form10q.htm
As filed
with the Securities and Exchange Commission on
November
10, 2008
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2008
Commission
File Number 001-14951
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
(Exact
name of registrant as specified in its charter)
Federally
chartered instrumentality of the United States
|
52-1578738
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
employer identification number)
|
|
|
1133
Twenty-First Street, N.W., Suite 600
Washington,
D.C.
|
20036
|
(Address
of principal executive offices)
|
(Zip
code)
|
(202)
872-7700
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer £
|
Accelerated
filer T
|
|
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As of
November 1, 2008, the registrant had 1,030,780 shares of Class A Voting Common
Stock, 500,301 shares of Class B Voting Common Stock and 8,601,352 shares of
Class C Non-Voting Common Stock outstanding.
PART
I - FINANCIAL INFORMATION
Item
1.
|
Condensed Consolidated
Financial Statements
|
The
following information concerning Farmer Mac’s interim unaudited condensed
consolidated financial statements is included in this report beginning on the
pages listed below:
Condensed
Consolidated Balance Sheets as of September 30, 2008 and December 31,
2007
|
3
|
Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2008 and 2007
|
4
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2008 and 2007
|
5
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in
thousands)
|
|
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
50,661 |
|
|
$ |
101,445 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value (includes securities pledged to counterparties of $16.6
million and $7.2 million as of September 30, 2008 and December 31, 2007,
respectively)
|
|
|
1,297,255 |
|
|
|
2,616,187 |
|
Trading,
at fair value
|
|
|
171,046 |
|
|
|
8,179 |
|
Total
investment securities
|
|
|
1,468,301 |
|
|
|
2,624,366 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
Held-to-maturity,
at amortized cost
|
|
|
- |
|
|
|
959,865 |
|
Available-for-sale,
at fair value
|
|
|
1,250,194 |
|
|
|
338,958 |
|
Trading,
at fair value
|
|
|
913,211 |
|
|
|
- |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
2,163,405 |
|
|
|
1,298,823 |
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
held for sale, at lower of cost or fair value
|
|
|
63,202 |
|
|
|
118,629 |
|
Loans
held for investment, at amortized cost
|
|
|
630,615 |
|
|
|
649,280 |
|
Allowance
for loan losses
|
|
|
(2,329 |
) |
|
|
(1,690 |
) |
Total
loans, net of allowance
|
|
|
691,488 |
|
|
|
766,219 |
|
|
|
|
|
|
|
|
|
|
Real
estate owned, at lower of cost or fair value
|
|
|
590 |
|
|
|
590 |
|
Financial
derivatives, at fair value
|
|
|
3,395 |
|
|
|
2,288 |
|
Interest
receivable
|
|
|
57,701 |
|
|
|
91,939 |
|
Guarantee
and commitment fees receivable
|
|
|
60,385 |
|
|
|
57,804 |
|
Deferred
tax asset, net
|
|
|
55,073 |
|
|
|
30,239 |
|
Prepaid
expenses and other assets
|
|
|
107,689 |
|
|
|
3,900 |
|
Total
Assets
|
|
$ |
4,658,688 |
|
|
$ |
4,977,613 |
|
|
|
|
|
|
|
|
|
|
Liabilities,
Mezzanine Equity and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
3,642,228 |
|
|
$ |
3,829,698 |
|
Due
after one year
|
|
|
664,874 |
|
|
|
744,649 |
|
Total
notes payable
|
|
|
4,307,102 |
|
|
|
4,574,347 |
|
|
|
|
|
|
|
|
|
|
Financial
derivatives, at fair value
|
|
|
65,670 |
|
|
|
55,273 |
|
Accrued
interest payable
|
|
|
32,520 |
|
|
|
50,004 |
|
Guarantee
and commitment obligation
|
|
|
55,582 |
|
|
|
52,130 |
|
Accounts
payable and accrued expenses
|
|
|
24,780 |
|
|
|
20,069 |
|
Reserve
for losses
|
|
|
2,106 |
|
|
|
2,197 |
|
Total
Liabilities
|
|
|
4,487,760 |
|
|
|
4,754,020 |
|
|
|
|
|
|
|
|
|
|
Mezzanine
Equity:
|
|
|
|
|
|
|
|
|
Series
B redeemable preferred stock, redemption/liquidation value of $1,000
per share, 65,000 shares authorized, issued and
outstanding
|
|
|
61,039 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
Series
A, stated at redemption/liquidation value, $50 per share, 700,000 shares
authorized, issued and outstanding
|
|
|
35,000 |
|
|
|
35,000 |
|
Common
stock:
|
|
|
|
|
|
|
|
|
Class
A Voting, $1 par value, no maximum authorization
|
|
|
1,031 |
|
|
|
1,031 |
|
Class
B Voting, $1 par value, no maximum authorization
|
|
|
500 |
|
|
|
500 |
|
Class
C Non-Voting, $1 par value, no maximum authorization
|
|
|
8,598 |
|
|
|
8,364 |
|
Additional
paid-in capital
|
|
|
96,194 |
|
|
|
87,134 |
|
Accumulated
other comprehensive loss
|
|
|
(41,421 |
) |
|
|
(2,793 |
) |
Retained
earnings
|
|
|
9,987 |
|
|
|
94,357 |
|
Total
Stockholders' Equity
|
|
|
109,889 |
|
|
|
223,593 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities, Mezzanine Equity and Stockholders' Equity
|
|
$ |
4,658,688 |
|
|
$ |
4,977,613 |
|
See
accompanying notes to condensed consolidated financial statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in
thousands, except per share amounts)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
September 30,
2008
|
|
|
September 30,
2007
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
and cash equivalents
|
|
$ |
20,395 |
|
|
$ |
46,621 |
|
|
$ |
97,305 |
|
|
$ |
127,143 |
|
Farmer
Mac Guaranteed Securities
|
|
|
28,470 |
|
|
|
18,437 |
|
|
|
67,007 |
|
|
|
56,622 |
|
Loans
|
|
|
11,718 |
|
|
|
11,636 |
|
|
|
35,192 |
|
|
|
34,154 |
|
Total
interest income
|
|
|
60,583 |
|
|
|
76,694 |
|
|
|
199,504 |
|
|
|
217,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
39,260 |
|
|
|
66,177 |
|
|
|
135,885 |
|
|
|
189,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
21,323 |
|
|
|
10,517 |
|
|
|
63,619 |
|
|
|
28,078 |
|
(Provision)/recovery
for loan losses
|
|
|
(731 |
) |
|
|
- |
|
|
|
(731 |
) |
|
|
215 |
|
Net
interest income after (provision)/recovery for loan losses
|
|
|
20,592 |
|
|
|
10,517 |
|
|
|
62,888 |
|
|
|
28,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(loss)/income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
|
7,281 |
|
|
|
6,421 |
|
|
|
20,574 |
|
|
|
18,633 |
|
Losses
on financial derivatives
|
|
|
(19,021 |
) |
|
|
(24,906 |
) |
|
|
(29,691 |
) |
|
|
(9,040 |
) |
Losses
on trading assets
|
|
|
(14,507 |
) |
|
|
- |
|
|
|
(21,664 |
) |
|
|
(74 |
) |
Impairment
losses on available-for-sale investment securities
|
|
|
(97,108 |
) |
|
|
- |
|
|
|
(102,452 |
) |
|
|
- |
|
(Losses)/gains
on sale of available-for-sale investment securities
|
|
|
(85 |
) |
|
|
87 |
|
|
|
65 |
|
|
|
108 |
|
Gains
on sale of Farmer Mac Guaranteed Securities
|
|
|
1,531 |
|
|
|
- |
|
|
|
1,531 |
|
|
|
- |
|
Gains
on the repurchase of debt
|
|
|
840 |
|
|
|
- |
|
|
|
840 |
|
|
|
- |
|
Gains
on the sale of real estate owned
|
|
|
- |
|
|
|
98 |
|
|
|
- |
|
|
|
130 |
|
Other
income
|
|
|
192 |
|
|
|
712 |
|
|
|
1,315 |
|
|
|
1,163 |
|
Non-interest
(loss)/income
|
|
|
(120,877 |
) |
|
|
(17,588 |
) |
|
|
(129,482 |
) |
|
|
10,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
3,748 |
|
|
|
3,459 |
|
|
|
11,327 |
|
|
|
10,315 |
|
General
and administrative
|
|
|
4,061 |
|
|
|
1,982 |
|
|
|
8,331 |
|
|
|
6,556 |
|
Regulatory
fees
|
|
|
513 |
|
|
|
550 |
|
|
|
1,538 |
|
|
|
1,650 |
|
Real
estate owned operating costs, net
|
|
|
15 |
|
|
|
(31 |
) |
|
|
102 |
|
|
|
(31 |
) |
(Recovery)/provision
for losses
|
|
|
(91 |
) |
|
|
386 |
|
|
|
(91 |
) |
|
|
73 |
|
Non-interest
expense
|
|
|
8,246 |
|
|
|
6,346 |
|
|
|
21,207 |
|
|
|
18,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income
before income taxes
|
|
|
(108,531 |
) |
|
|
(13,417 |
) |
|
|
(87,801 |
) |
|
|
20,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit)/expense
|
|
|
(2,973 |
) |
|
|
(5,407 |
) |
|
|
3,463 |
|
|
|
5,249 |
|
Net
(loss)/income
|
|
|
(105,558 |
) |
|
|
(8,010 |
) |
|
|
(91,264 |
) |
|
|
15,401 |
|
Preferred
stock dividends
|
|
|
(578 |
) |
|
|
(560 |
) |
|
|
(1,698 |
) |
|
|
(1,680 |
) |
Net
(loss)/income available to common stockholders
|
|
$ |
(106,136 |
) |
|
$ |
(8,570 |
) |
|
$ |
(92,962 |
) |
|
$ |
13,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings
per common share and dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss)/earnings per common share
|
|
$ |
(10.55 |
) |
|
$ |
(0.82 |
) |
|
$ |
(9.33 |
) |
|
$ |
1.32 |
|
Diluted
(loss)/earnings per common share
|
|
$ |
(10.55 |
) |
|
$ |
(0.82 |
) |
|
$ |
(9.33 |
) |
|
$ |
1.29 |
|
Common
stock dividends per common share
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
See
accompanying notes to condensed consolidated financial statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
|
(in
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(91,264 |
) |
|
$ |
15,401 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Net
amortization of premiums and discounts on loans and
investments
|
|
|
3,752 |
|
|
|
(1,530 |
) |
Amortization
of debt premiums, discounts and issuance costs
|
|
|
66,790 |
|
|
|
98,154 |
|
Purchases
of trading investment securities
|
|
|
- |
|
|
|
(9,090 |
) |
Proceeds
from repayment of trading investment securities
|
|
|
6,507 |
|
|
|
5,417 |
|
Purchases
of loans held for sale
|
|
|
(38,461 |
) |
|
|
(36,021 |
) |
Proceeds
from repayment of loans held for sale
|
|
|
14,747 |
|
|
|
5,744 |
|
Net
change in fair value of trading securities and financial
derivatives
|
|
|
30,954 |
|
|
|
8,692 |
|
Amortization
of SFAS 133 transition adjustment on financial derivatives
|
|
|
222 |
|
|
|
297 |
|
Impairment
losses on available-for-sale investment securities
|
|
|
102,452 |
|
|
|
- |
|
Gains
on sale of Farmer Mac Guaranteed Securities
|
|
|
(1,531 |
) |
|
|
- |
|
Gains
on sale of available-for-sale investment securities
|
|
|
(65 |
) |
|
|
(108 |
) |
Gains
on repurchase of debt
|
|
|
(840 |
) |
|
|
- |
|
Gains
on the sale of real estate owned
|
|
|
- |
|
|
|
(130 |
) |
Total
provision/(recovery) for losses
|
|
|
640 |
|
|
|
(142 |
) |
Deferred
income taxes
|
|
|
(11,316 |
) |
|
|
(5,588 |
) |
Stock-based
compensation expense
|
|
|
3,389 |
|
|
|
2,452 |
|
Decrease
in interest receivable
|
|
|
34,238 |
|
|
|
13,474 |
|
Increase
in guarantee and commitment fees receivable
|
|
|
(2,581 |
) |
|
|
(14,544 |
) |
Increase
in other assets
|
|
|
(41,561 |
) |
|
|
(2,276 |
) |
(Decrease)/increase
in accrued interest payable
|
|
|
(17,484 |
) |
|
|
3,376 |
|
Increase
in other liabilities
|
|
|
8,911 |
|
|
|
11,199 |
|
Net
cash provided by operating activities
|
|
|
67,499 |
|
|
|
94,777 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of available-for-sale investment securities (1)
|
|
|
(1,160,501 |
) |
|
|
(3,211,435 |
) |
Purchases
of Farmer Mac II Guaranteed Securities and
|
|
|
|
|
|
|
|
|
AgVantage Farmer
Mac Guaranteed Securities
|
|
|
(305,584 |
) |
|
|
(172,503 |
) |
Purchases
of loans held for investment
|
|
|
(86,024 |
) |
|
|
(51,025 |
) |
Purchases
of defaulted loans
|
|
|
(1,746 |
) |
|
|
(3,911 |
) |
Proceeds
from repayment of investment securities (2)
|
|
|
445,154 |
|
|
|
2,314,070 |
|
Proceeds
from repayment of Farmer Mac Guaranteed Securities
|
|
|
219,341 |
|
|
|
201,667 |
|
Proceeds
from repayment of loans held for investment
|
|
|
101,964 |
|
|
|
121,261 |
|
Proceeds
from sale of available-for-sale investment securities
|
|
|
351,256 |
|
|
|
58,383 |
|
Proceeds
from sale of real estate owned
|
|
|
- |
|
|
|
1,523 |
|
Proceeds
from sale of Farmer Mac Guaranteed Securities
|
|
|
649,723 |
|
|
|
2,538 |
|
Net
cash provided by/(used in) investing activities
|
|
|
213,583 |
|
|
|
(739,432 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of discount notes
|
|
|
105,086,822 |
|
|
|
88,500,039 |
|
Proceeds
from issuance of medium-term notes
|
|
|
1,486,903 |
|
|
|
1,261,000 |
|
Payments
to redeem discount notes
|
|
|
(104,926,504 |
) |
|
|
(88,604,301 |
) |
Payments
to redeem medium-term notes
|
|
|
(1,979,660 |
) |
|
|
(805,665 |
) |
Tax
benefit from tax deductions in excess of compensation cost
recognized
|
|
|
381 |
|
|
|
593 |
|
Proceeds
from common stock issuance
|
|
|
5,722 |
|
|
|
7,531 |
|
Purchases
of common stock
|
|
|
(830 |
) |
|
|
(15,041 |
) |
Dividends
paid on common and preferred stock
|
|
|
(4,700 |
) |
|
|
(4,789 |
) |
Net
cash (used in)/provided by financing activities
|
|
|
(331,866 |
) |
|
|
339,367 |
|
Net
decrease in cash and cash equivalents
|
|
|
(50,784 |
) |
|
|
(305,288 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
101,445 |
|
|
|
877,714 |
|
Cash
and cash equivalents at end of period
|
|
$ |
50,661 |
|
|
$ |
572,426 |
|
(1)
|
Includes
purchases of $349.0 million and $2.0 billion related to auction-rate
certificates for the nine months ended September 30, 2008 and 2007,
respectively. See Note 2 to the condensed consolidated
financial statements.
|
(2)
|
Includes
proceeds, through the normal auction process, of $268.0 million and $1.9
billion related to auction-rate certificates for the nine months ended
September 30, 2008 and 2007, respectively. See Note 2 to the
condensed consolidated financial
statements.
|
See
accompanying notes to condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
1.
|
Accounting
Policies
|
The
interim unaudited condensed consolidated financial statements of the Federal
Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). These interim unaudited condensed
consolidated financial statements reflect all normal and recurring adjustments
that are, in the opinion of management, necessary to present a fair statement of
the financial condition and the results of operations and cash flows of Farmer
Mac for the interim periods presented. Certain information and
footnote disclosures normally included in the annual consolidated financial
statements have been condensed or omitted as permitted by SEC rules and
regulations. The December 31, 2007 consolidated balance sheet
presented in this report has been derived from the Corporation’s audited 2007
consolidated financial statements. Management believes that the
disclosures are adequate to present fairly the condensed consolidated financial
position, condensed consolidated results of operations and condensed
consolidated cash flows as of the dates and for the periods
presented. These interim unaudited condensed consolidated financial
statements should be read in conjunction with the audited 2007 consolidated
financial statements of Farmer Mac included in the Corporation’s Annual Report
on Form 10-K for the year ended December 31, 2007. Results for
interim periods are not necessarily indicative of those that may be expected for
the fiscal year. Below is a summary of Farmer Mac’s significant
accounting policies.
|
(a)
|
Cash and Cash
Equivalents and Statements of Cash
Flows
|
Farmer
Mac considers highly liquid investment securities with original maturities of
three months or less at the time of purchase to be cash
equivalents. Changes in the balance of cash and cash equivalents are
reported in the condensed consolidated statements of cash flows. The
following table sets forth information regarding certain cash and non-cash
transactions for the nine months ended September 30, 2008 and 2007.
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
|
(in
thousands)
|
|
Cash
paid for:
|
|
|
|
|
|
|
Interest
|
|
$ |
88,012 |
|
|
$ |
93,345 |
|
Income
taxes
|
|
|
25,069 |
|
|
|
8,000 |
|
Non-cash
activity:
|
|
|
|
|
|
|
|
|
Loans
acquired and securitized as Farmer Mac Guaranteed
Securities
|
|
|
79,757 |
|
|
|
1,324 |
|
Issuance
of Series B redeemable preferred stock (net of deferred offering
costs)
|
|
|
61,039 |
|
|
|
- |
|
Reclassification
of unsettled trades with The Reserve Primary Fund from Cash and cash
equivalents to Prepaid expenses and other assets
|
|
|
42,489 |
|
|
|
- |
|
Transfers
of investment securities from available-for-sale to trading from the
effect of adopting SFAS 159
|
|
|
600,468 |
|
|
|
- |
|
Transfers
of Farmer Mac II Guaranteed Securities from held-to-maturity to trading
from the effect of adopting SFAS 159
|
|
|
428,670 |
|
|
|
- |
|
Transfers
of Farmer Mac II Guaranteed Securities from held-to-maturity to
available-for-sale
|
|
|
493,997 |
|
|
|
- |
|
Transfers
of Farmer Mac I Guaranteed Securities from held-to-maturity to
available-for-sale
|
|
|
25,458 |
|
|
|
- |
|
Transfers
of available-for-sale investment securities to available-for-sale Farmer
Mac Guaranteed Securities - Rural Utilities
|
|
|
902,420 |
|
|
|
- |
|
Transfers
of trading investment securities to trading Farmer Mac Guaranteed
Securities - Rural Utilities
|
|
|
459,026 |
|
|
|
- |
|
As of
September 30, 2008, Farmer Mac maintained an allowance for losses to cover
estimated probable losses on loans held, real estate owned, and loans underlying
long-term standby purchase commitments (“LTSPCs”) and Farmer Mac I Guaranteed
Securities issued after the Farm Credit System Reform Act of 1996 (the “1996
Act”) in accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies
(“SFAS 5”), and Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for
Impairment of a Loan, as amended (“SFAS 114”).
The
allowance for losses is increased through periodic provisions for loan losses
that are charged against net interest income and provisions for losses that are
charged to non-interest expense and is reduced by charge-offs for actual losses,
net of recoveries. Negative provisions for loan losses or negative
provisions for losses are recorded in the event that the estimate of probable
losses as of the end of a period is lower than the estimate at the beginning of
the period.
Farmer
Mac’s methodology for determining its allowance for losses incorporates the
Corporation’s proprietary automated loan classification system. That
system scores loans based on criteria such as historical repayment performance,
loan seasoning, loan size and loan-to-value ratio. For the purposes
of the loss allowance methodology, the loans in Farmer Mac’s portfolio of loans
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
have been scored and classified for each calendar quarter since first quarter
2000. The allowance methodology captures the migration of loan scores
across concurrent and overlapping three-year time horizons and calculates loss
rates separately within each loan classification for (1) loans underlying LTSPCs
and (2) loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities. The calculated loss rates are applied to the current
classification distribution of Farmer Mac’s portfolio to estimate inherent
losses, on the assumption that the historical credit losses and trends used to
calculate loss rates will continue in the future. Management
evaluates this assumption by taking into consideration factors
including:
|
·
|
geographic
and agricultural commodity/product concentrations in the
portfolio;
|
|
·
|
the
credit profile of the portfolio;
|
|
·
|
delinquency
trends of the portfolio;
|
|
·
|
historical
charge-off and recovery activities of the portfolio;
and
|
|
·
|
other
factors to capture current portfolio trends and characteristics that
differ from historical experience.
|
Management
believes that its use of this methodology produces a reliable estimate of
probable losses, as of the balance sheet date, for all loans held, real estate
owned and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs in accordance with SFAS 5 and SFAS 114.
The
following table summarizes the changes in the components of Farmer Mac’s
allowance for losses for the three and nine months ended September 30, 2008 and
2007:
|
|
September 30, 2008
|
|
|
|
Allowance
for Loan Losses
|
|
|
REO
Valuation Allowance
|
|
|
Reserve
for Losses
|
|
|
Total
Allowance for Losses
|
|
|
|
(in
thousands)
|
|
Three
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,592 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,789 |
|
Provision/(recovery)
for losses
|
|
|
731 |
|
|
|
- |
|
|
|
(91 |
) |
|
|
640 |
|
Charge-offs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Recoveries
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
Ending
balance
|
|
$ |
2,329 |
|
|
$ |
- |
|
|
$ |
2,106 |
|
|
$ |
4,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,690 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,887 |
|
Provision/(recovery)
for losses
|
|
|
731 |
|
|
|
- |
|
|
|
(91 |
) |
|
|
640 |
|
Charge-offs
|
|
|
(108 |
) |
|
|
- |
|
|
|
- |
|
|
|
(108 |
) |
Recoveries
|
|
|
16 |
|
|
|
- |
|
|
|
- |
|
|
|
16 |
|
Ending
balance
|
|
$ |
2,329 |
|
|
$ |
- |
|
|
$ |
2,106 |
|
|
$ |
4,435 |
|
|
|
September 30, 2007
|
|
|
|
Allowance
for Loan Losses
|
|
|
REO
Valuation Allowance
|
|
|
Reserve
for Losses
|
|
|
Total
Allowance for Losses
|
|
|
|
(in
thousands)
|
|
Three
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,681 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,878 |
|
Provision/(recovery)
for losses
|
|
|
- |
|
|
|
- |
|
|
|
386 |
|
|
|
386 |
|
Charge-offs
|
|
|
- |
|
|
|
- |
|
|
|
(386 |
) |
|
|
(386 |
) |
Recoveries
|
|
|
20 |
|
|
|
- |
|
|
|
- |
|
|
|
20 |
|
Ending
balance
|
|
$ |
1,701 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,945 |
|
|
$ |
- |
|
|
$ |
2,610 |
|
|
$ |
4,555 |
|
Provision/(recovery)
for losses
|
|
|
(215 |
) |
|
|
100 |
|
|
|
(27 |
) |
|
|
(142 |
) |
Charge-offs
|
|
|
(49 |
) |
|
|
(100 |
) |
|
|
(386 |
) |
|
|
(535 |
) |
Recoveries
|
|
|
20 |
|
|
|
- |
|
|
|
- |
|
|
|
20 |
|
Ending
balance
|
|
$ |
1,701 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,898 |
|
Prior to
third quarter 2007, no allowance for losses had been made for loans underlying
Farmer Mac I Guaranteed Securities issued prior to the 1996 Act (“Pre-1996 Act
Farmer Mac I Guaranteed Securities”), AgVantage securities or securities issued
under the Farmer Mac II program (“Farmer Mac II Guaranteed
Securities”). Pre-1996 Act Farmer Mac I Guaranteed Securities are
supported by unguaranteed first loss subordinated interests, which are expected
to exceed the estimated credit losses on those loans. Through
September 30, 2008, Farmer Mac had charged off $0.4 million related to one loan
underlying Pre-1996 Act Farmer Mac I Guaranteed Securities. The
remaining $1.7 million of Pre-1996 Act Farmer Mac I Guaranteed Securities
represent interests in seasoned performing loans with low loan-to-value
ratios. Farmer Mac does not expect to incur any further losses on the
remaining Pre-1996 Act Farmer Mac I Guaranteed Securities in the
future. Each AgVantage security is a general obligation of an issuing
institution approved by Farmer Mac and is collateralized by eligible mortgage
loans. As of September 30, 2008, there were no probable losses
inherent in Farmer Mac’s AgVantage securities due to the high credit quality of
the obligors, as well as the underlying collateral. As of September
30, 2008, Farmer Mac had not experienced any credit losses on any AgVantage
securities and does not expect to incur any such losses in the
future. The guaranteed portions collateralizing Farmer Mac II
Guaranteed Securities are guaranteed by the United States Department of
Agriculture (“USDA”). Each USDA guarantee is an obligation backed by
the full faith and credit of the United States. As of September 30,
2008, Farmer Mac had not experienced any credit losses on any Farmer Mac II
Guaranteed Securities and does not expect to incur any such losses in the
future.
On May
22, 2008, Congress enacted into law the Food, Conservation and Energy Act of
2008 (the “Farm Bill”), which expanded Farmer Mac’s authorities to include
providing a secondary market for rural electric and telephone loans made by
cooperative lenders. During second quarter 2008, Farmer Mac placed
its guarantee on $430.7 million of securities representing interests in rural
electric cooperative loans and $900.0 million principal amount of obligations
collateralized by rural electric cooperative loans previously held as
mission-related investments under authority granted by the Farm Credit
Administration (“FCA”). During third quarter 2008, $500.0 million of
the obligations collateralized by rural electric cooperative loans matured and
was repaid and $5.7 million of the securities representing interests in rural
electric cooperative loans was repaid. Farmer Mac evaluated the
remaining $825.0 million Farmer Mac Guaranteed Securities – Rural Utilities
outstanding as of September 30, 2008 and determined that there were no probable
losses inherent in the securities or the underlying rural utilities
loans. Accordingly, no allowance for losses was recorded as of
September 30, 2008 with respect to those securities.
The table
below summarizes the components of Farmer Mac’s allowance for losses as of
September 30, 2008 and December 31, 2007:
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
|
(in
thousands)
|
|
Allowance
for loan losses
|
|
$ |
2,329 |
|
|
$ |
1,690 |
|
Real
estate owned valuation allowance
|
|
|
- |
|
|
|
- |
|
Reserve
for losses:
|
|
|
|
|
|
|
|
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
868 |
|
|
|
857 |
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
895 |
|
|
|
655 |
|
LTSPCs
|
|
|
343 |
|
|
|
685 |
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
4,435 |
|
|
$ |
3,887 |
|
As of
September 30, 2008, Farmer Mac individually analyzed $3.7 million of its $47.8
million of impaired assets for collateral shortfalls against updated appraised
values, other updated collateral valuations or discounted
values. Farmer Mac evaluated the remaining $44.1 million of impaired
assets, for which updated valuations were not available, in the aggregate in
consideration of their similar risk characteristics and historical
statistics. All of the $3.7 million of assets analyzed individually
were adequately collateralized. Accordingly, Farmer Mac did not
record any specific allowances for any of its impaired assets as of September
30, 2008. Similarly, as of December 31, 2007, Farmer Mac did not
record any specific allowances related to its $36.6 million of impaired assets
as of that date.
Farmer
Mac recognized interest income of approximately $1.0 million and $3.1 million on
impaired loans during the three and nine months ended September 30, 2008,
respectively, compared to $1.1 million and $2.9 million, respectively, during
the same periods in 2007. During the three and nine months ended
September 30, 2008, Farmer Mac’s average investment in impaired loans was $46.9
million and $42.2 million, respectively, compared to $44.5 million and $50.1
million, respectively, for the same periods in 2007.
|
(c)
|
Adoption of Fair Value
Accounting Standards
|
Effective
January 1, 2008, Farmer Mac adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (“SFAS 157”) and Statement of Financial Accounting Standards
No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115 (“SFAS 159”). These standards require
disclosures about financial assets and liabilities that are measured at fair
value and provide an election option to report financial instruments at fair
value with changes in fair value recorded in earnings as they
occur.
Fair
Value Measurements
SFAS 157
defines fair value, establishes a framework for measuring fair value under other
accounting pronouncements that permit or require fair value measurements, and
expands disclosures about fair value measurements. In particular,
disclosures are required to provide information on the extent to which fair
value is used to measure assets and liabilities, the inputs used to develop
measurements and the effects of certain of the measurements on earnings or
changes in net assets.
