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Transformations

Annual Report 2018 | Financials


Farm Credit Financial Partners is the premier provider of technology products and services to the Farm Credit System.


2018 Annual Report Our Mission

2

Letter from the President and Chairman

5

Board of Directors

8

Executive Team

9

Year in Review

10

Partner Spotlights

11

Partner Summit

18

Partner Series

20

FPI Culture and Values

24

Brand Refresh

26

FPI By the Numbers

27

Financials28

2018 Annual Report | Farm Credit Financial Partners 1


Our Mission

Supporting Farm Credit Associations with innovative, trusted technology With a partner-driven approach we’re improving lending for American agriculture with technology that is robust, reliable, intuitive.

2 Farm Credit Financial Partners | 2018 Annual Report


2018 Annual Report | Farm Credit Financial Partners 3


When is the right time for a business transformation? 4 Farm Credit Financial Partners | 2018 Annual Report


Letter from the President and Chairman

Technology delivery requires precise and consistent operational execution. To achieve desired business results, systems and data use must be maximized. Every day at FPI we keep our systems reliably running, supporting our Agricultural Credit Association (ACA) Partners as they provide essential financial services and fulfill the Farm Credit mission. To achieve this level of operational excellence, we initiated FPI 2.0 in 2017. FPI 2.0 was an enterprise-wide initiative built on our success of over 20 years supporting the Farm Credit System. Our efforts have resulted in FPI becoming a safer, more effective technology provider as we re-engineered our internal processes following industry standards in operations, controls and information security. We improved and added new features to our robust business applications suite, supporting six ACAs with 100,000 members and $43 billion in Farm Credit assets.

We are proud of our achievements and focused on the future. We are strong, stable, and strategically positioned to meet the challenges and opportunities of the next decade. We listen to our ACA Partners as they develop business strategies for the future, participating in ACA business discussions, attending management meetings, and keeping abreast of broader financial services industry trends. As technology specialists, we understand how emerging technology products and operating models provide new opportunities to develop solutions for the future.

Howard Bruck President and Chief Executive Officer Bill Lipinski Chairman of the Board Chief Executive Officer Farm Credit East

With all that accomplishment, now is the right time to move to the next stage of our business transformation.

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These are the ingredients of our business transformation that we call AgWorx by FPI: our next generation of products and services. AgWorx leverages market leading commercial software from companies like Microsoft, Fiserv, Salesforce, and nCino. Following industry best practices, FPI is configuring and maintaining these software packages for Farm Credit, ensuring integration and operation in a controlled, consistent manner. We are embracing cloud computing, partnering with providers that understand and have demonstrated proficiency working in Financial Services. At the same time, we are developing our employees to be masters of these new technologies.

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AgWorx is also a new model for delivering services that support and add value to our product solutions. We are re-engineering our customer support model to embrace these new solutions and ensure that our ACA Partners are maximizing the value of these new tools. We are enhancing communication and training programs, making sure that as we implement AgWorx, ACA employees have the appropriate information and expertise. We will continue to focus on the areas of information security and information technology controls, understanding how important they are in our industry.

As exciting as our technology product and services roadmap is, AgWorx is more than a transformation of our technology suite. AgWorx is a new business model. It allows each ACA to configure products to meet their needs while FPI ensures the integrity of the systems and data. We are providing ACAs with the flexibility to customize our partnership, while providing safe, effective, and efficient technology solutions to run their businesses. As we continue to refine AgWorx, our products and services will be even more flexible, enabling ACAs to determine which services are appropriate for them, and aligning FPI as a consultative partner of technology.


AgWorx is at the center of FPI’s business transformation. It will deliver new and enhanced services for ACA members, flexible and innovative technology for ACA staff, and exciting opportunities for FPI employees. We are paving the way for the next decade of technology service delivery for Farm Credit.

TM

2018 Annual Report | Farm Credit Financial Partners 7


Board of Directors

Bill Lipinski

Mark Littlefield

Chairman of the Board Chief Executive Officer Farm Credit East

President and Chief Executive Officer Farm Credit West

Tom Nakano

Marcus L. Knisely

Tom Tracy

Executive Vice President, Chief Administrative Officer and Chief Financial Officer Northwest Farm Credit Services

President and Chief Executive Officer AgCountry Farm Credit Services

President and Chief Executive Officer Farm Credit Illinois

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Executive Team

Howard Bruck

Kathy D’Amario

President and Chief Executive Officer

Executive Vice President and Chief Technology Officer

Sheryl Shinn

Scott Berard

Executive Vice President and Chief Information Officer

Executive Vice President and Chief Customer Officer Secretary of the Board 2018 Annual Report | Farm Credit Financial Partners 9


2018 Year in Review FPI’s technology and business practices are evolving to meet new opportunities presented in the marketplace. We are leading this innovation through the implementation of cloud-based applications, supporting our Partners in maintaining a leadership position within their industry. FPI and our ACA Partners made great strides in 2018 as we launched full-speed ahead with AgWorx, FPI’s digital transformation we envisioned last year.

AgWorx by FPI AgWorx Customer With our initial production rollout of AgWorx Customer, powered by Salesforce, FPI laid the foundation for future development efforts and the transformation of our systems and software. This transformation, implemented at different speeds for each of our Partners, allows for their unique planning, implementation and adoption methods and timelines. While our Partners planned for, trained on, and adopted AgWorx Customer, data gathering, planning, and development was underway at FPI for the next major initiative: AgWorx Lending.

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AgWorx Lending AgWorx Lending, powered by nCino and built on the Salesforce platform, is the heartbeat of our Partners’ businesses. This new tool enhances the customer-centric focus of our Partners by integrating customer relationship functions with lending capabilities. Our twenty-five year relationship with our Partner ACAs enabled and drove FPI’s development of the AgWorx Lending Gold nCino version in 2018. The integration of AgWorx Customer with AgWorx Lending will equip our Partners with the tools they need to enrich customer relationships and improve customized agricultural lending.

Information Security FPI’s Information Security Team also made great strides in 2018, securing the future of FPI’s cloudbased offerings. The move to cloud computing and the adoption of market leading commercial software has shifted the focus of our Information Security directives. FPI’s emerging products and services require flexible cybersecurity solutions that protect the organization’s data. In 2018, a new set of policies and control standards were created to drive FPI’s IT Control and Security program. Additionally, three separate third party assessments were performed that provided valuable insight and assisted FPI in developing a new cloud security strategy, setting the strategic direction for 2019 and beyond.


Preparing Our Partners for the Future

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ACA Partner Spotlights

In 2018, AgCountry Farm Credit Services (AgCountry) rolled out AgWorx Customer, powered by Salesforce, as a first step toward transforming business processes and capabilities. The move to AgWorx by FPI sparked conversations about business needs and the use of best

in class technology applications, leading to innovation that benefits the customer. AgCountry took a proactive approach to prepare for the future by creating the Business Transformation Unit (BTU). The BTU helps AgCountry take advantage of industry best practices and applications as they transform their business.

AgCountry supplemented the BTU with two FPI Implementation Analysts to promote adoption across the association and create a feedback loop with BTU. The introduction of the IA team at AgCountry is just one example of how FPI and our ACA Partners are working together to understand business needs and address these needs through technology.

 his transformation has been an opportunity to expand and sharpen T both FPI and AgCountry’s skills. We’ve seen everyone coming together: FPI, AgCountry, and consultants. We’ve come together with expertise, knowledge, and new ideas. It’s a good combination and allows us to deliver a better product for end users.” — Leland Fredman SVP Business Transformation AgCountry Farm Credit Services

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The FPI family grew in 2018 with the onboarding of Farm Credit Illinois (FCI). As an Association, FCI looks for the best collaborations in the Farm Credit System that will not only meet the organization’s needs, but also support FCI’s goals. When looking for a technology partner, FCI saw FPI as a leader and innovator in the agricultural lending space. Beyond the existing functionality offered within FPI’s product suite today, FPI’s vision for technology of the future aligned with FCI’s strategic direction.

