Unassociated Document
As filed
with the Securities and Exchange Commission on
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, 2009
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.
Yes x No ¨
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 x
|
|
|
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).
Yes ¨ No x
As of
November 2, 2009 the registrant had 1,030,780 shares of Class A Voting
Common Stock, 500,301 shares of Class B Voting Common Stock and
8,610,918 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, 2009 and December 31,
2008
|
|
3
|
Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2009 and 2008
|
|
4
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2009 and 2008
|
|
5
|
Notes
to Condensed Consolidated Financial Statements
|
|
6
|
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
274,894 |
|
|
$ |
278,412 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
924,041 |
|
|
|
1,072,096 |
|
Trading,
at fair value
|
|
|
97,438 |
|
|
|
163,763 |
|
Total
investment securities
|
|
|
1,021,479 |
|
|
|
1,235,859 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
2,609,185 |
|
|
|
1,511,694 |
|
Trading,
at fair value
|
|
|
890,976 |
|
|
|
939,550 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
3,500,161 |
|
|
|
2,451,244 |
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
held for sale, at lower of cost or fair value
|
|
|
646,420 |
|
|
|
66,680 |
|
Loans
held for investment, at amortized cost
|
|
|
85,706 |
|
|
|
718,845 |
|
Allowance
for loan losses
|
|
|
(4,892 |
) |
|
|
(10,929 |
) |
Total
loans, net of allowance
|
|
|
727,234 |
|
|
|
774,596 |
|
|
|
|
|
|
|
|
|
|
Real
estate owned, at lower of cost or fair value
|
|
|
10,637 |
|
|
|
606 |
|
Financial
derivatives, at fair value
|
|
|
21,099 |
|
|
|
27,069 |
|
Interest
receivable
|
|
|
56,206 |
|
|
|
73,058 |
|
Guarantee
and commitment fees receivable
|
|
|
54,472 |
|
|
|
61,109 |
|
Deferred
tax asset, net
|
|
|
15,150 |
|
|
|
87,793 |
|
Prepaid
expenses and other assets
|
|
|
52,399 |
|
|
|
117,561 |
|
Total
Assets
|
|
$ |
5,733,731 |
|
|
$ |
5,107,307 |
|
|
|
|
|
|
|
|
|
|
Liabilities,
Mezzanine Equity and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
3,155,589 |
|
|
$ |
3,757,099 |
|
Due
after one year
|
|
|
1,962,591 |
|
|
|
887,999 |
|
Total
notes payable
|
|
|
5,118,180 |
|
|
|
4,645,098 |
|
|
|
|
|
|
|
|
|
|
Financial
derivatives, at fair value
|
|
|
127,607 |
|
|
|
181,183 |
|
Accrued
interest payable
|
|
|
37,388 |
|
|
|
40,470 |
|
Guarantee
and commitment obligation
|
|
|
48,811 |
|
|
|
54,954 |
|
Accounts
payable and accrued expenses
|
|
|
44,979 |
|
|
|
20,532 |
|
Reserve
for losses
|
|
|
7,585 |
|
|
|
5,506 |
|
Total
Liabilities
|
|
|
5,384,550 |
|
|
|
4,947,743 |
|
|
|
|
|
|
|
|
|
|
Mezzanine
Equity:
|
|
|
|
|
|
|
|
|
Series
B redeemable preferred stock, par value $1,000, 150,000 shares authorized,
issued and outstanding
|
|
|
144,216 |
|
|
|
144,216 |
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
Series
C, stated at redemption/liquidation value, $1,000 per share, 100,000
shares authorized, 57,000 and 9,200 issued and outstanding as of September
30, 2009 and December 31, 2008, respectively
|
|
|
57,000 |
|
|
|
9,200 |
|
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
|
|
|
8,609 |
|
|
|
8,601 |
|
Additional
paid-in capital
|
|
|
96,547 |
|
|
|
95,572 |
|
Accumulated
other comprehensive income/(loss)
|
|
|
18,139 |
|
|
|
(47,412 |
) |
Retained
earnings/(accumulated deficit)
|
|
|
23,139 |
|
|
|
(52,144 |
) |
Total
Stockholders' Equity
|
|
|
204,965 |
|
|
|
15,348 |
|
Total
Liabilities, Mezzanine Equity and Stockholders' Equity
|
|
$ |
5,733,731 |
|
|
$ |
5,107,307 |
|
See
accompanying notes to condensed consolidated financial
statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
|
|
(in thousands, except per share amounts)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
and cash equivalents
|
|
$ |
6,345 |
|
|
$ |
20,395 |
|
|
$ |
22,303 |
|
|
$ |
97,305 |
|
Farmer
Mac Guaranteed Securities
|
|
|
27,668 |
|
|
|
28,470 |
|
|
|
81,232 |
|
|
|
67,007 |
|
Loans
|
|
|
8,815 |
|
|
|
11,718 |
|
|
|
28,196 |
|
|
|
35,192 |
|
Total
interest income
|
|
|
42,828 |
|
|
|
60,583 |
|
|
|
131,731 |
|
|
|
199,504 |
|
Total
interest expense
|
|
|
23,031 |
|
|
|
39,260 |
|
|
|
68,593 |
|
|
|
135,885 |
|
Net
interest income
|
|
|
19,797 |
|
|
|
21,323 |
|
|
|
63,138 |
|
|
|
63,619 |
|
Provision
for loan losses
|
|
|
(3,098 |
) |
|
|
(731 |
) |
|
|
(939 |
) |
|
|
(731 |
) |
Net
interest income after provision for loan losses
|
|
|
16,699 |
|
|
|
20,592 |
|
|
|
62,199 |
|
|
|
62,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
|
8,168 |
|
|
|
7,281 |
|
|
|
23,486 |
|
|
|
20,574 |
|
(Losses)/gains
on financial derivatives
|
|
|
(7,733 |
) |
|
|
(19,021 |
) |
|
|
15,506 |
|
|
|
(29,691 |
) |
Gains/(losses)
on trading assets
|
|
|
25,047 |
|
|
|
(14,507 |
) |
|
|
56,707 |
|
|
|
(21,664 |
) |
Other-than-temporary
impairment losses
|
|
|
(1,621 |
) |
|
|
(97,108 |
) |
|
|
(3,994 |
) |
|
|
(102,452 |
) |
Gains/(losses)
on sale of available-for-sale investment securities
|
|
|
63 |
|
|
|
(85 |
) |
|
|
2,913 |
|
|
|
65 |
|
Gains
on sale of loans and Farmer Mac Guaranteed Securities
|
|
|
- |
|
|
|
1,531 |
|
|
|
1,581 |
|
|
|
1,531 |
|
Gains
on repurchase of debt
|
|
|
- |
|
|
|
840 |
|
|
|
- |
|
|
|
840 |
|
Other income
|
|
|
874 |
|
|
|
192 |
|
|
|
1,209 |
|
|
|
1,315 |
|
Non-interest
income/(loss)
|
|
|
24,798 |
|
|
|
(120,877 |
) |
|
|
97,408 |
|
|
|
(129,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
2,896 |
|
|
|
3,748 |
|
|
|
10,493 |
|
|
|
11,327 |
|
General
and administrative
|
|
|
2,432 |
|
|
|
4,061 |
|
|
|
8,332 |
|
|
|
8,331 |
|
Regulatory
fees
|
|
|
512 |
|
|
|
513 |
|
|
|
1,537 |
|
|
|
1,538 |
|
Real
estate owned operating costs, net
|
|
|
203 |
|
|
|
15 |
|
|
|
208 |
|
|
|
102 |
|
Provision/(recoveries)
for losses
|
|
|
89 |
|
|
|
(91 |
) |
|
|
2,079 |
|
|
|
(91 |
) |
Non-interest
expense
|
|
|
6,132 |
|
|
|
8,246 |
|
|
|
22,649 |
|
|
|
21,207 |
|
Income/(loss)
before income taxes
|
|
|
35,365 |
|
|
|
(108,531 |
) |
|
|
136,958 |
|
|
|
(87,801 |
) |
Income
tax expense/(benefit)
|
|
|
13,097 |
|
|
|
(2,973 |
) |
|
|
47,721 |
|
|
|
3,463 |
|
Net
income/(loss)
|
|
|
22,268 |
|
|
|
(105,558 |
) |
|
|
89,237 |
|
|
|
(91,264 |
) |
Preferred
stock dividends
|
|
|
(4,368 |
) |
|
|
(578 |
) |
|
|
(12,434 |
) |
|
|
(1,698 |
) |
Net
income/(loss) available to common stockholders
|
|
$ |
17,900 |
|
|
$ |
(106,136 |
) |
|
$ |
76,803 |
|
|
$ |
(92,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss)
per common share and dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings/(loss) per common share
|
|
$ |
1.77 |
|
|
$ |
(10.55 |
) |
|
$ |
7.58 |
|
|
$ |
(9.33 |
) |
Diluted
earnings/(loss) per common share
|
|
$ |
1.74 |
|
|
$ |
(10.55 |
) |
|
$ |
7.54 |
|
|
$ |
(9.33 |
) |
Common
stock dividends per common share
|
|
$ |
0.05 |
|
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
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,
2009
|
|
|
September 30,
2008
|
|
|
|
(in thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$ |
89,237 |
|
|
$ |
(91,264 |
) |
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Net
amortization of premiums and discounts on loans, investments and Farmer
Mac Guaranteed Securities
|
|
|
3,123 |
|
|
|
3,752 |
|
Amortization
of debt premiums, discounts and issuance costs
|
|
|
10,982 |
|
|
|
66,790 |
|
Proceeds
from repayment and sale of trading investment securities
|
|
|
644 |
|
|
|
6,507 |
|
Purchases
of loans held for sale
|
|
|
(122,421 |
) |
|
|
(38,461 |
) |
Proceeds
from repayment of loans held for sale
|
|
|
51,896 |
|
|
|
14,747 |
|
Net
change in fair value of trading securities and financial
derivatives
|
|
|
(104,312 |
) |
|
|
30,954 |
|
Amortization
of transition adjustment on financial derivatives
|
|
|
124 |
|
|
|
222 |
|
Other-than-temporary
impairment losses
|
|
|
3,994 |
|
|
|
102,452 |
|
Gains
on sale of loans and Farmer Mac Guaranteed Securities
|
|
|
(1,581 |
) |
|
|
(1,531 |
) |
Gains
on sale of available-for-sale investment securities
|
|
|
(2,913 |
) |
|
|
(65 |
) |
Gains
on repurchase of debt
|
|
|
- |
|
|
|
(840 |
) |
Total
provision for losses
|
|
|
3,018 |
|
|
|
640 |
|
Deferred
income taxes
|
|
|
73,629 |
|
|
|
(11,316 |
) |
Stock-based
compensation expense
|
|
|
2,159 |
|
|
|
3,389 |
|
Decrease
in interest receivable
|
|
|
16,852 |
|
|
|
34,238 |
|
Decrease/(increase) in
guarantee and commitment fees receivable
|
|
|
6,637 |
|
|
|
(2,581 |
) |
Decrease/(increase)
in other assets
|
|
|
24,287 |
|
|
|
(41,561 |
) |
Decrease
in accrued interest payable
|
|
|
(3,082 |
) |
|
|
(17,484 |
) |
Increase
in other liabilities
|
|
|
11,725 |
|
|
|
8,911 |
|
Net
cash provided by operating activities
|
|
|
63,998 |
|
|
|
67,499 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of available-for-sale investment securities
|
|
|
(41,721 |
) |
|
|
(1,160,501 |
) |
Purchases
of Farmer Mac Guaranteed Securities
|
|
|
(1,952,704 |
) |
|
|
(305,584 |
) |
Purchases
of loans held for investment
|
|
|
(48,147 |
) |
|
|
(86,024 |
) |
Purchases
of defaulted loans
|
|
|
(19,631 |
) |
|
|
(1,746 |
) |
Proceeds
from repayment of available-for-sale investment securities
|
|
|
148,544 |
|
|
|
445,154 |
|
Proceeds
from repayment of Farmer Mac Guaranteed Securities
|
|
|
690,741 |
|
|
|
219,341 |
|
Proceeds
from repayment of loans
|
|
|
37,308 |
|
|
|
101,964 |
|
Proceeds
from sale of available-for-sale investment securities
|
|
|
207,879 |
|
|
|
351,256 |
|
Proceeds
from sale of Farmer Mac Guaranteed Securities
|
|
|
24,232 |
|
|
|
649,723 |
|
Proceeds
from sale of real estate owned
|
|
|
31,056 |
|
|
|
- |
|
Proceeds
from sale of loans held
|
|
|
358,953 |
|
|
|
- |
|
Net
cash (used in)/provided by investing activities
|
|
|
(563,490 |
) |
|
|
213,583 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of discount notes
|
|
|
40,680,191 |
|
|
|
105,086,822 |
|
Proceeds
from issuance of medium-term notes
|
|
|
2,962,189 |
|
|
|
1,486,903 |
|
Payments
to redeem discount notes
|
|
|
(41,077,281 |
) |
|
|
(104,926,504 |
) |
Payments
to redeem medium-term notes
|
|
|
(2,103,000 |
) |
|
|
(1,979,660 |
) |
Tax
benefit from tax deductions in excess of compensation cost
recognized
|
|
|
- |
|
|
|
381 |
|
Proceeds
from common stock issuance
|
|
|
29 |
|
|
|
5,722 |
|
Purchases
of common stock
|
|
|
- |
|
|
|
(830 |
) |
Proceeds
from preferred stock issuance
|
|
|
47,800 |
|
|
|
- |
|
Dividends
paid
|
|
|
(13,954 |
) |
|
|
(4,700 |
) |
Net
cash provided by/ (used in) financing activities
|
|
|
495,974 |
|
|
|
(331,866 |
) |
Net decrease
in cash and cash equivalents
|
|
|
(3,518 |
) |
|
|
(50,784 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
278,412 |
|
|
|
101,445 |
|
Cash
and cash equivalents at end of period
|
|
$ |
274,894 |
|
|
$ |
50,661 |
|
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, 2008
condensed consolidated balance sheet presented in this report has been derived
from the Corporation’s audited 2008 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 2008 consolidated
financial statements of Farmer Mac included in the Corporation’s Annual Report
on Form 10-K for the year ended December 31, 2008 filed with the SEC on March
16, 2009. Results for interim periods are not necessarily indicative of those
that may be expected for the fiscal year. Farmer Mac evaluated subsequent events
through November 9, 2009. 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. During the three and nine months ended September 30, 2009,
Farmer Mac refinanced $100 million and $500 million, respectively, of certain
Farmer Mac Guaranteed Securities - Rural Utilities. For the nine months ended
September 30, 2009, the cash flows related to these transactions are presented
gross in the condensed consolidated statements of cash flows, whereas the six
months ended June 30, 2009 reflected a net presentation. The following table
sets forth information regarding certain cash and non-cash transactions for the
nine months ended September 30, 2009 and 2008.
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
(in thousands)
|
|
Cash
paid for:
|
|
|
|
|
|
|
Interest
|
|
$ |
58,994 |
|
|
$ |
88,012 |
|
Income
taxes
|
|
|
10,500 |
|
|
|
25,069 |
|
Non-cash
activity:
|
|
|
|
|
|
|
|
|
Transfer
of loans held for investment to real estate owned
|
|
|
41,086 |
|
|
|
- |
|
Loans
acquired and securitized as Farmer Mac Guaranteed
Securities
|
|
|
17,224 |
|
|
|
79,757 |
|
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 the fair value option
|
|
|
- |
|
|
|
600,468 |
|
Transfers
of Farmer Mac II Guaranteed Securities from held-to-maturity to trading
from the effect of adopting the fair value option
|
|
|
- |
|
|
|
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 |
|
Transfers
of Farmer Mac I Guaranteed Securities to loans held for
sale
|
|
|
288,012 |
|
|
|
- |
|
Transfers
of loans held for investment to loans held for sale
|
|
|
617,072 |
|
|
|
- |
|
Exchange
of GSE preferred stock - transfer from trading to
available-for-sale
|
|
|
90,657 |
|
|
|
- |
|
(b) Allowance for
Losses
As of
September 30, 2009, Farmer Mac maintained an allowance for losses to cover
estimated probable losses on loans held and loans underlying LTSPCs, Farmer Mac
I Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural Utilities
in accordance with ASC 450-20, Loss Contingencies (formerly
FASB Statement No. 5) and ASC 310-35, Receivables – Subsequent Measurement
(formerly FASB Statement No. 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, or releases of allowance 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 automated loan classification system. That system scores loans
based on criteria such as historical repayment performance, indicators of
current financial condition, 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 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 Farmer Mac I Guaranteed Securities. The
calculated loss rates are applied to the current classification distribution of
unimpaired loans in 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.
|
Farmer
Mac separately evaluates the cooperative lender obligations of loans and loans
underlying its Farmer Mac Guaranteed Securities in its Rural Utilities program
to determine if there are probable losses inherent in the securities or the
underlying rural utilities loans.
Farmer
Mac also analyzes assets in its portfolio for impairment. Farmer Mac’s impaired
assets include:
|
·
|
non-performing
assets (loans 90 days or more past due, in foreclosure, restructured,
in bankruptcy – including loans performing under either their original
loan terms or a court-approved bankruptcy
plan);
|
|
·
|
loans
for which Farmer Mac had adjusted the timing of borrowers’ payment
schedules, but still expects to collect all amounts due and has not made
economic concessions; and
|
|
·
|
additional
performing loans that have previously been delinquent or are secured by
real estate that produces agricultural commodities or products currently
under stress.
|
For loans
with an updated appraised value, other updated collateral valuation or
management’s estimate of discounted collateral value, this analysis includes the
measurement of the fair value of the underlying collateral for individual loans
relative to the total recorded investment, including principal, interest and
advances. In the event that the collateral value does not support the total
recorded investment, Farmer Mac provides a specific allowance for the difference
between the recorded investment and its fair value, less estimated costs to
liquidate the collateral. For the remaining impaired assets without updated
valuations, this analysis is performed in the aggregate in consideration of the
similar risk characteristics of the assets and historical
statistics.
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 and loans
underlying Farmer Mac I Guaranteed Securities, LTSPCs and Farmer Mac Guaranteed
Securities – Rural Utilities.
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, 2009 and
2008:
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Allowance
|
|
|
|
|
|
Total
|
|
|
Allowance
|
|
|
|
|
|
Total
|
|
|
|
for Loan
|
|
|
Reserve
|
|
|
Allowance
|
|
|
for Loan
|
|
|
Reserve
|
|
|
Allowance
|
|
|
|
Losses
|
|
|
for Losses
|
|
|
for Losses
|
|
|
Losses
|
|
|
for Losses
|
|
|
for Losses
|
|
|
|
(in thousands)
|
|
For
the Three Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,810 |
|
|
$ |
7,496 |
|
|
$ |
9,306 |
|
|
$ |
1,592 |
|
|
$ |
2,197 |
|
|
$ |
3,789 |
|
Provision/(recovery)
for losses
|
|
|
3,098 |
|
|
|
89 |
|
|
|
3,187 |
|
|
|
731 |
|
|
|
(91 |
) |
|
|
640 |
|
Charge-offs
|
|
|
(16 |
) |
|
|
- |
|
|
|
(16 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Recoveries
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
6 |
|
Ending
balance
|
|
$ |
4,892 |
|
|
$ |
7,585 |
|
|
$ |
12,477 |
|
|
$ |
2,329 |
|
|
$ |
2,106 |
|
|
$ |
4,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
10,929 |
|
|
$ |
5,506 |
|
|
$ |
16,435 |
|
|
$ |
1,690 |
|
|
$ |
2,197 |
|
|
$ |
3,887 |
|
Provision/(recovery)
for losses
|
|
|
939 |
|
|
|
2,079 |
|
|
|
3,018 |
|
|
|
731 |
|
|
|
(91 |
) |
|
|
640 |
|
Charge-offs
|
|
|
(7,741 |
) |
|
|
- |
|
|
|
(7,741 |
) |
|
|
(108 |
) |
|
|
- |
|
|
|
(108 |
) |
Recoveries
|
|
|
765 |
|
|
|
- |
|
|
|
765 |
|
|
|
16 |
|
|
|
- |
|
|
|
16 |
|
Ending
balance
|
|
$ |
4,892 |
|
|
$ |
7,585 |
|
|
$ |
12,477 |
|
|
$ |
2,329 |
|
|
$ |
2,106 |
|
|
$ |
4,435 |
|
No
allowance for losses has been provided for loans underlying AgVantage securities
or securities issued under the Farmer Mac II program (“Farmer Mac II Guaranteed
Securities”). Each AgVantage security is a general obligation of an
issuing institution approved by Farmer Mac and is collateralized by eligible
loans in an amount at least equal to the outstanding principal amount of the
security. As of September 30, 2009, there were no probable losses
inherent in Farmer Mac’s AgVantage securities due to the credit quality of the
obligors, as well as the underlying collateral. As of September 30,
2009, Farmer Mac had not experienced any credit losses on any AgVantage
securities. 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, 2009, Farmer Mac had not experienced any credit losses on any Farmer Mac II
Guaranteed Securities.
The table
below summarizes the components of Farmer Mac’s allowance for losses as of
September 30, 2009 and December 31, 2008:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Allowance
for loan losses
|
|
$ |
4,892 |
|
|
$ |
10,929 |
|
Reserve
for losses:
|
|
|
|
|
|
|
|
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
- |
|
|
|
869 |
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
1,511 |
|
|
|
535 |
|
LTSPCs
|
|
|
6,074 |
|
|
|
4,102 |
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
12,477 |
|
|
$ |
16,435 |
|
As of
September 30, 2009, Farmer Mac individually analyzed $44.5 million of its
$216.4 million of impaired assets for collateral shortfalls against updated
appraised values, other updated collateral valuations or discounted
values. Farmer Mac evaluated the remaining $171.9 million of
impaired assets for which updated valuations were not available in the aggregate
in consideration of their similar risk characteristics and historical
statistics. Farmer Mac’s specific allowance for under-collateralized
assets was $1.5 million as of September 30, 2009 and $8.6 million as of
December 31, 2008. Farmer Mac’s non-specific or general allowances
were $11.0 million as of September 30, 2009 and $7.8 million as of December
31, 2008.
Farmer
Mac recognized interest income of approximately $0.4 million and $2.0 million on
impaired loans during the three and nine months ended September 30, 2009,
respectively, compared to $1.0 million and $3.1 million, respectively, during
the same periods in 2008. During the three and nine months ended
September 30, 2009, Farmer Mac’s average investment in impaired loans was $184.6
million and $168.0 million, respectively, compared to $46.9 million and $42.2
million, respectively, for the same periods in 2008.
(c) 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. 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 loans 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 often times deriving an overall
lower effective cost of borrowing than would otherwise be available to Farmer
Mac in the conventional debt market. Farmer Mac also recognizes
certain contracts and commitments as derivatives when the characteristics of
those contracts and commitments meet the definition of a derivative in ASC Topic
815, Derivatives and
Hedging (“ASC 815”).
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 the debt of other government-sponsored enterprises (“GSEs”),
futures contracts involving U.S. Treasury securities and interest rate swap
contracts. Farmer Mac uses forward sale contracts on GSE securities
to reduce its interest rate exposure to changes in both U.S. Treasury rates and
spreads on Farmer Mac debt. 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.
