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THE COOPERATIVE FINANCE ASSOCIATION, INC.

Financial Statements

Years Ended August 31, 2015 and 2014

The Cooperative Finance Association, Inc. • 1

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2 • The Cooperative Finance Association, Inc.

INDEPENDENT AUDITORS' REPORT

To the Board of Directors THE COOPERATIVE FINANCE ASSOCIATION, INC.

We have audited the accompanying financial statements of The Cooperative Finance Association,Inc., which comprise the balance sheets as of August 31, 2015 and 2014, and the related statements ofoperations, capital shares and equities, and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements

in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. We

conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclo-sures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluat-ing the appropriateness of accounting policies used and the reasonableness of significant accounting esti-mates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide abasis for our audit opinion.

OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the

financial position of The Cooperative Finance Association, Inc. as of August 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Kansas City, Missouri

October 22, 2015

Member of Kreston International - a global network of independent accounting firms



MANAGEMENT’S REPORT

Dear Stockholders:

The financial statements of The Cooperative Finance Association, Inc. (CFA)

are prepared by management which is responsible for their integrity and objectivity,

including amounts that must necessarily be based on judgments and estimates.

The financial statements have been prepared in conformity with generally accepted

accounting principles appropriate in the circumstances. The financial statements,

in the opinion of management, fairly present the financial condition and operating

results of the company.

To meet its responsibility for reliable financial information, management depends on

CFA’s accounting and internal control systems which have been designed to

provide reasonable, but not absolute, assurance that assets are safeguarded and

transactions are properly authorized and recorded. The systems have been designed to

recognize that the cost must be related to the benefits derived. The financial statements

are audited by the independent accounting firm of Mayer Hoffman McCann P.C. They

have obtained a sufficient understanding of the internal control structure to plan the audit

and determine the nature, timing and extent of tests to be performed in accordance with

generally accepted auditing standards. CFA is also examined by its source of funding.

The Board of Directors has overall responsibility for CFA’s system

of internal control and financial reporting. The Board consults regularly with

management and meets periodically with the independent auditors to review

the scope and results of their work.

Frank Riedl Dean L. Searcy

Chairman of the Board President and CEO


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THE COOPERATIVE FINANCE ASSOCIATION, INC. Balance Sheets

August 31, 2015 and 2014

Assets 2015 2014

Loans $ 317,352,512 311,001,071Less allowance for loan losses 4,890,940 3,780,121

Net loans 312,461,572 307,220,950

Cash 625,653 495,545Accrued interest receivable 5,059,595 4,853,731Investments in cooperatives 8,522,483 8,112,326Other assets, net of accumulated depreciation and amortization of

$2,078,762 in 2015 and $1,646,585 in 2014 1,327,110 1,573,990

$ 327,996,413 322,256,542

Liabilities, Capital Shares, and Equities

Liabilities:Credit facility $ 265,200,000 262,600,000Patronage refunds payable 3,652,348 3,436,971Accrued interest payable 407,388 393,681Other liabilities 4,469,839 2,066,940

Total liabilities 273,729,575 268,497,592

Capital shares and equities:Preferred stock, $10 par value. Authorized 1,000,000 shares; issued none — —Common stock, $1 par value. Authorized 15,000,000 shares; issued none — —Class A common stock, $2,000 par value. Authorized 2,000 shares; issued andoutstanding 162 and 173 shares at August 31, 2015 and 2014, respectively 324,000 346,000

Class B common stock, $100 par value. Authorized 1,000,000 shares;issued and outstanding 458,977 and 446,398 shares at August 31, 2015and 2014, respectively 45,897,700 44,639,800

Capital credits 11,695 12,620Patronage refunds for reinvestment 2,408,157 2,224,975Paid-in capital 647,984 647,984Earned surplus 4,977,302 5,887,571

Total capital shares and equities 54,266,838 53,758,950

$ 327,996,413 322,256,542

See accompanying notes to financial statements.




