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2017 Annual Report delivering trusted technology solutions


table of contents

mission & vision Delivering trusted technology solutions that:

• Enable our Partners to grow strong relationships with their members • Strengthen the Farm Credit System by achieving financial services industry standards • Provide our Partners with a competitive advantage

Farm Credit Financial Partners, Inc.

2017 Annual Report

Farm Credit Financial Partners, Inc.

2017 Annual Report

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Howard Bruck President & CEO Bill Lipinski Chairman of the Board Technology presents many business opportunities and challenges. Exciting new devices like drones and selfdriving vehicles along with computing advances like artificial intelligence and data science are creating new ways of improving productivity, safety, and developing enhanced products and services. Understanding how and when to leverage these advances is critical to success as current competitors and new innovators are all seeking to redefine the competitive landscape New technology also demands that we recognize the associated hazards and prepare to answer key questions. When will a new technology be ready for implementation, how dramatically will it change current business operations and what could go wrong? At Farm Credit Financial Partners (FPI), we explore and execute on these opportunities and challenges with our partners at the Agriculture Credit Associations. As a financial services technology provider we assess the latest advances in our industry and stand ready to seize the opportunities and manage the risks. 2017 was another important year for FPI as we continue on our evolutionary journey of improving the technology platforms that help our partners serve the Farm Credit mission. We created new software platforms, completed a technical merger of Associations, and improved our IT Control and Security programs. We describe several of our major accomplishments in this report. Our theme for this year’s annual report is a focus on security, compliance, controls, and risk management. FPI is all about delivering great technical solutions, but we must also do the right things the right way. Last year, we announced “FPI 2.0,” a program to bring all of FPI’s systems and processes to the leading standards and best practices for Financial Services Technology Providers. Most of our programs are already completed and the remainder are well underway towards that goal. One exciting FPI 2.0 project for 2018 will be the implementation of additional phases of our Governance, Risk, and Compliance (GRC) technology. GRC, has been a rapidly growing technology adopted by the Financial Services world. FPI is already in production with several modules continuing our rollout through the year. With the adoption of the SalesForce platform last year, FPI has begun a program to transition our application delivery towards integration of purchased software, a decided move from our tradition of custom software development. Fortunately, FPIs current software is both robust and technically up-to-date. That gives us the advantage of being able to transition our platforms in an orderly fashion over several years. To support this new strategy, FPI has created an extensive SalesForce training for our software developers and analysts, giving them opportunities to learn and work with the latest technologies. Perhaps FPI’s greatest strength comes from its unique relationship with its Agricultural Credit Association partners. We are aligned in our vision, and focused on the success of the Farm Credit mission. To enhance our relationships, we created Team-FPI, a unique program of FPI and Association peer groups that develop deeper understanding of our businesses and work on creating the best solutions to support the farmer-borrowers. In addition to our prior announcement about Farm Credit Illinois, we are thrilled that Fresno-Madera Farm Credit has also decided to join the FPI family last year and we are looking forward to a long and successful relationship with them. The staff at FPI is energized. We have exciting plans for 2018 and our teams and projects are in full-swing. We expect another solid year of delivery and innovation as we build the technology to support our Agriculture Credit Association partners.

Howard Bruck President & CEO

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Bill Lipinski Chairman of the Board

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board of directors

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BILL LIPINSKI

MARK LITTLEFIELD

PHIL DIPOFI

Chairman of the Board CEO Farm Credit East

President & CEO Farm Credit West

President & CEO Northwest Farm Credit Services

MARCUS L. KNISELY

TOM TRACY

President & CEO AgCountry Farm Credit Services

President & CEO Farm Credit Illinois

Farm Credit Financial Partners, Inc.

2017 Annual Report

executive team

Howard Bruck

Kathy D’Amario

Dan Caron

President & Chief Executive Officer

Executive Vice President & Chief Technology Officer

Executive Vice President, Consulting Services

Sheryl Shinn

SCOTT BERARD

Executive Vice President & Chief Information Officer

Sr. Director Partner Relations & Communications

Farm Credit Financial Partners, Inc.

2017 Annual Report

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technology LEADERSHIP team

Max Kizilov, Senior Director, Platform Services; Matt Judd, Director, Infrastructure; Laura Hecker, Director, Project Management; Jason Hilzendeger, Director, Custom Solutions Group; Maria Ingani, Senior Director, Implementation Services; Jim McCormack, Director, Application Development

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Farm Credit Financial Partners, Inc.

2017 Annual Report

business leadership team

Scott Rousseau, Chief Financial Officer; Mary Mazza, Director, Human Resources; Jill Brody, Chief Audit Officer; Luis Arzu, Chief Information Security Officer

Farm Credit Financial Partners, Inc.

2017 Annual Report

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2017

Year in Review

a review of last year’s accomplishments and next year’s focus

CRM Farm Credit West was very pleased with the redesigned Billing Statements and Transaction Summaries that FPI developed in the Fall of 2017. The Marketing Team has had several comments from branch staff that they are receiving an increased number of calls from customers curious about programs we have featured on the front of the redesigned billing statement. The redesigned statements are not only attractive, they are a great tool to deliver important information to our customers. Michelle Paul VP, Marketing Farm Credit West

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In 2017, we shifted from a home-grown CRM (Customer Relationship Management) system to Salesforce, an industry leader in the commercial CRM market. This key enablement provides our partners with a comprehensive set of sales and marketing features to help grow their businesses by developing great relationships with their customers. The rich marketplace of Salesforce partners, combined with the extensibility of the platform, provides the most powerful and comprehensive solution for managing customer relationships. Looking forward, we will continue to develop functionality to drive top-line growth, internal operational efficiencies, and customer engagement within our associations.

GOVERNANCE, RISK & COMPLIANCE (GRC) As part of our focus on adopting industry standards and best practices, last year we implemented a new GRC management system (RSA Archer). This system maps our procedures to policies, and policies to authoritative sources (compliance frameworks such as NIST, FFIEC, etc.). This linkage allows us to keep our policies and procedures up-to-date as regulatory requirements change. The system also provides a comprehensive solution for managing 3rd party risks, as well as managing our Disaster Recovery and Business Continuity Plans. Along with our Risk Management team, our new GRC system enables us to more effectively identify and manage risk while meeting regulatory requirements.

LOAN NARRATIVE Last year, we released a new loan narrative subsystem which fully integrates with our loan origination and credit analysis systems. The new narrative solution enables financial professionals to easily import financials, create financial trend charts, and input their commentary in a consistent way across all branches in each association. The innovative solution enables associations to enforce consistency by defining narrative templates that are driven by loan size, industry or other variables. The result is a beautiful, concise full-color narrative with rich data visualizations, charts, commentary and financial data. Everything is in one place for credit approvers to easily make credit decisions.

Farm Credit Financial Partners, Inc.

2017 Annual Report

FPI pushed their external auditors to not only make improvements in the content of the SOC reports, but even more so in their testing of the controls. I think FPI is positioned to do well moving forward with further improvements in not only their own internal controls, but also in supporting the association related internal controls that we all need to live up to the ever increasing demands from the external auditors. Jeff Hennig SVP Internal Audit Northwest FCS

BILLING & STATEMENTS For many years, our associations’ members have enjoyed comprehensive, consolidated statements all in a single envelope. Our statements have historically included transaction summaries and data from several different account types (service accounts, future payment funds, etc.) In 2017, we redesigned our statements to be full-color and provided our associations advanced, on-statement marketing features to insert marketing messages to their members. Forward looking, we will be providing enhancements to our electronic statement and marketing capabilities while ensuring compliance with the Dodd-Frank act.

Farm Credit Financial Partners, Inc.

2017 Annual Report

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2017

Year in Review

a review of last year’s accomplishments and next year’s focus

AGCOUNTRY / UNITED FCS MERGER

FPI’s Custom Solutions Group (CSG) was the silver bullet for the AgCountry-United merger. They created conversions for some non-core programs, developed functionality to bridge gaps between EmPOWER and the legacy United systems, and provided much-needed BA and PM resource to supplement the FPI merger team. Ongoing, AgCountry relies on CSG to fast-track enhancements, navigate the complexities of data extracts for our funding bank and FCA, and provide “quality of life” enhancements to improve efficiency and promote product adoption. We get a great return on our CSG investment. Becky Thibert SVP Strategic Technology, AgCountry

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Similarly to what the retail banking industry has experienced over the past 20 years, there has been a trend towards consolidating Farm Credit associations. In July of 2016, AgCountry notified FPI of its intention to expand its territory by merging with United FCS. This merger would expand AgCountry’s territory into Wisconsin and deeper into Minnesota. Over the next 12 months, FPI carefully executed a meticulous plan to merge the technology of the two entities. In July of 2017, the two entities united to form a larger AgCountry association. Since this was the first external merger into the FPI family in over a decade, FPI was proud to have accomplished a near-perfect data conversion. This conversion put into place reusable documentation, procedures and systems which are being reused in 2018 to onboard FresnoMadera Farm Credit and Farm Credit Illinois as new partners.