All
financial derivatives are recorded on the balance sheet at fair value as a
freestanding asset or liability. 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 tables summarize information related to Farmer Mac’s financial
derivatives as of September 30, 2009 and December 31, 2008:
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Notional
|
|
|
Fair Value
|
|
|
Pay
|
|
|
Receive
|
|
|
Forward
|
|
|
Life
|
|
|
|
Amount
|
|
|
Asset
|
|
|
(Liability)
|
|
|
Rate
|
|
|
Rate
|
|
|
Price
|
|
|
(in years)
|
|
|
|
(dollars in thousands)
|
|
Interest
rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
fixed callable
|
|
$ |
100,337 |
|
|
$ |
- |
|
|
$ |
(2,664 |
) |
|
|
5.74 |
% |
|
|
0.45 |
% |
|
|
|
|
|
7.65 |
|
Pay
fixed non-callable
|
|
|
1,190,521 |
|
|
|
- |
|
|
|
(121,394 |
) |
|
|
5.15 |
% |
|
|
0.42 |
% |
|
|
|
|
|
4.94 |
|
Receive
fixed callable
|
|
|
325,000 |
|
|
|
347 |
|
|
|
(51 |
) |
|
|
0.04 |
% |
|
|
0.56 |
% |
|
|
|
|
|
0.92 |
|
Receive
fixed non-callable
|
|
|
2,601,263 |
|
|
|
20,702 |
|
|
|
(778 |
) |
|
|
0.53 |
% |
|
|
1.77 |
% |
|
|
|
|
|
2.04 |
|
Basis
swaps
|
|
|
262,177 |
|
|
|
533 |
|
|
|
(3,961 |
) |
|
|
1.74 |
% |
|
|
1.09 |
% |
|
|
|
|
|
2.59 |
|
Agency
forwards
|
|
|
34,551 |
|
|
|
- |
|
|
|
(298 |
) |
|
|
|
|
|
|
|
|
|
|
99.04 |
|
|
|
|
|
Treasury
futures
|
|
|
800 |
|
|
|
- |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
118.18 |
|
|
|
|
|
Credit
valuation adjustment
|
|
|
- |
|
|
|
(483 |
) |
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
financial derivatives
|
|
$ |
4,514,649 |
|
|
$ |
21,099 |
|
|
$ |
(127,607 |
) |
|
|
1.91 |
% |
|
|
1.25 |
% |
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
Average
|
|
Remaining
|
|
|
|
Notional
|
|
|
Fair
Value
|
|
|
Pay
|
|
|
Receive
|
|
Forward
|
|
Life
|
|
|
|
Amount
|
|
|
Asset
|
|
|
(Liability)
|
|
|
Rate
|
|
|
Rate
|
|
Price
|
|
(in
years)
|
|
|
|
(dollars
in thousands)
|
|
Interest
rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
fixed callable
|
|
$ |
208,958 |
|
|
$ |
- |
|
|
$ |
(6,646 |
) |
|
|
5.51 |
% |
|
|
3.23 |
% |
|
|
|
7.66 |
|
Pay
fixed non-callable
|
|
|
1,311,218 |
|
|
|
- |
|
|
|
(169,040 |
) |
|
|
5.21 |
% |
|
|
3.05 |
% |
|
|
|
5.33 |
|
Receive
fixed callable
|
|
|
606,500 |
|
|
|
1,727 |
|
|
|
(65 |
) |
|
|
2.91 |
% |
|
|
3.20 |
% |
|
|
|
1.28 |
|
Receive
fixed non-callable
|
|
|
1,347,069 |
|
|
|
25,269 |
|
|
|
(94 |
) |
|
|
2.23 |
% |
|
|
2.28 |
% |
|
|
|
1.43 |
|
Basis
swaps
|
|
|
206,863 |
|
|
|
45 |
|
|
|
(3,734 |
) |
|
|
3.84 |
% |
|
|
3.28 |
% |
|
|
|
4.31 |
|
Agency
forwards
|
|
|
74,998 |
|
|
|
- |
|
|
|
(1,604 |
) |
|
|
|
|
|
|
|
|
105.85
|
|
|
|
|
Treasury
futures
|
|
|
2,500 |
|
|
|
28 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
126.88
|
|
|
|
|
Total
financial derivatives
|
|
$ |
3,758,106 |
|
|
$ |
27,069 |
|
|
$ |
(181,183 |
) |
|
|
3.68 |
% |
|
|
2.82 |
% |
|
|
|
|
|
In the
normal course of business, collateral requirements contained in Farmer Mac’s
derivative contracts are enforced by Farmer Mac and its
counterparties. Upon enforcement of the collateral requirements, the
amount of collateral posted is typically based on the net fair value of all
derivative contracts with the counterparty, i.e., derivative assets net of
derivative liabilities at the counterparty level. If Farmer Mac were
to be in violation of certain provisions of the derivative contracts, the
related counterparty could request payment or full collateralization on the
derivative contracts. As of September 30, 2009, the fair value of
Farmer Mac’s derivatives in a net liability position at the counterparty level,
which includes accrued interest but excludes any adjustment for nonperformance
risk, was $116.6 million. As of September 30, 2009, Farmer Mac posted
assets with a fair value of $37.5 million as collateral for its derivatives in
net liability positions. If Farmer Mac had breached certain
provisions of the derivative contracts as of September 30, 2009, it could
have been required to settle its obligations under the agreements or post
additional collateral of $79.1 million.
The
following table summarizes the effects of Farmer Mac’s financial derivatives on
the condensed consolidated statements of operations for the three and nine
months ended September 30, 2009 and 2008:
|
|
(Losses)/Gains on Financial Derivatives
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
(6,409 |
) |
|
$ |
(18,652 |
) |
|
$ |
17,971 |
|
|
$ |
(29,218 |
) |
Agency
forwards
|
|
|
(1,223 |
) |
|
|
(470 |
) |
|
|
(2,301 |
) |
|
|
(255 |
) |
Treasury
futures
|
|
|
(47 |
) |
|
|
148 |
|
|
|
28 |
|
|
|
63 |
|
Pay-fixed
swaptions
|
|
|
- |
|
|
|
61 |
|
|
|
- |
|
|
|
61 |
|
|
|
|
(7,679 |
) |
|
|
(18,913 |
) |
|
|
15,698 |
|
|
|
(29,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of derivatives transition adjustment
|
|
|
(54 |
) |
|
|
(108 |
) |
|
|
(192 |
) |
|
|
(342 |
) |
Total
|
|
$ |
(7,733 |
) |
|
$ |
(19,021 |
) |
|
$ |
15,506 |
|
|
$ |
(29,691 |
) |
As of
September 30, 2009 and December 31, 2008, respectively, Farmer Mac had
approximately $0.1 million and $0.2 million of net after-tax unrealized
losses on financial derivatives included in accumulated other comprehensive
income/(loss) related to the financial derivatives 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 $0.1
million of the amount currently reported in accumulated other comprehensive
income/(loss) will be reclassified into earnings.
As of
September 30, 2009, Farmer Mac had outstanding basis swaps with Zions First
National Bank, a related party, with total notional amount of $105.2 million and
a fair value of $(3.9) million, compared to $131.9 million and
$(3.7) million, respectively, as of December 31, 2008. Under the
terms of those basis swaps, Farmer Mac pays Constant Maturity Treasury-based
rates and receives LIBOR. Those swaps economically 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. The pricing of discount notes is closely
correlated to LIBOR rates. Farmer Mac recorded unrealized losses of
$0.6 million and $0.2 million on those outstanding basis swaps for the three and
nine months ended September 30, 2009, respectively, compared to unrealized gains
of $0.2 million and unrealized losses of $0.1 million, respectively, for
the same periods in 2008.
(d)
Earnings/(Loss)
Per Common Share
Basic
earnings/(loss) per common share are based on the weighted-average number of
shares of common stock outstanding. Diluted earnings/(loss) 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,
stock appreciation rights (“SARs”) and nonvested restricted stock
awards. The following schedule reconciles basic and diluted
earnings/(loss) per common share (“EPS”) for the three and nine months ended
September 30, 2009 and 2008:
|
|
For the Three Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Net
|
|
|
|
|
|
$ per
|
|
|
Net
|
|
|
|
|
|
$ per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Share
|
|
|
|
(in thousands, except per share amounts)
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) available to common stockholders
|
|
$ |
17,900 |
|
|
|
10,140 |
|
|
$ |
1.77 |
|
|
$ |
(106,136 |
) |
|
|
10,065 |
|
|
$ |
(10.55 |
) |
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options, SARs and restricted stock (1)
|
|
|
|
|
|
|
146 |
|
|
|
(0.03 |
) |
|
|
|
|
|
|
- |
|
|
|
- |
|
Diluted
EPS
|
|
$ |
17,900 |
|
|
|
10,286 |
|
|
$ |
1.74 |
|
|
$ |
(106,136 |
) |
|
|
10,065 |
|
|
$ |
(10.55 |
) |
(1)
|
For
the three months ended September 30, 2009 and 2008, stock options, SARs
and nonvested restricted stock of 1,590,965 and 2,381,503, respectively,
were outstanding but not included in the computation of diluted
earnings/(loss) per share of common stock because they were
anti-dilutive.
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Net
|
|
|
|
|
|
$ per
|
|
|
Net
|
|
|
|
|
|
$ per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Share
|
|
|
|
(in thousands, except per share amounts)
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) available to common stockholders
|
|
$ |
76,803 |
|
|
|
10,138 |
|
|
$ |
7.58 |
|
|
$ |
(92,962 |
) |
|
|
9,966 |
|
|
$ |
(9.33 |
) |
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options, SARs and restricted stock (1)
|
|
|
|
|
|
|
49 |
|
|
|
(0.04 |
) |
|
|
|
|
|
|
- |
|
|
|
- |
|
Diluted
EPS
|
|
$ |
76,803 |
|
|
|
10,187 |
|
|
$ |
7.54 |
|
|
$ |
(92,962 |
) |
|
|
9,966 |
|
|
$ |
(9.33 |
) |
(1)
|
For
the nine months ended September 30, 2009 and 2008, stock options, SARs and
nonvested restricted stock of 1,784,912 and 2,385,890, respectively, were
outstanding but not included in the computation of diluted earnings/(loss)
per share of common stock because they were
anti-dilutive.
|
(e) 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 ten 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.
During 2008, Farmer
Mac’s stockholders approved the 2008 Omnibus Incentive Compensation Plan that
authorizes the grants of restricted stock, stock options and SARs, among other
alternative forms of equity-based compensation, to directors, officers and other
employees. SARs awarded to officers and employees vest annually in
thirds and SARs awarded to directors vest fully after approximately one
year. If not exercised or terminated earlier due to the termination
of employment or service on the Board, SARs granted to officers or employees
expire after ten years and those granted to directors expire after seven
years. 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. SARs granted to officers during June 2009 have an exercise
price of $5.93 per share. There were no SARs granted to directors
during 2009. Restricted stock was awarded to directors in June 2009 and vests
fully after approximately one year. Restricted stock awarded to
officers in June 2009 vests after approximately three years and only vests if
certain performance conditions are met. Restricted stock awards
granted to both directors and officers are not issued until full vesting
occurs.
For the
three and nine months ended September 30, 2009, Farmer Mac recognized
$0.6 million and $2.2 million, respectively, of compensation expense
related to stock options, SARs, and restricted stock awards compared to
$1.1 million and $3.4 million for the same periods in 2008.
The
following tables summarize activity related to stock options, SARs and nonvested
restricted share awards for the three and nine months ended September 30, 2009
and 2008:
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Stock
|
|
|
Weighted-
|
|
|
Stock
|
|
|
Weighted-
|
|
|
|
Options
|
|
|
Average
|
|
|
Options
|
|
|
Average
|
|
|
|
and
|
|
|
Exercise
|
|
|
and
|
|
|
Exercise
|
|
|
|
SARs
|
|
|
Price
|
|
|
SARs
|
|
|
Price
|
|
For
the Three Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
1,755,965 |
|
|
$ |
23.06 |
|
|
|
2,381,503 |
|
|
$ |
26.24 |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
(106,331 |
) |
|
|
21.99 |
|
Canceled
|
|
|
(1,500 |
) |
|
|
22.94 |
|
|
|
(12,667 |
) |
|
|
28.50 |
|
Outstanding,
end of period
|
|
|
1,754,465 |
|
|
$ |
23.06 |
|
|
|
2,262,505 |
|
|
$ |
26.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
2,237,711 |
|
|
$ |
25.54 |
|
|
|
2,218,199 |
|
|
$ |
25.48 |
|
Granted
|
|
|
165,000 |
|
|
|
5.93 |
|
|
|
339,770 |
|
|
|
28.92 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
(264,297 |
) |
|
|
21.43 |
|
Canceled
|
|
|
(648,246 |
) |
|
|
27.27 |
|
|
|
(31,167 |
) |
|
|
28.67 |
|
Outstanding,
end of period
|
|
|
1,754,465 |
|
|
$ |
23.06 |
|
|
|
2,262,505 |
|
|
$ |
26.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options and SARs exercisable at the end of the period
|
|
|
1,398,262 |
|
|
$ |
25.17 |
|
|
|
1,520,944 |
|
|
$ |
25.32 |
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Nonvested
|
|
|
Average
|
|
|
Nonvested
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant-date
|
|
|
Restricted
|
|
|
Grant-date
|
|
|
|
Stock
|
|
|
Fair Value
|
|
|
Stock
|
|
|
Fair Value
|
|
For
the Three Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
200,548 |
|
|
$ |
5.93 |
|
|
|
- |
|
|
$ |
- |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Canceled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding,
end of period
|
|
|
200,548 |
|
|
$ |
5.93 |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
Granted
|
|
|
200,548 |
|
|
|
5.93 |
|
|
|
- |
|
|
|
- |
|
Canceled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding,
end of period
|
|
|
200,548 |
|
|
$ |
5.93 |
|
|
|
- |
|
|
$ |
- |
|
The
cancellations of stock options during the first nine months of 2009 and 2008
were due to unvested options or SARs terminating and the cancellation of a
portion of vested options upon employee and officers’ departures from Farmer
Mac. There were no stock options or SARs exercised during the first
nine months of 2009 and 264,297 shares were exercised during the first nine
months of 2008.
The
following tables summarize information regarding stock options, SARs and
nonvested restricted stock outstanding as of September 30, 2009:
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Vested or Expected to Vest
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Stock
|
|
|
Average
|
|
|
Stock
|
|
|
Average
|
|
|
Stock
|
|
|
Average
|
|
Range of
|
|
Options
|
|
|
Remaining
|
|
|
Options
|
|
|
Remaining
|
|
|
Options
|
|
|
Remaining
|
|
Exercise
|
|
and
|
|
|
Contractual
|
|
|
and
|
|
|
Contractual
|
|
|
and
|
|
|
Contractual
|
|
Prices
|
|
SARs
|
|
|
Life
|
|
|
SARs
|
|
|
Life
|
|
|
SARs
|
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.00
- $ 9.99
|
|
|
255,000 |
|
|
9.4
years
|
|
|
|
30,000 |
|
|
9.0
years
|
|
|
|
220,500 |
|
|
9.5
years
|
|
10.00
- 14.99
|
|
|
- |
|
|
-
|
|
|
|
- |
|
|
-
|
|
|
|
- |
|
|
-
|
|
15.00
- 19.99
|
|
|
81,722 |
|
|
4.5
years
|
|
|
|
81,722 |
|
|
4.5
years
|
|
|
|
81,722 |
|
|
4.5
years
|
|
20.00
- 24.99
|
|
|
550,588 |
|
|
4.6
years
|
|
|
|
550,588 |
|
|
4.6
years
|
|
|
|
550,588 |
|
|
4.6
years
|
|
25.00
- 29.99
|
|
|
653,487 |
|
|
5.1
years
|
|
|
|
530,288 |
|
|
4.5
years
|
|
|
|
642,634 |
|
|
5.0
years
|
|
30.00
- 34.99
|
|
|
213,668 |
|
|
2.4
years
|
|
|
|
205,664 |
|
|
2.2
years
|
|
|
|
211,267 |
|
|
2.3
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,754,465 |
|
|
|
|
|
|
|
1,398,262 |
|
|
|
|
|
|
|
1,706,711 |
|
|
|
|
|
|
|
Outstanding
|
|
Expected to Vest
|
|
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Nonvested
|
|
Remaining
|
|
Nonvested
|
|
Remaining
|
|
Grant-Date
|
|
Restricted
|
|
Contractual
|
|
Restricted
|
|
Contractual
|
|
Fair Value
|
|
Stock
|
|
Life
|
|
Stock
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.93
|
|
200,548
|
|
1.4
years
|
|
180,493
|
|
1.4
years
|
|
The
weighted-average grant date fair value of options and SARs granted during the
nine months ended 2009 and 2008 was $4.12 and $11.33 per share,
respectively. The weighted-average grant date fair value of shares of
restricted stock granted during the nine months ended 2009 was $5.93 per
share. No shares of restricted stock were granted in
2008. The fair values for SARs and stock options were estimated using
the Black-Scholes option pricing model based on the following
assumptions:
|
|
SARs and Stock Options
|
|
|
|
2009
|
|
|
2008
|
|
Risk-free
interest rate
|
|
|
1.5 |
% |
|
|
2.5 |
% |
Expected
years until exercise
|
|
7
years
|
|
|
6
years
|
|
Expected
stock volatility
|
|
|
104.3 |
% |
|
|
43.2 |
% |
(f) Reclassifications
Certain
reclassifications of prior period information were made to conform to the
current period presentation.
(g) Fair
Value
Effective
January 1, 2008, Farmer Mac adopted the guidelines in ASC Topic 820
(“ASC 820”), Fair Value
Measurements and Disclosures (formerly FASB
Statement No. 157). ASC 820 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date and
establishes a fair value hierarchy that ranks the quality and reliability of the
inputs to valuation techniques used to measure fair value. The
hierarchy gives highest rank to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the lowest rank to
unobservable inputs (Level 3 measurements). Effective January 1,
2009, Farmer Mac adopted the guidance in ASC 820 related to non-recurring fair
value measurements of non-financial assets and liabilities.
Farmer
Mac’s assessment of the significance of the input to the fair value measurement
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 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.
Effective
January 1, 2008, Farmer Mac adopted the guidelines in ASC Topic 825
(“ASC 825”), Financial
Instruments (formerly FASB Statement No. 159). ASC 825
provides companies an irrevocable option to report financial instruments at fair
value with changes in fair value recorded in earnings as they
occur. On January 1, 2008, 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. 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.
See Note
7 for more information regarding fair value measurement.
(h) New Accounting
Standards
In June
2009, the FASB issued FASB Statement No. 166, Accounting for Transfers of
Financial Assets (“FAS 166”) and FASB Statement No. 167,
Amendments to FASB
Interpretation No. 46(R) (“FAS 167”). These statements address
amendments to ASC Topic 860 (“ASC 860”), Transfers and Servicing
(formerly FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities), and to
ASC Topic 810 (“ASC 810”), Consolidations (formerly FASB
Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities). The two FASB statements are effective for fiscal
years beginning after November 15, 2009. The statements,
amending ASC 860 and ASC 810, remove the concept of a qualifying special-purpose
entity (“QSPE”) from ASC 860 and remove the exception from applying ASC 810 to
QSPEs. Although Farmer Mac is currently evaluating the impact of
these new accounting standards, Farmer Mac believes the adoption of FAS 166 and
FAS 167 will result in the consolidation of assets and liabilities onto
Farmer Mac’s balance sheet in connection with trusts that currently qualify for
the QSPE exception. Additionally, interest income and interest
expense related to the consolidated assets and liabilities of the trusts will be
reflected in the statement of operations. Farmer
Mac expects the adoption of FAS 166 and FAS 167 to require the consolidation of
additional assets and liabilities on its balance sheet, resulting in an increase
in its statutory minimum capital requirement; however, Farmer Mac believes its
current capital is adequate to remain in compliance with regulatory capital
requirements, absorb the additional capital required upon adoption, and provide
sufficient excess capital above the statutory minimum capital requirement for
its business needs.
In June
2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162. This statement
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
non-governmental entities that are presented in conformity with generally
accepted accounting principles (“GAAP”) in the United States (the GAAP
hierarchy). This statement is effective for financial statements
issued for interim and annual periods ending after September 15,
2009. The adoption of this guidance did not have a material impact on
Farmer Mac’s financial condition, results of operations or cash
flows.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value
(“ASU 2009-05”), within ASC 820. ASU 2009-05
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more techniques that maximize the
use of relevant observable inputs. The ASU is effective for the first
interim or annual reporting period beginning after issuance, which will be
fourth quarter 2009. Farmer Mac does not expect the adoption of this
guidance to have a material impact on its financial condition, results of
operations or cash flows.
The
following tables present the amortized cost and estimated fair values of Farmer
Mac’s investments as of September 30, 2009 and December 31,
2008.
|
|
September 30, 2009
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
$ |
74,100 |
|
|
$ |
- |
|
|
$ |
(1,365 |
) |
|
$ |
72,735 |
|
Floating
rate asset-backed securities
|
|
|
67,352 |
|
|
|
140 |
|
|
|
(41 |
) |
|
|
67,451 |
|
Floating
rate corporate debt securities
|
|
|
292,807 |
|
|
|
9 |
|
|
|
(2,708 |
) |
|
|
290,108 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
328,395 |
|
|
|
798 |
|
|
|
(1,067 |
) |
|
|
328,126 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
6,451 |
|
|
|
328 |
|
|
|
- |
|
|
|
6,779 |
|
Floating
rate GSE subordinated debt
|
|
|
70,000 |
|
|
|
- |
|
|
|
(9,684 |
) |
|
|
60,316 |
|
Fixed
rate GSE preferred stock
|
|
|
90,622 |
|
|
|
7,904 |
|
|
|
- |
|
|
|
98,526 |
|
Total
available-for-sale
|
|
|
929,727 |
|
|
|
9,179 |
|
|
|
(14,865 |
) |
|
|
924,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
6,850 |
|
|
|
- |
|
|
|
(5,002 |
) |
|
|
1,848 |
|
Fixed
rate GSE preferred stock
|
|
|
89,816 |
|
|
|
5,774 |
|
|
|
- |
|
|
|
95,590 |
|
Total
trading
|
|
|
96,666 |
|
|
|
5,774 |
|
|
|
(5,002 |
) |
|
|
97,438 |
|
Total
investment securities
|
|
$ |
1,026,393 |
|
|
$ |
14,953 |
|
|
$ |
(19,867 |
) |
|
$ |
1,021,479 |
|
|
|
December 31, 2008
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
|
$ |
193,950 |
|
|
$ |
- |
|
|
$ |
(15,373 |
) |
|
$ |
178,577 |
|
Floating
rate asset-backed securities
|
|
|
85,005 |
|
|
|
1 |
|
|
|
(3,750 |
) |
|
|
81,256 |
|
Floating
rate corporate debt securities
|
|
|
458,428 |
|
|
|
- |
|
|
|
(39,363 |
) |
|
|
419,065 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
338,907 |
|
|
|
270 |
|
|
|
(3,512 |
) |
|
|
335,665 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
7,375 |
|
|
|
188 |
|
|
|
- |
|
|
|
7,563 |
|
Floating
rate GSE subordinated debt
|
|
|
70,000 |
|
|
|
- |
|
|
|
(20,811 |
) |
|
|
49,189 |
|
Floating
rate GSE preferred stock
|
|
|
781 |
|
|
|
- |
|
|
|
- |
|
|
|
781 |
|
Total
available-for-sale
|
|
|
1,154,446 |
|
|
|
459 |
|
|
|
(82,809 |
) |
|
|
1,072,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
7,494 |
|
|
|
- |
|
|
|
(5,283 |
) |
|
|
2,211 |
|
Fixed
rate GSE preferred stock
|
|
|
180,579 |
|
|
|
- |
|
|
|
(19,027 |
) |
|
|
161,552 |
|
Total
trading
|
|
|
188,073 |
|
|
|
- |
|
|
|
(24,310 |
) |
|
|
163,763 |
|
Total
investment securities
|
|
$ |
1,342,519 |
|
|
$ |
459 |
|
|
$ |
(107,119 |
) |
|
$ |
1,235,859 |
|
(1)
|
The
fair value of these securities as of December 31, 2008 includes the fair
value of Farmer Mac's put rights related to $119.9 million (par value) of
its auction-rate certificates.
|
During
the three and nine months ended September 30, 2009, Farmer Mac recognized in
earnings other-than-temporary impairment charges of $1.6 million and $2.7
million, respectively, compared to $97.1 million and $102.5 million,
respectively, for the same periods during 2008. During third quarter
2009, Farmer Mac recorded an other-than-temporary impairment loss of $1.6
million related to its $49.9 million investment in HSBC Finance corporate debt
securities. Farmer Mac recognized the entire difference between the
amortized cost basis of these securities and their fair values in earnings since
management intended to sell the securities as of September 30,
2009. During the second quarter 2009, Farmer Mac recorded an
other-than-temporary impairment loss of $1.0 million related to its investment
in CIT Group Inc. corporate debt securities. During third quarter
2008, Farmer Mac recorded an other-than-temporary impairment loss of
$44.7 million related to its investment in Fannie Mae floating rate
preferred stock and $52.4 million related to its investment in Lehman
Brothers Holding Inc. senior debt securities. These losses were due
to credit deterioration and were recognized as “Other-than-temporary impairment
losses” in the condensed consolidated statements of operations.
During
the three months ended September 30, 2009, Farmer Mac received proceeds of $54.8
million from the sale of securities from its available-for-sale investment
portfolio, resulting in gross realized gains of $1.0 million and gross realized
losses of $0.9 million. During the nine months ended September 30,
2009, Farmer Mac received proceeds of $207.9 million from the sale of securities
from its available-for-sale investment portfolio, resulting in gross realized
gains of $4.1 million and gross realized losses of $1.2 million.