The
principal impact of SFAS 157 to Farmer Mac is to require expanded disclosures
regarding fair value measurements. SFAS 157 establishes a fair value
hierarchy that prioritizes inputs to valuation techniques used to measure fair
value. The hierarchy gives highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). Farmer Mac’s assets and liabilities recorded at fair
value have been categorized based upon a fair value hierarchy in accordance with
SFAS 157. The levels of fair value hierarchy are described
below:
Basis of
Fair Value Measurement
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities. Farmer
Mac has classified exchange-traded Treasury futures as Level 1
measurements.
|
|
Level
2
|
Quoted
prices in markets that are not active or financial instruments for which
all significant inputs are observable, either directly or
indirectly. Level 2 inputs include inputs other than quoted
prices that are observable for the financial instrument, such as interest
rates and yield curves that are observable at commonly quoted
intervals. Farmer Mac has classified financial instruments for
which there are continuous and verifiable pricing sources as Level 2
inputs, including certificates of deposit, commercial paper, asset-backed
securities, corporate debt securities, mortgage-backed securities,
preferred stock issued by Fannie Mae, and most financial
derivatives.
|
|
Level
3
|
Prices
or valuations that require inputs that are both significant to the fair
value measurement and unobservable. Level 3 inputs include
situations where there is little, if any, market activity for the
financial instrument. For financial instruments that are thinly
traded, Farmer Mac uses as its primary fair value source analytical models
that project cash flows based on internal and external inputs, including
transaction terms, yield curves, benchmark data, volatility data,
prepayment assumptions and default assumptions. Financial
instruments requiring Level 3 inputs include available-for-sale Farmer Mac
I Guaranteed Securities, available-for-sale and trading Farmer Mac II
Guaranteed Securities, available-for-sale and trading Farmer Mac
Guaranteed Securities – Rural Utilities, auction-rate certificates, basis
swaps, preferred stock issued by institutions of the Farm Credit System
and loans held for sale.
|
In some
cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, the level in the fair value
hierarchy within which the fair value measurement in its entirety falls has been
determined based on the lowest level input that is significant to the fair value
measurement in its entirety. Farmer Mac’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the financial
instrument.
Both
observable and unobservable inputs may be used to determine the fair value of
positions that Farmer Mac has classified within the Level 3
category. As a result, the unrealized gains and losses for assets and
liabilities within the Level 3 category presented in the following tables may
include changes in fair value that were attributable to both observable (e.g.,
changes in market interest rates) and unobservable (e.g., changes in long-dated
volatilities) inputs.
The
following table presents information about Farmer Mac’s assets and liabilities
measured at fair value on a recurring and nonrecurring basis as of September 30,
2008, and indicates the fair value hierarchy of the valuation techniques
utilized by Farmer Mac to determine such fair value.
Assets and Liabilities
Measured at Fair Value as of September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Recurring:
|
|
(in
thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate certificates of deposit
|
|
$ |
- |
|
|
$ |
60,000 |
|
|
$ |
- |
|
|
$ |
60,000 |
|
Fixed
rate commercial paper
|
|
|
- |
|
|
|
84,571 |
|
|
|
- |
|
|
|
84,571 |
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
|
- |
|
|
|
- |
|
|
|
192,010 |
|
|
|
192,010 |
|
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
94,437 |
|
|
|
- |
|
|
|
94,437 |
|
Floating
rate corporate debt securities
|
|
|
- |
|
|
|
448,950 |
|
|
|
- |
|
|
|
448,950 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
- |
|
|
|
355,748 |
|
|
|
- |
|
|
|
355,748 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
- |
|
|
|
7,508 |
|
|
|
- |
|
|
|
7,508 |
|
Floating
rate GSE subordinated debt
|
|
|
- |
|
|
|
51,562 |
|
|
|
- |
|
|
|
51,562 |
|
Floating
rate GSE preferred stock
|
|
|
- |
|
|
|
2,469 |
|
|
|
- |
|
|
|
2,469 |
|
Total
available-for-sale investment securities
|
|
|
- |
|
|
|
1,105,245 |
|
|
|
192,010 |
|
|
|
1,297,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
4,357 |
|
|
|
4,357 |
|
Fixed
rate GSE preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
166,689 |
|
|
|
166,689 |
|
Total
trading investment securities
|
|
|
- |
|
|
|
- |
|
|
|
171,046 |
|
|
|
171,046 |
|
Total
investment securities
|
|
|
- |
|
|
|
1,105,245 |
|
|
|
363,056 |
|
|
|
1,468,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
- |
|
|
|
- |
|
|
|
354,712 |
|
|
|
354,712 |
|
Farmer
Mac II
|
|
|
- |
|
|
|
- |
|
|
|
493,997 |
|
|
|
493,997 |
|
Rural
Utilities
|
|
|
- |
|
|
|
- |
|
|
|
401,485 |
|
|
|
401,485 |
|
Total
available-for-sale guaranteed securities
|
|
|
- |
|
|
|
- |
|
|
|
1,250,194 |
|
|
|
1,250,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II
|
|
|
- |
|
|
|
- |
|
|
|
476,880 |
|
|
|
476,880 |
|
Rural
Utilities
|
|
|
- |
|
|
|
- |
|
|
|
436,331 |
|
|
|
436,331 |
|
Total
trading guaranteed securities
|
|
|
- |
|
|
|
- |
|
|
|
913,211 |
|
|
|
913,211 |
|
Total
Farmer Mac guaranteed securities
|
|
|
- |
|
|
|
- |
|
|
|
2,163,405 |
|
|
|
2,163,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives
|
|
|
238 |
|
|
|
3,157 |
|
|
|
- |
|
|
|
3,395 |
|
Total
Assets at fair value
|
|
$ |
238 |
|
|
$ |
1,108,402 |
|
|
$ |
2,526,461 |
|
|
$ |
3,635,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives
|
|
$ |
- |
|
|
$ |
64,461 |
|
|
$ |
1,209 |
|
|
$ |
65,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities at fair value
|
|
$ |
- |
|
|
$ |
64,461 |
|
|
$ |
1,209 |
|
|
$ |
65,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
63,202 |
|
|
$ |
63,202 |
|
The
following tables present additional information about assets and liabilities
measured at fair value on a recurring and nonrecurring basis for which Farmer
Mac has used significant Level 3 inputs to determine fair value for the three
and nine months ended September 30, 2008.
Level 3 Assets and
Liabilities Measured at Fair Value for the Three Months Ended September 30,
2008
|
|
Beginning Balance
|
|
|
Purchases, Sales, Issuances and Settlements,
Net
|
|
|
Realized and Unrealized Gains/(Losses) included in
Income
|
|
|
Unrealized Gains/(Losses) included in Other
Comprehensive Income
|
|
|
Net Transfers In and/or Out
|
|
|
Ending Balance
|
|
Recurring:
|
|
(in
thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
$ |
209,360 |
|
|
$ |
(17,525 |
) |
|
$ |
- |
|
|
$ |
175 |
|
|
$ |
- |
|
|
$ |
192,010 |
|
Floating
rate corporate debt securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Fixed
rate corporate debt securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
available-for-sale
|
|
|
209,360 |
|
|
|
(17,525 |
) |
|
|
- |
|
|
|
175 |
|
|
|
- |
|
|
|
192,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities (1)
|
|
|
7,414 |
|
|
|
(143 |
) |
|
|
(2,914 |
) |
|
|
- |
|
|
|
- |
|
|
|
4,357 |
|
Fixed
rate mortgage-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Fixed
rate GSE preferred stock(1)
|
|
|
- |
|
|
|
(338 |
) |
|
|
(12,073 |
) |
|
|
- |
|
|
|
179,100 |
|
|
|
166,689 |
|
Total
trading
|
|
|
7,414 |
|
|
|
(481 |
) |
|
|
(14,987 |
) |
|
|
- |
|
|
|
179,100 |
|
|
|
171,046 |
|
Total
investment securities
|
|
|
216,774 |
|
|
|
(18,006 |
) |
|
|
(14,987 |
) |
|
|
175 |
|
|
|
179,100 |
|
|
|
363,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
391,904 |
|
|
|
(64,387 |
) |
|
|
- |
|
|
|
2,203 |
|
|
|
24,992 |
|
|
|
354,712 |
|
Farmer
Mac II
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
419 |
|
|
|
493,578 |
|
|
|
493,997 |
|
Rural
Utilities
|
|
|
901,639 |
|
|
|
(500,000 |
) |
|
|
- |
|
|
|
(154 |
) |
|
|
- |
|
|
|
401,485 |
|
Total
available-for-sale
|
|
|
1,293,543 |
|
|
|
(564,387 |
) |
|
|
- |
|
|
|
2,468 |
|
|
|
518,570 |
|
|
|
1,250,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II (2)
|
|
|
450,562 |
|
|
|
26,218 |
|
|
|
100 |
|
|
|
- |
|
|
|
- |
|
|
|
476,880 |
|
Rural
Utilities (1)
|
|
|
441,685 |
|
|
|
(5,735 |
) |
|
|
381 |
|
|
|
- |
|
|
|
- |
|
|
|
436,331 |
|
Total
trading
|
|
|
892,247 |
|
|
|
20,483 |
|
|
|
481 |
|
|
|
- |
|
|
|
- |
|
|
|
913,211 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
2,185,790 |
|
|
|
(543,904 |
) |
|
|
481 |
|
|
|
2,468 |
|
|
|
518,570 |
|
|
|
2,163,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets at fair value
|
|
$ |
2,402,564 |
|
|
$ |
(561,910 |
) |
|
$ |
(14,506 |
) |
|
$ |
2,643 |
|
|
$ |
697,670 |
|
|
$ |
2,526,461 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives (3)
|
|
$ |
(1,457 |
) |
|
$ |
- |
|
|
$ |
248 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(1,209 |
) |
Total
Liabilities at fair value
|
|
$ |
(1,457 |
) |
|
$ |
- |
|
|
$ |
248 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(1,209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
142,695 |
|
|
$ |
(79,534 |
) |
|
$ |
41 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
63,202 |
|
(1)
|
Unrealized
gains/(losses) are attributable to assets still held as of September 30,
2008 and are recorded in losses on trading
assets.
|
(2)
|
Includes
unrealized gains of approximately $455,000 attributable to assets still
held as of September 30, 2008 that are recorded in losses on trading
assets.
|
(3)
|
Unrealized
gains are attributable to liabilities still held as of September 30, 2008
and are recorded in losses on financial
derivatives.
|
Level 3 Assets and
Liabilities Measured at Fair Value for the Nine Months Ended September 30,
2008
|
|
Beginning Balance
|
|
|
Purchases, Sales, Issuances and Settlements,
Net
|
|
|
Realized and Unrealized Gains/(Losses) included in
Income
|
|
|
Unrealized Gains/(Losses) included in Other
Comprehensive Income
|
|
|
Net Transfers In and/or Out
|
|
|
Ending Balance
|
|
Recurring:
|
|
(in
thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
$ |
- |
|
|
$ |
62,406 |
|
|
$ |
- |
|
|
$ |
(1,940 |
) |
|
$ |
131,544 |
|
|
$ |
192,010 |
|
Floating
rate corporate debt securities
|
|
|
- |
|
|
|
400,000 |
|
|
|
- |
|
|
|
(669 |
) |
|
|
(399,331 |
) |
|
|
- |
|
Fixed
rate corporate debt securities
|
|
|
500,138 |
|
|
|
- |
|
|
|
- |
|
|
|
2,951 |
|
|
|
(503,089 |
) |
|
|
- |
|
Total
available-for-sale
|
|
|
500,138 |
|
|
|
462,406 |
|
|
|
- |
|
|
|
342 |
|
|
|
(770,876 |
) |
|
|
192,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities (1)
|
|
|
8,179 |
|
|
|
(771 |
) |
|
|
(3,051 |
) |
|
|
- |
|
|
|
- |
|
|
|
4,357 |
|
Fixed
rate mortgage-backed securities
|
|
|
415,813 |
|
|
|
29,367 |
|
|
|
13,846 |
|
|
|
- |
|
|
|
(459,026 |
) |
|
|
- |
|
Fixed
rate GSE preferred stock(1)
|
|
|
- |
|
|
|
(338 |
) |
|
|
(12,073 |
) |
|
|
- |
|
|
|
179,100 |
|
|
|
166,689 |
|
Total
trading
|
|
|
423,992 |
|
|
|
28,258 |
|
|
|
(1,278 |
) |
|
|
- |
|
|
|
(279,926 |
) |
|
|
171,046 |
|
Total
investment securities
|
|
|
924,130 |
|
|
|
490,664 |
|
|
|
(1,278 |
) |
|
|
342 |
|
|
|
(1,050,802 |
) |
|
|
363,056 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
338,958 |
|
|
|
(15,161 |
) |
|
|
- |
|
|
|
5,923 |
|
|
|
24,992 |
|
|
|
354,712 |
|
Farmer
Mac II
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
419 |
|
|
|
493,578 |
|
|
|
493,997 |
|
Rural
Utilities
|
|
|
- |
|
|
|
(500,000 |
) |
|
|
- |
|
|
|
(935 |
) |
|
|
902,420 |
|
|
|
401,485 |
|
Total
available-for-sale
|
|
|
338,958 |
|
|
|
(515,161 |
) |
|
|
- |
|
|
|
5,407 |
|
|
|
1,420,990 |
|
|
|
1,250,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II (2)
|
|
|
428,670 |
|
|
|
46,715 |
|
|
|
1,495 |
|
|
|
- |
|
|
|
- |
|
|
|
476,880 |
|
Rural
Utilities (1)
|
|
|
- |
|
|
|
(5,735 |
) |
|
|
(16,960 |
) |
|
|
- |
|
|
|
459,026 |
|
|
|
436,331 |
|
Total
trading
|
|
|
428,670 |
|
|
|
40,980 |
|
|
|
(15,465 |
) |
|
|
- |
|
|
|
459,026 |
|
|
|
913,211 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
767,628 |
|
|
|
(474,181 |
) |
|
|
(15,465 |
) |
|
|
5,407 |
|
|
|
1,880,016 |
|
|
|
2,163,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets at fair value
|
|
$ |
1,691,758 |
|
|
$ |
16,483 |
|
|
$ |
(16,743 |
) |
|
$ |
5,749 |
|
|
$ |
829,214 |
|
|
$ |
2,526,461 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives (3)
|
|
$ |
(1,106 |
) |
|
$ |
- |
|
|
$ |
(103 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(1,209 |
) |
Total
Liabilities at fair value
|
|
$ |
(1,106 |
) |
|
$ |
- |
|
|
$ |
(103 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(1,209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
- |
|
|
$ |
(79,534 |
) |
|
$ |
(20 |
) |
|
$ |
- |
|
|
$ |
142,756 |
|
|
$ |
63,202 |
|
(1)
|
Unrealized losses
are attributable to assets still held as of September 30, 2008 and are
recorded in losses on trading
assets.
|
(2)
|
Includes
unrealized gains of approximately $2.3 million attributable to assets
still held as of September 30, 2008 that are recorded in losses on trading
assets.
|
(3)
|
Unrealized
losses are attributable to liabilities still held as of September 30, 2008
and are recorded in losses on financial
derivatives.
|
Fair
Value Option
SFAS 159
permits entities to make a one-time election to report financial instruments at
fair value with changes in fair value recorded in earnings as they
occur. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions.
Farmer
Mac adopted the provisions of SFAS 159 on January 1, 2008 and recorded a
cumulative effect of adoption adjustment of $12.1 million, net of tax, as an
increase to the beginning balance of retained earnings. The fair
value option election was made for certain available-for-sale investment
securities and certain Farmer Mac II Guaranteed Securities that were classified
as held-to-maturity on January 1, 2008. These assets were selected
for the fair value option under SFAS 159 because they were funded or hedged
principally with financial derivatives and, therefore, it was expected that the
changes in fair value of the assets would provide partial economic and financial
reporting offsets to the related financial derivatives.
Impact of
Adopting SFAS 159 to Retained Earnings as of January 1, 2008
|
|
Carrying Value as of January 1, 2008 Prior to
Adoption of Fair Value Option
|
|
|
Transition Gain
|
|
|
Fair Value as of January 1, 2008 After
Adoption of Fair Value Option
|
|
|
|
(in
thousands)
|
|
Available-for-sale
Investment Securities:
|
|
|
|
|
|
|
|
|
|
Fixed
rate GSE preferred stock (1)
|
|
$ |
184,655 |
|
|
$ |
2,783 |
|
|
$ |
184,655 |
|
Fixed
rate mortgage-backed securities (1)
|
|
|
415,813 |
|
|
|
14,504 |
|
|
|
415,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
Farmer Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II Guaranteed Securities
|
|
|
427,330 |
|
|
|
1,340 |
|
|
|
428,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
cumulative effect of adoption
|
|
|
|
|
|
|
18,627 |
|
|
|
|
|
Tax
effect
|
|
|
|
|
|
|
6,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adoption to beginning retained earnings
|
|
|
|
|
|
$ |
12,108 |
|
|
|
|
|
(1)
Farmer Mac adopted the fair value option for certain securities classified
within its investment portfolio previously classified as
available-for-sale. These securities are presented in the condensed
consolidated balance sheet at fair value in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities and the amount of the transition gain was
recognized in accumulated other comprehensive loss prior to the adoption of SFAS
159.
|
(d)
|
Financial
Derivatives
|
Farmer
Mac enters into financial derivative transactions principally to protect against
risk from the effects of market price or interest rate movements on the value of
certain assets, future cash flows or debt issuance, not for trading or
speculative purposes. Principally, Farmer Mac enters into interest
rate swap contracts to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk and also to derive
an overall lower effective cost of borrowing than would otherwise be available
to Farmer Mac in the conventional debt market. During third quarter
2008, Farmer Mac, for the first time, purchased pay-fixed swaptions, which
provide the option of entering into pay-fixed swaps, as part of its overall
strategy in managing interest rate risk. Farmer Mac is required also
to recognize certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a
derivative as promulgated by Statement of Financial Accounting Standards No.
133, Accounting for Derivative
Instruments and Hedging Activities, as amended (“SFAS 133”).
Farmer
Mac manages the interest rate risk related to loans it has committed to acquire,
but has not yet purchased and permanently funded, through the use of forward
sale contracts on mortgage-backed securities and the debt of other
government-sponsored enterprises (“GSEs”), futures contracts involving U.S.
Treasury securities and interest rate swaps. Farmer Mac uses forward
sale contracts on GSE securities to reduce its interest rate exposure to changes
in both Treasury rates and spreads on Farmer Mac debt and Farmer Mac Guaranteed
Securities. The notional amounts of these contracts are determined
based on a duration-matched hedge ratio between the hedged item and the hedge
instrument. Gains or losses generated by these hedge transactions
should offset changes in funding costs or Farmer Mac Guaranteed Securities sale
prices that occur during the hedge period.
All
financial derivatives are recorded on the balance sheet at fair value as a
freestanding asset or liability in accordance with SFAS 133. Farmer
Mac does not designate its financial derivatives as fair value hedges or cash
flow hedges; therefore, the changes in the fair values of financial derivatives
are reported as gains or losses on financial derivatives in the condensed
consolidated statements of operations.
The
following table summarizes information related to Farmer Mac’s financial
derivatives as of September 30, 2008 and December 31, 2007:
|
|
September 30, 2008
|
|
|
December 31,
2007
|
|
|
|
Notional
Amount
|
|
|
Fair
Value
|
|
|
Notional
Amount
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
Interest
rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$ |
1,540,286 |
|
|
$ |
(56,452 |
) |
|
$ |
1,411,772 |
|
|
$ |
(52,941 |
) |
Receive-fixed
|
|
|
2,011,074 |
|
|
|
(4,903 |
) |
|
|
1,098,000 |
|
|
|
1,065 |
|
Basis
|
|
|
131,863 |
|
|
|
(1,209 |
) |
|
|
161,967 |
|
|
|
(1,106 |
) |
Pay-fixed
swaption
|
|
|
100,000 |
|
|
|
10 |
|
|
|
- |
|
|
|
- |
|
Agency
forwards
|
|
|
12,932 |
|
|
|
41 |
|
|
|
4,233 |
|
|
|
(2 |
) |
Treasury
futures
|
|
|
12,900 |
|
|
|
238 |
|
|
|
1,000 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,809,055 |
|
|
$ |
(62,275 |
) |
|
$ |
2,676,972 |
|
|
$ |
(52,985 |
) |
As of
September 30, 2008, Farmer Mac had approximately $0.3 million of net after-tax
unrealized losses on financial derivatives included in accumulated other
comprehensive loss related to the SFAS 133 transition
adjustment. These amounts will be reclassified into earnings in the
same period or periods during which the hedged forecasted transactions (either
the payment of interest or the issuance of discount notes) affect earnings or
immediately when it becomes probable that the original hedged forecasted
transaction will not occur within two months of the originally specified
date. Over the next 12 months, Farmer Mac estimates that $0.2 million
of the amount currently reported in accumulated other comprehensive loss will be
reclassified into earnings.
As of
September 30, 2008, Farmer Mac had outstanding basis swaps with a related party
with a notional amount of $131.9 million and a fair value of $(1.2)
million. As of December 31, 2007, these swaps had an outstanding
notional amount of $162.0 million and a fair value of $(1.1)
million. Under the terms of those basis swaps, which are not in
designated hedge relationships, Farmer Mac pays Constant Maturity Treasury-based
rates and receives London Interbank Offered Rate, or LIBOR. Those
swaps hedge most of the interest rate basis risk related to loans Farmer Mac
purchases that pay a Constant Maturity Treasury-based rate and the discount
notes Farmer Mac issues to fund the loan purchases. Historically, the
pricing of discount notes has correlated to LIBOR rates. Farmer Mac
recorded an unrealized gain on those basis swaps of $0.2 million during third
quarter 2008 and a $0.1 million unrealized loss for the nine month period ended
September 30, 2008. See Note 3 “Related Party Transactions” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007,
as filed with the SEC on March 17, 2008, for additional information on these
related party transactions.
|
(e)
|
(Loss)/Earnings Per
Common Share
|
Basic
(loss)/earnings per common share are based on the weighted-average number of
shares of common stock outstanding. Diluted (loss)/earnings per
common share are based on the weighted-average number of shares of common stock
outstanding adjusted to include all potentially dilutive common stock options
and stock appreciation rights (“SARs”). The following schedule
reconciles basic and diluted (loss)/earnings per common share (“EPS”) for the
three and nine months ended September 30, 2008 and 2007:
|
|
Three Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
|
Shares
|
|
|
$ per Share
|
|
|
Net (Loss)
|
|
|
Shares
|
|
|
$ per Share
|
|
|
|
(in
thousands, except per share amounts)
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) available to common stockholders
|
|
$ |
(106,136 |
) |
|
|
10,065 |
|
|
$ |
(10.55 |
) |
|
$ |
(8,570 |
) |
|
|
10,420 |
|
|
$ |
(0.82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and SARs (1)
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$ |
(106,136 |
) |
|
|
10,065 |
|
|
$ |
(10.55 |
) |
|
$ |
(8,570 |
) |
|
|
10,420 |
|
|
$ |
(0.82 |
) |
(1)
|
For
the three months ended September 30, 2008 and 2007, stock options and SARs
of 2,381,503 and 2,310,599, respectively, were outstanding but not
included in the computation of diluted (losses)/earnings per share of
common stock because they were
anti-dilutive.
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
|
Shares
|
|
|
$ per Share
|
|
|
Net Income
|
|
|
Shares
|
|
|
$ per Share
|
|
|
|
(in
thousands, except per share amounts)
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)/income available to common stockholders
|
|
$ |
(92,962 |
) |
|
|
9,966 |
|
|
$ |
(9.33 |
) |
|
$ |
13,721 |
|
|
|
10,391 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and SARs (1)
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$ |
(92,962 |
) |
|
|
9,966 |
|
|
$ |
(9.33 |
) |
|
$ |
13,721 |
|
|
|
10,628 |
|
|
$ |
1.29 |
|
(1)
|
For
the nine months ended September 30, 2008 and 2007, stock options and SARs
of 2,385,890 and 224,169, respectively, were outstanding but not included
in the computation of diluted (losses)/earnings per share of common stock
because they were anti-dilutive.
|
In
February 2007, Farmer Mac announced the establishment of a program to repurchase
up to one million shares of the Corporation’s outstanding Class C Non-Voting
Common Stock. The aggregate number of shares purchased by Farmer Mac
under that stock repurchase program reached the maximum number of authorized
shares during first quarter 2008, thereby terminating the program according to
its terms. During the three months ended March 31, 2008, Farmer Mac repurchased 31,691 shares of its Class C Non-Voting
Common Stock at an average price of $26.13 per share pursuant to the stock repurchase program. These
repurchases reduced the Corporation’s stockholders’ equity by approximately
$0.8 million. All
of the shares repurchased under Farmer Mac’s stock repurchase program were
purchased in open market transactions and were retired to become authorized but
unissued shares available for future issuance.
|
(f)
|
Stock-Based
Compensation
|
In 1997,
Farmer Mac adopted a stock option plan for directors, officers and other
employees to acquire shares of Class C Non-Voting Common Stock. Upon
stock option exercise, new shares are issued by the
Corporation. Under the plan, stock options awarded vest annually in
thirds, with the first third vesting one year after the date of
grant. If not exercised, any options granted under the 1997 plan
expire 10 years from the date of grant, except that options issued to directors
since June 1, 1998, if not exercised, expire five years from the date of
grant. For all stock options granted, the exercise price is equal to
the closing price of the Class C Non-Voting Common Stock on or immediately
preceding the date of grant. As of June 30, 2008, the plan had
terminated pursuant to its terms and no further grants will be made under
it.
At the
June 5, 2008 Annual Meeting of Stockholders, Farmer Mac’s stockholders approved
the 2008 Omnibus Incentive Compensation Plan that authorizes the grants of
restricted stock, options and SARs, among other alternative forms of
equity-based compensation, to directors, officers and other
employees. At its June 5, 2008 meeting, the Board and the
Compensation Committee awarded SARs to Farmer Mac’s directors and
officers. Under the grants, the SARs awarded to officers vest
annually in thirds, with the first third vesting on May 31, 2009, and awards to
directors vesting in full on May 31, 2009. If not exercised or
terminated earlier due to the termination of employment or service on the Board,
any SARs granted June 5, 2008 to officers expire on June 5, 2018 and those
granted to directors expire on June 5, 2015. For all SARs granted,
the exercise price is equal to the closing price of the Class C Non-Voting
Common Stock on the date of grant.
Farmer
Mac recognized no compensation expense and $0.9 million of compensation expense
during the three and nine months ended September 30, 2008, respectively, and
$0.3 million and $1.2 million of compensation expense during the three and nine
months ended September 30, 2007, respectively, related to the non-vested portion
of stock option awards that were outstanding as of December 31,
2005. Additionally, Farmer Mac recognized $1.1 million and $2.5
million of compensation expense related to stock options and SARs awarded
subsequent to December 31, 2005 for the three and nine months ended September
30, 2008, respectively, compared to $0.6 million and $1.3 million of similar
compensation expense for the three and nine months ended September 30, 2007,
respectively.
The
following table summarizes stock option and SARs activity for the three and nine
months ended September 30, 2008 and 2007:
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
|
Stock
Options and SARs
|
|
|
Weighted-
Average Exercise Price
|
|
|
Stock
Options and SARs
|
|
|
Weighted-
Average Exercise Price
|
|
Three
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
2,381,503 |
|
|
$ |
26.24 |
|
|
|
2,305,599 |
|
|
$ |
25.15 |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
5,000 |
|
|
|
28.24 |
|
Exercised
|
|
|
(106,331 |
) |
|
|
21.99 |
|
|
|
(100,732 |
) |
|
|
20.13 |
|
Canceled
|
|
|
(12,667 |
) |
|
|
28.50 |
|
|
|
(1,668 |
) |
|
|
23.53 |
|
Outstanding,
end of period
|
|
|
2,262,505 |
|
|
$ |
26.43 |
|
|
|
2,208,199 |
|
|
$ |
25.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
2,218,199 |
|
|
$ |
25.48 |
|
|
|
2,145,705 |
|
|
$ |
23.83 |
|
Granted
|
|
|
339,770 |
|
|
|
28.92 |
|
|
|
462,427 |
|
|
|
29.31 |
|
Exercised
|
|
|
(264,297 |
) |
|
|
21.43 |
|
|
|
(363,596 |
) |
|
|
21.08 |
|
Canceled
|
|
|
(31,167 |
) |
|
|
28.67 |
|
|
|
(36,337 |
) |
|
|
26.62 |
|
Outstanding,
end of period
|
|
|
2,262,505 |
|
|
$ |
26.43 |
|
|
|
2,208,199 |
|
|
$ |
25.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and SARs exercisable at end of period
|
|
|
1,520,944 |
|
|
$ |
25.32 |
|
|
|
1,337,795 |
|
|
$ |
24.34 |
|
The
cancellations of stock options were due either to unvested options terminating
in accordance with the provisions of the applicable stock option plans upon
directors’ or employees’ departures from Farmer Mac or vested options
terminating unexercised on their expiration date. For the three and
nine months ended September 30, 2008, the additional paid-in capital received
from stock option exercises was $2.2 million and $5.4 million, respectively,
compared to $1.8 million and $7.1 million for the comparable periods in
2007. For the three and nine months ended September 30, 2008, the
reduction of income taxes to be paid as a result of the deduction for stock
option exercises was $0.3 million and $0.9 million, respectively, compared to
$0.5 million and $1.3 million for the comparable periods in 2007.
