Unassociated Document
As filed
with the Securities and Exchange Commission on
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
FORM
10-K
(Mark
One)
x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2009.
or
o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _____ to _____.
Commission
File Number 001-14951
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
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(Exact
name of registrant as specified in its charter)
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Federally
chartered instrumentality
of
the United States
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52-1578738
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
employer identification number)
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1133
Twenty-First Street, N.W., Suite 600,
Washington,
D.C.
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20036
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(Address
of principal executive offices)
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(Zip
code)
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(202)
872-7700
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(Registrant’s telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class
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Exchange
on which registered
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Class
A voting common stock
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New
York Stock Exchange
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Class
C non-voting common stock
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: Class B voting
common stock
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. §229.405) is
not contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. x
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 the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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x
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Smaller reporting company
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o
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Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes o No x
The aggregate market values of the
Class A voting common stock and Class C non-voting common stock held by
non-affiliates of the registrant were $3,875,733 and $41,496,245, respectively,
as of June 30, 2009, based upon the closing prices for the respective classes on
June 30, 2009 reported by the New York Stock Exchange. For
purposes of this information, the outstanding shares of Class C non-voting
common stock owned by directors and executive officers of the registrant were
deemed to be held by affiliates. The aggregate market value of the
Class B voting common stock is not ascertainable due to the absence of publicly
available quotations or prices for the Class B voting common stock as a result
of the limited market for, and infrequency of trades in, Class B voting common
stock and the fact that any such trades are privately negotiated
transactions.
As of March 1, 2010, the registrant had
outstanding 1,030,780 shares of Class A voting
common stock, 500,301 shares of Class B voting common stock and 8,612,720
shares of Class C non-voting common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
The definitive proxy statement relating
to the registrant’s 2010 Annual Meeting of Stockholders (portions of which are
incorporated by reference into Part II and Part III of this Annual Report on
Form 10-K as described herein).
Table
of Contents
PART
I
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4
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Item
1.
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Business
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4
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General
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4
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FARMER
MAC PROGRAMS
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10
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Farmer
Mac I
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11
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Loan
Eligibility
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11
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Summary
of Farmer Mac I Transactions
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12
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Loan
Purchases
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13
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Off-Balance
Sheet Guarantees and Commitments
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13
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AgVantage
Securities
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16
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Underwriting
and Collateral Valuation (Appraisal) Standards
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17
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Portfolio
Diversification
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21
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Sellers
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21
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Servicing
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22
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Farmer
Mac II
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22
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General
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22
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Summary
of Farmer Mac II Transactions
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23
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United
States Department of Agriculture Guaranteed Loan Programs
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24
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Rural
Utilities
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25
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General
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25
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Summary
of Rural Utilities Transactions
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25
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Loan
Eligibility
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26
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Underwriting
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26
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Collateral
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28
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Servicing
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29
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Sellers
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29
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Portfolio
Diversification
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29
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Funding
of Guarantee and LTSPC Obligations
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29
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Financing
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30
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Debt
Issuance
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30
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Equity
Issuance
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31
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FARMER
MAC’S AUTHORITY TO BORROW FROM THE U.S. TREASURY
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35
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GOVERNMENT
REGULATION OF FARMER MAC
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35
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General
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35
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Regulation
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36
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Office
of Secondary Market Oversight (OSMO)
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36
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Capital
Standards
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36
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Item 1A.
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Risk
Factors
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38
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Item
1B.
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Unresolved
Staff Comments
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45
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Item
2.
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Properties
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45
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Item
3.
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Legal
Proceedings
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45
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Item
4.
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(Removed
and Reserved)
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45
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PART II
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46
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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46
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Item
6.
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Selected
Financial Data
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49
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
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50
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Forward-Looking
Statements
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50
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Overview
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51
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Critical
Accounting Policies and Estimates
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55
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Results
of Operations
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60
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Balance
Sheet Review
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77
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Risk
Management
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78
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Liquidity
and Capital Resources
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93
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Regulatory
Matters
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99
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Other
Matters
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99
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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99
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Item
8.
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Financial
Statements
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100
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MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
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100
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REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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101
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CONSOLIDATED
BALANCE SHEETS
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104
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CONSOLIDATED
STATEMENTS OF OPERATIONS
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105
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CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
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106
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CONSOLIDATED
STATEMENTS OF CASH FLOWS
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107
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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108
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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180
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Item
9A.
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Controls
and Procedures
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180
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Item
9B.
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Other
Information
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180
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PART
III
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181
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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181
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Item
11.
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Executive
Compensation
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181
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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181
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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181
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Item
14.
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Principal
Accountant Fees and Services
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181
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PART
IV
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182
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Item
15.
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Exhibits
and Financial Statement Schedules
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182
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General
The
Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) is
a stockholder-owned, federally chartered corporation that combines private
capital and public sponsorship to serve a public purpose. Congress
has charged Farmer Mac with the mission of providing a secondary market for a
variety of loans made to borrowers in rural America. A secondary
market is an economic arrangement in which the creators or owners of financial
investments, such as the originators of loans, may sell all or part of their
interests or otherwise offset, for a fee, some or all of the inherent risks of
holding those investments. Farmer Mac’s main secondary market
activities are:
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·
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purchasing
eligible loans directly from
lenders;
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·
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providing
advances against eligible loans by purchasing obligations secured by those
loans;
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·
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securitizing
assets and guaranteeing the resulting securities representing interests
in, or obligations secured by, pools of eligible
loans;
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·
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issuing
long-term standby purchase commitments (“LTSPCs”) for eligible
loans.
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Securities
guaranteed by Farmer Mac may be retained by the seller of the underlying assets,
retained by Farmer Mac, or sold to third party investors.
These
activities are intended to provide participants with an efficient and
competitive secondary market that enhances the participants’ ability to offer
competitively-priced financing to rural borrowers. This secondary
market is designed to increase the availability of long-term credit at stable
interest rates to America’s rural communities and to provide those borrowers
with the benefits of capital markets pricing and product
innovation. The Farmer Mac secondary market functions as a bridge
between the national capital markets and the agricultural and rural credit
markets by attracting new capital for financing to provide greater liquidity and
lending capacity to lenders that extend credit to agricultural and rural
borrowers. Farmer Mac’s purchases of eligible loans and obligations
secured by eligible loans, as well as Farmer Mac’s guaranteed securities sold to
third party investors, increase the capital and liquidity of primary lenders and
provide a continuous source of funding for new lending. Farmer Mac’s
guaranteed securities that are retained by the seller of the securitized assets,
as well as Farmer Mac’s LTSPCs for eligible loans, result in lower regulatory
capital requirements for assets retained by the lenders, thereby expanding their
lending capacity. By thus increasing the efficiency and
competitiveness of rural finance, the Farmer Mac secondary market has the
potential to lower the interest rates paid on loans by rural
borrowers.
Farmer
Mac conducts these activities through three programs—Farmer Mac I,
Farmer Mac II and Rural Utilities. The loans eligible for
the Farmer Mac secondary market include:
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·
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mortgage
loans secured by first liens on agricultural real estate and rural housing
(encompassing the Farmer Mac I
program);
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·
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certain
agricultural and rural loans guaranteed by the United States Department of
Agriculture (encompassing the Farmer Mac II program);
and
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·
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loans
to finance electrification and telecommunications systems in rural areas
(encompassing the Rural Utilities
program).
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As of
December 31, 2009, the total outstanding amount of the eligible loans included
in all of Farmer Mac’s programs was $10.7 billion.
Under the
Farmer Mac I program, Farmer Mac purchases or commits to purchase mortgage loans
secured by first liens on agricultural real estate. Farmer Mac also
guarantees securities representing interests in, or obligations secured by,
pools of eligible mortgage loans. The securities guaranteed by Farmer
Mac under the Farmer Mac I program are referred to as “Farmer Mac I Guaranteed
Securities.” To be eligible for the Farmer Mac I program, loans must
meet Farmer Mac’s credit underwriting, collateral valuation, documentation and
other specified standards that are discussed in “Business—Farmer Mac
Programs—Farmer Mac I.” As of December 31, 2009, outstanding
Farmer Mac I loans held by Farmer Mac and loans that either back Farmer Mac I
Guaranteed Securities or are subject to LTSPCs in the Farmer Mac I program
totaled $7.4 billion.
Under the Farmer Mac II program, prior
to January 2010 Farmer Mac purchased the portions of certain agricultural, rural
development, business and industry, and community facilities loans guaranteed by
the United States Department of Agriculture (“USDA-guaranteed portions”)
pursuant to the Consolidated Farm and Rural Development Act (7 U.S.C. §§ 1921 et
seq.) and guaranteed securities backed by those USDA-guaranteed portions
(“Farmer Mac II Guaranteed Securities”). As of December 31, 2009,
outstanding Farmer Mac II Guaranteed Securities totaled $1.2
billion. Since January 2010, all purchases of USDA-guaranteed
portions under the Farmer Mac II program (other than purchases of
USDA-guaranteed portions that back Farmer Mac II Guaranteed Securities to be
sold to third parties) have been, and will continue to be, made by Farmer Mac’s
subsidiary, Farmer Mac II LLC, which is now operating substantially all of the
business related to the Farmer Mac II program.
Farmer Mac’s Rural Utilities program
was initiated during second quarter 2008 after Congress expanded Farmer Mac’s
authorized secondary market activities to include rural utilities
loans. Farmer Mac’s authorized activities under this program are
similar to those conducted under the Farmer Mac I program—loan purchases,
guarantees of securities (“Farmer Mac Guaranteed Securities – Rural Utilities”)
and issuance of LTSPCs—with respect to eligible rural utilities
loans. To be eligible for the Rural Utilities program, loans must
meet Farmer Mac’s credit underwriting and other specified standards that are
discussed in “Business—Farmer Mac Programs—Rural Utilities.” From
inception through third quarter 2009, Farmer Mac retained in its portfolio all
of the rural utilities loans and Farmer Mac Guaranteed Securities – Rural
Utilities under this program. During fourth quarter 2009, Farmer Mac
guaranteed a general obligation secured by eligible rural utilities loans in the
amount of $16.0 million, which was sold to third parties. To date,
Farmer Mac has not issued any LTSPCs with respect to rural utilities
loans. As of December 31, 2009, the aggregate outstanding
principal balance of rural utilities loans held and Farmer Mac Guaranteed
Securities – Rural Utilities was $2.1 billion.
Farmer
Mac I Guaranteed Securities, Farmer Mac II Guaranteed Securities and
Farmer Mac Guaranteed Securities – Rural Utilities are sometimes collectively
referred to as “Farmer Mac Guaranteed Securities.” The assets
underlying Farmer Mac Guaranteed Securities include (1) securitized loans or
USDA-guaranteed portions eligible under one of Farmer Mac’s programs and (2)
general obligations of lenders secured by pools of eligible
loans. The Corporation guarantees the timely payment of principal and
interest on the resulting Farmer Mac Guaranteed
Securities. AgVantage® is a
registered trademark of Farmer Mac used to designate Farmer Mac’s guarantees of
securities related to general obligations of lenders that are secured by pools
of eligible loans. Farmer Mac may retain Farmer Mac Guaranteed
Securities in its portfolio or sell them to third parties.
Farmer
Mac’s two principal sources of revenue are:
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·
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guarantee
and commitment fees received in connection with outstanding Farmer Mac
Guaranteed Securities and LTSPCs;
and
|
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·
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interest
income earned on assets held on balance sheet, net of related funding
costs and interest payments and receipts on financial
derivatives.
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Farmer
Mac funds its “program” purchases of Farmer Mac Guaranteed Securities and
eligible loans primarily by issuing debt obligations of various maturities in
the public capital markets. As of December 31, 2009, Farmer Mac had
$2.3 billion of discount notes and $3.3 billion of medium-term notes
outstanding. To the extent the proceeds of debt issuance exceed
Farmer Mac’s need to fund program assets, those proceeds are invested in
“non-program” investments that must comply with policies adopted by the
Corporation’s board of directors and with regulations promulgated by the Farm
Credit Administration (“FCA”), including dollar amount, issuer concentration,
and credit quality limitations. Those regulations can be found at 12
C.F.R. §§ 652.1-652.45 (the “Investment Regulations”). Farmer
Mac’s regular debt issuance supports its access to the capital markets, and
Farmer Mac’s non-program investment assets provide an alternative source of
funds should market conditions be unfavorable. For more information
about Farmer Mac’s program assets and non-program investment assets, as well as
its financial performance and sources of capital and liquidity, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Farmer
Mac was established, and continues to exist, under federal legislation first
enacted in 1988 and amended as recently as 2008 – Title VIII of the Farm Credit
Act of 1971, as amended (12 U.S.C. §§ 2279aa et seq.), which is sometimes
referred to as Farmer Mac’s charter. Farmer Mac is known as a
government-sponsored enterprise (“GSE”) by virtue of the status conferred by its
charter. The charter provides that Farmer Mac has the power to
establish, acquire, and maintain affiliates (as defined in the charter) under
applicable state law to carry out any activities that otherwise would be
performed directly by the Corporation. Farmer Mac established its two
existing subsidiaries, Farmer Mac II LLC and Farmer Mac Mortgage Securities
Corporation, pursuant to that power.
Farmer
Mac is an institution of the Farm Credit System (the “FCS”), which is composed
of the banks, associations and related entities, including Farmer Mac and its
subsidiaries, regulated by FCA, an independent agency in the executive branch of
the United States government. FCA is a federal agency, but it is not
supported by federal money and is funded by assessments paid by FCS
institutions. FCA policy and regulatory agendas are established by a
full-time, three-person board whose members are appointed by the President of
the United States with the advice and consent of the United States
Senate. Although Farmer Mac (including its subsidiaries) is an
institution of the FCS, it is not liable for any debt or obligation of any other
institution of the FCS. None of FCA, the FCS, or any other individual
institution of the FCS is liable for any debt or obligation of Farmer Mac or its
subsidiaries, nor are Farmer Mac’s or its subsidiaries’ debts or obligations
guaranteed by the full faith and credit of the United States.
Farmer
Mac’s basic capital and corporate governance structure is prescribed in its
charter, which authorizes Farmer Mac to issue two classes of voting common stock
that each elects one-third of Farmer Mac’s 15-person board of directors, as well
as non-voting common stock.
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·
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The
charter restricts ownership of Farmer Mac’s Class A voting common stock to
banks, insurance companies and other financial institutions or similar
entities that are not institutions of the FCS. The charter also
provides that five members of Farmer Mac’s 15-member board of directors
are elected by a plurality of the votes of the Class A stockholders each
year. The charter limits the amount of Class A voting common
stock that may be owned by one holder to no more than 33 percent of
the outstanding shares of Class A voting common stock. Farmer
Mac is not aware of any regulation applicable to non-FCS financial
institutions that requires a minimum investment in Farmer Mac Class A
voting common stock or that prescribes a maximum amount lower than the
33 percent limit set forth in the charter. Farmer Mac’s
Class A voting common stock trades on the New York Stock Exchange under
the symbol AGM.A.
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·
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The
charter restricts ownership of Farmer Mac’s Class B voting common stock to
FCS institutions and also provides that five members of Farmer Mac’s
15-member board of directors are elected by a plurality of the votes of
the Class B stockholders each year. The charter does not
contain any restrictions on the maximum holdings of Class B voting common
stock, and Farmer Mac is not aware of any regulation applicable to FCS
institutions that requires a minimum investment in Farmer Mac Class B
voting common stock or that prescribes a maximum amount. Farmer
Mac’s Class B voting common stock, which has a limited market and trades
infrequently, is not listed or quoted on any exchange or other medium, and
Farmer Mac is not aware of any publicly available quotations or prices for
that class of common stock.
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·
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The
remaining five members of Farmer Mac’s board of directors are individuals
who meet the qualifications specified in the charter and are appointed by
the President of the United States with the advice and consent of the
United States Senate. These appointed directors serve at the
pleasure of the President of the United
States.
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·
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The
charter does not impose any ownership restrictions on Class C non-voting
common stock, and those shares are freely transferable. Holders
of the Class C common stock do not vote on the election of directors or
any other matter. Farmer Mac’s Class C non-voting common stock
trades on the New York Stock Exchange under the symbol
AGM.
|
The
ownership of Farmer Mac’s two classes of voting common stock is currently
concentrated in a small group of institutions. Approximately 97
percent of the voting power of the Class B voting common stock is held by five
institutions of the FCS. Approximately 44 percent of the Class A
voting common stock is held by three financial institutions, with
31 percent held by one institution. Farmer Mac believes that the
concentration in such a small group of holders of Class B voting common
stock is a by-product of the limited number of eligible holders of that stock
under the charter and the structure of the FCS. Farmer Mac believes
that the concentration in the Class A voting common stock is a by-product
of trading activity in the stock over time and is not by design under the
charter or any regulatory mandate.
The
dividend and liquidation rights of all three classes of the Corporation’s common
stock are the same. Dividends may be paid on Farmer Mac’s common
stock only when, as, and if declared by the Corporation’s board of directors in
its sole discretion, subject to the payment of dividends on any outstanding
preferred stock issued by Farmer Mac. Upon liquidation, dissolution
or winding up of the business of Farmer Mac, after payment and provision for
payment of outstanding debt of the Corporation, the holders of shares of Farmer
Mac preferred stock would be paid in full at par value, plus all accrued
dividends, before the holders of shares of common stock received any
payment. See “Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities” for more
information regarding Farmer Mac’s common stock. See “Business—Farmer
Mac Programs—Financing—Equity Issuance” for information regarding Farmer Mac’s
preferred stock.
The
charter assigns to FCA, acting through the separate Office of Secondary Market
Oversight (“OSMO”) within FCA, the responsibility for the examination of, and
the general supervision of the safe and sound performance of the powers,
functions, and duties vested in Farmer Mac by the charter. The
charter also authorizes FCA, acting through OSMO, to apply its general
enforcement powers to Farmer Mac. Farmer Mac (including its
subsidiaries) is the only entity regulated by OSMO, which was created as a
separate office in recognition of the different role that Farmer Mac plays as a
secondary market compared to the roles of other FCS institutions as primary
lenders. The Director of OSMO is selected by, and reports to, the FCA
board. The FCA board approves the policies, regulations, charters,
and enforcement activities applicable to other FCS institutions, which are the
only eligible holders of Farmer Mac’s Class B voting common
stock. FCA has no regulatory authority over the financial
institutions that are the eligible holders of Farmer Mac’s Class A voting common
stock.
The
charter establishes three capital standards for Farmer Mac—minimum capital,
critical capital and risk-based capital. Farmer Mac is required to
comply with the higher of the minimum capital requirement or the risk-based
capital requirement. The charter also requires an annual examination
of the financial transactions of Farmer Mac and authorizes FCA to assess Farmer
Mac for the cost of FCA’s regulatory activities, including the cost of any
examination. Each year, OSMO conducts an examination of Farmer Mac to
evaluate its safety and soundness, compliance with applicable laws and
regulations, and mission achievement. The examination includes a
review of Farmer Mac’s capital adequacy, asset quality, management performance,
earnings, liquidity, and sensitivity to interest rate risk. Farmer
Mac is also required to file quarterly reports of condition with
OSMO. For a more detailed discussion of Farmer Mac’s regulatory and
governmental relationships, see “—Government Regulation of Farmer
Mac.” For a discussion of Farmer Mac’s statutory and regulatory
capital requirements and its actual capital levels, and particularly FCA’s role
in the establishment and maintenance of those requirements and levels, see
“—Government Regulation of Farmer Mac—Regulation—Capital Standards,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Balance Sheet Review—Capital,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Capital Requirements” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Regulatory Matters.”
Unlike
some other GSEs, specifically other FCS institutions and the Federal Home Loan
Banks, Farmer Mac is not structured as a cooperative owned exclusively by member
institutions and established to provide services exclusively to its
members. Farmer Mac, as a stockholder-owned, publicly-traded
corporation, seeks to fulfill its mission of serving the financing needs of
agriculture and rural America while at the same time providing a return on the
investment of all its stockholders, including those who do not directly
participate in the Farmer Mac secondary market. Farmer Mac’s policy
is to require financial institutions to own a requisite amount of Farmer Mac
Class A or Class B voting common stock, based on the size and type of
institution, to participate in the Farmer Mac I Program. As a
result of this requirement, coupled with the ability of holders of Class A and
Class B voting common stock to elect two-thirds of Farmer Mac’s board of
directors, Farmer Mac regularly conducts business with “related parties,”
including institutions affiliated with members of Farmer Mac’s board of
directors and institutions that own large amounts of Farmer Mac voting common
stock. Farmer Mac has adopted a Code of Business Conduct and Ethics
that governs any conflicts of interest that may arise in these transactions, and
Farmer Mac’s policy is to require that any transactions with related parties be
conducted in the ordinary course of business, with terms and conditions
comparable to those available to any other program participant not related to
Farmer Mac. For more information about related party transactions,
see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Results of Operations—Related Party Transactions” and Note 3 to the
consolidated financial statements.
As of December 31, 2009, Farmer Mac
employed 53 people, located primarily at its principal executive offices at 1133
Twenty-First Street, N.W., Washington, D.C. 20036. Farmer Mac’s main
telephone number is (202) 872-7700.
Farmer Mac makes available free of
charge, through the “Investors” section of its internet website at
www.farmermac.com, copies of materials it files with, or furnishes to, the U.S.
Securities and Exchange Commission (the “SEC”), including Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports, as soon as reasonably practicable after
electronically filing such materials with, or furnishing such materials to, the
SEC. Please note that all references to www.farmermac.com in this
Annual Report on Form 10-K are inactive textual references only and that the
information contained on Farmer Mac’s website is not incorporated by reference
into this Annual Report on Form 10-K.
FARMER
MAC PROGRAMS
The following tables present the
outstanding balances and annual activity under Farmer Mac’s three
programs—Farmer Mac I, Farmer Mac II, and Rural Utilities.
Outstanding
Balance of Farmer Mac Loans and Loans Underlying
Farmer
Mac Guaranteed Securities and LTSPCs
|
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
On-balance
sheet:
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
Loans
|
|
$ |
733,422 |
|
|
$ |
781,305 |
|
Guaranteed
Securities
|
|
|
5,307 |
|
|
|
282,185 |
|
AgVantage
|
|
|
48,800 |
|
|
|
53,300 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
1,164,996 |
|
|
|
1,013,330 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
28,644 |
|
|
|
— |
|
Guaranteed
Securities
|
|
|
2,087,948 |
|
|
|
1,054,941 |
|
Total
on-balance sheet
|
|
$ |
4,069,117 |
|
|
$ |
3,185,061 |
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet:
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
$ |
1,492,239 |
|
|
$ |
1,697,983 |
|
AgVantage
|
|
|
2,945,000 |
|
|
|
2,945,000 |
|
LTSPCs
|
|
|
2,165,706 |
|
|
|
2,224,181 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
34,802 |
|
|
|
30,095 |
|
Rural
Utilities:
|
|
|
14,240 |
|
|
|
— |
|
Total
off-balance sheet
|
|
$ |
6,651,987 |
|
|
$ |
6,897,259 |
|
Total
|
|
$ |
10,721,104 |
|
|
$ |
10,082,320 |
|
Farmer
Mac Loan Purchases, Guarantees and LTSPCs
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
195,318 |
|
|
$ |
196,622 |
|
|
$ |
127,709 |
|
LTSPCs
|
|
|
234,166 |
|
|
|
530,363 |
|
|
|
970,789 |
|
AgVantage
|
|
|
— |
|
|
|
475,000 |
|
|
|
1,000,000 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
346,432 |
|
|
|
303,941 |
|
|
|
210,040 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
28,644 |
|
|
|
— |
|
|
|
— |
|
Guaranteed
Securities
|
|
|
1,711,009 |
|
|
|
1,560,676 |
|
|
|
— |
|
Total purchases, guarantees and commitments
|
|
$ |
2,515,569 |
|
|
$ |
3,066,602 |
|
|
$ |
2,308,538 |
|
The
following sections describe Farmer Mac’s activities under each
program.
Farmer
Mac I
Under the Farmer Mac I program, Farmer
Mac assumes, for a fee, the credit risk on agricultural real estate mortgage
loans by (1) guaranteeing the timely payment of principal and interest on
securities representing interests in, or obligations secured by, pools of
eligible mortgage loans, or (2) issuing LTSPCs to acquire designated
eligible mortgage loans. Farmer Mac also may assume the credit risk
on eligible mortgage loans by purchasing and retaining them.
Loan Eligibility
To be
eligible for the Farmer Mac I program, a loan is required to:
|
·
|
be
secured by a fee simple mortgage or a long-term leasehold mortgage, with
status as a first lien on agricultural real estate or rural housing (as
defined below) located within the United
States;
|
|
·
|
be
an obligation of a citizen or national of the United States, an alien
lawfully admitted for permanent residence in the United States or a
private corporation or partnership that is majority-owned by U.S.
citizens, nationals or legal resident
aliens;
|
|
·
|
be
an obligation of a person, corporation or partnership having training or
farming experience that is sufficient to ensure a reasonable likelihood
that the loan will be repaid according to its terms;
and
|
|
·
|
meet
the Farmer Mac I credit underwriting, collateral valuation,
documentation and other specified standards. See “—Underwriting
and Collateral Valuation (Appraisal) Standards” and “—Sellers” for a
description of these standards.
|
Eligible
agricultural real estate consists of one or more parcels of land, which may be
improved by permanently affixed buildings or other structures,
that:
|
·
|
is
used for the production of one or more agricultural commodities or
products; and
|
|
·
|
either
consists of a minimum of five acres or generates minimum annual receipts
of $5,000.
|
Farmer
Mac’s charter authorizes a maximum loan size of $9.8 million (adjusted annually
for inflation) for a Farmer Mac I eligible loan secured by more than 1,000 acres
of agricultural real estate. Although the charter does not prescribe
a maximum loan size for a Farmer Mac I eligible loan secured by 1,000 acres or
less of agricultural real estate, Farmer Mac currently limits the size of those
loans to:
|
·
|
$22.5 million
for transactions involving direct exposure to credit risk on loans
(e.g., loan purchases, LTSPC transactions, and non-AgVantage Farmer
Mac Guaranteed Securities, which are not backed by a general obligation of
a lender); and
|
|
·
|
$50.0 million
in AgVantage transactions, which involve the general obligation of a
lender that is in turn secured by eligible loans, resulting in indirect
exposure to credit risk on those
loans.
|
These two
maximum loan size levels were increased from $15.0 million and
$35.0 million, respectively, in December 2009.
For the
rural housing portion of the Farmer Mac I program, an eligible loan must be
secured by a mortgage on a one- to four-family, owner-occupied, moderately
priced principal residence located in a community with a population of 2,500 or
fewer. The current maximum purchase price or current appraised value
for a dwelling, excluding the land to which the dwelling is affixed, that
secures a rural housing loan is $269,807 (effective January 1,
2010). That limit is adjusted annually based on changes in home
values during the previous year. In addition to the dwelling itself,
an eligible rural housing loan can be secured by land associated with the
dwelling having an appraised value of no more than 50 percent of the total
appraised value of the combined property. Rural housing loans do not
represent a significant part of Farmer Mac’s business, with a total of $6.9
million of those loans in Farmer Mac’s portfolio as of December 31,
2009.
Summary of Farmer Mac I
Transactions
During the year ended December 31,
2009, Farmer Mac purchased or placed under guarantee or LTSPC $429.5 million of
loans under the Farmer Mac I program. As of December 31, 2009,
loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs
totaled $7.4 billion.
The
following table summarizes loans purchased or newly placed under guarantees or
LTSPCs under the Farmer Mac I program for each of the years ended December 31,
2009, 2008 and 2007.
|
|
For
the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and Guaranteed Securities
|
|
$ |
195,318 |
|
|
$ |
196,622 |
|
|
$ |
127,709 |
|
AgVantage
|
|
|
— |
|
|
|
475,000 |
|
|
|
1,000,000 |
|
LTSPCs
|
|
|
234,166 |
|
|
|
530,363 |
|
|
|
970,789 |
|
Total
|
|
$ |
429,484 |
|
|
$ |
1,201,985 |
|
|
$ |
2,098,498 |
|
The
following table presents the outstanding balances of Farmer Mac I loans held and
loans underlying Farmer Mac I Guaranteed Securities and LTSPCs as of the dates
indicated:
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
On-balance
sheet assets:
|
|
|
|
|
|
|
Loans
|
|
$ |
733,422 |
|
|
$ |
781,305 |
|
Guaranteed
Securities
|
|
|
5,307 |
|
|
|
282,185 |
|
AgVantage
|
|
|
48,800 |
|
|
|
53,300 |
|
Total
on-balance sheet
|
|
$ |
787,529 |
|
|
$ |
1,116,790 |
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet assets:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
$ |
1,492,239 |
|
|
$ |
1,697,983 |
|
AgVantage
|
|
|
2,945,000 |
|
|
|
2,945,000 |
|
LTSPCs
|
|
|
2,165,706 |
|
|
|
2,224,181 |
|
Total
off-balance sheet
|
|
$ |
6,602,945 |
|
|
$ |
6,867,164 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,390,474 |
|
|
$ |
7,983,954 |
|
Loan Purchases
Farmer Mac offers loan products
designed to increase the secondary market liquidity of agricultural real estate
mortgage loans and the lending capacity of financial institutions that originate
those loans. Farmer Mac enters into mandatory and optional delivery
commitments to purchase loans and offers rates for such commitments
daily. Farmer Mac also purchases portfolios of newly originated and
seasoned loans on a negotiated basis. Farmer Mac purchases both fixed
and adjustable rate loans that have a variety of maturities and often include
balloon payments. Loans purchased or subject to purchase commitments
may include provisions that require a yield maintenance payment or some other
form of prepayment penalty in the event a borrower prepays a loan (depending
upon the level of interest rates at the time of prepayment). Of the
$195.3 million of loans purchased in the Farmer Mac I program during 2009,
54 percent included balloon payments and 1 percent included yield
maintenance prepayment protection. By comparison, of the $196.6
million of loans purchased in the Farmer Mac I program during 2008, 59 percent
included balloon payments and 2 percent included yield maintenance prepayment
protection.
Off-Balance
Sheet Guarantees and Commitments
Farmer
Mac offers two Farmer Mac I credit enhancement alternatives that allow approved
agricultural and rural residential mortgage lenders the ability to retain the
cash flow benefits of their loans and increase their liquidity and lending
capacity: (1) LTSPCs and (2) Farmer Mac I Guaranteed
Securities. Both of these products result in the creation of
off-balance sheet obligations for Farmer Mac in the ordinary course of its
business.
Both
types of transactions permit a seller to nominate from its portfolio a
segregated pool of loans for participation in the Farmer Mac I program,
subject to review by Farmer Mac for conformance with its applicable
standards. In both types of transactions, the seller effectively
transfers the credit risk on those loans upon Farmer Mac’s approval of the
eligible loans because, through its guarantee or commitment to purchase, Farmer
Mac assumes the ultimate credit risk of borrower defaults on the underlying
loans and, in the case of AgVantage securities, issuer default on the underlying
obligations that are backed by eligible loans. That transfer of risk
reduces the seller’s credit and concentration risk exposures and, consequently,
its regulatory capital requirements and its loss reserve
requirements. The loans underlying LTSPCs and Farmer Mac I Guaranteed
Securities may include loans with payment, maturity and interest rate
characteristics that differ from the loan products that Farmer Mac offers for
purchase on a daily basis, but all the loans are subject to the applicable
underwriting standards described in “—Underwriting
and Collateral Valuation (Appraisal) Standards.” See also
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Risk Management—Credit Risk – Loans.”
LTSPCs. An
LTSPC commits Farmer Mac to a future purchase of eligible loans from a
segregated pool of loans that met Farmer Mac’s standards at the time the loans
first became subject to the LTSPC and Farmer Mac assumed the credit risk on the
loans. The LTSPC structure, which is not a guarantee of loans or
securities, permits the seller to retain the segregated loan pool in its
portfolio until such time, if ever, as the seller delivers some or all of the
segregated loans to Farmer Mac for purchase under the LTSPC. As
consideration for its assumption of the credit risk on loans underlying an
LTSPC, Farmer Mac receives commitment fees payable monthly in arrears in an
amount approximating what would have been the guarantee fees if the transaction
were structured as Farmer Mac I Guaranteed Securities. The loans
underlying an LTSPC can be converted into Farmer Mac I Guaranteed Securities at
the option of the seller, with no conversion fee paid to Farmer
Mac.
