2020 ANNUAL REPORT
Supporting Farm Credit associations with innovative, trusted technology
CONTENTS
Letter from the President and Chairman 2
Board of Directors 4
Senior Leadership Team 5
Management’s Discussion and Analysis 6 Report of Management 10 Report of Audit Committee 11
Report of Independent Auditors 12
Financial Statements 13
Notes to Financial Statements 19
Letter from the President and Chairman
The past year presented many opportunities and challenges for Farm Credit Financial Partners, Inc. (FPI). We celebrated our 25th year of serving the Farm Credit System and took a step back to reflect on FPI’s transformation through the years as we look ahead to the future. It was fitting that in our 25th anniversary year, Bill Lipinski—who was instrumental in the founding of FPI—stepped in as Interim President to fill a void in leadership early in the year. This allowed the Board of Directors to assess the leadership needs of FPI, the company’s value proposition to our customer-owners, and ultimately appoint a new President and CEO that would provide stability and ensure the strategy set by our Board of Directors remained on track. With FPI’s technology strategy continuing to evolve to meet the needs of our customerowners, we also broadened the Board of Directors last year, adding new members with skills and expertise that complement the Board. This will provide valuable perspectives as we continue to partner with our customer-owners to modernize the agricultural lending experience. In addition to leadership and Board changes, FPI was focused on keeping staff safe and healthy during the global pandemic, which forced both FPI and our customer-owners to quickly pivot to a remote work environment. We managed projects and relationships online, sought innovative ways to stay connected and collaborate, and responded to the demands of a new normal. At the same time, FPI closed the chapter on our Agawam, Massachusetts office—where we started back in 1995—and moved our headquarters to Tower Square in Springfield, Massachusetts.
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of serving Farm Credit
With the ability to leverage cloud-based technologies, it was a smooth transition to a remote work environment, but one that didn’t come without its challenges. Not only were we forced to work differently as a result of the pandemic, we were also forced to reevaluate and pause many of the strategic projects we had planned for the year. The impact of COVID-19 and the need to access systems anytime, from anywhere made our strategy to implement cloud-based solutions even more critical. With that, we focused on moving ahead with the implementation of AgWorx Lending at AgCountry Farm Credit Services and Northwest Farm Credit Services and accelerated the enrichment of these platforms for our other customer-owners. Amidst all of these changes and challenges, FPI’s strategic direction has not changed. Our focus continues to center around execution and supporting our customer-owners by ensuring they have the technological tools to effectively compete in a competitive landscape. We introduced new cultural pillars for FPI—customer focus, executionoriented, collaborative, and outcomes-based—which challenge each FPI employee to hone their customer focus every day. In addition, these pillars emphasize the efficient delivery of technology solutions as we head into 2021 where we will see the final two AgWorx Lending implementations for Farm Credit Illinois and Fresno Madera Farm Credit.
BOB PASSINI President and Chief Executive Officer Farm Credit Financial Partners
MARCUS L. KNISELY Chairman of the Board President and Chief Executive Officer AgCountry Farm Credit Services
Throughout our 25 years of serving Farm Credit, one thing has not changed: Our commitment to our customer-owners’ success. Our customer-owners will continue to remain central to our business philosophy and drive our direction for the next 25 years.
Our focus continues to center around execution and supporting our customer-owners.
FA R M C R E D I T F I NA N C I A L PA R T N E R S
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Board of Directors
MARCUS L. KNISELY Chairman of the Board
MARK D. LITTLEFIELD Vice Chairman of the Board
President and Chief Executive Officer AgCountry Farm Credit Services
President and Chief Executive Officer Farm Credit West
DAVID BARBIERI
JOHN BARCELOS
BRIANA BEEBE
RYAN BERG
Senior Vice President and Chief Information Officer Northwest Farm Credit Services
Chief Risk Officer Farm Credit West
Executive Vice President of Human Resources Farm Credit East
Senior Vice President and Chief Administrative Officer Farm Credit Illinois
JESSICA FYRE
AARON S. JOHNSON
TOM NAKANO
MICHAEL J. REYNOLDS
General Counsel and Chief Operations Officer AgCountry Farm Credit Services
President and Chief Executive Officer Farm Credit Illinois
Executive Vice President, Chief Administrative Officer, and Chief Financial Officer Northwest Farm Credit Services
Chief Executive Officer Farm Credit East
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Senior Leadership Team
BOB PASSINI
SCOTT BERARD
President and Chief Executive Officer
Executive Vice President Chief Customer Officer Secretary of the Board
JILL BRODY
MARY MAZZA
JIM MCCORMACK
Senior Vice President Chief Audit Officer
Senior Vice President Human Resources
Senior Vice President Engineering and Architecture
PAUL NESLUSAN
SCOTT ROUSSEAU
JOHN STABILO
Executive Vice President Chief Risk Officer
Executive Vice President Chief Financial Officer and Treasurer
Executive Vice President Application and Infrastructure Delivery
FA R M C R E D I T F I NA N C I A L PA R T N E R S
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general ledger, and data analytics. Services that support these solutions include infrastructure management, information security and administration, technical and application support, data processing and risk management. These solutions and services are used by our ACA customers to support their lending and financial services needs. In addition to core services, we provide technology solutions to address individual customer needs. YEAR IN REVIEW
Management’s Discussion and Analysis INTRODUCTION
BUSINESS OVERVIEW
The following discussion summarizes the financial position and results of operations of Farm Credit Financial Partners, Inc. (FPI or the Company) for the year ended December 31, 2020. 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:
Farm Credit System Structure and Mission We operate as part of the Farm Credit System (the System or Farm Credit), which was created by Congress in 1916 and has served agricultural producers for over 100 years. The System’s 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.
• Business Overview • Year in Review • Results of Operations • Liquidity and Funding Sources • Ownership and Capital • Governance • Forward-Looking Information
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Our Structure and Focus As a cooperative, we are Agricultural Credit Association (ACA) owned. Our core service solutions include loan origination, customer relationship management, loan accounting and
Farm Credit has a rich, mission-based history of supporting rural communities and American agriculture. To meet the evolving needs of its customers, the Farm Credit System requires technology that is as unique as its mission. To meet the challenges our ACA customers face and to support them in preparing for the future, our strategy shifted in 2017 from custom building software to purchasing and integrating market leading commercial software into the integrated AgWorx by FPI (AgWorx) ecosystem. Our technology ecosystem encompasses a variety of products that leverage cloud-based enabling technologies for customer relationship management, lending, online banking, loan servicing, financial, security, data and productivity tools. These technologies provide our ACA customers best-in-class banking tools that are configured and integrated specifically for Farm Credit. We are leveraging our Farm Credit knowledge and working closely with our ACA customers to develop solutions that support Farm Credit’s unique customerfocused culture and business model. AgWorx implementations began in 2018 and have continued through 2020. Key implementations to date have included AgWorx Customer, our customer relationship management solution leveraging Salesforce®,
AgWorx Lending, our loan origination solution leveraging nCino® and AgWorx Insights, our advanced data solution. Additional AgWorx implementations are currently underway and will continue throughout 2021 and into 2022. In addition to AgWorx Lending, we made progress during 2020 on other areas of the AgWorx ecosystem, including work on the new online banking and legal document offerings, as well as continued progress on the AgWorx Insights data solution which is targeted for 2021 implementations. Detailed planning is also being completed for future rollouts of updated financial, accounting, credit analysis and document management systems. Other key areas of focus during the year include investments in security for both on-premises and cloud-based environments as well as productivity applications leveraging Microsoft Office 365. During the year, FPI also completed a move of our legacy data center into a modern, co-located facility. FPI’s data center footprint for applications that remain in an on-premises environment is now comprised of two co-located facilities: one in Denver, Colorado and the second in Waltham, Massachusetts. These facilities provide state of the art monitoring and service capabilities.
