2010 Annual Report by Farm Credit East

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OUR VALUES ARE FIRMLY ROOTED IN NORTHEAST AGRICULTURE ANNUAL REPORT 2010

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COMMITMENT AND UNDERSTANDING OUR ROOTS A letter from the Chairman of the Board and Chief Executive Officer was a significant year for your cooperative. In year one,

operational, finance, credit and personnel policies of the

we successfully brought together two excellent organiza-

predecessor organizations and adopt new policies that reflect

2010

the best practices of both.

tions to form Farm Credit East. The merger has crystallized a great team with more depth and established an organization for today and

•

Staff from the two predecessor organizations participated in

tomorrow — with greater capacity of capital, people and leadership

“integration groups” to develop new internal procedures and

to serve northeast agriculture.

processes to strengthen the organization. Programs offered by one of the predecessor entities are now available throughout Farm Credit East.

Farm Credit East is a value-driven organization. One of our most important and underlying values is commitment — to the success of

•

services and they help to surface candidates for director seats.

With that commitment comes a sense of pride. We are proud to work with some of the world’s best in farming, commercial fishing and

All 19 branch offices now have customer service councils that provide ongoing input on Farm Credit East programs and

our individual customers and to the future of northeast agriculture. •

We continue to work hard to identify risk in our loan portfolio and to help customers manage that risk. As such, we work with

forest products businesses.

the Farm Services Agency and others to provide loan guarantees and maintain our overall financial capacity.

Farm Credit East understands that for our organization to be successful, our customers must be successful. Over the past several years,

•

We have increased the amount of information to help customers

we have experienced one of the most challenging credit cycles in 50

understand financial markets. We made a special effort in 2010

years. The weak economy impacted many of the farm industries that

to help customers consider the implications of fixed vs. variable interest rates on their businesses.

we serve, especially nursery, greenhouse, turf, forest products and dairy. Mother Nature threw in one of the wettest, coldest growing sea-

•

We worked with the national Farm Credit Council to ensure that new financial services legislation did not interfere with our

sons on record in 2009, followed by severe isolated drought in 2010.

ability to serve our customers efficiently or add unnecessary Through it all, our customers’ resilience has been impressive. Our

costs borne by our customers. We continue to work with Farm

customers have made tough adjustments. We are not completely out

Credit institutions nationwide to ensure that we have access to financial markets in order to meet customer credit needs.

of this cycle and clearly there are significant weaknesses in the U.S. economy that will continue to play a role, but we are hopeful that the

•

We participated in key national Farm Credit System leadership committees and councils and implemented joint initiatives with

coming year will provide better opportunities for our customers.

other forward-thinking Farm Credit institutions. Growth in credit slowed in 2010. Given the financial stress faced by many of our customers in 2009, this was an appropriate response on

As we visited with customers throughout the year including at our

the part of the customer and Farm Credit East. During this period,

customer appreciation meetings in November, we were told that

our priority has been working closely with customers to proactively

maintaining a financially strong Farm Credit East organization that

deal with credit issues.

can weather industry cycles is essential. This means maintaining strong capital levels and earnings. Farm Credit East’s 2010 financial

It is during challenging times that Farm Credit earns its true value

results are strong, but they also reflect the difficult challenges faced

as a customer-owned financial cooperative. When members face

by many of the industries that we serve.

financial problems, we don’t cut and run like many other financial

•

That does not mean we never see a situation where a customer may

Net income was $101 million, an increase from a combined net income of $85.8 million in 2009.

institutions. Instead, we work with each member to find solutions. •

The provision for loan losses was $20 million in 2010. When

exit agriculture, but that only occurs after all alternatives have been

combined with net loan charge-offs and the merger accounting

considered.

for the allowance for loan losses, the association is well positioned with an allowance for loan losses to loans of 1.29 percent.

Some of our efforts over the past year include: •

Customer service has been the priority. Lending and services staff has focused on providing timely, consultative assistance

•

Nonaccrual loans were $50.6 million, a decrease of $3.6 million from a combined $54.2 million in 2009.

•

Total capital for your association was $760.4 million. We have

to all customers.

continued to strengthen our capital ratios and members equity

The Board and management worked tirelessly to review the

stood at 17.10 percent of assets at the end of 2010.

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•

Return on assets was 2.36 percent. This level is strong compared to other Farm Credit System institutions and banking industry standards.

•

Based on our positive results, the Board approved a patronage dividend to eligible customers amounting to $35 million to be paid in cash during February 2011. For the average customer’s loans, this equals a 1 percent reduction in the customer’s interest rate or more than 22 percent of the interest paid.

In the last two years, the cost of money to variable-rate customers has been among the lowest in recent history as Farm Credit’s cost of money remained low due to the actions of the Federal Reserve. As economic conditions change, we may begin to see increased movement in the cost of funds. We will continue to watch this closely in 2011 and keep you informed. In closing, we greatly appreciate your support of Farm Credit East. The Board and management remain focused on our deep member-roots and commitment. We appreciate the trust that Farm Credit East stockholders have in our organization. We will continue to work hard to keep that trust.

William J. Lipinski CEO

Abbott W. Lee Chairman of the Board

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AN INNOVATIVE BOARD FIRMLY ROOTED IN NORTHEAST VALUES Being owned and governed by our customers sets Farm Credit East apart from other financial institutions. As leaders in northeast agriculture, these directors serve our customers by proactively addressing key issues that impact the success of our cooperative and the success of our members’ individual businesses. We value their diversity of expertise and their insight in running a cooperative that meets the credit and financial service needs of their fellow members. We believe that this forward-thinking approach is the best way to help the organization achieve its mission that is firmly rooted in northeast agriculture.

Front row, seated from left: Donald N. Jensen II Lawnhurst Farms Stanley, N.Y. Abbott W. Lee Chairman Integrity Propagation, LLC Chatsworth, N.J. Henry “Hal” Adams III Vice Chairman Black Brook Farm Shortsville, N.Y.

Ann P. Hudson, CPA Outside director Suffield, Conn. June W. Hoeflich Outside director Retired, HSBC Bank, USA Williamsville, N.Y.

Back row, from left: Charles R. Miller Willow Ridge Farms, LLC Alexander, N.Y. Richard P. Janiga R + D Janiga Enterprises, LLC East Aurora, N.Y. Matthew W. Beaton Sure-Cran Services, Inc. and Beaton’s, Inc. East Sandwich, Mass. Andrew J. Gilbert Adon Farms Potsdam, N.Y.

Peggy Jo Jones Outside director Albertsons, LLC Boise, Idaho

Sandra K. Prokop Crossbrook Farm Middleburgh, N.Y.

John Lyman III The Lyman Farm, Inc. Middlefield, Conn.

Christine E. Fesko Fesko Farms, Inc. and Chris Fesko Enterprises Skaneateles, N.Y.

John J. Dickinson Ideal Dairy Farms and Quiet Brook Holsteins Hudson Falls, N.Y.

Robert R. Brown II Orchard Dale Fruit Farms, Inc. and Brown’s Berry Patch Waterport, N.Y.

Peter J. Russell Russell Farms, Inc. Appleton, N.Y.

Gary Mahany, Mahany Farms, Arkport, N.Y., was unavailable the day the photo was taken.

Benjamin J. Freund Freund’s Farm, Inc. East Canaan, Conn.

Bruce L. Kidder Kidder Farms Jamestown, N.Y.

Lyle C. Wells Wells Homestead Acres Riverhead, N.Y.

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DELIVERING HIGH-VALUE CREDIT AND FINANCIAL SERVICES TO PRODUCTIVE BUSINESSES Farm Credit East is committed to delivering highvalue credit and financial services to the northeast agricultural businesses that deliver so much to our everyday lives. From the tip of Cape Cod to the shores of Lake Erie, the 12,000 customers we serve produce high-quality, safe agricultural and green products and support our local communities through employment and economic activity.

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Lamb Farms, Inc., Oakfield, N.Y. Our relationship with the Lamb family goes way back to 1938 when Leslie Lamb came to Farm Credit as a young man ready to turn his dream of business ownership into reality. Today, weâ&#x20AC;&#x2122;re still there, growing right alongside the Lambs and supporting their business goals in western New York. Through three generations, weâ&#x20AC;&#x2122;ve provided advice, financing for growth and participation in our Large Dairy Benchmark and Dairy Profit Analysis programs.

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ADVANCING AGRICULTURE ONE CUSTOMER AT A TIME Knowing our customers, earning their trust, understanding their businesses. It’s the foundation for all that we do. We invest in our customers and the industries we serve by providing effective solutions that focus on long-term success. We know what it takes to overcome challenges, and we value financial stability and sound planning. Our roots are in these rural businesses. Our credit and financial service staff listen closely to our customer needs. They work with producers right at their operations and draw on their working knowledge of our customers’ businesses. Our staff is thoroughly trained in providing high-value business solutions that focus on each customer’s long-term success. “We look at Farm Credit as a forward-thinking organization that helps us determine where we want to take our business and how we can make that happen. Financing through Farm Credit East ensures that we can take advantage of opportunities when they arise. And the Large Dairy Benchmark keeps us competitive by helping us establish how we compare with other well-positioned businesses in

Farm Credit loan officer Steve Tudhope (center) meets with Lamb Farms partners (from left) Jim Veazey, Jonathan Lamb, Leslie Lamb, Gordon Lamb and Matt Lamb.

the region. We also use the Dairy Profit Analyzer program to watch our profitability and monthly costs, and to determine where we need to be to remain competitive in this industry.” Jim Veazey, partner, Lamb Farms, Inc.

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Our 400 agricultural specialists are experts in the unique characteristics of northeast agricultural industries. Through our expertise and understanding of each industry, we have gained a 60 percent market share of farms lending across six northeastern states.

COMMITTED TO NORTHEAST AGRICULTURAL

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Farm Credit East: ❖ Is one of the nation’s leading lenders to

dairy, working with producers to advance their profitability ❖ Is a leading lender to the northeast forest

products industry ❖ Serves the credit and financial service

needs of nursery and sod producers ❖ Has expertise dedicated to serving green-

house and agricultural retail operations ❖ Works with the region’s apple growers, who

ship to local, national and international markets

PRODUCERS

❖ Serves cranberry producers in two major

cranberry-growing regions ❖ Supports excellent wineries throughout the

It is a core Farm Credit East value to be a trusted

region, as well as grape producers known for the quality of their juice and jellies

and consistent provider of credit and services for

❖ Finances major vegetable operations that

the farming, fishing and timber businesses that we serve. As a result, we are the largest lender to agriculture in the Northeast, with $4.47 billion in loans that capitalize a wide range of industries.

deliver sweet corn, cabbage, potatoes, squash, carrots and an ever-growing variety of other vegetables ❖ Works with commercial fishermen despite a

very tough regulatory environment ❖ Provides Country Living loans to help

families realize their dream of life in the country ❖ Provides industry-specific services to farm

service businesses and value-added agricultural enterprises

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COMMITMENT TO THE FUTURE SUCCESS OF NORTHEAST AGRICULTURE Farm Credit East is a leader in supporting programs for young and beginning farmers, providing college scholarships and sponsorships as well as working capital through our unique FarmStart program. In addition,

Mike Puglisi, a participant in Farm Credit East’s Generation NeXt seminars, inspects eggs for defects as they pass by on a 2-mile-long conveyer belt at Puglisi Egg Farms in Howell, N.J.

our Generation NeXt seminar series offers intensive management coaching to the next generation of agricultural entrepreneurs and future family business owners, like Mike Puglisi, of Puglisi Egg Farms in Howell, N.J. The Puglisi family has borrowed from Farm Credit for more than 40 years. Puglisi Egg Farms, Inc. is a family-run egg producing corporation and Puglisi Farms is a distributor of food products, such as eggs products, butter and cheese. Mike is the family’s third generation on the farm. “Through the Generation NeXt seminars, I learned what I need to know to be successful in my family business, which I hope to manage one day. “Our instructor, Steve Makarevich, went over a wide variety of issues that every business owner faces, from accounting to problem solving. And, even more importantly, he offered concrete examples of each issue that I could tie right back to our business. Steve made the concepts come alive for me so I knew exactly how I could apply them the next day on the farm.” Mike Puglisi, Puglisi Egg Farms, Inc.

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FINANCIALS ANNUAL REPORT 2010

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Management’s aiscussion and Analysis of cinancial mosition and oesults of lperations qhe following commentary is a review of the financial condition and results of operations of carm Credit bastI ACA Ethe AssociationF as of aecember PNI OMNM with comparisons to prior yearsK qhe commentary includes material known trendsI commitmentsI eventsI or uncertainties that have impacted or are reasonably likely to impact our financial condition and results of operationsK qhis commentary should be read in conjunction with the accompanying consolidated financial statements and notes appearing in this Annual oeportK aollar amounts are in thousands unless otherwise notedK

Business ptructure qhe Association is an institution of the carm Credit pystemI which was created by Congress in NVNS and has served agricultural producers for over VM yearsK qhe pystem’s mission is to maintain and improve the income and wellJbeing of American farmersI ranchersI and producers or harvesters of aquatic products and farmJrelated businessesK qhe carm Credit pystem is the largest agricultural lending organization in the rnited ptatesK qhe carm Credit pystem is regulated by the carm Credit Administration EcCAF which is an independent safety and soundness regulatorK

qhe accompanying financial statements were prepared under the oversight of the Audit CommitteeK

As a cooperativeI the Association is owned by the members it servesK qhe territory served extends across a diverse agricultural region covering the entire states of ConnecticutI jassachusettsI ohode fslandI kew gerseyI six counties of kew eampshireI and all of kew vork except two countiesK qhe Association makes short and intermediate term loans for agricultural production and long term real estate mortgage loansK lur success begins with our extensive agricultural experience and knowledge of the marketK

corwardJiooking ptatements Certain information included in this report contains forwardJ looking statementsK qhese statements are not guarantees of future performance and involve certain risksI uncertaintiesI and assumptions that are difficult to predictK tords such as “believesI” “couldI” “estimatesI” “anticipatesI” “mayI” “shouldI” “willI” or other variations of these terms or similar expressions are intended to identify forwardJlooking statementsK qhese statements are based on assumptions and analyses made in light of experienceI historical trendsI current conditionsI and expected future developmentsK eoweverI actual results and developments may differ materially from our expectations and predictions due to a number of risks and uncertaintiesI many of which are beyond our controlK qhese risks and uncertainties includeI but are not limited to fluctuations in the economyI the relative strengths and weaknesses in the agricultural credit sectors and in the real estate marketI and the actions taken by the cederal oeserve in implementing monetary policyK

qhe Association obtains its funding for its lending and operations from CoBankI ACB ECoBankFK CoBank is a cooperative of which carm Credit bast is an owner and memberK qhe AssociationI along with other carm Credit pystem EcCpF entitiesI also purchases payroll and other human resource services from CoBankK qhe Association is materially affected by CoBank’s financial condition and results of operationsK qo obtain a free copy of the CoBank Annual oeport to ptockholdersI please contact us at one of our offices or by accessing CoBank’s website at wwwKcobankKcomK carm Credit bast’s Annual and nuarterly reports to stockholders are available on the Association’s websiteI carmcrediteastKcom or can be obtained free of charge by calling the Association’s main office at USMJTQNJQPVMK Annual reports are available TR days after year end and quarterly reports are available QM days after each calendar quarter endK

Critical Accounting bstimates qhe financial statements are reported in conformity with accounting principles generally accepted in the rnited ptates of AmericaK qhe Association’s significant accounting policies are critical to the understanding of the results of operations and financial position because some accounting policies require management to make complex or subjective judgments and estimates that may affect the value of certain assets or liabilitiesK janagement considers these policies critical because it has to make judgments about matters that are inherently uncertainK cor a complete discussion of significant accounting policiesI see kote O to the consolidated financial statements “pummary of pignificant Accounting molicies”K

qhe Association purchases technology and other operational services from carm Credit cinancial martnersI fncK EcmfFI a technology service corporationK carm Credit bast is an owner in cmfK jerger bffective ganuary NI OMNMI carm Credit of testern kew vorkI ACA Etestern kew vorkF merged into cirst mioneer carm CreditI ACA Ecirst mioneerFK qhe merged association operates under the name of carm Credit bastI ACAK qhe merger successfully brought together two excellent organizations and

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established a business entity with greater capacity of capitalI peopleI and leadership to serve northeast agricultureK cor additional informationI see kote N to these consolidated financial statements “lrganizationI Business Combination and lperations”K

which is expected to be paid in OMNN while at the same time increasing both the dollar and percent levels of permanent capital during the yearK Agricultural lutlook qhe Association has a diverse loan portfolioK qhe following reflects the economic conditions for the various key commodities served by the AssociationK

vear in oeview qhe OMNM business environment was a continuation of the high unemploymentI low interest rateI and low growth climate that started with the financial crisis of OMMUK jany of our customers have struggled with reduced revenues either from low prices or reduced demand for their productsK At carm Credit bastI we continue to focus on maintaining a financially strong organization with high customer service and valueK then our customers require capital for their businessesI we are ready with not only the right products and the financial capability to deliver themI but also a highly trained and knowledgeable staff to work with customersK

aairy EOQK5B of total loan volumeF – aairy farmers had a significantly improved year during OMNM as the farm price of milk recovered significantly from the depressed levels of OMMVK te estimate that the average producer operated at a modest level of profitability during OMNMI although most farmers remained in recovery mode in terms of paying down bills from OMMVI dealing with deferred capital spendingI and paying down additional debtK fn most of the kortheastI it was a good crop year and the yield and quality of forage and feed crops was generally excellentK qhere is a wide range of individual producer results around this average such that some producers had a very good year in OMNM while others with high cost structures struggled for the second year in a rowK solatility of milk pricesI purchased feedsI and oilJrelated inputs continues to be a challenge in dairyK A growing number of producers are learning to implement various risk management tools by which they can better manager their downside risk on milkJfeed marginsK

qhe most significant event of OMNM was the merger of cirst mioneer and testern kew vork effective ganuary NI OMNMI to form carm Credit bastK qhis event impacts the presentation of the financial results contained in this reportK jerger accounting rules require the financial statement presentation of combined balances as of the date of mergerI but not for previous periodsK Accordingly all years prior to OMNM presented in this Annual oeport represent the former cirst mioneer onlyK vou will see references to combined results of the two former entities for OMMV in other parts of this discussion and analysis of financial position and results of operationsK qhese combined OMMV results do not reflect any purchase accounting adjustmentsI the impact of which would not be materialK qhe assets and liabilities of the former testern kew vork entity are reflected in the aecember PNI OMNM consolidated balance sheetK qhe equity of the former testern kew vork entity shows as “additional paid Jin capital” in the equity section of the balance sheetK

aairy exports increased significantly in OMNM over OMMVI and are continuing to grow during OMNNK aemand for improved diets in countries such as China and fndiaI supply challenges in other major exportersI and the relatively low value of the rKpK dollar are all drivers of increased rp exports of dairy protein productsK As a resultI the current outlook for farm milk prices for OMNN is positive based both on forecasts by the experts and the dairy futures marketsK Cost of production is also on the rise driven by anticipated sharply higher purchased feed costs as well as increased costs for petroleum and related inputsK ff the current forecasts come to fruition later in the year and barring unusually adverse weatherI OMNN appears to be an opportunity for most dairy farmers to achieve profitability above the fiveJ year averageK AgainI there is substantial uncertainty around this forecast at this point in the yearK

pince testern kew vork was approximately one third of the size of cirst mioneerI the growth in assets and earnings that occurred from OMMV to OMNM and reflected in this report are mostly due to the combination of the two organizations unless otherwise notedK eaving said thatI carm Credit bast had a good year financially in OMNMK qhe Association experienced modest nonJmerger growth in loans Ejust under RBFI while reducing high risk assets such as nonaccrual loansK ket income of ANMNKM million was an increase of ANRKO million over the combined earnings of the two former entities in OMMVK qhe return on average assets of OKPSB was higher than either predecessor entityK cor the year ending aecember PNI OMNMI the Association declared a APRKM million patronage dividend

Availability of sufficient labor continues to be a concern for many dairy farms AlsoI the cost and complexity of environmental compliance is a continuing challenge in this industryK

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Cash cield ENNKPB of total loan volumeF J qhe kortheast industry consists of corn for grainI soybeansI hayI and some small grainsK juch is partJtime agriculture with a strong reliance on nonfarm income as well as a significant presence of semiJretired farmersK fn the western regionI there are more full time crop farmers and the markets for their crops are more diverse such as the western kew vork ethanol facilitiesK fn OMNM corn prices were down somewhat from OMMVK diven strong export demandI smaller world supply and a smallerJ thanJanticipated rp cropI grain prices have been very strong in recent months and continue to rise at the time this report is completedK poybean prices were also down slightly in OMNMK poybean demand and prices are also expected to be up in OMNNK

dreenhouse ESKPB of total loan volumeF : OMNM was an average to slightly above yearK qhe season benefited from an early start in the springI but slowed significantly in late jay as summer weather arrived earlyK pummer sales were slow due to hotI dry weatherK A nice fall season and good weather leading up to the Christmas holiday allowed for good fall crops and poinsettia salesK oevenues for wholesale greenhouses in OMNM were zero to RB above OMMV on averageK oetail greenhouse businesses had similar sales patternsI but more variation in OMNM revenues with some reporting sales decreases and others ahead by R to NMBK bnergy and other input costs were stable compared to OMMVK ppring OMNN will be compressed due to a late basterI which could be a challenge to growersI especially if there is adverse weatherK qhe overall outlook for OMNN is more positive than OMNM and some additional expansion activity is expectedK

Timber EVK8B of total loan volumeF: qimberland investmentI lumber productionI specialty wood productsI and structural panels are the primary industries within this segment of the portfolioK eousing market weakness continues to leave all wood prices lowI although some prices were up slightly in OMNMK iumber prices in the top tier have remained surprisingly strong due to declining productionK AlsoI markets for sawdustI chipsI and bark have been relatively strong due to the demand for domestic pulp productionI wood pellet fuel manufacturingI and biomass alternative fuelsK eoweverI there is an oversupply of wood pellets which has lowered prices somewhatK qhere is a note of pessimism going into OMNNI as many think the rebound that occurred in early OMNM was too strongI building up too much inventoryK qhe cost of truckingI expected to go up in OMNNI continues to be a challengeK

cruit E5KVB of total loan volumeF: qhis is a diverse category consisting of apples for fresh market and processingI kew gersey blueberriesI Concord and kiagara grapes for juice in western kew vorkI farm wineries in western and central kew vorkI iong fsland and southern kew bnglandI and kew gersey peachesK fn terms of volumeI most of this fruit enters wholesale channelsI but in terms of valueJaddedI many producersI especially smaller operations outside the major fruit belts rely on retailK pupply was tighter in OMNMI sending apple prices higherK oetail orchards saw steady sales given good call weatherK vields along the iake brie grape belt were generally very good in OMNMK mrices were solid depending upon the individual coJop or proprietary processor buyerK tine sales were in general flat in OMNMK qhe OMNN outlook is of course dependent on weatherI but a shortage of juice both in apples and grapes should support higher pricesK

iivestock EVKTB of total loan volumeF : qhese borrowers are mostly partJtime farmers with horses or beef cattle in the Associationâ&#x20AC;&#x2122;s more suburbanized areasK qheir farm is typically their home and also a partJtime enterpriseK qhe primary economic influence is nonfarm incomeI not agricultural factorsK qhe outlook for this sector is fair for equineI and good for beef and other protein producersK Beef cattle prices were up significantly in OMNM over OMMVK A high commercial slaughter rate combined with lower cattle inventories has kept the herd size lowI with herd rebuilding efforts further held back by forecasted high grain pricesK eigher prices are expected to persist in OMNNI but input costs will also be upK

kursery E5KQB of total loan volumeFW dross sales continued to trend downward in OMNMI but at a slower rate than in OMMUJMVK ln averageI revenues were down R to NMB in OMNMI impacted by a hotter than average summerK call OMNM sales and early bookings for OMNN were better than expectedI which may lead to a stabilizing of revenue or even modest increase in OMNNK diven that grower and wholesale yard inventory levels are down significantly compared to OMMUJOMMVI coupled with the dissolution of several large nurseriesI this may equate to better supply and demand balanceK iiquidity and cash flow will continue to be tight due to the lower revenue trend that began in OMMUK oising oil and other commodity prices will lead to higher input costs for fertilizerI fuelI plasticsI and other key inputsK drower focus in OMNN is to continue to reduce controllable costsI EiKeKI laborI suppliesI inventoryFI and to continue rebuilding revenue through innovative marketingK

bquine operations have been negatively impacted by the recession and its aftermathK oacing and breeding facilities in kew vork look forward to an improved OMNN with additional capital investment being made in the industryK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

get the timing right and that quantitative easing will ultimately lead to a renewal of inflationK

carm Services EQKVB of total loan volumeFW qhis segment consists of diverse agribusinesses that provide services and inputs to farmersK qhe primary economic drivers are the overall health of the farm economy and demand from nonfarm consumersK mrice volatility in fertilizerI chemicalsI seedI and other farm inputs has been difficult and substantially raised this segment’s risk exposureK bquipment dealers report a mixed bag for OMNMK ment up demand in traditional farming areas helped to boost salesI yet availability of equipment has become tighterK

kational housing market conditions continue to be discouraging entering OMNNK qhis industry remained depressed during OMNM and is clearly still in the midst of a major structural correction cycleK qhis is not only a drag on overall economic growthI but directly impacts demand for product from the timberI nurseryI and sod industriesK jost of the states within carm Credit bast’s service area face substantial fiscal challenges in OMNNK qhis will impact local employmentI could lead to further tax and “user fee” increasesI and may well lead to reductions in spending for programs that assist local agriculture in a variety of waysK