THE COOPERATIVE FINANCE ASSOCIATION, INC. Statements of Operations

Years ended August 31, 2015 and 2014

2015 2014

Interest income $ 13,321,530 12,835,337

Interest expense 4,620,666 4,402,284

Net interest income 8,700,864 8,433,053

Provision for loan losses 1,110,000 700,000

Net interest income after provision for loan losses 7,590,864 7,733,053

Noninterest income:

Patronage refunds 1,982,747 1,803,897

Other income 597,011 542,836

Total noninterest income 2,579,758 2,346,733

Noninterest expense:

Employee 3,495,841 3,450,019

Customer relations 180,135 161,071

Professional 356,806 288,280

Administrative and other 435,427 443,047

Depreciation and amortization 432,177 319,632

Total noninterest expense 4,900,386 4,662,049

Income before income taxes 5,270,236 5,417,737

Provision for income taxes 120,000 165,000

Net income $ 5,150,236 5,252,737

Appropriation of net income:

Patronage refunds $ 6,060,505 5,661,946

Earned surplus (910,269) (409,209)

$ 5,150,236 5,252,737





THE COOPERATIVE FINANCE ASSOCIATION, INC. Statements of Capital Shares and EquitiesYears ended August 31, 2015 and 2014

TotalClass A Class B Patronage capitalcommon common Capital refunds for Paid-in Earned shares and stock stock credits reinvestment capital surplus equities

Balance at August 31, 2013 $ 334,000 43,660,300 45,384 2,148,736 647,984 6,296,780 53,133,184

Appropriation of net income — — — — — (409,209) (409,209)

Patronage refunds allocated — 2,148,736 — 3,513,210 — — 5,661,946

Patronage refunds payable in cash — — — (3,436,971) — — (3,436,971)

Retirement of equities — (1,166,900) (33,100) — — — (1,200,000)

Equity exchange 4,000 (3,800) (200) — — — —

Issuance of equities 8,000 2,000 — — — — 10,000

Capital credit reclassification — (536) 536 — — — —

Balance at August 31, 2014 346,000 44,639,800 12,620 2,224,975 647,984 5,887,571 53,758,950

Appropriation of net income — — — — — (910,269) (910,269)

Patronage refunds allocated — 2,224,975 — 3,835,530 — — 6,060,505

Patronage refunds payable in cash — — — (3,652,348) — — (3,652,348)

Retirement of equities — (999,400) (600) — — — (1,000,000)

Equity exchange (30,000) 30,000 — — — — —

Issuance of equities 8,000 2,000 — — — — 10,000

Capital credit reclassification — 325 (325) — — — —

Balance at August 31, 2015 $ 324,000 45,897,700 11,695 2,408,157 647,984 4,977,302 54,266,838





THE COOPERATIVE FINANCE ASSOCIATION, INC. Statements of Cash Flows

Years ended August 31, 2015 and 2014

2015 2014

Cash flows from operating activities:Net income $5 ,150,236 5,252,737Adjustments to reconcile net income to net cash provided by

operating activities:Depreciation and amortization 432,177 319,632

Provision for loan losses 1 ,110,000 700,000Patronage refunds received in equities (410,157) (373,603)Changes in other assets and liabilities:

Accrued interest receivable and other assets 181,566 210,999 Accrued interest payable and other liabilities 2,416,606 (141,499)

Net cash provided by operating activities 8,880,428 5,968,266

Cash flows from investing activities:Net increase in loans (6,350,622) (30,043,684)Purchase of software and equipment (572,727) (509,956)

Net cash used in investing activities (6,923,349) (30,553,640)

Cash flows from financing activities:Net proceeds from credit facility 2 ,600,000 28,900,000Payments of patronage refunds ( 3,436,971) (3,311,783)Retirement of equities ( 1,000,000) (1,200,000)Issuance of Class A and Class B common stock 10,000 10,000

Net cash (used in) provided by financing activities ( 1,826,971) 24,398,217

Net increase (decrease) in cash 130,108 (187,157)

Cash at beginning of year 495,545 682,702

Cash at end of year $ 625,653 495,545

Cash paid for interest and income taxes:

Interest $4 ,606,959 4,372,731

Income taxes 92,298 128,638






1 Summary of Organization and Significant Accounting Policies

(a) Organization and Basis of PresentationAs a cooperative incorporated under the Kansas

Cooperative Marketing Act, The Cooperative Finance Association, Inc. (CFA) makes loans for the benefit of its stockholder members as patrons and equity holders of CFA. Loans include those of a seasonal nature for oper-ating purposes and those of a term nature to finance property, plant, and equipment. Accounting and report-ing policies conform with accounting principles gener-ally accepted in the United States of America (GAAP).

(b) LoansLoans are recorded at their principal amount out-

standing as CFA has the intent to hold until maturity. Interest income is recorded on an accrual basis in accordance with the terms of the loans. The accrual of interest on loans is discontinued when, in man-agement’s opinion, future interest accruals will not be collectible in the ordinary course of business. Impaired loans are loans for which it is probable that not all principal and interest will be collected according to the contractual terms of the loan.

