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2016 Annual Report

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THE FPI VISION

To deliver premier technology solutions to the Farm Credit System by Focusing on the business value created by our customers use of technology Striving for ever-higher levels of operational excellence Providing a secure, robust, and well-controlled production environment Fostering a culture of innovation, collaboration, and professionalism Understanding the importance of the Farm Credit System and our role on delivering that mission

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OUR BOARD Mark Littlefield Phil DiPofi

Bill Lipinski

Bob Bahl

Chairman, President & CEO, Farm Credit West

Vice Chair, President & CEO, Northwest Farm Credit Services

CEO, Farm Credit East

President & CEO, AgCountry Farm Credit Services

Mark Littlefield has served in his current position since January 2011. Prior to that, he served as an executive vice president (and senior vice president) of Farm Credit West since its founding in 2001. He has been employed in the Farm Credit System since 1984. Mark is a National Association of Corporate Directors (NACD) Governance Fellow, and he serves on Farm Credit West’s corporate governance committee. In addition, Mark is chairman of the FPI Board of Directors and also serves on the Farm Credit Foundations Board, which offers centralized human resources services for Farm Credit nationwide.

Phil DiPofi earned his bachelor’s degree from the State University College of New York at Buffalo, and his MBA with a concentration in accounting from Niagara University. Phil most recently served as CoBank’s chief banking officer, where he was responsible for the bank’s strategic banking functions, including regional agribusiness, corporate agribusiness and banking services. As the president and CEO of Northwest FCS, Phil is ultimately responsible for the association’s $10 billion portfolio of owned and serviced loans, overall financial performance and for more than 600 employees in 47 offices throughout the Northwest. Phil also chairs FPI’s human capital and compensation committee.

As CEO of Farm Credit East, headquartered in Enfield, Conn., Bill Lipinski leads a team that serves Maine, Massachusetts, Connecticut, Rhode Island, New Jersey, eastern New Hampshire and New York. Farm Credit East has loans outstanding in excess of $5.8 billion and serves close to 14,000 farmers, agribusiness firms and rural residence customers. In addition, it is a leading provider of financial services, including recordkeeping, tax preparation, business and estate consulting, appraisal and insurance. Bill graduated with a degree in agricultural economics from Cornell University, where he has been named an outstanding alumnus. Bill also chairs FPI’s audit committee.

Bob is president and CEO of AgCountry Farm Credit Services, which serves more than 11,000 farmers and ranchers in eastern North Dakota and Northwest and west central Minnesota along with agribusinesses nationwide. Bob leads a dynamic team that delivers a full spectrum of credit and financial services products to the agricultural market. Raised on a family grain and livestock farm near Mohall, N.D., Bob earned a B.S./B.A. in finance and accounting with MBA studies from the University of North Dakota. A merger between AgCountry and FCS of Grand Forks resulted in Bob assuming the position of president and CEO of the combined AgCountry association in 2008.

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TO OUR COLLEAGUES IN THE FARM CREDIT SYSTEM When used as a strategic asset, technology confers an advantage. Whether it results from a suite of robust and easy to use tools, a streamlined and automated back-office process, or the business insights derived from actionable data, financial services institutions are better prepared to compete when they take advantage of evolving and advancing technology. Those that best leverage technology to enhance business results also remember to inject their internal, hard-won, and very human expertise into the strategic deployment of solutions. Technology makes foundational practices, such as the formation of strong, trusting relationships with customers, easier to accomplish; it does not replace them. The judgement, experience, and service orientation of an organization is supported, not supplanted, by technology. Organizations are required to plan their tech strategy out several years and manage to their goals; all while navigating quickly evolving realities. Whether faced with new regulations, a changing credit environment, emerging customer demands, or the latest information security threats, organizations must be prepared with the right technology strategy with experienced and innovative infrastructure and systems management. FPI provides this formidable technological support. Now, having served for a full year as FPI’s President and CEO, I truly appreciate the strength of our staff, the impressive product suite we provide to the Associations, and the aggressive strategic path our company is carving through the landscape. To insure that Farm Credit Financial Partners (FPI) is prepared to deliver on this vision we are working on these initiatives now. Inside this report, we outline FPI 2.0, our multi-year

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program to insure that FPI’s technology, processes, and people are operating at the highest standards. We also highlight our broadened product and services portfolio which we keep up-to-date and always moving forward towards meeting the emerging needs of Agriculture Credit Associations. In 2016, we identified FPI’s vision for the future and began the work of transforming ourselves into our next generation that we call “FPI 2.0”. Working with our Board of Directors, the management team identified a plan that touches every part of our organization and sets the target to attain excellence in our products, services, and internal business processes. We began that journey in 2016 and have identified over fifty associated projects to accomplish in the next two years. Last year saw a series of successful initiatives that are helping pave the way for the future. Last summer we moved our West Coast data center from an in-house operation to a premier hosted facility in Denver. This move puts our systems into a highly secure environment with high levels of systems availability. FPI’s product offerings also advanced over the year. We recently launched Narrative the latest extension to EmPOWER, our flagship loan origination system. The Narrative module gives Associations a fully automated and auditable tool to create robust credit decisioning documents. Credit departments use the tool to configure standard templates that pull data from our systems to create consistent documents for review and approval. The Farm Credit Digital Alliance, our partnership with CoBank to build the next generation of customer facing digital


solutions, delivered 2 new modules. Farmerborrowers can now pay loan accounts by capturing check images with their mobile devices. We also added a commercial billpay function to streamline borrower’s access to their credit lines. Risk management is one of our most important focus areas as we strengthen our control environment and information security programs. Significant in this area is FPI’s adoption of the NIST standard, supporting our Association’s ICFR requirements, and enhancing our risk based audit approach. Similarly we are maturing our adoption of technology management practices centered on the ITIL framework. Of course we have robust plans to significantly enhance our industry leading set of business applications with an emphasis on Customer Relationship Management, Statements and Billing, as well as a modern approach to underwriting and pricing. To accomplish these ambitious goals, we need great people. We are very pleased to welcome two new executives to our company. Kathy D’Amario joined FPI last year as our Chief Technology Officer responsible for our product portfolio and application development and support function. Kathy joined FPI with senior IT leadership experience at large financial services institutions and most recently as head of development for a leading commercial software provider. Sheryl Shinn is FPI’s Chief Information Officer in charge of our infrastructure and operations departments. Sheryl has been a Bank CIO for 10 years where she also was responsible for several operational areas including loan servicing. We are also honored to have won the trust and support of additional Associations. We worked with Farm Credit Illinois on their due diligence selection process and we were very impressed with their thoughtful and engaged teams. We share their executives’ vision

that technology is a key enabler of people and processes to support the goals of their organizations and customers. We welcome them to the FPI family. We are also working with other Associations on due diligence programs. FPI would not be in this strong position, with such a bright future, without the collective work of the people in our organization and the people in the organizations we serve. It is in the union of the talent and efforts of both FPI and the businesses we partner with that has enabled FPI’s consistent advancement, and it is through our mutual collaboration that we all realize the greatest gains. Together, we are a team: Team FPI, and together we mutually benefit and are mutually responsible for our success. We look forward to continuing this exciting journey, together.

Howard Bruck President & CEO Financial Partners, Inc.

Mark Littlefield Chairman, President & CEO Farm Credit West

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OUR MANAGEMENT TEAM Howard Bruck President & Chief Executive Officer Howard Bruck joined FPI in 2016 as president and CEO. His prior work experience includes serving as Chief Information Officer at Sterling National Bank, managing director of technology at the New York Stock Exchange and group manager of information systems at PepsiCo International. For the past 12 years, Howard has been an adjunct professor at NYU-Polytechnic University and the Fordham University Business School where he teaches courses in business operations and IT strategy. He has served on the business banking strategy committee for Fiserv and the midmarket advisory council for IBM. Howard regularly speaks at industry events and publishes articles in business journals. He earned his MBA from Fordham University and his B.S. from Long Island University.

Kathy D’Amario Executive Vice President & Chief Technology Officer Kathy is responsible for defining the strategic technology direction of FPI’s software products, including all phases of architecture, design, development and testing. Kathy’s teams deliver on innovative ideas and architectural designs to provide the industry leading products FPI brings to market. Ms. D’Amario joined FPI after 6 years at Medecision, where she held the position of CTO and Chief Architect. Prior to that she was Chief Architect at CIGNA Corporation and has also held senior management roles with ING, Aetna Retirement Services, MassMutual and various consulting companies. A graduate of Springfield College and Western New England College, Ms. D’Amario holds a BS degree and an MBA in Business Administration.

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Dan Carey Executive VIce President, Chief Administrative Officer & Chief Risk Officer Dan Carey joined FPI in 2015 as its Chief Administrative Officer, being additionally named its Chief Risk Officer in early 2016. Prior to joining FPI, Dan led administrative and risk groups for large and mid-sized organizations in multiple industries, including serving on the executive management team of an international photofinishing R&D and manufacturing company, based in Zurich. Dan also practiced law, both in private practice with a focus on employment and labor law and as an assistant district attorney in Massachusetts. Dan received his B.A. from the University of Massachusetts, returning later to receive his MBA from the university’s Isenberg School of Business. Additionally, Dan received his Juris Doctor from Western New England College School of Law.

