change. As of December 31, 2012, our optimum permanent capital target range was 13% to 17%.
We are involved in a number of initiatives designed to improve our credit delivery, related services, and marketplace presence. PROPARTNERS FINANCIAL We have an alliance with nine other Farm Credit association partners to provide producer financing for agribusiness companies under the trade name, ProPartners Financial (ProPartners). In September 2012, Northwest Farm Credit Services (Northwest) joined the alliance resulting in expanded agribusiness client programs in which ProPartners loans can be originated. The addition of Northwest increased our financial strength, processing capacity, technology, expertise, and geographic diversity to support our clients’ growth. ProPartners is directed by representatives from participating associations and has employees in California, Illinois, Indiana, Kansas, Minnesota, Missouri, North Dakota, Tennessee, and Washington. The income, expense, and loss sharing arrangements are based on each association’s participation interest in ProPartners’ volume. Each association’s allocation is established according to a prescribed formula which includes risk funds of the associations. We had $128.6 million, $133.6 million, and $122.6 million of ProPartners volume at December 31, 2012, 2011, and 2010, respectively. We also had $133.0 million of available commitment on ProPartners loans at December 31, 2012. TRADE CREDIT We have entered into agreements with certain dealer networks to provide alternative service delivery channels to borrowers. These trade credit opportunities create more flexible and accessible financing options to borrowers through programs such as dealer point-of-purchase financing. We participate in the AgDirect trade credit financing program which includes origination and refinancing of agricultural equipment loans through independent equipment dealers. The program is facilitated by another AgriBank District association through a limited liability partnership in which we are partial owners. AGRISOLUTIONS We have an alliance with AgriSolutions, a farm software and consulting company, to provide farm records, income tax planning and preparation services, farm business consulting, and producer education seminars. FARM CASH MANAGEMENT We offer Farm Cash Management to our members. Farm Cash Management links members’ revolving lines of credit with an AgriBank investment bond to optimize members’ use of funds. AGRICULTURE AND RURAL COMMUNITY BOND PROGRAM We participate in the Agriculture and Rural Community Bond Program authorized during 2006 by the FCA in order to meet the changing needs of agriculture and rural America by making investments that support farmers, ranchers, agribusinesses, and their rural communities and businesses. These investments will help to increase their well-being and prosperity by providing an adequate flow of capital into rural areas. We had $557 thousand, $603 thousand, and $645 thousand of volume under this program at December 31, 2012, 2011, and 2010, respectively.
The changes in our capital ratios reflect changes in capital and assets. Refer to the Loan Portfolio and the Investment Securities sections for further discussion of the changes in assets. Additional members’ equity information is included in Note 8.
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GreenStone Farm Credit Services
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
Relationship with AgriBank BORROWING We borrow from AgriBank to fund our lending operations in accordance with the Farm Credit Act. Approval from AgriBank is required for us to borrow elsewhere. A General Financing Agreement, as discussed in Note 7, governs this lending relationship. Cost of funds under the General Financing Agreement includes: • a marginal cost of debt component, • a spread component, which includes cost of servicing, cost of liquidity, and bank profit, and • a risk premium component, if applicable. The marginal cost of debt approach simulates matching the cost of underlying debt with substantially the same terms as the anticipated terms of our loans to borrowers. This methodology substantially protects us from market interest rate risk. In the periods presented, we were not subject to the risk premium component. INVESTMENT We are required to invest in AgriBank capital stock as a condition of borrowing. This investment may be in the form of purchased stock or stock representing previously distributed AgriBank surplus. As of December 31, 2012, we were required to maintain a stock investment equal to 2.5% of the average quarterly balance of our note payable to AgriBank plus an additional 1.0% on growth that exceeded a targeted rate. AgriBank’s current bylaws allow AgriBank to increase the required investment to 4.0%. However, AgriBank currently has not communicated a plan to increase the required investment.
PATRONAGE We receive different types of discretionary patronage from AgriBank. AgriBank’s Board of Directors sets the level of patronage for each of the following: • patronage on the annual average daily balance of our note payable with AgriBank, • patronage based on the balance and net earnings of the pool of loans sold to AgriBank, and • although not directly received from AgriBank, we do receive a partnership distribution resulting from our participation in the AgDirect trade credit financing program in an amount that approximated our share of the net earnings of the loans in the program, adjusted for required return on capital and servicing and origination fees. Patronage is paid from AgriBank to AgDirect, LLP, which in turn distributes it to the participating associations. Patronage income on our note payable with AgriBank was received in the form of cash and AgriBank stock. PURCHASED SERVICES We purchase various services from AgriBank including certain: • financial and retail systems, support, and reporting, • technology services, and • insurance services. The total cost of services we purchased from AgriBank was $1.8 million, $1.7 million, and $1.6 million in 2012, 2011, and 2010, respectively.
At December 31, 2012, $81.7 million of our investment in AgriBank consisted of stock representing distributed AgriBank surplus and $69.9 million consisted of purchased investment. For the periods presented in this report, we have received no dividend income on this stock investment and we do not anticipate any in future years.
IMPACT ON MEMBERS’ INVESTMENT Due to the nature of our financial relationship with AgriBank, the financial condition and results of operations of AgriBank materially impact our members’ investment. To request free copies of the AgriBank and the combined AgriBank and Affiliated Associations’ financial reports contact us at 3515 West Road, East Lansing, Michigan 48823, (800) 968-0061, or by e-mail to Travis.Jones@greenstonefcs.com, or through our website at www.greenstonefcs.com. You may also contact AgriBank at 30 East 7th Street, Suite 1600, St. Paul, MN 55101, (651) 282-8800, or by e-mail to agribankmn@agribank.com. The reports are also available through AgriBank’s website at www.agribank.com.
Although it is not a direct association investment in AgriBank, AgDirect, LLP that facilitates the AgDirect trade credit financing program, is required to own stock in AgriBank in the amount of 6.0% of the AgDirect program participation outstanding loan balance at quarter end plus 6.0% of the expected balance to be originated during the following quarter. We, in turn, are required to own the same amount of stock in AgDirect, LLP.
To request free copies of our Annual or Quarterly Reports contact us as stated above. The Annual Report is available on our website no later than 75 days after the end of the calendar year and members are provided a copy of such report no later than 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.
In addition, we are required to hold AgriBank stock equal to 8.0% of the quarter end asset pool program participation loan balance as discussed in the Loan Portfolio section.
Annual Report 2012
23
OUR STORY
Relationship with Other Farm Credit Institutions BGM TECHNOLOGY COLLABORATION We participate in the BGM Technology Collaboration (BGM) with certain other AgriBank District associations to facilitate the development and maintenance of certain retail technology systems essential to providing credit and other services to our member/borrowers. BGM operations are governed by representatives of each participating association. The expenses of BGM are allocated to each of the participating associations based on an agreed upon formula. The systems developed are owned by each of the participating associations. As the facilitating association, we provide various support functions for the operations of BGM. This includes support for technology, human resources, accounting, payroll, reporting, and other finance functions. INVESTMENT IN OTHER FARM CREDIT INSTITUTIONS We have a relationship with CoBank, ACB (CoBank), a System bank, which involves purchasing or selling participation interests in loans. As part of this relationship, our equity investment in CoBank was $17 thousand, $3 thousand, and $1 thousand at December 31, 2012, 2011, and 2010, respectively. CoBank provides direct loan funds to associations in its chartered territory and also makes loans to cooperatives and other eligible borrowers. We also have a relationship with Farm Credit Services of America, ACA (FCS of America) which involves purchasing or selling participation interests in loans. As part of this relationship, our equity investment in FCS of America was $1 thousand at December 31, 2012, 2011, and 2010. FCS of America is a System association which provides credit and credit-related services to its eligible members. In April 2010, we entered into an agreement to participate in the AgDirect trade credit financing program. A limited liability partnership was established in the second quarter of 2011 to facilitate this program. Our investment in AgDirect, LLP, was $13.7 million and $8.3 million at December 31, 2012 and 2011, respectively. We had no investment at December 31, 2010. In addition, we have a relationship with Farm Credit Foundations (Foundations) which involves purchasing benefit, human resource information systems, payroll, and workforce management services. Foundations was operated as part of AgriBank prior to January 1, 2012 when it formed a System service corporation and thus is no longer operated as part of AgriBank. As of December 31, 2012, our investment in Foundations was $59 thousand. The total cost of services we purchased from Foundations was $223 thousand in 2012.
24
GreenStone Farm Credit Services
REPORT OF MANAGEMENT
Report of Management GreenStone Farm Credit Services, ACA We prepare the consolidated financial statements of GreenStone Farm Credit Services, ACA (the Association) and are responsible for their integrity and objectivity, including amounts that must necessarily be based on judgments and estimates. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements, in our opinion, fairly present the financial condition of the Association. Other financial information included in the Annual Report is consistent with that on the consolidated financial statements. To meet our responsibility for reliable financial information, we depend on 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 consolidated 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. The Board of Directors has overall responsibility for our system of internal control and financial reporting. The Board of Directors and its Audit Committee consults regularly with us 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 the Association. The undersigned certify we have reviewed the Associationâ&#x20AC;&#x2122;s Annual Report and it 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 our knowledge and belief.
Scott A. Roggenbuck Chairperson of the Board GreenStone Farm Credit Services, ACA
David B. Armstrong Chief Executive Officer GreenStone Farm Credit Services, ACA
Travis D. Jones Chief Financial Officer GreenStone Farm Credit Services, ACA March 13, 2013
Annual Report 2012
25
Report On Internal Control Over Financial Reporting GreenStone Farm Credit Services, ACA The GreenStone Farm Credit Services, ACA (the Association) principal executives and principal financial officers, or persons performing similar functions, are responsible for establishing and maintaining adequate internal control over financial reporting for the Association’s consolidated financial statements. For purposes of this report, “internal control over financial reporting” is defined as a process designed by, or under the supervision of the Association’s principal executives and principal financial officers, or persons performing similar functions, and effected by its Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting information and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Association, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial information in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Association, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Association’s assets that could have a material effect on its consolidated financial statements. The Association’s management has completed an assessment of the effectiveness of internal control over financial reporting as of December 31, 2012. In making the assessment, management used the framework in Internal Control — Integrated Framework, promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on the assessment performed, the Association concluded that as of December 31, 2012, the internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on this assessment, the Association determined that there were no material weaknesses in the internal control over financial reporting as of December 31, 2012.
David B. Armstrong Chief Executive Officer GreenStone Farm Credit Services, ACA
Travis D. Jones Chief Financial Officer GreenStone Farm Credit Services, ACA March 13, 2013
26
GreenStone Farm Credit Services
REPORT OF AUDIT COMMITTEE
Report of Audit Committee GreenStone Farm Credit Services, ACA The consolidated financial statements were prepared under the oversight of the Audit Committee. The Audit Committee is composed of four members of the Board of Directors of GreenStone Farm Credit Services, ACA (the Association). The Audit Committee oversees the scope of the Association’s internal audit program, the approval, and independence of PricewaterhouseCoopers LLP (PwC) as independent auditors, the adequacy of the Association’s system of internal controls and procedures, and the adequacy of management’s action with respect to recommendations arising from those auditing activities. The Audit Committee’s responsibilities are described more fully in the Internal Control Policy and the Audit Committee Charter. Management is responsible for internal controls and the preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. PwC is responsible for performing an independent audit of the consolidated financial statements in accordance with generally accepted auditing standards in the United States of America and to issue their report based on their audit. The Audit Committee’s responsibilities include monitoring and overseeing these processes. In this context, the Audit Committee reviewed and discussed the audited consolidated financial statements for the year ended December 31, 2012, with management. The Audit Committee also reviewed with PwC the matters required to be discussed by Statement on Auditing Standards No. 114, The Auditor’s Communication with Those Charged with Governance, and both PwC and the internal auditors directly provided reports on significant matters to the Audit Committee. The Audit Committee had discussions with and received written disclosures from PwC confirming its independence. The Audit Committee also reviewed the non-audit services provided by PwC, if any, and concluded these services were not incompatible with maintaining PwC’s independence. The Audit Committee discussed with management and PwC such other matters and received such assurances from them as the Audit Committee deemed appropriate. Based on the foregoing review and discussions, and relying thereon, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Annual Report for the year ended December 31, 2012.