During
the three months ended September 30, 2008, Farmer Mac received proceeds of $63.0
million from the sale of securities from its available-for-sale investment
portfolio, resulting in gross realized gains of $1,000 and gross realized losses
of $0.1 million. During the nine months ended September 30, 2008,
Farmer Mac received proceeds of $351.3 million from the sale of securities from
its available-for-sale investment portfolio, resulting in gross realized gains
of $0.3 million and gross realized losses of $0.2 million.
As of
September 30, 2009 and December 31, 2008, unrealized losses on
available-for-sale investment securities were as follows:
|
|
September 30, 2009
|
|
|
|
Available-for-Sale Securities
|
|
|
|
Unrealized loss position for
|
|
|
Unrealized loss position for
|
|
|
|
less than 12 months
|
|
|
more than 12 months
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
|
(in thousands)
|
|
Floating
rate corporate debt securities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
202,680 |
|
|
$ |
(2,708 |
) |
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
19,549 |
|
|
|
(41 |
) |
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
|
- |
|
|
|
- |
|
|
|
72,735 |
|
|
|
(1,365 |
) |
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
95,303 |
|
|
|
(421 |
) |
|
|
56,505 |
|
|
|
(646 |
) |
Floating
rate GSE subordinated debt
|
|
|
- |
|
|
|
- |
|
|
|
60,316 |
|
|
|
(9,684 |
) |
Total
|
|
$ |
95,303 |
|
|
$ |
(421 |
) |
|
$ |
411,785 |
|
|
$ |
(14,444 |
) |
|
|
December 31, 2008
|
|
|
|
Available-for-Sale Securities
|
|
|
|
Unrealized loss position for
|
|
|
Unrealized loss position for
|
|
|
|
less than 12 months
|
|
|
more than 12 months
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
|
(in thousands)
|
|
Floating
rate corporate debt securities
|
|
$ |
19,858 |
|
|
$ |
(142 |
) |
|
$ |
393,808 |
|
|
$ |
(39,221 |
) |
Floating
rate asset-backed securities
|
|
|
80,605 |
|
|
|
(3,750 |
) |
|
|
- |
|
|
|
- |
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
|
58,727 |
|
|
|
(15,373 |
) |
|
|
- |
|
|
|
- |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
263,516 |
|
|
|
(3,138 |
) |
|
|
10,751 |
|
|
|
(374 |
) |
Floating
rate GSE subordinated debt
|
|
|
- |
|
|
|
- |
|
|
|
49,189 |
|
|
|
(20,811 |
) |
Total
|
|
$ |
422,706 |
|
|
$ |
(22,403 |
) |
|
$ |
453,748 |
|
|
$ |
(60,406 |
) |
The
temporary unrealized losses presented above are principally due to a general
widening of credit spreads from the dates of acquisition to September 30, 2009
and December 31, 2008, as applicable. The resulting decreases in
fair values reflect an increase in the perceived risk by the financial markets
related to those securities. As of September 30, 2009, all of the
investment securities in an unrealized loss position were rated at least “A” by
Standard & Poor’s. As of December 31, 2008, all of the investment
securities in an unrealized loss position were rated at least “A”, except one
that was rated “BBB+” and one that was rated “BBB-”. The unrealized
losses were on 90 and 116 individual investment securities as of
September 30, 2009 and December 31, 2008, respectively.
As of
September 30, 2009, 71 of the securities in loss positions had been in loss
positions for more than 12 months and had a total unrealized loss of $14.4
million. As of December 31, 2008, 34 of the securities in loss positions had
been in loss positions for more than 12 months and had a total unrealized loss
of $60.4 million. Securities in unrealized loss positions 12 months or more have
a fair value as of September 30, 2009 that is, on average, approximately 97
percent of their amortized cost basis. Farmer Mac believes that all these
unrealized losses are recoverable within a reasonable period of time through
changes in credit spreads or maturity and expects to recover the amortized cost
basis of these securities. Accordingly, Farmer Mac has concluded that none of
the unrealized losses on these available-for-sale investment securities
represent other-than-temporary impairment as of September 30, 2009. Farmer Mac
does not intend to sell these securities and it is not more likely than not that
Farmer Mac will be required to sell the securities before recovery of the
amortized cost basis.
As of
September 30, 2009, Farmer Mac did not own any held-to-maturity investments. As
of September 30, 2009, Farmer Mac owned trading investment securities that
mature after five years with an amortized cost of $96.7 million, a fair value of
$97.4 million, and a weighted- average yield of 8.32 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, 2009 are set forth below. Asset-backed 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, 2009
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Average Yield
|
|
|
|
(dollars in thousands)
|
|
Due
within one year
|
|
$ |
69,296 |
|
|
$ |
69,264 |
|
|
|
0.50 |
% |
Due
after one year through five years
|
|
|
255,316 |
|
|
|
252,617 |
|
|
|
0.73 |
% |
Due
after five years through ten years
|
|
|
126,964 |
|
|
|
126,941 |
|
|
|
2.30 |
% |
Due
after ten years
|
|
|
478,151 |
|
|
|
475,219 |
|
|
|
3.32 |
% |
Total
|
|
$ |
929,727 |
|
|
$ |
924,041 |
|
|
|
2.26 |
% |
Note
3.
|
Farmer
Mac Guaranteed Securities
|
The
following table sets forth information about on-balance sheet Farmer Mac
Guaranteed Securities as of September 30, 2009 and December 31,
2008.
|
|
September 30, 2009
|
|
|
|
Available-
|
|
|
|
|
|
|
|
|
|
for-Sale
|
|
|
Trading
|
|
|
Total
|
|
|
|
|
|
Farmer
Mac I
|
|
$ |
57,811 |
|
|
$ |
- |
|
|
$ |
57,811 |
|
Farmer
Mac II
|
|
|
696,029 |
|
|
|
436,853 |
|
|
|
1,132,882 |
|
Rural
Utilities
|
|
|
1,855,345 |
|
|
|
454,123 |
|
|
|
2,309,468 |
|
Total
|
|
$ |
2,609,185 |
|
|
$ |
890,976 |
|
|
$ |
3,500,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
$ |
2,575,478 |
|
|
$ |
828,190 |
|
|
$ |
3,403,668 |
|
Unrealized
gains
|
|
|
44,827 |
|
|
|
62,786 |
|
|
|
107,613 |
|
Unrealized
losses
|
|
|
(11,120 |
) |
|
|
- |
|
|
|
(11,120 |
) |
Fair
value
|
|
$ |
2,609,185 |
|
|
$ |
890,976 |
|
|
$ |
3,500,161 |
|
|
|
December 31, 2008
|
|
|
|
Available-
|
|
|
|
|
|
|
|
|
|
for-Sale
|
|
|
Trading
|
|
|
Total
|
|
|
|
|
|
Farmer
Mac I
|
|
$ |
349,292 |
|
|
$ |
- |
|
|
$ |
349,292 |
|
Farmer
Mac II
|
|
|
522,565 |
|
|
|
496,863 |
|
|
|
1,019,428 |
|
Rural
Utilities
|
|
|
639,837 |
|
|
|
442,687 |
|
|
|
1,082,524 |
|
Total
|
|
$ |
1,511,694 |
|
|
$ |
939,550 |
|
|
$ |
2,451,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
$ |
1,501,980 |
|
|
$ |
907,506 |
|
|
$ |
2,409,486 |
|
Unrealized
gains
|
|
|
23,727 |
|
|
|
32,044 |
|
|
|
55,771 |
|
Unrealized
losses
|
|
|
(14,013 |
) |
|
|
- |
|
|
|
(14,013 |
) |
Fair
value
|
|
$ |
1,511,694 |
|
|
$ |
939,550 |
|
|
$ |
2,451,244 |
|
The
temporary unrealized losses presented above are principally due to changes in
interest rates from the date of acquisition to September 30, 2009 and December
31, 2008, as applicable. As of September 30, 2009, the unrealized
losses presented above are related to Farmer Mac II Guaranteed Securities, which
are USDA-guaranteed portions backed by the full faith and credit of the United
States. As of December 31, 2008, the available-for-sale
unrealized losses were on 9 individual securities. One of the
available-for-sale Farmer Mac I Guaranteed Securities in a loss position as of
December 31, 2008 had been in a loss position for more than 12 months and had an
unrealized loss that was less than one percent of the amortized security
cost. Accordingly, Farmer Mac has concluded that none of the
unrealized losses on its available-for-sale Farmer Mac Guaranteed Securities
represents an other-than-temporary impairment as of September 30, 2009 and
December 31, 2008. Farmer Mac does not intend to sell these
securities and it is not more likely than not that Farmer Mac will be required
to sell the securities before recovery of the amortized cost basis.
The table
below presents a sensitivity analysis for the Corporation’s on-balance sheet
Farmer Mac Guaranteed Securities as of September 30, 2009.
|
|
September 30, 2009
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Fair
value of beneficial interests retained in Farmer Mac Guaranteed
Securities
|
|
$ |
3,500,161 |
|
|
|
|
|
|
Weighted-average
remaining life (in years)
|
|
|
3.6 |
|
|
|
|
|
|
Weighted-average
prepayment speed (annual rate)
|
|
|
4.3 |
% |
Effect
on fair value of a 10% adverse change
|
|
$ |
(894 |
) |
Effect
on fair value of a 20% adverse change
|
|
$ |
(1,727 |
) |
|
|
|
|
|
Weighted-average
discount rate
|
|
|
2.9 |
% |
Effect
on fair value of a 10% adverse change
|
|
$ |
(22,857 |
) |
Effect
on fair value of a 20% adverse change
|
|
$ |
(46,058 |
) |
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, 2009 and December 31,
2008.
Outstanding Balance of Farmer Mac Loans and Loans Underlying
|
|
Farmer Mac Guaranteed Securities and LTSPCs
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
On-balance
sheet:
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
Loans
|
|
$ |
704,235 |
|
|
$ |
781,305 |
|
Guaranteed
Securities
|
|
|
5,314 |
|
|
|
282,185 |
|
AgVantage
|
|
|
48,800 |
|
|
|
53,300 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
1,107,270 |
|
|
|
1,013,330 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
28,644 |
|
|
|
- |
|
Guaranteed
Securities
|
|
|
2,237,948 |
|
|
|
1,054,941 |
|
Total
on-balance sheet
|
|
$ |
4,132,211 |
|
|
$ |
3,185,061 |
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet:
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
$ |
1,524,590 |
|
|
$ |
1,697,983 |
|
AgVantage
|
|
|
2,945,000 |
|
|
|
2,945,000 |
|
LTSPCs
|
|
|
2,135,445 |
|
|
|
2,224,181 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
34,300 |
|
|
|
30,095 |
|
Total
off-balance sheet
|
|
$ |
6,639,335 |
|
|
$ |
6,897,259 |
|
Total
|
|
$ |
10,771,546 |
|
|
$ |
10,082,320 |
|
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. The following table presents information related to
Farmer Mac’s acquisition of defaulted loans for the three and nine months ended
September 30, 2009 and 2008 and the outstanding balances and carrying amounts of
all such loans as of September 30, 2009 and December 31, 2008,
respectively.
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value at acquisition date
|
|
$ |
14,029 |
|
|
$ |
557 |
|
|
$ |
19,666 |
|
|
$ |
1,746 |
|
Contractually
required payments receivable
|
|
|
14,029 |
|
|
|
597 |
|
|
|
19,675 |
|
|
|
1,950 |
|
Impairment
recognized subsequent to acquisition
|
|
|
16 |
|
|
|
- |
|
|
|
7,741 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
balance
|
|
$ |
49,040 |
|
|
$ |
91,942 |
|
|
|
|
|
|
|
|
|
Carrying
amount
|
|
|
37,154 |
|
|
|
69,308 |
|
|
|
|
|
|
|
|
|
Net
credit losses and 90-day delinquencies as of and for the periods indicated for
Farmer Mac Guaranteed Securities, loans and LTSPCs are presented in the table
below. Information is not presented for loans underlying AgVantage
securities or Farmer Mac II Guaranteed Securities. Each AgVantage
security is a general obligation of an issuing institution approved by Farmer
Mac and is secured by eligible loans in an amount at least equal to the
outstanding principal amount of the security. As of September 30,
2009, there were no probable losses inherent in Farmer Mac’s AgVantage
securities due to the credit quality of the obligors, as well as the underlying
collateral. As of September 30, 2009, Farmer Mac had not experienced
any credit losses on any AgVantage securities. 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, 2009,
Farmer Mac had not experienced any credit losses on any Farmer Mac II Guaranteed
Securities.
|
|
90-Day
|
|
|
Net Credit
|
|
|
|
Delinquencies (1)
|
|
|
Losses (2)
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
On-balance
sheet assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
47,288 |
|
|
$ |
65,060 |
|
|
$ |
9,327 |
|
|
$ |
6,976 |
|
|
$ |
92 |
|
Total
on-balance sheet
|
|
$ |
47,288 |
|
|
$ |
65,060 |
|
|
$ |
9,327 |
|
|
$ |
6,976 |
|
|
$ |
92 |
|
Off-balance
sheet assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
$ |
12,150 |
|
|
$ |
2,060 |
|
|
$ |
2,154 |
|
|
$ |
- |
|
|
$ |
- |
|
Guaranteed
Securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
off-balance sheet
|
|
$ |
12,150 |
|
|
$ |
2,060 |
|
|
$ |
2,154 |
|
|
$ |
- |
|
|
$ |
- |
|
Total
|
|
$ |
59,438 |
|
|
$ |
67,120 |
|
|
$ |
11,481 |
|
|
$ |
6,976 |
|
|
$ |
92 |
|
|
(1)
|
Includes
loans and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs
that are 90 days or more past due, in foreclosure, restructured after
delinquency, and in bankruptcy, excluding loans performing under either
their original loan terms or a court-approved bankruptcy
plan.
|
|
(2)
|
Includes
loans and loans underlying Farmer Mac I Guaranteed Securities and
LTSPCs.
|
Note
4. Comprehensive Income/(Loss)
Comprehensive
income/(loss) 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 income for the three and nine months ended
September 30, 2009 and 2008:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$ |
22,268 |
|
|
$ |
(105,558 |
) |
|
$ |
89,237 |
|
|
$ |
(91,264 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding gains/(losses)
|
|
|
30,237 |
|
|
|
(57,247 |
) |
|
|
64,178 |
|
|
|
(64,086 |
) |
Reclassification
adjustment for realized losses
|
|
|
414 |
|
|
|
33,097 |
|
|
|
1,249 |
|
|
|
36,473 |
|
Net
change from available-for-sale securities (1)
|
|
|
30,651 |
|
|
|
(24,150 |
) |
|
|
65,427 |
|
|
|
(27,613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
for amortization of financial derivatives transition
adjustment
(2)
|
|
|
34 |
|
|
|
66 |
|
|
|
124 |
|
|
|
222 |
|
Other
comprehensive income/(loss), net of tax
|
|
|
30,685 |
|
|
|
(24,084 |
) |
|
|
65,551 |
|
|
|
(27,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income/(loss)
|
|
$ |
52,953 |
|
|
$ |
(129,642 |
) |
|
$ |
154,788 |
|
|
$ |
(118,655 |
) |
(1)
|
Unrealized
gains/(losses) on available-for-sale securities is shown net of income tax
(expense)/benefit of ($16.5) million and $13.0 million for the three
months ended September 30, 2009 and 2008, respectively, and ($35.2)
million and $14.9 million for the nine months ended September 30, 2009 and
2008, respectively.
|
(2)
|
Amortization
of derivatives transition adjustment is shown net of income tax expense of
$19,000 and $36,000 for the three months ended September 30, 2009 and
2008, respectively, and $67,000 and $119,000 for the nine months ended
September 30, 2009 and 2008,
respectively.
|
The
following table presents Farmer Mac’s accumulated other comprehensive
income/(loss) as of September 30, 2009 and December 31, 2008 and changes in the
components of accumulated other comprehensive income/(loss) for the nine months
ended September 30, 2009 and the year ended
December 31, 2008.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(47,214 |
) |
|
$ |
(2,320 |
) |
Reclassification
adjustment to retained earnings for fair value option adoption, net of
tax
|
|
|
- |
|
|
|
(11,237 |
) |
Adjusted
beginning balance
|
|
|
(47,214 |
) |
|
|
(13,557 |
) |
Net
unrealized gains/(losses), net of tax
|
|
|
65,427 |
|
|
|
(33,657 |
) |
Ending
balance
|
|
$ |
18,213 |
|
|
$ |
(47,214 |
) |
|
|
|
|
|
|
|
|
|
Financial
derivatives:
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(198 |
) |
|
$ |
(473 |
) |
Amortization
of financial derivatives transition adjustment, net of tax
|
|
|
124 |
|
|
|
275 |
|
Ending
balance
|
|
$ |
(74 |
) |
|
$ |
(198 |
) |
Accumulated
other comprehensive income/(loss), net of tax
|
|
$ |
18,139 |
|
|
$ |
(47,412 |
) |
As of
April 1, 2009, Farmer Mac held no debt securities for which an
other-than-temporary impairment was previously
recognized. Accordingly, a cumulative effect of adoption adjustment
was not recognized upon adoption in second quarter 2009 of the
other-than-temporary impairment guidance in ASC 320-10-65-1 (formerly FASB Staff
Position FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments).
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 relevant guidance in
ASC Topic 460 (“ASC 460”), Guarantees (formerly FASB
Interpretation No. 45). In accordance with ASC 460, 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. Proceeds from new securitizations during the nine months
ended September 30, 2009 and 2008 were $17.2 million and $79.8 million,
respectively. The decrease year over year was driven by the third
quarter 2008 transfer of $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. During first quarter 2009, $17.1 million of agricultural
mortgage loans held on balance sheet were transferred into a trust as part of a
securitization transaction in which guaranteed agricultural mortgage-backed
securities were sold to Zions First National Bank, a related
party. The following table summarizes cash flows received from and
paid to trusts used for securitizations:
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
(in thousands)
|
|
Proceeds
from new securitizations
|
|
$ |
17,224 |
|
|
$ |
79,757 |
|
Guarantee
fees received
|
|
|
9,673 |
|
|
|
9,433 |
|
Purchases
of assets from the trusts
|
|
|
841 |
|
|
|
648 |
|
Servicing
advances
|
|
|
11 |
|
|
|
7 |
|
Repayment
of servicing advances
|
|
|
10 |
|
|
|
2 |
|
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, 2009 and
December 31, 2008, 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,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I Guaranteed Securities
|
|
$ |
1,524,590 |
|
|
$ |
1,697,983 |
|
AgVantage
|
|
|
2,945,000 |
|
|
|
2,945,000 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
34,300 |
|
|
|
30,095 |
|
Total
off-balance sheet Farmer Mac I and II
|
|
$ |
4,503,890 |
|
|
$ |
4,673,078 |
|
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 $31.6 million as of September
30, 2009 and $37.1 million as of December 31, 2008. As of
September 30, 2009, the weighted-average remaining maturity of all
loans underlying off-balance sheet Farmer Mac Guaranteed Securities, excluding
AgVantage securities, was 13.4 years.
Long-Term
Standby Purchase Commitments (LTSPCs)
An LTSPC
is a commitment by Farmer Mac to purchase eligible loans from a segregated pool
of loans under enumerated circumstances, either for cash or in exchange for
Farmer Mac I Guaranteed Securities, on one or more undetermined future
dates. 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 Farmer Mac Guaranteed
Securities.
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 $2.1 billion as of September 30, 2009 and $2.2
billion as of December 31, 2008.
As of
September 30, 2009, the weighted-average remaining maturity of all loans
underlying LTSPCs was 15.2 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 $17.2 million as of September 30, 2009 and $17.9 million
as of December 31, 2008.
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.
|
From
fourth quarter 2004 through fourth quarter 2008, Farmer Mac paid a quarterly
dividend of $0.10 per share on all classes of the Corporation’s common
stock. On March 11, 2009, Farmer Mac’s board of directors declared a
quarterly dividend of $0.05 per share on the Corporation’s common stock payable
on April 3, 2009. On June 3, 2009, Farmer Mac’s board of directors
declared a quarterly dividend of $0.05 per share on the Corporation’s common
stock payable on June 30, 2009. On August 6, 2009, Farmer Mac’s
board of directors declared a quarterly dividend of $0.05 per share on the
Corporation’s common stock payable on September 30, 2009. 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 series of preferred stock outstanding:
|
·
|
Series
B, which was newly issued on September 30, 2008 and on December 15, 2008,
is temporary equity and is reported as Mezzanine Equity on the condensed
consolidated balance sheets because it contains redemption features that,
although remote, are not solely within the control of Farmer Mac;
and
|
|
·
|
Series
C, which was newly issued during fourth quarter 2008 and during 2009, is a
component of Stockholders’ Equity on the condensed consolidated balance
sheets.
|
During
the three and nine months ended September 30, 2009, Farmer Mac sold 17,000
and 47,800 shares, respectively, of its Series C Preferred Stock to
National Rural Cooperative Finance Corporation (“National Rural”) pursuant to a
program under which any participant who uses Farmer Mac for a credit enhancement
or purchase transaction in excess of $20.0 million is required to purchase
an equity interest in Farmer Mac in the form of shares of Series C, thereby
enabling Farmer Mac to raise additional capital to support its mission of
providing liquidity and lending capacity to agricultural and rural utilities
lenders. Farmer Mac sold the shares of Series C without registration
under the Securities Act of 1933, as amended, in reliance upon the exemption
provided by Section 3(a)(2), for an aggregate purchase price of $17.0 million or
$1,000 per share, and $47.8 million or $1,000 per share, respectively, for the
three and nine months ended September 30, 2009. There were 57,000
shares of Series C Preferred Stock outstanding as of September 30, 2009, all
held by National Rural.
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. All series of Farmer Mac’s preferred stock are included
as components of core capital for regulatory and statutory capital compliance
measurements.
Statutory
and Regulatory Capital Requirements
Farmer
Mac is subject to, and as of September 30, 2009 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 – the Farm Credit Administration (“FCA”) has established a
risk-based capital stress test for Farmer
Mac.
|
As of
September 30, 2009, Farmer Mac’s minimum and critical capital requirements were
$204.7 million and $102.3 million, respectively, and Farmer Mac’s core
capital (common and preferred stock outstanding plus additional paid-in-capital
and retained earnings) level was $331.0 million, $126.3 million above the
minimum capital requirement and $228.7 million above the critical capital
requirement. As of December 31, 2008, Farmer Mac’s minimum and
critical capital requirements were $193.5 million and $96.7 million,
respectively, and its actual core capital level was $207.0 million, $13.5
million above the minimum capital requirement and $110.2 million above the
critical capital requirement.
Based on
the risk-based capital stress test, Farmer Mac’s risk-based capital requirement
as of September 30, 2009 was $37.7 million and Farmer Mac’s regulatory capital
(core capital plus the allowance for losses) of $343.5 million exceeded
that requirement by approximately $305.8 million.
Note
7.
|
Fair
Value Disclosures
|
Fair
Value Measurement
Effective
January 1, 2008, Farmer Mac adopted ASC 820 which defines fair value,
establishes a hierarchy for ranking fair value measurements, and expands
disclosures about fair value measurements. ASC 820 defines fair value
as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (also referred to as an exit price).
In
determining fair value, Farmer Mac uses various valuation approaches, including
market, income and/or cost approaches. The fair value hierarchy
established in ASC 820 requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value. When available, the fair value of Farmer Mac’s financial
instruments is based on quoted market prices, valuation techniques that use
observable market-based inputs or unobservable inputs that are corroborated by
market data. Pricing information obtained from third parties is
internally validated for reasonableness prior to use in the condensed
consolidated financial statements.
When
observable market prices are not readily available, Farmer Mac estimates the
fair value using techniques that rely on alternate market data or internally
developed models using significant inputs that are generally less readily
observable. Market data includes prices of financial instruments with
similar maturities and characteristics, duration, interest rate yield curves,
measures of volatility and prepayment rates. If market data needed to
estimate fair value is not available, Farmer Mac estimates fair value using
internally-developed models that employ a discounted cash flow
approach. Even when market assumptions are not readily available,
Farmer Mac’s assumptions reflect those that market participants would use in
pricing the asset or liability at the measurement date.
The fair
value hierarchy ranks the quality and reliability of the information used to
determine fair values. The hierarchy gives highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The standard
describes the following three levels used to classify fair value
measurements:
|
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities.
|
|
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 3
|
Prices
or valuations that require unobservable inputs that are significant to the
fair value measurement.
|
Farmer
Mac performed a detailed analysis of the assets and liabilities carried at fair
value to determine the appropriate level based on the transparency of the inputs
used in the valuation techniques. In certain cases, the inputs used
to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, an instrument’s level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair
value measurement. Farmer Mac’s assessment of the significance of a
particular input to the fair value measurement of an instrument requires
judgment and consideration of factors specific to the
instrument. While Farmer Mac believes its valuation methods are
appropriate and consistent with those of other market participants, using
different methodologies or assumptions to determine fair value could result in a
materially different estimate of the fair value of some financial
instruments.