Sheryl Shinn Executive Vice President & Chief Information Officer Sheryl Shinn leads our infrastructure and operations function, which includes our data centers, networks, client technology, security engineering and daily computer operations. Sheryl was formerly the Chief Information Officer for UniBank, a $1.6 billion mutual bank in Whitinsville, MA where she was responsible for all information systems and services for the bank including information technology infrastructure, security, enterprise applications, customer e-banking technologies, and deposit and loan operations. Ms. Shinn has over 20 years of experience in management and leadership in the information technology field. She holds a bachelor’s degree in Mathematics and Statistics from Mount Holyoke College, a Wharton Leadership Certificate from the University of Pennsylvania, and a graduate degree from the University of Pennsylvania, Stonier National School of Banking.

Dan Caron Executive Vice President, Consulting Services Dan Caron leads our consulting division which provides custom technology solutions and related services. This includes software development, project management, technology integrations and new implementations. With more than 20 years of experience in software engineering, Dan joined FPI in 2010 after leading Microsoft application development for MassMutual and prior to that Internet development for Tweeter Home Entertainment Group. In his first years with FPI, Dan’s team developed several new products including intranets, websites, customer portals, auditor portals and enterprise risk management dashboards. Prior to leading our consulting division, Dan led our Infrastructure & Operations division as CIO.

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FPI is in a state of transformation. For over twenty years, FPI has been at the forefront of technology development and support in the Farm Credit System. FPI’s investments in its product portfolio over that time have yielded a suite of products that is unparalleled within the System and provides truly tailored solutions for the Farm Credit institutions it serves. Today, FPI, our customers, and the Farm Credit System itself are faced with a changed landscape of obligations and expectations. Financial services of all kinds are being asked to rise to a level of operational excellence that has not before been required; institutions within the system fend off malicious attacks and exploits at an unprecedented rate; and regulatory bodies are reacting to these new realities with drastically increased expectations and enforcement. FPI has been quick to react to this changed landscape. FPI 2.0 is a three year, planned enterprise improvement program to deliver our organization into the next stage of its evolution: operational excellence enabling a customer-centered approach to value-enhancing business solutions for our customers in the Farm Credit System.

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The FPI 2.0 program is designed to prepare the company to meet the future challenges of Financial Services Technology providers and achieve the highest levels of operational performance, information security standards, and enterprise risk management. Much of FPI 2.0 is about aligning our processes with industry best practices. These include the NIST framework in information security, ITIL practices in technology operations, and ICFR standards in financial controls. The program covers every part of our company and every employee. FPI 2.0 represents over 50 specific projects across the company forming our new baseline operation. This one time effort is designed to initially transform the company, but each program is also designed to become a self-sustaining, permanent program of continual improvement. Technology Operations Product Management Customer Relations Financial Stewardship

Application Development Risk Management

Human Capital

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PRODUCTS & SERVICES

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OUR PRODUCTS As FPI’s flagship product, EmPOWER delivers a fully integrated suite of features that serves the entire lifecycle of the lending process.

• Loan Origination and Servicing – Create new loans, change payment terms and rates, conduct risk analysis, create and track Loan Covenants, and capture loan approvals.

• Narrative Web - The second module of the new EmPOWER Web Suite, Narrative Web retrieves the appropriate information from the related credit analysis and underwriting products consolidating the data together for the loan officer into one document to submit for loan approval. Rich text commentary fields are available to provide additional information in context of the data to complete the credit presentation. This combined information of data and commentary is generated into a comprehensive pdf document that contains all the information for the credit approval.

• Collateral Web – The first module of the new EmPOWER Web Suite, Collateral Web enables users to easily configure relationships between legal entities, loans, collateral, and underlying documentation. Using a simple but powerful user interface, each collateral component is graphically represented with relationships clearly highlighted.

• Customer Relationship Management – Manage all aspects of your customers including demographics, relationships, and marketing information.

• Document Management – The Electronic Customer Binder (ECB) provides a single repository for all documents associated with each customer.

• Loan Accounting Frontend (LAF) – Create, validate, and monitor transactions without having to work directly in the Loan Accounting system. EmPOWER is fully integrated with many other FPI products such as Loan Accounting, General Ledger, Credit Pro, and a reporting data warehouse. This level of integration translates to fewer points of data entry, a consistent user experience, and fewer systems to learn.

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Business Intelligence Our Business Intelligence (BI) platform facilitates all your data, reporting, and audit needs. The platform collects and manages data from core FPI systems - EmPOWER, Loan Accounting, and General Ledger - and is the source of information for many daily extracts and automated reports. With a full featured querying tool, subject matter experts can mine their data, unlock actionable insights, and provide information to decision-makers in risk management, operations, and finance.

Credit Pro is a web-based credit analysis tool designed specifically for the Farm Credit System. Credit Pro is an intuitive platform with a powerful calculation engine for seamless and simplified trending, stressing, and reporting. Balance sheets and earnings statement templates provide flexibility, while ensuring consistency across industries. The application is fully integrated with EmPOWER and Collateral Web.

Core Financial Systems FPI’s Core Financial Systems are the Lawson Financial Management and Fiserv DNA Loan Accounting systems. Both are fully integrated with EmPOWER and a Business Intelligence data warehouse to provide a seamless flow of data from loan origination to financial reporting. This integration not only creates efficiency for our customers but improves the quality and accuracy of financial data. Our DNA loan accounting system was developed by Fiserv, the trusted industry leader in mid-market loan accounting applications. Our customers rely on DNA to track payments, disbursements, and interest accruals, that are unique to Farm Credit institutions. Lawson Financial Management consists of a suite of applications including general ledger, accounts payable, fixed asset and cost allocations.

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Accounting Services FPI’s Accounting Services team provides continuous support of all loan accounting functions. We monitor the database daily and work closely with each association to ensure the accuracy of all loan accounting data. Throughout the year, we also are engaged in a wide variety of projects that provide additional functionality and enhance the customer experience. The Accounting Services team also facilitates the year end process as well as the creation and distribution of customer tax documents.

Billing Services FPI manages the overall process of generating customer billing statements, rate change notices, tax documents, and patronage letters on behalf of our association customers. The data is extracted from EmPOWER and formatted into a readable file for delivery to our third party print and mail vendor, who performs the physical printing and delivery to USPS.

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OUR SERVICES Doc Engine FPI’s Document Engine is a powerful tool that creates custom loan legal documents directly from the loan origination process. The Document Engine pulls borrower information from the Loan Origination system and places it into the lender’s loan documents, improving the efficiency and quality of what had been a very manual process. Loan documents are configurable by customer to accommodate your unique legal and company branding requirements.

Legal Services The FPI Legal Department provides legal services and consultation to our PSP customers. As Farm Credit System experts, they understand the broad array of issues that face institutions in our industry. We assist with deciphering and applying Farm Credit Administration regulations, consumer lending laws, and other federal laws specific to lending in agriculture.

Information Security FPI’s Information Security team takes a systematic approach to managing your security needs. We actively monitor for malicious or anomalous activity, respond to security events and incidents, and create the policies and procedures that govern our environment to ensure your data is safe and meets compliance requirements.

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Infrastructure Services Infrastructure Services begins with connecting your locations into our secure MPLS network. From there you will have access to all PSP applications that are hosted in our geo-redundant data center. FPI provides engineering, support and maintenance, as well as security vulnerability prevention for servers, storage arrays, and operating systems. We also perform data replication and backups to provide an effective disaster recovery solution for all our PSP applications. Infrastructure services also delivers a standard desktop PC with business productivity tools such as email, Cisco WebEx, and a full suite of desktop applications such as Microsoft Office, Internet Explorer, PDF Exchange, and Cisco Instant Messaging.

Security Administration The Security Administration team is the gate keeper to all your secured applications and directories. This dedicated team applies security to network assets, applications, file shares, and more. Working collaboratively with customers through a centralized request system, all security access requests and approvals are documented to ensure the appropriate level of control and auditability.

Customer Support Our Customer Center of Excellence (CCOE) provides Tier 1 Help Desk support for all our PSP customers. With teams on both the East and West Coast, we provide coverage during extended business hours regardless of your location. The CCOE handles and directs calls for hardware and software issues, training questions, password resets, and production application issues. Behind the CCOE are a number of Tier 2 and Tier 3 support teams that investigate more complex problems and make system changes to resolve issues.

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Websites & Customer Portals We host and help manage our customers’ external facing websites. Using the Sitecore Content Management System, customers maintain complete control over this important marketing tool while relying on FPI for security, design, and web development expertise. FPI also provides a fully integrated, mobile-friendly borrower web portal, called Customer MySite. It features a secure login, borrower specific account information, targeted marketing, and a Secure Messaging portal; everything an association would need to digitally interact with their borrowers in a safe and convenient manner.

Financial Benchmark compiles groups of financial statements to create an average, or Benchmark, for comparing the financial situation of similar farms. Highly integrated into FC Credit Pro, the Benchmark tool uses years of credit analysis data to generate reports and publish a summarized industry Benchmark back to Credit Pro. Once published to Credit Pro, Benchmark statements can be included in customer trends and reports for comparison purposes.

eReview is a tool for internal auditors and risk managers to review and assess credit decisions and risk. The practical web interface enables the review of loans, appraisals, and various financial services such as crop insurance, tax returns, farm records, and payroll services. Internal reporting features as well as a dedicated data warehouse allow for comprehensive management reporting at the branch, region, or enterprise portfolio level.