Eugene B. College Chairperson of the Audit Committee GreenStone Farm Credit Services, ACA Andy Snider, William J. Stutzman, and Catherine L. Webster Members of the Audit Committee March 13, 2013
Annual Report 2012
27
Independent Auditor’s Report
To the Board of Directors and Members of GreenStone Farm Credit Services, ACA We have audited the accompanying consolidated financial statements of GreenStone Farm Credit Services, ACA (the Association) and its subsidiaries, which comprise the consolidated statements of condition as of December 31, 2012, 2011 and 2010, and the related consolidated statements of income, changes in members’ equity and cash flows for the years then ended. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated 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 consolidated 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 consolidated 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Association’s preparation and fair presentation of the consolidated 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 Association’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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of GreenStone Farm Credit Services, ACA and its subsidiaries at December 31, 2012, 2011 and 2010, 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 13, 2013
PricewaterhouseCoopers LLP, 225 South Sixth Street, Suite 1400, Minneapolis, MN 55402 T: (612) 596 6000, www.pwc.com/us
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GreenStone Farm Credit Services
CONSOLIDATED STATEMENTS OF CONDITION
Consolidated Statements of Condition GreenStone Farm Credit Services, ACA (In thousands) As of December 31 ASSETS Loans Allowance for loan losses Net loans Investment in AgriBank, FCB Investment securities Accrued interest receivable Premises and equipment, net Acquired property Deferred tax assets, net Other assets Total assets LIABILITIES Note payable to AgriBank, FCB Accrued interest payable Patronage distribution payable Deferred tax liabilities, net Other liabilities Total liabilities Contingencies and commitments MEMBERS’ EQUITY Protected members’ equity Capital stock and participation certificates Unallocated surplus Total members’ equity Total liabilities and members’ equity
2012
2011
2010
$5,726,832 41,964
$5,181,888 49,771
$4,878,869 43,293
5,684,868 151,615 40,757 38,015 30,764 31,928 3,167 46,955
5,132,117 145,621 33,820 39,767 30,360 62,172 2,706 42,182
4,835,576 143,560 9,120 37,467 29,752 49,644 — 45,566
$6,028,069
$5,488,745
$5,150,685
$4,903,770 19,721 26,495 — 29,176
$4,461,155 20,685 23,313 — 35,575
$4,234,600 20,848 18,200 3,851 19,345
4,979,162
4,540,728
4,296,844
—
—
—
3 19,742 1,029,162 1,048,907
4 18,512 929,501 948,017
5 17,599 836,237 853,841
$6,028,069
$5,488,745
$5,150,685
The accompanying notes are an integral part of these consolidated financial statements.
Annual Report 2012
29
OUR STORY
Consolidated Statements of Income GreenStone Farm Credit Services, ACA (In thousands) Year ended December 31 Interest income Interest expense NET INTEREST INCOME Provision for loan losses
2012
2011
2010
$240,958 $237,112 $227,408 78,863 82,910 88,949 162,095
154,202
10,045 16,490
138,459 35,495
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
152,050
137,712
102,964
Non-interest income Patronage income Financially related services income Fee income Acquired property net (loss) income Allocated insurance reserve accounts distribution Miscellaneous income, net
26,005 9,665 3,408 (10,152) 5,209 1,146
23,889 9,049 3,408 (753) â&#x20AC;&#x201D; 1,808
29,296 10,482 3,668 1,820 4,842 1,190
TOTAL NON-INTEREST INCOME
35,281
37,401
51,298
40,709 23,036
38,106 22,430
34,963 21,356
63,745
60,536
Operating expenses Salaries and employee benefits Other operating expenses TOTAL OPERATING EXPENSES INCOME BEFORE INCOME TAXES (Benefit from) provision for income taxes NET INCOME
123,586 114,577 (2,571)
(1,990)
$126,157 $116,567
56,319 97,943 4,453 $93,490
The accompanying notes are an integral part of these consolidated financial statements.
30
GreenStone Farm Credit Services
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
Consolidated Statements of Changes In Members’ Equity GreenStone Farm Credit Services, ACA (In thousands)
Capital Protected Stock and Total Members’ Participation Unallocated Members’ Equity Certificates Surplus Equity Balance at December 31, 2009 Net income Unallocated surplus designated for patronage distributions Capital stock/participation certificates issued Capital stock/participation certificates retired
$6 — — — (1)
$16,305 — — 2,388 (1,094)
$760,938 93,490 (18,191) — —
$777,249 93,490 (18,191) 2,388 (1,095)
Balance at December 31, 2010 Net income Unallocated surplus designated for patronage distributions Capital stock/participation certificates issued Capital stock/participation certificates retired
5 — — — (1)
17,599 — — 2,066 (1,153)
836,237 116,567 (23,303) — —
853,841 116,567 (23,303) 2,066 (1,154)
Balance at December 31, 2011 Net income Unallocated surplus designated for patronage distributions Capital stock/participation certificates issued Capital stock/participation certificates retired
4 — — — (1)
18,512 — — 2,682 (1,452)
929,501 126,157 (26,496) — —
948,017 126,157 (26,496) 2,682 (1,453)
Balance at December 31, 2012
$3
$1,029,162
$1,048,907
$19,742
The accompanying notes are an integral part of these consolidated financial statements.
Annual Report 2012
31
OUR STORY
Consolidated Statements of Cash Flows GreenStone Farm Credit Services, ACA (In thousands) Year ended December 31 CASH FLOWS FROM OPERATING ACTIVITIES Net income Depreciation on premises and equipment Depreciation on assets held for lease Loss (gain) on sale of premises and equipment and assets held for lease Amortization of premiums on loans and investment securities, net Provision for loan losses Stock patronage received from Farm Credit Institutions Write-down on acquired property Gain on acquired property Changes in operating assets and liabilities: Accrued interest receivable Other assets Accrued interest payable Other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Increase in loans, net Redemptions of investment in AgriBank, FCB, net Purchases of investment in other Farm Credit Institutions, net Increase in investment securities, net Changes in acquired property, net Purchases of premises and equipment and assets held for lease, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase in note payable to AgriBank, FCB, net Patronage distributions Capital stock and participation certificates retired, net Net cash provided by financing activities Net change in cash Cash at beginning of year Cash at end of year SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES Stock financed by loan activities Stock applied against loan principal Stock applied against interest Interest transferred to loans Loans transferred to acquired property Qualified cash patronage distributions payable to members Financed sales of acquired property SUPPLEMENTAL INFORMATION Interest paid Taxes (refunded) paid
2012
2011
2010
$126,157 2,890 1,013 450 970 10,045 (7,308) 9,600 (404)
$116,567 2,961 1,374 (19) 518 16,490 (8,617) 1,881 (144)
$93,490 2,889 1,707 (14) 106 35,495 (6,181) 1,194 (2,760)
(7,081) 225 (964) (6,399) 129,194
(13,152) 8,964 (163) 12,379 139,039
(14,389) (14,133) (2,644) (8,134) 86,626
(551,625) 1,300 (5,445) (7,824) 20,177 (4,757) (548,174)
(312,619) 6,556 (8,286) (25,218) (2,660) (4,924) (347,151)
(351,265) 4,957 — (9,226) 9,795 (10,353) (356,092)
442,615 (23,314) (321) 418,980 — 7 $7
226,555 (18,190) (253) 208,112 — 7 $7
281,650 (11,991) (193) 269,466 — 7 $7
$2,566 1,008 8 8,825 12,694 26,495 13,565
$2,008 829 14 10,838 13,609 23,313 2,004
$2,337 842 9 14,731 36,918 18,200 2,302
$79,827 (114)
$83,073 5,891
$91,593 5,588
The accompanying notes are an integral part of these consolidated financial statements.
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GreenStone Farm Credit Services
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements GreenStone Farm Credit Services, ACA
NOTE 1: ORGANIZATION AND OPERATIONS FARM CREDIT SYSTEM AND DISTRICT The Farm Credit System (System) is a nationwide system of cooperatively owned banks and associations established by Congress to meet the credit needs of American agriculture. At December 31, 2012, the System consisted of three Farm Credit Banks, one Agricultural Credit Bank, and eighty-two associations. AgriBank, FCB (AgriBank), a System bank, and its affiliated associations are collectively referred to as the AgriBank Farm Credit District (AgriBank District or the District). At December 31, 2012, the District consisted of seventeen Agricultural Credit Associations (ACA) that each have wholly-owned Federal Land Credit Association (FLCA) and Production Credit Association (PCA) subsidiaries. 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 subsidiaries. Associations are authorized to provide lease financing options for agricultural purposes and are also authorized to purchase and hold certain types of investments. AgriBank provides funding to all associations chartered within the District. Associations are authorized to provide, either directly or in participation with other lenders, credit and related services to eligible borrowers. Eligible borrowers may include farmers, ranchers, producers or harvesters of aquatic products, rural residents, and farm-related service businesses. In addition, associations can 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. Associations are also authorized to purchase and hold certain types of investments. The Farm Credit Administration (FCA) is authorized by Congress to regulate the System banks and associations. We are examined by the FCA and certain association actions are subject to the prior approval of the FCA and/or AgriBank.
ASSOCIATION GreenStone Farm Credit Services, ACA and its subsidiaries, GreenStone Farm Credit Services, FLCA and GreenStone Farm Credit Services, PCA (the subsidiaries) are lending institutions of the System. We are a memberowned cooperative providing credit and credit related services to, or for the benefit of, eligible members for qualified agricultural purposes in the state of Michigan and the counties of Brown, Door, Florence, Kewaunee, Manitowac, Marinette, Menominee, Oconto, Outagamie, Shawano, and Waupaca in the state of Wisconsin. We borrow from AgriBank and provide financing and related services to our members. Our ACA holds all the stock of the FLCA and PCA subsidiaries and provides lease financing options for agricultural production or operating purposes. The FLCA makes secured long-term agricultural real estate and rural home mortgage loans and provides lease financing options. The ACA and PCA make short-term and intermediate term loans and provide lease financing options for agricultural production or operating purposes. At this time, the ACA holds all short-term and intermediate-term loans and the PCA has no assets. We, along with certain other System institutions, own AgDirect, LLP, which facilitates a trade credit financing program for its owners. We, along with certain other System institutions, own Farm Credit Foundations (Foundations) which provides benefit, human resource information systems, payroll, and workforce management services. We offer various risk management services, including credit life, term life, credit disability, crop hail, and multi-peril crop insurance for borrowers and those eligible to borrow. We also offer farm records, fee appraisals, and income tax planning and preparation services to our members.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
• to ensure the timely payment of principal and interest on Farm Credit Systemwide debt obligations,
ACCOUNTING PRINCIPLES AND REPORTING POLICIES Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (GAAP) and the prevailing practices within the financial services industry. Preparing financial statements in conformity with GAAP requires us 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 consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
• to ensure the retirement of protected borrower capital at par or stated value, and
Certain amounts in prior years’ financial statements have been reclassified to conform to the current year’s presentation.
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:
• 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% of the aggregated insured obligations adjusted to reflect the reduced risk on loans or investments guaranteed by federal or state governments. This percentage of aggregate obligations can be changed by the Insurance Corporation, at its sole discretion, to a percentage it determines to be actuarially sound. The basis for assessing premiums is debt outstanding with adjustments made for nonaccrual loans and impaired investment securities which are assessed a surcharge while guaranteed loans and investment securities are deductions from the premium base. AgriBank, in turn, assesses premiums to the associations each year based on similar factors.