Farmer
Mac purchases loans subject to an LTSPC at:
|
·
|
par
(if the loans become delinquent for at least four months or are in
material non-monetary default), with accrued and unpaid interest on the
defaulted loans payable out of any future loan payments or liquidation
proceeds as received;
|
|
·
|
a
mark-to-market price or in exchange for Farmer Mac I Guaranteed Securities
(if the loans are not delinquent and are standard Farmer Mac I loan
products); or
|
|
·
|
either
(1) a mark-to-market negotiated price for all (but not some) loans in the
pool, based on the sale of Farmer Mac I Guaranteed Securities in the
capital markets or the funding obtained by Farmer Mac through the issuance
of matching debt in the capital markets, or (2) in exchange for Farmer Mac
I Guaranteed Securities (if the loans are not four months
delinquent).
|
In 2009,
Farmer Mac entered into $234.2 million of LTSPCs, compared to
$530.4 million in 2008. In 2009, LTSPCs remained the preferred
credit enhancement alternative for new off-balance sheet transactions and they
continue to be a significant portion of the Farmer Mac I
program. During 2009, there were no conversions of LTSPCs into Farmer
Mac I Guaranteed Securities. As of December 31, 2009, Farmer
Mac’s outstanding LTSPCs covered 6,766 mortgage loans with an aggregate
principal balance of $2.2 billion, and outstanding off-balance sheet Farmer
Mac I Guaranteed Securities were backed by 6,553 mortgage loans having an
aggregate principal balance of $1.5 billion. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Results
of Operations—Business Volume.”
Farmer Mac I Guaranteed
Securities. In Farmer Mac I Guaranteed Securities
transactions, Farmer Mac either (1) guarantees securities representing interests
in, or obligations secured by, eligible loans held by a trust or other entity
established by a seller or (2) acquires eligible loans from sellers in
exchange for Farmer Mac I Guaranteed Securities backed by those
loans. Farmer Mac guarantees the timely payment of interest and
principal on the securities, which are either retained by Farmer Mac or sold to
third parties. These securities are customarily issued through
special purpose trusts and entitle each investor in a class of securities to
receive a portion of the payments of principal and interest on the related
underlying pool of loans or obligation equal to the investor’s proportionate
interest in the pool or obligation as specified in the applicable transaction
documents. As consideration for its assumption of the credit risk on
loans underlying the Farmer Mac I Guaranteed Securities, Farmer Mac
receives guarantee fees payable in arrears out of periodic loan interest
payments and based on the outstanding principal balance of the related Farmer
Mac I Guaranteed Securities. The Farmer Mac I Guaranteed Securities
representing the general obligations of issuers secured by eligible loans are
referred to as AgVantage securities. See “—AgVantage
Securities.”
Farmer Mac is obligated under its
guarantee on the securities to make timely payments to investors of principal
(including balloon payments) and interest based on the scheduled payments on the
underlying loans or obligations, regardless of whether the trust has actually
received such scheduled payments. Farmer Mac’s guarantee fees
typically are collected out of installment payments made on the underlying loans
or obligations until those loans or obligations have been repaid or otherwise
liquidated (generally as a result of default). The aggregate amount
of guarantee fees received on Farmer Mac I Guaranteed Securities depends upon
the amount of such securities outstanding and on the applicable guarantee fee
rate, which Farmer Mac’s statutory charter caps at 50 basis points (0.50
percent) per annum. The Farmer Mac I guarantee fee rate typically
ranges from 15 to 50 basis points (0.15 to 0.50 percent) per annum,
depending on the credit quality of and other criteria regarding the loans or
obligations. The amount of non-AgVantage Farmer Mac I Guaranteed
Securities outstanding is influenced by the repayment rates on the underlying
loans and by the rate at which Farmer Mac issues new Farmer Mac I Guaranteed
Securities. In general, when the level of interest rates declines
significantly below the interest rates on loans underlying Farmer Mac I
Guaranteed Securities, the rate of prepayments is likely to increase;
conversely, when interest rates rise above the interest rates on the loans
underlying Farmer Mac I Guaranteed Securities, the rate of prepayments is likely
to decrease. In addition to changes in interest rates, the rate of
principal payments on Farmer Mac I Guaranteed Securities also is influenced by a
variety of economic, demographic and other considerations, such as yield
maintenance provisions that may be associated with loans underlying Farmer Mac I
Guaranteed Securities. For more information regarding yield
maintenance provisions, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Risk Management—Interest Rate
Risk.”
For each
of the years ended December 31, 2009 and 2008, Farmer Mac sold non-AgVantage
Farmer Mac I Guaranteed Securities in the amounts of $28.7 million and
$143.8 million, respectively. The 2009 sales resulted in no
gains or losses, and the 2008 sales resulted in Farmer Mac recognizing a gain of
$1.5 million. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Results of Operations—Business
Volume.” See “—AgVantage Securities” for information about Farmer
Mac’s AgVantage transactions, which are a form of Farmer Mac I Guaranteed
Securities.
AgVantage
Securities
Each
AgVantage security is a general obligation of an institution approved by Farmer
Mac, which obligation is also secured by a pool of eligible loans under one of
Farmer Mac’s programs. Farmer Mac guarantees those securities as to
the timely payment of principal and interest and may retain AgVantage securities
in its portfolio or sell them to third parties in the capital markets as Farmer
Mac Guaranteed Securities.
Before
approving an institution as an issuer in a Farmer Mac I AgVantage transaction,
Farmer Mac assesses the institution’s agricultural real estate mortgage loan
performance as well as the institution’s creditworthiness. Farmer Mac
continues to monitor the counterparty risk assessment on an ongoing basis after
the AgVantage security is issued.
In
addition to being a general obligation of the issuing institution, each Farmer
Mac I AgVantage security is secured by eligible agricultural real estate
mortgage loans in an amount at least equal to the outstanding principal amount
of the security. In the Farmer Mac I program, Farmer Mac also
requires the general obligation to be overcollateralized, either by more
eligible loans or any of the following types of assets:
|
·
|
securities
issued by the U.S. Treasury or guaranteed by an agency or instrumentality
of the United States; or
|
|
·
|
other
highly-rated securities.
|
The
required collateralization level for a Farmer Mac I AgVantage security issued by
an institution without a long-term debt rating from a nationally recognized
statistical rating organization (“NRSRO”) ranges from 111 percent to
150 percent, depending on whether physical possession of the collateral is
maintained by Farmer Mac (11 percent overcollateralization) or whether a
specific pledge (20 percent overcollateralization) or a general pledge
(50 percent overcollateralization) of collateral is made by the
issuer. Historically, Farmer Mac I AgVantage securities of these
issuers have been retained by Farmer Mac and not sold to third
parties.
A Farmer
Mac I AgVantage security issued by an institution with an investment grade
long-term debt rating from an NRSRO requires a collateralization level of at
least 103 percent of the outstanding principal amount of the security
(3 percent overcollateralization), which collateralization level could be
higher depending on the rating of the issuer. Historically, Farmer
Mac I AgVantage securities of these issuers have been sold to third parties
in the capital markets.
In all
AgVantage transactions, Farmer Mac can require the issuer 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. As of December 31, 2009, Farmer Mac had not experienced
any credit losses, nor had it been called upon to make a guarantee payment, on
any of its AgVantage securities.
As of
December 31, 2009 and 2008, the outstanding principal amount of Farmer
Mac I AgVantage securities held by Farmer Mac was $48.8 million and
$53.3 million, respectively. As of December 31, 2009 and 2008,
the aggregate outstanding principal amount of off-balance sheet AgVantage
securities issued under the Farmer Mac I program totaled $3.0 billion and
$2.9 billion, respectively. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Results of
Operations—Business Volume” and “—Risk Management—Credit Risk –
Institutional.”
Underwriting
and Collateral Valuation (Appraisal) Standards
As required by Farmer Mac’s charter,
Farmer Mac has established underwriting, security appraisal, and repayment
standards for eligible loans taking into account the nature, risk profile, and
other differences between different categories of qualified
loans. These standards for agricultural real estate mortgage loans
under the Farmer Mac I program at a minimum, as prescribed by the charter, are
intended to:
|
Ÿ
|
provide
that no loan with a loan-to-value ratio (“LTV”) in excess of
80 percent may be eligible;
|
|
Ÿ
|
require
each borrower to demonstrate sufficient cash-flow to adequately service
the loan;
|
|
Ÿ
|
protect
the integrity of the appraisal process with respect to any loan;
and
|
|
Ÿ
|
confirm
that the borrower is or will be actively engaged in agricultural
production.
|
Loans
securing off-balance sheet Farmer Mac I AgVantage securities are required to
meet these statutory standards in place of the underwriting standards set forth
below.
Farmer Mac uses experienced internal
agricultural credit underwriters and external agricultural loan servicing and
collateral valuation contractors (under Farmer Mac supervision and review) to
perform those respective functions on loans that come into the Farmer Mac I
program. Farmer Mac believes that the combined expertise of its own
internal staff and those third-party service providers provides the Corporation
adequate resources for performing the necessary underwriting, collateral
valuation and servicing functions.
Underwriting. To
manage its credit risk, to mitigate the risk of loss from borrower defaults and
to provide guidance concerning the management, administration and conduct of
underwriting to all participating sellers and potential sellers in its programs,
Farmer Mac has adopted credit underwriting standards for the Farmer Mac I
program that vary by type of loan and program product under which the loan is
brought to Farmer Mac. These standards were developed based on
industry norms for similar mortgage loans and are designed to assess the
creditworthiness of the borrower, as well as the risk to Farmer Mac as the
guarantor of mortgage-backed securities representing interests in, or
obligations secured by, pools of such mortgage loans. Further, Farmer
Mac requires sellers of agricultural real estate mortgage loans to make
representations and warranties regarding the conformity of eligible mortgage
loans to these standards and any other requirements the Corporation may impose
from time to time.
Farmer
Mac I credit underwriting standards require that the original LTV of any loan
not exceed 70 percent, with the exception that a loan secured by a livestock
facility and supported by a contract with an approved integrator may have an
original LTV of up to 80 percent. Rural housing loans and
agricultural real estate mortgage loans secured primarily by owner-occupied
residences may also have LTVs of up to 80 percent. Farmer Mac
may require that a loan have a lower LTV when it determines that such lower LTV
is appropriate. The original LTV of a loan is calculated by dividing
the loan’s principal balance at the time of guarantee, purchase or commitment by
the lower of the appraised value or the purchase price at the date of loan
origination or, when available, updated appraised value at the time of
guarantee, purchase or commitment.
In the
case of newly-originated farm and ranch loans, borrowers on the loans must,
among other criteria set forth in Farmer Mac’s credit underwriting standards,
meet the following ratios on a pro forma basis:
|
·
|
total
debt service coverage ratio, including farm and non-farm income, of not
less than 1.25:1;
|
|
·
|
debt-to-asset
ratio of 50 percent or less;
|
|
·
|
ratio
of current assets to current liabilities of not less than 1:1;
and
|
|
·
|
cash
flow debt service coverage ratio on the mortgaged property of not less
than 1:1.
|
Farmer
Mac evaluates and adjusts these standards on an ongoing basis based on current
and anticipated market conditions. During the latter part of 2008,
Farmer Mac anticipated a change in agricultural market conditions and adjusted
its loan purchase underwriting standards for loans with LTVs between
60 percent and 70 percent to require a higher total debt service
coverage ratio and to not permit exceptions to any underwriting criteria based
on compensating strengths for those loans. Those adjustments were in
effect throughout 2009 and remain in effect as of the date of this
report.
For loans
secured by agricultural real estate with building improvements other than a
residence contributing more than 60 percent of the appraised value of the
property (referred to by Farmer Mac as facility loans), the credit underwriting
standards are the same as for farm and ranch loans but more stringent with
respect to two ratios, requiring:
|
·
|
total
debt service coverage ratio, including farm and non-farm income, of not
less than 1.35:1; and
|
|
·
|
ratio
of current assets to current liabilities of not less than
1.25:1.
|
Loans
secured by eligible collateral with LTVs not greater than 55 percent made to
borrowers with high credit scores and adequate financial resources may be
accepted without further underwriting tests being
applied. Agricultural real estate mortgage loans secured primarily by
owner-occupied residences and rural housing loans are underwritten to industry
norms for conforming loans secured by primary residences, with fully verified
repayment capacity and assets and liabilities. Applicants’ credit
scores are obtained and used in the underwriting process.
In
addition, Farmer Mac’s underwriting standards provide for the acceptance of a
loan that, in the judgment of the Farmer Mac underwriter, is a sound loan with a
high probability of repayment in accordance with its terms even though the loan
does not meet one or more of the underwriting ratios usually required for loans
of that type. In those cases, Farmer Mac permits exceptions to
applicable underwriting standards when a loan:
|
·
|
exceeds
minimum requirements for one or more of the underwriting standards to a
degree that compensates for noncompliance with one or more other
standards, referred to as compensating strengths;
and
|
|
·
|
is
made to a producer of particular agricultural commodities or products in a
segment of agriculture in which such compensating strengths are typical of
the financial condition of sound borrowers in that
segment.
|
Despite
these underwriting approvals based on compensating strengths, no loan will be
approved if it does not at least meet all of Farmer Mac’s statutory underwriting
standards described at the beginning of this section.
Farmer
Mac’s use of compensating strengths is not intended to provide a basis for
waiving or lessening the requirement that eligible mortgage loans under the
Farmer Mac I program be of consistently high quality. In fact, loans
approved on the basis of compensating strengths are fully underwritten and have
not demonstrated a significantly different rate of default, or loss following
default, than loans that were approved on the basis of conformance with all
applicable underwriting ratios. Beginning in the latter part of 2008,
Farmer Mac anticipated a leveling of agricultural real estate values and
implemented underwriting practices that reflected that leveling, resulting in
fewer approvals based on compensating strengths compared to years prior to
2008. During 2009, $69.2 million (16.1 percent) of the loans
purchased or added under LTSPCs were approved based upon compensating strengths
($0.8 million of which had original LTVs of greater than 70 percent),
as compared to 2008 when $51.2 million (7.0 percent) of the loans purchased
or added under LTSPCs were approved based upon compensating strengths
($9.2 million of which had original LTVs of greater than 70 percent)
and 2007 when $447.9 million (40.8 percent) of the loans purchased or added
under LTSPCs were approved based upon compensating strengths ($49.8 million of
which had original LTVs of greater than 70 percent). As of December
31, 2009, a total of $1.7 billion (38.9 percent) of the outstanding
balance of loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed
Securities (excluding AgVantage securities) were approved based upon
compensating strengths ($93.6 million of which had original LTVs of greater
than 70 percent).
In the
case of a seasoned loan, Farmer Mac considers sustained historical performance
to be a reliable alternative indicator of a borrower’s ability to pay the loan
according to its terms. A seasoned loan generally will be deemed
an eligible loan if:
|
·
|
it
has been outstanding for at least five years and has an LTV of
60 percent or less;
|
|
·
|
there
have been no payments more than 30 days past due during the previous three
years; and
|
|
·
|
there
have been no material restructurings or modifications for credit reasons
during the previous five years.
|
A
seasoned loan that has been outstanding for more than one year but less than
five years must substantially comply with the applicable underwriting standards
for newly originated loans as of the date the loan was originated by the
lender. The loan must also have a payment history that shows no
payment more than 30 days past due during the three-year period immediately
prior to the date the loan is either purchased by Farmer Mac or made subject to
an LTSPC. There is no requirement that each loan’s compliance with
the underwriting standards be re-evaluated after Farmer Mac accepts the loan
into its program.
Farmer
Mac performs due diligence before purchasing, guaranteeing securities backed by,
or committing to purchase seasoned loans, including:
|
·
|
evaluating
loan database information to determine conformity to the criteria set
forth in the preceding paragraphs;
|
|
·
|
confirming
that loan file data conform to database
information;
|
|
·
|
validating
supporting credit information in the loan files;
and
|
|
·
|
reviewing
loan documentation and collateral
valuations.
|
Farmer
Mac performs these and other due diligence procedures using methods that give
due regard to the size, age, leverage, industry sector, and nature of the
collateral for the loans.
Required
documentation for all Farmer Mac I loans includes a first lien mortgage or deed
of trust, a written promissory note and assurance of Farmer Mac’s lien position
through either a title insurance policy or title opinion from an experienced
real estate attorney in geographic areas where title insurance is not the
industry practice.
As Farmer
Mac develops new Farmer Mac I credit products, it establishes underwriting
guidelines for them. Those guidelines result in industry-specific
measures that meet or exceed the statutory underwriting standards and provide
Farmer Mac the flexibility to deliver the benefits of a secondary market to
farmers, ranchers and rural homeowners in diverse sectors of the rural
economy.
Collateral Valuations
(Appraisals and Evaluations). Farmer Mac has adopted
collateral valuation standards for newly originated loans purchased or placed
under a Farmer Mac I Guaranteed Security or LTSPC. Those
standards require, among other things, that a current valuation be performed, or
has been performed within the preceding 12 months, independently of the credit
decision-making process. In addition, Farmer Mac requires appraisals
to conform to the Uniform Standards of Professional Appraisal Practice
promulgated by the Appraisal Standards Board.
Farmer
Mac’s collateral valuation standards require that the valuation function be
conducted or administered by an individual meeting specific qualification and
competence criteria who:
|
·
|
is
not associated, except by the engagement for the collateral valuation,
with the credit underwriters making the loan decision, though the
appraiser or evaluator and the credit underwriter may be directly or
indirectly employed by a common
employer;
|
|
·
|
receives
no financial or professional benefit of any kind by virtue of the report
content, valuation or credit decision made or based on the valuation
report; and
|
|
·
|
has
no present or contemplated future direct or indirect interest in the
property serving or to serve as
collateral.
|
Farmer
Mac’s collateral valuation standards require uniform reporting of reliable and
credible opinions of the market value based on analyses of comparable property
sales, including consideration of the property’s income producing capacity and,
if relevant, the market’s response to the cost of improvements, as well as
information regarding market trends. For seasoned loans, Farmer Mac
obtains collateral valuation updates as considered necessary in its assessment
of collateral risk determined in the due diligence process. If a
current or updated collateral valuation is required for a seasoned loan, the
collateral valuation standards described above would apply.
Portfolio Diversification
It is Farmer Mac’s policy to diversify
its portfolio of loans held and loans underlying Farmer Mac I Guaranteed
Securities and LTSPCs, both geographically and by agricultural
commodity/product. Farmer Mac directs its marketing efforts toward
agricultural lenders throughout the nation to achieve commodity/product and
geographic diversification in its exposure to credit risk. Farmer Mac
evaluates its credit exposure in particular geographic regions and
commodities/products, adjusted for the credit quality of the loans in those
particular geographic regions or commodity/product groups relative to the total
principal amount of all outstanding loans held and loans underlying Farmer Mac I
Guaranteed Securities and LTSPCs.
Farmer
Mac is not obligated to purchase, or commit to purchase, every loan that meets
its underwriting and collateral valuation standards submitted by an eligible
seller. Farmer Mac may consider other factors, such as its overall
portfolio diversification, commodity and farming forecasts and risk management
objectives, in deciding whether to accept the loans into the Farmer Mac I
program. For example, if industry forecasts indicate possible
weakness in a geographic area or agricultural commodity or product, Farmer Mac
may decide not to purchase or commit to purchase an affected loan as part of
managing its overall portfolio exposure to areas of possible heightened risk
exposure. Because Farmer Mac effectively assumes the credit risk on
all loans under an LTSPC, Farmer Mac’s commodity/product and geographic
diversification disclosures reflect all loans under LTSPCs and any loans that
have been purchased out of LTSPC pools. For information regarding the
diversification of Farmer Mac’s existing portfolio, see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Risk
Management—Credit Risk – Loans” and Note 8 to the consolidated financial
statements.
Sellers
As of
December 31, 2009, Farmer Mac had 307 approved loan sellers eligible to
participate in the Farmer Mac I program, ranging from single-office to
multi-branch institutions, spanning community banks, FCS institutions, mortgage
companies, commercial banks and insurance companies. The increase in
the number of approved Farmer Mac I loan sellers from 256 as of
December 31, 2008 is principally the result of Farmer Mac’s alliance with the
American Bankers Association, as well as lender informational seminars Farmer
Mac conducts in key regional locations and through the internet. In
addition to participating directly in the Farmer Mac I program, some of the
approved loan sellers facilitate indirect participation by other lenders in the
Farmer Mac I program by managing correspondent networks of lenders from which
the approved loan sellers purchase loans to sell to Farmer Mac. As of
December 31, 2009, 202 lenders were participating in one or both of the Farmer
Mac I or Farmer Mac II programs.
To be
considered for approval as a Farmer Mac I seller, a financial institution must
meet the criteria that Farmer Mac establishes. Those criteria include
the following requirements:
|
·
|
own
a requisite amount of Farmer Mac Class A or Class B voting common stock
according to a schedule prescribed for the size and type of
institution;
|
|
·
|
have,
in the judgment of Farmer Mac, the ability and experience to make or
purchase and sell loans eligible for the Farmer Mac I program and service
such loans in accordance with Farmer Mac requirements either through its
own staff or through contractors and
originators;
|
|
·
|
maintain
a minimum adjusted net worth;
and
|
|
·
|
enter
into a Seller/Servicer agreement to comply with the terms of the Farmer
Mac Seller/Servicer Guide, including representations and warranties
regarding the eligibility of the loans and accuracy of loan data provided
to Farmer Mac.
|
Servicing
Farmer Mac generally does not directly
service loans held in its portfolio, although it does act as “master servicer”
for loans underlying Farmer Mac I Guaranteed Securities. Farmer Mac
also may assume direct servicing for defaulted loans. Loans held by
Farmer Mac or underlying Farmer Mac Guaranteed Securities are serviced only by
Farmer Mac-approved entities designated as “central servicers” that have entered
into central servicing contracts with Farmer Mac. Sellers of eligible
mortgage loans sold into the Farmer Mac I program have a right to retain certain
“field servicing” functions (typically direct borrower contacts) and may enter
into contracts with Farmer Mac’s central servicers that specify such servicing
functions. Loans underlying LTSPCs and AgVantage securities are
serviced by the holders of those loans in accordance with those lenders’
servicing procedures, which are reviewed and approved by Farmer Mac before
entering into those transactions.
Farmer
Mac II
General
The Farmer Mac II program was initiated
in 1992 and is authorized under sections 8.0(3) and 8.0(9)(B) of Farmer Mac’s
statutory charter (12 U.S.C. §§ 2279aa(3) and 2279aa(9)(B)), which provide
that:
|
·
|
USDA-guaranteed
portions of loans guaranteed under the Consolidated Farm and Rural
Development Act (7 U.S.C. § 1921 et seq.) are statutorily included in the
definition of loans eligible for Farmer Mac’s secondary market
programs;
|
|
·
|
USDA-guaranteed
portions are exempted from the credit underwriting, collateral valuation,
documentation and other standards that other loans must meet to be
eligible for Farmer Mac programs, and are exempted from any
diversification and internal credit enhancement that may be required of
pools of other loans eligible for Farmer Mac programs;
and
|
|
·
|
Farmer
Mac is authorized to pool and issue Farmer Mac Guaranteed Securities
backed by USDA-guaranteed portions.
|
Until
January 1, 2010, all USDA-guaranteed portions held by Farmer Mac were held in
the form of Farmer Mac II Guaranteed Securities. Since January 2010,
all purchases of USDA-guaranteed portions under the Farmer Mac II program (other
than purchases of USDA-guaranteed portions that back Farmer Mac II Guaranteed
Securities to be sold to third parties) have been, and will continue to be, made
by Farmer Mac’s subsidiary, Farmer Mac II LLC, which is now operating
substantially all of the business related to the Farmer Mac II
program. In the future, Farmer Mac will operate only that part of the
Farmer Mac II program that involves the issuance of Farmer Mac II Guaranteed
Securities, and only to the extent that Farmer Mac is approached or referred by
an investor. Farmer Mac will not issue Farmer Mac II Guaranteed
Securities to Farmer Mac II LLC.
Summary
of Farmer Mac II Transactions
Farmer Mac guarantees the timely
payment of principal and interest on Farmer Mac II Guaranteed Securities backed
by USDA-guaranteed portions. Farmer Mac does not guarantee the
repayment of the USDA-guaranteed portions, only the Farmer Mac II Guaranteed
Securities that are backed by USDA-guaranteed portions.
During
the years ended December 31, 2009, 2008 and 2007, Farmer Mac issued
$346.4 million, $303.9 million and $210.0 million, respectively, of
Farmer Mac II Guaranteed Securities, most of which were retained by Farmer Mac
rather than sold to lenders or other investors. As of
December 31, 2009, 2008 and 2007, $1.2 billion, $1.0 billion and
$946.6 million, respectively, of Farmer Mac II Guaranteed Securities were
outstanding. The following table presents Farmer Mac II activity for
each of the years indicated:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
and retained
|
|
$ |
336,963 |
|
|
$ |
291,335 |
|
|
$ |
204,931 |
|
Purchased
and sold
|
|
|
9,469 |
|
|
|
12,606 |
|
|
|
5,109 |
|
Total
|
|
$ |
346,432 |
|
|
$ |
303,941 |
|
|
$ |
210,040 |
|
The
following table presents the outstanding balance of Farmer Mac II Guaranteed
Securities as of the dates indicated:
|
|
Outstanding Balance of
|
|
|
|
Farmer Mac II Guaranteed
|
|
|
|
Securities as of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
On-balance
sheet
|
|
$ |
1,164,996 |
|
|
$ |
1,013,330 |
|
Off-balance
sheet
|
|
|
34,802 |
|
|
|
30,095 |
|
Total
|
|
$ |
1,199,798 |
|
|
$ |
1,043,425 |
|
As of
December 31, 2009, Farmer Mac had experienced no credit losses on any of its
Farmer Mac II Guaranteed Securities. As of December 31, 2009, Farmer
Mac had outstanding $0.6 million of principal and interest advances on
Farmer Mac II Guaranteed Securities, compared to $0.3 million as of
December 31, 2008 and $0.4 million as of December 31,
2007.
United States Department of Agriculture
Guaranteed Loan Programs
The United States Department of
Agriculture (“USDA”), acting through its various agencies, currently administers
the federal rural credit programs first developed in the
mid-1930s. The USDA makes direct loans and guarantees portions of
loans made and serviced by USDA-qualified lenders for various
purposes. The USDA’s guarantee is supported by the full faith and
credit of the United States. USDA-guaranteed portions represent up to
95 percent of the principal amount of guaranteed loans. Through its
Farmer Mac II program, Farmer Mac is one of several competing purchasers of
USDA-guaranteed portions of farm ownership loans, farm operating loans, business
and industry loans, community facilities loans and other loans that are fully
guaranteed as to principal and interest by the USDA.
USDA
Guarantees. Each USDA guarantee is a full faith and credit
obligation of the United States and becomes enforceable if a lender fails to
repurchase the USDA-guaranteed portion from its owner within 30 days after
written demand from the owner when:
|
·
|
the
borrower under the guaranteed loan is in default not less than
60 days in the payment of any principal or interest due on the
USDA-guaranteed portion; or
|
|
·
|
the
lender has failed to remit to the owner the payment made by the borrower
on the USDA-guaranteed portion or any related loan subsidy within
30 days after the lender’s receipt of the
payment.
|
If the lender does not repurchase the
USDA-guaranteed portion as provided above, the USDA is required to purchase the
unpaid principal balance of the USDA-guaranteed portion together with accrued
interest (including any loan subsidy) to the date of purchase, less the
servicing fee, within 30 days after written demand upon the USDA by the
owner. While the USDA guarantee will not cover the note interest to
the owner on USDA-guaranteed portions accruing after 90 days from the date
of the original demand letter of the owner to the lender requesting repurchase,
Farmer Mac has established procedures to require prompt demand on the USDA to
purchase USDA-guaranteed portions that have not been repurchased by the
lender.
If, in the opinion of the lender (with
the concurrence of the USDA) or in the opinion of the USDA, repurchase of the
USDA-guaranteed portion is necessary to service the related guaranteed loan
adequately, the owner will sell the USDA-guaranteed portion to the lender or
USDA for an amount equal to the unpaid principal balance and accrued interest
(including any loan subsidy) on such USDA-guaranteed portion less the lender’s
servicing fee. Federal regulations prohibit the lender from
repurchasing USDA-guaranteed portions for arbitrage purposes.
Lenders. Any
lender authorized by the USDA to obtain a USDA guarantee on a loan may be a
seller in the Farmer Mac II program. During 2009, 158 sellers,
consisting mostly of community and regional banks, sold USDA-guaranteed portions
to Farmer Mac under the Farmer Mac II program, as compared to 187 sellers that
did so during 2008. In the aggregate, 202 sellers were participating
directly in one or both of the Farmer Mac I or Farmer Mac II programs during
2009.
Loan
Servicing. The lender on each guaranteed loan is required by
regulation to retain the unguaranteed portion of the guaranteed loan, to service
the entire underlying guaranteed loan, including the USDA-guaranteed portion,
and to remain mortgagee and/or secured party of record. The
USDA-guaranteed portion and the unguaranteed portion of the underlying
guaranteed loan are to be secured by the same security with equal lien
priority. The USDA-guaranteed portion cannot be paid later than, or
in any way be subordinated to, the related unguaranteed portion.
Rural
Utilities
General
In May
2008, Congress expanded Farmer Mac’s authority to permit purchases, and
guarantees of securities backed by, rural electric and telephone loans made by
cooperative lenders to borrowers who have received or are eligible to receive
loans under the Rural Electrification Act of 1936 (“REA”). The REA is
administered by the Rural Utilities Service (“RUS”), an agency of the
USDA. None of Farmer Mac’s business to date under the Rural Utilities
program has involved telecommunications loans. Farmer Mac’s Rural
Utilities program encompasses loan purchases, Farmer Mac Guaranteed Securities –
Rural Utilities, and issuance of LTSPCs, in each case with respect to eligible
rural utilities loans, although no LTSPCs have been issued to date under the
Rural Utilities program.
Summary
of Rural Utilities Transactions
During
the year ended December 31, 2009, Farmer Mac added $1.7 billion of new
business under the Rural Utilities program. As of December 31,
2009, the aggregate outstanding principal balance of rural utilities loans held
and of Farmer Mac Guaranteed Securities – Rural Utilities was
$2.1 billion.
The
following table summarizes new business activity under Farmer Mac’s Rural
Utilities program for each of the years ended December 31, 2009, 2008 and
2007.
|
|
For
the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
On-balance
sheet:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
28,644 |
|
|
$ |
— |
|
|
$ |
— |
|
Guaranteed
Securities
|
|
|
— |
|
|
|
430,676 |
|
|
|
— |
|
AgVantage
|
|
|
1,695,000 |
|
|
|
1,130,000 |
|
|
|
— |
|
Off-balance
sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
AgVantage
|
|
|
16,009 |
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
1,739,653 |
|
|
$ |
1,560,676 |
|
|
$ |
— |
|
The
following table presents the outstanding balances of rural utilities loans held
and of Farmer Mac Guaranteed Securities – Rural Utilities as of the dates
indicated:
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
On-balance
sheet:
|
|
|
|
|
|
|
Loans
|
|
$ |
28,644 |
|
|
$ |
— |
|
Guaranteed
Securities
|
|
|
412,948 |
|
|
|
424,941 |
|
AgVantage
|
|
|
1,675,000 |
|
|
|
630,000 |
|
Total
on-balance sheet
|
|
$ |
2,116,592 |
|
|
$ |
1,054,941 |
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet:
|
|
|
|
|
|
|
|
|
AgVantage
|
|
$ |
14,240 |
|
|
$ |
— |
|
Total
|
|
$ |
2,130,832 |
|
|
$ |
1,054,941 |
|
All of
the Farmer Mac Guaranteed Securities – Rural Utilities in the Rural Utilities
program consisted of securities representing either (1) direct interests in
eligible rural electric loans or (2) general obligations of the National
Rural Utilities Cooperative Finance Corporation (“National Rural”) secured by
eligible rural electric loans. As of December 31, 2009, National
Rural held 7.7 percent of Farmer Mac’s outstanding Class A voting common
stock (5.2 percent of total voting shares) and 100 percent of Farmer Mac’s
outstanding Series C preferred stock.