All lther EOOKOB of total loan volumeF: qhere are NT other diverse loan typesI with none accounting for more than PKRB of total loan volumeK kumerous factorsI about RMB of which can be tied to general economic conditions and the remaining RMB to industryJspecific conditions affect this segment of the portfolioK

ioan mortfolio qhe loan portfolio consists primarily of agricultural real estate loansI agricultural production operating loansI and intermediate installment loansK ioans are originated and serviced within the ipA in kew vorkI kew gerseyI and throughout pouthern kew bnglandI as well as outside the ipA through purchased loan participationsK qhe geographic distribution of loans followsW

deneral bconomy At this timeI there are indications of continued gradual improvement in the rKpK economy and a cautiously positive outlook through OMNNK qhe overriding caution is that while the economy is growingI it is not growing fast enough to create substantial new employmentK rnemployment and underemployment are overriding political issuesI and thus create continued pressure on Congress and the Administration to “do somethingI” and for the cederal oeserve to manage short term interest rates with a strong bias toward economic growthK AlsoI high unemploymentLunderemployment is a drag on consumer spending and housingI and these components themselves are critical to accelerating economic growthK

As of aecember PN

OMMV

OMM8

kew vork

RNB

QOB

kew gersey

jassachusetts Connecticut ohode fslandI kew eampshire and other states qotal

collowing another budget deficit of ANKP trillion in OMNMI the rKpK national debt now stands about ANQ trillionI increasing rapidly over the past three yearsK crom a longerJterm standpointI the rKpK government fiscal challenge has major implications for the future direction of interest ratesI the value of the rKpK dollarI the ability of the cederal government to meet its obligations and meet future challengesI and the role of the rKpK in the global economyK

OMNM

QNB

NMMB

ioan volume totaled AQKP billion at aecember PNI OMNMK qhe merger with testern kew vork contributed the majority of the increase in the loan categories noted belowK ln a prior year combined basisI loan volume increased QKVB from OMMVK

qhe year OMNN will be another critical year for the cederal oeserve BoardK qhe ced has pursued an aggressive role in keeping interest rates lowI purchasing the securities of cannie jae and creddie jac to keep mortgage rates lowI and more recently pursuing an initiative termed “quantitative easingK” ff perfectly executedI when the desired economic results become apparentI the ced will reverse the process and sell these securities back and withdraw the corresponding dollars from the money supplyK qhere is some fear that the ced might not

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Comparative allowance coverageI as a percentage of key loan categoriesI followsW

qhe following table summarizes loan related assets and statisticsW As of aecember PN

OMNM

OMMV

As of aecember PN

OMM8

ioansW merforming loans ioans past due VM days or more still accruing

Allowance for loan losses A QIOONIRNO

A PIMPSIUUN

A OIVRNIMSQ

PIMMS

NIQNP

OMU

konaccrual loans

RMIRUS

QMIUQQ

ORIPRO

qotal highJrisk loans

RPIRVO

QOIORT

ORIRSM

lther property owned

OISMV

OST

TRR

qotal high risk assets

RSIOMN

QOIROQ

OSIPNR

A QIOTRINMQ

A PIMTVINPU

A OIVTSISOQ

dross loans

eighJrisk loans to gross loans

NKPB

NKQB

MKVB

konaccrual loans to gross loans

NKOB

NKPB

MKVB

aelinquencies as a B of total performing loans

MKQB

MKSB

MKQB

OMNM

OMMV

OMM8

ARRIPVR

AQMITSQ

APNIPRP

Allowance as a percentage ofW dross loans

NKPB

NKNB

konaccrual loans

NMVKRB

VVKUB

NOPKTB

eighJrisk loans

NMPKQB

VSKRB

NOOKVB

cor further discussion regarding the allowance for loan lossesI refer to kote P to the consolidated financial statementsI “ioans and Allowance for ioan iosses”K Credit nuality Credit risk arises from the inability of an obligor to meet its repayment obligation and exists in our outstanding loansI unfunded loan commitmentsI and letters of creditK te manage credit risk associated with our lending activities through an assessment of the credit risk profile of an individual borrower based on an analysis of the borrower’s credit historyI repayment capacityI financial positionI and collateralK oepayment capacity focuses on the borrower’s ability to repay the loan based on cash flows from operations or other sources of incomeK qhe Association also manages single borrower hold positions and industry concentrations based on underlying riskK qhe geographic and commodity diversity in the loan portfolioI coupled with disciplined underwritingI reduces the potential for significant credit lossesK Also worth notingI carm Credit bast’s underwriting standards do not allow for subprime lending which is evident based on the current and historical delinquency percentages of the loan portfolioK

cor additional loan type informationI see kote P to the consolidated financial statements “ioans and Allowance for ioan iosses”K Allowance for ioan iosses qhe allowance for loan losses was ARRKQ million at aecember PNI OMNMK ket loan chargeJoffs were ARKQ million for the twelve months ended aecember PNI OMNMK qhe allowance for loan losses at each period end was considered by management to be adequate to absorb probable losses existing in and inherent to the loan portfolioK janagement’s evaluations consider factors including loan loss experienceI portfolio qualityI loan portfolio compositionI current production conditionsI and economic conditionsK

qo reduce portfolio riskI the Association participates in the rpaA’s carm pervice Agency guarantee program and as of aecember PNI OMNM has guarantees totaling AOVQ millionK qhe Association also participates in the carmer jac iong qerm ptandby Commitment to murchase mrogramK As of aecember PNI OMNMI commitments totaling AUU million were in this programK konaccrual loans totaled ARMKS million at aecember PNI OMNMI a decrease of APKS million from a combined ARQKO million at aecember PNI OMMVK konaccrual loans as a percentage of gross loans remained at a relatively low level of NKOBK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

lther credit quality indicators remained generally favorableK ioan delinquencies Eaccruing loans PM days or more past dueF as a percentage of accruing loans at aecember PNI OMNM were MKPTBK ioans classified under the carm Credit Administration’s rniform ioan Classification pystem as “acceptable” or “other assets especially mentioned” as a percentage of total loans totaled VQKNB at aecember PNI OMNMK auring OMNM continued stress in key agricultural industries included dairyI timberI tobaccoI and green EgreenhouseI nursery and sodFK Adversely classified loans were RKVB as of aecember PNI OMNMK Adversely classified loans are loans with wellJ defined weaknesses identified outside our credit standardsK

Net fnterest fncome ket interest income was ANPQKQ million for the year ended aecember PNI OMNMK qhe following table quantifies the changes in net interest income EA in millionsFW

thile uncertainties continue to exist in national and some local economiesI we anticipate only a slight decline in credit quality but generally credit quality should remain stable in OMNNK

qhe following table reflects key performance results (A in millionsFW OMNM

OMMV

OMM8

ket income

NMNKM

SSKO

SMKM

ket interest income

NPQKQ

VRKT

UMKT

ket interest margin

PKPB

PKOB

OKVB

oeturn on average assets

OKQB

OKNB

NPKSB

NOKTB

NOKOB

oeturn on average members equity

OMMV versus OMM8

A PUKU

A NQKV

bffect on change in net incomeW fncrease in net interest income EfncreaseF in provision for loan losses fncrease in noninterest income EfncreaseF in noninterest expenses EfncreaseF decrease in provision for income taxes qotal increase in net income

ERKMF NQKM

ETKRF OKN

ENOKQF

EPKRF

EMKSF

MKO

PQKU

Changes in volume Changes in nonaccrual and other income Changes in rates and margin eedging activity ket change

A OQKN OKU NQKN EOKOF A PUKU

A QKT MKM SKV PKP A NQKV

fnformation regarding the average daily balances and average rates earned and paid on our portfolio are presented in the following tableW As of aecember PN

ket interest income

Changes in the significant components impacting the results of operations are summarized in the following table EA in millionsFW OMNM versus OMMV

OMMV versus OMM8

fn OMNMI the primary driver for increased net interest income was the addition of approximately AN billion of earning assets from the merger with testern kew vorkK qhe Association also experienced modest internal growth during OMNMK lf the APUKU million increase from OMMVI AOQKN million was due to increased loan volume from merger and internal growthK ANQKN million was due to higher margin over funding cost and increased equity investment in loans due to mergerK Customer rates were stable year over year while average funding costs declined from NKTTB in OMMV to NKRRB in OMNMK qhe Association’s hedging strategy also contributed AOKU million to net interest incomeK

oesults of lperations ket income was ANMNKM million for the year ended aecember PNI OMNM an increase of ANRKO million from a combined net income of AURKU million from OMMVK

vear ended aecember PN

Changes in net interest income due toW

OMNM versus OMMV

OMNM

NPQIQOT

OMMV

VRISSR

OMM8

UMITNU

Average balances Average interest earning loans

A QIMQPIURT

A PIMMPIRUQ

A OITUSIPTU

Average interest bearing liabilities

A PIQVUITTT

A OISMVIUUV

A OIQMSIMMS

Average yields and rates

SKO

fnterest earning loan yield

QKQSB

QKRMB

RKQVB

oate paid on interest bearing liabilities

NKRRB

NKTTB

PKNTB

fnterest rate spread

OKVNB

OKTPB

OKPOB

ket interest margin Einterest income as a percentage of average earning loansF

PKPOB

PKNVB

OKVMB

cAoM Cobafq bApq | OMNM ANNrAi obmloq

palaries and employee benefits is the primary component of noninterest expense and totaled APSKO million for the twelve months ended aecember PNI OMNM an increase of AOKR million from a combined APPKT million from OMMVK qhe increase is a result of annual merit and incentive compensation increases and slightly higher staffing levelsK

mrovision for loan losses qhe Association recognized a provision for loan losses of AOMKM million for the twelve months ended aecember PNI OMNMK qhe provision for loan losses was recorded primarily for inherent lossesI yet unidentified due to credit conditions within the Association’s loan portfolio in a more volatile economic environmentK

cees paid to cmfI the Association’s technology service providerI were ARKP million and insurance fund premiums were ANKS million for the twelve months ended aecember PNI OMNMK fn OMNM the premiums charged to the Association decreased as a result of the fnsurance cund exceeding the secure base amount at aecember PNI OMMVK koninterest expenses also include occupancy and equipment expense and other operating expensesK

Noninterest income koninterest income totaled AQOKV million for the twelve months ended aecember PNI OMNMK qhis increase is a direct result of the mergerK matronage income from CoBank is a significant part of the Association’s noninterest incomeK matronage income is based on the average balance of the Association’s note payable to CoBankK cor the year ended aecember PNI OMNMI CoBank patronage income totaled ANTKP millionK qhe increase in patronage income is a result of growth in CoBank earnings and the increase in Association’s borrowingsK qhe patronage rates paid by CoBank on the Association’s note payable were QR basis points in OMNMI OMMVI and OMMUK qhe Association also receives patronage from other participating carm Credit entities that purchased interests in loans originated by the AssociationK cor the year ended aecember PNI OMNMI this revenue totaled AMKN millionK

fncome Taxes qhe provision for income taxes was AMKT million for the twelve months ended aecember PNI OMNMK matronage distributions to stockholders reduce the Association’s tax liabilityK cor additional informationI see kote U “fncome qaxes” to the consolidated financial statementsK matronage aistributions qhe Association has a patronage program that allows it to distribute its available net earnings to its stockholdersK qhe patronage program consists of a qualified cash distribution and a nonJqualified distributionK qhe distributions are sent to eligible customers shortly after the end of the yearK cor OMNMI the Association declared a APRKM million qualified patronage refund which will be distributed NMMB cashK

fncluded in noninterest income for the year ended aecember PNI OMNM was AQKQ million in refunds received from the carm Credit pystem fnsurance Corporation Efnsurance CorporationF related to the carm Credit fnsurance cund Efnsurance cundFK As more fully explained in kote N to these consolidated financial statements “lrganizationI Business Combination and lperations”I when the fnsurance cund exceeds the statutory OKMB secure base amountI the fnsurance Corporation is required to reduce premiums and may refund excess amountsK qhe fnsurance cund ended OMMV above the secure base amount and consequently during the first quarter of OMNMI the fnsurance Corporation distributed to carm Credit entities the excess amount generated in OMMV as well as excess amounts from OMMPK

iiquidity and cunding pources qhe Association’s primary source of funding is CoBankK cunds are obtained through borrowing on a revolving line of credit governed by a deneral cinancing AgreementK At aecember PNI OMNMI the Association’s notes payable to CoBank totaled APKS billionK qhe line of credit available to the Association is formulaJdriven based on Association loan volume and credit qualityK Because of the funding relationship with CoBankI the Association does not maintain large balances in cash or other liquid investmentsK pubstantially all of the Association’s assets are pledged as security to CoBankK qhe Association is in full compliance with its financing agreement with CoBank and has capacity under the agreement to borrow funds needed to meet anticipated loan demandK

koninterest income also includes fees for financial servicesI loan feesI compensation on participation loansI and other noninterest incomeK qhese other noninterest income sources totaled AONKN million for the twelve months ended aecember PNI OMNM with financial services fee income comprising ANRKQ millionK Noninterest expense koninterest expense totaled ARRKT million for the twelve months ended aecember PNI OMNMK qhis increase is a direct result of the mergerK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

qhe Association minimizes its interest rate risk by funding loans with debt from CoBank that has similar pricing characteristicsK As a resultI the Association is not subject to substantial interest rate riskK qhe Association’s loan portfolio consisted of the following breakdown by pricing typeW As of aecember PN

OMNM

OMMV

jembers’ bquity fn conjunction with its annual financial planning processI the Association’s Board of airectors reviews and approves a Capitalization mlanK qhe objective of the plan is to build and maintain adequate capital for continued financial viability and to provide for growth necessary to meet customer needsK

OMM8

qotal members’ equity totaled ATSMKQ million for the twelve months ended aecember PNI OMNMK jembers’ equity at aecember PNI OMNM was comprised of unallocated surplus of ARRVKQ millionI additional paidJin capital of ANSQKQ millionI allocated surplus of AQRKR millionI customer capital stock and participation certificates of ANOKM millionI and accumulated other comprehensive loss of YAOMKU> millionK

mricing qypeW sariable rate loans

SPKMB

SPKVB

SNKQB

fndexed loans EmrimeI AojI ifBloF

NMKNB

VKRB

VKQB

cixed rate loans

OSKVB

OSKSB

OVKOB

As discussed previouslyI a OMNM qualified distribution was declared totaling APRKM million paid in cash subsequent to year endK qotal accumulated allocated surplus was AQRKR million at aecember PNI OMNMK qhe Association plans to redeem its existing allocated surplus by the year OMNQI subject to the Association’s Capitalization mlanK fn conjunction with that planI the Association redeemed ANMKM million during OMNMK

qhe interest rates charged to the Association on debtI by and largeI have the same pricing characteristics as the loans fundedK cor exampleI fixed rate loans are funded with fixed rate debt with the same termK qhe Association’s goal is to fund fixed and indexed rate loans with NMMB matching debtK qhe Association’s equity is invested in variable rate loansK qhe yield on equity funded loans is the average variable portfolio rateK As rates rise or fallI earnings on equity funded loans go up and downK qhe Association also uses interest rate contracts EswapsF with CoBank to better manage its equity investment in variable rate loansK then rates are lowI the Association earns more on its interest rate contractsI offsetting lower earnings on its equity position and serving to stabilize net interest incomeK EConverselyI when rates riseI the Association will earn less on its contracts and more on its equity positionFK qhe average length of the Association’s contracts is about NO monthsK qhe effect of this hedging strategy diminishes if rates stay stable for two or more yearsK

qhe AssociationI along with other pystem institutionsI is subject to regulatory oversight by cCAK fn addition to the Association’s Board approved Capitalization mlanI a number of rules and regulations are imposed under the carm Credit Act on the operations of pystem entitiesI including requirements to maintain a minimum permanent capital ratioI total surplus ratioI and core surplus ratioK As displayed in the following tableI the Association exceeded the minimum regulatory requirementsI which are noted parentheticallyK

qhe swaps also extend the duration of the Association’s equity position resulting in increased earnings from the normal yield curve and some change in the value of equity due to changes in interest ratesK qhe Association’s interest rate hedging program is summarized in the following table EA in millionsFW As of aecember PN

pwap notional amount

OMNM

OMMV

A OUMKM

A OQMKM

As of aecember PN

OMNM

OMMV

OMM8

jembers’ equity as a B of assets

NTKNB

NSKRB

NRKVB

mermanent capital ratio ETKMBF

NRKUB

NRKQB

NQKTB

qotal surplus ratio ETKMBF

NRKRB

NRKNB

NQKQB

Core surplus ratio EPKRBF

NQKTB

NQKPB

NPKSB

OMM8

cinancial condition ratios for OMNM are consistent with the Association’s current Capitalization mlan and long term objectivesK cor a description of the Association’s capitalization requirementsI equitiesI and regulatory capitalization requirements and restrictionsI see kote T to the consolidated financial statementsI “jembers’ bquity”K Association management knows of no reason that would cause the Association not to meet these standards in the foreseeable futureK

A OPMKM

salue

NKN

OKM

QKM

Cash pettlements

OKU

QKP

NKR

cor additional informationI see kote NP to the consolidated financial statements “aerivative fnstruments and eedging Activities”K

cAoM Cobafq bApq | OMNM ANNrAi obmloq

oeport of Management qhe consolidated financial statements of carm Credit bastI ACA Ecarm Credit bast or the AssociationF are prepared by managementI who are responsible for their integrity and objectivityI including amounts that must necessarily be based on judgments and estimatesK qhe consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the rnited ptates of America appropriate in the circumstancesK qhe consolidated financial statementsI in our opinionI fairly present the financial position of the AssociationK lther financial information included in this Annual oeport is consistent with that in the consolidated financial statementsK qo meet their responsibility for reliable financial informationI management depends on the Associationâ&#x20AC;&#x2122;s accounting and internal control systemsI which have been designed to provide reasonableI but not absoluteI assurances that assets are safeguarded and transactions are properly authorized and recordedK qhe systems have been designed to recognize that the cost must be related to the benefits derivedK qo monitor complianceI the Associationâ&#x20AC;&#x2122;s internal auditors and risk management staff perform audits of the accounting recordsI review accounting systems and internal controls and recommend improvements as appropriateK qhe consolidated financial statements are audited by mricewaterhouseCoopers iimI independent auditorsI who also conduct a review of internal controls to obtain sufficient understanding of the internal control structure in order to establish a basis for reliance thereon in determining the natureI extentI and timing of procedures applied in the audit of the financial statementsK carm Credit bast is also examined by the carm Credit Administration EcCAFI regulator of the carm Credit pystemK qhe chief executive officerI as delegated by the Board of airectors Ethe BoardFI has overall responsibility for the Associationâ&#x20AC;&#x2122;s system of internal control and financial reportingK qhe Board has delegated significant responsibility to the Audit CommitteeI which is comprised entirely of directors who are independent of carm Credit bast managementK qhe Audit Committee consults regularly with management and meets periodically with the independent auditors and internal auditors to ensure that they are carrying out their responsibilitiesK qhe independent auditors and the internal auditors have full and free access to the Audit CommitteeI with or without the presence of managementI to discuss the adequacy of the internal control structure for financial reporting and any other matters that they believe should be brought to the attention of the committeeK qhe undersigned certify that we have reviewed the OMNM Annual oeport to ptockholders and it has been prepared in accordance with all applicable statutory or regulatory requirements and that the information contained herein is trueI accurateI and complete to the best of our knowledge and beliefK

tilliam gK iipinski Cbl

Abbott tK iee Chairman of the Board

Charles pK eerring mresidentI Cll and CCl

maul pK Bajgier penior sice mresident C qreasurer

jarch QI OMNN

cAoM Cobafq bApq | OMNM ANNrAi obmloq

oeport of Audit Committee qhe Audit Committee is composed of six members of the Board of airectors of carm Credit bastI ACA Ethe AssociationFK fn OMNMI the Audit Committee met six times in person and participated in several conference callsK qhe Audit Committee oversees the scope of the Association’s internal audit programI the independence of the outside auditorsI the adequacy of the Association’s system of internal controls and proceduresI and the adequacy of management’s action with respect to recommendations arising from those auditing activitiesK fn additionI the Audit Committee approved the appointment of mricewaterhouseCoopers iim EmwCF as our independent auditors for OMNMK qhe Audit Committee’s responsibilities are described more fully in the Association’s fnternal Control molicy and the Audit Committee pcope of oesponsibilityK janagement is responsible for the Association’s internal controls and the preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the rntied ptates of AmericaK mwC is responsible for performing an independent audit of the financial statements in accordance with generally accepted auditing standards in the rnited ptates of America and to issue their report based on the auditK qhe Audit Committee’s responsibilities include monitoring and overseeing these processesK fn this contextI the Audit Committee reviewed and discussed the audited consolidated financial statements for the year ended aecember PNI OMNMI with managementK qhe Audit Committee also reviewed with mwC the matters required to be discussed by ptatement of Auditing ptandards koK NNQ The Auditor’s Communication tith Those Charged tith dovernanceI and both mwC and the internal auditors directly provided reports on significant matters to the Audit CommitteeK qhe Audit Committee received the written disclosures and the letter from mwC in accordance with fndependence ptandards Board ptandard koK N fndependence aiscussion with Audit CommitteesI and discussed with mwC its independenceK qhe Audit Committee requires approval of all nonJaudit services provided by mwCK fn OMNMI mwC was engaged for tax services as well as auditJrelated merger services and the Audit Committee concluded these services were not incompatible with maintaining the independent auditors’ independenceK qhe Audit Committee has discussed with management and mwC such other matters and received such assurances from them as the Audit Committee deemed appropriateK Based on the foregoing review and discussionsI and relying thereonI the Audit Committee recommended that the Board of airectors include the audited consolidated financial statements in the Annual oeport for the year ended aecember PNI OMNMK

Benjamin gK creund Chairman of the Audit Committee carm Credit bastI ACA lther Committee jembersW Andrew gK dilbert gune tK eoeflich Ann mK eudsonI CmA aonald kK gensen meter gK oussell jarch QI OMNN

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Management’s oeport of fnternal Control over cinancial oeporting qhe Association’s principal executives and principal financial officersI or persons performing similar functionsI are responsible for establishing and maintaining adequate internal control over financial reporting for the Association’s combined financial statementsK cor purposes of this reportI “internal control over financial reporting” is defined as a process designed byI or under the supervision of the Association’s principal executives and principal financial officersI or persons performing similar functionsI and effected by its boards of directorsI management and other personnelI to provide reasonable assurance regarding the reliability of financial reporting information and the preparation of the combined financial statements for external purposes in accordance with accounting principles generally accepted in the rnited ptates of America and includes those policies and procedures thatW ENF pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the AssociationI EOF provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial information in accordance with accounting principles generally accepted in the rnited ptates of AmericaI and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the AssociationI and EPF provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitionI use or disposition of the Association’s assets that could have a material effect on its combined financial statementsK qhe Association’s management has completed an assessment of the effectiveness of internal control over financial reporting as of aecember PNI OMNMK fn making the assessmentI management used the framework in fnternal Control — fntegrated crameworkI promulgated by the Committee of pponsoring lrganizations of the qreadway CommissionI commonly referred to as the “Clpl” criteriaK Based on the assessment performedI the Association concluded that as of aecember PNI OMNMI the internal control over financial reporting was effective based upon the Clpl criteriaK AdditionallyI based on this assessmentI the Association determined that there were no material weaknesses in the internal control over financial reporting as of aecember PNI OMNMK

tilliam gK iipinski mresident C Cbl

Abbott tK iee Chairman of the Board

maul pK Bajgier penior sice mresident C qreasurer

games aK jiller penior sice mresident of cinance

jarch QI OMNN

cAoM Cobafq bApq | OMNM ANNrAi obmloq

oeport of fndependent Auditors

Report of Independent Auditors

To Board of Directors and Stockholders of Farm Credit East, ACA: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in members' equity and of cash flows present fairly, in all material respects, the financial position of Farm Credit East, ACA (the "Association") and its subsidiaries at December 31, 2010, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companyâ&#x20AC;&#x2122;s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As disclosed in Note 2 to the consolidated financial statements, the Association changed its method of accounting for pension and other postretirement benefits in 2008. As disclosed in Note 1 to the consolidated financial statements, the Association merged with Farm Credit of Western New York, ACA on January 1, 2010.