The
following is a description of the fair value techniques used for instruments
measured at fair value as well as the general classification of such instruments
pursuant to the valuation hierarchy described above. Fair value
measurements related to financial instruments that are reported at fair value in
the consolidated financial statements each period are referred to as recurring
fair value measurements. Fair value measurements related to assets
and liabilities that are not reported at fair value each period but are subject
to fair value adjustments in certain circumstances are referred to as
nonrecurring fair value measurements.
Recurring
Fair Value Measurements and Classification
Available-for-Sale and
Trading Investment Securities
Fair
value is primarily determined using a reputable and nationally recognized third
party pricing service for a significant portion of Farmer Mac’s investment
portfolio, including most asset-backed securities, corporate debt securities,
Government/GSE guaranteed mortgage-backed securities and preferred stock issued
by Fannie Mae. The prices obtained are non-binding and generally
representative of recent market trades. The fair values of certain
asset-backed and Government guaranteed mortgage-backed securities are estimated
based on quotations from brokers or dealers. Farmer Mac corroborates
its primary valuation source by obtaining a secondary price from another
independent third party pricing service. Farmer Mac classifies these
fair value measurements as Level 2.
For
investment securities which are thinly traded or not quoted, Farmer Mac
estimates fair value using internally-developed models that employ a discounted
cash flow approach. Farmer Mac maximizes the use of observable market
data, including prices of financial instruments with similar maturities and
characteristics, interest rate yield curves, measures of volatility and
prepayment rates. Farmer Mac generally considers a market to be
inactive if the following conditions exist: (1) there are few transactions
for the financial instruments; (2) the prices in the market are not
current; (3) the price quotes vary significantly either over time or among
independent pricing services or dealers; or (4) there is a limited
availability of public market information. Farmer Mac classifies
these fair value measurements as Level 3.
Due to
the lack of an active market for Farmer Mac’s investments in auction-rate
certificates (“ARCs”) and GSE preferred stock issued by CoBank, ACB and AgFirst
Farm Credit Bank with current par values of $74.1 million, $88.5 million and
$88.0 million, respectively, Farmer Mac transferred these securities from Level
2 to Level 3 during 2008. Farmer Mac’s transfers in and out of Level
3 are as of the beginning of the reporting period on a quarterly
basis. During first quarter 2009, Farmer Mac changed the inputs to
its discounted cash flow model used to estimate the fair value of its
investments in thinly traded GSE preferred stock. The benchmark
securities previously used to derive credit spreads for estimates of fair value
as of December 31, 2008 were preferred stock issued by large national financial
institutions. The preferred stock securities of these large financial
institutions experienced significant volatility during first quarter 2009 due to
changes in the credit quality of the issuers and the market expectations
regarding projected cash flows for the securities. The change in the
market expectations of projected future cash flows for those securities was
inconsistent with the Farm Credit System preferred stock owned by Farmer
Mac. Had Farmer Mac estimated the fair value of the Farm Credit
System preferred stock as of December 31, 2008 using the new methodology in
place as of March 31, 2009, the fair values of those securities would have been
$175.0 million, an increase of approximately $13.4 million from the estimated
fair value of $161.6 million as of December 31, 2008.
During
second quarter 2009, Farmer Mac transferred its investment in the subordinated
debt of CoBank with a par value of $70.0 million from Level 2 to Level 3 for
purposes of estimating its fair value. Farmer Mac determined that the
third party pricing service used to estimate fair value for this security as a
Level 2 investment, in second quarter 2009, provided a price that, while
representative of a recent market trade, was not reflective of an orderly
transaction. In accordance with the relevant guidance in ASC 820,
Farmer Mac used its internally-developed models as an alternative valuation
technique to estimate fair value as a Level 3 investment.
Available-for-Sale and
Trading Farmer Mac Guaranteed Securities
Farmer
Mac estimates the fair value of its Farmer Mac Guaranteed Securities by
discounting the projected cash flows of these instruments at projected interest
rates. The fair values are based on the present value of expected
cash flows using management’s best estimate of certain key assumptions, which
include prepayment speeds, forward yield curves and discount rates commensurate
with the risks involved. Farmer Mac classifies these measurements as
Level 3 because there is limited market activity and therefore little or no
price transparency. On a sample basis, Farmer Mac corroborates the
fair value of its Farmer Mac Guaranteed Securities by obtaining a secondary
valuation from an independent third party pricing service.
Financial
Derivatives
The fair
value of exchange-traded U.S. Treasury futures is based on unadjusted quoted
prices for identical financial instruments. Farmer Mac classifies
these fair value measurements as Level 1.
Farmer
Mac’s derivative portfolio consists primarily of interest rate swaps and forward
sales contracts on the debt of other GSEs. Farmer Mac estimates the
fair value of these financial instruments based upon the counterparty
valuations. Farmer Mac internally values its derivative portfolio
using a discounted cash flow valuation technique and obtains a secondary
valuation for certain interest rate swaps to corroborate the counterparty
valuations. Farmer Mac also regularly reviews the counterparty
valuations as part of the collateral exchange process. Farmer Mac
classifies these fair value measurements as Level 2.
Certain
basis swaps are nonstandard interest rate swap structures and are therefore
internally modeled using significant assumptions and unobservable inputs,
resulting in Level 3 classification. Farmer Mac uses a discounted
cash flow valuation technique, using management’s best estimates of certain key
assumptions, which include prepayment speeds, forward yield curves and discount
rates commensurate with the risks involved.
As of
September 30, 2009, the consideration of credit risk, Farmer Mac’s and the
counterparties’, resulted in an adjustment to the valuations of Farmer Mac’s
derivative portfolio of $1.1 million. As of December 31, 2008, the
consideration of credit risk, Farmer Mac’s and the counterparties’, did not
result in a material adjustment to the valuations of Farmer Mac’s derivative
portfolio.
Nonrecurring
Fair Value Measurements and Classification
Loans Held for
Sale
Loans
held for sale are reported at the lower of cost or fair value in the
condensed consolidated balance sheets. Farmer Mac internally models
the fair value of loans by discounting the projected cash flows of these
instruments at projected interest rates. The fair values are based on
the present value of expected cash flows using management’s best estimate of
certain key assumptions, which include prepayment speeds, forward yield curves
and discount rates commensurate with the risks involved. The fair
values of these instruments are classified as Level 3 measurements.
Real Estate Owned
Properties
Farmer
Mac initially records real estate owned (“REO”) properties at fair value less
costs to sell and subsequently records them at the lower of carrying value or
fair value less costs to sell. The fair value of REO is determined by
third-party appraisals when available. When third-party appraisals are not
available, fair value is estimated based on factors such as prices for similar
properties in similar geographical areas and/or assessment through observation
of such properties. Farmer Mac classifies the REO fair values as
Level 3 measurements.
Fair
Value Classification and Transfers
As of
September 30, 2009, Farmer Mac’s assets and liabilities recorded at fair value
included financial instruments and non-financial assets valued at $3.9 billion
whose fair values were estimated by management in the absence of readily
determinable fair values (i.e., Level 3). These assets and
liabilities measured as Level 3 represented 68 percent of total assets and
82 percent of total assets and liabilities measured at fair value as of
September 30, 2009. As of December 31, 2008, Farmer Mac’s assets and
liabilities recorded at fair value included financial instruments valued at $2.8
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 55 percent of total assets and 72 percent
of financial instruments measured at fair value as of December 31,
2008.
The
following tables present information about Farmer Mac’s assets and liabilities
measured at fair value on a recurring and nonrecurring basis as of September 30,
2009 and December 31, 2008, respectively, and indicates the fair value
hierarchy of the valuation techniques used by Farmer Mac to determine such fair
value.
Assets and Liabilities Measured at Fair Value as of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Recurring:
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed
student loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
72,735 |
|
|
$ |
72,735 |
|
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
67,451 |
|
|
|
- |
|
|
|
67,451 |
|
Floating
rate corporate debt securities
|
|
|
- |
|
|
|
290,108 |
|
|
|
- |
|
|
|
290,108 |
|
Floating
rate Government/GSE guaranteed mortgage-backed
securities
|
|
|
- |
|
|
|
328,126 |
|
|
|
- |
|
|
|
328,126 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
- |
|
|
|
6,779 |
|
|
|
- |
|
|
|
6,779 |
|
Floating
rate GSE subordinated debt
|
|
|
- |
|
|
|
- |
|
|
|
60,316 |
|
|
|
60,316 |
|
Fixed
rate GSE preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
98,526 |
|
|
|
98,526 |
|
Total
available-for-sale
|
|
|
- |
|
|
|
692,464 |
|
|
|
231,577 |
|
|
|
924,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
1,848 |
|
|
|
1,848 |
|
Fixed
rate GSE preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
95,590 |
|
|
|
95,590 |
|
Total
trading
|
|
|
- |
|
|
|
- |
|
|
|
97,438 |
|
|
|
97,438 |
|
Total
investment securities
|
|
|
- |
|
|
|
692,464 |
|
|
|
329,015 |
|
|
|
1,021,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
- |
|
|
|
- |
|
|
|
57,811 |
|
|
|
57,811 |
|
Farmer
Mac II
|
|
|
- |
|
|
|
- |
|
|
|
696,029 |
|
|
|
696,029 |
|
Rural
Utilities
|
|
|
- |
|
|
|
- |
|
|
|
1,855,345 |
|
|
|
1,855,345 |
|
Total
available-for-sale
|
|
|
- |
|
|
|
- |
|
|
|
2,609,185 |
|
|
|
2,609,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II
|
|
|
- |
|
|
|
- |
|
|
|
436,853 |
|
|
|
436,853 |
|
Rural
Utilities
|
|
|
- |
|
|
|
- |
|
|
|
454,123 |
|
|
|
454,123 |
|
Total
trading
|
|
|
- |
|
|
|
- |
|
|
|
890,976 |
|
|
|
890,976 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
- |
|
|
|
- |
|
|
|
3,500,161 |
|
|
|
3,500,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives
|
|
|
- |
|
|
|
21,099 |
|
|
|
- |
|
|
|
21,099 |
|
Total
Assets at fair value
|
|
$ |
- |
|
|
$ |
713,563 |
|
|
$ |
3,829,176 |
|
|
$ |
4,542,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives
|
|
$ |
1 |
|
|
$ |
123,671 |
|
|
$ |
3,935 |
|
|
$ |
127,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities at fair value
|
|
$ |
1 |
|
|
$ |
123,671 |
|
|
$ |
3,935 |
|
|
$ |
127,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
28,329 |
|
|
$ |
28,329 |
|
REO
|
|
|
- |
|
|
|
- |
|
|
|
10,177 |
|
|
|
10,177 |
|
Total
Assets at fair value
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
38,506 |
|
|
$ |
38,506 |
|
Assets and Liabilities Measured at Fair Value as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Recurring:
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
178,577 |
|
|
$ |
178,577 |
|
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
81,256 |
|
|
|
- |
|
|
|
81,256 |
|
Floating
rate corporate debt securities
|
|
|
- |
|
|
|
419,065 |
|
|
|
- |
|
|
|
419,065 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
- |
|
|
|
335,665 |
|
|
|
- |
|
|
|
335,665 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
- |
|
|
|
7,563 |
|
|
|
- |
|
|
|
7,563 |
|
Floating
rate GSE subordinated debt
|
|
|
- |
|
|
|
49,189 |
|
|
|
- |
|
|
|
49,189 |
|
Floating
rate GSE preferred stock
|
|
|
- |
|
|
|
781 |
|
|
|
- |
|
|
|
781 |
|
Total
available-for-sale
|
|
|
- |
|
|
|
893,519 |
|
|
|
178,577 |
|
|
|
1,072,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
2,211 |
|
|
|
2,211 |
|
Fixed
rate GSE preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
161,552 |
|
|
|
161,552 |
|
Total
trading
|
|
|
- |
|
|
|
- |
|
|
|
163,763 |
|
|
|
163,763 |
|
Total
investment securities
|
|
|
- |
|
|
|
893,519 |
|
|
|
342,340 |
|
|
|
1,235,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
- |
|
|
|
- |
|
|
|
349,292 |
|
|
|
349,292 |
|
Farmer
Mac II
|
|
|
- |
|
|
|
- |
|
|
|
522,565 |
|
|
|
522,565 |
|
Rural
Utilities
|
|
|
- |
|
|
|
- |
|
|
|
639,837 |
|
|
|
639,837 |
|
Total
available-for-sale
|
|
|
- |
|
|
|
- |
|
|
|
1,511,694 |
|
|
|
1,511,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II
|
|
|
- |
|
|
|
- |
|
|
|
496,863 |
|
|
|
496,863 |
|
Rural
Utilities
|
|
|
- |
|
|
|
- |
|
|
|
442,687 |
|
|
|
442,687 |
|
Total
trading
|
|
|
- |
|
|
|
- |
|
|
|
939,550 |
|
|
|
939,550 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
- |
|
|
|
- |
|
|
|
2,451,244 |
|
|
|
2,451,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives
|
|
|
28 |
|
|
|
27,041 |
|
|
|
- |
|
|
|
27,069 |
|
Total
Assets at fair value
|
|
$ |
28 |
|
|
$ |
920,560 |
|
|
$ |
2,793,584 |
|
|
$ |
3,714,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives
|
|
$ |
- |
|
|
$ |
177,464 |
|
|
$ |
3,719 |
|
|
$ |
181,183 |
|
Total
Liabilities at fair value
|
|
$ |
- |
|
|
$ |
177,464 |
|
|
$ |
3,719 |
|
|
$ |
181,183 |
|
(1)
Includes the fair value of Farmer Mac's put rights related to $119.9 million
(par value) of its ARC holdings.
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.
|
|
|
|
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
|
|
|
|
(in thousands)
|
|
Recurring:
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
$ |
68,716 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,019 |
|
|
$ |
- |
|
|
$ |
72,735 |
|
Floating
rate GSE subordinated debt
|
|
|
54,187 |
|
|
|
- |
|
|
|
- |
|
|
|
6,129 |
|
|
|
- |
|
|
|
60,316 |
|
Fixed
rate GSE preferred stock
|
|
|
- |
|
|
|
(35 |
) |
|
|
- |
|
|
|
7,904 |
|
|
|
90,657 |
|
|
|
98,526 |
|
Total
available-for-sale
|
|
|
122,903 |
|
|
|
(35 |
) |
|
|
- |
|
|
|
18,052 |
|
|
|
90,657 |
|
|
|
231,577 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities(1)
|
|
|
1,937 |
|
|
|
(172 |
) |
|
|
83 |
|
|
|
- |
|
|
|
- |
|
|
|
1,848 |
|
Fixed
rate GSE preferred stock(2)
|
|
|
183,500 |
|
|
|
(309 |
) |
|
|
3,056 |
|
|
|
- |
|
|
|
(90,657 |
) |
|
|
95,590 |
|
Total
trading
|
|
|
185,437 |
|
|
|
(481 |
) |
|
|
3,139 |
|
|
|
- |
|
|
|
(90,657 |
) |
|
|
97,438 |
|
Total
investment securities
|
|
|
308,340 |
|
|
|
(516 |
) |
|
|
3,139 |
|
|
|
18,052 |
|
|
|
- |
|
|
|
329,015 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
55,632 |
|
|
|
1,493 |
|
|
|
- |
|
|
|
686 |
|
|
|
- |
|
|
|
57,811 |
|
Farmer
Mac II
|
|
|
644,572 |
|
|
|
42,323 |
|
|
|
- |
|
|
|
9,134 |
|
|
|
- |
|
|
|
696,029 |
|
Rural
Utilities
|
|
|
1,424,077 |
|
|
|
425,000 |
|
|
|
- |
|
|
|
6,268 |
|
|
|
- |
|
|
|
1,855,345 |
|
Total
available-for-sale
|
|
|
2,124,281 |
|
|
|
468,816 |
|
|
|
- |
|
|
|
16,088 |
|
|
|
- |
|
|
|
2,609,185 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II(3)
|
|
|
447,957 |
|
|
|
(19,978 |
) |
|
|
8,874 |
|
|
|
- |
|
|
|
- |
|
|
|
436,853 |
|
Rural
Utilities(1)
|
|
|
447,174 |
|
|
|
(6,085 |
) |
|
|
13,034 |
|
|
|
- |
|
|
|
- |
|
|
|
454,123 |
|
Total
trading
|
|
|
895,131 |
|
|
|
(26,063 |
) |
|
|
21,908 |
|
|
|
- |
|
|
|
- |
|
|
|
890,976 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
3,019,412 |
|
|
|
442,753 |
|
|
|
21,908 |
|
|
|
16,088 |
|
|
|
- |
|
|
|
3,500,161 |
|
Total
Assets at fair value
|
|
$ |
3,327,752 |
|
|
$ |
442,237 |
|
|
$ |
25,047 |
|
|
$ |
34,140 |
|
|
$ |
- |
|
|
$ |
3,829,176 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives(4)
|
|
$ |
(3,350 |
) |
|
$ |
- |
|
|
$ |
(585 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(3,935 |
) |
Total
Liabilities at fair value
|
|
$ |
(3,350 |
) |
|
$ |
- |
|
|
$ |
(585 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(3,935 |
) |
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(315 |
) |
|
$ |
- |
|
|
$ |
28,644 |
|
|
$ |
28,329 |
|
REO
|
|
|
43,260 |
|
|
|
(31,609 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,474 |
) |
|
|
10,177 |
|
Total
Assets at fair value
|
|
$ |
43,260 |
|
|
$ |
(31,609 |
) |
|
$ |
(315 |
) |
|
$ |
- |
|
|
$ |
27,170 |
|
|
$ |
38,506 |
|
(1)
|
Unrealized
gains are attributable to assets still held as of September 30, 2009 and
are recorded in gains/(losses) on trading
assets.
|
(2)
|
Includes
unrealized gains of $3.5 million for assets still held as of September 30,
2009 that are recorded in gains/(losses) on trading
assets.
|
(3)
|
Includes
unrealized gains of approximately $9.5 million attributable to assets
still held as of September 30, 2009 that are recorded in gains/(losses) on
trading assets.
|
(4)
|
Unrealized
losses are attributable to liabilities still held as of September 30, 2009
and are recorded in (losses)/gains on financial
derivatives.
|
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
|
|
|
|
(in thousands)
|
|
Recurring:
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
$ |
209,360 |
|
|
$ |
(17,525 |
) |
|
$ |
- |
|
|
$ |
175 |
|
|
$ |
- |
|
|
$ |
192,010 |
|
Total
available-for-sale securities
|
|
|
209,360 |
|
|
|
(17,525 |
) |
|
|
- |
|
|
|
175 |
|
|
|
- |
|
|
|
192,010 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities(1)
|
|
|
7,414 |
|
|
|
(143 |
) |
|
|
(2,914 |
) |
|
|
- |
|
|
|
- |
|
|
|
4,357 |
|
Fixed
rate GSE preferred stock(1)
|
|
|
- |
|
|
|
(338 |
) |
|
|
(12,073 |
) |
|
|
- |
|
|
|
179,100 |
|
|
|
166,689 |
|
Total
trading investment securities
|
|
|
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 gains/(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 gains/(losses) on
trading assets.
|
(3)
|
Unrealized
gains are attributable to liabilities still held as of September 30, 2008
and are recorded in (losses)/gains on financial
derivatives.
|
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 nine
months ended September 30, 2009 and September 30, 2008,
respectively.
Level 3 Assets and Liabilities Measured at Fair Value for the Nine
Months Ended September 30, 2009
|
|
|
|
|
|
|
Purchases,
|
|
|
Realized and
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
|
|
|
Unrealized
|
|
|
Gains/(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances and
|
|
|
Gains/(Losses)
|
|
|
included in Other
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Settlements,
|
|
|
included in
|
|
|
Comprehensive
|
|
|
Net Transfers In
|
|
|
|
|
|
|
Balance
|
|
|
net
|
|
|
Income
|
|
|
Income
|
|
|
and/or Out
|
|
|
Ending Balance
|
|
|
|
(in thousands)
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed
student
loans
|
|
$ |
178,577 |
|
|
$ |
(119,850 |
) |
|
$ |
- |
|
|
$ |
14,008 |
|
|
$ |
- |
|
|
$ |
72,735 |
|
Floating
rate GSE subordinated debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,184 |
|
|
|
49,132 |
|
|
|
60,316 |
|
Fixed
rate GSE preferred stock
|
|
|
- |
|
|
|
(35 |
) |
|
|
- |
|
|
|
7,904 |
|
|
|
90,657 |
|
|
|
98,526 |
|
Total
available-for-sale investment securities
|
|
|
178,577 |
|
|
|
(119,885 |
) |
|
|
- |
|
|
|
33,096 |
|
|
|
139,789 |
|
|
|
231,577 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities(1)
|
|
|
2,211 |
|
|
|
(645 |
) |
|
|
282 |
|
|
|
- |
|
|
|
- |
|
|
|
1,848 |
|
Fixed
rate GSE preferred stock(2)
|
|
|
161,552 |
|
|
|
(990 |
) |
|
|
25,685 |
|
|
|
- |
|
|
|
(90,657 |
) |
|
|
95,590 |
|
Total
trading
|
|
|
163,763 |
|
|
|
(1,635 |
) |
|
|
25,967 |
|
|
|
- |
|
|
|
(90,657 |
) |
|
|
97,438 |
|
Total
investment securities
|
|
|
342,340 |
|
|
|
(121,520 |
) |
|
|
25,967 |
|
|
|
33,096 |
|
|
|
49,132 |
|
|
|
329,015 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
349,292 |
|
|
|
(2,188 |
) |
|
|
- |
|
|
|
(1,281 |
) |
|
|
(288,012 |
) |
|
|
57,811 |
|
Farmer
Mac II
|
|
|
522,565 |
|
|
|
160,574 |
|
|
|
- |
|
|
|
12,890 |
|
|
|
- |
|
|
|
696,029 |
|
Rural
Utilities
|
|
|
639,837 |
|
|
|
1,195,000 |
|
|
|
- |
|
|
|
20,508 |
|
|
|
- |
|
|
|
1,855,345 |
|
Total
available-for-sale
|
|
|
1,511,694 |
|
|
|
1,353,386 |
|
|
|
- |
|
|
|
32,117 |
|
|
|
(288,012 |
) |
|
|
2,609,185 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II(3)
|
|
|
496,863 |
|
|
|
(67,320 |
) |
|
|
7,310 |
|
|
|
- |
|
|
|
- |
|
|
|
436,853 |
|
Rural
Utilities(1)
|
|
|
442,687 |
|
|
|
(11,994 |
) |
|
|
23,430 |
|
|
|
- |
|
|
|
- |
|
|
|
454,123 |
|
Total
trading
|
|
|
939,550 |
|
|
|
(79,314 |
) |
|
|
30,740 |
|
|
|
- |
|
|
|
- |
|
|
|
890,976 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
2,451,244 |
|
|
|
1,274,072 |
|
|
|
30,740 |
|
|
|
32,117 |
|
|
|
(288,012 |
) |
|
|
3,500,161 |
|
Total
Assets at fair value
|
|
$ |
2,793,584 |
|
|
$ |
1,152,552 |
|
|
$ |
56,707 |
|
|
$ |
65,213 |
|
|
$ |
(238,880 |
) |
|
$ |
3,829,176 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives(4)
|
|
$ |
(3,719 |
) |
|
$ |
- |
|
|
$ |
(216 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(3,935 |
) |
Total
Liabilities at fair value
|
|
$ |
(3,719 |
) |
|
$ |
- |
|
|
$ |
(216 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(3,935 |
) |
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(315 |
) |
|
$ |
- |
|
|
$ |
28,644 |
|
|
$ |
28,329 |
|
REO
|
|
|
- |
|
|
|
(31,609 |
) |
|
|
- |
|
|
|
- |
|
|
|
41,786 |
|
|
|
10,177 |
|
Total
Assets at fair value
|
|
$ |
- |
|
|
$ |
(31,609 |
) |
|
$ |
(315 |
) |
|
$ |
- |
|
|
$ |
70,430 |
|
|
$ |
38,506 |
|
(1)
|
Unrealized
gains are attributable to assets still held as of September 30, 2009 and
are recorded in gains/(losses) on trading
assets.
|
(2)
|
Includes
unrealized gains of $15.6 million for assets still held as of September
30, 2009 that are recorded in gains/(losses) on trading
assets.
|
(3)
|
Includes
unrealized gains of approximately $8.6 million attributable to assets
still held as of September 30, 2009 that are recorded in gains/(losses) on
trading assets.
|
(4)
|
Unrealized
losses are attributable to liabilities still held as of September 30, 2009
and are recorded in (losses)/gains 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
|
|
|
|
(in thousands)
|
|
Recurring:
|
|
|
|
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 securities
|
|
|
500,138 |
|
|
|
- |
|
|
|
- |
|
|
|
2,951 |
|
|
|
(503,089 |
) |
|
|
- |
|
Total
available-for-sale securities
|
|
|
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 gains/(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 gains/(losses) on
trading assets.
|
(3)
|
Unrealized
losses are attributable to liabilities still held as of September 30, 2008
and are recorded in (losses)/gains on financial
derivatives.
|
Fair
Value Option
ASC 825
permits entities to make a one-time irrevocable election to report financial
instruments at fair value with changes in fair value recorded in earnings as
they occur. One of the FASB’s stated objectives of this guidance 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.