Annual Report 2012
PRINCIPLES OF CONSOLIDATION The consolidated financial statements present the consolidated financial results of GreenStone Farm Credit Services, ACA and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. SIGNIFICANT ACCOUNTING POLICIES Loans: Loans are carried at their principal amount outstanding net of any unearned income, cumulative charge-offs, unamortized deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. Loan interest is accrued and credited to interest income based upon the daily principal amount outstanding. Material fees, net of related costs, are deferred and recognized over the life of the loan as an adjustment to net interest income. Other loan fees are netted with the related origination costs and included as an adjustment to net interest
33
OUR STORY
income. The net amount of these fees and expenses are not material to the consolidated financial statements taken as a whole. We place loans in nonaccrual status when: • principal or interest is delinquent for 90 days or more (unless the loan is 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, we reverse current year accrued interest 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 of the loan. Any cash received on nonaccrual loans is applied to reduce the recorded investment in the loan, except in those cases where the collection of the recorded investment is fully expected and the loan does not have any unrecovered prior charge-offs. In these circumstances interest is credited to income when cash is received. Loans are charged-off at the time they are determined to be uncollectible. 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, • the borrower has demonstrated payment performance, and • the loan is not classified as 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 formally restructured. 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. Allowance for Loan Losses: The allowance for loan losses is an estimate of losses in our loan portfolio as of the financial statement date. We determine the appropriate level of allowance for loan losses based on periodic evaluation of factors such as: • loan loss history, • probability of default, • severity of loss given default, • portfolio quality, and • current economic and environmental conditions. Loans in our portfolio that are considered impaired are analyzed individually to establish a specific allowance for impaired loans. A loan is impaired when it is probable that all amounts due under the contractual terms of the loan agreement will not be collected. We generally measure impairment 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.
34
We record a specific allowance to reduce the carrying amount of the risk loan to the lower of book value or the net realizable value of collateral. When we deem a loan to be uncollectible, we charge the loan principal and prior year(s) accrued interest against the allowance for loan losses. Subsequent recoveries, if any, are added to the allowance for loan losses. An allowance is recorded for probable and estimable credit losses as of the financial statement date for loans that are not individually assessed as impaired. 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 6-point scale addressing the loss given default. The combination of estimated default probability and loss given default is the primary basis for recognition and measurement of loan collectability of these pools of loans. Changes in the allowance for loan losses consist of provision activity, recorded in “Provision for loan losses” on the Consolidated Statements of Income, and recoveries and charge-offs. Investment in AgriBank: Accounting for our stock investment in AgriBank is on a cost plus allocated equities basis. Investment Securities: We are authorized to purchase and hold certain types of investments. As we have the positive intent and ability to hold these investments to maturity, they have been classified as held-tomaturity and are carried at cost adjusted for the amortization of premiums and accretion of discounts. If an investment is determined to be otherthan-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. Premises and Equipment: The carrying amount of premises and equipment is at cost, less accumulated depreciation. Calculation of depreciation is generally on the straight line method over the estimated useful lives of the assets. Gains or losses on disposition are included in “Miscellaneous income, net” on the Consolidated Statements of Income. Depreciation, maintenance, and repairs expenses are included in “Other operating expenses” on the Consolidated Statements of Income, and improvements are capitalized. Acquired Property: Acquired property, 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 cost 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, expenses, and gains or losses from operations and carrying value adjustments are included in “Acquired property net (loss) income” on the Consolidated Statements of Income. Leases: We have finance and operating leases. Under finance leases, unearned income from lease contracts represents the excess of gross lease receivables plus residual receivables over the cost of leased equipment. We amortize net unearned finance income to earnings using the interest method. The carrying amount of finance leases is included in “Loans” on the Consolidated Statements of Condition and represents lease rent receivables net of the unearned income plus the residual receivable. We recognize operating lease revenue evenly over the term of the lease in “Miscellaneous income, net” on the Consolidated Statements of Income. We charge depreciation and other expenses against revenue as incurred. The carrying amount of operating leases is included in “Other Assets” on the Consolidated Statements of Condition and represents the asset cost net of accumulated depreciation.
GreenStone Farm Credit Services
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Post-Employment Benefit Plans: The District has various post-employment benefit plans in which Association employees participate. 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. We provide benefits 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. All employees hired after December 31, 2006, only participate in this plan. Certain employees also participate in the defined benefit retirement plan of the District. The plan is comprised of two benefit formulas. At their option, employees hired prior to October 1, 2001 are on the cash balance formula or on the final average pay formula. Between October 1, 2001 and December 31, 2006, all new benefits-eligible employees are on 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. Certain employees also participate in the non-qualified defined benefit Pension Restoration Plan of the AgriBank District. 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. We also provide certain health insurance benefits 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: The ACA and PCA accrue federal and state income taxes. Deferred tax assets and liabilities are recognized for 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. The expected future tax consequences of uncertain income tax positions are accrued. The FLCA is exempt from federal and other taxes to the extent provided in the Farm Credit Act. Patronage Program: We accrue patronage distributions according to a prescribed formula approved by the Board of Directors. Generally, we pay the accrued patronage during the first quarter after year end. Statements of Cash Flows: For purposes of reporting cash flow, cash includes cash on hand. Fair Value Measurement: The Financial Accounting Standards Board (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,
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 our 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. RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS 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 only applied 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 retroactively for all comparative periods and is effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of this guidance will have no impact on our consolidated financial condition or consolidated results of operations. In September 2011, the FASB issued guidance entitled, “Compensation – Retirement Benefits – Multiemployer Plans.” The guidance is intended to provide more information about an employer’s financial obligations to multiemployer pension and post-employment benefit plans which should help financial statement users better understand the financial health of significant plans in which the employer participates. For non-public entities, the disclosures are effective for annual reporting periods ending on or after December 15, 2012. The adoption of this guidance did not have any impact on our consolidated financial condition or consolidated results of operations, but resulted in additional disclosures in Note 10. In June 2011, the FASB issued guidance entitled, “Presentation of Comprehensive Income.” The guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement – referred to as the Statement of Comprehensive Income – or in two separate, but consecutive, statements. The guidance is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. For non-public entities, the guidance is effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The adoption of the guidance did not have any impact on our consolidated financial condition or consolidated results of operations. If, in future periods, we have other comprehensive income, expanded financial statement presentation will be required.
• quoted prices for identical or similar assets or liabilities in markets that are not active so that they are traded less frequently than exchangetraded instruments, the prices are not current or principal market information 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.
Annual Report 2012
35
OUR STORY
In May 2011, the FASB issued guidance entitled, “Fair Value Measurement – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).” The guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The amendments include the following: • Application of the highest and best use valuation premise is only relevant when measuring the fair value of nonfinancial assets. • An exception to the requirement for measuring fair value when a reporting entity manages its financial instruments on the basis of its net exposure, rather than its gross exposure, to market risks such as interest rate risk and credit risk of counterparties. • Expansion of the disclosures about fair value measurements. New disclosures are required about the use of a nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best use.
The amendments are to be applied prospectively. For non-public entities, the amendments are effective for annual periods beginning after December 15, 2011. The adoption of this guidance did not have any impact on our consolidated financial condition or consolidated results of operations and did not result in additional disclosures at this time. In April 2011, the FASB issued guidance entitled, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The guidance provides additional clarification to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The guidance is effective for non-public entities for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. The adoption of this guidance did not have a significant impact on our consolidated financial condition or consolidated results of operations and did not result in additional disclosures.
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following (dollars in thousands): As of December 31
Amount
2012 2011 2010 Percentage Amount Percentage Amount Percentage
Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$3,301,886 1,820,234 321,429 191,910 25,224 66,149
57.6% 31.8 5.6 3.4 0.4 1.2
$2,831,210 1,745,640 322,382 183,708 33,690 65,258
54.6% 33.7 6.2 3.5 0.7 1.3
$2,580,581 1,665,074 359,473 179,940 35,553 58,248
52.9% 34.1 7.4 3.7 0.7 1.2
Total
$5,726,832
100.0%
$5,181,888
100.0%
$4,878,869
100.0%
The other category is comprised of communication and energy related loans as well as loans originated under our Mission Related Investment authority. Loan asset growth exceeded 6.5% in all defined market segments, with the AgriConsumer and Traditional segments both increasing in excess of 10.0%. This increase was a result of high demand for credit and overall favorable credit conditions in our market segments. Growth in all of our market segments was positively impacted by historically low interest rates. PORTFOLIO CONCENTRATIONS We have concentrations with individual borrowers, within various agricultural commodities, and within our chartered territory. At December 31, 2012, volume plus commitments to our ten largest borrowers totaled an amount equal to 4.6% of total loans and commitments. The commodity concentrations have not changed materially from prior years. We are chartered to operate throughout Michigan and in certain counties in Wisconsin. Our portfolio is fairly evenly distributed among the territory with no material concentrations in any one county. This is evidenced by there being no individual county representing greater than 5% of our total loan volume at December 31, 2012. While these concentrations represent our maximum potential credit risk as it relates to recorded loan principal, a substantial portion of our lending activities are collateralized. This reduces our exposure to credit loss associated with our lending activities. We consider credit risk exposure in establishing the allowance for loan losses.
36
GreenStone Farm Credit Services
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our agricultural commodity concentrations at December 31, 2012, were as follows:
POTATOES [1.9%]
POULTRY [1.1%] COUNTRY HOME LIVING [20.8%]
SUGAR BEETS [1.6%]
TIMBER [3.5%] VEGETABLES [1.4%]
AGRIBUSINESS [4.7%]
BROILERS [2.3%]
NON AGRIBUSINESS [0.1%]
OTHER [3.3%]
LIVESTOCK [3.1%] LANDLORDS [1.2%] CASH CROPS [20.0%] HOGS [3.5%]
GREENHOUSE & NURSERY [2.8%]
GRAINS & FIELD BEANS [1.0%] GOV. GUARANTEE [0.9%]
FRUIT [3.1%]
FOOD PRODUCTS & DISTRIBUTION [0.8%]
DAIRY [22.9%]
Annual Report 2012
37
OUR STORY
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 (GFA) limitations. The following table presents information regarding participations purchased and sold (in thousands): AgriBank, FCB Participations As of December 31, 2012 Purchased Sold
Other Farm Credit Institutions Participations Purchased Sold
Non-Farm Credit Institutions Participations Purchased Sold
Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$ — ($435,001) — (28,218) — (788) — (13,941) — — — —
$122,306 ($72,070) 208,134 (46,392) 158,034 (9,921) 249 — 3,949 — 56,638 —
$123,986 142,520 8,750 — — —
Total
$ — ($477,948)
$549,310 ($128,383)
Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$ — ($487,487) — (27,562) — (1,809) — (15,177) — — — —
Total
$ — ($532,035)
Total Participations Purchased Sold
$— (16) — — — —
$246,292 ($507,071) 350,654 (74,626) 166,784 (10,709) 249 (13,941) 3,949 — 56,638 —
$275,256
($16)
$824,566 ($606,347)
$99,376 ($74,699) 208,471 (37,451) 143,040 (32,231) 579 — 4,730 — 54,344 —
$125,085 114,396 10,930 — — —
($6,142) — — — — —
$224,461 ($568,328) 322,867 (65,013) 153,970 (34,040) 579 (15,177) 4,730 — 54,344 —
$510,540 ($144,381)
$250,411
($6,142)
$760,951 ($682,558)
As of December 31, 2011
Information in the preceding chart excludes loans entered into under our Mission Related Investment authority. CREDIT QUALITY AND DELINQUENCY 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: loans are expected to be fully collectible and represent the highest quality, • Other assets especially mentioned (OAEM): loans are currently collectible but exhibit some potential weakness, • Substandard: loans exhibit some serious weakness in repayment capacity, equity, and/or collateral pledged on the loan, • Doubtful: loans exhibit similar weaknesses to substandard loans; however, doubtful loans have additional weaknesses in existing factors, conditions, and values that make collection in full highly questionable, and • Loss: loans are considered uncollectible.
