Power in Partnerships 2019 ANNUAL REPORT
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F I NA N C I A L S
Supporting Farm Credit associations with innovative, trusted technology With a partner-driven approach, we’re improving lending for American agriculture with technology that is robust, reliable, and intuitive.
CONTENTS
Power in Partnerships by the Numbers
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Letter from the President and Chairman
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Board of Directors
6
Senior Leadership Team
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Remembering Tom Tracy
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The AgWorx by FPI Journey 10
2019 Year in Review 12
FPI LIVE! Operations Summit 16
Partner Series C
Partner Series 21 Celebrating Service to Farm Credit 24
Management’s Discussion and Analysis 27
Report of Independent Auditors 30
Financial Statements 31
Notes to Financial Statements 37
We enter 2020 with a renewed focus on our partnerships and on FPI becoming an even more Partner-centric organization. Our ACA Partners will remain central to our business philosophy.
FA R M C R E D I T F I N A N C I A L PA RT N E R S
Power in Partnerships BY
T H E
N U M B E R S
6
250
ACA Partners
FPI employees
FPI gives back
2500+ ACA Partner end users
680
ACA Partner satisfaction surveys completed in 2019Â
Supporting agricultural lending across
18 states
9 summer interns learned about Farm Credit and our ACA Partners
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personal care packages donated to Friends of the Homeless
220
pounds of snacks and supplies sent to troops abroad
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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Letter from the President and Chairman
Farm Credit Financial Partners, Inc.’s (FPI) vision is to equip our agricultural credit association (ACA) Partners with tools that enable them to succeed in a competitive landscape. We have designed our technology strategy around the increased pressures the financial services industry faces, including new regulatory requirements, a changing credit environment, shifting customer demands, and risk and security threats. With an eye on emerging trends, FPI and our ACA Partners are modernizing the agricultural lending experience for borrowers so that they can meet today’s challenges. To reach our strategic goals, we—together with our ACA Partners—are integrating bestin-breed tools to offer enhanced cloud-based business solutions. To that end, we have adopted industry best practices, improved our processes, prepared our infrastructure, and enhanced controls for our risk and security programs to support our migration to the cloud. In 2019 we executed our renewed strategic plan. With the first implementations of AgWorx Lending, FPI and our ACA Partners began to implement a vision for the AgWorx by FPI ecosystem. While many of our ACA Partners had already implemented AgWorx Customer, Farm Credit West’s and Farm Credit East’s adoption of AgWorx Lending marked the first move away from legacy applications, transitioning the system of record from EmPOWER to AgWorx Customer. Managing customer relationships from centralized tools will not only increase transparency, providing insight into the borrower’s journey, but also improve relationship management and sales tools. The past two years have been heavily focused on implementation strategies and improving technological processes. Although it is a continuous journey of selfimprovement, FPI has renewed its customer-centric focus. This past year we introduced association-specific Partner Success Teams to provide enhanced support to our ACA Partners. The dedicated resources on these teams are well versed in both FPI systems and specific ACA business processes. Thus, they will provide a more effective way of managing issue resolution and enhance communication around day-to-day servicing, all while continuing to develop their association-specific knowledge and ownership. We will continue to face new risk and security challenges as we transition to using cloud-based service providers. We are ensuring that third-party risk management is woven into the fabric of our organization by maturing our tool set to meet the evolving threat landscape. Our philosophy of continuous improvement is informed by industry standard testing and reporting, with the goal of ensuring the best available protections for ACA customer data.
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With an eye on emerging trends, FPI and our ACA Partners are modernizing the agricultural lending experience.
The past year has reminded us of one of the fundamental reasons that FPI was founded: to achieve the benefits and There was no doubt that our shift from a build model—to suit existing business processes—to a buy-off-the-shelf model would mean considerable change for both FPI and our ACA Partners. Change brings new challenges, but we are facing these challenges together and positioning ourselves for the future. We are redefining the way that FPI supports and provides value to our ACA Partners. While there is still more work to be done, the past year has reminded us of one of the fundamental reasons that FPI was founded: to achieve the benefits and rewards a partnership brings its owners.
rewards a partnership brings its owners.
We enter 2020 with a renewed focus on these partnerships and on FPI becoming an even more Partner-centric organization. Our ACA Partners will remain central to our business philosophy and drive its direction. As we introduce new products to the AgWorx by FPI ecosystem, we will continue to support our ACA Partners on successful integration and adoption of these new tools and, most importantly, on leveraging these tools to support the Farm Credit mission.
WILLIAM J. LIPINSKI Interim President
MARCUS L. KNISELY Chairman of the Board President and Chief Executive Officer AgCountry Farm Credit Services
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
AARON S. JOHNSON
TOM NAKANO
President and Chief Executive Officer Farm Credit Illinois
Executive Vice President, Chief Administrative Officer, and Chief Financial Officer Northwest Farm Credit Services
MICHAEL J. REYNOLDS Chief Executive Officer Farm Credit East
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Senior Leadership Team
SCOTT BERARD
JILL BRODY
Executive Vice President Chief Customer Officer Secretary of the Board
Senior Vice President Chief Audit Officer
TODD CYBORON
MARY MAZZA
JIM MCCORMACK
Executive Vice President Application Services
Senior Vice President Human Resources
Senior Vice President Engineering and Application Development
BOB PASSINI
SCOTT ROUSSEAU
SHERYL SHINN
Executive Vice President Chief Risk Officer
Senior Vice President Chief Financial Officer and Treasurer
Executive Vice President Chief Operating Officer Chief Information Officer
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Remembering Tom Tracy P R E S I D E N T & C E O, FA R M C R E D I T I L L I N O I S
Tom Tracy, who passed away in the fall of 2019, was a valued member of our board of directors and a compassionate business leader within the Farm Credit community. He actively contributed to the shared vision of our organization and ACA Partners. Tom was considerate, positive, and thoughtful. He was committed to growing Farm Credit Illinois as a strong cooperative for its farmer-owners and was an insightful member of our board. Tom is greatly missed by Farm Credit Financial Partners and the larger Farm Credit family. We honor his achievements and contributions as a leader in the Farm Credit System.
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“ We lost a gifted leader and valued friend and coworker, but Tom’s passion and vision will forever be part of Farm Credit Illinois. We will carry his legacy forward as we support one another and continue Helping Farm Families Succeed.” AARON JOHNSON President & CEO Farm Credit Illinois
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 AgWorx by FPI Journey
Salesforce® nCino® Fiserv® Microsoft®
Our journey to implement the AgWorx by FPI ecosystem over the past few years has been one of innovation, discovery, and— most importantly—partnership. The journey isn’t over, but with two AgWorx by FPI solutions released, we’re well on our way.
Innovation
The future is now.
New Opportunities
in production and a third nearly
New business opportunities are identified through exploration of best practices and innovative products.
2017
Emerging Technologies
Future Focused
The focus shifts from homegrown technology to market-leading products to meet the evolving needs of our ACA Partners.
To take advantage of emerging cloud technologies and meet increasingly complex security and compliance needs, a new path is forged.
Industry Leaders
Market-leading enabling technologies are carefully selected.
collaboration Discovery
ACA Partners are introduced to new vendor products, performing gap analyses and best practice reviews.
Integration
FPI integrates business capabilities specific to both Farm Credit and funding banks in order to fill vendor product gaps.
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Engagement
Improved business processes and efficiencies are collaboratively explored with product vendors, best practice consultants, ACA Partners, and FPI, then implemented through product configurations.
ACA Experience
ACA Partners get hands-on experience with new vendor products, gaining exposure to AgWorx by FPI solutions and the new business capabilities they provide.
2018
TM
Customer
CUSTOMER RELATIONSHIP MANAGEMENT
Lending
LOAN ORIGINATION
Financials
2019
LOAN ACCOUNTING AND GENERAL LEDGER
Insights
DATA ANALYTICS
Next Generation
With the first implementation of AgWorx Lending and the migration of the book of record from EmPOWER to AgWorx Customer, the AgWorx by FPI ecosystem is born.
Strategic Advantage
ACA Partners see strategic advantages through new technology, with integrated customer relationship and lending functions.
transformation Improved Experiences
AgWorx by FPI is modernizing the customer experience, adding Farm Credit configurations to support customer needs.
Unanticipated Uses
The AgWorx by FPI ecosystem is ready to grow and evolve as our ACA Partners identify new needs and opportunities.
TM
Preparing Our Partners for the Future 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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2019 Year in Review
P R E PA R I N G N E T W O R K INFRASTRUCTURE
As our technology offerings evolve from data center–based applications to cloud-based applications, our network infrastructure is also evolving. Increased network resiliency, capacity, and performance are critical for supporting AgWorx by FPI implementations, such as AgWorx Lending. Our network evolution program is providing optimized network performance, operational agility, and enhanced disaster recovery and business continuity plans. Cloud-based applications result in increased Internet traffic on our network. To optimize network
M AT U R I N G R I S K- M A N A G E M E N T C A PA B I L I T I E S
AgWorx by FPI leverages marketleading commercial software to offer a robust set of solutions, all of which live within our interconnected technology ecosystem. This ecosystem allows for the expansion of business capabilities by integrating and configuring thirdparty platforms and applications. It also introduces new security and risk complexities as we migrate data to the cloud and introduce third-party products to our ecosystem.