CFA recognizes origination fees charged to bor-rowers for loans when collected and direct origina-tion costs on loans are recognized as incurred. This is not materially different from fees and expenses that would have been recognized under the provision of Financial Accounting Standard Board (FASB) Accounting Standards Codification (ASC) 310-20 “Nonrefundable Fees and Other Costs.”

(c) Allowance for Loan LossesThe allowance for loan losses (allowance) con-

sists of a specific valuation allowance and a general component. The specific valuation allowance relates to loans that are classified as impaired and the esti-mated discounted cash flows or collateral values are less than the respective loan’s balance. The general component is based on factors such as loan loss his-tory, portfolio quality and current economic and envi-ronmental factors. The allowance for loan losses is maintained at a level that management considers ade-quate to provide for estimated losses incurred to date inherent in the loan portfolio. The allowance is based on management’s periodic evaluation of the loan port-

folio, which generally considers the type of loan, its credit quality, an in-depth analysis of adversely clas-sified loans, specific industry conditions, general eco-nomic and political conditions, and other factors. Changes to the estimated levels of the allowance are made through the provision for loan losses. Loan loss-es are recorded against the allowance when manage-ment believes the loss is confirmed. Subsequent recoveries, if any, are added to the allowance.

CFA’s customers depend on agriculture for their income. Although management believes it has rea-sonable credit policies, the credit risk in its portfolio can be difficult to assess because of uncertainties related to economic conditions, collateral values, and estimated future cash flows on loans that become impaired. Therefore, the allowance for loan losses is inherently subjective and is susceptible to revision if facts and circumstances change.

(d) CashCash consists of cash on hand and demand

deposits with financial institutions. At times, CFA maintains deposits in financial institutions in excess of federally insured limits. Management monitors the soundness of these financial institutions and believes CFA’s risk is negligible.

(e) Investments in CooperativesInvestments in cooperatives are required to be

maintained in order to retain borrowing availability at such funding cooperatives. Such investments are recorded at cost and increased by patronage refunds received in the form of equity and reduced by equity redemptions. There is no available market for these investments but they may be redeemed at the discretion of the funding cooperatives. CFA periodically evaluates the carrying amounts of the investments for impairment and has determined that no impairment occurred during the years ended August 31, 2015 or 2014.

(f) Other AssetsAt August 31, 2015 and 2014, other assets consisted

of deferred financing costs of $446,667 and $714,667, respectively; prepaid fees and insurance of $98,990 and $208,015, respectively; and software and equipment with net carrying values of $781,453 and $651,308, respectively. During the fiscal year ended August 31, 2012, CFA incurred $1,340,000 in upfront financing costs which are being amortized on a straight-line basis over the five year term of the amended and restated.

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funding arrangement (see note 5). Software and equip-ment are carried at cost and amortized/depreciated on a straight line basis over their estimated useful lives, generally three years.

(g) Transfers of Financial AssetsTransfers of financial assets are accounted for as

sales, when control over the assets has been surren-dered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolat-ed from CFA and are put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) CFA does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

(h) Income TaxesCFA operates as a cooperative which is not

exempt from Federal and state income taxes and, therefore, is subject to taxes on all income not paid or allocated to patrons. Deferred income taxes are recog-nized for the tax consequences of “temporary differ-ences,” as adjusted for anticipated patronage refunds by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred income taxes are not significant as CFA expects to pay or distribute substantially all future income to its patrons.

(i) Use of EstimatesManagement of CFA has made a number of esti-

mates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities and the reported amounts of rev-enues and expenses during the reporting period to pre-pare these financial statements in conformity with GAAP. Actual results could differ from those estimates.

2 Loans and Allowance for Loan Losses

CFA‘s loan portfolio consists of two primary segments representing loans to agriculture related entities primarily located in the Midwest.

Loans at August 31, 2015 and 2014 are summarized as follows:

2015 2014Agribusiness:

Maturing within one year $ 18,232,018 28,451,089

Maturing after one year 10,469,564 12,804,722

Production agriculture:

Maturing within one year 287,434,379 268,677,161

Maturing after one year 1,216,551 1,068,099

Balance atend of year $ 317,352,512 311,001,071

The agribusiness portfolio focuses on loans pro-vided to cooperative associations who are either stockholders or entities sponsored by stockholders of CFA. Loans maturing within one year are primarily comprised of operating and grain loans that provide financing for seasonal inventory and receivables and are typically secured by those assets. Loans maturing after one year are generally provided for plant and equipment needs and permanent working capital and are typically secured by all of the assets of the bor-rower. Multiple lines of credit with a single borrower are typically cross collateralized. During the fiscal years ended August 31, 2015 and 2014, interest income of $2,199,608 and $2,745,537 respectively was earned on the agribusiness portfolio.