Loan Eligibility
To be
eligible for Farmer Mac’s Rural Utilities program, a rural utilities loan (or an
interest in such a loan) is required to:
|
·
|
be
for an electric or telephone facility by a cooperative lender to a
borrower that has received or is eligible to receive a loan under the
REA;
|
|
·
|
be
performing and not more than 30 days delinquent;
and
|
|
·
|
meet
Farmer Mac’s rural utilities underwriting standards described in more
detail below.
|
Underwriting
In order
for Farmer Mac to manage its credit risk, to mitigate the risk of loss from
borrower defaults and to provide guidance concerning the management,
administration and underwriting to all participating sellers in its programs,
Farmer Mac has adopted credit underwriting standards that vary by type of loan,
be it to electric distribution cooperatives or electric generation and
transmission (“G&T”) cooperatives, and program product under which the loan
is brought to Farmer Mac. These standards are based on rural utility
industry norms for similar loans and are designed to assess the creditworthiness
of the borrower, as well as the risk to Farmer Mac either as the direct
purchaser of rural utilities loans or as the purchaser of or the guarantor of
securities representing interests in those loans or in obligations secured by
pools of those loans. Farmer Mac reviews sellers’ credit submissions
and analyzes borrowers’ audited financial statements and financial and operating
reports filed with RUS and the Federal Energy Regulatory Commission to confirm
that the Corporation’s underwriting standards for rural utilities
loans are met. Further, Farmer Mac requires sellers of rural
utilities loans to make representations and warranties regarding the conformity
of eligible loans to these standards and any other requirements the Corporation
may impose from time to time.
Farmer
Mac has developed different underwriting standards for rural utilities loans
that depend on whether direct or indirect credit exposure is assumed on a loan
and whether the borrower is an electric distribution cooperative or a G&T
cooperative. Farmer Mac’s credit underwriting standards for all rural
utilities loans on which it assumes direct credit exposure (i.e., with no
general obligation of a lender involved in the transaction) through the Rural
Utilities program require:
|
·
|
each
electric or telephone cooperative to have received or be eligible to
receive a loan under the REA;
|
|
·
|
each
borrower to demonstrate sufficient cash-flow to adequately service the
loan; and
|
|
·
|
each
borrower’s leverage position to be adequate based on industry
standards.
|
In the
case of a newly-originated loan to a distribution cooperative on which Farmer
Mac assumes direct credit exposure, the borrower must, among other criteria set
forth in Farmer Mac’s credit underwriting standards, meet the following ratios
based on the average of the most recent three years:
|
·
|
the
ratio of long-term debt to “net utility plant” does not exceed
90 percent;
|
|
·
|
the
modified debt service coverage ratio equals or exceeds 1.35;
and
|
|
·
|
the
ratio of equity to total assets equals or exceeds 20
percent.
|
The “net
utility plant” means the real and tangible personal property of a rural
utilities borrower constituting the long-term assets of property, plant, and
equipment (PPE), less depreciation computed in accordance with applicable
accounting requirements.
In the
case of a newly-originated loan to a G&T cooperatives on which Farmer Mac
assumes direct credit exposure, the borrower must, among other criteria set
forth in Farmer Mac’s credit underwriting standards, meet the following ratios
(based on the average of the most recent three years):
|
·
|
the
equity to total assets ratio equals or exceeds
10 percent;
|
|
·
|
the
modified debt service coverage ratio equals or exceeds
1.15;
|
|
·
|
the
debt to EBITDA ratio does not exceed 12;
and
|
|
·
|
the
equity to total capitalization ratio equals or exceeds
25 percent.
|
Farmer
Mac’s credit underwriting standards for all AgVantage transactions under the
Rural Utilities program, in which Farmer Mac has indirect credit exposure on
loans securing the general obligation of a lender, require:
|
·
|
the
credit rating of the counterparty issuing the general obligation to be at
least investment grade as determined by an NRSRO, or equivalent as
determined by Farmer Mac analysis;
|
|
·
|
the
collateral to be comprised of loans, or interests in loans, for electric
or telephone facilities by a cooperative lender to a borrower that has
received or is eligible to receive a loan under the
REA;
|
|
·
|
the
collateral to be performing and not more than 30 days delinquent;
and
|
|
·
|
the
collateralization (consisting of current, performing loans) to be
maintained at the contractually prescribed level, in an amount at least
equal to the outstanding principal amount of the
security.
|
In
addition, the same underwriting standards that apply to loans made to
distribution cooperatives on which Farmer Mac assumes direct credit exposure
also apply to loans made to distribution cooperatives that secure the general
obligation of the lender in AgVantage transactions (based on the average of the
most recent three years):
|
·
|
the
ratio of long-term debt to net utility plant does not exceed
90 percent;
|
|
·
|
the
modified debt service coverage ratio equals or exceeds 1.35;
and
|
|
·
|
the
ratio of equity to total assets equals or exceeds 20
percent.
|
For loans
made to G&T cooperatives that secure the general obligation of the lender in
AgVantage transactions, the G&T cooperative must either (1) have a rating
from an NRSRO of BBB- (or equivalent) or better or (2) meet the following
underwriting standards (based on the average of the most recent three
years):
|
·
|
the
equity to total capitalization ratio equals or exceeds
25 percent;
|
|
·
|
the
modified debt service coverage ratio equals or exceeds 1.10;
and
|
|
·
|
the
equity to total assets ratio equals or exceeds 10
percent.
|
The due
diligence Farmer Mac performs before purchasing, guaranteeing securities backed
by, or committing to purchase rural utilities loans includes:
|
·
|
evaluation
of loan database information to determine conformity to Farmer Mac’s
underwriting standards;
|
|
·
|
confirmation
that loan file data conforms to database
information;
|
|
·
|
validation
of supporting credit information in the loan files;
and
|
|
·
|
review
of loan documentation.
|
Farmer
Mac is not obligated to purchase, or commit to purchase, every rural utilities
loan that meets it underwriting and collateral valuation standards submitted to
Farmer Mac. Farmer Mac may consider other factors, such as portfolio
diversification, in deciding whether to accept the loans into the Farmer Mac
Rural Utilities program.
Collateral
It is
customary in loans to distribution cooperatives and G&T cooperatives for the
lender to take a security interest in substantially all of the borrower’s
assets. In cases where Farmer Mac purchases a loan and another rural
utility lender has a lien on all assets, Farmer Mac verifies that a lien
accommodation results in either a shared first lien or a first lien in favor of
Farmer Mac. In cases where debt indentures are utilized, Farmer Mac
determines if available collateral is adequate to support the loan program and
Farmer Mac’s investment.
Servicing
Farmer
Mac generally does not directly service the rural utilities loans held in its
portfolio or the loans underlying Farmer Mac Guaranteed Securities – Rural
Utilities. Those loans are serviced by a servicer designated by
Farmer Mac. Rural utilities loans pledged to secure AgVantage
securities are serviced by the holders of those loans in accordance with those
lenders’ servicing procedures, which are reviewed and approved by Farmer Mac
before entering into those transactions. National Rural currently
services all of the rural utilities loans in Farmer Mac’s
portfolio.
Sellers
The
statutory authorities that authorize Farmer Mac to become involved in rural
utilities lending specify that the loans be sourced from a cooperative
lender. Currently the the only two rural utilities lenders that are
cooperatives are National Rural and CoBank, ACB (“CoBank”), an institution of
the FCS. As of December 31, 2009, these cooperatives had
approximately $17.8 billion in loans outstanding to distribution
cooperatives and $6.1 billion in loans outstanding to G&T
cooperatives.
Portfolio
Diversification
It is Farmer Mac’s policy to diversify
its rural utilities portfolio of loans held and loans underlying Farmer Mac
Guaranteed Securities – Rural Utilities geographically. National
Rural and CoBank each lends throughout the entire United
States. Farmer Mac analyzes the geographic distribution of loans to
cooperatives and considers regional concentration levels in connection with its
business activities under the Rural Utilities program.
The
maximum cumulative direct credit exposure on eligible rural utilities loans
(e.g., purchases of loans or securities representing interests in loans) to any
one borrower or related borrowers is $22.5 million. For indirect
credit exposures on rural utilities loans (e.g., AgVantage transactions)
the maximum loan exposure to any one borrower or related borrowers is
$50.0 million, with the amount of any direct exposure to a borrower also
counting toward the $50.0 million limit. Farmer Mac’s cumulative
exposure to loans to electric G&T facilities, whether through direct or
indirect credit exposure, is limited to no more than 20 percent of Farmer Mac’s
cumulative direct and indirect exposure to all rural utilities
loans. Additionally, Farmer Mac’s cumulative direct credit exposure
to G&T facilities is limited to no more than 10 percent of Farmer Mac’s
cumulative direct and indirect exposure to all Rural Utilities
loans.
Funding
of Guarantee and LTSPC Obligations
The principal sources of funding for
the payment of Farmer Mac’s obligations under its guarantees and LTSPCs are the
fees for its guarantees and commitments, net interest income and the proceeds of
debt issuances. Farmer Mac satisfies its obligations under LTSPCs and
its guarantees by purchasing defaulted loans out of LTSPCs and from the related
trusts for Farmer Mac Guaranteed Securities. Farmer Mac typically
recovers a significant portion of the value of defaulted loans purchased either
through borrower payments, loan payoffs, payments by third parties or
foreclosure and sale of the property securing the loans. Ultimate
losses arising from Farmer Mac’s guarantees and commitments are reflected in the
Corporation’s charge-offs against its allowance for losses and gains and losses
on the sale of real estate owned (“REO”), which consists of real estate acquired
through foreclosure. During 2009, Farmer Mac’s net charge-offs were
$7.5 million, compared to $5.3 million during 2008.
Farmer
Mac’s charter requires Farmer Mac to set aside in a segregated account a portion
of the guarantee fees it receives from its guarantee activities. That
segregated account must be exhausted before Farmer Mac may issue obligations to
the U.S. Treasury against the $1.5 billion that Farmer Mac is
statutorily authorized to borrow from the U.S. Treasury to fulfill its guarantee
obligations. That borrowing authority is not intended to be a routine
funding source and has never been used. As of December 31, 2009, the
amount in that reserve account was $64.6 million. Farmer Mac’s
total outstanding guarantees and LTSPCs exceed the cumulative amount (1) held as
an allowance for losses, (2) the amount in the segregated account, and (3) the
amount Farmer Mac may borrow from the U.S. Treasury; however, Farmer Mac does
not expect its obligations under its guarantees and LTSPCs to exceed amounts
available to satisfy those obligations. For information regarding
Farmer Mac’s allowance for losses, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Risk Management—Credit Risk –
Loans” and Note 2(j) and Note 8 to the consolidated financial
statements. For a more detailed discussion of Farmer Mac’s borrowing
authority from the U.S. Treasury, see “Business—Farmer Mac’s Authority to Borrow
from the U.S. Treasury.”
Financing
Debt Issuance
Section
8.6(e) of Farmer Mac’s statutory charter (12 U.S.C. § 2279aa-6(e))
authorizes Farmer Mac to issue debt obligations to purchase eligible loans,
USDA-guaranteed portions and Farmer Mac Guaranteed Securities and to maintain
reasonable available cash and cash equivalents for business operations,
including adequate liquidity. Farmer Mac funds its purchases of
program and non-program assets primarily by issuing debt obligations of various
maturities in the public capital markets. Debt obligations issued by
Farmer Mac include discount notes and fixed and floating rate medium-term notes,
including callable notes. Farmer Mac also issues discount notes and
medium-term notes to obtain funds to finance its investments, transaction costs,
guarantee payments and LTSPC purchase obligations.
The
interest and principal on Farmer Mac’s debt are not guaranteed by and do not
constitute debts or obligations of FCA or the United States or any agency or
instrumentality of the United States other than Farmer Mac. Farmer
Mac is an institution of the FCS, but is not liable for any debt or obligation
of any other institution of the FCS. Likewise, neither the FCS nor
any other individual institution of the FCS is liable for any debt or obligation
of Farmer Mac. Income to the purchaser of a Farmer Mac discount note
or medium-term note is not exempt under federal law from federal, state or local
taxation. The Corporation’s discount notes and medium-term notes are
not currently rated by an NRSRO.
Farmer
Mac’s board of directors has authorized the issuance of up to $7.0 billion
of discount notes and medium-term notes (of which $5.6 billion was
outstanding as of December 31, 2009), subject to periodic review by Farmer
Mac’s board of directors of the adequacy of that level relative to Farmer Mac’s
borrowing needs. 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 that comply with
its Investment Regulations, including dollar amount, issuer concentration and
credit quality limitations. Farmer Mac’s regular debt issuance
supports its access to the capital markets, and Farmer Mac’s non-program
investment assets provide an alternative source of funds should market
conditions be unfavorable. Farmer Mac’s current policies authorize
non-program investments in:
|
·
|
obligations
of the United States;
|
|
·
|
obligations
of government-sponsored enterprises
(“GSEs”);
|
|
·
|
international
and multilateral development bank
obligations;
|
|
·
|
money
market instruments;
|
|
·
|
diversified
investment funds;
|
|
·
|
asset-backed
securities;
|
|
·
|
corporate
debt securities; and
|
For more
information about Farmer Mac’s outstanding investments and indebtedness, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Balance Sheet Review” and Note 4 and Note 7 to the consolidated
financial statements.
Equity Issuance
Farmer Mac’s charter authorizes the
Corporation to issue voting common stock, non-voting common stock and non-voting
preferred stock. Only banks, other financial entities, insurance
companies and institutions of the FCS eligible to participate in one or more of
Farmer Mac’s programs may hold voting common stock. 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 Class A voting common
stock. There are no restrictions on the maximum holdings of Class B
voting common stock. No ownership restrictions apply to Class C
non-voting common stock or preferred stock, and they are freely
transferable.
Upon
liquidation, dissolution or winding up of the business of Farmer Mac, after
payment and provision for payment of outstanding debt of the Corporation, the
holders of shares of preferred stock would be paid in full at par value, plus
all accrued dividends, before the holders of shares of common stock received any
payment. The dividend rights of all three classes of the
Corporation’s common stock are the same, and dividends may be paid on common
stock only when, as, and if declared by Farmer Mac’s board of directors in its
sole discretion, subject to the payment of dividends on outstanding preferred
stock.
As of
December 31, 2009, the following shares of Farmer Mac common and preferred stock
were outstanding:
|
·
|
1,030,780
shares of Class A voting common
stock;
|
|
·
|
500,301 shares
of Class B voting common stock;
|
|
·
|
8,610,918 shares
of Class C non-voting common stock;
|
|
·
|
150,000
shares of Series B non-voting redeemable cumulative preferred stock;
and
|
|
·
|
57,578
shares of Series C non-voting redeemable cumulative preferred
stock.
|
Farmer
Mac may obtain additional capital from future issuances of voting and non-voting
common stock and non-voting preferred stock.
The
following table presents the dividends declared on the common stock during and
subsequent to 2009:
Date
|
|
Per
|
|
For
|
|
|
Dividend
|
|
Share
|
|
Holders Of
|
|
Date
|
Declared
|
|
Amount
|
|
Record As Of
|
|
Paid
|
|
|
|
|
|
|
|
March
11, 2009
|
|
$ |
0.05 |
|
March
24, 2009
|
|
April
3, 2009
|
June
3, 2009
|
|
|
0.05 |
|
June
15, 2009
|
|
June
30, 2009
|
August
6, 2009
|
|
|
0.05 |
|
September
15, 2009
|
|
September
30, 2009
|
December
2, 2009
|
|
|
0.05 |
|
December
15, 2009
|
|
December
31, 2009
|
February
4, 2010
|
|
|
0.05 |
|
March
15, 2010
|
|
*
|
* The
dividend declared on February 4, 2010 is scheduled to be paid on March 31,
2010.
Farmer
Mac’s ability to declare and pay common stock dividends could be restricted if
it were to fail to comply with its regulatory capital
requirements. See Note 9 to the consolidated financial statements and
“Business—Government Regulation of Farmer Mac—Regulation—Capital
Standards—Enforcement Levels.”
Series B Preferred
Stock
On September 30, 2008, Farmer Mac
issued 60,000 shares of its newly issued Series B-1 Senior Cumulative Perpetual
Preferred Stock (“Initial Series B-1 Preferred Stock”) and 5,000 shares of its
newly issued Series B-2 Senior Cumulative Perpetual Preferred Stock (“Series B-2
Preferred Stock”), each having a par value and initial liquidation preference of
$1,000 per share (collectively, the Initial Series B-1 Preferred Stock and
Series B-2 Preferred Stock, the “Initial Series B Preferred Stock”) for an
aggregate purchase price of $65.0 million, or $1,000 per
share. Farmer Mac incurred $4.0 million of direct costs related
to the issuance of the Initial Series B Preferred Stock, which reduced the
amount of mezzanine equity recorded as of September 30, 2008.
On
December 15, 2008, Farmer Mac issued 70,000 shares of its newly issued Series
B-3 Senior Cumulative Perpetual Preferred Stock (“Series B-3 Preferred Stock”)
having a par value and initial liquidation preference of $1,000 per share for a
purchase price of $70.0 million and an additional 15,000 shares of Series
B-1 Preferred Stock (the “Supplemental Series B-1 Preferred Stock”) for a
purchase price of $15.0 million. Farmer Mac incurred
$1.8 million of direct costs related to the issuance of the Series B-3
Preferred Stock and Supplemental Series B-1 Preferred Stock, which reduced the
amount of mezzanine equity recorded as of December 31, 2008. The
Initial Series B Preferred Stock, the Supplemental Series B-1 Preferred Stock
and the Series B-3 Preferred Stock are together referred to as the “Series B
Preferred Stock.”
On January 25, 2010, Farmer Mac used
part of the proceeds from the sale of $250.0 million of Farmer Mac II LLC’s
preferred stock to repurchase and retire all $150.0 million of the
outstanding Series B Preferred Stock. After consideration of the
consolidated tax benefits to Farmer Mac, the net effective cost of the new $250
million of preferred stock is 5.77 percent per year, which is $3.6 million less
per year than the cost of the $150 million of Series B Preferred Stock based on
its 2010 dividend rate of 12 percent, which was scheduled to increase to 14
percent at the end of 2010 and 16 percent in 2011. Prior to its
retirement in January 2010, the Series B Preferred Stock ranked senior to Farmer
Mac’s outstanding Class A voting common stock, Class B voting common stock,
Class C non-voting common stock and Series C Preferred Stock with respect to
dividends, distributions upon a change in control, liquidation, and dissolution
or winding up of Farmer Mac. Each series of Series B Preferred Stock
ranked pari passu with
the others. See Note 15 to the consolidated financial statements for
more information regarding the private offering and terms of the preferred stock
issued by Farmer Mac II LLC.
The
following table presents the dividends declared on Series B preferred stock
during and subsequent to 2009:
|
|
Per
|
|
|
|
|
|
|
Date
|
|
Share
|
|
For
|
|
For
|
|
|
Dividend
|
|
Amount
|
|
Period
|
|
Period
|
|
Date
|
Declared
|
|
Series B-1
|
|
|
Series B-2
|
|
|
Series B-3
|
|
Beginning
|
|
Ending
|
|
Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
28, 2009
|
|
$ |
25.00 |
|
|
$ |
25.00 |
|
|
$ |
25.00 |
|
January
1, 2009
|
|
March
31, 2009
|
|
March
31, 2009
|
June
3, 2009
|
|
|
25.00 |
|
|
|
25.00 |
|
|
|
25.00 |
|
April
1, 2009
|
|
June
30, 2009
|
|
June
30, 2009
|
August
6, 2009
|
|
|
25.00 |
|
|
|
25.00 |
|
|
|
25.00 |
|
July
1, 2009
|
|
September 30, 2009
|
|
September 30, 2009
|
December 2, 2009
|
|
|
30.00 |
|
|
|
30.00 |
|
|
|
25.00 |
|
October
1, 2009
|
|
December
31, 2009
|
|
December
31, 2009
|
*
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
January
1, 2010
|
|
January
25, 2010
|
|
January
25,
2010
|
* On
January 25, 2010 all of the outstanding Series B Preferred Stock was
retired. The price paid for the Series B
Preferred Stock included accrued dividends of $8.33 per share through the
purchase date.
Series C Preferred
Stock
In fourth
quarter 2008, Farmer Mac began to require its business partners to purchase an
equity interest in Farmer Mac in the form of shares of Farmer Mac’s
Series C Non-Voting Cumulative Preferred Stock (“Series C Preferred Stock”)
in connection with transactions involving pools of loans in excess of
$20.0 million. The amount of the required investment was equal
to 1.25 percent greater than the Corporation’s required statutory minimum
capital for the pool of loans being accepted by Farmer Mac. The
requirement was instituted to ensure that Farmer Mac had adequate capital to
support new business in fulfilling its mission, In December 2009,
Farmer Mac eliminated the requirement to purchase Series C Preferred Stock in
connection with new business. With the additional regulatory capital
resulting from the issuance of preferred stock by Farmer Mac II LLC on January
25, 2010, Farmer Mac believes it currently has sufficient capital to support new
business without requiring further purchases of equity by its
customers.
Series C
Preferred Stock has a par value of $1,000 per share, an initial liquidation
preference of $1,000 per share and shall consist of up to 75,000 shares. Series
C Preferred Stock ranks senior to Farmer Mac’s outstanding Class A voting common
stock, Class B voting common stock, Class C non-voting common stock and any
other common stock of Farmer Mac issued in the future. Series C
Preferred Stock ranked junior to Farmer Mac’s Series B Preferred Stock until the
Series B Preferred Stock’s retirement in January 2010.
Dividends
on Series C Preferred Stock compound quarterly at an annual rate of
5.0 percent of the then-applicable Liquidation Preference per
share. The annual rate will increase to (1) 7.0 percent on
the January 1st
following the fifth anniversary of the applicable issue date and (2)
9.0 percent on the January 1st
following the tenth anniversary of the applicable issue
date. Dividends on Series C Preferred Stock will accrue and
cumulate from the applicable issue date whether or not declared by the board of
directors and will be payable quarterly in arrears out of legally available
funds when and as declared by the board of directors on each dividend payment
date—March 31, June 30, September 30 and December 31 of each year,
beginning March 31, 2009. Farmer Mac may pay dividends on
Series C Preferred Stock without paying dividends on any outstanding class
or series of stock that ranks junior to Series C Preferred Stock.
Farmer
Mac has the right, but not the obligation, to redeem some or all of the issued
and outstanding shares of Series C Preferred Stock at a price equal to the
then-applicable Liquidation Preference beginning on the first anniversary of the
applicable issue date and on each subsequent dividend payment
date. Farmer Mac’s redemption right with respect to Series C
Preferred Stock is subject to receipt of the prior written approval of FCA, if
required. The following table presents the dividends declared on
Series C preferred stock during and subsequent to 2009.
Date
|
|
Per
|
|
For
|
|
For
|
|
|
Dividend
|
|
Share
|
|
Period
|
|
Period
|
|
Date
|
Declared
|
|
Amount
|
|
Beginning
|
|
Ending
|
|
Paid
|
|
|
|
|
|
|
|
|
|
February
28, 2009
|
|
$ |
12.50 |
|
January
1, 2009
|
|
March
31, 2009
|
|
March
31, 2009
|
June
3, 2009
|
|
|
12.50 |
|
April
1, 2009
|
|
June
30, 2009
|
|
June
30, 2009
|
August
6, 2009
|
|
|
12.50 |
|
July
1, 2009
|
|
September
30, 2009
|
|
September
30, 2009
|
December
2, 2009
|
|
|
12.50 |
|
October
1, 2009
|
|
December
31, 2009
|
|
December
31, 2009
|
February
4, 2010
|
|
|
12.50 |
|
January
1, 2010
|
|
March
31, 2010
|
|
*
|
* The
dividend declared on February 4, 2010 is scheduled to be paid on March 31,
2010.
During
2009, Farmer Mac sold 48,378 shares of Series C Preferred Stock resulting in
57,578 shares of Series C Preferred Stock outstanding as of December 31,
2009.
Common Stock
Repurchases
There
were no common stock repurchases during 2009. During 2008 and 2007,
Farmer Mac repurchased
31,691 and 1,086,541 shares, respectively, of its Class
C non-voting common stock at an average price of $26.13 and
$26.61 per share,
respectively, pursuant to the Corporation’s stock repurchase
programs. These repurchases reduced the Corporation’s stockholders’
equity by approximately $0.8 million and
$29.0 million,
respectively. The aggregate number of shares purchased by
Farmer Mac under the stock repurchase programs reached the maximum number of
authorized shares during first quarter 2008, thereby terminating the program
according to its terms. All of the shares repurchased under Farmer
Mac’s stock repurchase programs were purchased in open market transactions and
were retired to become authorized but unissued shares available for future
issuance.
FARMER
MAC’S AUTHORITY TO BORROW FROM THE U.S. TREASURY
Farmer Mac may issue obligations to the
U.S. Treasury in a cumulative amount not to exceed
$1.5 billion. The proceeds of those obligations may be used
solely for the purpose of fulfilling Farmer Mac’s guarantee obligations under
the Farmer Mac I, Farmer Mac II, and Rural Utilities
programs. Farmer Mac’s charter provides that the U.S. Treasury is
required to purchase those obligations of the Corporation if Farmer Mac
certifies that:
|
·
|
a
portion of the guarantee fees assessed by Farmer Mac has been set aside in
a segregated account as a reserve against losses arising out of Farmer
Mac’s guarantee activities in an amount determined by Farmer Mac’s board
of directors to be necessary and such reserve has been exhausted (that
amount was $64.6 million and $63.2 million as of December 31, 2009 and
2008, respectively); and
|
|
·
|
the
proceeds of such obligations are needed to fulfill Farmer Mac’s guarantee
obligations.
|
Such
obligations would bear interest at a rate determined by the U.S. Treasury,
taking into consideration the average rate on outstanding marketable obligations
of the United States as of the last day of the last calendar month ending before
the date of the purchase of the obligations from Farmer Mac, and would be
required to be repurchased from the U.S. Treasury by Farmer Mac within a
“reasonable time.” As of December 31, 2009, Farmer Mac had not
utilized this borrowing authority and does not expect to utilize this borrowing
authority in the near future.
The United States government does not
guarantee payments due on Farmer Mac Guaranteed Securities, funds invested in
the equity or debt securities of Farmer Mac, any dividend payments on shares of
Farmer Mac stock or the profitability of Farmer Mac.
GOVERNMENT
REGULATION OF FARMER MAC
General
In 1987, Congress created Farmer Mac in
the aftermath of the collapse of the agricultural credit delivery
system. Farmer Mac’s primary committees of jurisdiction in the U.S.
House of Representatives and the U.S. Senate—the Agriculture Committees—added
requirements for Farmer Mac that had not been included in any of the other
statutes establishing other GSEs.
Unlike
the other existing GSEs at the time, Farmer Mac’s initial 1987 legislation
required the Corporation to be regulated by an independent regulator, the Farm
Credit Administration, which has the authority to regulate Farmer Mac’s safety
and soundness. The statute creating Farmer Mac expressly requires
that qualified loans meet minimum credit and appraisal standards that represent
sound loans to profitable farm businesses. The enabling legislation
also required Farmer Mac to comply with the periodic reporting requirements of
the SEC, including quarterly reports on the financial status of the Corporation
and interim reports when there are significant developments. Farmer
Mac’s statutory charter also requires offerings of Farmer Mac Guaranteed
Securities to be registered under the Securities Act unless an exemption for an
offering is available.
Since
Farmer Mac’s creation, Congress has amended Farmer Mac’s charter four
times:
|
·
|
in
1990 to create the Farmer Mac II
program;
|
|
·
|
in
1991 to clarify Farmer Mac’s authority to purchase its guaranteed
securities, establish OSMO as Farmer Mac’s financial regulator and set
minimum regulatory capital requirements for Farmer
Mac;
|
|
·
|
in
1996 to remove certain barriers to and restrictions on Farmer Mac’s
operations to be more competitive (e.g., allowing Farmer Mac to buy loans
directly from lenders and issue guaranteed securities representing 100% of
the principal of the purchased loans and modifying capital requirements);
and
|
|
·
|
in
2008 to authorize Farmer Mac to purchase, and guarantee securities backed
by, loans made by cooperative lenders to borrowers to finance
electrification and telecommunications systems in rural
areas.
|
Farmer
Mac’s authorities and regulatory structure were not revised by subsequent
legislation adopted in 2008 to regulate other GSEs.
Regulation
Office of Secondary Market Oversight
(OSMO)
As an institution of the FCS, Farmer
Mac (including its subsidiaries) is subject to the regulatory authority of
FCA. FCA, acting through OSMO, has general regulatory and enforcement
authority over Farmer Mac, including the authority to promulgate rules and
regulations governing the activities of Farmer Mac and to apply its general
enforcement powers to Farmer Mac and its activities. The Director of
OSMO, who is selected by and reports to the FCA board, is responsible for the
examination of Farmer Mac and the general supervision of the safe and sound
performance by Farmer Mac of the powers and duties vested in it by Farmer Mac’s
charter. The charter requires an annual examination of the financial
transactions of Farmer Mac and authorizes FCA to assess Farmer Mac for the cost
of its regulatory activities, including the cost of any
examination. Farmer Mac is required to file quarterly reports of
condition with FCA.
Capital Standards
General. Farmer
Mac’s charter establishes three capital standards for Farmer Mac:
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Statutory
minimum capital requirement – Farmer Mac’s minimum capital level is an
amount of core capital (stockholders’ equity less accumulated other
comprehensive income/(loss) plus mezzanine equity) 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 Farmer Mac’s
aggregate off-balance sheet obligations, specifically
including:
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o
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the
unpaid principal balance of outstanding Farmer Mac Guaranteed
Securities;
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instruments
issued or guaranteed by Farmer Mac that are substantially equivalent to
Farmer Mac Guaranteed Securities, including LTSPCs;
and
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other
off-balance sheet obligations of Farmer
Mac.
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Statutory
critical capital requirement – Farmer Mac’s critical capital level is an
amount of core capital equal to 50 percent of the total minimum capital
requirement at that time.
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Risk-based
capital – The charter directs FCA to establish a risk-based capital stress
test for Farmer Mac, using specified stress-test
parameters.
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Farmer
Mac is required to comply with the higher of the minimum capital requirement or
the risk-based capital requirement.
The
risk-based capital stress test promulgated by FCA is intended to determine the
amount of regulatory capital (core capital plus the allowance for losses, but
excluding the valuation allowance for REO) that Farmer Mac would need to
maintain positive capital during a ten-year period in which:
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annual
losses occur at a rate of default and severity “reasonably related” to the
rates of the highest sequential two years in a limited U.S. geographic
area; and
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interest
rates increase to a level equal to the lesser of 600 basis points or
50 percent of the ten-year U.S. Treasury rate, and interest rates remain
at such level for the remainder of the
period.
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The
risk-based capital stress test then adds an additional 30 percent to the
resulting capital requirement for management and operational
risk. FCA promulgated a revised risk-based capital stress test that
became effective July 25, 2008.
As of
December 31, 2009, Farmer Mac’s minimum and critical capital requirements were
$217.0 million and $108.5 million, respectively, and its actual core
capital level was $337.2 million, $120.2 million above the minimum
capital requirement and $228.7 million above the critical capital
requirement. Based on the risk-based capital stress test, Farmer
Mac’s risk-based capital requirement as of December 31, 2009 was
$35.9 million and Farmer Mac’s regulatory capital of $351.3 million
exceeded that amount by approximately
$315.4 million. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Capital Requirements” for a presentation of Farmer Mac’s current
regulatory capital position.
Enforcement
Levels. Farmer Mac’s charter directs FCA to classify Farmer
Mac within one of four enforcement levels for purposes of determining compliance
with capital standards. As of December 31, 2009, Farmer Mac was
classified as within level I—the highest compliance level.
Failure
to comply with the applicable required capital level in the charter would result
in Farmer Mac being classified as within level II (below the applicable
risk-based capital level, but above the minimum capital level), level III (below
the minimum capital level, but above the critical capital level) or level IV
(below the critical capital level). In the event that Farmer Mac were
classified as within level II, III or IV, the charter requires the Director of
OSMO to take a number of mandatory supervisory measures and provides the
Director with discretionary authority to take various optional supervisory
measures depending on the level in which Farmer Mac is
classified. The mandatory measures applicable to levels II and III
include:
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requiring
Farmer Mac to submit and comply with a capital restoration
plan;
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prohibiting
the payment of dividends if such payment would result in Farmer Mac being
reclassified as within a lower level and requiring the pre-approval of any
dividend payment even if such payment would not result in reclassification
as within level IV; and
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reclassifying
Farmer Mac as within one level lower if it does not submit a capital
restoration plan that is approved by the Director, or the Director
determines that Farmer Mac has failed to make, in good faith, reasonable
efforts to comply with such a plan and fulfill the schedule for the plan
approved by the Director.