Another key driver in FCI’s decision to partner with FPI was the power of collaboration with other ACA Partners. During onboarding, FCI experienced just how powerful this collaboration can be. The onboarding touched every aspect of FCI’s internal processes, requiring focus and engagement of employees on transition action teams. In addition to FCI and FPI onboarding teams, our ACA Partners provided education, input, and even shared staff resources who were on the ground in Illinois supporting FCI branches

during their first week using FPI products and systems. Since onboarding, FPI continues to work with FCI teams, driving adoption of FPI’s product suite and maximizing productivity within the organization. FCI is positioning itself to take on the accelerated pace of technology changes of the future.

 e believe FPI is one of the premier technology solutions in the Farm W Credit System. FPI is developing the next generation of solutions with the AgWorx suite of products. Farm Credit Illinois is excited about the potential of AgWorx. It will be a key strategic tool for our employees as they provide additional value to our customers and world-class service.” — Ryan Berg SVP, Chief Administrative Officer Farm Credit Illinois

2018 Annual Report | Farm Credit Financial Partners 13


Farm Credit East (FCE) drove a smooth ACA-wide adoption of AgWorx Customer in 2018 by planting the seeds for a successful implementation early on. In addition to putting employees at the center of FCE’s technological transformation, they had the engagement of leadership and developed a culture of continuous improvement. Driven by the desire to improve the customer experience, FCE employees quickly utilized and

adopted AgWorx Customer, powered by Salesforce. They found it to be flexible, helping them to not only meet their business needs, but also inspiring them to adapt and evolve existing business practices. With a focus on continuous improvement, FCE employees are utilizing these new tools to find creative ways to improve their processes. AgWorx Customer is the first step towards achieving FCE’s vision of building a best in class customer experience.

With FCE team members fully engaged in AgWorx Customer by the fall of 2018, the focus was shifted to FPI’s next innovative product: AgWorx Lending. FCE is moving quickly to implementation with a projected date of mid-2019, continuing them on their journey of continuous improvement.

 he transformation to AgWorx allows Farm Credit East the ability to better T align our business goals with the goals of our customers. By introducing cloud-based technologies, we are bridging the divide between business and technology. We are looking towards the future and modernizing the face of the bank through the eyes of our customers.” — Daryn Daveau VP; Director, Technology and Information Security Farm Credit East

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With the introduction of AgWorx, Farm Credit West’s (FCW) key area of focus in 2018 was preparing the organization for a successful adoption of new cloud-based technology. FCW spent much of 2018 learning the craft of change management, which helped employees with the transition to AgWorx and the new capabilities that come along with it. The first step in FCW’s change management plan was the creation of an AgWorx advisory group.

Tasked with aligning FCW business practices with AgWorx, the group was the first to experience the out of the box functionality of AgWorx Customer, powered by Salesforce. They worked to revise workflows and introduce innovative business practices for the rollout of AgWorx Customer. One advisory group member, Ryan Camara, embraced the opportunity to learn AgWorx Customer. Ryan’s enthusiasm and engagement led to him becoming a subject matter expert in AgWorx Customer and a driver of change at FCW. He led training at many of FCW’s branch

offices, engaging and exciting FCW team members of the new possibilities that come along with AgWorx Customer. In addition to the advisory group, FCW employees took the initiative to become skilled users of these new tools, earning over 300 Salesforce Trailhead badges. With the successful roll out of AgWorx Customer, FCW is setting its sights on the next major initiative: AgWorx Lending, powered by nCino.

 his change is very fast-paced but we are seeing everyone fully engaged. T We have the dedication of Farm Credit West, vendor project teams, consultants, and FPI staff. Participation has been incredible throughout this process.” — James Neeley SVP, Chief Strategy Officer Farm Credit West

2018 Annual Report | Farm Credit Financial Partners 15


Northwest Farm Credit Services (Northwest FCS) values their employees’ experience and engagement as much as their customers’ experience. As Northwest FCS prepares for the rollout of Salesforce, the new platform that will drive customer relationship management, they have been carefully analyzing the configuration of the platform to ensure these new tools will be valuable for employees and align with their needs.

Northwest FCS has also been redefining internal business processes with these new tools in mind. To align business processes and technology, Northwest FCS introduced Business Technology Advisors (BTAs) in 2018, a team of employees helping to drive change throughout the organization through change communication and leadership. BTAs are building a knowledge base and awareness around new technology to support a smooth adoption by employees.

The focus of FPI’s product and services transformation has been around business enablement for our ACA Partners. While we ensure the integrity and security of these new integrated technologies, associations like Northwest FCS are able to reimagine their business with the future in mind.

 s we drive new technology, we are trying to stay connected to what A our employees really need, and make it easier. Easier for our employees to do their jobs, and easier for customers to leverage our services.” — David Barbieri SVP and Chief Information Officer Northwest Farm Credit Services

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Fresno Madera Farm Credit (FMFC) was the most recent ACA to join the FPI family in late 2018. FMFC saw FPI as a full-service IT solution provider with a strong focus on information security, which allows associations like FMFC to focus more on servicing their customers. By partnering with FPI, FMFC is able to move from using multiple systems for data entry and storage to using an integrated solution, leading to increased efficiency across

the organization. As FMFC looked ahead to the future and at how new technologies could shape their business, they found FPI to be a fast-follower of innovative technologies and solutions. By utilizing cloud-based solutions within AgWorx, FMFC will be able to position itself for the future.

 e understand that as a farmer-owned cooperative we need to find ways W to efficiently serve our membership while creating the best-possible customer experience. AgWorx will put us in a position to leverage technology to achieve these important goals. We want to use technology to achieve our strategic objectives, and AgWorx is a confident move toward that end.” — Dan Kiggens Chief Credit Officer Fresno Madera Farm Credit

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The Power of Big Ideas

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Partner Summit The financial services industry is changing rapidly. There is increased competition, and shifts in technology and security needs. At the same time, the demographics of the agriculture industry are changing too. Together, this has driven FPI’s technology transformation over the past two years, and required FPI and our ACA Partners to collaborate and innovate. In 2018, we launched our first Partner Summit. This interactive program brought together stakeholders from each of our ACA Partners, FPI, and our Board of Directors. We learned about new challenges and opportunities our ACAs face, and discussed our collective future. The Partner Summit included strategic product discussions, new business capabilities that should be digitized, insights on the use of innovative technologies in banking, and how technology can help achieve the Associations’ strategic vision. The

program also included a re-launch of the Team FPI initiative, including the addition of the Credit/Marketplace Team FPI Group.

Industry Insights In addition to key stakeholders, the Partner Summit also brought in two experts: David O’Connell, Senior Analyst at the Aite Group, and Brad Neigel, Senior Vice President of Commercial Banking at First National Bank of Pennsylvania. During Brad’s keynote address, “Getting the Most Out of Your Salesforce Investment,” he shared his experience with Salesforce implementations at various commercial banking institutions. The impact of business integration on loan revenue and operational efficiency is an important topic for our ACAs as they implement and utilize AgWorx Customer. David’s keynote address, “Lending, Innovation, and the Final Word on Build versus Buy,” described how the financial services industry is evolving to meet new market needs. David highlighted new technology innovations ACAs can leverage to

grow, and challenged participants to look beyond the traditional ways of doing business. He also discussed competition with emerging fin-techs, artificial intelligence, user experience, and digital transformation.