The
following table summarizes information regarding stock options and SARs
outstanding as of September 30, 2008:
|
|
|
Outstanding
|
|
Exercisable
|
Range
of Exercise Prices
|
|
|
Stock
Options and SARs
|
|
Weighted-
Average Remaining Contractual Life
|
|
Stock
Options and SARs
|
|
Weighted-
Average Remaining Contractual Life
|
|
|
|
|
|
|
|
|
|
|
$10.00
- $19.99 |
|
|
|
81,722 |
|
5.5
years
|
|
|
81,722 |
|
5.5
years
|
20.00
- 24.99 |
|
|
|
656,952 |
|
4.8
years
|
|
|
646,114 |
|
4.8
years
|
25.00
- 29.99 |
|
|
|
1,310,163 |
|
7.2
years
|
|
|
595,443 |
|
6.1
years
|
30.00
- 34.99 |
|
|
|
213,668 |
|
3.4
years
|
|
|
197,665 |
|
2.9
years
|
|
|
|
|
2,262,505 |
|
|
|
|
1,520,944 |
|
|
The
weighted-average grant date fair values of stock options and SARs granted during
the nine months ended September 30, 2008 and 2007 were $11.33 and $11.23 per
share, respectively. The fair values were estimated using the
Black-Scholes option pricing model based on the following
assumptions:
|
|
2008
|
|
|
2007
|
|
Risk-free
interest rate
|
|
|
2.5 |
% |
|
|
4.8 |
% |
Expected
years until exercise
|
|
6
years
|
|
|
6
years
|
|
Expected
stock volatility
|
|
|
43.2 |
% |
|
|
35.9 |
% |
Dividend
yield
|
|
|
1.4 |
% |
|
|
1.4 |
% |
Certain
reclassifications of prior period information were made to conform to the
current period presentation.
|
(h)
|
New Accounting
Standards
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
157, which defined fair value, established a framework for measuring fair value
under other accounting pronouncements that permit or require fair value
measurements, and expanded disclosures about fair value
measurements. In particular, disclosures are required to provide
information on the extent to which fair value is used to measure assets and
liabilities, the inputs used to develop measurements and the effects of certain
of the measurements on earnings or changes in net assets. In February
2008, FASB issued a final FASB Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No.
157. This FSP delayed the effective date of SFAS 157, for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. In addition, the FSP removed certain leasing transactions from
the scope of SFAS 157. The effective date of SFAS 157 for
nonfinancial assets and liabilities has been delayed by one year to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal
years. SFAS 157 for financial assets and liabilities was effective for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. Farmer Mac’s adoption of SFAS 157 on January 1, 2008
did not result in a material difference to its fair value
measurements.
In
February 2007, FASB issued SFAS 159, which permitted entities to make a one-time
election to report financial instruments at fair value with changes in fair
value recorded in earnings as they occur. The objective was to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. Farmer Mac adopted the provisions of SFAS 159 on January
1, 2008 and recorded a cumulative effect of adoption adjustment of $12.1
million, net of tax, as an increase to the beginning balance of retained
earnings. The fair value option election was made for certain
available-for-sale investment securities and certain Farmer Mac II Guaranteed
Securities that were classified as held-to-maturity on January 1,
2008. These assets were selected for the fair value option under SFAS
159 because they were funded or hedged principally with financial derivatives
and, therefore, it was expected that the changes in fair value of the assets
would provide partial economic and financial reporting offsets to the related
financial derivatives.
In
November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at
Fair Value Through Earnings (“SAB 109”), which expressed the SEC’s views
regarding written loan commitments that are accounted for at fair value through
earnings. SAB 109 revised and rescinded portions of Staff Accounting
Bulletin No. 105, Application
of Accounting Principles to Loan Commitments. SAB 109 revised
the SEC’s views on incorporating expected net future cash flows related to loan
servicing activities in the fair value measurement of a written loan
commitment. SAB 109 retained the SEC’s views on incorporating net
future cash flows related to internally-developed intangible assets in the fair
value measurement of a written loan commitment. SAB 109 was effective
on a prospective basis to derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007. The adoption of
SAB 109 did not have a material effect on Farmer Mac’s results of operations or
financial position.
In April
2007, FASB issued FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation No.
39 (“FSP FIN 39-1”). This FSP amended FIN 39 to allow an
entity to offset cash collateral receivables and payables reported at fair value
against derivative instruments (as defined by SFAS 133) for contracts executed
with the same counterparty under master netting arrangements. The
decision to offset cash collateral under this FSP must be applied consistently
to all derivatives counterparties where the entity has master netting
arrangements. If an entity nets derivative positions as permitted
under FIN 39, this FSP requires the entity to also offset the cash collateral
receivables and payables with the same counterparty under a master netting
arrangement. FSP FIN 39-1 was effective for fiscal years beginning
after November 15, 2007. The adoption of FSP FIN 39-1 did not have a
material effect on Farmer Mac’s results of operations or financial
position.
In March
2008, FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (“SFAS 161”). This standard applies to derivative
instruments, non-derivative instruments that are designated and qualify as
hedging instruments and related hedged items accounted for under SFAS
133. SFAS 161 does not change the accounting for derivatives and
hedging activities, but requires enhanced disclosures concerning the effect on
the financial statements from their use. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Since SFAS 161 only requires additional
disclosures, it will not have an impact on Farmer Mac’s results of operations or
financial position.
In May
2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements that are presented in conformity
with GAAP. This statement will be effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning
of Present Fairly in Conformity With
Generally Accepted Accounting Principles. Farmer Mac does not
expect the adoption of this statement to have a material impact on the
Corporation’s financial condition, results of operations or cash flows in future
periods.
In
September 2008, FASB issued three separate but related Exposure Drafts for
public comment. The proposed FASB Statements, Accounting for Transfers of
Financial Assets and
Amendments to FASB Interpretation No. 46(R), address amendments to FASB
Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities and to FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable
Interest Entities. The two proposed FASB statements would be
effective for fiscal years beginning after November 15, 2009. The
proposed statements, amending SFAS 140 and FIN 46(R), would remove the concept
of a qualifying special-purpose entity (QSPE) from SFAS 140 and remove the
exception from applying FIN 46(R) to QSPEs. While the proposed
standards have not been finalized and are subject to a public comment period
until November 14, 2008, these changes may result in the consolidation of assets
and liabilities onto Farmer Mac’s consolidated balance sheet in connection with
trusts that currently meet the QSPE criteria.
Proposed
FASB Staff Position (FSP) FAS 140-e and FIN 46(R)-e, Disclosures about Transfers of
Financial Assets and Interests in Variable Interest Entities, addresses
related disclosure requirements for public entities. The proposed FSP
amends SFAS 140 to require additional disclosures about transfers of financial
assets and also amends FIN 46(R) to require additional disclosures about
involvement with variable interest entities. The effective date for
the proposed FSP would be the first reporting period that ends after the
issuance of the FSP for public entities; FASB expects to issue the FSP in the
fourth quarter of 2008.
In
October 2008, FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which clarifies the
application of SFAS 157 in a market that is not active and provides an example
to illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. The
example emphasizes the principles of SFAS 157, including the objective of fair
value, the necessary considerations pertaining to distressed transactions, the
relevance of observable data, management’s assumptions about nonperformance and
liquidity risks, third-party pricing quotes and disclosure
requirements. The FSP became effective on October 10, 2008 and
applies to prior periods for which financial statements have not yet been
issued. Entities must account for revisions to fair value estimates
resulting from the adoption of the FSP as a change in accounting estimate under
SFAS 154, Accounting Changes
and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No.
3, but do not need to provide the disclosures required by that
Statement. Farmer Mac adopted the provisions of FSP 157-3 on
September 30, 2008 due to the lack of an active market for its investments in
GSE preferred stock issued by CoBank, ACB and AgFirst Farm Credit
Bank.
The
following tables present the amortized cost and fair values of Farmer Mac’s
investments as of September 30, 2008 and December 31, 2007.
|
|
As of September 30, 2008
|
|
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
|
(in
thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate certificates of deposit
|
|
$ |
60,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
60,000 |
|
Fixed
rate commercial paper
|
|
|
84,571 |
|
|
|
- |
|
|
|
- |
|
|
|
84,571 |
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
|
|
193,950 |
|
|
|
- |
|
|
|
(1,940 |
) |
|
|
192,010 |
|
Floating
rate asset-backed securities
|
|
|
95,345 |
|
|
|
- |
|
|
|
(908 |
) |
|
|
94,437 |
|
Floating
rate corporate debt securities (2)
|
|
|
506,723 |
|
|
|
- |
|
|
|
(57,773 |
) |
|
|
448,950 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
(3)
|
|
|
352,156 |
|
|
|
4,698 |
|
|
|
(1,106 |
) |
|
|
355,748 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
7,576 |
|
|
|
1 |
|
|
|
(69 |
) |
|
|
7,508 |
|
Floating
rate GSE subordinated debt
|
|
|
70,000 |
|
|
|
- |
|
|
|
(18,438 |
) |
|
|
51,562 |
|
Floating
rate GSE preferred stock (4)
|
|
|
2,469 |
|
|
|
- |
|
|
|
- |
|
|
|
2,469 |
|
Total
available-for-sale
|
|
|
1,372,790 |
|
|
|
4,699 |
|
|
|
(80,234 |
) |
|
|
1,297,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
7,661 |
|
|
|
- |
|
|
|
(3,304 |
) |
|
|
4,357 |
|
Fixed
rate GSE preferred stock
|
|
|
180,900 |
|
|
|
- |
|
|
|
(14,211 |
) |
|
|
166,689 |
|
Total
trading
|
|
|
188,561 |
|
|
|
- |
|
|
|
(17,515 |
) |
|
|
171,046 |
|
Total
investment securities
|
|
$ |
1,561,351 |
|
|
$ |
4,699 |
|
|
$ |
(97,749 |
) |
|
$ |
1,468,301 |
|
(1)
|
AAA-rated
callable auction-rate certificates collateralized by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are
backed by the full faith and credit of the United States, the interest
rates of which are reset through an auction process, most commonly at
intervals of 28 days or at formula-based floating rates in the event of a
failed auction.
|
(2)
|
Includes
a $52.4 million other-than-temporary impairment loss on Lehman Brothers
Holdings Inc. floating rate corporate debt. The amortized cost
of this investment was written down to its fair value of $7.5 million as
of September 30, 2008.
|
(3)
|
Includes
$16.6 million fair value of floating rate GSE mortgage-backed securities
that Farmer Mac has pledged as collateral and for which the counterparty
has the right to sell or repledge.
|
(4)
|
Includes
a $50.0 million other-than-temporary impairment loss on Fannie Mae
floating rate preferred stock. The amortized cost of this
investment was written down to its fair value of $2.5 million as of
September 30, 2008.
|
|
|
As of December 31,
2007
|
|
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
|
(in
thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate certificates of deposit
|
|
$ |
181,864 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
181,864 |
|
Fixed
rate commercial paper
|
|
|
66,339 |
|
|
|
- |
|
|
|
- |
|
|
|
66,339 |
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
|
|
131,544 |
|
|
|
- |
|
|
|
- |
|
|
|
131,544 |
|
Floating
rate asset-backed securities
|
|
|
30,000 |
|
|
|
13 |
|
|
|
- |
|
|
|
30,013 |
|
Floating
rate corporate debt securities
|
|
|
561,193 |
|
|
|
1 |
|
|
|
(19,345 |
) |
|
|
541,849 |
|
Fixed
rate corporate debt securities (2)
|
|
|
501,490 |
|
|
|
138 |
|
|
|
(3 |
) |
|
|
501,625 |
|
Fixed
rate mortgage-backed securities (3)
|
|
|
401,309 |
|
|
|
14,504 |
|
|
|
- |
|
|
|
415,813 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
(4)
|
|
|
437,680 |
|
|
|
5,016 |
|
|
|
(192 |
) |
|
|
442,504 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
8,330 |
|
|
|
1 |
|
|
|
(47 |
) |
|
|
8,284 |
|
Floating
rate GSE subordinated debt
|
|
|
70,000 |
|
|
|
- |
|
|
|
(4,397 |
) |
|
|
65,603 |
|
Floating
rate GSE preferred stock
|
|
|
52,500 |
|
|
|
- |
|
|
|
(6,406 |
) |
|
|
46,094 |
|
Fixed
rate GSE preferred stock
|
|
|
181,873 |
|
|
|
4,206 |
|
|
|
(1,424 |
) |
|
|
184,655 |
|
Total
available-for-sale
|
|
|
2,624,122 |
|
|
|
23,879 |
|
|
|
(31,814 |
) |
|
|
2,616,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities (5)
|
|
|
8,432 |
|
|
|
- |
|
|
|
(253 |
) |
|
|
8,179 |
|
Total
trading
|
|
|
8,432 |
|
|
|
- |
|
|
|
(253 |
) |
|
|
8,179 |
|
Total
investment securities
|
|
$ |
2,632,554 |
|
|
$ |
23,879 |
|
|
$ |
(32,067 |
) |
|
$ |
2,624,366 |
|
(1)
|
AAA-rated
callable auction-rate certificates collateralized by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are
backed by the full faith and credit of the United States, the interest
rates of which are reset through an auction process, most commonly at
intervals of 28 days or at formula-based floating rates in the event of a
failed auction.
|
(2)
|
Fixed
rate corporate debt securities included $500.0 million of mission-related
investments that were transferred to Farmer Mac Guaranteed Securities -
Rural Utilities in June 2008 pursuant to the expanded authorities granted
in the Farm Bill.
|
(3)
|
Fixed
rate mortgage-backed securities are comprised of mission-related
investments that were transferred to Farmer Mac Guaranteed Securities -
Rural Utilities in June 2008 pursuant to the expanded authorities granted
in the Farm Bill.
|
(4)
|
Includes
$7.2 million fair value of floating rate GSE mortgage-backed securities
that Farmer Mac has pledged as collateral and for which the counterparty
has the right to sell or repledge.
|
(5)
|
Floating
rate asset-backed securities are comprised of mission-related
investments.
|
During
third quarter 2008, Farmer Mac recorded a $44.7 million other-than-temporary
impairment (in addition to the $5.3 million other-than-temporary impairment
recorded in second quarter 2008) related to its investment in Fannie Mae
floating rate preferred stock. The carrying value of this investment
was written down to its fair value of $2.5 million as of September 30, 2008 and
the impairment loss was recognized as “Impairment losses on available-for-sale
investment securities” in the condensed consolidated statements of
operations.
During
third quarter 2008, Farmer Mac recorded a $52.4 million other-than-temporary
impairment related to its investment in Lehman Brothers Holdings Inc. senior
debt securities. The amortized cost of this investment was written
down to its fair value of $7.5 million as of September 30, 2008 and the
impairment loss was recognized as “Impairment losses on available-for-sale
investment securities” in the condensed consolidated statements of
operations.
As of
September 30, 2008 and December 31, 2007, unrealized losses on
available-for-sale investment securities were as follows:
|
|
As of September 30,
2008
|
|
|
|
Available-for-Sale Investment
Securities
|
|
|
|
Unrealized loss position for less than 12
months
|
|
|
Unrealized loss position for more than 12
months
|
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
|
(in
thousands)
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
$ |
192,010 |
|
|
$ |
(1,940 |
) |
|
$ |
- |
|
|
$ |
- |
|
Floating
rate asset-backed securities
|
|
|
94,437 |
|
|
|
(908 |
) |
|
|
- |
|
|
|
- |
|
Floating
rate corporate debt securities
|
|
|
58,514 |
|
|
|
(751 |
) |
|
|
382,936 |
|
|
|
(57,022 |
) |
Floating
rate Government/GSE guaranteed mortgage-backed
securities
|
|
|
82,883 |
|
|
|
(914 |
) |
|
|
8,509 |
|
|
|
(192 |
) |
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
6,283 |
|
|
|
(44 |
) |
|
|
757 |
|
|
|
(25 |
) |
Floating
rate GSE subordinated debt
|
|
|
- |
|
|
|
- |
|
|
|
51,562 |
|
|
|
(18,438 |
) |
Total
|
|
$ |
434,127 |
|
|
$ |
(4,557 |
) |
|
$ |
443,764 |
|
|
$ |
(75,677 |
) |
|
|
As of December 31,
2007
|
|
|
|
Available-for-Sale Investment
Securities
|
|
|
|
Unrealized loss position for less than 12
months
|
|
|
Unrealized loss position for more than 12
months
|
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
|
(in
thousands)
|
|
Floating
rate corporate debt securities
|
|
$ |
493,458 |
|
|
$ |
(16,732 |
) |
|
$ |
47,369 |
|
|
$ |
(2,613 |
) |
Fixed
rate corporate debt securities
|
|
|
1,488 |
|
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
35,610 |
|
|
|
(185 |
) |
|
|
499 |
|
|
|
(7 |
) |
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
7,748 |
|
|
|
(47 |
) |
Floating
rate GSE subordinated debt
|
|
|
65,603 |
|
|
|
(4,397 |
) |
|
|
- |
|
|
|
- |
|
Floating
rate GSE preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
46,094 |
|
|
|
(6,406 |
) |
Fixed
rate GSE preferred stock
|
|
|
89,385 |
|
|
|
(1,424 |
) |
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
685,544 |
|
|
$ |
(22,741 |
) |
|
$ |
101,710 |
|
|
$ |
(9,073 |
) |
The
temporary unrealized losses presented above are principally due to a general
widening of credit spreads from the dates of acquisition to September 30, 2008
and December 31, 2007, as applicable. The resulting decreases in fair
values reflect an increase in the perceived risk by the financial markets
related to those securities, even though there has not been significant
deterioration in the credit ratings of the securities. As of
September 30, 2008 and December 31, 2007, all of the investment securities in an
unrealized loss position were at least “A” rated, except one $22.0 million
corporate debt security that was rated “BBB” as of September 30,
2008. The unrealized losses were on 110 and 65 individual
available-for-sale investment securities as of September 30, 2008 and December
31, 2007, respectively.
As of
September 30, 2008, 31 of the securities in loss positions had been in loss
positions for more than 12 months and had a total unrealized loss of $75.7
million. As of December 31, 2007, 11 of the securities in loss
positions had been in loss positions for more than 12 months and had a total
unrealized loss of $9.1 million. Securities with unrealized losses
aged 12 months or more have a fair value as of September 30, 2008 that is at
least 65 percent of their amortized cost basis and, on average, approximately 85
percent of their amortized cost basis. Farmer Mac believes that all
aged unrealized losses are recoverable within a reasonable period of time by way
of changes in credit spreads or maturity. Accordingly, Farmer Mac has
concluded that none of the unrealized losses on its available-for-sale
investment securities represent other-than-temporary impairment as of September
30, 2008. Farmer Mac has the intent and ability to hold its
investment securities in loss positions until either the market value recovers
or the securities mature.
As of
September 30, 2008, Farmer Mac did not own any held-to-maturity
investments. As of September 30, 2008, Farmer Mac owned trading
investment securities that mature after five years with an amortized cost of
$188.6 million, a fair value of $171.0 million, and a weighted average yield of
8.04 percent. The amortized cost, fair value and weighted average
yield of investments by remaining contractual maturity for available-for-sale
investment securities as of September 30, 2008 are set forth
below. Asset- and mortgage-backed securities are included based on
their final maturities, although the actual maturities may differ due to
prepayments of the underlying assets or mortgages.
|
|
Investment Securities
Available-for-Sale
as of September 30,
2008
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Weighted Average Yield
|
|
|
|
(dollars
in thousands)
|
|
Due
within one year
|
|
$ |
324,565 |
|
|
$ |
311,122 |
|
|
|
2.91 |
% |
Due
after one year through five years
|
|
|
375,732 |
|
|
|
331,000 |
|
|
|
2.91 |
% |
Due
after five years through ten years
|
|
|
94,772 |
|
|
|
94,479 |
|
|
|
3.84 |
% |
Due
after ten years
|
|
|
577,721 |
|
|
|
560,654 |
|
|
|
3.92 |
% |
Total
|
|
$ |
1,372,790 |
|
|
$ |
1,297,255 |
|
|
|
|
|
Note
3.
|
Farmer
Mac Guaranteed Securities
|
The
following table sets forth information about on-balance sheet Farmer Mac
Guaranteed Securities as of September 30, 2008 and December 31,
2007.
|
|
September 30, 2008
|
|
|
|
Held-to-
Maturity
|
|
|
Available-
for-Sale
|
|
|
Trading
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I
|
|
$ |
- |
|
|
$ |
354,712 |
|
|
$ |
- |
|
|
$ |
354,712 |
|
Farmer
Mac II
|
|
|
- |
|
|
|
493,997 |
|
|
|
476,880 |
|
|
|
970,877 |
|
Farmer
Mac Guaranteed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
- Rural Utilities
|
|
|
- |
|
|
|
401,485 |
|
|
|
436,331 |
|
|
|
837,816 |
|
Total
|
|
$ |
- |
|
|
$ |
1,250,194 |
|
|
$ |
913,211 |
|
|
$ |
2,163,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
$ |
- |
|
|
$ |
1,238,000 |
|
|
$ |
898,986 |
|
|
$ |
2,136,986 |
|
Unrealized
gains
|
|
|
- |
|
|
|
14,089 |
|
|
|
14,228 |
|
|
|
28,317 |
|
Unrealized
losses
|
|
|
- |
|
|
|
(1,895 |
) |
|
|
(3 |
) |
|
|
(1,898 |
) |
Fair
value
|
|
$ |
- |
|
|
$ |
1,250,194 |
|
|
$ |
913,211 |
|
|
$ |
2,163,405 |
|
|
|
December 31, 2007
|
|
|
|
Held-to-
Maturity
|
|
|
Available-
for-Sale
|
|
|
Trading
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I
|
|
$ |
33,961 |
|
|
$ |
338,958 |
|
|
$ |
- |
|
|
$ |
372,919 |
|
Farmer
Mac II
|
|
|
925,904 |
|
|
|
- |
|
|
|
- |
|
|
|
925,904 |
|
Total
|
|
$ |
959,865 |
|
|
$ |
338,958 |
|
|
$ |
- |
|
|
$ |
1,298,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
$ |
959,865 |
|
|
$ |
334,592 |
|
|
$ |
- |
|
|
$ |
1,294,457 |
|
Unrealized
gains
|
|
|
628 |
|
|
|
5,412 |
|
|
|
- |
|
|
|
6,040 |
|
Unrealized
losses
|
|
|
(1,562 |
) |
|
|
(1,046 |
) |
|
|
- |
|
|
|
(2,608 |
) |
Fair
value
|
|
$ |
958,931 |
|
|
$ |
338,958 |
|
|
$ |
- |
|
|
$ |
1,297,889 |
|
Effective
September 30, 2008, Farmer Mac transferred $518.6 million of its Farmer Mac
Guaranteed Securities classified as held-to-maturity to
available-for-sale. This transfer resulted in the recognition of
unrealized gains of $2.3 million and unrealized losses of $1.4
million. This change in classification and the resulting recognition
of unrealized gains and losses do not affect Farmer Mac’s regulatory core
capital. Farmer
Mac transferred these assets since the Corporation is evaluating strategies to
further strengthen its capital position, including for example, additional asset
sales and common and preferred equity offerings. Farmer Mac does not
currently classify any Farmer Mac Guaranteed Securities or investment securities
as held-to-maturity.
The
temporary unrealized gains and losses presented above are principally due to
changes in market interest rates from the date of acquisition to September 30,
2008 and December 31, 2007, as applicable. The available-for-sale
unrealized losses for Farmer Mac I Guaranteed Securities were on 5 and 9
individual securities as of September 30, 2008 and December 31, 2007,
respectively.
As of
September 30, 2008, one of the available-for-sale Farmer Mac Guaranteed
Securities in a loss position had been in a loss position for more than 12
months and had a total unrealized loss of less than one thousand
dollars. As of December 31, 2007, four of the available-for-sale
Farmer Mac Guaranteed Securities in loss positions had been in loss positions
for more than 12 months and had a total unrealized loss of $1.0
million. The unrealized losses on those securities are due to overall
changes in market interest rates. As of September 30, 2008 and
December 31, 2007, all of the available-for-sale securities with unrealized
losses aged greater than 12 months have losses that are less than one percent
and two percent of the amortized security cost, respectively. Farmer
Mac believes that all aged unrealized losses are recoverable within a reasonable
period of time by way of changes in market interest
rates. Accordingly, Farmer Mac has concluded that none of the
unrealized losses on its available-for-sale Farmer Mac Guaranteed Securities
represent other-than-temporary impairment as of September 30, 2008 or December
31, 2007. Farmer Mac has the intent and ability to hold its
on-balance sheet Farmer Mac Guaranteed Securities until either the market value
recovers or the securities mature.
The table
below presents a sensitivity analysis for the Corporation’s on-balance sheet
Farmer Mac Guaranteed Securities as of September 30, 2008.
|
|
September 30, 2008
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Fair
value of beneficial interests retained in Farmer Mac
Guaranteed Securities
|
|
$ |
2,163,405 |
|
|
|
|
|
|
Weighted-average
remaining life (in years)
|
|
|
4.1 |
|
|
|
|
|
|
Weighted-average
prepayment speed (annual rate)
|
|
|
6.6 |
% |
Effect
on fair value of a 10% adverse change
|
|
$ |
(24 |
) |
Effect
on fair value of a 20% adverse change
|
|
$ |
(25 |
) |
|
|
|
|
|
Weighted-average
discount rate
|
|
|
4.7 |
% |
Effect
on fair value of a 10% adverse change
|
|
$ |
(27,946 |
) |
Effect
on fair value of a 20% adverse change
|
|
$ |
(56,338 |
) |
These
sensitivities are hypothetical. Changes in fair value based on 10
percent or 20 percent variations in assumptions generally cannot be extrapolated
because the relationship of the change in assumptions to the change in fair
value may not be linear. Also, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated
without changing any other assumption. In fact, changes in one factor
may result in changes in another (for example, increases in market interest
rates may result in lower prepayments), which might amplify or counteract the
sensitivities.
The table
below presents the outstanding principal balances for Farmer Mac Guaranteed
Securities, loans, and LTSPCs as of September 30, 2008 and December 31,
2007.