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performance, in 2019 we supplemented our traditional wide area network with a modern software-defined wide area network (SD-WAN) solution. This includes the delivery of SD-WAN appliances and configurations—which help to prioritize network traffic by choosing the fastest route—to our ACA Partners. Our ACA Partners are benefiting from this infrastructure initiative as they adopt the AgWorx by FPI ecosystem and Microsoft Office 365 products. From the groundwork laid last year, they will enjoy improved security, experience optimized performance for working from the cloud, and benefit from the ability of FPI to monitor traffic trends, so we can adapt and flex our support
In 2019, a key area of focus was maturing our risk-management capabilities. We recognize the risks of this new landscape, and we are committed to managing them as we implement new solutions, as was evidenced by the appointment of a chief risk officer (CRO) this past year. Under our CRO, we have aligned risk functions, including third-party risk management, business resiliency, and information security. As we look to add complementary applications to our cloud environment, we must ensure the integrity and security of our systems. To that end,
of network activity based on real-time usability demands. We are ensuring a modernized environment for success with cloud-based applications.
vCom Grand Slam Award In October 2019, Farm Credit Financial Partners, AgCountry Farm Credit Services, Farm Credit West, and Northwest Farm Credit Services won a Grand Slam award from vCom—the reseller of our SD-WAN services—for the size, complexity, and cooperative approach of our implementation projects.
our risk management team modernized our tool set to meet the evolving threat landscape and ensure adequate protections of customer data while leveraging the benefits of cloud solutions. We will continue to focus on enterprise risk management in 2020 and beyond with a proactive approach to managing and mitigating risk. This will enable the introduction of new business capabilities to our ecosystem in a dynamic threat and regulatory landscape.
E X PA N D I N G T H E A G W O R X BY FPI ECOSYSTEM
AGWORX LENDING I M P L E M E N TAT I O N S
The AgWorx by FPI ecosystem expanded in 2019 with the introduction of our second cloud-based solution: AgWorx Lending. This solution, which integrates with AgWorx Customer and leverages the nCino® Bank Operating System, broadens ecosystem offerings beyond customer relationship management to include loan origination, legal and customer documents, financial analysis, and loan compliance. This expansion allows our ACA Partners to capitalize on new business capabilities that cloudbased market-leading software offers.
The AgWorx Lending program was separated into four main projects: vendor selection, core integration, implementation, and post go-live remediation. With vendor selection and core integration completed in 2018, the focus of 2019 was implementation. Teams were formed through a collaborative approach and included a dedicated FPI project team, ACA Partners, best practice consultants from West Monroe Partners, and nCino team experts.
Moving lending capabilities to the cloud allows for additional integrations and provides increased efficiency and mobility with the goal of improving the lending experience for customermembers. By integrating customer relationship management and loan origination systems, management of the customer journey is streamlined. Operating out of the AgWorx by FPI ecosystem also improves access to customer information while ACA loan officers are on the road, granting them mobile access to customer records and lending information. It also facilitates communication with branch office staff through shared data. Workflows can be triggered while on the road as data is gathered during face-to-face customer visits out of the office. The focus of the AgWorx Lending program was largely on business transformation versus technology upgrades. As new features from nCino were explored, our ACA Partners took the opportunity to reevaluate the delivery of credit to their customer-members. They identified areas of improvement and standardization across their associations and took an iterative approach to business process review and changes, celebrating small wins through frequent milestone achievements and placing an emphasis on change management.
“
AgWorx Lending has been implemented in a phased approach. In 2019, Farm Credit West and Farm Credit East were the first to go live with this new solution. Months of hard work—from business process evaluation to preparation and training—culminated in migration efforts taking place over a go-live weekend and staff logging in to the new system on Monday morning. ACA staff are now realizing the rewards of these new tools, as they enjoy improved and streamlined communication, a reduction in side systems, and a more holistic view of their customers.
“
Overall, our AgWorx Lending implementation has helped increase transparency between business units. The ability to track all customer activity within one system has streamlined our efforts and given us better insight into our customer relationships. Mobile capabilities enable us to operate in real time, capturing customer interactions and requests on the farm and sharing them immediately with teammates back in the office. We are looking forward to what AgWorx by FPI will bring to our organization in the future!
”
AgWorx Lending is a powerful tool that will continue to offer more as we move forward. Now that we have integrated AgWorx Lending with AgWorx Customer, we are seeing the vision of just how powerful the AgWorx by FPI ecosystem will become. Jace Householder Vice President Credit Lending Farm Credit West
”
Farm Credit West’s approach leading up to the AgWorx Lending implementation was to evaluate current business processes to become more efficient. The goal was not to customize the new system following current processes but rather to be good stewards of customers’ money by saving staff time throughout the day. They are also now equipping staff with new tools, such as dashboard and reporting functions, and are finding that the intuitiveness of the new platforms is improving employee onboarding. Farm Credit East also spent time evaluating processes to identify opportunities for improved efficiency. Now that they are using AgWorx Lending, they are continuing to refine and improve processes and are exploring future opportunities through automation, such as automated notifications of customer delinquencies for loan officers. They are also benefiting from increased transparency across business units and better tracking of customer touchpoints and activity. This year’s AgWorx Lending implementations were a testament to the benefits of collaboration, teamwork, and creativity as we move into the next decade of cloud-based service delivery.
Bri Lovechio Project Manager Farm Credit East 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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L AY I N G T H E G R O U N D W O R K F O R A N A LY T I C S
As businesses move further into the digital landscape by adopting cloud computing, data is becoming increasingly valuable. The financial services industry is analyzing and leveraging data to evaluate risks, automate processes, and provide new insights and business intelligence. As we continue to integrate new cloud-based products within the AgWorx by FPI ecosystem, our ACA Partners are positioned to harness the power of data in the cloud. In 2019, the groundwork was laid for the new world of data with the launch of AgWorx Insights. This new solution will leverage trusted data sources to provide new data-focused capabilities for our ACA Partners within a modern and flexible data architecture platform. The analytics architecture initiative launched in 2019 and included building a data lake environment—a centralized repository of data, leveraging both Microsoft Azure and cloud storage. It was built with a discoverable data governance framework and will improve compliance monitoring and offer new opportunities through enhanced reporting capabilities, predictive analytics, increased data flexibility, and speed. It will also provide our ACA Partners more transparency and autonomy in the use of their data.
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SalesforceÂŽ Platform Developer and Administrator certifications
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ENHANCING CUSTOMER SUPPORT
As our business model adapts to meet the growing demands of the financial services industry, our customer support model is also adapting. With the introduction of purchased applications into the AgWorx by FPI ecosystem—and the decrease of custom software development—our employees must be trained to become masters of these new platforms and tools. In 2019, our employees earned thirty-six Salesforce® Platform Developer and Administrator certifications, ranging from level one to advanced. Fortythree employees graduated from nCino University, which prepared them for the rollout of AgWorx Lending, the second solution to be introduced to the AgWorx by FPI ecosystem. Many additional certifications were achieved, including seven from the International Software Testing Qualifications Board (ISTQB) for our quality assurance team and fourteen from the International Institute of Business Analysis in the form of the
43
nCino University graduates
28%
increase in ACA Partner satisfaction survey submissions
Entry Certificate in Business Analysis™ (ECBA™) for our business analysts. Employees continued to earn certifications in other areas to ensure excellence in service delivery, including project management, UX design, Microsoft, and Scrum Alliance certifications. Our Customer Center of Excellence (CCOE) team focused its training efforts on building knowledge to effectively support new technologies, such as Salesforce and nCino, while also supporting legacy applications like EmPOWER. Other trainings—such as emotional intelligence training—were focused on sharpening customer focus through a heightened awareness of empathy, listening, and understanding customer needs. The transition away from custom development also led to customer support process improvements in 2019. The CCOE began with a review of our incident management process, which led to the formalization of new service level agreements to improve delivery and communication with our ACA Partners. With the formalization of service level agreements, we introduced new
PA R T N E R S U C C E S S T E A M S
The CCOE process improvements in the latter half of 2019 resulted in the introduction of Partner Success Teams (PSTs): association-specific teams designed to provide enhanced support to our ACA Partners. This new structure will ensure that CCOE team members are not only knowledgeable about FPI systems but also well versed in each of our ACA Partners’ business processes. PSTs are a joint effort by the CCOE, subject-matter experts across FPI, and our ACA Partners. Realigning the CCOE into association-specific teams allows for the following: • Improved ownership, collaboration, and commitment to each ACA Partner
standard weekly reports on overall case status. The CCOE also launched a library of knowledge articles, which will grow over time, to provide end users quick access to frequently asked questions and troubleshooting. It also improved email templates to promote post-incident survey completion by our ACA Partners. The new template led to a 28 percent increase in survey submissions about end users’ experience with our service delivery. Survey feedback will be used to inform additional process improvements, identify internal training opportunities, and cultivate an improved customer experience.