38
GreenStone Farm Credit Services
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes loans and related accrued interest classified under the FCA Uniform Classification System by loan type (dollars in thousands): Substandard/ Acceptable OAEM Doubtful/Loss As of December 31, 2012 Amount % Amount % Amount %
Total Amount
%
Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$3,157,769 95.1% 1,760,390 95.8 280,259 86.9 174,824 90.9 24,838 98.5 66,176 100.0
$40,593 8,304 21,215 4,457 — —
1.2% 0.5 6.6 2.3 — —
$124,071 67,169 21,033 13,028 386 —
3.7% 3.7 6.5 6.8 1.5 —
$3,322,433 1,835,863 322,507 192,309 25,224 66,176
100.0% 100.0 100.0 100.0 100.0 100.0
Total loan portfolio
$5,464,256
94.8%
$74,569
1.3%
$225,687
3.9%
$5,764,512
100.0%
Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$2,669,879 93.6% 1,679,294 95.3 285,300 88.1 164,752 89.5 32,857 97.5 65,321 100.0%
$69,874 22,308 35,135 4,348 — —
2.5% 1.3 10.8 2.4 — —
$112,301 60,743 3,421 15,051 833 —
3.9% 3.4 1.1 8.1 2.5 —
$2,852,054 1,762,345 323,856 184,151 33,690 65,321
100.0% 100.0 100.0 100.0 100.0 100.0
Total loan portfolio
$4,897,403
$131,665
2.5%
$192,349
3.7%
$5,221,417 100.0%
As of December 31, 2011
93.8%
The following table provides an aging analysis of past due loans and related accrued interest by loan type (in thousands): 30-89 90 Days Days or More Total As of December 31, 2012 Past Due Past Due Past Due
Not Past Due or Less than 30 Days Total Past Due Loans
90 Days Past Due and Accruing
Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$18,691 5,742 82 4,018 275 —
$7,158 2,495 206 1,835 31 —
$25,849 8,237 288 5,853 306 —
$3,296,584 1,827,626 322,219 186,456 24,918 66,176
$3,322,433 1,835,863 322,507 192,309 25,224 66,176
$— — — — — —
Total
$28,808
$11,725
$40,533
$5,723,979
$5,764,512
$—
Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$16,194 13,337 — 4,563 64 —
$12,811 6,070 82 2,812 288 —
$29,005 19,407 82 7,375 352 —
$2,823,049 1,742,938 323,774 176,776 33,338 65,321
$2,852,054 1,762,345 323,856 184,151 33,690 65,321
$— — — — — —
Total
$34,158
$22,063
$56,221
$5,165,196
$5,221,417
$—
As of December 31, 2011
Annual Report 2012
39
OUR STORY
RISK LOANS A loan is considered a risk loan if it is probable that we will be unable to collect all principal and interest according to the loan agreement. The following table presents risk loan information (in thousands). Accruing volume includes accrued interest receivable. As of December 31 Nonaccrual loans: Current Past due Total nonaccrual loans Accruing restructured loans Accruing loans 90 days or more past due Total risk loans
2012
2011
2010
$47,928 $56,094 $39,386 22,176 36,357 53,909 70,104 92,451 93,295 850 238 153 — $70,954
— 908 $92,689 $94,356
Volume with specific reserves Volume without specific reserves
$45,517 25,437
$69,916 $49,490 22,773 44,866
Total risk loans
$70,954
$92,689 $94,356
Total specific reserves
$20,067
$25,898 $20,477
For the year ended December 31
2012
2011
2010
Income on accrual risk loans Income on nonaccrual loans Total income on risk loans
$24 1,511 $1,535
$79 2,318 $2,397
$154 1,153 $1,307
Average recorded investment
$84,504
$82,536 $132,620
Nonaccrual loan assets decreased from $92.5 million (1.8% of loans) as of December 31, 2011 to $70.1 million (1.2% of loans) as of December 31, 2012. This $22.4 million decrease in nonaccrual volume was primarily attributable to the partial charge-off and subsequent transfer to acquired property of a large greenhouse totaling $13.1 million at December 31, 2011. In addition, two separate large dairy relationships totaling $5.3 million at December 31, 2011 were sold or paid-off during 2012. Also, a $3.0 million charge-off related to a dairy participation loan was recorded during 2012. As of December 31, 2012, approximately 34% of the nonaccrual loan portfolio was comprised of greenhouse and nursery loans, 24% part-time farmers, 18% dairy, 9% rural housing, 9% general livestock farms, and 4% miscellaneous farm operations. The volume of nonaccrual loans remained at an acceptable level at December 31, 2012. At December 31, 2012, 68.4% of our nonaccrual loans were current in their payment status.
40
Accruing restructured loans increased slightly during 2012 from $238 thousand as of December 31, 2011 to $850 thousand as of December 31, 2012. At December 31, 2012, 100% of our accruing restructured loans were current in their payment status. To mitigate credit risk, we have entered into a Standby Commitment to Purchase Agreement with the Federal Agricultural Mortgage Corporation (Farmer Mac). In the event of default, subject to certain conditions, we have the right to sell the loans identified in the agreement to Farmer Mac. This agreement remains in place until receipt of full payment. The balance of loans under this agreement was $11.8 million, $12.3 million, and $7.6 million at December 31, 2012, 2011, and 2010, respectively. Fees paid to Farmer Mac for these commitments totaled $64 thousand, $53 thousand, and $44 thousand in 2012, 2011, and 2010, respectively. These amounts are included in “Other operating expenses” on the Consolidated Statements of Income. As of December 31, 2012, no sales of loans to Farmer Mac have been made under this agreement. Nonaccrual loans by loan type were as follows (in thousands): As of December 31
2012
2011
2010
Nonaccrual loans: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases
$37,298 26,850 331 5,555 70
$49,354 $55,915 35,378 29,334 213 1,902 7,040 5,969 466 175
Total nonaccrual loans
$70,104
$92,451 $93,295
There were no loans 90 days or more past due and still accruing interest at December 31, 2012 or 2011. There were $397 thousand of real estate mortgage loans, $200 thousand of production and intermediate term loans, and $311 thousand rural residential real estate loans 90 days or more past due and accruing interest at December 31, 2010.
GreenStone Farm Credit Services
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All risk loans are considered to be impaired loans. The following table provides additional impaired loan information (in thousands): For the year ended As of December 31, 2012 December 31, 2012 Unpaid Average Interest Recorded Principal Related Impaired Income 1 2 Investment Balance Allowance Loans Recognized Impaired loans with a related allowance for credit losses: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$19,581 $24,486 $6,010 $23,753 $— 22,081 32,155 12,620 25,592 — 283 298 232 212 — 3,572 4,306 1,205 4,225 — — — — — — — — — — —
Total
$45,517
$61,245
Impaired loans with no related allowance for credit losses: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$18,441 4,894 49 1,983 70 —
Total
$20,067
$53,782
$—
$35,750 16,174 121 5,382 70 —
$— — — — — —
$22,376 5,643 112 2,345 221 25
$383 407 584 161 — —
$25,437
$57,497
$—
$30,722
Total impaired loans: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$38,022 26,975 332 5,555 70 —
$60,236 48,329 419 9,688 70 —
Total
$70,954
$118,742
$6,010 12,620 232 1,205 — — $20,067
$46,129 31,235 324 6,570 221 25 $84,504
$1,535 $383 407 584 161 — — $1,535
1
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 charge-off of the investment.
2
Unpaid principal balance represents the contractual principal balance of the loan.
Annual Report 2012
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OUR STORY
For the year ended As of December 31, 2011 December 31, 2011 Unpaid Average Interest Recorded Principal Related Impaired Income Investment1 Balance2 Allowance Loans Recognized Impaired loans with a related allowance for credit losses: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$30,510 $33,540 $8,814 $22,256 $— 34,389 43,048 15,585 20,288 — 53 859 32 358 — 4,964 6,489 1,467 4,387 — — — — — — — — — — —
Total
$69,916
$83,936
$25,898
$47,289
$—
Impaired loans with no related allowance for credit losses: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$19,082 989 160 2,076 466 —
$36,752 12,041 322 3,680 466 —
$— — — — — —
$23,875 6,828 1,607 2,464 300 173
$1,477 593 98 224 — 5
Total
$22,773
$53,261
$—
$35,247
$2,397
Total impaired loans: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Finance leases Other
$49,592 35,378 213 7,040 466 —
$70,292 55,089 1,181 10,169 466 —
$8,814 15,585 32 1,467 — —
$46,131 27,116 1,965 6,851 300 173
$1,477 593 98 224 — 5
Total
$92,689
$137,197
$25,898
$82,536
$2,397
1
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 charge-off of the investment.
2
Unpaid principal balance represents the contractual principal balance of the loan.
We did not have any material commitments to lend additional money to borrowers whose loans were at risk at December 31, 2012. TROUBLED DEBT RESTRUCTURINGS Included within our loans are troubled debt restructurings, also known as formally restructured. 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. Loans classified as troubled debt restructurings are considered risk loans. All risk loans are analyzed within our allowance for loan losses. The following table presents information regarding troubled debt restructurings (in thousands): For the year ended December 31
2012
Pre-modification Outstanding Recorded Investment Troubled debt restructurings: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Total
2011
Post-modification Outstanding Recorded Investment
Pre-modification Outstanding Recorded Investment
Post-modification Outstanding Recorded Investment
$2,367
$2,362
$3,959
$3,959
2,045 — —
2,060 — —
1,275 82 580
1,275 82 580
$4,412
$4,422
$5,896
$5,896
Pre-modification represents the recorded investment just prior to restructuring and post-modification 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, and acquisition costs and may also reflect a previous direct charge-off of the investment.
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GreenStone Farm Credit Services
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents troubled debt restructurings that defaulted during the years ended December 31 in which the modification date was within 12 months of the beginning of the respective reporting period (in thousands):
2012
2011
Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Total
$764 $1,612 187 252 — 82 — 272 $951 $2,218
Troubled debt restructurings outstanding at December 31, 2012 totaled $6.2 million, of which $5.3 million were in nonaccrual status compared to $6.7 million at December 31, 2011 of which $6.5 million were in nonaccrual status. There were no additional commitments to lend to borrowers whose loans have been modified in a troubled debt restructuring at December 31, 2012.
ALLOWANCE FOR LOAN LOSSES A summary of the changes in the allowance for loan losses follows (in thousands): For the year ended December 31
2012
2011
2010
Balance at beginning of year Provision for loan losses Loan recoveries Loan charge-offs
$49,771 10,045 2,406 (20,258)
$43,293 $35,326 16,490 35,495 3,264 1,573 (13,276) (29,101)
Balance at end of year
$41,964
$49,771 $43,293
The allowance for loan losses decreased $7.8 million from December 31, 2011 to December 31, 2012. The decrease in allowance for loan losses is primarily due to net charge-offs exceeding provision for loan losses. During 2012, $10.0 million of provision for loan losses was recorded, which was offset by $17.8 million of net charge-offs. The total net chargeoffs were primarily due to large charge-offs in dairy and greenhouse/ nursery industries.