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
|
(in
thousands)
|
|
On-balance
sheet assets:
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
Loans
|
|
$ |
689,539 |
|
|
$ |
762,319 |
|
Guaranteed
Securities
|
|
|
343,370 |
|
|
|
367,578 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
964,112 |
|
|
|
921,802 |
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
|
|
824,941 |
|
|
|
- |
|
Total
on-balance sheet
|
|
$ |
2,821,962 |
|
|
$ |
2,051,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet assets:
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
$ |
2,264,880 |
|
|
$ |
1,948,941 |
|
AgVantage
|
|
|
2,945,000 |
|
|
|
2,500,000 |
|
Guaranteed
Securities
|
|
|
1,746,958 |
|
|
|
2,018,300 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
31,527 |
|
|
|
24,815 |
|
Total
off-balance sheet
|
|
$ |
6,988,365 |
|
|
$ |
6,492,056 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,810,327 |
|
|
$ |
8,543,755 |
|
When
particular criteria are met, such as the default of the borrower, Farmer Mac
becomes entitled to purchase the defaulted loans underlying Farmer Mac
Guaranteed Securities (commonly referred to as “removal-of-account”
provisions). Farmer Mac records these loans at their fair values in
the condensed consolidated financial statements during the period in which
Farmer Mac becomes entitled to purchase the loans and therefore regains
effective control over the transferred loans. Fair values are
determined by current collateral valuations or management’s estimate of
discounted collateral values, and represent the cash flows expected to be
collected. Farmer Mac records, at acquisition, the difference between
each loan’s acquisition cost and its fair value, if any, as a charge-off to the
reserve for losses. Subsequent to the purchase, such defaulted loans
are treated as nonaccrual loans and, therefore, interest is accounted for on the
cash basis. Any decreases in expected cash flows are recognized as
impairment. No impairment was recognized during the three and nine
months ended September 30, 2008 and 2007. The following table
presents information related to Farmer Mac’s acquisition of defaulted loans for
the three and nine months ended September 30, 2008 and 2007 and the outstanding
balances and carrying amounts of all such loans as of September 30, 2008 and
December 31, 2007, respectively.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
September 30,
2008
|
|
|
September 30,
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at acquisition date
|
|
$ |
557 |
|
|
$ |
2,428 |
|
|
$ |
1,746 |
|
|
$ |
3,911 |
|
Contractually
required payments receivable
|
|
|
597 |
|
|
|
2,535 |
|
|
|
1,950 |
|
|
|
4,065 |
|
Impairment
recognized subsequent to acquisition
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
As of
|
|
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Outstanding
balance
|
|
$ |
31,774 |
|
|
$ |
38,621 |
|
Carrying
amount
|
|
|
27,967 |
|
|
|
34,541 |
|
Net
credit losses for the nine months ended September 30, 2008 and 2007 and 90-day
delinquencies as of September 30, 2008, December 31, 2007 and September 30, 2007
for Farmer Mac Guaranteed Securities, loans and LTSPCs are presented in the
table below. Information is not presented for loans underlying
Pre-1996 Act Farmer Mac I Guaranteed Securities, AgVantage securities, Farmer
Mac Guaranteed Securities – Rural Utilities or Farmer Mac II Guaranteed
Securities. Pre-1996 Act Farmer Mac I Guaranteed Securities are
supported by unguaranteed first loss subordinated interests, which are expected
to exceed the estimated credit losses on those loans. Through
September 30, 2008, Farmer Mac had charged off $0.4 million related to one loan
underlying Pre-1996 Act Farmer Mac I Guaranteed Securities. The
remaining $1.7 million of Pre-1996 Act Farmer Mac I Guaranteed Securities
represent interests in seasoned performing loans with low loan-to-value
ratios. Farmer Mac does not expect to incur any further losses on the
remaining Pre-1996 Act Farmer Mac I Guaranteed Securities in the
future. Each AgVantage security is a general obligation of an issuing
institution approved by Farmer Mac and is collateralized by eligible mortgage
loans. As of September 30, 2008, there were no probable losses
inherent in Farmer Mac’s AgVantage securities due to the high credit quality of
the obligors, as well as the underlying collateral. As of September
30, 2008, Farmer Mac had not experienced any credit losses on any AgVantage
Securities and does not expect to incur any such losses in the
future. The guaranteed portions collateralizing Farmer Mac II
Guaranteed Securities are guaranteed by the USDA. Each USDA guarantee
is an obligation backed by the full faith and credit of the United
States. As of September 30, 2008, Farmer Mac had not experienced any
credit losses on any Farmer Mac II Guaranteed Securities and does not expect to
incur any such losses in the future. As of September 30, 2008, there
were no 90-day delinquencies, nor had Farmer Mac incurred any net credit losses,
on loans underlying Farmer Mac Guaranteed Securities – Rural
Utilities.
|
|
90-Day
Delinquencies (1)
|
|
|
Net
Credit Losses (2)
|
|
|
|
As
of September 30,
|
|
|
As
of December 31,
|
|
|
As
of September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
On-balance
sheet assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
9,327 |
|
|
$ |
10,024 |
|
|
$ |
16,407 |
|
|
$ |
92 |
|
|
$ |
29 |
|
Total
on-balance sheet
|
|
$ |
9,327 |
|
|
$ |
10,024 |
|
|
$ |
16,407 |
|
|
$ |
92 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
$ |
2,154 |
|
|
$ |
560 |
|
|
$ |
616 |
|
|
$ |
- |
|
|
$ |
- |
|
Total
off-balance sheet
|
|
$ |
2,154 |
|
|
$ |
560 |
|
|
$ |
616 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
11,481 |
|
|
$ |
10,584 |
|
|
$ |
17,023 |
|
|
$ |
92 |
|
|
$ |
29 |
|
(1)
|
Includes
loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs that are 90 days or more past due, in foreclosure,
restructured after delinquency, and in bankruptcy, excluding
loansperforming
under either their original loan terms or a court-approved bankruptcy
plan.
|
(2)
|
Includes
loans and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities and LTSPCs.
|
Note
4.
|
Comprehensive
(Loss)/Income
|
Comprehensive
(loss)/income represents all changes in stockholders’ equity except those
resulting from investments by or distributions to stockholders, and is comprised
primarily of net income and unrealized gains and losses on securities
available-for-sale, net of related taxes. The following table sets
forth Farmer Mac’s comprehensive (loss)/income for the three and nine months
ended September 30, 2008 and 2007:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
September 30,
2008
|
|
|
September 30,
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)/income
|
|
$ |
(105,558 |
) |
|
$ |
(8,010 |
) |
|
$ |
(91,264 |
) |
|
$ |
15,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding gains/(losses)
|
|
|
(57,247 |
) |
|
|
3,539 |
|
|
|
(64,086 |
) |
|
|
(3,413 |
) |
Reclassification
for realized net losses/(gains)
|
|
|
33,097 |
|
|
|
(57 |
) |
|
|
36,473 |
|
|
|
(70 |
) |
Net
change from available-for-sale securities (1)
|
|
|
(24,150 |
) |
|
|
3,482 |
|
|
|
(27,613 |
) |
|
|
(3,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
for amortization of SFAS 133transition adjustment (2)
|
|
|
66 |
|
|
|
88 |
|
|
|
222 |
|
|
|
297 |
|
Other
comprehensive (loss)/income, net of tax
|
|
|
(24,084 |
) |
|
|
3,570 |
|
|
|
(27,391 |
) |
|
|
(3,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(loss)/income
|
|
$ |
(129,642 |
) |
|
$ |
(4,440 |
) |
|
$ |
(118,655 |
) |
|
$ |
12,215 |
|
(1)
|
Unrealized
(losses)/gains on available-for-sale securities is shown net of income tax
(expense)/benefit of $13.0 million and $(1.9) million for the three months
ended September 30, 2008 and 2007, respectively, and $14.9 million and
$1.9 million for the nine months ended September 30, 2008 and 2007,
respectively.
|
(2)
|
Amortization
of SFAS 133 transition adjustment is shown net of income tax expense of
$36,000 and $47,000 for the three months ended September 30, 2008 and
2007, respectively, and $0.1 million and $0.2 million for the nine months
ended September 30, 2008 and 2007,
respectively.
|
The
following table presents Farmer Mac’s accumulated other comprehensive loss as of
September 30, 2008 and December 31, 2007 and changes in the components of
accumulated other comprehensive loss for the nine months ended September 30,
2008 and the year ended December 31, 2007.
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(in
thousands)
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(2,320 |
) |
|
$ |
5,802 |
|
Reclassification
adjustment to retained earnings for SFAS 159 adoption, net of
tax
|
|
|
(11,237 |
) |
|
|
- |
|
Adjusted
beginning balance
|
|
|
(13,557 |
) |
|
|
5,802 |
|
Net
unrealized losses, net of tax
|
|
|
(27,613 |
) |
|
|
(8,122 |
) |
Ending
balance
|
|
$ |
(41,170 |
) |
|
$ |
(2,320 |
) |
|
|
|
|
|
|
|
|
|
Financial
derivatives:
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(473 |
) |
|
$ |
(846 |
) |
Amortization
of SFAS 133 transition adjustment on financial derivatives, net of
tax
|
|
|
222 |
|
|
|
373 |
|
Ending
balance
|
|
$ |
(251 |
) |
|
$ |
(473 |
) |
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss, net of tax
|
|
$ |
(41,421 |
) |
|
$ |
(2,793 |
) |
Note
5.
|
Off-Balance
Sheet Guarantees and Long-Term Standby Purchase
Commitments
|
Overview
Farmer
Mac offers approved lenders two credit enhancement alternatives to increase
their liquidity or lending capacity while retaining the cash flow benefits of
their loans: (1) Farmer Mac Guaranteed Securities, which are
available through each of the Farmer Mac I, Farmer Mac II and Rural Utilities
programs; and (2) LTSPCs, which are available only through the Farmer Mac I and
Rural Utilities programs. Both of these alternatives result in the
creation of off-balance sheet obligations for Farmer Mac in the ordinary course
of its business. Farmer Mac accounts for these transactions and other
financial guarantees in accordance with FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (“FIN 45”). In accordance with FIN 45,
Farmer Mac records, at the inception of a guarantee, a liability for the fair
value of its obligation to stand ready to perform under the terms of each
guarantee and an asset that is equal to the fair value of the fees that will be
received over the life of each guarantee. The fair values of the
guarantee obligation and asset at inception are based on the present value of
expected cash flows using management’s best estimate of certain key assumptions,
including prepayment speeds, forward yield curves and discount rates
commensurate with the risks involved. Because the cash flows of these
instruments may be interest rate path dependent, these values and projected
discount rates are derived using a Monte Carlo simulation model. The
guarantee obligation and corresponding asset are subsequently amortized into
guarantee and commitment fee income in relation to the decline in the unpaid
principal balance on the underlying agricultural real estate mortgage and rural
utilities loans.
Off-Balance
Sheet Farmer Mac Guaranteed Securities
Eligible
loans and other eligible assets may be placed into trusts that are used as
vehicles for the securitization of the transferred assets and the Farmer
Mac-guaranteed beneficial interests in the trusts are sold to
investors. During third quarter 2008, Farmer Mac transferred $77.3
million of agricultural mortgage loans held on balance sheet into a trust as
part of a securitization transaction in which guaranteed agricultural
mortgage-backed securities were sold to a related party. Gains of $28
thousand were recognized as “Gains on sale of Farmer Mac Guaranteed Securities”
in the condensed consolidated statements of operations in connection with that
transaction. The following table summarizes cash flows received from
and paid to trusts used for securitizations:
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
|
(in
thousands)
|
|
Proceeds
from new securitizations
|
|
$ |
79,757 |
|
|
$ |
1,324 |
|
Fair
value at acquisition date
|
|
|
9,433 |
|
|
|
8,755 |
|
Purchases
of assets from the trusts
|
|
|
648 |
|
|
|
1,562 |
|
Servicing
advances
|
|
|
7 |
|
|
|
29 |
|
Repayment
of servicing advances
|
|
|
2 |
|
|
|
24 |
|
The
following table presents the maximum principal amount of potential undiscounted
future payments that Farmer Mac could be required to make under all off-balance
sheet Farmer Mac Guaranteed Securities as of September 30, 2008 and December 31,
2007, not including offsets provided by any recourse provisions, recoveries from
third parties or collateral for the underlying loans.
Outstanding
Balance of Off-Balance Sheet
Farmer Mac Guaranteed
Securities
|
|
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
Fair
value at acquisition date
|
|
(in
thousands)
|
|
Post-1996
Act Farmer Mac I Guaranteed Securities
|
|
$ |
4,691,958 |
|
|
$ |
4,518,300 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
31,527 |
|
|
|
24,815 |
|
Total
Farmer Mac I and II
|
|
$ |
4,723,485 |
|
|
$ |
4,543,115 |
|
For those
securities issued or modified on or after January 1, 2003, Farmer Mac has
recorded a liability for its obligation to stand ready under the guarantee in
the guarantee and commitment obligation on the condensed consolidated balance
sheet. This liability approximated $37.5 million as of September 30,
2008 and $36.4 million as of December 31, 2007. As of September 30,
2008, the weighted-average remaining maturity of all loans underlying
off-balance sheet Farmer Mac Guaranteed Securities, excluding AgVantage
securities, was 14.0 years.
Long-Term
Standby Purchase Commitments (LTSPCs)
An LTSPC
is a commitment by Farmer Mac to purchase on one or more unspecified future
dates, from a segregated pool of eligible loans, either: (a) loans delinquent
120 days or more at par plus accrued interest, or (b) performing loans at a
mark-to-market negotiated price. As consideration for its assumption
of the credit risk on loans underlying an LTSPC, Farmer Mac receives a
commitment fee payable monthly in arrears in an amount approximating what would
have been the guarantee fee if the transaction were structured as a swap for
Farmer Mac Guaranteed Securities.
As of
September 30, 2008 and December 31, 2007, the maximum principal amount of
potential undiscounted future payments that Farmer Mac could be requested to
make under all LTSPCs, not including offsets provided by any recourse
provisions, recoveries from third parties or collateral for the underlying
loans, was $2.3 billion and $1.9 billion, respectively.
As of
September 30, 2008, the weighted-average remaining maturity of all loans
underlying LTSPCs was 15.0 years. For those LTSPCs issued or modified
on or after January 1, 2003, Farmer Mac has recorded a liability for its
obligation to stand ready under the commitment in the guarantee and commitment
obligation on the condensed consolidated balance sheet. This
liability approximated $18.1 million as of September 30, 2008 and $15.7 million
as of December 31, 2007.
Note
6.
|
Stockholders’
Equity and Mezzanine Equity
|
Common
Stock
Farmer
Mac has three classes of common stock outstanding:
·
|
Class
A Voting Common Stock, which may be held only by banks, insurance
companies and other financial institutions or similar entities that are
not institutions of the Farm Credit System. By federal statute,
no holder of Class A Voting Common Stock may directly or indirectly be a
beneficial owner of more than 33 percent of the outstanding shares of that
class of stock;
|
·
|
Class
B Voting Common Stock, which may be held only by institutions of the Farm
Credit System. There are no restrictions on the maximum
holdings of Class B Voting Common Stock;
and
|
·
|
Class
C Non-Voting Common Stock, which has no ownership
restrictions.
|
Since
fourth quarter 2004, Farmer Mac has paid a quarterly dividend of $0.10 per share
on all classes of the Corporation’s common stock. Farmer Mac’s
ability to declare and pay a dividend could be restricted if it failed to comply
with regulatory capital requirements.
Preferred
Stock
Farmer
Mac has two classes of preferred stock outstanding. The first, Series
A, is permanent equity and is a component of Stockholders’ Equity on the
condensed consolidated balance sheets. The second, newly issued on
September 30, 2008, Series B, is temporary equity and is reported as Mezzanine
Equity on the condensed consolidated balance sheets. This preferred
stock is temporary equity because it contains redemption features that, although
remote, are not solely within the control of Farmer Mac. Farmer Mac’s
ability to declare and pay dividends on its outstanding preferred stock could be
restricted if it failed to comply with regulatory capital
requirements. Both the Series A and Series B Preferred Stock are
components of Farmer Mac’s core capital for regulatory and statutory capital
compliance measurements.
Series A Preferred
Stock
Since May
6, 2002, the Corporation has had outstanding 700,000 shares of 6.40 percent
Cumulative Preferred Stock, Series A (the “Series A Preferred Stock”), which has
a redemption price and liquidation preference of $50.00 per share, plus accrued
and unpaid dividends. The Series A Preferred Stock does not have a
maturity date. Beginning on June 30, 2012, Farmer Mac has the option
to redeem the Series A Preferred Stock at any time, in whole or in part, at the
redemption price of $50.00 per share, plus accrued and unpaid dividends through
and including the redemption date. Farmer Mac pays cumulative
dividends on the Series A Preferred Stock quarterly in arrears out of legally
available funds when and if declared by the board of directors. The
costs of issuing the Series A Preferred Stock were charged to additional paid-in
capital. The Series A Preferred Stock ranks junior to the Series B
Preferred Stock with respect to dividends, distributions upon a change in
control, liquidation, and dissolution or winding up of Farmer Mac.
Series B Preferred
Stock
On
September 30, 2008, Farmer Mac sold 60,000 shares of its newly issued Series B-1
Senior Cumulative Perpetual Preferred Stock (“Series B-1”) and 5,000 shares of
its newly issued Series B-2 Senior Cumulative Perpetual Preferred Stock (“Series
B-2”), each having a par value of $1.00 per share and an initial liquidation
preference of $1,000 per share (subject to adjustment of such fixed dollar
amount for any stock splits, stock dividends, combinations, recapitalizations or
similar transactions) (collectively, the “Series B Preferred Stock”) for an
aggregate purchase price of $65.0 million, or $1,000 per
share. Farmer Mac incurred $4.0 million of direct costs related to
the issuance of the Series B Preferred Stock, which reduced the amount of
mezzanine equity recorded as of September 30, 2008.
The
Series B Preferred Stock ranks senior to Farmer Mac’s outstanding Class A Voting
Common Stock, Class B Voting Common Stock, Class C Non-Voting Common Stock,
Series A Preferred Stock and any other class of capital stock issuable in the
future with respect to dividends, distributions upon a change in control,
liquidation, and dissolution or winding up of Farmer Mac. Series B-1
and Series B-2 rank pari
passu with one another.
Dividends
on the Series B Preferred Stock will compound quarterly at an annual rate of 10
percent of the then-applicable Liquidation Preference (as defined below) per
share. The annual rate will increase to 12 percent from and after the
period beginning October 1, 2009, 14 percent from and after the period beginning
October 1, 2010 and 16 percent from and after the period beginning October 1,
2011. Dividends on the Series B Preferred Stock will accrue and
cumulate from September 30, 2008 whether or not declared by Farmer Mac’s Board
of Directors (the “Board”) and will be payable quarterly in arrears out of
legally available funds when and as declared by the Board on each dividend
payment date, beginning December 31, 2008. Farmer Mac may pay
dividends on the Series B Preferred Stock without paying dividends on any
outstanding class or series of stock that ranks junior to the Series B Preferred
Stock.
Farmer
Mac has the right, but not the obligation, to redeem all, but not less than all,
of the issued and outstanding shares of Series B Preferred Stock at a price
equal to the then-applicable Liquidation Preference amount beginning nine months
from September 30, 2008 and on each subsequent dividend payment
date. Farmer Mac must redeem all, but not less than all, of the
outstanding shares of Series B Preferred Stock at a price equal to the
then-applicable Liquidation Preference amount under specified circumstances,
including (i) in the event that any indebtedness of Farmer Mac or its
subsidiaries (“Farmer Mac Debt”) becomes or is declared due and payable prior to
the stated maturity thereof or is not paid when it becomes due and payable, (ii)
an event of default occurs with respect to any Farmer Mac Debt, or (iii) Farmer
Mac becomes bankrupt or insolvent or a receiver or conservator is appointed for
Farmer Mac. The redemption price for any shares of Series B Preferred
Stock redeemed by Farmer Mac will be payable in cash equal to the original issue
price of the Series B Preferred Stock ($1,000 per share), plus all accrued but
unpaid dividends (the “Liquidation Preference”) or, at the election of Farmer
Mac, payable in securities and loans that are qualified under the Farmer Mac I
or Farmer Mac II programs or other assets acceptable to the holders of the
Series B Preferred Stock.
Upon a
change in control of Farmer Mac, holders of the Series B Preferred Stock will be
entitled to receive an amount in cash equal to the Liquidation
Preference. Except as required by applicable law, the holders of the
Series B Preferred Stock are not entitled to any voting rights.
Statutory
and Regulatory Capital Requirements
Farmer
Mac is subject to, and as of September 30, 2008 was in compliance with, its
three statutory and regulatory capital requirements:
·
|
Minimum
capital – Farmer Mac’s minimum capital level is equal to the sum of 2.75
percent of Farmer Mac’s aggregate on-balance sheet assets, as calculated
for regulatory purposes, plus 0.75 percent of the aggregate off-balance
sheet obligations of Farmer Mac, including Farmer Mac Guaranteed
Securities and LTSPCs;
|
·
|
Critical
capital – Farmer Mac’s critical capital level is equal to 50 percent of
the minimum capital requirement at that time;
and
|
·
|
Risk-based
capital – FCA has established a risk-based capital stress test for Farmer
Mac.
|
As of
September 30, 2008, Farmer Mac’s minimum and critical capital requirements were
$182.3 million and $91.2 million, respectively, and Farmer Mac’s core capital
level was $212.3 million, $30.0 million above the minimum capital requirement
and $121.2 million above the critical capital requirement. As of
December 31, 2007, Farmer Mac’s core capital of $226.4 million exceeded the
minimum and critical capital requirements by $40.4 million and $133.4 million,
respectively.
Based on
the risk-based capital stress test, Farmer Mac’s risk-based capital requirement
as of September 30, 2008 was $52.2 million and Farmer Mac’s regulatory capital
(core capital plus the allowance for losses) of $216.8 million exceeded that
requirement by approximately $164.6 million. Farmer Mac’s risk-based
capital requirement as of December 31, 2007 was $42.8 million and Farmer Mac’s
regulatory capital of $230.3 million exceeded that amount by approximately
$187.5 million.
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Financial
information is consolidated to include the accounts of Farmer Mac and its
wholly-owned subsidiary, Farmer Mac Mortgage Securities
Corporation.
This
discussion and analysis of financial condition and results of operations should
be read together with: (1) the interim unaudited condensed
consolidated financial statements and the related notes that appear elsewhere in
this report; and (2) Farmer Mac’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2007.
The
discussion below is not necessarily indicative of future results.
Special Note Regarding
Forward-Looking Statements
Some
statements made in this report are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 pertaining to
management’s current expectations as to Farmer Mac’s future financial results,
business prospects and business developments. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
typically are accompanied by, and identified with, such terms as “anticipates,”
“believes,” “expects,” “intends,” “should” and similar phrases. The
following management’s discussion and analysis includes forward-looking
statements addressing Farmer Mac’s:
|
·
|
prospects
for earnings;
|
|
·
|
prospects
for growth in loan purchase, guarantee, securitization and LTSPC
volume;
|
|
·
|
trends
in net interest income;
|
|
·
|
trends
in portfolio credit quality and provisions for
losses;
|
|
·
|
trends
in non-program investments;
|
|
·
|
changes
in capital position; and
|
|
·
|
other
business and financial matters.
|
Management’s
expectations for Farmer Mac’s future necessarily involve a number of assumptions
and estimates and the evaluation of risks and uncertainties. Various
factors or events could cause Farmer Mac’s actual results to differ materially
from the expectations as expressed or implied by the forward-looking statements,
including the factors discussed under “Risk Factors” in Part I, Item 1A of
Farmer Mac’s Annual Report on Form 10-K for the year ended December 31, 2007 and
under “Risk Factors” in Part II, Item 1A of this report, as well as,
uncertainties regarding:
|
·
|
the
ability of Farmer Mac to increase its capital in an amount sufficient to
enable it to continue to operate profitably and provide a secondary market
for agricultural mortgage and rural utilities
loans;
|
|
·
|
the
availability of reasonable rates and terms of debt financing to Farmer
Mac;
|
|
·
|
fluctuations
in the fair value of assets held by Farmer Mac, particularly in volatile
markets;
|
|
·
|
increases
in general and administrative expenses attributable to changes in the
business and regulatory environment, including the hiring of additional
personnel with expertise in key functional
areas;
|
|
·
|
the
rate and direction of development of the secondary market for agricultural
mortgage and rural utilities loans, including lender interest in Farmer
Mac credit products and the Farmer Mac secondary
market;
|
|
·
|
the
general rate of growth in agricultural mortgage and rural utilities
indebtedness;
|
|
·
|
borrower
preferences for fixed-rate agricultural mortgage
indebtedness;
|
|
·
|
legislative
or regulatory developments that could affect Farmer
Mac;
|
|
·
|
the
willingness of investors to invest in Farmer Mac Guaranteed Securities;
and
|
|
·
|
developments
in the financial markets, including possible investor, analyst and rating
agency reactions to events involving GSEs, including Farmer
Mac.
|
In light
of these potential risks and uncertainties, no undue reliance should be placed
on any forward-looking statements expressed in this
report. Furthermore, Farmer Mac undertakes no obligation to release
publicly the results of revisions to any forward-looking statements that may be
made to reflect new information or any future events or circumstances, except as
otherwise mandated by the SEC.
Critical Accounting Policies
and Estimates
The
critical accounting policies that are both important to the portrayal of Farmer
Mac’s financial condition and results of operations and require complex,
subjective judgments are the accounting policies for the allowance for losses,
other-than-temporary impairment of investment securities and fair value
measurements.
Allowance
for Losses. For a discussion
of Farmer Mac’s accounting policy for the allowance for losses and the related
use of estimates and assumptions that affect the amounts reported in the
condensed consolidated financial statements and related notes for the periods
presented, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Policy and Estimates” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007,
as filed with the SEC on March 17, 2008.
Other-than-Temporary
Impairment of Investment Securities. Other-than-temporary
impairment occurs when the fair value of an available-for-sale security is below
its amortized cost, and it is determined that it is not probable that all
contractual principal and interest payments will be collected or that management
does not have the intent and ability to hold the security until it recovers to
its amortized cost or is repaid in full. Many factors considered in
this determination involve significant judgment, including recent events
specific to the issuer or the related industry, changes in external credit
ratings, the severity and duration of the impairment, the probability that all
amounts contractually due will be collected, and the intent and ability to hold
the securities until recovery or repayment.
Generally,
changes in the fair value of available-for-sale securities resulting from
changes in interest rates are determined to be temporary if management has the
positive intent and ability to hold the security until the earlier of the
recovery of the unrealized loss amount or maturity. If the decision
is made to sell a security or that a security may be sold in the future prior to
recovery, the security is determined to be other-than-temporarily impaired in
the period of the decision. For an available-for-sale security in an
unrealized loss position due to factors other than changes in interest rates,
such as deterioration in the credit of the issuer or the general widening of
credit spreads, management considers the probability that all contractual cash
flows will be collected. Generally, if management believes that it is
probable that all contractual cash flows will be collected and management has
the positive intent and ability to hold the security until recovery or maturity,
the unrealized loss is determined to be
temporary. Other-than-temporary impairment charges may subsequently
be recovered if contractual principal and interest payments are collected or if
the security is subsequently sold at an amount greater than its carrying
value.
Fair
Value Measurement. A significant
portion of Farmer Mac’s assets consists of financial instruments that are
measured at fair value in the condensed consolidated balance
sheets. For financial instruments that are complex in nature or for
which observable inputs are not available, the measurement of fair value
requires significant management judgments and assumptions. These
judgments and assumptions, as well as changes in market conditions, may have a
material impact on the condensed consolidated balance sheets and statements of
operations. While Farmer Mac’s fair value measurement methods had not
changed from reporting periods prior to 2008, additional disclosures of such
measurement methods are required by the adoption of SFAS 157 as described in
Note 1(c) to the condensed consolidated financial statements.
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in a transaction between market participants at the
measurement date. The amount of judgment involved in measuring the
fair value of a financial instrument is affected by a number of factors, such as
the type of investment, the liquidity of the markets for the instrument and the
contractual characteristics of the instrument. Farmer Mac uses one of
the following three practices for estimating fair value, the selection of which
is based on the reliability and availability of relevant market data: (1) quoted
market prices for identical instruments, (2) quoted prices, from multiple third
parties, in markets that are not active or for which all significant inputs are
observable, either directly or indirectly, or (3) analytical models that employ
techniques such as discounted cash flow approach and that include market-based
assumptions such as prepayment speeds, forward yield curves and discount rates
commensurate with the risks involved. Price transparency tends to be
limited in less liquid markets where quoted market prices or observable market
data may not be available. Farmer Mac refines and enhances its
valuation methodologies to correlate more closely to observable market
data. When observable market prices or data are not readily available
or do not exist, the estimation of fair value may require significant management
judgment and assumptions. The estimates are subject to change in
future reporting periods if such conditions and information
change. For example, volatility in credit markets could result in
wider credit spreads, which may change fair value measurements for certain
financial instruments.
Farmer
Mac’s assets and liabilities presented at fair value in the condensed
consolidated balance sheet on a recurring basis include:
|
·
|
Farmer
Mac Guaranteed Securities classified as available-for-sale and trading;
and
|
The
changes in fair value from period to period are recorded either in the condensed
consolidated balance sheet to accumulated other comprehensive income/(loss) or
in the condensed consolidated statement of operations as gains/(losses) on
financial derivatives or gains/(losses) on trading assets.
As of
September 30, 2008, Farmer Mac’s assets and liabilities recorded at fair value
included financial instruments valued at $2.6 billion whose fair values were
estimated by management in the absence of readily determinable fair values
(i.e., Level 3). These financial instruments measured as Level 3
represented 56 percent of total assets and 69 percent of financial instruments
measured at fair value as of September 30, 2008. Assets underlying
these financial instruments measured as Level 3 primarily include the
following:
Type of Financial
Instrument
|
Underlying Assets
|
Farmer Mac I Guaranteed
Securities
|
Agricultural mortgage loans eligible under Farmer
Mac’s credit underwriting, collateral valuation, documentation and other
standards.
|
Farmer Mac II Guaranteed
Securities
|
Portions of loans guaranteed by USDA pursuant to
the Consolidated Farm Rural Development Act.
|
Farmer Mac Guaranteed Securities – Rural
Utilities
|
General obligations of the National Rural
Utilities Cooperative Finance Corporation (“Nat Rural”) and/or loans made
to rural electric distribution cooperatives by Nat
Rural.
|
Auction-rate certificates
(“ARCs”)
|
Guaranteed student loans that are backed by the
full faith and credit of the United States.
|
GSE preferred stock
|
Preferred stock investments in CoBank, ACB and AgFirst Farm Credit Bank,
institutions of the Farm Credit System, a government-sponsored
enterprise.
|
Due to
the lack of an active market for Farmer Mac’s investments in GSE preferred stock
issued by CoBank, ACB and AgFirst Farm Credit Bank with par values of $88.5
million and $88.0 million, respectively, during third quarter 2008 Farmer Mac
transferred both of those securities from Level 2 to Level 3 and recorded them
at fair values of $84.8 million and $81.9 million, respectively.