Innovation Challenge The Innovation Challenge, an interactive breakout session, was a competition to create the most innovative ideas around a business problem central to Farm Credit. Each team had 45 minutes to brainstorm an idea, design a framework and implemention plan within an ACA, and identify its business value. The 2018 competition winner, Northwest Farm Credit Services, took home the Innovation Challenge trophy.

2018 Annual Report | Farm Credit Financial Partners 19


Deepening Relationships with our Partners

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Partner Series For over 100 years, the Farm Credit System (FCS) has provided financial services that meet the unique needs of the agricultural industry—an industry that affects more lives, every day, than any other. We are proud to be a part of this system, delivering the trusted technology solutions our Partners use to help American agriculture thrive. When a lending transaction is seamless and intuitive, we have done our job. Providing the technology platform for financial interactions starts with an intimate understanding of our Partners’ unique relationships with their customers, whether they’re dairy farmers in rural New York State or wineries in northern California.

customers. It‘s how we create products and services that meet our Partners’ needs. Last year, the FPI Partner Series program was born. This program provides a holistic learning experience about the FCS for our employees through a combination of guest speakers from our ACA Partners, dynamic video and informational content curated from our Partners and the FCS, and immersive farm visit experiences. As we look ahead, we will continue to drive innovation through a sophisticated and very personal understanding of our Partners.

Farming doesn’t happen from behind a desk, nor should financial transactions. Our foundation? Cultivating our employees’ knowledge of the FCS, our Partners, and their

Our ACA Partner loan officers aren’t just loaning customers money. They are helping their customers succeed.” — Katie Maloney FPI Product Manager 2018 Annual Report | Farm Credit Financial Partners 21


An Immersive Farm Experience A group of FPI employees put work on hold for a day in December and headed to location with loan officer Bob Wigmore of Farm Credit East. Bob served as a tour guide for the group as they visited three Massachusetts farm operations: Lashway Lumber, Nourse Farms,

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and Barstow’s Longview Farm. Each stop on the tour gave FPI employees a look into a day-in-the-life of a Farm Credit East customer. FPI employees left the farm visits with a new understanding of farmer-customers. They were inspired by the personal stories, ingenuity, innovation, and technology

used on each farm. Just as important, they witnessed Bob’s passion and deep understanding of his customer’s business operations and history, a relationship unique to the FCS. This kind of passion drives the work we do every day at FPI. When our ACA Partners can support their customers successfully, we succeed too.


Our technology makes the lending process simple, so that loan officers like Bob can focus on helping to make their customers’ businesses not only viable but vibrant.” — Laura Hecker FPI Project Management Office Director

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The People Behind the Technology

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FPI Culture & Values At FPI, we’re not just developers, software engineers, and business analysts. Our nearly 250 employees are people who care deeply about the Farm Credit Associations we serve, and about each other.

The FPI community One of our core company values is teamwork: creating a caring organization that fosters diversity of thought, collaboration, and innovation. None of it happens by sitting at a desk all day. Throughout the year, you will find us cooking for chili competitions, outside on the lawn playing whiffle ball, or walking a lap on our outdoor trails between meetings. Our annual events—a giant St. Patrick’s Day celebration, lunch to celebrate Cinco de Mayo, a pumpkin-carving contest at Halloween and holiday party— provide opportunities for employees to have fun together and connect in a different way.

Developing our youth

Celebrating our people

Each April, we welcome employee’s school-aged children to our Agawam, MA office for FPI Kids Day. Children engage in coding exercises, robotics activities, and meet small farm animals. It’s a busy day full of energy and excitement as kids get a peek into our world of technology and its connection to farming.

Our Going the Extra Mile (GEM) awards is an opportunity to recognize and appreciate fellow employees. Last year, we presented 159 employees with GEM awards to remind each other how important going the extra mile is—not only for us, but also for our ACA Partners.

Giving to others Each August, we rally together to raise money for local causes. It’s a competitive month filled with ping-pong tournaments, dunk tanks, races to collect spare change, and baked good sales. Last year, we raised nearly $15,000 for our local Open Pantry Community Services, which works to improve the quality of life for those who are hungry, homeless, or disadvantaged.

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Brand Refresh

AgWorx by FPI is a reinvention of our products as well as our business model. One that provides more functionality and flexibility to our ACA partners. We think this is also a great time to refresh our look. We are excited to partner with Boston Interactive, who helped us with messaging as well as a website redesign. You will notice a new logo and overall brand language. The new look and feel serve to position FPI as a technology backbone in the Farm Credit System. A messaging document was also developed to help us speak about ourselves in the same way, to have one clear concise tone that defines us. 26 Farm Credit Financial Partners | 2018 Annual Report


FPI By the Numbers

$43B

Over

2,500

100,000

250

Employees

In Assets Under Management

Borrowers

Users Across 6 ACA Partners

2018 Annual Report | Farm Credit Financial Partners 27


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, 2018. Comparisons with prior years are included. The discussion and analysis should be read in conjunction with the accompanying financial statements, footnotes, and other sections of this report. The accompanying financial

statements were prepared under the oversight of our Audit Committee. The Management’s Discussion and Analysis includes the following sections: Business Overview 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 Agricultural Credit Association (ACA) owned. 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 28 Farm Credit Financial Partners | 2018 Annual Report


by our customer-owners to support their lending and financial services needs. In addition to core services, we provide custom technology solutions to address individual customer needs. Beyond core and customer 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 Following the successes of the FPI 2.0 program initially begun in 2017 to adopt industry best practices in operations, controls and information security areas, FPI continued to invest and focus in these areas in 2018. During the year, investments were made in key areas such as data backup technologies, information and network security, and the adoption of additional industry standard IT service management methodologies. The result is a more effective and efficient, process-driven organization with a strong commitment to controls and information security.

In addition to our focus on process and operations, FPI worked closely with our ACA Partners to develop and begin work on programs to implement a bold new strategy and business model designed to support our Partners’ individual business strategies as they look to the future. This strategy is the AgWorx business model. AgWorx was conceived in 2017 and initiated in 2018 with investments in industry leading technologies. AgWorx Customer, powered by Salesforce, was launched in 2018 and AgWorx Lending, powered by nCino is underway with initial implementations planned for mid-2019. This work will continue into 2020 and 2021 with a focus on the full next generation suite of FPI products including AgWorx Financials and other key products. The end result will be a cloud based platform that will provide integrated industry leading technologies and increased flexibility for our Partners to support their individual businesses. FPI also completed the onboarding of two new ACA Partners during 2018 - Farm Credit Illinois (FCI) and

Fresno Madera Farm Credit (FMFC). FPI teams worked closely with teams from both of our new partners throughout the onboarding processes and both implementations were completed on schedule with FCI going live on FPI’s systems in August, and FMFC following in October. The accomplishments achieved in 2018 related to process, strategy, and new product development, together with the growth in our customer base, facilitated the establishment of the vision, plans, and resources that position FPI for success in 2019 and beyond.