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Intranets FPI builds and maintains branded intranets for each of our customers as well as an “extranet” that enables collaboration between our customers. FPI leverages Microsoft SharePoint to provide our customers the ability to broadcast company news and information, share and collaborate across their organization, manage and search content, and implement consistent business processes through workflow automation.

Custom Solutions Group The PSP Suite of applications is a robust solution set to meet the core business needs of any Farm Credit ACA. However, your business may have unique needs or may want to deploy functionality beyond our standard solutions. FPI’s Custom Solutions Group provides a wide range of technical and business process expertise to tailor more specific solutions to meet the needs of each of our customers.

Advanced Business Intelligence Tools FPI currently offers a suite of products in the Business Intelligence domain for reporting and analysis, but we are actively working on more automation and integration, tools for predictive analytics, geo-coding of data sets, and data governance.

EmPOWER Mobile is our enterprise mobile app companion for EmPOWER. It provides the Relationship Manager or Loan Officer the tools they need to be productive and focused while out of the office visiting with customers. The EmPOWER Mobile App is designed to streamline tasks such as account inquiries, managing customer activities, and updating customer information.

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THE FPI ADVANTAGE

FPI provides cost effective and innovative products and services that drive profitability and competitive advantage for our customers. How do we do it? Customer-Driven Solutions. FPI has a long history of working collaboratively with our customers to understand their business needs and develop products tailored to Farm Credit. Working closely with your executive team and senior managers we ensure that our strategies are aligned, and your organization has the technology to support its business plans. No other organization can provide stronger technology leadership, operational excellence, and industry insight than Farm Credit Financial Partners, Inc.

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Innovation. A common theme throughout our history has been the level of innovation that comes from the FPI customer partnership. Working closely with our customers to identify business opportunities and challenges in their marketplaces, FPI has become a hub for innovative solutions that help our customers compete in their marketplaces.

Common Vision. FPI and our customers share a common vision for the organization: to be the premier technology and service provider in the Farm Credit System. Every day, we strive to provide the highest quality products and services while furthering our collective strategic vision. To be the best solution provider, we hire great people, maintain a steadfast focus on customer service and constantly look to the future for the next great idea.

Partnership. Our customers view FPI as a trusted business partner. We work cooperatively with each association as an integral part of their organization. Each customer has a dedicated relationship manager who understands, communicates and champions their association’s short- and long-term needs.

Farm Credit Experience. The FPI staff and management understand association business challenges because many have Farm Credit lending experience. We understand credit analysis, loan origination and maintenance, loan accounting, money movement and the Farm Credit legal and regulatory environment. This experience influences each of our products and services to ensure we provide solutions that meet our customers’ needs.

Comprehensive Portfolio of Products. Our PSP offering focuses on lending, infrastructure technology and daily operations, but we also offer a wide range of products and services that are essential to managing a Farm Credit association. Business intelligence, website hosting, loan document creation, legal consulting and information security are just a few of the services that complete our offering.

Technology Professionals. Our staff brings a wealth of information technology experience to create high quality and innovative solutions. As experts in IT infrastructure, application development, hosting and production support, we offer highly available, custom solutions that meet the needs of the Farm Credit System.

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2016 FINANCIALS

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Management’s Discussion and Analysis Overview The following comments address the operations and financial position of Farm Credit Financial Partners, Inc. (FPI). These comments should be read in conjunction with the accompanying financial statements and notes to the financial statements. During 2016, FPI achieved financial results favorable to plan in all key areas, including net income, capital levels, and liquidity. Carefully managed operating expenses, capital spending and project spending led to FPI’s financial performance exceeding earnings targets. FPI’s total operating income for 2016 was $39.8 million. This amount represents an increase of $0.1 million over 2015. Operating expenses for 2016 were $39.7 million, an increase of $0.7 million over 2015. Net income after other income and expenses, including provision for income taxes, was $133 thousand for the year as compared to $268 thousand in 2015.

Funding sources FPI operates with two primary sources of funding: 1. Operating income for “core” services provided. 2. Capital funding from owners. In addition, FPI maintains a $3.75 million open-ended line of credit with CoBank. There were no borrowings on this line-of-credit as of December 31, 2016. Funding levels are established and approved annually during the budget planning cycle. Capital funding is planned over a five-year cycle and reviewed annually. The current capital plan focuses on building capital funds appropriate to continue FPI’s vision to be a leading edge provider of technology solutions. The capital plan identifies key strategic projects. Completion of these projects and others is setting FPI on a strong course for effectively meeting demands related to systems, the marketplace, and governance.

Results of operations As noted above, FPI’s net income for 2016 decreased by $135 thousand as compared to 2015 net income. Additional discussion on FPI’s year over year financial results follows: During 2016, FPI’s revenue totaled $39.8 million and was comprised of core and extended core fees to customers of $34.5 million, R&D funding of $0.3 million, custom project and technology revenue of $2.9 million, and other revenues of $2.1 million. As noted in the overview section, this represents an increase of $0.1 million, or 0.3 percent over 2015. This increase is primarily

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due to increases in core services fees offset by reductions in R&D revenue due to the termination of this funding source. Operating expenses totaled $39.7 million during 2016, an increase of $0.7 million, or 1.8% over 2015. The primary area of change as compared to 2015 is in equipment costs due to investments in new product development and infrastructure, including the physical move and modernization of our data center. Increases in this area total $0.7 million year over year. Other areas impacting operating expenses this year are increased staff costs of $0.3 million offset by a reduction in purchased services costs of $0.7 million as FPI decreases its reliance on contract labor. Other operating costs, driven by investments in our wide area and backup networks, increased by $0.4 million versus prior year. Non-operating expenses (primarily income tax provisions) decreased by $0.4 million. FPI ended 2016 with cash and cash equivalent balances of $1.7 million, a reduction of $1.9 million from prior year. This planned reduction is due to investments in new product development and the one-time costs of moving and modernizing our data center. FPI met its financial targets during 2016 and positioned itself for future success. We completed a full work plan including the development of EmPOWER Narrative, which was released in February of 2017. In addition to new product rollouts, FPI continued to reduce outstanding production support case volumes and improved quality metrics, all while maintaining budget discipline. By year-end 2016, FPI had successfully completed its work plan, delivered strong operational performance, and was positioned to continue to deliver value added solutions in the future.

Ownership and capital As of December 31, 2016, FPI had four owners with stock investments totaling $10.0 million. Total equity at December 31, 2016 equaled $5.3 million, down $0.1 million from 2015. The decrease in equity reflects the impact of $0.1 million in 2016 earnings and an increase of $0.2 million in other comprehensive losses. The increase in accumulated other comprehensive loss is primarily due to a corresponding increase in FPI’s defined benefit retirement plan liability. FPI’s capital plan provides for continued investment in FPI’s strategic products as well as the multi-year FPI 2.0 program. Capital remains adequate for continued operations and approved projects.

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The CEO of each owner-association serves as a member of the FPI Board of Directors. FPI’s board operates under a committee structure. The committees are: •

Executive compensation committee. This committee is an advisory group dealing with CEO compensation and FPI’s overall human capital strategy.

Audit committee. This committee is an oversight committee working with FPI on enterprise risk management processes and financial controls.

Future FPI enters 2017 with strong financial resources, well positioned products and solid, high- quality and increasingly efficient operations. As a result, FPI’s financial plan for the years through 2020 was developed with the following themes in mind: •

Complete the development of customer focused credit and lending systems and plan strategic growth. Core services income is based on market pricing and is adequate to cover necessary costs of operations and resources available for normal system enhancements/work plan initiatives. The goal over the plan period is to focus on value-added product development, the fulfillment of the FPI 2.0 vision and to pursue growth opportunities that are consistent with FPI’s strategic vision.

The FPI capital plan has the expressed goal of generating capital replacement funds for major projects. Available funds are used to complete targeted and planned projects as approved annually by the board. As required by GAAP, FPI capitalizes and depreciates appropriate projects.

In 2016, FPI continued its focus on delivering tangible value to associations, while maintaining the quality, consistency, and predictability that have been key areas of focus over the last several years. During 2017 and beyond, FPI will continue to focus on planning and strong financial and project management discipline. Associations will continue to be very active partners, shaping products as they are developed and implemented. With $31 billion in footings, combined loan volume of FPI’s owner-associations, and excellent additional growth opportunities, FPI remains very well positioned to achieve our long-term strategic objective of: Building FPI into a highly sought-after business partner by achieving superior empowerment of association operations and an unparalleled value proposition.