The production agriculture portfolio focuses on loans to agricultural producers, almost all of which are sponsored by stockholders of CFA. These loans are provided to fill the needs of the producer for short and intermediate term credit. Sponsored loans include loans that are designed to provide CFA’sstockholders (Local Associations) with an effective and flexible tool to provide credit support for theirlocal marketing efforts. Through contractual arrange-ments between CFA and the Local Associations, the Local Associations originate loans for CFA to produc-ers that are their patrons. The Local Associations gen-erally assumes a portion of the risk of loss on these loans on a pro-rata basis up to a maximum per their individual contract. As of August 31, 2015 and 2014, outstanding principal balances of $21,140,338 and.

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$20,260,658 respectively was subject to a 100% guarantee while another $175,268,007 and $166,748,869 respectively was subject to a 30% guarantee by the Local Associations.

Loans made as a part of these programs provide funding for production needs primarily for crops and to a limited extent, livestock production activi-ties and are typically secured by the resultant pro-duction. Loans maturing after one year generally provide financing for equipment, facilities, and per-manent working capital and are typically secured by the land, equipment, and real property of the borrower. Multiple lines of credit with a single bor-rower are typically cross collateralized. During the fiscal years ended August 31, 2015 and 2014, inter-est income of $11,121,922 and $10,089,800 respec-tively was earned on the production agriculture portfolio.

CFA has entered into Master Non Recourse Loan Participation Agreements with several Farm Credit Associations whereby CFA and these associa-tions may offer to sell to the other party, participa-tions in loans made or owned by the other. CFA generally sells participation interests under these arrangements and does so primarily as a part of its risk management and in light of its loan concentra-tion policy.

The outstanding principal portion of participat-ed loans sold under all of these arrangements($10,116,768 and $8,003,136 as of August 31, 2015 and 2014, respectively) is not included on CFA’s balance sheets nor is the interest income related thereto included in the accompanying statements of operations.

Generally, CFA does not provide significant financing on a fixed rate basis except on the occa-sion of a very short duration. As such, almost all loans outstanding carry a variable rate that tracks with changes in the prevailing interest rate markets.

From a credit quality perspective, CFA utilizes the Farm Credit Administration’s Uniform Loan Classification System that classifies loans into five categories. The categories are defined as follows:

• Acceptable – assets are expected to be fullycollectible and represent the highest quality,

• Special Mention – assets are currently col-lectible but exhibit some potential weakness,

• Substandard – assets exhibit some serious weakness in repayment capacity, equity, and/or collateral pledged on the loan,

• Doubtful – assets exhibit similar weakness to substandard assets; however, doubtful assets have additional weaknesses in existing factors, conditions and values that make collection in full highly questionable, and

• Loss – assets are considered uncollectible.

A summary of loans and relatedallowance for loan losses follows:

2015Principal Allowance

Agribusiness:

Acceptable, current $ 25,724,502 34,073Special Mention, current 1,481,237 14,812Substandard, current 1,495,843 74,792

Production Agriculture:

Acceptable, current 281,155,898 2,811,599Acceptable, past due 184,881 1,849Special Mention, current 2,585,265 87,899Substandard, past due 1,162,076 116,206Doubtful, past due 3,562,810 1,749,710

Balance at end of year $ 317,352,512 4,890,940

2014 Principal Allowance

Agribusiness:

Acceptable, current $ 34,869,922 60,127Special Mention, current 4,814,066 48,141Substandard, current 1,571,823 78,591

Production agriculture:

Acceptable, current 264,675,549 2,646,755Acceptable, past due 128,200 1,282Special Mention, current 1,806,774 61,430Substandard, current 1,059,699 105,970Substandard, past due 1,017,561 101,446Doubtful, past due 1,057,477 676,379


Impaired loans are loans for which it is proba-ble that all principal and interest will not be col-lected according to the contractual terms.


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Substandard past due (greater than 90 days) and Doubtful loans generally are considered impaired based on significant delays in anticipated collection of principal and interest. Generally, CFA treats loans over 90 days past due as nonaccrual loans and reverses all accrued interest receivable on these loans. When loans are in nonaccrual status, loan payments received are applied against the principal balance. Until the principal balance has been fully recovered, no interest income is recognized. Generally, loans are charged off when collection efforts are no longer feasible.