March 4, 2011

PricewaterhouseCoopers LLP, 185 Asylum Street, Suite 2400, Hartford, CT 06103 T: (860) 241 7000, F: (860) 241 7458, www.pwc.com/us

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Consolidated Balance pheet (dollars in thousands)

OMNM

As of aecember PNI OMMV

OMMU

ioans iess allowance for loan losses ket loans

A QIOTRINMQ RRIPVR QIONVITMV

A PIMTVINPU QMITSQ PIMPUIPTQ

A OIVTSISOQ PNIPRP OIVQRIOTN

Cash Accrued interest receivable fnvestment in CoBankI ACB fnvestment in oural fnvestmentsI iiC mremises and equipmentI net lther property owned lther assets qotal assets

NOIQVP NQIVSP NQQINPV SIPUR NTIRSQ OISMV OVIPMS A QIQQTINSU

RIPUV NNISVU NMTIRRN M NOINTQ OST OOIUMM A PINVUIORP

NPINON NPISTT VUIVMT M NNIQVS TRR OOIMOQ A PINMRIORN

A PISPPITUT PRIMMM NTIVOR PISUSITNO

A OISPMIOQV OPIQMM NSITRO OISTMIQMN

A OIRTUIPNN NPIVQU NVITRM OISNOIMMV

NNIVSO NSQIPSV QRIQUU RRVIQOQ EOMITUTF TSMIQRS A QIQQTINSU

UIURM M QNIROU QVPIQNT ENRIVQPF ROTIURO A PINVUIORP

UITSP M QTIUQS QRMISOT ENPIVVQF QVPIOQO A PINMRIORN

Assets

iiabilities

kotes payable to CoBankI ACB matronage refunds payable lther liabilities qotal liabilities

jembersD bquity

Capital stock and participation certificates Additional paidJin capital Allocated surplus rnallocated surplus Accumulated other comprehensive loss qotal membersD equity qotal liabilities and membersD equity

qhe accompanying notes are an integral part of these statementsK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Consolidated ptatement of fncome (dollars in thousands)

OMNM

vear bnded aecember PNI OMMV OMMU

fnterest fncome

ioans lther qotal interest income

NUPIUPV NIOVO NURINPN

fnterest bxpense kotes payable to CoBankI ACB lther qotal interest expense ket interest income mrovision for loan losses ket interest income after provision for loan losses

NPSIPUR RPU NPSIVOP

NRQIUPN SNV NRRIQRM

RMISUU NS RMITMQ

QNIORU M QNIORU

TQITPO M TQITPO

NPQIQOT OMIMMM

VRISSR NRIMMM

UMITNU TIRMM

NNQIQOT

UMISSR

TPIONU

NTIQMV NRIQMO QIQOO OINTS PIRMR OM QOIVPQ

NOIVQQ NOINRM M NIPQV OIQPN VP OUIVST

NNIVQQ NOINMU M NIPQV NIQOU UN OSIVNM

PSIOMR OISQT NIRUR RIOUU VITVV TS SN RRISSN

ORINUV OIMRO QISPR PIVUR TIOTS TS VP QPIPMS

OOITQU NITRQ PITVQ PIVTP TIMUV OQ PUN PVITSP

NMNITMM SVP NMNIMMT

SSIPOS NPS SSINVM

SMIPSR PRN SMIMNQ

koninterest fncome

matronage income cinancial services fee income oefunds from carm Credit pystem fnsurance Corporation ioan fees Compensation on participation loans lther income qotal noninterest income koninterest bxpense

palaries and employee benefits lccupancy and equipment fnsurance fund premium cees paid to technology service provider lther operating expenses bxpenses and losses on other property owned lther expense qotal noninterest expenses fncome before income taxes mrovision for income taxes ket income

qhe accompanying notes are an integral part of these statementsK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Consolidated ptatement of Changes in Membersâ&#x20AC;&#x2122; bquity

(dollars in thousands)

Balance at aecember PNI OMMT

Capital ptock and marticipation Certificates

Additional Accumulated lther Comprehensive Allocated maidJinJ fncomeLEiossF purplus Capital

rnallocated purplus

UIQTR

ENIPMPF A QQIPPS

bffect of changing defined benefit plan measurement date

Comprehensive fncome Capital stock and participation certificates issued Capital stock and participation certificates retired Allocated surplus retired matronage distribution Cash Balance at aecember PNI OMMV Comprehensive fncomeW ket income lther comprehensive incomeI net of taxes Change in minimum pension liability ket change in cash flow hedge Comprehensive fncome Capital stock and participation certificates issued Capital stock and participation certificates retired bquity reJcharacterized upon merger Allocated surplus retired matronage Cash Balance at aecember PNI OMNM

EUQF

Comprehensive fncomeW ket income lther comprehensive incomeI net of taxes Change in minimum pension liability ket change in cash flow hedge Comprehensive fncome Capital stock and participation certificates issued Capital stock and participation certificates retired Allocated surplus retired matronage distribution Cash Allocated surplus Balance at aecember PNI OMMU Comprehensive fncomeW ket income lther comprehensive incomeI net of taxes Change in minimum pension liability ket change in cash flow hedge

QNPISVT

qotal jembersD bquity

SMIMNQ ENRIUTTF

ERIRQOF

VIMRO ENPIVVQF A QTIUQS

ENPIVQUF EVIMROF QRMISOT A SSINVM

SVR EOISQQF

ENRIVQPF A QNIROU

EOPIQMMF QVPIQNT A NMNIMMT

EQIRNTF EPOTF VTT ETSTF OIVMO

NNIVSO

NSQIPSV

A NSQIPSV

qhe accompanying notes are an integral part of these statementsK

EOPIQMMF ROTIURO NMNIMMT EQIRNTF EPOTF VSINSP VTT ETSTF NUNIOTN ENMIMQMF

NQIMMM ENMIMQMF

SSINVM

SQIOQN SRP ERSSF ESIPNUF

ESIPNUF

UIURM

QTIPOP VOR ESPTF ERIRQOF J ENPIVQUF J QVPIOQO

SVR EOISQQF

SRP ERSSF

SMIMNQ

PINUS

VOR ESPTF

UITSP

EUQF

ENRIUTTF

PINUS

QSRIOMR

EOMITUTF A QRIQUU

EPRIMMMF RRVIQOQ A

EPRIMMMF TSMIQRS

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Consolidated ptatement of Cash clows (dollars in thousands)

OMNM Cash flows from operating activitiesW ket income Adjustments to reconcile net income to net cash provided by operating activitiesW aepreciation mrovision for loan losses EfncreaseF decrease in accrued interest receivable aecrease in other liabilities fncrease in other assets EdainF loss from sales of other property owned ioss from sales of premises and equipment qotal adjustments

ket cash provided by operating activities Cash flows from investing activitiesW fncrease in loansI net fncrease in investment in CoBank aecrease EincreaseF in investments bxpenditures for premises and equipment mroceeds from sales of other property owned mroceeds from sales of premises and equipment ket cash acquired in business combination ket cash used in investing activities Cash flows from financing activitiesW Advances on notes payable under financing agreement with CoBankI ACB oepayment of notes payable to CoBankI ACB Capital stock and participation certificates issued Capital stock and participation certificates retired matronage distributions paid ket cash provided by financing activities

vear bnded aecember PNI OMMV OMMU

NMNIMMT

SSINVM

SMIMNQ

NITUR OMIMMM EQTTF ENMISMNF EOTRF ESF T NMIQPP

NIMTP NRIMMM NIQQV EQIVQTF EQTQF PO NST NOIPMM

UPU TIRMM NISSR EQIMSTF EQUPF ON NQ RIQUU

NNNIQQM

TUIQVM

SRIRMO

EOMSIUMVF ENIUROF NIOVM EOIPORF TOO NNS QIMMS

ENMUIONMF EUISQQF EPMOF EOIVPRF NIMVO NIMNT M

EPTPIUQUF ENMIPUSF EQNMF EQISRMF VU NNP M

EOMQIUROF

ENNTIVUOF

EPUVIMUPF

PISSTINVS EPIRORIMQVF VTT ETSTF EQNIUQNF

OIMVVITTM EOIMQTIUPNF SRP ERSSF EOMIOSSF

OIVUUIUVT EOISQUINROF VOQ ESPSF ENVIMNTF

NMMIRNS

PNITSM

POOIMNS

ket increase EdecreaseF in cash and cash equivalents

TINMQ

ETITPOF

ENIRSRF

Cash and cash equivalents at beginning of year

RIPUV

NPINON

NQISUS

Cash and cash equivalents at end of year

NOIQVP

pupplemental schedule of nonJcash investing and financing activitiesW Accrued interest receivable transferred to loans A RRN fncrease in other comprehensive income EQIUQQF ioan amounts transferred to other property owned PIMRU matronage distribution declared PRIMMM qransfer of surplus to additional paidJinJcapital related to Association merger NSQIPSV

qhe accompanying notes are an integral part of these statementsK

RIPUV

NPINON

RPM ENIVQVF SPT OPIQMM

TTT ENOISVNF TRR OPIMMM

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Notes to Consolidated cinancial ptatements Edollars in thousands except as noted)

fnsurance cund is required to be used ENF to insure the timely payment of principal and interest on pystemwide debt obligations Einsured debtFI EOF to ensure the retirement of protected borrower capital at par or stated valueI and EPF for other specified purposesK qhe fnsurance cund is also available for the discretionary uses by the fnsurance Corporation of providing assistance to certain troubled pystem institutions and to cover the operating expenses of the fnsurance CorporationK bach pystem Bank has been required to pay premiumsI which may be passed onto the AssociationsI into the fnsurance cundI based on its annual average adjusted outstanding insured debt until the monies in the fnsurance cund reach the “secure base amountI” which is defined in the carm Credit Act as OKMB of the aggregate insured obligations Eadjusted to reflect the reduced risk on loans or investments guaranteed by federal or state governmentsF or such other percentage of the aggregate obligations as the fnsurance Corporation in its sole discretion determines to be actuarially soundK then the amount in the fnsurance cund exceeds the secure base amountI the fnsurance Corporation is required to reduce premiumsI as necessary to maintain the fnsurance cund at the OB levelK As required by the carm Credit ActI as amendedI the fnsurance Corporation may return excess funds above the secure base amount to pystem institutionsK

klqb N – lrganizationI Business Combination and lperations lrganization carm Credit bastI ACAI an Agricultural Credit Association EACAF and its subsidiariesI carm Credit bast ciCAI a cederal iand Credit Association EciCAFI and carm Credit bast mCAI a mroduction Credit Association EmCAFI Ecollectively called “the Association”FI is a memberJowned cooperative which provides credit and financially related services to or for the benefit of eligible borrowersLstockholders for qualified agricultural purposes in the counties of BelknapI CarrollI eillsboroughI jerrimackI oockinghamI and ptrafford in the ptate of kew eampshire; all counties in the ptate of kew vork except Clinton and bssexI and in the ptates of ConnecticutI jassachusettsI ohode fslandI and kew gerseyK qhe Association is a lending institution of the carm Credit pystem Ethe pystemFI a nationwide system of cooperatively owned Banks and AssociationsI which was established by Acts of Congress to meet the credit needs of American agriculture and is subject to the provisions of the carm Credit Act of NVTNI as amended Ethe carm Credit ActFK

Business Combination

At aecember PNI OMNMI the pystem was comprised of four carm Credit Banks and one Agricultural Credit Bank and UM affiliated AssociationsK

bffective ganuary NI OMNMI carm Credit of testern kew vorkI ACA Etestern kew vorkF merged into cirst mioneer carm CreditI ACA Ecirst mioneerFK qhe merged association operates under the name of carm Credit bastK As the accounting acquirerI cirst mioneer accounted for the transaction under the acquisition method of accounting in accordance with the cApB Accounting ptandards Codification EApCF UMR Business Combinations EApC UMRFK As the accounting acquirerI cirst mioneer recognized the identifiable assets acquired and liabilities assumed in the jerger as of ganuary NI OMNM at their respective fair valuesK qhe fair values were measured based on various estimates using assumptions that cirst mioneer management believed are reasonable utilizing information currently availableK

CoBankI ACB ECoBank or ACBF and its related Associations are collectively referred to as the “aistrict”K CoBank provides funding to all associations within the aistrict and is responsible for supervising certain activities of the aistrict AssociationsK qhe ciCA makes secured longJterm agricultural real estate and rural home mortgage loansK qhe ACA makes short and intermediateJterm loans for agricultural production or operating purposesK qhe AssociationI along with other pystem fnstitutionsI owns carm Credit cinancial martnersI fncK EcmfF which provides technology and other operational services to its ownersK

As cooperative organizationsI carm Credit associations operate for the mutual benefit of our customer owners and other customers and not for the benefit of any other equity investors; capital stock provides no significant interest in corporate earnings or growthK ppecificallyI due to restrictions in applicable regulations and their bylawsI the Associations can issue stock only at its par value of AR per shareI the stock is not tradableI and the stock can be retired only for the lesser of par value or book valueK fn these and other respectsI the shares of stock in one Association that were converted to shares of

qhe carm Credit Administration EcCAF is delegated authority by Congress to regulate the pystem Banks and AssociationsK qhe cCA examines the activities of pystem Associations to ensure their compliance with the carm Credit ActI cCA regulationsI and safe and sound banking practicesK qhe carm Credit Act established the carm Credit pystem fnsurance Corporation Efnsurance CorporationF to administer the carm Credit fnsurance cund Efnsurance cundFK qhe

cAoM Cobafq bApq | OMNM ANNrAi obmloq

another Association had identical rights and attributesK cor this reasonI the conversion of stock pursuant to the merger occurred at a oneJforJone exchange ratioK

management believes are reasonable utilizing information currently availableK qhe use of different estimates and judgments could yield materially different resultsK

janagement believes that because the stock in each Association is fixed in valueI the stock issued pursuant to the merger provides no basis for estimating the fair value of the consideration transferred pursuant to the mergerK fn the absence of a purchase price determinationI the cirst mioneer identified and estimated the acquisition date fair value of the equity interests of the acquired Association instead of the acquisition date fair value of the equity interests transferred as considerationK qhe fair value of the assets acquiredI including specific intangible assets and liabilities assumedI were measured based on various estimates using assumptions that

qhis evaluation produced a fair value of identifiable assets acquired and liabilities assumed that was substantially equal to the fair value of the member interests transferred in the mergerK As a resultI management recorded no goodwillK qhe excess value receivedI by the acquiring Association from the acquired AssociationI over the par value of capital stock and participation certificates issued in the merger is considered to be additional paidJin capitalK qhe opening balance sheet below shows the fair value of the acquired assets and assumed liabilities as of ganuary NI OMNMK

carm Credit bastI ACA lpening Balance pheet As of ganuary NI OMNM Assets ioans iess J Allowance konaccretable loan credit mark Accretable loan yield mark ket ioans

cirst mioneer A PIMTVINPU QMITSQ J J PIMPUIPTQ

testern kew vork A NIMMNIRUP J ETIMOPF OIQTP VVTIMPP

As Adjusted mroJcorma A QIMUMITON QMITSQ ETIMOPF OIQTP QIMPRIQMT

RIPUV NNISVU NMTIRRN J NOINTQ OST OOIUMM

QIMMS PIPPV PQITPS TIVPT QIVTP J RIVSU

VIPVR NRIMPT NQOIOUT TIVPT NTINQT OST OUITSU

PINVUIORP

A NIMRTIVVO

A QIORSIOQR

OISPMIOQV J OISPMIOQV

URRIRST RIUOQ USNIPVN

A PIQURIUNS RIUOQ PIQVNISQM

OPIQMM NSITRO

UIQMM SIVPM

PNIUMM OPISUO

OISTMIQMN

UTSITON

PIRQTINOO

UIURM ENRIVQPF QNIROU QVPIQNT J

OIVMO J NQIMMM J NSQIPSV

NNITRO ENRIVQPF RRIROU QVPIQNT NSQIPSV

Cash Accrued fnterest oeceivable fnvestment in CoBankI ACB fnvestment in oural fnvestmentsI iiC mremises and bquipmentI net lther mroperty lwned lther Assets qotal assets iiabilities kotes payable to CoBankI ACB Accretable note payable yield mark ket kotes payable to CoBankI ACB matronage refunds payable lther iiabilities qotal iiabilities jembersD bquity Capital stock and participation certificates Accumulated other comprehensive loss Allocated surplus rnallocated surplus Additional paidJin capital qotal jembersD bquity qotal iiabilities and jembersD bquity

ROTIURO

NUNIOTN

TMVINOP

PINVUIORP

A NIMRTIVVO

A QIORSIOQR

cAoM Cobafq bApq | OMNM ANNrAi obmloq

klqb O – pummary of pignificant Accounting molicies

qhe fair value of the impaired loans acquired as of ganuary NI OMNM was ASKP million and the gross contractual amount of these impaired loans was ANPKP millionK qhe amount of accretable yield relating to all loans acquired was AOKR million at ganuary NI OMNMK

qhe accounting and reporting policies of the Association conform with accounting principles generally accepted in the rnited ptates of America EdAAmF and prevailing practices within the banking industryK qhe preparation of financial statements in conformity with dAAm requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notesK pignificant estimates are discussed in these footnotesI as applicableK Actual results may differ from these estimatesK

At aecember PNI OMNM the fair value of the impaired loans acquired was AOKR million and the gross contractual amount of these impaired loans was APKV millionK qhe amount of accretable yield relating to all loans acquired was AOKO million at aecember PNI OMNMK qhe acquisition method of accounting requires the financial statement presentation of combined balances as of the date of the mergerI but not for previous periodsK qhe Consolidated Balance pheetI Consolidated ptatement of fncomeI Consolidated ptatement of Changes in jembers’ bquityI and Consolidated ptatement of Cash clows reflect the merged balances as of aecember PNI OMNM and the balances of cirst mioneer only as previously presented for aecember PNI OMMV and aecember PNI OMMUK

Certain amounts in prior year’s financial statements have been reclassified to conform to current financial statement presentationK qhe consolidated financial statements include the accounts of carm Credit bastI mCA and carm Credit bastI ciCAK All interJcompany transactions have been eliminated in consolidationK oecently fssued Accounting mronouncements

lperations

fn guly OMNMI the cinancial Accounting ptandards Board EcApBF issued guidance on “aisclosures about the Credit nuality of cinancing oeceivables and the Allowance for Credit iossesI” which is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of the allowance for credit lossesK bxisting disclosures are amended to include additional disclosures of financing receivables on a disaggregated basis Eby portfolio segment and class of financing receivableF including among othersI a rollforward schedule of the allowance for loan losses from the beginning of the reporting period to the end of the period on a portfolio segment basisI with the ending balance further disaggregated on the basis of the method of impairment Eindividually or collectively evaluatedFK qhe guidance also calls for new disclosures including but not limited to credit quality indicators at the end of the reporting period by class of financing receivablesI the aging of past due financing receivablesI nature and extent of financing receivables modified as troubled debt restructurings by class and the effect on the allowance for credit lossesK cor public entitiesI the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending after aecember NRI OMNMK qhe disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after aecember NRI OMNMK qhe adoption of this ptandard did not have an impact on the Association’s financial condition or results of operationsI but did result in additional disclosuresK

qhe carm Credit Act sets forth the types of authorized lending activityI persons eligible to borrowI and financial services which can be offered by the AssociationK qhe Association is authorized to provideI either directly or in participation with other lendersI creditI credit commitmentsI and related services to eligible borrowersK bligible borrowers include farmersI ranchersI producers or harvesters of aquatic productsI rural residentsI and farmJrelated businessesK qhe Association provides additional services to borrowers such as financial recordkeeping and report generationI tax return preparationI tax planningI farm accounting softwareI fee appraisalsI farm business consultingI and leasingK qhe Association also offers credit life insurance and multiJperil crop insurance to its borrowersI as an agentK rpon requestI stockholders of the Association will be provided with a CoBank Annual oeport to ptockholdersI which includes the combined financial statements of the Bank and its related AssociationsK qhe Association’s financial condition may be impacted by factors which affect CoBankK CoBank’s Annual oeport to ptockholders discusses the material aspects of its financial conditionI changes in financial conditionI and results of operationsK fn additionI the CoBank Annual oeport identifies favorable and unfavorable trendsI significant eventsI uncertaintiesI and the impact of activities of the fnsurance CorporationK qhe lending and financial services performed by CoBank are described in kote N of CoBank’s Annual oeport to ptockholdersK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

fn ganuary OMNMI the cApB issued guidance on “cair salue jeasurements and aisclosuresI” which is to improve disclosures about fair value measurement by increasing transparency in financial reportingK qhe changes will provide a greater level of disaggregated information and more robust disclosures of valuation techniques and inputs to fair value measurementK qhe new disclosures and clarification of existing disclosures were effective for interim and annual reporting periods beginning after aecember NRI OMMVI except for the disclosures about purchasesI salesI issuancesI and settlements in the rollforward of activity in ievel P fair value measurementsK qhose disclosures are effective for fiscal years beginning after aecember NRI OMNMI and for interim periods within those fiscal yearsK qhe adoption of this ptandard had no impact on the Association’s financial condition and results of operationsK

enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entityK AdditionallyI an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performanceK qhis guidance was effective as of the beginning of each reporting entity’s first annual reporting period that begins after kovember NRI OMMVI for interim periods within that first annual reporting periodI and for interim and annual reporting periods thereafterK barlier application was prohibitedK pystem institutions reviewed transactions that are included in the scope of this guidance and determined that the impact of adoption on ganuary NI OMNM was immaterial to the Association’s financial condition and results of operationsK

fn gune OMMVI the cApB issued guidance on “Accounting for qransfers of cinancial AssetsI” which amends previous guidance by improving the relevanceI representational faithfulnessI and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial positionI financial performanceI and cash flows; and a transferor’s continuing involvementI if anyI in transferred financial assetsK qhis guidance was effective as of the beginning of each reporting entity’s first annual reporting period that begins after kovember NRI OMMVI for interim periods within that first annual reporting period and for interim and annual reporting periods thereafterK barlier application was prohibitedK qhis ptatement must be applied to transfers occurring on or after the effective dateK AdditionallyI on and after the effective dateI the concept of a qualifying special purpose entity is no longer relevant for accounting purposesK qhereforeI formerly qualifying specialJpurpose entities Eas defined under previous accounting standardsF should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidanceK ff the evaluation on the effective date results in consolidationI the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidationK pystem institutions reviewed their loan participation agreements to ensure that participations would meet the requirements for sales treatment and not be required to be consolidatedK qhe impact of adoption on ganuary NI OMNM was immaterial to the Association’s financial condition and results of operationsK