IT Controls The Farm Credit System has been facing an ever increasing environment of external audit pressure and regulatory requirements. As a service provider, we have implemented improvements to keep pace with best practices over IT internal controls. To assist our partners in meeting their audit and regulatory needs, we refreshed our service provider reports in 2017 to bring them in-line with the financial services industry. These reports increase reliability for purposes of 1) Internal Controls over Financial Reporting (ICFR) attestations; and 2) effectiveness of security, availability, processing integrity, and confidentiality. Updates to these reports will be an evolving process given FPI’s commitment to technology innovation.

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For years, FPI has been known in Farm Credit for its comprehensive and fully-integrated suite branded as EmPOWER. FPI has differentiated itself in the Farm Credit System by having a single point of data entry that flows to other integrated systems. FPI had built EmPOWER during a time when there weren’t viable commercial loan origination, CRM or ECM systems available in the marketplace. As the financial services marketplace evolved, FPI’s product strategy evolved in parallel. We have since shifted into a BUY versus BUILD mentality where we first look at the commercial marketplace to identify solutions that meet the requirements. Embracing this approach, FPI sought to replace our legacy Loan Origination system with a comprehensive commercial system that integrates with Salesforce, our CRM provider. Throughout 2018 and 2019, you will see FPI transform our Loan Origination system to deliver a more usable, modern and commercially extensible system to support the needs of our Farm Credit associations. This has been a pivotal change for FPI as it demonstrates our commitment to choosing the best system for our needs, with a preference for robust and proven commercial systems.

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DATA GOVERNANCE Year after year, FPI systems aggregate more and more data which has become an increasingly wealthy source of knowledge. Much of this data can be leveraged by associations to make better decisions, reach more customers and grow their businesses. Over the next year, FPI will implement a formal data governance program which will mature our overall management of the availability, usability, integrity and security of the data associations use.

Farm Credit Financial Partners, Inc.

2017 Annual Report

LOAN ORIGINATION

QUOTING/PRICING and RISK RATING MATRIX

While EmPOWER handles the vast majority of lending functionality, the FPI family recognizes the need to develop a more robust quoting and pricing solution. In 2018, you will see FPI implement a new subsystem which will streamline the process of quoting and pricing. The new system will enforce consistency across branches and regions within an association which will enhance the auditability and compliance of the process.

Farm Credit Financial Partners, Inc.

2017 Annual Report

Risk Matrix Web is an application designed to replace a 15+ year old Excel workbook used by FCW. Our current tool is very flexible, and has evolved over time to become a central component of our underwriting process. With heightened expectations around ICFR, and our desire to eliminate side systems & dual-entry, we knew that we needed to move away from doing business in spreadsheets. However, replacing something so central to your current processes is no easy task.…The entire team worked hard to capture the best elements of our current tool, while challenging us to find different (and in many cases better) ways of doing things. They have all been fantastic to work with! Slated for a mid-2018 delivery, I anticipate that Risk Matrix Web will be a much-welcomed enhancement for FCW’s lending staff. John Barcelos SVP, Chief Risk Officer, Strategy

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SAFETY & SOUNDNESS

For 23 years, FPI has embraced a commitment to excellence through continuous improvement of our products and services. As the environment around us evolves, we recognize the need for FPI to adapt by leading our organization and partners through incremental improvements – and sometimes pivotal changes. One of the pivotal changes that FPI introduced in 2016 is a commitment to embracing industry standards & best practices. Through a broad set of initiatives, we are creating a robust infrastructure that can sustain growth, increasing regulatory requirements, and ever evolving information security demands. In Information Security, we are implementing programs that enable us to better identify, protect and respond to threats. We have chosen to adopt the NIST Cybersecurity policy framework as a way to measure and improve the maturity of our security program. In 2017, we partnered with a world-class security firm to protect, monitor and take action on security events 24 hours a day, 7 days a week. As part of our proactive program, we also engaged 3rd party security firms to perform threat assessments and active penetration tests. Our focus in 2018 is to continue maturing the systems we have put in place, which serve as reference Information Security programs for our partners. Our commitment to adopting industry standards extends to every department within FPI. For Project Management best practices, we have chosen the PMP Certification as the reference standard for skillset certification. This ensures that our Project Managers are properly trained so that FPI can consistently execute projects that produce optimal results while creating the necessary audit trails for compliance.

For IT Management, we have chosen the widely adopted ITIL (Information Technology Infrastructure Library) Framework as our reference standard for establishing best practices. As part of embracing ITIL, we transformed our customer support model into a multi-tiered structure created as a scalable and sustainable service. This transformation included improvements which impact our entire company in how we manage incidents, system changes, problems and releases. Our focus throughout 2018 is to mature the customer support service by continuing to develop our staff and optimize our procedures. As an IT service provider, FPI has an obligation to demonstrate compliance to our partners. One way FPI measures compliance is through a robust SOC (Services Organization Controls) report. An SOC report validates that the policies, procedures and controls have been appropriately designed and tested. In 2017, FPI completely rewrote our SOC reports and had rigorous testing performed by a global CPA firm. Combined with improvements to our risk-based audit program, we assured our partners that FPI is properly focused on safety and soundness. With over 50 initiatives like these, FPI is demonstrating a commitment to being a premier technology provider. Our Board of Directors is committed to a 3-year program to mature our practices that protect our assets and reputation. The policies, procedures and frameworks we put into place will ensure that FPI continues to sustain excellence and continually improve our capacity to provide a world-class service to our partners.

During the AgCountry/United merger FPI did an excellent job ensuring that the loan data conversion was accurate and ready to go on Day 1. Any issues were handled in a timely and professional manner by the FPI Help Desk and on-site staff. In addition, FPI handled the migration of customer documents from the United EDOCS system to the EmPOWER customer binder very well preserving vital customer history. Leleand Fredman SVP, Producer Marketing AgCountry

FPI does a great job of planning ahead. They had a team in place to brainstorm and consider all of the technology related tasks that needed to be accomplished in order to have a smooth transition. They coordinated with multiple vendors to assure the physical infrastructure was delivered on time and adequate to serve our needs. Where FPI’s customer service really peaked was during movein time at the new office. FPI was on site for 3 days working diligently to solve each and every glitch that inevitably was waiting to happen. Their high quality service and professional approach to this project made the entire transition much smoother on staff! Rob Yurkewecz Branch Office Manager Cooperstown (NY) Branch

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Farm Credit Financial Partners, Inc.

2017 Annual Report

Farm Credit Financial Partners, Inc.

2017 Annual Report

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solutions for success Business Enabling

Customer Enabling

Loan Servicing

Underwriting

Accounting

Other

Loan Origination

Financial Analysis

Transaction Processing

Custom Solutions

Loan Accounting

3rd Party Application Support

Loan Servicing

CRM

Collateral Mgmt.

Narrative

External Interfaces

Customer Statements

CoBank

e-Signature

AgriBank

Websites

Funding Corp

Customer Portals

Farm Credit Administration

General Ledger

Secure Messaging Document Mgmt.

Financial Benchmarking

Participation Syndication

Legal Doc Generation

Credit Scoring

Non-Accrual

Governance Compliance & Risk

Balance Sheet Helper

Regulatory Reporting Lockbox Processing Management Reporting Online Banking

Escrow Processing

Customer Stock Mgmt.

Legal Support Cash Management

Financial Svc’s Billing

Scanning Solution & Print Driver

Financial Controls Auditor Review & Portals Stress Testing

Foundational Technology

Employee Efficiency

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Customer Support

Workflow / Work Queue

FPI Product Training

Intranets

Mobile Tools / EmPOWER Mobile

Data Center

Business Continuity Planning

Security

Networks

Hardware / Software Procurement

Disaster Recovery Desktop / Branch Hardware Support

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THE FPI advantage collaboration

valued partner Customer Driven Solutions

team fpi

FPI has a long history of working collaboratively with our partners to understand their business needs and develop products tailored to Farm Credit. Each year, we host a Partner Summit which gives FPI the opportunity to listen to the needs of our partners and also set the direction for the road ahead. In addition, our various cross-organizational councils meet regularly to calibrate our direction throughout each year. Working closely with association leadership, we ensure that our strategies are aligned to ensure our partners have the best technology solutions to support their evolving business needs.

Being part of the FPI family means being part of Team FPI. Team FPI is a collaboration between FPI and our partners with a focus on thought leadership across nine key business functions. This collaboration among our partners strengthens FPI’s technology strategy by ensuring it is effectively aligned to support the associations’ business needs. Participants from each of our partners contribute to the collaboration across these nine disciplines:

innovation A common theme throughout our history has been a strong commitment to developing innovations which give our partners a competitive advantage in their marketplaces. Our culture fosters diversity of thought and creativity which encourages our staff to bring their best ideas forth. As our partners identify business opportunities and challenges, the FPI family works together to produce innovative solutions which create a competitive advantage for our partners.