Information about impaired and nonaccrual loans as of August 31

is as follows:

2015 2014Impaired loans with a specificvaluation allowances $ 4,724,886 2,075,038

Impaired loans without aspecific valuation allowances $ — —

Valuation allowancerelated to impaired loans $ 1,865,916 777,825

Average balance ofimpaired loans $ 3,573,623 1,160,495

Nonaccrual loans $ 4,724,886 2,075,038

Cumulative foregone intereston nonaccrual loans $ 295,941 177,247

Loans past due more than90 days and still accruing $ 184,881 128,200

There were no material commitments to lend additional funds to debtors whose loans were iden-tified as impaired as of the dates presented.

After applying all available collateral in collec-tion actions, CFA may also apply a patron’s equities in CFA against such patron’s loan balance prior to charging any loss to the allowance account. The patron’s CFA equities are then applied against the loan balance and retired. Any regional cooperatives’equities held as collateral are either sold and the proceeds applied to the loan balance, or recorded at the lower of estimated net realizable value or carry-ing value of the related receivable. No equities were applied against loan balances for the years ended August 31, 2015 or 2014.

Activity in the allowance for loan lossesduring 2015 and 2014 is as follows:

ProductionAgribusiness Agriculture Total

Balance atAugust 31, 2013 $ 67,875 3,053,894 3,121,769Provision for loanlosses 118,984 581,016 700,000Charge-offs — (49,822) (49,822)Recoveries — 8,174 8,174

Balance atAugust 31, 2014 186,859 3,593,262 3,780,121Provision for loanlosses (63,182) 1,173,182 1,110,000Recoveries — 819 819

Balance atAugust 31, 2015 $ 123,677 4,767,263 4,890,940

Almost all of CFA’s loans are to borrowers in the heartland of the United States and are secured by the agricultural resources of the borrowers in that area. As such, the ability of the borrowers to fulfill their obligations is dependent on the eco-nomic conditions of the agricultural communities in their respective geographies. The ability of bor-rowers to fulfill their commitments can also be impacted by significant volatility in the commodity markets, environmental factors in their region and governmental policies and regulations.

Management exercises significant judgment when evaluating the effect of qualitative factors on the amount of the allowance for loan losses. Such judgments are heavily affected by management’s out-look for the agriculture economy and commodity prices that have a direct effect on collateral marginsand the ability of borrowers to perform on their loan obligations. Due to the level of uncertainty inherent in the allowance for loan loss estimate, a large por-tion of the allowance is attributable to environmen-tal factors and may not be evident in historical loss experiences for specific loans or groups of loans.

3 Investments in Cooperatives

As a customer of CoBank ACB (CoBank), CFA isrequired to maintain an investment in CoBank




through the ownership of equities equal to a targetequity level set annually by CoBank’s board of directors (see note 5). Investments in stock areobtained through direct purchases of stock and patronage refunds received in the form of equity. To the extent that CFA’s equity in CoBank exceeds the target, the excess is returned to CFA in cash.Retirements under the CoBank capital plan begin in the year following the year when the loan is paid in full, and continue over an 11 year period, subject to board approval. As one of the banks of the FarmCredit System, a nationwide system of cooperatively owned banks and associations established by an Act of the United States Congress subject to the provi-sions of the Farm Credit Act of 1971, as amended, a substantial portion of CoBank’s business is depen-dent on the agribusiness economic sector.

CoBank has communicated its intent to contin-ue a patronage rate of 1% of the current year loan average daily balance with a 75 basis point cash portion over the near term, but with annual board review, assessment and modification as needed.

CFA also holds a $1,000 equity investment in a Farm Credit Association that participates with CFA under a Master Non-Recourse Loan Participation Agreement (see note 2) and in the credit facility with CoBank. CFA received a cash patronage refund from this and another participant in the credit facility during the years ended August 31, 2015 and 2014.

Information related to CFA’s investments in cooperatives and

patronage refunds received is as follows:

2015 2014Investments in Cooperatives:CoBank investment $ 8,521,483 8,111,326 Other cooperative investment 1,000 1,000


Patronage Refunds:CoBank:Cash portion $ 1,230,469 1,120,810Equity portion 410,157 373,603

Other cooperatives: 342,121 309,484Total for the year $ 1,982,747 1,803,897

4 Related Party Transactions

As an agricultural finance cooperative, CFA exists primarily for the purpose of accessing and delivering financing to its stockholders. During the years ended August 31, 2015 and 2014, approximate-ly 99% and 98%, respectively, of all interest income was derived from loans made directly to or spon-sored by stockholders and therefore related parties to CFA. Management believes that all loans to these customers are made on an arm’s length basis.

