2 0 1 5 A N N U A L R E P O R T Mississippi Land Bank, ACA Part of the Farm Credit System Table of Contents Report of Management ....................................................................................................................... 2 Report of Audit Committee ................................................................................................................ 3 Five-Year Summary of Selected Consolidated Financial Data .......................................................... 4 Management’s Discussion and Analysis of Financial Condition and Results of Operations ....................................................................................................... 6 Report of Independent Auditors ....................................................................................................... 12 Consolidated Financial Statements ................................................................................................... 13 Notes to Consolidated Financial Statements .................................................................................... 17 Disclosure Information and Index .................................................................................................... 46 Mississippi Land Bank, ACA—2015 Annual Report 1 REPORT OF MANAGEMENT The consolidated financial statements of Mississippi Land Bank, ACA (Association) are prepared by management, who is responsible for the statements’ 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 appropriate in the circumstances. Other financial information included in the annual report is consistent with that in the consolidated financial statements. To meet its responsibility for reliable financial information, management depends on the Farm Credit Bank of Texas’ and the Association’s accounting and internal control systems, which have been designed to provide reasonable, but not absolute, assurance that assets are safeguarded and transactions are properly authorized and recorded. The systems have been designed to recognize that the cost of controls must be related to the benefits derived. The consolidated financial statements are audited by PricewaterhouseCoopers LLP, independent accountants, who conduct a review of internal controls solely for the purpose of establishing a basis for reliance thereon in determining the nature, extent and timing of audit tests applied in the audit of the consolidated financial statements in accordance with auditing standards generally accepted in the United States of America. The Association is also examined by the Farm Credit Administration. The board of directors has overall responsibility for the Association’s systems of internal control and financial reporting. The board consults regularly with management and reviews the results of the audits and examinations referred to previously. The undersigned certify that we have reviewed this annual report, that it has been prepared in accordance with all applicable statutory or regulatory requirements, and that the information contained herein is true, accurate and complete to the best of our knowledge or belief. Craig B. Shideler, Chief Executive Officer Abbott R. Myers, Chairman, Board of Directors March 14, 2016 March 14, 2016 Claire B. Pegram, Chief Financial Officer Lawson McClellan, Chairman, Audit Committee March 14, 2016 March 14, 2016 J. Matthew Walden, Chief Operating Officer March 14, 2016 Mississippi Land Bank, ACA—2015 Annual Report 2 REPORT OF AUDIT COMMITTEE The Audit Committee (Committee) is composed of Lawson McClellan, Alan Blaine, Jan Hill and Abbott Myers. In 2015, seven Committee meetings were held. The Committee oversees the scope of Mississippi Land Bank, ACA’s (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 Committee’s approved responsibilities are described more fully in the Audit Committee Charter, which is available on request or on the Association’s website. The Committee approved the appointment of PricewaterhouseCoopers LLP for 2015. Management is responsible for the Association’s internal controls and the preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements are prepared under the oversight of the Committee. PricewaterhouseCoopers LLP is responsible for performing an independent audit of the Association’s consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and for issuing a report thereon. The Committee’s responsibilities include monitoring and overseeing the processes. In this context, the Committee reviewed and discussed the Association’s audited consolidated financial statements for the year ended December 31, 2015 (audited consolidated financial statements), with management and PricewaterhouseCoopers LLP. The Committee also reviews with PricewaterhouseCoopers LLP the matters required to be discussed by authoritative guidance “The