Results of
Operations
Overview. The current
world-wide credit market disruptions and economic slowdown have recently caused
unprecedented financial market volatility, which adversely affected Farmer Mac’s
financial results and capital position. Farmer Mac’s net loss to
common stockholders for third quarter 2008 was $106.1 million or $10.55 per
diluted common share, compared to a net loss of $8.6 million or $0.82 per
diluted common share for third quarter 2007. The net loss to common
stockholders for the nine months ended September 30, 2008 was $93.0 million or
$9.33 per diluted common share, compared to net income of $13.7 million or $1.29
per diluted common share for the nine months ended September 30,
2007.
The most
significant factor affecting Farmer Mac’s disappointing results for third
quarter 2008 was the historic turmoil in the nation’s financial
markets. Among other major developments, Fannie Mae entered into
conservatorship on September 7, 2008 and Lehman Brothers Holdings Inc. (“Lehman
Brothers”) declared bankruptcy on September 15, 2008. At the time of
these events, Farmer Mac held in its investment portfolio $50.0 million Fannie
Mae floating rate preferred stock and $60.0 million of Lehman Brothers senior
debt securities. As a result of these events, Farmer Mac recognized a
total of $97.1 million other-than-temporary impairment charges on these holdings
of $44.7 million and $52.4 million, respectively, during third quarter
2008. Farmer Mac had previously recorded a $5.3 million impairment
charge on the Fannie Mae preferred stock during second quarter
2008. If these two securities experience further price declines
subsequent to September 30, 2008, additional impairment losses would be
recognized. These two investments were acquired in 2005 and 2007,
respectively, as part of the Corporation’s liquidity investment portfolio, which
is designed to provide liquidity in the event of a market disruption, facilitate
Farmer Mac’s regular debt issuance program, and provide net interest income to
support Farmer Mac’s Congressional mission. Following the recognition
of these significant losses and a subsequent change in management, Farmer Mac is
revising its liquidity investment portfolio guidelines and its related ongoing
funding strategies with the goal of minimizing the Corporation’s exposure to
financial market volatility and preserving capital.
These
other-than-temporary impairment charges directly reduced the Corporation’s
retained earnings, and therefore its core capital, by $97.1 million in third
quarter 2008. Core capital is the regulatory measure by which Farmer
Mac’s compliance with its statutory minimum capital requirement is
determined. These significant reductions in core capital caused
Farmer Mac to conclude that additional capital was necessary to maintain
compliance with its statutory minimum capital requirement. On
September 30, 2008, Farmer Mac issued $65.0 million of Series B Preferred Stock,
which is reported as Mezzanine Equity on the condensed consolidated balance
sheet and is a component of Farmer Mac’s core capital for statutory and
regulatory capital compliance purposes. As a result of the issuance
of the Series B Preferred Stock, as well as measures taken by Farmer Mac during
the quarter to reduce the level of total assets outstanding, Farmer Mac was in
compliance with all applicable capital requirements as of September 30, 2008,
with core capital exceeding the statutory minimum capital requirement by $30.0
million as of that date.
Those
impairment losses were not reduced by any related tax benefits because the
losses are capital losses and any tax benefits could only be realized to the
extent Farmer Mac would have offsetting capital gains. Farmer Mac
does not currently expect to produce sufficient capital gains to recognize any
material tax benefits related to these losses. Therefore, Farmer Mac
has recorded a valuation allowance against the deferred tax benefit resulting
from these losses. As of September 30, 2008, that deferred tax asset
valuation allowance totaled $35.4 million.
Farmer
Mac recorded losses on financial derivatives used to manage interest rate risk
of $19.0 million and $29.7 million during the three and nine month periods ended
September 30, 2008, respectively. Comparable losses for the three and
nine month periods ended September 30, 2007 were $24.9 million and $9.0 million,
respectively. Losses on trading assets totaled $14.5 million and
$21.7 million for the three and nine month periods ended September 30, 2008,
respectively. Farmer Mac incurred no gains or losses on trading
assets for the three months ended September 30, 2007 and $0.1 million of losses
for the nine month period then ended.
On
January 1, 2008, with the adoption of SFAS 159, Farmer Mac elected to measure
$600.5 million of investment securities and $427.3 million of Farmer Mac II
Guaranteed Securities at fair value, with changes in fair value reflected in
earnings as they occur. Upon adoption, Farmer Mac recorded a
cumulative effect of adoption adjustment of $12.1 million, net of tax, as an
increase to the beginning balance of retained earnings. During the
three and nine months ended September 30, 2008, Farmer Mac elected to measure
$39.2 million and $100.3 million, respectively of Farmer Mac II Guaranteed
Securities at fair value, with changes in fair value reflected in earnings as
they occur. All of these assets were selected for the fair value
option under SFAS 159 because they were funded or hedged principally with
financial derivatives and, therefore, it was expected that the changes in fair
value of the assets would provide partial economic and financial reporting
offsets to the related financial derivatives. Due to the significant
declines in the fair values of investment securities attributable to the
widening of credit spreads experienced during 2008, such financial reporting
offsets were not achieved. For the three and nine month periods ended
September 30, 2008, Farmer Mac recorded net losses on trading assets of $11.6
million and $18.6 million, respectively, for changes in fair values of the
assets selected for the fair value option.
Beyond
the impacts of other-than-temporary impairment charges on investment securities
and the changes in fair values of financial derivatives and assets recorded in
earnings pursuant to SFAS 133 and SFAS 159, there were positive developments in
Farmer Mac’s business. During third quarter 2008, Farmer Mac achieved
growth in its guarantee and commitment fees associated with its core business,
and Farmer Mac’s net interest income increased due to continued favorable
short-term borrowing costs. For the three and nine month periods
ended September 30, 2008, guarantee and commitment fees were $7.3 million and
$20.6 million, respectively, compared to $6.4 million and $18.6 million for the
comparable periods in 2007. As a result of Farmer Mac’s status as a
federally-chartered instrumentality of the United States, Farmer Mac has
maintained access to the capital markets at favorable
rates. Throughout 2008, Farmer Mac’s short-term funding spreads below
the corresponding London Interbank Offered Rate, or LIBOR, were significantly
more advantageous than historical levels. Consequently, Farmer Mac’s
net interest yield on investments and program assets was significantly higher
during 2008 than its net interest yields earned on such assets in its historical
experience. For the three and nine month periods ended September 30,
2008, net interest income including realized gains/losses on financial
derivatives were $11.3 million and $43.2 million, respectively, compared to $9.0
million and $27.7 million for the comparable periods in 2007. Given
the volatility in the debt markets, the federal government’s effective guarantee
of certain corporate debt and questions concerning the status of all GSEs, it is
uncertain whether Farmer Mac’s advantageous short-term borrowing costs will
continue and, if so, for how long.
Mortgages
and loans underlying Farmer Mac’s guarantees and commitments continue to perform
well, with delinquencies remaining at historically low levels consistent with
the continued strength of the U.S. agricultural economy. As of
September 30, 2008, Farmer Mac’s 90 day delinquencies (Farmer Mac I loans
purchased or placed under Farmer Mac I Guaranteed Securities or LTSPCs after
enactment of the 1996 Act that were 90 days or more past due, in foreclosure,
restructured after delinquency, or in bankruptcy, excluding loans performing
under either their original loan terms or a court-approved bankruptcy plan) were
$11.5 million, representing 0.23 percent of the principal balance of the
outstanding post-1996 Act Farmer Mac I portfolio (excluding AgVantage
securities), compared to $17.0 million (0.35 percent) as of September 30,
2007. As part of Farmer Mac’s continuing evaluation of the overall
credit quality of its portfolio, the state of the U.S. agricultural economy, the
continued upward trends in agricultural land values, and the level of Farmer
Mac’s outstanding guarantees and commitments, Farmer Mac determined that the
appropriate allowance for losses as of September 30, 2008 was $4.4 million,
which was 9 basis points relative to the outstanding post-1996 Act Farmer Mac I
portfolio (excluding AgVantage securities). The allowance for losses
was $3.9 million and 8 basis points as of both December 31, 2007 and September
30, 2007.
To assist
in the comparison of results to prior periods, the table below summarizes many
of the significant items discussed above as they relate to Farmer Mac’s results
of operations for the three and nine month periods ended September 30, 2008 and
2007 and reconciles those items as separate components of net (loss)/income
available to common stockholders, distinct from the recurring items during the
periods presented.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
September 30,
2008
|
|
|
September 30,
2007
|
|
|
|
(in
thousands)
|
|
Recurring
Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
$ |
7,281 |
|
|
$ |
6,421 |
|
|
$ |
20,574 |
|
|
$ |
18,633 |
|
Net
interest income including realized gains/(losses) on financial
derivatives
|
|
|
11,341 |
|
|
|
8,957 |
|
|
|
43,218 |
|
|
|
27,667 |
|
Other
income
|
|
|
192 |
|
|
|
712 |
|
|
|
1,315 |
|
|
|
1,163 |
|
Credit
related (charges)/benefit
|
|
|
(655 |
) |
|
|
(257 |
) |
|
|
(742 |
) |
|
|
303 |
|
Operating
costs
|
|
|
(8,322 |
) |
|
|
(5,991 |
) |
|
|
(21,196 |
) |
|
|
(18,521 |
) |
Tax
(expense)/benefit
|
|
|
(3,097 |
) |
|
|
(2,734 |
) |
|
|
(13,944 |
) |
|
|
(8,257 |
) |
Preferred
stock dividends
|
|
|
(578 |
) |
|
|
(560 |
) |
|
|
(1,698 |
) |
|
|
(1,680 |
) |
Subtotal
|
|
|
6,162 |
|
|
|
6,548 |
|
|
|
27,527 |
|
|
|
19,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
resulting from fair value fluctuations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
values changes in financial derivatives
|
|
|
(9,039 |
) |
|
|
(23,346 |
) |
|
|
(9,290 |
) |
|
|
(8,629 |
) |
Fair
value changes in trading assets
|
|
|
(14,507 |
) |
|
|
- |
|
|
|
(21,664 |
) |
|
|
(74 |
) |
Tax
(expense)/benefit
|
|
|
8,241 |
|
|
|
8,171 |
|
|
|
10,834 |
|
|
|
3,046 |
|
Subtotal
|
|
|
(15,305 |
) |
|
|
(15,175 |
) |
|
|
(20,120 |
) |
|
|
(5,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring
Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
losses on available-for-sale investment securities
|
|
|
(97,108 |
) |
|
|
- |
|
|
|
(102,452 |
) |
|
|
- |
|
Gains
on assets sales and debt repurchases
|
|
|
2,286 |
|
|
|
87 |
|
|
|
2,436 |
|
|
|
108 |
|
Tax
(expense)/benefit
|
|
|
(2,171 |
) |
|
|
(30 |
) |
|
|
(353 |
) |
|
|
(38 |
) |
Subtotal
|
|
|
(96,993 |
) |
|
|
57 |
|
|
|
(100,369 |
) |
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)/income available to common stockholders
|
|
$ |
(106,136 |
) |
|
$ |
(8,570 |
) |
|
$ |
(92,962 |
) |
|
$ |
13,721 |
|
Beginning
in fourth quarter 2008, Farmer Mac’s Acting Chief Executive Officer and
Acting Chief Financial Officer started working with other members of management
to review and revise the Corporation’s liquidity investment portfolio
guidelines and related funding strategies with the goal of minimizing the
Corporation’s exposure to financial market volatility, preserving capital and
maintaining the Corporation’s access to the debt
markets. Additionally, the Corporation is evaluating strategies to
further strengthen its capital position, including for example, additional asset
sales and common and preferred equity offerings. Strengthening the
Corporation’s capital position will provide greater flexibility to
accomplish its Congressional mission and ensure continued compliance with
its statutory and regulatory capital requirements.
Set forth
below is a more detailed discussion of Farmer Mac’s results of
operations.
Net
Interest Income. Net interest income was $21.3 million for
third quarter 2008, compared to $10.5 million for third quarter
2007. Net interest income was $63.6 million for the nine months ended
September 30, 2008, compared to $28.1 million for the nine months ended
September 30, 2007. The net interest yield was 150 basis points for
the nine months ended September 30, 2008, compared to 73 basis points for the
nine months ended September 30, 2007.
As
discussed in Note 1(d) to the condensed consolidated financial statements,
Farmer Mac accounts for its financial derivatives as undesignated financial
derivatives. Accordingly, the Corporation classifies the net interest
income and expense realized on financial derivatives as gains and losses on
financial derivatives. For the nine months ended September 30, 2008
and 2007, this classification resulted in an increase of the net interest yield
of $18.9 million (45 basis points) and a decrease of the net interest yield of
$0.4 million (1 basis point), respectively.
The net
interest yields for the nine months ended September 30, 2008 and 2007 included
the benefits of yield maintenance payments of $3.2 million (7 basis points) and
$2.7 million (7 basis points), respectively. Yield maintenance
payments represent the present value of expected future interest income streams
and accelerate the recognition of interest income from the related
loans. Because the timing and size of these payments vary greatly,
variations do not necessarily indicate positive or negative trends to gauge
future financial results. For the nine months ended September 30,
2008 and 2007, the after-tax effects of yield maintenance payments on net income
and diluted earnings per share were $2.1 million or $0.21 per diluted share and
$1.7 million or $0.16 per diluted share, respectively.
The
following table provides information regarding interest-earning assets and
funding for the nine months ended September 30, 2008 and 2007. The
balance of non-accruing loans is included in the average balance of
interest-earning loans and Farmer Mac Guaranteed Securities presented, though
the related income is accounted for on the cash basis. Therefore, as
the balance of non-accruing loans and the income received increases or
decreases, the net interest yield will fluctuate accordingly. Net
interest income and the yield will also fluctuate due to the uncertainty of the
timing and size of yield maintenance payments. The average rate
earned on cash and investments reflects lower short-term market rates partially
offset by wider investment spreads during the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007 and the short-term or
floating rate nature of most investments acquired or reset during
2008. The lower average rate on loans and Farmer Mac Guaranteed
Securities during the nine months ended September 30, 2008 reflects the decline
in market rates reflected in the rates on loans acquired or reset during that
period compared to the rates on loans that have matured. The lower
average rate on Farmer Mac’s notes payable due within one year is consistent
with general trends in average short-term rates during the periods
presented. The downward trend in the average rate on notes payable
due after one year reflects the retirement of older debt and the issuance of new
debt at lower market rates during 2008.
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
|
Average Balance
|
|
|
Income/ Expense
|
|
|
Average Rate
|
|
|
Average Balance
|
|
|
Income/ Expense
|
|
|
Average Rate
|
|
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and investments
|
|
$ |
3,218,258 |
|
|
$ |
97,305 |
|
|
|
4.03 |
% |
|
$ |
3,128,207 |
|
|
$ |
127,143 |
|
|
|
5.42 |
% |
Loans
and Farmer Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
2,430,259 |
|
|
|
102,199 |
|
|
|
5.61 |
% |
|
|
2,015,572 |
|
|
|
90,776 |
|
|
|
6.00 |
% |
Total
interest-earning assets
|
|
|
5,648,517 |
|
|
|
199,504 |
|
|
|
4.71 |
% |
|
|
5,143,779 |
|
|
|
217,919 |
|
|
|
5.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable due within one year
|
|
|
3,824,478 |
|
|
|
81,287 |
|
|
|
2.83 |
% |
|
|
3,409,363 |
|
|
|
132,062 |
|
|
|
5.16 |
% |
Notes
payable due after one year
|
|
|
1,589,692 |
|
|
|
54,598 |
|
|
|
4.58 |
% |
|
|
1,535,514 |
|
|
|
57,779 |
|
|
|
5.02 |
% |
Total
interest-bearing liabilities
|
|
|
5,414,170 |
|
|
|
135,885 |
|
|
|
3.35 |
% |
|
|
4,944,877 |
|
|
|
189,841 |
|
|
|
5.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
non-interest-bearing funding
|
|
|
234,347 |
|
|
|
|
|
|
|
|
|
|
|
198,902 |
|
|
|
|
|
|
|
|
|
Total
funding
|
|
$ |
5,648,517 |
|
|
|
135,885 |
|
|
|
3.21 |
% |
|
$ |
5,143,779 |
|
|
|
189,841 |
|
|
|
4.92 |
% |
Net
interest income/yield
|
|
|
|
|
|
$ |
63,619 |
|
|
|
1.50 |
% |
|
|
|
|
|
$ |
28,078 |
|
|
|
0.73 |
% |
The
following table sets forth information regarding the changes in the components
of Farmer Mac’s net interest income for the periods indicated. For
each category, information is provided on changes attributable to changes in
volume (change in volume multiplied by old rate) and changes in rate (change in
rate multiplied by old volume). Combined rate/volume variances, the
third element of the calculation, are allocated based on their relative
size. The decreases in income due to changes in rate reflect the
reset of variable-rate investments and adjustable-rate mortgages to lower rates
and the acquisition of new lower-yielding investments, loans and Farmer Mac
Guaranteed Securities, as described above. The decreases in expense
reflect the decreased cost of funding due to the decrease in capital markets
interest rates.
|
|
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
|
|
|
|
Increase/(Decrease) Due to
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Income
from interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Cash
and investments
|
|
$ |
(33,403 |
) |
|
$ |
3,565 |
|
|
$ |
(29,838 |
) |
Loans
and Farmer Mac Guaranteed Securities
|
|
|
(6,317 |
) |
|
|
17,740 |
|
|
|
11,423 |
|
Total
|
|
|
(39,720 |
) |
|
|
21,305 |
|
|
|
(18,415 |
) |
Expense
from interest-bearing liabilities
|
|
|
(70,631 |
) |
|
|
16,675 |
|
|
|
(53,956 |
) |
Change
in net interest income
|
|
$ |
30,911 |
|
|
$ |
4,630 |
|
|
$ |
35,541 |
|
Guarantee
and Commitment Fees. Guarantee and commitment fees, which
compensate Farmer Mac for assuming the credit risk on loans underlying Farmer
Mac Guaranteed Securities and LTSPCs, were $7.3 million for third quarter 2008
and $20.6 million for the nine months ended September 30, 2008, compared to $6.4
million and $18.6 million, respectively, for the same periods in
2007. The increases are due to the higher level of outstanding Farmer
Mac Guaranteed Securities and LTSPCs during the periods in 2008.
Expenses. General
and administrative expenses were $4.1 million for third quarter 2008, and $8.3
million for the nine months ended September 30, 2008, compared to $2.0 million
and $6.6 million, respectively, for the same periods in 2007. The
increases in general and administrative expenses were largely attributable to
advisory fees related to the issuance of Series B Preferred Stock and legal and
other advisory fees related to the development of Farmer Mac programs and
corporate governance matters. Farmer Mac expects general and
administrative expenses to return to recent levels going
forward. Compensation and employee benefits were $3.7 million for
third quarter 2008 and $11.3 million for the nine months ended September 30,
2008, compared to $3.5 million and $10.3 million respectively, for the same
periods in 2007. For information on stock-based compensation, see
Note 1(f) to the condensed consolidated financial statements.
Regulatory
fees for third quarter 2008 and the nine months ended September 30, 2008 were
$0.5 million and $1.5 million, respectively, compared to $0.6 million and $1.7
million, respectively, for the same periods in 2007. FCA has advised
Farmer Mac that its estimated fees for the federal fiscal year ending September
30, 2009 will be $2.1 million, compared to $2.1 million for the federal fiscal
year ended September 30, 2008. After the end of a federal government
fiscal year, FCA may revise its prior year estimated assessments to reflect
actual costs incurred, and has issued both additional assessments and refunds in
the past.
For the
three and nine month periods ended September 30, 2008, Farmer Mac recorded
provisions for losses of $0.6 million. For the comparable periods in
2007, Farmer Mac recorded provisions for losses of $0.4 million and recoveries
of $0.1 million, respectively. See “—Risk Management—Credit Risk” for
additional information regarding Farmer Mac’s provision for losses, provision
for loan losses and Farmer Mac’s methodology for determining its allowance for
losses. As of September 30, 2008, Farmer Mac’s total allowance for
losses was $4.4 million, which was 9 basis points relative to the outstanding
post-1996 Act Farmer Mac I portfolio (excluding AgVantage securities), compared
to $3.9 million and 8 basis points as of December 31, 2007.
Gains
and Losses on Financial Derivatives and Trading Assets. As
discussed in Note 1(d) to the condensed consolidated financial statements, the
Farmer Mac accounts for its financial derivatives as undesignated financial
derivatives under SFAS 133. The net losses on financial derivatives
for the three and nine month periods ended September 30, 2008 were losses of
$19.0 million and $29.7 million, respectively, compared to net losses of $24.9
million and $9.0 million, respectively, for the same periods in
2007. On January 1, 2008, with the adoption of SFAS 159, Farmer
Mac elected to measure $600.5 million of investment securities and $427.3
million of Farmer Mac II Guaranteed Securities at fair value, with changes in
fair value reflected in earnings as they occur. During the three and nine
months ended September 30, 2008, Farmer Mac elected to measure an additional
$39.2 million and $100.3 million, respectively, of Farmer Mac II Guaranteed
Securities at fair value, with changes in fair value reflected in earnings as
they occur. Farmer Mac selected these assets for the fair value
option under SFAS 159 because they were funded or hedged principally with
financial derivatives and, therefore, it was expected that the changes in fair
value of the assets would provide partial economic and financial reporting
offsets to the related financial derivatives. During the three and
nine month periods ended September 30, 2008, the net decrease in fair value of
assets selected for the fair value option and other investment securities
classified as trading assets resulted in Farmer Mac recording net losses on
trading assets of $14.5 million and $21.7 million,
respectively. There were no gains or losses recorded on trading
assets for the three month period ended September 30, 2007 and losses of $0.1
million for the nine month period then ended.
Farmer
Mac records financial derivatives at fair value on its balance sheet with the
related changes in fair value recognized in the condensed consolidated statement
of operations. Although the Corporation’s use of financial
derivatives achieves its economic and risk management objectives, its
classification of financial derivatives as undesignated hedges elected under
SFAS 133 allows factors unrelated to the economic performance of the
Corporation’s business, such as changes in interest rates, to increase the
volatility – or even change the direction – of the Corporation’s earnings under
GAAP.
Farmer
Mac enters into financial derivative transactions principally to protect against
risk from the effects of market price or interest rate movements on the value of
certain assets, future cash flows or debt issuance, not for trading or
speculative purposes. Principally, Farmer Mac enters into interest
rate swap contracts to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk and also to derive
an overall lower effective cost of borrowing than would otherwise be available
to Farmer Mac in the conventional debt market. During third quarter
2008, Farmer Mac, for the first time, purchased pay-fixed swaptions, which
provide the option of entering into pay-fixed swaps, as part of its overall
strategy in managing interest rate risk.
Business
Volume. Farmer Mac’s
outstanding program volume was $9.8 billion as of both September 30, 2008 and
June 30, 2008. New business volume for third quarter 2008 was $831.0
million. During third quarter 2008, Farmer Mac:
|
·
|
guaranteed
$475.0 million of AgVantage
securities;
|
|
·
|
added
$239.2 million of Farmer Mac I loans under
LTSPCs;
|
|
·
|
purchased
$33.2 million of newly originated and current seasoned Farmer Mac I loans;
and
|
|
·
|
purchased
$83.7 million of Farmer Mac II USDA-guaranteed portions of
loans.
|
This new
business volume was largely offset by expected principal paydowns on outstanding
loans underlying Farmer Mac Guaranteed Securities and LTSPCs and the maturation
and repayment during third quater 2008 of $500.0 million of Farmer Mac
Guaranteed Securities – Rural Utilities. Like much of Farmer Mac’s
program volume in recent years, $475.0 million of third quarter 2008 volume was
a result of a large program transaction of high asset quality, with greater
protection against adverse credit performance and commensurately lower
compensation for the assumption of credit risk and administrative costs,
resulting in projected risk-adjusted marginal returns on equity approximately
equal to those of other Farmer Mac program transactions. These
transactions tend to be larger portfolio transactions that have ranged up to
$1.0 billion. The enactment of the Farm Bill on May 22, 2008 expanded
Farmer Mac’s authorities to include providing a secondary market for rural
electric and telephone loans made by cooperative lenders. Pursuant to
this expanded authority, during second quarter 2008, Farmer Mac placed its
guarantee on securities previously held by the Corporation as mission-related
investments under authority granted by FCA. Farmer Mac categorizes
these program assets as part of its new Rural Utilities program, which is
separate from the existing Farmer Mac I and Farmer Mac II programs.
Farmer
Mac sees prospects for additional portfolio transactions related to rural
utilities loans as well as agricultural mortgages, particularly as LTSPCs,
though no assurance can be given at this time as to the certainty or timing of
similar transactions in the future. Looking ahead, Farmer Mac’s
marketing initiatives continue to generate business opportunities for 2008 and,
it believes, beyond. Farmer Mac must increase its surplus capital to
be able to take advantage of business opportunities that may arise from these
marketing initiatives. The Corporation is working on several
initiatives to obtain that capital, including consideration of requiring
participants in certain Farmer Mac programs to purchase an equity interest in
the Corporation sufficient to capitalize the business they bring to Farmer
Mac.
Notwithstanding
these efforts and developments, Farmer Mac’s business with agricultural mortgage
and rural utilities lenders has been and may continue to be constrained
by:
|
·
|
Farmer
Mac’s available capital, above its statutory minimum capital requirement,
which is necessary to expand its guarantee and commitment activities in a
prudent manner;
|
|
·
|
the
need to obtain the consent of the holders of Series B-1 Preferred Stock
before any material expansion of business (see “—Balance
Sheet Review” for a description of the actions requiring such
consent);
|
|
·
|
restrictions
FCA may place on Farmer Mac’s growth absent an increase in Farmer Mac’s
capital;
|
|
·
|
developments
in the capital markets that may adversely affect Farmer Mac or its
prospective business partners;
|
|
·
|
changes
in the capital, liquidity or funding needs of major business
partners;
|
|
·
|
alternative
sources of capital, funding and credit enhancement for agricultural
mortgage and rural utilities
lenders;
|
|
·
|
political,
environmental and technological developments affecting rural utilities;
and
|
|
·
|
increased
competition in the secondary market for agricultural mortgage
loans.
|
USDA’s
most recent publications (as available on USDA’s website as of November 1, 2008)
forecast:
|
·
|
2008
net cash farm income to be $101.3 billion, an increase of $13.9 billion
over 2007 estimates, and a 49 percent premium over the 10-year average of
$68.2 billion.
|
|
·
|
2008
net farm income to be $95.7 billion, an increase of $8.9 billion over 2007
estimates, and a sizable increase ($34 billion) over the 10-year average
of $61.1 billion.
|
|
·
|
Total
direct U.S. government payments to be $13.2 billion in 2008, up from $12
billion in 2007, but still 20 percent below the 5-year
average. Direct payment rates are fixed in legislation and are
not affected by the level of program crop
prices.
|
|
·
|
Countercyclical
payments to decrease to $0.96 billion in 2008 from $1.2 billion in
2007.
|
|
·
|
Marketing
loan benefits, which include loan deficiency payments, marketing loan
gains, and certificate exchange gains, to drop to $7 million in 2008 from
$1.1 billion in 2007.
|
|
·
|
The
value of U.S. farm real estate to increase 7.3 percent in 2008 to $2.1
trillion from the current projection of $1.9 trillion for
2007.
|
|
·
|
The
amount of farm real estate debt to increase by 3.1 percent in 2008 to
$111.1 billion, compared to the current projection of $107.8 billion in
2007.
|
The USDA
forecasts referenced above relate to U.S. agriculture generally, but should
collectively be favorable for Farmer Mac’s financial condition relative to its
exposure to outstanding guarantees and commitments, as they indicate strong
borrower cash flows, and increased farm real estate values in most U.S.
agricultural regions.