As a group, customers of CFA with which mem-bers of the current board of directors of CFA are affili-ated held 29% of the common stock and capital cred-its, representing 38% of the voting power and were responsible for 16% of the interest income for the year ended August 31, 2015. As of August 31, 2014, customers of CFA with which members of the then current board of directors of CFA were affiliated held 30% of the common stock and capital credits, repre-senting 37% of the voting power and were responsible for 17% of the interest income. As of August 31, 2015 and 2014, CFA had loan commitments outstanding to members of the board of directors of $19,750,000 and $20,000,000 with outstanding balances of $967,953 and $1,000,000 respectively. As of August 31, 2015, these loans are set to mature from January 15, 2016 to April 15, 2024 and bear interest at rates ranging from 2.75% to 3.50%. Separately, within the production agriculture program which lends directly to agricul-ture producers, CFA’s board of directors sponsored $82,168,838 of funded and unfunded commitments under contracts not to exceed $167,000,000 with a maximum guarantee amount of $20,660,000 as ofAugust 31, 2015. Comparably, as of August 31, 2014, the then current board of directors of CFA sponsored$87,228,686 of commitments under contracts totaling $157,000,000 with a maximum guarantee amount of $19,130,000.

As a part of CFA’s normal lending activity in concert with its stockholders’ marketing strategies, various stockholders enter into interest rate subsidy agreements on certain inventory and production loans. Amounts included in interest income from subsidy agreements totaled $2,542,931 and$2,093,370 in 2015 and 2014, respectively. Net amounts receivable under the agreements were.

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$1,416,423 and $1,149,777 at August 31, 2015 and 2014, respectively.

5 FinancingAgreements

As of August 31, 2015, CFA’s credit facility agree-ment with a consortium of lenders lead by CoBank provides CFA with a $300,000,000, five year revolving facility maturing on April 23, 2017 and a $10,000,000, six year revolving facility maturing April 23, 2020. This agreement provides for an accordion option to request an additional $50,000,000 under the five year revolving facility and an additional $10,000,000 under the six year revolving facility. It is CFA’s intent to maintain adequate facilities throughout the term of its current facility and subsequent to the expiration of its then current commitments, however; there can be no guarantee sufficient funding of a similar nature will be available in either case.

The credit agreement was arranged to provide funding for loans to CFA customers based on a credit quality dictated advance rate and cost of funds and is secured by all such customer notes. Each draw upon the credit facility is subject to individual terms, including the interest rate and maturity. As of August 31, 2015 and 2014, the amount outstanding under this credit agreement was $265,200,000 and$262,600,000, respectively, with an interest rate as of August 31, 2015 of 1.70%. At August 31, 2015 and 2014, CFA had pledged loans with an outstanding bal-ance of $317,352,512 and $311,001,071, respectively.

The current credit agreement includes restrictive covenants that require total capital shares and equi-ties plus the allowance for loan losses (Risk Funds) to be no less than $46,000,000 and the maintenance of a ratio of total loans to Risk Funds of not greater than 6 to 1. In addition, the credit agreement limits cus-tomer commitment concentration by CFA to 15% of Risk Funds (25% for short term special circumstance exceptions) and provides for a 50% and 100% limita-tion of adverse (i.e., the principal balance of loans classified as Substandard, Doubtful and Loss) and criticized loans (i.e., the principal balance of loans classified as Special Mention, Substandard, Doubtful and Loss), respectively, to Risk Funds. At August 31, 2015, CFA was in compliance with all restrictive covenants of the credit agreement.

CFA occasionally offers commercial paper invest-ment opportunities to qualified members. The terms of the arrangements are payable upon demand with a maximum maturity date of 180 days and bearing a variable interest rate.

6 Income Taxes

The provision for income taxes for the years ended August 31, 2015 and 2014

consists of the following:2015 2014

Current income tax expense:

Federal $ 96,000 135,000

State 24,000 30,000

Provision for income taxes $120,000 165,000

The provision for income taxes for the years ended August 31, 2015 and

2014 differs from the federal income tax expense (computed by applying a 34%

statutory rate to income before income taxes) primarily as a result

of the following:

2015 2014Federal tax atstatutory rate $ 1,791,880 1,842,031

Patronage refunddeduction (2,060,572) (1,925,062)

Patronage-sourced items with timingdifferences, net 378,953 221,545

State income tax 8,125 10,121

Other, net 1,614 16,365

Provision forincome taxes $ 120,000 165,000

The tax effects of temporary differences that give rise to deferred taxes are not significant at August 31, 2015 and 2014 as substantially all profits are expect-ed to be paid through patronage refunds.