• Increased visibility and awareness of each ACA Partner’s business processes • Improved incident resolution through dedicated technical resources PSTs will continue to improve communication in the day-to-day servicing of our ACA Partners. They will also work closely with associationspecific subject-matter experts throughout FPI, including service directors, relationship executives, and implementation analysts. The PSTs will facilitate collaboration and relationship building that will improve overall customer support delivery with the goal of serving as an extension of our ACA Partners’ staff.
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FPI Live!
50+
ACA Partners attended
3 days 16
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OPERATIONS SUMMIT | OCTOBER 2019
While our ACA Partners focus on providing the best experience for their customer-members, FPI has been focused on improving service delivery to our ACA Partners. In October 2019, over fifty of our ACA Partners came from around the country to join us for our inaugural Operations Summit, with the goal of increasing collaboration and building and enhancing relationships. This music-themed event provided attendees with a backstage pass to meet the band (the folks at FPI whom they had often interacted with but hadn’t yet met in person), participate in engaging sessions, and share their insights.
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collaborative sessions
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OPERATIONS SUMMIT
To develop technology solutions that give association staff the ability to focus on meeting the needs of their customer-members, we must stay attuned to the needs of our ACA Partners. The Operations Summit offered an opportunity for our ACA Partners to engage in conversations about our partner support and engagement models, FPI as an extension of ACA Partner teams, and how we can enhance collaboration as we transform our technology solutions. We gathered feedback from operations staff, expanding our knowledge of ACA business practices and use of technology, and gained insights regarding approaches to everyday challenges.
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OPERATIONS SUMMIT
The three-day summit offered a variety of session options, such as an educational presentation from our infrastructure team about the numerous technologies taking place behind the scenes when users power up their computers. Other sessions included the life cycle of a support ticket, in which attendees followed a submitted incident, represented by a large ball of red yarn being passed from one person to the next. This helped attendees visualize the intricate path an incident ticket follows from submission to resolution. Attendees answered trivia questions and learned that an average of 134 incident tickets are submitted each day and that the CCOE team answered over 24,000 phone calls in 2018.
Attendees met members of the newly formed Partner Success Teams under the glitter of a Grammy Awards– themed presentation, complete with a red carpet. During a session by our security team, attendees learned that the email they received prior to the summit inviting them to win a free iPad was actually a phishing exercise. The email served to educate the group on how phishing scams can easily trap end users. Statistics presented during the session highlighted an upward trend in the number of website- and email-related security threats blocked by FPI in 2019. Each session allowed our ACA Partners to learn about a different area of FPI, increasing transparency and providing opportunities for conversation.
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OPERATIONS SUMMIT
Power of Partnerships One of the key benefits of partnership within the FPI family is the opportunity for our ACA Partners to collaborate and share lessons learned—particularly as emerging trends and technologies are explored and implemented. The AgWorx Lending Experience panel discussion with Farm Credit East and Farm Credit West garnered much interest from participants. Bri Lovechio—AgWorx Lending project manager at Farm Credit East—and James Neeley—chief strategy officer at Farm Credit West and project lead for the AgWorx Lending implementation—shared lessons learned from their implementations. Being the first associations within the FPI family to implement the AgWorx Lending solution, their presentations provided valuable feedback to the remaining four ACA Partners that will be implementing AgWorx Lending beginning in 2020, offering insights and advice and answering questions.
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“
AgCountry appreciates the great
relationships we have with staff from other ACAs and with FPI. While many conversations happen over the phone, the Operations Summit was an opportunity to connect in person. It reaffirmed how valuable these relationships are. Through the panel discussion with Farm Credit West and Farm Credit East, we were able to learn about their AgWorx Lending implementations, which will benefit us as we prepare for our implementation this year.
”
Micki Antoine AVP Loan Accounting AgCountry Farm Credit Services
Partner Series
We are proud to be a part of the Farm Credit System (FCS) and its mission to support rural communities and agriculture with reliable, consistent credit and financial services. We engage our employees in this mission through our Partner Series program. Launched in 2018, this program cultivates our employees’ knowledge of the FCS, our agricultural credit association (ACA) Partners, and our Partners’ customer-members. Through an intimate understanding of our ACA Partners’ unique relationships with their customer-members, our employees are equipped to develop technology solutions that enhance these relationships. The Partner Series program also reinforces one of our core company values: helping our ACA Partners succeed by understanding their businesses. We provide employees with dynamic videos and informational content about our ACA Partners and the FCS, and through our immersion series, some employees step away from their desks to experience a day in the life of a Farm Credit customer-member. Last year, fifteen of our employees visited
three local Farm Credit East customers—Taylor Brooke Farm, Buell’s Orchard, and Fairholm Farm— with Dayville, Connecticut, branch staff. FPI employees came away from these visits with a renewed understanding of the challenges that customermembers face and the importance of delivering the funds necessary to maintain day-to-day operations. Last year we added a speaker component to the program, hosting speakers from four of our ACA Partners at our Agawam, Massachusetts, and Spokane, Washington, offices. These insightful presentations not only served to engage our employees but assisted in sharpening our Partner-centric support model and enhancing relationships with the ACA Partners we serve every day.
Our unique structure and partnerships allow us to leverage a wealth of knowledge as we continue to drive innovative initiatives together. The Partner Series will continue to be broadened this year. Through these holistic learning experiences, our employees are becoming more attuned to our ACA Partners’ values and challenges and to our role in providing technology that supports the Farm Credit mission.
Our unique structure and partnerships allow us to leverage a wealth of knowledge as we continue to drive innovative initiatives together.
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PA RT N E R S E R I E S
The Partner Series program reinforces one of our core company values: helping our ACA Partners succeed by understanding their businesses.
For over 100 years, the Farm Credit System has provided financial services to meet the unique needs of the agricultural industry. Our first speaker of the year, Bill Lipinski—former chief executive officer of Farm Credit East—shared an overview of the Farm Credit System and our role within it, from the signing of the Federal Farm Loan Act of 1916 to the founding of Farm Credit Financial Partners, Inc., in 1995. Our employees left the presentation with a deeper understanding of the Farm Credit mission we serve, and how our ACA Partners leverage technology as they deliver on this mission.
In June, Ryan Berg, senior vice president and chief administrative officer of Farm Credit Illinois (FCI), provided an overview of FCI’s customers and how the association helps them succeed. Ryan shared FCI’s ten-year vision, outlining the factors that influence their strategic planning, values, and standards. He also spoke to FPI’s role in developing a road map and implementing the technology advancements necessary to operate in today’s competitive market.
Leland Fredman, senior vice president of business transformation at AgCountry Farm Credit Services, and Keith Wilson, vice president of insurance, visited in September, presenting on the opportunities of AgWorx by FPI. They provided insight into the lending process by acting out a typical farm visit as a loan officer and customer-member. Through a live demo of the Salesforce® mobile application, they also demonstrated
The last presentation of the year was from Bill Perry, executive vice president of lending and insurance at Northwest Farm Credit Services (Northwest FCS). Bill’s presentation emphasized Northwest FCS’ commitment to their customer-members, highlighting programs they offer to provide value to customers. He spoke about Northwest FCS’ Business Management Center, which provides education and acumen to manage an agricultural business. Bill also spoke about Northwest FCS’ commitment to the communities it serves through its stewardship mission and its encouragement of employees’ involvement in the local community.
how new cloud-based tools enable loan officers to manage relationships while on the road. These mobile features provide loan officers instant access to customer data and the ability to capture important notes and follow-up items from customer visits directly within the app.
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“FPI is a valuable partner for Farm
Credit East. Our loan officers were happy to invite FPI employees to visit the farm operations of our customer-members to illustrate the importance of a strong relationship between our organizations.� Lynn A. Weaver Branch Manager, FarmStart LLP Farm Credit East
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Celebrating Service to Farm Credit Our Farm Credit–friendly culture embraces the power of partnerships. Our employees are passionate about the Farm Credit mission and committed to the ACA Partners we serve, as evidenced by the extensive list of landmark anniversaries celebrated in 2019, many of which predate the founding of FPI. How is this possible? Many employees began their careers within the Farm Credit System long before FPI was created and have been with FPI since its founding in 1995.
30
years
SHERRY LEARNED
20
years
BRENDA STEVENS
40
years
MARIE MEIERS
“
Throughout my 40-year career with Farm Credit, I have worked in many different departments, traveled to branch locations of our ACA Partners, and visited customer-member farms. I’ve stayed because of the people. Farm Credit is like a family and has allowed me to build lifelong relationships. We unite around the Farm Credit mission, and we’re supporting a really important cause.
”
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35
LO U I S E W AT R O U S BOYD WOOD
years
DAVE BAREISS
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My Farm Credit career has lasted 35 years for one important reason: The people really care about one another. The longevity of FPI employees is a testament to the industry and our company. We want to do our best—for each other and for our ACA Partners. Twenty years ago, I was given a chance helping with the nightly cycle. That opportunity has carried me through my career, and I’m proud to work for Farm Credit.