Cash CashI as included in the statement of cash flowsI represents cash on hand and on deposit at banksK fnvestment pecurities qhe AssociationI as permitted under the cCA regulationsI can hold investments for purposes of maintaining a liquidity reserveI managing shortJterm surplus fundsI and managing interest rate riskK qhe Association’s investments may not necessarily be held to maturity and accordingly are classified as availableJforJsaleK qhese investments are reported at fair value with unrealized gains and losses that are netted and reported as a separate component of members’ equity Eaccumulated other comprehensive income ElossFF in the consolidated balance sheetK Changes in the fair value of these investments are reflected as direct charges or credits other comprehensive incomeI unless the investment is deemed to be other than temporarily impairedK fmpairment is considered to be otherJ thanJtemporary if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security Eany such shortfall is referred to as a “credit loss”FK ff an entity intends to sell an impaired debt security or is more likely than not to be required to sell the security before recovery of its amortized cost basis less any currentJperiod credit lossI the impairment is otherJthanJ temporary and should be recognized currently in earnings in an amount equal to the entire difference between fair value and amortized costK ff a credit loss existsI but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recoveryI the impairment is otherJthanJtemporary and should be separated into EiF the estimated amount relating to credit lossI and EiiF the amount relating to all other factorsK lnly the estimated credit loss amount is recognized currently in earningsI with the remainder

fn gune OMMVI the cApB also issued guidance to improve financial reporting for those enterprises involved with variable interest entitiesI which amends previous guidance by requiring an enterprise to perform an analysis to determine whether the

cAoM Cobafq bApq | OMNM ANNrAi obmloq

of the loss amount recognized in other comprehensive incomeK dains and losses on the sales of investments availableJforJsale are determined using the specific identification methodK mremiums and discounts are amortized or accreted into interest income over the term of the respective issuesK qhe Association did not hold any availableJforJsale investment securities as of aecember PNI OMNMI OMMVI and OMMUK

konaccrual loans mayI at timesI be maintained on a cash basisK denerally cash basis refers to the recognition of interest income from cash payments received on certain nonaccrual loans for which the collectibility of the recorded investment in the loan is no longer in doubt and the loan does not have a remaining unrecovered prior chargeJoff associated with itK konaccrual loans may be returned to accrual status when principal and interest are current and reinstatement is supported by a period of sustained performance in accordance with the contractual terms of the note andLor loan agreement and the loan is not classified “doubtful” or “loss”K

ioans and Allowance for ioan iosses iongJterm real estate mortgage loans generally have maturities ranging from R to QM yearsK pubstantially all shortJterm and intermediateJterm loans for agricultural production or operating purposes have maturities of NM years or lessK ioans are carried at their principal amount outstanding adjusted for chargeJoffs and deferred loan fees or costsK ioan origination fees and direct loan origination costs are capitalized and the net fee or cost is amortized over the life of the related loan as an adjustment to yieldK

ioans are chargedJoff at the time they are determined to be uncollectibleK qhe Association uses a twoJdimensional loan rating model based on an internally generated combined system risk rating guidance that incorporates a NQJpoint riskJrating scale to identify and track the probability of borrower default and a separate scale addressing loss given default over a period of timeK mrobability of default is the probability that a borrower will experience a default within NO months from the date of the determination of the risk ratingK A default is considered to have occurred if the lender believes the borrower will not be able to pay its obligation in full or the borrower is past due more than VM daysK qhe loss given default is management’s estimate as to the anticipated economic loss on a specific loan assuming default has occurred or is expected to occur within the next NO monthsK

fmpaired 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 and are generally considered substandard or doubtful which is in accordance with the loan rating modelI as described belowK A loan is considered contractually past due when any principal repayment or interest payment required by the loan instrument is not received on or before the due dateK A loan shall remain contractually past due until it is formally restructured or until the entire amount past dueI including principalI accrued interestI and penalty interest accrued as the result of past due statusI is collected or otherwise discharged in fullK

bach of the probability of default categories carries a distinct percentage of default probabilityK qhe NQJpoint risk rating scale provides for granularity of the probability of defaultI especially in the acceptable ratingsK qhere are nine acceptable categories that range from a borrower of the highest quality to a borrower of minimally acceptable qualityK qhe probability of default between N and V is very narrow and would reflect almost no default to a minimal default percentageK qhe probability of default grows more rapidly as a loan moves from a “V” to other assets especially mentioned and grows significantly as a loan moves to a substandard EviableF levelK A substandard EnonJviableF rating indicates that the probability of default is almost certainK

ioans are generally placed in nonaccrual status when principal or interest is delinquent for VM days or more Eunless adequately secured and in the process of collectionF or circumstances indicate that collection of principal andLor interest is in doubtK then a loan is placed in nonaccrual statusI accrued interest deemed uncollectible is either reversed Eif accrued in the current yearF andLor chargedJoff against the allowance for loan losses Eif accrued in the prior yearFK A restructured loan constitutes a troubled debt restructuring if for economic or legal reasons related to the debtor’s financial difficulties the Association grants a concession to the debtor that it would not otherwise considerK

qhe credit risk rating methodology is a key component of the Association’s allowance for loan losses evaluationI and is generally incorporated into the institution’s loan underwriting standards and internal lending limitK qhe allowance for loan losses is maintained at a level considered adequate by management to provide for probable and estimable losses inherent in the loan portfolioK qhe allowance is based on a periodic evaluation of the loan portfolio by management in which numerous factors are consideredI including economic conditionsI loan portfolio characteristics and compositionI

then loans are in nonaccrual statusI the Association’s general practice is to apply and record on its financial records any payments received on nonaccrual loans in the following sequenceW ENF to existing principal which includes outstanding principalI accounts receivableI and accrued interest receivable as of the date of transfer plus any additional advances made since the loan was placed in nonaccrual status; EOF to recover any chargedJoff amount; and EPF to interest incomeK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

collateral valueI portfolio qualityI current production conditions and economic conditionsI and prior loan loss experienceK ft is based on estimatesI appraisalsI and evaluations of loans whichI by their natureI contain elements of uncertainty and imprecisionK qhe possibility exists that changes in the economy and its impact on borrower repayment capacity will cause these estimatesI appraisalsI and evaluations to changeK

based on years of serviceI to an investment account maintained for the employeeK Costs for this plan are expensed as funded and recorded as employee benefit expenseK Association employees are also eligible to participate in an employee savings plan Eqhrift mlanFK qhe Association matches a certain percentage of employee contributions with costs being expensed as fundedK qhese costs are recorded as employee benefit expenseK

fnvestment in CoBankI ACB

qhe Association provides certain health care and life insurance benefits to eligible retired employeesK pubstantially all employees may become eligible for these benefits if they reach early retirement age while working for the AssociationK qhe anticipated costs of these benefits are accrued during the period of the employee’s active service and are classified as employee benefit expenseK eoweverI substantially all participants pay the full premiums associated with these benefitsK

qhe Association’s investment in CoBank is in the form of Class b stockK Accounting for this investment is on the cost plus allocated equities basisK lther mroperty lwned lther property ownedI consisting of real and personal property acquired through foreclosure or deed in lieu of foreclosureI is recorded at fair value less estimated selling costs upon acquisitionK Any initial reduction in the carrying amount of a loan to be the fair value of the collateral received is charged to the allowance for loan lossesK ln at least an annual basisI revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the assetI provided that such adjusted value is not in excess of the carrying amount at acquisitionK fncome and expenses from operations and carrying value adjustments are included in gains ElossesF on other property owned in the consolidated ptatement of fncomeK

fncome qaxes As previously describedI carm Credit bastI ACA operates two wholly owned subsidiariesK carm Credit bastI ciCA is exempt from federal and other income taxes as provided in the carm Credit ActK carm Credit bastI ACA and its subsidiary carm Credit bastI mCA are subject to cederal and ptate income taxK All entities are eligible to operate as cooperatives that qualify for tax treatment under pubchapter q of the fnternal oevenue CodeK AccordinglyI under specified conditionsI the Association can exclude from taxable income amounts distributed as qualified patronage refunds in the form of cashI stockI or allocated surplusK mrovisions for income taxes are made only on those earnings that will not be distributed as qualified patronage refundsK qhe Association distributes patronage on the basis of book incomeK lperating expenses are allocated to each subsidiary based on estimated relative serviceK All significant transactions between the subsidiaries and the parent company have been eliminated in consolidationK

mremises and bquipment mremises and equipment are carried at cost less accumulated depreciationK iand is carried at costK aepreciation is provided on the straightJline method over the estimated useful lives of the assetsK dains and losses on dispositions are reflected in current operationsK jaintenance and repairs are charged to operating expense and improvements are capitalizedK bmployee Benefit mlans

aeferred taxes are recorded on the tax effect of all temporary differencesK A valuation allowance is provided against deferred tax assets to the extent that it is more likely than not Eover RM percent probabilityFI based on management’s estimateI that they will not be realizedK qhe consideration of valuation allowances involves various estimates and assumptions as to future taxable earningsI including the effects of our expected patronage programI which reduces taxable earningsK

pubstantially all employees of the Association may be eligible to participate in various retirement plansK Association employees hired prior to ganuary NI OMMT participate in a qualified defined benefit pension planI which is noncontributory and covers substantially all employeesK qhe net expense for this plan is recorded as employee benefit expenseK qhe “mrojected rnit Credit” actuarial method is used for financial reporting and funding purposesK

aeferred income taxes have not been provided by the Association on patronage stock distributions from the carm Credit Bank of ppringfield EcCBF prior to ganuary NI NVVPI the adoption date of the cApB guidance on income taxesK janagement’s intent is ENF to permanently invest these and other undistributed earnings in the cCBI thereby indefinitely

bffective ganuary NI OMMTI the Association closed the existing defined benefit pension plan to new participantsK All employees hired on or after ganuary NI OMMT are participants in a noncontributory defined contribution planK marticipants in this plan receive a fixed percentage of their eligible wagesI

cAoM Cobafq bApq | OMNM ANNrAi obmloq

postponing their conversion to cashI or EOF to pass through any distribution related to preJNVVP earnings to Association borrowers through qualified patronage allocationsK CoBank is the successor to the cCBK

hedge transactionsK qhis process includes linking all derivatives that are designated as fair value or cash flow hedges to ENF a portion of our longJterm variable loans on the balance sheet or EOF firm commitments or forecasted transactionsK qhe Association also formally assesses Eboth at the hedge’s inception and on an ongoing basisF whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periodsK qhe Association uses regression analysis Eor statistical analysisF to assess the effectiveness of its hedgesK qhe Association discontinues hedge accounting prospectively when the Association determines that NF a derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; OF the derivative expires or is soldI terminatedI or exercised; PF it is no longer probable that the forecasted transaction will occur; QF a hedged firm commitment no longer meets the definition of a firm commitment; or RF management determines that designating the derivative as a hedging instrument is no longer appropriateK qhe cApB guidance provides for various remedies in the event hedge accounting is discontinuedK aue to the structure of the Association’s current swap transactionsI management has no reason to believe that hedge accounting qualifications will not be met and believes the transactions will continue to be recorded in the manner described in kote NQ of these consolidated financial statementsK

qhe Association has not provided deferred income taxes on amounts allocated to the Association which relate to the cCB’s and CoBank’s postJNVVO earnings to the extent that such earnings will be passed through to Association borrowers through qualified patronage allocationsK AdditionallyI deferred income taxes have not been provided on the cCB’s and the CoBank’s postJNVVO unallocated earningsK CoBank currently has no plans to distribute unallocated earnings and does not contemplate circumstances thatI if distributions were madeI would result in taxes being paid at the Association levelK matronage fncome from CoBankI ACB qhe Association records patronage refunds from CoBankI ACB on the accrual basisK aerivative fnstruments and eedging Activity qhe Association is party to derivative financial instrumentsI primarily interest rate swapsI which are principally used to manage interest rate risk on assetsI liabilitiesI and anticipated transactionsK aerivatives are recorded on the balance sheet as assets and liabilities at fair valueK Changes in the fair value of a derivative are recorded in current period earnings or accumulated other comprehensive income ElossF depending on the use of the derivative and whether it qualifies for hedge accountingK cor fairJvalue hedge transactionsI which hedge changes in the fair value of assetsI liabilitiesI or firm commitmentsI changes in the fair value of the derivative are recorded in earnings and will generally be offset by changes in the hedged item’s fair valueK cor cashJflow hedge transactionsI which hedge the variability of future cash flows related to a variableJrate assetI liabilityI or a forecasted transactionI changes in the fair value of the derivative will generally be deferred and reported in accumulated other comprehensive income ElossFK qhe gains and losses on the derivative that are deferred and reported in accumulated other comprehensive income ElossF will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged itemK qhe ineffective portion of all hedges is recorded in current period earningsK cor derivatives not designated as a hedging instrumentI the related change in fair value is recorded in current period earningsK

cair salue jeasurement qhe cApB guidance defines fair valueI establishes a framework for measuring fair valueI and expands disclosures about fair value measurementsK ft describes three levels of inputs that may be used to measure fair valueW ievel N — nuoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement dateK ievel N asset and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange marketI as well as certain rKpK qreasuryI other rKpK dovernment and agency mortgageJbacked debt securities that are highly liquid and are actively traded in overJ theJcounter marketsK Also included in ievel N are assets held in trust fundsI which relate to deferred compensation and our supplemental retirement planK qhe trust funds include investments that are actively traded and have quoted net asset values that are observable in the marketplaceK mension plan assets that are invested in equity securitiesI including mutual fundsI and fixedJincome securities that are actively traded are also included in ievel NK

qhe Association formally documents all relationships between hedging instruments and hedged itemsI as well as its risk management objective and strategy for undertaking various

ievel O — lbservable inputs other than quoted prices included within ievel N that are observable for the asset or liability either

cAoM Cobafq bApq | OMNM ANNrAi obmloq

milot fnvestment mrogram and jission oelated fnvestments

directly or indirectlyK ievel O inputs include the followingW EaF quoted prices for similar assets or liabilities in active markets; EbF quoted prices for identical or similar assets or liabilities in markets that are not active so that they are traded less frequently than exchangeJtraded instrumentsI the prices are not current or principal market information is not released publicly; EcF inputs other than quoted prices that are observable such as interest rates and yield curvesI prepayment speedsI credit risks and default ratesI and EdF inputs derived principally from or corroborated by observable market data by correlation or other meansK qhis category generally includes certain rKpK dovernment and agency mortgageJbacked debt securitiesI corporate debt securitiesI and derivative contractsK mension plan assets that are derived from observable inputsI including corporate bonds and mortgageJbacked securities are reported in ievel OK

ln guly NI OMMR the carm Credit Administration approved a pilot investment program for the Association designed to provide an opportunity for the Association to invest in testern kew vork agricultureK qhe approval provided for the ability to purchase investments in a securitized pool of agricultural loans from oural fnvestmentsI iiC for a period of up to one yearK ln August OSI OMMR the Association entered into an agreement with oural fnvestmentsI iiC Eoural fnvestmentsF a special purpose entity created by the Association and dpp eoldingsI fncK to hold loans sold by a commercial lenderK oural fnvestments was formed specifically to own and securitize the loans and subsequently sell the security to the Association as an investmentK oural fnvestments sole member is dpp eoldingsI fncK a aelaware special purpose entity created to own oural fnvestmentsK qhe Association is the manager and through agreement controls oural fnvestments and all its activitiesK All benefits and risks accrue to the Association as managerK qhe ciCA holds the investment security certificateK

ievel P — rnobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilitiesK qhese unobservable inputs reflect the reporting entity’s own assumptions about assumptions that market participants would use in pricing the asset or liabilityK ievel P assets and liabilities include financial instruments whose value is determined using pricing modelsI discounted cash flow methodologiesI or similar techniquesI as well as instruments for which the determination of fair value requires significant management judgment or estimationK qhis category generally includes certain private equity investmentsI retained residual interests in securitizationsI assetJbacked securitiesI highly structured or longJterm derivative contractsI certain loans and other property ownedK mension plan assets such as certain mortgageJbacked securities that are supported by little or no market data in determining the fair value are included in ievel PK

qhe investment is carried at the lower of cost or fair market valueK A valuation to determine fair market value is performed monthly by managementI taking into account cash flows and the underlying loans contained in the investmentK fncome is recorded on investments only as it relates to underlying loans contained in the security that would be classified as accruing had the Association owned the loansK fnterest is accrued and credited to interest income based upon the daily investment valueK Any difference between amortized cost and actual borrower balances on the underlying loans is accredited to interest income as payments are received over the life of the investmentK Any reduction in value recognized through the ongoing fair market value determination is recorded as a current charge and will directly impact the income statement at the time of recognitionK ko valuation allowance is maintainedK fncome is not recognized on the underlying loans contained in the investment for loans that would be considered impaired if the loans were owned by the AssociationK qhe Association’s practice is to apply and record payments received on impaired underlying loans in the following sequenceW

qhe fair value disclosures are presented in kote NN of these consolidated financial statementsK lffJBalance pheet Credit bxposures Commitments to extend credit are agreements to lend to customersI generally having fixed expiration dates or other termination clauses that may require payment of a feeK Commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third partyK qhese letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and third partyK qhe credit risk associated with commitments to extend credit and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policiesK Collateral may be obtained based on management’s assessment of the customer’s creditworthinessK

NK OK

qo existing principal until all principal is paidI and then qo interest income

rnderlying loans contained in the investment may be returned to accrual status once performance criteria are metK rpon reinstatementI previously unrecognized income will be recognized as payments are received over the remaining life of the investmentK pee kote NQ for additional information regarding the rural investmentK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

qhe Association may also hold additional investments in accordance with missionJrelated and other investment programsI approved by the carm Credit AdministrationK qhese programs allow the Association to make investments that further the pystem’s mission to serve rural AmericaK qhe Association held mission related investments which are classified as loans totaling ATIMNPI ASIUMTI and ARIPRM at aecember PNI OMNMI OMMVI and OMMU respectivelyK qhe Association also held an equity investment in carmptartI iim of AVVVI AUNTI and ASMQ that is accounted for on the equity method and is classified as other assets at aecember PNI OMNMI OMMVI and OMMU respectivelyK klqb P – ioans and Allowance for ioan iosses A summary of loans followsW

As of aecember PN oeal estate mortgage mroduction and intermediate term ioans to cooperatives mrocessing and marketing carm related business Communication bnergy oural residential real estate taterLtaste disposal iease receivables qotal ioans

OMNM

OMMV

A OIMPTIQQU NISPNIUUM NROIOMR NUMIOQN NVUIMRV NRV TIMRQ SNIVNU SINQM M A QIOTRINMQ

OMMU

A NISNQIUQQ NIMTPISPP SOIMQO NNVIQON NQSIRNV ONS PIOUP ROIURU SIOPT UR A PIMTVINPU

A NIQVNITUM NIMPPISNU TUIQUO NQMITTR NSMISTQ OST VIMMT RRIUUV RIVNT ONR A OIVTSISOQ

qhe Association may purchase or sell participation interests with other parties in order to diversify riskI manage loan volumeI and comply with carm Credit Administration regulationsK qhe following table presents information regarding participations purchased and sold as of aecember PNI OMNM which are also included in the table aboveW

marticipations murchased

oeal estate mortgage mroduction and intermediate term ioans to cooperatives mrocessing and marketing carm related business bnergy taterLtaste disposal qotal ioans

A NVQIMUO NUVIOPV NROINVU NVUIRST OTIORU TIMRP SINQM A TTQIRPT

marticipations pold

QMIVPR OONITMM M NNSIVMM PPIVPU M M QNPIQTP

qhe Association’s concentration of credit risk in various agricultural commodities is shown in the following tableK thile the amounts represent the Association’s maximum potential credit risk as it relates to recorded loan principalI a substantial portion of the Association’s lending activities is collateralized and the Association’s exposure to credit loss associated with lending activities is reduced accordinglyK An estimate of the Association’s credit risk exposure is considered in the determination of the allowance for loan lossesK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

As of aecember PN Commodity aairy Cash cield qimber iivestock dreenhouse cruit kursery carm pervices mrocessing C jarketing segetables Aquatic Cranberries All lther qotal

OMNM

OMMV

OMMU

Amount

A NIMQUIMUR QUPIRUN QNTIRQN QNRISUR OSVIQUV ORNIVPU OPOIVSN OMVIVTQ NTQINUV NRMIOTP NNMIUPQ VPIRRO QNTIMMO

OQKRB NNKPB VKUB VKTB SKPB RKVB RKQB QKVB QKNB PKRB OKSB OKOB VKUB

A SPOIRMP OVUIPSV PRNINMU PRRIVVN ORRITPR NTMIOMP OOTIPVS NQSIUSQ SMIMTR NMRIUTN UMINNM UOIOMT PNOITMS

OMKRB VKTB NNKQB NNKSB UKPB RKRB TKQB QKUB OKMB PKQB OKSB OKTB NMKNB

A RUOIVST OUMISUR POVIPRV PQOIUQQ OSUIROO NSUIVVO OOQISMP NSMIVSO RQISRU VRITSP UMISOT TQIQRU PNOINUQ

NVKSB VKQB NNKNB NNKRB VKMB RKTB TKRB RKQB NKUB PKOB OKTB OKRB NMKSB

A QIOTRINMQ

NMMB

A PIMTVINPU

NMMB

A OIVTSISOQ

NMMB

qhe amount of collateral obtainedI if deemed necessary upon extension of creditI is based on management’s credit evaluation of the borrowerK Collateral held variesI but typically includes farmland and incomeJproducing propertyI such as crops and livestock as well as receivablesK iongJterm real estate loans are secured by the first liens on the underlying propertyK cederal regulations state that longJterm real estate loans are not to exceed URB EVTB if guaranteed by a government agencyF of the property’s appraised valueK eoweverI a decline in a property’s market value subsequent to loan origination or advancesI or other actions necessary to protect the financial interest of the Association in the collateralI may result in the loan to value ratios in excess of the regulatory maximumK

Amount

qhe following table presents information relating to impaired loansW As of aecember PN konaccrual loansW Current as to principal and interest mast due qotal impaired loans