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7 Commitments and Contingent Liabilities

At August 31, 2015 and 2014, CFA had out-standing commitments to originate loans of $606,065,675 and $625,372,100, respectively. Inconnection with these outstanding commitments to originate loans, CFA has sold loan commitments of $30,581,209 and $38,318,000 as of August 31, 2015 and 2014, respectively, under its Master Non Recourse Loan Participation Agreements (see note 2). Loan commitments generally have fixed expira-tion dates or other termination clauses. Because a significant amount of the commitments are expected to expire without being drawn, the total commit-ment amounts do not necessarily represent future cash requirements. At August 31, 2015 and 2014, CFA had an available borrowing capacity of$44,800,000 and $47,400,000, respectively, under its existing credit agreements (see note 5), subject to available collateral.

CFA has operating agreements for office spaceand equipment through September 2019. CFA’s min-imum commitment under these agreements for each of the five succeeding fiscal years is as follows:$126,837; $127,154; $128,699; $125,914; and, $12,381 for a total of $520,985. Total rent expensefor the years ended August 31, 2015 and 2014 was $131,566 and $139,315, respectively.

8 Capital Shares and Equities

Class A common stockholders are entitled to one vote per share plus one additional vote for each share of Class B common stock. Class B com-mon stock is nonvoting except when the stock-holder owns a share of Class A common stock. Holders of Class A common stock who do not con-duct business with CFA in a 24 month period or who have failed to meet their financial commit-ments to CFA may have their Class A common stock converted into Class B common stock or cap-ital credits of equal par value by the board of directors. In addition, subject to board approval, capital credits and Class B shares can be converted into Class A shares.

For the year ended August 31, 2015, four Class A shares and 20 Class B shares were issued for cash and 15 Class A shares were converted into 300 Class B shares. For the year ended August 31, 2014, 38 Class B shares and $200 in capital credits were converted into two Class A shares, and 20 Class B shares and four Class A shares were issued for cash.

CFA has established a Base Capital Plan under which patrons provide capital (common stock and/or capital credits) in amounts determined in accordance with their relative patronage of CFA. The Base Capital Plan as approved by the board of directors establishes a patron’s annual capitalrequirement using an 8.5% capitalization rate based on the patron’s high credit of the then current and preceding two fiscal years (Base Capital Requirement or BCR). The satisfaction of the indi-vidual patron’s BCR is then used to determine the cash portion of patronage refunds and excess capi-talization for purposes of prorating the board of directors’ discretionary equity retirement funding. The following table details the percent of cash patronage refunds paid to patrons based on their BCR rate.

Capital Percent of CashSatisfaction Patronage

Less than 80% 50%

80% to 100% 80%

Greater than 100% 100%

Patronage refunds reflected for the year ended August 31, 2015 were $6,060,505, consisting of $3,652,348 to be paid in cash and $2,408,157 in CFA equities. Patronage refunds reflected for the year ended August 31, 2014 were $5,661,946, con-sisting of $3,436,971 paid in cash and $2,224,975 in CFA equities. Patronage refunds to be paid inCFA equities are identified as patronage refunds for reinvestment in the statement of capital shares and equities until the equities are allocated to the indi-vidual stockholders. The equity portion of patron-age dividends is paid in Class B common stock with capital credits issued for fractional shares..

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Equity may be redeemed at the sole discretion and direction of the board of directors. Equity retired during the years ended August 31, 2015 and 2014 was $1,000,000 and $1,200,000, respec-tively.

Paid-in capital of $647,984 represents the excess of the par value over the book value of equities exchanged when CFA was recapitalized on December 1, 1993.

9 Employee Benefit Plans

CFA is one of approximately 380 employers that contribute to the Co-op Retirement Plan, EIN 01-0689331, Plan Number 001, (Co-op Plan), which is a defined benefit plan constituting a “multiple employer plan” under the Internal Revenue Code of 1986, as amended, and a “multiemployer plan”under the FASB Accounting Standards MasterGlossary. The risks of participating in these multi-employer plans are different from single-employer plans as follows:

aa)) Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers;

bb)) If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and

cc)) If CFA chooses to stop participating in the mul-tiemployer plan, CFA may be required to pay the Co-op Plan an amount based on the under-funded status of the Co-op Plan, referred to as a withdrawal liability.