Results of Operations During 2018, FPI achieved operating and net income in line with plan and favorable to prior year. Carefully managed operating expenses, capital spending, and project spending led to FPI’s financial performance exceeding targets in these areas. Additionally, total equity increased over prior year and liquidity remains strong. 2018 Annual Report | Farm Credit Financial Partners 29


Net Operating Income Net operating income increased to $241.9k in 2018 from $188.3k in 2017, an increase of $53.6k or 28.4%. Total revenues increased to $60,467.2k in 2018 from $51,039.3k in 2017, an increase of $9,427.9k, or 18.5%. Revenue growth was primarily driven by the addition of FCI and FMFC to the FPI family. The increase in core service revenue is primarily driven by the postimplementation impact of FCI and FMFC while the increase in custom services revenues over prior year is driven by implementation related revenues for the two new partners. Offsetting the increased revenues are related increased operating expenses. Total operating expenses increased to $60,225.3k in 2018 from $50,850.9k in 2017, an increase of $9,374.4k or 18.4%. The majority of the increase is in purchased services expense and is driven by increased contract labor costs utilized in the onboarding process for FCI and FMFC. These costs are recovered in implementation related revenues. Also contributing are increased equipment costs which are related to investments in computing, storage and licensing capacity required to support growth during the year.

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These costs are recovered in core fee revenues.

Net Income FPI is reporting net income for 2018 in the amount of $181.5k as compared to a loss of ($962.1k) in 2017. The 2017 loss was driven by two non-operating factors, the ($874.4k) negative impact on net deferred tax assets and earnings of the 2017 Tax Cuts and Jobs Act and a ($348.3k) loss related to the disposal of capitalized software.

Liquidity and Funding Sources FPI operates with the following primary sources of funding: 1. Revenue for core services, 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, 2018. 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 customer-owners. By year-end 2018, FPI had successfully delivered key strategic projects, FPI 2.0 initiatives, and strong operational performance. FPI enters 2019 with strong financial resources, well positioned products, and solid, high-quality and increasingly efficient operations.

Ownership and Capital As of December 31, 2018, FPI had five owners with stock investments totaling $27.8 million. Total equity at December 31, 2018 equaled $25.3 million, up $1.1 million from 2017. The increase in equity reflects the impact of the following items. • Accumulated other comprehensive loss was reduced by $0.9M due to a reduction in FPI’s employee benefit liabilities. • Retained earnings increased by $0.2M during the year. FPI’s capital plan provides for continued investment in FPI’s


strategic products as well as ongoing investments in operations, controls and information security. Capital remains adequate for continued operations and approved projects.

Governance Board of Directors The CEO or CEO-designee 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:

Audit Committee 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,

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.

Compensation Committee • 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.

• the establishment and 2018 Annual Report | Farm Credit Financial Partners 31


Independent Auditor's Report Audit Committee Farm Credit Financial Partners, Inc. Report on the Financial Statements We have audited the accompanying financial statements of Farm Credit Financial Partners, Inc. (the Company), which comprise the balance sheets as of December 31, 2018, 2017, and 2016, the related statements of operations and comprehensive income (loss), accumulated other comprehensive loss, changes in equity and cash flows for each of the years then ended, and the related notes to the financial statements (collectively, the financial statements). Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Farm Credit Financial Partners, Inc. as of December 31, 2018, 2017, and 2016, and the results of its operations and its cash flows for each of the years then ended in accordance with accounting principles generally accepted in the United States of America.

Boston, Massachusetts March 29, 2019

1

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Farm Credit Financial Partners, Inc. Balance Sheets As of December 31, 2018, 2017, and 2016 December 31, 2018

2017

2016

$14,893,055

$16,904,629

$1,739,095

618,913

1,142,133

864,587

Assets Current assets: Cash and cash equivalents Accounts receivable Prepaid assets

5,056,441

3,100,072

2,291,768

20,568,409

21,146,834

4,895,450

Fixed assets, net

6,341,801

5,783,476

5,246,761

Intangible assets, net

8,859,352

9,921,264

9,051,701

Deferred tax asset, net

1,186,741

1,612,574

3,366,091

Total current assets Long-term assets:

Other long-term assets Total long term-assets Total assets

1,377,245

1,063,340

1,270,464

17,765,139

18,380,654

18,935,017

$38,333,548

$39,527,488

$23,830,467

$4,277,285

$4,433,274

$

1,290,519

1,149,032

1,083,301

599,768

327,483

1,500,855

6,167,572

5,909,789

5,975,448

6,108,987

8,900,295

11,583,656

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

3,391,292

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

798,751

619,416

937,078

6,907,738

9,519,711

12,520,734

13,075,310

15,429,500

18,496,182

Class A preferred stock, $5.00 par value, 5,000,000 shares authorized, 2,500,000 shares issued and outstanding as of December 31, 2018 and 2017; 2,000,000 shares authorized, issued and outstanding as of December 31, 2016

12,500,000

12,500,000

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, 2018 and 2017; 2,000,000 shares authorized, 0 issued and outstanding as of December 31, 2016

9,750,000

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, 2018 and 2017; 2,000,000 shares authorized, 0 issued and outstanding as of December 31, 2016

5,550,000

5,550,000

—

(4,144,839)

(5,088,547)

(5,943,596) 1,277,881

Total long-term liabilities Total liabilities Equity

Accumulated other comprehensive loss Accumulated earnings Total equity Total liabilities and equity

1,603,077

1,386,535

25,258,238

24,097,988

5,334,285

$38,333,548

$39,527,488

$23,830,467

The accompanying notes are an integral part of these statements. 2018 Annual Report | Farm Credit Financial Partners 33


Farm Credit Financial Partners, Inc. Statements of Operations and Comprehensive Income (Loss) Years ended December 31, 2018, 2017, and 2016 December 31, 2018

2017

2016

Revenue Core and custom services

$60,467,204

$51,039,307

$39,495,755

306,767

60,467,204

51,039,307

39,802,522

Salaries and employee benefits

29,287,425

27,405,782

22,920,848

Purchased services

13,719,067

8,194,603

3,851,832

Occupancy and equipment

10,846,049

9,284,370

8,306,690

Other operating expenses

6,372,790

5,966,174

4,620,221

Total operating expenses

60,225,331

50,850,929

39,699,591

Net income from operations

241,873

188,378

102,931

195,608

55,704

38,823

Research and development services Total revenue Operating Expenses

Other Income/(Expense) Interest income Interest expense

(240)

(26,001)

(348,321)

11,900

930

8,659

Total other (expense) income

181,507

(291,927)

47,482

Income (loss) before income taxes

423,380

(103,549)

150,413

Income tax provision

206,838

858,531

17,629

Net income (loss)

216,542

(962,080)

132,784

Loss on disposal of fixed assets Loss on disposal of intangible assets Other gains

Other comprehensive income (loss): Net change in retirement plan liabilities Comprehensive income (loss)

943,708

1,925,783

(182,469)

$1,160,250

$963,703

$(49,685)

The accompanying notes are an integral part of these statements. 34 Farm Credit Financial Partners | 2018 Annual Report


Farm Credit Financial Partners, Inc. Statements of Cash Flows Years ended December 31, 2018, 2017, and 2016 December 31, 2018

2017

2016

$216,542

$(962,080)

$132,784

7,055,847

6,042,172

5,360,526

26,001

348,321

Cash Flows from Operating Activities Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Loss on disposal of fixed assets Loss on disposal of intangible assets Changes in operating assets and liabilities: Decrease (increase) in accounts receivable

523,220

(277,546)

(69,825)

Decrease (increase) in deferred tax asset, net

425,833

1,753,517

(232,614)

(2,270,274)

(601,180)

343,177

451,620

(1,491,034)

688,609

(155,989)

1,041,982

(769,383)

(Increase) decrease in prepaid and other assets Increase (decrease) in deferred revenue and customer deposits (Decrease) increase in accrued expenses and other liabilities (Decrease) increase in accrued employee benefits, net

(1,706,114)

(691,847)

178,064

4,566,686

5,162,305

5,631,338

Purchase of fixed assets

(4,206,655)

(3,925,254)

(2,982,942)

Capitalized software development costs

(2,371,605)

(3,871,517)

(4,515,916)

Net cash used in investing activities

(6,578,260)