OMNM A OOIMPP OUIRRP A RMIRUS

OMMV A A

OMMU

NOINQU A PINSP OOINUV OUISVS QMIUQQ A ORIPRO

Accruing loans VM days or more past due were APIMMSI ANIQNPI and ANVU at aecember PNI OMNMI OMMVI OMMU respectivelyK janagement does not consider these loans to be impairedK

fmpaired loans are loans for which it is probable that all principal and interest will not be collected according to the contractual termsK fnterest income recognized and cash payments received on nonaccrual impaired loans are applied in a similar manner as for nonaccrual loansI as described in kote OK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

konperforming assets Eincluding related accrued interestF and related credit quality statistics are as followsW

As of aecember PN konaccrual loansW oeal estate mortgage mroduction and int ermediate term Agribusiness oural residential real estate taterLtaste disposal qot al nonaccrual loans Accruing loans VM days or more past dueW oeal estate mortgage mroduction and int ermediate term qot al accruing loans VM days or more past due

OMNM A

A A

ORIRQN NTIPRQ RIUVP QRM NIPQU RMIRUS

SVT OIVPT PIMVQ

qotal nonperforming loans

lther owned property qotal nonperforming assets

OMMV A

A A

VINUO NPIVOR NIVST OTU M ORIPRO

M NIQQN NIQQN

NSR QP OMU

RPISUM

QOIOUR

ORIRSM

OISMV

OST

TRR

RSIOUV

QOIRRO

NVINVP NOISUS UIQOU RPT M QMIUQQ

OMMU

A OSIPNR

cAoM Cobafq bApq | OMNM ANNrAi obmloq

qhe following table shows loans and related accrued interest classified under the carm Credit Administration’s rniform ioan Classification pystem as a percentage of total loans and related accrued interest receivable by loan type as of aecember PNW

As of aecember PN oeal estate mortgage Acceptable lAbj pubstandardLdoubtful mroduction and intermediate term Acceptable lAbj pubstandardLdoubtful ioans to cooperatives Acceptable lAbj pubstandardLdoubtful mrocessing and marketing Acceptable lAbj pubstandardLdoubtful carm related business Acceptable lAbj pubstandardLdoubtful bnergy and taterLwaste disposal Acceptable lAbj pubstandardLdoubtful oural residential real estate Acceptable lAbj pubstandardLdoubtful qotal loans Acceptable lAbj pubstandardLdoubtful

OMNM

OMMV

OMMU

QNKSB PKQB OKTB QTKTB

QSKNB PKNB PKQB ROKSB

QTKNB NKTB NKQB RMKOB

POKOB PKNB OKUB PUKNB

OVKPB PKQB OKNB PQKUB

PNKOB NKPB OKOB PQKTB

PKPB MKPB MKNB PKTB

OKMB MKMB MKMB OKMB

MKMB MKMB MKMB MKMB

PKUB MKPB MKNB QKOB

PKNB MKRB MKOB PKUB

TKOB MKMB MKNB TKPB

QKOB MKPB MKNB QKSB

QKPB MKPB MKOB QKUB

QKVB MKPB MKOB RKQB

MKPB MKMB MKMB MKPB

MKRB MKMB MKMB MKRB

NKPB MKMB MKNB NKQB

NKSB MKMB MKNB NKTB

NKUB MKMB MKNB NKVB

USKTB TKQB RKVB NMMKMB

USKTB TKPB SKMB NMMKMB

VOKTB PKPB QKMB NMMKMB

cAoM Cobafq bApq | OMNM ANNrAi obmloq

qhe following table provides an age analysis of past due loans as of aecember PNI OMNMW

PMJUV aays mast aue

oeal estate mortgage mroduct ion and intermediate term ioans to cooperat ives mrocessing and marketing carm related business Communication bnergy and waterLwaste disposal oural residential real estate qotal ioans

VM aays or jore mast aue

A VIOPS PIPMV M M RNO M M RUM A NPISPT

qotal mast aue

A NOIROU NQIVNR M M OIVPU M M SR A PMIQQS

A ONITSQ NUIOOQ M M PIQRM M M SQR A QQIMUP

kot mast aue or less than PM aays mast aue

A OIMNRISUQ NISNPISRS NROIOMR NUMIOQN NVQISMV NRV NPINVQ SNIOTP A QIOPNIMON

qotal ioans

A OIMPTIQQU NISPNIUUM NROIOMR NUMIOQN NVUIMRV NRV NPINVQ SNIVNU A QIOTRINMQ

oecorded fnvestment >VM days and accruing

SUU OIPNU M M M M M M A PIMMS

koteW qhe recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premiumI discountI finance chargesI or acquisition costs and may also reflect a previous direct writeJdown of the investmentK

A restructuring of debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise considerK As of aecember PNI OMNM the Association has no accruing troubled debt restructuringsK Additional impaired loan information is as followsW oecorded fnvestment at NOLPNLNM

fmpaired loans with a related allowance for loan lossesW oeal estate mortgage A NNINNN mroduction and intermediate term UIPNS carmJrelated business OMS bnergy and waterL waste disposal QUT oural residential real estate QMM qotal A OMIROM fmpaired loans with no related allowance for loan lossesW oeal estate mortgage A NQIQOU mroduction and intermediate term VIMPV mrocessing and marketing OIOVV carmJrelated business PIPUU bnergy and waterL waste disposal USN oural residential real estate RN qotal A PMIMSS Total fmpaired loansW oeal estate mortgage mroduction and intermediate term mrocessing and marketing carmJrelated business bnergy and waterL waste disposal oural residential real estate qotal a

A ORIRPV NTIPRR OIOVV PIRVQ NIPQU QRN A RMIRUS

rnpaid mrincipal Balancea

oelated Allowance

NRIOPU VISVU ONO QUT QRM A OSIMUR

NSISTP NTIPPM OIOVV PIUNO URU NMV QNIMUN

PNIVNN OTIMOU OIOVV QIMOQ NIPQR RRV STINSS

rnpaid principal balance represents the borrower’s contractual balance of the loan

NIOMT OIPUR RO OTN NVU QINNP

Average fmpaired ioans

A NOITTN UISQM ONT QUS QNP A OOIROT

M M M M M M M

A NSITNN NSIPUN RITMP PITOV UUN VV A QPIRMQ

A NIOMT OIPUR M RO OTN NVU A QINNP

A OVIQUO ORIMON RITMP PIVQS NIPST RNO A SSIMPN

fnterest fncome oecognized

ENSF ERRF ENF EOF ENMF EUQF

NITPP NIQRP QM S M R PIOPT

NITNT NIPVU QM R EOF ERF PINRP

cAoM Cobafq bApq | OMNM ANNrAi obmloq

qhere were no material commitments to lend additional funds to debtors whose loans were classified as impaired at aecember PNI OMNMK fnterest income on nonaccrual loans that would have been recognized under the original terms of the loans at aecember PNI OMNM are as followsW fnterest income which would have been recognized under the original loan terms iessW interest income recognized corgone interest income

QIOUO

PINRP NINOV

A summary of the changes in the allowance for loan losses and the ending balance of loans outstanding are as followsW

oeal estate mortgage

mroduction and intermediate

Agribusiness

Communications

bnergy C waterLwaste disposal

oural residential real estate

qotal

Allowance for ioan iossesW Balance at aecember PNI OMMV

ChargeJoffs

NRITST

EPIQQSF

oecoveries mrovision for loan losses Balance at aecember PNI OMNM bnding BalanceW individually evaluated for impairment bnding BalanceW collectively evaluated for impairment

NPINVO

EQUF

NNIMVN

EOIOROF

NRQ

RSM

ENF

QMITSQ ERITQTF

NQR

NMM

NPP

PTU

OINQS

UINNS

VITUV

OMS

EOSOF

OMIMMM

NQISNO

ONIPSM

NUITSN

PSM

OVT

RRIPVR

NIOMT

OIPUR

OTN

NVU

QINNP

NPIQMR

NUIVTR

NUITMV

RNIOUO

A NISPNIUUM

RPMIRMR

NRV

NPINVQ

SNIVNU

UIPNS

OMS

QUT

QMM

A NISOPIRSQ

RPMIOVV

NRV

NOITMT

SNIRNU

oecorded fnvestments in ioans lutstandingW bnding Balance at aecember PNI OMNM

OIMPTIQQU

bnding balance for loans individually evaluated for impairment

NNINNN

bnding balance for loans collectively evaluated for impairment

OIMOSIPPT

A QIOTRINMQ

OMIROM

A QIORQIRUQ

qo mitigate the risk of loan lossesI the Association may enter into longJterm standby commitments to purchase agreements with the cederal Agricultural jortgage Corporation Ecarmer jacFK qhe agreementsI which are effectively credit guarantees that will remain in place until the loans are paid in fullI give the Association the right to sell the loans identified in the agreements to carmer jac in the event of default Etypically four months past dueFI subject to certain conditionsK qhe balance of loans under longJterm standby commitments was AUTIUVSI ASPISMUI and ARPIRTR at aecember PNI OMNMI OMMVI and OMMU respectivelyK cees paid to carmer jac for such commitments totaled AQSSI APNRI and AOVS for the years ended aecember PNI OMNMI OMMVI and OMMU respectivelyK qhese amounts are classified as noninterest expenseK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

klqb Q – fnvestment in CoBankI ACB

klqb R – mremises and bquipment

At aecember PNI OMNMI the Association’s investment in CoBankI ACB is in the form of Class b stockK qhe Association is required to invest in the ACB for two purposesK

mremises and equipment consists of the followingW As of aecember PN

cirstI the Association is required to invest in the ACB to capitalize the Association’s loan from the ACBK qhe capitalization requirement for this purpose is QB of the average borrowings for the previous yearK cor OMNMI the required investment in the ACB for this purpose was ANPVKR million and the actual investment was ANPVKR millionK then the Association’s investment meets or exceeds the required amountI the ACB pays patronage to the Association NMMB in cashK ff the Association’s investment in the ACB is less than the required amountI the ACB will issue additional equity through their patronage program until we reach the required amountK qhe Association elected to purchase ANKQ million of Class b stock in aecember OMNM to meet the required capitalization level and continue to receive cash patronageK

iand Buildings and improvements curniture and equipment lperating lease equipment Autos iessW accumulated depreciation qotal

OMNM A

NIMPV NTIQPO SIPSM M PIQNV OUIORM NMISUS A NTIRSQ

OMMV A

UOU NOIMUN QIOOM M NIQOO NUIRRN SIPTT A NOINTQ

OMMU A

UOU NOIQTT PIPOM NIMOQ SPU NUIOUT SITVN A NNIQVS

klqb S – kotes mayable to CoBankI ACB qhe Association’s indebtedness to CoBank represents borrowings by the Association to fund its loan portfolioK rnder terms of a general financing agreement with CoBankI which provides the Association an openJend revolving line of creditI loans made by the AssociationI as well as substantially all its assets are assigned to CoBank as primary collateral for funds advanced by CoBankK qhe interest rate is periodically adjusted by CoBankK qhe weighted average interest rate was NKPVB at aecember PNI OMNMK

pecondI the Association is required to invest in the ACB to capitalize any participation loans sold to the ACBK qhe capitalization requirement for this purpose is UB of the previous ten years’ average participations soldK cor OMNMI the required investment in the ACB for this purpose was ATKT million and the actual investment was AQKP millionK then the Association’s investment is less than the required amountI the ACB pays patronage to the Association SRB in cash and PRB in stockK

CoBankI consistent with cCA regulationsI has established limitations on the Association’s ability to borrow funds based on specified factors or formulas relating primarily to credit quality and financial conditionK At aecember PNI OMNMI the Association’s notes payable are within the specified limitationsK

fn addition to the required stock investmentI the Association purchased during OMMQ and OMMP an investment of participation certificates in the ACB with a balance of APMM at aecember PNI OMNMK qhis equityI which does not count toward either capitalization requirement aboveI is expected to be redeemed in cash in the futureK

klqb T – jembers’ bquity A description of the Association’s capitalization requirementsI protection mechanismsI regulatory capitalization requirements and restrictionsI and equities are provided belowK jembers’ equity is described and governed by the Association’s capitalization policiesK carm Credit bast’s capitalization policies are specified in the Bylaws and in the Capitalization mlan approved by the Board of airectorsK Copies of the Association’s Bylaws and Capitalization mlan are available to members at any timeK

qhe Association owns VKOB of the issued stock of the ACB as of aecember PNI OMNMK As of that dateI the ACB’s assets totaled ASRKU billion and members’ equity totaled AQKQ billionK qhe ACB earned net income of ASNQ million during OMNMK

qhe components of Association capital that are allocated directly to members are capital stockI participation certificatesI and allocated surplusK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Capital stock and participation certificates fn accordance with the carm Credit ActI and the Association’s capitalization Bylaws and Capitalization mlanI each Association borrowerI as a condition of borrowingI is required at the time the loan is madeI to invest in Class B ptock for agricultural loans or Class B marticipation Certificates for country home and farm related business loansK Association Bylaws require that borrowers acquire capital stock or participation certificatesI as a condition of borrowingI at least the lesser of ANIMMM or OB of the amount of the loanI and not more than NMB of the amount of the loanK

usually does not make a cash investmentK qhe aggregate par value is added to the principal amount of the related loan obligationK qhe Association retains a first lien on the stock or participation certificates owned by borrowersK oetirement of such equities will generally be at the lower of par or book valueI and repayment of a loan does not automatically result in retirement of the corresponding stock or participation certificatesK All stock and participation certificates are retired at the discretion of the Association’s Board of airectors after considering the capitalization plan as well as regulatory and other requirementsK

mursuant to the Association Capitalization mlanI the Association Board has determined that Class B stock and Class B participation certificates shall be issued as followsW

pubject to the carm Credit Act and oegulations thereunderI and the Association’s Capitalization mlanI each Association’s Board of airectors may declare a dividend on the Association’s stock and participation certificatesK qhe Association has not declared a dividend on stock and participation certificates and has no plan to do so in the immediate futureK

cor all loans Eexcept where indicated belowF Class B stock and Class B participation certificates shall be issued equal to one thousand dollars per customer as a condition of borrowing from this AssociationK cor purposes of borrower stockI a customer is defined as the primary borrower on a loanK qhe intent of this policy is for each primary customer to have one thousand dollars of stockI regardless of the number of loans or balance on those loans to that customerK ptock shall be purchased at the beginning of a customer’s relationship and will not be retired until all loans to that customer are paid in full and there are no funds available for advancesK

aescription of equities bach owner or joint owners of Class B stock are entitled to a single voteI while Class B participation certificates provide no voting rights to their ownersK soting stock may not be transferred to another person unless such person is eligible to hold voting stockK At aecember PNI OMNMI the Association had OINRTIMOR shares of Class B stock outstanding at a par value of AR per shareI OPQIVOT shares of Class B participation certificates outstanding at a par value of AR per shareI and TMU shares of Class C stock outstanding at a par value of AR per shareK

bxceptions to this policy areW •

•

At the time of the carm Credit bast merger Eganuary OMNMFI certain customers with less than one thousand dollars of stock were “grandfathered” at the stock level at conversionK drandfathered customer stock will be frozen at converted levels until all loans are repaidI at which time the stock will be retiredI or increased to one thousand dollars at the time of a future advance or credit actionK

lwnership of stockI participation certificatesI or allocated surplus is sometimes subject to certain risks that could result in a partial or complete lossK qhese risks include excessive levels of loan losses experienced by the AssociationI losses resulting from contractual and statutory obligationsI impairment of ACB stock owned by the AssociationI losses resulting from adverse judicial decisions or other losses that may arise in the course of businessK fn the event of such impairmentI borrowers would remain liable for the full amount of their loansK

Certain small borrowers Ecustomers with total commitment less than ten thousand dollars initiallyF will be issued at NMB of the initial commitmentI consistent with ByJiaw limitationsK

•

Certain interests in loans sold to other financial institutionsK

•

ioans to be sold into the secondary marketK

Any losses which result in impairment of capital stock and participation certificates would be allocated to such purchased capital on a pro rata basis impairing Class B stock and participation certificatesK fn the case of liquidation or dissolution of the AssociationI capital stockI participation certificatesI and allocated surplus would be utilized as necessary to satisfy any remaining obligations in excess of the amounts realized on the sale or liquidation of assetsK

qhe borrower acquires ownership of the capital stock or participation certificates at the time the loan is madeI but

cAoM Cobafq bApq | OMNM ANNrAi obmloq

matronage distributions pubject to the carm Credit Act and oegulations there underI and the Association’s Capitalization mlanI each Association’s Board of airectors may authorize the distribution of Association earnings in the form of patronage refundsK matronage dividends based on one year’s operating results are distributed in the subsequent yearK qhe table below summarizes the patronage distributions since OMMUK barnings not distributed are retained as unallocated surplusK barnings vear

Cash aistribution

Allocated purplus aistribution

qotal matronage

OMNM OMMV OMMU

A PRIMMM A OPIQMM A NPIVQU

A M A M A VIMRO

A PRIMMM A OPIQMM A OPIMMM

An cCA regulation empowers it to direct a transfer of funds or equities by one or more pystem institutions to another pystem institution under specified circumstancesK qhe Association has not been called upon to initiate any transfers and is not aware of any proposed action under this regulationK lther Comprehensive fncome lther comprehensive income is comprised of NF net income and OF certain changes in cash flow hedgesK bffective as of fiscal OMMUI the change in the minimum pension liability is also included in other comprehensive incomeK lther comprehensive income was AVSINSPI ASQIOQNI and AQTIPOP for the years ended aecember PNI OMNMI OMMVI and OMMU respectivelyK klqb U – fncome qaxes qhe provision for income taxes consists of the followingW

As outlined in the carm Credit bast Capitalization mlanI if the Association continues to meet its financial goalsI it plans to redeem its existing allocated surplus by the year OMNQK mlanned redemptions have occurred in jay of OMNMI OMMVI and OMMUK Allocated surplus is retired at the discretion of the Association’s Board of airectors after considering the capitalization plan as well as regulatory and other requirementsK

As of aecember PN CurrentW cederal ptate qotal current provision for income taxes aeferredW cederal ptate qotal deferred EbenefitF expense from income taxes

oegulatory capitalization requirements and restrictions cCA’s capital adequacy regulations require the Association to achieve permanent capital of seven percent ETKMBF of riskJ adjusted assets and offJbalanceJsheet commitmentsK cailure to meet the TKMB capital requirement can initiate certain mandatory and possibly additional discretionary actions by cCA thatI if undertakenI could have a direct material effect on the Association’s financial statementsK qhe Association is prohibited from reducing permanent capital by retiring stock or making certain other distributions to shareholders unless prescribed capital standards are metK cCA regulations also require that additional minimum standards for capital be achievedK qhese standards are summarized belowW

mermanent Capital oatio qotal purplus oatio Core purplus oatio

cCA oegulatory jinimum

oatios at aecember PNI OMNM

TKMB TKMB PKRB

NRKUNB NRKRPB NQKTMB

OMNM A

fncrease EdecreaseF in deferred tax asset valuation allowance mrovision for income taxes

OMMV

UPO NTR NIMMT

RV TT NPS

OMMU A

OTM UN PRN

EPIUONF ERSOF

RISVS NINPN

EOUVF ESF

EQIPUPF

SIUOT

EOVRF

QIMSV

ESIUOTF

OVR

A SVP

NPS

PRN

qhe provision for income tax differs from the amount of income tax determined by applying the applicable rKpK statutory federal tax rate to pretax income as followsW

As of aecember PN cederal tax at statutory rate ptate taxI net bffect of nontaxable activities matronage distribution triteJoff of loss carryforwards Change in valuation allowance lther

tith respect to participation loansI the amount of participation certificates purchased and sold between Associations or an Association and CoBank may be negotiated within bylaw limits or may be undercapitalized with suitable negotiated compensation to the participating entityK

mrovision for income taxes

OMNM A PRIRVR NNQ EOQIVSPF ENPINUSF M QIMSV EVPSF A

SVP

OMMV A OPIONQ RM ENRIUNMF EUINVMF UIMQM ESIUOTF EPQNF A

NPS

OMMU A ONINOU RP ENPINPQF EUIMRMF M OVR RV A

PRN

cAoM Cobafq bApq | OMNM ANNrAi obmloq

qhe tax years that remain open for federal and state income tax jurisdictions are OMMT and forwardK

aeferred tax assets and liabilities are comprised of the followingW As of aecember PN aeferred income tax assetsW Allowance for loan losses konaccrual loan interest Credit jark Annual leave eealth reserve iong term incentive aeferred compensation mensions mostretirement benefits other than pensions ioss carry forwards lther dross deferred tax assets iessW valuation allowance dross deferred tax assetsI net aeferred income tax liabilitiesW Bank patronage after aecember PNI NVVO CoBank patronage aepreciation aeferred gain dross deferred tax liability ket deferred tax asset

OMNM

OMMV

klqb V – bmployee Benefit mlans

OMMU

qhe Association has fundedI qualified defined benefit pension plansI which are noncontributory and cover employees hired prior to ganuary NI OMMTK aepending on the date of hireI benefits are determined by a formula based on years of service and final average payK bffective ganuary NI OMMTI the Association closed the remaining qualified defined benefit pension plan to new participantsK

A NMIRRR TTV RMN QRT ORR STS RNU OIUUQ

A RIPRR ROR M QPQ OPS PQR QPP NISMO

A PINPS SUP M QMM OOV NOO PTT PIPNN

RRQ M ONN NTIPVM ENOIPPQF RIMRS

NSR M OQ VINNV ESIQRQF OISSR

NTN UIMQM QU NSIRNT ENPIRPRF OIVUO

qhe Association also has a noncontributoryI unfunded nonqualified supplemental executive retirement plan EpbomF covering the CblK qhe defined benefit pension plans and pbom are collectively referred to as oetirement mlansK qhe Association holds assets in a trust fund related to the pbom; howeverI such funds remain Association assets and are not included as plan assets in the accompanying disclosuresK

ESORF EPIQOTF EVOOF EUOF ERIMRSF A M

EQSTF ENIUUMF EOPSF EUOF EOSSRF A M

EQSSF ENIUPSF EOTNF EQMVF EOIVUOF A M

qhe Association has a QMNEkF retirement savings plan pursuant to which the Association matches NMMB of employee contributions up to a maximum employee contribution of SB of compensationK fn additionI under this planI employees hired on or after ganuary NI OMMT receive additional employer defined contributionsK qhe Association contributions to the QMNEkF retirement savings plan and the employer defined contribution planI which are recorded as employee compensation expenseI were ANKS millionI ANKN millionI and ANKM million for OMNMI OMMVI and OMMU respectivelyK

Based on the Association’s strategic financial planI primarily expected future patronage programs and the tax benefits of the ciCA subsidiaryI management believes that as of the end of OMNMI none of the Association’s net deferred tax assets will be realizable in future periodsK AccordinglyI a valuation allowance is provided against the net deferred tax assets since it has been determined that it is more likely than not Eover RM percent probabilityFI based on management’s estimateI that they will not be realizedK

All retirementJeligible employees are also currently eligible for other postretirement benefitsI which primarily include access to health care benefitsK pubstantially all participants pay the full premiums associated with these other postretirement health care benefitsK marticipant contributions are adjusted annuallyK

qhe Association has no unrecognized tax benefits for which liabilities have been established for the years ended aecember PNI OMNMI OMMVI and OMMUK qhe Association recognizes interest and penalties related to unrecognized tax benefits as an adjustment to income tax expenseK qhe amount of interest recognized was AM and the amount of penalties recognized was AM for OMNMK qhe total amount of unrecognized tax benefits thatI if recognized would affect the effective tax rate is AMK qhe Association did not have any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next NO monthsK qhe Association is currently under examination by the fnternal oevenue pervice for the tax years OMMT and OMMUK

qhe following table provides a summary of the changes in the oetirement mlans’ projected benefit obligations and fair values of assets over the threeJyear period ended aecember PNI OMNM as well as a statement of funded status as of aecember PN of each yearK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