R E S U LT S O F O P E R AT I O N S
2020 was a year of change and transition for FPI. The rapid and successful transition to a remote work environment due to the global pandemic required thoughtful and dynamic financial planning and management, while the CEO transition provided FPI with strong and experienced leadership to guide the Company through these challenges. During 2020, FPI achieved revenues in line with plan with net income falling slightly short of our breakeven target. Carefully managed operating expenses, capital spending, and project spending supported FPI’s pivot to a remote work environment, successful product delivery and continued support of our production systems during the year. The remaining AgWorx implementations are expected to be completed by 2023. Based on the Board approved financial plan, liquidity is projected to remain sufficient to complete these remaining AgWorx implementations, while continuing to provide the high level of customer and production support our ACA customers deserve and rely on. 2020 financial results are consistent with FPI’s strategy of delivering high quality products and services to our ACA customers while managing to a materially break-even budget.
Revenue 2020 revenues were in line with plan at $62,273k. Revenues increased by $4,136k, or 7.0% from 2019 levels due to the funding of additional AgWorx implementations and targeted operational initiatives. Expenses Note on presentation of expenses: During the prior year, FPI adopted ASU 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Cost, however did not reflect the standard for reporting purposes until FY2020. While this Standard does not change total amount of cost reported on the statement of operations, it does require that non-service cost components (other components of net periodic pension cost) be reported in the other (expense)/ income section of the statement. These costs were previously reported in the salaries and employee benefits line item within the operating expenses section of the statement. Service costs continue to be reported on the salaries and employee benefits line item. All years presented in the statement of operations have been updated to reflect this Standard. Operating Expenses Total operating expenses increased to $63,151k in 2020 from $59,226k in 2019, an increase of $3,925k or 6.6%.
With successful enterprise-wide implementations continuing through 2020, we are well on our way to realizing the AgWorx strategy that was conceived in 2017. As we introduce new products to our ecosystem and plan upcoming implementations with our ACA customers, we are excited and optimistic for the future. Together with our ACA customers, we are developing solutions that provide integrated, market leading technologies and increased flexibility to support their customermembers and the Farm Credit mission.
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Similar to the year over year increase in revenues, this change is primarily driven by the increased investments in both the AgWorx ecosystem as well as in operational process improvements that are reflected on the purchased services expense line item. This line item increased by $2,760k, or 19.0% over 2019. Other key drivers of the increase are reported on the occupancy and equipment line item and include certain costs associated with our new data center, investments made in our network to support a fully remote work environment, and a temporary increase in rent costs due to an office move that took place during the year. Occupancy and equipment costs increased by $826k, or 7.8% over 2019. Other year-over-year changes in operating expenses include an $801k, or 2.8% increase in salaries and employee benefits costs as well as a ($462k), or (7.7%) decrease in other operating expenses. This decrease in other operating expenses is driven primarily by lower travel and related costs resulting from the global pandemic. FPI targets breakeven results from operations (revenue less operating expenses). During 2020 revenues slightly exceeded operating expenses resulting in net income from operations of $122k. By comparison, we reported a net loss from operations of ($88k) in 2019.
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Other Income and Expense FPI is reporting net other, non-operating expense of $465k for the year. This expense is driven by the Company’s reflection of ASU 2017-07 and the reporting of other components of net periodic pension cost in this section of the statement. While service costs, which are reported in the salaries and employee benefits line of the statement of operations, represent the value of expected pension benefits to be earned during the year, the other components of net periodic pension cost include the annual interest cost on the projected benefit obligation less the expected return on plan assets plus the amortization of any prior service costs and actuarial gains and losses. These costs increased by $392k as compared to 2019 primarily due to a reduction in the discount rate used to value the pension liability. Additional details are available in footnote 13 – Employee Benefit Plans. Net Income The 2020 net loss after taxes is ($265k) as compared to net income of $23k in 2019. On a margin percentage basis, 2020 net loss is (0.42%) of revenues while 2019 net income is 0.04% of revenues.
LIQUIDITY AND FUNDING SOURCES
FPI operates with the following primary sources of funding: 1. 2. 3.
Revenue for core services, Revenue from custom and other projects, Capital funding from owners.
In addition, FPI maintains a $3.75 million line of credit with CoBank. This line renews annually on July 31. 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 and related funding sources. Completion of these projects is setting FPI on a strong course for effectively meeting the technology demands of and creating business value for our ACA customers. O W N E R S H I P A N D C A P I TA L
As of December 31, 2020, FPI had five owners with stock investments totaling $27.8 million. • Total equity at December 31, 2020 equaled $23.5 million, an increase of $301k from 2019. The increase in equity is due to a reduction in the accumulated
procedures, and the adequacy of management’s action with respect to recommendations arising from those auditing activities. Human Capital Committee • The Human Capital Committee is responsible for the oversight of employee compensation. The Human Capital Committee is composed of one Board member from each owner ACA with one Committee member elected as the Chair and one elected as Vice Chair. The Committee reviews, evaluates and approves the compensation policies, programs and plans for senior officers and employees including benefits programs. other comprehensive loss line item of $567k partially offset by a reduction of $265k in accumulated earnings resulting from FPI’s 2020 net loss. The accumulated other comprehensive loss reduction is due to a reduction in FPI’s defined benefit pension plan liability during the year.
Audit Committee The Audit Committee is composed of one Board member from each owner ACA with one Committee member elected as the Chair and one elected as Vice Chair. The Audit Committee responsibilities generally include, but are not limited to:
FPI’s Board approved capital plan provides for continued investment in FPI’s strategic products as well as ongoing investments in operations, controls and information security over the 2021-2023 periods.
•
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;
GOVERNANCE
•
the review and assessment of the impact of accounting and auditing developments on the consolidated financial statements;
•
the establishment and maintenance of procedures for the receipt, retention and treatment of confidential and anonymous submission of concerns regarding accounting, internal accounting controls or auditing matters;
•
oversight of the Company’s internal audit program, the independence of the outside auditors, the adequacy of the Company’s system of internal controls and
Board of Directors Historically, FPI’s Board of Directors has been comprised of the CEO or CEOdesignee of each owner-association. During 2020 the Board was expanded to include a second member from each owner-association. This expansion strengthened the Board by adding senior ACA executives with diverse experience across critical functional areas including technology, human resource and risk management, finance and administration, legal, and operations. FPI’s board operates under a committee structure. The committees are:
F O R W A R D - L O O K I N G I N F O R M AT I O N
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.