Legal

Risk

Human Resources

Finance

Credit & Marketplace

Data Management

Information Security

Infrastructure

Audit

Farm Credit experience We intimately understand the nuances of Farm Credit because we live and breathe it everyday. Some of our staff have Farm Credit lending experience, while even more operate small farms or grew up on a farm. We have many staff members with over 20 years of Farm Credit experience. FPI has a deep bench of talented staff with deep knowledge and broad experiences across Farm Credit. comprehensive portfolio As an end-to-end IT solution provider, we offer a wide range of products and services that are essential to managing a Farm Credit association. Beyond our rich credit delivery product portfolio, we also manage everything from security to desktops and mobile devices. We focus on all aspects of the technology so associations can focus on running their businesses.

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technology professionals Our staff brings a wealth of information technology experience from a broad array of industries. FPI’s Agawam office is located in New England’s Knowledge Corridor which is home to 41 colleges/universities and 215,000 students. This region is consistently among the nation’s top 10 in percentage of the population with advanced degrees, science-engineering doctorates and new patents registered. This region is also home to 64,000 businesses. Our location and hiring strategy enables us to attract talented and experienced technology professionals who bring creativity and diversity of thought to FPI. common vision FPI and our partners share a common vision for the organization: to be the premier technology and service provider in the Farm Credit System. Everyday, we strive to provide the highest quality products and services while advancing 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.

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Farm Credit Financial Partners, Inc.

2017 Annual Report

trust

Farm Credit Financial Partners is a partner-focused, trusted financial services technology company, driven by an empowered team dedicated to delivering innovative solutions. We believe that strong relationships are the building blocks of success, and we are committed to ensuring the highest possible levels of satisfaction through our consultative partner service approach. In delivering innovative solutions, we put our partners at the center of our business philosophy, operations, and vision. Helping our partners succeed involves more than providing excellent products. To be acknowledged as a trusted partner means providing the support required to get the maximum value from those products, acting with the highest standards of integrity and openness to ensure the trust of those we serve. These behaviors are woven into the fabric that is Farm Credit Financial Partners. Farm Credit Financial Partners, Inc.

2017 Annual Report

2017 was our first year using Custom Solutions Group. The experience was amazing. We were able to get several association specific enhancements done that helped improve efficiencies across the whole organization. The CSG team is committed to providing a high level of service. They are more than willing to go above and beyond to get the job done. Hindsight…I wish we would have started utilizing this service sooner. Melissa Gomes Vice President, Strategy Farm Credit West

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GIVING BACK TO THE COMMUNITY

Bob Bahl

Retirement

After a 38 year career in the Farm Credit System, Bob retired from AgCountry Farm Credit Services and the FPI Board of Directors on December 31, 2017. Bob served as President and Chief Executive Officer of Farm Credit Services of Grand Forks since 1993 and was named President and CEO of AgCountry Farm Credit Services and a member of the FPI Board of Directors in 2008. Bob served as Chairman of The FPI Board of Directors from 2011-2015. Bob’s vision included joining the FPI family, and he oversaw the onboarding of AgCountry to FPI systems in 2008. Bob has always been a believer in technology as a business enabler and as a driver of value for customers “I have witnessed tremendous changes within agriculture during my time. I am proud to have worked with many great people along the way and led an organization that has proactively changed to meet the needs of our industry.” Bob grew up on his family’s farm near the small town of Mohall, N.D. He has been married to his wife Kerry, also of Mohall, for 47 years. Together they have three children and seven grandchildren.

I have witnessed tremendous changes within agriculture during my time. Every year, our employees take the initiative to raise money so we can give back to our community. These donations include sending care packages to soldiers, donations to families in need, contributions to end childhood cancer and donations to local community service organizations. FPI has been part of the Springfield area community for 23 years and has partnered with the Springfield

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Open Pantry Community Services for the past 11 years. The Open Pantry provides essential resources to the Greater Springfield area, including an Emergency Food Pantry, Holiday Meals, the Loaves and Fishes Kitchen, a Teen Parent Program and Open Door Social Services to hungry, homeless or disadvantaged members within our community.

Farm Credit Financial Partners, Inc.

2017 Annual Report

Bob looks forward to spending more time with his family in Fort Meyers FL and on Lake Melissa in the summertime. FPI would like to thank Bob for his leadership and stewardship and we wish him well in his future endeavors!

I am proud to have worked with many great people along the way and led an organization that has proactively changed to meet the needs of our industry.

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financials


MANAGEMENT’S

DISCUSSION AND ANALYSIS INTRODUCTION The following discussion summarizes the financial position and results of operations of Farm Credit Financial Partners, Inc. (FPI) for the year ended December 31, 2017. Comparisons with prior years are included. The discussion and analysis should be read in conjunction with the accompanying consolidated financial statements, footnotes, and other sections of this report. The accompanying consolidated financial statements were prepared under the oversight of our Audit Committee. The Management’s Discussion and Analysis includes the following sections: BUSINESS OVERVIEW

Key successes in the FPI 2.0 program centered on adopting industry standard technologies and methodologies. Successes in this area impacted most areas within the company, specifically within the application development, information security, production support, infrastructure and risk areas. In the area of large custom projects, FPI completed the technology integration of AgCountry Farm Credit Services, an existing FPI customer, and United Farm Credit Services. The two organizations merged during 2017 and the combined organization, AgCountry Farm Credit Services, operates on a successfully integrated FPI platform. Early in the year, both Farm Credit Illinois and Fresno Madera Farm Credit made the strategic decision to select FPI as their technology provider. During the year, project teams at FPI and the two associations have been working diligently to bring these organizations onto FPI’s platform. Both projects are scheduled for completion during 2018. FPI also successfully completed the decommissioning of Yankee Farm Credit off of FPI systems and on to another platform during the year.

RESULTS OF OPERATIONS

YEAR IN REVIEW RESULTS OF OPERATIONS LIQUIDITY AND FUNDING SOURCES OWNERSHIP AND CAPITAL GOVERNANCE FORWARD LOOKING INFORMATION

BUSINESS OVERVIEW FARM CREDIT SYSTEM STRUCTURE AND MISSION We operate as part of the Farm Credit System (System), which was created by Congress in 1916. The System mission is to provide sound and dependable credit to American farmers, ranchers, and other agricultural producers and farm-related businesses through a member-owned cooperative system. FPI serves System association lenders in providing a comprehensive technology platform, support and related services. The Farm Credit Administration (FCA) is the System’s independent safety and soundness federal regulator and was established to supervise, examine and regulate System institutions. OUR STRUCTURE AND FOCUS As a cooperative, we are owned by the associations we serve. Our core services offerings include credit delivery and management systems, core infrastructure and security, financial accounting and loan accounting services, management reporting, electronic commerce as well as other products and services used by our customerowners to support their lending and financial services needs. In addition to core services, we provide custom technology solutions through our Custom Solutions Group (CSG) to address individual customer needs outside of our core services offerings. Beyond core and CSG related services, FPI adds value through maintaining a commitment to provide modern, industry standard systems, outstanding customer support, and consultative services designed to support and implement solutions for our customers’ changing businesses.

YEAR IN REVIEW 2017 was a year in which FPI delivered on key strategic priorities, made considerable progress on the multi-year FPI 2.0 program, successfully worked on other large custom projects and continued to provide the high quality support of production systems and service delivery that our customer-owners expect. From a strategic project standpoint, FPI delivered the new Narrative module of EmPOWER which automates the creation, editing and approval of documents needed to make informed credit decisions. FPI also implemented enhanced loan billing statements and related farmer-customer facing documentation during the year.