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Background Organized in 1995, FPI is a dedicated service entity providing a full realm of “backroom services” to its customers. It is the first successful, dedicated backroom shop in the Farm Credit System, effectively breaking the mold of bank-owned and bank-controlled service centers in favor of an association-controlled model. It is a leading advocate of employing cutting-edge, fully-integrated technology in a perpetual quest to drive value into the association delivery process. The FPI tool set and service delivery process are unparalleled in the Farm Credit System and provide a distinct advantage to the owner-customers. FPI is based on an ideology of associations with a common vision banding together and standardizing to create superior products and efficiency. It is dedicated to one-stop shopping for its customers. But, in its simplest form, FPI was started — and has prospered — based on one fundamental, unshakeable principle: FPI is a customer-controlled and customer-driven organization. Based in Agawam, Massachusetts and Spokane, Washington, the staff and management of FPI bring a strong sense of customer-driven problem-solving to the table. There is a strong blend of association lending experience, Farm Credit Bank technology and operations experience, and newly-added talent, all bringing a wide range of corporate experience to the table. FPI prides itself on adherence to the following key principles as fundamental to our operations and customer relationships:       

A complete customer focus A strong focus on consensus building and best practice sharing among customers A dedication to employing heavily-integrated, empowering technology and staying abreast of developments in technology that can be implemented to the distinct advantage of the customer base A partnership with our owners. This requires extensive give and take on the part of both parties and a heavy problem-solving atmosphere Striving toward a “no-surprises-to-the-customer” credo Continually testing and reinventing the services model to meet the changing demands and challenges of the marketplace An open, empowered environment within which employees grow and develop

FPI’s delivery strategy is closely focused on one-stop shopping for our customers. This, by necessity, does not mean that FPI will build all the systems or products that our customers require. Rather, we often become “procurers” of products and services for our customers, looking for the best value at all times. If it is a common need for our associations, FPI helps provide the service or we coordinate service through outside vendors. FPI’s ultimate goal is to: Allow our customers to focus on what they do best. FPI is a seasoned technology company capable of continually reinventing and reenergizing itself to be a market leader. We always look forward to our next major opportunity or challenge. FPI proudly reflects on our accomplishments and remains committed to continual development in the future.

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Farm Credit Financial Partners, Inc. Balance Sheet

As of December 31, 2016, 2015, and 2014

December 31, 2015

2016 Assets Current assets: Cash and cash equivalents Accounts receivable Prepaid assets Total current assets

$

Long-term assets: Fixed assets, net Intangible assets, net Deferred tax asset Other long-term assets Total long term-assets

1,739,095 864,587 2,291,768 4,895,450

$

5,246,761 9,051,701 5,520,144 1,270,464 21,089,070

Total assets

Liabilities Current liabilities: Accrued expenses and other liabilities Deferred revenue and customer deposits Total current liabilties

$

25,984,520

$

3,391,292 1,500,855 4,892,147

Long-term liabilities: Accrued employee benefits Deferred revenue and customer deposits, long-term Deferred tax liability Total long-term liabilities Total liabilities

Equity Class A preferred stock, $5.00 par value, 2,000,000 shares authorized, 2,000,000 shares issued and outstanding as of December 31, 2016, 2015 and 2014 Class B preferred stock, $5.00 par value, 2,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2016, 2015 and 2014 Accumulated other comprehensive loss Accumulated earnings Total equity Total liabilities and equity $

Financial Partners, Inc.

$

5,477,964 6,682,166 5,220,929 1,152,395 18,533,454 $

$

7,366,703 281,604 1,753,328 9,401,635

5,849,026 7,746,316 4,285,859 913,374 18,794,575

25,687,845

$

28,196,210

4,160,675 1,031,825 5,192,500

$

2,171,585 6,733,393 8,904,978

12,666,957 937,078 2,154,053 15,758,088

12,306,424 717,499 2,087,452 15,111,375

9,994,636 1,242,132 1,612,070 12,848,838

20,650,235

20,303,875

21,753,816

10,000,000

10,000,000

10,000,000

(5,943,596) 1,277,881 5,334,285 25,984,520

(5,761,127) 1,145,097 5,383,970 25,687,845

(4,434,903) 877,297 6,442,394 28,196,210

$

The accompanying notes are an integral part of these statements.

24

3,606,615 794,762 2,753,014 7,154,391

2014

$


Farm Credit Financial Partners, Inc. Statement of Income

Years ended December 31, 2016, 2015, and 2014

2016

Revenue Core and custom services Research and development services Total revenue

$

Operating Expenses Salaries and employee benefits Purchased services Occupancy and equipment Other operating expenses Total operating expenses Net income from operations Other Income/(Expense) Interest income Interest expense Other gains/(losses) Total other income Income before income taxes Income tax provision Net income

$

Year Ended December 31,

39,495,755 306,767 39,802,522

2015

$

34,418,812 5,258,541 39,677,353

$

2014 30,507,954 4,922,812 35,430,766

22,920,848 3,851,832 8,306,690 4,620,221 39,699,591

22,626,180 4,536,709 7,592,549 4,242,236 38,997,674

19,198,746 4,659,066 7,249,134 4,085,807 35,192,753

102,931

679,679

238,013

38,823 8,659 47,482

25,348 20,777 46,125

25,141 (10,235) 4,866 19,772

150,413 17,629 132,784

725,804 458,004 267,800

257,785 124,471 133,314

$

$

The accompanying notes are an integral part of these statements.

2016 Annual Report

25


Farm Credit Financial Partners, Inc. Statement of Cash Flows

Years ended December 31, 2016, 2015, and 2014

2016

Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization (Loss) gain from sales of fixed assets Changes in operating assets and liabilities: (Increase) in accounts receivable (Increase) in deferred tax asset Decrease (increase) in prepaid and other assets Increase (decrease) in deferred revenue and customer deposits (Decrease) increase in accrued expenses and other liabilities Increase in deferred tax liability Increase in accrued employee benefits, net Net cash provided by (used in) operating activities

$

Year Ended December 31,

132,784

$

267,800

$

2014

133,314

5,360,526 -

4,897,468 (11,667)

4,652,186 504

(69,825) (299,215) 343,177 688,609 (769,383) 66,601 178,064 5,631,338

(513,158) (935,070) (1,238,707) (6,226,201) 1,989,090 475,382 985,564 (309,499)

(20,825) (1,683,484) (1,073,570) (1,195,793) (2,728,747) 970,751 3,813,835 2,868,171

Cash Flows from Investing Activities Purchase of fixed assets Proceeds from sales of fixed assets Capitalized software development costs Net cash used in investing activities

(2,982,942) (4,515,916) (7,498,858)

(2,588,489) 44,044 (906,144) (3,450,589)

(1,058,698) (4,997,569) (6,056,267)

Cash Flows from Financing Activities Advances on notes payable with CoBank, ACB Repayment of notes payable to CoBank, ACB Preferred stock issued Preferred stock retired Decrease in retained earnings Net cash provided by financing activities

2,833,336 (2,833,336) -

2,614,077 (2,614,077) -

5,217,830 (5,217,830) 8,022,727 (6,813,636) (144,973) 1,064,118

Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

$

(1,867,520) 3,606,615 1,739,095

$

(3,760,088) 7,366,703 3,606,615

$

(2,123,978) 9,490,681 7,366,703

Supplemental Cash Information: Cash paid during the year for: Interest Income taxes Change in minimum pension liability Disposal of fully depreciated fixed assets

$ $ 195,300 $ (182,469) $ 10,473,414

$ $ $ $

1,107,225 (1,326,224) -

$ $ $ $

10,235 525,300 (2,121,009) -

The accompanying notes are an integral part of these statements.

26

2015

Financial Partners, Inc.


Farm Credit Financial Partners, Inc. Statement of Changes in Equity

Years ended December 31, 2016, 2015, and 2014 Class A Preferred Stock Shares Amount Balance as of January 1, 2014 Net income Other comprehensive loss Shares issued to owners Shares retired from owners Retirement of accumulated earnings Balance as of December 31, 2014

928,182

$

4,640,910

Accumulated Other Comprehensive Loss

Class B Preferred Stock Shares Amount 830,000

$ 4,150,000

$

$

888,957 133,314

1,604,545 (532,727)

8,022,725 (2,663,635)

2,000,000

10,000,000

(830,000)

-

-

(4,434,903)

10,000,000

-

-

(5,761,127)

877,297

6,442,394

267,800

267,800 (1,326,224)

1,145,097 132,784

(182,469) 2,000,000

$

10,000,000

-

$

-

$

(5,943,596)

$

$ 7,365,973

(144,974)

(1,326,224) 2,000,000

Total

133,314 (2,121,009) 8,022,725 (6,813,635) (144,974)

(4,150,000)

Net income Other comprehensive loss Balance as of December 31, 2016

(2,313,894)

(2,121,009)

Net income Other comprehensive loss Balance as of December 31, 2015

Accumulated Earnings

1,277,881

5,383,970 132,784 (182,469) $ 5,334,285

The accompanying notes are an integral part of these statements.

2016 Annual Report

27


Farm Credit Financial Partners, Inc. Accumulated Other Comprehensive Loss

Years ended December 31, 2016, 2015, and 2014

The components of Accumulated Other Comprehensive Loss are as follows:

Balance as of January 1, 2014 Change in period Tax effect of change in period

Minimum Pension Liability $

(1,951,229) (3,343,378) 1,283,079

Postretirement Liability $

(252,953) (70,741) 28,276

(109,712) (30,402) 12,157

$

Total

(2,313,894) (3,444,521) 1,323,512

Balance as of December 31, 2014 Change in period Tax effect of change in period

(4,011,528) (1,832,217) 536,780

(295,418) (113,238) 38,334

(127,957) 72,976 (28,859)

(4,434,903) (1,872,479) 546,255

Balance as of December 31, 2015 Change in period Tax effect of change in period

(5,306,965) 313,464 (112,464)

(370,322) 63,705 (23,454)

(83,840) (676,017) 252,297

(5,761,127) (298,848) 116,379

Balance as of December 31, 2016

$

(5,105,965)

$

(330,071)

The accompanying notes are an integral part of these statements.

28

$

SERP Liability

Financial Partners, Inc.