(7,796,771)

(7,498,858)

Net cash provided by operating activities

Cash Flows from Investing Activities

Cash Flows from Financing Activities Advances on notes payable with CoBank, ACB

3,173,712

4,156,874

2,833,336

(3,173,712)

(4,156,874)

(2,833,336)

Proceeds from issuance of Class A and B preferred stock

12,250,000

Proceeds from issuance of Class C common stock

5,550,000

Net cash provided by financing activities

17,800,000

(2,011,574)

15,165,534

(1,867,520)

Repayment of notes payable to CoBank, ACB

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

16,904,629

1,739,095

3,606,615

$14,893,055

$16,904,629

$1,739,095

Interest

$

$240

$—

Income taxes

$38,800

$189,300

$195,300

Change in minimum pension liability

$943,709

$1,925,783

$(182,469)

Disposal of fully depreciated fixed assets

$11,084,367

$185,555

$10,473,414

Cash and cash equivalents at end of year

Supplemental Cash Information: Cash paid during the year for:

The accompanying notes are an integral part of these statements. 2018 Annual Report | Farm Credit Financial Partners 35


Farm Credit Financial Partners, Inc. Statements of Changes in Equity December 31, 2018, 2017, and 2016 Accumulated Class A

Class B

Preferred Stock Shares Balance as of January 1, 2016

Class C

Preferred Stock

Amount

Shares

2,000,000 $10,000,000

Other

Common Stock

Amount

Shares

Comprehensive Accumulated

Amount

— $

$

Loss

Earnings

$ (5,761,127)

Total

$ 1,145,097 $ 5,383,970

Net income

132,784

132,784

Other comprehensive loss

(182,469)

(182,469)

2,000,000

10,000,000

(5,943,596)

1,277,881

5,334,285

Net loss

(962,080)

(962,080)

Other comprehensive income

1,925,783

1,925,783

Reclassification in connection with adoption of ASU 2018-02 (Note 10)

Balance as of December 31, 2016

(1,070,734)

1,070,734

Issuance of Class A preferred stock

500,000

2,500,000

2,500,000

Issuance of Class B preferred stock

1,950,000

9,750,000

9,750,000

Issuance of Class C common stock

1,110,000

5,550,000

5,550,000

Balance as of December 31, 2017

2,500,000

12,500,000

1,950,000

9,750,000

1,110,000

5,550,000

(5,088,547)

1,386,535

24,097,988

Net income

216,542

216,542

Other comprehensive income

943,708

943,708

1,950,000 $ 9,750,000

1,110,000

$ 5,550,000

$ (4,144,839)

Balance as of December 31, 2018

2,500,000 $12,500,000

The accompanying notes are an integral part of these statements. 36 Farm Credit Financial Partners | 2018 Annual Report

$ 1,603,077 $ 25,258,238


Farm Credit Financial Partners, Inc. Accumulated Other Comprehensive Loss Years ended December 31, 2018, 2017, and 2016 The components of Accumulated Other Comprehensive Loss are as follows:

Balance as of January 1, 2016 Change in period Tax effect of change in period Balance as of December 31, 2016 Change in period Tax effect of change in period

Minimum

Postretirement

SERP

Pension Liability

Liability

Liability

Total

$(5,306,965)

$(370,322)

$(83,840)

$(5,761,127)

313,464

63,705

(676,017)

(298,848)

(112,464)

(23,454)

252,297

116,379

(5,105,965)

(330,071)

(507,560)

(5,943,596)

1,949,847

(72,586)

809,645

2,686,906

(302,085)

(478,002)

18,964

Tax effect of change in federal tax rate (Note 10)

(1,005,720)

(65,014)

Balance as of December 31, 2017

(761,123) (1,070,734)

(4,639,840)

(448,707)

(5,088,547)

Change in period

1,198,453

31,676

1,230,129

Tax effect of change in period

(280,750)

(5,671)

(286,421)

$(3,722,137)

$(422,702)

$(4,144,839)

Balance as of December 31, 2018

$

The accompanying notes are an integral part of these statements. 2018 Annual Report | Farm Credit Financial Partners 37


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

NOTE 2 – Summary of Significant Accounting Policies A. Basis of Presentation 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. 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. dollardenominated 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. 38 Farm Credit Financial Partners | 2018 Annual Report


D. Accounts Receivable 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, 2018, 2017, and 2016, there was no allowance for uncollectable 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, 2018, 2017, and 2016. E. 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 $154,314, $636,906, and $504,192 at December 31, 2018, 2017, and 2016. F. Fixed Assets Fixed assets are carried at cost less accumulated depreciation. Depreciation is computed 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. 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 development 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 sheets and disclosed in more detail in Note 5. 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. 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. 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 in an investment account maintained for the employee. Costs for this plan are expensed as funded and recorded as employee benefit expense. Company employees are also eligible to participate in an employee savings plan. The Company matches a certain percentage of employee contributions with costs being expensed as funded. These costs are recorded as employee benefit expense. 2018 Annual Report | Farm Credit Financial Partners 39


The company also provides certain health care and life insurance benefits to employees. Costs for these benefits are recorded as employee benefit expense in the period in which they are incurred. I. Income Taxes The company is organized as a C Corporation for Federal Income Tax purposes and files a form 1120-C. We use the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company also reduces deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This methodology requires estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities. Valuation allowances are recorded against the gross deferred tax assets that management believes, after considering all available positive and negative objective evidence, historical and prospective, with greater weight given to historical evidence, that it is more likely than not that these assets will not be realized. In addition, the Company is required to recognize in the financial statements, those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized. The Company recognizes interest and penalties as a component of the provision for income taxes in the accompanying statements of income. The Company does not believe it has any material uncertain tax positions. Interest and penalties paid were $0 for the year ending December 31, 2018, $1,126 for the year ending December 31, 2017 and interest and penalties refunded were $4,193 for the year ending December 31, 2016. The Company is no longer subject to federal, state, and local income tax examinations by tax authorities for years prior to 2014. J. Revenue Recognition The Company derives revenue from core services, custom services, and research and development services from its customers, all of which are lending associations in the Farm Credit System. Core and extended core services include credit delivery and management systems, core infrastructure and security, financial accounting and loan accounting services, management reporting, electronic commerce, legal support, and custom solutions. Customer solutions includes a retained technology services team dedicated to any specific projects required by the customer over a period of time which is typically one year. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. FPI has determined that its core and extended core 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. 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, 2018, 2017, and 2016, 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. See Note 16 for concentrations of revenue and accounts receivable.

40 Farm Credit Financial Partners | 2018 Annual Report


L. Accumulated Other Comprehensive Income 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 8) 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 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, 2018, 2017, and 2016 there were no impairment losses recognized for long-lived assets. O. Recently Issued or Adopted Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity is expected to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation. ASU 2014-09, as deferred one year by ASU 2015-14, will be effective for annual reporting periods beginning after December 15, 2018 using either of two methods: (a) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined in ASU 2014-09. The Company has not yet selected a transition method and is currently evaluating the impact of the pending adoption of ASU 2014-09 on the financial statements. In 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 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, 2018. 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. In August 2018, the Financial Accounting Standards Board (FASB) issued guidance entitled “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Cost.” 2018 Annual Report | Farm Credit Financial Partners 41


The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this guidance. This guidance becomes effective for interim and annual periods beginning after December 15, 2020. The guidance also requires an entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. It further specifies where to present expense and payments in the financial statements. Early adoption is permitted. The guidance is to be applied on a retrospective or prospective basis to all implementation costs incurred after the date of adoption. The Company is evaluating the impact of adoption on the Company’s financial condition and its results of operations. In August 2018, the FASB issued guidance entitled “Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans.” The guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance becomes effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The guidance is to be applied on a retrospective basis for all periods. The adoption of this guidance will not impact the Company’s financial condition or its results of operations, but will impact the employee benefit plan disclosures.