”
15
years
JASON HILZENDEGER MICHAEL MACNEIL
10
years
MIKE NOWILL DAN SANDERS PA U L A S U L L I V A N KAREN WEINER
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Management’s Discussion and Analysis
Beyond core and custom services, FPI adds value through maintaining a commitment to provide modern, best in class systems, outstanding customer support, and consultative services designed to support and implement solutions for our ACA Partners. YEAR IN REVIEW
INTRODUCTION
BUSINESS OVERVIEW
The following discussion summarizes the financial position and results of operations of Farm Credit Financial Partners, Inc. (FPI) for the year ended December 31, 2019. 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 (System), which was created by Congress in 1916. The System mission is to provide sound and dependable credit to American farmers, ranchers, and other agricultural producers and farmrelated businesses through a memberowned 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
Our Structure and Focus As a cooperative, we are Agricultural Credit Association (ACA) owned. Our core service offerings include credit delivery and management systems, core infrastructure and security, financial accounting and loan accounting services, management reporting, electronic commerce as well as other products and services used by our ACA Partners to support their lending and financial services needs. In addition to core services, we provide custom technology solutions to address individual customer needs.
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 Partners face and prepare them for the future, our strategy shifted in 2017 from custom building software to purchasing market leading commercial software. Since 2017, we have transformed our business, focusing on industry standards in operations, controls, and information security. The next stage in our business transformation launched in 2018 with the introduction of AgWorx by FPI: A comprehensive set of next generation products and services within a cloudbased technology ecosystem.
TM
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 Partners best-in-breed banking tools that are configured and integrated for Farm Credit. We are leveraging our Farm Credit knowledge and working closely with our ACA Partners to develop solutions that support Farm Credit’s unique customerfocused culture and business model.
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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During 2018, initial AgWorx by FPI implementations began, which included AgWorx Customer, our customer relationship management solution leveraging Salesforce®. Work also began on AgWorx Lending, our loan origination solution leveraging nCino®. During 2019, our first rollouts of the AgWorx Lending solution began with two ACA Partner implementations. Additional AgWorx Lending implementations are currently underway by our ACA Partners and will continue throughout 2020 and into 2021. In addition to AgWorx Lending, we made progress during 2019 on other areas of the AgWorx by FPI ecosystem, including planning for new online banking and legal document offerings, which are targeted for 2020 implementations. Planning was also underway for future rollouts of updated financial, accounting and data systems. Other key areas of focus included investments in security for both on-premises and cloud-based environments, productivity applications leveraging Microsoft Office 365, and investments to modernize technology infrastructure for applications that remain in an on-premises environment. What started as a shift in our strategy in 2017 led to planning and initial implementations during 2018, and then to the execution of multiple enterprise-wide implementations during 2019. As we introduce new products to our ecosystem and plan upcoming implementations with our ACA Partners, we are excited and optimistic for the future. Together with our ACA Partners, we are developing solutions that provide integrated, market leading technologies and increased flexibility to support their customer-members and the Farm Credit mission.
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2 0 1 9 A N N UA L R E P O RT
R E S U LT S O F O P E R AT I O N S
During 2019, FPI achieved revenues and net income materially in line with plan. Carefully managed operating expenses, capital spending, and project spending led to FPI’s financial performance meeting targets. Additionally, total equity and liquidity remain strong. 2019 financial results are consistent with FPI’s strategy of delivering high quality products and services to our ACA Partners while managing to a materially break-even budget. Operating Income 2019 revenues were in line with plan at $59,137k. Revenues decreased by $1,330k, or 2.2% from 2018 levels, as prior-year revenues included nonrecurring implementation fees for two new ACA Partners. Increases in 2019 recurring core services revenues for the new Partners partially offset this reduction.
Total operating expenses decreased to $59,330k in 2019 from $60,225k in 2018, a decrease of $895k or 1.5%. Like the related year over year revenue decrease, this change is driven by the completion of new partner implementations during 2018 and the corresponding temporary increase in non-recurring operating expenses during 2018. The year over year change is reflected in lower 2019 operating expenses in the salary and employee benefits line item, depreciation costs reported on the occupancy and equipment line, and savings in other expenses including lower travel, contract labor and consulting costs. FPI targets a breakeven operating income margin. During 2019, operating expenses exceeded revenues by $193k resulting in an operating loss of the same amount, or (0.34%) of revenues. By comparison, 2018 operating income was a positive $242k, or 0.42% of revenues.
Other Income FPI is reporting other, non-operating income of $241k for the year which is primarily due to interest on FPI’s cash balances. By comparison, 2018 other income was $182k.
•
Net Income
2019 net income after taxes is $24k as compared to $217k in 2018. On a margin basis, 2019 net income is 0.04% of revenues while 2018 is 0.37% of revenues. The 2017 loss of ($962.1k) was driven by two non-operating factors, an ($874.4k) negative impact on net deferred tax assets resulting from the 2017 Tax Cuts and Jobs Act (TCJA) and a ($348.3k) loss related to the disposal of capitalized software.
Total equity at December 31, 2019 equaled $23.2 million, a decrease of $2.1 million from 2018. The decrease in equity is reflected in the accumulated other comprehensive loss line item and is due to an increase in FPI’s employee benefit liabilities during the year.
FPI’s capital plan provides for continued investment in FPI’s strategic products as well as ongoing investments in operations, controls and information security. Capital remains adequate for continued operations and approved projects. GOVERNANCE
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 open-ended line of credit with CoBank. There were no borrowings on this line-ofcredit as of December 31, 2019. 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 Partners. O W N E R S H I P A N D C A P I TA L
As of December 31, 2019, FPI had five
of the outside auditors, the adequacy of the Company’s system of internal controls and procedures, and the adequacy of management’s action with respect to recommendations arising from those auditing activities.
owners with stock investments totaling $27.8 million.
Board of Directors The CEO or CEO-designee of each owner-association serves as a member of the FPI Board of Directors. FPI’s board operates under a committee structure. The committees are: Audit Committee The Audit Committee is composed of the full Board of Directors. The Audit Committee responsibilities generally include, but are not limited to: •
oversight of the financial reporting risk and the accuracy of the annual shareholder reports;
•
the oversight of the internal controls related to the preparation of annual shareholder reports;
•
the review and assessment of the impact of accounting and auditing developments on the consolidated financial statements;
•
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
Compensation Committee
•
The Compensation Committee is responsible for the oversight of employee compensation. The Compensation Committee is composed of the full Board of Directors. The Committee reviews, evaluates and approves the compensation policies, programs and plans for senior officers and employees including benefits programs.
F O R WA R D-LO 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. 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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FARM CREDIT FINANCIAL PARTNERS, INC.
Balance Sheets
AS OF DECEMBER 31, 2019, 2018, AND 2017 2019
2018
2017
ASSETS
Current assets: Cash and cash equivalents
$ 8,096,049
Accounts receivable
$ 14,893,055
356,951
$ 16,904,629
618,913
1,142,133
Prepaid and other assets
6,706,751
5,056,441
3,100,072
Total current assets
15,159,751
20,568,409
21,146,834
Long-term assets: Fixed assets, net
Intangible assets, net Deferred tax asset, net Other long-term assets Total long-term assets Total assets
6,341,801
5,783,476
11,546,796
4,874,733
8,859,352
9,921,264
1,774,359
1,186,741
1,612,574
1,185,669
1,377,245
1,063,340
19,381,557
17,765,139
18,380,654
$ 34,541,308
$ 38,333,548
$ 39,527,488
LIABILITIES
Current liabilities: Accrued expenses and other liabilities
$ 3,101,985
Accrued employee benefits Deferred revenue Total current liabilities
$
4,277,285
$
4,433,274
1,334,705
1,290,519
1,149,032
595,451
599,768
327,483
5,032,141
6,167,572
5,909,789
Long-term liabilities: Accrued expenses and other liabilities, long-term
545,548
Accrued employee benefits, long-term
5,553,293
6,108,987
207,175
798,751
Deferred revenue, long-term Total long-term liabilities
–
– 8,900,295 619,416
6,306,016
6,907,738
9,519,711
11,338,157
13,075,310
15,429,500
Class A preferred stock, $5.00 par value, 5,000,000 shares authorized, 2,500,000 shares issued and outstanding as of December 31, 2019, 2018 and 2017
12,500,000
12,500,000
12,500,000
Class B preferred stock, $5.00 par value, 5,000,000 shares authorized, 1,950,000 shares issued and outstanding as of December 31, 2019, 2018 and 2017
9,750,000
9,750,000
9,750,000
Class C common stock, $5.00 par value, 5,000,000 shares authorized, 1,110,000 shares issued and outstanding as of December 31, 2019, 2018 and 2017
5,550,000
5,550,000
5,550,000
(6,223,575)
(4,144,839)
(5,088,547)
1,626,726
1,603,077
1,386,535
23,203,151
25,258,238
24,097,988
$ 34,541,308
$ 38,333,548
$ 39,527,488
Total liabilities EQUITY
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, 2019, 2018, AND 2017 2019
2018
2017
REVENUE
Core and custom services
$ 59,137,376
Revenue
$ 60,467,204
$ 51,039,307
59,137,376
60,467,204
51,039,307
28,450,277
29,287,425
27,405,782
Purchased services
14,199,259
13,719,067
8,194,603
Occupancy and equipment
10,586,717
10,846,049
9,284,370
OPERATING EXPENSES
Salaries and employee benefits
Other operating expenses Total operating expenses (Loss) income from operations
6,094,108
6,372,790
5,966,174
59,330,361
60,225,331
50,850,929
(192,985)
241,873
188,378
195,608
55,704
OTHER INCOME/(EXPENSE)
Interest income
243,097
Interest expense Loss on disposal of fixed assets Loss on disposal of intangible assets Other gains Total other income (expense) Income (loss) before income taxes
32
2 0 1 9 A N N UA L R E P O RT
–
(240)
(26,001)
–
–
–
(348,321)
–
11,900
930
241,296
181,507
(291,927)
423,380
(103,549)
48,311
Income tax provision Net income (loss)
(561) (1,240)
24,662 $
23,649
$
206,838
858,531
216,542
$ (962,080)
The accompanying notes are an integral part of these financial statements
FARM CREDIT FINANCIAL PARTNERS, INC.
