2017 ANNUAL REPORT s ce pa n S Ope Financing the Wide- 3/15/18 4:08 PM 2017 Annual Report-v2.indd 2 Robin Herring, Shareholder Huntington, Texas 2017 Annual Report-v2.indd 3 3/15/18 4:08 PM TABLE OF CONTENTS Report of Management ...............................................................................5 Report of Audit Committee..........................................................................6 Five-Year Summary of Selected Consolidated Financial Data ......7 Management’s Discussion and Analysis of Financial ...................9 Condition and Results of Operations Report of Independent Auditors ..........................................................16 Consolidated Financial Statements ....................................................17 Notes to Consolidated Financial Statements ................................ 22 Disclosure Information and Index .................................................... 56 2017 Annual Report-v2.indd 4 3/15/18 4:08 PM Dear Shareholder, I would like to thank the shareholders and board of directors for the support given to me and the staff at Heritage Land Bank. By all significant measures, it appears our 100th year was a very successful one for our Association. Our focus in 2017 was to identify and develop underserved markets in our territory, primarily the Dallas-Fort Worth Metroplex. We continue to expand and develop our marketing strategy, which includes traditional or conventional advertising along with digital and social media. This past year we saw another year of double-digit core loan growth. We ended the year with $485 million in accrual loans, up $65 million over the previous year, a growth rate of 15.4%. Net income for Heritage totaled $6.79 million, which was a $1.2 million improvement over 2016. At 15.9%, our capital remains strong relative to the Farm Credit Tenth District, the industry and other financial institutions. Credit quality of acceptable loans and other assets especially mentioned improved to a rating of 97.8% as of December 2017. Finally, for a fifth year in a row, Heritage experienced net loan loss recoveries in 2016, with previously charged off loan recoveries being more than losses by $246 thousand. As a result of solid earnings and capital, your board of directors is pleased to report that they have approved another cash patronage distribution from 2017 earnings of 0.65%. This action in our centennial year continues Heritage Land Bank’s long trend of returning a significant portion of our annual earnings to you, our shareholders. In fact, Heritage Land Bank has returned to its shareholders patronage payments totaling more than $42.1 million for 23 of the last 24 years. As we head into 2018 and embark upon our 101st year, we are excited about the new and developing opportunities in front of us. Over the last three plus years, we have been identifying and serving a number of new markets that should lend themselves well for future growth. In addition to our traditional marketing efforts, our website marketing and social media efforts should MESSAGE FROM THE CEO FROM MESSAGE help us get our message out to those markets more efficiently and effectively. While all of these initiatives are important, none are more important than the loyalty and support you have shown to Heritage Land Bank by allowing us to be your lender of choice. We do not take your support for granted and pledge to you that we will work every day to earn your continued support. Thank you and best wishes in 2018! William M. Tandy Chief Executive Officer 2017 Annual Report-v2.indd 5 3/15/18 4:08 PM COMMITTED. RELIABLE. CONSISTENT. 100 YEARS OF Each of us at Heritage Land Bank is HERITAGE HISTORY committed to the communities we serve and call home. Our borrowers are our neighbors. That is 1916 the reason you will find us working hard Founding the to make each customer experience better System than the last. President Wilson signs legislation creating the Federal Land Bank System. Steven Dyess The first loan is made less than a year Branch Manager later. NMLS# 1256540 1917 “Steven Dyess was extremely professional, knowledgeable and personable. I was very impressed with him and his staff's customer Our Heritage service. I am well pleased with Heritage Land Bank and am glad I Begins found you.” – Jeremy C., Stockholder Heritage Land Bank is established as part of the Houston Federal Land Bank. Zach Dominy Loan Officer NMLS# 1557525 1923 New Credit, “Zach and Rosy were awesome. Started process of looking for New Service, property over a year ago. Zach made updating info each time we Better Funding found something very easy.” – Donna G., Stockholder The new legislation provides for 12 Federal Intermediate Credit Banks (FICBs) to finance short-term Adam Davis commercial loans and make direct loans Branch Manager to cooperatives. The legislation also NMLS# 776634 extended the Federal Land Bank System to Alaska and Puerto Rico. The same year, the Federal Farm Loan Board “Adam Davis and his staff at Athens made this purchase one of if not creates a Fiscal Agency to more the easiest experience I have ever had. [Heritage Land Bank] has 100% all of my real estate purchase business from now on.” effectively market the bonds that – Stockholder provided credit for the system. 2017 Annual Report-v2.indd 6 3/15/18 4:08 PM 1933 The Great % Depression of our members say The Farm Credit Act of 1933 establishes their loan officer Production Credit Associations (PCAs) responds to requests to make short-term loans timed to in a timely manner. agricultural cycles, along with Banks for 100 Cooperatives (BCs) to lend to cooperatives. Now regulated by the Farm Credit Administration, the Farm Credit System loans more than $2 97% 98% billion in 1933 and 1934 along to help of our members say their of our members say their farmers and ranchers refinance and keep producing. loan officer explained the loan was completed in a process and terms well. timely manner. 1944 Production for 98% 100% the War of our members rate of our members say their loan Occupying a strategic position in the their overall experience officer is polite and attentive. nation’s food supply chain, the Banks with us as good or excellent. for Cooperatives financed the production and marketing of war-critical foods, fibers and oils. The FLBs helped to stem inflation by continuing to appraise farmland on the basis of "normal value" (the general % level of prices from 1909 to 1914) rather of our members say than wartime prices. they would recommend Heritage Land Bank 100 to others. 1958 Houston FLA Strengthens By the late 1950s, Farm Credit had taken on the air of a sense of permanence and power, symbolized by the imposing 45 YEARS edifice of the bronze-trimmed limestone Federal Land Bank Building at 430 The longest relationship Heritage Land Bank currently has with a customer. Lamar Street in Houston. Here employees pose in April 1958. 2017 Annual Report-v2.indd 7 3/15/18 4:08 PM REPORT OF MANAGEMENT The consolidated financial statements of Heritage 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. 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 (PwC), independent accountants, who also conduct a review of internal controls to the extent necessary to comply with auditing standards 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 and regulatory requirements, and that the information contained herein is true, accurate and complete to the best of our knowledge or belief. William M. Tandy, Chief Executive Officer Roger W. Claxton, Chairman, Board of Directors March 14, 2018 March 14, 2018 Adena K. Nichols, Chief Financial Officer March 14, 2018 Heritage Land Bank, ACA— 2017 Annual Report 5 REPORT OF AUDIT COMMITTEE The Audit Committee (committee) is composed of the four members of the board of directors of Heritage Land Bank, ACA. In 2017, eight committee meetings were held. The committee oversees the scope of Heritage Land Bank, ACA’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 Heritage Land Bank, ACA’s website. The committee approved the appointment of PricewaterhouseCoopers LLP (PwC) for 2017. Management is responsible for Heritage Land Bank, ACA’s internal controls and the preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.