Auditor’s Communication with Those Charged with Governance,” and both PricewaterhouseCoopers LLP’s and the Association’s internal auditors directly provide reports on significant matters to the Committee. The Committee discussed with PricewaterhouseCoopers LLP its independence from the Association. The Committee also reviewed the nonaudit services provided by PricewaterhouseCoopers LLP and concluded that these services were not incompatible with maintaining the independent accountant’s independence. The Committee has discussed with management and PricewaterhouseCoopers LLP such other matters and received such assurances from them as the Committee deemed appropriate. Based on the foregoing review and discussions and relying thereon, the Committee recommended that the board of directors include the audited consolidated financial statements in the Association’s Annual Report to Stockholders for the year ended December 31, 2015. Audit Committee Members Lawson McClellan Alan Blaine Jan Hill Abbott Myers March 14, 2016 Mississippi Land Bank, ACA—2015 Annual Report 3 MISSISSIPPI LAND BANK, ACA FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA (unaudited) (dollars in thousands) 2015 2014 2013 2012 2011 Balance Sheet Data Assets Cash $ 10 $ 7 $ 41 $ 107 $ 178 Loans 597,273 560,898 525,615 497,681 460,434 Less: allowance for loan losses 705 690 362 712 993 Net loans 596,568 560,208 525,253 496,969 459,441 Investment in and receivable from the Farm Credit Bank of Texas 11,053 9,601 9,988 13,199 8,403 Other property owned, net 60 60 791 1,599 808 Other assets 13,096 11,763 12,484 11,420 11,816 Total assets $ 620,787 $ 581,639 $ 548,557 $ 523,294 $ 480,646 Liabilities Obligations with maturities of one year or less $ 8,150 $ 8,356 $ 6,190 $ 9,013 $ 7,548 Obligations with maturities greater than one year 508,022 475,448 450,822 429,036 394,710 Total liabilities 516,172 483,804 457,012 438,049 402,258 Members' Equity Capital stock and participation certificates 3,062 2,932 2,831 2,726 2,600 Unallocated retained earnings 101,662 95,185 88,660 82,719 75,835 Accumulated other comprehensive income (loss) (109) (282) 54 (200) (47) Total members' equity 104,615 97,835 91,545 85,245 78,388 Total liabilities and members' equity $ 620,787 $ 581,639 $ 548,557 $ 523,294 $ 480,646 Statement of Income Data Net interest income $ 15,337 $ 14,898 $ 14,650 $ 13,972 $ 12,929 (Provision for loan losses) or loan loss reversal 2 (600) (1,003) (360) (318) Income from the Farm Credit Bank of Texas 2,246 2,110 2,059 1,914 1,829 Other noninterest income 324 1,377 473 839 292 Noninterest expense (8,932) (8,460) (8,438) (7,481) (7,565) Net income (loss) $ 8,977 $ 9,325 $ 7,741 $ 8,884 $ 7,167 Key Financial Ratios for the Year Return on average assets 1.5% 1.7% 1.5% 1.8% 1.5% Return on average members' equity 8.8% 9.8% 8.7% 10.8% 9.5% Net interest income as a percentage of average earning assets 2.7% 2.8% 2.9% 2.9% 2.9% Net charge-offs (recoveries) as a percentage of average loans 0.0% 0.1% 0.3% 0.1% 0.0% Mississippi Land Bank, ACA—2015 Annual Report 4 MISSISSIPPI LAND BANK, ACA FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA (unaudited) (dollars in thousands) 2015 2014 2013 2012 2011 Key Financial Ratios at Year End Members' equity as a percentage of total assets 16.9% 16.8% 16.7% 16.3% 16.3% Debt as a percentage of members' equity 493.4% 494.5% 499.2% 513.9% 513.2% Allowance for loan losses as a percentage of loans 0.1% 0.1% 0.1% 0.1% 0.2% Permanent capital ratio 15.6% 15.9% 15.3% 15.3% 15.1% Core surplus ratio 15.1% 15.4% 14.8% 14.7% 14.5% Total surplus ratio 15.1% 15.4% 14.8% 14.7% 14.5% Net Income Distribution Patronage dividends: Cash $ 2,800 $ 1,800 $ 2,000 $ 1,325 $ 1,578 Mississippi Land Bank, ACA—2015 Annual Report 5 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary explains management’s assessment of the principal aspects of the consolidated financial condition and results of operations of Mississippi Land Bank, ACA, including its wholly-owned subsidiaries, Mississippi, PCA and Mississippi Land Bank, FLCA (collectively called the Association), for the years ended December 31, 2015, 2014 and 2013, and should be read in conjunction with the accompanying consolidated financial statements. The accompanying financial statements were prepared under the oversight of the Association’s Audit Committee. Forward-Looking Information: This annual information statement contains 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 “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will” or other variations of these terms are intended to identify the forward-looking statements. These statements are based on assumptions and analyses made in light of experience and other historical trends, current conditions and expected future developments. However, actual results and developments may