As of aecember PN

OMNM

OMMV

OMMU

Change in projected benefit obligationW mrojected benefit obligation at beginning of year pervice cost fnterest cost mlan amendments Actuarial loss ppecial termination benefits Acquisitions qransfers Actual benefits paid mrojected benefit obligation at end of year

A RMIPOT OIORP QIMQS NIRVS PIPMO QOM OOIOPT QQM EOIORPF A UOIPSU

A QPIRSV NIPVT OITNV M QIOTO M M M ENISPMF A RMIPOT

A PVISNR NISSM PIMUT QPU RQT M M M ENITTUF A QPIRSV

Change in plan assetsW cair value of plan assets at beginning of year Actual return on plan assets bmployer Contributions Benefits paid Acquisitions qransfers cair value of plan assets at end of year

A QSIRQU SIOUU SIMMM EOIORPF OMIUPM QQM A TTIURP

A PRIPNU UIQSM QIQMM ENISPMF M M A QSIRQU

A QPIQSS ENMIPTMF QIMMM ENITTUF M M A PRIPNU

cunded status of the plan ket amount recognized in the balance sheet

A EQIRNR F

A EPITTVF

A EUIORNF

aecember PNI OMNMI which is included in “lther Assets” in the accompanying consolidated balance sheetK rnlike the assets related to the qualified plansI those funds remain Association assets and would be subject to general creditors in a bankruptcy or liquidationK AccordinglyI they are not included as part of the assets shown in a previous tableK As depicted in the preceding tableI the pbom plan has a projected benefit obligation and an accumulated benefit obligation of ANKS million and ANKM millionI respectivelyI as of aecember PNI OMNMK qhe following table represents the components of net periodic benefit cost and other amounts recognized in other comprehensive income as of aecember PN as followsW

As of aecember PN

OMNM

OMMV

OMMU

pervice cost

A OIORP

A NIPOU

fnterest cost

QIMQS

OITNV

OIQSV

ERIRNMF

EPISNVF

EPIPOUF ENPUF

ket periodic benefit cost

bxpected return on plan assets

Amounts recognized in accumulated other comprehensive income rnrecognized prior service cost EcreditF rnrecognized net actuarial loss

NINTQ NVIOQM

A EQRRF NTIPQT

A ERRMF NUIOMN

qotal

A OMIQNQ

A NSIUVO

A NTISRN

NIPVT

Amortization of unrecognizedW mrior service credit

EPOF

EVRF

Actuarial loss

SPM

OUR

ket periodic benefit cost mlan merger purchase accounting

qhe projected benefit obligation and the accumulated benefit obligation for the oetirement mlans as of yearJend are as followsW

ppecial termination benefits qotal expense

A NIPUT

SUT

P A

PPQ

TIRTT

QOM

A VIPUQ

SUT

PPQ

lther Changes in mlan Assets and Benefit lbligation oecognized in lther Comprehensive fncome

As of aecember PN mrojected Benefit lbligationW cunded plans rnfunded pbom Accumulated Benefit lbligationW cunded plans rnfunded pbom

OMNM

OMMV

OMMU

ket actuarial loss EgainF mrior service cost

A UMITSM NISMU A UOIPSU

A RMIPOT M A RMIPOT

A QPIRSV M A QPIRSV

A SRIPQO VUQ A SSIPOS

A PVIVOT M A PVIVOT

A PQISTO M A PQISTO

AOIROP

NIRVT

ERSVF

A NRIMTT

QPU

NPU

ESPMF

EOURF

EOF

Amortization ofW mrior service cost ket actuarial gain Adjustment to due measurement date change qotal recognized in other comprehensive income

M APIROO

M A

ETRVF

PQ A NRISUR

qhe Association anticipates that its total pension expense for all retirement plans will be approximately ANKS million in OMNN compared to ANKQ million in OMNMK

qhe ATTKV million in fair value of plan assets shown in a previous table relates only to the qualified retirement plansK As depicted in the preceding tableI such plans had a projected benefit obligation and an accumulated benefit obligation of AUMKU million and ASRKP millionI respectivelyI as of aecember PNI OMNMK

Assumptions qhe Association measures plan obligations and annual expense using assumptions designed to reflect future economic conditionsK As the bulk of pension benefits will not be paid for many yearsI the computations of pension expenses and benefits are based on assumptions about discount ratesI estimates of

qhe Association holds assets in trust accounts related to its pbom planK puch assets had a fair value of AMKV million as of

cAoM Cobafq bApq | OMNM ANNrAi obmloq

annual increases in compensation levelsI and expected rates of return on plan assetsK

qhe assets of the defined benefit retirement plans consist primarily of investments in various domestic equityI international equityI and bond fundsK qhese funds do not contain any significant investments in a single entityI industryI country or commodityI thereby mitigating concentration riskK

qhe weightedJaverage rate assumptions used in the measurement of the Association’s benefit obligations are as followsW As of aecember PN

OMNM

OMMV

OMMU

aiscount rate oate of compensation increase

RKPRB RKMMB

RKTMB RKMMB

SKPRB RKMMB

qhe following table presents major categories of plan assets that are measured at fair value at aecember PNI OMNM and aecember PNI OMMV for each of the fair value hierarchy levels as defined in kote OW As of aecember PNI OMNM

qhe weightedJaverage rate assumptions used in the measurement of our net periodic benefit cost are as followsW OMNM

OMMV

OMMU

aiscount rate bxpected rate of return on plan assets Equalified plans onlyF oate of compensation increase Equalified plans onlyF

RKPRB

SKPRB

UKMMB

RKMMB

ievel O

qotal

Asset category Cash

As of aecember PN

ievel N

aomestic bquityW iargeJcap growth fund iargeJcap equity fund pmallJcap growth fund fnternational bquityW fnternational fund cixed fncomeW Bond fund

mlan Assets qhe asset allocation target ranges for the defined benefit retirement plans follow the investment policy adopted by the Association’s retirement trust committeeK qhis policy provides for a certain level of trustee flexibility in selecting target allocation percentagesK qhe actual asset allocations at aecember PNI OMNMI OMMVI and OMMU are shown in the following table along with the adopted range for target allocation percentages by asset classK qhe actual allocation percentages reflect the quoted market values at yearJend and may vary during the course of the yearK mlan assets are generally rebalanced to a level within the target range each year at the direction of the trusteesK

PQM

A PQM

NSIRSM M M

M NOIVTN QIOOU

NSIRSM NOIVTN QIOOU

TIRPM

OUIMQV

PIUTO

QIPMP

A RSITUO

A ONIMTN

ATTIURP

bmerging jarketsW bquity and fixed income fund oeal AssetsW dold fund qotal

As of aecember PNI OMMV

ievel N

ievel O

qotal

A SNU

NMINPP M M

M TIRTM OIQPR

NMINPP TIRTM OIQPR

QIPQM

OMIOSS M

M NINUS

OMIOSS NINUS

A PRIPRT

A NNINVN

AQSIRQU

Asset category mercentage of mlan Assets as of aecember PNI qarget Allocation oange

OMNM

OMMV

Cash aomestic bquityW iargeJcap growth fund iargeJcap equity fund pmallJcap growth fund

OMMU

Asset Category aomestic bquity

QM – RMB

QPB

PRB

aomestic cixed fncome

PR – RM

fnternational bquity bmerging jarkets bquity and cixed fncome

M – NM

oeal Assets

M– R

NMMB

qotal

fnternational bquityW fnternational fund cixed fncomeW Bond fund eigh yield bond fund qotal

SNU

cAoM Cobafq bApq | OMNM ANNrAi obmloq

ievel N plan assets are funds with quoted daily net asset values that are directly observable by market participantsK qhe fair value of these funds is the net asset value at close of business on the reporting dateK

pubstantially all postretirement healthcare plans have no plan assets and are funded on a current basis by employer contributions and retiree premium paymentsK klqb NM – oelated marty qransactions

ievel O plan assets are funds with quoted net asset values that are not directly observable by market participantsK A significant portion of the underlying investments in these funds have individually observable market pricesI which are utilized by the plan’s trustee to determine a net asset value at close of business on the reporting dateK qhere were no ievel P plan assets at aecember PNI OMNMK

fn the ordinary course of businessI the Association enters into loan transactions with directors and senior officers of the AssociationI their immediate families and other organizations with which such persons may be associatedK puch loans are subject to special approval requirements contained in the cCA regulations and are made on the same termsI including interest rates and collateralI as those prevailing at the time for comparable transactions with unrelated borrowersK

Contributions fn OMNNI the Association expects to contribute ANKU million to its defined benefit retirement plans and AMKN million to its trust fund related to the pbomK qhe actual OMNN contributions could differ from the estimatesK

qotal loans to such persons at aecember PNI OMNM amounted to AORIMRMK auring OMNMI AOOIVUV of new loans were made and repayments totaled ANQIUOTK AdditionallyI other changes to the related party loan balance totaling AEQITSRF represent changes in the composition of Association employees andLor directors during OMNMK fn the opinion of managementI none of these loans outstanding at aecember PNI OMNM involved more than a normal risk of collectibility and none of these loans are in nonaccrual statusK

bstimated cuture Benefit mayments qhe Association expects to make the following benefit paymentsI which reflect expected future serviceI as appropriateK bstimated Benefit mayouts OMNN mayouts OMNO mayouts OMNP mayouts OMNQ mayouts OMNR mayouts OMNS mayouts to OMOM mayouts

At aecember PNI OMNMI the Association owned a OMKSB interest in carm Credit cinancial martnersI fncK EcmfFK qhe Association records this investment on the equity method of accountingK cmf currently provides accountingI information technologyI and other services to the Association on a fee basisK cees paid to cmf for the years ended aecember PNI OMNMI OMMVI and OMMU were ARIOUUI APIVURI and APIVTP respectivelyK

SIOOO RIROT TIMQO SIPSQ TIMMM PVIQMR

klqb NN – cair salue jeasurements

lther mostretirement Benefits mostretirement benefits other than pensions Eprimarily health care benefitsF are also provided to retirees of the AssociationK qhe following table sets forth the funding status and weighted average assumptions used to determine post retirement health care benefit obligationsK

As of aecember PN

OMNM

OMMV

OMMU

Accumulated ben efit obligation

NVP

OSQ

A PQR

ket liability recogn ized in the balance sheet

NIPQR

QON

NINRO RKPRB

EUMF RKTMB

ket periodic exp ense EincomeF aiscount rate

Accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liabilityK pee kote O – pummary of pignificant Accounting molicies for additional informationK

QPT

A EVUF SKPRB

cAoM Cobafq bApq | OMNM ANNrAi obmloq

saluation qechniques As more fully discussed in kote O – pummary of pignificant Accounting moliciesI accounting guidance establishes a fair value hierarchyI which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair valueK qhe following represent a brief summary of the valuation techniques used for the Association’s assets and liabilitiesK

Assets and liabilities measured at fair value on a recurring basis at aecember PNI OMNM and aecember PNI OMMV are summarized belowW

As of aecember PNI OMNM AssetsW aerivative assets Assets held in trust qotal assets iiabilitiesW aerivative liabilities qotal liabilities

ievel N

M OIOUP A OIOUP

A A

AssetsW aerivative assets Assets held in trust qotal assets iiabilitiesW aerivative liabilities qotal liabilities

M M

As of aecember PNI OMMV

ievel O

NINRV M NINRV

A A

V V

ievel N

qotal cair salue

ievel P

ievel O

M M M

A A

NINRV OIOUP PIQQO

A A

M M

A A

V V

OINOU M OINOU

A A

M A M A

NSS NSS

aerivatives bxchangeJtraded derivatives valued using quoted prices are classified within ievel N of the valuation hierarchyK eoweverI few classes of derivative contracts are listed on an exchange; thusI the Association’s derivative positions are valued using internally developed models that use as their basis readily observable market parameters and are classified within ievel O of the valuation hierarchyK puch derivatives include basic interest rate swapsK aerivatives that are valued based upon models with significant unobservable market parameters and that are normally traded less actively or have trade activity that is one way are classified within ievel P of the valuation hierarchyK qhe Association does not have any derivatives classified within ievel PK

qotal cair salue

ievel P

M A NIOPV NIOPV A

Assets eeld in qrust Assets held in trust funds related to deferred compensation and supplemental retirement plans and are classified within ievel NK qhese assets include investments that are actively traded and have quoted net asset values that are observable in the marketplaceK

M M M

A OINOU NIOPV A PIPST

A A

M M

A A

NSS NSS

qhe models used to determine the fair value of derivative assets and liabilities use an income approach based on observable market inputsI primarily the ifBlo swap curve and volatility assumptions about future interest rate movementsK

Assets and liabilities measured at fair value on a nonJrecurring basis at aecember PNI OMNM and aecember PNI OMMV for each of the fair value hierarchy values are summarized belowW

As of aecember PNI OMNM

ievel N

AssetsW fmpaired loans lther mroperty lwned oural fnvestmentsI iiC

A A A

ievel O M A M A M A

As of aecember PNI OMMV

ievel N

AssetsW fmpaired loans lther mroperty lwned

A A

M M M

ievel O

M M

A A

M M

ievel P

qotal cair salue

A A A

QSIQTP OIUMO SIPUR

ievel P

A A

PPIQMP A OUV A

fmpaired ioans cor certain loans evaluated for impairment under cApB impairment guidanceI the fair value is based upon the underlying collateral since the loans are collateralJdependent loans for which real estate is the collateralK qhe fair value measurement process uses independent appraisals and other marketJbased informationI but in many cases it also requires significant input based on management’s knowledge of and judgment about current market conditionsI specific issues relating to the collateral and other mattersK As a resultI these fair value measurements fall within ievel P of the hierarchyK then the value of the real estateI less estimated costs to sellI is less than the principal balance of the loanI a specific reserve is establishedK

QSIQTP OIUMO SIPUR

qotal cair salue PPIQMP OUV

cAoM Cobafq bApq | OMNM ANNrAi obmloq

meet their obligations and the collateral or other security is of no valueK qhe amount of collateral obtainedI if deemed necessary upon extension of creditI is based on management’s credit evaluation of the borrowerK oeserves related to unfunded commitments to extend credit are included in the calculation of the allowance for loan lossesK

lther mroperty lwned lther property owned is generally classified as ievel PK qhe process for measuring the fair value of the other property owned involves the use of appraisals or other marketJbased informationK Costs to sell represent transaction costs and are not included as a component of the asset’s fair valueK As a resultI these fair value measurements fall within ievel P of the hierarchyK oural fnvestmentsI iiC cor these investmentsI the fair value is based upon the underlying loans contained in the investmentK qhe fair value measurement process uses independent appraisals and other marketJbased informationI but in many cases it also requires significant input based on management’s knowledge of and judgment about current market conditionsI specific issues relating to the collateral and other mattersK As a resultI these fair value measurements fall within ievel P of the hierarchyK then the value of the collateral is less than the principal balance of the investment a loss is realizedK klqb NO – Commitments and Contingencies qhe Association has various commitments outstanding and contingent liabilitiesK qhe Association may participate in financial instruments with offJbalanceJsheet risk to satisfy the financing needs of its borrowers and to manage their exposure to interestJrate riskK qhese financial instruments include commitments to extend credit and commercial letters of creditK qhe instruments involveI to varying degreesI elements of credit risk in excess of the amount recognized in the financial statementsK Commitments to extend credit are agreements to lend to a borrower as long as there is not a violation of any condition established in the contractK Commercial letters of credit are agreements to pay a beneficiary under conditions specified in the letter of creditK Commitments and letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a feeK At aecember PNI OMNMI ANIORVIMMR of commitments to extend creditI AOQIRSS of commercial letters of credit and ANPITMP of standby letters of credit were outstandingK pince many of these commitments are expected to expire without being drawn uponI the total commitments do not necessarily represent future cash requirementsK eoweverI these creditJrelated financial instruments have offJbalanceJ sheet credit risk because their amounts are not reflected on the Balance pheet until funded or drawn uponK qhe credit risk associated with issuing commitments and letters of credit is substantially the same as that involved in extending loans to borrowers and management applies the same credit policies to these commitmentsK rpon fully funding a commitmentI the credit risk amounts are equal to the contract amountsI assuming that borrowers fail completely to

fn additionI actions are pending against the Association in which claims for monetary damages are assertedK Based on current informationI management and legal council are of the opinion that the ultimate liabilityI if anyI resulting there fromI would not be material in relation to the financial position of the AssociationK klqb NP – aisclosures about cair salue of cinancial fnstruments qhe following table presents the carrying amounts and fair values of the Association’s financial instruments at aecember PNI OMNMI OMMVI and OMMUK nuoted market prices are generally not available for certain pystem financial instrumentsI as described belowK AccordinglyI fair values are based on judgments regarding future expected loss experienceI current economic conditionsI risk characteristics of various financial instrumentsI and other factorsK qhese estimates involve uncertainties and matters of judgmentI and thereforeI cannot be determined with precisionK Changes in assumptions could significantly affect the estimatesK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

qhe estimated fair values of the Associations’ financial instruments are as followsW

As of aecember PN

cinancial assetsW ioansI net Cash cinancial liabilitiesW kotes payable to ACB

OMNM

OMMV

OMMU

Carrying Amount

cair salue

Carrying Amount

cair salue

Carrying Amount

cair salue

AQIONVITMV A NOIQVP

AQIOVMIVUS A NOIQVP

APIMPUIPTQ A RIPUV

APINMMIROT A RIPUV

AOIVQRIOTN A NPINON

AOIVSNIVPR A NPINON

APISPPITUT

APISSTIUPP

AOISPMIOQV

AOISRRINVN

AOIRTUIPNN

AOIRPRIPSP

klqb NQ – fnvestments

A description of the methods and assumptions used to estimate the fair value of each class of the Association’s financial instruments for which it is practicable to estimate that value followsW

ln August OSI OMMRI the Association entered into an agreement with oural fnvestmentsI iiC Ea aelaware iimited iiability CompanyF to service and collect a securitized pool of agricultural loans sold by a commercial lender located in the Association’s territory Ethe investmentFK qhe investment is comprised of loans with characteristics similar to loans contained in the Association’s loan portfolioK qo effect this agreementI the Association purchased a security issued by oural fnvestmentsI iiC which is collateralized by all the assets EloansF and the underlying collateral securing the loans purchased by oural fnvestmentsI iiCK qhe agreement assigns all the benefits and risk associated with the investment and names the Association as the sole janager of the iiCK qhe security purchased on August OSI OMMR totaled AOMITMOK pubsequent to the initial purchase additional purchases were made and the total investments purchased through aecember PNI OMMR were AOOISQSK qhe Association was given authority to purchase additional securities for a period of one year from the date of initial purchaseK Additional purchases totaling ATMQ were made under the authority during OMMSK oural fnvestmentsI iiC invested AQVM as a minority member of denesee Agribusiness iiC EdAiiCF on kovember TI OMMUK dAiiC is an agribusiness industrial development park located in town of BataviaI denesee CountyI kvK qhe fair market value of securities and investment in oural fnvestmentI iiC at aecember PNI OMNM is ASIPUR and the Association recorded AUQM of interest income on the investment in OMNMK

ioans Because no active market exists for the Association’s loansI fair value is estimated by discounting the expected future cash flows using CoBank’s or Association’s current interest rates at which similar loans would be made to borrowers with similar credit riskK pince the discount rates are based on CoBank’s or Association’s loan rates as well as management estimatesI management has no basis to determine whether the fair values presented would be indicative of the value negotiated in an actual saleK Cash qhe carrying value of cash is a reasonable estimate of fair valueK kotes payable to CoBankI ACB qhe notes payable are segregated into pricing pools according to the types and terms of the loans Eor other assetsF which they fundK cair value of the note payable is estimated by discounting the anticipated cash flows of each pricing pool using the current rate that would be charged for additional borrowingsK cor purposes of this estimate it is assumed the cash flow on the notes is equal to the principal payments on the Association’s loan receivables plus accrued interest on the notes payableK qhis assumption implies that earnings on the Association’s interest margin are used to fund operating expenses and capital expendituresK

qhe quality of the investment is acceptable based on current valuations performed by managementK fn additionI the Association makes monthly assessments regarding the performance status of each of the underlying loans contained in the security purchased from oural fnvestmentsI iiCK qhis quality assessment is made in a similar manner as that made on loans in the Association’s core portfolioK fnvestments

cAoM Cobafq bApq | OMNM ANNrAi obmloq

interest rate fluctuationsI the interest income and interest expense of hedged variableJrate assetsI will increase or decreaseK qhe effect of this variability in earnings is expected to be substantially offset by the Association’s gains and losses on the derivative instruments that are linked to these hedged assetsK qhe Association considers its strategic use of derivatives to be a prudent method of managing interest rate sensitivityI as it prevents earnings from being exposed to undue risk posed by changes in interest ratesK

performing according to the contractual terms of the underlying notes are carried in accruing statusK fnvestments that are not performing or where there is some question as to the full collectability of the underlying loans are carried as nonaccrualL impairedK rnderlying impaired loans contained in the investment are those where it is probable that not all principal and interest will be collected according to the terms of the underlying loanK fmpaired investments include those identified as nonaccrual or VM days past dueK ko allowance is provided on the investmentK qhe valuation determines the fair market value of the underlying loan contained in the investment and if it is less than the current carrying value of the underlying loan contained in the investment no additional income is recorded until all payments are received under the terms of the loanK

qhe Association enters into interest rate swaps to stabilize net interest income on variable priced loan assetsI to the degree they are funded with equityK rnder interest rate swap arrangementsI the Association agrees with other parties ECoBankF to exchangeI at specified intervalsI payment streams calculated on a specified notional principal amountI with at least one stream based on a specified floating rate indexK

qhe following table presents information illustrating the investment amounts and the performance status of the underlying loans contained in the investment that would have been included in the Association’s performance categories had the loans been owned by the AssociationW

As of aecember PN cair salue of fnvestments fnvestment in denesee Agribusiness iiC Accruing investments konaccrualLfmpaired investments qotal investment value

Allowance on underlying impaired loans rnderlying impaired loans with a related allowance rnderlying impaired loans with no related allowance qotal underlying impaired loans

qhe Association’s interestJearning assetsI to the degree they are funded with debtI are matched with similarly priced and termed liabilitiesK solatility in net interest incomeI comes from equity fundedI variable priced assetsK qo the degree that variable priced assets are funded with equityI interest rate swaps in which the Association pays the floating rate and receives the fixed rate Ereceive fixed swapsF are used to reduce the impact of market fluctuations on the Association’s net interest incomeK

OMNM A A

By using derivative instrumentsI the Association exposes itself to credit and market riskK ff a counterparty fails to fulfill its performance obligations under a derivative contractI the Association’s credit risk will equal the fair value gain in a derivativeK denerallyI when the fair value of a derivative contract is positiveI this indicates that the counterparty owes the AssociationI thus creating a repayment risk for the AssociationK then the fair value of the derivative contract is negativeI the Association owes the counterparty andI thereforeI assumes no repayment riskK qhe Association minimizes the credit Eor repaymentF risk by entering into transactions only with CoBankK

QVM OISUT PIOMU SIPUR

M PIOMU A PIOMU

Cash flow hedges qhe Association uses interest rate swaps to hedge the risk of overall changes in the cash flows of an assetK qhe asset is defined as a pool of long term variable rate loans equal to the notional amount of the swapsI and not exceeding the Association’s equity positionK qhese swapsI which qualify for hedge accountingI have up to a threeJyear termI with a pay rate indexed to three month ifBloK

klqb NR – aerivative fnstruments and eedging Activities qhe Association maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatilityK qhe Association’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets so that the net interest margin is not adversely affected by movements in interest ratesK As a result of