On
January 1, 2008, with the adoption of ASC 825, 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 2008,
Farmer Mac elected to measure an additional $113.3 million of Farmer Mac II
Guaranteed Securities at fair value, with changes in fair value reflected in
earnings as they occur. Farmer Mac selected all of these assets for
the fair value option 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 nine months
of 2009, Farmer Mac did not elect the fair value option for any assets or
liabilities.
Impact of Adopting Fair Value Option to Retained Earnings as of January 1, 2008
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
as of January 1, 2008
|
|
|
|
|
|
|
|
|
|
Prior to Adoption of
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Transition
|
|
|
After Adoption of
|
|
|
|
Option
|
|
|
Gain
|
|
|
Fair Value Option
|
|
|
|
(in thousands)
|
|
Available-for-sale
Investment Securities (1):
|
|
|
|
|
|
|
|
|
|
Fixed
rate GSE preferred stock
|
|
$ |
184,655 |
|
|
$ |
2,783 |
|
|
$ |
184,655 |
|
Fixed
rate mortgage-backed securities
|
|
|
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 ASC
Topic 320, Investments - Debt and Equity
Securities, (“ASC 320”), and the amount of transition gain was
recognized in accumulated other comprehensive income/loss prior to the
adoption of ASC 825.
|
For the
three months and nine months ended September 30, 2009, Farmer Mac recorded net
gains on trading assets of $25.0 million and $56.4 million, respectively,
for changes in fair values of the assets selected for the fair value option,
compared to net losses on trading assets of $11.6 million and $18.6 million for
the same periods ended September 30, 2008. These gains/(losses) are
recognized as “Gains/(losses) on trading assets” in the condensed consolidated
statements of operations.
Disclosures
about Fair Value of Financial Instruments
The
following table sets forth the estimated fair values and the carrying values for
financial assets, liabilities and guarantees and commitments as of September 30,
2009 and December 31, 2008 in accordance with ASC 825-10-50-10 to 50-19
(formerly FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments):
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
|
(in thousands)
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
274,894 |
|
|
$ |
274,894 |
|
|
$ |
278,412 |
|
|
$ |
278,412 |
|
Investment
securities
|
|
|
1,021,479 |
|
|
|
1,021,479 |
|
|
|
1,235,859 |
|
|
|
1,235,859 |
|
Farmer
Mac Guaranteed Securities
|
|
|
3,500,161 |
|
|
|
3,500,161 |
|
|
|
2,451,244 |
|
|
|
2,451,244 |
|
Loans
|
|
|
743,699 |
|
|
|
727,234 |
|
|
|
789,613 |
|
|
|
774,596 |
|
Financial
derivatives
|
|
|
21,099 |
|
|
|
21,099 |
|
|
|
27,069 |
|
|
|
27,069 |
|
Interest
receivable
|
|
|
56,206 |
|
|
|
56,206 |
|
|
|
73,058 |
|
|
|
73,058 |
|
Guarantee
and commitment fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
|
16,646 |
|
|
|
18,322 |
|
|
|
20,434 |
|
|
|
19,232 |
|
Farmer
Mac Guaranteed Securities
|
|
|
31,503 |
|
|
|
36,150 |
|
|
|
36,071 |
|
|
|
41,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
|
3,159,434 |
|
|
|
3,155,589 |
|
|
|
3,773,430 |
|
|
|
3,757,099 |
|
Due
after one year
|
|
|
2,031,031 |
|
|
|
1,962,591 |
|
|
|
944,490 |
|
|
|
887,999 |
|
Financial
derivatives
|
|
|
127,607 |
|
|
|
127,607 |
|
|
|
181,183 |
|
|
|
181,183 |
|
Accrued
interest payable
|
|
|
37,388 |
|
|
|
37,388 |
|
|
|
40,470 |
|
|
|
40,470 |
|
Guarantee
and commitment obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
|
15,486 |
|
|
|
17,162 |
|
|
|
19,058 |
|
|
|
17,856 |
|
Farmer
Mac Guaranteed Securities
|
|
|
27,002 |
|
|
|
31,649 |
|
|
|
31,291 |
|
|
|
37,098 |
|
The
carrying value of cash and cash equivalents, certain short-term investment
securities, interest receivable and accrued interest payable is a
reasonable estimate of their approximate fair value. Farmer Mac
estimates the fair value of its loans, guarantee and commitment fees
receivable/obligation and notes payable by discounting the projected cash flows
of these instruments at projected interest rates. The fair values are
based on the present value of expected cash flows using management’s best
estimate of certain key assumptions, which include 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.
Different
market assumptions and estimation methodologies could significantly affect
estimated fair value amounts.
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, 2008 filed with the SEC on March 16,
2009.
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, delinquencies and provisions for
losses;
|
|
·
|
trends
in non-program investments;
|
|
·
|
prospects
for asset impairments and allowance for
losses;
|
|
·
|
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, 2008 filed with the SEC on March 16, 2009, as well as
uncertainties regarding:
|
·
|
the
ability of Farmer Mac to increase its capital in an amount and at a cost
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;
|
|
·
|
legislative
or regulatory developments that could affect Farmer
Mac;
|
|
·
|
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;
|
|
·
|
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
severity and duration of current economic and financial conditions
generally and within the agricultural and rural utilities sectors in
particular;
|
|
·
|
developments
in the financial markets, including possible investor, analyst and rating
agency reactions to events involving GSEs, including Farmer Mac;
and
|
|
·
|
the
willingness of investors to invest in Farmer Mac Guaranteed
Securities.
|
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
preparation of Farmer Mac’s consolidated financial statements in conformity with
GAAP requires the use of estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and related notes
for the periods presented. Actual results could differ from those
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: (1) the allowance for losses, (2) fair value measurement,
and (3) other-than-temporary impairment.
During
second quarter 2009, Farmer Mac amended its critical accounting policy relating
to other-than-temporary impairments upon the adoption of ASC 320-10-35-33
(formerly FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments). This guidance amended the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. The existing recognition and measurement guidance related
to other-than-temporary impairments of equity securities was not
amended.
If the
fair value of a security is less than its amortized cost basis as of the balance
sheet date, Farmer Mac assesses whether the impairment is temporary or
other-than-temporary. Other-than-temporary impairment occurs when the
fair value of an available-for-sale debt security is below its amortized cost,
and it is determined that management (a) has the intent to sell the debt
security or (b) more likely than not will be required to sell the debt security
before its anticipated recovery. In these cases, the entire
difference between the amortized cost basis of the security and the fair value
as of the balance sheet date is recognized as other-than-temporary impairment in
earnings.
If
management does not intend to sell the security and it is not more likely than
not that it will be required to sell the security before anticipated recovery,
Farmer Mac determines whether a credit loss exists. 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, recoveries or
additional declines in fair value subsequent to the balance sheet date, and
other relevant information related to the collectability of the
security. If Farmer Mac determines that the present value of the cash
flows likely to be collected from the security is greater than the amortized
cost basis of the security, the impairment is deemed to be
temporary. Conversely, if the present value of the expected cash
flows is less than the amortized cost basis of the security, a credit loss has
occurred and the security is deemed to be other-than-temporarily impaired and
the amount of the total other-than-temporary impairment related to the credit
loss is recognized in earnings. The amount of the total
other-than-temporary impairment related to all other factors is recognized in
other comprehensive income, net of applicable taxes.
For a
discussion of Farmer Mac’s critical accounting policies related to the allowance
for losses and fair value measurement 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 Policies and Estimates” in the Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2008 filed with the
SEC on March 16, 2009.
Results of
Operations
Overview. Farmer
Mac’s net income available to common stockholders for third quarter 2009 was
$17.9 million or $1.74 per diluted common share, compared to a net loss of
$106.1 million or $10.55 per diluted common share for third quarter
2008. Net income available to common stockholders for the nine months
ended September 30, 2009 was $76.8 million or $7.54 per diluted common share,
compared to a net loss of $93.0 million or $9.33 per diluted common share for
the nine months ended September 30, 2008. Farmer Mac’s results for
both the three and nine month periods ended September 30, 2008 were severely
adversely impacted by losses on investment securities that were subsequently
liquidated during 2009. Subsequent to those events and a change in
management, Farmer Mac revised its investment portfolio guidelines and revamped
its funding strategies with the intent to reduce Farmer Mac’s exposure to
adverse financial market volatility and to preserve and rebuild
capital. Farmer Mac’s excess capital above its statutory minimum
capital requirement, which had fallen to as low as $13.5 million as of December
31, 2008, was $126.3 million as of September 30, 2009.
Farmer
Mac’s non-performing assets were $84.8 million (1.94 percent) as of
September 30, 2009, compared to $97.1 million as of June 30, 2009 (2.17
percent). This decrease was due to the third quarter sale of three of
Farmer Mac’s four ethanol facilities that had been classified as REO as of June
30, 2009 (the fourth facility was sold in October 2009). REO
properties are included in Farmer Mac’s non-performing assets but not in 90-day
delinquencies. Farmer Mac’s 90-day delinquencies increased from
$42.3 million (0.95 percent) as of June 30, 2009 to $59.4 million
(1.36 percent) as of September 30, 2009.
As of
September 30, 2009, Farmer Mac’s ethanol exposure, which includes loans,
loans subject to LTSPCs and REO, was $275.8 million, with exposure to
29 different plants, and an additional $35.8 million of undisbursed
commitments. Other than the undisbursed commitments, Farmer Mac is
not seeking to add more ethanol loan exposure to its
portfolio. See “—Risk Management—Credit Risk – Loans” for more
detail about Farmer Mac’s ethanol portfolio.
During
third quarter 2009, Farmer Mac recorded a provision to its allowance for losses
of $3.2 million, compared to a provision of $0.6 million during third
quarter 2008. For the nine months ended September 30, 2009,
offsetting provisions and releases related to the allowance for losses resulted
in net provisions of $3.0 million, compared to net provisions of $0.6
million for the nine months ended September 30, 2008. As of September
30, 2009, the total allowance for losses was $12.5 million, compared to
$16.4 million as of December 31, 2008.
Farmer
Mac’s non-performing assets were down slightly from higher levels reported
earlier during the year. Those reductions are in part a result of the
reclassification of certain ethanol loans from “in bankruptcy” during second
quarter 2009 to REO and having been sold with subsequent loans to the purchasers
classified as current as of September 30, 2009. Much of the remainder
of the portfolio continues to benefit from the cumulative strong performance of
the U.S. agricultural economy over the past several years, which has enabled
most agricultural producers in stressed industries to manage current economic
pressures and meet their obligations on mortgage loans. However,
based on the potential decline in the profitability of certain agricultural
industries, Farmer Mac expects that delinquencies are likely to increase during
the remainder of 2009 and beyond, although any such delinquencies and related
credit losses are expected to remain within Farmer Mac’s historical experience
but likely greater than the historical average. See “—Results of
Operations—Outlook” and “—Risk Management—Credit Risk – Loans” for more detail
about the outlook for certain agricultural industries.
Changes
in the fair values of financial derivatives and trading assets have historically
contributed significant volatility to Farmer Mac’s periodic
earnings. Consistent with that trend, Farmer Mac’s third quarter loss
on financial derivatives was $7.7 million, compared to a loss of $19.0
million during third quarter 2008. For the nine months ended
September 30, 2009, the gain on financial derivatives was $15.5 million,
compared to a loss of $29.7 million for the nine months ended September 30,
2008. Fair value gains on trading assets totaled $25.0 million for
third quarter 2009, compared to losses of $14.5 million for third quarter
2008. For the nine months ended September 30, 2009, the gains on
trading assets totaled $56.7 million, compared to losses of
$21.7 million for the nine months ended September 30,
2008. While these volatile changes in fair values may at times
produce significant income, as has been the case in 2009, they may also produce
significant losses, as has been the case in previous reporting
periods. Future changes in those values cannot be reliably predicted;
however, as of September 30, 2009 the cumulative fair value after-tax losses
recorded on financial derivatives was $69.2 million. Over time,
Farmer Mac will realize in earnings the net effect of the cash settlements on
its interest rate swap contracts, which may on its own produce either income or
expense, but is expected to generate positive effective net spread when combined
with the interest earned and paid on the assets and liabilities Farmer Mac holds
on its balance sheet. This positive effective net spread will
continue to build retained earnings and capital over time. Although
the unrealized fair value fluctuations experienced throughout the term of the
financial derivatives will temporarily impact earnings and capital, those
fluctuations will have no permanent effect upon maturity.
During
third quarter 2009, Farmer Mac recorded an other-than-temporary impairment loss
of $1.6 million to write down the Corporation’s $49.9 million investment in the
unsecured debt of HSBC Finance to its fair value of $48.3 million as of
September 30, 2009. Subsequent to September 30, 2009, Farmer Mac
sold $20.0 million of the HSBC Finance debt for
$19.5 million. That sale resulted in a loss of $0.5 million
on Farmer Mac’s initial investment, but a gain of $0.1 million during
fourth quarter 2009 because the sale proceeds exceeded the carrying value that
reflected the other-than-temporary impairment loss recorded during third quarter
2009. To mitigate the credit exposure related to Farmer Mac’s
remaining $28.9 million investment in HSBC Finance debt, during fourth quarter
2009 Farmer Mac entered into a credit default swap covering the
balance. The credit default swap protects Farmer Mac against any
future default by HSBC Finance and provides an offset to further fluctuations in
the fair value of the remaining investment.
Farmer
Mac’s year-to-date 2009 results benefited from two first quarter
transactions. The first was the conversion of certain Farmer Mac
Guaranteed Securities into loans and the subsequent sale of a pool of loans
consisting of a portion of the loans previously underlying those securities and
other loans previously classified on the balance sheet as loans. The
total principal balance of loans sold was $354.5 million. The sale
resulted in a gain of $1.6 million and a recovery of previously charged off
losses of $0.8 million. The second transaction was the sale of Lehman
Brothers Holdings Inc. senior debt securities that had been written down to
$5.4 million as of December 31, 2008. The sale of the securities
during first quarter 2009 for $8.6 million resulted in a $3.2 million recovery
of previously written off losses.
To assist
in the comparison of results to prior periods, the table below summarizes many
of the items discussed above as they relate to Farmer Mac’s results of
operations for the three and nine month periods ended September 30, 2009 and
2008 and reconciles those items as separate components of net income available
to common stockholders, distinct from the recurring items during the periods
presented.
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Recurring
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
$ |
8,168 |
|
|
$ |
7,281 |
|
|
$ |
23,486 |
|
|
$ |
20,574 |
|
Net
interest income including realized gains/(losses) on financial
derivatives
|
|
|
10,737 |
|
|
|
11,455 |
|
|
|
31,038 |
|
|
|
43,332 |
|
Other
income
|
|
|
874 |
|
|
|
192 |
|
|
|
1,209 |
|
|
|
1,315 |
|
Credit
related charges
|
|
|
(3,390 |
) |
|
|
(655 |
) |
|
|
(3,226 |
) |
|
|
(742 |
) |
Operating
costs
|
|
|
(5,840 |
) |
|
|
(8,322 |
) |
|
|
(20,362 |
) |
|
|
(21,196 |
) |
Related
tax expense
|
|
|
(3,176 |
) |
|
|
(3,137 |
) |
|
|
(9,963 |
) |
|
|
(13,984 |
) |
Preferred
stock dividends
|
|
|
(4,368 |
) |
|
|
(578 |
) |
|
|
(12,434 |
) |
|
|
(1,698 |
) |
Subtotal
|
|
|
3,005 |
|
|
|
6,236 |
|
|
|
9,748 |
|
|
|
27,601 |
|
Items
resulting from fair value fluctuations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value changes in financial derivatives
|
|
|
1,327 |
|
|
|
(9,153 |
) |
|
|
47,606 |
|
|
|
(9,404 |
) |
Fair
value changes in trading assets
|
|
|
25,047 |
|
|
|
(14,507 |
) |
|
|
56,707 |
|
|
|
(21,664 |
) |
Related
tax (expense)/benefit
|
|
|
(9,231 |
) |
|
|
8,281 |
|
|
|
(36,510 |
) |
|
|
10,874 |
|
Subtotal
|
|
|
17,143 |
|
|
|
(15,379 |
) |
|
|
67,803 |
|
|
|
(20,194 |
) |
Other
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses
|
|
|
(1,621 |
) |
|
|
(97,108 |
) |
|
|
(3,994 |
) |
|
|
(102,452 |
) |
Gains
on asset sales and debt repurchases
|
|
|
63 |
|
|
|
2,286 |
|
|
|
4,494 |
|
|
|
2,436 |
|
Related
tax expense
|
|
|
(690 |
) |
|
|
(2,171 |
) |
|
|
(1,248 |
) |
|
|
(353 |
) |
Subtotal
|
|
|
(2,248 |
) |
|
|
(96,993 |
) |
|
|
(748 |
) |
|
|
(100,369 |
) |
Net
income available to common stockholders
|
|
$ |
17,900 |
|
|
$ |
(106,136 |
) |
|
$ |
76,803 |
|
|
$ |
(92,962 |
) |
Set forth
below is a more detailed discussion of Farmer Mac’s results of
operations.
Net
Interest Income. For third quarter 2009, net interest income
was $19.8 million, compared to $21.3 million for third quarter
2008. For the nine months ended September 30, 2009, net interest
income was $63.1 million, compared to $63.6 million for the nine
months ended September 30, 2008. During 2009, Farmer Mac has
maintained uninterrupted access to the capital markets at favorable rates,
though the Corporation’s short-term borrowing costs relative to LIBOR returned
to historical levels during third quarter 2009. Toward the end of
2008 and into 2009, Farmer Mac reduced the size of its liquidity investment
portfolio as it positioned the portfolio to preserve capital and reduce
risk. The reduced level of investment has decreased the net interest
income earned from that portfolio compared to earlier periods. The
net interest yield was 169 basis points for the nine months ended September 30,
2009, compared to 150 basis points for the nine months ended September 30,
2008.
The
following table provides information regarding interest-earning assets and
funding for the nine months ended September 30, 2009 and 2008. 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. The
average rate earned on cash and investments reflects lower short-term market
rates during the nine months ended September 30, 2009 compared to the nine
months ended September 30, 2008. The lower average rate on loans and
Farmer Mac Guaranteed Securities during the nine months ended September 30, 2009
reflects the decline in market rates reflected in the rates on loans acquired or
reset during the past year. 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 the latter
part of 2008 and 2009.
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Average
Rate
|
|
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and investments
|
|
$ |
1,457,216 |
|
|
$ |
22,303 |
|
|
|
2.04%
|
|
|
$ |
3,218,258 |
|
|
$ |
97,305 |
|
|
|
4.03%
|
|
Loans
and Farmer Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
3,527,656 |
|
|
|
109,428 |
|
|
|
4.14%
|
|
|
|
2,430,259 |
|
|
|
102,199 |
|
|
|
5.61%
|
|
Total
interest-earning assets
|
|
|
4,984,872 |
|
|
|
131,731 |
|
|
|
3.52%
|
|
|
|
5,648,517 |
|
|
|
199,504 |
|
|
|
4.71%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable due within one year
|
|
|
3,109,850 |
|
|
|
20,306 |
|
|
|
0.87%
|
|
|
|
3,824,478 |
|
|
|
81,287 |
|
|
|
2.83%
|
|
Notes
payable due after one year
|
|
|
1,662,863 |
|
|
|
48,287 |
|
|
|
3.87%
|
|
|
|
1,589,692 |
|
|
|
54,598 |
|
|
|
4.58%
|
|
Total
interest-bearing liabilities
|
|
|
4,772,713 |
|
|
|
68,593 |
|
|
|
1.92%
|
|
|
|
5,414,170 |
|
|
|
135,885 |
|
|
|
3.35%
|
|
Net
non-interest-bearing funding
|
|
|
212,159 |
|
|
|
- |
|
|
|
|
|
|
|
234,347 |
|
|
|
- |
|
|
|
|
|
Total
funding
|
|
$ |
4,984,872 |
|
|
|
68,593 |
|
|
|
1.83%
|
|
|
$ |
5,648,517 |
|
|
|
135,885 |
|
|
|
3.21%
|
|
Net
interest income/yield
|
|
|
|
|
|
$ |
63,138 |
|
|
|
1.69%
|
|
|
|
|
|
|
$ |
63,619 |
|
|
|
1.50%
|
|
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 lower interest rates in the debt
markets.
|
|
For the Nine Months Ended September 30, 2009
|
|
|
|
Compared to the Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
|
Increase/(Decrease) Due to
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Income
from interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Cash
and investments
|
|
$ |
(35,577 |
) |
|
$ |
(39,425 |
) |
|
$ |
(75,002 |
) |
Loans
and Farmer Mac Guaranteed Securities
|
|
|
(31,262 |
) |
|
|
38,491 |
|
|
|
7,229 |
|
Total
|
|
|
(66,839 |
) |
|
|
(934 |
) |
|
|
(67,773 |
) |
Expense
from interest-bearing liabilities
|
|
|
(52,686 |
) |
|
|
(14,606 |
) |
|
|
(67,292 |
) |
Change
in net interest income
|
|
$ |
(14,153 |
) |
|
$ |
13,672 |
|
|
$ |
(481 |
) |
Farmer
Mac’s net interest yield excludes income and expense related to financial
derivatives and includes yield maintenance payments received upon the early
payoff of certain borrower’s loans. The following paragraphs describe
the effects of these items on the net interest yield and the table below
presents them as adjustments to reconcile to the net effective spread Farmer Mac
earns on the difference between its interest-earning assets and its net funding
costs, including payments for income and expense related to financial
derivatives.
Farmer
Mac accounts for its financial derivatives as undesignated financial
derivatives. Accordingly, the Corporation records the income or
expense related to financial derivatives as gains and losses on financial
derivatives. For the three months ended September 30, 2009, this
resulted in an increase of the net interest yield of $7.8 million (61 basis
points), compared to an increase of the net interest yield of $8.8 million (63
basis points) for the three months ended September 30, 2008. For the
nine months ended September 30, 2009, this resulted in an increase of the net
interest yield of $28.4 million (76 basis points), compared to an increase
of the net interest yield of $18.9 million (45 basis points) for the nine months
ended September 30, 2008.
Farmer
Mac’s net interest income and net interest yields for the three months ended
September 30, 2009 and 2008 included the benefits of yield maintenance
payments of $0.1 million (0 basis points) and $0.2 million
(2 basis points), respectively. The net interest yields for the
nine months ended September 30, 2009 and 2008 included the benefits of yield
maintenance payments of $0.4 million (1 basis point) and $3.2 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. As these figures demonstrate, the amounts of these payments,
which are largely the result of borrower refinancing, were greatly reduced in
2009 compared to 2008. Because the timing and size of these payments
vary greatly, variations do not necessarily indicate positive or negative trends
to gauge future financial results.
The
following table presents the net effective spread between Farmer Mac’s
interest-earning assets and its net funding costs. This spread is
measured by including income or expense related to financial derivatives and
subtracting yield maintenance payments.