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Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

During 2017, FPI achieved financial results favorable to prior year in the key areas of net operating income, liquidity and capital levels. Carefully managed operating expenses, capital spending and project spending, as well as additional capital investments by our owners led to FPI’s financial performance exceeding targets in these areas. Two non-operating items detailed below account for the difference between FPI’s net operating income of $188.4k and net loss of ($962.1k) for the year. NET OPERATING INCOME Net operating income increased to $188.4k in 2017 from $102.9k in 2016, an increase of $85.4k or 83.0%. The $85.4k increase is due to materially offsetting increases in revenue and expense. Total revenues increased to $51,039.3k in 2017 from $39,802.5k in 2016, an increase of $11,236.8k, or 28.2%. Increased core service fees of $5,575.9k and additional income from custom and other projects of $5,967.6k drive overall revenue growth. A reduction in R&D funding due to the termination of this funding program in 2016 results in an offsetting revenue decrease of ($306.7k). Increases in core service revenues reflect the funding of additional strategic initiatives and the FPI 2.0 program. Additionally, core fees were impacted by the mid-year merger of AgCountry Farm Credit Services and United Farm Credit Services (the Merger) as well as the organic growth within FPI’s customer-owners. Increases in custom services revenues over prior year are due primarily to large custom projects including the Merger, the decommissioning of Yankee Farm Credit from FPI’s systems, the implementation projects for Farm Credit Illinois and Fresno Madera Farm Credit as well as rebilled customer network costs. Offsetting the increased revenues are related increased operating expenses. Total operating expenses increased to $50,850.9k in 2017 from $39,699.6k in 2016, an increase of $11,151.3k or 28.1%. The majority of the increase is in employee and contract labor costs which were incurred in support of the delivery of core and custom project services as detailed above. Also contributing are increases in network, depreciation and software maintenance costs. NET INCOME FPI is reporting a net loss for 2017 in the amount of ($962.1k) as compared to earnings of $132.8k in 2016. The non-operating factors contributing to the net loss are as follows: •

Impact of 2017 Tax Cuts and Jobs Act: Our provision for income taxes increased to $858.5k in 2017 from $17.6k in 2016. This significant increase included the impact of $874.4k in net deferred tax adjustments resulting from the enactment of federal tax legislation in late December 2017 which, among other things, lowered the federal corporate tax rate from 35 percent to 21 percent beginning in 2018. In accordance with accounting principles generally accepted in the United States (GAAP), the change to the lower corporate tax rate led to a revaluation of our deferred tax assets in the period of enactment (2017). Our primary deferred tax assets relate to our employee benefit plans while our primary deferred tax liabilities relate to book vs. tax depreciation timing differences. The $874.4k net adjustment includes $1,582.9 million expense from the revaluation of deferred tax assets somewhat offset by a $708.5k benefit from the revaluation of deferred tax liabilities. Excluding

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

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the impact of the $874.4k adjustment, our provision for income taxes was ($15.9k) in 2017 compared to $17.6k in 2016. •

Loss on disposal of intangible asset: Due to changes in the technology marketplace and the emergence of products that provide rich functionality, robust configurability, and the ability to meet broad business requirements, FPI made a strategic decision in late 2017 to pursue the adoption of a commercial software product for its future loan origination solution. The market for this class of product, in particular, has grown dramatically in recent years. In accordance with accounting principles generally accepted in the United States (GAAP), the Company recorded a $348.3k loss related to the disposal of a component of a capitalized computer software cost project related to future loan origination that will no longer be used

THE FOLLOWING TABLE PRESENTS THE CHANGES IN THE SIGNIFICANT COMPONENTS OF NET INCOME FROM THE PREVIOUS YEAR. (dollars in thousands)

2017 vs. 2016

Net income, prior year

$132.8

Increase/(Decrease) from changes in:

OWNERSHIP AND CAPITAL As of December 31, 2017, FPI had five owners with stock investments totaling $27.8 million. Total equity at December 31, 2017 equaled $24.1 million, up $18.8 million from 2016. The increase in equity reflects the impact of the following items. •

During March of 2017, FPI’s four owners collectively contributed an additional $7.8M in capital to FPI via a cash stock purchase. This purchase was part of FPI’s capital plan.

In December of 2017, Farm Credit Illinois contributed $10.0M in capital to FPI via a cash stock purchase. With this contribution, Farm Credit Illinois became an owner of FPI.

The balance in accumulated other comprehensive loss was reduced by $0.9M due to the combined impact of a reduction in FPI’s employee benefit liabilities and the reduction in deferred tax liabilities resulting from the 2017 Tax Reform and Jobs Act.

Retained earnings increased by $0.1M during the year.

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.

GOVERNANCE BOARD OF DIRECTORS

Core service fees

$5,575.9

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:

Custom and other services

$5,660.8

AUDIT COMMITTEE

Operating expenses

(11,151.3)

Non-operating items

($339.4)

Provision for income taxes

($840.9)

Total (decrease)/increase in net income

($1,094.9)

Net loss, current year

The Audit Committee is composed of the full Board of Directors. The Audit Committee responsibilities generally include, but are not limited to: •

oversight of the financial reporting risk and the accuracy of the annual shareholder reports;

the oversight of the internal controls related to the preparation of annual shareholder reports;

the review and assessment of the impact of accounting and auditing developments on the consolidated financial statements; and,

the establishment and maintenance of procedures for the receipt, retention and treatment of confidential and anonymous submission of concerns, regarding accounting, internal accounting controls or auditing matters.

oversight of the Company’s internal audit program, the independence of the outside auditors, the adequacy of the Company’s system of internal controls and procedures, and the adequacy of management’s action with respect to recommendations arising from those auditing activities.

($962.1)

LIQUIDITY AND FUNDING SOURCES FPI operates with the following primary sources of funding: 1. Revenue for Core Services,

COMPENSATION COMMITTEE

2. Revenue from Custom and Other Projects,

3. 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, 2017. 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 capital plan identifies key strategic projects. Completion of these projects and others is setting FPI on a strong course for effectively meeting the technology demands of and creating business value for our customerowners. By year-end 2017, FPI had successfully delivered key strategic and custom projects, FPI 2.0 initiatives and strong operational performance, and was positioned to continue to deliver value added solutions in the future. FPI enters 2018 with strong financial resources, well positioned products, and solid, high-quality and increasingly efficient operations.

4 24

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

The Compensation Committee is responsible for the oversight of employee compensation. The Compensation Committee is composed of the full Board of Directors. The Committee reviews, evaluates and approves the compensation policies, programs and plans for senior officers and employees including benefits programs.

FORWARD-LOOKING INFORMATION Our discussion contains forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Words such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” and “will,” or other variations of these terms are intended to identify forward-looking statements. These statements are based on assumptions and analyses made in light of experience and other historical trends, current conditions, and expected future developments. However, actual results and developments may differ materially from our expectations and predictions due to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties include, but are not limited to fluctuations in the economy, the relative strengths and weaknesses in the agricultural credit sectors and in the real estate market, and the actions taken by the Federal Reserve in implementing monetary policy.

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

5 25


Farm Credit Financial Partners, Inc. Balance Sheets

As of December 31, 2017, 2016, and 2015

December 31, 2016

2017 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, net Other long-term assets Total long term-assets

16,904,629 1,142,133 3,100,072 21,146,834

$

5,783,476 9,921,264 1,612,574 1,063,340 18,380,654

Total assets

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

$

39,527,488

$

4,433,274 1,149,032 327,483 5,909,789

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

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

2015

$

5,246,761 9,051,701 3,366,091 1,270,464 18,935,017 $

$

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

5,477,964 6,682,166 3,133,477 1,152,395 16,446,002

23,830,467

$

23,600,393

3,391,292 1,083,301 1,500,855 5,975,448

$

4,160,675 1,368,271 1,031,825 6,560,771

8,900,295 619,416 9,519,711

11,583,656 937,078 12,520,734

10,938,153 717,499 11,655,652

15,429,500

18,496,182

18,216,423

Equity Class A preferred stock, $5.00 par value, 5,000,000 shares authorized, 2,500,000 shares issued and outstanding as of December 31, 2017; 2,000,000 shares authorized, issued and outstanding as of December 31, 2016 and 2015

12,500,000

10,000,000

10,000,000

Class B preferred stock, $5.00 par value, 5,000,000 shares authorized, 1,950,000 shares issued and outstanding as of December 31, 2017; 2,000,000 shares authorized, 0 issued and outstanding as of December 31, 2016 and 2015

9,750,000

Class C common stock, $5.00 par value, 5,000,000 shares authorized, 1,110,000 shares issued and outstanding as of December 31, 2017; 2,000,000 shares authorized, 0 issued and outstanding as of December 31, 2016 and 2015 Accumulated other comprehensive loss Accumulated earnings Total equity Total liabilities and equity

5,550,000 (5,088,547) 1,386,535 24,097,988 39,527,488

Total liabilities

$

-

$

(5,943,596) 1,277,881 5,334,285 23,830,467

-

$

(5,761,127) 1,145,097 5,383,970 23,600,393

The accompanying notes are an integral part of these statements. 6 26

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

The accompanying notes are an integral part of these statements. Farm Credit FinancialPartners, Partners,Inc. Inc. 2017 Farm Credit Financial 2017Annual AnnualReport Report

7 27


Farm Credit Financial Partners, Inc. Statements of Operations and Comprehensive Income

Farm Credit Financial Partners, Inc. Statement of Cash Flows

Years ended December 31, 2017, 2016, and 2015

Years ended December 31, 2017, 2016, and 2015

2017

2017

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 I ncome/(Expense) Interest income Interest expense Loss on disposal of intangible asset Other gains Total other (expense) income

51,039,307 51,039,307

2016

$

$

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

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

188,378

102,931

679,679

38,823 8,659 47,482

(103,549) 858,531 (962,080)

$

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

2015

27,405,782 8,194,603 9,284,370 5,966,174 50,850,929

55,704 (240) (348,321) 930 (291,927)

(Loss) income before income taxes Income tax provision Net (loss) income Other comprehensive income (loss): Net change in retirement plan liabilities Comprehensive income (loss)

Year Ended December 31,

1,925,783 963,703

25,348 20,777 46,125

150,413 17,629 132,784

$

(182,469) (49,685)

725,804 458,004 267,800

$

The accompanying notes are an integral part of these statements.