NOTE 3 – Prepaid Assets Prepaid assets consist of the following: December 31,

2018

2017

2016

$4,622,660

$2,040,310

$1,702,483

Unbilled revenue

154,314

636,906

504,192

Federal and state taxes

237,889

375,424

83,142

41,578

47,432

1,951

$5,056,441

$3,100,072

$2,291,768

Prepaid vendor invoices

Other

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

2018

2017

2016

$15,947,377

$12,691,805

$11,162,903

11,919,745

21,781,033

19,705,397

1,906,102

2,204,100

2,068,939

29,773,224

36,676,938

32,937,239

23,431,423

30,893,462

27,690,478

$6,341,801

$5,783,476

$5,246,761

For the year ended December 31, 2018 there were disposals of $11,110,369 with a realized loss of $26,001. For the years 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 $3,622,330 $3,388,539, and $3,214,145 in 2018, 2017, and 2016 respectively.

42 Farm Credit Financial Partners | 2018 Annual Report


NOTE 5 – Intangible Assets Intangible assets consisted of capitalized computer software costs, as follows: December 31, Capitalized Software Less: Accumulated amortization

2018

2017

2016

$20,930,469

$18,558,864

$15,035,668

12,071,117

8,637,600

5,983,967

$8,859,352

$9,921,264

$9,051,701

Capitalized computer software costs are amortized over a five-year useful life. Amortization expense associated with these assets totaled $3,433,517, $2,653,633, and $2,146,381 for the years ended December 31, 2018, 2017, and 2016, respectively. As of December 31, 2018, 2017 and 2016, there was $1,114,276, $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. 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: 2019

$2,999,889

2020

2,338,742

2021

2,002,735

2022

1,202,338

2023

315,648

Total

$8,859,352

NOTE 6 – Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following: December 31, Accrued expenses Trade payables Taxes payable

2018

2017

2016

$4,053,555

$3,487,884

$2,705,891

204,662

923,708

668,937

19,068

21,682

16,464

$4,277,285

$4,433,274

$3,391,292

2018 Annual Report | Farm Credit Financial Partners 43


NOTE 7 – Accrued Employee Benefits Accrued employee benefits consist of the following: December 31, 2018

2017

2016

$1,093,453

$1,014,062

$923,490

197,066

134,970

159,811

1,290,519

1,149,032

1,083,301

5,881,574

8,675,604

10,122,502

227,413

224,211

218,301

SERP

1,238,552

Other

480

4,301

6,108,987

8,900,295

11,583,656

7,399,506

$10,049,327

$12,666,957

Current liabilities: Annual leave Health reserve Long-term liabilities: Pension Post-retirement benefits

$

NOTE 8 – Captive Insurance Company In conjunction with other System entities, the Company jointly owns the Farm Credit System Association Captive Insurance Company (the Captive). The Captive is an insurer that provides insurance services such as directors’ and officers’ liability, fiduciary liability, bankers bond and other property and liability insurance for the member associations, which includes three farm credit banks, one agricultural credit bank, four farm credit service corporations and 69 associations. The carrying value of the investment totaled $551,273, $559,547 and $563,734 at December 31, 2018, 2017, and 2016 respectively and is included in other long-term assets on the accompanying balance sheets. Premiums paid in those respective years to the captive totaled $239,837, $201,541 and $198,279 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.

NOTE 9 – Notes Payable to CoBank, ACB Notes payable to CoBank, ACB represent borrowings by FPI to fund normal operations and capital expenditures. Under terms of the financing agreement with CoBank, which provides FPI with a $3,750,000 revolving line of credit, substantially all FPI’s assets are assigned to CoBank as primary collateral for funds advanced. During the normal course of business this line is used to settle transactions between FPI and CoBank. Charges on the line are simultaneously settled from cash accounts. There were no borrowings from CoBank outstanding as of December 31, 2018, 2017 or 2016. Borrowings made and repaid during the year as part of the settlement process were $3,173,712, $4,156,874, and $2,833,336 for the years ended December 31, 2018, 2017 and 2016, respectively. Interest expense incurred to CoBank for the years ended December 31, 2018, 2017 and 2016 was $0, $240, 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, 2018 was 4.36%. The line of credit matures on July 31, 2019.

44 Farm Credit Financial Partners | 2018 Annual Report


NOTE 10 – Income Taxes The provision for income taxes consisted of the following: December 31, 2018

2017

2016

$67,079

$(133,863)

346

67,425

(133,863)

78,499

113,412

988,503

(130,450)

26,001

3,891

69,580

139,413

922,394

(60,870)

$206,838

$858,531

Current: Federal State Total

$

78,499

Deferred: Federal State Total Total provision for income taxes

$

17,629

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, 2018 Federal tax at statutory rate

$

2017

2016

88,910

($35,506)

State tax, net

20,814

2,568

45,923

Permanent differences

32,093

15,528

(90,347)

Accrual to return

67,079

383

10,653

874,435

(2,058)

1,123

260

Revaluation of federal tax rate Other

$206,838

$

858,531

$

51,140

$

17,629

Deferred tax assets and (liabilities) resulted from the following: December 31, 2018 Annual leave

$

2017

278,898

$

2016

254,568

$

344,561

Pension

1,500,165

2,177,906

4,238,889

Operating loss carryforward

1,456,585

151,139

97,312

Postretirement

58,004

56,286

81,450

Health reserve

49,145

32,763

58,507

357,768

237,708

699,407

130

18

18

3,700,695

2,910,388

5,520,144

Depreciation

(2,513,954)

(1,297,814)

(2,154,053)

Gross deferred tax liabilities

(2,513,954)

(1,297,814)

(2,154,053)

Deferred revenue Charitable contributions Gross deferred tax assets

Net deferred tax asset

$

1,186,741

$

1,612,574

$

3,366,091

2018 Annual Report | Farm Credit Financial Partners 45


Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may limit in the future a significant portion of the amount of net operating loss carry forwards which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any annual limitation is determined based on the Company’s value and certain other factors on the date of ownership change. Management has determined that it is more likely than not that the Company will recognize the benefits of federal and state deferred tax assets within the allowable time period, despite the ownership changes and, as a result, has determined that no valuation allowance related to deferred tax assets is necessary as of December 31, 2018, 2017 and 2016. FPI has federal net operating loss carry forwards of $6,335,604 and state net operating loss carry forwards of $2,027,136. Federal NOLs of $2,414,015 were earned in 2017 or prior and those, as well as the state NOLs, expire at various dates through 2020. Federal NOLs of $3,921,589 that were earned in 2018 will be available to offset 80% of taxable income for an indefinite period of time, until fully utilized. 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. 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. Under Staff Accounting Bulletin 118 (“SAB 118”), our preliminary estimate of the TCJA and the remeasurement of our deferred tax assets and liabilities was finalized after 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. The one-year remeasurement period allowed under SAB 118 ended December 31, 2018 and the Company did not make any significant changes to the provisional amounts recorded. The effective tax rate was 48.85 percent for the year ended December 31, 2018. Excluding the impact of the $874,435 net adjustment, the effective tax rate was 16.07 percent in 2017 and 11.72 percent in 2016. 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 11 – Fair Value Measurements The Company follows the guidance in FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2: Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. 46 Farm Credit Financial Partners | 2018 Annual Report


Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified between levels. Assets and liabilities measured at fair value on a nonrecurring basis are recognized at fair value subsequent to initial recognition when they are deemed to be other-than-temporarily impaired. As of December 31, 2018, 2017 and 2016, the Company does not have any assets or liabilities subject to measurement at fair value on a nonrecurring basis. As of December 31, the Company’s fair value hierarchy for its financial assets that are carried at fair value was as follows: Assets at Fair Value as of December 31, 2018 Money market accounts

Total

Level 1

Level 2

Level 3

$12,758,812

$12,758,812

$—

$—

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

Total

Level 1

Level 2

Level 3

$12,112,138

$12,112,138

$—

$—

Assets at Fair Value as of December 31, 2016 Money market accounts Assets held in trust

Total

Level 1

Level 2

Level 3

$246,752

$246,752

$—

$—

182,727

182,727

$429,479

$429,479

$—

$—

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

NOTE 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, 2018, 2017, and 2016 the Company has recorded expense, net of employee withholdings or contributions, of approximately $1,891,788, $1,621,700 and $1,511,603. Included in accrued expenses and other liabilities in the balance sheets as of December 31, 2018, 2017, and 2016 are self-insurance reserves totaling $197,066, $134,970 and $159,811.

