Annual Report 2018 - Page 9

Changes in Significant Components of Net Income For the year ended December 31 2018 2017 (in thousands) $99,033 -- 20,712 9,114 47,010 128 Net interest income Provision for loan losses Patronage income Other income, net Operating expenses Provision for income taxes $93,708 -- 19,180 7,219 47,991 1,974 $81,721 Net income $70,142 2016 Increase (decrease) in net income 2018 vs 2017 2017 vs 2016 $90,043 1,000 13,438 7,458 47,353 1,020 $61,566 $5,325 -- 1,532 1,895 981 1,846 $3,665 1,000 5,742 (239) (638) (954) $11,579 $8,576 Net Interest Income Changes in Net Interest Income (in thousands) 2018 vs 2017 For the year ended December 31 Changes in volume Changes in interest rates Changes in nonaccrual income and other Net change 2017 vs 2016 $4,968 216 141 $3,934 (293) 24 $5,325 $3,665 Net interest income included income on nonaccrual loans that totaled $752 thousand, $612 thousand, and $587 thousand in 2018, 2017, and 2016, 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 as a percentage of average earning assets) was 2.6%, 2.5%, and 2.5% in 2018, 2017, and 2016, respectively. Our net interest margin is sensitive to interest rate changes and competition. Provision for Loan Losses The fluctuation in the provision for loan losses was related to our estimate of losses in our portfolio for the applicable years. Additional discussion is included in Note 3 to the accompanying Consolidated Financial Statements. Patronage Income We may receive patronage from AgriBank and other Farm Credit Institutions. Patronage distributions from AgriBank and other Farm Credit Institutions are declared solely at the discretion of each institution’s Board of Directors. Patronage Income (in thousands) For the year ended December 31 Wholesale patronage Pool program patronage AgDirect partnership distribution Other Farm Credit Institutions Total patronage income 2018 2017 2016 $17,067 2,969 661 15 $15,733 3,272 159 16 $9,576 3,819 -- 43 $20,712 $19,180 $13,438 Wholesale patronage income is based on the average balance of our note payable to AgriBank. The patronage rates were 54.1 basis points, 52.1 basis points, and 25.6 basis points in 2018, 2017, and 2016, respectively. The increase in the patronage rate in 2017 was primarily due to a change in AgriBank’s capital plan effective July 1, 2017. The capital plan was modified to pay out 100% of net earnings beginning in 2017. Previously, 50% of net earnings was paid. See the Relationship with AgriBank section for further discussion on patronage income. We have participated in a pool program in which we sell participation interests in certain loans to AgriBank. As part of this program, we received patronage income in an amount that approximated the net earnings of the 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. The patronage recorded in 2018 included $89 thousand of our share of distributions from the Allocated Insurance Reserve Accounts (AIRA) related to the participations sold to AgriBank. The AIRA was established by the FCSIC when premiums collected increased the level of the Insurance Fund beyond the required secured base amount of 2.0% of insured debt. There were no AIRA distributions in 2017 or 2016. We also received a partnership distribution resulting from our participation in the AgDirect trade credit financing program. The AgDirect trade credit financing 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. Patronage distributions are paid to AgDirect, LLP, which in turn pays partnership distributions to the participating associations. We received a partnership distribution 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. No partnership distribution was received in 2016. 6