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If Farmer
Mac were classified as within level III, then, in addition to the foregoing
mandatory supervisory measures, the Director of OSMO could take any of the
following discretionary supervisory measures:
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imposing
limits on any increase in, or ordering the reduction of, any obligations
of Farmer Mac, including off-balance sheet
obligations;
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limiting
or prohibiting asset growth or requiring the reduction of
assets;
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requiring
the acquisition of new capital in an amount sufficient to provide for
reclassification as within a higher
level;
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terminating,
reducing or modifying any activity the Director determines creates
excessive risk to Farmer Mac; or
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appointing
a conservator or a receiver for Farmer
Mac.
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Farmer
Mac’s charter does not specify any supervisory measures, either mandatory or
discretionary, to be taken by the Director in the event Farmer Mac were
classified as within level IV.
The Director of OSMO has the
discretionary authority to reclassify Farmer Mac to a level that is one level
below its then current level (for example, from level I to level II) if the
Director determines that Farmer Mac is engaging in any action not approved by
the Director that could result in a rapid depletion of core capital or if the
value of property subject to mortgages backing Farmer Mac Guaranteed Securities
has decreased significantly.
Item
1A. Risk Factors
Farmer
Mac’s business activities, financial performance and results of operations are,
by their nature, subject to a number of risks and
uncertainties. Consequently, the Corporation’s net interest income,
total revenues and net income have been, and are likely to continue to be,
subject to fluctuations that reflect the effect of many factors, including the
risk factors described below. Other sections of this Annual Report on
Form 10-K may include additional factors that could adversely affect Farmer
Mac’s business and its financial performance and results of
operations. Furthermore, because new risk factors likely will emerge
from time to time, management can neither predict all such risk factors nor
assess the effects of such factors on Farmer Mac’s business, operating results
and financial condition or the extent to which any factor, or combination of
factors, may affect the Corporation’s actual results and financial
condition. If any of the following risks materialize, Farmer Mac’s
business, financial condition or results of operations could be materially and
adversely affected.
An
inability to access the debt capital markets could have a material adverse
effect on Farmer Mac’s business, operating results, financial condition and
capital levels.
Farmer Mac’s ability to operate its
business, meet its obligations, grow its assets and fulfill its statutory
purpose depends on the Corporation’s ability to issue substantial amounts of
debt frequently and at favorable rates. The issuance of short-term
and long-term debt securities in the U.S. financial markets is the primary
source of funding for Farmer Mac’s purchases of program and non-program assets
and for repaying or refinancing existing debt. Moreover, one of the
primary sources of the Corporation’s revenue is the net interest income earned
from the difference, or “spread,” between the return received on assets held and
the related borrowing costs. Farmer Mac’s ability to obtain funds
through the issuance of debt, and the cost at which these funds may be obtained,
depends on many factors, including:
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Farmer
Mac’s corporate and regulatory structure, including its status as a GSE
and perceptions about the viability of stockholder-owned GSEs in
general;
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compliance
with regulatory capital requirements and any measures imposed by Farmer
Mac’s regulator if the Corporation were to fail to remain in compliance
with those requirements;
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Farmer
Mac’s financial results and changes in its financial
condition;
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the
public’s perception of the risks to and financial prospects of Farmer
Mac’s business;
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prevailing
conditions in the capital
markets;
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competition
from other issuers of GSE debt;
and
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legislative
or regulatory actions relating to Farmer Mac’s business, including any
actions that would affect the Corporation’s GSE status or add additional
requirements that would restrict or reduce its ability to issue
debt.
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Farmer
Mac’s business, operating results, financial condition and capital levels may be
materially and adversely affected by external factors that may be beyond its
control.
Farmer
Mac’s business, operating results, financial condition and capital levels may be
materially and adversely affected by external factors that may be beyond its
control, including, but not limited to:
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disruptions
in the capital markets, which could adversely affect the value and
performance of Farmer Mac’s program and non-program assets, the
Corporation’s liquidity position and Farmer Mac’s ability to fund assets
at favorable levels by issuing debt securities and to raise capital by
selling equity securities;
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legislative
or regulatory developments or interpretations of Farmer Mac’s statutory
charter that could adversely affect Farmer Mac, its ability to offer new
products, the ability or motivation of certain lenders to participate in
its programs or the terms of any such participation, or increase the cost
of regulation and related corporate
activities;
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Farmer
Mac’s access to the debt markets at favorable rates and
terms;
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competitive
pressures in the purchase of agricultural real estate mortgage loans and
the sale of Farmer Mac Guaranteed Securities and debt
securities;
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changes
in interest rates, agricultural land values, commodity prices, export
demand for U.S. agricultural products, general economic conditions, and
other factors that may affect delinquency levels and credit losses on
agricultural real estate mortgage
loans;
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protracted
adverse weather, animal and plant disease outbreaks, costs of agricultural
production inputs for farmers and ranchers, availability and cost of
agricultural workers, market or other conditions affecting particular
geographic regions or particular agricultural commodities or products
related to agricultural real estate mortgage loans backing Farmer Mac I
Guaranteed Securities or under
LTSPCs;
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the
effects of any changes in federal assistance for agriculture on the
agricultural economy;
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energy
policy changes that adversely affect the loan repayment capacity of
ethanol plants;
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public
policy changes that adversely affect rural electric cooperatives,
including carbon capture or limitation on coal-fired power generation and
other initiatives designed to promote the shift to clean or “green”
energy, which may require utilities to raise rates to customers to pay for
new generation sources;
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restrictions
on water supply in agricultural production due to adverse weather
conditions, legal disputes or other
causes;
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depressed
real property values that may impact the value of agricultural real
estate; and
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decreases
in demand for agricultural commodities and/or increases in production
costs, in each case within a particular industry, that may affect
delinquency levels and credit losses on agricultural real estate mortgage
loans within that industry.
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Farmer
Mac’s business development, profitability and capital depend on the continued
growth of the secondary market for agricultural real estate mortgage loans and
for rural utilities loans, the future for both of which remains
uncertain.
Continued
growth in Farmer Mac’s business and future profitability may be constrained by
conditions that limit the need or ability for lenders to obtain the benefits of
Farmer Mac’s programs, including, but not limited to:
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reduced
growth rates in the agricultural mortgage market due to the slowdown of
the overall economy;
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the
availability of other sources of capital for customers of Farmer Mac,
including through federal programs;
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the
acceptance by Federal Home Loan Banks of agricultural real estate mortgage
loans as collateral;
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the
historical preference of many agricultural lending institutions to retain
loans in their portfolios rather than to sell them into the secondary
market;
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the
small number of business partners that currently provide a significant
portion of Farmer Mac’s business volume, resulting in vulnerability as
existing business volume pays down or matures and the status of these
business partners evolves;
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expanded
funding available from the federal government for rural utilities lenders;
and
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legislative
and regulatory developments that affect the agricultural and rural
utilities sectors.
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Farmer
Mac is a GSE whose continued growth may be materially and adversely affected by
legislative and regulatory developments.
Farmer
Mac is a GSE that is governed by a statutory charter controlled by the U.S.
Congress and regulated by governmental agencies. Although Farmer Mac
is not aware of any pending legislative proposals which would adversely affect
the Corporation at this time, Farmer Mac is subject to risks and uncertainties
related to legislative, regulatory or political developments. Such
developments could affect the ability of lenders to participate in Farmer Mac’s
programs or the terms on which they may participate. Further, from
time to time, legislative or regulatory initiatives are commenced that, if
successful, could result in the enactment of legislation or the promulgation of
regulations that could affect negatively the growth or operation of the
secondary market for agricultural mortgages and rural utilities
loans. For example, the costs related to any potential climate change
legislation costs could be significant to the electric utility industry, which
could dramatically increase the cost of energy from thermal generation sources
and have a particularly damaging effect on rural G&T cooperatives, which
generally have a higher reliance on fossil-fueled resources and are more
dependent on coal-fired generation than the electric industry as a
whole. Any of these political or regulatory developments could have a
material and adverse effect on Farmer Mac’s business, operating results,
financial condition and capital levels. See “Government Regulation of
Farmer Mac” in Item 1 of this Annual Report on Form 10-K for additional
discussion on the rules and regulations governing Farmer Mac’s
activities.
Farmer
Mac is subject to statutory and regulatory capital requirements that are subject
to change, and failure to meet those requirements could result in supervisory
measures or otherwise
materially and adversely affect Farmer Mac’s business, operating results or
financial condition.
Farmer Mac is required by statute and
regulation to maintain certain core capital levels. Any inability by
Farmer Mac to meet these capital requirements could result in supervisory
measures by FCA or could otherwise materially and adversely affect Farmer Mac’s
business, operating results or financial condition. Factors that
could adversely affect the adequacy of Farmer Mac’s capital levels in the
future, and which may be beyond Farmer Mac’s control, include:
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the
potential for any other-than-temporary impairment
charges;
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adverse
changes in interest rates or credit
spreads;
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the
potential need to increase the level of the allowance for losses on
program assets in the future;
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legislative
or regulatory actions that increase Farmer Mac’s applicable capital
requirements; and
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changes
in generally accepted accounting
principles.
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Farmer
Mac Guaranteed Securities and LTSPCs expose Farmer Mac to significant contingent
liabilities, and its ability to fulfill its obligations under its guarantees and
LTSPCs may be limited.
Farmer
Mac assumes the ultimate credit risk of borrower defaults on the loans it holds
as well as the loans underlying Farmer Mac Guaranteed Securities and
LTSPCs. In the Farmer Mac I program, repayment of eligible loans
typically depends on the success of the related farming operation, which, in
turn, depends on many variables and factors over which farmers may have little
or no control, such as weather conditions, animal and plant disease outbreaks,
economic conditions (both domestic and international) and political
conditions.
In the
Rural Utilities program, eligible utilities operations include the distribution
of electricity, the generation and transmission of electricity, and
telecommunications. Each type of utility operation has different
inherent risks associated with it, but all share a common risk posed by
potential changes in public and regulatory policies. Business cash
flows can be disrupted as a result of storms, though distribution cooperatives
have in place cost-sharing arrangements with providers in other regions that
mitigate this exposure. Historically, natural disasters have often
resulted in disaster area declarations and financial aid to utilities providers
through the Federal Emergency Management Agency and other conduits, although
there can be no assurance that any such aid would be available in the event of
any future natural disaster. The electrical distribution and
generation sectors can be adversely affected by changes in fuel costs and prices
received from consumers, as well as by contractual power obligations that do not
match up with supply or demand. The depth and pace of technological
change in the telecommunications industry can also provide significant
challenges, as the industry requires heavy capital investment and correct
judgments about the sustainability of new technologies in an area with many
competitors.
Widespread
repayment shortfalls on loans in the Farmer Mac I program or Rural Utilities
program could require Farmer Mac to pay under its guarantees and LTSPCs and
could have a material adverse effect on the Corporation’s financial condition,
results of operations and liquidity.
Farmer
Mac Guaranteed Securities and LTSPCs are obligations of Farmer Mac only, and are
not backed by the full faith and credit of the United States, FCA or any other
agency or instrumentality of the United States other than Farmer
Mac. Farmer Mac’s principal source of funds for the payment of claims
under its guarantees and purchase commitments are the fees received in
connection with outstanding Farmer Mac Guaranteed Securities and
LTSPCs. These amounts are, and will continue to be, substantially
less than the amount of Farmer Mac’s aggregate contingent liabilities under its
guarantees and LTSPCs. Farmer Mac is required to set aside a portion
of the fees it receives as a reserve against losses from its guarantee and
commitment activities. Farmer Mac expects that its future contingent
liabilities for its guarantee and commitment activities will continue to grow
and will exceed Farmer Mac’s resources, including amounts in the Corporation’s
allowance for losses and its limited ability to borrow from the U.S.
Treasury.
Farmer
Mac is exposed to credit risk and interest rate risk that could materially and
adversely affect its business, operating results, financial condition, capital
levels and future earnings.
Farmer
Mac’s earnings depend largely on the performance of its program assets and
non-program investments, and the spread between interest earned on such assets
and investments and interest paid on Farmer Mac’s obligations and
liabilities. As a result, Farmer Mac’s earnings may be adversely
affected by its exposure to credit and interest rate risks,
including:
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credit
risk associated with the agricultural mortgages and rural utilities loans
that Farmer Mac purchases or commits to purchase or that back Farmer Mac
Guaranteed Securities;
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interest
rate risk on interest-earning assets and related interest-bearing
liabilities due to possible timing differences in the associated cash
flows;
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credit
risk associated with Farmer Mac’s business relationships with other
institutions, such as counterparties to interest rate swap contracts and
other hedging arrangements; and
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risks
as to the creditworthiness of the issuers of AgVantage securities and the
Corporation’s non-program
investments.
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Farmer
Mac may be adversely affected by weak economic conditions and market
turmoil.
The
recent significant disruptions in world financial markets, and resulting
economic downturn, may have an adverse effect on the value and performance of
Farmer Mac’s assets. The possible duration and severity of the
adverse economic cycle is unknown, as the efficacy of legislative and regulatory
efforts and programs to stabilize the economy are
uncertain. Furthermore, there can be no assurance that economic
conditions will improve in the near future. To the extent that
economic conditions, such as high unemployment or decreases in agricultural real
estate values, negatively impact agricultural production or demand, Farmer Mac’s
business, operating results or financial condition could be adversely
affected.
Farmer
Mac may experience writedowns of its investments in future periods, which could
adversely affect the Corporation’s business, operating results, financial
condition and capital levels.
Deterioration in financial and credit
market conditions could reduce the fair value of Farmer Mac’s investment
securities, particularly those securities that are less liquid and more subject
to volatility.
Recent
events in the credit markets have also necessitated an increase in the amount of
judgment required to be exercised by management to value certain
securities. Furthermore, Farmer Mac relies on internal models to
determine the fair value of certain investment securities, and those models
could fail to produce reliable results. Subsequent valuations of
investment securities, in light of factors then prevailing, may result in
significant changes in the value of the Corporation’s investment securities in
the future. If Farmer Mac decides to sell any of the securities in
its investment portfolio, the price ultimately realized will depend on the
demand and liquidity in the market at that time and may be materially lower than
their current fair value.
Changes
in interest rates may cause volatility in financial results and capital
levels.
Farmer
Mac enters into financial derivatives transactions to hedge interest rate risks
inherent in its business and applies fair value accounting to its financial
derivatives transactions pursuant to guidance from the Financial Accounting
Standards Board (“FASB”) on accounting for derivatives; it does not apply hedge
accounting to those derivatives. Although Farmer Mac’s financial
derivatives provide highly effective economic hedges of interest rate risk, the
FASB guidance requires the losses on financial derivatives to be reflected in
net income, while a majority of the offsetting economic gains on the hedged
items are not. In addition to volatile earnings under accounting
principles generally accepted in the United States (“GAAP”), another consequence
of the changes in the fair values of financial derivatives being accounted for
in earnings is the resulting effect on Farmer Mac’s regulatory core capital that
is available to meet the Corporation’s statutory minimum capital
requirement.
Farmer
Mac relies on information systems and other technology in its business
operations, and any
failure or interruption in those systems could adversely affect
Farmer Mac’s business, operating results or financial condition.
Farmer Mac relies heavily on
information systems and other technology, including from third parties, to
conduct and manage its business. If Farmer Mac experiences a failure
or interruption in any of these systems or other technology, including as a
result of any actions or failures of third parties, it may be unable to conduct
and manage its business effectively. Although Farmer Mac has
implemented a business continuity plan, Farmer Mac may not be able to prevent,
address on a timely and adequate basis, or mitigate the negative effects of any
failure or interruption. Furthermore, any breach or loss of sensitive
or confidential information could cause Farmer Mac to suffer reputational harm
with respect to its business partners. As a result, any failure or
interruption of these information systems or other technology could adversely
affect Farmer Mac’s business, operating results or financial
condition.
If
Farmer Mac’s management of risk associated with its program and non-program
assets is not effective, its business, operating results, financial condition
and capital levels could be materially adversely affected.
Recent events in the financial markets
relating to volatility, liquidity and credit have challenged financial
institutions, including Farmer Mac, to adapt and further develop profitability
and risk management models adequate to address a wider range of possible market
developments. Farmer Mac’s techniques and strategies may not be
effective in mitigating its risk exposure in all economic market environments or
against all types of risk, including risks that Farmer Mac fails to identify or
anticipate. Some of Farmer Mac’s qualitative tools and metrics for
managing risk are based upon its use of observed historical market
behavior. Farmer Mac applies statistical and other tools to these
observations to quantify its risks. These tools and metrics may fail
to predict future risk. Such failures could, for example, arise from
factors Farmer Mac did not anticipate or correctly evaluate in its
models. In addition, Farmer Mac’s quantified modeling does not take
into account all risks. Its more qualitative approach to managing
those risks could prove insufficient, exposing it to material unanticipated
losses. The inability of Farmer Mac to effectively identify and
manage the risks inherent in its business could have a material adverse effect
on its business, operating results, financial condition and capital
levels.
Farmer Mac’s
ability to repay its obligations and/or raise capital through issuances of debt
or equity may be adversely affected by the operating results of its subsidiary
Farmer Mac II LLC.
In January 2010, Farmer Mac contributed
substantially all of its Farmer Mac II program business to Farmer Mac II LLC,
including USDA-guaranteed portions having an aggregate principal amount of
$1.1 billion and the primary intangible assets related to the operation of
the Farmer Mac II program. As a result, the assets of Farmer Mac II
LLC are not directly available to satisfy the claims of Farmer Mac’s creditors
or stockholders. In the event of an insolvency, bankruptcy,
liquidation, reorganization, dissolution or winding-up of Farmer Mac II LLC,
Farmer Mac, as the holder of the common equity interest, may lose all or some of
its investment in Farmer Mac II LLC, which event likely would adversely affect
Farmer Mac’s ability to raise capital, issue new debt and repay outstanding debt
as it comes due. If Farmer Mac is a creditor to Farmer Mac II LLC,
the value of Farmer Mac II LLC’s assets may be insufficient to repay amounts due
to Farmer Mac, which also could adversely affect Farmer Mac’s ability to raise
capital, issue new debt and repay outstanding debt as it comes
due. In addition, the ability of Farmer Mac II LLC to successfully
operate the Farmer Mac II program will impact its ability to pay dividends on
the common equity interest owned by Farmer Mac. If Farmer Mac II LLC
cannot pay dividends to Farmer Mac or repay or refinance obligations owed to
Farmer Mac, Farmer Mac’s liquidity and ability to raise additional capital also
may be adversely affected, which could adversely affect the Corporation’s
operating results and financial condition.
Any of
these risks could materially and adversely affect Farmer Mac’s business,
operating results, financial condition, capital levels and future
earnings. For additional discussion about the Corporation’s risk
management, see “Management’s Discussion and Analysis of Financial Conditions
and Results of Operation—Risk Management” in Item 7 of this Annual Report
on Form 10-K.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Farmer Mac
currently occupies its principal offices, which are located at 1133 Twenty-First
Street, N.W., Washington, D.C. 20036, under the terms of a lease that expires on
November 30, 2011 and covers approximately 13,500 square feet of office
space. Farmer Mac also maintains an office located at 1517 North
Ankeny Boulevard, Ankeny, Iowa 50021, under the terms of a lease that expires on
November 14, 2010 and covers approximately 1,358 square feet of office
space. Farmer Mac’s offices are suitable and adequate for its
current and currently anticipated needs.
Item
3. Legal Proceedings
On December 5, 2008, a lawsuit was
filed in the United States District Court for the District of Columbia 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. The lawsuit alleges, among other things,
violations of Section 10(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Rule 10b-5 promulgated thereunder by all defendants and
violations of Section 20(a) of the Exchange Act by the individual defendants in
relation to statements and omissions concerning the financial condition of the
Corporation alleged to be materially false or misleading. The
complaint alleged that Farmer Mac made false and misleading statements that had
the effect of artificially inflating the price of its securities during the
period referenced above. The complaint also alleged that Farmer Mac
failed to disclose material information relating to impairment costs and/or
depreciation expenses and that Farmer Mac used overly optimistic assumptions
with respect to asset valuations and investments, the size of Farmer Mac’s
exposure to Lehman Brothers Holdings Inc. and Fannie Mae, and its performance
relative to estimates of future performance. The
December 5, 2008 complaint requested class certification, compensatory
damages, and other remedies, but did not specify the amount of damages
sought. On February 23, 2009, the Court appointed lead plaintiffs for
the litigation. On February 26, 2010, the Court entered a stipulation
of voluntary dismissal between the parties pursuant to which the lead plaintiffs
voluntarily dismissed their case and agreed not to further pursue or assert any
claims against the parties that were asserted, or could have been asserted, in
the action or otherwise relate to the subject matter of the action.
Item
4. (Removed and
Reserved)
PART
II
Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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(a) Farmer Mac
has three classes of common stock outstanding. Ownership of Class A
voting common stock is restricted to banks, insurance companies and other
financial institutions or similar entities that are not institutions of the
FCS. Ownership of Class B voting common stock is restricted to
institutions of the FCS. There are no ownership restrictions on the
Class C non-voting common stock. Under the terms of the original
public offering of the Class A and Class B voting common stock, the Corporation
reserved the right to redeem at book value any shares of either class held by an
ineligible holder.
Farmer
Mac’s Class A voting common stock and Class C non-voting common stock trade on
the New York Stock Exchange under the symbols AGM.A and AGM,
respectively. The Class B voting common stock, which has a limited
market and trades infrequently, is not listed or quoted on any exchange or other
medium, and Farmer Mac is unaware of any publicly available quotations or prices
for that class of common stock.
The
information below represents the high and low closing sales prices for the Class
A and Class C common stocks for the periods indicated as reported by the New
York Stock Exchange.
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Sales Prices
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Class A Stock
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Class C Stock
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High
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|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
(per
share)
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter (through March 1, 2010)
|
|
$ |
8.85 |
|
|
$ |
6.18 |
|
|
$ |
9.15 |
|
|
$ |
6.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
quarter
|
|
$ |
7.58 |
|
|
$ |
5.29 |
|
|
$ |
9.63 |
|
|
$ |
6.11 |
|
Third
quarter
|
|
|
8.12 |
|
|
|
2.99 |
|
|
|
11.49 |
|
|
|
4.11 |
|
Second
quarter
|
|
|
6.16 |
|
|
|
2.00 |
|
|
|
8.38 |
|
|
|
2.62 |
|
First
quarter
|
|
|
3.50 |
|
|
|
1.81 |
|
|
|
4.47 |
|
|
|
2.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
quarter
|
|
$ |
9.14 |
|
|
$ |
1.25 |
|
|
$ |
10.99 |
|
|
$ |
2.38 |
|
Third
quarter
|
|
|
22.06 |
|
|
|
2.25 |
|
|
|
32.25 |
|
|
|
2.28 |
|
Second
quarter
|
|
|
22.05 |
|
|
|
14.75 |
|
|
|
33.85 |
|
|
|
24.52 |
|
First
quarter
|
|
|
20.15 |
|
|
|
15.50 |
|
|
|
29.92 |
|
|
|
21.63 |
|
As of
March 1, 2010, Farmer Mac estimates that there were 1,181 registered owners
of the Class A voting common stock, 89 registered owners of the Class
B voting common stock and 1,109 registered owners of the Class C non-voting
common stock.
The
dividend rights of all three classes of the Corporation’s common stock are the
same, and dividends may be paid on common stock only when, as, and if declared
by Farmer Mac’s board of directors in its sole discretion. From
fourth quarter 2004 through fourth quarter 2008 and from first quarter 2009
through fourth quarter 2009, Farmer Mac paid a quarterly dividend of $0.10 per
share and $0.05 per share, respectively, on all classes of the Corporation’s
common stock. On February 4, 2010, Farmer Mac’s board of directors
declared a quarterly dividend of $0.05 per share on the Corporation’s common
stock payable on March 31, 2010. The board reduced the quarterly
dividend in 2009 compared to 2008 to preserve capital based on its assessment of
the uncertain outlook for capital market conditions and to ensure that Farmer
Mac had adequate capital to meet its statutory capital requirements and support
new business. Farmer Mac’s ability to pay dividends on its common
stock is subject to the payment of dividends on its outstanding preferred
stock. Farmer Mac’s ability to declare and pay dividends could also
be restricted if it were to fail to comply with regulatory capital
requirements. See “Business—Government Regulation of Farmer
Mac—Regulation—Capital Standards—Enforcement Levels.”
Information
about securities authorized for issuance under Farmer Mac’s equity compensation
plans appears under “Equity Compensation Plans” in the Corporation’s definitive
proxy statement to be filed on or about April 28, 2010. That portion
of the definitive proxy statement is incorporated by reference into this Annual
Report on Form 10-K.
Farmer
Mac is a federally chartered instrumentality of the United States and its common
stock is exempt from registration pursuant to Section 3(a)(2) of the Securities
Act. Two types of transactions related to Farmer Mac common stock
occurred during fourth quarter 2009 that were not registered under the
Securities Act and not otherwise reported on a Current Report on
Form 8-K:
|
·
|
On
October 7, 2009, Farmer Mac granted stock appreciation rights under its
2008 Omnibus Incentive Plan with respect to an aggregate of 45,000 shares
of Class C non-voting common stock, at an exercise price of $7.78 per
share, to nine non-officer employees as incentive
compensation.
|
|
·
|
On
October 22, 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 cash retainers, Farmer Mac issued an
aggregate of 1,685 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 $7.50 per share, which was the closing
price of the Class C non-voting common stock on September 30, 2009 as
reported by the New York Stock
Exchange.
|
Performance
Graph. The following graph compares the performance of Farmer
Mac’s Class A voting common stock and Class C non-voting common stock with
the performance of the New York Stock Exchange Composite Index (the “NYSE Comp”)
and the Standard & Poor’s 500 Diversified Financials Index (the “S&P Div
Fin”) over the period from December 31, 2004 to December 31,
2009. The graph assumes that $100 was invested on December 31,
2004 in each of: Farmer Mac’s Class A voting common stock;
Farmer Mac’s Class C non-voting common Stock; the NYSE Comp; and the S&P Div
Fin. The graph also assumes that all dividends were reinvested into
the same securities throughout the past five years. Farmer Mac
obtained the information contained in the performance graph from SNL
Financial.
![](chart.jpg)
This
performance graph shall not be deemed to be “soliciting material” or to be
“filed” with the SEC, and such performance graph shall not be incorporated by
reference into any of Farmer Mac’s filings under the Securities Act or the
Exchange Act, whether made before or after the date hereof and irrespective of
any general incorporation language contained in such filing (except to the
extent Farmer Mac specifically incorporates this section by reference into such
filing).
(c) Farmer
Mac did not repurchase any shares of its common stock during
2009. See “Business—Farmer Mac Programs—Financing—Equity
Issuance—Common Stock Repurchases” for information regarding Farmer Mac’s
repurchases of its Class C non-voting common stock during 2008 and
2007.
Item
6.
|
Selected
Financial Data
|
The
selected consolidated financial data presented below is summarized from Farmer
Mac’s consolidated balance sheet data as of December 31, 2009 and the
five-year period then ended, as well as selected results of
operations data for the five-year period then ended. This data should
be reviewed in conjunction with the audited consolidated financial statements
and related notes and with “Item 7—Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in this Annual Report on
Form 10-K.
|
|
As
of December 31,
|
|
Summary
of Financial Condition:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(dollars
in thousands)
|
|
Cash
and cash equivalents
|
|
$ |
654,794 |
|
|
$ |
278,412 |
|
|
$ |
101,445 |
|
|
$ |
877,714 |
|
|
$ |
458,852 |
|
Investment
securities
|
|
|
1,131,895 |
|
|
|
1,235,859 |
|
|
|
2,624,366 |
|
|
|
1,830,904 |
|
|
|
1,621,941 |
|
Farmer
Mac Guaranteed Securities
|
|
|
3,398,996 |
|
|
|
2,451,244 |
|
|
|
1,298,823 |
|
|
|
1,330,418 |
|
|
|
1,330,976 |
|
Loans,
net
|
|
|
753,720 |
|
|
|
774,596 |
|
|
|
766,219 |
|
|
|
775,421 |
|
|
|
799,516 |
|
Total
assets
|
|
|
6,138,813 |
|
|
|
5,107,307 |
|
|
|
4,977,613 |
|
|
|
4,953,673 |
|
|
|
4,341,445 |
|
Notes
payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
|
3,662,898 |
|
|
|
3,757,099 |
|
|
|
3,829,698 |
|
|
|
3,298,097 |
|
|
|
2,587,704 |
|
Due
after one year
|
|
|
1,908,713 |
|
|
|
887,999 |
|
|
|
744,649 |
|
|
|
1,296,691 |
|
|
|
1,406,527 |
|
Total
liabilities
|
|
|
5,798,406 |
|
|
|
4,947,743 |
|
|
|
4,754,020 |
|
|
|
4,705,184 |
|
|
|
4,095,416 |
|
Mezzanine
equity
|
|
|
144,216 |
|
|
|
144,216 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stockholders'
equity
|
|
|
196,191 |
|
|
|
15,348 |
|
|
|
223,593 |
|
|
|
248,489 |
|
|
|
246,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets (1)
|
|
|
1.46 |
% |
|
|
-3.06 |
% |
|
|
0.09 |
% |
|
|
0.64 |
% |
|
|
1.15 |
% |
Return
on average common equity (2)
|
|
|
113.70 |
% |
|
|
-158.24 |
% |
|
|
2.20 |
% |
|
|
14.03 |
% |
|
|
22.87 |
% |
Average
equity to assets (3)
|
|
|
1.88 |
% |
|
|
2.37 |
% |
|
|
4.75 |
% |
|
|
5.32 |
% |
|
|
5.88 |
% |
Average
total equity to assets (4)
|
|
|
4.45 |
% |
|
|
3.80 |
% |
|
|
4.75 |
% |
|
|
5.32 |
% |
|
|
5.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31,
|
|
Summary
of Operations:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in
thousands, except per share amounts)
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after (provision)/recovery for loan losses
|
|
$ |
83,055 |
|
|
$ |
74,184 |
|
|
$ |
44,668 |
|
|
$ |
40,686 |
|
|
$ |
50,689 |
|
Non-interest
income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
|
31,805 |
|
|
|
28,381 |
|
|
|
25,232 |
|
|
|
21,815 |
|
|
|
19,554 |
|
Gains/(losses)
on financial derivatives and trading assets
|
|
|
64,570 |
|
|
|
(141,042 |
) |
|
|
(40,274 |
) |
|
|
1,617 |
|
|
|
11,537 |
|
Other-than-temporary
impairment losses
|
|
|
(3,994 |
) |
|
|
(106,240 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gains
on asset sales and debt repurchases
|
|
|
4,934 |
|
|
|
2,689 |
|
|
|
288 |
|
|
|
1,150 |
|
|
|
116 |
|
Gains
on the sale of real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
130 |
|
|
|
809 |
|
|
|
34 |
|
Representation
and warranty claims income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
718 |
|
|
|
79 |
|
Other
income
|
|
|
1,439 |
|
|
|
1,413 |
|
|
|
1,411 |
|
|
|
1,001 |
|
|
|
1,872 |
|
Non-interest
income/(loss)
|
|
|
98,754 |
|
|
|
(214,799 |
) |
|
|
(13,213 |
) |
|
|
27,110 |
|
|
|
33,192 |
|
Non-interest
expense
|
|
|
29,692 |
|
|
|
32,612 |
|
|
|
24,877 |
|
|
|
23,094 |
|
|
|
11,518 |
|
Income/(loss)
before income taxes
|
|
|
152,117 |
|
|
|
(173,227 |
) |
|
|
6,578 |
|
|
|
44,702 |
|
|
|
72,363 |
|
Income
tax expense/(benefit)
|
|
|
52,517 |
|
|
|
(22,864 |
) |
|
|
(83 |
) |
|
|
12,689 |
|
|
|
23,091 |
|
Net
income/(loss)
|
|
|
99,600 |
|
|
|
(150,363 |
) |
|
|
6,661 |
|
|
|
32,013 |
|
|
|
49,272 |
|
Preferred
stock dividends
|
|
|
(17,302 |
) |
|
|
(3,717 |
) |
|
|
(2,240 |
) |
|
|
(2,240 |
) |
|
|
(2,240 |
) |
Net
income/(loss) available to common stockholders
|
|
$ |
82,298 |
|
|
$ |
(154,080 |
) |
|
$ |
4,421 |
|
|
$ |
29,773 |
|
|
$ |
47,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Losses Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
$ |
5,242 |
|
|
$ |
17,840 |
|
|
$ |
(142 |
) |
|
$ |
(3,408 |
) |
|
$ |
(8,777 |
) |
Net
charge-offs/(recoveries)
|
|
|
7,490 |
|
|
|
5,292 |
|
|
|
526 |
|
|
|
690 |
|
|
|
(329 |
) |
Ending
balance
|
|
|
14,187 |
|
|
|
16,435 |
|
|
|
3,887 |
|
|
|
4,555 |
|
|
|
8,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Share and Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings/(loss) per common share
|
|
$ |
8.12 |
|
|
$ |
(15.40 |
) |
|
$ |
0.43 |
|
|
$ |
2.74 |
|
|
$ |
4.14 |
|
Diluted
earnings/(loss) per common share
|
|
|
8.04 |
|
|
|
(15.40 |
) |
|
|
0.42 |
|
|
|
2.68 |
|
|
|
4.09 |
|
Common
stock dividends per common share
|
|
|
0.20 |
|
|
|
0.40 |
|
|
|
0.40 |
|
|
|
0.40 |
|
|
|
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
minimum capital requirement
|
|
$ |
216,959 |
|
|
$ |
193,476 |
|
|
$ |
186,032 |
|
|
$ |
174,539 |
|
|
$ |
142,439 |
|
Core
capital
|
|
|
337,153 |
|
|
|
206,976 |
|
|
|
226,386 |
|
|
|
243,533 |
|
|
|
244,792 |
|
Minimum
capital surplus
|
|
|
120,194 |
|
|
|
13,500 |
|
|
|
40,354 |
|
|
|
68,994 |
|
|
|
102,353 |
|
|
(1)
|
Calculated
as net income/(loss) available to common stockholders divided by the
simple average of beginning and ending total
assets.
|
|
(2)
|
Calculated as net income/(loss)
available to common stockholders divided by the simple average of
beginning and ending stockholders' equity, net of preferred stock,
at redemption value.
|
|
(3)
|
Calculated
as the simple average of beginning and ending stockholders' equity divided
by the simple average of beginning and ending total
assets.
|
|
(4)
|
Calculated
as the simple average of beginning and ending mezzanine equity and
stockholders' equity divided by the simple average of beginning and ending
assets.