$

(507,560)

$

(5,943,596)


Notes to Financial Statements NOTE 1 - Organization and Operations Farm Credit Financial Partners, Inc. (FPI) or (the Company) is engaged principally in providing information technology, financial services support, and other services to associations in the Farm Credit System (the System) on a fee basis. Currently, FPI services associations funded through CoBank, ACB (CoBank), an agricultural credit bank in the Farm Credit System, as well as association customers of AgriBank, FCB a farm credit bank in the Farm Credit System. The Farm Credit Administration (FCA) chartered FPI as a service corporation under Section 4.25 of the Farm Credit Act of 1971, as amended (the Act). The FCA has authority under the Act to charter and regulate Farm Credit System banks, associations and service corporations. The activities of FPI are examined by FCA and certain actions by FPI are subject to the prior approval of FCA and FPI owner associations.

NOTE 2 - Summary of Significant Accounting Policies A.

Basis of Presentation

B.

Use of Estimates

C.

Cash and Cash Equivalents

The accompanying financial statements have been prepared in accordance with accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets generally accepted accounting principles (“GAAP”) that the Company follows to ensure its financial condition, results of operations and cash flows are consistently reported. References to GAAP issued by the FASB in these notes to the financial statements are to the FASB Accounting Standards Codification (“ASC”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include the valuation of deferred tax assets and liabilities, assets and liabilities associated with employee benefit plans, revenue recognition, and capitalized computer software costs, and are discussed in these footnotes, as applicable. Actual results may differ from those estimates. Cash, as included in the financial statements, represents cash on hand and on deposit at banks. Cash equivalents are FPI’s investments in a short-term, highly-liquid money market fund. The fund invests in high-quality U.S. dollar-denominated short-term debt obligations including: securities issued by the U.S. Government or its agencies, bankers’ acceptances, certificates of deposit, time deposits from U.S. or foreign banks, repurchase agreements, commercial paper, municipal securities and master notes.

2016 Annual Report

29


D.

Accounts Receivable

E.

Unbilled Revenue

F.

Fixed Assets

G.

H.

Accounts receivable are stated at amounts management expects to collect on outstanding balances. FPI evaluates the collectability of its receivables based on its prior experience and assessment of potential future losses, and does so through ongoing reviews of its aging analysis. As of December 31, 2016, 2015, and 2014, there was no allowance for uncollectible accounts required, as the Company had collected all accounts receivable outstanding as of the date the financial statements were available to be issued. The Company did not write off as bad debt any accounts receivable in the years ended December 31, 2016, 2015, and 2014. At times, FPI performs services for customers in advance of invoicing for such services. These amounts are recorded as unbilled revenue, are included in prepaid assets, in the accompanying balance sheets, and amount to $504,192, $150,000, and $0 at December 31, 2016, 2015, and 2014. Fixed assets are carried at cost less accumulated depreciation. Depreciation is computed principally using the straight line method over the estimated useful lives of five to ten years for furniture and fixtures, and three to five years for computer equipment and software. Gains and losses on dispositions are reflected in current operations. Maintenance and repairs are charged to operating expense and improvements are capitalized.

Software Development Costs

The Company is developing new products which the Company intends to offer as part of its Core Services and is developing significant upgrades and enhancements to its existing software as-a-service (“SaaS”) platform. The Company follows the guidance of ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software, for development costs related to these new products. Costs incurred in the planning stage are expensed as incurred while costs incurred in the application and infrastructure stage are capitalized, assuming such costs are deemed to be recoverable. Costs incurred in the operating stage are generally expensed as incurred except for significant upgrades and enhancements. Capitalized software costs are amortized over the software’s estimated useful life, which management has determined to be five years. Capitalized software development costs are included in intangible assets in the accompanying balance sheet and disclosed in more detail in Note 5.

Employee Benefit Plans

The funded status of pension and other postretirement benefit plans is recognized on the balance sheets. Gains and losses, prior service costs and credits and any remaining transition amounts that have not yet been recognized through pension expense will be recognized in accumulated other comprehensive income, net of tax, until they are amortized as a component of net periodic pension/postretirement benefits expense. Pension expense is based on an actuarial computation of future benefits using estimates for expected return on assets, expected compensation increases and applicable discount rates. Management has reviewed the discount rates and rates of return with our consulting actuaries and investment advisor and concluded they were reasonable. Expected compensation increases are estimated based on historical and expected increases in the

30

Financial Partners, Inc.


future. Increases in estimated compensation increases would result in higher pension expense while decreases would lower pension expense. Discount rates are selected based upon rates of return on high quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefit. Detailed rate assumptions are included in Note 13. Effective January 1, 2005 the Company closed the existing defined benefit pension plan to new participants. All employees hired on or after January 1, 2005 are participants in a noncontributory defined contribution plan. Participants in this plan receive a fixed percentage of their eligible wages to an investment account maintained for the employee. Costs for this plan are expensed as funded and recorded as employee benefit expense. Company employees are also eligible to participate in an employee savings plan. The Company matches a certain percentage of employee contributions with costs being expensed as funded. These costs are recorded as employee benefit expense. The company also provides certain health care and life insurance benefits to employees. Costs for these benefits are recorded as employee benefit expense in the period in which they are incurred.

I.

Income Taxes

The company is organized as a C Corporation for Federal Income Tax purposes and files a form 1120-C. We use the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company also reduces deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This methodology requires estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities. Valuation allowances are recorded against the gross deferred tax assets that management believes, after considering all available positive and negative objective evidence, historical and prospective, with greater weight given to historical evidence, that it is more likely than not that these assets will not be realized. In addition, the Company is required to recognize in the financial statements, those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized. The Company recognizes interest and penalties as a component of the provision for income taxes in the accompanying statements of income. The Company does not believe it has any material uncertain tax positions. Interest and penalties refunded were $4,193 for the year ending December 31 2016 and interest and penalties paid were $23,172 for the year ending December 31, 2015. There were no interest and penalties for the year ending December 31, 2014. The Company is no longer subject to federal, state, and local income tax examinations by tax authorities for years prior to 2013.

2016 Annual Report

31


J.

Revenue Recognition

The Company derives revenue from core services, custom services, and research and development services from its customers, all of which are lending associations in the Farm Credit System. Core and extended core services include credit delivery and management systems; core infrastructure and security, financial accounting and loan accounting services, management reporting, electronic commerce, legal support, and custom solutions, which include a retained technology services team dedicated to any specific projects required by the customer over a period of time which is typically one year. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. FPI has determined that its core and extended services are performed ratably and represent one integrated performance obligation over the contracted delivery period, which is one year, and as such recognizes revenue over this one year term. When FPI sells custom services, such services are generally negotiated separately from the core services and have standalone value and as such, are recognized ratably over the period of performance. Custom services were purchased with a contract term commensurate with that of the core services (one year), and as such revenue is recognized ratably over the contract term. Annually, each FPI association contributes one basis point on its association loan volume toward FPI’s research and development services for spending related to specific forwardlooking projects to enhance the technology and service offerings. This practiced ceased for the fiscal year ended 2016. Total association payments were $0 in 2016, $2,697,453 in 2015; $2,486,160 in 2014. FPI recognizes these fees as revenue in the period in which the services are performed. The Company does not have any obligation or intent to repay previously expended research and development contributions. Deferred revenue recorded for services not yet performed was $0 as of December 31, 2016; $306,767 as of December 31, 2015; and $6,021,123 as of December 31.

32

K.

Concentrations of Credit Risk

L.

Accumulated Other Comprehensive Income

Financial instruments which potentially subject the Company to credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company maintains its cash and cash equivalents with high credit quality financial institutions, and monitors credit risk with individual financial institutions and issuers. At December 31, 2016, 2015, and 2014, the Company had cash balances at certain financial institutions in excess of federally insured limits; however it has not experienced any losses in such accounts. In accordance with required standards for reporting comprehensive income, the Company reports in its financial statements, in addition to its net income (loss) all changes in equity during a period from non-owner sources. The accumulated other comprehensive income represents adjustments to the minimum pension liability, net of tax.

Financial Partners, Inc.


M.

Captive Insurance Company

N.

Impairment of Long-Lived Assets

O.

Reclassifications

P.

FPI accounts for its investment in the captive insurance company (Note 6) under the equity method of accounting. The carrying value of the investment is recorded based on FPI’s initial investment and adjusted for FPI’s share of the earnings. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. As of December 31, 2016, 2015, and 2014 there were no impairment losses recognized for long-lived assets. Certain accounts within the 2015 and 2014 financial statements have been reclassified to conform to the presentation in the 2016 financial statements. These reclassifications include presentation of certain prepaid assets and deferred revenue balances as current and long-term. Total equity and net income are unchanged due to these reclassifications.

Recently Issued or Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity is expected to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation. ASU 2014-09, as deferred one year by ASU 2015-14, will be effective for annual reporting periods beginning after December 15, 2018 using either of two methods: (a) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined in ASU 2014-09. The Company has not yet selected a transition method and is currently evaluating the impact of the pending adoption of ASU 2014-09 on the financial statements. In August 2014, the FASB issued guidance entitled “Presentation of Financial Statements — Going Concern.” The guidance governs management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year after the date the financial statements are issued or within one year after the financial statements are available to be issued, when applicable. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations for the assessed period. This guidance becomes effective for interim and annual periods ending after December 15, 2016, and early application is permitted. FPI adopted this guidance in the fourth quarter of 2016 and management made its initial assessment as of December 31, 2016.