As of aecember PNI OMNMI the Association has executed interest rate swap contracts with CoBankI ACB having a notional

cAoM Cobafq bApq | OMNM ANNrAi obmloq

amount of AOUM millionK qhe fair value of the swap contracts at aecember PNI OMNM is ANINRM of which ATTV is reflected in accumulated other comprehensive income due to the highly effective nature of the hedge transaction and APTN of income is recorded in interest expense due to the ineffectiveness of the hedge transactionsK qhe carrying value of the hedged assets was ANINRV and the carrying value of the hedged liabilities was AVK qhe Association is exposed to credit loss in the event of nonperformance by other parties to the interest rate swap agreement; howeverI the Association does not anticipate nonperformance by CoBankI ACBK klqb NS â&#x20AC;&#x201C; pubsequent bvents qhe Association has evaluated subsequent events through jarch QI OMNN which is the date the financial statements were issued or available to be issuedK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Board of airector aisclosures an Ag fnitiativesK qhe primary responsibilities of each Board Committee are described as followsW

qhe Board is midway in a twoJyear downsizing process resulting from the OMNM jerger to form carm Credit bastK qhe Board currently consists of NT elected and P appointed directorsK At the close of the OMNN airector blectionsI there will be NQ elected directors and P appointed directorsK At the close of OMNO airector blectionsI the Board will consist of NO elected directors J four directors from each of the three nominating regions and up to four appointed directorsK qhe transition plan isW

bxecutive Committee qhe bxecutive Committee members consist of the board chairmanI vice chairmanI and two other directors designated by the BoardI each representing a nominating region other than those represented by the chairman or vice chairmanK ff the chairman and vice chairman are from different regions than one of the other directors will be atJlargeK

• fn OMNNI four testern seats are being combined into oneK qhere will be four open director seats in the OMNN election cycleW two from the bastern regionI one from the Central region and one from the testern regionK

qhe committee is primarily responsible for providing input and direction to management on the development and implementation of the Association’s strategic planI policiesI and other significant matters requiring attention between board meetingsK qhe committee also acts as the liaison with the Association’s regulatorI the cCAK

• fn OMNOI three testern seats are being combined into oneK qhere will be three open director seats in the OMNO election cycleW one from each of the three kominating oegionsK

qhe bxecutive CommitteeI along with another appointed directorI also functions as the Board’s Compensation CommitteeK qhe function of this committee is to review the Association’s overall compensation and benefits packagesI including the performance and compensation for the Chief bxecutive lfficerI and the funding of these programsK

qhe carm Credit bast Bylaws specify QJyear terms with a limit of four consecutive termsK At the end of the transitionI there will be one seat from each oegion open for election each yearK auring the transitionI there will be several PJyear terms in order to achieve a balanced rotationK qhe Bylaws also specify the director candidates be nominated by oegion and be elected by the entire membershipK qhere are three approximately equal kominating oegions as shown on the map on the inside back cover of this Annual oeportK qhe Board may appoint up to four directorsI two of which must be outside directorsI iKeKI not have a borrowing or other business relationship with carm Credit bastK

Audit Committee qhe Audit Committee is comprised of six directors and reports to the Association’s BoardK qhe committee members are appointed by the Board chairman in consultation with the board officersK All members of the Audit Committee are independent of management of carm Credit bast and any other pystem entityK All committee members are expected to have practical knowledge of finance and accountingI be able to read and have a working understanding of financial statementsI or develop that understanding within a reasonable period of time after being appointed to the CommitteeK Ann mK eudson was appointed to the Board of airectors in jay OMMSK eer current term expires in OMNOK qhe Board has determined that jsK eudson has the qualifications and experience necessary to serve as the Audit Committee “financial expertI” as defined by cCA regulationsI and has been designated as suchK

qhe Board is independent of managementK qhe Cbl reports to the Board and no management or employees may serve as directors within one year of employmentK qhe Board generally has seven regularly scheduled meetings each year and has established a number of committees to provide concentrated focus and expertise in particular areas and to enhance the overall efficiency of scheduled Board meetingsK bach committee created by the Board prepares a charter outlining the committee’s purposeI its dutiesI responsibilitiesI and authoritiesK All Committees report on their meetings at the regular meeting of the full BoardK jinutes of each Committee meeting are documented and approved at the following meetingK qhe full text of each committee charter is available on our website under “Board Committees” at wwwKcarmcrediteastKcomK

qhe Audit Committee has unrestricted access to representatives of the internal audit and risk management departmentsI financial managementI and our independent auditorsK qhe primary purpose of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities related to accounting policiesI internal controlsI financial reporting practicesI and regulatory requirementsK

Association bylaws also established an bxecutive Committee which also functions as the Board’s bxecutive Compensation CommitteeK qhe Board has established the following standing committeesW an Audit CommitteeI dovernance CommitteeI and

cAoM Cobafq bApq | OMNM ANNrAi obmloq

continues to attract a highly qualified and diverse BoardK qhe kominating Committee makes a best effort to recommend at least two candidates for each open Board positionK ptockholders and interested candidates may gather signatures for petitions to run for the Board following the conclusion of the kominating Committeeâ&#x20AC;&#x2122;s workK

qhe Audit Committee preJapproves all audit and auditJrelated services and permitted nonaudit services Eincluding the fees and terms thereofF to be performed for the Association by its independent auditorsI as negotiated by managementK Aggregate fees incurred by the Association for services rendered by its independent auditorsI mricewaterhouseCoopersI iim for the years ended aecember PNI OMNM and OMMV followW

Audit cees Audit J oelated qax cees qotal

vear ended aecember PNI OMNM OMMV A VMIMMM A SSIMMM UIMMM RRIMRU USINOP QPIPQP A NUQINOP A NSQIQMN

qhe OMNM tax fees include services rendered in connection with a transfer pricing study and for services rendered in connection with an fop examinationK qhe OMMV tax fees include services rendered in connection with an fop examinationK qhe OMNM and OMMV audit related fees include services rendered in connection with the mergerK

dovernance Committee qhe dovernance Committee members are appointed by the board chairman in consultation with the board officersK qhe committee is primarily responsible for the training and education of Board membersI the outside director election processI director compensationI ethicsI and conflict of interest mattersK

Ag fnitiatives Committee qhe Ag fnitiative Committee members are appointed by the board chairman in consultation with the board officersK qhe committee is primarily responsible for directing the Associationâ&#x20AC;&#x2122;s lending and financial services program for voungI BeginningI and pmall farmers to support the development of agriculture with financial incentives and educational opportunitiesK

lther Committees kominating Committee qhe kominating Committee is comprised of one member and an alternative member from each branch officeI who are elected each year by the membership at the annual stockholder meetingK qhis committeeI which consists of customers who are not seated on the Board of airectorsI proactively identifies qualified candidates for Board membership and reviews director nominationsI helping to ensure that the Association

cAoM Cobafq bApq | OMNM ANNrAi obmloq

gohn gK aickinsonI eudson callsI kvI has served as airector since NVVV with his current term expiring in OMNNK ee is presently a member of the Board’s bxecutive and Agfnitiatives CommitteesK qogether with his wife aeniseI gohn operates fdeal aairy carms and nuiet Brook eolsteins consisting of URM cows and OIMMM acres croppedK gohn is a director of the tashington County poil and tater aistrictI tashington County tater nuality Coordinating Committee memberI and voting member of the kew vork ptate poil and tater Conservation CommitteeK gohn is stepping down from the Board due to term limits after NO years of great serviceK

carm Credit bast airectors fnformation regarding directors who served as of aecember PNI OMNMI including business experience in the last five years and any other business interest where a director serves on the board of directors or as a senior officer followsW Abbott tK ieeI ChatsworthI kgI became Chairman of the carm Credit bast Board in OMNMI having previously served as Chairman of the cirst mioneer BoardK ee was first elected as airector in OMMN and his current term expires in OMNPK ee is a member of the Board’s bxecutive and Compensation CommitteesK Abbott is the founder and owner of fntegrity mropagationI iiC the cranberry industry’s only foundation level nurseryK mreviously he was a partner in iee BrothersI fncKI a six generation family blueberryJcranberry farmK

Christine bK ceskoI pkaneatelesI kvI has served as a director since OMMP with her current term expiring in OMNOK phe serves on the Board’s dovernance CommitteeK ChrisI along with her husband oick and daughter himI operate cesko carmsI fncKI a RMMJcow dairyK Chris cesko bnterprises produces videos for schools and the general public nationwideK Chris owns the carm aiscovery CenterI an educational facility for urban children to experience mathI science and language arts in a farm setting as a school field tripK

eenry “eal” Adams fffI phortsvilleI kvI became sice Chairman of the carm Credit bast Board in OMNMI having previously served as Chairman of the carm Credit of testern kew vork BoardK ee was first elected as airector in NVVT and his current term expires in OMNPK ee is a member of the Board’s bxecutive CommitteeK eal and his wife herry operate Black Brook carmI a NTMJcow dairy with QVM crop acresK ee is a delegate and cinance Committee member of rpstate kiagara CooperativeI fncK

Benjamin gK creundI bast CanaanI CqI has served as director since OMMN and his current term expires in OMNQK ee had previously served as sice Chairman of the cirst mioneer Board and currently serves as Chair of the Audit CommitteeK Ben and his brother jatthew own and operate creund’s carmI fncKI a ORMJcow dairy farm with SRM acres of pastureI cornI and hayI and also manufacture CowmotstmI a horticultural planting container manufactured from composted manure solidsK Ben serves as pecretaryLqreasurer of the Canaan salley Agricultural CooperativeK

jatthew tK BeatonI bast pandwichI jAI has served as director since OMMS and his current term expires in OMNOK ee is a member of the Board’s dovernance CommitteeK jatt is president and owner of pureJCran pervicesI fncKI a custom management company managing over RQM acres of cranberry bogs in southeastern jassachusettsK jatt is also presidentLcoJ owner of Beaton’sI fncKI which owns NRM acres of cranberry bogsK jatt is Chairman of the Cape Cod drowers Association’s oesearch and bnvironmental CommitteesK

Andrew gK dilbertI motsdamI kvI has served as a director since OMMR with his current term expiring in OMNQK ee is a member of the Board’s Audit CommitteeK ee also serves as director of the carm Credit CouncilI a national trade associationK Andy and his brother qony own and operate Adon carmsI an NIOMMJcow dairyK qhey grow corn for grainI grow all their foragesI and haul their own milkK qhey also own and operate marishville pand and dravel with their cousin aonald pnyderI also a carm Credit memberK

oobert oK Brown ffI taterportI kv has served as airector since OMMO and his current term expires in OMNNK ee is a member of the Board’s dovernance CommitteeK BobI along with his brother bric and son BobbyI operate lrchard aale cruit carmsI fncKI growing PMM acres of fruits and berriesK Bob and his wife aeborah also operate Brown’s Berry match with pickJyourJown berriesI applesI cherries and pumpkinsI along with a variety of other retail offeringsK Bob is a partner of iake lntario cruit Company that storesI packs and ships fresh apples from western kew vork growersK

gune tK eoeflichI tilliamsvilleI kv has served as outside director since OMMS with her current term expiring in OMNOK gune is a member of the Board’s Audit CommitteeK phe is a retired penior Bank bxecutive with epBC BankI rpA and former Cbl C mresident of pheehan jemorial eospitalK gune currently serves on the Board of Community eealth coundationI ooswell mark Cancer fnstitute Board of qrusteesI Blue Cross Blue phield of tkv and the prkv Buffalo mresident’s CouncilK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

gohn iymanI fffI jiddlefieldI CqI has served as a airector since NVVV with his current term expiring in OMNNK ee is currently a member of the Board’s bxecutiveI Compensation and Agfnitiatives CommitteesK gohn is bxecutive sice mresident of qhe iyman carmI fncKI an eighthJgeneration family farm business consisting of orchardsI farm marketLbakeryI and golf coursesK ee manages the QMMJacre diversified orchard business and directs the company’s marketing and public relations programsK gohn serves as directorI kew bngland Apple Council and directorI oogers lrchardsI fncK gohn is stepping down from the Board due to term limits after NO years of great serviceK

Ann mK eudsonI puffieldI CqI was first appointed to a threeJ year term as outside director in jay of OMMS and has been reappointed to a term expiring in OMNOK phe is a member of the Board’s Audit CommitteeK Ann has had a career in public accounting starting with mrice taterhouse and progressing as partner with tax expertise through two other accounting firmsK Currently an independent consultant and partJtime farmerI she is a member of the Board of airectors and chairwoman of the Audit Committee of qhe kew bngland College of lptometryK oichard mK ganigaI bast AuroraI kv has served as director since OMMM with his current term expiring in OMNQK ee is a Chairman of the dovernance CommitteeK ee was previously sice Chairman of the Board of carm Credit of testern kew vorkK oick owns and operates o H a ganiga bnterprisesI iiC a PMMJcow dairyI cash crop and custom harvest operationK ee serves on the qown of jarilla mlanning Board and the rpstate kiagara jilk Cooperative Board of aelegatesK

dary jahanyI ArkportI kv has served as director since OMMU with his current term expiring in OMNNK ee is a member of the Board’s Agfnitiatives CommitteeK dary and his brother oobert operate jahany carms in pteuben CountyI cropping OISOO acresK qhe farm grows potatoes for chipping and processingI field cornI snap beansI wheatI oatsI and clover for seedI alfalfaI and carrotsK qhe farm also owns heavy equipment for construction and site work on farm and offK dary is qreasurer of the testern kew vork motato mroducers AssociationI and also qreasurer of jarsh aitch tatershed mrotection aistrictK dary will be retiring as director this spring as part of the Board downJsizing planI and his service over the past three years is greatly appreciatedK

aonald kK gensen ffI ptanleyI kv has served on the board since NVVS with a term expiring in OMNNK ee currently serves on the Board’s Audit CommitteeK aon operates iawnhurst carmsI a NIOMMJcow dairy farm in lntario CountyK ee is a board member of kortheast aairy mroducers AssociationI fncK aon will be retiring as director this spring due to term limits and as part of the Board downJsizing planK eis service to carm Credit in a variety of roles starting with the Board of carm Credit of testern kew vork through the present is greatly appreciatedK

Charles oK jillerI AlexanderI kv has served on the board since NVVV with his current term expiring in OMNOK ee is a member of the Board’s Agfnitiatives Committee and Compensation Committee and has served in a variety of Board roles including vice chairman in the pastK Charlie operates tillow oidge carmsI iiCI a SIMMMJsow farrowJtoJfinish hog farm along with NIMMM acres of grain and vegetable crops in denesee CountyK ee is also director of the kew vork mork mroducers AssociationK

meggy go gonesI BoiseI faI was appointed as outside director in jarch OMMU to a term expiring in OMNNK phe serves on the Board’s Compensation and dovernance CommitteesK phe is a consultant providing training and human resources services to AlbertsonsI iiCI a major food and drug retailerK fn addition to extensive management experience in the food retailing industryI meggy’s professional profile also includes having previously been a director and chair of the board of directors for korthwest carm Credit pervicesI ACAK

pandra hK mrokopI jiddleburghI kvI was first elected airector in OMMM with her current term expiring in OMNOK phe is a member of the Board’s Agfnitiative CommitteeK pandieI her husband oichardI and son gon own and operate Crossbrook carmI a dairy farm with PTR milkers and URM acres of cropsK pandie is a airector bmiteritus for the Cobleskill Agricultural pociety and past mresident and airector of the kvp Ag pocietyK phe is employed as janaging airectorI the kew vork carm Bureau coundation for Agricultural bducationI fncK

Bruce iK hidderI gamestownI kv has served as director since NVVV and his current term expires in OMNNK ee is Chairman of the Agfnitiatives CommitteeK Bruce operates hidder carmsI a POMJcow dairy farm in Chautauqua CountyK ee is also a director of Busti iime perviceI fncK and Board jember of the Chautauqua County poil C tater aistrictK Bruce will be retiring as director this spring as part of the Board downJsizing planK eis service to carm Credit in a variety of roles starting with the carm Credit of testern kew vork Board through the present is greatly appreciatedK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

meter gK oussellI AppletonI kv has served on the board since NVVU with his current term expiring in OMNOK ee is a member of the Boardâ&#x20AC;&#x2122;s Audit CommitteeK mete is president of oussell carmsI fncKI a Rth generation farm along with two brothers tilliam and maulK oussell carms grows PMM acres of applesI NRM apples of cabbageI and RM acres of tomatoesK ee also owns and operates a commercial RMMIMMM bushel capacity controlled atmosphere and cold storage for growers as well as his own cropK mete is a airector of kew vork ptate Agricultural Affiliates and serves on the qown of kewfane mlanning BoardK ee also serves as qrusteeLblder of oidgewood Bible ChurchK iyle CK tellsI oiverheadI kvI has served as a airector since NVVV with his current term expiring in OMNNK ee is a member of the Boardâ&#x20AC;&#x2122;s dovernance CommitteeK iyle owns and operates tells eomestead AcresI a NMMHJacre wholesale vegetable operation producing asparagusI zucchiniI cucumbersI and winter squash which are marketed through local supermarket chainsK iyle is past president of the iong fsland carm BureauI mlanning Board member for oiverhead qownI and airector of the kew vork ptate segetable drowers AssociationK iyle is stepping down from the Board due to term limits after NO years of great serviceK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

airector Compensation airectors were compensated at a per diem rate of ARRM for each day or any part thereof servedI ARRM for each day traveled before and after the meetingI ARRM for board meeting preparation time EAUOR for Board ChairmanF and a per diem rate of ARRMI approved in advanceI for special assignmentsK airectors also received an annual retainer of ANMIURM EANPITMM and ANOIRRM respectively for Board Chairman and sice ChairmanF plus reimbursement of related travel expensesK qotal cash compensation paid to the directors as a group during OMNM was ASTQIVTTK Additional information for each director who served during OMNM is provided belowK Current carm Credit bast policy regarding reimbursements for travelI subsistenceI and other related expenses provides for reimbursement of actual reasonable out of pocket expenses incurred while traveling on official Association businessK airectors who use their own automobiles for Association business purposes will be reimbursed at a rate that has been established in accordance with fop guidelinesK qhe aggregate amount of reimbursement for travelI subsistence and other related expenses for all directors as a group was AORVIURUI AONPIMPTI and ANRUIQMQ for OMNMI OMMVI and OMMU respectivelyK A copy of the Association travel policy is available to stockholders upon requestK

OMNM airector Compensation

airector

aays perved lther lfficial Board Activities jeetings

Compensation

eenry Adams fff

jatthew tK Beaton

NMKR

PSIQVO OVIOTR

oobert oK Brown ff

PMIPUM

gohn gK aickinson

ORITMM

Christine bK cesko

POIURM

Benjamin gK creund

PPIVRM

Andrew gK dilbert G

QPITRM

gune tK eoeflich

PVITPM

Ann mK eudson

PMISRM

oichard mK ganiga

PSIQPM

aonald kK gensen ff

POIRUM

meggy go gones

POIPMM

Bruce lK hidder

PMIVPM

Abbott tK iee

QPIQMM

gohn iymanI fff

OVIRRM

gK pcott jarkham N

PIURM

dary jahany

ORIQPM

Charles oK jiller

PNIQUM

Charles pK kewman N

PIPMM

pandra hK mrokop

PTIUMM

meter gK oussell

PSITMM

iyle CK tells

qotal N

OUIQRM A

STQIVTT

qerm ended during year qhis director represented carm Credit bastâ&#x20AC;&#x2122;s interest by serving on boards of other organizations important to the AssociationK aays of service related to these activities and any compensation received Eif anyF are not included in this reportK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

qransactions with airectors At aecember PNI OMNMI the Association had loans outstanding with directors individually and to the business organizations of directorsK All of the loans were in the ordinary course of business and remain on the same termsI including interest ratesI amortization schedulesI and collateral as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk collectabilityK fnformation regarding related party transactions is incorporated herein by reference from kote NM of the consolidated financial statements included in this annual report to stockholdersK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

penior lfficer aisclosures gohn oK Batchellor E“gack”F is bxecutive sice mresidentI a position held since gune NVVUK gack is secretary of carm Credit bast’s Credit CommitteeI which acts on large and complex credit decisionsK qhe Commercial iending and Country iiving groups report through gackK ee is a Cornell rniversity graduate with a degree in Agricultural bconomicsK ee joined carm Credit in NVTR and was promoted through a number of positions with the predecessor kortheast AssociationsI including Cbl of darden ptate carm CreditI ACAK ee also sits on the euman oesources CommitteeK

penior lfficers iisted below are the Cbl and senior officers of carm Credit bastI ACAK fnformation is provided on their experienceI as well as on any business for which they serve on the board of directors or act as a senior officer and the primary business that organization is engaged inK tilliam gK iipinski serves as Chief bxecutive lfficer a position held since carm Credit bast was formed on ganuary NI OMNMK ee was previously mresident and Cbl of cirst mioneer carm Credit from ganuary NI NVVR until the formation of carm Credit bastK ee reports to and works closely with the Board of airectorsK ee sets strategic direction with the Board and directs human resourcesI credit and services deliveryI finance and customer serviceK Bill is a graduate of Cornell rniversity with a degree in Agricultural bconomicsK Bill began his carm Credit career in NVTV and was promoted through a number of positions with the predecessor kortheast Associations and the carm Credit Bank of ppringfield before becoming CblK Bill is a current director and past Chairman of the Board of carm Credit cinancial martnersI a service company owned by carm Credit bast and other ACAsK ee is a member of the carm Credit pystem mresidents mlanning CommitteeI a national leadership groupK Bill was a former member of the Board of airectors of mroJcac CooperativeI fncK ee also served as director of the carm Credit ieasing Corporation for a number of yearsK

aavid tK Boone serves as bxecutive sice mresident and oegional janagerI a position held since guly NVVUK ee provides senior management oversight and coaching to the BridgetonI ClaverackI CobleskillI clemington and jiddletown offices in creditI financial servicesI consulting and customer serviceK aave is a carm Credit veteran having joined in NVTU and been promoted through a variety of positionsK ee is a member of carm Credit bast’s CreditI euman oesources and cinancial pervices CommitteesK ee has also active in the kew gersey farm community having served on several boardsK aavid is a qrustee of the tarren County Community CollegeI where he serves as chairman of the boardK tilliam pK Bathel holds the title of bxecutive sice mresident and has held the position of Chief oisk lfficer since NVVRK Bill is responsible for measuring and monitoring risk in carm Credit bast’s loan portfolioK ee provides reports to the Board and management to help assure the ACA’s financial safetyK Bill administers the ACA’s credit reviewI appraisal review and internal auditK ee coJdirects the ACA’s business planning processK ee also coordinates with our federal examinerI the carm Credit AdministrationK Bill joined the carm Credit pystem in NVUT and was promoted through a number of positions with the predecessor kortheast AssociationsK Bill is a graduate of the rniversity of kebraska with a degree in AccountingK ee serves on the carm Credit bast Credit Committee and works closely with the Board’s Audit CommitteeK