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FARM CREDIT FINANCIAL PARTNERS
REPORT OF MANAGEMENT The financial statements of Farm Credit Financial Partners, Inc. (the Company) are prepared by management, who is responsible for their integrity and objectivity, including amounts that must necessarily be based on judgments and estimates. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The financial statements, in our opinion, fairly present the financial condition of the Company. Other financial information included in this 2020 annual report is consistent with that in the financial statements. To meet our responsibility for reliable financial information, management depends on accounting and internal control systems designed to provide reasonable, but not absolute assurance that assets are safeguarded and transactions are properly authorized and recorded. Costs must be reasonable in relation to the benefits derived when designing accounting and internal control systems. To monitor compliance, the Company’s internal auditors perform audits of accounting records, review accounting systems and internal controls, and recommend improvements as appropriate. The financial statements are audited by RSM US LLP, our independent auditors, in accordance with auditing standards generally accepted in the United States of America. The Company is also examined by the Farm Credit Administration. The chief executive officer, as delegated by the Board of Directors, has overall responsibility for the Company’s system of internal controls and financial reporting, subject to the review of the Audit Committee of the Board of Directors. The Audit Committee consults regularly with management and meets periodically with the independent auditors and internal auditors to review the scope and results of their examinations. The Audit Committee reports regularly to the Board of Directors. Both the independent auditors and the internal auditors have direct access to the Audit Committee. The undersigned certify that the 2020 Annual Report to Shareholders and information contained herein is true, accurate and complete to the best of our knowledge and belief.
BOB PASSINI President and Chief Executive Officer Farm Credit Financial Partners March 12, 2021
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SCOTT ROUSSEAU Chief Financial Officer Farm Credit Financial Partners March 12, 2021
MARCUS L. KNISELY Chairman of the Board AgCountry Farm Credit Services March 12, 2021
FARM CREDIT FINANCIAL PARTNERS
REPORT OF AUDIT COMMITTEE The consolidated financial statements were prepared under the oversight of the Audit Committee (Committee). The Committee is composed of a subset of the Board of Directors of Farm Credit Financial Partners, Inc. (FPI). The Committee oversees the scope of FPI’s internal audit program, the approval, and independence of RSM US LLP as external auditors, the adequacy of FPI’s system of internal controls and procedures, and the adequacy of management’s action with respect to recommendations arising from those auditing activities. The Committee’s responsibilities are described more fully in the FPI’s Internal Control Policy and the Audit Committee Charter. Management is responsible for FPI’s internal controls and the preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. RSM US LLP is responsible for performing an independent audit of FPI’s consolidated financial statements in accordance with generally accepted auditing standards in the United States of America and to issue a report thereon. The Committee’s responsibilities include monitoring and overseeing these processes. In this context, the Committee reviewed and discussed the audited consolidated financial statements for the year ended December 31, 2020, with management. The Committee also receives from RSM US LLP the matters required to be communicated to those charged with governance in accordance with generally accepted auditing standards in the United States of America. FPI’s internal auditors directly provide reports on significant matters to the Committee. The Committee approves all non-audit services provided by RSM US LLP, if any. In 2020 RSM US LLP was not engaged for non-audit services. Based on the foregoing review and discussions, and relying thereon, the Committee recommended that the Board of Directors include the audited financial statements in the Annual Report for the year ended December 31, 2020 and for filing with the FCA.
TOM NAKANO Chairperson of the Audit Committee Northwest Farm Credit Services March 12, 2021 Members of the Audit Committee: Aaron Johnson, Vice Chair Marc Knisely Mark Littlefield Mike Reynolds March 12, 2021
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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, 2020, 2019 and 2018, the related statements of operations, comprehensive (loss) income, cash flows, changes in equity and accumulated other comprehensive loss for 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, 2020, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Boston, Massachusetts March 12, 2021
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FARM CREDIT FINANCIAL PARTNERS, INC.
Balance Sheets
AS OF DECEMBER 31, 2020, 2019, AND 2018
2020 Assets Current assets: Cash and cash equivalents Accounts receivable Prepaid and other assets Total current assets
$
Long-term assets: Fixed assets, net Intangible assets, net Deferred tax asset, net Prepaid assets, long-term Captive investment Total long term-assets Total assets Liabilities Current liabilities: Accrued expenses and other liabilities Accrued employee benefits Deferred revenue Line of credit Total current liabilities
6,968,224 434,347 6,032,250 13,434,821
2019
$
3,947,420 16,799,020 1,667,454 507,767 623,401 23,545,062
8,096,049 356,951 6,706,751 15,159,751
2018
$
4,874,733 11,546,796 1,774,359 609,939 575,730 19,381,557
14,893,055 618,913 5,056,441 20,568,409
6,341,801 8,859,352 1,186,741 825,972 551,273 17,765,139
$
36,979,883
$
34,541,308
$
38,333,548
$
3,397,293 1,545,882 1,426,172 109,146 6,478,493
$
3,101,985 1,334,705 595,451 5,032,141
$
4,277,285 1,290,519 599,768 6,167,572
Long-term liabilities: Accrued expenses and other liabilities, long-term Accrued employee benefits, long-term Deferred revenue, long-term Total long-term liabilities Total liabilities
409,765 5,531,490 1,055,838 6,997,093
545,548 5,553,293 207,175 6,306,016
6,108,987 798,751 6,907,738
13,475,586
11,338,157
13,075,310
12,500,000
12,500,000
12,500,000
9,750,000
9,750,000
9,750,000
5,550,000 (5,656,996) 1,361,293 23,504,297 36,979,883
5,550,000 (6,223,575) 1,626,726 23,203,151 34,541,308
5,550,000 (4,144,839) 1,603,077 25,258,238 38,333,548
Commitments and contingencies (Note 15) Equity Class A preferred stock, $5.00 par value, 5,000,000 shares authorized, 2,500,000 shares issued and outstanding as of December 31, 2020, 2019 and 2018 Class B preferred stock, $5.00 par value, 5,000,000 shares authorized, 1,950,000 shares issued and outstanding as of December 31, 2020, 2019 and 2018 Class C common stock, $5.00 par value, 5,000,000 shares authorized, 1,110,000 shares issued and outstanding as of December 31, 2020, 2019 and 2018 Accumulated other comprehensive loss Accumulated earnings Total equity Total liabilities and equity
The accompanying notes are an integral part of these financial statements
$
$
$
FA R M C R E D I T F I N A N C I A L PA R T N E R S
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FARM CREDIT FINANCIAL PARTNERS, INC.