differ materially from our expectations and predictions due to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties include, but are not limited to: • political, legal, regulatory and economic conditions and developments in the United States and abroad; • economic fluctuations in the agricultural, rural utility, international and farm-related business sectors; • weather-related, disease-related and other adverse climatic or biological conditions that periodically occur that impact agricultural productivity and income; • changes in United States government support of the agricultural industry; and • actions taken by the Federal Reserve System in implementing monetary policy. Significant Events: In December 2015, the Association received a direct loan patronage of $2,023,218 from the Farm Credit Bank of Texas (Bank), representing 42 basis points on the average daily balance of the Association’s direct loan with the Bank. During 2015, the Association received $170,648 in patronage payments from the Bank, based on the Association’s stock investment in the Bank. Also, the Association received a participation patronage of $52,230 from the Bank, representing 75 basis points on the Association’s average balance of participations in the Bank’s patronage pool program. In June 2015, one nonaccrual participation loan was sold at foreclosure for an amount in excess of the loan’s carrying value. Upon receipt of its portion of the sales proceeds, the Association paid off the loan and recorded a recovery of $50,841. In June 2014, the Association utilized funds previously reserved as a specific allowance to charge off $272,051 of a nonaccrual participation loan in order reduce the book value of the loan to the net realizable value of the most recent appraisal. The transaction had no effect on the income statement. Additionally, during the third quarter of 2014 the Association sold an acquired property, resulting in a gain of $1,227,063. For more than 25 years, the Association has continued to provide its members with quality financial services. The board of directors and management remain committed to maintaining the financial integrity of the Association while offering competitive loan products that meet the financial needs of agricultural producers. Loan Portfolio: The Association makes and services loans to farmers, ranchers, rural homeowners and certain farm-related businesses. The Association’s loan volume consists of long-term farm mortgage loans, production and intermediate-term loans, and farm-related business loans, with loan maturities ranging from one to 30 years. These loan products are available to eligible borrowers with competitive variable, fixed, adjustable, LIBOR-based and prime-based interest rates. Loans serviced by the Association offer several installment payment cycles, the timing of which usually coincides with the seasonal cash-flow capabilities of the borrower. Mississippi Land Bank, ACA—2015 Annual Report 6 The composition of the Association’s loan portfolio, including principal less funds held of $597,272,935, $560,898,215 and $525,614,771 as of December 31, 2015, 2014 and 2013, respectively, is described more fully in detailed tables in Note 3 to the consolidated financial statements, “Loans and Allowance for Loan Losses,” included in this annual report. Purchase and Sales of Loans: The Association utilizes the Mississippi Development Authority’s Agribusiness Enterprise Loan Program (ABE) to lower the cost of financing for its borrowers. The ABE loan program is designed to provide a percentage of low-cost state financing that is combined with private financial lending institutions’ loan proceeds to encourage loans to the agribusiness industry in the state. Loans made under the ABE may be for a maximum of 15 years at a zero percent interest rate. The ABE allows for a loan in an amount not to exceed 20 percent of the total project cost or $200,000, whichever is less, and $200,000 or 30 percent for agribusinesses that are retrofitting operations. Typical eligible industries include manufacturers, aquaculture, horticulture and agricultural-related industries while eligible projects include buildings and equipment. The Association guarantees payment of the borrower’s ABE loan to the Mississippi Development Authority (MDA); therefore, the amount of ABE loans outstanding and due to MDA is included in “Loans” on the consolidated balance sheet with an offsetting liability at “Guaranteed obligations to government entities” and is also included in Participations Sold in Note 3 to the consolidated financial statements, “Loans and Allowance for Loan Losses,” included in this annual report. ABE loans totaled $5,356,879, $5,057,582 and $4,427,306 as of December 31, 2015, 2014 and 2013, respectively. During 2015, 2014 and 2013, the Association was participating