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Dollars
|
|
|
Yield
|
|
|
Dollars
|
|
|
Yield
|
|
|
Dollars
|
|
|
Yield
|
|
|
Dollars
|
|
|
Yield
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income/yield
|
|
$ |
19,797 |
|
|
|
1.54%
|
|
|
$ |
21,323 |
|
|
|
1.52%
|
|
|
$ |
63,138 |
|
|
|
1.69%
|
|
|
$ |
63,619 |
|
|
|
1.50%
|
|
Expense
related to financial derivatives
|
|
|
(7,834 |
) |
|
|
-0.61%
|
|
|
|
(8,795 |
) |
|
|
-0.63%
|
|
|
|
(28,358 |
) |
|
|
-0.76%
|
|
|
|
(18,915 |
) |
|
|
-0.45%
|
|
Yield
maintenance payments
|
|
|
(50 |
) |
|
|
0.00%
|
|
|
|
(249 |
) |
|
|
-0.02%
|
|
|
|
(423 |
) |
|
|
-0.01%
|
|
|
|
(3,161 |
) |
|
|
-0.07%
|
|
Net
spread
|
|
$ |
11,913 |
|
|
|
0.93%
|
|
|
$ |
12,279 |
|
|
|
0.87%
|
|
|
$ |
34,357 |
|
|
|
0.92%
|
|
|
$ |
41,543 |
|
|
|
0.98%
|
|
Provision
for Loan Losses. During the three and nine months ended
September 30, 2009, Farmer Mac recorded provisions to its allowance for loan
losses of $3.1 million and $0.9 million, respectively, compared to provisions of
$0.7 million in each of the same periods in 2008. As of
September 30, 2009, Farmer Mac’s total allowance for loan losses was
$4.9 million, compared to $10.9 million as of December 31,
2008. See “—Risk Management—Credit Risk – Loans.”
Provision
for Losses. During the three and nine months ended September
30, 2009, Farmer Mac recorded provisions for losses of $0.1 million and
$2.1 million, respectively, for losses related to its guarantee activities and
LTSPCs, compared to releases of reserves for losses of $0.1 million in each of
the same periods in 2008. As of September 30, 2009, Farmer Mac’s
reserve for losses was $7.6 million, compared to $5.5 million as of
December 31, 2008.
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 $8.2 million for third quarter 2009
and $23.5 million for the nine months ended September 30, 2009, compared to
$7.3 million and $20.6 million, respectively, for the same periods in
2008. As noted above, Farmer Mac’s guarantee and commitment fees
increased in 2009 because of increases in both the average fees charged and the
average level of guarantees and commitments outstanding. In both
cases, the increases are attributable to the rural utilities business added
since June 30, 2008.
Gains
and Losses on Financial Derivatives. Farmer Mac accounts for
its financial derivatives as undesignated financial derivatives and does not
apply hedge accounting available under ASC Topic 815 (“ASC 815”), Derivatives and Hedging
(formerly FASB Statement No. 133). The net effect of
gains and losses on financial derivatives for the three and nine months ended
September 30, 2009 was a net loss of $7.7 million and a net gain of $15.5
million, respectively, compared to net losses of $19.0 million and
$29.7 million, respectively, for the same periods in 2008. The
components of gains and losses on financial derivatives for the three and nine
months ended September 30, 2009 and 2008 are summarized in the following
table:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Realized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
related to financial derivatives
|
|
$ |
(7,834 |
) |
|
$ |
(8,795 |
) |
|
$ |
(28,358 |
) |
|
$ |
(18,915 |
) |
Losses
due to terminations or net settlements
|
|
|
(1,172 |
) |
|
|
(965 |
) |
|
|
(3,550 |
) |
|
|
(1,030 |
) |
Unrealized
gains/(losses) due to fair value changes
|
|
|
1,327 |
|
|
|
(9,153 |
) |
|
|
47,606 |
|
|
|
(9,404 |
) |
Amortization
of financial derivatives transition adjustment
|
|
|
(54 |
) |
|
|
(108 |
) |
|
|
(192 |
) |
|
|
(342 |
) |
(Losses)/gains
on financial derivatives
|
|
$ |
(7,733 |
) |
|
$ |
(19,021 |
) |
|
$ |
15,506 |
|
|
$ |
(29,691 |
) |
The
accrual of periodic cash settlements for interest paid or received from Farmer
Mac’s interest rate swap contracts is shown as expense related to financial
derivatives in the table above. Payments or receipts to terminate
derivative positions or net cash settle forward sales contracts on
mortgage-backed securities and the debt of other GSEs and U.S. Treasury futures
are included in losses due to terminations or net
settlements. Changes in the fair value of Farmer Mac’s open
derivative positions are captured in unrealized gains/(losses) due to fair value
changes and are primarily the result of fluctuations in market interest
rates. The amortization of the financial derivatives transition
adjustment reflects the reclassification into earnings of the unrealized losses
on financial derivatives included in accumulated other comprehensive
income/(loss) as a result of the adoption of ASC 815. The remaining
financial derivatives transition adjustment of $0.1 million 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.
Gains
and Losses on Trading Assets. During the three and nine months
ended September 30, 2009, Farmer Mac recognized gains on trading assets of $25.0
million and $56.7 million, respectively, compared to losses of $14.5 million and
$21.7 million, respectively, for the same periods in 2008. The gains
recognized during third quarter 2009 are primarily the result of increases in
the fair values of Farmer Mac II Guaranteed Securities and Farmer Mac Guaranteed
Securities – Rural Utilities of $8.9 million and $13.0 million,
respectively. Gains on trading assets are discussed further in Note
7 to the condensed consolidated financial statements. During first
quarter 2009, Farmer Mac changed the inputs to its discounted cash flow model
used to estimate the fair value of its investments in thinly traded GSE
preferred stock. The benchmark securities previously used to derive
credit spreads for estimates of fair value as of September 30, 2008 and December
31, 2008 were preferred stock issued by large national financial
institutions. The preferred stock securities of these large financial
institutions experienced significant volatility during first quarter 2009 due to
changes in the credit quality of the issuers and the market expectations
regarding projected cash flows for the securities. The change in the
market expectations of projected future cash flows for those securities was
inconsistent with the Farm Credit System preferred stock owned by Farmer
Mac. Had Farmer Mac estimated the fair value of the Farm Credit
System preferred stock as of December 31, 2008 using the new methodology in
place as of March 31, 2009, the fair values of those securities would have been
$175.0 million, an increase of approximately $13.4 million from the estimated
fair value of $161.6 million as of December 31, 2008.
Gains
and Losses on Sale of Available-for-Sale Investment
Securities. During the three and nine months ended September
30, 2009, Farmer Mac realized gains of $0.1 million and $2.9 million,
respectively, from the sale of securities from its available-for-sale portfolio,
compared to losses of $0.1 million and gains of $0.1 million, respectively, for
the same periods in 2008. The gain in 2009 was primarily attributable
to Farmer Mac’s sale of all of its remaining investment in Lehman Brothers
Holdings, Inc. senior debt securities as to which the Corporation had recorded
$54.5 million in other-than-temporary impairment losses during
2008.
General
and Administrative Expenses. General and administrative
expenses, including legal, independent audit, and consulting fees, were
$2.4 million for third quarter 2009 and $8.3 million for the nine
months ended September 30, 2009, compared to $4.1 million and
$8.3 million, respectively, for the same periods in 2008. The
higher level of expenses in third quarter 2008 resulted from advisory fees
related to the issuance of preferred stock and legal and other advisory fees
related to corporate governance matters.
Regulatory
Fees.
Regulatory fees for the three and nine months ended September 30, 2009 were
$0.5 million and $1.5 million, respectively, compared to $0.5 million and
$1.5 million, respectively, for the same periods in 2008. FCA has
advised Farmer Mac that its estimated fees for the federal fiscal year ending
September 30, 2010 will be $2.3 million, compared to $2.1 million for
the federal fiscal year ended September 30, 2009. 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.
Income
Tax Expense/Benefit. Income tax expense totaled $13.1 million
and $47.7 million for the three and nine months ended September 30, 2009,
respectively, compared to an income tax benefit of $3.0 million and income tax
expense of $3.5 million, respectively, for the same periods in
2008. Farmer Mac’s effective tax rates for the three and nine months
ended September 30, 2009 were approximately 37.0 percent and 34.8 percent,
respectively, compared to approximately 2.7 percent and (3.9) percent,
respectively, for the same periods in 2008.
Business
Volume. During third
quarter 2009, Farmer Mac added $707.6 million of new program volume in the form
of:
|
·
|
purchases
of $40.7 million of Farmer Mac I
loans;
|
|
·
|
the
placement of $37.1 million of Farmer Mac I loans under
LTSPCs;
|
|
·
|
purchases
of $76.1 million of Farmer Mac II USDA-guaranteed portions of
loans;
|
|
·
|
purchases
of $28.7 million of Rural Utilities loans;
and
|
|
·
|
purchases
of $525.0 million of Farmer Mac Guaranteed Securities – Rural
Utilities.
|
This new
business volume was partially offset by principal paydowns on outstanding loans
and loans underlying Farmer Mac Guaranteed Securities and
LTSPCs. Farmer Mac’s outstanding program volume was $10.8 billion as
of September 30, 2009.
The
following table sets forth Farmer Mac’s loan purchase, guarantee, and commitment
activities for newly originated and current seasoned loans during the periods
indicated:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Loan
purchase and guarantee and commitment activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
40,732 |
|
|
$ |
33,179 |
|
|
$ |
108,446 |
|
|
$ |
124,485 |
|
LTSPCs
|
|
|
37,083 |
|
|
|
239,170 |
|
|
|
125,520 |
|
|
|
408,923 |
|
AgVantage
|
|
|
- |
|
|
|
475,000 |
|
|
|
- |
|
|
|
475,000 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
76,119 |
|
|
|
83,672 |
|
|
|
251,496 |
|
|
|
216,486 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
28,644 |
|
|
|
- |
|
|
|
28,644 |
|
|
|
- |
|
Guaranteed
Securities
|
|
|
525,000 |
|
|
|
- |
|
|
|
1,695,000 |
|
|
|
1,330,676 |
|
Total
purchases, guarantees and commitments
|
|
$ |
707,578 |
|
|
$ |
831,021 |
|
|
$ |
2,209,106 |
|
|
$ |
2,555,570 |
|
The
weighted-average ages of the Farmer Mac I newly originated and current seasoned
loans purchased during third quarter 2009 and third quarter 2008 was less than
one month. Of the Farmer Mac I newly originated and current seasoned
loans purchased during third quarter 2009 and third quarter 2008, 59 percent and
75 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 12.2 years and 15.4 years,
respectively. The weighted-average age of delinquent loans purchased
out of securitized pools and LTSPCs during third quarter 2009 and third quarter
2008 was 2.6 years and 9.1 years, respectively.
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 or
in material non-monetary default 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, 2008 filed with the SEC on March 16,
2009.
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:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I newly originated and current seasoned loan purchases
|
|
$ |
40,732 |
|
|
$ |
33,179 |
|
|
$ |
108,446 |
|
|
$ |
124,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defaulted
loans purchased underlying off-balance sheet Farmer Mac I Guaranteed
Securities
|
|
|
841 |
|
|
|
344 |
|
|
|
841 |
|
|
|
648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defaulted
loans underlying on-balance sheet Farmer Mac I Guaranteed Securities
transferred to loans
|
|
|
- |
|
|
|
213 |
|
|
|
2,216 |
|
|
|
1,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defaulted
loans purchased underlying LTSPCs
|
|
|
13,188 |
|
|
|
- |
|
|
|
16,608 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loan purchases
|
|
$ |
54,761 |
|
|
$ |
33,736 |
|
|
$ |
128,111 |
|
|
$ |
126,231 |
|
Outlook. During
third quarter 2009, the disruptions in the capital markets that began in 2008
and led to a sharp downturn in the national economy continued to
ease. While Farmer Mac’s medium-term note issuance was somewhat
limited by market conditions near the end of 2008, during 2009 Farmer Mac has
regularly issued medium-term notes, with maturities ranging from one to fifteen
years. For several quarters prior to second quarter 2009, Farmer Mac
had been able to issue shorter term discount notes at historically wide spreads
below LIBOR as investors sought safety in the debt of the U.S. government and
GSEs. Those spreads returned to historical levels during second
quarter 2009, primarily as a result of improved investor confidence in non-GSE
issuers. During third quarter 2009, those spreads were consistent
with the historical levels prior to third quarter 2008.
To date
in 2009, conditions in the agricultural sector have generally continued to be
more stable than the national economy in general, but the sector is not
insulated from the effects of the economic downturn. The agricultural
sector is made up of diverse industries that respond in different ways to
changes in economic conditions and, in fact, often compete with one
another. While some industries continue to prosper, others, such as
the protein sector (i.e., cattle, poultry and pork producers) are being
pressured by falling prices for their products and elevated input
costs. In recent months, the pressure on the ethanol industry has
moderated somewhat as the cost of corn, the primary input, has decreased, and
the price of ethanol has risen compared to the levels prevailing in the summer
of 2008 when the ethanol sector first started experiencing
stress. The dairy sector continues to experience operating losses due
to oversupply and the worldwide economic slowdown. Farmer Mac will
continue to monitor closely developments in industries experiencing stress, but
anticipates that loan problems in those industries are likely to increase during
the remainder of 2009 and beyond, which could lead to higher delinquencies,
provisions for losses and charge-offs. These cyclical credit issues
are expected to remain within Farmer Mac’s historical experience but are likely
to be greater than the historical average.
With
respect to the agricultural operating and lending markets, recent farmland sales
have not reflected the level of buyer confidence that has been evident over the
past several years, as farm real estate values appear slightly lower in most
U.S. agricultural regions. Farm input costs and current commodity
prices have significantly squeezed profits and the related demand for farmland,
especially in the protein sector and stressed irrigation water
areas. Additionally, non-farmer investors who bought farmland during
the past several years contributed to the rise in farm real estate values over
that time, and these farmland buyers are notably fewer under current economic
and market conditions. Although these factors have slowed the rapid
farm real estate value appreciation of the past several years, Farmer Mac
generally expects farmland values to remain stable.
Farmer
Mac foresees opportunities for business growth in the rural utilities segment, a
new area for Farmer Mac as a result of the legislative expansion of its charter
in May 2008. Farmer Mac’s expansion into the rural utilities sector
has led to $2.3 billion of loans and Farmer Mac Guaranteed Securities –
Rural Utilities outstanding as of September 30, 2009. That business
has been largely concentrated in the extension of credit to National Rural in
the form of notes representing general obligations of National Rural and secured
by eligible rural utilities loans in an amount at least equal to the total
principal amount of notes outstanding. For more information about
those obligations, which are similar in structure to AgVantage securities issued
under the Farmer Mac I program, see “—Risk Management—Credit Risk –
Institutional.” Farmer Mac’s outlook for the rural utilities industry
and its business prospects in that area have not changed since disclosed in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Results of Operations—Outlook for 2009” in the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on
March 16, 2009.
Balance Sheet
Review
Assets. Total
assets as of September 30, 2009 were $5.7 billion, compared to $5.1 billion
as of December 31, 2008. That increase is a result of Farmer Mac’s
on-balance sheet program assets (Farmer Mac Guaranteed Securities and loans)
increasing $1.0 billion to a total of $4.2 billion and non-program assets
decreasing $0.4 billion to $1.5 billion as of September 30,
2009. The increase in program assets was largely a result of the
purchase of Farmer Mac Guaranteed Securities – Rural Utilities, partially offset
by the first quarter 2009 sale of $354.5 million of loans and ongoing
borrower paydowns of loans and loans underlying Farmer Mac Guaranteed
Securities.
As of
September 30, 2009, Farmer Mac had $274.9 million of cash and cash equivalents
compared to $278.4 million as of December 31, 2008. As of
September 30, 2009, Farmer Mac had $1.0 billion of investment securities
compared to $1.2 billion as of December 31, 2008.
The following table summarizes Farmer
Mac’s $1.0 billion of investment securities and the unrealized gains and
losses as of September 30, 2009.
|
|
September 30, 2009
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in
thousands)
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
$ |
74,100 |
|
|
$ |
- |
|
|
$ |
(1,365 |
) |
|
$ |
72,735 |
|
Floating
rate asset-backed securities
|
|
|
67,352 |
|
|
|
140 |
|
|
|
(41 |
) |
|
|
67,451 |
|
Floating
rate corporate debt securities
|
|
|
292,807 |
|
|
|
9 |
|
|
|
(2,708 |
) |
|
|
290,108 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
328,395 |
|
|
|
798 |
|
|
|
(1,067 |
) |
|
|
328,126 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
6,451 |
|
|
|
328 |
|
|
|
- |
|
|
|
6,779 |
|
Floating
rate GSE subordinated debt
|
|
|
70,000 |
|
|
|
- |
|
|
|
(9,684 |
) |
|
|
60,316 |
|
Fixed
rate GSE preferred stock
|
|
|
90,622 |
|
|
|
7,904 |
|
|
|
- |
|
|
|
98,526 |
|
Total
available-for-sale
|
|
|
929,727 |
|
|
|
9,179 |
|
|
|
(14,865 |
) |
|
|
924,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
6,850 |
|
|
|
- |
|
|
|
(5,002 |
) |
|
|
1,848 |
|
Fixed
rate GSE preferred stock
|
|
|
89,816 |
|
|
|
5,774 |
|
|
|
- |
|
|
|
95,590 |
|
Total
trading
|
|
|
96,666 |
|
|
|
5,774 |
|
|
|
(5,002 |
) |
|
|
97,438 |
|
Total
investment securities
|
|
$ |
1,026,393 |
|
|
$ |
14,953 |
|
|
$ |
(19,867 |
) |
|
$ |
1,021,479 |
|
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. The unrealized losses on
available-for-sale investment securities are recorded to “Accumulated other
comprehensive income/(loss)” in the equity section of Farmer Mac’s condensed
consolidated balance sheets. Accumulated other comprehensive
income/(loss) 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.
During
third quarter 2009, Farmer Mac accepted an exchange offer extended by CoBank,
ACB, an institution of the Farm Credit System and a government-sponsored
enterprise, whereby Farmer Mac tendered all of its outstanding shares of
CoBank’s 7.814 percent Series A Cumulative Perpetual Preferred Stock ($88.5
million par value) in exchange for an equal amount of shares and par value of
CoBank’s newly issued 11.0 percent Series D Non-Cumulative Subordinated
Perpetual Preferred Stock. Farmer Mac recorded the newly acquired
shares at $90.7 million, the estimated fair value of the surrendered shares
on the date of the exchange, and elected to classify the newly acquired equity
securities as available-for-sale in accordance with ASC Topic 320, Investments-Debt and Equity
Securities (formerly FASB Statement No. 115). Farmer Mac had
elected the fair value option for the surrendered Series A preferred shares and
recorded the changes in fair value up until the date of the exchange through
“Gains/(losses) on trading assets” on the condensed consolidated statements of
operations.
The GSE
subordinated debt securities are investments in CoBank. The floating
rate corporate debt securities with unrealized losses are summarized in the
following table:
|
|
September 30, 2009
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
S&P Credit
|
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Value
|
|
|
Rating
|
|
Maturity
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merrill
Lynch & Co., Inc. (1)
|
|
$ |
49,990 |
|
|
$ |
(1,522 |
) |
|
$ |
48,468 |
|
|
A
|
|
November
2011
|
Goldman
Sachs
|
|
|
61,741 |
|
|
|
(892 |
) |
|
|
60,849 |
|
|
A
|
|
February
2012
|
Morgan
Stanley
|
|
|
34,953 |
|
|
|
(160 |
) |
|
|
34,793 |
|
|
A
|
|
Various
through January 2011
|
Wachovia
Corp. (2)
|
|
|
9,954 |
|
|
|
(95 |
) |
|
|
9,859 |
|
|
AA-
|
|
October
2011
|
Credit
Suisse USA Inc.
|
|
|
25,000 |
|
|
|
(19 |
) |
|
|
24,981 |
|
|
A+
|
|
Various
through August 2011
|
John
Deere Capital Corp
|
|
|
20,000 |
|
|
|
(17 |
) |
|
|
19,983 |
|
|
A
|
|
July
2010
|
Aleutian
Investments LLC (3)
|
|
|
3,750 |
|
|
|
(3 |
) |
|
|
3,747 |
|
|
A/*-
|
|
April
2010
|
HSBC
Finance (4)
|
|
|
48,293 |
|
|
|
- |
|
|
|
48,293 |
|
|
A
|
|
Various
through July 2012
|
|
|
$ |
253,681 |
|
|
$ |
(2,708 |
) |
|
$ |
250,973 |
|
|
|
|
|
(1)
Merrill Lynch & Co., Inc. was acquired by Bank of America in January
2009.
(2)
Wachovia Corp. was acquired by Wells Fargo in January 2009.
(3)
Aleutian Investments LLC was put on credit watch negative (*-) in September
2009.
(4) The
amortized cost of this investment was written down to its fair value resulting
in no unrealized loss as of September 30, 2009.
Farmer
Mac continues to evaluate the inherent risks of holding each of its 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. Farmer
Mac does not intend to sell the securities with unrealized losses and it is not
more likely than not that Farmer Mac will be required to sell the securities
before recovery of the amortized cost basis. Management will continue
to evaluate each of these investment positions in light of the inherent risks
and Farmer Mac’s capital position.
During
third quarter 2009, Farmer Mac recorded an other-than-temporary impairment loss
of $1.6 million to write down the Corporation’s $49.9 million investment in the
unsecured debt of HSBC Finance to its fair value of $48.3 million as of
September 30, 2009. Subsequent to September 30, 2009, Farmer Mac
sold $20.0 million of the HSBC Finance debt for
$19.5 million. That sale resulted in a loss of $0.5 million
on Farmer Mac’s initial investment, but a gain of $0.1 million during
fourth quarter 2009 because the sale proceeds exceeded the carrying value that
reflected the other-than-temporary impairment loss recorded during third quarter
2009. To mitigate the credit exposure related to Farmer Mac’s
remaining $28.9 million investment in HSBC Finance debt, during fourth quarter
2009 Farmer Mac entered into a credit default swap covering the
balance. The credit default swap protects Farmer Mac against any
future default by HSBC Finance and provides an offset to further fluctuations in
the fair value of the remaining investment.
Liabilities
and Stockholders’ Equity. Consistent with the net increase in
total assets of $626.4 million during the nine months ended September 30, 2009,
total liabilities increased $436.8 million and stockholders’ equity increased
$189.6 million during the same period. The increase in liabilities
was primarily due to additional debt issuance used to acquire additional program
assets. The increase in stockholders’ equity resulted primarily from
$75.3 million of retained earnings, $65.6 million of other comprehensive
income, and the issuance of $47.8 million of Series C Preferred
Stock.
Regulatory
Capital. Farmer Mac was in compliance with its statutory
minimum capital requirement and its risk-based capital standard as of September
30, 2009. Farmer Mac is required to hold capital at the higher of its
statutory minimum capital requirement or the amount required by its risk-based
capital stress test. As of September 30, 2009, Farmer Mac’s core
capital totaled $331.0 million and exceeded its statutory minimum capital
requirement of $204.7 million by $126.3 million. As of December 31,
2008, Farmer Mac’s core capital totaled $207.0 million and exceeded its
statutory minimum capital requirement of $193.5 million by $13.5
million. As of September 30, 2009, Farmer Mac’s risk-based capital
stress test generated a risk-based capital requirement of $37.7
million. Farmer Mac’s regulatory capital of $343.5 million exceeded
that amount by approximately $305.8 million. Accumulated other
comprehensive income/(loss) is not a component of Farmer Mac’s core capital or
regulatory capital.
Farmer
Mac is currently evaluating its capital position and structure, including the
prospective increasing costs of its Series B Preferred Stock, with respect to
its statutory and regulatory capital requirements and prospective business
opportunities. In addition to the ongoing issuance of its Series C
Preferred Stock, in conjunction with the placement of pools of loans in excess
of $20.0 million into a Farmer Mac program, the Corporation is exploring other
potential strategies to further strengthen Farmer Mac’s capital position and
reduce its overall cost of capital. The strategies under
consideration include offerings of common or preferred equity securities by
Farmer Mac or a subsidiary of Farmer Mac that would be supported primarily by
the cash flows from the operations of Farmer Mac or a subsidiary to which
selected program assets may be transferred. Strengthening Farmer
Mac’s capital position would provide greater assurance of Farmer Mac’s continued
compliance with statutory and regulatory capital requirements and its ability to
accomplish its Congressional mission.
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 condensed consolidated
financial statements for further information regarding Farmer Mac’s off-balance
sheet program activities.
Risk
Management
Credit
Risk – Loans. Farmer Mac is
exposed to credit risk resulting from the failure of borrowers to repay their
loans in conjunction with a deficiency in the value of the collateral relative
to the outstanding balance of the loan and the costs of
liquidation. Farmer Mac is exposed to credit risk on:
|
·
|
loans
underlying Farmer Mac Guaranteed Securities;
and
|
|
·
|
loans
underlying LTSPCs.
|
Farmer
Mac generally assumes 100 percent of the credit risk on loans held and
loans underlying Farmer Mac I Guaranteed Securities, LTSPCs and Farmer Mac
Guaranteed Securities – Rural Utilities. Farmer Mac’s credit
exposure on USDA-guaranteed portions is covered by the full faith and credit of
the United States. Farmer Mac believes it has little or no credit
risk exposure to USDA-guaranteed portions because of the USDA
guarantee. As of September 30, 2009, 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.