Statements of Operations
YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
2020
2019
2018
Revenue Core and custom services
$ 63,273,375
Total revenue Operating Expenses Salaries and employee benefits Purchased services Occupancy and equipment Other operating expenses Total operating expenses Net income (loss) from operations
14
$
59,137,376
$
60,467,204
63,273,375
59,137,376
60,467,204
29,251,423 16,959,204 11,412,721 5,527,724 63,151,072
28,450,277 14,199,259 10,586,717 5,989,348 59,225,601
29,287,425 13,719,067 10,846,049 5,972,791 59,825,332
122,303
(88,225)
641,872
Other (Expense)/Income Interest income Interest expense Other components of net periodic pension cost Other gains Total other (expense) income
32,157 (498,000) 1,031 (464,812)
243,097 (561) (106,000) 136,536
195,608 (426,000) 11,900 (218,492)
(Loss) income before income taxes Income tax (benefit) provision Net (loss) income
(342,509) (77,076) (265,433)
48,311 24,662 23,649
423,380 206,838 216,542
2 0 2 0 A N N UA L R E P O RT
$
$
$
The accompanying notes are an integral part of these financial statements
FARM CREDIT FINANCIAL PARTNERS, INC.
Statements of Comprehensive Income (Loss) YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
2020
2019
Net (loss) income
$
(265,433)
$
Other comprehensive income (loss): Net change in retirement plan liabilities Comprehensive income (loss)
$
566,579 301,146
$
The accompanying notes are an integral part of these financial statements
23,649
(2,078,736) (2,055,087)
2018 $
216,542
$
943,708 1,160,250
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FARM CREDIT FINANCIAL PARTNERS, INC.
Statements of Cash Flows
YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
2020 Cash Flows from Operating Activities Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization Loss on disposal of fixed assets Decrease (increase) in deferred tax asset, net Changes in operating assets and liabilities: (Increase) decrease in accounts receivable Decrease (increase) in prepaid and other assets Increase (decrease) in deferred revenue Increase (decrease)in accrued expenses and other liabilities Increase (decrease) in accrued employee benefits Net cash provided by operating activities
$
$
23,649
2018
$
216,542
6,691,087 138 106,905
6,563,452 1,240 (587,618)
7,055,847 26,001 425,833
(77,396) 729,002 1,679,384 159,525 755,953 9,779,165
261,962 (1,458,734) (595,893) (629,752) (2,590,244) 988,062
523,220 (2,270,274) 451,620 (155,989) (1,706,114) 4,566,686
(2,348,218) (8,667,918) (11,016,136)
(2,024,446) (5,760,622) (7,785,068)
(4,206,655) (2,371,605) (6,578,260)
Cash Flows from Financing Activities Advances on notes payable with CoBank, ACB Repayment of notes payable to CoBank, ACB Net cash provided by financing activities
3,429,228 (3,320,082) 109,146
5,484,871 (5,484,871) -
3,173,712 (3,173,712) -
Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
$
(1,127,825) 8,096,049 6,968,224
$
(6,797,006) 14,893,055 8,096,049
$
(2,011,574) 16,904,629 14,893,055
Supplemental Cash Information: Cash paid during the year for: Interest Income taxes Change in minimum pension liability
$ $ $
$ $ $
561 33,800 (2,078,736)
$ $ $
Cash Flows from Investing Activities Purchase of fixed assets Capitalized software development costs Net cash used in investing activities
16
(265,433)
2019
2 0 2 0 A N N UA L R E P O RT
42,000 566,579
38,800 943,709
The accompanying notes are an integral part of these financial statements
FARM CREDIT FINANCIAL PARTNERS, INC.
Statements of Changes in Equity YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
Balance as of January 1, 2018 Net income Other comprehensive income Balance as of December 31, 2018 Net income Other comprehensive loss
Balance as of December 31, 2019 Net loss Other comprehensive income Balance as of December 31, 2020
Class A Preferred Stock Shares Amount
Class B Preferred Stock Shares Amount
Class C Common Stock Shares Amount
Accumulated Other Comprehensive Loss
Accumulated Earnings
2,500,000
1,950,000
1,110,000
$
$
$ 12,500,000
$
9,750,000
$
5,550,000
-
-
-
-
-
-
-
-
-
-
-
-
2,500,000
12,500,000
1,950,000
9,750,000
1,110,000
-
-
-
-
-
-
-
-
-
-
-
2,500,000
12,500,000
1,950,000
9,750,000
1,110,000
-
-
-
-
-
-
-
-
-
-
-
$ 12,500,000
1,950,000
The accompanying notes are an integral part of these financial statements
$
9,750,000
1,110,000
943,708
$
5,550,000
(2,078,736)
216,542
216,542
25,258,238
23,649
23,649
(265,433)
566,579
-
$
943,708
1,603,077
1,626,726
-
(5,656,996)
$ 24,097,988
-
(6,223,575)
$
1,386,535
-
(4,144,839)
5,550,000
-
2,500,000
-
5,550,000
-
(5,088,547)
Total
1,361,293
(2,078,736)
23,203,151 (265,433) 566,579
$ 23,504,297
FA R M C R E D I T F I NA N C I A L PA R T N E R S
17
FARM CREDIT FINANCIAL PARTNERS, INC.
Accumulated Other Comprehensive Loss YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
Minimum Pension Liability Balance as of January 1, 2018 Change in period Tax effect of change in period
(4,639,840) 1,198,453 (280,750)
$
(448,707) 31,676 (5,671)
Total $
(5,088,547) 1,230,129 (286,421)
Balance as of December 31, 2018 Change in period Tax effect of change in period
(3,722,137) (2,841,412) 654,232
(422,702) 150,607 (42,163)
(4,144,839) (2,690,805) 612,069
Balance as of December 31, 2019 Change in period Tax effect of change in period
(5,909,317) 673,751 (165,113)
(314,258) 76,808 (18,867)
(6,223,575) 750,559 (183,980)
Balance as of December 31, 2020
18
$
Postretirement Liability
2 0 2 0 A N N UA L R E P O RT
$
(5,400,679)
$
(256,317)
$
(5,656,996)
The accompanying notes are an integral part of these financial statements
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. On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, it is reasonably possible that estimates made in the financial statements may be materially and adversely impacted in the near term as a result of these conditions.
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 in the United States (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 software development costs, and are discussed in these footnotes, as applicable. Actual results may differ from those estimates.
C.
Cash and Cash Equivalents Cash includes cash on hand and on deposit at banks. Cash equivalents are FPI’s investments in a short-term money market fund with a maturity of three months or less. The fund invests in U.S. dollar-denominated short-term debt obligations including securities issued by the U.S. Government or its agencies, bankers’ acceptances, certificates of deposit, time deposits from U.S. or foreign banks, repurchase agreements, commercial paper, municipal securities and master notes.
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. The allowance for doubtful accounts balance at December 31, 2020, 2019, and 2018 was $0. Bad debt expense was $0 for the years ended December 31, 2020, 2019, and 2018.
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 and other assets in the accompanying balance sheets, and amount to $373,108, $251,208, and $154,314 at December 31, 2020, 2019, and 2018, respectively.