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Financial information as of and for
each of the years ended December 31, 2009, 2008 and 2007 is consolidated to
include the accounts of Farmer Mac and its subsidiaries, Farmer Mac Mortgage
Securities Corporation and Farmer Mac II LLC. Farmer Mac II LLC was
formed as a Delaware limited liability company in December 2009 to operate
substantially all of the business related to the Farmer Mac II program –
primarily the acquisition of USDA-guaranteed portions. The business
operations of Farmer Mac II LLC began in January 2010. In the future,
Farmer Mac will operate only that part of the Farmer Mac II program that
involves the issuance of Farmer Mac II Guaranteed Securities, and only to the
extent that Farmer Mac is approached or referred by an
investor. Farmer Mac will not issue Farmer Mac II Guaranteed
Securities to Farmer Mac II LLC. See Note 15 to the consolidated
financial statements for more information regarding Farmer Mac II
LLC.
This
discussion and analysis of financial condition and results of operations should
be read together with Farmer Mac’s consolidated financial statements and the
related notes to the consolidated financial statements for the fiscal years
ended December 31, 2009, 2008 and 2007.
The
discussion below is not necessarily indicative of future results.
Forward-Looking
Statements
Some
statements made in this Annual Report on Form 10-K 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 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 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 this
Annual Report on Form 10-K and uncertainties regarding:
|
·
|
the
availability of reasonable rates and terms of debt financing to Farmer Mac
and Farmer Mac II LLC;
|
|
·
|
legislative
or regulatory developments that could affect Farmer
Mac;
|
|
·
|
fluctuations
in the fair value of assets held by Farmer Mac and Farmer Mac II
LLC;
|
|
·
|
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;
|
|
·
|
the
impact of economic conditions and real estate values on agricultural
mortgage lending;
|
|
·
|
the
willingness of investors to invest in Farmer Mac Guaranteed
Securities;
|
|
·
|
developments
in the financial markets, including possible investor, analyst and rating
agency reactions to events involving GSEs, including Farmer Mac;
and
|
|
·
|
the
future level of interest rates, commodity prices, and export demand for
U.S. agricultural
products.
|
In light
of these potential risks and uncertainties, no undue reliance should be placed
on any forward-looking statements expressed in this Annual Report on Form
10-K. 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.
Overview
During
2009 and into 2010, Farmer Mac continued to make progress in repositioning the
Corporation in response to the events of 2008 that caused that year to be one of
the most challenging in Farmer Mac’s history. Since the end of 2008,
Farmer Mac has improved its risk-bearing capacity and strengthened its balance
sheet while remaining focused on fulfilling its mission of providing the
advantages of a secondary market to lenders in rural America.
Farmer
Mac’s excess capital above its statutory minimum capital requirement rose to
$120.2 million as of December 31, 2009 from $13.5 million as of
December 31, 2008 as the result of 2009’s increase in retained earnings and
unrealized gains on securities classified as available-for-sale, as well as the
issuance of $48.4 million of Series C Preferred Stock during
2009. On January 25, 2010, Farmer Mac used the proceeds from the sale
of $250.0 million of preferred stock of its subsidiary, Farmer Mac II LLC, to
repurchase and retire the Corporation’s $150.0 million of outstanding Series B
Preferred Stock and to further strengthen Farmer Mac’s financial position to
support the continued fulfillment of its mission. That transaction
provided Farmer Mac with additional capital at a significantly lower cost, with
the net effective cost of the new $250.0 million of preferred stock of
5.77 percent per year after consideration of the consolidated tax benefits
to Farmer Mac. As a result, the net cost of the new preferred stock
on Farmer Mac’s consolidated financial statements will be approximately
$14.4 million per year, compared to an annual cost of $18.0 million per
year for the $150.0 million of Series B Preferred Stock (based on the 2010
dividend rate of 12 percent for the Series B Preferred Stock, which was
scheduled to increase to 14 percent at the end of 2010 and 16 percent in
2011). With the issuance of the new preferred stock, Farmer Mac
believes it is well-positioned to actively partner with agricultural and rural
utilities lenders, and that Farmer Mac II LLC is well-positioned to partner with
lenders participating in USDA’s guaranteed loan programs, to continue to fulfill
Farmer Mac’s mission to provide the needed capital and liquidity to rural
America.
In
addition to strengthening the Corporation’s capital position, Farmer Mac took
other actions during 2009 as part of the repositioning of its business, most
notably changes to Farmer Mac’s investment policies and the automation of
various internal operational practices. During 2009, Farmer Mac
reduced the size of its liquidity investment portfolio as it positioned the
portfolio to preserve capital and reduce risk while maintaining acceptable
levels of liquidity. The Corporation 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. As a result of that review, Farmer Mac revised its
investment policies and operations in 2009, with the goals of minimizing the
Corporation’s exposure to financial market volatility, preserving capital, and
supporting access to the debt markets. For example, Farmer Mac
implemented tighter limits on concentrations of risk in its investment portfolio
and restricted the use of certain financial derivatives in funding strategies to
ensure proper consideration of the potential adverse effects on capital
resulting from changes in their fair values over time. In addition to
the changes in its investment policies and operations, Farmer Mac developed and
implemented a web-based loan underwriting system during 2009, which increased
the efficiency in the Corporation’s loan approval, rate lock, and loan funding
processes and enhanced the integrity of data flow.
Farmer
Mac’s net income available to common stockholders for 2009 was
$82.3 million or $8.04 per diluted common share, compared to net loss of
$154.1 million or $15.40 per diluted common share for 2008, and net income
of $4.4 million or $0.42 per diluted common share for
2007. Compared to prior years, 2009 net income was driven by higher
net interest income after provisions for loan losses, higher guarantee and
commitment fees, and gains, in contrast to losses, on financial derivatives and
trading assets. In addition, Farmer Mac’s results for 2008 were
severely adversely affected by impairment losses on investment securities that
were subsequently liquidated during 2009.
Farmer
Mac achieved growth in its outstanding guarantees and commitments associated
with its program business. The Corporation added $2.5 billion to its
portfolio of loans, guarantees and commitments during 2009, which increased the
aggregate outstanding principal amount of that portfolio to $10.7 billion
as of December 31, 2009 from $10.1 billion as of December 31, 2008
after the effects of paydowns and maturities. The year-over-year
increase in outstanding program volume was primarily attributable to substantial
growth in business volume under the Rural Utilities program. As a
result of the increase in outstanding business volume, guarantee and commitment
fees increased to $31.8 million for 2009, compared to $28.4 million and
$25.2 million for 2008 and 2007, respectively.
Throughout
2009, business growth in the Farmer Mac I program slowed due to the disruptions
in the financial sector, more sporadic profits in agriculture, the reduced
volume of refinanced loans due to the protracted low interest rate environment,
and to reduced non-farm investor interest in purchasing
farmland. Farmer Mac’s capital position in late 2008 caused Farmer
Mac to implement a requirement for business partners to purchase Series C
Preferred Stock in connection with new transactions in excess of $20.0 million,
which reduced the flow of business volume from some of Farmer Mac’s traditional
sources during 2009. However, by the end of 2009, Farmer Mac was
positioned to grow the Farmer Mac I program business as the plan to raise
capital was reaching completion and with the following additional
developments:
|
·
|
the
Series C Preferred Stock investment requirement was eliminated and
communicated to Farmer Mac’s business
partners;
|
|
·
|
Farmer
Mac expanded its marketing arrangements with the American Bankers
Association (ABA) and the Independent Community Bankers of America (ICBA);
and
|
|
·
|
one
of Farmer Mac’s commercial bank business partners obtained a clarification
from its regulator that the bank’s loans that are subject to Farmer Mac
LTSPCs would obtain a favorable risk-weighting (20 percent), which is
consistent with the risk-weighting enjoyed by FCS institutions for loans
subject to LTSPCs.
|
The
growth in Farmer Mac’s Rural Utilities program continued for much of 2009, which
led to $2.1 billion of loans and Farmer Mac Guaranteed Securities
outstanding under the Rural Utilities program as of December 31,
2009. A large portion of that business was the purchase of general
obligation notes from National Rural secured by eligible rural utilities loans
in AgVantage structures. See “—Risk Management—Credit Risk –
Institutional.” Beginning in August 2009, the majority of Farmer
Mac’s rural utilities business was direct purchases of distribution cooperative
rural utilities loans, and this trend of purchasing eligible rural utilities
loans, as opposed to guaranteeing general obligations secured by eligible loans
in AgVantage transactions, is expected to continue for the foreseeable future
under the Rural Utilities program. In late 2009, Farmer Mac developed
underwriting standards for the purchase of loans to G&T cooperatives and
expects to see purchase requests for these types of rural utilities loans by
mid-year 2010.
Conditions
in the agricultural sector in 2009 were more stable than the national economy in
general, but agriculture was not completely insulated from the effects of the
economic downturn or commodity price cycles. Although some industries
in the agricultural sector prospered, others, such as the protein sector (i.e.,
cattle, poultry and pork producers), continued to be pressured by low prices for
their products due to oversupply and elevated input
costs. Profitability has been elusive for many farmers and ranchers
in some areas of California and the northwestern United States that rely on
irrigation water from watershed runoff. In addition, competing
interests for the water supply have limited the flow to farmers in some areas to
a level well below that embedded in long-standing water contract
agreements. During fourth quarter 2009, corn and ethanol prices
returned to levels that allowed profitability to return to the ethanol industry,
a key development for Farmer Mac’s ethanol portfolio. The dairy
sector experienced operating losses throughout most of 2009 due to oversupply
and the worldwide economic slowdown. However, during fourth quarter
2009, some dairy operators began to operate at break-even or profitable levels,
as supply and demand conditions came back into balance and the price of milk
rose. See “—Results of Operations—Outlook” and “—Risk
Management—Credit Risk – Loans” for more detail about the outlook for certain
agricultural industries.
As of
December 31, 2009, Farmer Mac’s 90 day delinquencies were $49.5 million, down
from $67.1 million as of December 31, 2008. Farmer Mac’s
non-performing assets (which in addition to 90-day delinquencies include REO and
loans in bankruptcy) were $62.0 million as of December 31, 2009, also down
from $80.0 million as of December 31, 2008. Those reductions are in
part a result of the progression of certain ethanol loans from “in bankruptcy”
during fourth quarter 2008, to “real estate owned” as of second quarter 2009,
and to “loans held for investment” as of December 31, 2009. As of
December 31, 2009, Farmer Mac’s ethanol exposure, which includes loans held and
loans subject to LTSPCs, was $263.9 million with exposure to 29 different plants
and an additional $37.0 million of undisbursed commitments. Other
than the undisbursed commitments, Farmer Mac does not expect 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
2009, Farmer Mac recorded provisions to its allowance for losses of
$5.2 million, compared to provisions of $17.8 million during 2008, and
recoveries of $0.1 million during 2007. As of December 31, 2009, the
total allowance for losses was $14.2 million, compared to
$16.4 million as of December 31, 2008.
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 gains on financial
derivatives for 2009 were $21.3 million, compared to losses of $130.4
million and $39.9 million for 2008 and 2007, respectively. Fair value
gains on trading assets totaled $43.3 million for 2009, compared to losses of
$10.6 million and $0.3 million for 2008 and 2007,
respectively. While these volatile changes in fair values may at
times produce significant income, as was the case in 2009, they may also produce
significant losses, as was the case in some previous reporting
periods. Future changes in those values cannot be reliably predicted;
however, as of December 31, 2009, the cumulative fair value after-tax losses
recorded on financial derivatives was $60.0 million. Over time,
Farmer Mac will realize in earnings the net effect of the cash settlements on
its interest rate swap contracts, which may 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. Any positive effective net spread will 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
2009, Farmer Mac recognized in earnings other-than-temporary impairment losses
of $4.0 million, compared to $106.2 million in 2008. Prior to 2008,
Farmer Mac had not recognized any other-than-temporary impairment
losses. The significant losses in 2008 stemmed from Farmer Mac’s
investments in Fannie Mae preferred stock and Lehman Brothers Holdings Inc.
senior debt securities.
To assist
in the comparison of results to prior periods, the table below summarizes many
of the significant items discussed above as they relate to Farmer Mac’s results
of operations for the years ended December 31, 2009, 2008 and 2007 and
reconciles those items as separate components of net income/(loss) available to
common stockholders, distinct from the recurring items during the periods
presented.
|
|
For the Year Ended December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Recurring
items:
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
$ |
31,805 |
|
|
$ |
28,381 |
|
|
$ |
25,232 |
|
Net
interest income including realized gains/(losses) on financial
derivatives
|
|
|
45,535 |
|
|
|
59,441 |
|
|
|
43,235 |
|
Other
income
|
|
|
1,439 |
|
|
|
1,413 |
|
|
|
1,411 |
|
Credit
related (charges)/benefit
|
|
|
(5,595 |
) |
|
|
(17,956 |
) |
|
|
300 |
|
Operating
costs
|
|
|
(26,950 |
) |
|
|
(29,187 |
) |
|
|
(24,832 |
) |
Related
tax expense
|
|
|
(14,337 |
) |
|
|
(12,509 |
) |
|
|
(13,486 |
) |
Preferred
stock dividends
|
|
|
(17,302 |
) |
|
|
(3,717 |
) |
|
|
(2,240 |
) |
Subtotal
|
|
|
14,595 |
|
|
|
25,866 |
|
|
|
29,620 |
|
Items
resulting from fair value fluctuations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value changes in financial derivatives
|
|
|
61,670 |
|
|
|
(101,129 |
) |
|
|
(38,729 |
) |
Fair
value changes in trading assets
|
|
|
43,273 |
|
|
|
(10,639 |
) |
|
|
(327 |
) |
Related
tax (expense)/benefit
|
|
|
(36,730 |
) |
|
|
39,119 |
|
|
|
13,670 |
|
Subtotal
|
|
|
68,213 |
|
|
|
(72,649 |
) |
|
|
(25,386 |
) |
Other
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses
|
|
|
(3,994 |
) |
|
|
(106,240 |
) |
|
|
— |
|
Gains
on asset sales and debt repurchases
|
|
|
4,934 |
|
|
|
2,689 |
|
|
|
288 |
|
Related
tax expense
|
|
|
(1,450 |
) |
|
|
(3,746 |
) |
|
|
(101 |
) |
Subtotal
|
|
|
(510 |
) |
|
|
(107,297 |
) |
|
|
187 |
|
Net
income/(loss) available to common stockholders
|
|
$ |
82,298 |
|
|
$ |
(154,080 |
) |
|
$ |
4,421 |
|
See
“—Results of Operations” for a detailed presentation of Farmer Mac’s financial
results for the years ended December 31, 2009, 2008 and 2007.
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 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.
Allowance
for Losses
Total Allowance for
Losses
Farmer
Mac maintains an allowance for losses to cover estimated probable losses
incurred as of the balance sheet date on loans held (“allowance for loan
losses”) and loans underlying LTSPCs, Farmer Mac I Guaranteed Securities
and Farmer Mac Guaranteed Securities – Rural Utilities (“reserve for losses”)
based on available information in accordance with FASB standards on accounting
for contingencies and on measuring individual impairment of a
loan.
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. Charge-offs represent losses on the outstanding
principal balance, any interest payments previously accrued or advanced and
expected costs of liquidation. Negative provisions for loan losses or
negative provisions for losses are recorded in the event that the estimate of
probable losses as of the end of a period is lower than the estimate at the
beginning of the period.
The total
allowance for losses consists of a general allowance for losses and a specific
reserve for impaired loans.
General Allowance for
Losses
Farmer
Mac’s methodology for determining its general 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:
· economic
conditions;
· geographic
and agricultural commodity/product concentrations in the portfolio;
· the
credit profile of the portfolio;
· delinquency
trends of the portfolio;
· historical
charge-off and recovery activities of the portfolio; and
|
·
|
other
factors to capture current portfolio trends and characteristics that
differ from historical experience.
|
Management
believes that its use of this methodology produces a reliable estimate of
inherent, probable losses, as of the balance sheet date, for all loans included
in Farmer Mac’s portfolio, including loans held and loans
underlying Farmer Mac I Guaranteed Securities and
LTSPCs.
Farmer
Mac separately evaluates the rural utilities loans it owns, as well as the
lender obligations and loans underlying or securing its Farmer Mac Guaranteed
Securities – Rural Utilities, to determine if there are any probable losses
inherent in those assets.
No
allowance for losses has been provided for loans underlying AgVantage securities
or securities issued under the Farmer Mac II program. 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. 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. 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.
Specific
Reserve for Impaired Loans
Farmer
Mac specifically analyzes certain loans in its portfolio for
impairment. A loan is considered impaired when, based on current
information and events, it is probable that Farmer Mac will be unable to collect
all amounts due according to the contractual terms of the loan
agreement.
Farmer
Mac considers the following loans to be impaired:
|
·
|
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 – and
REO);
|
|
·
|
loans
for which Farmer Mac has 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 some
impaired loans, Farmer Mac measures impairment based on the fair value of the
underlying collateral relative to the total amount due. In the event
that the updated appraisal or management’s estimate of discounted collateral
value does not support the total recorded investment, Farmer Mac provides a
specific allowance for the difference between the recorded investment and the
fair value of the underlying collateral, less estimated costs to liquidate the
collateral. Estimates of selling costs are based on historical
selling costs incurred by Farmer Mac.
For
impaired loans without updated collateral value estimates, Farmer Mac aggregates
those loans and uses historical statistics to measure impairment. All
impaired loans that do not have an updated appraisal obtained within the
previous two years or discount applied to an older appraised value, are measured
for impairment in the aggregate.
Further
information regarding the allowance for losses is included in “—Risk Management
– Credit Risk – Loans.”
Fair
Value Measurement
A
significant portion of Farmer Mac’s assets consists of financial instruments
that are measured at fair value in the consolidated balance
sheets. For financial instruments that are complex in nature or for
which observable inputs are not available, the measurement of fair value
requires significant management judgments and assumptions. These
judgments and assumptions, as well as changes in market conditions, may have a
material impact on the consolidated balance sheets and statements of
operations.
Effective
January 1, 2008, Farmer Mac adopted FASB guidance on fair value measurements and
disclosures that defines fair value, establishes a hierarchy for ranking
fair value measurements, and expands disclosures about fair value
measurements. The new guidance 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
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 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, 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 likely use
in pricing the asset or liability at the measurement date.
Farmer
Mac’s assets and liabilities presented at fair value in the consolidated balance
sheet on a recurring basis include investment securities, Farmer Mac Guaranteed
Securities and financial derivatives. The changes in fair value from
period to period are recorded either in the consolidated balance sheet to
accumulated other comprehensive income/(loss) or in the consolidated statement
of operations as gains/(losses) on financial derivatives or gains/(losses) on
trading assets.
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.
|
As of
December 31, 2009, Farmer Mac’s assets and liabilities recorded at fair value
included financial instruments valued at $3.7 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 61 percent of total assets and 80 percent of financial
instruments measured at fair value as of December 31, 2009. Assets
underlying these financial instruments measured as level 3 primarily include the
following:
Type of Financial
Instrument
|
|
Underlying Assets
|
Farmer
Mac I Guaranteed Securities
|
|
Agricultural
real estate mortgage loans eligible under the standards for the Farmer Mac
I program.
|
|
|
|
Farmer
Mac II Guaranteed Securities
|
|
Portions
of loans guaranteed by the USDA pursuant to the Consolidated Farm Rural
Development Act.
|
|
|
|
Farmer
Mac Guaranteed Securities – Rural Utilities
|
|
General
obligations of National Rural and/or loans made to rural electric
distribution cooperatives by National Rural.
|
|
|
|
Auction-rate
certificates (“ARCs”)
|
|
Guaranteed
student loans that are backed by the full faith and credit of the United
States.
|
|
|
|
GSE
preferred stock
|
|
Preferred
stock investments in CoBank, ACB, and AgFirst Farm Credit Bank, both of
which are institutions of the FCS, a government-sponsored
enterprise.
|
|
|
|
GSE
subordinated debt
|
|
Subordinated
debt issued by CoBank,
ACB.
|
Further
information regarding fair value measurement is included in Note 13 to the
consolidated financial statements.
Other-than-Temporary Impairment of
Investment Securities
Effective
April 1, 2009, Farmer Mac adopted the amended FASB guidance for the
recognition and presentation of other-than-temporary impairments for debt
securities. 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 security is below its amortized cost, and it
is determined that management (a) has the intent to sell the security or (b)
more likely than not will be required to sell the 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.
For debt
securities, 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.
Results
of Operations
Net
Interest Income. Net interest income was $85.9 million
for 2009, $88.7 million for 2008 and $44.5 million for
2007. 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 while maintaining acceptable
levels of liquidity. The reduced level of investment has decreased
the net interest income earned from that portfolio compared to earlier
periods. The net interest yield was 168 basis points for the year
ended December 31, 2009, compared to 162 and 85 basis points for the
years ended December 31, 2008 and 2007, respectively.
The
following table provides information regarding interest-earning assets and
funding for the years ended December 31, 2009, 2008 and 2007. The
balance of non-accruing loans is included in the average balance of
interest-earning loans and Farmer Mac Guaranteed Securities presented, though
the related income is accounted for on the cash basis. Therefore, as
the balance of non-accruing loans and the income received increases or
decreases, the net interest yield will fluctuate accordingly. The
average rate earned on cash and investments reflects lower short-term market
rates during 2009 compared to 2008. The lower average rate on loans
and Farmer Mac Guaranteed Securities during 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 Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and investments
|
|
$ |
1,419,714 |
|
|
$ |
28,727 |
|
|
|
2.02 |
% |
|
$ |
2,928,424 |
|
|
$ |
113,722 |
|
|
|
3.88 |
% |
|
$ |
3,195,475 |
|
|
$ |
174,196 |
|
|
|
5.45 |
% |
Loans
and Farmer Mac Guaranteed Securities
|
|
|
3,682,166 |
|
|
|
147,766 |
|
|
|
4.01 |
% |
|
|
2,540,802 |
|
|
|
141,973 |
|
|
|
5.59 |
% |
|
|
2,020,290 |
|
|
|
123,562 |
|
|
|
6.12 |
% |
Total
interest-earning assets
|
|
|
5,101,880 |
|
|
|
176,493 |
|
|
|
3.46 |
% |
|
|
5,469,226 |
|
|
|
255,695 |
|
|
|
4.68 |
% |
|
|
5,215,765 |
|
|
|
297,758 |
|
|
|
5.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable due within one year
|
|
|
3,104,198 |
|
|
|
24,150 |
|
|
|
0.78 |
% |
|
|
3,731,051 |
|
|
|
98,049 |
|
|
|
2.63 |
% |
|
|
3,493,047 |
|
|
|
176,786 |
|
|
|
5.06 |
% |
Notes
payable due after one year (1)
|
|
|
1,781,974 |
|
|
|
66,435 |
|
|
|
3.73 |
% |
|
|
1,521,305 |
|
|
|
68,931 |
|
|
|
4.53 |
% |
|
|
1,521,738 |
|
|
|
76,519 |
|
|
|
5.03 |
% |
Total
interest- bearing liabilities
|
|
|
4,886,172 |
|
|
|
90,585 |
|
|
|
1.85 |
% |
|
|
5,252,356 |
|
|
|
166,980 |
|
|
|
3.18 |
% |
|
|
5,014,785 |
|
|
|
253,305 |
|
|
|
5.05 |
% |
Net
non-interest-bearing funding
|
|
|
215,708 |
|
|
|
— |
|
|
|
— |
|
|
|
216,870 |
|
|
|
— |
|
|
|
— |
|
|
|
200,980 |
|
|
|
— |
|
|
|
— |
|
Total
funding
|
|
$ |
5,101,880 |
|
|
|
90,585 |
|
|
|
1.78 |
% |
|
$ |
5,469,226 |
|
|
|
166,980 |
|
|
|
3.05 |
% |
|
$ |
5,215,765 |
|
|
|
253,305 |
|
|
|
4.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income/yield
|
|
|
|
|
|
$ |
85,908 |
|
|
|
1.68 |
% |
|
|
|
|
|
$ |
88,715 |
|
|
|
1.62 |
% |
|
|
|
|
|
$ |
44,453 |
|
|
|
0.85 |
% |
(1)
Includes current portion of long-term notes.
The
average rate earned on cash and investments reflects lower short-term interest
rates in 2009 compared to 2008 and 2007, and the short-term or floating rate
nature of most investments acquired and outstanding during 2009. The
lower average rate on loans and Farmer Mac Guaranteed Securities reflects the
reset of adjustable rate mortgages to lower rates and the acquisition of new
lower-yielding loans compared to rates on loans that have
matured. The lower average rate on Farmer Mac’s notes payable due
within one year is consistent with general trends in average short-term rates
during the periods presented. The downward trend in the average rate
on notes payable due after one year reflects the retirement of older debt at
higher market rates and the issuance of new debt at lower market rates during
2009.
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.
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
|
Increase/(Decrease) Due to
|
|
|
Increase/(Decrease) Due to
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Income
from interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and investments
|
|
$ |
(40,947 |
) |
|
$ |
(44,048 |
) |
|
$ |
(84,995 |
) |
|
$ |
(46,859 |
) |
|
$ |
(13,615 |
) |
|
$ |
(60,474 |
) |
Loans
and Farmer Mac Guaranteed Securities
|
|
|
(46,938 |
) |
|
|
52,731 |
|
|
|
5,793 |
|
|
|
(11,364 |
) |
|
|
29,775 |
|
|
|
18,411 |
|
Total
|
|
|
(87,885 |
) |
|
|
8,683 |
|
|
|
(79,202 |
) |
|
|
(58,223 |
) |
|
|
16,160 |
|
|
|
(42,063 |
) |
Expense
from interest-bearing liabilities
|
|
|
(65,447 |
) |
|
|
(10,948 |
) |
|
|
(76,395 |
) |
|
|
(97,821 |
) |
|
|
11,496 |
|
|
|
(86,325 |
) |
Change
in net interest income
|
|
$ |
(22,438 |
) |
|
$ |
19,631 |
|
|
$ |
(2,807 |
) |
|
$ |
39,598 |
|
|
$ |
4,664 |
|
|
$ |
44,262 |
|
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. Farmer Mac’s net interest yield was $85.9 million
(168 basis points) for 2009, compared to $88.7 million (162 basis points)
and $44.5 million (85 basis points) for 2008 and 2007,
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 adding (expense)/income
related to financial derivatives to net interest income and subtracting yield
maintenance payments.
|
|
For the Year Ended December
31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Dollars
|
|
|
Yield
|
|
Dollars
|
|
|
Yield
|
|
Dollars
|
|
|
Yield
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income/yield
|
|
$ |
85,908 |
|
|
|
1.68 |
% |
|
$ |
88,715 |
|
|
|
1.62 |
% |
|
$ |
44,453 |
|
|
|
0.85 |
% |
(Expense)/income
related to financial derivatives
|
|
|
(35,676 |
) |
|
|
-0.70 |
% |
|
|
(26,975 |
) |
|
|
-0.49 |
% |
|
|
76 |
|
|
|
0.00 |
% |
Yield
maintenance payments
|
|
|
(454 |
) |
|
|
-0.01 |
% |
|
|
(3,556 |
) |
|
|
-0.07 |
% |
|
|
(3,896 |
) |
|
|
-0.07 |
% |
Net
spread
|
|
$ |
49,778 |
|
|
|
0.97 |
% |
|
$ |
58,184 |
|
|
|
1.06 |
% |
|
$ |
40,633 |
|
|
|
0.78 |
% |
Farmer
Mac’s borrowing costs during 2008 were significantly more advantageous than
historical levels. During 2009, the decline in the yield on Farmer
Mac’s floating rate assets outpaced the decline in borrowing costs that were
already at historically low levels.
Yield
maintenance payments represent the present value of expected future interest
income streams and accelerate the recognition of interest income from the
related loans. While the amount of yield maintenance payments has
been relatively consistent over the past three years, the timing and amounts of
these payments could vary greatly. Future variations in yield
maintenance payments would not necessarily indicate positive or negative trends
upon which to gauge future financial results. For the years ended
December 31, 2009, 2008 and 2007, the after-tax effects of yield maintenance
payments on net income and diluted earnings per share were $0.3 million or $0.03
per diluted share, $2.3 million or $0.23 per diluted share and
$2.5 million or $0.24 per diluted share, respectively.
Provision
for Loan Losses. During 2009, Farmer Mac provided for $2.9
million of loan losses, compared to $14.5 million during 2008 and recoveries of
$0.2 million during 2007. The provisions for loan losses during 2008
were largely attributable to defaulted ethanol loans purchased from AgStar
Financial Services, a related party, pursuant to the terms of an LTSPC
agreement. See “—Risk Management—Credit Risk – Loans.”
Provision
for Losses. The provision
for losses on Farmer Mac Guaranteed Securities and LTSPCs was $2.4 million for
2009 compared to $3.3 million for 2008 and $0.1 million during
2007. Similar to the provision for loan losses, the increase in 2008
was largely attributable to Farmer Mac’s exposures to the ethanol
industry. See “—Risk Management—Credit Risk –
Loans.”
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 $31.8 million for 2009, compared to
$28.4 million for 2008 and $25.2 million for 2007. 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 FASB guidance on
derivatives. The net effect of gains and losses on financial
derivatives recorded in Farmer Mac’s consolidated statements of operations was a
net gain of $21.3 million for 2009, and net losses of $130.4 million and
$39.9 million for 2008 and 2007, respectively. The components of
gains and losses on financial derivatives for the years ended December 31, 2009,
2008 and 2007 are summarized in the following table:
|
|
For the Year Ended December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Realized:
|
|
|
|
|
|
|
|
|
|
(Expense)/income
related to financial derivatives
|
|
$ |
(35,676 |
) |
|
$ |
(26,975 |
) |
|
$ |
76 |
|
Losses
due to terminations or net settlements
|
|
|
(4,463 |
) |
|
|
(1,876 |
) |
|
|
(720 |
) |
Unrealized
gains/(losses) due to fair value changes
|
|
|
61,670 |
|
|
|
(101,129 |
) |
|
|
(38,729 |
) |
Amortization
of financial derivatives transition adjustment
|
|
|
(234 |
) |
|
|
(423 |
) |
|
|
(574 |
) |
Gains/(losses)
on financial derivatives
|
|
$ |
21,297 |
|
|
$ |
(130,403 |
) |
|
$ |
(39,947 |
) |
The
accrual of periodic cash settlements for interest paid or received from Farmer
Mac’s interest rate swap contracts is shown as (expense)/income related to
financial derivatives in the table above. Payments or receipts to
terminate derivative positions or net cash settle forward sales contracts on 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 the FASB standard on
derivatives. The remaining financial derivatives transition
adjustment 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.