Farmer
Mac AgVantage securities are general obligations of institutions approved by
Farmer Mac and are secured by eligible loans in an amount at least equal to the
outstanding principal amount of the security. Farmer Mac excludes the
loans that secure AgVantage securities from the credit risk metrics it discloses
because of the credit quality of the issuing institutions, the collateralization
level for the securities, and because delinquent loans are required to be
removed from the pool of pledged loans and replaced with current eligible
loans. As of September 30, 2009, Farmer Mac had not experienced any
credit losses on any AgVantage securities and does not expect to incur any such
losses in the future.
Farmer
Mac has established underwriting, collateral valuation and documentation
standards for eligible 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. Detailed information regarding Farmer Mac’s
underwriting and collateral valuation standards and seller eligibility
requirements are presented in “Business—Farmer Mac Programs—Farmer Mac
I—Underwriting and Collateral Valuation (Appraisal) Standards,” “Business—Farmer
Mac Programs—Farmer Mac I—Sellers” and “Business—Farmer Mac Programs—Rural
Utilities” in the Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the SEC on March 16, 2009.
Farmer
Mac maintains an allowance for losses to cover estimated probable losses on
loans held and loans underlying Farmer Mac I Guaranteed Securities, LTSPCs and
Farmer Mac Guaranteed Securities – Rural Utilities in accordance with ASC
450-20, Loss
Contingencies (formerly FASB Statement No. 5) and ASC 310-35, Receivables—Subsequent Measurement
(formerly FASB Statement No. 114). The methodology that Farmer Mac
uses to determine the level of its allowance for losses is described in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and Estimates—Allowance for Losses” in
the Corporation’s Annual Report on Form 10-K for the year ended December 31,
2008 filed with the SEC on March 16, 2009. Management believes that
this methodology produces a reliable estimate of probable losses, as of the
balance sheet date, for all loans held and loans underlying Farmer Mac
Guaranteed Securities and LTSPCs, in accordance with ASC 450-20 and
ASC 310-35.
The
following table summarizes the components of Farmer Mac’s allowance for losses
as of September 30, 2009 and December 31, 2008:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Allowance
for loan losses
|
|
$ |
4,892 |
|
|
$ |
10,929 |
|
Reserve
for losses:
|
|
|
|
|
|
|
|
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
- |
|
|
|
869 |
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
1,511 |
|
|
|
535 |
|
LTSPCs
|
|
|
6,074 |
|
|
|
4,102 |
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
12,477 |
|
|
$ |
16,435 |
|
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, 2009 and
2008:
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Allowance
|
|
|
|
|
|
Total
|
|
|
Allowance
|
|
|
|
|
|
Total
|
|
|
|
for
Loan
|
|
|
Reserve
|
|
|
Allowance
|
|
|
for
Loan
|
|
|
Reserve
|
|
|
Allowance
|
|
|
|
Losses
|
|
|
for Losses
|
|
|
for Losses
|
|
|
Losses
|
|
|
for Losses
|
|
|
for Losses
|
|
|
|
(in
thousands)
|
|
For
the Three Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,810 |
|
|
$ |
7,496 |
|
|
$ |
9,306 |
|
|
$ |
1,592 |
|
|
$ |
2,197 |
|
|
$ |
3,789 |
|
Provision/(recovery)
for losses
|
|
|
3,098 |
|
|
|
89 |
|
|
|
3,187 |
|
|
|
731 |
|
|
|
(91 |
) |
|
|
640 |
|
Charge-offs
|
|
|
(16 |
) |
|
|
- |
|
|
|
(16 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Recoveries
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
6 |
|
Ending
balance
|
|
$ |
4,892 |
|
|
$ |
7,585 |
|
|
$ |
12,477 |
|
|
$ |
2,329 |
|
|
$ |
2,106 |
|
|
$ |
4,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
10,929 |
|
|
$ |
5,506 |
|
|
$ |
16,435 |
|
|
$ |
1,690 |
|
|
$ |
2,197 |
|
|
$ |
3,887 |
|
Provision/(recovery)
for losses
|
|
|
939 |
|
|
|
2,079 |
|
|
|
3,018 |
|
|
|
731 |
|
|
|
(91 |
) |
|
|
640 |
|
Charge-offs
|
|
|
(7,741 |
) |
|
|
- |
|
|
|
(7,741 |
) |
|
|
(108 |
) |
|
|
- |
|
|
|
(108 |
) |
Recoveries
|
|
|
765 |
|
|
|
- |
|
|
|
765 |
|
|
|
16 |
|
|
|
- |
|
|
|
16 |
|
Ending
balance
|
|
$ |
4,892 |
|
|
$ |
7,585 |
|
|
$ |
12,477 |
|
|
$ |
2,329 |
|
|
$ |
2,106 |
|
|
$ |
4,435 |
|
During
the three and nine months ended September 30, 2009, Farmer Mac recorded
provisions to its allowance for losses of $3.2 million and $3.0 million,
respectively, compared to provisions of $0.6 million for the same periods in
2008. Farmer Mac recorded $16,000 and $7.7 million of
charge-offs in the three and nine months ended September 30, 2009,
respectively, against the allowance for losses, and no charge-offs and $0.1
million of charge-offs for the same periods in 2008. Farmer Mac
recorded no recoveries in the three months ended September 30, 2009 and
$0.8 million in recoveries in the nine months ended September 30, 2009,
compared to $6,000 and $16,000, respectively, for the same periods in
2008. There was no previously accrued or advanced interest on loans
or Farmer Mac I Guaranteed Securities charged off in third quarter 2009 or third
quarter 2008. As of September 30, 2009, Farmer Mac’s allowance for
losses totaled $12.5 million, or 28 basis points of the outstanding
principal balance of loans held and loans underlying Farmer Mac I
Guaranteed Securities (excluding AgVantage securities) and LTSPCs, compared to
$16.4 million or 33 basis points as of December 31,
2008.
As of
September 30, 2009, Farmer Mac’s 90-day delinquencies were $59.4 million
(1.36 percent), compared to $11.5 million (0.23 percent) as of
September 30, 2008. Ethanol loans comprised $18.5 million of the
90-day delinquencies as of September 30, 2009. Farmer Mac’s
non-performing assets were down slightly from higher levels reported earlier
during the year. Those reductions are in part a result of the
reclassification of certain ethanol loans from “in bankruptcy” during second
quarter 2009 to REO and having been sold with subsequent loans to the purchasers
classified as current as of September 30, 2009. The remainder of the
portfolio benefits from the cumulative strong performance of the U.S.
agricultural economy over the past several years, which has enabled most
agricultural producers in stressed industries to manage current economic
pressures and meet their obligations on mortgage loans. As of
September 30, 2009, there were no delinquencies or non-performing assets in
Farmer Mac’s portfolio of rural utilities loans. As of September 30,
2009, Farmer Mac’s non-performing assets totaled $84.8 million (1.94
percent), compared to $32.9 million (0.66 percent) as of September 30,
2008. Ethanol loans comprised $28.4 million of non-performing assets
as of September 30, 2009. Loans that have been restructured 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.
As of
September 30, 2009, Farmer Mac’s ethanol exposure, which includes loans, loans
subject to LTSPCs and REO, was $275.8 million on 29 different plants, with
an additional $35.8 million of undisbursed commitments. Other
than the undisbursed commitments, Farmer Mac is not seeking to add more ethanol
loan exposure to its portfolio.
During
fourth quarter 2008, VeraSun Energy Corporation and its subsidiaries filed for
Chapter 11 bankruptcy. VeraSun’s subsidiaries operated four
ethanol plants that secured $43.9 million of outstanding loan
participations in Farmer Mac’s portfolio. As of March 31, 2009,
Farmer Mac’s carrying value on the loans, net of a specific allowance of $12.1
million, was $31.8 million. As of June 30, 2009, Farmer Mac
classified its interests in the underlying ethanol plants as REO and recorded
its investment at the estimated net realizable value of $41.0 million, which was
the estimated fair value of the ethanol plants less anticipated selling
costs. Farmer Mac considered many factors in determining its best
estimate of fair value, including sales price and financing terms,
collectability of the sales price, credit standing and risk of loss of the
purchaser, operating capacity of the plants and adequacy of cash flow
projections, and an independent third-party appraisal. Due to the
distressed nature of the bankruptcy auction in April 2009, Farmer Mac ultimately
concluded that the sales prices negotiated in third quarter 2009 were the best
evidence of the fair values of the REO properties as of the date of acquisition
of the REO properties. Those fair values resulted in charge-offs of
$5.7 million and the release of the remaining $6.3 million of the specific
allowance outstanding as of March 31, 2009.
Farmer
Mac, as a member of each of the four lender groups, sold three of the four
ethanol plants during third quarter 2009 and completed the sale of the fourth
plant in October 2009. Although the terms of sale and the
participants in the lending group vary among each of the four ethanol plants, in
each case the lending group provided a significant portion of the financing to
the purchasers. As of September 30, 2009, Farmer Mac classified its
outstanding loans resulting from the sale of three ethanol plants as “Loans held
for investment” on the condensed consolidated balance sheets and recorded its
investment at $31.8 million, which includes $33.5 million of unpaid
principal loan balances, net of a $1.7 million deferred gain resulting from the
sale of the three REO properties. Because the lender groups provided
a significant portion of the financing, with little or no initial net investment
from the purchasers, Farmer Mac did not recognize a gain upon the sale of the
REO properties. These gains will be recognized over time as the
purchasers make principal payments on the loans. As of September 30,
2009, the fourth ethanol plant, which was not sold until October 2009, is
classified as “Real estate owned” on the condensed consolidated balance sheet
and is recorded at the estimated net realizable value of
$9.9 million.
The
following table presents historical information regarding Farmer Mac’s
non-performing assets and 90-day delinquencies in the Farmer Mac I program
compared to the principal balance of all loans held and loans underlying Farmer
Mac I Guaranteed Securities (excluding AgVantage securities) and
LTSPCs:
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Guarantees
(1),
|
|
|
Non-
|
|
|
|
|
|
REO
and
|
|
|
|
|
|
|
|
|
|
|
LTSPCs,
|
|
|
performing
|
|
|
|
|
|
Performing
|
|
|
90-day
|
|
|
|
|
|
|
and REO
|
|
|
Assets
|
|
|
Percentage
|
|
|
Bankruptcies
|
|
|
Delinquencies
|
|
|
Percentage
|
|
|
|
(dollars
in thousands)
|
|
As
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
$ |
4,379,450 |
|
|
$ |
84,779
|
|
|
|
1.94%
|
|
|
$ |
25,341
|
|
|
|
$ |
59,438
|
|
|
|
|
1.36%
|
|
June
30, 2009
|
|
|
4,471,567 |
|
|
|
97,123
|
|
|
|
2.17%
|
|
|
|
54,816
|
|
|
|
|
42,307
|
|
|
|
|
0.95%
|
|
March
31, 2009
|
|
|
4,530,892 |
|
|
|
96,175
|
|
|
|
2.12%
|
|
|
|
9,941
|
|
|
|
|
86,234
|
|
|
|
|
1.90%
|
|
December
31, 2008
|
|
|
4,983,963 |
|
|
|
80,032
|
|
|
|
1.61%
|
|
|
|
12,912
|
|
|
|
|
67,120
|
|
|
|
|
1.35%
|
|
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%
|
|
(1)
Excludes loans underlying AgVantage securities.
As of
September 30, 2009, Farmer Mac individually analyzed $44.5 million of its
$216.4 million of impaired assets for collateral shortfalls against updated
appraised values, other updated collateral valuations or discounted
values. Farmer Mac evaluated the remaining $171.9 million of
impaired assets for which updated valuations were not available in the aggregate
in consideration of their similar risk characteristics and historical
statistics. As of September 30, 2009, Farmer Mac had recorded
specific allowances of $1.5 million for under-collateralized
assets. Farmer Mac’s non-specific or general allowances were $11.0
million as of September 30, 2009.
As of
September 30, 2009, the weighted-average original loan-to-value ratio (“LTV”)
for loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed
Securities (excluding AgVantage securities) was 50.4 percent, and the
weighted-average original LTV for all non-performing assets was
54.0 percent.
The
following table presents outstanding loans held and loans underlying LTSPCs and
Farmer Mac I Guaranteed Securities (excluding AgVantage securities) and
non-performing assets as of September 30, 2009 by year of origination,
geographic region and commodity/collateral type.
Farmer Mac I Non-performing Assets as of September
30, 2009
|
|
|
|
Distribution
of
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Loans,
|
|
|
|
|
|
|
|
|
|
Loans,
|
|
|
Guarantees,
|
|
|
Non-
|
|
|
Non-
|
|
|
|
Guarantees,
|
|
|
LTSPCs
|
|
|
performing
|
|
|
performing
|
|
|
|
LTSPCs and REO
|
|
|
and REO (1)
|
|
|
Assets (2)
|
|
|
Asset Rate
|
|
|
|
(dollars
in thousands)
|
|
By
year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
1997
|
|
|
8%
|
|
|
$ |
358,825 |
|
|
$ |
6,828 |
|
|
|
1.90%
|
|
1997
|
|
|
3%
|
|
|
|
130,940 |
|
|
|
2,059 |
|
|
|
1.57%
|
|
1998
|
|
|
4%
|
|
|
|
188,912 |
|
|
|
4,391 |
|
|
|
2.32%
|
|
1999
|
|
|
6%
|
|
|
|
255,234 |
|
|
|
3,362 |
|
|
|
1.32%
|
|
2000
|
|
|
3%
|
|
|
|
131,728 |
|
|
|
2,047 |
|
|
|
1.55%
|
|
2001
|
|
|
6%
|
|
|
|
250,273 |
|
|
|
8,171 |
|
|
|
3.26%
|
|
2002
|
|
|
8%
|
|
|
|
338,470 |
|
|
|
2,049 |
|
|
|
0.61%
|
|
2003
|
|
|
8%
|
|
|
|
371,776 |
|
|
|
3,775 |
|
|
|
1.02%
|
|
2004
|
|
|
7%
|
|
|
|
301,054 |
|
|
|
1,098 |
|
|
|
0.36%
|
|
2005
|
|
|
10%
|
|
|
|
440,838 |
|
|
|
1,228 |
|
|
|
0.28%
|
|
2006
|
|
|
12%
|
|
|
|
510,642 |
|
|
|
14,333 |
|
|
|
2.81%
|
|
2007
|
|
|
10%
|
|
|
|
446,022 |
|
|
|
10,529 |
|
|
|
2.36%
|
|
2008
|
|
|
11%
|
|
|
|
460,295 |
|
|
|
22,272 |
|
|
|
4.84%
|
|
2009
|
|
|
4%
|
|
|
|
194,441 |
|
|
|
2,637 |
|
|
|
1.36%
|
|
Total
|
|
|
100%
|
|
|
$ |
4,379,450 |
|
|
$ |
84,779 |
|
|
|
1.94%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
geographic region (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
|
|
|
15%
|
|
|
$ |
648,390 |
|
|
$ |
25,996 |
|
|
|
4.01%
|
|
Southwest
|
|
|
40%
|
|
|
|
1,719,455 |
|
|
|
15,501 |
|
|
|
0.90%
|
|
Mid-North
|
|
|
21%
|
|
|
|
937,945 |
|
|
|
27,062 |
|
|
|
2.89%
|
|
Mid-South
|
|
|
12%
|
|
|
|
545,557 |
|
|
|
9,102 |
|
|
|
1.67%
|
|
Northeast
|
|
|
8%
|
|
|
|
350,841 |
|
|
|
2,992 |
|
|
|
0.85%
|
|
Southeast
|
|
|
4%
|
|
|
|
177,262 |
|
|
|
4,126 |
|
|
|
2.33%
|
|
Total
|
|
|
100%
|
|
|
$ |
4,379,450 |
|
|
$ |
84,779 |
|
|
|
1.94%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
commodity/collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crops
|
|
|
37%
|
|
|
$ |
1,664,468 |
|
|
$ |
25,089 |
|
|
|
1.51%
|
|
Permanent
plantings
|
|
|
19%
|
|
|
|
846,135 |
|
|
|
11,885 |
|
|
|
1.40%
|
|
Livestock
|
|
|
28%
|
|
|
|
1,219,408 |
|
|
|
13,995 |
|
|
|
1.15%
|
|
Part-time
farm/rural housing
|
|
|
8%
|
|
|
|
330,965 |
|
|
|
5,371 |
|
|
|
1.62%
|
|
Ag
storage and processing (including ethanol facilities)
|
|
|
7%
|
|
|
|
290,360 |
|
|
|
28,439 |
|
|
|
9.79%
|
|
Other
|
|
|
1%
|
|
|
|
28,114 |
|
|
|
- |
|
|
|
0.00%
|
|
Total
|
|
|
100%
|
|
|
$ |
4,379,450 |
|
|
$ |
84,779 |
|
|
|
1.94%
|
|
(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
LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities)
as of September 30, 2009, by year of origination, geographic region and
commodity/collateral type. The purpose of this information is to
present information regarding losses relative to original guarantees and
commitments.
Farmer
Mac I Credit Losses Relative to all
|
|
Cumulative Original Loans, Guarantees and
LTSPCs
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
Original
Loans,
|
|
|
|
Cumulative
|
|
|
Cumulative
|
|
|
|
Guarantees,
|
|
|
|
Net
Credit
|
|
|
Loss
|
|
|
|
LTSPCs and REOs
|
|
|
|
Losses
|
|
|
Rate
|
|
|
|
(dollars
in thousands)
|
|
By
year of origination:
|
|
|
|
|
|
|
|
|
|
|
Before
1997
|
|
$ |
3,322,003 |
|
|
|
$ |
1,593 |
|
|
|
0.05%
|
|
1997
|
|
|
717,213 |
|
|
|
|
2,493 |
|
|
|
0.35%
|
|
1998
|
|
|
1,088,183 |
|
|
|
|
3,885 |
|
|
|
0.36%
|
|
1999
|
|
|
1,089,318 |
|
|
|
|
1,291 |
|
|
|
0.12%
|
|
2000
|
|
|
700,344 |
|
|
|
|
2,285 |
|
|
|
0.33%
|
|
2001
|
|
|
998,893 |
|
|
|
|
45 |
|
|
|
0.00%
|
|
2002
|
|
|
1,025,834 |
|
|
|
|
- |
|
|
|
0.00%
|
|
2003
|
|
|
842,498 |
|
|
|
|
- |
|
|
|
0.00%
|
|
2004
|
|
|
622,941 |
|
|
|
|
- |
|
|
|
0.00%
|
|
2005
|
|
|
751,748 |
|
|
|
|
131 |
|
|
|
0.02%
|
|
2006
|
|
|
798,507 |
|
|
|
|
11,104 |
|
|
|
1.39%
|
|
2007
|
|
|
546,015 |
|
|
|
|
- |
|
|
|
0.00%
|
|
2008
|
|
|
511,296 |
|
|
|
|
1,821 |
|
|
|
0.36%
|
|
2009
|
|
|
154,404 |
|
|
|
|
- |
|
|
|
0.00%
|
|
Total
|
|
$ |
13,169,197 |
|
|
|
$ |
24,648 |
|
|
|
0.19%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
geographic region (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
|
|
$ |
2,490,535 |
|
|
|
$ |
10,540 |
|
|
|
0.42%
|
|
Southwest
|
|
|
5,174,317 |
|
|
|
|
5,978 |
|
|
|
0.12%
|
|
Mid-North
|
|
|
2,312,384 |
|
|
|
|
8,132 |
|
|
|
0.35%
|
|
Mid-South
|
|
|
1,274,856 |
|
|
|
|
(314 |
) |
|
|
-0.02%
|
|
Northeast
|
|
|
1,002,923 |
|
|
|
|
83 |
|
|
|
0.01%
|
|
Southeast
|
|
|
914,182 |
|
|
|
|
229 |
|
|
|
0.03%
|
|
Total
|
|
$ |
13,169,197 |
|
|
|
$ |
24,648 |
|
|
|
0.19%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
commodity/collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crops
|
|
$ |
5,387,869 |
|
|
|
$ |
559 |
|
|
|
0.01%
|
|
Permanent
plantings
|
|
|
2,958,416 |
|
|
|
|
9,349 |
|
|
|
0.32%
|
|
Livestock
|
|
|
3,355,504 |
|
|
|
|
2,676 |
|
|
|
0.08%
|
|
Part-time
farm/rural housing
|
|
|
891,868 |
|
|
|
|
339 |
|
|
|
0.04%
|
|
Ag
storage and processing (including ethanol facilities)
|
|
|
436,876 |
(3) |
|
|
|
11,725 |
|
|
|
2.68%
|
|
Other
|
|
|
138,664 |
|
|
|
|
- |
|
|
|
0.00%
|
|
Total
|
|
$ |
13,169,197 |
|
|
|
$ |
24,648 |
|
|
|
0.19%
|
|
|
(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, 2009, approximately
$35.8 million of the loans were not yet disbursed by the
lender.
|
Historically,
losses and collateral deficiencies have been less prevalent in the loans secured
by real estate producing agricultural commodities that receive significant
government support (such as cotton, soybeans, wheat, and corn) and more
prevalent in those that do not receive such support (such as the protein sector,
permanent plantings and vegetables). However, the level of government
support may vary and is not necessarily the primary factor to forecast future
losses and collateral deficiencies. In Farmer Mac’s experience,
another significant determinant of ultimate losses on loans is the degree to
which the collateral is specialized or highly improved, such as permanent
plantings and facilities. As adverse economic conditions persist for
the agricultural commodities or products related to those types of collateral,
the prospective sale value of the collateral is likely to decrease and the
related loans may become under-collateralized.
This
analysis is consistent with corresponding commodity analyses, which indicate
that Farmer Mac has experienced higher loss and collateral deficiency rates in
its loans classified as permanent plantings as well as storage and processing
loans, which include Farmer Mac’s exposure to loans on ethanol
plants. Most of the loans classified as permanent plantings do not
receive significant government support and are therefore more susceptible to
adverse commodity-specific economic trends, while the collateral for storage and
processing loans is typically highly improved and specialized. Farmer
Mac anticipates that one or more particular commodity groups will be under
economic pressure at any one time and actively manages its portfolio to mitigate
concentration risks while preserving Farmer Mac’s ability to meet the financing
needs of all commodity groups. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Results of
Operations—Outlook.”
Analysis
of portfolio performance by geographic distribution indicates that, while
commodities are the primary determinant of exposure to loss, within most
commodity groups certain geographic areas allow greater economies of scale or
proximity to markets than others and, consequently, result in more successful
farms within the commodity group. Likewise, certain geographic areas
offer better growing conditions than others and, consequently, result in more
versatile and more successful farms within a given commodity group – and the
ability to switch crops among commodity groups.
Farmer Mac’s methodologies for pricing
its guarantee and commitment fees, managing credit risks and providing adequate
allowances for losses consider all of the foregoing factors and
information.
Credit
Risk – Institutional. Farmer Mac is also exposed to credit
risk arising from its business relationships with other institutions,
including:
|
·
|
issuers
of AgVantage securities and other investments held or guaranteed by Farmer
Mac;
|
|
·
|
sellers
and servicers; and
|
|
·
|
interest
rate swap contract counterparties.
|
AgVantage
securities are general obligations of the AgVantage issuers and are secured by
eligible loans in an amount at least equal to the outstanding principal amount
of the security, with some level of overcollaterization also required for Farmer
Mac I AgVantage securities. In those transactions, the corporate
obligor is required to remove from the pool of pledged collateral any loan that
becomes more than 30 days delinquent in the payment of principal or interest and
to substitute an eligible loan that is current in payment to maintain the
minimum required collateralization level. In the event of a default
on the general obligation, Farmer Mac would have recourse to the pledged
collateral and have rights to the ongoing borrower payments of principal and
interest. For a more detailed description of AgVantage securities,
see “Business—Farmer Mac Programs—Farmer Mac I—AgVantage Securities” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2008 filed with the SEC on March 16, 2009.
Outstanding
AgVantage on-balance sheet Farmer Mac I Guaranteed Securities totaled
$48.8 million and $53.3 million as of September 30, 2009 and December 31,
2008, respectively. Farmer Mac Guaranteed Securities – Rural
Utilities structured as AgVantage transactions issued by National Rural and held
by Farmer Mac totaled $1.8 billion as of September 30, 2009, compared to $0.6
billion as of December 31, 2008. In addition, outstanding off-balance
sheet AgVantage Farmer Mac I Guaranteed Securities totaled $2.9 billion as
of both September 30, 2009 and December 31, 2008. The following
table provides information about the issuers of AgVantage securities, as well as
the required collateralization levels for those transactions as of September 30,
2009 and December 31, 2008.