2016 Annual Report

33


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. FPI is currently evaluating the impact of adoption of the new standard on the financial statements

NOTE 3 – Fair Value Measurements The Company follows the guidance in FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2: Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified between levels. Assets and liabilities measured at fair value on a nonrecurring basis are recognized at fair value subsequent to initial recognition when they are deemed to be other-than-temporarily impaired. As of December 31, 2016, 2015 and 2014, the Company’s does not have any assets or liabilities subject to measurement at fair value on a nonrecurring basis.

34

Financial Partners, Inc.


As of December 31, the Company’s fair value hierarchy for its financial assets that are carried at fair value was as follows:

Money market accounts Assets held in trust

Money market accounts Assets held in trust

Money market accounts Assets held in trust

$ $

$ $

$ $

Assets at Fair Value as of December 31, 2016 Total Level 1 Level 2 Level 3 246,752 $ 246,752 $ - $ 182,727 182,727 429,479 $ 429,479 $ - $ Assets at Fair Value as of December 31, 2015 Total Level 1 Level 2 Level 3 2,084,942 $ 2,084,942 $ - $ 171,765 171,765 2,256,707 $ 2,256,707 $ - $ Assets at Fair Value as of December 31, 2014 Total Level 1 Level 2 Level 3 5,196,034 $ 5,196,034 $ - $ 91,551 91,551 5,287,585 $ 5,287,585 $ - $

Money market accounts are classified within Level 1 and are valued based on quoted prices in active markets for identical securities. Assets held in trust funds related to a supplemental retirement plan (Note 13) and are classified within Level 1. These assets include investments that are actively traded and have quoted net asset values that are observable in the marketplace.

NOTE 4 - Fixed Assets Fixed Assets consisted of the following: December 31, 2016 Computer equipment

$

Computer software Furniture and fixtures Less: Accumulated depreciation Total

$

11,162,903

2015 $

13,447,123

2014 $

12,236,758

19,705,397

25,076,322

24,049,422

2,068,939

1,904,266

1,836,302

32,937,239

40,427,711

38,122,482

27,690,478

34,949,747

32,273,456

5,246,761

$

5,477,964

$

5,849,026

As of December 31, 2016, there was $97,639 capitalized to furniture and fixtures that the Company was not depreciating, as these assets were not yet placed in service. For the year ended December 31, 2016 there were disposals of fully depreciated assets of $10,473,414. Depreciation

2016 Annual Report

35


expense related to the Company's property and equipment was $3,214,145, $2,934,852, and $3,241,193 in 2016, 2015, and 2014 respectively.

NOTE 5 – Intangible Assets Intangible assets at December 31, 2016, 2015, and 2014, consisted of capitalized computer software costs, as follows: Gross Carrying Amount December 31, 2016 December 31, 2015 December 31, 2014

$15,035,668 $10,519,752 $ 9,621,287

Accumulated Amortization $5,983,967 $3,837,586 $1,874,971

Net Book Value $9,051,701 $6,682,166 $7,746,316

Capitalized computer software costs are amortized over a five year useful life. Amortization expense associated with these assets totaled $2,146,381, $1,962,616, and $1,410,993 for the years ended December 31, 2016, 2015, and 2014, respectively. As of December 31, 2016, there was $4,109,356 capitalized that the Company was not amortizing, as these products were in the application development stage and not yet placed in service. Based on the current amount of intangible assets subject to amortization, amortization expense is expected to be as follows for each of the years ending December 31: 2017 2018 2019 2020 2021 Total

$2,969,946 2,511,134 1,620,932 1,069,309 880,380 $ 9,051,701

NOTE 6 – Captive Insurance Company In conjunction with other System entities, the Company jointly owns the Farm Credit System Association Captive Insurance Company (the Captive). The Captive is an insurer that provides insurance services such as directors’ and officers’ liability, fiduciary liability, bankers bond and other property and liability insurance for the member associations, which includes 3 farm credit banks, one agricultural credit bank, 4 farm credit service corporations and 76 associations. The carrying value of the investment totaled $563,734, $491,109 and $468,672 at December 31, 2016, 2015, and 2014 respectively and is included in other long-term assets on the accompanying balance sheets. Premiums paid in those respective years to the captive totaled $198,279, $165,585 and $158,633 respectively. If FPI should terminate its interest in the captive, any contributed surplus will be returned within six months of the termination, subject to approval by the Board of Governors of the Captive.

36

Financial Partners, Inc.


NOTE 7 - Notes Payable to CoBank, ACB Notes payable to CoBank, ACB represent borrowings by FPI to fund normal operations and capital expenditures. Under terms of the financing agreement with CoBank, which provides FPI with a $3,750,000 revolving line of credit, substantially all FPI’s assets are assigned to CoBank as primary collateral for funds advanced. During the normal course of business this line is used to settle transactions between FPI and CoBank. Charges on the line are simultaneously settled from cash accounts. There were no borrowings from CoBank outstanding as of December 31, 2016, 2015 or 2014. Borrowings made and repaid during the year as part of the settlement process were $2,833,336, $2,614,077 and $5,217,830 for the years ended December 31, 2016, 2015 and 2014, respectively. Interest expense incurred to CoBank for the years ended December 31, 2016, 2015 and 2014 was $0, $0, and $10,235, respectively. At each draw, FPI may choose between the interest rate that is 1.85% above the one-month LIBOR index rate in effect at the time of the draw, or a fixed rate quoted by CoBank at its sole discretion. The variable rate in effect at December 31, 2016 was 2.6%. The line of credit matures on July 31, 2017.

NOTE 8 – Prepaid Assets Prepaid assets consist of the following:

2016 Prepaid vendor invoices Federal and state taxes Unbilled revenue Other

$1,702,483 83,142 504,192 1,951 $2,291,768

December 31, 2015 $1,769,107 791,429 150,000 42,478 $2,753,014

2014 $1,497,288 252,110 3,930 $1,753,328

NOTE 9 – Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following: December 31, 2016 Accrued expenses

2015

2014

$2,705,891

$2,415,053

Trade payables

668,937

1,721,129

Taxes payable

16,464

24,493

19,802

-

-

2,317

CoBank line of credit

$3,391,292

$4,160,675

$2,149,466 -

$2,171,585

2016 Annual Report

37


NOTE 10 – Accrued Employee Benefits Accrued employee benefits consist of the following: December 31, 2015

2016 Annual leave Pension Postretirement benefits Health Reserve SERP Other

2014

$923,490 10,122,502 218,301 159,811 1,238,552 4,301

$914,246 10,104,101 357,918 454,025 471,849 4,285

$927,818 7,530,407 397,762 689,736 444,593 4,319

$12,666,957

$12,306,424

$9,994,635

NOTE 11 - Income Taxes The provision for income taxes consisted of the following:

Current: Federal State Total Deferred: Federal State Total Total provision for income taxes

2016 $

$

78,499 78,499 (130,450) 69,580 (60,870) 17,629

December 31, 2015 $

18,334 204,072 222,406

461,809 (226,211) 235,598 $ 458,004

2014 $

(493,326) 7,017 (486,309) 598,182 12,598 610,780 124,471

$

The provision for income tax differs from the amount of income tax determined by applying the U.S. statutory federal tax rate to pretax income as follows: 2016 Federal tax at statutory rate State tax, net Permanent differences Accrual to return Other Provision for income taxes

38

Financial Partners, Inc.

$

$

51,140 45,923 (90,347) 10,653 260 17,629

December 31, 2015 $

$

246,773 204,072 117,923 (109,274) (1,490) 458,004

2014 $

$

87,647 12,750 18,281 4,191 1,602 124,471


Deferred tax assets and (liabilities) resulted from the following: 2016 Annual leave Pension Operating loss carryforward Postretirement Health reserve Deferred revenue Charitable contributions Gross deferred tax assets Depreciation Gross deferred tax liabilities Net deferred tax asset

$

$

344,561 4,238,889 97,312 81,450 58,507 699,407 18 5,520,144 (2,154,053) (2,154,053) 3,366,091

December 31, 2015 $

$

340,626 3,940,344 502,977 133,351 169,159 134,453 19 5,220,929 (2,087,452) (2,087,452) 3,133,477

2014 $

353,182 3,035,755 292,468 151,412 262,554 190,458 30 4,285,859

(1,612,070) (1,612,070) $ 2,673,789

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may limit in the future a significant portion of the amount of net operating loss carry forwards which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any annual limitation is determined based on the Company’s value and certain other factors on the date of ownership change. Management has determined that it is more likely than not that the Company will recognize the benefits of federal and state deferred tax assets within the allowable time period, despite the ownership changes and, as a result, has determined that no valuation allowance related to deferred tax assets is necessary as of December 31, 2016, 2015 and 2014. FPI has state net operating loss carry forwards of $1,862,466 that begin to expire in 2020. FPI expects that the operating loss carryovers will be fully utilized before they expire. The Internal Revenue Service (IRS) commenced an audit during 2013 of the U.S. federal income tax return for the taxable years ending December 31, 2010 through 2013. During 2014, the IRS issued Notices of Proposed Adjustment to FPI in the amount of $3,445,464. FPI disagreed with the IRS finding and filed an appeal in January 2015. This appeal was resolved in July 2015 with a time value of money settlement in the amount of $322,699 which was paid in 2015. No additional taxes were due and the exam has been closed.