For the
years ended December 31, 2009, 2008 and 2007, Farmer Mac was a party to interest
rate swap contracts with one related party, Zions First National
Bank. Farmer Mac realized expenses of $3.3 million and $1.3 million
and income of $1.8 million during 2009, 2008 and 2007, respectively, related to
these interest rate swap contracts. Farmer Mac recognized unrealized
gains of $0.1 million and unrealized losses of $2.6 million and $3.9 million
during 2009, 2008 and 2007, respectively, due to changes in the fair value of
these interest rate swap contracts. See Note 3 to the consolidated
financial statements for more information on related party
transactions.
Gains
and Losses on Trading Assets. During 2009, Farmer Mac
recognized gains on trading assets of $43.3 million, compared to losses of $10.6
million and $0.3 million for 2008 and 2007, respectively. The gains
recognized during 2009 are primarily the result of increases in the fair values
of GSE preferred stock, Farmer Mac II Guaranteed Securities and Farmer Mac
Guaranteed Securities – Rural Utilities of $18.4 million, $3.7 million and
$20.8 million, respectively. Gains on trading assets are
discussed further in Note 13 to the 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 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 FCS preferred stock owned by Farmer Mac. Had
Farmer Mac estimated the fair value of the FCS 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.
On
January 1, 2008, with the adoption of the FASB standard on the fair value option
for financial instruments, 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. One of the FASB’s stated objectives of the FASB 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. Consistent with that objective, Farmer Mac selected all
of these assets for the fair value option under the FASB guidance because they
were funded or hedged principally with financial
derivatives. Consequently, Farmer Mac expected that the changes in
fair value of the assets would provide partial economic and financial reporting
offsets to the related financial derivatives. Due to the significant
declines in the fair values of investment securities attributable to the
widening of credit spreads experienced during 2008, such financial reporting
offsets were not achieved. For 2008, Farmer Mac recorded net losses
on trading assets of $5.6 million for changes in fair values of the assets
selected for the fair value option.
During
fourth quarter 2008, Farmer Mac also elected to measure put rights related to
$119.9 million (par value) of its ARC holdings at fair value upon the
election of the fair value option as permitted by the FASB
guidance. See Note 4 to the consolidated financial statements for
more information related to these put rights. Farmer Mac made no fair
value option elections during 2009.
Other-than-Temporary
Impairment Losses. During 2009, Farmer Mac recognized in
earnings other-than-temporary impairment losses of $4.0 million, compared to
$106.2 million in 2008. Prior to 2008, Farmer Mac had not recognized
any other-than-temporary impairment losses. The significant losses in
2008 stemmed from Farmer Mac’s investments in Fannie Mae preferred stock and
Lehman Brothers Holdings Inc. senior debt securities. During 2009,
Farmer Mac recorded additional other-than-temporary impairment losses of $0.1
million related to its investment in Fannie Mae preferred stock and $1.0 million
related to its investment in CIT Group Inc. corporate debt
securities. Farmer Mac sold all of these investments in 2009 and
recognized net recoveries of $3.2 million.
During
2009, Farmer Mac recorded an impairment of $1.3 million related to its remaining
investment in The Reserve Primary Fund. Taking into account the $4.8
million distribution received in January 2010, Farmer Mac’s remaining exposure
to this Fund is $0.5 million. Farmer Mac also recorded
other-than-temporary impairment losses of $1.6 million in 2009 to write
down its $49.9 million investment in the HSBC Finance corporate debt securities
to its fair value of $48.3 million since management intended to sell these
securities. Farmer Mac sold $20.0 million of the HSBC Finance
corporate debt during 2009 and entered into credit default swaps with notional
balances totaling $30.0 million to mitigate the credit exposure related to the
remaining investment in HSBC Finance. The credit default swaps
protect Farmer Mac against any future default by HSBC
Finance. Changes in the fair value of the credit default swaps
will be recorded in earnings; however, only additional credit losses related to
the HSBC Finance corporate debt will be recorded in earnings since management no
longer intends to sell these securities.
Gains on
Sale of Available-for-Sale Investment Securities. During 2009,
2008 and 2007, Farmer Mac recognized realized net gains of $3.4 million, $0.3
million and $0.3 million, respectively, from the sale of securities from
its available-for-sale portfolio. 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. Upon the sale of these securities in first quarter 2009, Farmer
Mac recognized a recovery of $3.2 million.
Gains on
Sale of Loans and Farmer Mac Guaranteed Securities. During 2009 and
2008, Farmer Mac recognized gains on sale of loans held and Farmer Mac
Guaranteed Securities of $1.6 million and $1.5 million,
respectively. There were no gains or losses on the sale of loans held
and Farmer Mac Guaranteed Securities during 2007.
Compensation
and Employee Benefits. Compensation and
employee benefits were $13.7 million, $15.3 million and
$14.2 million for 2009, 2008 and 2007, respectively. The
decrease in 2009 from 2008 was due to accruals in 2008 for severance payments to
the former Chief Executive Officer and Chief Financial Officer.
General
and Administrative Expenses. General and
administrative expenses, including legal, independent audit, and consulting
fees, were $11.2 million, $11.9 million and $8.5 million for
2009, 2008 and 2007, respectively. The increase from 2007 to 2008 was
largely attributable to advisory fees related to the issuance of Series B
Preferred Stock and to legal and other advisory fees related to the development
of Farmer Mac programs and corporate governance matters, which continued in 2009
in connection with the sale of Non-Cumulative Perpetual Preferred Stock of
Farmer Mac’s newly formed subsidiary, Farmer Mac II LLC. See Note 15
to the consolidated financial statements for more information related to Farmer
Mac II LLC.
Regulatory
Fees. Regulatory fees
were $2.1 million, $2.1 million and $2.2 million for 2009, 2008 and
2007, respectively. 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. The regulatory assessments from FCA for each of the examination
periods corresponding approximately with each of the years ended December 31,
2009, 2008 and 2007 include both their originally estimated assessments and
revisions to those estimates that reflect actual costs
incurred. These revisions have resulted in both additional
assessments and refunds in the past.
Income
Tax Expense/Benefit. Income tax expense totaled $52.5 million
in 2009, compared to tax benefits of $22.9 million and $0.1 million in 2008
and 2007, respectively. Farmer Mac’s effective tax rates for 2009,
2008 and 2007 were approximately 34.5 percent, (13.2) percent and (1.3) percent,
respectively. Farmer Mac’s negative tax rate for 2008 was largely
attributable to significant pre-tax losses recognized on Farmer Mac’s derivative
and investment portfolios, which were partially offset by the recognition of a
deferred tax valuation allowance. The negative tax rate for 2007 was
a result of a portion of Farmer Mac’s dividend income on investment securities
being non-taxable. During 2007, the effect of that non-taxable
dividend income on investment securities exceeded Farmer Mac’s tax expense at
its statutory tax rate.
As of
December 31, 2009 and 2008, Farmer Mac recorded a valuation allowance of
$41.1 million and $40.0 million, respectively, against the deferred tax
assets arising from other-than-temporary impairment losses and losses on
preferred stock held in its investment portfolio. Because these
losses were capital in nature, tax benefits can only be realized to the extent
Farmer Mac would have offsetting capital gains. Farmer Mac does not
currently expect to produce sufficient capital gains to recognize any material
tax benefits related to these losses. For more information about
income taxes, see Note 10 to the consolidated financial
statements.
Business
Volume. During 2009, Farmer Mac added $2.5 billion of
program volume, compared to $3.1 billion and $2.3 billion in 2008 and 2007,
respectively. Farmer Mac’s outstanding program volume as of
December 31, 2009 was $10.7 billion, compared to $10.1 billion and
$8.5 billion as of December 31, 2008 and 2007,
respectively. The difference in outstanding program volume as of
December 31, 2009 compared to December 31, 2008 and 2007 is largely attributable
to increases in business volume under Farmer Mac’s Rural Utilities
program. During 2009, Farmer Mac:
|
·
|
purchased
$195.3 million of newly originated Farmer Mac I eligible
loans;
|
|
·
|
added
$234.2 million of Farmer Mac I eligible loans under
LTSPCs;
|
|
·
|
purchased
$28.6 million of loans under the Rural Utilities
program;
|
|
·
|
purchased
or placed its guarantee on $1.7 billion of Farmer Mac Guaranteed
Securities – Rural Utilities; and
|
|
·
|
purchased
$346.4 million of Farmer Mac II USDA-guaranteed
portions.
|
The
following table sets forth Farmer Mac I, Farmer Mac II and Rural Utilities loan
purchase, LTSPC and guarantee activities for newly originated and current
seasoned loans during the periods indicated:
Farmer
Mac Loan Purchases, Guarantees and LTSPCs
|
|
|
|
For the Year Ended December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
195,318 |
|
|
$ |
196,622 |
|
|
$ |
127,709 |
|
LTSPCs
|
|
|
234,166 |
|
|
|
530,363 |
|
|
|
970,789 |
|
AgVantage
|
|
|
— |
|
|
|
475,000 |
|
|
|
1,000,000 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
346,432 |
|
|
|
303,941 |
|
|
|
210,040 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
28,644 |
|
|
|
— |
|
|
|
— |
|
Guaranteed
Securities
|
|
|
1,711,009 |
|
|
|
1,560,676 |
|
|
|
— |
|
Total
purchases, guarantees and commitments
|
|
$ |
2,515,569 |
|
|
$ |
3,066,602 |
|
|
$ |
2,308,538 |
|
The
decrease in business volume under the Farmer Mac I program during 2009 compared
to 2008 and 2007 was attributable in part to Farmer Mac’s requirement, beginning
in late 2008, that business partners purchase Series C Preferred Stock in
connection with new transactions in excess of $20.0 million. That
requirement reduced the flow of business volume from some of Farmer Mac’s
traditional sources during 2009, particularly under the Farmer Mac I
program. Farmer Mac eliminated the Series C Preferred Stock
investment requirement in December 2009.
The
purchase price of newly originated and seasoned eligible loans and portfolios,
none of which are delinquent at the time of purchase, is the fair value based on
current market interest rates and Farmer Mac’s target net yield, which includes
an amount to compensate Farmer Mac for credit risk that is similar to the
guarantee or commitment fee it receives for assuming credit risk on loans
underlying Farmer Mac Guaranteed Securities and LTSPCs.
Based on
market conditions, Farmer Mac either retains the loans it purchases or
securitizes them and sells Farmer Mac Guaranteed Securities backed by those
loans. Farmer Mac’s decision to retain loans it purchases is based on
analysis of the underlying funding costs and resulting net interest income
achievable over the lives of the loans. The weighted-average age of
the Farmer Mac I newly originated and current seasoned loans purchased and
retained (excluding the purchases of defaulted loans) during both 2009 and 2008
was less than one year. Of those loans, 54 percent and 59 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 12.7 years and 16.3 years, respectively.
During
2009, 2008 and 2007, Farmer Mac securitized loans it purchased and sold the
resulting Farmer Mac Guaranteed Securities in the amount of $28.7 million,
$98.8 million and $1.3 million, respectively. Of the 2009
transactions, $27.8 million was sold to Zions First National Bank (“Zions”) and
$0.9 million was sold to AgStar Financial Services, ACA
(“AgStar”). Of the 2008 transactions, $96.1 million was sold to Zions
and $2.7 million was sold to AgStar. All of the 2007 transactions
were sold to AgStar. Both Zions and AgStar are related parties with
respect to Farmer Mac. Additionally, during 2007 Farmer Mac issued
$681.7 million of Farmer Mac I Guaranteed Securities as the result of
conversions of LTSPCs, of which $400.2 million were issued to related
parties. All of those 2007 transactions were with
AgStar. See Note 3 to the consolidated financial statements for
more information about related party transactions.
The
following table sets forth information regarding the Farmer Mac I Guaranteed
Securities issued during the periods indicated:
|
|
For the Year Ended December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Loans
securitized and sold as Farmer Mac I Guaranteed
Securities
|
|
$ |
28,736 |
|
|
$ |
98,843 |
|
|
$ |
1,324 |
|
AgVantage
securities
|
|
|
— |
|
|
|
475,000 |
|
|
|
1,000,000 |
|
Conversions
of LTSPCs into Farmer Mac I Guaranteed Securities
|
|
|
— |
|
|
|
— |
|
|
|
681,732 |
|
Total
Farmer Mac I Guaranteed Securities Issuances
|
|
$ |
28,736 |
|
|
$ |
573,843 |
|
|
$ |
1,683,056 |
|
The
outstanding principal balance of loans held and loans underlying LTSPCs and on-
and off-balance sheet Farmer Mac Guaranteed Securities increased 6.3 percent to
$10.7 billion as of December 31, 2009 from $10.1 billion as of
December 31, 2008. The following table sets forth information
regarding those outstanding balances as of the dates indicated:
Outstanding
Balance of Farmer Mac Loans and Loans Underlying
|
|
Farmer
Mac Guaranteed Securities and LTSPCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
733,422 |
|
|
$ |
781,305 |
|
|
$ |
762,319 |
|
Guaranteed
Securities (including AgVantage)
|
|
|
4,491,346 |
|
|
|
4,978,468 |
|
|
|
4,885,878 |
|
LTSPCs
|
|
|
2,165,706 |
|
|
|
2,224,181 |
|
|
|
1,948,941 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
1,199,798 |
|
|
|
1,043,425 |
|
|
|
946,617 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
28,644 |
|
|
|
1,054,941 |
|
|
|
— |
|
Guaranteed
Securities (including AgVantage)
|
|
|
2,102,188 |
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
10,721,104 |
|
|
$ |
10,082,320 |
|
|
$ |
8,543,755 |
|
Of the
$10.7 billion outstanding principal balance of volume included in Farmer Mac’s
three programs as of December 31, 2009, $4.7 billion are Farmer Mac
Guaranteed Securities structured as AgVantage 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. Unlike business volume
in the form of purchased loans and loans underlying LTSPCs and non-AgVantage
Farmer Mac Guaranteed Securities, the Farmer Mac Guaranteed Securities
structured as AgVantage securities do not pay down principal based on
amortization schedules and instead have fixed maturity dates when the secured
general obligation is due. The following table summarizes by maturity
date the outstanding principal amount of AgVantage securities as of December 31,
2009.
AgVantage Balances by Year of
Maturity
|
|
|
|
As
of
|
|
|
|
December 31, 2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
2010
|
|
$ |
195,600 |
|
2011
|
|
|
2,051,400 |
|
2012
|
|
|
497,000 |
|
2013
|
|
|
157,750 |
|
2014
|
|
|
761,900 |
|
Thereafter
|
|
|
1,019,390 |
|
Total
|
|
$ |
4,683,040 |
|
As shown
in the table above, $2.1 billion of the outstanding $4.7 billion of
AgVantage securities matures in 2011. If the institution that issued
a maturing AgVantage security does not refinance it through Farmer Mac and
Farmer Mac does not find alternate sources of business volume, the
Corporation’s
income could be adversely affected, although the effect on income of less
AgVantage business may not be material and will likely not be proportional to
the amount of any decrease in business volume as a result of the maturity of
AgVantage securities.
As part
of fulfilling its guarantee obligations for Farmer Mac I Guaranteed Securities
and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac
purchases defaulted loans, all of which are at least 90 days delinquent at
the time of purchase, out of the loan pools underlying those securities and
LTSPCs, and records the purchased loans as such on its balance
sheet. The purchase price for defaulted loans purchased out of Farmer
Mac I Guaranteed Securities is the current outstanding principal balance of the
loan plus accrued and unpaid interest. The purchase price for
defaulted loans purchased under an LTSPC is the 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 “—Risk Management—Credit Risk –
Loans.”
The
following table presents Farmer Mac’s purchases of newly originated and current
seasoned loans and purchases of defaulted loans underlying Farmer Mac I
Guaranteed Securities and LTSPCs for the periods indicated:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I newly originated and current seasoned loan purchases
|
|
$ |
195,318 |
|
|
$ |
196,622 |
|
|
$ |
127,709 |
|
Defaulted
loans purchased underlying off-balance sheet Farmer Mac I
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
1,157 |
|
|
|
647 |
|
|
|
1,562 |
|
Defaulted
loans purchased underlying LTSPCs
|
|
|
17,896 |
|
|
|
56,560 |
|
|
|
1,033 |
|
Defaulted
loans underlying on-balance sheet Farmer Mac I Guaranteed Securities
transferred to loans
|
|
|
2,216 |
|
|
|
1,072 |
|
|
|
1,316 |
|
Total
loan purchases
|
|
$ |
216,587 |
|
|
$ |
254,901 |
|
|
$ |
131,620 |
|
The
purchases of defaulted loans underlying Farmer Mac I Guaranteed Securities and
LTSPCs are pursuant to Farmer Mac’s obligations as guarantor and under its
contractual commitments, respectively. Farmer Mac may, in its sole
discretion, purchase the defaulted loans underlying Farmer Mac Guaranteed
Securities and is obligated to purchase those underlying an
LTSPC. With respect to the transfer of loans from on-balance sheet
Farmer Mac I Guaranteed Securities to loans, when particular criteria are met,
such as the default of the borrower, Farmer Mac becomes entitled to purchase the
defaulted loans underlying Farmer Mac I Guaranteed Securities (commonly referred
to as “removal-of-account” provisions). Farmer Mac records all such
defaulted loans at their unpaid principal balance during the period in which
Farmer Mac becomes entitled to purchase the loans and therefore regains
effective control over the transferred loans. Considering the low
loan-to-value ratios in its portfolio, Farmer Mac believes that it is probable
at the acquisition of these loans that it will be able to collect all
contractually required payments receivable. The weighted-average age
of delinquent loans purchased out of securitized pools and LTSPCs during 2009,
2008 and 2007 was 3 years, 3 years and 8 years, respectively.
For
information regarding sellers in the Farmer Mac I and Farmer Mac II
programs, see “Business—Farmer Mac Programs—Farmer Mac I—Sellers” and
“Business—Farmer Mac Programs—Farmer Mac II—United States Department of
Agriculture Guaranteed Loan Programs.”
Related
Party Transactions. As provided by Farmer Mac’s statutory
charter, only banks, insurance companies and other financial institutions or
similar entities may hold Farmer Mac’s Class A voting common stock, and only
institutions of the FCS may hold Farmer Mac’s Class B voting common
stock. Farmer Mac’s statutory charter also provides that holders of
Class A voting common stock elect five members of Farmer Mac’s 15-member board
of directors and that holders of Class B voting common stock elect five members
of the board of directors. The ownership of Farmer Mac’s two classes
of voting common stock is currently concentrated in a small group of
institutions. Approximately 97 percent of the voting power of
the Class B voting common stock is held by five institutions of the
FCS. Approximately 44 percent of the Class A voting common stock
is held by three financial institutions, with 31 percent held by one
institution.
Unlike
some other GSEs, specifically other FCS institutions and the Federal Home Loan
Banks, Farmer Mac is not structured as a cooperative owned exclusively by member
institutions and established to provide services exclusively to its
members. Farmer Mac, as a stockholder-owned, publicly-traded
corporation, seeks to fulfill its mission of serving the financing needs of
agriculture and rural America while at the same time providing a return on the
investment of all its stockholders, including those who do not directly
participate in the Farmer Mac secondary market. Farmer Mac’s policy
is to require financial institutions to own a requisite amount of Farmer Mac
Class A or Class B voting common stock, based on the size and type of
institution, to participate in the Farmer Mac I program. As a result
of this requirement, coupled with the ability of holders of Class A and Class B
voting common stock to elect two-thirds of Farmer Mac’s board of directors,
Farmer Mac regularly conducts business with “related parties,” including
institutions affiliated with members of Farmer Mac’s board of directors and
institutions that own large amounts of Farmer Mac voting common
stock. Farmer Mac has adopted a Code of Business Conduct and Ethics
that governs any conflicts of interest that may arise in these transactions, and
Farmer Mac’s policy is to require that any transactions with related parties be
conducted in the ordinary course of business, with terms and conditions
comparable to those available to any other program participant not related to
Farmer Mac.
The
following table summarizes the material relationships between Farmer Mac and
certain related parties. The related parties listed in the table
consist of (1) all holders of at least five percent of a class of Farmer
Mac voting common stock and (2) other institutions that own less than five
percent of a class of Farmer Mac voting common stock but are considered “related
parties” through an affiliation with a Farmer Mac director and also conduct
material business with Farmer Mac. The table below does not specify
any relationships based on the ownership of non-voting common or preferred
stock, such as Farmer Mac’s investments in preferred stock issued by AgFirst and
CoBank or the investments of related parties in Farmer Mac’s Series B Preferred
Stock or Series C Preferred Stock.
Name
of Institution
|
|
Ownership
of
Farmer
Mac
Voting
Common
Stock
|
|
Affiliation
with any
Farmer
Mac
Directors
|
|
Primary
Aspects of Institution’s
Business
Relationship with
Farmer
Mac
|
AgFirst
Farm Credit Bank
|
|
84,024
shares of Class B voting common stock
(16.79%
of outstanding Class B stock and 5.49% of total voting common stock
outstanding)
|
|
Farmer
Mac director John Dan Raines, Jr. is also a director of
AgFirst
|
|
·
In 2009 and 2008, Farmer Mac earned approximately $1.9 million
and $2.1 million, respectively, in fees attributable to transactions
with AgFirst, primarily commitment fees for LTSPCs.
|
|
|
|
|
|
|
|
AgriBank,
FCB
|
|
201,621
shares of Class B voting common stock)
(40.30%
of outstanding Class B stock and 13.17% of total voting common stock
outstanding)
|
|
Farmer
Mac director Brian J. O’Keane is the Chief Financial Officer of
AgriBank
|
|
·
No Farmer Mac program business conducted between the
parties.
|
AgStar
Financial Services, ACA
|
|
None
|
|
Farmer
Mac director Paul A. DeBriyn is the Chief Executive Officer of
AgStar
|
|
·
In 2009 and 2008, Farmer Mac received approximately
$3.2 million and $3.8 million, respectively, in fees
attributable to transactions with AgStar, primarily guarantee fees for
Farmer Mac I Guaranteed Securities and commitment fees for
LTSPCs.
·
In 2009 and 2008, Farmer Mac purchased from AgStar approximately
$11.9 million and $53.2 million, respectively, of defaulted
loans related to ethanol plants pursuant to the terms of the applicable
LTSPC agreement.
·
In 2009 and 2008, AgStar received approximately $1.6 million
and $1.9 million, respectively, in servicing fees for its work as a
Farmer Mac central
servicer.
|
Name
of Institution
|
|
Ownership
of
Farmer
Mac
Voting
Common
Stock
|
|
Affiliation
with any
Farmer
Mac
Directors
|
|
Primary
Aspects of Institution’s
Business
Relationship with
Farmer
Mac
|
CoBank,
ACB
|
|
62,980
shares of Class B voting common stock
(12.59%
of outstanding Class B stock and 4.11% of total voting common stock
outstanding)
|
|
Farmer
Mac director Brian P. Jackson is the former Chief Financial and
Administrative Officer (and currently a non-officer employee) of
CoBank
|
|
·
No Farmer Mac program business conducted between the
parties.
|
Farm
Credit Bank of Texas (FCBT)
|
|
38,503
shares of Class B voting common stock)
(7.70%
of outstanding Class B stock and 2.52% of total voting common stock
outstanding)
|
|
None
|
|
·
In 2009 and 2008, Farmer Mac earned approximately $1.9 million
and $1.8 million, respectively, in fees attributable to transactions with
FCBT, primarily commitment fees for LTSPCs.
|
Farm
Credit West, ACA (FCW)
|
|
750
shares of Class B Voting Common Stock
(0.15%
of outstanding Class B stock and 0.05% of total voting common stock
outstanding)
|
|
Farmer
Mac director Ernest M. Hodges is an Executive Vice President of Farm
Credit West
|
|
·
In 2009 and 2008, Farmer Mac received approximately
$3.3 million and $3.7 million, respectively, in fees
attributable to transactions with FCW, primarily guarantee fees for Farmer
Mac I Guaranteed Securities and commitment fees for LTSPCs.
·
In 2009 and 2008, FCW received approximately $2.2 million and
$2.4 million, respectively, in servicing fees for its work as a
Farmer Mac central servicer.
|
|
|
|
|
|
|
|
National
Rural Utilities Cooperative Finance Corporation
|
|
79,000
shares of Class A Voting Common Stock
(7.66%
of outstanding Class A stock and 5.16% of total voting common stock
outstanding)
|
|
None
|
|
·
Transactions with National Rural represent 100 percent of business
volume under the Farmer Mac Rural Utilities program since the program’s
inception in May 2008.
·
Transactions with National Rural during 2009 and 2008 represented
69.2 percent and 50.9 percent, respectively, of Farmer Mac’s
total new program volume for those years.
·
In 2009, Farmer Mac earned guarantee fees of approximately
$6.0 million and interest income of $32.3 million attributable
to AgVantage transactions with National Rural.
·
National Rural is currently the only servicer of all the rural
utilities loans included in Farmer Mac’s Rural Utilities
program
|
Name
of Institution
|
|
Ownership
of
Farmer
Mac
Voting
Common
Stock
|
|
Affiliation
with any
Farmer
Mac
Directors
|
|
Primary
Aspects of Institution’s
Business
Relationship with
Farmer
Mac
|
U.S.
AgBank
|
|
100,273
shares of Class B Voting Common Stock
(20.04%
of outstanding Class B stock and 6.55% of total voting common stock
outstanding)
|
|
None
|
|
·
No Farmer Mac program business conducted between the
parties.
|
The
Vanguard Group, Inc.
|
|
56,295
shares of Class A Voting Common Stock
(5.46%
of outstanding Class A stock and 3.68% of total voting common stock
outstanding)
|
|
None
|
|
·
No Farmer Mac program business conducted between the
parties.
|
Zions
First National Bank
|
|
322,100
shares of Class A Voting Common Stock
(31.25%
of outstanding Class A stock and 21.04% of total voting common stock
outstanding)
|
|
None
|
|
·
In 2009 and 2008, Farmer Mac’s purchases of loans from Zions under
the Farmer Mac I program represented approximately 39.5 percent and
36.5 percent, respectively, of Farmer Mac I loan purchase volume for
those years. Those purchases represented 17.9 percent and
6.0 percent, respectively, of Farmer Mac’s total program volume for
those years.
·
In 2009 and 2008, Farmer Mac received approximately
$1.4 million and $1.8 million, respectively, in guarantee fees
attributable to transactions with Zions.
·
In 2009 and 2008, Zions received approximately $1.6 million
and $1.5 million, respectively, in servicing fees for its work as a
Farmer Mac central
servicer.
|
For more
information about related party transactions, see Note 3 to the consolidated
financial statements.
Outlook. The
agricultural sector is made up of diverse industries that respond in different
ways to changes in economic conditions. Those industries often are
affected differently, sometimes positively and sometimes negatively, by
prevailing economic conditions. This dynamic results in cycles where
one or more industries may be under stress at any one time, such as the protein
sector and the dairy sector in 2009. Farmer Mac anticipates that loan
problems and reduced profitability in the protein sector and the dairy sector
are likely to continue during much of 2010, 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. Farmer Mac
will continue to closely monitor developments in industries and geographic areas
experiencing stress.
With
respect to the agricultural operating and lending markets, recent farmland sales
have reflected more limited investor interest and the effects of reduced
profitability in most commodity groups. Elevated farm input costs and
lower current commodity prices have significantly squeezed profits and the
related farmer demand for additional land, especially in the protein sector,
dairy sector, and stressed irrigation water areas. 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 also monitors the establishment and evolution of
governmental policies and regulations that affect farmers, ranchers, and
lenders, including agricultural polices contained in the current Farm Bill due
to expire in 2013. Congress has targeted the development of a new
Farm Bill to begin during the summer of 2010.
Broader
trends underway now, such as the deleveraging of capital, will also have an
effect in reducing credit availability from traditional lenders to the
agricultural sector. Accordingly, Farmer Mac expects a growing need
for financial vehicles to expand credit availability to those agricultural
industries that have sound financial fundamentals, which presents both a
challenge and an opportunity that Farmer Mac is actively
pursuing. For example, based on recent communications between a
Farmer Mac commercial bank business partner and its banking regulator, it is
expected that loans from commercial banks that are placed in the LTSPC program
will receive favorable capital treatment, thereby increasing opportunities for
LTSPC transactions with commercial banks.
Farmer
Mac also foresees opportunities for continued business growth in the rural
utilities segment, though not at the pace experienced during 2008 and
2009. In the near term, Farmer Mac expects that the majority of any
new rural utilities business will be in the form of direct credit exposures to
both electric distribution and G&T loans through purchases of those loans,
rather than indirect credit exposures to those loans through AgVantage
transactions.
Farmer
Mac expects that, in the near term, demand for rural utilities loans will
reflect the state of the general economy. Recently, electric
consumption has been reduced, which has slowed loan demand, but is expected to
return as the economy strengthens. The industry recently added
significant new generation capacity for the first time since the 1970s, and in
some areas planned residential and commercial development did not keep pace with
generation expansion. Nonetheless, Farmer Mac believes that the rural
utilities sector is a strong and growing industry with significant needs for
future financing during the next five to ten years, as capital will be needed to
finance the construction of new generation and transmission facilities,
modernize existing equipment, and comply with environmental regulations.
Farmer Mac’s ability to participate in the growth of the rural utilities portion
of its business will be limited by Farmer Mac’s limits on borrower exposures,
its overall risk tolerance, and the ability of Farmer Mac to maintain its
funding costs at levels conducive to further growth in the Rural Utilities
program.
The
electrical power generated by and for rural electric cooperatives generally uses
coal as a fuel, and Farmer Mac continues to closely monitor the risk factors
associated with the electric industry and their potential effect on the
Corporation’s rural utilities portfolio. As green energy sources
continue to be developed, new power transmission lines will be needed to support
the development and operation of many new wind and solar power plants to
transfer their power from remote locations to the ultimate
consumer. Public policy shifts in the energy sector, such as carbon
tax, cap and trade legislation, and clean energy incentives, may also alter
Farmer Mac’s opportunities in this area as cooperatives invest in clean energy
projects and demand-side management and avoid new coal-fired generating
projects. Any of those developments could lead to increased or
decreased business volume for Farmer Mac in the rural utilities sector depending
on how any new initiatives, legislation, or regulations are implemented and
their effect on lending to rural utilities cooperative borrowers.
With
lenders in both the agricultural and rural utilities sectors continuing to face
capital markets and economic challenges, Farmer Mac represents a source of
liquidity and capital and risk management to help lenders meet the borrowing
needs of their customers. Farmer Mac intends to continue to explore
new possibilities for advancing the Corporation’s mission of serving the
financing needs of agriculture and rural America, especially as the structures,
strategies, and programs deployed by the financial markets and the federal
government continue to evolve in attempts to unlock the credit
markets. These efforts will take time to develop, but Farmer Mac
believes that the flexibility provided in its charter is a strength that offers
advantages in current market conditions. The charter permits both (1)
loan purchases, which create value in new loan originations by providing
liquidity for them, and (2) guarantees and LTSPCs, which enhance the value of
eligible loans already in the portfolios of lenders while reducing the required
regulatory capital support for those loans. Farmer Mac’s business
strategies in the near term will focus on flexibility, identification of
opportunities, and growth through multiple channels and with numerous business
partners. In pursuing these objectives, Farmer Mac intends to
actively search for new program business, aggressively work with business
partners to create new products, continue to improve operations with the goal of
improving the customer experience, and continue to seek out new relationships
and strengthen long-term relationships.
Balance
Sheet Review
Assets. Total
assets as of December 31, 2009 were $6.1 billion, compared to $5.1 billion as of
December 31, 2008. On-balance sheet program assets (Farmer Mac
Guaranteed Securities and loans) increased $1.0 billion during 2009 to a total
of $4.2 billion. Farmer Mac’s non-program assets increased $0.1
billion to $2.0 billion as of December 31, 2009.