The
following table sets forth Farmer Mac I, Farmer Mac II and Rural Utilities loan
purchase and guarantee activities for newly originated and current seasoned
loans during the periods indicated:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
(in
thousands)
|
|
Loan
purchase and guarantee and commitment activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
33,179 |
|
|
$ |
25,545 |
|
|
$ |
124,485 |
|
|
$ |
87,046 |
|
LTSPCs
|
|
|
239,170 |
|
|
|
156,930 |
|
|
|
408,923 |
|
|
|
705,654 |
|
AgVantage
|
|
|
475,000 |
|
|
|
- |
|
|
|
475,000 |
|
|
|
1,000,000 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
83,672 |
|
|
|
49,049 |
|
|
|
216,486 |
|
|
|
161,746 |
|
Farmer
Mac Guaranteed Securities -Rural Utilities
|
|
|
- |
|
|
|
- |
|
|
|
1,330,676 |
|
|
|
- |
|
Total
purchases, guarantees and commitments
|
|
$ |
831,021 |
|
|
$ |
231,524 |
|
|
$ |
2,555,570 |
|
|
$ |
1,954,446 |
|
As part
of fulfilling its guarantee obligations for Farmer Mac I Guaranteed Securities
and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac
purchases defaulted loans, all of which are at least 90 days delinquent at the
time of purchase, out of the loan pools underlying those securities and LTSPCs,
and records the purchased loans as such on its balance sheet. The
purchase price for defaulted loans purchased out of Farmer Mac I Guaranteed
Securities is the current outstanding principal balance of the loan plus accrued
and unpaid interest. The purchase price for defaulted loans purchased
under an LTSPC is the then-current outstanding principal balance of the loan,
with accrued and unpaid interest on the defaulted loans payable out of any
future loan payments or liquidation proceeds as received. The
purchase price of a defaulted loan is not an indicator of the expected loss on
that loan; many other factors affect expected loss, if any, on loans so
purchased. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Risk Management—Credit Risk—Loans” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007,
as filed with the SEC on March 17, 2008.
The
following table presents Farmer Mac’s loan purchases of newly originated and
current seasoned loans and defaulted loans purchased underlying Farmer Mac I
Guaranteed Securities and LTSPCs:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30,
2007
|
|
|
September 30,
2008
|
|
|
September 30,
2007
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I newly originated and current seasoned loan purchases
|
|
$ |
33,179 |
|
|
$ |
25,545 |
|
|
$ |
124,485 |
|
|
$ |
87,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defaulted
loans purchased underlying off-balance sheet Farmer Mac I
Guaranteed Securities
|
|
|
344 |
|
|
|
1,315 |
|
|
|
648 |
|
|
|
1,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defaulted
loans underlying on-balance sheet Farmer Mac I Guaranteed
Securities transferred to loans
|
|
|
213 |
|
|
|
352 |
|
|
|
1,072 |
|
|
|
1,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defaulted
loans purchased underlying LTSPCs
|
|
|
- |
|
|
|
761 |
|
|
|
26 |
|
|
|
1,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loan purchases
|
|
$ |
33,736 |
|
|
$ |
27,973 |
|
|
$ |
126,231 |
|
|
$ |
90,957 |
|
The
weighted-average ages of the Farmer Mac I newly originated and current seasoned
loans purchased during third quarter 2008 and third quarter 2007 was less than
one month. Of the Farmer Mac I newly originated and current seasoned
loans purchased during third quarter 2008 and third quarter 2007, 75 percent and
58 percent, respectively, had principal amortization periods longer than the
maturity date, resulting in balloon payments at maturity, with a
weighted-average remaining term to maturity of 15.4 years and 14.9 years,
respectively. The weighted-average age of delinquent loans purchased
out of securitized pools and LTSPCs during third quarter 2008 and third quarter
2007 was 9.1 years and 8.0 years, respectively.
Balance Sheet
Review
As of
September 30, 2008, Farmer Mac had $50.7 million of cash and cash equivalents
compared to $101.4 million as of December 31, 2007. Because Farmer
Mac’s statutory minimum capital requirement is based in part on 2.75 percent of
all assets held by Farmer Mac including cash, cash equivalents and government
securities, the Corporation reduced the level of its borrowings and resulting
cash holdings on its balance sheet during 2008. During 2007, Farmer
Mac used additional short term borrowings, in the form of discount notes, and
invested the proceeds in cash and cash equivalents such that the average level
of cash and cash equivalents during 2007 was approximately $700.0
million. As of September 30, 2008, Farmer Mac had $1.5 billion of
investment securities compared to $2.6 billion as of December 31,
2007. The decrease in investment securities during the nine months
ended September 30, 2008 reflects the transfer of $1.4 billion of rural
utilities loan-related securities from investment securities to Farmer Mac
Guaranteed Securities with Farmer Mac’s guarantee of those securities pursuant
to the expanded authorities granted in the Farm Bill and the maturation and
repayment of $500.0 million of those Farmer Mac Guaranteed Securities at
maturity. Accordingly, during the nine months ended September 30,
2008, Farmer Mac Guaranteed Securities increased by a net amount of $0.9 billion
to $2.2 billion.
As noted
above, Farmer Mac’s third quarter 2008 results of operations were adversely
affected by losses on certain investment securities. The following
table (as presented in the notes to Farmer Mac’s condensed consolidated
financial statements) summarizes Farmer Mac’s $1.5 billion of investment
securities and the unrealized gains and losses as of September 30,
2008.
|
|
As
of September 30, 2008
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate certificates of deposit
|
|
$ |
60,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
60,000 |
|
Fixed
rate commercial paper
|
|
|
84,571 |
|
|
|
- |
|
|
|
- |
|
|
|
84,571 |
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
|
|
193,950 |
|
|
|
- |
|
|
|
(1,940 |
) |
|
|
192,010 |
|
Floating
rate asset-backed securities
|
|
|
95,345 |
|
|
|
- |
|
|
|
(908 |
) |
|
|
94,437 |
|
Floating
rate corporate debt securities (2)
|
|
|
506,723 |
|
|
|
- |
|
|
|
(57,773 |
) |
|
|
448,950 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
(3)
|
|
|
352,156 |
|
|
|
4,698 |
|
|
|
(1,106 |
) |
|
|
355,748 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
7,576 |
|
|
|
1 |
|
|
|
(69 |
) |
|
|
7,508 |
|
Floating
rate GSE subordinated debt
|
|
|
70,000 |
|
|
|
- |
|
|
|
(18,438 |
) |
|
|
51,562 |
|
Floating
rate GSE preferred stock (4)
|
|
|
2,469 |
|
|
|
- |
|
|
|
- |
|
|
|
2,469 |
|
Total
available-for-sale
|
|
|
1,372,790 |
|
|
|
4,699 |
|
|
|
(80,234 |
) |
|
|
1,297,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
7,661 |
|
|
|
- |
|
|
|
(3,304 |
) |
|
|
4,357 |
|
Fixed
rate GSE preferred stock
|
|
|
180,900 |
|
|
|
- |
|
|
|
(14,211 |
) |
|
|
166,689 |
|
Total
trading
|
|
|
188,561 |
|
|
|
- |
|
|
|
(17,515 |
) |
|
|
171,046 |
|
Total
investment securities
|
|
$ |
1,561,351 |
|
|
$ |
4,699 |
|
|
$ |
(97,749 |
) |
|
$ |
1,468,301 |
|
(1)
|
AAA-rated
callable auction-rate certificates collateralized by pools of Federal
Family Education Loan Program ("FFELP") guaranteed student loans that are
backed by the full faith and credit of the United States, the interest
rates of which are reset through an auction process, most commonly at
intervals of 28 days or at formula-based floating rates in the event of a
failed auction.
|
(2)
|
Includes
a $52.4 million other-than-temporary impairment loss on Lehman Brothers
Holdings Inc. floating rate corporate debt. The amortized cost
of this investment was written down to its fair value of $7.5 million as
of September 30, 2008.
|
(3)
|
Includes
$16.6 million fair value of floating rate GSE mortgage-backed securities
that Farmer Mac has pledged as collateral and for which the counterparty
has the right to sell or repledge.
|
(4)
|
Includes
a $50.0 million other-than-temporary impairment loss on Fannie Mae
floating rate preferred stock. The amortized cost of this
investment was written down to its fair value of $2.5 million as of
September 30, 2008.
|
The
unrealized losses on the investment securities classified as trading have been
recognized in retained earnings and, as such, reduced Farmer Mac’s core capital
for regulatory compliance purposes as of September 30, 2008. The
unrealized losses on available-for-sale investment securities are recorded as
reductions to Accumulated other comprehensive income in the equity section of
Farmer Mac’s balance sheet. Accumulated other comprehensive income is not a
component of Farmer Mac’s core capital for regulatory capital compliance
purposes. Therefore, such losses do not impact Farmer Mac’s
regulatory capital compliance measures. If such losses were realized,
either through sale or determination that the unrealized losses were
other-than-temporary, Farmer Mac’s regulatory capital compliance measures would
be affected as such items would be recorded through retained earnings, which is
a component of Farmer Mac’s core capital for regulatory capital compliance
purposes.
As shown
in the table above, unrealized losses on the investment securities are
concentrated in three categories: floating rate corporate debt
securities, floating rate GSE subordinated debt, and fixed rate GSE preferred
stock. The GSE subordinated debt and the GSE preferred stock are
investments in CoBank, ACB and AgFirst Farm Credit Bank, institutions of the
Farm Credit System, a government-sponsored enterprise. The floating
rate corporate debt securities with significant unrealized losses (which are
concentrated in financial institutions) are summarized in the following
table:
|
|
As of September 30,
2008
|
|
|
Amortized Cost
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
S & P
Credit Rating
|
|
Maturity
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sallie Mae
|
|
$ |
25,007 |
|
|
$ |
(3,002 |
) |
|
$ |
22,005 |
|
|
BBB-
|
|
July
2009
|
CIT
|
|
|
35,000 |
|
|
|
(6,840 |
) |
|
|
28,160 |
|
|
A-
|
|
August
2009
|
Lehman
Brothers (1) |
|
|
7.500 |
|
|
|
- |
|
|
|
7,500 |
|
|
N/A
|
|
Various
through May 2010 |
Morgan Stanley
|
|
|
59,916 |
|
|
|
(14,731 |
) |
|
|
45,185 |
|
|
A+
|
|
Various
through January 2011
|
Wachovia
|
|
|
9,930 |
|
|
|
(3,035 |
) |
|
|
6,895 |
|
|
A+
|
|
October
2011
|
Merrill Lynch
|
|
|
49,985 |
|
|
|
(7,355 |
) |
|
|
42,630 |
|
|
A
|
|
November
2011
|
Goldman Sachs
|
|
|
61,695 |
|
|
|
(13,686 |
) |
|
|
48,009 |
|
|
AA-
|
|
February
2012
|
HSBC
|
|
|
49,884 |
|
|
|
(6,524 |
) |
|
|
43,360 |
|
|
AA-
|
|
Various
through July 2012
|
Other
(2)
|
|
|
207,806 |
|
|
|
(2,600 |
) |
|
|
205,206 |
|
|
A+
(Minimum)
|
|
Various
through August 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
506,723 |
|
|
$ |
(57,773 |
) |
|
$ |
448,950 |
|
|
|
|
|
(1)
|
The
amortized cost of this investment was written down to its fair value
resulting in no unrealized loss as of September 30,
2008.
|
(2)
|
Consists
of 12 corporate debt securities with unrealized losses ranging from $20
thousand to $0.7 million.
|
Farmer
Mac has evaluated the inherent risks of holding each of the investment
securities in an unrealized loss position. That evaluation includes
the assessment of the potential losses that could be realized (including
other-than-temporary impairment charges), the likelihood of recovery (including
an evaluation of the time to maturity and likelihood of repayment), the impact
of recent and planned interventions by several governments and their agencies to
support financial institutions, as well as the adequacy of Farmer Mac’s core
capital to absorb a realized loss on the sale of a security. At this
time, selling these securities would adversely affect the level
of Farmer Mac's excess capital above the statutory minimum capital
requirement. As of September 30, 2008, that excess capital was $30.0
million. Farmer Mac currently has the intent and ability to retain
all of the individually named above investments until either the market values
recover or the securities mature. Management will continue to
evaluate each of these investment positions in light of the inherent risks and
Farmer Mac’s capital position.
Consistent
with the net decrease in total assets of $318.9 million during the nine months
ended September 30, 2008, total liabilities also decreased $266.3 million during
the same period. The decrease in liabilities was primarily due to the
intentional reduction in total assets, as described above, which were used to
reduce outstanding borrowings. For further information regarding
off-balance sheet program activities, see “—Off-Balance Sheet Program
Activities” below.
During
the nine months ended September 30, 2008, accumulated other comprehensive loss
increased $38.6 million to $41.4 million. The increase was primarily
the result of losses on securities available-for-sale during the nine months
ended September 30, 2008. Accumulated other comprehensive loss is not
a component of Farmer Mac’s core capital or regulatory capital measurements, and
therefore, increases or decreases in unrealized losses on investment securities
classified as available-for-sale do not impact Farmer Mac’s regulatory capital
compliance determinations.
On
September 30, 2008, Farmer Mac sold 60,000 shares of its newly issued Series B-1
Senior Cumulative Perpetual Preferred Stock (“Series B-1”) and 5,000 shares of
its newly issued Series B-2 Senior Cumulative Perpetual Preferred Stock (“Series
B-2” and together with Series B-1, the “Series B Preferred Stock”), each having
a par value of $1.00 per share and an initial liquidation preference of $1,000
per share (subject to adjustment of such fixed dollar amount for any stock
splits, stock dividends, combinations, recapitalizations or similar
transactions). Consent of at least two-thirds of shares of Series B-1
will be required for certain transactions involving Farmer Mac, including,
without limitation, (i) proposals by Farmer Mac to amend its statutory charter
or to change its bylaws in a manner that adversely affects the rights of the
holders of Series B Preferred Stock, (ii) increases or decreases in authorized
amounts of the Series B Preferred Stock other than through authorized
redemptions, (iii) any issuance of capital stock that ranks senior to or on
parity with the Series B Preferred Stock, (iv) a voluntary bankruptcy, (v) the
incurrence of material indebtedness other than in the ordinary course of
business consistent with past practice, (vi) the redemption or repurchase of its
equity securities (other than authorized redemptions of the Series B Preferred
Stock), (vii) the transfer or acquisition of material assets other than in
arm’s-length transactions with affiliates in the ordinary course of business
consistent with past practice, (viii) issuances of equity securities or
securities convertible into equity securities, (ix) a change in control of
Farmer Mac, (x) the consummation of certain transactions with affiliates of
Farmer Mac other than in arm’s-length transactions in the ordinary course of
business consistent with past practice, (xi) the adoption of any material new
business initiative or the material expansion of existing business, or (xii) any
change in the executive management of Farmer Mac or its
subsidiaries. After June 30, 2009, if, upon Farmer Mac’s request, the
holders of Series B-1 determine that Farmer Mac is in sound financial condition,
such holders may waive the consent right contained in (xi) above. For
more information about the Series B Preferred Stock, see Note 6 to the condensed
consolidated financial statements and Farmer Mac’s Current Report on Form 8-K
filed with the SEC on October 6, 2008.
Farmer Mac was in
compliance with its statutory minimum capital requirement as of September 30,
2008. As of September 30, 2008, Farmer Mac’s core capital
totaled $212.3
million, which exceeded the statutory minimum capital requirement of
$182.3
million by $30.0 million. As
of December 31, 2007, Farmer Mac’s core capital of $226.4 million exceeded the
statutory minimum capital requirement of $186.0 million by $40.4
million.
Farmer
Mac was also in compliance with its risk-based capital standards as of September
30, 2008. As of September 30, 2008, Farmer Mac’s regulatory capital
of $216.8 million exceeded the risk-based capital requirement of $52.2 million
by approximately $164.6 million. The risk-based capital stress test
developed by FCA generated a regulatory capital requirement of $52.2 million as
of September 30, 2008, compared to $48.8 million as of June 30,
2008. In the June 5, 2008 issue of the Federal Register, FCA
published a final rule containing a revised risk-based capital stress test that
became effective July 25, 2008. The revised risk-based capital stress
test would have generated a regulatory capital requirement of $56.8 million had
it been in effect as of June 30, 2008.
Off-Balance Sheet Program
Activities
Farmer
Mac offers approved lenders two credit enhancement alternatives to increase
their liquidity or lending capacity while retaining the cash flow benefits of
their loans: (1) Farmer Mac Guaranteed Securities, which are
available through each of the Farmer Mac I, Farmer Mac II and Rural Utilities
programs; and (2) LTSPCs, which are available only through the Farmer Mac I and
Rural Utilities programs. Both of these alternatives result in the
creation of off-balance sheet obligations for Farmer Mac in the ordinary course
of its business. See Note 5 to the interim unaudited condensed
consolidated financial statements for further information regarding Farmer Mac’s
off-balance sheet program activities.
Risk
Management
Credit
Risk. Historically,
Farmer Mac’s primary exposure to credit risk was that resulting from its
purchase of agricultural and rural utility loans and the issuance of Farmer Mac
Guaranteed Securities and entering into LTSPCs. However, during 2008
Farmer Mac experienced significant losses due to its exposures to corporate
credit risk in its portfolio of investment securities. Consistent
with FCA regulations, Farmer Mac maintains a minimum of 60 days of liquidity in
a portfolio of investment securities intended to provide a source of liquidity
in the event of a period of market disruption or limited access to the debt
markets. The profile of the permitted investment securities is
restricted by FCA regulation and Farmer Mac Board Policy. The
existing eligibility requirements for investment securities include limitations
on dollar amount, issuer concentration and maturity date for various investment
categories, as well as credit quality limitations, such as requiring minimum
credit ratings by nationally recognized statistical rating organizations
(“NRSROs”) for most investment categories. Nonetheless, despite
regulatory compliance at the time of purchase, some of these investments posed a
significant risk to Farmer Mac’s capital adequacy during third quarter
2008. Farmer Mac has retained an investment advisory firm to assist
in developing revisions to its investment policies. Further detail
regarding credit risk inherent in the portfolio of investment securities is
described above in “—Balance Sheet Review.”
Farmer
Mac’s exposure to credit risk in its program business rises from the inability
of borrowers to repay their mortgages in conjunction with a deficiency in the
value of the collateral relative to the amount outstanding on the mortgage and
the costs of liquidation and the inability of a corporate borrower under the
AgVantage program to repay its debt in conjunction with the borrowers on the
loans that are collateral for the AgVantage bonds to repay their
mortgages. Farmer Mac has established underwriting, collateral
valuation (appraisal) and documentation standards (including interest rate shock
tests for adjustable rate mortgages with initial reset periods of five years or
less) for agricultural mortgage loans to mitigate the risk of loss from borrower
defaults and to provide guidance concerning the management, administration and
conduct of underwriting and appraisals to all participating sellers and
potential sellers in its programs.
Farmer
Mac’s allowance for losses is presented in three components on its condensed
consolidated balance sheets:
|
·
|
an
“Allowance for loan losses” on loans
held;
|
|
·
|
a
valuation allowance on real estate owned, which is included in the balance
sheet under “Real estate owned”;
and
|
|
·
|
an
allowance for losses on loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities, LTSPCs and Farmer Mac Guaranteed Securities – Rural
Utilities, which is included in the balance sheet under “Reserve for
losses.”
|
Farmer
Mac’s provision for losses is presented in two components on its condensed
consolidated statements of operations:
|
·
|
a
“Provision for loan losses,” which represents losses on Farmer Mac’s loans
held; and
|
|
·
|
a
“Provision for losses,” which represents losses on loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities, LTSPCs, Farmer Mac
Guaranteed Securities – Rural Utilities, and real estate
owned.
|
Farmer
Mac’s methodology for determining its allowance for losses incorporates the
Corporation’s proprietary automated loan classification system. That
system scores loans based on criteria such as historical repayment performance,
loan seasoning, loan size and loan-to-value ratio. For the purposes
of the loss allowance methodology, the loans in Farmer Mac’s portfolio of loans
and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and LTSPCs
have been scored and classified for each calendar quarter since first quarter
2000. The allowance methodology captures the migration of loan scores
across concurrent and overlapping 3-year time horizons and calculates loss rates
separately within each loan classification for (1) loans underlying LTSPCs and
(2) loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities. The calculated loss rates are applied to the current
classification distribution of Farmer Mac’s portfolio to estimate inherent
losses, on the assumption that the historical credit losses and trends used to
calculate loss rates will continue in the future. Management
evaluates this assumption by taking into consideration factors
including:
|
·
|
geographic
and agricultural commodity/product concentrations in the
portfolio;
|
|
·
|
the
credit profile of the portfolio;
|
|
·
|
delinquency
trends of the portfolio;
|
|
·
|
historical
charge-off and recovery activities of the portfolio;
and
|
|
·
|
other
factors to capture current portfolio trends and characteristics that
differ from historical experience.
|
Management
believes that its use of this methodology produces a reliable estimate of
probable losses, as of the balance sheet date, for all loans held, real estate
owned and loans underlying post-1996 Act Farmer Mac I Guaranteed Securities and
LTSPCs in accordance with SFAS 5 and SFAS 114.
Prior to
third quarter 2007, no allowance for losses had been made for loans underlying
Pre-1996 Act Farmer Mac I Guaranteed Securities, AgVantage securities or Farmer
Mac II Guaranteed Securities. Pre-1996 Act Farmer Mac I Guaranteed Securities
are supported by unguaranteed first loss subordinated interests, which are
expected to exceed the estimated credit losses on those loans. Through September
30, 2008, Farmer Mac had charged off $0.4 million related to one loan underlying
Pre-1996 Act Farmer Mac I Guaranteed Securities. The remaining $1.7 million of
Pre-1996 Act Farmer Mac I Guaranteed Securities represent interests in seasoned
performing loans with low loan-to-value ratios. Farmer Mac does not expect to
incur any further losses on the remaining Pre-1996 Act Farmer Mac I Guaranteed
Securities in the future. Each AgVantage security is a general obligation of an
issuing institution approved by Farmer Mac and is collateralized by eligible
mortgage loans. As of September 30, 2008, there were no probable losses inherent
in Farmer Mac’s AgVantage securities due to the high credit quality of the
obligors, as well as the underlying collateral. As of September 30, 2008, Farmer
Mac had not experienced any credit losses on any AgVantage securities and does
not expect to incur any such losses in the future. The guaranteed portions
collateralizing Farmer Mac II Guaranteed Securities are guaranteed by the USDA.
Each USDA guarantee is an obligation backed by the full faith and credit of the
United States. As of September 30, 2008, Farmer Mac had not experienced any
credit losses on any Farmer Mac II Guaranteed Securities and does not expect to
incur any such losses in the future.
On May
22, 2008, Congress enacted into law the Food, Conservation and Energy Act of
2008 (the “Farm Bill”), which expanded Farmer Mac’s authorities to include
providing a secondary market for rural electric and telephone loans made by
cooperative lenders. During second quarter 2008, Farmer Mac placed its guarantee
on $430.7 million of securities representing interests in rural electric
cooperative loans and $900.0 million principal amount of obligations
collateralized by rural electric cooperative loans previously held as
mission-related investments under authority granted by the Farm Credit
Administration (“FCA”). During third quarter 2008, $500.0 million of the
obligations collateralized by rural electric cooperative loans matured and was
repaid and $5.7 million of the securities representing interests in rural
electric cooperative loans was repaid. Farmer Mac evaluated the $824.9 million
Farmer Mac Guaranteed Securities – Rural Utilities outstanding as of September
30, 2008 and determined that there were no probable losses inherent in the
securities or the underlying rural utilities loans. Accordingly, no allowance
for losses was recorded as of September 30, 2008 with respect to those
securities.
The
following table summarizes the changes in the components of Farmer Mac’s
allowance for losses for the three months and nine months ended September 30,
2008 and 2007:
|
|
September 30, 2008
|
|
|
|
Allowance
for Loan Losses
|
|
|
REO
Valuation Allowance
|
|
|
Reserve
for Losses
|
|
|
Total
Allowance for Losses
|
|
|
|
(in
thousands)
|
|
Three
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,592 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,789 |
|
Provision/(recovery)
for losses
|
|
|
731 |
|
|
|
- |
|
|
|
(91 |
) |
|
|
640 |
|
Charge-offs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Recoveries
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
2,329 |
|
|
$ |
- |
|
|
$ |
2,106 |
|
|
$ |
4,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,690 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,887 |
|
Provision/(recovery)
for losses
|
|
|
731 |
|
|
|
- |
|
|
|
(91 |
) |
|
|
640 |
|
Charge-offs
|
|
|
(108 |
) |
|
|
- |
|
|
|
- |
|
|
|
(108 |
) |
Recoveries
|
|
|
16 |
|
|
|
- |
|
|
|
- |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
2,329 |
|
|
$ |
- |
|
|
$ |
2,106 |
|
|
$ |
4,435 |
|
|
|
September 30, 2007
|
|
|
|
Allowance
for Loan Losses
|
|
|
REO
Valuation Allowance
|
|
|
Reserve
for Losses
|
|
|
Total
Allowance for Losses
|
|
|
|
(in
thousands)
|
|
Three
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,681 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,878 |
|
Provision/(recovery)
for losses
|
|
|
- |
|
|
|
- |
|
|
|
386 |
|
|
|
386 |
|
Charge-offs
|
|
|
- |
|
|
|
- |
|
|
|
(386 |
) |
|
|
(386 |
) |
Recoveries
|
|
|
20 |
|
|
|
- |
|
|
|
- |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
1,701 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,945 |
|
|
$ |
- |
|
|
$ |
2,610 |
|
|
$ |
4,555 |
|
Provision/(recovery)
for losses
|
|
|
(215 |
) |
|
|
100 |
|
|
|
(27 |
) |
|
|
(142 |
) |
Charge-offs
|
|
|
(49 |
) |
|
|
(100 |
) |
|
|
(386 |
) |
|
|
(535 |
) |
Recoveries
|
|
|
20 |
|
|
|
- |
|
|
|
- |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
1,701 |
|
|
$ |
- |
|
|
$ |
2,197 |
|
|
$ |
3,898 |
|
During
third quarter 2008, Farmer Mac made provisions for its allowance for losses of
$0.6 million, compared to a provision of $0.4 million in third quarter
2007. During third quarter 2008, Farmer Mac did not record any
charge-offs against the allowance for losses and recorded negligible
recoveries. During third quarter 2007, Farmer Mac charged-off $0.4
million and recovered $20,000 in losses against the allowance for
losses. There was no previously accrued or advanced interest on loans
or Farmer Mac I Guaranteed Securities charged off in third quarter 2008 or third
quarter 2007. As of September 30, 2008, Farmer Mac’s allowance for
losses totaled $4.4 million, or 9 basis points of the outstanding principal
balance of loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities (excluding AgVantage securities) and LTSPCs, compared to $3.9 million
(8 basis points) as of December 31, 2007.
As of
September 30, 2008, Farmer Mac’s 90-day delinquencies totaled $11.5 million and
represented 0.23 percent of the principal balance of all loans held and loans
underlying post-1996 Act Farmer Mac I Guaranteed Securities (excluding AgVantage
securities) and LTSPCs, compared to $17.0 million (0.35 percent) as of September
30, 2007. As of September 30, 2008, Farmer Mac’s non-performing
assets (which include 90-day delinquencies, loans performing in bankruptcy, and
real estate owned) totaled $32.9 million and represented 0.66 percent of the
principal balance of all loans held and loans underlying post-1996 Act Farmer
Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs,
compared to $37.4 million (0.76 percent) as of September 30,
2007. Loans that have been restructured after delinquency were
insignificant and are included within the reported 90-day delinquency and
non-performing asset disclosures. From quarter to quarter, Farmer Mac
anticipates that 90-day delinquencies and non-performing assets will fluctuate,
both in dollars and as a percentage of the outstanding portfolio, with higher
levels likely at the end of the first and third quarters of each year
corresponding to the semi-annual (January 1st and
July 1st)
payment characteristics of most Farmer Mac I loans. Although
Farmer Mac expects the amount of non performing assets during fourth quarter
2008 to increase, the increase will be primarily due to the chapter 11
bankruptcy filing by VeraSun Energy Corporation and its subsidiaries in October
2008. These subsidiaries include four ethanol plants with $39.9
million of outstanding loans in Farmer Mac’s portfolio. Farmer Mac
expects these loans to be classified as loans performing in bankruptcy beginning
in fourth quarter 2008, but does not expect these events to have a material
effect on the Corporation’s provisions for losses during fourth quarter
2008.