Statements of Comprehensive (Loss) Income YEARS ENDED DECEMBER 31, 2019, 2018, AND 2017 2019
Net income (loss)
$
23,649
2018
$ 216,542
2017
$ (962,080)
OTHER COMPREHENSIVE (LOSS) INCOME:
Net change in retirement plan liabilities Comprehensive (loss) income
The accompanying notes are an integral part of these financial statements
(2,078,736) $ (2,055,087)
943,708 $ 1,160,250
1,925,783 $ 963,703
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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FARM CREDIT FINANCIAL PARTNERS, INC.
Statements of Cash Flows
YEARS ENDED DECEMBER 31, 2019, 2018, AND 2017 2019
2018
2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
$
23,649
$
216,542
$
(962,080)
Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization
6,563,452
7,055,847
6,042,172
1,240
26,001
–
–
–
348,321
(587,618)
425,833
1,753,517
261,962
523,220
(277,546)
(1,458,734)
(2,270,274)
(601,180)
(Decrease) increase in deferred revenue
(595,893)
451,620
(1,491,034)
(Decrease) increase in accrued expenses and other liabilities
(629,752)
(155,989)
1,041,982
(2,590,244)
(1,706,114)
(691,847)
988,062
4,566,686
5,162,305
Loss on disposal of fixed assets Loss on disposal of intangible assets (Increase) decrease in deferred tax asset, net Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (Increase) in prepaid and other assets
(Decrease) in accrued employee benefits, net Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets
(2,024,446)
(4,206,655)
(3,925,254)
Capitalized software development costs
(5,760,622)
(2,371,605)
(3,871,517)
Net cash used in investing activities
(7,785,068)
(6,578,260)
(7,796,771)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on notes payable with CoBank, ACB
Repayment of notes payable to CoBank, ACB
5,484,871
3,173,712
4,156,874
(5,484,871)
(3,173,712)
(4,156,874)
Proceeds from issuance of Class A and B preferred stock
–
–
12,250,000
Proceeds from issuance of Class C common stock
–
–
5,550,000
Net cash provided by financing activities
–
–
17,800,000
Net (decrease) increase in cash and cash equivalents
(6,797,006)
(2,011,574)
15,165,534
Cash and cash equivalents at beginning of year
14,893,055
16,904,629
1,739,095
Cash and cash equivalents at end of year
$
8,096,049
$
14,893,055
$
16,904,629
SUPPLEMENTAL CASH INFORMATION:
Cash paid during the year for: Interest
$
Income taxes
$
33,800
$
38,800
$
189,300
$
(2,078,736)
$
943,709
$
1,925,783
Change in minimum pension liability
34
2 0 1 9 A N N UA L R E P O RT
561
$
–
$
240
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, 2019, 2018, AND 2017
Class B Preferred Stock
Class A Preferred Stock Shares
Balance as of January 1, 2017
Amount
Shares
2,000,000 $10,000,000
–
Amount
$
Class C Common Stock Shares
Amount
Accumulated Other Comprehensive Loss
Accumulated Earnings
Total
–
– $
–
$ (5,943,596)
$1,277,881
$ 5,334,285
Net loss
–
–
–
–
–
–
–
(962,080)
(962,080)
Other comprehensive income
–
–
–
–
–
–
1,925,783
–
1,925,783
Reclassification in connection with adoption of ASU 201802 (Note 10)
–
–
–
–
–
–
(1,070,734)
1,070,734
–
Issuance of Class A preferred stock
500,000
2,500,000
–
–
–
–
–
–
2,500,000
Issuance of Class B preferred stock
–
–
1,950,000
9,750,000
–
–
–
–
9,750,000
Issuance of Class C common stock
–
–
–
–
1,110,000 5,550,000
–
–
5,550,000
Balance as of December 31, 2017
2,500,000
12,500,000
1,950,000
9,750,000
1,110,000
(5,088,547)
1,386,535
24,097,988
Net income
–
–
–
–
–
–
–
216,542
216,542
Other comprehensive income
–
–
–
–
–
–
943,708
–
943,708
2,500,000
12,500,000
1,950,000
9,750,000
1,110,000
(4,144,839)
1,603,077
25,258,238
Net income
–
–
–
–
–
–
–
23,649
23,649
Other comprehensive loss
–
–
–
–
–
–
(2,078,736)
–
(2,078,736)
1,110,000 $5,550,000
$(6,223,575)
$1,626,726
$23,203,151
Balance as of December 31, 2018
Balance as of December 31, 2019
2,500,000 $12,500,000
1,950,000 $9,750,000
The accompanying notes are an integral part of these financial statements
5,550,000
5,550,000
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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FARM CREDIT FINANCIAL PARTNERS, INC.
Accumulated Other Comprehensive Loss YEARS ENDED DECEMBER 31, 2019, 2018, AND 2017
Balance as of January 1, 2017 Change in period Tax effect of change in period
Minimum Pension Liability
Post-Retirement Liability
SERP Liability
Total
$ (5,105,965)
$ (330,071)
$ (507,560)
$ (5,943,596)
1,949,847
(72,586)
809,645
2,686,906
(478,002)
18,964
(302,085)
(761,123)
Tax effect of change in federal tax rate (Note 10)
(1,005,720)
(65,014)
–
(1,070,734)
Balance as of December 31, 2017
(4,639,840)
(448,707)
–
(5,088,547)
Change in period
1,198,453
31,676
–
1,230,129
Tax effect of change in period
(280,750)
(5,671)
–
(286,421)
Balance as of December 31, 2018
(3,722,137)
(422,702)
–
(4,144,839)
Change in period
(2,841,412)
150,607
–
(2,690,805)
654,232
(42,163)
–
612,069
$ (5,909,317)
$ (314,258)
–
$ (6,223,575)
Tax effect of change in period Balance as of December 31, 2019
36
2 0 1 9 A N N UA L R E P O RT
$
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.
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, as included in the financial statements, represents cash on hand and on deposit at banks. Cash equivalents are FPI’s investments in a short-term, highly-liquid money market fund with a maturity of three months or less. The fund invests in high-quality U.S. dollar-denominated short-term debt obligations including: securities issued by the U.S. Government or its agencies, bankers’ acceptances, certificates of deposit, time deposits from U.S. or foreign banks, repurchase agreements, commercial paper, municipal securities and master notes.
D.
Accounts Receivable Accounts receivable are stated at amounts management expects to collect on outstanding balances. FPI evaluates the collectability of its receivables based on its prior experience and assessment of potential future losses and does so through ongoing reviews of its aging analysis. As of December 31, 2019, 2018, and 2017, there was no allowance for uncollectable accounts required, as the Company had collected all accounts receivable outstanding as of the date the financial statements were available to be issued. The Company did not write off as bad debt any accounts receivable in the years ended December 31, 2019, 2018, and 2017.
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 $251,208, $154,314, and $636,906 at December 31, 2019, 2018, and 2017, 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 current operations. Maintenance and repairs are charged to operating expense and improvements are capitalized.
G.