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 seven years for computer equipment and software. Gains and losses on dispositions are reflected in other operating expenses on the statements of operation. Maintenance and repairs are charged to operating expense and improvements are capitalized.
FA R M C R E D I T F I NA N C I A L PA R T N E R S
19
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. Software development costs are amortized over the software’s estimated useful life, which management has determined to be five years. Software development costs are included in intangible assets, net in the accompanying balance sheets and disclosed in more detail in Note 5.
H. Employee Benefit Plans The funded status of pension and other post-retirement benefit plans is recognized in the balance sheets in long-term accrued employee benefits. Gains and losses, prior service costs and credits that have not yet been recognized through pension expense will be recognized in accumulated other comprehensive (loss) income, net of tax, until they are amortized as a component of net periodic pension/post-retirement 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. Expected compensation increases are estimated based on historical and expected increases in the future. Increases in estimated compensation would result in higher pension expense while decreases would lower pension expense. Discount rates are selected based upon rates of return on 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 these benefits are recorded in the period in which they are incurred in salaries and employee benefits on the statements of operations. 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. Costs for these benefits are recorded in the period in which they are incurred in salaries and employee benefits on the statements of operations. The Company also provides certain health care and life insurance benefits to employees. Costs for these benefits are recorded in the period in which they are incurred in salaries and employee benefits on the statements of operations. I.
Income Taxes The Company is organized as a C Corporation for Federal Income Tax purposes and files a Form 1120-C. The Company uses 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. 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. On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act). The 2017 tax reform legislation known as the Tax Cuts and Jobs Act of 2017 (TCJA) lifted the previous 20-year limit on NOL carryforwards, but limited NOLs to 80% of taxable income in any one tax period. Among other changes, The CARES Act temporarily removes this 80% limit for taxable years beginning before 2021 to allow an NOL carryforward to fully offset an organization’s income. The Company has availed itself of this tax benefit for the tax year ended December 31, 2020 by fully utilizing federal net operating losses to offset its federal taxable income. 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 operations. The Company does not believe it has any material uncertain tax positions.
20
2 0 2 0 A N N UA L R E P O RT
Interest and penalties paid were $0, $318 and $0 for the years ending December 31, 2020, 2019 and 2018, respectively. The Company is no longer subject to federal, state, and local income tax examinations by tax authorities for years prior to 2016. J.
Revenue Recognition The Company derives revenue from core and custom services from its customers, all of which are lending associations in the Farm Credit System. Core and custom services include credit delivery and management systems, core infrastructure and security, financial accounting and loan accounting services, management reporting, electronic commerce, legal support, and custom solutions, which include a retained technology services team dedicated to any specific projects required by the customer over a period of time which is typically one year. Prior to 2019, the Company recognized in accordance with FASB ASC 605, Revenue Recognition (ASC 605). Core and extended core services included credit delivery and management systems; core infrastructure and security, financial accounting and loan accounting services, management reporting, electronic commerce, legal support, and custom solutions, which included 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 was 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 were performed ratably and represented one integrated deliverable over the contracted delivery period, which was one year, and as such recognized 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. Revenue recognition (FASB ASC 606): During the year ended December 31, 2019, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606). The Company adopted ASC 606 on January 1, 2019 utilizing the modified retrospective method which requires the standard to be adopted for the period beginning January 1, 2019 with no change to reported balances December 31, 2018. Results for the years ended December 31, 2020 and 2019 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under accounting standards in effect for the prior periods. In connection with the adoption of ASC 606, the Company also adopted Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers (ASC 340-40) related to contract acquisition and fulfillment costs. The Company recognizes revenue in accordance with ASC 606, which provides a five-step model for recognizing revenue from contracts with customers as follows: • Identify the contract with a customer • Identify the performance obligation(s) in the contract • Determine the transaction price • Allocate the transaction price to the performance obligation(s) in the contract • Recognize revenue when or as performance obligation(s) are satisfied The Company assesses the contract term as the period in which the parties to the contract have presently enforceable rights and obligations. Contracts are generally standardized and non-cancellable for the duration of the stated contract term. FPI has determined that its core services represent a series of promises which represent a single performance obligation. When FPI sells custom services, such services are generally negotiated separately from the core services. Such services are recognized over time over the period of performance under the input method. All revenues for the years ended December 31, 2020 and 2019, as reported within the statements of operations, of $63,273,375 and $59,137,376 are recognized over time. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods and services to the customer. Revenue from sales is recorded based on the transaction price, which includes estimates of variable consideration. The amount of variable consideration included in the transaction price is constrained and is included only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. At the inception of a contract, the Company expects the period between when it satisfies its performance obligations, and when the customer pays for the services, will be one year or less. As such, the Company has elected to apply the practical expedient which allows the Company to not adjust the promised amount of consideration for the effects of a significant financing component, when a financing component is present. Payment terms on invoiced amounts are typically 30 days. The Company does not offer rights of return for its services in the normal course of business, and contracts generally do not include customer acceptance clauses. The Company also excludes from revenue governmentassessed and imposed taxes on revenue-generating activities that are invoiced to customers. The timing of revenue recognition may not align with the right to invoice the customer. The Company records accounts receivable when it has the unconditional right to issue an invoice and receive payment regardless of whether revenue has been recognized. If revenue has not yet been recognized, a contract liability (deferred revenue) also is recorded. If revenue is recognized in advance of the right to invoice, unbilled revenue is recorded. Balances as of December 31, 2019 and 2020 were as follows:
FA R M C R E D I T F I NA N C I A L PA R T N E R S
21
December 31, 2019
December 31, 2020
Accounts Receivable
$356,951
$434,347
Unbilled Revenue
$251,208
$373,108
$802,626
$2,482,010
Contract Liabilities: Deferred Revenue
Costs to obtain and fulfill a contract: In accordance with ASC 340-40, the Company has elected to apply the practical expedient and recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period for the assets that the Company otherwise would have recognized is one year or less. Therefore, the Company would capitalize the incremental costs of obtaining a contract with a customer, if the Company expects the benefit of those costs to be longer than one year and amortize such costs over the expected benefit period. The Company considered the relevant guidance under ASC 340-40 and did not identify any incremental costs of obtaining a contract which would require capitalization for the years ended December 31, 2020 and 2019. The Company does not pay commissions in connection with its contracts which would require capitalization under the provisions of ASC 340-40. Further, the Company did not identify other material contract acquisition and fulfillment costs where ASC 340-40 results in capitalization. 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, 2020, 2019, and 2018, 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.
L.
Accumulated Other Comprehensive (Loss) 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, 2020, 2019, and 2018 there were no impairment losses recognized for long-lived assets.
O.
