Annual Report 2018 - Page 4

MESSAGE FROM THE CHAIRPERSON OF THE BOARD AND CHIEF EXECUTIVE OFFICER Dear FCS Financial Member: We are pleased to present this 2018 Annual Report to Shareholders of FCS Financial. As a customer-owned cooperative dedicated to serving agriculture and rural communities in Missouri, FCS Financial remains committed to supporting our owner-members and ensuring they have a consistent, reliable and affordable source of credit, and related services through all agricultural cycles. 2018 continued to provide challenges for agriculture producers across Missouri. Commodity prices, trade policy fears, and weather were major concerns. Much of Missouri experienced a wet spring, dry summer, wet fall, and early winter which added to the uncertainty for producers as each season had an impact on crop results to varying degrees. 2018 continued to reinforce the importance of high quality production and financial information, and effective production, marketing, and financial management plans. Despite these challenges, FCS Financial had another solid year. The Association continues to benefit from diversification across commodities and types of farming and ranching operations within our membership. In addition, our involvement in capital market participations with other entities brings additional geographic and earnings diversification to your cooperative. Earning assets grew at a relatively modest rate of 4.3% with the average daily balance (ADB) of our owned and managed assets increasing to $4.0 billion at December 31, 2018, compared to $3.8 billion at the end of 2017. We believe this rate of growth is reflective of the opportunities and conditions which currently exist in the marketplace. Net income at the end of 2018 was $81.7 million, for a return on assets (ROA) of 2.0%. This compares to $70.1 million and an ROA of 1.8% at the end of 2017. Our 2018 net income was positively affected by several factors including higher interest earning assets, continued strong patronage from our funding bank, lower cost of insuring our portion of the Farm Credit System debt, and a distribution from the Farm Credit Insurance Fund. Asset quality remained relatively unchanged at 97.9% owned acceptable and special mention, compared to 97.4% at the end of 2017. Loans 30 days or more past due, an indicator of potential future credit concerns, remained at very low levels and ended 2018 at 0.1%. The Association’s Permanent Capital Ratio, a key indicator of financial adequacy, was 18.5% as of December 31, 2018, and was well in excess of our regulatory requirement. Maintaining a strong capital position is critical to ensure the Association is protected from unexpected losses and is well positioned for future opportunities to serve our owner-members, new members, and rural communities in Missouri. These positive results enabled your Board of Directors to declare a cash patronage distribution for 2018 of $24.0 million, or an average of approximately 0.83% of eligible owner-member borrowings from FCS Financial. This is a record level of patronage and brings the total distribution to nearly $120 million since 2006. We are especially pleased that this effectively reduces our owner-members’ borrowing costs in an already low interest rate environment, especially during this challenging period in agriculture. We believe patronage provides our owner-members a significant benefit and is one of the many advantages of choosing FCS Financial as your source of financing. While the Association’s success is shared directly with our owner-members through cash patronage, we also share our success with our rural communities. We are making meaningful financial contributions and investing significant employee resources to benefit education, young and beginning farmers, and agriculture-related youth programs. As we look ahead, we recognize there is still much to be done. 2019 will bring new challenges and opportunities to our business. Lower projected net farm income, breakeven or below prices for most major commodities, a stronger dollar, and increasing interest rates will likely persist for the next several years. These challenges will likely impact the Association’s earnings, credit quality, and growth opportunities. However, we believe that through sound financial management and prudent risk administration, the Association is well positioned to continue to serve agriculture and our rural communities. Our business operations continue to become more complex as increased regulatory requirements, rising costs related to technology and information security, and additional emphasis on internal controls continue to affect our cost of operations. We are also planning for the transition to the next generation of leaders as some of our more tenured staff are retiring. Prudent management will be important for the foreseeable future to ensure the Association continues to operate cost effectively, delivers value to our owner-members, and supports our rural communities across Missouri. A significant strength of FCS Financial is that we are a customer-owned cooperative whose primary purpose is to serve our owner-members. Our mission over our more than 100 years has not changed – to ensure that farmers, ranchers, and agribusinesses have a consistent, affordable, and reliable source of funding – in all economic cycles. This has been the key to our success for over 100 years and we believe it must remain our focus for the next 100 years. Thank you for choosing FCS Financial for your agricultural financing needs and we wish you continued success in 2019. Sincerely, Kenneth Bergmann Chairperson of the Board FCS Financial, ACA David D. Janish Chief Executive Officer FCS Financial, ACA March 11, 2019 1