Software Development Costs The Company is developing new products, which the Company intends to offer as part of its core services, and is developing significant upgrades and enhancements to its existing software-as-a-service (“SaaS”) platform. The Company follows the guidance of ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software, for development costs related to these new products. Costs incurred in the planning
FA R M C R E D I T F I NA N C I A L PA R T N E R S
37
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 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 on the balance sheets. Gains and losses, prior service costs and credits and any remaining transition amounts that have not yet been recognized through pension expense will be recognized in accumulated other comprehensive income (loss), 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. Management has reviewed the discount rates and rates of return with our consulting actuaries and investment advisor and concluded they were reasonable. Expected compensation increases are estimated based on historical and expected increases in the future. Increases in estimated compensation increases would result in higher pension expense, while decreases would lower pension expense. Discount rates are selected based on rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefit. Detailed rate assumptions are included in Note 13. Effective January 1, 2005, the Company closed the existing defined benefit pension plan to new participants. All employees hired on or after January 1, 2005 are participants in a noncontributory defined contribution plan. Participants in this plan receive a fixed percentage of their eligible wages in an investment account maintained for the employee. Costs for this plan are expensed as funded and recorded as employee benefit expense. Company employees are also eligible to participate in an employee savings plan. The Company matches a certain percentage of employee contributions with costs being expensed as funded. These costs are recorded as employee benefit expense. The Company also provides certain health care and life insurance benefits to employees. Costs for these benefits are recorded as employee benefit expense in the period in which they are incurred. I.
Income Taxes The Company is organized as a C Corporation for federal income tax purposes and files a form 1120-C. 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. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company also reduces deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This methodology requires estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities. Valuation allowances are recorded against the gross deferred tax assets that management believes, after considering all available positive and negative objective evidence, historical and prospective, with greater weight given to historical evidence, that it is more likely than not that these assets will not be realized. In addition, the Company is required to recognize in the financial statements those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more likely than not to be sustained based solely on its technical merits, no benefits of the position are recognized. The Company recognizes interest and penalties as a component of the provision for income taxes in the accompanying statements of income. The Company does not believe it has any material uncertain tax positions. Interest and penalties paid were $318, $0, and $1,126 for the years ending December 31, 2019, 2018 and 2017, respectively. The Company is no longer subject to federal, state, and local income tax examinations by tax authorities for years prior to 2015.
J.
Revenue Recognition Revenue recognition (FASB ASC 605): Prior to 2019, the Company derives revenue from core services, custom services, and research and development services from its customers, all of which are lending associations in the Farm Credit System. The Company recognizes revenue from these arrangements in accordance with FASB ASC 605, “Revenue Recognition�. Core and extended core services include credit delivery and management systems; core infrastructure and security, financial accounting and loan accounting services, management reporting, electronic commerce, legal support, and custom solutions, which include a retained technology services team dedicated to any specific projects required by the customer over a period of time, which is typically one year. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured.
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2 0 1 9 A N N UA L R E P O RT
FPI has determined that its core and extended core services are performed ratably and represent one integrated deliverable over the contracted delivery period, which is one year, and, as such, recognizes revenue over this one-year term. When FPI sells custom services, such services are generally negotiated separately from the core services and have standalone value and, as such, are recognized ratably over the period of performance. Revenue recognition (FASB ASC 606): During the year ended December 31, 2019, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (FASB ASC 606). The Company adopted FASB 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 as of December 31, 2018. Results for the year ended December 31, 2019 are presented under FASB 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 FASB 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 FASB 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 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. 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 revenue for the year ended December 31, 2019, as reported within the statement of operations, of $59,137,376 is 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 products and services in the normal course of business, and contracts generally do not include customer acceptance clauses. The Company also excludes from revenue government-assessed 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) is also recorded. If revenue is recognized in advance of the right to invoice, unbilled revenue is recorded. Balances as of January 1, 2019 and December 31, 2019 were as follows: January 1, 2019
December 31, 2019
Accounts Receivable
$618,913
$356,951
Unbilled Revenue
154,314
251,208
1,398,519
802,626
Contract Liabilities: Deferred Revenue
The decrease in contract liabilities was due to revenue recognized of $595,893. 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
FA R M C R E D I T F I NA N C I A L PA R T N E R S
39
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 amortizes 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 in the current year. 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 the adoption of ASC 340-40 will result in a change in its current accounting under existing GAAP. 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, 2019, 2018, and 2017, 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 (loss) 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, 2019, 2018, and 2017, there were no impairment losses recognized for longlived 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 the revenue recognition requirements in ASC Topic 605, Revenue Recognition (Topic 605), 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. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as the “new standard.” 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. 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 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 recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. FPI is currently evaluating the impact of adoption of the new standard on the financial statements. In August 2018, the Financial Accounting Standards Board (FASB) issued guidance titled “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Cost.” The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this guidance. This guidance becomes effective for interim and annual periods beginning after December 15, 2020. The guidance also requires an entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. It further specifies where
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2 0 1 9 A N N UA L R E P O RT
to present expense and payments in the financial statements. Early adoption is permitted. The guidance is to be applied on a retrospective or prospective basis to all implementation costs incurred after the date of adoption. The Company is evaluating the impact of adoption on the Company’s financial condition and its results of operations. In August 2018, the FASB issued guidance titled “Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans.” The guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. This guidance becomes effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The guidance is to be applied on a retrospective basis for all periods. The adoption of this guidance will not impact the Company’s financial condition or its results of operations but will impact the employee benefit plan disclosures.
NOTE 3 — PREPAID AND OTHER ASSETS Prepaid and other assets consist of the following (as of December 31):
Prepaid vendor invoices Unbilled revenue Federal and state taxes Other
2019
2018
2017
$ 6,408,073
$ 4,622,660
$ 2,040,310
251,208
154,314
636,906
4,990
237,889
375,424
42,480
41,578
47,432
$ 6,706,751
$ 5,056,441
$ 3,100,072
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
2019
2018
2017
$ 17,019,429
$ 15,947,377
$ 12,691,805
11,839,385
11,919,745
21,781,033
1,906,102
1,906,102
2,204,100
30,764,916
29,773,224
36,676,938
25,890,183
23,431,423
30,893,462
$ 4,874,733
$ 6,341,801
$ 5,783,476
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, and for the year ended December 31, 2017, there were disposals of fully depreciated assets of $185,555. Depreciation expense related to the Company’s fixed assets was $3,490,274, $3,622,330, and $3,388,539 in 2019, 2018, and 2017, respectively.
NOTE 5 — INTANGIBLE ASSETS Intangible assets consisted of the following software development costs (as of December 31):
Software development costs Less: Accumulated amortization
2019
2018
2017
$ 26,691,091
$ 20,930,469
$ 18,558,864
15,144,295
12,071,117
8,637,600
$ 11,546,796
$ 8,859,352
$ 9,921,264
Software development costs are typically amortized over a five-year useful life. Amortization expense associated with these assets totaled $3,073,178, $3,433,517, and $2,653,633 for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, 2018 and 2017, there was $2,207,628, $1,114,276, and $2,477,065, respectively, capitalized that the Company was not amortizing, as these products were in the application development stage and not yet placed in service.
FA R M C R E D I T F I NA N C I A L PA R T N E R S
41
Based on the current amount of intangible assets subject to amortization, including those not yet placed in service, amortization expense is expected to be as follows for each of the years ending December 31:
2020
$ 3,369,691
2021
3,033,684
2022
2,233,287
2023
1,346,596
2024
1,248,924
Thereafter Total
314,614 $ 11,546,796
NOTE 6 — ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following (as of December 31): 2019
2018
2017
$ 2,230,584
$ 3,010,695
$ 2,510,005
Accrued expenses
665,756
1,042,860
977,879
Trade payables
185,811
204,662
923,708
Current liabilities: Bonus
Taxes payable
19,834
19,068
21,682
3,101,985
4,277,285
4,433,274
545,548
–
–
$ 3,647,533
$ 4,277,285
$ 4,433,274
2019
2018
2017
$ 1,116,552
$1,093,453
$1,014,062
188,495
197,066
134,970
29,658
–
–
1,334,705
1,290,519
1,149,032
5,398,678
5,881,574
8,675,604
154,615
227,413
224,211
–
–
480
5,553,293
6,108,987
8,900,295
$ 6,887,998
$ 7,399,506
$ 10,049,327
Long-term liabilities: Bonus
NOTE 7 — ACCRUED EMPLOYEE BENEFITS Accrued employee benefits consist of the following (as of December 31):
Current liabilities: Annual leave Health reserve Payroll taxes
Long-term liabilities: Pension Post-retirement benefits Other
NOTE 8 — CAPTIVE INSURANCE COMPANY In conjunction with other System entities, the Company jointly owns the Farm Credit System Association Captive Insurance Company (the Captive). The Captive is an insurer that provides insurance services such as directors’ and officers’ liability, fiduciary liability, bankers bonds, and other property and liability insurance for the member associations, which includes three farm credit banks, one agricultural credit bank, four farm credit service corporations and seventy associations. The carrying value of the investment totaled $575,730, $551,273 and $559,547 at December 31, 2019, 2018,
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2 0 1 9 A N N UA L R E P O RT
and 2017, respectively, and is included in other long-term assets on the accompanying balance sheets. Premiums paid in those respective years to the Captive totaled $248,580, $239,837 and $201,541, 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 — NOTES PAYABLE TO COBANK, ACB Notes payable to CoBank, ACB represent borrowings by FPI to fund normal operations and capital expenditures. Under terms of the financing agreement with CoBank, which provides FPI with a $3,750,000 revolving line of credit, substantially all FPI’s assets are assigned to CoBank as primary collateral for funds advanced. During the normal course of business, this line is used to settle transactions between FPI and CoBank. Charges on the line are settled from cash accounts. There were no borrowings from CoBank outstanding as of December 31, 2019, 2018 or 2017. Borrowings made and repaid during the year as part of the settlement process were $5,484,871, $3,173,712, and $4,156,874 for the years ended December 31, 2019, 2018 and 2017, respectively. Interest expense incurred to CoBank for the years ended December 31, 2019, 2018 and 2017 was $561, $0, and $240, 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, 2019 was 3.64%. The line of credit matures on July 31, 2020.