in loans with other lenders. As of December 31, 2015, 2014 and 2013, these participations totaled $29,522,677, $23,131,736 and $18,397,131, or 4.9 percent, 4.1 percent and 3.5 percent of loans, respectively. The Association has also sold participations of $12,289,882, $13,737,082 and $8,574,867 as of December 31, 2015, 2014 and 2013, respectively. Risk Exposure: High-risk assets include nonaccrual loans, loans that are past due 90 days or more and still accruing interest, formally restructured loans and other property owned, net. The following table illustrates the Association’s components and trends of high-risk assets serviced for the prior three years as of December 31: 2015 2014 2013 Amount % Amount % Amount % Nonaccrual $ 900,991 72.6% $ 1,091,715 69.9% $ 1 ,698,613 46.6% 90 days past due and still accruing interest 262,709 21.2% 410,553 26.3% 2 50,933 6.9% Formally restructured 17,263 1.4% - 0.0% 9 04,404 24.8% Other property owned, net 59,711 4.8% 59,711 3.8% 7 91,248 21.7% Total $ 1,240,674 100.0% $ 1,561,979 100.0% $ 3 ,645,198 100.0% At December 31, 2015, 2014 and 2013, loans that were considered impaired were $1,180,963, $1,502,268 and $2,853,950, representing 0.2 percent, 0.3 percent and 0.5 percent of loan volume, respectively. Impaired loans consist of all high-risk assets except other property owned, net. At December 31, 2015, other property owned totaled $59,711 and was solely comprised of the balance due to the Association from a previously reported sale of acquired property. Except for the relationship between installment due date and seasonal cash-flow capabilities of the borrower, the Association is not affected by any seasonal characteristics. The factors affecting the operations of the Association are the same factors that would affect any agricultural real estate lender. To help mitigate and diversify credit risk, the Association has employed practices including securitization of loans, obtaining credit guarantees and engaging in loan participations. Mississippi Land Bank, ACA—2015 Annual Report 7 Allowance for Loan Losses: The following table provides relevant information regarding the allowance for loan losses as of, or for the year ended, December 31: 2015 2014 2013 Allowance for loan losses $ 705,331 $ 689,859 $ 362,004 Allowance for loan losses to total loans 0.1% 0.1% 0.1% Allowance for loan losses to nonaccrual loans 78.3% 63.2% 21.3% Allowance for loan losses to impaired loans 59.7% 45.9% 12.7% Net charge-offs to average loans 0.0% 0.1% 0.3% Each quarter the Association employs a rigorous allowance evaluation model consisting of four facets, each related to the allowance for loan losses, in order to determine an appropriate level of allowance to carry on the Association’s consolidated balance sheet. The first facet is a general allowance calculation based upon the risk rating of each individual loan in the Association’s portfolio. The second is a specific allowance calculation derived from calculations, analyses and communications among the branch vice presidents and members of the Association’s Asset-Liability Committee (ALCO). The third facet is based upon the results of the quarterly stress testing model performed by the branch vice presidents and members of the ALCO. The fourth facet is a general economy and commodity evaluation in which the ALCO evaluates the current market for each commodity, as well as general economic factors such as unemployment. Management also evaluates the Association’s historical losses and the relationship of these losses to the current level of allowance. The final results are evaluated for reasonableness by the Association’s ALCO. The slight increase in allowance for loan losses from 2014 to 2015 is primarily related to the results of the quarterly stress testing model. The increase in the allowance from 2013 to 2014 is primarily due to the addition of a commodity pool evaluation tranche containing funds designated for use against losses realized among specifically identified loan categories. The allowance is based on a periodic evaluation of the loan portfolio by management in which numerous factors are considered, including economic conditions, loan portfolio composition, collateral value, portfolio quality, current production conditions and economic conditions, and prior loan loss experience. Management considers the following factors in determining and supporting the level of allowance for loan losses: the concentration of lending in agriculture, combined with uncertainties associated with farmland values, commodity prices, exports, government assistance programs, regional economic effects and weather-related influences. Based upon ongoing risk assessment and the allowance for loan losses procedures outlined above, the allowance for loan losses of $705,331, $689,859 and $362,004 at December 31, 