A summary of changes in the allowance for loan losses and period end recorded investments in loans by loan type (loans outstanding includes accrued interest receivable) is as follows (in thousands): Production and Rural Real Estate Intermediate Residential Finance Mortgage Term Agribusiness Real Estate Leases Other Total Allowance for loan losses: Balance at December 31, 2011 Provision for (reversal of) loan losses Loan recoveries Loan charge-offs Balance at December 31, 2012
$17,819
$28,661
$576
$2,692
$8
$15
$49,771
4,782 1,600 (10,504)
(2,700) 794 (8,148)
6,796 9 (2)
972 3 (1,604)
86 — —
109 — —
10,045 2,406 (20,258)
$13,697
$18,607
$7,379
$2,063
$94
$124
$41,964
Ending balance: individually evaluated for impairment
$6,010
$12,620
$232
$1,205
$—
$—
$20,067
Ending balance: collectively evaluated for impairment
$7,687
$5,987
$7,147
$858
$94
$124
$21,897
$3,322,433
$1,835,863
$322,507
$192,309
$25,224
$66,176
$5,764,512
$38,022
$26,975
$332
$5,555
$70
$—
$70,954
$3,284,411
$1,808,888
$322,175
$186,754
$25,154
$66,176
$5,693,558
Recorded investments in loans outstanding: Ending balance at December 31, 2012 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment
Annual Report 2012
43
OUR STORY
Real Estate Mortgage Allowance for loan losses: Balance at December 31, 2010 Provision for (reversal of) loan losses Loan recoveries Loan charge-offs Balance at December 31, 2011
Production and Intermediate Term Agribusiness
Rural Residential Real Estate
Finance Leases
Other
Total
$23,494
$15,056
$2,569
$2,005
$50
$119
$43,293
(1,029) 1,845 (6,491)
18,627 841 (5,863)
(2,419) 475 (49)
1,457 103 (873)
(42) — —
(104) — —
16,490 3,264 (13,276)
$17,819
$28,661
$576
$2,692
$8
$15
$49,771
Ending balance: individually evaluated for impairment
$8,814
$15,585
$32
$1,467
$—
$—
$25,898
Ending balance: collectively evaluated for impairment
$9,005
$13,076
$544
$1,225
$8
$15
$23,873
$2,852,054
$1,762,345
$323,856
$184,151
$33,690
$65,321
$5,221,417
$49,592
$35,378
$213
$7,040
$466
$—
$92,689
$2,802,462
$1,726,967
$323,643
$177,111
$33,224
$65,321
$5,128,728
Recorded investments in loans outstanding: Ending balance at December 31, 2011 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment
ACQUIRED PROPERTY Acquired property is real and personal property acquired through foreclosure or deed in lieu of foreclosure. Acquired property was $31.9 million, $62.2 million, and $49.6 million at December 31, 2012, 2011, and 2010, respectively. The decrease in acquired property during 2012 was primarily due to the sale of a commercial dairy, a large tract of timber and a lumber concentration yard business with balances of $33.4 million in total at December 31, 2011. As of December 31, 2012, approximately $28.5 million, or 89.4%, of the acquired property portfolio was comprised of four large assets. These assets are related to the timber and greenhouse/nursery industries. The remaining $3.4 million primarily related to our AgriConsumer portfolio.
NOTE 4: INVESTMENT IN AGRIBANK At December 31, 2012, we were required by AgriBank to maintain an investment equal to 2.5% of the average quarterly balance of our note payable to AgriBank plus an additional 1.0% on growth that exceeded a targeted rate. At December 31, 2012, we were also required by AgriBank to maintain an investment equal to 8.0% of the quarter end balance of the participation interests in real estate loans sold to AgriBank under the asset pool program. The balance of our investment in AgriBank, all required stock, was $151.6 million, $145.6 million, and $143.6 million at December 31, 2012, 2011, and 2010, respectively.
44
NOTE 5: INVESTMENT SECURITIES We held investment securities of $40.8 million, $33.8 million, and $9.1 million at December 31, 2012, 2011, and 2010, respectively. Our investment securities consisted of loans guaranteed by the Small Business Administration. The securities have been classified as held-to-maturity. The investment portfolio is evaluated for other-than-temporary impairment. To date, we have not recognized any impairment on our investment portfolio. The following table presents further information on investment securities (dollars in thousands): As of December 31 Amortized cost Unrealized gains Unrealized losses Fair value Weighted average yield
2012
2011
2010
$40,757 1,116 — $41,873
$33,820 364 (6) $34,178
$9,120 72 — $9,192
2.0%
2.3%
1.7%
Investment income is recorded in “Interest income” on the Consolidated Statements of Income and totaled $707 thousand, $548 thousand, and $156 thousand in 2012, 2011, and 2010, respectively.
NOTE 6: PREMISES AND EQUIPMENT Premises and equipment consisted of the following (in thousands): As of December 31
2012
2011
2010
Land, buildings, and improvements Furniture and equipment Subtotal Less: accumulated depreciation
$35,451 $33,945 21,732 20,271 57,183 54,216 (26,419) (23,856)
$31,260 19,779 51,039 (21,287)
Total
$30,764
$30,360 $29,752
GreenStone Farm Credit Services
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: NOTE PAYABLE TO AGRIBANK Our note payable to AgriBank represents borrowings, in the form of a line of credit, to fund our loan portfolio. The line of credit is governed by a GFA and our assets serve as collateral. The total line of credit was $6.0 billion, $5.0 billion, and $5.0 billion at December 31, 2012, 2011, and 2010, respectively, and the outstanding principal under the line of credit was $4.9 billion, $4.5 billion, and $4.2 billion at December 31, 2012, 2011, and 2010, respectively. The interest rate is adjusted monthly and was 1.6%, 1.9%, and 2.0% at December 31, 2012, 2011, and 2010, respectively. The maturity date is January 31, 2014, for our note payable, at which time the note will be renegotiated. The GFA provides for limitations on our ability to borrow funds based on specified factors or formulas relating primarily to outstanding balances, credit quality, and financial condition. At December 31, 2012, and throughout the year, we were within the specified limitations and in compliance with all debt covenants.
NOTE 8: MEMBERS’ EQUITY CAPITALIZATION REQUIREMENTS In accordance with the Farm Credit Act, each borrower is required to invest in us as a condition of obtaining a loan. As authorized by the Agricultural Credit Act and our capital bylaws, our Board of Directors has adopted a capital plan that establishes a stock purchase requirement for obtaining a loan of 2.0% of the customer’s total loan(s) or one thousand dollars, whichever is less. The purchase of one participation certificate is required of all customers to whom a lease is issued and of all non-stockholder customers who purchase financial services. The Board of Directors may increase the amount of required investment to the extent authorized in the capital bylaws. The borrower acquires ownership of the capital stock at the time the loan or lease is made. The aggregate par value of the stock is added to the principal amount of the related obligation. We retain a first lien on the stock or participation certificates owned by customers. PROTECTION MECHANISMS Under the Farm Credit Act, certain borrower equity is protected. We are required to retire protected borrower equity at par or stated value regardless of its book value. Protected borrower equity includes capital stock and participation certificates that were outstanding as of January 6, 1988, or were issued prior to October 6, 1988 as a requirement for obtaining a loan. If we were to be unable to retire protected borrower equity at par value or stated value, the Insurance Corporation would provide the amounts needed to retire this equity. REGULATORY CAPITALIZATION REQUIREMENTS Under capital adequacy regulations, we are required to maintain a permanent capital ratio of at least 7.0%, a total surplus ratio of at least 7.0%, and a core surplus ratio of at least 3.5%. The calculation of these ratios in accordance with FCA Regulations is discussed as follows:
DESCRIPTION OF EQUITIES The following table presents information regarding classes and number of shares of stock and participation certificates outstanding as of December 31, 2012. All shares and participation certificates are stated at a $5.00 par value. Class A common stock (protected) Class B common stock (at-risk) Class E participation certificates (at-risk) Class F participation certificates (protected)
Shares Outstanding 8 3,478,912 469,528 551
Under our bylaws, we are also authorized to issue Class C and Class D common stock. Each of these classes of stock is at-risk and nonvoting with a $5.00 par value per share. Currently, no stock of these classes has been issued. Only holders of Class B common stock have voting rights. Our bylaws do not prohibit us from paying dividends on any classes of stock. However, no dividends have been declared to date. Our bylaws generally permit stock and participation certificates to be retired at the discretion of our Board of Directors and in accordance with our capitalization plans, provided prescribed capital standards have been met. At December 31, 2012, we exceeded the prescribed standards. We do not anticipate any significant changes in capital that would affect the normal retirement of stock. In accordance with our bylaws, in the event of our liquidation or dissolution, any assets remaining after payment or retirement of all liabilities shall be distributed pro rata to all holders of stock and participation certificates. In the event of impairment, losses will be absorbed by concurrent impairment of all classes of stock and participation certificates; however, protected stock will be retired at par value regardless of impairment. All classes of stock and participation certificates, except Class A common stock and Class F participation certificates, are transferable to other customers who are eligible to hold such class as long as we meet the regulatory minimum capital requirements. PATRONAGE DISTRIBUTIONS We accrued patronage distributions of $26.5 million, $23.3 million, and $18.2 million at December 31, 2012, 2011, and 2010, respectively. The patronage distributions are paid in cash during the first quarter after year end, along with the reporting of non-qualified allocations. The Board of Directors may authorize a distribution of earnings provided we meet all statutory and regulatory requirements. The FCA Regulations prohibit patronage distributions to the extent they would reduce our permanent capital ratio below the minimum permanent capital adequacy standards. We do not foresee any events that would result in this prohibition in 2013.
• The permanent capital ratio is average at-risk capital divided by average risk-adjusted assets. At December 31, 2012, our ratio was 14.6%. • The total surplus ratio is average unallocated surplus less any deductions made in the computation of permanent capital divided by average riskadjusted assets. At December 31, 2012, our ratio was 14.3%. • The core surplus ratio is average unallocated surplus less any deductions made in the computation of total surplus and less any excess stock investment in AgriBank divided by average risk-adjusted assets. At December 31, 2012, our ratio was 14.3%. We have an agreement with AgriBank which defines how our investment in AgriBank is allocated in calculating regulatory capital ratios. According to the agreement, we include in our ratios all of our investment in AgriBank that is in excess of the required amount. We had no excess stock at December 31, 2012, 2011, or 2010.
Annual Report 2012
45
OUR STORY
NOTE 9: INCOME TAXES (BENEFIT FROM) PROVISION FOR INCOME TAXES Our (benefit from) provision for income taxes follows (dollars in thousands): For the year ended December 31 Current: Federal State Total current Deferred: Federal State Total deferred (Benefit from) provision for income taxes
2012
2011
2010
($2,433) 323 (2,110)
$3,899 668 4,567
$3,034 515 3,549
(349) (112) (461)
(6,280) (277) (6,557)
1,151 (247) 904
($2,571)
($1,990) $4,453
Effective tax rate (2.1%) (1.7%) 4.5% The following table quantifies the differences between the (benefit from) provision for income taxes and income taxes at the statutory rates (in thousands): For the year ended December 31 Federal tax at statutory rate (34%) State tax, net Patronage distributions Effect of non-taxable entity Other (Benefit from) provision for income taxes
2012
2011
2010
$42,019 $38,956 $33,301 150 179 389 (4,546) (4,756) (4,068) (38,811) (35,498) (24,870) (1,383) (871) (299) ($2,571)
($1,990) $4,453
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 Consolidated Statements of 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 Consolidated Statements of Condition. Deferred tax assets and liabilities were composed of the following (in thousands): As of December 31
2012
2011
2010
Allowance for loan losses Postretirement benefit accrual Accrued incentive Leasing related, net Accrued patronage income not received AgriBank, FCB 2002 allocated stock Accrued pension asset Depreciation Other assets Other liabilities
$9,544 1,042 948 (2,874)
$9,007 $3,619 1,019 961 867 597 (3,389) (3,331)
(801) (1,755) (1,678) (916) 151 (494)
(830) (1,711) (1,662) (1,015) 812 (392)
Deferred tax assets (liabilities), net
$3,167
$2,706 ($3,851)
(1,404) (1,620) (1,825) (709) 170 (309)
Gross deferred tax assets
$11,685
$11,705
$5,347
Gross deferred tax liabilities
($8,518)
($8,999) ($9,198)
A valuation allowance for the deferred tax assets was not necessary at December 31, 2012, 2011, or 2010. We have not provided for deferred income taxes on approximately $46.0 million of patronage allocations received from AgriBank prior to 1993. Such allocations, distributed in the form of stock, are subject to tax only upon conversion to cash. Our intent is to permanently maintain this
46
investment in AgriBank. Additionally, we have not provided deferred income taxes on accumulated FLCA earnings of $834.5 million as it is our intent to permanently maintain this equity in the FLCA or to distribute the earnings to members in a manner that results in no additional tax liability to us. 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 authorities. However, we had no uncertain income tax positions at December 31, 2012. In addition, we believe we are no longer subject to income tax examinations for years prior to 2009.