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
S&P
|
|
|
Required
|
|
|
|
|
|
S&P
|
|
|
Required
|
|
Counterparty
|
|
Balance
|
|
|
Rating
|
|
|
Collateralization
|
|
|
Balance
|
|
|
Rating
|
|
|
Collateralization
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metlife
|
|
$ |
2,500,000 |
|
|
AA-
|
|
|
|
103%
|
|
|
$ |
2,500,000 |
|
|
AA
|
|
|
|
103%
|
|
National
Rural
|
|
|
1,825,000 |
|
|
A
|
|
|
|
100%
|
|
|
|
630,000 |
|
|
A
|
|
|
|
100%
|
|
M&I
Bank
|
|
|
475,000 |
|
|
BBB
|
|
|
|
106%
|
|
|
|
475,000 |
|
|
A
|
|
|
|
106%
|
|
Other
(1)
|
|
|
18,800 |
|
|
N/A
|
|
|
|
(2)
|
|
|
|
23,300 |
|
|
N/A
|
|
|
|
(2)
|
|
Total
outstanding
|
|
$ |
4,818,800 |
|
|
|
|
|
|
|
|
|
|
$ |
3,628,300 |
|
|
|
|
|
|
|
|
|
(1)
Consists of AgVantage securities issued by 6 and 7 different issuers as of
September 30, 2009 and December 31, 2008, respectively.
(2)
Ranges from 111% to 120%.
Farmer
Mac manages institutional credit risk related to sellers and servicers by
requiring those institutions to meet Farmer Mac’s standards for
creditworthiness. Farmer Mac monitors the financial condition of
those institutions by evaluating financial statements and bank credit rating
agency reports. For more information on Farmer Mac’s approval of
sellers, see “Business—Farmer Mac Programs—Farmer Mac I—Sellers” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2008 filed with the SEC on March 16, 2009.
Credit
Risk – Other Investments. As of September 30, 2009, Farmer Mac
had $274.9 million of cash and cash equivalents and $1.0 billion of
investment securities. The management of the credit risk inherent in
these investments is governed by regulations promulgated by the FCA found at
12 C.F.R. §§ 652.1-652.45 (the “Investment Regulations”), which include
dollar amount, issuer concentration, and credit quality limitations, as well as
by Farmer Mac’s own policies. In general, these regulations and
policies require each investment or issuer of an investment to be highly rated
by a nationally-recognized statistical rating organization
(“NRSRO”). Investments in mortgage securities and asset-backed
securities are required to have a rating in the highest NRSRO
category. Corporate debt securities with maturities of no more than
five years but more than three years are required to be rated in one of the two
highest categories; corporate debt securities with maturities of three years or
less are required to be rated in one of the three highest
categories. There are limited exceptions where a rating is not
required, such as obligations of the United States or diversified investment
funds regulated under the Investment Company Act
of 1940. Investments in money market funds are further limited
to those funds that are holding only instruments approved for direct purchase by
Farmer Mac.
FCA’s
Investment Regulations also establish concentration limits, which are intended
to reduce exposure to any one counterparty. Farmer Mac’s total credit
exposure to any single issuer of securities or uncollateralized financial
derivatives is limited by regulation to 25 percent of regulatory capital (as of
September 30, 2009, 25 percent of Farmer Mac’s regulatory capital was $85.9
million). This regulatory limit does not apply to obligations of the
United States or to qualified investment funds. With respect to
obligations of GSEs, the regulatory limitation is 100 percent of Farmer
Mac’s regulatory capital.
In light
of the severe impact that the historic turmoil in the nation’s capital markets
has had on Farmer Mac’s investments, Farmer Mac conducted an extensive review of
its investment policies and operations with a view to strengthening policies,
procedures and oversight of its investment portfolio and related funding
strategies. This review was concluded during first quarter 2009 and
its findings are currently being implemented, with the goals of minimizing the
Corporation’s exposure to financial market volatility, preserving capital and
supporting the Corporation’s access to the debt markets.
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, 2009, 21
percent of the outstanding balance of retained Farmer Mac I Guaranteed
Securities had yield maintenance provisions and 14 percent had other forms of
prepayment protection (together covering 52 percent of all loans with fixed
interest rates). Of the Farmer Mac I new and current loans
purchased in third quarter 2009, 1 percent had yield maintenance or other forms
of prepayment protection. As of September 30, 2009, none of the
USDA-guaranteed portions underlying Farmer Mac II Guaranteed Securities had
yield maintenance provisions; however, 9.0 percent contained prepayment
penalties. Of the USDA-guaranteed portions purchased in third quarter
2009, 4.7 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.
Farmer
Mac’s cash equivalents mature within three months and are funded with discount
notes having similar maturities. As of September 30, 2009,
$820.6 million of the $1.0 billion of investment securities (80 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 appropriate
spreads. The following schedule summarizes the results of Farmer
Mac’s MVE sensitivity analysis as of September 30, 2009 and December 31,
2008 to an immediate and instantaneous uniform or “parallel” shift in the yield
curve. During the first three quarters of 2009, Farmer Mac’s interest
rate sensitivity increased somewhat due primarily to higher interest rates and a
steeper yield curve as well as changes to the Corporation’s balance
sheet.
|
|
Percentage Change in MVE from
Base Case
|
|
Interest
Rate
|
|
September
30,
|
|
|
December
31,
|
|
Scenario
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
+
300 bp
|
|
|
-19.8%
|
|
|
|
-10.4%
|
|
+
200 bp
|
|
|
-10.7%
|
|
|
|
-2.1%
|
|
+
100 bp
|
|
|
-3.6%
|
|
|
|
3.7%
|
|
-
100 bp
|
|
|
*
|
|
|
|
*
|
|
-
200 bp
|
|
|
*
|
|
|
|
*
|
|
-
300 bp
|
|
|
*
|
|
|
|
*
|
|
|
*
|
As
of the date indicated, a parallel shift of the U.S. Treasury yield curve
by the number of basis points indicated produced negative interest rates
for portions or all of this curve.
|
As of
September 30, 2009, 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 minus 2.4 months as of December 31,
2008. A year-to-date increase in interest rates has lengthened the
duration of Farmer Mac’s assets relative to that of the Corporation’s
liabilities, thereby reducing the effective duration gap. Duration matching
helps to maintain the correlation of cash flows and stabilize portfolio earnings
even when interest rates are not stable.
As of
September 30, 2009, 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 9.4 percent, while a parallel decrease of
25 basis points would have decreased NII by 6.6 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, 2009, both MVE and NII
showed similar or lesser sensitivity to non-parallel shocks than to the parallel
shocks.
The
economic effects of financial derivatives are included in the Corporation’s MVE,
NII and duration gap analyses. Farmer Mac enters into the following
financial derivative transactions principally to protect against risk from the
effects of market price or interest rate movements on the value of assets,
future cash flows and debt issuance, not for trading or speculative
purposes:
|
·
|
“pay-fixed”
interest rate swaps, in which it pays fixed rates of interest to, and
receives floating rates of interest from,
counterparties;
|
|
·
|
“receive-fixed”
interest rate swaps, in which it receives fixed rates of interest from,
and pays floating rates of interest to, counterparties;
and
|
|
·
|
“basis
swaps,” in which it pays variable rates of interest based on one index to,
and receives variable rates of interest based on another index from,
counterparties.
|
As of
September 30, 2009, Farmer Mac had $4.5 billion combined notional amount of
interest rate swaps, with terms ranging from one to fifteen years, of which
$1.3 billion were pay-fixed interest rate swaps, $2.9 billion were
receive-fixed interest rate swaps, and $0.3 billion were basis
swaps.
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 2009. 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 targets 90 days of
liquidity. In accordance with the methodology prescribed by those
regulations, Farmer Mac maintained an average of 133 days of liquidity
during third quarter 2009 and had 123 days of liquidity as of September 30,
2009.
Debt
Issuance. Farmer Mac funds its purchases of program 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 investment activities, transaction costs,
guarantee payments and LTSPC purchase obligations. See
“Business—Financing—Debt Issuance” in the Corporation’s Annual Report on Form
10-K for the year ended December 31, 2008 filed with the SEC on March 16,
2009 for more information about Farmer Mac’s debt issuance.
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 $5.1 billion was outstanding
as of September 30, 2009), 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 are driven by the purchase
of loans, USDA-guaranteed portions and Farmer Mac Guaranteed Securities; the
maturities of and interest payments on 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.
|
Farmer
Mac’s short term borrowing costs have remained at favorable levels despite
continued market volatility. Through September 2008, Farmer Mac
historically 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 have provided favorable
effectively 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. Conversely, if the rates on the Farmer Mac discount notes
were to decrease relative to LIBOR, Farmer Mac would be exposed to a
commensurate increase on its net interest yield on the notional amount of its
pay-fixed interest rate swaps and other LIBOR-based floating rate
assets. Further, the widespread use of pay-fixed interest rate swaps
subjected the Corporation’s regulatory capital surplus to the potential adverse
effects of a downward move in the fair values of those interest rate
swaps. Such a downward move was seen in the third and fourth quarters
of 2008. Since September 2008, Farmer Mac has been systematically
entering into offsetting interest rate swaps, receive-fixed swaps, to counteract
the fair value movements of previously-existing swaps. These
transactions have dampened the susceptibility of Farmer Mac’s regulatory capital
surplus to changes in the fair values of its financial derivatives.
Farmer
Mac maintains cash, cash equivalents (including short-term money market
instruments) and other investment securities that can be drawn upon for
liquidity needs. As of September 30, 2009, these assets consisted of:
$274.9 million of cash and cash equivalents; $589.3 million of securities
issued or guaranteed by GSEs or the U.S. Government and its agencies;
$142.0 million of asset-backed securities; and $290.1 million of
corporate debt securities. None of Farmer Mac’s asset-backed
securities were backed by sub-prime or Alt-A residential or commercial mortgages
or home-equity loans.
Farmer
Mac’s asset-backed investment securities include callable, AAA-rated
auction-rate certificates (“ARCs”). As of September 30, 2009, Farmer
Mac had reduced its holdings of ARCs to $72.7 million, down from
$178.6 million as of December 31, 2008. During first quarter
2009, Farmer Mac sold $119.9 million of ARCs at par pursuant to an offer of
Auction Rate Securities Rights, Series B-2 from UBS AG. As of
September 30, 2009, Farmer Mac’s carrying value of its remaining ARCs was 98.2
percent of par. The discounted carrying value reflects uncertainty
regarding the ability to obtain par in the absence of any active market
trading. 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. Beginning in mid-February 2008, widespread failures of the
auction mechanism designed to provide regular liquidity to these types of
securities caused the interest rates on the ARCs to be set pursuant to the
formulas set forth in the related transaction documents. Farmer Mac
continues to believe that the credit quality of these securities is high, based
on the underlying collateralization 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.
As of
September 30, 2009 and December 31, 2008, Farmer Mac had a remaining investment
of $6.9 million and $17.3 million, respectively, in The Reserve Primary
Fund (the “Fund”), a money market fund that has suspended redemptions and is
being liquidated. Farmer Mac has classified its unsettled trades with
the Fund as “Prepaid expenses and other assets” on the condensed consolidated
balance sheets. In September 2008, Farmer Mac delivered a timely
redemption request to redeem its entire investment in the Fund, but its
confirmed redemption request was not honored. On February 26, 2009,
the Fund announced its decision to set aside $3.5 billion in a special reserve
to cover potential liabilities for damages and associated expenses related to
lawsuits and regulatory actions against the Fund. As part of that
announcement, the Fund indicated that it planned to continue to make interim
distributions up to 91.72 cents per share. On May 5, 2009, the
SEC filed a civil injunctive action charging the entities and individuals who
operate the Fund with several counts of securities fraud for failing to disclose
key material information to the Fund’s investors, board of trustees, and ratings
agencies after Lehman Brothers filed for bankruptcy protection during third
quarter 2008. In this action, the SEC seeks an order providing for
the continued pro rata distribution of the remaining assets to all unpaid
shareholders and objects to the creation of the $3.5 billion reserve
fund. The SEC contends that if all remaining Primary Fund assets were
distributed on a pro rata basis to all unpaid shareholders, investors would
recover approximately 98.4 cents per share.
Based on
the SEC action described above, during second quarter 2009 Farmer Mac recorded
an impairment loss of $1.3 million, which represents 1.6 percent of its initial
investment of $81.7 million. This loss was recognized as
“Other-than-temporary impairment losses” in the condensed consolidated
statements of operations. Although Farmer Mac may be able to recover
some of this loss through the SEC’s actions against the individuals who operated
the Fund, any such recovery is uncertain and may take an extended period of
time. To date, Farmer Mac has received a total of $75.1 million (91.9
percent) of its initial investment, including a $1.6 million payment on October
2, 2009 that reduced the Corporation’s remaining investment in the Fund to $5.3
million.
Capital. During
the three and nine months ended September 30, 2009, Farmer Mac issued
$17.0 million and $47.8 million of Series C Preferred Stock,
respectively. For more information about the Series C Preferred
Stock, see Note 6 to the interim unaudited condensed consolidated financial
statements and Farmer Mac’s Form 10-K for the fiscal year ended December 31,
2008 filed with the SEC on March 16, 2009. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Balance
Sheet Review—Capital” in this report for more information about Farmer Mac’s
capital position.
Other
Matters
Dividends. Beginning
in fourth quarter 2004 and continuing through fourth quarter 2008, Farmer Mac
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. For each of
the first three quarters in 2009, Farmer Mac’s board of directors declared a
quarterly dividend of $0.05 per share on the Corporation’s common stock that
were paid on April 3, 2009, June 30, 2009, and September 30, 2009,
respectively. Farmer Mac’s ability to pay dividends on its common
stock is also subject to the payment of dividends on its outstanding preferred
stock. Farmer Mac’s ability to declare and pay dividends 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, 2008 filed with
the SEC on March 16, 2009.
Supplemental
Information
The
following tables present quarterly and annual information regarding loan
purchases, guarantees and LTSPCs and outstanding loans, guarantees and
LTSPCs.
Farmer Mac Purchases, Guarantees and
LTSPCs
|
|
|
|
Farmer Mac I
|
|
|
|
|
|
Rural
Utilities
|
|
|
|
|
|
|
Loans
and
|
|
|
|
|
|
|
|
|
Loans
and
|
|
|
|
|
|
|
Guaranteed
|
|
|
|
|
|
|
|
|
Guaranteed
|
|
|
|
|
|
|
Securities
|
|
|
LTSPCs (1)
|
|
|
Farmer Mac II
|
|
|
Securities (2)
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
For
the quarter ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
$ |
40,732 |
|
|
$ |
37,083 |
|
|
$ |
76,119 |
|
|
$ |
553,644 |
|
|
$ |
707,578 |
|
June
30, 2009
|
|
|
37,900 |
|
|
|
22,717 |
|
|
|
96,322 |
|
|
|
900,000 |
|
|
|
1,056,939 |
|
March
31, 2009
|
|
|
29,814 |
|
|
|
65,720 |
|
|
|
79,055 |
|
|
|
270,000 |
|
|
|
444,589 |
|
December
31, 2008
|
|
|
72,137 |
|
|
|
121,440 |
|
|
|
87,455 |
|
|
|
230,000 |
|
|
|
511,032 |
|
September
30, 2008
|
|
|
508,179 |
|
|
|
239,170 |
|
|
|
83,672 |
|
|
|
- |
|
|
|
831,021 |
|
June
30, 2008
|
|
|
53,838 |
|
|
|
116,472 |
|
|
|
79,700 |
|
|
|
1,330,676 |
|
|
|
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 |
|
For
the year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
671,622 |
|
|
|
530,363 |
|
|
|
303,941 |
|
|
|
1,560,676 |
|
|
|
3,066,602 |
|
December
31, 2007
|
|
|
1,127,709 |
|
|
|
970,789 |
|
|
|
210,040 |
|
|
|
- |
|
|
|
2,308,538 |
|
(1)
|
During
2005, Farmer Mac began issuing LTSPCs for the construction of agricultural
storage and processing facilities, primarily ethanol
facilities. As of September 30, 2009, approximately $35.8
million of the loans underlying those $436.9 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.
|
|
|
Guarantees and LTSPCs
|
|
|
|
Farmer Mac I
|
|
|
|
|
|
Rural
Utilities
|
|
|
|
|
|
|
Loans
and
|
|
|
|
|
|
|
|
|
Loans
and
|
|
|
|
|
|
|
Guaranteed
|
|
|
|
|
|
|
|
|
Guaranteed
|
|
|
|
|
|
|
Securities
|
|
|
LTSPCs
|
|
|
Farmer Mac II
|
|
|
Securities
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
As
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
$ |
5,227,939 |
|
|
$ |
2,135,445 |
|
|
$ |
1,141,570 |
|
|
$ |
2,266,592 |
|
|
$ |
10,771,546 |
|
June
30, 2009
|
|
|
5,241,145 |
|
|
|
2,181,712 |
|
|
|
1,115,025 |
|
|
|
1,819,033 |
|
|
|
10,356,915 |
|
March
31, 2009
|
|
|
5,313,680 |
|
|
|
2,216,564 |
|
|
|
1,082,215 |
|
|
|
1,319,033 |
|
|
|
9,931,492 |
|
December
31, 2008
|
|
|
5,759,773 |
|
|
|
2,224,181 |
|
|
|
1,043,425 |
|
|
|
1,054,941 |
|
|
|
10,082,320 |
|
September
30, 2008
|
|
|
5,724,867 |
|
|
|
2,264,880 |
|
|
|
995,639 |
|
|
|
824,941 |
|
|
|
9,810,327 |
|
June
30, 2008
|
|
|
5,474,303 |
|
|
|
1,997,172 |
|
|
|
960,278 |
|
|
|
1,330,676 |
|
|
|
9,762,429 |
|
March
31, 2008
|
|
|
5,521,945 |
|
|
|
1,943,181 |
|
|
|
959,444 |
|
|
|
- |
|
|
|
8,424,570 |
|
December
31, 2007
|
|
|
5,648,197 |
|
|
|
1,948,941 |
|
|
|
946,617 |
|
|
|
- |
|
|
|
8,543,755 |
|
September
30, 2007
|
|
|
5,694,971 |
|
|
|
1,724,328 |
|
|
|
943,183 |
|
|
|
- |
|
|
|
8,362,482 |
|
Outstanding
Balance of Loans Held and Loans Underlying
|
|
On-Balance Sheet Farmer Mac Guaranteed
Securities
|
|
|
|
|
|
|
5-to-10-Year
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
ARMs
&
|
|
|
1-Month-to-
|
|
|
Held
in
|
|
|
|
Fixed Rate
|
|
|
Resets
|
|
|
3 Year ARMs
|
|
|
Portfolio
|
|
|
|
(in
thousands)
|
|
As
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
$ |
2,138,544 |
|
|
$ |
685,553 |
|
|
$ |
1,403,298 |
|
|
$ |
4,227,395 |
|
June
30, 2009
|
|
|
1,716,678 |
|
|
|
649,078 |
|
|
|
1,303,332 |
|
|
|
3,669,088 |
|
March
31, 2009
|
|
|
1,728,174 |
|
|
|
660,398 |
|
|
|
759,535 |
|
|
|
3,148,107 |
|
December
31, 2008
|
|
|
1,659,983 |
|
|
|
746,623 |
|
|
|
819,234 |
|
|
|
3,225,840 |
|
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 |
|
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(c) 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 Chief Executive Officer (the “CEO”) and 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,
2009.
The
Corporation carried out the evaluation required by paragraph (b) of Exchange Act
Rules 13a-15 and 15d-15, 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, 2009.
(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, 2009 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 previously disclosed, in its Quarterly Report on Form 10-Q for the quarter
ended June 30, 2009, the status of the lawsuit filed against
Farmer Mac and certain of its present and former officers and directors on
behalf of purchasers of the securities of the Corporation between March 15, 2007
and September 12, 2008. There have been no material developments in the lawsuit
since that disclosure was made.
There
were no material changes from the risk factors previously disclosed in Farmer
Mac’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with
the SEC on March 16, 2009.
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.
|
During
third quarter 2009, one type of transaction occurred related to Farmer Mac
common stock that was not registered under the Securities Act of 1933 and not
otherwise reported on a Current Report on Form 8-K. On July 10,
2009, 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 2,616 shares of
its Class C Non-Voting Common Stock to the five directors who elected to
receive such stock in lieu of their cash retainers. The number of
shares issued to the directors was calculated based on a price of $4.83 per
share, which was the closing price of the Class C Non-Voting Common Stock on
June 30, 2009 as reported by the New York Stock Exchange.
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
|
-
|
Second
Amended and Restated Certificate of Designation of Terms and Conditions of
Farmer Mac Senior Cumulative Perpetual Preferred Stock, Series B-1 (Form
10-K filed March 16, 2009).
|
|
|
|
|
*
|
4.5
|
-
|
Second
Amended and Restated Certificate of Designation of Terms and Conditions of
Farmer Mac Senior Cumulative Perpetual Preferred Stock, Series B-2 (Form
10-K filed March 16, 2009).
|
|
|
|
|
*
|
4.6
|
-
|
Certificate
of Designation of Terms and Conditions of Farmer Mac Senior Cumulative
Perpetual Preferred Stock, Series B-3 (Form 10-K filed March 16,
2009).
|
|
|
|
|
**
|
4.7
|
-
|
Amended
and Restated Certificate of Designation of Terms and Conditions of
Non-Voting Cumulative Preferred Stock, Series C.
|
|
|
|
|
†*
|
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).
|
|
|
|
|
†*
|
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).
|
*
|
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.
|
†*
|
10.1.4
|
-
|
Form
of Restricted Stock Agreement (Officers) under the 2008 Omnibus Incentive
Plan (Previously filed as Exhibit 10.1 to Form 8-K filed June 10,
2009).
|
|
|
|
|
†*
|
10.1.5
|
-
|
Form
of Restricted Stock Agreement (Directors) under the 2008 Omnibus Incentive
Plan (Previously filed as Exhibit 10.2 to Form 8-K filed June 10,
2009).
|
|
|
|
|
†*
|
10.2
|
-
|
Employment
Agreement dated as of March 1, 2009 between Michael A. Gerber and the
Registrant (Form 10-Q filed May 12, 2009).
|
|
|
|
|
†*
|
10.3
|
-
|
Compiled
Amended and Restated Employment Contract dated as of June 5, 2008 between
Tom D. Stenson and the Registrant (Previously filed as Exhibit 10.4 to
Form 10-Q filed August 12, 2008).
|
|
|
|
|
†*
|
10.4
|
-
|
Compiled
Amended and Restated Employment Contract dated June 5, 2008 between
Timothy L. Buzby and the Registrant (Previously filed as Exhibit 10.5 to
Form 10-Q filed August 12, 2008).
|
|
|
|
|
†*
|
10.4.1
|
-
|
Amendment
No. 6 to Employment Contract between Timothy L. Buzby and the Registrant,
dated as of April 2, 2009 (Form 10-Q filed August 10,
2009).
|
|
|
|
|
†*
|
10.5
|
-
|
Compiled
Amended and Restated Employment Contract dated June 5, 2008 between Mary
K. Waters and the Registrant (Previously filed as Exhibit 10.6 to Form
10-Q filed August 12, 2008).
|
|
|
|
|
|
10.6
|
-
|
Exhibit
number reserved for future use.
|
|
|
|
|
*
|
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).
|
*
|
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.
|
*#
|
10.10
|
-
|
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).
|
|
|
|
|
*#
|
10.11.1
|
-
|
Amendment
No. 1 to Amended and Restated Master Central Servicing Agreement between
Zions First National Bank and the Registrant, dated as of June 1, 2009
(Form 10-Q filed August 10, 2009).
|
|
|
|
|
*#
|
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).
|
*
|
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.
|
*#
|
10.16.1
|
-
|
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).
|
|
|
|
|
†*
|
10.20
|
-
|
Agreement
and General Release dated as of January 30, 2009 between Henry D. Edelman
and the Registrant (Form 10-Q filed May 12, 2009).
|
|
|
|
|
†*
|
10.21
|
-
|
Agreement
and General Release dated as of February 6, 2009 between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed May 12,
2009).
|
|
|
|
|
|
21
|
-
|
Farmer
Mac Mortgage Securities Corporation, a Delaware
corporation.
|
|
|
|
|
**
|
31.1
|
-
|
Certification
of Chief Executive Officer relating to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2009, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
**
|
31.2
|
-
|
Certification
of Chief Financial Officer relating to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2009, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
**
|
32
|
-
|
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, 2009, 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
9, 2009
|
By:
|
/s/ Michael A.
Gerber
|
|
|
Michael
A. Gerber
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
/s/ Timothy L.
Buzby
|
|
|
Timothy
L. Buzby
Vice
President – Chief Financial Officer
(Principal
Financial Officer)
|