2015, 2014 and 2013, respectively, is considered adequate by management to compensate for inherent losses in the loan portfolio at such dates. The allowance for loan losses is based upon estimates that consider the general financial strength of the agricultural economy, loan portfolio composition, credit administration and the portfolio’s prior loan loss experience. Results of Operations: The Association’s net income for the year ended December 31, 2015, was $8,977,457 as compared to $9,325,293 for the year ended December 31, 2014, reflecting a decrease of $347,836, or 3.7 percent. The Association’s net income for the year ended December 31, 2013 was $7,741,095. Net income increased $1,584,198, or 20.5 percent, in 2014 versus 2013. Mississippi Land Bank, ACA—2015 Annual Report 8 Net interest income for 2015, 2014 and 2013 was $15,337,386, $14,897,885 and $14,649,761, respectively, reflecting increases of $439,501, or 3.0 percent, for 2015 versus 2014 and $248,124, or 1.7 percent, for 2014 versus 2013. Net interest income is the principal source of earnings for the Association and is impacted by volume, yields on assets and cost of debt. The effects of changes in average volume and interest rates on net interest income over the past three years are presented in the following tables: 2015 2014 2013 Average Average Average Balance Interest Balance Interest Balance Interest Loans $ 567,722,496 $ 24,771,804 $ 526,260,331 $ 23,285,883 $ 504,981,500 $ 22,951,481 Interest-bearing liabilities 481,931,098 9,434,418 447,798,847 8,387,998 432,993,634 8,301,720 Impact of capital $ 85,791,398 $ 78,461,484 $ 71,987,866 Net interest income $ 15,337,386 $ 14,897,885 $ 14,649,761 2015 2014 2013 Average Yield Average Yield Average Yield Yield on loans 4.36% 4.42% 4.55% Cost of interest-bearing liabilities 1.96% 1.87% 1.92% Interest rate spread 2.40% 2.55% 2.63% 2015 vs. 2014 2014 vs. 2013 Increase (decrease) due to Increase (decrease) due to Volume Rate Total Volume Rate Total Interest income - loans $ 1,834,618 $ (348,697) $ 1,485,921 $ 967,123 $ (632,721) $ 334,402 Interest expense 639,365 407,055 1,046,420 283,860 (197,582) 86,278 Net interest income $ 1,195,253 $ (755,752) $ 439,501 $ 683,263 $ (435,139) $ 248,124 Interest income for 2015 increased by $1,485,921, or 6.4 percent, compared to 2014, primarily due to an increase in average loan volume, offset by a decrease in average yield on loans. Interest expense for 2015 increased by $1,046,420, or 12.5 percent, compared to 2014 due to an increase in the note payable to the Bank coupled with an increase in average cost of funds. The interest rate spread decreased by 15 basis points to 2.40 percent in 2015 from 2.55 percent in 2014, primarily due to increased competition in an environment of low interest rates. The Association uses a risk-based approach when pricing new loans; however, current market conditions in each of the respective branch territories also impact interest rate spreads. As evidenced in the table above, net interest income for 2015 was most significantly impacted by the increase in loan volume; however, this increase was offset by compressions on interest rate spread due to the current competitive interest rate environment. The interest rate spread decreased by 8 basis points to 2.55 percent in 2014 from 2.63 percent in 2013, primarily as the result of an environment of continued low interest rates coupled with continued strong competition. Noninterest income for 2015 decreased by $917,073, or 26.3 percent, compared to 2014, due primarily to the gain on a sale of acquired property of $1,227,063 recorded in 2014. Noninterest income for 2014 increased by $955,439, or 37.7 percent, compared to 2013, due primarily to the recording of the gain on the sale of acquired property previously referenced. Provisions for loan losses decreased by $601,905, or 100 percent, compared to 2014, due primarily to an increase in allowance of $400,000 in 2014, coupled with a recovery of $50,841 from the sale of a participation loan. Operating expenses consist primarily of salaries, employee benefits and Insurance Fund premiums. Additionally, expenses related to travel, occupancy and equipment, and advertising comprise a significant portion of the remaining operating expenses. Travel expenses primarily consist of expenses related to Association automobiles, such as fuel, maintenance and depreciation. Occupancy and equipment is comprised of rent expense, utilities and depreciation, while advertising expense primarily consists of the cost of advertising in various media outlets. Overall operating expenses increased $472,993 over 2014, primarily due to increases in salaries and benefits expense and Insurance Fund premiums of $265,780 and $76,886, respectively. Operating expenses for 2014 Mississippi Land Bank, ACA—2015 Annual Report 9