Charles pK eerring E“pcott”F serves as mresidentI Chief lperating lfficer and Chief Credit lfficerK pcott chairs carm Credit bast’s Credit CommitteeI which acts on large and complex credit decisionsK ee is responsible for balancing sound extension of credit and services with high quality customer serviceK All branch credit and financial services operations as well as finance and internal control report through pcottK pcott is a graduate of Alfred rniversity with a degree in Business AdministrationK ee joined carm Credit in NVTS and was promoted through a number of positions with the predecessor kortheast AssociationsI the carm Credit Banks in ppringfieldI jA and CoBank including Cbl of the carm Credit of testern kew vork prior to its merger into carm Credit bastK ee serves on the carm Credit pystem oisk janagement tork droup a subcommittee of the mresidents mlanning Committee and also the CoBank oetirement qrust CommitteeK pcott is past president of the kortheast Cooperative Council and past ibAa kew vork board memberK ee also sits on the euman oesources CommitteeK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

maul pK Bajgier serves as penior sice mresident and qreasurerI a position he has held since NVVRK ee is responsible for the financial administration of the Association including general ledger and loan accountingI operational proceduresI Association tax filings and external reportingK ee also works closely with the Board Audit Committee to manage carm Credit bast’s relationship with mricewaterhouseCoopersI the Association’s independent auditorK maul is a CmA and worked for mrice taterhouse for five years before joining carm Credit in NVVOK maul is a graduate of testern kew bngland College with a degree in AccountingK

dary oK Bradley has served as bxecutive sice mresident and oegional janager since NVVUK ee provides senior management oversight and coaching to the BurrvilleI CortlandI dreenwichI motsdamI and pangerfield offices in creditI financial servicesI consulting and customer serviceK dary joined carm Credit in NVTT and was promoted through a number of positions with the predecessor kortheast AssociationsK ee serves on the Credit and euman oesources CommitteesK ee also works closely with the Board’s Ag fnitiatives Committee and is a member of the carm Credit cellows Committee at Cornell rniversityK dary holds a Cornell rniversity degree in Business janagement and jarketingK

games aK jiller has served as penior sice mresident of cinance since NVVRK ee is responsible for the patronage dividend programI loan pricingI asset liability management including funding relationship with CoBankI budgetingI internal management informationI capital projects and technology implementationK pince joining carm Credit in NVUNI gim has had diverse experience in creditI appraisalI risk management and financeK ee is a graduate of Cornell rniversity with a Bp in Agricultural bconomics and an jBA in cinance and AccountingK ee is a airector of the Connecticut carmland qrustK

gohn mK Caltabiano who serves as bxecutive sice mresident and oegional janagerI a position held since April OMMOK ee provides senior management oversight and coaching for the BedfordI aayvilleI bnfieldI jiddleboro and oiverhead offices in creditI financial servicesI consulting and customer serviceK gohn joined carm Credit in NVUP and was promoted through a number of positions with the predecessor kortheast AssociationsI the carm Credit Banks in ppringfieldI jA and CoBank in aenverI ColoradoK ee is a member of carm Credit bast’s Credit and euman oesources CommitteesK gohn holds a Bp in Agricultural bconomicsLmlant pcience from Cornell rniversity and an jBA from auke rniversityK ee is a graduate of ibAa kew vork having recently served as mresident of its BoardK ee is also a airector of the kortheast Agricultural bducation coundationK

ooger bK jurray serves as penior sice mresident J Crop fnsurance and has been part of the senior management team since NVVRK ooger manages risk management servicesI including crop and credit life insuranceK ee also provides program leadership for leasing and sales trainingK ee serves on the carm Credit bast’s euman oesources CommitteeK ooger holds a Cornell rniversity degree in Agricultural bconomics and is a licensed insurance agentK ee joined carm Credit in NVUN and was promoted through a number of positions with the predecessor kortheast Associations and the carm Credit Banks in ppringfieldI jAK

Brian jonckton serves as bxecutive sice mresident and oegional janagerK ee provides senior management oversight and coaching to the BataviaI denevaI eornellI and jayville offices in creditI financial servicesI consulting and customer serviceK Brian joined carm Credit in NVUNand was promoted through a number of positions with the predecessor kortheast Associations and was Chief lperating lfficer of carm Credit of testern kew vork prior to its merger into carm Credit bastK ee is a graduate of Cornell with a Bp in Agricultural bconomics and a graduate of ibAa kew vorkK

jichael gK l’ConnorI fff serves as penior sice mresidentI deneral Counsel and Corporate pecretary having joined cirst mioneer in cebruary NVVVK ee serves the Board as Corporate pecretaryI manages all carm Credit bast’s legal matters and provides support on complex and innovative loan issuesK jick is a member of the Credit and euman oesources Committees and frequently serves on regional and national task forcesK ee came to carm Credit in NVUU with the carm Credit Banks of ppringfield and later worked for CoBankK ee is a graduate of Amherst College and the rniversity of Connecticut pchool of iawK

games kK mutnamI ff is bxecutive sice mresident for jarketing and mlanningI a position held since NVVRK gim coJ directs the ACA’s business planning processK ee is practice manager for business consulting services and program leader for farm recordsI farm softwareI tax services and new product developmentK hnowledge bxchangeI Customer Communications and mublic Affairs also report through this positionK gim started with carm Credit in NVTR after earning a Bp Erniversity of jassachusettsF and an jp Efowa ptate rniversityFI both in Agricultural bconomicsK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

oobert eK oeidI gr. serves as penior sice mresident and euman oesources airectorI a position held since jarch NVVUK ee leads carm Credit bast’s human resource programsI administers insurance programs and is liaison to the carm pervices AgencyK Bob is Chairman of carm Credit bast’s euman oesources Committee and serves on the CoBankI ACB telfare Benefits CommitteeK ee joined carm Credit in NVTV and was promoted through a number of positions with the predecessor kortheast AssociationsK ee is a graduate of the rniversity of jaine with a degree in accountingK oobert AK pmith serves as penior sice mresident for mublic Affairs and hnowledge bxchange and Acting Corporate pecretaryK Bob joined cirst mioneer carm Credit in ganuary OMMTK ee has responsibility for public policy and carm Credit bast’s hnowledge bxchange initiativeK mrior to joining the cirst mioneer carm CreditI he served as sice mresident for dovernmental oelations for CoBank and was responsible for CoBank’s tashingtonI aC officeK mrior to CoBankI Bob worked as a aeputy Commissioner in the kvp aepartment of Agriculture and jarketsI and Assistant pecretary to the dovernor of kew vorkK Before joining the aepartment of Agriculture and jarketsI Bob served as airector of dovernmental oelations and Communications for kew vork carm BureauK ee is a graduate of Cornell rniversity and ibAa kvK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Compensation of Cbl and penior lfficers

employees are also eligible to participate in a QMNEkF retirement savings planI which includes a matching contribution by the AssociationK cor a detailed description of the various benefit plansI see kote V “bmployee Benefit mlans” to the consolidated financial statementsK

carm Credit bast’s Ethe AssociationF compensation strategy is to attract and retain highly talented employees to fulfill our mission as the premier credit and financial services provider in the kortheastK qhe compensation philosophy seeks to achieve the appropriate balance among marketJbased salariesI benefits and variable incentive compensation designed to incent and reward both the current and long term achievement of our business objectives and business financial plansK te believe this philosophy fosters a performanceJorientedI resultsJbased culture wherein compensation varies on the basis of results achievedK

CEl Compensation qhe Cbl’s compensation is benchmarked to a select peer group of financial institutionsK qhis evaluation helps ensure that such compensation is competitive with positions of similar scope at similar financial institutionsK qhe Board’s executive compensation committee reviews the performance of the Cbl semiJannually and reviews it with the BoardK qhe Board of airectors annually approves the Cbl compensation levelK

palaries are market basedI as determined in consultation with an independent executive compensation consultantK qhe determination of market salaries consists of a comparison of salary levels to positions of similar scope at select peer group financial institutionsI coupled with an evaluation of individual performanceI competencies and responsibilitiesK

fn addition to the base salaryI the Cbl can earn both a shortJ term bonus and a long term incentive each year based on preJ established performance goalsK qhe short term bonus potential for OMNM ranged from MB to RMB of base salaryK qhe OMNM long term award was RMB of base salaryK qhe short term bonus shown in the chart below reflects the amount earned and actually paid in each yearK qhe long term incentive shown in the chart below reflects the amount earned and actually paid in accordance with any deferral elections made before the start of the plan yearK qhe compensation that is deferred is invested in any number of investment alternatives selected by the participantK qhe participant is subject to all risks and returns of amounts investedK

Annual short term incentive payments are based on a combination of Association and individual performanceK qhe plan focuses on achieving nearJtermI annual resultsK pubstantially all employees in the Association are eligible to participate in this plan at various levelsK Criteria used to determine amounts payable were established by the Board of airectors and include the achievement of certain Association financial targets and strategic business objectivesK mayments are typically made in cebruaryI but always following the end of the year to which the award is applicableK

qhe Cbl’s compensation in excess of the fnternal oevenue Code is made up for via participation in a nonqualified deferred compensation planK Contributions are made at the same percentages as available under the QMNh planK qhe compensation that is deferred is invested in any number of investment alternatives selected by the participantK qhe participant is subject to all risks and returns of amounts investedK qhe nonqualified deferred compensation plan payment is shown in the chart belowK

qhe Association also utilizes a longJterm incentive plan and long term retention plan that provides senior officers and other key employees the opportunity for financial rewards tied to carm Credit bast’s sustained successK bligibility for participation is limited to those individuals who clearly have the ability to drive the success of strategies critical to long term value creation for stockholdersK qhe plan payouts are based on Association performance in the achievement of key financial metrics over a threeJyear performance periodK qhe cash awards are to be paid subsequent to completion the performance period cycleI subject to approval by the Board of airectorsK marticipants forfeit those amounts if they resign prior to being paidK

As of aecember PNI OMNMI the Cbl is employed pursuant to a three year employment contract which runs through aecember PNI OMNOK qhe employment agreement provides specified compensation and related benefits in the event employment is terminatedI except for termination with causeK qhe significant provisions of the agreement are that the Cbl would be entitled to severance benefits of two years base salary plus any incentives earned in the year of terminationK qhe employment agreement is automatically renewed unless either party notifies the other of terminationK

qhe Association has a fundedI qualified defined benefit pension plan which is noncontributory and cover employees hired prior to ganuary NI OMMTK Benefits are determined by a formula based on years of service and eligible compensationK All senior officers are fully vested in the defined benefit pension planK qhere is also a noncontributoryI unfundedI nonqualified supplemental executive plan EpbomF covering the CblK All

cAoM Cobafq bApq | OMNM ANNrAi obmloq

G The number of senior officers in 2010 and reflected in this chart

penior lfficer Compensation qhe Cbl is responsible for setting the compensation levels of the senior officersI whoI in turn are responsible for the compensation of all other employeesK

was fourteen; the number of senior officers in 2009 and 2008 and reflected in this chart was twelve. GG The retention incentive reflects the amount awarded to these senior officers. The amounts are held as a general obligation of the Association and are subject to forfeiture.

qhe Association’s short term incentive compensation plan featuring annual payments based on calendar year performance periodsK qhe annual short term incentive targets are set for all employees at the beginning of the yearK cor the OMNM performance periodI the short term incentive levels ranged from RB to NTB of base salaryK fndividual performance is also considered in the determination of the amount payableK qhe short term bonuses shown in the chart below are paid in cebruary following the end of the year to which the award is applicableK

GGG Amount represents the taxable benefit of a company automobile for personal useI as determined by fop regulationsI and the taxable benefit of company paid group term life insurance.

Current Association policy regarding reimbursements for travelI subsistenceI and other related expenses provides for reimbursement of actual reasonable out of pocket expenses incurred while traveling on official Association businessK bmployees who use their own automobiles for Association business purposes will be reimbursed at a rate that has been established in accordance with fop guidelinesK qhe Association provides automobiles to exempt employees with credit or AssociationJwide management responsibilitiesK Association employees are allowed to use assigned cars for personal useK All miles other than those driven for business purposesI as defined by the fopI are considered personal miles and are accounted for as a taxable benefit to the employeeK A copy of the Association travel policy is available to stockholders upon requestK

qhe Association’s longJterm retention plan provides senior officers and other key employees the opportunity for financial rewards tied to carm Credit bast’s sustained successK cor the OMNM performance periodI the retention plan incentive reward was ONB of base salaryK qhis retention plan is not funded or held in trust but contractually obligates the Association to make future payments in specified amountsK qhe cash awards are to be paid subsequent to completion the performance period cycleK marticipants in the longJterm retention plan can elect to defer incentive plan payments if the election is made before the start of the plan yearK Compensation earned by the Cbl and aggregate compensation of the senior officers for the years ended aecember PNI OMNMI OMMV and OMMUI respectively is disclosed in the accompanying tableK aisclosure of the total compensation during the last fiscal year to any senior officer included in the aggregate whose compensation exceeds ARMIMMM is available to stockholders upon request in writingK OMNM tilliam gK iipinskiI Cbl palary phortJterm incentive iongJterm incentive iongJterm incentive – deferred konqualified compensation – deferred merquisitesLlther GGG qotal

penior lfficers Eexcluding CblF G palary phortJterm incentive oetention incentive GG merquisitesLlther GGG qotal

A OIPRNIOQS PORIMVP PUOIMUM SMIONN A PINNUISPM

RMMIMMM OORIMMM NQTIMMM NMMIMMM OPIMQM SIOPT NIMMNIOTT

OMMV A

qransactions with penior lfficers At aecember PNI OMNMI there was one loan outstanding to a penior lfficer and there were loans outstanding to an immediate family member of another senior officerK All of the loans approved were in the ordinary course of business and remain on the same termsI including interest ratesI amortization schedulesI and collateral as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibilityK fnformation regarding related party transactions is incorporated herein by reference from kote NM of the consolidated financial statements included in this annual report to stockholdersK

OMMU

QVQIMMM OPTIRMM NPTIRMM NMMIMMM QNIQPU SIVPS A NIMNTIPTQ

QTRIMMM OMUINOR NORIMMM NMMIMMM M SISQQ VNQITSV

A NIUPMIVRU OVNITRM ORUIQQT QVIROR A OIQPMISUM

A NITQTIMMM OVPIMMM NPRIOQM QRIPOP A OIOOMIRSP

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Code of bthics qhe Association sets high standards for honestyI ethicsI integrityI impartiality and conductK bach yearI every employee certifies compliance with the Association’s bmployee ptandard of Conduct molicy which establishes the ethical standards of the AssociationK AdditionallyI all employees certify compliance with the Code of bthicsK qhe Code of bthics supplements the bmployee ptandard of Conduct molicy and establishes additional responsibilities related to the preparation and distribution of the Association’s financial statements and related disclosuresK cor details about the Association’s Code of bthicsI visit carmcrediteastKcom and click on About rsK A copy of the Association’s Code of bthics is available to stockholders upon requestK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

aisclosure fnformation oequired by carm Credit Administration oegulations ErnauditedF janagement’s aiscussion and Analysis

fn accordance with carm Credit Administration EcCAF regulationsI carm Credit bastI ACA has prepared this Annual oeport to ptockholders for the year ended aecember PNI OMNM in accordance with all applicable statutory or regulatory requirementsK

“janagement’s aiscussion and Analysis” included in this annual report to stockholdersI is incorporated herein by referenceK

cinancial ptatements

aescription of Business

qhe “oeport of janagement”I “oeport of Audit Committee”I “janagement’s oeport on fnternal Control over cinancial oeporting”I “oeport of fndependent Auditors”I “Consolidated cinancial ptatements”I and “kotes to Consolidated cinancial ptatements” included in this annual report to stockholdersI is incorporated herein by referenceK

deneral information regarding the business is incorporated herein by reference to kote N of the financial statements included in this annual report to stockholdersK qhe description of significant developmentsI if anyI required to be disclosed in this section is incorporated herein by reference to “janagement’s aiscussion and Analysis of cinancial mosition and oesults of lperations” included in this annual report to stockholdersK

airector and penior lfficer aisclosures “airector aisclosures” and “penior lfficer aisclosures” included in this annual report to stockholdersI is incorporated herein by referenceK

aescription of mroperty

fnvolvement in Certain iegal mroceedings

carm Credit bastI ACA is headquartered in bnfieldI ConnecticutK qhere are nineteen offices located throughout the territoryI seventeen of which are owned and two which are leasedK A listing of Association offices together with addresses and telephone numbers is included on the inside back cover of this annual reportK

qhere were no matters that came to the attention of the Board of airectors or management regarding involvement of current directors or senior officers in specified legal proceedings that require to be disclosedK

oelationship with fndependent Auditors

iegal mroceedings

qhere were no changes in independent auditors since the prior annual report to stock holders and there has been no material disagreement with our independent auditors on any matter of accounting principles or financial statement disclosure during this periodK

fnformation regarding legal proceedings is incorporated herein by reference to kote NO of the consolidated financial statements included in this annual report to stockholdersK qhe Association was not subject to any enforcement actions at aecember PNI OMNMK

CoBankI ACB Annual oeport and nuarterly oeports

aescription of Capital ptructure

As an Association ptockholderI your equity investment in the Association is materially affected by the financial condition and results of operations of the CoBankI ACB ECoBankFK

fnformation required to be disclosed in this section is incorporated herein by reference to kote T of the consolidated financial statements included in this annual report to stockholdersK

oegulations require that CoBank’s Annual and nuarterly oeports be made available to you upon request at no chargeK AccordinglyI you may pickJup a copy of CoBank’s Annual and nuarterly oeports at one of our officesI or you may call the office to have a copy sent to youK A listing of the Association offices and telephone numbers are listed on the inside back cover of this Annual oeportK

aescription of iiabilities fnformation required to be disclosed in this section is incorporated herein by reference to kotes SI UI VI NNI NO and NR of the consolidated financial statements included in this annual report to stockholdersK

pelected cinancial aata “cive vear pummary of pelected cinancial aata” included in this annual report to stockholdersI is incorporated herein by referenceK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

Customer mrivacy Customer financial privacy and the security of other nonJpublic information are importantK carm Credit bast holds your financial and other personal information in strict confidenceK carm Credit bast does not sell or trade our customersâ&#x20AC;&#x2122; personal information to marketing companies or information brokersK cCA regulations allow disclosure of customer information only in certain situationsK bxamples of these situations include law enforcement or legal proceedingsI when such information is requested by a carm Credit pystem or other financial institution with which customers do business or to a credit bureau or other consumer reporting agencyK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

aescription and ptatus oeport on the voungI Beginning and pmall carmers EvBpF mrogram pervices mrovided qhere are several credit and other related services offered through the Board approved vBp mrogram that allows carm Credit bast to effectively serve the needs within the youngI beginning and small customer segmentsW

lverview carm Credit bastI ACA Ethe AssociationF takes great pride that it’s founding Board of airectors EBoardF made youngI beginning and small farmers a special focus since its founding in NVVQK qhe Board maintains a standing committee of directors to oversee youngI beginning and small farmer service and initiativesI as well as to plan further to serve these groupsK

• ppecial incentives that may be offered at a discount for a period of up to five includeW

jission qhe Association’s Board recognizes that the long range strength and soundness of the future of carm Credit bast and of the agricultural community in the area it serves depends on the individuals entering the industryK ft further recognizes that demands for capital and farm and financial management skills make it exceedingly difficult to become established in the businessK qhereforeI we believe that it is in the Association’s best interest to assist youngI beginning and small farmers by providing loans and credit related servicesI and help to provide and encourage their participation in activities that improve farm and financial management skillsK

o o o o o o

carm accounting and management software fees qax preparation fees Consulting fees Appraisal fees cpA guaranteed loan fees fnterest rate assistance

carm Credit bast’s special incentives were AOMNIVSQI AOPUIOURI and AOTUINSV for the years ended aecember PNI OMNMI OMMVI and OMMU respectivelyK • pince OMMSI incentives are offered to organizationsI schoolsI and universities for special training and educational programs utilizing the carm Credit bast developed earvesting a mrofit guideK

mrogram aefinitions qhe definitions of youngI beginning and small farmers and ranchers as developed by the carm Credit Administration followW

• carm Credit bast provides supportI fundingI and staff involvement in aairy cellowsI carm Credit cellowsI Ag AmbassadorsI korth bast aairy ChallengeI and other programs at educational institutionsK

• voung J A farmerI rancherI producerI or harvester of aquatic products who is PR years or younger as of the loan transaction dateK

• oepresentation by vBp farmers on carm Credit bast’s Customer pervice CouncilsK qhese councils provide customer feedback and function as a liaison to association managementK

• Beginning J A farmerI rancherI producerI or harvester of aquatic products who has NM years or less farming experience as of the loan transaction dateK • pmall carmerW A farmerI rancherI producerI or harvester of aquatic products who normally generates less than AORMIMMM in annual gross sales of agricultural or aquatic productsK

• A portion of the youngI beginning and small loan portfolio is supported by government guaranteesI including guarantees by the carm pervices Agency EcpAF and rpaA’s Business and fndustry guaranteed loan programK mrovided below are statistics related to government guarantees usage among the youngI beginning and small portfolioK

lbjectives voungI beginning and small farmers are a vital part of agriculture and carm Credit bast is proud to provide innovative products and services that contribute to their successK fn NVVRI the Board created a committee to develop and then oversee a program to assist youngI beginning and small farmersI regarding this as one of the core values of the carm Credit bast associationK

cAoM Cobafq bApq | OMNM ANNrAi obmloq

and parts of the states of kew vork and kew eampshireK aemographic data for voungI Beginning and pmall farmers with annual gross sales over ANMIMMM was taken from the rpaA’s OMMT Census of AgricultureK qhe census is conducted every five yearsK ft showed the followingW

dovernment duaranteed voungI Beginning and pmall carmer ioans kumber

solume G

voung

QMN

ATVIPOR

Beginning

QPU

AVOIOPN

pmall

QRU

ARQITPM

mercentage ievels in carm Credit bast iending Territory bxpressed as a B of Total carms

kew dovernment duaranteed vBp ioans Elriginated in OMNMF kumber

solume G

voung

ANQIPTR

Beginning

ANTINUN

pmall

ANMIRVO

•

carm Credit bast works closely with the kew vork ptate iink aeposit mrogram which reduces the effective interest rate paid on loans for qualifying projectsK

qhe Association works with the kortheast Cooperative Council EkbCCF to develop and host young cooperators programs along with sponsoring attendance by customersK

•

carm Credit bast provides a series of annual seminars that focus on developing skill sets of vBp farmersK

•

oeceiving regulatory authority in late OMMRI carm Credit bast secured a partner ECoBankI ACBF and chartered carmptartI iim EcarmptartFK At aecember PNI OMNMI carm Credit bast has an equity investment in carmptart of AVVUIVPMK carmptart assists beginning farmers and new cooperatives by providing investments in working capital of up to ARMIMMMK At aecember PNI OMNMI carmptart has SQ investments with an outstanding balance of ANKU millionK

pmall

NMKVSB

SOKOTB

UQKMSB

menetration ievels in carm Credit bast iending Territory aecember PNI OMNM

carm Credit bast’s pcholarship program awards scholarships to OU students with an emphasis towards those students with “ag” backgrounds and pursuing interests related to agricultureK

•

Beginning

carm Credit bast has annually undertaken a study of the youngI beginning and small farmer segmentK qhis study makes a determination of Association penetration of youngI beginning and small farmers utilizing information reported in the OMMT Census of Agriculture to better ascertain carm Credit bast’s penetration of these farmer segmentsK qhe following table shows carm Credit bast’s penetration in each market segmentW

G in thousands

•

voung

Beginning

pmall

NVB

OSB

QNB

carm Credit bast penetration for young and beginning farmers is determined based on the number of loans to a specified group as a percentage of total loansK menetration for small farmers is based on total number of small loans as a percentage of total small farms in Association territoryI per the OMMT Census of AgricultureK

aemographics qhe local service area of carm Credit bastI ACA includes the states of kew gerseyI ohode fslandI ConnecticutI jassachusettsI

cAoM Cobafq bApq | OMNM ANNrAi obmloq

voungI Beginning and pmall carmer solume in carm Credit bast’s ioan mortfolio qhe following table outlines the percentage of young and beginning farmer and rancher loans in the loan portfolio Eby number and volumeF as of aecember PNI OMNM compared to total number of loans in the portfolioW kumber of ioans

B of Total ioans

solume lutstanding G

B of Total solume

qotal ioans and Commitments

NSIPMM

NMMB

A RIQSVIRST

NMMB

voung carmers and oanchers

PIMTN

NVB

SSVITPS

NOB

Beginning carmers and oanchers

QINVT

OSB

VNOIVSO

NTB