(1,326,224) (1,058,424)

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

$

Year Ended December 31,

(962,080)

2016

$

132,784

$

2015

267,800

6,042,172 348,321 -

5,360,526 -

4,897,468 (11,667)

(277,546) 1,753,517 (601,180) (1,491,034) 1,041,982 (691,847) 5,162,305

(69,825) (232,614) 343,177 688,609 (769,383) 178,064 5,631,338

(513,158) (459,688) (1,238,707) (6,226,201) 1,989,090 985,564 (309,499)

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

(3,925,254) (3,871,517) (7,796,771)

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

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

Cash Flows from Financing Activities Advances on notes payable with CoBank, ACB Repayment of notes payable to CoBank, ACB Proceeds from issuance of Class A and B preferred stock Proceeds from issuance of Class C common stock Net cash provided by financing activities

4,156,874 (4,156,874) 12,250,000 5,550,000 17,800,000

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

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

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

$

15,165,534 1,739,095 16,904,629

$

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

$

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

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

$ $ $ $

240 195,300 1,925,783 185,555

$ $ $ $

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

$ $ $ $

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

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements. 8 28

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

The accompanying notes are an integral part of these statements. Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

9 29


Farm Credit Financial Partners, Inc. Accumulated Other Comprehensive Loss

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

Years ended December 31, 2017, 2016, and 2015 Class A Preferred Stock Shares Amount Balance as of January 1, 2015 Net income Other comprehensive loss Balance as of December 31, 2015 Net income Other comprehensive loss Balance as of December 31, 2016 Net loss Other comprehensive income Reclassification in connection with adoption of ASU 2018-02 (Note 11) Issuance of Class A preferred stock Issuance of Class B preferred stock Issuance of Class C common stock Balance as of December 31, 2017

2,000,000

$

-

10,000,000 -

2,000,000

10,000,000

-

-

2,000,000

10,000,000

-

-

500,000 2,500,000

Class B Preferred Stock Shares Amount

$

-

$

Accumulated Other Comprehensive Loss

Class C Common Stock Shares Amount -

-

$

-

$

(4,434,903)

Years ended December 31, 2017, 2016, and 2015

Accumulated Earnings $

877,297

-

-

-

-

(1,326,224)

267,800 -

-

-

-

-

(5,761,127)

1,145,097

-

-

-

-

(182,469)

132,784 -

-

-

-

-

(5,943,596)

1,277,881

-

-

-

-

1,925,783

2,500,000 -

1,950,000 -

9,750,000 -

1,110,000

5,550,000

12,500,000

1,950,000

$ 9,750,000

1,110,000

$ 5,550,000

(962,080) -

(1,070,734) $

(5,088,547)

$

The components of Accumulated Other Comprehensive Loss are as follows: Total $ 6,442,394 267,800 (1,326,224) 5,383,970 132,784 (182,469) 5,334,285 (962,080) 1,925,783

1,070,734 -

2,500,000 9,750,000 5,550,000

1,386,535

$ 24,097,988

Minimum Postretirement Pension Liability Liability

Balance as of January 1, 2015 Change in period Tax effect of change in period

$

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

$

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

$

SERP Liability

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

$

Total

(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 Change in period Tax effect of change in period Tax effect of change in federal tax rate (Note 11)

(5,105,965) 1,949,847 (478,002) (1,005,720)

(330,071) (72,586) 18,964 (65,014)

(507,560) 809,645 (302,085) -

(5,943,596) 2,686,906 (761,123) (1,070,734)

Balance as of December 31, 2017

$

(4,639,840)

$

(448,707)

$

-

$

(5,088,547)

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements. 10 30

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

The accompanying notes are an integral part of these statements. Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

11 31


NOTES TO FINANCIAL STATEMENTS

D.

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, 2017, 2016, and 2015, 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, 2017, 2016, and 2015.

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.

E.

F.

Use of Estimates 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.

C.

Cash and Cash Equivalents 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.

12 32

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

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.

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”). B.

Fixed Assets 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.

G.

Basis of Presentation

Unbilled Revenue 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 $636,906, $504,192, and $150,000 at December 31, 2017, 2016, and 2015.

NOTE 2 - Summary of Significant Accounting Policies A.

Accounts Receivable

H.

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.

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

13 33


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 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.

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 paid were $1,126 for the year ending December 31, 2017, 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 ended December 31, 2015. The Company is no longer subject to federal, state, and local income tax examinations by tax authorities for years prior to 2013. J.

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.

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.

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.

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable.

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.

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,

14 34

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.

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.

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

Revenue Recognition

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 forward-looking projects to enhance the technology and service offerings. This practiced ceased for the fiscal year ended 2016. Total association payments were $0 in 2017, $0 in 2016 and $2,697,453 in 2015. 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, 2017 and 2016 and $306,767 as of December 31, 2015. K.

Concentrations of Credit Risk 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, 2017, 2016, and 2015, 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.

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

15 35


L.

Accumulated Other Comprehensive Income

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

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. M.

Captive Insurance Company 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.

N.

Impairment of Long-Lived Assets

In March 2017, the FASB issued guidance entitled “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost.” The guidance requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. This guidance becomes effective for interim and annual periods beginning after December 15, 2017. The adoption of this guidance is not expected to impact the Company’s financial condition but could change the classification of certain items in the results of operations.

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, 2017, 2016, and 2015 there were no impairment losses recognized for long-lived assets. O.

Reclassifications Certain accounts within the 2016 and 2015 financial statements have been reclassified to conform to the presentation in the 2017 financial statements. These reclassifications include the presentation of certain accrued employee benefits from long-term liabilities to current liabilities of $1,083,301 and $1,368,271 for 2016 and 2015, respectively. Total equity and net income are unchanged due to these reclassifications.

P.

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 201409, 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.

16 36

In February of 2018, the FASB issued ASU 2018-02 Income Statement-Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. The amendments in this update are effective for fiscal years beginning after December 15, 2018. Early adoption of the Update is permitted. The Company has adopted this Update for the fiscal year ended December 31, 2017 and all stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act have been reclassified from accumulated other comprehensive income to retained earnings.

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

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 mea surement and unobservable.

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

17 37


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.

NOTE 4 - Fixed Assets Fixed Assets consisted of the following: December 31, 2017 Computer equipment Computer software Furniture and fixtures Less: Accumulated depreciation Total

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, 2017, 2016 and 2015, the Company does not have any assets or liabilities subject to measurement at fair value on a nonrecurring basis.

Assets at Fair Value as of December 31, 2017 Money market accounts

Level 1

Level 2

$

$ 12,002,362

$

- $

-

$ 12,002,362

$ 12,002,362

$

- $

-

Money market accounts

$

Assets held in trust

246,752

$

182,727 $

429,479

Level 2

246,752

$

182,727 $

429,479

$

-

$

-

$

13,447,123

21,781,033

19,705,397

25,076,322

2,204,100

2,068,939

1,904,266

36,676,938

32,937,239

40,427,711

30,893,462

27,690,478

34,949,747

5,783,476

Gross Carrying Amount

Level 3 -

11,162,903

$

5,246,761

$

5,477,964

Intangible assets at December 31, 2017, 2016, and 2015, consisted of capitalized computer software costs, as follows:

Assets at Fair Value as of December 31, 2016 Level 1

$

NOTE 5 – Intangible Assets Level 3

$ 12,002,362

Total

12,691,805

2015

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, 2017 and 2016 there were disposals of fully depreciated assets of $185,555 and $10,473,414, respectively. Depreciation expense related to the Company’s property and equipment was $3,388,539, $3,214,145, and $2,934,852, in 2017, 2016, and 2015 respectively.

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

Total

$

2016

$

-

Accumulated Amortization

Net Book Value

December 31, 2017

$18,558,864

$8,637,600

$9,921,264

December 31, 2016

$15,035,668

$5,983,967

$9,051,701

December 31, 2015

$10,519,752

$3,837,586

$6,682,166

Assets at Fair Value as of December 31, 2015 Total Money market accounts

$

Assets held in trust

2,084,942

Level 1 $

171,765 $

2,256,707

Level 2

2,084,942

$

171,765 $

2,256,707

$

Level 3 - $

-

-

-

- $

-

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.