NOTE 10 — INCOME TAXES The provision for income taxes consisted of the following (as of December 31): 2019
2018
2017
67,079
$ (133,863)
Current: Federal
$
–
$
State
211
346
–
Total
211
67,425
(133,863)
Federal
30,400
113,412
988,503
State
(5,949)
26,001
3,891
Total
24,451
139,413
922,394
$ 24,662
$ 206,838
Deferred:
Total provision for income taxes
$
858,531
The provision for income tax differs from the amount of income tax determined by applying the U.S. statutory federal tax rate to pretax income as follows (as of December 31): 2019 Federal tax at statutory rate
$
2017
88,910
$ (35,506)
State tax, net
(4,700)
20,814
2,568
Permanent difference
18,875
32,093
15,528
Accrual to return
–
67,079
383
Revaluation of federal tax rate
–
–
874,435
342
(2,058)
1,123
$ 24,662
$ 206,838
Other
$ 10,145
2018
$
858,531
FA R M C R E D I T F I NA N C I A L PA R T N E R S
43
Deferred tax assets and (liabilities) resulted from the following (as of December 31): 2019 Annual leave
$
274,822
2018 $
278,898
2017 $
254,568
Pension
1,328,270
1,500,165
2,177,906
Operating loss carryforward
1,484,776
1,456,585
151,139
Post-retirement
38,028
58,004
56,286
Health reserve
46,395
49,145
32,763
197,554
357,768
237,708
130
130
18
3,369,975
3,700,695
2,910,388
Depreciation
(1,595,616)
(2,513,954)
(1,297,814)
Gross deferred tax liabilities
(1,595,616)
(2,513,954)
(1,297,814)
Deferred revenue Charitable contributions Gross deferred tax assets
Net deferred tax asset
$
1,774,359
$
1,186,741
$
1,612,574
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 carryforwards which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any annual limitation is determined based on the Company’s value and certain other factors on the date of ownership change. Management has determined that it is more likely than not that the Company will recognize the benefits of federal and state deferred tax assets within the allowable time period, despite the ownership changes and, as a result, has determined that no valuation allowance related to deferred tax assets is necessary as of December 31, 2019, 2018 and 2017. At December 31, 2019, FPI has federal net operating loss carryforwards of $5,677,797 and state net operating loss carryforwards of $4,545,203. Federal NOLs of $2,414,015 were earned in 2017 or prior, and those, as well as the state NOLs, expire at various dates through 2020. Federal NOLs of $449,685 and $2,814,097 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. In December 2017, the Tax Cuts and Jobs Act, or the Tax Act (“TCJA”), was signed into law. Among other things, the Tax Act permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 34%, effective for tax years including or commencing January 1, 2018. In accordance with GAAP, the change to the lower corporate tax rate led to a revaluation of our deferred tax liabilities and deferred tax assets in the period of enactment (2017). The $874,435 net adjustment includes a $708,479 benefit from the revaluation of deferred tax liabilities, offset by a $1,582,914 expense from the revaluation of deferred tax assets. Under Staff Accounting Bulletin 118 (“SAB 118”), our preliminary estimate of the TCJA and the remeasurement of our deferred tax assets and liabilities was finalized after management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns. The one-year remeasurement period allowed under SAB 118 ended December 31, 2018 and the Company did not make any significant changes to the provisional amounts recorded. The effective tax rate was 51.05% for the year ended December 31, 2019 and 48.85% for the year ended December 31, 2018. Excluding the impact of the $874,435 net adjustment, the effective tax rate was 16.07% in 2017. The Company elected to adopt ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income for fiscal year 2017 financial reporting. Adoption of this ASU resulted in the reclassification of the income tax effects of the 2017 Tax Cuts and Jobs Act in the amount of $1,070,734 from accumulated other comprehensive loss to retained earnings.
NOTE 11 — FAIR VALUE MEASUREMENTS The Company follows the guidance in FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
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2 0 1 9 A N N UA L R E P O RT
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, 2019, 2018 and 2017, 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, 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 $
–
Assets at Fair Value as of December 31, 2017
Money market accounts
Total
Level 1
$ 12,112,138
$ 12,112,138
Level 2 $
–
Level 3 $
–
Money market accounts are classified within Level 1 and are valued based on quoted prices in active markets for identical securities.
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, 2019, 2018, and 2017, the Company has recorded expense, net of employee withholdings or contributions, of $1,937,809, $1,891,788 and $1,621,700, respectively. Included in accrued expenses and other liabilities in the balance sheets as of December 31, 2019, 2018, and 2017 are self-insurance reserves totaling $188,495, $197,066 and $134,970, 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. During the years ended December 31, 2019, 2018 and 2017, employer contributions charged to expense were $1,169,198, $1,182,959 and $1,115,990, respectively. Defined Contribution Retirement Plan FPI participates in the CoBank defined contribution qualified retirement plan, a noncontributory, multiple-employer plan (defined contribution plan). Under this plan for employees hired January 1, 2005 and later, the employer contributes a percentage of each employee’s salary, based on years of
FA R M C R E D I T F I NA N C I A L PA R T N E R S
45
service, to an account maintained for the employee. During the years ended December 31, 2019, 2018 and 2017, employer contributions charged to expense were $614,663, $583,960 and $530,785, respectively. Defined Benefit Retirement Plan FPI participates in the CoBank defined benefit qualified retirement plan (defined benefit plan). This plan covers FPI employees hired before January 1, 2005. Benefits are based on years of service and compensation levels during the years of employment. It is the policy of the participating employers to fund at least the minimum required by the Employee Retirement Income Security Act (ERISA). FPI’s contributions during 2019, 2018 and 2017 were consistent with this policy. Plan assets are stated at fair value and are primarily invested in publicly traded stocks and bonds, real estate and contracts with insurance companies. Supplemental Executive Retirement Plan Beginning in 2010, FPI entered into a noncontributory, nonqualified supplemental executive retirement plan (SERP). The plan covered one employee. The Company held assets in a trust fund related to the SERP; however, such funds remained Company assets and were not included as plan assets in accompanying disclosures but rather included in the other long-term asset balance in the accompanying balance sheets. During 2017, this plan was fully settled, and the plan was closed. Post-Retirement Health Care Benefit Plan FPI provides certain health care and life insurance benefits to employees if they reach normal retirement age while working for FPI (the postretirement health care plan). The authoritative accounting guidance requires the accrual of the expected cost of providing post-retirement benefits other than pensions (primarily health care benefits) to an employee and an employee’s beneficiaries and covered dependents during the years that the employee renders service necessary to become eligible for these benefits. These accrued expenses/(benefits) of $77,808, $34,879 and ($66,676) were classified as salaries and employee benefits on FPI’s Statements of Operations during the years ended December 31, 2019, 2018 and 2017, respectively. The funding status and the amounts recognized in the statement of condition of FPI’s defined benefit plan and SERP, combined as “Retirement Plans,” as well as other post-retirement benefits are as follows as follows (as of December 31; $ in thousands): Retirement Plans
2019
2018
2017
Change in projected benefit obligation: Benefit obligation at beginning of year
$
30,230
$
31,893
$
32,898
Service cost
529
678
745
Interest cost
1,313
1,171
1,336
–
–
–
5,433
(2,251)
874
Plan participant contributions
–
–
–
Transfers
–
–
–
(2,351)
(1,261)
(3,960)
Plan amendments Actuarial loss (gain), net
Benefits paid Benefit obligation at end of year
$
35,154
$
30,230
$
31,893
$
24,348
$
23,218
$
21,537
Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets
3,798
(309)
3,283
Employer contributions
3,960
2,700
2,358
Plan participant contributions
–
–
–
Transfers
–
–
–
(2,351)
(1,261)
(3,960)
Benefits paid Fair value of plan assets at end of year
$
29,755
$
24,348
$
23,218
$
(5,399)
$
(5,882)
$
(8,675)
Funded status of the plan: Net amount recognized in the balance sheet in accrued employee benefits
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2 0 1 9 A N N UA L R E P O RT
Other Post-Retirement Benefits
2019
2018
2017
Change in projected benefit obligation: Benefit obligation at beginning of year
$
227
$
224
$
218
Service cost
7
8
9
Interest cost
10
8
9
–
–
–
(105)
15
113
75
49
23
–
–
–
(59)
(77)
(148)
Plan amendments Actuarial (gain) loss, net Plan participant contributions Transfers Benefits paid Benefit obligation at end of year
$
155
$
227
$
224
$
–
$
–
$
–
Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participant contributions
–
–
–
(16)
28
125
75
49
23
–
–
–
(59)
(77)
(148)
Transfers Benefits paid Fair value of plan assets at end of year
$
–
$
$
–
–
Funded status of the plan: Net amount recognized in the balance sheet in accrued employee benefits
$ (155)
$ (227)
$ (224)
The accumulated benefit obligation for FPI’s defined benefit plan and SERP, combined as “Retirement Plans,” as well as other post-retirement benefits are presented in the following table (as of December 31; $ in thousands). Retirement Plans
Other Post-Retirement Plans
2019
2018
2017
2019
2018
2017
$32,192
$27,687
$28,308
$155
$227
$224
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.