NOTE 10: EMPLOYEE BENEFIT PLANS PENSION AND POST-EMPLOYMENT BENEFIT PLANS Complete financial information for the pension and post-employment benefit plans may be found in the Combined AgriBank, FCB and Affiliated Associations 2012 Annual Report (District financial statements). The Farm Credit Foundations Coordinating and Trust Committees provide oversight of the District benefit plans. The governance committees are either elected or appointed representatives (senior leadership and/or Board of Director members) from the participating organizations. The Coordinating Committee is responsible for decisions regarding benefits at the direction of the participating employers. The Trust Committee is responsible for fiduciary and plan administrative functions. Pension Plan: Certain employees 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 eligible District employees. The assets, liabilities, and costs of the plan are not segregated by participating entities. 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 we choose to stop participating in the plan, we 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 moves 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. As disclosed in the District financial statements, the defined benefit pension plan reflects an unfunded liability totaling $442.6 million at December 31, 2012. 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 consolidated financial statements. The projected benefit obligation 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 projected benefit obligation of the District-wide plan was $1.1 billion, $934.8 million, and $834.2 million at December 31, 2012, 2011, and 2010, respectively. The fair value of the plan assets was $640.1 million, $557.6 million, and $573.0 million at December 31, 2012, 2011, and 2010, respectively. The amount of the pension benefits and 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.
GreenStone Farm Credit Services
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. We recognize our proportional share of expense and contribute a proportional share of funding. Total plan expense for participating employers was $52.7 million, $44.0 million, and $37.0 million for 2012, 2011, and 2010, respectively. Our allocated share of plan expenses included in “Salaries and employee benefits” on the Consolidated Statements of Income was $5.1 million, $4.2 million, and $3.6 million for 2012, 2011, and 2010, respectively. Participating employers contributed $51.3 million, $27.9 million, and $25.3 million to the plan in 2012, 2011, and 2010, respectively. Our allocated share of these pension contributions was $4.9 million, $2.6 million, and $2.5 million for 2012, 2011, and 2010, respectively. 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 plans during 2013 is $57.2 million. Our allocated share of these pension contributions is expected to be $5.4 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. Retiree Medical Plans: District employers also provide certain health insurance benefits to eligible retired employees according to the terms of the benefit plan. The anticipated costs of these benefits are accrued during the period of the employee’s active status. Postretirement benefits included in “Salaries and employee benefits” on the Consolidated Statements of Income were $98 thousand, $146 thousand, and $163 thousand for 2012, 2011, and 2010, respectively. Our cash contributions were equal to the benefits paid and were $155 thousand, $162 thousand, and $158 thousand for 2012, 2011, and 2010, respectively. Nonqualified Retirement Plan: We also participate in a District-wide non-qualified 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. Costs are determined for each individual employer based on costs directly related to their current employees. Total Pension Restoration Plan expense for participating employers was $2.4 million, $2.5 million, and $1.7 million for 2012, 2011, and 2010, respectively. Our allocated share of plan expenses included in “Salaries and employee benefits” on the Consolidated Statements of Income was $331 thousand, $317 thousand, and $219 thousand for 2012, 2011, and 2010, respectively. The Pension Restoration Plan is unfunded and we make annual contributions to fund benefits paid to our retirees covered by the plan. Our cash contributions were equal to the benefits paid and were $258 thousand per year for 2012, 2011, and 2010, respectively. RETIREMENT SAVINGS PLAN We 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% and 50 cents on the dollar on the next 4% on both pre-tax and post-tax contributions. The maximum employer match is 4%. For employees hired after December 31, 2006, we contribute 3% of the employee’s compensation and will match employee contributions dollar for dollar up to a maximum of 6% on both pre-tax and post-tax contributions. The maximum employer contribution is 9%. Employer contribution expenses are included in “Salaries and employee benefits” on the Consolidated Statements of Income under the plan and were $1.7 million, $1.5 million, and $1.4 million in 2012, 2011, and 2010, respectively. These expenses are equal to our cash contributions for each year.
Annual Report 2012
NOTE 11: RELATED PARTY TRANSACTIONS In the ordinary course of business, we may enter into loan transactions with our 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 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 other persons. In our opinion, none of these loans outstanding at December 31, 2012 involved more than a normal risk of collectability. The following table represents information on loans and leases to related parties (in thousands): As of December 31: Total related party loans and leases For the year ended December 31: Advances to related parties Repayments by related parties
2012
2011
2010
$21,362
$18,704 $11,745
$18,958 21,752
$9,038 $13,175 17,171 16,428
The composition of related parties can be different each year end primarily due to changes in the make-up of our Board of Directors. Advances and repayments to related parties at the end of each year are included in the preceding chart. We purchase various services from AgriBank including financial and retail systems, support, financial reporting, technology services, and insurance services. The total cost of services we purchased from AgriBank was $1.8 million, $1.7 million, and $1.6 million in 2012, 2011, and 2010, respectively. We purchase benefit, human resource information systems, payroll, and workforce management services from Foundations. Foundations was operated as a part of AgriBank prior to January 1, 2012 when it formed a System service corporation. The System entities using Foundations’ services contributed an investment into the service corporation in January 2012. Our investment was $59 thousand at December 31, 2012. The total cost of services purchased from Foundations was $223 thousand in 2012.
NOTE 12: CONTINGENCIES AND COMMITMENTS In the normal course of business, we have various contingent liabilities and commitments outstanding which may not be reflected in the accompanying consolidated financial statements. We do not anticipate any material losses because of these contingencies or commitments. From time to time, we may be named as a defendant in certain lawsuits or legal actions in the normal course of business. At the date of these consolidated financial statements, we were not aware of any such actions that would have a material impact on our financial condition. However, such actions could arise in the future. We have commitments to extend credit and letters of credit to satisfy the financing needs of our borrowers. These financial instruments involve, to varying degrees, elements of credit risk not recognized in the financial statements. Commitments to extend credit are agreements to lend to a borrower as long as there is not a violation of any condition established in the loan contract. Standby letters of credit are agreements to pay a beneficiary if there is a default on a contractual arrangement. Commercial letters of credit are agreements to pay a beneficiary under specific conditions. At December 31, 2012, we had commitments to extend credit and unexercised commitments related to standby letters of credit of $1.7 billion. Additionally, we had $23.3 million of issued standby letters of credit as of December 31, 2012. At December 31, 2012, we had commercial letters of credit of $209 thousand. Commitments to extend credit and letters of credit generally have fixed expiration dates or other termination clauses and we may require payment
47
OUR STORY
of a fee. If commitments to extend credit 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 us to recover from third parties amounts paid under guarantees, thereby limiting our maximum potential exposure. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to borrowers and we apply the same credit policies.
The fair value measurement would fall under level 2 of the hierarchy if the process uses independent appraisals and other market-based information. The fair value measurement would fall under level 3 of the hierarchy 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.
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS Quoted market prices are generally not available for our financial instruments. Accordingly, we base fair values on:
NOTE 13: FAIR VALUE MEASUREMENTS
• judgments regarding future expected losses,
The FASB guidance on “Fair Value Measurement” 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 in the principal or most advantageous market for the asset or liability. The guidance also establishes a fair value hierarchy, with three levels of inputs that may be used to measure fair value. Refer to Note 2 for a more complete description of the three input levels.
• current economic conditions,
NON-RECURRING BASIS We do not have any assets or liabilities measured at fair value on a recurring basis at December 31, 2012, 2011, or 2010. We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis. Information on assets measured at fair value on a non-recurring basis is as follows (in thousands): As of December 31, 2012 Fair Value Measurement Using Total Fair Total Level 1 Level 2 Level 3 Value (Losses) Loans Acquired property
$ — —
$14,125 $12,597 5,601 27,538
$26,722 ($14,427) 33,139 (9,196)
As of December 31, 2011 Fair Value Measurement Using Total Fair Total Level 1 Level 2 Level 3 Value (Losses) Loans Acquired property
$ — —
$33,770 $12,454 $46,224 ($5,421) 52,502 12,475 64,977 (1,737)
As of December 31, 2010 Fair Value Measurement Using Total Fair Total Gains Level 1 Level 2 Level 3 Value (Losses) Loans Acquired property
$ — —
$21,180 $9,361 $30,541 ($377) 38,309 14,721 53,030 1,566
VALUATION TECHNIQUES Loans: Represents the carrying amount and related write-downs of loans which were evaluated for individual impairment based on the appraised value of the underlying collateral. When the value of the collateral, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value. Acquired property: Represents the fair value and related gains (losses) of foreclosed assets that were measured at fair value based on the collateral values, which is generally determined using appraisals or other indications based on sales of similar properties. Costs to sell represent transaction costs and are not included as a component of the assets fair value.
48
• risk characteristics of various financial instruments, • credit risk, and • other factors. These estimates involve uncertainties and matters of judgment and cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Estimating the fair value of our investment in AgriBank is not practical because the stock is not traded. As discussed in Notes 2 and 4, the investment is a requirement of borrowing from AgriBank. A description of the methods and assumptions used to estimate the fair value of each class of our financial instruments, for which it is practical to estimate that value, follows: Net loans: The estimate of the fair value of loan assets is determined by discounting the expected future cash flows using current interest rates. Current interest rates are estimated based on similar loans made or loans repriced to borrowers with similar credit risk. This methodology is used because no active market exists for the vast majority of these loans. Since the discount rates are based upon internal pricing mechanisms and other estimates, we cannot determine whether the fair values presented would equal 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 unmarketable outside the System. We segregate the loan portfolio into pools of loans with homogenous characteristics for purposes of determining fair value of loans not individually impaired. Expected future cash flows and interest rates reflecting appropriate credit risk are separately determined for each individual pool. For fair value of loans individually impaired, we assume collection will result only from the sale of the underlying collateral. Fair value is estimated to equal the total net realizable value of the underlying collateral. Costs to sell represent transaction costs and are not included as a component of the asset’s fair value. Investment securities: If an active market exists, the fair value is based on currently quoted market prices. For those securities for which an active market does not exist, we estimate the fair value of these investments by discounting the expected future cash flows using current interest rates adjusted for credit risk. Note payable to AgriBank: Estimating the fair value of the note payable to AgriBank is determined by segregating the note into pricing pools according to the types and terms of the underlying loans funded. We discount the estimated cash flows from these pools using the current rate charged by AgriBank for additional borrowings with similar characteristics. 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.
GreenStone Farm Credit Services
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of our financial instruments is as follows (in thousands): As of December 31 Financial assets: Net loans Investment securities Financial liabilities: Note payable to AgriBank Unrecognized financial instruments: Commitments to extend credit and letters of credit
2012
2011
Carrying Amount Fair Value
Carrying Amount Fair Value
2010 Carrying Amount
Fair Value
$5,684,868 40,757
$5,772,302 41,873
$5,132,117 33,820
$5,232,867 34,178
$4,835,576 9,120
$4,883,685 9,192
$4,903,770
$4,963,933
$4,461,155
$4,519,324
$4,234,600
$4,258,731
—
($2,109)
—
($1,626)
—
($1,486)
NOTE 15: QUARTERLY FINANCIAL INFORMATION (Unaudited) Quarterly consolidated results of operations for the years ended December 31, 2012, 2011, and 2010 follow (in thousands): 2012
First
Second
Third
Fourth
Total
Net interest income (Reversal of) provision for loan losses Patronage income Other expense, net Provision for (benefit from) income taxes
$39,166 (1,762) 5,304 11,355 1,095
$39,419 (1,401) 6,207 7,704 2,061
$41,094 5,681 5,240 20,150 (3,948)
$42,416 7,527 9,254 15,260 (1,779)
$162,095 10,045 26,005 54,469 (2,571)
Net income
$33,782 $37,262 $24,451 $30,662 $126,157
2011 Net interest income Provision for loan losses Patronage income Other expense, net Provision for (benefit from) income taxes Net income 2010 Net interest income Provision for loan losses Patronage income Other expense, net Provision for income taxes Net income
First
Second
Third
Fourth
Total
$36,472 6,710 4,880 9,658 13 $24,971
$38,044 695 5,250 12,280 2,034 $28,285
$38,536 141 4,602 12,356 (1,430) $32,071
$41,150 8,944 9,157 12,730 (2,607) $31,240
$154,202 16,490 23,889 47,024 (1,990) $116,567
First
Second
Third
Fourth
Total
$33,093 5,156 5,591 2,869 2,112 $28,547
$33,511 13,012 4,975 8,946 251 $16,277
$34,394 1,873 4,130 10,757 648 $25,246
$37,461 15,454 14,600 11,745 1,442 $23,420
$138,459 35,495 29,296 34,317 4,453 $93,490
NOTE 16: SUBSEQUENT EVENTS We have evaluated subsequent events through March 13, 2013, 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 2012 Consolidated Financial Statements or disclosures in the Notes to Consolidated Financial Statements.