Capitalized computer software costs are amortized over a five year useful life. Amortization expense associated with these assets totaled $2,653,633, $2,146,381, and $1,962,616 for the years ended December 31, 2017, 2016, and 2015, respectively. As of December 31, 2017 and 2016, there was $2,477,065 and $4,109,356, respectively capitalized that the Company was not amortizing, as these products were in the application development stage and not yet placed in service. During the year ended December 31, 2017, the Company recorded a $348,321 loss related to the disposal of a component of a capitalized computer software cost project that will no longer be used. 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: 2018 2019 2020 2021 2022 Total

18 38

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

$3,252,960 2,362,759 1,811,136 1,616,056 878,353 $ 9,921,264

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

19 39


NOTE 6 – Captive Insurance Company

NOTE 9 – Accrued Expenses and Other Liabilities

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 $559,547, $563,734 and $491,109 at December 31, 2017, 2016, and 2015 respectively and is included in other long-term assets on the accompanying balance sheets. Premiums paid in those respective years to the captive totaled $201,541, $198,279 and $165,585 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.

Accrued expenses and other liabilities consist of the following:

NOTE 7 - Notes Payable to CoBank, ACB

NOTE 10 – Accrued Employee Benefits

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.

Accrued employee benefits consist of the following:

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, 2017, 2016 or 2015. Borrowings made and repaid during the year as part of the settlement process were $4,156,874, $2,833,336 and $2,614,077 for the years ended December 31, 2017, 2016 and 2015, respectively. Interest expense incurred to CoBank for the years ended December 31, 2017, 2016 and 2015 was $240, $0, and $0, 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, 2017 was 3.42%. The line of credit matures on July 31, 2018.

December 31, 2017 Accrued expenses

$

2016

3,487,884

$

2015

2,705,891

$

2,415,053

Trade payables

923,708

668,937

1,721,129

Taxes payable

21,682

16,464

24,493

$

4,433,274

$

3,391,292

$

4,160,675

December 31, 2017

2016

2015

Current liabilities: Annual leave

$

Health Reserve

1,014,062

$

923,490

$

914,246

134,970

159,811

454,025

1,149,032

1,083,301

1,368,271

8,675,604

10,122,502

10,104,101

224,211

218,301

357,918

1,238,552

471,849

4,301

4,285

Long-term liabilities: Pension

Postretirement benefits SERP

-

Other

480 $

NOTE 8 – Prepaid Assets

10,049,327

$

12,666,957

$

12,306,423

NOTE 11 - Income Taxes Prepaid assets consist of the following:

The provision for income taxes consisted of the following: December 31,

2017

December 31,

2016

2015

$2,040,310

$1,702,483

$1,769,107

Current:

Unbilled revenue

636,906

504,192

150,000

Federal

Federal and state taxes

375,424

83,142

791,429

State

47,432

1,951

42,478

$3,100,072

$2,291,768

$2,753,014

Prepaid vendor invoices

Other

2017 $

2016

(133,863)

$

-

Total

$

(133,863)

2015

78,499

$

$

78,499

18,334 204,072

$

222,406

Deferred: Federal State Total Total provision for income taxes

20 40

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

$

988,503

(130,450)

461,809

3,891

69,580

(226,211)

992,394

(60,870)

235,598

858,531

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

$

17,629

2017 2017Annual AnnualReport Report

$

458,004

21 41


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: December 31, 2017 Federal tax at statutory rate

$

2016

(35,506)

State tax, net Permanent differences

51,140

204,072

15,528

(90,347)

117,923

383

10,653

(109,274)

-

-

260

1,123

Provision for income taxes

$

246,773

45,923

874,435

Other

$

2,568

Accrual to return Revaluation of federal tax rate

$

2015

858,531

$

17,629

(1,490) $

December 31, Annual leave

$

Pension

2016

254,568

$

2015

344,561

$

340,626

2,177,906

4,238,889

3,940,344

151,139

97,312

502,977

Postretirement

56,286

81,450

133,351

Health reserve

32,763

58,507

169,159

237,708

699,407

134,453

18

18

19

2,910,388

5,520,144

5,220,929

Depreciation

(1,297,814)

(2,154,053)

(2,087,452)

Gross deferred tax liabilities

(1,297,814)

(2,154,053)

(2,087,452)

Operating loss carryforward

Deferred revenue Charitable contributions Gross deferred tax assets

Net deferred tax asset

$

1,612,574

$

3,366,091

$

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, 2017, 2016 and 2015. FPI has state net operating loss carry forwards of $1,976,103 that begin to expire in 2020. FPI expects that the operating loss carryovers will be fully utilized before they expire.

458,004

Deferred tax assets and (liabilities) resulted from the following:

2017

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.

3,133,477

In December 2017, the Tax Cuts and Jobs Act, or the Tax Act (“TCJA”), was signed into law. Among other things, the Tax Act permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 34%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, U.S. GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. In accordance with GAAP, the change to the lower corporate tax rate led to a revaluation of our deferred tax liabilities and deferred tax assets in the period of enactment (2017). The $874,435 net adjustment includes a $708,479 benefit from the revaluation of deferred tax liabilities offset by a $1,582,914 expense from the revaluation of deferred tax assets. Our preliminary estimate of the TCJA and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TCJA may require further adjustments and changes in our estimates. The final determination of the TCJA and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA. Excluding the impact of the $874,435 net adjustment, the effective tax rate was 16.07 percent for the year ended December 31, 2017 compared to 11.72 percent in 2016 and 63.10 percent in 2015. The Company elected to adopt ASU 2018-02 Income Statement-Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income for fiscal year 2017 financial reporting. Adoption of this ASU resulted in the reclassification of the income tax effects of the 2017 Tax Cuts and Jobs Act in the amount of $1,070,734 from accumulated other comprehensive loss to retained earnings.

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, 2017, 2016, and 2015 the Company has recorded expense, net of employee withholdings or contributions, of approximately $1,621,700, $1,511,603 and $1,386,136. Included in accrued expenses and other liabilities in the balance sheets as of December 31, 2017, 2016, and 2015 are self-insurance reserves totaling $134,970, $159,811 and $454,025. 22 42

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

23 43


NOTE 13 - Employee Benefit Plans

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

Employee Employee Savings Savings Plan Plan FPI FPI participates participates in in the the CoBank CoBank Employee Employee Savings Savings Plan Plan (Employee (Employee Savings Savings Plan), Plan), a a deferred deferred compensation plan in which FPI matches a certain percentage of employee contributions. compensation plan in which FPI matches a certain percentage of employee contributions. The The Employee Employee Savings Savings Plan Plan requires requires FPI FPI to to match match 100 100 percent percent of of employee employee contributions contributions up up to to a a maximum maximum employee employee contribution contribution of of six six percent percent of of base base salary. salary. Employer Employer contributions contributions charged charged to to expense expense were were $1,115,990 $1,115,990 in in 2017, 2017, $969,499 $969,499 in in 2016 2016 and and $917,439 $917,439 in in 2015. 2015. Defined Defined Contribution Contribution Retirement Retirement Plan Plan FPI FPI participates participates in in the the CoBank CoBank defined defined contribution contribution qualified qualified retirement retirement plan, plan, a a noncontributory, noncontributory, multiple-employer plan (defined contribution plan). Under this plan for employees multiple-employer plan (defined contribution plan). Under this plan for employees hired hired January January 1, 1, 2005 2005 and and later, later, the the employer employer contributes contributes a a percentage percentage of of each each employee’s employee’s salary, salary, based based on on years years of of service, service, to to an an account account maintained maintained for for the the employee. employee. Employer Employer contributions contributions charged charged to to expenses were $530,785 in 2017, $402,152 in 2016 and $295,594 in 2015. expenses were $530,785 in 2017, $402,152 in 2016 and $295,594 in 2015. Defined Defined Benefit Benefit Retirement Retirement Plan Plan FPI FPI participates participates in in the the CoBank CoBank defined defined benefit benefit qualified qualified retirement retirement plan plan (defined (defined benefit benefit plan). plan). This This plan plan covers covers FPI FPI employees employees hired hired before before January January 1, 1, 2005. 2005. Benefits Benefits are are based based on on years years of of serservice vice and and compensation compensation levels levels during during the the years years of of employment. employment. It It is is the the policy policy of of the the participating participating employers employers to to fund fund at at least least the the minimum minimum required required by by the the Employee Employee Retirement Retirement Income Income Security Security Act (ERISA). FPI’s contributions during 2017, 2016 and 2015 were consistent with Act (ERISA). FPI’s contributions during 2017, 2016 and 2015 were consistent with this this policy. policy. Plan Plan assets assets are are stated stated at at fair fair value value and and are are primarily primarily invested invested in in publicly publicly traded traded stocks stocks and and bonds, bonds, real real estate estate and and contracts contracts with with insurance insurance companies. companies.