2018 Annual Report | Farm Credit Financial Partners 47


NOTE 13 – Employee Benefit Plans Employee Savings Plan FPI participates in the CoBank Employee Savings Plan (Employee Savings Plan), a deferred compensation plan in which FPI matches a certain percentage of employee contributions. The Employee Savings Plan requires FPI to match 100 percent of employee contributions up to a maximum employee contribution of six percent of base salary. Employer contributions charged to expense were $1,182,959 in 2018, $1,115,990 in 2017 and $969,499 in 2016. Defined Contribution Retirement Plan FPI participates in the CoBank defined contribution qualified retirement plan, a noncontributory, multiple-employer plan (defined contribution plan). Under this plan for employees hired January 1, 2005 and later, the employer contributes a percentage of each employee’s salary, based on years of service, to an account maintained for the employee. Employer contributions charged to expenses were $583,960 in 2018, $530,785 in 2017 and $402,152 in 2016. Defined Benefit Retirement Plan FPI participates in the CoBank defined benefit qualified retirement plan (defined benefit plan). This plan covers FPI employees hired before January 1, 2005. Benefits are based on years of service and compensation levels during the years of employment. It is the policy of the participating employers to fund at least the minimum required by the Employee Retirement Income Security Act (ERISA). FPI’s contributions during 2018, 2017 and 2016 were consistent with this policy. Plan assets are stated at fair value and are primarily invested in publicly traded stocks and bonds, real estate and contracts with insurance companies. Supplemental Executive Retirement Plan Beginning in 2010 FPI entered into a noncontributory, nonqualified supplemental executive retirement plan (SERP). The plan covered one employee. The Company held assets in a trust fund related to the SERP; however, such funds remained Company assets and were not included as plan assets in accompanying disclosures but rather included in the other long-term asset balance in the accompanying balance sheets. During 2017, this plan was fully settled and the plan was closed. Post-Retirement Health Care Benefit Plan FPI provides certain health care and life insurance benefits to employees if they reach normal retirement age while working for FPI (the post-retirement health care plan). The authoritative accounting guidance requires the accrual of the expected cost of providing postretirement benefits other than pensions (primarily healthcare benefits) to an employee and an employee’s beneficiaries and covered dependents during the years that the employee renders service necessary to become eligible for these benefits. These accrued expenses/(benefits) of $34,879, ($66,676) and ($75,912) were classified as salaries and employee benefits on FPI’s Statements of Operations and Comprehensive Income (Loss) statements during 2018, 2017 and 2016, respectively.

48 Farm Credit Financial Partners | 2018 Annual Report


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

Other Post-Retirement Benefits

December 31,

December 31,

2018

2017

2016

2018

2017

2016

Change in projected benefit obligation Benefit obligation at beginning of year

$

31,893 $

32,898 $ 30,368

$

224 $

218 $

358

Service cost

678

745

841

8

9

18

Interest cost

1,171

1,336

1,339

8

9

16

87

(2,251)

874

708

15

113

(25)

Plan participant contributions

49

23

11

Transfers

(1,261)

(3,960)

(445)

(77)

(148)

(160)

$

30,230 $

31,893 $ 32,898

$

227 $

Fair value of plan assets at beginning of year $

23,218 $

21,537 $ 19,792

$

— $

— $

Plan amendments Actuarial loss (gain), net

Benefits paid Benefit obligation at end of year

224 $218

Change in plan assets Actual return on plan assets

(309)

3,283

1,190

Employer contributions

2,700

2,358

1,000

28

125

149

Plan participant contributions

49

23

11

Transfers

(1,261)

(3,960)

(445)

(77)

(148)

(160)

$

24,348 $

23,218 $ 21,537

$

$

(5,882) $

(8,675) $ (11,361)

$

Benefits paid Fair value of plan assets at end of year

— $— $

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

(227) $

(224) $

(218)

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

2018

Retirement Plans

Other Post-Retirement Benefits

December 31,

December 31,

2017

2016

2018

2017

2016

$27,687 $28,308 $28,730 $227 $224 $

218

2018 Annual Report | Farm Credit Financial Partners 49


The accumulated benefit obligation is the actuarial present value of the benefits accrued for service rendered to that date based on current salary levels. The projected benefit obligation is the actuarial present value of the benefits accrued for service rendered to that date based on estimated future salary levels. Components of net periodic benefit cost and other amounts recognized in other comprehensive income are as follows ($ in thousands): Retirement Plans December 31, 2018

2017

2016

Periodic benefit cost Service cost

$

678

Interest cost

$

745

$

841

1,170

1,336

1,339

(1,397)

(1,437)

(1,409)

Prior service cost

213

221

225

Net actuarial loss

440

575

427

Expected return on plan assets Amortization of unrecognized:

$

1,104

$

1,440

$

1,423

Settlement expense/(income)

903

Curtailment expense/(income)

89

$

1,104

$

2,432

$

1,423

$

(545)

$

(972)

$

927

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

87

(213)

(310)

(225)

Amortization of: Prior service cost/(credit) Net actuarial (gain)/loss

(440) $

(1,477)

(1,198)

$

(2,759)

(427) $

362

Approximately $698,008 will be amortized from accumulated other comprehensive (income) loss into net period benefit cost in 2019; included in this amount is $635,342 related to the retirement plans and $62,666 related to the post-retirement health care plan. The weighted average rate assumptions used to determine benefit obligations for the defined benefit plan and SERP are as follows: Defined Benefit Plan

SERP

December 31,

December 31,

2018

2017

2016

2018

2017

2016

Discount rate

4.45%

3.75%

4.30%

N/A

N/A

4.30%

Expected return on plan assets

6.00%

6.00%

6.00%

N/A

N/A

N/A

Rate of compensation increase

3.60%

3.60%

4.75%

N/A

N/A

4.00%

50 Farm Credit Financial Partners | 2018 Annual Report


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

SERP

December 31,

December 31,

2018

2017

2016

2018

2017

2016

Discount rate

3.75%

Expected return on plan assets

6.00%

4.30%

4.55%

N/A

4.30%

4.55%

6.00%

6.63%

N/A

N/A

N/A

Rate of compensation increase

3.60%

4.35%

4.75%

N/A

4.00%

4.00%

The discount rates are calculated using a spot yield curve method developed by an independent actuary. The approach maps a high-quality bond yield curve to the duration of the plans’ liabilities, thus approximating each cash flow of the liability stream to be discounted at an interest rate specifically applicable to its respective period in time. Plan Assets The asset allocation target ranges for the defined benefit plan follows the investment policy adopted by our retirement trust committee. This policy provides for a certain level of trustee flexibility in selecting target allocation percentages. The actual asset allocations at December 31, 2018, 2017, and 2016 are shown in the following table, along with the adopted range for target allocation percentages by asset class. The actual allocation percentages reflect the quoted market values at year-end and may vary during the course of the year. Plan assets are generally rebalanced to a level within the target range each year at the direction of the trustees. We establish the expected rate of return on plan assets based on a review of past and anticipated future returns on plan assets. The expected rate of return on plan assets assumption also matches the pension plans’ long-term interest rate assumption used for funding purposes. Percentage of Plan Assets at December 31,