NOTE 12 – Self-Insured Health Care Plan FPI provides health care benefits to its employees through a multiple-employer insurance plan with CoBank, ACB (the plan administrator), Farm Credit East, ACA, the Federal Farm Credit Banks Funding Corporation and Yankee Farm Credit, ACA. The plan is responsible for the first $200,000 in claims per person per year, with stop loss and group reinsurance to protect against catastrophic claims. For the years ended December 31, 2016, 2015, and 2014 the Company has recorded expense, net of employee withholdings or contributions, of approximately $1,511,603, $1,386,136 and $1,243,500. Included in accrued expenses and other liabilities in the balance

2016 Annual Report

39


sheets as of December 31, 2016, 2015, and 2014 are self-insurance reserves totaling $159,811, $454,025 and $689,736.

NOTE 13 - Employee Benefit Plans Employee Savings Plan FPI participates in the CoBank Employee Savings Plan (Employee Savings Plan), a deferred compensation plan in which FPI matches a certain percentage of employee contributions. The Employee Savings Plan requires FPI to match 100 percent of employee contributions up to a maximum employee contribution of six percent of base salary. Employer contributions charged to expense were $969,499 in 2016; $917,439 in 2015 and $788,032 in 2014. Defined Contribution Retirement Plan FPI participates in the CoBank defined contribution qualified retirement plan, a noncontributory, multiple-employer plan (defined contribution plan). Under this plan for employees hired January 1, 2005 and later, the employer contributes a percentage of each employee’s salary, based on years of service, to an account maintained for the employee. Employer contributions charged to expenses were $402,152 in 2016; $295,594 in 2015 and $319,440 in 2014. Defined Benefit Retirement Plan FPI participates in the CoBank defined benefit qualified retirement plan (defined benefit plan). This plan covers FPI employees hired before January 1, 2005. Benefits are based on years of service and compensation levels during the years of employment. It is the policy of the participating employers to fund at least the minimum required by the Employee Retirement Income Security Act (ERISA). FPI’s contributions during 2016, 2015 and 2014 were consistent with this policy. Plan assets are stated at fair value and are primarily invested in publicly traded stocks and bonds, real estate and contracts with insurance companies. Supplemental Executive Retirement Plan Beginning in 2010 FPI entered into a noncontributory, nonqualified supplemental executive retirement plan (SERP). The plan currently covers one employee. The Company holds assets in a trust fund related to the SERP; however, such funds remain Company assets and are not included as plan assets in accompanying disclosures but rather included in the other long-term asset balance in the accompanying balance sheets. Post Retirement Health Care Benefit Plan FPI provides certain health care and life insurance benefits to employees if they reach normal retirement age while working for FPI (the post-retirement health care plan). The authoritative accounting guidance requires the accrual of the expected cost of providing postretirement benefits other than pensions (primarily healthcare benefits) to an employee and an employee’s beneficiaries and covered dependents during the years that the employee renders service necessary to become eligible for these benefits. These accrued (benefits)/expenses of ($75,912), ($153,082) and ($10,750) were classified as salaries and employee benefits on FPI’s financial statements during 2016, 2015 and 2014, respectively.

40

Financial Partners, Inc.


The funding status and the amounts recognized in the statement of condition of FPI’s defined benefit plan and SERP, combined as “Retirement Plans” as well as other post retirement benefits are as follows ($ in thousands): Retirement Plans December 31, 2015

2016

Other Post Retirement Benefits December 31, 2016 2015 2014

2014

Change in projected benefit obligation Benefit obligation at beginning of year

$

30,368

$

27,650

$

22,101

$

358

$

398

$

338

Service cost

841

892

755

18

22

24

Interest cost

1,339

1,112

1,052

16

16

16

87

935

Plan amendments

-

-

Actuarial loss (gain), net

708

-

3,875

(25)

141

91

Plan participant contributions

-

-

-

11

17

16

Transfers

-

Benefits paid

-

(445)

Benefit obligation at end of year

-

-

(221)

-

(133)

-

(160)

$

32,898

$

30,368

$

27,650

$

$

19,792

$

19,675

$

17,807

$

-

-

(236)

218

$

-

$

(87)

358

$

398

-

$

-

Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets

1,190

(265)

Employer contributions

1,000

603

531

-

-

Plan participant contributions

-

1,470

Transfers

-

-

-

Benefits paid

-

-

-

Other

(445)

Fair value of plan assets at end of year

$

21,537

$

(11,361)

(221) $

19,792

-

-

149

219

71

11

17

16

-

-

(160)

(133) 19,675

$

$

(7,975)

$

-

(236)

-

$

-

(87)

-

-

$

-

$

-

Funded status of the plan Net amount recognized in the balance sheet in accrued employee benefits

$ (10,576)

(218)

$

(358)

$

(398)

The accumulated benefit obligation for FPI’s defined benefit plan and SERP, combined as “Retirement Plans” as well as other post retirement benefits are presented in the following table ($ in thousands). 2016 $

28,730

December 31, 2015

2014

$ 24,838

$ 21,936

2016 $

218

December 31, 2015 $

358

2014 $

398

The accumulated benefit obligation is the actuarial present value of the benefits accrued for service rendered to that date based on current salary levels. The projected benefit obligation is the actuarial present value of the benefits accrued for service rendered to that date based on estimated future salary levels.

2016 Annual Report

41


Components of net periodic benefit cost and other amounts recognized in other comprehensive income are as follows ($ in thousands): Retirement Plans December 31, 2015

2016 Periodic benefit cost Service cost Interest cost Expected return on plan assets Amortization of unrecognized: Prior service cost Net actuarial loss

$

$ Changes in plan assets and benefit obligations recognized in other comprehensive income Net actuarial loss (gain) Prior service cost/(credit) Amortization of: Prior service cost/(credit) Net actuarial (gain)/loss

$

$

841 1,339 (1,409) 225 427 1,423

927 87 (225) (427) 362

$

$

$

$

891 1,112 (1,338) 118 512 1,295

1,454 935 (118) (512) 1,759

2014

$

$

$

$

755 1,052 (1,200) 60 171 838

3,605 (60) (171) 3,374

Approximately $1,970,842 will be amortized from accumulated other comprehensive (income) loss into net period benefit cost in 2017; included in this amount is $1,911,929 related to the retirement plans and $58,913 related to the post-retirement health care plan. The weighted average rate assumptions used to determine benefit obligations for the defined benefit plan and SERP are as follows:

Discount rate Expected return on plan assets Rate of compensation increase

Defined Benefit Plan 2016 2015 2014 4.30% 4.55% 4.10% 6.00% 6.63% 7.25% 4.75% 4.75% 4.75%

2016 4.30% N/A 4.00%

SERP 2015 4.55% N/A 4.00%

2014 4.10% N/A 4.00%

The weighted average rate assumptions used to determine net periodic benefit cost for the defined benefit plan and SERP are as follows:

Discount rate Expected return on plan assets Rate of compensation increase

42

Financial Partners, Inc.

Defined Benefit Plan 2016 2015 2014 4.55% 4.10% 4.85% 6.63% 7.25% 7.25% 4.75% 4.75% 4.75%

2016 4.55% N/A 4.00%

SERP 2015 4.10% N/A 4.00%

2014 4.85% N/A 4.00%


The discount rates are calculated using a spot yield curve method developed by an independent actuary. The approach maps a high-quality bond yield curve to the duration of the plans’ liabilities, thus approximating each cash flow of the liability stream to be discounted at an interest rate specifically applicable to its respective period in time. Plan Assets The asset allocation target ranges for the defined benefit plan follows the investment policy adopted by our retirement trust committee. This policy provides for a certain level of trustee flexibility in selecting target allocation percentages. The actual asset allocations at December 31, 2016, 2015, and 2014 are shown in the following table, along with the adopted range for target allocation percentages by asset class. The actual allocation percentages reflect the quoted market values at year-end and may vary during the course of the year. Plan assets are generally rebalanced to a level within the target range each year at the direction of the trustees. We establish the expected rate of return on plan assets based on a review of past and anticipated future returns on plan assets. The expected rate of return on plan assets assumption also matches the pension plans’ long-term interest rate assumption used for funding purposes. Total Allocation Range Asset Category Domestic Equity Domestic Fixed Income International Equity Emerging Markets Equity and Fixed Income Real Assets: Gold Fund Total

40-50 % 35-50 0-10 0-10 0-5 100 %

Percentage of Plan Assets at December 31, 2016 2015 2014

45 % 35 10 5 5 100 %

45 % 36 9 5 5 100 %

48 % 33 10 4 5 100 %

The assets of the defined benefit plan consist primarily of investments in various domestic equity, international equity and bond funds. These funds do not contain any significant investments in a single entity, industry, country or commodity, thereby mitigating concentration risk. No CoBank stock or debt, or that of any other System institution, is included in these investments. Investment strategy and objectives are described in the pension plans’ formal investment policy documents. The basic strategy and objectives as adopted in the investment policy are: • • •

Manage portfolio assets with a long-term time horizon appropriate for the participant demographics and cash flow requirements; Optimize long-term funding requirements by generating rates of return sufficient to fund liabilities and exceed the long-term rate of inflation; and Provide competitive investment returns and reasonable risk levels when measured against appropriate benchmarks.