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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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 Retirement Plans
2019
2018
2017
Periodic benefit cost: Service cost
$
Interest cost
529
$
678
$
745
1,313
1,170
1,336
(1,529)
(1,397)
(1,437)
Prior service cost
213
213
221
Net actuarial loss
109
440
575
Expected return on plan assets Amortization of unrecognized:
$
635
$
1,104
$
1,440
Settlement expense/(income)
–
–
903
Curtailment expense/(income)
–
–
89
$
635
$
1,104
$
2,432
$
(545)
$
(972)
Changes in plan assets and benefit obligations recognized in other comprehensive income Net actuarial loss/(gain)
$
Prior service cost/(credit)
3,164 –
–
–
Prior service credit
(214)
(213)
(310)
Net actuarial (gain)/loss
(109)
(440)
(1,477)
Amortization of:
$
2,841
$
1,198
$
2,759
Approximately $1,073,459 will be amortized from accumulated other comprehensive (income) loss into net period benefit cost in 2020; included in this amount is $1,029,244 related to the retirement plans and $44,215 related to the post-retirement health care plan. The weighted average rate assumptions used to determine benefit obligations for the defined benefit plan and SERP are as follows (as of December 31):
Defined Benefit Plan
2019
2018
2017
Discount rate
3.30%
4.45%
3.75%
Expected return on plan assets
6.00%
6.00%
Rate of compensation increase
3.60%
3.60%
SERP
2019
2018
2017
Discount rate
N/A
N/A
N/A
6.00%
Expected return on plan assets
N/A
N/A
N/A
3.60%
Rate of compensation increase
N/A
N/A
N/A
The weighted average rate assumptions used to determine net periodic benefit cost for the defined benefit plan and SERP are as follows (as of December 31): Defined Benefit Plan
48
2019
2018
2017
Discount rate
4.45%
3.75%
4.30%
Expected return on plan assets
6.00%
6.00%
Rate of compensation increase
3.60%
3.60%
2 0 1 9 A N N UA L R E P O RT
SERP
2019
2018
2017
Discount rate
N/A
N/A
4.30%
6.00%
Expected return on plan assets
N/A
N/A
N/A
4.35%
Rate of compensation increase
N/A
N/A
4.00%
The discount rates are calculated using a spot yield curve method developed by an independent actuary. The approach maps a high-quality bond yield curve to the duration of the plans’ liabilities, thus approximating each cash flow of the liability stream to be discounted at an interest rate specifically applicable to its respective period in time. Plan Assets The asset allocation target ranges for the defined benefit plan follows the investment policy adopted by our retirement trust committee. This policy provides for a certain level of trustee flexibility in selecting target allocation percentages. The actual asset allocations at December 31, 2019, 2018, and 2017 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
2019
2018
2017
Domestic equity
40–50%
40%
39%
41%
Domestic fixed income
35–50%
41%
40%
35%
International equity
0–10%
12%
10%
12%
Emerging markets equity and fixed income
0–10%
2%
6%
7%
Real assets
0–5%
5%
5%
5%
Total
100%
100%
100%
100%
Asset category:
The assets of the defined benefit plan consist primarily of investments in various domestic equity, international equity and bond funds. These funds do not contain any significant investments in a single entity, industry, country or commodity, thereby mitigating concentration risk. No CoBank stock or debt, or that of any other System institution, is included in these investments. Investment strategy and objectives are described in the pension plans’ formal investment policy documents. The basic strategy and objectives as adopted in the investment policy are:
• Manage portfolio assets with a long-term time horizon appropriate for the participant demographics and cash flow requirements;
• Optimize long-term funding requirements by generating rates of return sufficient to fund liabilities and exceed the long-term rate of inflation; and
• Provide competitive investment returns and reasonable risk levels when measured against appropriate benchmarks.
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, 2019, 2018 and 2017 for each of the fair value hierarchy levels as defined in Note 11 ($ in thousands): As of December 31, 2019
Level 1
Level 2
NAV
Total
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 (1)
Fund invests primarily in diversified portfolios of common stocks of U.S. companies in various industries, including consumer goods and services, information technology, health care, 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, health care, 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 health care.
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2 0 1 9 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
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, 2017 Asset category: Cash
$
36
$
$
–
–
$
36
Domestic equity: Large-cap growth funds (1)
4,285
–
–
4,285
Large-cap equity funds (1)
–
–
4,039
4,039
Small-cap growth funds (1)
–
–
1,160
1,160
2,386
–
489
2,875
5,039
3,129
–
8,168
500
–
1,094
1,594
Gold fund
–
–
–
–
Hedge funds (6)
–
–
1,061
1,061
$ 12,246
$ 3,129
$ 7,843
$ 23,218
International equity: International fund (2) Fixed income Bond fund (3)(4) Emerging markets: Equity and fixed income fund (5) Real assets
Total
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.
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51
Expected Contributions We expect to contribute approximately $382,688 to our funded, qualified defined benefit pension plan in 2020. Our actual 2020 contributions could differ from the estimates noted above. Estimated Future Benefits Payments We expect to make the following benefit payments, which reflect expected future service, as appropriate ($ in thousands).
Year
Expected Benefit Payments (Pension)
2020
$ 1,620
2021
1,570
2022
1,612
2023
1,898
2024
1,839
2025–2029
10,711
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). 2019
2018
Accumulated benefit obligation
$ 262
$ 340
$
375
Net liability recognized in the balance sheet
$ 155
$ 227
$
224
Net periodic expense (income)
$
$
35
$ (67)
4.45%
3.75%
Discount rate
78
3.30%
2017
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. Effective March 31, 2017, FPI issued 1,560,000 shares of Class B preferred stock for a total purchase price of $7,800,000. Effective December 18, 2017, FPI issued 500,000 shares of Class A preferred stock; 390,000 shares of Class B preferred stock; and 1,110,000 shares of Class C common stock for a total purchase price of $10,000,000. At December 31, 2019, FPI had 2,500,000 shares of Class A preferred stock outstanding, 1,950,000 shares of Class B preferred stock outstanding and 1,110,000 shares of Class C common stock outstanding, all at a par value of $5 per share. Each owner of Class A preferred stock is entitled to a single vote regardless of the number of shares owned, while Class B preferred stock and Class C common stock provide no voting rights to their owners. 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.
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• Other classes and issues of stock shall be approved by the stockholders.
2 0 1 9 A N N UA L R E P O RT
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, 2019, 2018 and 2017. In the event of liquidation or dissolution of the Company, any assets remaining after payment or retirement of all liabilities shall be distributed first to the holders of the Class B preferred stock, second to the holders of Class A preferred stock and third to the holders of the Class C common stock.
NOTE 15 — COMMITMENTS AND CONTINGENCIES FPI has an agreement with Pine Creek Management, Agawam, Massachusetts, to lease the general office space, warehouse storage, loft space and garage space at 67 Hunt Street, Agawam, Massachusetts. FPI also has an agreement with Northwest Farm Credit Services to lease space at 2001 S. Flint Road, Spokane, Washington. The leases expire on February 28, 2021 and December 31, 2021, respectively. Rent expense for these leases was $689,914, $678,340, and $667,349 for the years ended December 31, 2019, 2018, and 2017, respectively. Northwest Farm Credit Services is an FPI owner customer. At December 31, 2019 future minimum lease payments were as follows (as of December 31):
Year
Amount
2020
$679,337
2021
228,761
Total
$908,098
NOTE 16 — RELATED PARTY TRANSACTIONS At December 31, 2019, 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, 2019, 2018, and 2017, the Company recognized revenue of $56,037,809, $55,433,122 and $48,029,213, representing 94.8%, 91.7%, and 94.1%, respectively, from transactions with its ACA owners. At December 31, 2019, 2018, and 2017, accounts receivable from such customers totaled $336,358, $465,577 and $930,268, representing 94.2%, 75.2%, and 81.5% of total accounts receivable outstanding at such dates. FPI paid rent to Northwest Farm Credit Services, ACA, in the amount of $119,904 for the years ended December 31, 2019, 2018 and 2017. 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, 2019, 2018, or 2017.
NOTE 17 — SUBSEQUENT EVENTS The Company has evaluated subsequent events through March 27, 2020, 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
53
67 Hunt Street Suite 2 Agawam, MA 01001 413.271.8600
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