Annual Report 2012
49
OUR STORY
Disclosure Information Required By Regulations GreenStone Farm Credit Services, ACA (Unaudited) DESCRIPTION OF BUSINESS General information regarding the business is discussed in Note 1 of this Annual Report. The description of significant business developments, if any, is discussed in the “Management’s Discussion and Analysis” portion of this Annual Report. DESCRIPTION OF PROPERTY The following table sets forth certain information regarding our properties: Location
Description
Usage
Adrian, MI Allegan, MI Alma, MI Alpena, MI Ann Arbor, MI Appleton, WI Bad Axe, MI Bay City, MI Berrien Springs, MI Cadillac, MI Caro, MI Charlotte, MI Clintonville, WI Coleman, WI Concord, MI Corunna, MI De Pere, WI West Rd, East Lansing, MI Abbey Rd, East Lansing, MI1 Escanaba, MI Grand Rapids, MI Hart, MI Hastings, MI Hillsdale, MI Howell, MI Ionia, MI Lakeview, MI Lapeer, MI Manitowoc, WI Mason, MI Monroe, MI Mt. Pleasant, MI Saginaw, MI Sandusky, MI Schoolcraft, MI St. Johns, MI Sturgeon Bay, WI Traverse City, MI
Owned by ACA Owned by ACA Owned by ACA Owned by ACA Owned by FLCA Leased Owned by ACA Owned jointly Owned by ACA Owned by FLCA Owned by ACA Leased Owned by FLCA Owned by ACA Owned by FLCA Owned by ACA Owned by ACA Owned by ACA Owned by ACA Leased Owned by ACA Leased Owned by ACA Owned by FLCA Leased Owned jointly Owned by ACA Owned by ACA Leased Leased Owned by ACA Owned by ACA Owned by ACA Owned by ACA Owned by ACA Owned by FLCA Leased Owned by FLCA
Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Corporate Corporate Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office
Former corporate office, currently occupied by a tenant on a long-term lease.
1
LEGAL PROCEEDINGS Information regarding legal proceedings is discussed in Note 12 of this Annual Report. We were not subject to any enforcement actions at December 31, 2012.
DESCRIPTION OF CAPITAL STRUCTURE Information regarding our capital structure is discussed in Note 8 of this Annual Report. DESCRIPTION OF LIABILITIES Information regarding liabilities is discussed in Notes 7, 8, 9, 10, 12, and 14 of this Annual Report. SELECTED FINANCIAL DATA The “Consolidated Five-Year Summary of Selected Financial Data” is presented at the beginning of this Annual Report. MANAGEMENT’S DISCUSSION AND ANALYSIS Information regarding any material aspects of our financial condition, changes in financial condition, and results of operations are discussed in the “Management’s Discussion and Analysis” portion of this Annual Report. BOARD OF DIRECTORS Information regarding directors who served as of December 31, 2012, including business experience in the last five years and any other business interest where a director serves on the board of directors or as a senior officer follows: Scott A. Roggenbuck (Board Chair), Age 50; Huron County, Harbor Beach, Michigan. Board Executive and Compensation Committees. He is a lifelong cash crop farmer and is president of Cedar Pond Farms, Inc. (grain and sugar beet operation) and Cedar Pond Ag Service (a Pioneer Seed Sales Agency). His term of office expires in 2013, and he has served on the board for six years. Edward L. Reed (Board Vice Chair), Age 50; Cass County, Marcellus, Michigan. Board Executive and Compensation Committees. He is a hog and grain producer, an electrical engineer, and serves as president on the board of the Michigan Pork Producers Association. His term of office expires in 2014, and he has served on the board for five years. Laura A. Braun, Age 53; Clinton County, Ovid, Michigan. Legislative/Public Policy Committee, Vice Chair. She has been farming for 26 years. Laura farms in partnership with husband, Russell, 700 acres cash crops including corn, soybeans, and wheat. They also manage 200 head of beef cattle. She is owner of The Shepardsville Corner Store, a country grocery and convenience store with a bakery and deli featuring local produce in season and home-raised beef. Her term of office expires in 2015, and she has served on the board for six months. Eugene B. College, Age 67; Appointed Director, Board Audit Committee, Chair. He retired in 2007 as senior vice president and chief financial officer of Farm Credit Services of America. He has served on the board since 2009 and has been re-appointed to a three-year term that will expire in 2015. Christine M. Crumbaugh, Age 43; Gratiot County, St. Louis, Michigan. Finance Committee. She has been farming for 15 years. Her family operates a 3,000 acre cash crop farm raising sugar beets, corn, soybeans, and wheat. Christine is personally responsible for managing the accounting and finance; human resources and payroll; field recordkeeping; crop marketing; crop insurance; and FSA matters among other things. Her term of office expires in 2015, and she has served on the board for 6 months. Raymond Diederich, Age 61; Brown County, De Pere, Wisconsin. Board Finance Committee, Chair. He is a life-long dairy and crop farmer. He serves on the Board of Directors of Brown County Farm Bureau. His term of office expires 2015, and he has served on the board for 14 years.
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GreenStone Farm Credit Services
DISCLOSURE INFORMATION REQUIRED BY REGULATIONS
Darl E. Evers, Age 69; Allegan County, Martin, Michigan. Board Executive and Compensation Committees. He is a life-long farmer. In the past he raised broilers, feeder cattle, and was a dairyman. He currently has Holstein heifers at one farm and is raising turkeys at another. His term of office expires in 2014, and he has served on the board for 23 years. Lynn D. Gould, Age 69; Clare County, Clare, Michigan. Board Legislative/ Public Policy Committee. He has been a cattle farmer for over 30 years and owns and operates an 835 acre stocker cattle operation and sells hay. He assists land owners on leasing for gas and oil exploration and, with his wife, operates Gould Farm Bed & Breakfast Inn. He served on the Clare County Farm Bureau Board. He is a board member and has served as president and vice president of Mid-Michigan Sportsmen’s Alliance. His term of office expires in 2013, and he has served on the board for nine years. Bruce E. Lewis, Age 47; Hillsdale County, Jonesville, Michigan. Board Executive and Compensation Committees. He has farmed for over 26 years and currently has a 600 cow dairy, raising replacement heifers and steers, and farms 2,200 acres growing corn, alfalfa, soybeans, and wheat. His term of office expires in 2014, and he has served on the board for two years. David J. McConnachie, Age 55; Sanilac County, Deckerville, Michigan. Board Legislative/Public Policy Committee, Chair. He is a life-long cash crop farmer in partnership with his brother and father. He is a director for McConnachie AgriPetrol LLC (ethanol) and a partner in JGDM McConnachie (farming). His term of office expires in 2013, and he has served on the board for 15 years. Dennis C. Muchmore, Age 66; Appointed Director, Board Legislative/ Public Policy Committee. He is currently Chief of Staff for Michigan Governor Rick Snyder. He is a founder of Muchmore Harrington Smalley & Associates and formerly the executive vice president of DHR International. He has served on the board since 2002 and has been re-appointed to a three-year term that will expire in 2014. Gilbert E. Ritter, Age 62; Saginaw County, Saginaw, Michigan. Board Finance Committee. He is a life-long owner of a cash-crop farm. His term of office expires in 2013, and he has served on the board for 22 years. Aaron “Andy” Snider, Age 50; Oceana County, Hart, Michigan. Audit Committee. He has been farming for 31 years. He owns a livestock and crop farm producing 85,000 tom turkeys per year; 15,500 weaner pigs; 1,700 acres of corn; 350 acres of soybeans; and 50 acres of rye. He also manages the waste water for a large local fruit processor as well as some custom planting and harvesting. He serves on the Board of Directors of the Michigan Turkey Producers Cooperative. His term of office expires in 2015, and he has served on the board for six months.
The Board Chairperson and Chairperson of the Audit Committee received annual retainer fees of $26,000 each and the Board Vice Chairperson received $24,000. The remaining Board members received an annual retainer fee of $22,000. All board members also received a $600 computer allowance. The retainer fees are paid quarterly. In 2012, the Board members did not receive compensation for individual Board or regular committee meetings attended. Information regarding compensation for each director who served during 2012 follows: Number of Days Served Total Other Board Compensation Official Meetings Activities Paid in 2012 Laura A. Braun* Eugene B. College Christine M. Crumbaugh* Raymond Diederich Frank S. Engler** Darl E. Evers Lynn D. Gould Brian Haskin*** Bruce E. Lewis David J. McConnachie Dennis C. Muchmore David Rakowski** Edward L. Reed Gilbert E. Ritter Scott A. Roggenbuck Aaron “Andy” Snider* William J. Stutzman Dale L. Wagner* Catherine L. Webster Brent C. Wilson** Total
4 5 $12,217 7 8 26,600 5 11 12,217 7 14 22,600 2 20 12,217 7 17 22,600 7 23 22,600 2 4 10,383 7 13 22,600 7 15 22,600 5 9 22,600 2 8 10,383 7 9 23,600 7 12 22,600 7 14 25,600 5 8 12,217 7 15 22,600 5 16 12,217 7 20 22,600 2 10 10,383 109 251 $371,434
*Newly elected director **Not re-elected ***Did not run for re-election
William J. Stutzman, Age 65; Lenawee County, Blissfield, Michigan. Board Audit Committee, Vice Chair. He is a life-long cash crop farmer. He also serves on the AgriBank Board of Directors, Farm Credit Foundations Board, Farm Credit Foundations Plan Sponsor Committee, and as Vice Chairman of the Farm Credit Foundations Coordinating Committee. He is vice president of Stutzman Farms, Inc. (cash grain farming), president of Farm Resource Management, Inc. (cash grain/grain marketing), and president and chief executive officer of Ogden Communications, Inc. (rural telephone/internet services). His term of office expires in 2014, and he has served on the board for 26 years. Dale L. Wagner, Age 53; Manitowoc County, Manitowoc, Wisconsin. Finance Committee. Has been farming for 26 years. His farm was purchased in 1986 when he was milking 40 cows and owned 57 acres. He currently has 300 cows, owns 480 acres and rents another 600 acres. He and his son also own a custom cropping enterprise. His term of office expires in 2015, and he has served on the board for six months. Catherine L. Webster, Age 68; Clinton County, Elsie, Michigan. Board Audit Committee. She was a dairy/crop farmer for 42 years. Her term of office expires in 2015, and she has served on the board for 21 years.
Annual Report 2012
51
OUR STORY
SENIOR OFFICERS The senior officers include:
Senior officer incentives are paid annually based on performance criteria established by our Board of Directors. The criteria include return on assets, loan volume, efficiency ratio, customer satisfaction, credit quality, permanent capital, and employee engagement. We calculate the incentives after the end of the plan year (the plan year is the calendar year). We pay out the incentives within 90 days of year end. The compensation plans of the association were reviewed by the Compensation Committee of the Board of Directors.
David B. Armstrong Chief Executive Officer Jack W. Kelly Executive Vice President – Customer Delivery Paul E. Anderson Senior Vice President – Chief Credit Officer
TRANSACTIONS WITH SENIOR OFFICERS AND DIRECTORS Information regarding related party transactions is discussed in Note 11 of this Annual Report.