As of
December 31, 2009, Farmer Mac had $654.8 million of cash and cash equivalents
compared to $278.4 million as of December 31, 2008. As of December
31, 2009, Farmer Mac had $1.1 billion of investment securities compared to
$1.2 billion as of December 31, 2008. As noted above,
Farmer Mac’s 2008 financial results were adversely affected by realized losses
on certain investment securities. During 2009, Farmer Mac implemented
changes to its investment policies, with the goals of minimizing the
Corporation’s exposure to financial market volatility, preserving capital, and
supporting access to the debt markets. In addition, as of December
31, 2008 Farmer Mac had unrealized losses on investment securities of $107.1
million. That amount was reduced to $34.3 million as of December 31,
2009. Of the $34.3 million of unrealized losses as of December 31,
2009, $22.4 million is due to an investment in floating rate CoBank subordinated
debt. CoBank is an institution of the FCS, a government-sponsored
enterprise. As of December 31, 2008, unrealized losses in Farmer
Mac’s investments in floating rate corporate debt securities were significant,
totaling $39.4 million. As of December 31, 2009, those unrealized
losses were reduced to $1.4 million.
During
third quarter 2009, Farmer Mac accepted an exchange offer extended by CoBank,
ACB, an institution of the FCS, 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 FASB guidance on
investments. 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
consolidated statements of operations.
Liabilities. Total
liabilities increased to $5.8 billion as of December 31, 2009 from
$4.9 billion as of December 31, 2008. The increase in
liabilities was due primarily to an overall increase in notes payable due after
one year used to fund program assets. For more information about
Farmer Mac’s funding and interest rate risk practices and how financial
derivatives are used, see “—Risk Management—Interest Rate Risk.” For
more information about Farmer Mac’s reserve for losses, see “—Risk
Management—Credit Risk – Loans.”
Capital. As
of December 31, 2009, Farmer Mac had mezzanine equity of $144.2 million
resulting from issuances of preferred stock in 2008 and stockholders’ equity of
$196.2 million, compared to mezzanine equity of $144.2 million and
stockholders’ equity of $15.3 million as of December 31,
2008. The increase in stockholders’ equity was primarily due to $80.3
million of retained earnings, $50.7 million of other comprehensive income
resulting from unrealized gains on investment securities and Farmer Mac
Guaranteed Securities classified as available-for-sale, and the issuance of
$48.4 million of Farmer Mac’s Series C preferred stock during
2009. Farmer Mac’s $144.2 million of mezzanine equity was
included in its core capital for the purposes of meeting its statutory minimum
capital requirement and risk-based capital standards.
Farmer
Mac was in compliance with its statutory minimum capital requirement and its
risk-based capital standard as of December 31, 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 December 31, 2009, Farmer Mac’s core capital totaled
$337.2 million and exceeded its statutory minimum capital requirement of $217.0
million by $120.2 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 December 31,
2009, Farmer Mac’s risk-based capital stress test generated a risk-based capital
requirement of $35.9 million. Farmer Mac’s regulatory capital of
$351.3 million exceeded that amount by approximately $315.4
million. Accumulated other comprehensive (loss)/income is not a
component of Farmer Mac’s core capital or regulatory capital. For
further information, see “—Liquidity
and Capital Resources—Capital Requirements” and “—Regulatory
Matters.”
In
January 2010, Farmer Mac raised $250.0 million of new capital in the form of
non-voting, non-cumulative preferred stock issued by its newly formed
subsidiary, Farmer Mac II LLC. Farmer Mac used the proceeds
from the $250.0 million to retire all of the outstanding shares of its Series B
Preferred Stock and to further enhance its regulatory capital
position. After consideration of the consolidated tax benefits to
Farmer Mac, the net effective cost of the new $250 million of preferred stock is
5.77 percent per year, which is $3.6 million less per year than the cost of the
$150 million of Series B Preferred Stock based on its 2010 dividend rate of 12
percent, which was scheduled to increase to 14 percent at the end of 2010 and 16
percent in 2011. See Note 15 to the consolidated financial statements
for more information about the capital raise and Farmer Mac II LLC.
Risk
Management
Credit
Risk – Loans. Farmer Mac is
exposed to credit risk resulting from the inability 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 underlying Farmer Mac II Guaranteed
Securities 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
December 31, 2009, Farmer Mac had not experienced any credit losses on any
business under the Farmer Mac II program and does not expect that the
Corporation or Farmer Mac II LLC will 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 such, all AgVantage securities are secured by current loans
representing at least 100 percent of the outstanding amount of the
security. As of December 31, 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 (including interest rate shock tests for adjustable rate mortgages
with initial reset periods of five years or less) for agricultural real estate
mortgage loans and rural utilities 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. These standards were
developed on the basis of industry norms for agricultural real estate mortgage
loans and rural utilities loans and are designed to assess the creditworthiness
of the borrower, as well as the value of the collateral securing the
loan. Farmer Mac evaluates and adjusts these standards on an ongoing
basis based on current and anticipated market conditions. Farmer Mac
also requires sellers to make representations and warranties regarding the
conformity of eligible mortgage loans to these standards, the accuracy of loan
data provided to Farmer Mac and other requirements related to the
loans. Sellers are responsible to Farmer Mac for breaches of those
representations and warranties that result in economic losses to the
Corporation. Pursuant to contracts with Farmer Mac and in
consideration for servicing fees, Farmer Mac-approved central servicers service
loans in accordance with Farmer Mac requirements. Central servicers
are responsible to Farmer Mac for serious errors in the servicing of those
mortgage loans. 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” and
“Business—Farmer Mac Programs—Farmer Mac I—Sellers” and “Business—Farmer Mac
Programs—Rural Utilities.”
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. 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.” 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 FASB standards on accounting for contingencies and on measuring
individual impairment of a loan.
The
following table summarizes the components of Farmer Mac’s allowance for losses
as of December 31, 2009 and 2008:
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Allowance
for loan losses
|
|
$ |
6,292 |
|
|
$ |
10,929 |
|
Reserve
for losses:
|
|
|
|
|
|
|
|
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
— |
|
|
|
869 |
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
2,033 |
|
|
|
535 |
|
LTSPCs
|
|
|
5,862 |
|
|
|
4,102 |
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
14,187 |
|
|
$ |
16,435 |
|
The
following table summarizes the changes in the components of Farmer Mac’s
allowance for losses for each year in the five-year period ended
December 31, 2009:
|
|
Allowance
|
|
|
REO
|
|
|
|
|
|
Total
|
|
|
|
for
Loan
|
|
|
Valuation
|
|
|
Reserve
|
|
|
Allowance
|
|
|
|
Losses
|
|
|
Allowance
|
|
|
for Losses
|
|
|
for Losses
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2005
|
|
$ |
4,395 |
|
|
$ |
— |
|
|
$ |
12,706 |
|
|
$ |
17,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
(3,335 |
) |
|
|
206 |
|
|
|
(859 |
) |
|
|
(3,988 |
) |
Charge-offs
|
|
|
(105 |
) |
|
|
(206 |
) |
|
|
— |
|
|
|
(311 |
) |
Recoveries
|
|
|
640 |
|
|
|
— |
|
|
|
— |
|
|
|
640 |
|
Change
in accounting estimate
|
|
|
3,281 |
|
|
|
— |
|
|
|
(8,070 |
) |
|
|
(4,789 |
) |
Balance
as of December 31, 2005
|
|
$ |
4,876 |
|
|
$ |
— |
|
|
$ |
3,777 |
|
|
$ |
8,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
(2,396 |
) |
|
|
155 |
|
|
|
(1,167 |
) |
|
|
(3,408 |
) |
Charge-offs
|
|
|
(900 |
) |
|
|
(155 |
) |
|
|
— |
|
|
|
(1,055 |
) |
Recoveries
|
|
|
365 |
|
|
|
— |
|
|
|
— |
|
|
|
365 |
|
Balance
as of December 31, 2006
|
|
$ |
1,945 |
|
|
$ |
— |
|
|
$ |
2,610 |
|
|
$ |
4,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
(215 |
) |
|
|
100 |
|
|
|
(27 |
) |
|
|
(142 |
) |
Charge-offs
|
|
|
(60 |
) |
|
|
(100 |
) |
|
|
(386 |
) |
|
|
(546 |
) |
Recoveries
|
|
|
20 |
|
|
|
— |
|
|
|
— |
|
|
|
20 |
|
Balance
as of December 31, 2007
|
|
$ |
1,690 |
|
|
$ |
— |
|
|
$ |
2,197 |
|
|
$ |
3,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
14,531 |
|
|
|
— |
|
|
|
3,309 |
|
|
|
17,840 |
|
Charge-offs
|
|
|
(5,308 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5,308 |
) |
Recoveries
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
Balance
as of December 31, 2008
|
|
$ |
10,929 |
|
|
$ |
— |
|
|
$ |
5,506 |
|
|
$ |
16,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
2,853 |
|
|
|
— |
|
|
|
2,389 |
|
|
|
5,242 |
|
Charge-offs
|
|
|
(8,491 |
) |
|
|
— |
|
|
|
— |
|
|
|
(8,491 |
) |
Recoveries
|
|
|
1,001 |
|
|
|
— |
|
|
|
— |
|
|
|
1,001 |
|
Balance
as of December 31, 2009
|
|
$ |
6,292 |
|
|
$ |
— |
|
|
$ |
7,895 |
|
|
$ |
14,187 |
|
Farmer
Mac added $5.2 million to the allowance for losses during 2009, compared to
$17.8 million in 2008. During 2009 and 2008, Farmer Mac charged off
$8.5 million and $5.3 million, respectively, in losses against
the allowance for losses. The charge-offs for 2009 and 2008 did not
include any amounts related to previously accrued or advanced interest on loans
or Farmer Mac I Guaranteed Securities.
As of
December 31, 2009, Farmer Mac’s allowance for losses totaled $14.2 million, or
32 basis points of the outstanding principal balance of loans held and
loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding
AgVantage securities), compared to $16.4 million
(33 basis points) as of December 31, 2008.
As of
December 31, 2009, Farmer Mac’s 90-day delinquencies were $49.5 million
(1.13 percent), compared to $67.1 million (1.35 percent) as of
December 31, 2008. Those delinquencies are concentrated in the
Corporation’s ethanol portfolio, with ethanol loans comprising
$19.1 million of all 90-day delinquencies as of December 31, 2009, compared
to $49.2 million as of December 31, 2008. Other than the ethanol
portfolio, the loans underlying the Corporation’s guarantees and commitments
continued to perform well during 2009, with delinquencies on non-ethanol loans
remaining near historically low levels consistent with the strength of the U.S.
agricultural economy through the end of the year. As of December 31,
2009, there were no delinquencies or non-performing assets in Farmer Mac’s
portfolio of rural utilities loans. As of December 31, 2009,
Farmer Mac’s non-performing assets totaled $62.0 million (1.41 percent),
compared to $80.0 million (1.61 percent) as of December 31,
2008. 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
December 31, 2009, Farmer Mac’s ethanol exposure, which includes loans and loans
subject to LTSPCs, was $263.9 million with exposure to 29 different plants
in 11 states. As of that date, Farmer Mac also had $37.0 million
of undisbursed commitments with respect to ethanol loans. Other than
the undisbursed commitments, Farmer Mac does not expect to add additional
ethanol loans 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, as of December 31, 2008, secured $41.2 million of outstanding
loan participations in Farmer Mac’s portfolio. Farmer Mac recorded a
specific allowance of $8.6 million during fourth quarter 2008, which reduced the
carrying value on these loans to $32.6 million. Farmer Mac
presented the outstanding loans participations and specific allowance as “Loans
held for investment” and “Allowance for loan losses”, respectively, on the
consolidated balance sheets as of December 31, 2008.
As of
March 31, 2009, Farmer Mac’s outstanding loan participations secured by these
ethanol plants totaled $43.9 million and the specific allowance was $12.1
million, which brought the net carrying value to $31.8 million.
In second
quarter 2009, the lending groups that included Farmer Mac formed limited
liability companies through which the lending groups acquired the four ethanol
plants as part of the VeraSun bankruptcy proceedings, with the lender credit bid
prevailing at the bankruptcy auction. 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 fourth quarter
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 the
date of the acquisition of the properties, Farmer Mac presented its ownership
interest in the ethanol plants as “Real estate owned” on the consolidated
balance sheets 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, 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. 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.
As of
December 31, 2009, Farmer Mac presented its outstanding loans resulting from the
sale of the four ethanol plants as “Loans held for investment” on the
consolidated balance sheets and recorded its investment at $40.2 million, which
includes $43.4 million of unpaid principal loan balances, net of a $3.2 million
deferred gain resulting from the sale of the four 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
$ |
4,396,642 |
|
|
$ |
62,020 |
|
|
|
1.41 |
% |
|
$ |
12,494 |
|
|
$ |
49,526 |
|
|
|
1.13 |
% |
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 |
% |
(1)
|
Excludes
loans underlying AgVantage
securities.
|
As of
December 31, 2009, Farmer Mac individually analyzed $47.0 million of its
$101.2 million of impaired assets for collateral shortfalls against updated
appraised values, other updated collateral valuations or discounted
values. Farmer Mac evaluated the remaining $54.2 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 recorded specific allowances of $0.6 million
for under-collateralized assets as of
December 31, 2009. Farmer Mac’s non-specific or general
allowances were $13.6 million as of December 31, 2009.
Loans in
the Farmer Mac I program are all first mortgage agricultural real estate
loans. Accordingly, Farmer Mac’s exposure on a loan is limited to the
difference between the total of the accrued interest, advances and the principal
balance of a loan and the value of the property. Measurement of that
excess or shortfall is the best predictor and determinant of loss, compared to
other measures that evaluate the efficiency of a particular farm
operator. Debt service ratios depend upon farm operator efficiency
and leverage, which can vary widely within a geographic region, commodity type,
or an operator’s business and farming skills. Original LTVs
(calculated by dividing the loan principal balance at the time of guarantee,
purchase or commitment by the appraised value at the date of loan origination
or, when available, updated appraised value at the time of guarantee, purchase
or commitment) are one of many factors Farmer Mac considers in evaluating loss
severity. Other factors include, but are not limited to, other
underwriting standards, commodity and farming forecasts and regional economic
and agricultural conditions.
LTVs
depend upon the market value of a property, as determined in accordance with
Farmer Mac’s collateral valuation standards. As of December 31, 2009,
the weighted-average original LTV for loans held and loans underlying LTSPCs and
Farmer Mac I Guaranteed Securities (excluding AgVantage securities) was
50.0 percent, and the weighted-average original LTV for all non-performing
assets was 68.4 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
December 31, 2009 by year of origination, geographic region and
commodity/collateral type:
Farmer
Mac I Non-performing Assets as of December 31, 2009
|
|
|
Distribution of
|
|
Outstanding
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Loans,
|
|
|
|
|
|
|
|
|
Loans,
|
|
Guarantees,
|
|
|
Non-
|
|
|
Non-
|
|
|
Guarantees,
|
|
LTSPCs
|
|
|
performing
|
|
|
performing
|
|
|
LTSPCs and REO
|
|
and REO
|
|
|
Assets
|
|
|
Asset Rate
|
|
|
(dollars
in thousands)
|
|
By
year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
1997
|
|
|
8 |
% |
|
$ |
335,453 |
|
|
$ |
6,502 |
|
|
|
1.94 |
% |
1997
|
|
|
3 |
% |
|
|
127,281 |
|
|
|
1,662 |
|
|
|
1.31 |
% |
1998
|
|
|
4 |
% |
|
|
183,574 |
|
|
|
3,854 |
|
|
|
2.10 |
% |
1999
|
|
|
6 |
% |
|
|
250,678 |
|
|
|
2,901 |
|
|
|
1.16 |
% |
2000
|
|
|
3 |
% |
|
|
126,322 |
|
|
|
1,484 |
|
|
|
1.17 |
% |
2001
|
|
|
5 |
% |
|
|
241,254 |
|
|
|
1,289 |
|
|
|
0.53 |
% |
2002
|
|
|
7 |
% |
|
|
329,336 |
|
|
|
2,849 |
|
|
|
0.87 |
% |
2003
|
|
|
8 |
% |
|
|
364,816 |
|
|
|
3,510 |
|
|
|
0.96 |
% |
2004
|
|
|
7 |
% |
|
|
301,753 |
|
|
|
798 |
|
|
|
0.26 |
% |
2005
|
|
|
10 |
% |
|
|
437,046 |
|
|
|
914 |
|
|
|
0.21 |
% |
2006
|
|
|
11 |
% |
|
|
496,489 |
|
|
|
7,114 |
|
|
|
1.43 |
% |
2007
|
|
|
10 |
% |
|
|
449,903 |
|
|
|
9,514 |
|
|
|
2.11 |
% |
2008
|
|
|
11 |
% |
|
|
488,974 |
|
|
|
19,080 |
|
|
|
3.90 |
% |
2009
|
|
|
7 |
% |
|
|
263,763 |
|
|
|
549 |
|
|
|
0.21 |
% |
Total
|
|
|
100 |
% |
|
$ |
4,396,642 |
|
|
$ |
62,020 |
|
|
|
1.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
geographic region (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
|
|
|
15 |
% |
|
$ |
642,086 |
|
|
$ |
13,241 |
|
|
|
2.06 |
% |
Southwest
|
|
|
39 |
% |
|
|
1,722,181 |
|
|
|
13,383 |
|
|
|
0.78 |
% |
Mid-North
|
|
|
22 |
% |
|
|
979,714 |
|
|
|
25,725 |
|
|
|
2.63 |
% |
Mid-South
|
|
|
12 |
% |
|
|
537,682 |
|
|
|
3,078 |
|
|
|
0.57 |
% |
Northeast
|
|
|
8 |
% |
|
|
346,176 |
|
|
|
2,660 |
|
|
|
0.77 |
% |
Southeast
|
|
|
4 |
% |
|
|
168,803 |
|
|
|
3,933 |
|
|
|
2.33 |
% |
Total
|
|
|
100 |
% |
|
$ |
4,396,642 |
|
|
$ |
62,020 |
|
|
|
1.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
commodity/collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crops
|
|
|
39 |
% |
|
$ |
1,694,235 |
|
|
$ |
15,473 |
|
|
|
0.91 |
% |
Permanent
plantings
|
|
|
19 |
% |
|
|
853,554 |
|
|
|
9,229 |
|
|
|
1.08 |
% |
Livestock
|
|
|
28 |
% |
|
|
1,218,614 |
|
|
|
14,572 |
|
|
|
1.20 |
% |
Part-time
farm/rural housing
|
|
|
7 |
% |
|
|
325,666 |
|
|
|
3,677 |
|
|
|
1.13 |
% |
Ag
storage and processing (including ethanol facilities)
|
|
|
6 |
% |
|
|
276,848 |
|
|
|
19,069 |
|
|
|
6.89 |
% |
Other
|
|
|
1 |
% |
|
|
27,725 |
|
|
|
— |
|
|
|
0.00 |
% |
Total
|
|
|
100 |
% |
|
$ |
4,396,642 |
|
|
$ |
62,020 |
|
|
|
1.41 |
% |
(1)
|
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 December 31, 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
|
As
of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
Original
Loans,
|
|
|
Cumulative
|
|
|
Cumulative
|
|
|
Guarantees,
|
|
|
Net
Credit
|
|
|
Loss
|
|
|
LTSPCs and REOs
|
|
|
Losses
|
|
|
Rate
|
|
|
(dollars
in thousands)
|
|
By
year of origination:
|
|
|
|
|
|
|
|
|
|
Before
1997
|
|
$ |
3,322,193 |
|
|
$ |
1,593 |
|
|
|
0.05 |
% |
1997
|
|
|
713,884 |
|
|
|
2,256 |
|
|
|
0.32 |
% |
1998
|
|
|
1,089,363 |
|
|
|
3,885 |
|
|
|
0.36 |
% |
1999
|
|
|
1,090,809 |
|
|
|
1,291 |
|
|
|
0.12 |
% |
2000
|
|
|
700,943 |
|
|
|
2,285 |
|
|
|
0.33 |
% |
2001
|
|
|
1,001,195 |
|
|
|
45 |
|
|
|
0.00 |
% |
2002
|
|
|
1,029,230 |
|
|
|
— |
|
|
|
0.00 |
% |
2003
|
|
|
848,416 |
|
|
|
— |
|
|
|
0.00 |
% |
2004
|
|
|
630,699 |
|
|
|
— |
|
|
|
0.00 |
% |
2005
|
|
|
757,551 |
|
|
|
131 |
|
|
|
0.02 |
% |
2006
|
|
|
759,444 |
|
|
|
9,912 |
|
|
|
1.31 |
% |
2007
|
|
|
546,175 |
|
|
|
750 |
|
|
|
0.14 |
% |
2008
|
|
|
528,281 |
|
|
|
1,821 |
|
|
|
0.34 |
% |
2009
|
|
|
281,645 |
|
|
|
1,193 |
|
|
|
0.42 |
% |
Total
|
|
$ |
13,299,828 |
|
|
$ |
25,162 |
|
|
|
0.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
By
geographic region (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
|
|
$ |
2,511,265 |
|
|
$ |
10,304 |
|
|
|
0.41 |
% |
Southwest
|
|
|
5,196,906 |
|
|
|
5,978 |
|
|
|
0.12 |
% |
Mid-North
|
|
|
2,372,800 |
|
|
|
8,882 |
|
|
|
0.37 |
% |
Mid-South
|
|
|
1,287,977 |
|
|
|
(314 |
) |
|
|
-0.02 |
% |
Northeast
|
|
|
1,016,698 |
|
|
|
83 |
|
|
|
0.01 |
% |
Southeast
|
|
|
914,182 |
|
|
|
229 |
|
|
|
0.03 |
% |
Total
|
|
$ |
13,299,828 |
|
|
$ |
25,162 |
|
|
|
0.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
By
commodity/collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Crops
|
|
$ |
5,433,610 |
|
|
$ |
1,309 |
|
|
|
0.02 |
% |
Permanent
plantings
|
|
|
2,981,835 |
|
|
|
9,112 |
|
|
|
0.31 |
% |
Livestock
|
|
|
3,399,274 |
|
|
|
2,676 |
|
|
|
0.08 |
% |
Part-time
farm/rural housing
|
|
|
897,166 |
|
|
|
339 |
|
|
|
0.04 |
% |
Ag
storage and processing (including ethanol facilities) (2)
|
|
|
449,279 |
|
|
|
11,726 |
|
|
|
2.61 |
% |
Other
|
|
|
138,664 |
|
|
|
— |
|
|
|
0.00 |
% |
Total
|
|
$ |
13,299,828 |
|
|
$ |
25,162 |
|
|
|
0.19 |
% |
(1)
|
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).
|
(2)
|
Several
of the loans underlying agricultural storage and processing LTSPCs are for
facilities under construction and, as of December 31, 2009,
approximately $37.0 million of the loans were not yet disbursed by the
lender.
|
Analysis
of portfolio performance by commodity distribution indicates that losses and
collateral deficiencies have been and are expected to remain 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. 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. Because most of the loans
classified as permanent plantings do not receive significant government support,
they are generally more susceptible to adverse commodity-specific economic
trends. Further, as adverse economic conditions persist for the
agricultural commodities or products related to these types of collateral, the
prospective sale value of the land is likely to decrease and the related loans
may become under-collateralized. 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 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.
|
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, with some level of
overcollateralization also required for Farmer Mac I AgVantage
securities. The required collateralization level is established at
the time of issuance and does not change during the life of the
security. In AgVantage 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.
Outstanding
AgVantage on-balance sheet Farmer Mac I Guaranteed Securities totaled
$48.8 million as of December 31, 2009 and $53.3 million as of December
31, 2008. Farmer Mac Guaranteed Securities – Rural Utilities
structured as AgVantage transactions issued by National Rural and held by Farmer
Mac totaled $1.7 billion as of December 31, 2009, and $1.1 billion as of
December 31, 2008. In addition, outstanding off-balance sheet
AgVantage transactions totaled $3.0 billion as of December 31, 2009 and
$2.9 billion as of December 31, 2008. As of December 31, 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.
The
following table provides information about the issuers of AgVantage securities,
as well as the required collateralization levels for those transactions as of
December 31, 2009 and 2008.
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
S&P
|
|
|
Required
|
|
|
|
|
|
S&P
|
|
|
Required
|
|
Counterparty
|
|
Balance
|
|
|
Rating
|
|
|
Collateralization
|
|
|
Balance
|
|
|
Rating
|
|
|
Collateralization
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MetLife
(1)
|
|
$ |
2,500,000 |
|
|
AA-
|
|
|
103% |
|
|
$ |
2,500,000 |
|
|
AA
|
|
|
103%
|
|
National
Rural
|
|
|
1,689,240 |
|
|
A
|
|
|
100% |
|
|
|
630,000 |
|
|
A |
|
|
100% |
|
M&I
Bank
|
|
|
475,000 |
|
|
BBB
|
|
|
106% |
|
|
|
475,000 |
|
|
A |
|
|
106% |
|
Other
(2)
|
|
|
18,800 |
|
|
N/A
|
|
|
111%
to 120%
|
|
|
|
23,300 |
|
|
N/A
|
|
|
111%
to 120%
|
|
Total
outstanding
|
|
$ |
4,683,040 |
|
|
|
|
|
|
|
|
|
|
$ |
3,628,300 |
|
|
|
|
|
|
|
|
|
(1)
|
MetLife
was put on credit watch negative (*-) in February 2010.
|
(2)
|
Consists
of AgVantage securities issued by 6 different issuers as of December 31,
2009 and 7 different issuers as of December 31, 2008.
|
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.” Credit risk related to interest rate swap contracts is
discussed in “—Risk Management—Interest Rate Risk” and Note 6 to the
consolidated financial statements.
Credit
Risk – Other Investments. As of December 31, 2009, Farmer Mac
had $654.8 million of cash and cash equivalents and $1.1 billion of
investment securities. The management of the credit risk inherent in
these investments is governed by FCA’s Investment Regulations and Farmer Mac’s
own policies. Subsequent to significant losses on investments
incurred during 2008, 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 were implemented during 2009, 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.
In
general, FCA’s Investment Regulations and Farmer Mac’s policies require each
investment or issuer of an investment to be highly rated by an
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 investments for which 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 diversified investment funds are further limited to those funds that are
holding only instruments approved for direct investment by Farmer
Mac.
FCA’s
Investment Regulations and Farmer Mac’s policies also establish concentration
limits, which are intended to limit exposure to any one
counterparty. FCA’s Investment Regulations limit Farmer Mac’s total
credit exposure to any single issuer of securities and uncollateralized
financial derivatives to 25 percent of the Corporation’s regulatory capital (as
of December 31, 2009, 25 percent of Farmer Mac’s regulatory capital was
$87.8 million). This limitation is not applied to the
obligations of the United States or to qualified investment
funds. The limitation applied to the obligations of any GSE is
100 percent of Farmer Mac’s regulatory capital. In
June 2009, Farmer Mac’s board revised its policies for new investments to
limit the Corporation’s total credit exposure to any single issuer of securities
and uncollateralized financial derivatives to the lower of (1) 10 percent
of the Corporation’s regulatory capital or (2) 50 percent of the
expected net interest income from the investment portfolio over 12
months.
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
because of 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 December 31, 2009, 21
percent of the total outstanding balance of retained Farmer Mac I loans and
Farmer Mac I Guaranteed Securities had yield maintenance provisions and 13
percent had other forms of prepayment protection (together covering 51 percent
of all loans with fixed interest rates). Of the Farmer Mac I new and
current loans purchased in 2009, 1 percent had yield maintenance or another form
of prepayment protection (covering 5 percent of all loans with fixed interest
rates). As of December 31, 2009, none of the USDA-guaranteed portions
underlying Farmer Mac II Guaranteed Securities had yield maintenance provisions;
however, 13 percent contained prepayment penalties. Of the
USDA-guaranteed portions purchased in 2009, 16 percent contained various
forms of prepayment penalties. As of December 31, 2009, all of the
rural utilities loans underlying Farmer Mac Guaranteed Securities – Rural
Utilities on which Farmer Mac assumes direct credit exposure (i.e., with no
general obligation of an issuer involved in the transaction) had yield
maintenance provisions, and none of the rural utilities loans held (i.e., not
supporting Farmer Mac Guaranteed Securities) had yield maintenance
provisions.
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’ behaviors 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.
The
following table presents Farmer Mac’s on-balance sheet program assets based on
their interest rate characteristics.
Outstanding
Balance of Loans Held and Loans Underlying
|
|
On-Balance
Sheet Farmer Mac Guaranteed Securities
|
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Fixed
rate (10-yr. wtd. avg. term)
|
|
$ |
1,983,749 |
|
|
$ |
1,659,983 |
|
5-
to 10-year ARMs and resets
|
|
|
729,700 |
|
|
|
746,623 |
|
1-Month
to 3-Year ARMs
|
|
|
1,439,267 |
|
|
|
819,234 |
|
Total
held in portfolio
|
|
$ |
4,152,716 |
|
|
$ |
3,225,840 |
|
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 loans. 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 better match the durations of the Corporation’s
assets and liabilities, thereby reducing overall interest rate
sensitivity.
Farmer
Mac’s $654.8 million of cash and cash equivalents as of December 31, 2009
matures within three months and is match-funded with discount notes having
similar maturities. As of December 31, 2009, $0.8 billion of the
$1.1 billion of investment securities (73 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. See
Note 4 to the consolidated financial statements for more information on
investment securities. These investments are funded
using:
|
·
|
a
series of discount note issuances in which each successive discount note
is issued and matures on or about the corresponding interest rate reset
date of the related investment;
|
|
·
|
floating
rate notes having similar interest rate reset provisions as the related
investment; or
|
|
·
|
fixed
rate notes swapped to floating rates having similar interest rate reset
provisions as the related
investment.
|
Farmer
Mac is also subject to interest rate risk on loans, including loans that Farmer
Mac has committed to acquire (other than through LTSPCs) but has not yet
purchased. When Farmer Mac commits to purchase such loans, it is
exposed to interest rate risk between the time it commits to purchase the loans
and the time it either:
|
·
|
sells
Farmer Mac Guaranteed Securities backed by the loans;
or
|
|
·
|
issues
debt to retain the loans in its portfolio (although issuing debt to fund
the loans as investments does not fully eliminate interest rate risk due
to the possible timing differences in the cash flows of the assets and
related liabilities, as discussed
above).
|
Farmer
Mac manages the interest rate risk related to such loans, and any related Farmer
Mac Guaranteed Securities or debt issuance, through the use of forward sale
contracts on the debt of other GSEs and futures contracts involving U.S.
Treasury securities. Farmer Mac uses forward sale contracts on GSE
securities to reduce its interest rate exposure to changes in both Treasury
rates and spreads on Farmer Mac debt and certain Farmer Mac Guaranteed
Securities.
Recognizing
that interest rate sensitivity may change with the passage of time and as
interest rates change, Farmer Mac assesses this exposure on a regular basis and,
if necessary, readjusts its portfolio of assets and liabilities by:
|
·
|
purchasing
mortgage assets in the ordinary course of
business;
|
|
·
|
refunding
existing liabilities; or
|
|
·
|
using
financial derivatives to alter the characteristics of existing assets or
liabilities.
|
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 management’s estimate of 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 December 31, 2009 and
December 31, 2008 to an immediate and instantaneous uniform or “parallel”
shift in the yield curve.
|
|
Percentage Change in MVE from Base Case
|
Interest
Rate
|
|
As
of December 31,
|
Scenario
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
+
300 bp
|
|
|
-23.1 |
% |
|
|
-10.4 |
% |
+
200 bp
|
|
|
-13.8 |
% |
|
|
-2.1 |
% |
+
100 bp
|
|
|
-5.4 |
% |
|
|
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
measured by this MVE analysis, Farmer Mac’s interest rate sensitivity increased
somewhat during 2009. The primary drivers of this increase were
higher interest rates, a steeper yield curve and changes to the Corporation’s
balance sheet. However, Farmer Mac’s long-term interest rate
sensitivity remained at relatively low levels despite the significant change in
the yield curve that occurred during the year. Furthermore, the
$250.0 million preferred stock issued by the Corporation’s subsidiary in January
2010 is expected to reduce MVE sensitivity going forward. As of
December 31, 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 1.1 months, compared to
minus 2.4 months as of December 31, 2008. An increase
in interest rates during 2009 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
December 31, 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 8.9 percent, while a parallel decrease of 25 basis
points would have decreased NII by 2.9 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 December 31, 2009, both MVE and NII showed
similar or less sensitivity to non-parallel shocks than to the parallel
shocks. Farmer Mac believes that the relative insensitivity of its
MVE and NII to both parallel and non-parallel interest rate shocks, and its
duration gap, indicate that Farmer Mac’s approach to managing its interest rate
risk exposures is effective.