Total Allocation Range

2018

2017

2016

Asset Category Domestic Equity

40-50 %

39 %

41 %

45 %

Domestic Fixed Income

35-50

40

35

35

International Equity

0-10

10

12

10

and Fixed Income

0-10

6

7

5

Real Assets: Gold Fund

0-5

5

5

5

100 %

Emerging Markets Equity

Total

100 %

100 %

100 %

The assets of the defined benefit plan consist primarily of investments in various domestic equity, international equity and bond funds. These funds do not contain any significant investments in a single entity, industry, country or commodity, thereby mitigating concentration risk. No CoBank stock or debt, or that of any other System institution, is included in these investments. Investment strategy and objectives are described in the pension plans’ formal investment policy documents. The basic strategy and objectives as adopted in the investment policy are: • Manage portfolio assets with a long-term time horizon appropriate for the participant demographics and cash flow requirements; • Optimize long-term funding requirements by generating rates of return sufficient to fund liabilities and exceed the long-term rate of inflation; and • Provide competitive investment returns and reasonable risk levels when measured against appropriate benchmarks. 2018 Annual Report | Farm Credit Financial Partners 51


The following tables present major categories of defined benefit plan assets that are measured at fair value at December 31, 2018, 2017 and 2016 for each of the fair value hierarchy levels as defined in Note 3 ($ in thousands): As of December 31, 2018

Level 1

Level 2

Level 3

Total

Asset Category Cash

$

55

$

$

$

55

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

(1)

Small-cap Growth Fund

(1)

3,834

3,834

4,213

4,213

1,334

1,334

2,073

490

2,563

5,804

3,827

9,631

439

1,079

1,518

1,200

1,200

International Equity: International Fund (2) Fixed Income: Bond Fund (3) (4) Emerging Markets: Equity and Fixed Income Fund (5) Real Assets: Hedge Funds (6) Total

$

12,205

$

3,827

$

8,316

$

24,348

(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.

52 Farm Credit Financial Partners | 2018 Annual Report


As of December 31, 2017

Level 1

Level 2

Level 3

Total

Asset Category Cash

$

36

$

$

$

36

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

4,285

4,285

4,039

4,039

1,160

1,160

2,386

489

2,875

5,039

3,129

8,168

500

1,094

1,594

1,061

1,061

(1)

Small-cap Growth Fund

(1)

International Equity: International Fund (2) Fixed Income: Bond Fund (3) (4) Emerging Markets: Equity and Fixed Income Fund (5) Real Assets: Hedge Funds (6) Total

$

As of December 31, 2016

12,246

$

Level 1

3,129

$

Level 2

7,843

$

Level 3

23,218

Total

Asset Category Cash

$

46

$

$

$

46

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

(1)

Small-cap Growth Fund

(1)

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

International Equity: International Fund (2) Fixed Income: Bond Fund (3) (4) Emerging Markets: Equity and Fixed Income Fund (5) Real Assets: Hedge Funds (6) Total

$

7,004

$

13,478

$

1,055

$

21,537

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. 2018 Annual Report | Farm Credit Financial Partners 53


Expected Contributions We expect to contribute approximately $3,237,024 to our funded, qualified defined benefit pension plan in 2019. Our actual 2019 contributions could differ from the estimates noted above. Estimated Future Benefits Payments We expect to make the following benefit payments, which reflect expected future service, as appropriate ($ in thousands). Expected Benefit Payments Pension Year 2019

$1,452

2020

1,532

2021

1,578

2022

1,615

2023

1,856

2024 to 2028

9,977

The following table sets forth the funding status and weighted average assumptions used to determine post-retirement health care benefit obligations ($ in thousands). 2018

2017

2016

Accumulated benefit obligation

$

340

$

375

$

308

Net liability recognized in the balance sheet

$

227

$

224

$

218

Net periodic (income) expense

$

35

$

(67)

$

(76)

Discount rate

4.45%

3.75%

4.30%

For measurement purposes, a 7.8 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2018. The rate was assumed to decrease gradually to 4.5 percent for 2026, and remain at that level thereafter.

NOTE 14 – Equity FPI is 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. 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. At December 31, 2018, 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. 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.

54 Farm Credit Financial Partners | 2018 Annual Report


A description of equities is as follows: • Class A preferred stock (voting stock) is the second of the three stock classes to be impaired and the second of the three classes to be restored after impairment. This class of stock may be issued only to the bank serving the Northeast Region, the affiliated associations and non-affiliated customers using core services. • Class B preferred stock (nonvoting stock) is the last class to be impaired and the first class to be restored after impairment. This class of stock may be issued to Farm Credit System banks and associations under a program approved by the board. • Class C common stock (nonvoting stock) is the first class to be impaired and the third class to be restored after impairment. This class of stock may be issued to the bank, the affiliated associations and nonaffiliated customers under a program approved by the board. • Other classes and issues of stock shall be approved by the stockholders. The preferred and common shares are not convertible. All shares are non-assessable and no further capital contributions are required. Dividends or patronage distributions may be declared by the Board at its discretion provided no class of stock shall be impaired. There were no dividends or patronage distributions declared during the years ended December 31, 2018, 2017 and 2016. In the event of liquidation or dissolution of the Company, any assets remaining after payment or retirement of all liabilities shall be distributed first to the holders of the Class B preferred stock, second to the holders of Class A preferred stock and third to the holders of the Class C Common Stock.

NOTE 15 – Commitments and Contingencies FPI has an agreement with Pine Creek Management, Agawam, Massachusetts, to lease the general office space, warehouse storage, loft space and garage space at 67 Hunt Street, Agawam, Massachusetts. FPI also has an agreement with Northwest Farm Credit Services to lease space at 2001 S. Flint Road, Spokane, Washington. The leases expire on February 28, 2021 and December 31, 2021, respectively. Rent expense for these leases was $678,340, $667,349, and $653,646 for the years ended December 31, 2018, 2017, and 2016, respectively. Northwest Farm Credit Services is an FPI owner customer. At December 31, 2018 future minimum lease payments were: December 31, Year

Amount

2019

$669,087

2020

669,087

2021

218,511

Total

$

1,556,685

Note 16 – Related Party Transactions At December 31, 2018, 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, 2018, 2017, and 2016, the Company recognized revenue of $55,433,122, $48,029,213 and $36,681,627, representing 91.7 percent, 94.1 percent and 92.9 percent, respectively, from transactions with its ACA owners. At December 31, 2018, 2017, and 2016, accounts receivable from such customers totaled $465,577, $930,268 and $439,009 representing 75.2 percent, 81.5 percent, and 50.8 percent of total accounts receivable outstanding at such dates. The Company’s business and industry preclude it from applying the 2018 Annual Report | Farm Credit Financial Partners 55


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, 2018, 2017, or 2016.

Note 17 — Subsequent Events The Company has evaluated subsequent events through March 29, 2019, which is the date the financial statements were issued or were available to be issued. There are no such events to disclose.

56 Farm Credit Financial Partners | 2018 Annual Report


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

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