The
following table presents historical information regarding Farmer Mac’s
non-performing assets and 90-day delinquencies:
|
|
Outstanding
Post-1996 Act Farmer Mac I Loans, Guarantees (1), LTSPCs, and REO
|
|
|
Non-
performing Assets
|
|
|
Percentage
|
|
|
Less:
REO and Performing Bankruptcies
|
|
|
90-Day
Delinquencies
|
|
|
Percentage
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
$ |
4,989,755 |
|
|
$ |
32,883 |
|
|
|
0.66 |
% |
|
$ |
21,402 |
|
|
$ |
11,481 |
|
|
|
0.23 |
% |
June 30,
2008
|
|
|
4,937,870 |
|
|
|
28,230 |
|
|
|
0.57 |
% |
|
|
23,060 |
|
|
|
5,170 |
|
|
|
0.11 |
% |
March 31,
2008
|
|
|
4,933,720 |
|
|
|
31,640 |
|
|
|
0.64 |
% |
|
|
20,666 |
|
|
|
10,974 |
|
|
|
0.22 |
% |
December 31,
2007
|
|
|
5,063,164 |
|
|
|
31,924 |
|
|
|
0.63 |
% |
|
|
21,340 |
|
|
|
10,584 |
|
|
|
0.21 |
% |
September 30,
2007
|
|
|
4,891,525 |
|
|
|
37,364 |
|
|
|
0.76 |
% |
|
|
20,341 |
|
|
|
17,023 |
|
|
|
0.35 |
% |
June 30,
2007
|
|
|
4,904,592 |
|
|
|
37,225 |
|
|
|
0.76 |
% |
|
|
22,462 |
|
|
|
14,763 |
|
|
|
0.30 |
% |
March 31,
2007
|
|
|
4,905,244 |
|
|
|
50,026 |
|
|
|
1.02 |
% |
|
|
21,685 |
|
|
|
28,341 |
|
|
|
0.58 |
% |
December 31,
2006
|
|
|
4,784,983 |
|
|
|
39,232 |
|
|
|
0.82 |
% |
|
|
19,577 |
|
|
|
19,655 |
|
|
|
0.41 |
% |
September 30,
2006
|
|
|
4,621,083 |
|
|
|
44,862 |
|
|
|
0.97 |
% |
|
|
16,425 |
|
|
|
28,437 |
|
|
|
0.62 |
% |
(1)
|
Excludes
loans underlying AgVantage
securities.
|
As of
September 30, 2008, approximately $1.3 billion (26.8 percent) of Farmer Mac’s
outstanding loans held and loans underlying post-1996 Act Farmer Mac I
Guaranteed Securities (excluding AgVantage securities) and LTSPCs were in their
peak delinquency and default years (approximately years three through five after
origination), compared to $1.4 billion (27.7 percent) as of September 30,
2007.
As of
September 30, 2008, Farmer Mac individually analyzed $3.7 million of its $47.8
million of impaired assets for collateral shortfalls against updated appraised
values, other updated collateral valuations or discounted
values. Farmer Mac evaluated the remaining $44.1 million of impaired
assets, for which updated valuations were not available, in the aggregate in
consideration of their similar risk characteristics and historical
statistics. All of the $3.7 million of assets analyzed individually
were adequately collateralized. Accordingly, Farmer Mac did not
record any specific allowances for any of its impaired assets as of September
30, 2008. Farmer Mac’s non-specific or general allowances were $4.4
million as of September 30, 2008.
As of
September 30, 2008, the weighted-average original loan-to-value (“LTV”) ratio
for all loans held and loans underlying post-1996 Act Farmer Mac I Guaranteed
Securities (excluding AgVantage securities) and LTSPCs was 50.3 percent, and the
weighted-average original LTV ratio for all post-1996 Act non-performing assets
was 56.9 percent. The following table summarizes the post-1996 Act
non-performing assets by original LTV ratio:
Distribution
of Post-1996 Act Non-performing Assets by Original LTV Ratio as of September 30, 2008
|
|
(dollars
in thousands)
|
|
|
|
Original LTV Ratio
|
|
Post-1996
Act Non-performing Assets
|
|
|
Percentage
|
|
0.00%
to 40.00%
|
|
$ |
2,034 |
|
|
|
6%
|
|
40.01%
to 50.00%
|
|
|
7,394 |
|
|
|
22%
|
|
50.01%
to 60.00%
|
|
|
13,161 |
|
|
|
41%
|
|
60.01%
to 70.00%
|
|
|
9,087 |
|
|
|
28%
|
|
70.01%
to 80.00%
|
|
|
820 |
|
|
|
2%
|
|
80.01%
+
|
|
|
387 |
|
|
|
1%
|
|
Total
|
|
$ |
32,883 |
|
|
|
100%
|
|
The
following table presents outstanding loans held and loans underlying post-1996
Act Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and
LTSPCs and post-1996 Act non-performing assets as of September 30, 2008 by year
of origination, geographic region and commodity/collateral type:
Farmer
Mac I Post-1996 Act Non-performing Assets
|
|
|
Distribution
of Outstanding Loans, Guarantees and LTSPCs
|
|
|
Outstanding
Loans, Guarantees and LTSPCs (1)
|
|
|
Post-1996
Act Non- performing Assets (2)
|
|
|
Non-
performing Asset Rate
|
|
|
|
(dollars
in thousands)
|
|
By
year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
1997
|
|
|
10
|
%
|
|
$
|
474,722
|
|
|
$
|
5,730
|
|
|
|
1.21
|
%
|
1997
|
|
|
4
|
%
|
|
|
191,294
|
|
|
|
4,799
|
|
|
|
2.51
|
%
|
1998
|
|
|
6
|
%
|
|
|
311,666
|
|
|
|
6,537
|
|
|
|
2.10
|
%
|
1999
|
|
|
7
|
%
|
|
|
357,029
|
|
|
|
4,543
|
|
|
|
1.27
|
%
|
2000
|
|
|
4
|
%
|
|
|
184,031
|
|
|
|
2,989
|
|
|
|
1.62
|
%
|
2001
|
|
|
7
|
%
|
|
|
343,793
|
|
|
|
4,255
|
|
|
|
1.24
|
%
|
2002
|
|
|
9
|
%
|
|
|
449,288
|
|
|
|
2,171
|
|
|
|
0.48
|
%
|
2003
|
|
|
9
|
%
|
|
|
463,572
|
|
|
|
1,109
|
|
|
|
0.24
|
%
|
2004
|
|
|
7
|
%
|
|
|
339,957
|
|
|
|
293
|
|
|
|
0.09
|
%
|
2005
|
|
|
10
|
%
|
|
|
507,819
|
|
|
|
17
|
|
|
|
0.00
|
%
|
2006
|
|
|
12
|
%
|
|
|
592,855
|
|
|
|
326
|
|
|
|
0.05
|
%
|
2007
|
|
|
9
|
%
|
|
|
472,205
|
|
|
|
114
|
|
|
|
0.02
|
%
|
2008
|
|
|
6
|
%
|
|
|
301,524
|
|
|
|
-
|
|
|
|
0.00
|
%
|
Total
|
|
|
100
|
%
|
|
$
|
4,989,755
|
|
|
$
|
32,883
|
|
|
|
0.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
geographic region (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
|
|
|
16
|
%
|
|
$
|
804,953
|
|
|
$
|
19,451
|
|
|
|
2.42
|
%
|
Southwest
|
|
|
38
|
%
|
|
|
1,880,219
|
|
|
|
3,386
|
|
|
|
0.18
|
%
|
Mid-North
|
|
|
22
|
%
|
|
|
1,079,500
|
|
|
|
3,990
|
|
|
|
0.37
|
%
|
Mid-South
|
|
|
12
|
%
|
|
|
621,781
|
|
|
|
2,036
|
|
|
|
0.33
|
%
|
Northeast
|
|
|
8
|
%
|
|
|
387,743
|
|
|
|
1,177
|
|
|
|
0.30
|
%
|
Southeast
|
|
|
4
|
%
|
|
|
215,559
|
|
|
|
2,843
|
|
|
|
1.32
|
%
|
Total
|
|
|
100
|
%
|
|
$
|
4,989,755
|
|
|
$
|
32,883
|
|
|
|
0.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
commodity/collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crops
|
|
|
41
|
%
|
|
$
|
2,024,173
|
|
|
$
|
16,837
|
|
|
|
0.83
|
%
|
Permanent
plantings
|
|
|
19
|
%
|
|
|
955,532
|
|
|
|
9,576
|
|
|
|
1.00
|
%
|
Livestock
|
|
|
26
|
%
|
|
|
1,326,429
|
|
|
|
4,501
|
|
|
|
0.34
|
%
|
Part-time
farm/rural housing
|
|
|
7
|
%
|
|
|
349,607
|
|
|
|
1,824
|
|
|
|
0.52
|
%
|
Ag
storage and processing (including ethanol facilities)
|
|
|
6
|
%
|
|
|
296,393
|
|
|
|
-
|
|
|
|
0.00
|
%
|
Other
|
|
|
1
|
%
|
|
|
37,621
|
|
|
|
145
|
|
|
|
0.39
|
%
|
Total
|
|
|
100
|
%
|
|
$
|
4,989,755
|
|
|
$
|
32,883
|
|
|
|
0.66
|
%
|
|
(1)
|
Excludes
loans underlying AgVantage
securities.
|
|
(2)
|
Includes
loans 90 days or more past due, in foreclosure, restructured after
delinquency, in bankruptcy (including loans performing under either their
original loan terms or a court-approved bankruptcy plan), and real estate
owned.
|
|
(3)
|
Geographic
regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ,
CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South
(KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA,
RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC).
|
The
following table presents Farmer Mac’s cumulative net credit losses relative to
the cumulative original balance for all loans purchased and loans underlying
post-1996 Act Farmer Mac I Guaranteed Securities (excluding AgVantage
securities) and LTSPCs as of September 30, 2008, by year of origination,
geographic region and commodity/collateral type.
Farmer
Mac I Post-1996 Act Credit Losses Relative to all
Cumulative Original Loans, Guarantees and
LTSPCs
|
|
|
|
Cumulative
Original Loans, Guarantees and LTSPCs
(1)
|
|
|
Cumulative
Net Credit Losses
|
|
|
Cumulative
Loss Rate
|
|
|
|
(dollars
in thousands)
|
|
By
year of origination:
|
|
|
|
|
|
|
|
|
|
Before
1997
|
|
$ |
3,436,439 |
|
|
$ |
1,593 |
|
|
|
0.05 |
% |
1997
|
|
|
758,156 |
|
|
|
2,493 |
|
|
|
0.33 |
% |
1998
|
|
|
1,134,775 |
|
|
|
3,885 |
|
|
|
0.34 |
% |
1999
|
|
|
1,151,421 |
|
|
|
1,291 |
|
|
|
0.11 |
% |
2000
|
|
|
742,427 |
|
|
|
2,285 |
|
|
|
0.31 |
% |
2001
|
|
|
1,088,078 |
|
|
|
695 |
|
|
|
0.06 |
% |
2002
|
|
|
1,103,598 |
|
|
|
- |
|
|
|
0.00 |
% |
2003
|
|
|
899,818 |
|
|
|
- |
|
|
|
0.00 |
% |
2004
|
|
|
623,260 |
|
|
|
- |
|
|
|
0.00 |
% |
2005
|
|
|
741,000 |
|
|
|
115 |
|
|
|
0.02 |
% |
2006
|
|
|
746,192 |
|
|
|
- |
|
|
|
0.00 |
% |
2007
|
|
|
558,026 |
|
|
|
- |
|
|
|
0.00 |
% |
2008
|
|
|
326,542 |
|
|
|
- |
|
|
|
0.00 |
% |
Total
|
|
$ |
13,309,732 |
|
|
$ |
12,357 |
|
|
|
0.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
By
geographic region (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
|
|
$ |
2,454,288 |
|
|
$ |
6,891 |
|
|
|
0.28 |
% |
Southwest
|
|
|
5,284,702 |
|
|
|
4,778 |
|
|
|
0.09 |
% |
Mid-North
|
|
|
2,231,217 |
|
|
|
57 |
|
|
|
0.00 |
% |
Mid-South
|
|
|
1,230,910 |
|
|
|
336 |
|
|
|
0.03 |
% |
Northeast
|
|
|
1,150,356 |
|
|
|
66 |
|
|
|
0.01 |
% |
Southeast
|
|
|
958,259 |
|
|
|
229 |
|
|
|
0.02 |
% |
Total
|
|
$ |
13,309,732 |
|
|
$ |
12,357 |
|
|
|
0.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
By
commodity/collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Crops
|
|
$ |
5,385,928 |
|
|
$ |
9 |
|
|
|
0.00 |
% |
Permanent
plantings
|
|
|
2,980,749 |
|
|
|
9,349 |
|
|
|
0.31 |
% |
Livestock
|
|
|
3,450,213 |
|
|
|
2,677 |
|
|
|
0.08 |
% |
Part-time
farm/rural housing
|
|
|
936,445 |
|
|
|
322 |
|
|
|
0.03 |
% |
Ag
storage and processing (including ethanol
facilities)
|
|
|
415,840 |
(3) |
|
|
- |
|
|
|
0.00 |
% |
Other
|
|
|
140,557 |
|
|
|
- |
|
|
|
0.00 |
% |
Total
|
|
$ |
13,309,732 |
|
|
$ |
12,357 |
|
|
|
0.09 |
% |
|
(1)
|
Excludes
loans underlying AgVantage
securities.
|
|
(2)
|
Geographic
regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ,
CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South
(KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA,
RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC).
|
|
(3)
|
Several
of the loans underlying agricultural storage and processing LTSPCs are for
facilities under construction, and as of September 30, 2008, approximately
$43.8 million of the loans were not yet disbursed by the
lender.
|
Interest
Rate Risk. Farmer Mac is subject to interest rate risk on all
assets held for investment because of possible timing differences in the cash
flows of the assets and related liabilities. This risk is primarily
related to loans held and on-balance sheet Farmer Mac Guaranteed Securities due
to the ability of borrowers to prepay their mortgages before the scheduled
maturities, thereby increasing the risk of asset and liability cash flow
mismatches. Cash flow mismatches in a changing interest rate
environment can reduce the earnings of the Corporation if assets repay sooner
than expected and the resulting cash flows must be reinvested in lower-yielding
investments when Farmer Mac’s funding costs cannot be correspondingly reduced,
or if assets repay more slowly than expected and the associated debt must be
replaced by higher-cost debt.
Yield
maintenance provisions and other prepayment penalties contained in many
agricultural mortgage loans reduce, but do not eliminate, prepayment risk,
particularly in the case of a defaulted loan where yield maintenance may not be
collected. Those provisions require borrowers to make an additional
payment when they prepay their loans so that, when reinvested with the prepaid
principal, yield maintenance payments generate substantially the same cash flows
that would have been generated had the loan not prepaid. Those
provisions create a disincentive to prepayment and compensate the Corporation
for some of its interest rate risks. As of September 30, 2008, 47
percent of the outstanding balance of all loans held and loans underlying
on-balance sheet Farmer Mac I Guaranteed Securities (including 71 percent of all
loans with fixed interest rates) were covered by yield maintenance provisions
and other prepayment penalties. Of the Farmer Mac I fixed rate loans
purchased in third quarter 2008, 11 percent had yield maintenance or another
form of prepayment protection. As of September 30, 2008, none of the
USDA-guaranteed portions underlying Farmer Mac II Guaranteed Securities had
yield maintenance provisions; however, 18.5 percent contained prepayment
penalties. Of the USDA-guaranteed portions purchased in third quarter
2008, 33.4 percent contained various forms of prepayment penalties.
Taking
into consideration the prepayment provisions and the default probabilities
associated with its mortgage assets, Farmer Mac uses prepayment models to
project and value cash flows associated with these assets. Because
borrowers’ behavior in various interest rate environments may change over time,
Farmer Mac periodically evaluates the effectiveness of these models compared to
actual prepayment experience and adjusts and refines the models as necessary to
improve the precision of subsequent prepayment forecasts.
Cash
equivalents and investment securities pose only limited interest rate risk to
Farmer Mac, due to their closely matched funding. Farmer Mac’s cash
equivalents mature within three months and are match-funded with discount notes
having similar maturities. As of September 30, 2008, $1.3 billion of
the $1.5 billion of investment securities (88 percent) were floating rate
securities with rates that adjust within one year or fixed rate securities with
original maturities between three months and one year. Such
securities are funded with floating rate medium term notes or discount notes
that closely match the rate adjustment dates of the associated
investments.
The goal
of interest rate risk management at Farmer Mac is to create and maintain a
portfolio that generates stable earnings and value across a variety of interest
rate environments. Farmer Mac’s primary strategy for managing
interest rate risk is to fund asset purchases with liabilities that have similar
durations and cash flows so that they will perform similarly as interest rates
change. To achieve this match, Farmer Mac issues discount notes and
both callable and non-callable medium-term notes across a spectrum of
maturities. Farmer Mac issues callable debt to offset the prepayment
risk associated with some mortgage assets. By using a blend of
liabilities that includes callable debt, the interest rate sensitivities of the
liabilities tend to increase or decrease as interest rates change in a manner
similar to changes in the interest rate sensitivities of the
assets. Farmer Mac also uses financial derivatives to alter the
duration of its assets and liabilities to better match their durations, thereby
reducing overall interest rate sensitivity.
An
important “stress test” of Farmer Mac’s exposure to long-term interest rate risk
is the measurement of the sensitivity of its market value of equity (“MVE”) to
yield curve shocks. MVE represents the present value of all future
cash flows from on- and off-balance sheet assets, liabilities and financial
derivatives, discounted at current interest rates and spreads. The
following schedule summarizes the results of Farmer Mac’s MVE sensitivity
analysis as of September 30, 2008 and December 31, 2007 to an immediate and
instantaneous uniform or “parallel” shift in the yield curve. During
third quarter 2008, Farmer Mac maintained a low level of interest rate
sensitivity through ongoing asset and liability management
activities.
|
|
Percentage
Change in MVE from Base Case
|
Interest
Rate
|
|
September
30,
|
|
December
31,
|
Scenario
|
|
2008
|
|
2007
|
|
|
|
|
|
+
300 bp
|
|
-14.9%
|
|
-10.6%
|
+
200 bp
|
|
-8.8%
|
|
-6.3%
|
+
100 bp
|
|
-3.2%
|
|
-2.5%
|
-
100 bp
|
|
N/A*
|
|
-0.1%
|
-
200 bp
|
|
N/A*
|
|
-1.4%
|
-
300 bp
|
|
N/A*
|
|
-3.4%
|
|
*
|
As
of September 30, 2008, a parallel shift of -100, -200 and -300 basis
points of the U.S. Treasury yield curve produced negative interest rates
for maturities of 3 months and
shorter.
|
As of
September 30, 2008, a parallel increase of 100 basis points would have decreased
Farmer Mac’s net interest income (“NII”), a shorter-term measure of interest
rate risk, by 6.8 percent, while a parallel decrease of 50 basis points would
have increased NII by 5.0 percent. Farmer
Mac also measures the sensitivity of both MVE and NII to a variety of
non-parallel interest rate shocks, including flattening and steepening yield
curve scenarios. As of September 30, 2008, both MVE and NII showed
similar or lesser sensitivity to non-parallel shocks than to the parallel
shocks. As of September 30, 2008, Farmer Mac’s effective duration
gap, another standard measure of interest rate risk that measures the difference
between the sensitivities of assets compared to that of liabilities, was plus
0.6 months, compared to plus 0.7 months as of December 31,
2007. Duration matching helps to maintain the correlation of cash
flows and stable portfolio earnings even when interest rates are not
stable. Farmer Mac believes the relative insensitivity of its MVE and
NII to both parallel and non-parallel interest rate shocks, and its duration
gap, indicate that Farmer Mac’s approach to managing its interest rate risk
exposures is effective.
As of
September 30, 2008, Farmer Mac had $3.7 billion combined notional amount of
interest rate swaps with terms ranging from 1 to 15 years. Of those
interest rate swaps, $1.6 billion were floating-to-fixed rate interest rate
swaps, $2.0 billion were fixed-to-floating interest rate swaps and $0.1 billion
were basis swaps.
Farmer
Mac enters into financial derivative transactions principally to protect against
risk from the effects of market price or interest rate movements on the value of
certain assets, future cash flows or debt issuance, not for trading or
speculative purposes. As discussed in Note 1(d) to the condensed
consolidated financial statements, Farmer Mac accounts for its financial
derivatives as undesignated financial derivatives. All of Farmer
Mac’s financial derivative transactions are conducted under standard
collateralized agreements that limit Farmer Mac’s potential credit exposure to
any counterparty. As of September 30, 2008, Farmer Mac had
uncollateralized net exposure to two counterparties totaling $0.4
million.
Liquidity and Capital
Resources
Farmer
Mac depends on regular access to the capital markets for liquidity, and Farmer
Mac maintained access to the capital markets at favorable rates throughout
third quarter 2008. Assuming continuation of current market
conditions, Farmer Mac believes it has sufficient liquidity and capital
resources to support its operations for the next 12 months and for the
foreseeable future. Farmer Mac also has a liquidity contingency plan
to manage unanticipated disruptions in its access to the capital
markets. That plan involves borrowing through repurchase agreement
arrangements and the sale of liquid assets. Consistent with FCA
regulations, Farmer Mac maintains a minimum of 60 days of liquidity and a target
of 90 days of liquidity. In accordance with the methodology
prescribed by those regulations, Farmer Mac maintained an average of 77 days of
liquidity during third quarter 2008 and had 69 days of liquidity as of September
30, 2008.
Debt
Issuance. Section 8.6(e) of Farmer Mac’s statutory charter (12
U.S.C. § 2279aa-6(e)) authorizes Farmer Mac to issue debt obligations to
purchase eligible mortgage loans and Farmer Mac Guaranteed Securities and to
maintain reasonable available cash and cash equivalents for business operations,
including adequate liquidity. Farmer Mac funds its purchases of
program (loans and Farmer Mac Guaranteed Securities) and non-program assets
primarily by issuing debt obligations of various maturities in the public
capital markets. Debt obligations issued by Farmer Mac include
discount notes and fixed and floating rate medium-term notes, including callable
notes. Farmer Mac also issues discount notes and medium-term notes to
obtain funds to finance its investments, transaction costs, guarantee payments
and LTSPC purchase obligations.
The
interest and principal on Farmer Mac’s debt are not guaranteed by and do not
constitute debts or obligations of FCA or the United States or any agency or
instrumentality of the United States other than Farmer Mac. Farmer
Mac is an institution of the Farm Credit System (“FCS”), but is not liable for
any debt or obligation of any other institution of the FCS. Likewise,
neither the FCS nor any other individual institution of the FCS is liable for
any debt or obligation of Farmer Mac. Income to the purchaser of a
Farmer Mac discount note or medium-term note is not exempt under federal law
from federal, state or local taxation. The Corporation’s discount
notes and medium-term notes are not currently rated by an NRSRO.
Farmer
Mac’s board of directors has authorized the issuance of up to $7.0 billion of
discount notes and medium-term notes (of which $4.3 billion was outstanding as
of September 30, 2008), subject to periodic review of the adequacy of that level
relative to Farmer Mac’s borrowing requirements. Farmer Mac invests
the proceeds of such issuances in loans, Farmer Mac Guaranteed Securities, and
non-program investment assets in accordance with policies established by its
board of directors and subject to regulations established by FCA.
Liquidity. The
funding and liquidity needs of Farmer Mac’s business programs are driven by the
purchase and retention of eligible loans and Farmer Mac Guaranteed Securities;
the maturities of Farmer Mac’s discount notes and medium-term notes; and payment
of principal and interest on Farmer Mac Guaranteed Securities. Farmer
Mac’s primary sources of funds to meet these needs are:
|
·
|
principal
and interest payments and ongoing guarantee and commitment fees received
on loans, Farmer Mac Guaranteed Securities, and
LTSPCs;
|
|
·
|
principal
and interest payments received from investment securities;
and
|
|
·
|
the
issuance of new discount notes and medium-term
notes.
|
As a
result of Farmer Mac’s status as a federally-chartered instrumentality of the
United States, Farmer Mac has had access to the capital markets for short
term borrowings at favorable rates. Farmer Mac’s short term borrowing
costs have remained at historically low levels despite recent market
volatility. Historically, Farmer Mac has used pay-fixed interest rate
swaps, combined with a planned series of discount note issuances, as an
alternative source of effectively fixed-rate funding. While the swap
market may provide favorable fixed rates, swap transactions expose Farmer Mac to
the risk of future widening of its own issuance spreads versus corresponding
LIBOR rates. If the spreads on the Farmer Mac discount notes were to
increase relative to LIBOR, Farmer Mac would be exposed to a commensurate
reduction on its net interest yield on the notional amount of its pay-fixed
interest rate swaps and other LIBOR-based floating rate assets.
Farmer
Mac maintains cash and liquidity investments in cash equivalents (including
commercial paper and other short-term money market instruments) and liquid
investment securities that can be drawn upon for liquidity needs. As
of September 30, 2008, Farmer Mac’s non-program investments consisted of: $50.7
million of cash and cash equivalents; $584.0 million of securities issued or
guaranteed by GSEs or the U.S. Government and its agencies; $84.6 million of
commercial paper; $60.0 million of commercial bank certificates of deposit;
$286.4 million of asset-backed securities (principally backed by Government
guaranteed student loans); and $449.0 million of corporate debt securities,
including financial institutions. Farmer Mac did not hold any
investments in securities backed by sub-prime or Alt-A residential or commercial
mortgages or home-equity loans.
As
described above in “—Balance Sheet Review,” due to the current market turmoil
and general widening of corporate debt spreads, many of the corporate debt
securities owned by Farmer Mac are in unrealized loss positions. If
Farmer Mac needed to access those securities as a source of liquidity, Farmer
Mac would realize losses in earnings and reductions to its core capital equal to
amounts currently accounted for as unrealized losses in accumulated other
comprehensive income, which is not a component of Farmer Mac’s core capital for
statutory and regulatory compliance purposes. Currently, Farmer Mac
does not foresee the need to sell those securities as a source of
liquidity.
Farmer
Mac’s asset-backed investment securities include callable, AAA-rated
auction-rate certificates (“ARCs”), the interest rates on which are reset
through an auction process, most commonly at intervals of 28 days, or at
formula-based floating rates in the event of a failed auction. All
ARCs held by Farmer Mac are collateralized entirely by pools of Federal Family
Education Loan Program (“FFELP”) guaranteed student loans that are backed by the
full faith and credit of the United States. Farmer Mac held $192.0
million of ARCs as of September 30, 2008 compared to $131.5 million as of
December 31, 2007. Beginning in mid-February, there were widespread
failures of the auction mechanism designed to provide regular liquidity to these
types of securities. Consequently, Farmer Mac has not sold any of its
ARCs into the auctions since that time. Farmer Mac continues to
believe that the credit quality of these securities is high, based on that
guarantee and the securities’ continued AAA ratings. To date, Farmer
Mac has received all interest due on ARCs it holds and expects to continue to do
so. Farmer Mac does not believe that the auction failures will affect
the Corporation’s liquidity or its ability to fund its operations or make
dividend payments. All ARCs held by Farmer Mac are callable by the
issuers at par at any time and Farmer Mac believes it is likely they will be
called or repurchased during the next two years. Due to the absence
of an active auction market or other market trading in ARCs, during first
quarter 2008 Farmer Mac transferred all of its ARCs from Level 2 to Level 3 and
recorded the ARCs as of March 31, 2008 at fair values of approximately 99
percent of par and par. The discounted values reflect uncertainty
regarding the ability to obtain par in the absence of any active market
trading. On April 22, 2008, Farmer Mac received a par tender offer
for $20.0 million of its ARC holdings. Farmer Mac tendered those
bonds and received par upon settlement on May 21, 2008. In August
2008, Farmer Mac sold $17.5 million of ARCs at par in the secondary
market. On October 31, 2008, Farmer Mac accepted an offer of Auction
Rate Securities Rights, Series B-2 from UBS AG related to $119.9 million of the
ARCs in Farmer Mac’s investment portfolio. Under the terms of the
rights, UBS has the discretion to purchase or sell the $119.9 million of ARCs at
any time without prior notice so long as Farmer Mac receives par value, while
Farmer Mac has the right to require UBS to purchase the securities at par value
at any time between January 2, 2009 and January 4, 2011. Farmer Mac
intends to exercise its rights and sell the ARCs to UBS on January 2,
2009. As of September 30, 2008, Farmer Mac’s remaining ARC holdings
were recorded at fair values of approximately 99 percent of par.
As of
September 30, 2008, Farmer Mac had an investment of $81.7 million in The Reserve
Primary Fund (the “Fund”), a money market fund that has suspended redemptions
and is being liquidated. On September 15, 2008, Farmer Mac delivered
a timely redemption request to redeem its entire investment in the Fund, but its
confirmed redemption request was not honored. The Fund announced on
September 16, 2008 that the net asset value of the Fund decreased below $1.00
per share as a result of the valuing at zero the Fund’s holdings of debt
securities issued by Lehman Brothers, but that all redemption requests received
before 3:00 p.m. that day would be redeemed at $1.00 per share. On
September 22, 2008, the Fund announced that redemptions of shares in the Fund
were being suspended for the protection of the Fund’s investors pursuant to an
SEC order until the financial markets allow an orderly liquidation to be
effected. Farmer Mac expects further cash distributions to occur as
the Fund’s assets mature or are sold, which the Corporation believes will be
within the next twelve months, although no commitments on the timing and ability
of future redemptions have been made by the Fund. Investments in
money market funds are generally recorded in “Cash and cash equivalents” on the
Corporation’s balance sheet; however, based on the foregoing information, the
Corporation has presented $39.2 million of its investment in the Fund as “Cash
and cash equivalents” and $42.5 million of its unsettled trades with the Fund
separately on the balance sheet as “Prepaid expenses and other assets,” both at
net asset values of $1.00 per share. On October 31, 2008, Farmer Mac
collected from the Fund all amounts classified as “Cash and cash equivalents” as
of September 30, 2008. Although Farmer Mac expects to receive $1.00
net asset value per share on its unsettled trade with the Fund, there can be no
assurance that the Corporation will ultimately receive this amount.