Retirement Retirement Plans Plans December December 31, 31, 2017 2017 Change Change in in projected projected benefit benefit obligation obligation Benefit obligation at Benefit obligation at beginning beginning of of year year $ $ Service cost Service cost Interest Interest cost cost Plan Plan amendments amendments Actuarial Actuarial loss loss (gain), (gain), net net Plan Plan participant participant contributions contributions Transfers Transfers Benefits Benefits paid paid Benefit obligation obligation at Benefit at end end of of year year Change Change in in plan plan assets assets Fair value value of of plan plan assets assets at Fair at beginning beginning of of year year Actual Actual return return on on plan plan assets assets

$ $

$ $

Employer Employer contributions contributions Plan Plan participant participant contributions contributions Transfers Transfers Benefits Benefits paid paid Fair Fair value value of of plan plan assets assets at at end end of of year year

$ $

Other Other Post Post Retirement Retirement Benefits Benefits December December 31, 31,

2016 2016

32,898 32,898 745 745

$ $

2015 2015

30,368 30,368 841 841

1,336 1,336 --

1,339 1,339 87 87

874 874 --

708 708 --

-(3,960) (3,960) 31,893 31,893

-(445) (445) 32,898 32,898

21,537 21,537 3,283 3,283

$ $

$ $

19,792 19,792 1,190 1,190

2,358 2,358 --

1,000 1,000 --

-(3,960) (3,960) 23,218 23,218

-(445) (445) 21,537 21,537

$ $

2017 2017

27,650 27,650 892 892

218 218 9 9

1,112 1,112 935 935

$ $

$ $

(221) (221) 30,368 30,368

19,675 19,675 (265) (265)

$ $

$ $

603 603 --$ $

(11,361) (11,361) $ $

(10,576) (10,576)

$ $

$ $

398 398 22 22

16 16 --

16 16 --

23 23

(25) (25) 11 11

141 141 17 17

-(148) (148) 224 224

-(160) (160) 218 218

-(236) (236) 358 358

---

$ $

$ $

---

125 125 23 23

$ $

$ $

---

149 149 11 11

--

219 219 17 17

-(148) (148)

$ $

2015 2015

358 358 18 18

9 9 -113 113

----

(221) (221) 19,792 19,792

$ $

$ $

2016 2016

--

-(160) (160)

$ $

--

(236) (236) $ $

--

Funded Funded status status of of the the plan plan

Supplemental Supplemental Executive Executive Retirement Retirement Plan Plan Beginning Beginning in in 2010 2010 FPI FPI entered entered into into a a noncontributory, noncontributory, nonqualified nonqualified supplemental supplemental executive executive retireretirement plan (SERP). The plan currently covers one employee. The Company holds assets in a ment plan (SERP). The plan currently covers one employee. The Company holds assets in a trust trust fund fund related related to to the the SERP; SERP; however, however, such such funds funds remain remain Company Company assets assets and and are are not not included included as as plan plan assets assets in in accompanying accompanying disclosures disclosures but but rather rather included included in in the the other other long-term long-term asset asset balance balance in in the the accompanying accompanying balance balance sheets. sheets. During During 2017, 2017, this this plan plan was was fully fully settled settled and and the the plan plan was was closed. closed. Post Post Retirement Retirement Health Health Care Care Benefit Benefit Plan Plan FPI FPI provides provides certain certain health health care care and and life life insurance insurance benefits benefits to to employees employees if if they they reach reach normal normal retirement age while working for FPI (the post-retirement health care plan). The authoritative retirement age while working for FPI (the post-retirement health care plan). The authoritative acaccounting counting guidance guidance requires requires the the accrual accrual of of the the expected expected cost cost of of providing providing postretirement postretirement benefits benefits other other than than pensions pensions (primarily (primarily healthcare healthcare benefits) benefits) to to an an employee employee and and an an employee’s employee’s beneficiabeneficiaries and covered dependents during the years that the employee renders service necessary ries and covered dependents during the years that the employee renders service necessary to to become become eligible eligible for for these these benefits. benefits. These These accrued accrued (benefits)/expenses (benefits)/expenses of of ($66,676), ($66,676), ($75,912) ($75,912) and and ($153,082) ($153,082) were were classified classified as as salaries salaries and and employee employee benefits benefits on on FPI’s FPI’s financial financial statements statements during during 2017, 2017, 2016 2016 and and 2015, 2015, respectively. respectively.

Net Net amount amount recognized recognized in in the the balance balance sheet $ sheet in in accrued accrued employee employee benefits benefits $

(8,675) (8,675) $ $

$ $

(224) (224)

$ $

(218) (218)

$ $

(358) (358)

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

Retirement Plans December December 31, 31,

Other Post Retirement Benefits December December 31, 31,

2017 2017

2016 2016

2015 2015

2017 2017

2016 2016

2015 2015

$28,308 $28,308

$28,730 $28,730

$24,838 $24,838

$224 $224

$218 $218

$358 $358

The accumulated accumulated benefit benefit obligation obligation is is the the actuarial actuarial present present value value of of the the benefits benefits accrued The accrued for 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.

24 44 24

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial Farm Credit Financial Partners, Inc.

2017 2017 Annual Report 2017Annual AnnualReport Report

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial Farm Credit Financial Partners, Inc.

2017 2017 Annual Report 2017Annual AnnualReport Report

25 45 25


Components of net periodic benefit cost and other amounts recognized in other comprehensive Components of net ($ periodic benefit cost and other amounts recognized in other comprehensive income are as follows in thousands): income are as follows ($ in thousands): Retirement Plans Retirement Plans December 31, December 31, 2016 2016

2017 2017 Periodic benefit cost Periodic benefit cost Service cost $ Service cost $ Interest cost Interest cost Expected return on plan assets Expected return on plan assets Amortization of unrecognized: Amortization of unrecognized: Prior service cost Prior service cost Net actuarial loss Net actuarial loss $ $ Settlement expense/(income) Settlement expense/(income) Curtailment expense/(income) Curtailment expense/(income) $ $ Changes in plan assets and Changes in plan assets and benefit obligations recognized in benefit obligations recognized in other comprehensive income other comprehensive income Net actuarial (gain)/loss $ Net actuarial (gain)/loss $ Prior service cost/(credit) Prior service cost/(credit) Amortization of: Amortization of: Prior service cost/(credit) Prior service cost/(credit) Net actuarial (gain)/loss Net actuarial (gain)/loss $ $

2015 2015

745 $ 745 $ 1,336 1,336 (1,437) (1,437)

841 $ 841 $ 1,339 1,339 (1,409) (1,409)

891 891 1,112 1,112 (1,338) (1,338)

221 221 575 575 1,440 $ 1,440 $ 903 903 89 89 2,432 $ 2,432 $

225 225 427 427 1,423 $ 1,423 $ 1,423 $ 1,423 $

118 118 512 512 1,295 1,295 1,295 1,295

(972) $ (972) $ -

927 $ 927 $ 87 87

1,454 1,454 935 935

(310) (310) (1,477) (1,477) (2,759) $ (2,759) $

(225) (225) (427) (427) 362 $ 362 $

(118) (118) (512) (512) 1,759 1,759

Approximately $1,167,418 will be amortized from accumulated other comprehensive (income) Approximately $1,167,418 will in be2018; amortized from comprehensive loss into net period benefit cost included in accumulated this amount isother $1,104,424 related to(income) the loss into net period benefit cost in 2018; included in this amount is $1,104,424 retirement plans and $62,994 related to the post-retirement health care plan. related to the retirement plans and $62,994 related to the post-retirement health care plan. The weighted average rate assumptions used to determine benefit obligations for the defined The weighted assumptions used to determine benefit obligations for the defined benefit plan andaverage SERP arerate as follows: benefit plan and SERP are as follows: Defined Benefit Plan Defined Benefit Plan December 31, December 31, 2017 2016 2015 2017 2016 2015 Discount rate 3.75% 4.30% 4.55% Discount rate 3.75% 4.30% 4.55% Expected return on plan assets 6.00% 6.00% 6.63% Expected return on plan assets 6.00% 6.00% 6.63% Rate of compensation increase 3.60% 4.75% 4.75% Rate of compensation increase 3.60% 4.75% 4.75%

26 46

26

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial Farm Credit Financial Partners, Inc.