Travis D. Jones, CPA Senior Vice President – Chief Financial Officer Stephen A. Junglas Senior Vice President – Chief Information Officer
TRAVEL, SUBSISTENCE AND OTHER RELATED EXPENSES Directors and senior officers are reimbursed for reasonable travel, subsistence, and other related expenses associated with business functions. A copy of our policy for reimbursing these costs is available by contacting us at 3515 West Road, East Lansing, Michigan 48823, (800) 968-0061, or by e-mail to Travis.Jones@greenstonefcs.com, or through our website at www.greenstonefcs.com.
Peter L. Lemmer Senior Vice President – Chief Legal Counsel Bethany L. Barker, SPHR Senior Vice President – Chief Human Resources Officer Melissa A. Stolicker, CPA Senior Vice President – Chief Internal Auditor
The total directors’ travel, subsistence, and other related expenses were $138 thousand, $92 thousand, and $101 thousand in 2012, 2011, and 2010, respectively.
David B. Armstrong was promoted as Chief Executive Officer and Jack W. Kelly was promoted as the Executive Vice President – Customer Delivery in January 2009. Paul E. Anderson was promoted as Chief Credit Officer in November 2009. Travis D. Jones was hired as Chief Financial Officer in 2007 from Citizens Republic Bancorp. Stephen A. Junglas was promoted to Chief Information Officer in 2012, prior to that he served as the Information Services Director since 2006. Peter L. Lemmer was hired as Chief Legal Counsel in 2008 from Citizens Republic Bancorp. Bethany L. Barker has been in her position since April 1998. Melissa A. Stolicker has been in her position since August 2004.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS No events occurred 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 on January 1, 2013 or at any time during 2012.
A summary of compensation earned by senior officers/highly compensated individuals follows (in thousands): Name of Deferred Individual Year Salary Bonus Compensation Other Total David B. Armstrong, CEO
2012
$405 $224
($175)
$–
$454
David B. Armstrong, CEO
2011
376 215
(151)
–
440
David B. Armstrong, CEO
2010
342 203
(77)
–
468
Aggregate Number of Senior Officers/Highly Compensated Individuals, excluding CEO Aggregate Deferred Number Year Salary Bonus Compensation Other Total Seven
2012 $1,279 $444
($110)
$ – $1,613
Nine
2011 1,495 536
(30)
– 2,001
Nine
2010 1,375 499
–
– 1,874
Members may request information on the compensation paid during 2012 to the individuals included in the preceding table. In accordance with FCA Regulations, an advisory vote on CEO and/or senior officer compensation is required when five percent of the voting stockholders petition for such vote. Although the advisory votes are non-binding, our Board of Directors will take into consideration the outcome of the vote when making future CEO and senior officer compensation decisions.
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MEMBER PRIVACY Farm Credit Administration Regulations protect members’ nonpublic personal financial information. Our directors and employees are restricted from disclosing information about our association or our members not normally contained in published reports or press releases. 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 fees paid during 2012 were $116 thousand. The fees paid were for audit services. FINANCIAL STATEMENTS The “Report of Management”, “Report on Internal Control Over Financial Reporting”, “Report of Audit Committee”, “Independent Auditor’s Report”, “Consolidated Financial Statements”, and “Notes to Consolidated Financial Statements” are presented prior to this portion of the Annual Report. CREDIT AND SERVICES TO YOUNG, BEGINNING, AND SMALL FARMERS AND RANCHERS Information regarding credit and services to young, beginning, and small farmers and ranchers, and producers or harvesters of aquatic products is discussed in an addendum to this Annual Report. EQUAL EMPLOYMENT OPPORTUNITY We are an equal opportunity employer. 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, 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.
GreenStone Farm Credit Services
DISCLOSURE INFORMATION REQUIRED BY REGULATIONS
Funds Held Program GreenStone Farm Credit Services, ACA The Association offers a Funds Held Program (“Funds Held”) that provides funds for customers to make advance payments on designated real estate, operating and intermediate-term loans, pay insurance premiums, taxes or any other eligible purpose. PAYMENT APPLICATION: Loan payments received by the Association before the loan has been billed will normally be placed into Funds Held and applied against the next installment due. ACCOUNT MAXIMUM: The amount in Funds Held may not exceed the unpaid principal balance of the loan. INTEREST RATE: Interest will accrue on Funds Held at a simple rate of interest that may be changed by the Association from time to time. The interest rate may never exceed the interest rate charged on the related loan. Funds held on real estate loans, operating loans and intermediate-term loans are paid at a rate of interest equal to 3% (300 basis points) less than the loan rate.
WITHDRAWALS: Money in Funds Held may be withdrawn for the following items: Customers with real estate loans, operating loans and intermediateterm loans may use funds for future installments, insurance premiums or real estate taxes on collateral for the respective loan. Customers may make withdrawals for other approved purposes in lieu of increasing the loan amount for any eligible loan purpose. ASSOCIATION OPTIONS: In the event of default on any loan, if Funds Held exceeds the maximum limit as established above or if the Association discontinues their Funds Held program, the Association may apply funds in the account to the unpaid loan balance and other amounts due and shall return any excess funds to the customer. UNINSURED ACCOUNT: Funds Held is not a depository account and is not insured. In the event of the Association’s liquidation, customers having balances in Funds Held shall be notified according to regulations.
Young, Beginning, and Small Farmers and Ranchers GreenStone Farm Credit Services, ACA We have specific programs in place to serve the credit and related needs of young, beginning, and small farmers and ranchers (YBS) in our territory. The definitions of young, beginning, and small farmers and ranchers as developed by the Farm Credit Administration (FCA) follow: • Young: A farmer, rancher, or producer or harvester of aquatic products who was age 35 or younger as of the date the loan was originally made, • Beginning: A farmer, rancher, or producer or harvester of aquatic products who has 10 years or less of experience at farming, ranching, or producing or harvesting aquatic products as of the date the loan was originally made, and • Small: A farmer, rancher, or producer or harvester of aquatic products who normally generated less than $250,000 in annual gross sales of agricultural or aquatic products at the time the loan was originally made. YOUNG, BEGINNING, AND SMALL FARMER DEMOGRAPHICS The local service area of the association includes the entire state of Michigan and 11 counties in the northeastern part of the state of Wisconsin. Results from the 2007 Census of Agriculture became available in February 2009 and were studied to try and determine the numbers of YBS farmers within our territory. This most recent Agricultural Census represents the best demographic information available in our territory. Results of this study show the following: Category
Number Percent
Number of Farmers 34 and Younger
6,544
9.8%
Number of Farmers on Current Farm Less Than 10 Years
15,407
23.2%
Number of Farmers with Less Than $250,000 Farm Sales
60,793
91.4%
Total Number of Farmers
66,509
Annual Report 2012
There are several differences in the methods by which the demographic and FCA YBS farmer data is presented: Young farmers are defined by the FCA as 35 years old or less. The United States Department of Agriculture (USDA) demographic stratification breaks at 34 years. Beginning farmers are defined by the FCA as having 10 years or less farming experience. There is no measurement matching this definition in the USDA Census; however, the census does identify farmers on their current farm less than 10 years. That statistic may include beginning farmers, but may also include experienced farmers who have recently changed farmsteads. The FCA Small Farmer definition matches closely with the USDA delineation. The USDA Census of Agriculture is the best source of demographic information within the association local service area. Even though the statistical results of the census do not match the FCA definitions exactly, they do provide a consistent source of measurement with which to assess association targets and goals. DESCRIPTION AND STATUS REPORT ON THE YOUNG, BEGINNING, AND SMALL FARMER PROGRAM The mission statement of the program is as follows: “GreenStone Farm Credit Services recognizes the importance of young, beginning, and small farmers to the future of agriculture. The association shall serve the unique needs of this market segment through special lending programs that extend credit in a safe and sound manner for both the individual member and the association. GreenStone also believes in the value of education to prepare these producers to successfully compete in a highly competitive global marketplace and shall support educational opportunities for them that balance the cost of delivery with overall stockholder value.”
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OUR STORY
The association implemented a board approved YBS lending program comprised of separate components for YBS farmers. Relaxed underwriting standards and loan terms have been approved for farm operating loans, farm equipment and intermediate-term loans, and for real estate loans. These standards and terms are customized for young farmers and beginning farmers. Quantitative targets based upon reasonably reliable demographic data have been established by board policy for YBS farmers. Targets have also been established for the YBS program in an aggregate. The targets are as follows: Measure
At 12/31/2012
1. Y oung farmers in portfolio equal to or greater than percentage of young farmers in the census
Quantitative Targets
9.8%
20.6%
2. Young farmer loans at least 50% of the young farmers in census
50.0%
86.0%
3. Y oung farmers at least 10% total outstanding loan volume
10.0%
14.6%
4. Y oung farmers at least 10% of all new loans (number)
10.0%
18.7%
5. B eginning farmers at least 10% total number of loans outstanding
10.0%
27.8%
6. B eginning farmers at least 10% of total outstanding loan volume
10.0%
18.2%
7. B eginning farmers at least 10% of all new loans (number)
10.0%
22.4%
8. S mall farmers at least 40% of total number of loans outstanding
40.0%
52.2%
9. Small farmers at least 20% of total outstanding loan volume
20.0%
23.4%
10. Small farmers at least 40% of all new loans (number)
40.0%
45.1%
11. Maintain at least 50% of total loan numbers to YBS farmers
50.0%
66.7%
12. Maintain at least 30% of the total outstanding loan volume to YBS farmers
30.0%
32.3%
The association has also established certain qualitative goals addressing its efforts and to implement effective outreach programs to attract YBS farmers. These goals are as follows: Qualitative Goals
Measure
At 12/31/2012
5% Young 5% Beginning 5% Small
8.7% 5.1% 6.5%
1. Related services will be offered to YBS farmers in the territory. Goals: Book sales of at least one association offered related service to at least 5% of YBS farmers in the association portfolio. 2. Credit services and financially related services to YBS farmers will be coordinated with governmental and private sources of credit. Goals: Coordinate with the USDA 7.5% Young Farm Service Agency (FSA) to enhance 7.5% Beg. credit services to young and beginning farmers by obtaining guarantees on at least 7.5% loans (by number) and to take advantage of the FSA young farmer financing program utilizing private second mortgage financing or other alternative financing options whenever possible.
8.5% 5.1%
3. We will implement effective outreach programs to attract YBS farmers. Goals: (a) Participate in or sponsor annually at least 10 YBS farmer leadership and educational programs offered in either Michigan or Wisconsin.
10 Programs
27 Programs
(b) Offer at least five individual 5 scholarships to deserving Scholarships YBS farmers (or potential YBS farmers) to Michigan and/or Wisconsin Universities or Colleges.
9 Scholarships offered
All of the association’s quantitative and qualitative goals were met in 2012 with the exception of the use of FSA guarantees on beginning farmer loans. The stability of the agricultural economy and lower interest rates reduced the necessity to obtain FSA guarantees on our beginning farmer loans last year. The association employs the following methods and strategies to ensure that credit and services offered to YBS farmers are provided in a safe and sound manner and within risk-bearing capacity: • Board policy includes a specific section discussing program safety and soundness under its operating parameters, • Board policy includes a maximum level of risk for YBS adverse volume originated under the program, • The association internal audit plan requires periodic auditing of the YBS program, which is done annually in conjunction with the internal credit review. In addition, comprehensive reports are written periodically, the most recent report was as of December 31, 2009, and • The association internal audit and loan review plan will annually include a selection of YBS loans within its normal selection criteria and assess individual loan credit administration, coding, and loan quality.
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GreenStone Farm Credit Services
$670 Thousand in Charitable Contributions
97% Customer Satisfaction Rating
â&#x20AC;&#x153; While it is important that we focus on financial metrics and sound risk management practices, we must never lose sight of the fact that first and foremost we are a people business! â&#x20AC;?
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greenstone farm credit services 3515 West Road, East Lansing, MI 48823
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800- 444 -3276
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www.greenstonefcs.com
GreenStone Farm Credit Services annual report 2012
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