PREFERRED STOCKHOLDER UPDATE
"Explore the latest updates on Compeer's financial status, merger completion, portfolio makeup, and cooperative structure. Learn about funding, asset management, and industry specialties in this comprehensive report."
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PREFERRED STOCKHOLDER UPDATE March 13, 2018 Jase Wagner Chief Financial Officer jase.wagner@compeer.com William Moore, CFA Vice President, ALM & Capital Mgmt bill.moore@compeer.com
AGENDA Compeer Overview 2017 Review Ag Industry Capital 2
MULTI-FACETED COOPERATIVE STRUCTURE Due to cooperative structure, Compeer has access to a stable, highly-rated, matched funding Access to AA+/Aaa rated Matched Funding Agent Borrower Owner 3 3
FUNDING 4.00% 3.73% 3.80% The Funding Corp raises debt 10-13bps above Treasuries in the 1-5 year category, and 36-60bps in the 10-30 year category. 3.60% 3.40% 3.24% 3.20% With ~10 bps of AgriBank add-on, Compeer funds at 25- 75bps over the Treasury curve 3.00% 3.14% 3.00% 2.77% 2.80% 2.88% 2.66% 2.81% 2.53% 2.60% 2.65% 2.56% 2.35% 2.40% 2.41% 2.15% 2.20% 2.24% 2.00% 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 7 Yr 10 Yr 30 Yr FCS Bonds US Treasurys 4
COMPEER Merged three existing Farm Credit associations into one AgStar Financial Services Badgerland Financial 1st Farm Credit Services 45 office locations Managed through 12 Core Marketplaces as well as Industry Specialties Over 43,000 clients Assets of $19.5 Billion 144 counties A third of volume generated outside of local service area 5
MERGER UPDATE Completion: Seamlessly integrated Board and Executive Team pre-merger Effective merger date July 1, 2017 Accounting & GL systems integration November 1, 2017 Unified communications integration Fall 2017 Fulfilled key merger conditions with FCA December 2017 Board Elections December 2017 Single pricing tool rollout January 2018 To be completed Front-end (CRM, Workflow, document management) technology systems Dec 2018 6
*Data as of 12/31 PORTFOLIO MAKE-UP GRAIN - FMAC GUARANTEE, 2.0% OTHER LIVESTOCK, 2.3% RURAL HOME, 5.1% Compeer portfolio is more diversified than historical Associations Lower overall industry concentrations Lower individual loan concentrations Loan size diversity supporting both small and large clients Annual Report shows a higher grain mix due to FCS legacy classification of home mortgages CATTLE, 3.0% OTHER CROPS, 3.0% OTHER, 6.9% CASH GRAINS, 33.9% PAPER & TIMBER, 3.6% FOOD PRODUCTS, 4.7% LANDLORD, 5.1% SWINE, 7.1% DAIRY, 11.0% ENERGY POWER & TELECOM, 5.4% AGRIBUS, 7.0% 7
LARGEST CLIENTS Largest Industries (Top 100) Commitment Despite some overlap of customer commitments between legacy associations, concentration of client exposure remains minimal Diversified industries within the Top 100 All Top 100 clients are performing Food Products 21% Agribusiness 17% Paper Packaging & Timber 15% Swine 13% Energy Power & Telecom 11% Cash Grain 7% Poultry & Other Livestock 4% Other Crops 4% Cattle 2% Dairy 1% Other 6% 8
BUSINESS STRUCTURE Retail - Large Operation 14% Investments 4% Home Mortgage 5% Wholesale - Farm & Ranch 10% Input Finance (PPF) 1% Retail - Farm & Ranch 44% Large Syndicated Loans 21% 9
FINANCIAL SUMMARY Steady growth in earning assets Significant earnings growth over the last five years Merger significantly expanded the size and profitability of the association Record profits and consistent profitability Earning Assets (in $bn) Net Income After Tax (in $mm) $400 $20.0 $350 $18.0 $16.0 $300 $14.0 $250 $12.0 $200 AgStar $10.0 AgStar $150 $8.0 $100 $6.0 $50 $4.0 $- $2.0 1 1 11
PRO FORMA FINANCIAL PERFORMANCE 2017 % Var Description Actual Prior Year PY Variance Net Interest Income $ 487.6 $ 454.0 $ 33.5 7.4% Non-Interest Income 77.2 78.2 (1.0) -1.3% Total Operating Expense (238.4) (232.7) (5.7) 2.4% 9.0% Gain on Operations 326.3 299.5 26.9 Provision Expense (16.9) (10.7) (6.2) 57.9% Total Patronage 88.2 48.0 40.2 83.8% Other Expense (30.5) (27.7) (2.8) 10.1% Income Tax Expense (15.5) (6.1) (9.4) 154.1% 16.0% NET EARNINGS $ 351.6 $ 303.0 $ 48.6 Return on Average Equity Return on Average Assets Operating Efficiency Ratio Capital Ratio 9.71% 1.61% 0.81% 15.1% 9.88% 1.61% 0.82% -0.17% 0.00% -0.01% 1 2
CREDIT QUALITY RELATIVE TO PEERS 2.00% 1.86% 1.80% 1.60% 1.52% 1.40% 1.20% 1.00% 0.80% 0.66% 0.60% 0.40% 0.32% 0.20% 0.07% 0.01% 0.00% Deliquent Loan % Charge-off % Compeer Ag Production Loans Banks Farmland Loans Banks Source: Compeer, Federal Reserve All Commercial Banks as of Q4 17 1 3