Capital. On
September 30, 2008, Farmer Mac issued $65.0 million of Series B Preferred
Stock. For more information about the Series B Preferred Stock, see
Note 6 to the condensed consolidated financial statements and Farmer Mac’s
Current Report on Form 8-K filed with the SEC on October 6, 2008.
Other
Matters
Dividends. Beginning
in fourth quarter 2004 and continuing through third quarter 2008, Farmer Mac has
paid quarterly dividends of $0.10 per share on each of the Corporation’s three
classes of common stock – Class A Voting Common Stock, Class B Voting Common
Stock, and Class C Non-Voting Common Stock. Each dividend was paid on
the last business day of each quarter to holders of record as of a fixed day at
least two weeks prior to the dividend payment date. As a general
practice, Farmer Mac has declared the dividend payable in the fourth quarter of
a year at the Board of Directors meeting held in October of that
year. At its October 2008 meeting, the Board deferred its
consideration of the declaration of dividends on its preferred and common stock
until its December 2008 meeting. At that meeting,
a determination will be made about the declaration of any dividends for
fourth quarter 2008 based on the Board’s evaluation of Farmer Mac’s
then-existing financial condition, outlook and indicated capital
needs. Farmer Mac’s ability to declare and pay dividends on its
preferred and common stock could be restricted if it were to fail to comply with
the applicable regulatory capital requirements. See
“Business—Government Regulation of Farmer Mac—Regulation—Capital
Standards—Enforcement levels” in Farmer Mac’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2007. Farmer Mac’s ability to pay
dividends on its common stock is also subject to the payment of dividends on its
outstanding preferred stock.
The
descriptions of the changes in Farmer Mac's Chairman, President and Chief
Executive Officer and Executive Vice President - Chief Financial Officer and
Treasurer are reported in Item 5.02 of each of the following Farmer Mac SEC
filings: Current Report on Form 8 K filed on September 19, 2008;
Current Report on Form 8 K filed on October 6, 2008; and Current Report on Form
8 K filed on October 24, 2008. Those sections of the referenced
reports are hereby incorporated by reference in this report. In
addition to the Board Executive Committee referred to in the 8-K filed October
6, 2008, the Board also has established a separate committee to conduct a search
for a permanent Chief Executive Officer.
Supplemental
Information
The
following tables present quarterly and annual information regarding loan
purchases, guarantees and LTSPCs and outstanding guarantees and
LTSPCs.
Farmer Mac Purchases, Guarantees and
LTSPCs
|
|
|
|
Farmer Mac I
|
|
|
|
|
|
|
|
|
|
Loans
and Guaranteed Securities
|
|
|
LTSPCs (1)
|
|
|
Farmer Mac II
|
|
|
Farmer
Mac Guaranteed Securities - Rural
Utilities
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
For
the quarter ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
$ |
508,179 |
|
|
$ |
239,170 |
|
|
$ |
83,672 |
|
|
$ |
- |
|
|
$ |
831,021 |
|
June 30,
2008
|
|
|
53,838 |
|
|
|
116,472 |
|
|
|
79,700 |
|
|
|
1,330,676 |
(2) |
|
|
1,580,686 |
|
March 31,
2008
|
|
|
37,468 |
|
|
|
53,281 |
|
|
|
53,114 |
|
|
|
- |
|
|
|
143,863 |
|
December 31,
2007
|
|
|
40,664 |
|
|
|
265,135 |
|
|
|
48,294 |
|
|
|
- |
|
|
|
354,093 |
|
September 30,
2007
|
|
|
25,545 |
|
|
|
156,930 |
|
|
|
49,049 |
|
|
|
- |
|
|
|
231,524 |
|
June 30,
2007
|
|
|
1,039,856 |
|
|
|
152,402 |
|
|
|
59,149 |
|
|
|
- |
|
|
|
1,251,407 |
|
March 31,
2007
|
|
|
21,644 |
|
|
|
396,322 |
|
|
|
53,548 |
|
|
|
- |
|
|
|
471,514 |
|
December 31,
2006
|
|
|
24,046 |
|
|
|
318,064 |
|
|
|
54,136 |
|
|
|
- |
|
|
|
396,246 |
|
September 30,
2006
|
|
|
1,018,253 |
|
|
|
177,885 |
|
|
|
74,217 |
|
|
|
- |
|
|
|
1,270,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
1,127,709 |
|
|
|
970,789 |
|
|
|
210,040 |
|
|
|
- |
|
|
|
2,308,538 |
|
December 31,
2006
|
|
|
1,598,673 |
|
|
|
1,139,699 |
|
|
|
234,684 |
|
|
|
- |
|
|
|
2,973,056 |
|
(1)
|
During
2005, Farmer Mac began issuing LTSPCs for the construction of agricultural
storage and processing facilities. As of September 30, 2008,
approximately $43.8 million of the loans underlying those $377.8 million
of LTSPCs were not yet disbursed by the
lender.
|
(2)
|
The
enactment of the Farm Bill on May 22, 2008 expanded Farmer Mac’s
authorities to include providing a secondary market for rural electric and
telephone loans made by cooperative lenders. Pursuant to this
expanded authority, during second quarter 2008, Farmer Mac placed its
guarantee on $1.3 billion of securities it previously held as
mission-related investments under authority granted by
FCA.
|
Outstanding
Balance of Farmer Mac Loans,
Guarantees and LTSPCs
|
|
|
|
Farmer Mac I
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-1996 Act
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and Guaranteed Securities
|
|
|
LTSPCs
|
|
|
Pre-1996 Act
|
|
|
Farmer Mac II
|
|
|
Farmer
Mac Guaranteed Securities - Rural
Utilities
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
As
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
$ |
5,723,175 |
|
|
$ |
2,264,880 |
|
|
$ |
1,692 |
|
|
$ |
995,639 |
|
|
$ |
824,941 |
|
|
$ |
9,810,327 |
|
June 30,
2008
|
|
|
5,471,897 |
|
|
|
1,997,172 |
|
|
|
2,406 |
|
|
|
960,278 |
|
|
|
1,330,676 |
|
|
|
9,762,429 |
|
March 31,
2008
|
|
|
5,519,539 |
|
|
|
1,943,181 |
|
|
|
2,406 |
|
|
|
959,444 |
|
|
|
- |
|
|
|
8,424,570 |
|
December 31,
2007
|
|
|
5,645,023 |
|
|
|
1,948,941 |
|
|
|
3,174 |
|
|
|
946,617 |
|
|
|
- |
|
|
|
8,543,755 |
|
September 30,
2007
|
|
|
5,691,797 |
|
|
|
1,724,328 |
|
|
|
3,174 |
|
|
|
943,183 |
|
|
|
- |
|
|
|
8,362,482 |
|
June 30,
2007
|
|
|
5,783,879 |
|
|
|
1,644,413 |
|
|
|
3,611 |
|
|
|
942,443 |
|
|
|
- |
|
|
|
8,374,346 |
|
March 31,
2007
|
|
|
4,508,595 |
|
|
|
1,920,848 |
|
|
|
3,748 |
|
|
|
932,056 |
|
|
|
- |
|
|
|
7,365,247 |
|
December 31,
2006
|
|
|
4,338,698 |
|
|
|
1,969,734 |
|
|
|
5,057 |
|
|
|
925,799 |
|
|
|
- |
|
|
|
7,239,288 |
|
September 30,
2006
|
|
|
4,267,309 |
|
|
|
1,884,223 |
|
|
|
5,802 |
|
|
|
900,835 |
|
|
|
- |
|
|
|
7,058,169 |
|
The Loans
and Guaranteed Securities and LTSPCs amounts in the table above reflect the
following conversions of existing LTSPCs to Farmer Mac I Guaranteed Securities
at the request of program participants. In addition to these
conversions, during third quarter 2008, one program participant converted a
$114.2 million Farmer Mac I Guaranteed Security into an LTSPC.
Conversions of LTSPCs to
Farmer Mac I Guaranteed
Securities
|
|
(in
thousands)
|
|
|
|
|
|
During
the quarter ended:
|
|
|
|
September 30,
2008
|
|
$ |
- |
|
June 30,
2008
|
|
|
- |
|
March 31,
2008
|
|
|
- |
|
December 31,
2007
|
|
|
- |
|
September 30,
2007
|
|
|
17,189 |
|
June 30,
2007
|
|
|
360,777 |
|
March 31,
2007
|
|
|
303,766 |
|
December 31,
2006
|
|
|
143,582 |
|
September 30,
2006
|
|
|
341,164 |
|
Outstanding
Balance of Loans Held and Loans Underlying
On-Balance Sheet Farmer Mac Guaranteed
Securities
|
|
|
|
Fixed Rate
|
|
|
5-to-10-Year
ARMs & Resets
|
|
|
1-Month-to-
3 Year ARMs
|
|
|
Total
Held in Portfolio
|
|
|
|
(in
thousands)
|
|
As
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
$ |
1,412,136 |
|
|
$ |
699,611 |
|
|
$ |
743,146 |
|
|
$ |
2,854,893 |
|
June 30,
2008
|
|
|
1,974,048 |
|
|
|
772,859 |
|
|
|
739,642 |
|
|
|
3,486,549 |
|
March 31,
2008
|
|
|
963,336 |
|
|
|
748,584 |
|
|
|
342,496 |
|
|
|
2,054,416 |
|
December 31,
2007
|
|
|
962,320 |
|
|
|
750,472 |
|
|
|
352,250 |
|
|
|
2,065,042 |
|
September 30,
2007
|
|
|
932,134 |
|
|
|
735,704 |
|
|
|
366,573 |
|
|
|
2,034,411 |
|
June 30,
2007
|
|
|
914,890 |
|
|
|
752,991 |
|
|
|
399,147 |
|
|
|
2,067,028 |
|
March 31,
2007
|
|
|
899,628 |
|
|
|
743,891 |
|
|
|
417,722 |
|
|
|
2,061,241 |
|
December 31,
2006
|
|
|
891,429 |
|
|
|
761,754 |
|
|
|
452,656 |
|
|
|
2,105,839 |
|
September 30,
2006
|
|
|
863,000 |
|
|
|
744,903 |
|
|
|
459,604 |
|
|
|
2,067,507 |
|
Item
3.
|
Quantitative and
Qualitative Disclosures About Market
Risk
|
Farmer
Mac is exposed to market risk attributable to changes in interest
rates. Farmer Mac manages this market risk by entering into various
financial transactions, including financial derivatives, and by monitoring its
exposure to changes in interest rates. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Risk
Management—Interest Rate Risk” for more information about Farmer Mac’s exposure
to interest rate risk and strategies to manage such risk. For
information regarding Farmer Mac’s use of and accounting policies for financial
derivatives, see Note 1(d) to the interim unaudited condensed consolidated
financial statements contained in this report. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources” for further information regarding
Farmer Mac’s debt issuance and liquidity risks.
Item
4.
|
Controls and
Procedures
|
(a) Management’s Evaluation of
Disclosure Controls and Procedures. Farmer Mac maintains
disclosure controls and procedures designed to ensure that information required
to be disclosed in the Corporation’s periodic filings under the Securities
Exchange Act of 1934 (the “Exchange Act”), including this report, is recorded,
processed, summarized and reported on a timely basis. These
disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed under the Exchange Act is
accumulated and communicated to the Corporation’s management on a timely basis
to allow decisions regarding required disclosure. Management,
including Farmer Mac’s Acting Chief Executive Officer (the “CEO”) and Acting
Chief Financial Officer (the “CFO”), has evaluated the effectiveness of the
design and operation of the Corporation’s disclosure controls and procedures (as
defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September
30, 2008.
The
Corporation carried out the evaluation required by paragraph (b) of Exchange Act
Rules 13a-15 and 15d-5, under the supervision and with the participation of
management, including the CEO and CFO, of the effectiveness of Farmer Mac’s
disclosure controls and procedures. Based upon this evaluation, the
CEO and CFO concluded that the Corporation’s disclosure controls and procedures
were effective as of September 30, 2008.
(b) Changes in Internal Control
Over Financial Reporting. There were no changes in Farmer
Mac’s internal control over financial reporting during the quarter ended
September 30, 2008 that has materially affected, or is reasonably likely to
materially affect, Farmer Mac’s internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
Farmer
Mac is not a party to any material pending legal proceedings.
The "Risk
Factors” section in Part I, Item 1A of Farmer Mac’s Annual Report on Form 10-K
for the year ended December 31, 2007 identifies the most significant risk
factors that could materially adversely affect Farmer Mac’s business, financial
condition or results of operations. The risk factors set forth below
in this report provide more specificity to some of those previously identified
risk factors and reflect recent developments.
Farmer
Mac’s ability to meet its regulatory capital requirements has been, and may
continue to be, adversely affected by market conditions and other
factors.
Farmer
Mac’s ability to meet its regulatory capital requirements has been, and may
continue to be, adversely affected by various factors, including market
volatility and investor interest in Farmer Mac securities. Factors
that could adversely affect the adequacy of Farmer Mac’s capital levels in the
future include:
|
·
|
the
potential for additional other-than-temporary impairment
charges;
|
|
·
|
potential
losses on any asset sales determined to be necessary to reduce the
Corporation’s need for capital;
|
|
·
|
the
potential need to increase the level of the allowance for losses on
program assets in the future; and
|
|
·
|
legislative
or regulatory actions that increase Farmer Mac’s applicable capital
requirements.
|
Any
actions taken to maintain compliance with capital requirements or to increase
capital levels could adversely affect stockholders.
Farmer
Mac may take a variety of actions to increase its capital levels, or to reduce
its need for capital, to meet applicable regulatory capital requirements,
including:
|
·
|
issuing
additional common or preferred
stock;
|
|
·
|
reducing,
eliminating or delaying dividends on common and preferred
stock;
|
|
·
|
constraining
growth in the portfolio of program assets by forgoing new business
opportunities; or
|
|
·
|
reducing
the size of its program and non-program portfolios through asset
sales.
|
Farmer
Mac’s ability to execute any of these actions or their effectiveness may be
limited, especially in today’s volatile and illiquid markets, and could
adversely affect the Corporation’s business, operating results, financial
condition and earnings. For example, Farmer Mac’s ability to issue
additional preferred or common stock would depend, in part, on market
conditions, and Farmer Mac may not be able to raise additional capital in the
amounts and at the time needed, on favorable terms or at
all. Issuances of new common or preferred stock are likely to be
dilutive to existing stockholders and may carry other terms and conditions that
could adversely affect the value of the common or preferred stock held by
existing stockholders. Farmer Mac may also incur significant costs
and expenses related to any issuances of new common or preferred
stock.
Farmer
Mac has recorded material writedowns in the value of its investment securities
and could experience further writedowns of its investments in future periods,
which could adversely affect the Corporation’s business, operating results,
financial condition and capital levels.
Farmer
Mac has recorded material other-than-temporary impairment charges on its
investment portfolio, and that portfolio continues to have significant exposure
to securities issued by financial institutions. Continued
deterioration in financial and credit market conditions could further reduce the
fair value of these and other investment securities, particularly those
securities that are less liquid and more subject to volatility.
Market
conditions have also increased the amount of judgment required to be exercised
by management to value certain securities. Furthermore, Farmer Mac
relies on internal models to determine the fair value of certain investment
securities, and those models could fail to produce reliable
results. Subsequent valuations of investment securities, in light of
factors then prevailing, may result in significant changes in the value of the
Corporation’s investment securities in the future. If Farmer Mac
decides to sell any of the securities in its investment portfolio, the price
ultimately realized will depend on the demand and liquidity in the market at
that time and may be materially lower than their current fair
value.
See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Results of Operations—Overview” and “—Balance Sheet Review” in this
report for more information about the writedowns on and fair values of the
securities in Farmer Mac’s non-program investment portfolio.
An
inability to access the debt capital markets could have a material adverse
effect on Farmer Mac’s business, operating results, financial condition and
capital levels.
Liquidity
is essential to Farmer Mac’s business, and the Corporation relies on external
sources to finance a significant portion of its operations. Farmer
Mac’s ability to operate its business, meet its obligations and generate net
interest income depends to a large degree on the Corporation’s ability to issue
substantial amounts of debt frequently and at favorable rates. The
issuance of short-term and long-term debt securities in the U.S. financial
markets is the primary source of funding for Farmer Mac’s purchases of program
and non-program assets and for repaying or refinancing existing
debt. Moreover, one of the primary sources of the Corporation’s
revenue is the net interest income earned from the difference, or “spread,”
between the return received on assets held and the related borrowing
costs. Farmer Mac’s ability to obtain funds through the issuance of
debt, and the cost at which these funds may be obtained, depends on many
factors, including:
|
·
|
Farmer
Mac’s corporate and regulatory structure, including its status as a GSE
and perceptions about the viability of stockholder-owned GSEs in
general;
|
|
·
|
legislative
or regulatory actions relating to Farmer Mac’s business, including any
actions that would affect the Corporation’s GSE status or add additional
requirements that would restrict or reduce its ability to issue
debt;
|
|
·
|
compliance
with regulatory capital requirements and any measures imposed by Farmer
Mac’s regulator if the Corporation were to fail to remain in compliance
with those requirements;
|
|
·
|
Farmer
Mac’s financial results and changes in its financial
condition;
|
|
·
|
the
public’s perception of the risks to and financial prospects of Farmer
Mac’s business;
|
|
·
|
prevailing
conditions in the capital markets;
and
|
|
·
|
competition
from other issuers of GSE debt.
|
If Farmer
Mac were unable to issue debt securities at favorable rates in amounts
sufficient to operate its business and meet its obligations, it could have a
material adverse effect on the Corporation’s business, operating results,
financial condition and capital levels.
Farmer
Mac has been, and may continue to be, adversely affected by current economic and
market conditions.
The
recent significant disruptions in world financial markets have already adversely
affected Farmer Mac by requiring material writedowns of assets and may continue
to have an adverse effect on the value and performance of Farmer Mac’s assets,
as well as its liquidity position, ability to issue debt securities, or access
to capital. The possible duration and severity of the adverse
economic cycle is unknown, as the efficacy of recent efforts and programs to
stabilize the economy and the banking system are uncertain. There can
be no assurance that market conditions will improve in the near future or that
results will not continue to be adversely affected.
Item
2.
|
Unregistered Sales of
Equity Securities and Use of
Proceeds
|
|
(a)
|
Farmer
Mac is a federally chartered instrumentality of the United States and its
debt and equity securities are exempt from registration pursuant to
Section 3(a)(2) of the Securities Act of
1933.
|
On July
7, 2008, pursuant to Farmer Mac’s policy that permits directors of Farmer Mac to
elect to receive shares of Class C Non-Voting Common Stock in lieu of their
annual cash retainers, Farmer Mac issued an aggregate of 616 shares of its Class
C Non-Voting Common Stock, at an issue price of $24.78 per share, to the six
directors who elected to receive such stock in lieu of their cash
retainers.
On
September 30, 2008, Farmer Mac sold 60,000 shares of its newly issued Series B-1
Preferred Stock and 5,000 shares of its newly issued Series B-2 Preferred Stock
for an aggregate purchase price of $65.0 million, or $1,000 per share. For more
information about the Series B Preferred Stock, see Note 6 to the condensed
consolidated financial statements and Farmer Mac’s Current Report on Form 8-K
filed with the SEC on October 6, 2008.
Item
3.
|
Defaults Upon Senior
Securities
|
Item
4.
|
Submission of Matters
to a Vote of Security
Holders
|
Item
5.
|
Other
Information
|
*
|
3.1
|
-
|
Title
VIII of the Farm Credit Act of 1971, as most recently amended by the Food,
Conservation and Energy Act of 2008 (Form 10-Q filed August 12,
2008).
|
|
|
|
|
*
|
3.2
|
-
|
Amended
and Restated By-Laws of the Registrant (Form 10-K filed March 17,
2008).
|
|
|
|
|
*
|
4.1
|
-
|
Specimen
Certificate for Farmer Mac Class A Voting Common Stock (Form 10-Q filed
May 15, 2003).
|
|
|
|
|
*
|
4.2
|
-
|
Specimen
Certificate for Farmer Mac Class B Voting Common Stock (Form 10-Q filed
May 15, 2003).
|
|
|
|
|
*
|
4.3
|
-
|
Specimen
Certificate for Farmer Mac Class C Non-Voting Common Stock (Form 10-Q
filed May 15, 2003).
|
|
|
|
|
*
|
4.4
|
-
|
Certificate
of Designation of Terms and Conditions of Farmer Mac 6.40 percent
Cumulative Preferred Stock, Series A (Form 10-Q filed May 15,
2003).
|
|
|
|
|
*
|
4.5.1
|
-
|
Master
Terms Agreement for Farmer Mac’s Universal Debt Facility dated as of July
28, 2005 (Previously filed as Exhibit 4.3 to Form 8-A filed August 4,
2005).
|
|
|
|
|
*
|
4.5.2
|
-
|
Supplemental
Agreement for 4.25 percent Fixed Rate Global Notes Due July 29, 2008
(Previously filed as Exhibit 4.4 to Form 8-A filed August 4,
2005).
|
|
|
|
|
**
|
|
-
|
Amended
and Restated Certificate of Designation of Terms and Conditions of Farmer
Mac Senior Cumulative Perpetual Preferred Stock, Series
B-1.
|
|
|
|
|
**
|
|
-
|
Amended
and Restated Certificate of Designation of Terms and Conditions of Farmer
Mac Senior Cumulative Perpetual Preferred Stock, Series
B-2.
|
|
|
|
|
†*
|
10.1
|
-
|
Amended
and Restated 1997 Incentive Plan (Form 10-Q filed November 14,
2003).
|
|
|
|
|
†*
|
10.1.1
|
-
|
Form
of stock option award agreement under 1997 Incentive Plan (Form 10-K filed
March 16, 2005).
|
|
|
|
|
†*
|
10.1.2
|
-
|
2008
Omnibus Incentive Plan (Form 10-Q filed August 12,
2008).
|
__________________
*
|
Incorporated by
reference to the indicated prior filing. |
**
|
Filed with this
report.
|
†
|
Management
contract or compensatory plan.
|
#
|
Portions of this exhibit have
been omitted pursuant to a request for confidential
treatment.
|
†*
|
10.1.3
|
-
|
Form
of SAR Agreement under the 2008 Omnibus Incentive Plan (Previously filed
as Exhibit 10 to Form 8-K filed June 11, 2008).
|
|
|
|
|
†*
|
10.2
|
-
|
Compiled
Amended and Restated Employment Agreement dated June 5, 2008 between Henry
D. Edelman and the Registrant (Form 8-K filed August 1,
2008).
|
|
|
|
|
†*
|
10.3
|
-
|
Compiled
Amended and Restated Employment Agreement dated June 5, 2008 between Nancy
E. Corsiglia and the Registrant (Form 10-Q filed August 12,
2008).
|
|
|
|
|
†*
|
10.4
|
-
|
Compiled
Amended and Restated Employment Contract dated as of June 5, 2008 between
Tom D. Stenson and the Registrant (Form 10-Q filed August 12,
2008).
|
|
|
|
|
†*
|
10.5
|
-
|
Compiled
Amended and Restated Employment Contract dated June 5, 2008 between
Timothy L. Buzby and the Registrant (Form 10-Q filed August 12,
2008).
|
|
|
|
|
†*
|
10.6
|
-
|
Compiled
Amended and Restated Employment Contract dated June 5, 2008 between Mary
K. Waters and the Registrant(Form 10-Q filed August 12,
2008).
|
|
|
|
|
*
|
10.7
|
-
|
Farmer
Mac I Seller/Servicer Agreement dated as of August 7, 1996 between Zions
First National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
|
|
|
*
|
10.8
|
-
|
Medium-Term
Notes U.S. Selling Agency Agreement dated as of October 1, 1998 between
Zions First National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
|
|
|
*
|
10.9
|
-
|
Discount
Note Dealer Agreement dated as of September 18, 1996 between Zions First
National Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
|
|
|
*#
|
10.10
|
-
|
ISDA
Master Agreement and Credit Support Annex dated as of June 26, 1997
between Zions First National Bank and the Registrant (Form 10-Q filed
November 14, 2002).
|
|
|
|
|
*#
|
10.11
|
-
|
Amended
and Restated Master Central Servicing Agreement dated as of May 1, 2004
between Zions First National Bank and the Registrant (Previously filed as
Exhibit 10.11.2 to Form 10-Q filed August 9,
2004).
|
__________________
*
|
Incorporated by
reference to the indicated prior filing. |
**
|
Filed with this
report.
|
†
|
Management
contract or compensatory plan.
|
#
|
Portions of this exhibit have
been omitted pursuant to a request for confidential
treatment.
|
*#
|
10.12
|
-
|
Loan
Closing File Review Agreement dated as of August 2, 2005 between Zions
First National Bank and the Registrant (Form 10-Q filed November 9,
2005).
|
|
|
|
|
*#
|
10.13
|
-
|
Long
Term Standby Commitment to Purchase dated as of August 1, 1998 between
AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed November 14,
2002).
|
|
|
|
|
*#
|
10.13.1
|
-
|
Amendment
No. 1 dated as of January 1, 2000 to Long Term Standby Commitment to
Purchase dated as of August 1, 1998 between AgFirst Farm Credit Bank and
the Registrant (Form 10-Q filed November 14, 2002).
|
|
|
|
|
*
|
10.13.2
|
-
|
Amendment
No. 2 dated as of September 1, 2002 to Long Term Standby Commitment to
Purchase dated as of August 1, 1998, as amended by Amendment No. 1 dated
as of January 1, 2000, between AgFirst Farm Credit Bank and the Registrant
(Form 10-Q filed November 14, 2002).
|
|
|
|
|
*
|
10.14
|
-
|
Lease
Agreement, dated June 28, 2001 between EOP – Two Lafayette, L.L.C. and the
Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 27,
2002).
|
|
|
|
|
*#
|
10.15
|
-
|
Long
Term Standby Commitment to Purchase dated as of August 1, 2007 between
Farm Credit Bank of Texas and the Registrant (Previously filed as Exhibit
10.20 to Form 10-Q filed November 8, 2007).
|
|
|
|
|
*#
|
10.16
|
-
|
Long
Term Standby Commitment to Purchase dated as of June 1, 2003 between Farm
Credit Bank of Texas and the Registrant (Form 10-Q filed November 9,
2004).
|
|
|
|
|
*#
|
10.16.1
|
-
|
Amendment
No. 1 dated as of December 8, 2006 to Long Term Standby Commitment to
Purchase dated as of June 1, 2003 between Farm Credit Bank of Texas and
the Registrant (Form 10-K filed March 15, 2007).
|
|
|
|
|
*#
|
10.17
|
-
|
Central
Servicer Delinquent Loan Servicing Transfer Agreement dated as of July 1,
2004 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed
November 9, 2004).
|
|
|
|
|
†*
|
10.18
|
-
|
Form
of Indemnification Agreement for Directors (Previously filed as Exhibit
10.1 to Form 8-K filed April 9, 2008).
|
|
|
|
|
†*
|
10.19
|
-
|
Description
of compensation agreement between the Registrant and its directors (Form
10-Q filed August 9,
2007).
|
__________________
*
|
Incorporated by
reference to the indicated prior filing. |
**
|
Filed with this
report.
|
†
|
Management
contract or compensatory plan.
|
#
|
Portions of this exhibit have
been omitted pursuant to a request for confidential
treatment.
|
†**
|
|
-
|
Work
for Hire Agreement dated October 20, 2008 between William T. Sandalls, Jr.
and the Registrant.
|
|
|
|
|
†**
|
|
-
|
Secondment
Agreement effective as of October 1, 2008 between Farm Credit of Western
New York and the Registrant.
|
|
|
|
|
|
21
|
-
|
Farmer
Mac Mortgage Securities Corporation, a Delaware
corporation.
|
|
|
|
|
**
|
|
-
|
Certification
of Chief Executive Officer relating to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2008, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
**
|
|
-
|
Certification
of Chief Financial Officer relating to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2008, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
**
|
|
-
|
Certification
of Chief Executive Officer and Chief Financial Officer relating to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2008, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of
2002.
|
__________________
*
|
Incorporated by
reference to the indicated prior filing. |
**
|
Filed with this
report.
|
†
|
Management
contract or compensatory plan.
|
#
|
Portions of this exhibit have
been omitted pursuant to a request for confidential
treatment.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
November
10, 2008
|
By:
|
/s/ Michael A. Gerber
|
|
|
Michael
A. Gerber
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ William T. Sandalls,
Jr.
|
|
|
William
T. Sandalls, Jr.
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|
-85-