CFA’s contributions for the years ended August 31, 2015 and 2014 were $300,580 and $317,376, respectively, constituting its total contribution to the multiemployer plan and represented less than 5% of total contributions to the Co-op Plan as indi-cated in the Co-op Plan’s most recently available annual report (Form 5500). Plan level information is included in the Form 5500 and therefore is avail-able in the public domain. There have been no sig-nificant changes that affect the comparability of the 2015 and 2014 contributions.

This plan covers employees of CFA who work a minimum of 1,000 hours per year and is funded by contributions from CFA and its employees. Normal retirement benefits payable under this plan are based on years of service and the employee’s aver-age compensation during the highest four of the employee’s last ten years of eligible employment. Under the Co-op Plan, participating employers are allowed to annually elect a retirement benefit accrual rate for their eligible employees. CFA has elected to use a 1.75% annual benefit accrual rate since July 1, 2009.

CFA adopted The Restated Thrift/Profit Sharing Plan for Cooperatives in 2004. Generally, eligible employees may elect to contribute up to 80% of their earnings under this plan subject to IRS limita-tions. CFA will match up to 50% of the first 6% of each employee’s earnings contributed to the plan. Employees vest in CFA’s contribution after three years of service with distributions generally being made at retirement, disability, death or termination of employment whichever comes first. For the years ended August 31, 2015 and 2014, CFA’s contribu-tions amounted to $72,480 and $72,412, respective-ly, to this plan.

CFA has established a comprehensive wage plan under which certain employees are eligible to receive a supplemental cash bonus that is generally based on the employee’s duties and responsibilities and CFA’s operating results. Distributions are made annually after the close of each fiscal year. For the years ended August 31, 2015 and 2014, CFA charged $473,800 and $714,600 (to include related benefit accruals), respectively, against income under this plan.

10 Fair Value Measurement

CFA generally does not value any of its assets or liabilities at fair value on a recurring basis. Occasionally, some assets and liabilities are sub-ject to fair value adjustment under certain cir-cumstances on a nonrecurring basis. When fair value adjustments are required by GAAP, CFA estimates fair value in accordance with FASB ASC 820-10 “Fair Value Measurements.” Fair value measurements involve various valuation.

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techniques and assume that the transactions would occur between market participants in the most advantageous market. The standard estab-lishes a fair value hierarchy and prioritizes the inputs into valuation techniques used to measure fair value into three broad levels: 1) Level 1 inputs consist of unadjusted quoted prices in active markets for identical assets and liabilities that CFA has the ability to access at the measure-ment date; 2) Level 2 inputs include quoted prices in active markets for similar assets or lia-bilities and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and 3) Level 3 inputs are unobservable and are used if there is little, if any, market activity for the asset or liabil-ity at the measurement date. Level 3 inputs include internally developed pricing models and discounted cash flow methodologies. By their nature, Level 3 inputs require significant manage-ment judgment.

GAAP requires the maximization of observ-able inputs when calculating fair value for assets and liabilities. Loans are not recorded at fairvalue on a recurring basis. However, nonrecur-ring fair value adjustments are recorded on cer-tain loans to reflect impairments that are basedon management’s assessment of the collectible cash flows or the respective loan collateral value, which are considered a Level 3 input. At August 31, 2015 and 2014, CFA had impaired loans of $4,724,886 and $2,075,038 that were impaired by an estimated $1,865,916 and$777,825, respectively.

GAAP also requires disclosures of the fair value of financial assets and liabilities, including financial assets and liabilities that are not mea-sured and reported at fair value on a recurring or nonrecurring basis. Fair value estimates, including

methods and assumptions utilized by CFA, are set forth below:

•Loans – The carrying value of CFA’s loan portfo-lio approximates the estimated fair value because substantially all of the portfolio iseither at floating rates or re-prices within a rela-tively short time and the mitigation of credit risk by collateral and financial guarantees.

• Investments in cooperatives – Investments in cooperatives are carried at cost, reduced to net realizable value if a permanent diminution in value is determined or otherwise increased for the amount of patronage refund certificates received and patrons’ equities allocated, less distributions received. The investments’ cost approximates fair value as there is no market for the investments and all transactions are execut-ed at cost.

•Credit facility – The carrying value of thecredit facility approximates the estimated fair value as it is re-priced weekly reflective of cur-rent market conditions and credit risk.

•Other receivables and payables – The carry-ing value of all other receivables and payables approximates the fair value due to the short maturities of the receivables and payables.

11 Subsequent Events

Management of CFA has evaluated subsequent events through October 22, 2015, which is the date the financial statements were available to be issued. No significant matters were identified for disclosure during this evaluation..

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