SERP SERP December 31, December 31, 2017 2016 2015 2017 2016 2015 N/A 4.30% 4.55% N/A 4.30% 4.55% N/A N/A N/A N/A N/A N/A N/A 4.00% 4.00% N/A 4.00% 4.00%

2017 2017Annual AnnualReport Report 2017 Annual Report

The weighted average rate assumptions used to determine net periodic benefit cost for the deThebenefit weighted average rateare assumptions fined plan and SERP as follows: used to determine net periodic benefit cost for the defined benefit plan and SERP are as follows: Defined Benefit Plan Defined Benefit Plan December 31, December 31, 2017 2016 2015 2017 2016 2015 Discount rate 4.30% 4.55% 4.10% Discount rate 4.30% 4.55% 4.10% Expected return on plan assets 6.00% 6.63% 7.25% Expected return on plan assets 6.00% 6.63% 7.25% Rate of compensation increase 4.35% 4.75% 4.75% Rate of compensation increase 4.35% 4.75% 4.75%

SERP SERP December 31, December 31, 2017 2016 2015 2017 2016 2015 4.30% 4.55% 4.10% 4.30% 4.55% 4.10% N/A N/A N/A N/A N/A N/A 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

The discount rates are calculated using a spot yield curve method developed by an independent The discount rates aremaps calculated using a spot developed by an independent actuary. The approach a high-quality bondyield yieldcurve curvemethod to the duration of the plans’ liabiliactuary. The approach maps a high-quality bond yield curve to the duration of the plans’ ties, thus approximating each cash flow of the liability stream to be discounted at an interestliabilirate ties, thus applicable approximating cash flow of the specifically to itseach respective period in liability time. stream to be discounted at an interest rate specifically applicable to its respective period in time. Plan Assets Plan Assets The asset allocation target ranges for the defined benefit plan follows the investment policy The asset target ranges for the defined benefit plan follows the investment policy adopted by allocation our retirement trust committee. This policy provides for a certain level of trustee adopted our retirement trust committee. This policy provides forallocations a certain level of trustee31, flexibility inby selecting target allocation percentages. The actual asset at December flexibility in selecting target allocation percentages. The actual asset allocations at 31, 2017, 2016, and 2015 are shown in the following table, along with the adopted range December for tar2017, 2016, and 2015 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 get allocation asset class. Thethe actual allocation percentages reflect the quoted market values at percentages year-end andby may vary during course of the year. Plan assets are generally market values at year-end andtarget may vary during course the year.ofPlan areWe generally rebalanced to a level within the range eachthe year at theofdirection theassets trustees. estabrebalanced to a level within the target range each year at the direction of the trustees. establish the expected rate of return on plan assets based on a review of past and anticipated We future lish 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 returnsplans’ on plan assets. The expected rate of return onfor plan assetspurposes. assumption also matches the pension long-term interest rate assumption used funding pension plans’ long-term interest rate assumption used for funding purposes. Total Total Allocation Allocation Range Range Asset Category Asset Category Domestic Equity Domestic Equity Domestic Fixed Income Domestic Fixed Income International Equity International Equity Emerging Markets Equity Emerging Markets Equity and Fixed Income and Fixed Income Real Assets: Gold Fund Real Assets: Gold Fund Total Total

Percentage of Plan Percentage of Plan Assets at December 31, Assets at December 31, 2017 2016 2015 2017 2016 2015

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

41 % 41 % 35 35 12 12 7 5

7

5 100 % 100 %

45 % 45 % 35 35 10 10 5 5

5

5 100 % 100 %

45 % 45 % 36 36 9 9 5 5

5

5 100 % 100 %

The assets of the defined benefit plan consist primarily of investments in various domestic equity, The assets of the defined benefit consist primarily of investments in various domestic equity, international equity and bond funds.plan These funds do not contain any significant investments in a international equity and bond funds. These funds do not contain any significant investments single entity, industry, country or commodity, thereby mitigating concentration risk. No CoBankin a single entity,or industry, orSystem commodity, thereby mitigatinginconcentration risk. No CoBank stock or debt, that of country any other institution, is included these investments. stock or debt, or that of any other System institution, is included in these investments.

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial Farm Credit Financial Partners, Inc.

2017 2017Annual AnnualReport Report 2017 Annual Report

27 47

27


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.

The following table presents major categories of defined benefit plan assets that are measured at fair value at December 31, 2017, 2016 and 2015 for each of the fair value hierarchy levels as defined in Note 3 ($ in thousands):

As of December 31, 2016

Level 1

Level 1

Level 2

Level 3

Cash

$

46

36

$

-

$

-

$

36

Domestic Equity: Large-cap Growth Fund (1)

4,285

-

-

4,285

Large-cap Equity Fund (1)

-

-

4,039

4,039

Small-cap Growth Fund

-

-

1,160

1,160

2,386

-

489

2,875

(1)

$

-

$

-

$

46

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

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)

Small-cap Growth Fund

(1)

International Equity: International fund (2) Fixed Income:

Equity and Fixed Income Fund (5) $

Total

Emerging Markets:

Total

Asset Category Cash

Level 3

Asset Category

Bond Fund (3) (4) As of December 31, 2017

Level 2

Real Assets: Hedge Funds (6) Total

$

7,004

$

13,478

$

1,055

$

21,537

International Equity: International fund (2) Fixed Income: Bond Fund

5,039

3,129

-

8,168

Emerging Markets: Equity and Fixed Income Fund

Cash

$

500

-

1,094

1,594

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

-

(6)

$

12,246

$

3,129

1,061 $

7,843

1,061 $

23,218

(1)

Small-cap Growth Fund

(1)

Level 3

Total

29

$

-

$

-

$

29

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. Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

4,350

-

-

4,350

-

3,599

-

3,599

-

916

-

916

1,878

-

-

1,878

-

7,127

-

7,127

-

935

-

935

-

-

958

958

International Equity: International fund (2)

28 48

Level 2

Domestic Equity: (5)

Real Assets: Total

Level 1

Asset Category

(3) (4)

Hedge Funds

As of December 31, 2015

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

$

6,257

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

$

12,577

$

958

2017 2017Annual AnnualReport Report

$

19,792

29 49


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. 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 $2,700,000 to our funded, qualified defined benefit pension plan in 2018. Our actual 2018 contributions could differ from the estimates noted above. Estimated Future Benefits Payments

Pension

1,567

2020

1,597

2021

1,629

2022

1,679

2023 to 2027

9,766

The following table sets forth the funding status and weighted average assumptions used to determine post retirement health care benefit obligations ($ in thousands). 2017

30 50

2016

$

375

$

308

$

232

Net liability recognized in the balance sheet

$

224

$

218

$

358

Net periodic (income) expense

$

(67)

$

(76)

$

(153)

3.75%

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

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, 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.

2015

Accumulated benefit obligation

Discount rate

Effective March 31, 2017, FPI issued 1,560,000 shares of Class B preferred stock for a total purchase price of $7,800,000. Effective December 18, 2017, FPI issued 500,000 shares of Class A preferred stock; 390,000 shares of Class B preferred stock; and 1,110,000 shares of Class C common stock for a total purchase price of $10,000,000.

A description of equities is as follows:

Year 2019

Effective November 30, 2017, FPI has been authorized to issue 5,000,000 shares each of Class A preferred stock - voting; Class B preferred stock - non-voting; and Class C common stock non-voting all at a par value of $5 per share.

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.

Expected Benefit Payments

$1,363

NOTE 14 - Equity

At December 31, 2017, FPI had 2,500,000 shares of Class A preferred stock outstanding, 1,950,000 outstanding shares of Class B preferred stock and 1,110,000 shares of Class C common stock all at a par value of $5 per share.

We expect to make the following benefit payments, which reflect expected future service, as appropriate ($ in thousands).

2018

For measurement purposes, a 7 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2017. The rate was assumed to decrease gradually to 4.5 percent for 2024, and remain at that level thereafter.

4.30%

2017 2017Annual AnnualReport Report

4.55%

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, 2017, 2016 and 2015. 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.

Farm Credit FinancialPartners, Partners,Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report

31 51


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 $667,349, $653,646, and $585,721 for the years ended December 31, 2017, 2016, and 2015, respectively. Northwest Farm Credit Services is an FPI owner customer. At December 31, 2017 future minimum lease payments were: December 31, Year

NOTES -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Amount

2018

$

664,931

2019

$

653,646

2020

$

653,646

2021

$

208,861

Total

$

2,181,084

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 16 – Related Party Transactions At December 31, 2017, FPI is owned by five Farm Credit Agricultural Credit Associations (ACA): AgCountry Farm Credit Services, ACA, Farm Credit East, ACA, Farm Credit Illinois, ACA, Farm Credit West, ACA, and Northwest Farm Credit Services, ACA. For the years ended December 31, 2017, 2016, and 2015, the Company recognized revenue of $48,029,213, $36,681,627, and $37,230,062, representing 94.1%, 92.9% and 93.8%, respectively, from transactions with its ACA owners. At December 31, 2017, 2016, and 2015, accounts receivable from such customers totaled $1,353,191, $439,009 and $702,715 representing 76.37%, 51.8% and 88.4% 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, 2017, 2016, or 2015.

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 17 - Subsequent Events

-----------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has evaluated subsequent events through March 30, 2018, which is the date the financial statements were issued or were available to be issued. There are no such events to disclose.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

32 52

Farm Credit FinancialPartners, Partners, Inc. Inc. Farm Credit Financial

2017 2017Annual AnnualReport Report


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

Profile for Farm Credit Financial Partners, Inc.

2017 Annual Report  

2017 Annual Report