2016 Annual Report

43


The following table present major categories of defined benefit plan assets that are measured at fair value at December 31, 2016, 2015 and 2014 for each of the fair value hierarchy levels as defined in Note 3 ($ in thousands): As of December 31, 2016 Asset Category Cash

Level 1 $

Level 2

46

$

Level 3 -

$

Total -

$

46

Domestic Equity: Large-cap Growth Fund (1) Large-cap Equity Fund

(1)

Small-cap Growth Fund

(1)

International Equity: International fund (2)

4,883

-

-

4,883

-

3,913

-

3,913

-

1,026

-

1,026

2,075

-

-

2,075

-

7,532

-

7,532

-

1,007

-

1,007

1,055 1,055

1,055 $ 21,537

Fixed Income: Bond Fund (3) (4) Emerging Markets: Equity and Fixed Income Fund (5) Real Assets: Hedge Funds (6) Total

$

7,004

$

13,478

$

(1) Fund invests primarily in diversified portfolios of common stocks of U.S. companies in various industries, including consumer goods and services, information technology, healthcare, industrial materials, financial services and energy. (2) Fund invests primarily in a diversified portfolio of equities of non-U.S. companies in various industries, including information technology, financial services, healthcare, consumer goods and services, energy and telecommunications. (3) Fund invests primarily in a diversified portfolio of investment grade debt securities and cash instruments. (4) Fund invests primarily in U.S. Treasury debt securities and corporate bonds of U.S. companies primarily in the financial services industry. (5) Fund invests in equities and corporate debt securities of companies located in emerging international markets. Industries include energy, consumer goods and services, industrial materials, financial services and information technology. Fund also invests in the sovereign debt of various countries. (6) Fund invests in diversified portfolios of stocks, bonds and various other financial instruments in a variety of industries including financial services, telecommunications, information technology, consumer goods and services, and healthcare.

__________________________________________________________________

44

Financial Partners, Inc.


As of December 31, 2015

Level 1

Asset Category Cash

$

Level 2

29

$

Level 3 -

$

Total -

$

29

Domestic Equity: Large-cap Growth Fund (1)

4,350

-

Large-cap Equity Fund (1)

-

Small-cap Growth Fund (1)

-

International Equity: International fund (2)

-

4,350

3,599

-

3,599

916

-

916

1,878

-

-

1,878

-

7,127

-

7,127

-

935

-

935

958 958

958 $ 19,792

Fixed Income: Bond Fund (3) (4) Emerging Markets: Equity and Fixed Income Fund (5) Real Assets: Hedge Funds (6) Total

$

As of December 31, 2014

6,257

$

Level 1

Asset Category Cash

$

12,577

$

Level 2

22

$

Level 3 -

$

Total -

$

22

Domestic Equity: Large-cap Growth Fund Large-cap Equity Fund

(1)

(1)

Small-cap Growth Fund

(1)

International Equity: (2) International fund

4,477

-

-

4,477

-

4,105

-

4,105

-

890

-

890

1,908

-

-

1,908

-

6,538

-

6,538

-

830

-

830

905 905

905 $ 19,675

Fixed Income: Bond Fund

(3) (4)

Emerging Markets: Equity and Fixed Income Fund

(5)

Real Assets: Hedge Funds Total

(6)

$

6,407

$

12,363

$

Level 1 plan assets are funds with quoted daily net asset values that are directly observable by market participants. The fair value of these funds is the net asset value at close of business on the reporting date. Level 2 plan assets are funds with quoted net asset values that are not directly observable by market participants. A significant portion of the underlying investments in these funds have individually observable market prices, which are utilized by the plan’s trustee to determine a net asset value at close of business on the reporting date.

2016 Annual Report

45


Level 3 plan assets are funds with unobservable net asset values and supported by limited or no market activity Expected Contributions We expect to contribute approximately $1.138 million to our funded, qualified defined benefit pension plan in 2017. Our actual 2017 contributions could differ from the estimates noted above. Estimated Future Benefits Payments We expect to make the following benefit payments, which reflect expected future service, as appropriate ($ in thousands). Expe cte d Be ne fit Payments Pe nsion Year 2017 2018 2019 2020 2021 2022 to 2026

SERP

$1,320 1,462 1,733 1,805 1,861 10,623

$1,239 -

The following table sets forth the funding status and weighted average assumptions used to determine post retirement health care benefit obligations ($ in thousands). 2016 Accumulated benefit obligation Net liability recognized in the balance sheet Net periodic (income) expense Discount rate

$ $ $

308 218 (76) 4.30%

2015 $ $ $

232 358 (153) 4.55%

2014 $ $ $

79 398 (11) 4.10%

For measurement purposes, a 7 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2016. The rate was assumed to decrease gradually to 4.5 percent for 2026, and remain at that level thereafter.

NOTE 14 - Equity Effective June 30, 2006, FPI has been authorized to issue 2,000,000 shares each of Class A preferred stock - voting; Class B preferred stock - non-voting; and Class C common stock - nonvoting at a par value of $5 per share. At December 31, 2016, FPI had 2,000,000 shares of Class A preferred stock outstanding at a par value of $5 per share and no outstanding shares of Class B preferred stock or Class C common stock.

46

Financial Partners, Inc.


Each owner of Class A preferred stock is entitled to a single vote regardless of the number of shares owned, while Class B preferred stock and Class C common stock provide no voting rights to their owners. During the year ended December 31, 2014, three owners: Co-Bank ACB, Yankee Farm Credit ACA and Farm Credit Services Southwest ACA exited the ownership group. FPI continues to provide similar services to them as it has in the past. FPI’s remaining owners increased their stock investments in FPI as part of this plan. The net impact in stock investment in FPI was an increase of $1.2M during 2014. A description of equities is as follows: •

Class A preferred stock (voting stock) is the second of the three stock classes to be impaired and the second of the three classes to be restored after impairment. This class of stock may be issued only to the bank serving the Northeast Region, the affiliated associations and non-affiliated customers using core services.

Class B preferred stock (nonvoting stock) is the last class to be impaired and the first class to be restored after impairment. This class of stock may be issued to Farm Credit System banks and associations under a program approved by the board.

Class C common stock (nonvoting stock) is the first class to be impaired and the third class to be restored after impairment. This class of stock may be issued to the bank serving the Northeast Region, the affiliated associations and nonaffiliated customers under a program approved by the board.

Other classes and issues of stock shall be approved by the stockholders.

The preferred and common shares are not convertible. All shares are non-assessable and no further capital contributions are required. Dividends or patronage distributions may be declared by the Board at its discretion provided no class of stock shall be impaired. There were no dividends or patronage distributions declared during the years ended December 31, 2016, 2015 and 2014. In the event of liquidation or dissolution of the Company, any assets remaining after payment or retirement of all liabilities shall be distributed first to the holders of the Class B preferred stock, second to the holders of Class A preferred stock and third to the holders of the Class C Common Stock.

NOTE 15 – Commitments and Contingencies FPI has an agreement with Pine Creek Management, Agawam, Massachusetts, to lease the general office space, warehouse storage, loft space and garage space at 67 Hunt Street, Agawam, Massachusetts. FPI also has an agreement with Northwest Farm Credit Services to lease space at 2001 S. Flint Road, Spokane, Washington. The leases expire on February 28, 2021 and December 31, 2021, respectively. Rent expense for these leases was $653,646, $585,721, and $624,210 for the years ended December 31, 2016, 2015, and 2014, respectively. Northwest Farm Credit Services is an FPI owner customer.

2016 Annual Report

47


At December 31, 2016 future minimum lease payments were: December 31, Year Amount 2017 $ 672,470 2018 664,931 2019 653,646 2020 653,646 2021 208,861 Thereafter Total

$

2,853,554

Note 16 – Related Party Transactions At December 31, 2016, FPI is owned by four Farm Credit Agricultural Credit Associations (ACA): AgCountry Farm Credit Services, ACA, Farm Credit East, ACA, Farm Credit West, ACA, and Northwest Farm Credit Services, ACA. For the years ended December 31, 2016, 2015, and 2014, the Company recognized revenue of $36,681,627, $37,230,062, and $35,089,219, representing 92.9%, 93.8%, and 99.0%, respectively, from transactions with its ACA owners. At December 31, 2016, 2015, and 2014, accounts receivable from such customers totaled $439,009, $702,715, and $206,341, representing 51.8%, 88.4%, and 73.3% of total accounts receivable outstanding at such dates. During 2015, a non-owner customer of the Company, Farm Credit Southwest Services, ACA, merged with one of the Company’s owners, Farm Credit West, ACA. The disclosed revenue and AR numbers above include the amounts recognized from transactions with Southwest. The Company’s business and industry preclude it from applying the FASB guidance for farm cooperatives, however the Company’s revenue contracts with its major customers reflect a structure similar to that of a cooperative, whereby excess earnings are expected to be distributed to the customers, and excess losses are expected to be funded by the customers. No such distributions were made or additional funding received for the years ended December 31, 2016, 2015, or 2014.

Note 17 - Subsequent Events The Company has evaluated subsequent events through March 29, 2017, which is the date the financial statements were issued or were available to be issued. There are no such events to disclose.

48

Financial Partners, Inc.


49


50

Financial Partners, Inc.

67 Hunt St. Suite 2 | Agawam, MA 01001 | 413.271.8600 | financialpartners.com

Profile for Farm Credit Financial Partners, Inc.

2016 Annual Report  

2016 Annual Report