Recently Issued or Adopted Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes all existing revenue recognition rules, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40), which requires the deferral of incremental costs of obtaining a contract with a customer. In connection with the adoption of ASC 606, the Company also adopted Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers (ASC 340-40) related to contract acquisition and fulfillment costs. The Company adopted the requirements of the new standard as of January 1, 2019, utilizing the modified retrospective method of transition. Results of reporting periods after January 1, 2019 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. There was no cumulative adjustment recorded by the Company as a result of the adoption. In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Cost (Topic 715). 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. The Company has adopted the guidance during the year ended December 31, 2019, noting no material impact to 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
22
2 0 2 0 A N N UA L R E P O RT
recognition in the income statement. Topic 842 is effective for fiscal years beginning after December 15, 2021, 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 Topic 842 on the financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). Measurement of Credit Losses on Financial Instruments and issued subsequent amendments to the initial guidance in November 2018 within ASU 2018-19 and in April 2019 within ASU 2019-04 (ASU 2016-13, ASU 2018-19 and ASU 2019-04 collectively, Topic 326). Topic 326 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Topic 326 is effective for non-public entities for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the pending adoption of Topic 326 on its financial statements. In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Cost (Subtopic 350-40). 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 internaluse 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 ASU 2018-14, Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20). 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 Company is evaluating the impact of adoption on the Company’s financial condition and its results of operations.
NOTE 3 — PREPAID AND OTHER ASSETS Prepaid and other assets consist of the following (as of December 31):
Current assets: Prepaid vendor invoices Unbilled revenue Federal and state taxes Other
2020
2019
2018
$ 5,607,751
$ 6,408,073
$ 4,622,660
373,108
251,208
154,314
9,991
4,990
237,889
41,400
42,480
41,578
6,032,250
6,706,751
5,056,441
507,767
609,939
825,972
$ 6,540,017
$ 7,316,690
$ 5,882,413
Long-term assets: Prepaid vendor invoices
NOTE 4 — FIXED ASSETS, NET Fixed assets, net, consisted of the following (as of December 31):
Computer equipment Computer software Furniture and fixtures Less: Accumulated depreciation
2020
2019
2018
$ 17,909,356
$ 17,019,429
$ 15,947,377
12,278,609
11,839,385
11,919,745
1,936,847
1,906,102
1,906,102
32,124,812
30,764,916
29,773,224
(28,177,392)
(25,890,183)
(23,431,423)
$ 3,947,420
$ 4,874,733
$
6,341,801
FA R M C R E D I T F I NA N C I A L PA R T N E R S
23
For the year ended December 31, 2020, there were disposals of $988,322 with a realized loss of $138. For the year ended December 31, 2019, there were disposals of $1,032,754 with a realized loss of $1,240. For the year ended December 31, 2018, there were disposals of $11,110,369 with a realized loss of $26,001. Depreciation expense related to the Company’s fixed assets was $3,275,393, $3,490,274 and $3,622,330, for the years ended December 31, 2020, 2019, and 2018, respectively.
NOTE 5 — INTANGIBLE ASSETS, NET Intangible assets, net consisted of software development costs, as follows (as of December 31):
Software development costs Less: Accumulated amortization
2020
2019
2018
$ 35,359,010
$ 26,691,091
$ 20,930,469
(18,559,990)
(15,144,295)
(12,071,117)
$ 16,799,020
$ 11,546,796
$ 8,859,352
Software development costs are typically amortized over a five-year useful life. Amortization expense associated with these assets totaled $3,415,694, $3,073,178, and $3,433,517 for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, 2019 and 2018, there was $4,895,133, $2,207,628, and $1,114,276, 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, including those not yet placed in service based on anticipated placed in service date, amortization expense is expected to be as follows for each of the years ending December 31: 2021
$ 4,833,585
2022
4,033,188
2023
3,120,474
2024
3,009,553
2025
1,802,220
Total
$ 16,799,020
NOTE 6 — ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following (as of December 31): 2020
2019
2018
$ 2,269,133
$ 2,230 584
$ 3,010,695
Accrued expenses
692,019
665,756
1,042,860
Trade payables
405,498
185,811
204,662
Current liabilities: Bonus
Taxes payable
30,643
19,834
19,068
$ 3,397,293
$ 3,101,985
4,277,285
409,765
545,548
–
$ 3,807,058
$ 3,647,533
$ 4,277,285
Long-term liabilities: Bonus
24
2 0 2 0 A N N UA L R E P O RT
NOTE 7 — ACCRUED EMPLOYEE BENEFITS Accrued employee benefits consist of the following (as of December 31): 2020
2019
2018
$ 1,336,334
$ 1,116,552
$ 1,093,453
208,911
188,495
197,066
637
29,658
–
1,545,882
1,334,705
1,290,519
5,391,185
5,398,678
5,881,574
140,305
154,615
227,413
5,531,490
5,553,293
6,108,987
$ 7,077,372
$ 6,887,998
$ 7,399,506
Current liabilities: Annual leave Self-insurance reserve Payroll taxes
Long-term liabilities: Pension Post-retirement benefits
NOTE 8 — CAPTIVE INVESTMENT 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 member associations. The carrying value of the investment totaled $623,401, $575,730 and $551,273 at December 31, 2020, 2019, and 2018, respectively. Premiums paid in those respective years to the Captive totaled $270,538, $248,580 and $239,837, respectively, and are included in salaries and employee benefits on the accompanying statements of operations. 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 — LINE OF CREDIT The Company has a line of credit with CoBank, ACB 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, the line of credit is used to settle transactions between FPI and CoBank. Borrowings from CoBank outstanding as of December 31, 2020, 2019, 2018 were $109,146, $0 and $0, respectively. During the year ended December 31, 2020, borrowings were $3,429,228 and repayments were $3,320,082. Borrowings made and repaid during the year as part of the settlement process were $5,484,871, and $3,173,712 for the years ended December 31, 2019 and 2018, respectively. Interest expense incurred to CoBank for the years ended December 31, 2020, 2019 and 2018 was $0, $561 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, 2020 was 2.00%. The line of credit matures on July 31, 2021.
FA R M C R E D I T F I NA N C I A L PA R T N E R S
25
NOTE 10 — INCOME TAXES The (benefit) provision for income taxes consisted of the following (as of December 31): 2020
2019
2018
Current: Federal
$
–
$
–
$
67,079
State
–
211
346
Total
–
211
67,425
Federal
(62,963)
30,400
113,412
State
(14,113)
(5,949)
26,001
Total
(77,076)
24,451
139,413
Deferred:
Total (benefit) provision for income taxes
$
(77,076)
$
24,662
$
206,838
The (benefit) 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 (as of December 31): 2020 Federal tax at statutory rate
$
State tax, net Permanent difference Accrual to return Other $
2019
(71,927)
$
10,145
2018 $
88,910
(11,149)
(4,700)
20,814
5,579
18,875
32,093
–
–
67,079
421
342
(2,058)
(77,076)
$
24,662
$
206,838
Deferred tax assets and (liabilities) resulted from the following (as of December 31): 2020 Annual leave Pension
$
328,969
2019 $
274,822
2018 $
278,898
1,327,076
1,328,270
1,500,165
492,327
1,484,776
1,456,585
Post-retirement
34,535
38,028
58,004
Health reserve
51,430
46,395
49,145
611,004
197,554
357,768
130
130
130
2,845,471
3,369,975
3,700,695
Depreciation
(1,178,017)
(1,595,616)
(2,513,954)
Gross deferred tax liabilities
(1,178,017)
(1,595,616)
(2,513,954)
$ 1,667,454
$ 1,774,359
Operating loss carryforward
Deferred revenue Charitable contributions Gross deferred tax assets
Net deferred tax asset
$
1,186,741
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
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2 0 2 0 A N N UA L R E P O RT
within the allowable time period and, as a result, has determined that no valuation allowance related to deferred tax assets is necessary as of December 31, 2020, 2019 and 2018. At December 31, 2020, FPI has federal net operating loss carry forwards of $1,296,516 and state net operating loss carry forwards of $3,442,201. Federal net operating losses of $449,685 and $847,768 that were earned in 2019 and 2018 respectively, will be available to offset 80% of taxable income for an indefinite period of time, until fully utilized. The effective tax rates were 22.50%, 51.05% and 48.85% and for the years ended December 31, 2020, 2019 and 2018.