LOSS EXPERIENCE: CREDIT TRENDS 4.50% Compeer DQ Loans/Loans U.S. Commercial Banks DQ Loans/Loans Compeer NCOs/Loans U.S. Commercial Banks NCOs/Loans 4.00% 3.70% 3.59% 3.35% 3.50% 3.14% 3.00% 2.80% 2.76% 2.61% 2.97% 2.64% 2.57% 2.50% 2.38% 2.19% 2.13% 2.11% 2.00% 2.23% 1.75% 1.69% 1.76% 1.59% 1.61% 1.60% 1.55% 1.48% 1.46% 1.47% 1.66% 1.41% 1.42% 1.37% 1.50% 1.38% 1.33% 1.58% 1.30% 1.28% 1.51% 1.29% 1.20% 1.42% 1.22% 0.90% 1.13% 1.33% 1.09% 1.19% 1.08% 1.12% 1.10% 1.03% 0.91% 1.18% 1.00% 0.85% 0.76% 0.80% 0.76% 0.66% 0.59% 0.54% 0.89% 0.68% 0.94% 0.63% 0.68% 0.55% 0.56% 0.48% 0.49% 0.83% 0.52% 0.45% 0.70% 0.43% 0.49% 0.37% 0.50% 0.37% 0.56% 0.58% 0.52% 0.57% 0.52% 0.40% 0.48% 0.57% 0.48% 0.46% 0.43% 0.43% 0.45% 0.13% 0.14% 0.16% 0.38% 0.13% 0.12% 0.11% 0.12% 0.00% 0.07% 0.06% 0.07% 0.07% 0.02% 0.02% 0.08% 0.05% 0.03% 0.04% 0.01% 0.01% 0.00% (0.02%) 0.01% (0.02%) 0.00% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 (0.50%) 1 4 Source: U.S. commercial bank data from FDIC Quarterly Banking Profile
GRAIN INDUSTRY OUTLOOK High yields in Upper Midwest helped offset lower prices Farmers are utilizing strong equity balances to consolidate debt and replenish working capital to fund short-term losses Deferring CAPEX Evaluating rented land and family expenses Input prices adjust over time, just slowly Government sponsored insurance payments provide unique safety net Projections call for a decline in corn receipts and an slight increase in soy Acreage between the two even at 90mm acres for the first time 1 6
SUPPLIER TO THE GLOBE This is where it is grown U.S. is a leading soybean producer - Export near 50% of global soybeans and soybean products Best logistics and infrastructure in the world for grain production Time from Farm to Shanghai port is less than 29 days - 24 of which is on the Ocean 1 7
SUSTAINABLE VALUE LENDING Compeer incorporates a lending method that values the collateral at a sustainable price rather than market price Based on the long-run expectations of corn price and yield, and a 4% cap rate, sustainable value near $6,000 an acre Loan based on 65% of sustainable value, not market value Remaining portion funded with increased owners equity Reduces volatility in valuations caused by short-run market fluctuations 1 9 19
LENDING STANDARDS: LAND VALUES LTV on New Farm Mortgage Originations Southern MN Benchmark 9000 54% 53% 8000 53% 52% 52% 7000 52% 52% 6000 51% 50% 5000 50% 49% 49% 4000 49% 48% 48% 3000 48% 47% 2000 46% 1000 45% 0 * * 2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 AgStar Compeer * Note: 2017 Benchmark is Southern Minnesota only, whereas 2017 LTV is all of Compeer. 2 0 20
CHALLENGING ENVIRONMENT FOR YOUNG & BEGINNING PRODUCERS Younger borrowers have less ability to absorb significant losses less margin for error Compeer has dedicated lending programs in place to serve this market + Use of government guarantee programs lowers lending risk to the segment Dedicated conferences and education opportunities to assist these clients in managing their risks while growing their business Compeer s average client 2 1 Source: University of Illinois
OTHER INDUSTRIES Dairy Based on early 2018 prices, dairy operators will be unprofitable unless they contracted milk, current prices are more in-line with moderate losses + Regional variances Agribusiness Food processors and packers, branded companies, beverages and ethanol each experiencing solid margins and profits Grain and crop input related companies profits lessened due to low commodity prices Swine The average swine producer was profitable in 2017, and these producers have recorded 4 straight years of profitability + Production is increasing, but export demand has been strong Home Mortgage Compeer is advancing a Center of Excellence within the Farm Credit System for rural home mortgage + $575mm managed portfolio in addition to $1.1bn in portfolio loans 2 2
REGULATORY CAPITAL RATIOS 2017 Actual 14.2% 14.7% 15.1% 15.0% 2018 Budget 14.6% 15.1% 15.5% 15.3% Board Target > 11% > 12% 14%* > 12% Well-Capitalized Level 7.5% 9.0% 11.0% 5.4% Common Equity Tier 1 Tier 1 Total Regulatory Capital Ratio T1 Leverage Ratio * Operating range of 13-15%. All other targets are no less than measures. 2 3
TOTAL REGULATORY CAPITAL RATIO 0.08% 0.19% 0.42% 17.0% 2.11% 1.09% 16.0% 0.10% 15.0% 16.80% 16.80% 16.68% 14.0% 15.50% 15.59% 15.12% 15.12% 13.0% 12.0% 2 4
CAPITAL BENCHMARKS Compeer Capital Benchmarks Peer Average, 16.50% 18.0% Compeer Severe Stress Min, 13.50% 16.0% Economic Capital AAA, 12.30% FCA FIRS 1, 15.50% 14.0% Banking (Well Capitalized), 10.50% 12.0% AIRB - Under Stress, 9.80% Capital Ratio 10.0% Economic Capital AA, 11.30% 8.0% AB Risk Score - 100pts, 13% FCA FIRS 2, 11% 6.0% FMAC 12/31/2017, 9.40% 4.0% AIRB - No Stress, 5.70% 2.0% 0.0% Note: Analysis of Compeer portfolio using AIRB practices. FMAC based on only Farm & Loan portfolio (excludes guarantees) and all capital. 2 5