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. 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, 2020, 2019 and 2018, 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, 2020
Money market accounts
Total
Level 1
$ 3,822,174
$ 3,822,174
Level 2 $
–
Level 3 $
–
Assets at Fair Value as of December 31, 2019
Money market accounts
Total
Level 1
$ 5,724,292
$ 5,724,292
Level 2 $
–
Level 3 $
–
Assets at Fair Value as of December 31, 2018
Money market accounts
Total
Level 1
$ 12,758,812
$ 12,758,812
Level 2 $
–
Level 3 $
–
Money market accounts are included in cash and cash equivalents in the balance sheets, are classified within Level 1 and are valued based on quoted prices in active markets for identical securities. The fair value of investments in the Company’s employee benefit plans are included in Note 13.
FA R M C R E D I T F I NA N C I A L PA R T N E R S
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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, 2020, 2019, and 2018 the Company has recorded expense, net of employee withholdings or contributions, of $2,118,553 $1,937,809 and $1,891,788, respectively which are included in salaries and employee benefits on the accompanying statements of operations. Included in accrued expenses and other liabilities in the balance sheets as of December 31, 2020, 2019, and 2018 are self-insurance reserves totaling $208,911, $188,495 and $197,066, respectively.
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 6% of base salary. During the years ended December 31, 2020, 2019 and 2018, employer contributions charged to expense were $1,147,130, $1,169,198 and $1,182,959, respectively. Defined Contribution Retirement Plan FPI participates in the CoBank defined contribution qualified retirement plan, a noncontributory, multiple-employer plan (Defined Contribution Plan). Under the Defined Contribution 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. During the years ended December 31, 2020, 2019 and 2018, employer contributions charged to expenses were $639,845, $614,663 and $583,960, respectively. Defined Benefit Retirement Plan FPI participates in the CoBank defined benefit qualified retirement plan (Defined Benefit Plan). The Defined Benefit 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 the years ended December 31, 2020, 2019 and 2018 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. 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 (Post-Retirement Health Care Benefit Plan). The authoritative accounting guidance requires the accrual of the expected cost of providing post-retirement 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 of $62,497, $77,808 and $34,879 were classified as salaries and employee benefits on the accompanying statements of operations during the years ended December 31, 2020, 2019 and 2018, respectively. The funding status and the amounts recognized in the balance sheets of FPI’s Defined Benefit Plan and Post-Retirement Health Care Benefit Plan benefits are as follows (as of December 31; $ in thousands):
Defined Benefit Retirement Plan
2020
2019
2018
Change in projected benefit obligation: Benefit obligation at beginning of year
$
$
30,230
$
31,893
Service cost
530
529
678
Interest cost
1,133
1,313
1,171
–
–
–
3,220
5,433
(2,251)
Plan participant contributions
–
–
–
Transfers
–
–
–
(924)
(2,351)
(1,261)
Plan amendments Actuarial loss (gain), net
Benefits paid Benefit obligation at end of year
28
35,154
2 0 2 0 A N N UA L R E P O RT
$
39,113
$
35,154
$
30,230
Defined Benefit Retirement Plan
2020
2019
2018
Change in plan assets: Fair value of plan assets at beginning of year
$
29,755
Actual return on plan assets
$
24,348
$
23,218
4,529
3,798
(309)
363
3,960
2,700
Plan participant contributions
–
–
–
Transfers
–
–
–
(925)
(2,351)
(1,261)
Employer contributions
Benefits paid Fair value of plan assets at end of year
$
33,722
$
29,755
$
24,348
$
(5,391)
$
(5,399)
$
(5,882)
Funded status of the plan: Net amount recognized in the balance sheet in accrued employee benefits, long-term
Post-Retirement Health Care Benefit Plan
2020
2019
2018
Change in projected benefit obligation: Benefit obligation at beginning of year
$
155
$
227
$
224
Service cost
3
7
8
Interest cost
4
10
8
Plan amendments
–
–
–
(41)
(105)
15
82
75
49
–
–
–
(63)
(59)
(77)
Actuarial loss (gain), net Plan participant contributions Transfers Benefits paid Benefit obligation at end of year
$
140
$
155
$
227
$
–
$
–
$
–
Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participant contributions Transfers Benefits paid Fair value of plan assets at end of year
$
–
–
–
(18)
(16)
28
81
75
49
–
–
–
(63)
(59)
(77)
–
$
–
$
–
Funded status of the plan: Net amount recognized in the balance sheet in accrued employee benefits, long-term
$ (140)
$ (155)
$ (227)
FA R M C R E D I T F I NA N C I A L PA R T N E R S
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The accumulated benefit obligation for FPI’s Defined Benefit Plan and Post-Retirement Health Care Benefit Plan are presented in the following table (as of December 31; $ in thousands): Defined Benefit Retirement Plans
Post-Retirement Health Care Benefit Plan
2020
2019
2018
2020
2019
2018
$35,930
$32,192
$27,687
$140
$155
$227
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 (as of December 31; $ in thousands):
Components of Net Periodic Benefit Cost Defined Benefit Retirement Plan
2020
2019
2018
Periodic benefit cost: Service cost
$
Interest cost
531
$
529
$
678
1,133
1,313
1,170
(1,651)
(1,529)
(1,397)
Prior service cost
187
213
213
Net actuarial loss
829
109
440
Expected return on plan assets Amortization of unrecognized:
$ 1,029
$
635
$
1,104
3,164
$
(545)
Changes in plan assets and benefit obligations recognized in other comprehensive income Net actuarial (gain)/loss
$
342
$
Amortization of: Prior service cost/(credit)
(187)
(214)
(213)
Net actuarial (gain)/loss
(829)
(109)
(440)
$
(674)
$
2,841
$
1,198
In 2021, $902,500 will be amortized from accumulated other comprehensive (income) loss into net period benefit cost; included in this amount is $865,981 related to the retirement plans and $36,519 related to the Post-Retirement Health Care Benefit Plan.
The weighted average rate assumptions used to determine benefit obligations for FPI’s Defined Benefit Plan are presented as follows (as of December 31):
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2 0 2 0 A N N UA L R E P O RT
2020
2019
2018
Discount rate
2.60%
3.30%
4.45%
Expected return on plan assets
6.00%
6.00%
6.00%
Rate of compensation increase
3.40%
3.60%
3.60%
The weighted average rate assumptions used to determine net periodic benefit cost for the Defined Benefit Plan are as follows (as of December 31): 2020
2019
2018
Discount rate
3.30%
4.45%
3.75%
Expected return on plan assets
6.00%
6.00%
6.00%
Rate of compensation increase
3.60%
3.60%
3.60%
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 the 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, 2020, 2019, and 2018 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
2020
2019
2018
33 – 37%
32%
40%
39%
Domestic fixed income
36.5 – 40.5%
39%
41%
40%
International equity, Emerging markets equity and Fixed income
24.5 – 28.5%
24%
14%
16%
–
5%
5%
5%
100%
100%
100%
Asset category: Domestic equity
Real assets
The assets of the Defined Benefit Plan consist primarily of investments in various domestic equity, international equity and fixed income. 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.
FA R M C R E D I T F I NA N C I A L PA R T N E R S
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The following tables present major categories of Defined Benefit Plan assets that are measured at fair value at December 31, 2020, 2019 and 2018 for each of the fair value hierarchy levels as defined in Note 11 ($ in thousands): As of December 31, 2020
Level 1
Level 2
NAV
Total
Asset category: Cash
$
37
$
–
$
–
$
37
Domestic equity: Large-cap growth funds (1)
4,566
–
–
4,566
Large-cap equity funds (1)
–
–
4,565
4,565
Small-cap growth funds (1)
–
–
1,597
1,597
3,850
–
1,983
5,833
6,976
6,322
–
13,298
2,300
–
1
2,301
Gold fund
–
–
–
–
Hedge funds (6)
–
–
1,525
1,525
$ 17,729
$ 6,322
$ 9,671
$ 33,722
Level 1
Level 2
NAV
Total
International equity: International fund (2) Fixed income Bond fund (3)(4) Emerging markets: Equity and fixed income fund (5) Real assets
Total
As of December 31, 2019 Asset category: Cash
$
63
$
–
$
–
$
63
Domestic equity: Large-cap growth funds (1)
5,303
–
–
5,303
Large-cap equity funds (1)
–
–
4,882
4,882
Small-cap growth funds (1)
–
–
1,604
1,604
2,673
–
886
3,559
6,632
5,715
–
12,347
574
–
1
575
Gold fund
–
–
–
–
Hedge funds (6)
–
–
1,422
1,422
$ 15,245
$ 5,715
$ 8,795
$ 29,755
International equity: International fund (2) Fixed income Bond fund (3)(4) Emerging markets: Equity and fixed income fund (5) Real assets
Total
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2 0 2 0 A N N UA L R E P O RT
As of December 31, 2018
Level 1
Level 2
NAV
Total
Asset category: Cash
$
55
$
$
–
–
$
55
Domestic equity: Large-cap growth funds (1)
3,834
–
–
3,834
Large-cap equity funds (1)
–
–
4,213
4,213
Small-cap growth funds (1)
–
–
1,334
1,334
2,073
–
490
2,563
5,804
3,827
–
9,631
439
–
1,079
1,518
Gold fund
–
–
–
–
Hedge funds (6)
–
–
1,200
1,200
$ 12,205
$ 3,827
$ 8,316
$ 24,348
International equity: International fund (2) Fixed income Bond fund (3)(4) Emerging markets: Equity and fixed income fund (5) Real assets
Total
(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.
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. NAV plan assets are funds with unobservable net asset values and supported by limited or no market activity. Expected Contributions FPI expects to contribute $344,613 to the funded, qualified Defined Benefit Plan in 2021. Actual 2021 contributions could differ from the estimates noted above.
FA R M C R E D I T F I NA N C I A L PA R T N E R S
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Estimated Future Benefits Payments FPI expects future benefit payments, which reflect expected future service, as appropriate, are as follows ($ in thousands).
Year
Expected Benefit Payments (Pension)
2021
1,496
2022
1,526
2023
1,847
2024
1,801
2025
1,899
2026–2030
10,507
The following table sets forth the funding status and weighted average assumptions used to determine post-retirement health care benefit obligations (as of December 31; $ in thousands). 2020
2019
2018
Accumulated benefit obligation
$ 200
$ 262
$ 340
Net liability recognized in the balance sheet
$ 140
$ 155
$ 227
Net periodic expense
$
$
$
Discount rate
44
2.60%
78
3.30%
35
4.45%
For measurement purposes, a 7.8% 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% 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. 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 holders. A description of equities is as follows: • Class A preferred stock (voting stock) is the last of the three stock classes to be impaired and the first 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 second class to be impaired and the second 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, 2020, 2019 and 2018. 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.
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2 0 2 0 A N N UA L R E P O RT
NOTE 15 — COMMITMENTS AND CONTINGENCIES FPI had an agreement to lease general office space, warehouse storage, loft and garage space which expired in February 2021. In August 2020, FPI signed a new agreement for general office and garage space which expires in July 2030. FPI also has an agreement with Northwest Farm Credit Services, an FPI owner, to lease office space in Spokane, Washington which expires on December 31, 2021. Rent expense for these leases was $856,873, $689,914, and $678,340 for the years ended December 31, 2020, 2019, and 2018, respectively. At December 31, 2020 future minimum lease payments were:
Year
Amount
2021
$820,962
2022
612,101
2023
612,101
2024
612,101
2025
612,101
Thereafter
2,805,461
Total
$6,074,827
NOTE 16 — RELATED PARTY TRANSACTIONS At December 31, 2020, 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, 2020, 2019, and 2018, the Company recognized revenue of $59,880,699, $56,037,809 and $55,433,122, representing 94.5%, 94.8% and 91.7 %, respectively, from transactions with its ACA owners. At December 31, 2020, 2019, and 2018, accounts receivable from such customers totaled $417,844, $336,358 and $465,577 representing 96.2%, 94.2%, and 75.2% of total accounts receivable outstanding at such dates. The Company’s business and industry preclude it from applying the FASB guidance for farm cooperatives, however the Company’s revenue contracts with its major customers reflect a structure similar to that of a cooperative, whereby excess earnings are expected to be distributed to the customers, and excess losses are expected to be funded by the customers. No such distributions were made, or additional funding received for the years ended December 31, 2020, 2019, or 2018.
NOTE 17 — RECLASSIFICATION Certain prior period amounts were reclassified to conform to the presentation in the current period. These reclassifications had no impact to the reported net (loss) income on the statements of operations.
NOTE 18 — SUBSEQUENT EVENTS The Company has evaluated subsequent events through March 12, 2021, which is the date the financial statements were issued or were available to be issued. There are no such events to disclose.
FA R M C R E D I T F I NA N C I A L PA R T N E R S
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1500 Main Street, Suite 600 PO Box 15247 Springfield , MA 01115 413.271.8600
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