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, credit exposure 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;
|
|
·
|
“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; and
|
|
·
|
“credit
default swaps,” in which it pays a periodic fee to a counterparty in
exchange for the counterparty’s agreement to make payments in the event of
an instrument’s default or other credit
event.
|
As of
December 31, 2009, Farmer Mac had $4.2 billion combined notional
amount of interest rate and credit default swaps, with terms ranging
from one to fifteen years, of which $1.3 billion were pay-fixed
interest rate swaps, $2.6 billion were receive-fixed interest rate swaps,
$0.3 billion were basis swaps and $30.0 million were credit default
swaps.
Farmer
Mac enters into interest rate swap contracts to adjust the characteristics of
its short-term debt to match more closely the cash flow and duration
characteristics of its longer-term mortgage and other assets, and also to adjust
the characteristics of its long-term debt to match more closely the cash flow
and duration characteristics of its short-term assets, thereby reducing interest
rate risk and also to derive an overall lower effective cost of borrowing than
would otherwise be available to Farmer Mac in the conventional debt
market. Specifically, interest rate swaps convert the variable cash
flows related to the forecasted issuance of short-term debt into effectively
fixed rate medium-term notes that match the anticipated duration and interest
rate characteristics of the corresponding assets. Farmer Mac
historically evaluated the overall cost of using the swap market as an
alternative to issuing medium-term notes in the capital markets, which in most
instances resulted in the use of the swap market. Due to volatile
capital markets conditions, beginning in October 2008 through most of 2009,
Farmer Mac discontinued its practice of synthetically creating long-term fixed
rate debt through the use of pay-fixed interest rate swaps and a planned series
of discount note issuances, and instead issued medium-term notes as its source
of longer-term fixed rate funding. Farmer Mac remains cautious about
using pay-fixed interest rate swaps, but may use that type of financial
derivative as necessary in the future to manage specific interest rate risks for
specific transactions.
Farmer
Mac uses callable interest rate swaps (in conjunction with the issuance of
short-term debt) as an alternative to callable medium-term notes with
equivalently structured maturities and call options. The call options
on the swaps are designed to match the implicit prepayment options on those
mortgage assets without prepayment protection. The blended durations
of the swaps are also designed to match the duration of the related mortgages
over their estimated lives. If the mortgages prepay, the swaps can be
called and the short-term debt repaid; if the mortgages do not prepay, the swaps
remain outstanding and the short-term debt is rolled over, effectively providing
fixed rate callable funding over the lives of the related mortgages. Thus, the
economics of the assets are closely matched to the economics of the interest
rate swap and funding combination.
As
discussed in Note 6 to the consolidated financial statements, Farmer Mac
accounts for its financial derivatives as undesignated financial
derivatives. All of Farmer Mac’s financial derivative transactions
are conducted under standard collateralized agreements that limit Farmer Mac’s
potential credit exposure to any counterparty. As of December 31,
2009, Farmer Mac had uncollateralized net exposures of $4.1 million to two
counterparties.
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
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. In accordance with the calculation prescribed by
FCA regulations, Farmer Mac maintains a minimum of 60 days of liquidity and a
target of 90 days of liquidity. In accordance with the
methodology prescribed by those regulations, Farmer Mac maintained an average of
145 days of liquidity during 2009 and had 169 days of liquidity as of
December 31, 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 investments, transaction costs, guarantee
payments and LTSPC purchase obligations. See “Business—Financing—Debt
Issuance” for more information regarding Farmer Mac’s debt
issuance.
Liquidity. The
funding and liquidity needs of Farmer Mac’s business programs are driven by the
purchase and retention of eligible loans, USDA-guaranteed portions, and Farmer
Mac Guaranteed Securities; the maturities of Farmer Mac’s discount notes and
medium-term notes; and payment of principal and interest on Farmer Mac
Guaranteed Securities. Farmer Mac’s primary sources of funds to meet
these needs are:
|
·
|
principal
and interest payments and ongoing guarantee and commitment fees received
on loans, Farmer Mac Guaranteed Securities, and
LTSPCs;
|
|
·
|
principal
and interest payments received from investment securities;
and
|
|
·
|
the
issuance of new discount notes and medium-term
notes.
|
Farmer
Mac’s short term borrowing costs have remained at favorable levels despite
continued market volatility. Prior to 2009, 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, interest rate 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 its LIBOR-based floating rate
assets. Conversely, if the rates on the Farmer Mac discount notes
were to decrease relative to LIBOR, Farmer Mac would benefit from a commensurate
increase on its net interest yield on the notional amount of its pay-fixed
interest rate swaps and its 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 systematically entered
into various 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 U.S Treasury bills and other
short-term money market instruments) and other investment securities that can be
drawn upon for liquidity needs. The following table presents these
assets as of December 31, 2009 and 2008:
|
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
$ |
654,794 |
|
|
$ |
278,412 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Guaranteed
by GSEs and US Government agencies
|
|
|
753,439 |
|
|
|
554,750 |
|
Corporate
debt securities
|
|
|
245,605 |
|
|
|
419,065 |
|
Asset-backed
securities principally backed by Government guaranteed student loans
(1)
|
|
|
132,851 |
|
|
|
262,044 |
|
Total
|
|
$ |
1,786,689 |
|
|
$ |
1,514,271 |
|
|
(1)
|
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”), the interest rates on which are reset
through an auction process, most commonly at intervals of 28 days, or at
formula-based floating rates as set forth in the related transaction documents
in the event of a failed auction. These formula-based floating rates,
which may at times reset to zero, are intended to preserve the underlying
principal balance of the securities and avoid overall cash
shortfalls. Accordingly, payments of accrued interest may also be
delayed and are ultimately subject to cash
availability. Beginning in mid-February 2008, there were
widespread failures of the auction mechanism designed to provide regular
liquidity to these types of securities. Consequently, Farmer Mac has
not sold any of its ARCs into the auctions since that time. All ARCs
held by Farmer Mac are collateralized entirely by pools of Federal Family
Education Loan Program (“FFELP”) guaranteed student loans that are backed by the
full faith and credit of the United States. Farmer Mac 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.
Farmer
Mac held $72.9 million of ARCs as of December 31, 2009, compared to
$178.6 million as of December 31, 2008 (including related put
rights). As of December 31, 2009, Farmer Mac’s carrying value of its
ARCs was 98 percent of par. The discounted carrying value reflects uncertainty
regarding the ability to obtain par in the absence of any active market
trading. During fourth quarter 2008, Farmer Mac accepted an offer of
Auction Rate Securities Rights, Series B-2 from UBS AG related to
$119.9 million (par value) of the ARCs in Farmer Mac’s investment
portfolio, which granted Farmer Mac put rights related to these
securities. Farmer Mac elected the fair value option for these put
rights and recorded them at their fair value as of December 31,
2008. Farmer Mac exercised its rights and sold the ARCs to UBS during
first quarter 2009. As of December 31, 2008, Farmer Mac recorded
$119.9 million of ARC holdings and put rights at an amount equal to the par
amount of these securities and $74.1 million at fair values of
approximately 79 percent of par.
As of
December 31, 2009 and 2008, Farmer Mac had a remaining investment of
$5.3 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 presented its unsettled trades in the Fund
as “Prepaid expenses and other assets” on the consolidated balance
sheets. During 2009, Farmer Mac received distributions of $10.7
million and recorded an impairment charge of $1.3 million, which is presented as
“Other-than-temporary impairment losses” in the consolidated statement of
operations. In January 2010, Farmer Mac received an additional
distribution of $4.8 million, reducing its remaining investment in the fund
to $0.5 million. See Note 15 to the consolidated financial
statements for further information relating to Farmer Mac’s investment in the
Fund.
The
following table presents Farmer Mac’s seven largest holdings as of December 31,
2009. These holdings are presented as either “Cash and cash
equivalents” or “Investment securities” on the consolidated balance
sheets.
|
|
|
|
S&P Credit
|
|
|
|
|
Investment
|
|
Issuer
|
|
Rating
|
|
|
Amount (2)
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Short-term
Money Market Funds
|
|
Invesco
AIM
|
|
AAAm
|
|
|
$ |
182,827 |
|
Short-term
Money Market Funds
|
|
BlackRock
|
|
AAAm
|
|
|
|
150,915 |
|
GSE
Preferred Stock
|
|
CoBank,
ACB (1)
|
|
A
|
|
|
|
88,500 |
|
GSE
Preferred Stock
|
|
AgFirst
Farm Credit Bank (1)
|
|
A
|
|
|
|
88,035 |
|
GSE
Subordinated Debt
|
|
CoBank,
ACB (1)
|
|
A
|
|
|
|
70,000 |
|
Corporate
Debt
|
|
Goldman
Sachs Group, Inc.
|
|
A
|
|
|
|
61,850 |
|
Corporate
Debt
|
|
Merrill
Lynch & Co., Inc. (3)
|
|
A
|
|
|
|
50,000 |
|
(1)
|
CoBank,
ACB and AgFirst Farm Credit Bank are institutions of the Farm Credit
System, a government-sponsored enterprise.
|
(2)
|
Investment
balance does not include premiums paid or unrealized gains or losses on
the securities.
|
(3)
|
Merrill
Lynch & Co., Inc. was acquired by Bank of America in January 2009.
|
Capital
Requirements. Farmer Mac’s charter establishes three capital
standards for the Corporation—minimum, critical and risk-based. The
minimum capital requirement is expressed as a percentage of on-balance sheet
assets and off-balance sheet obligations. The critical capital
requirement is equal to one-half of the minimum capital amount. The
charter does not specify the required level of risk-based capital but directs
FCA to establish a risk-based capital stress test for Farmer Mac, using
specified stress-test parameters. For a discussion of the risk-based
capital stress test, see “Business—Government Regulation of Farmer
Mac—Regulation—Capital Standards—General.” Certain enforcement powers
are given to FCA depending upon Farmer Mac’s compliance with the capital
standards. See “Business—Government Regulation of Farmer
Mac—Regulation—Capital Standards—Enforcement Levels.”
As of
December 31, 2009 and 2008, Farmer Mac was classified as within “level I” (the
highest compliance level). The following table sets forth Farmer
Mac’s minimum capital requirements and surpluses as of
December 31, 2009 and 2008.
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Capital
Required
|
|
|
Amount
|
|
|
Ratio
|
|
|
Capital
Required
|
|
|
|
(dollars
in thousands)
|
|
On-balance
sheet assets as defined for determining statutory minimum
capital
|
|
$ |
6,068,572 |
|
|
|
2.75 |
% |
|
$ |
166,886 |
|
|
$ |
5,145,139 |
|
|
|
2.75 |
% |
|
$ |
141,491 |
|
Outstanding
balance of Farmer Mac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed
Securities held by others and LTSPCs
|
|
|
6,651,987 |
|
|
|
0.75 |
% |
|
|
49,890 |
|
|
|
6,897,259 |
|
|
|
0.75 |
% |
|
|
51,730 |
|
Financial
Derivatives
|
|
|
24,348 |
|
|
|
0.75 |
% |
|
|
183 |
|
|
|
34,032 |
|
|
|
0.75 |
% |
|
|
255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
capital level
|
|
|
|
|
|
|
|
|
|
|
216,959 |
|
|
|
|
|
|
|
|
|
|
|
193,476 |
|
Actual
core capital
|
|
|
|
|
|
|
|
|
|
|
337,153 |
|
|
|
|
|
|
|
|
|
|
|
206,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
surplus
|
|
|
|
|
|
|
|
|
|
$ |
120,194 |
|
|
|
|
|
|
|
|
|
|
$ |
13,500 |
|
Based on
the risk-based capital stress test, Farmer Mac’s risk-based capital requirement
as of December 31, 2009 was $35.9 million and Farmer Mac’s regulatory capital of
$351.3 million exceeded that amount by approximately
$315.4 million.
Contractual
Obligations. The following table presents the amount and
timing of Farmer Mac’s known fixed and determinable contractual obligations by
payment date as of December 31, 2009. The payment amounts
represent those amounts contractually due to the recipient (including return of
discount and interest on debt) and do not include unamortized premiums or
discounts or other similar carrying value adjustments.
|
|
One
Year
|
|
|
One
to
|
|
|
Three
to
|
|
|
Over
Five
|
|
|
|
|
|
|
or
Less
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Discount
notes (1)
|
|
$ |
2,302,025 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,302,025 |
|
Medium-term
notes (1)
|
|
|
1,362,590 |
|
|
|
640,275 |
|
|
|
1,151,000 |
|
|
|
120,000 |
|
|
|
3,273,865 |
|
Interest
payments on fixed rate medium-term notes
|
|
|
71,558 |
|
|
|
118,284 |
|
|
|
81,125 |
|
|
|
31,266 |
|
|
|
302,233 |
|
Interest
payments on floating rate medium-term notes (2)
|
|
|
636 |
|
|
|
374 |
|
|
|
— |
|
|
|
— |
|
|
|
1,010 |
|
Operating
lease obligations (3)
|
|
|
694 |
|
|
|
623 |
|
|
|
21 |
|
|
|
— |
|
|
|
1,338 |
|
Purchase
obligations (4)
|
|
|
629 |
|
|
|
622 |
|
|
|
63 |
|
|
|
— |
|
|
|
1,314 |
|
(1)
|
Future
events, including additional issuance of discount notes and medium-term
notes and refinancing of those notes, could cause actual payments to
differ significantly from these amounts. For more information
regarding discount notes and medium-term notes, see Note 7 to the
consolidated financial
statements.
|
(2)
|
Calculated
using the effective interest rates as of December 31, 2009. As a
result, these amounts do not reflect the effects of changes in the
contractual interest rates effective on future interest rate reset
dates.
|
(3)
|
Includes
amounts due under non-cancelable operating leases for office space and
office equipment. See Note 12 to the consolidated financial statements for
more information regarding Farmer Mac’s minimum lease payments for office
space.
|
(4)
|
Includes
minimum amounts due under non-cancelable agreements to purchase goods or
services that are enforceable and legally binding and specify all
significant terms. These agreements include agreements for the
provision of consulting services, information technology support,
equipment maintenance, and financial analysis software and
services. The amounts actually paid under these agreements will
likely be higher due to the variable components of some of these
agreements under which the ultimate obligation owed is determined by
reference to actual usage or hours worked. The table does not
include amounts due under agreements that are cancelable without penalty
or further payment as of December 31, 2009 and therefore do not represent
enforceable and legally binding obligations. The table
also does not include amounts due under the terms of employment agreements
with members of senior management; nor does it include payments that are
based on a varying outstanding loan volume (such as servicing and bond
administration fees), as those payments are not known, fixed and
determinable contractual
obligations.
|
Farmer
Mac enters into financial derivative contracts under which it either receives
cash from counterparties, or is required to pay cash to them, depending on
changes in interest rates. Financial derivatives are carried on the
consolidated balance sheet at fair value, representing the net present value of
expected future cash payments or receipts based on market interest rates as of
the balance sheet date. The fair values of the contracts change daily
as market interest rates change. Because the financial derivative
liabilities recorded on the consolidated balance sheet as of December 31, 2009
do not represent the amounts that may ultimately be paid under the financial
derivative contracts, those liabilities are not included in the table of
contractual obligations presented above. Further information
regarding financial derivatives is included in Note 2(h) and Note 6 to the
consolidated financial statements.
Contingent
Liabilities. In conducting its loan purchase activities,
Farmer Mac enters into mandatory and optional delivery commitments to purchase
agricultural real estate mortgage loans and corresponding optional commitments
to deliver Farmer Mac Guaranteed Securities. As of December 31, 2009
and 2008, Farmer Mac had no optional delivery commitments to purchase loans or
deliver Farmer Mac Guaranteed Securities outstanding. In conducting
its LTSPC activities, Farmer Mac enters into arrangements whereby it commits to
buy agricultural real estate mortgage loans under certain conditions at an
undetermined future date. The following table presents these
significant commitments.
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
$ |
2,165,706 |
|
|
$ |
2,224,181 |
|
|
|
|
|
|
|
|
|
|
Mandatory
commitments to purchase loans and USDA-guaranteed portions
|
|
|
13,300 |
|
|
|
26,735 |
|
Further
information regarding Farmer Mac’s commitments to purchase and sell loans is
included in Note 12 to the consolidated financial statements.
Off-Balance
Sheet Arrangements. 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) LTSPCs,
and (2) Farmer Mac Guaranteed Securities. Both of these alternatives
result in the creation of off-balance sheet obligations for Farmer Mac in the
ordinary course of its business. In performing its obligations
related to LTSPCs and Farmer Mac Guaranteed Securities, Farmer Mac would have
the right to enforce the underlying loans, and in the event of the default under
the terms of those loans, would have access to the underlying
collateral.
As of
December 31, 2009 and 2008, outstanding off-balance sheet LTSPCs and Farmer Mac
Guaranteed Securities totaled $6.7 billion and $6.9 billion,
respectively. The following table presents the balance of outstanding
LTSPCs and off-balance sheet Farmer Mac Guaranteed Securities as of
December 31, 2009 and 2008:
Outstanding
Balance of LTSPCs and
|
|
Off-Balance
Sheet Farmer Mac Guaranteed Securities
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I obligations:
|
|
|
|
|
|
|
Farmer
Mac I Guaranteed Securities
|
|
$ |
4,437,239 |
|
|
$ |
4,642,983 |
|
LTSPCs
|
|
|
2,165,706 |
|
|
|
2,224,181 |
|
Total
Farmer Mac I obligations
|
|
|
6,602,945 |
|
|
|
6,867,164 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
34,802 |
|
|
|
30,095 |
|
Rural
Utilities
|
|
|
14,240 |
|
|
|
— |
|
Total
off-balance sheet
|
|
$ |
6,651,987 |
|
|
$ |
6,897,259 |
|
See
“—Risk Management—Credit Risk – Loans” and Note 2(c), Note 2(e), Note 5 and Note
12 to the consolidated financial statements for more information on Farmer Mac
Guaranteed Securities and Note 2(o) and Note 12 to the consolidated financial
statements for more information on LTSPCs.
Regulatory
Matters
In the
January 22, 2010 issue of the Federal Register, FCA published for public
comment a proposed rule that would revise certain FCA regulations governing the
risk-based capital stress test applicable to Farmer Mac. In its
announcement of the proposed rule, FCA stated that the purpose of the proposed
changes is to update the risk-based capital model to address the addition of
rural utilities loans to Farmer Mac’s program authorities, to revise the
existing treatment of risk mitigations of general obligations in the AgVantage
structure, and to revise the treatment of counterparty risk on Farmer Mac’s
non-program investments. In the preamble to the proposed rule, FCA
noted that had the proposed rule been in effect on March 31, 2009, Farmer
Mac’s risk-based capital requirement as of that date would have been
approximately $62.9 million, compared to the risk-based capital requirement
of approximately $40.1 million under the existing risk-based capital stress
test at that time. FCA originally requested comments on the proposed
rule by March 8, 2010, but the FCA board recently approved the reopening of
the public comment period for an additional 30 days. The extended
comment period will end 30 days after publication of the reopening action in the
Federal Register, which had not occurred as of March 15,
2010. Farmer Mac plans to provide written comments on the proposed
rule to FCA before the end of the extended public comment period.
Other
Matters
The
expected effects of recently issued accounting pronouncements on the
consolidated financial statements are presented in Note 2(q) to the consolidated
financial statements.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Farmer
Mac is exposed to market risk from changes in interest rates. Farmer
Mac manages this market risk by entering into various financial transactions,
including financial derivatives, and by monitoring and measuring 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
its strategies to manage such risk. For information regarding Farmer
Mac’s use of financial derivatives and related accounting policies, see Note
2(h) and Note 6 to the consolidated financial statements.
Item
8. Financial Statements
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Farmer Mac is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Exchange Act
Rule 13a-15(f). Internal control over financial reporting is a
process designed under the supervision of Farmer Mac’s Chief Executive Officer
and Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Corporation’s
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Farmer
Mac’s internal control over financial reporting includes those policies and
procedures that: (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Corporation; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Corporation are being made only in accordance with
authorizations of management and directors of the Corporation; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Corporation’s assets that could have a
material effect on the consolidated financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. All control systems have inherent
limitations so that no evaluation of controls can provide absolute assurance
that all control issues are detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Under the
supervision and with the participation of the Corporation’s Chief Executive
Officer and Chief Financial Officer, Farmer Mac’s management assessed the
effectiveness of the Corporation’s internal control over financial reporting as
of December 31, 2009. In making this assessment, the Corporation’s
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control¾Integrated
Framework. Based on its evaluation under the COSO criteria,
management concluded that the Corporation’s internal control over financial
reporting as of December 31, 2009 was effective.
Farmer
Mac’s independent registered public accounting firm, Deloitte & Touche LLP,
has audited the effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2009, as stated in their report
appearing below.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Federal
Agricultural Mortgage Corporation
Washington,
DC
We have
audited the internal control over financial reporting of Federal Agricultural
Mortgage Corporation and subsidiaries (“Farmer Mac”) as of December 31, 2009,
based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Farmer Mac’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on Farmer
Mac’s internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, Farmer Mac maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2009 of Farmer Mac and our report dated March
16, 2010 expressed an unqualified opinion on those consolidated financial
statements.
/s/ Deloitte & Touche LLP
McLean,
Virginia
March 16,
2010
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Federal
Agricultural Mortgage Corporation
Washington,
DC
We have
audited the accompanying consolidated balance sheets of Federal Agricultural
Mortgage Corporation and subsidiaries (“Farmer Mac”) as of December 31, 2009 and
2008, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2009. These financial statements are the
responsibility of Farmer Mac's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Federal Agricultural Mortgage Corporation
and subsidiaries at December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.
As
discussed in Notes 10 and 2 to the consolidated financial statements, Farmer Mac
adopted the accounting standards: Accounting for Uncertainty in Income
Taxes, as of January 1, 2007; Fair Value Measurement, and
The Fair Value Option for
Financial Assets and Financial Liabilities, on January 1,
2008.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Farmer Mac's internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal Control−Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 16, 2010 expressed an
unqualified opinion on Farmer Mac’s internal control over financial
reporting.
/s/ Deloitte & Touche LLP
McLean,
Virginia
March 16,
2010
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
654,794 |
|
|
$ |
278,412 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
1,041,923 |
|
|
|
1,072,096 |
|
Trading,
at fair value
|
|
|
89,972 |
|
|
|
163,763 |
|
Total
investment securities
|
|
|
1,131,895 |
|
|
|
1,235,859 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
2,524,867 |
|
|
|
1,511,694 |
|
Trading,
at fair value
|
|
|
874,129 |
|
|
|
939,550 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
3,398,996 |
|
|
|
2,451,244 |
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
held for sale, at lower of cost or fair value
|
|
|
666,534 |
|
|
|
66,680 |
|
Loans
held for investment, at amortized cost
|
|
|
93,478 |
|
|
|
718,845 |
|
Allowance
for loan losses
|
|
|
(6,292 |
) |
|
|
(10,929 |
) |
Total
loans, net of allowance
|
|
|
753,720 |
|
|
|
774,596 |
|
|
|
|
|
|
|
|
|
|
Real
estate owned, at lower of cost or fair value
|
|
|
739 |
|
|
|
606 |
|
Financial
derivatives, at fair value
|
|
|
15,040 |
|
|
|
27,069 |
|
Interest
receivable
|
|
|
67,178 |
|
|
|
73,058 |
|
Guarantee
and commitment fees receivable
|
|
|
55,016 |
|
|
|
61,109 |
|
Deferred
tax asset, net
|
|
|
24,146 |
|
|
|
87,793 |
|
Prepaid
expenses and other assets
|
|
|
37,289 |
|
|
|
117,561 |
|
Total
Assets
|
|
$ |
6,138,813 |
|
|
$ |
5,107,307 |
|
|
|
|
|
|
|
|
|
|
Liabilities,
Mezzanine Equity and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
3,662,898 |
|
|
$ |
3,757,099 |
|
Due
after one year
|
|
|
1,908,713 |
|
|
|
887,999 |
|
Total
notes payable
|
|
|
5,571,611 |
|
|
|
4,645,098 |
|
|
|
|
|
|
|
|
|
|
Financial
derivatives, at fair value
|
|
|
107,367 |
|
|
|
181,183 |
|
Accrued
interest payable
|
|
|
39,562 |
|
|
|
40,470 |
|
Guarantee
and commitment obligation
|
|
|
48,526 |
|
|
|
54,954 |
|
Accounts
payable and accrued expenses
|
|
|
23,445 |
|
|
|
20,532 |
|
Reserve
for losses
|
|
|
7,895 |
|
|
|
5,506 |
|
Total
Liabilities
|
|
|
5,798,406 |
|
|
|
4,947,743 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine
Equity:
|
|
|
|
|
|
|
|
|
Series
B redeemable preferred stock, par value $1,000, 150,000 shares authorized,
issued and outstanding
(redemption
value $150,000,000)
|
|
|
144,216 |
|
|
|
144,216 |
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
Series
C, par value $1,000 per share, 100,000 shares authorized, 57,578 and 9,200
issued and outstanding as of
December
31, 2009 and 2008, respectively
|
|
|
57,578 |
|
|
|
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
|
|
|
8,611 |
|
|
|
8,601 |
|
Additional
paid-in capital
|
|
|
97,090 |
|
|
|
95,572 |
|
Accumulated
other comprehensive income/(loss)
|
|
|
3,254 |
|
|
|
(47,412 |
) |
Retained
earnings/(accumulated deficit)
|
|
|
28,127 |
|
|
|
(52,144 |
) |
Total
Stockholders' Equity
|
|
|
196,191 |
|
|
|
15,348 |
|
Total
Liabilities, Mezzanine Equity and Stockholders' Equity
|
|
$ |
6,138,813 |
|
|
$ |
5,107,307 |
|
See
accompanying notes to consolidated financial statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands, except per share amounts)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Investments
and cash equivalents
|
|
$ |
28,727 |
|
|
$ |
113,722 |
|
|
$ |
174,196 |
|
Farmer
Mac Guaranteed Securities
|
|
|
109,779 |
|
|
|
96,417 |
|
|
|
77,797 |
|
Loans
|
|
|
37,987 |
|
|
|
45,556 |
|
|
|
45,765 |
|
Total
interest income
|
|
|
176,493 |
|
|
|
255,695 |
|
|
|
297,758 |
|
Total
interest expense
|
|
|
90,585 |
|
|
|
166,980 |
|
|
|
253,305 |
|
Net
interest income
|
|
|
85,908 |
|
|
|
88,715 |
|
|
|
44,453 |
|
(Provision)/recovery
for loan losses
|
|
|
(2,853 |
) |
|
|
(14,531 |
) |
|
|
215 |
|
Net
interest income after (provision)/recovery for loan losses
|
|
|
83,055 |
|
|
|
74,184 |
|
|
|
44,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
|
31,805 |
|
|
|
28,381 |
|
|
|
25,232 |
|
Gains/(losses)
on financial derivatives
|
|
|
21,297 |
|
|
|
(130,403 |
) |
|
|
(39,947 |
) |
Gains/(losses)
on trading assets
|
|
|
43,273 |
|
|
|
(10,639 |
) |
|
|
(327 |
) |
Other-than-temporary
impairment losses
|
|
|
(3,994 |
) |
|
|
(106,240 |
) |
|
|
— |
|
Gains
on sale of available-for-sale investment securities
|
|
|
3,353 |
|
|
|
316 |
|
|
|
288 |
|
Gains
on sale of loans and Farmer Mac Guaranteed Securities
|
|
|
1,581 |
|
|
|
1,509 |
|
|
|
— |
|
Gains
on repurchase of debt
|
|
|
— |
|
|
|
864 |
|
|
|
— |
|
Gains
on sale of real estate owned
|
|
|
— |
|
|
|
— |
|
|
|
130 |
|
Other
income
|
|
|
1,439 |
|
|
|
1,413 |
|
|
|
1,411 |
|
Non-interest
income/(loss)
|
|
|
98,754 |
|
|
|
(214,799 |
) |
|
|
(13,213 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
13,683 |
|
|
|
15,266 |
|
|
|
14,161 |
|
General
and administrative
|
|
|
11,167 |
|
|
|
11,871 |
|
|
|
8,508 |
|
Regulatory
fees
|
|
|
2,100 |
|
|
|
2,050 |
|
|
|
2,163 |
|
Real
estate owned operating costs/(income), net
|
|
|
353 |
|
|
|
116 |
|
|
|
(28 |
) |
Provision
for losses
|
|
|
2,389 |
|
|
|
3,309 |
|
|
|
73 |
|
Non-interest
expense
|
|
|
29,692 |
|
|
|
32,612 |
|
|
|
24,877 |
|
Income/(loss)
before income taxes
|
|
|
152,117 |
|
|
|
(173,227 |
) |
|
|
6,578 |
|
Income
tax expense/(benefit)
|
|
|
52,517 |
|
|
|
(22,864 |
) |
|
|
(83 |
) |
Net
income/(loss)
|
|
|
99,600 |
|
|
|
(150,363 |
) |
|
|
6,661 |
|
Preferred
stock dividends
|
|
|
(17,302 |
) |
|
|
(3,717 |
) |
|
|
(2,240 |
) |
Net
income/(loss) available to common stockholders
|
|
$ |
82,298 |
|
|
$ |
(154,080 |
) |
|
$ |
4,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss)
per common share and dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings/(loss) per common share
|
|
$ |
8.12 |
|
|
$ |
(15.40 |
) |
|
$ |
0.43 |
|
Diluted
earnings/(loss) per common share
|
|
$ |
8.04 |
|
|
$ |
(15.40 |
) |
|
$ |
0.42 |
|
Common
stock dividends per common share
|
|
$ |
0.20 |
|
|
$ |
0.40 |
|
|
$ |
0.40 |
|
See
accompanying notes to consolidated financial statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(in
thousands)
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
9 |
|
|
$ |
9,200 |
|
|
|
700 |
|
|
$ |
35,000 |
|
|
|
700 |
|
|
$ |
35,000 |
|
Issuance
of Series C preferred stock
|
|
|
49 |
|
|
|
48,378 |
|
|
|
9 |
|
|
|
9,200 |
|
|
|
— |
|
|
|
— |
|
Redemption
of Series A preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
(700 |
) |
|
|
(35,000 |
) |
|
|
— |
|
|
|
— |
|
Balance,
end of year
|
|
|
58 |
|
|
$ |
57,578 |
|
|
|
9 |
|
|
$ |
9,200 |
|
|
|
700 |
|
|
$ |
35,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
10,132 |
|
|
$ |
10,132 |
|
|
|
9,895 |
|
|
$ |
9,895 |
|
|
|
10,607 |
|
|
$ |
10,607 |
|
Issuance
of Class C common stock
|
|
|
10 |
|
|
|
10 |
|
|
|
5 |
|
|
|
5 |
|
|
|
2 |
|
|
|
2 |
|
Repurchase
and retirement of Class C common stock
|
|
|
— |
|
|
|
— |
|
|
|
(32 |
) |
|
|
(32 |
) |
|
|
(1,087 |
) |
|
|
(1,087 |
) |
Exercise
of stock options
|
|
|
— |
|
|
|
— |
|
|
|
264 |
|
|
|
264 |
|
|
|
373 |
|
|
|
373 |
|
Balance,
end of year
|
|
|
10,142 |
|
|
$ |
10,142 |
|
|
|
10,132 |
|
|
$ |
10,132 |
|
|
|
9,895 |
|
|
$ |
9,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
|
|
|
$ |
95,572 |
|
|
|
|
|
|
$ |
87,134 |
|
|
|
|
|
|
$ |
85,349 |
|
Stock-based
compensation expense
|
|
|
|
|
|
|
2,694 |
|
|
|
|
|
|
|
2,759 |
|
|
|
|
|
|
|
3,681 |
|
Issuance
of Class C common stock
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
50 |
|
Repurchase
and retirement of Class C common stock
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(285 |
) |
|
|
|
|
|
|
(9,357 |
) |
(Expiration)/exercise
of stock options
|
|
|
|
|
|
|
(1,208 |
) |
|
|
|
|
|
|
5,899 |
|
|
|
|
|
|
|
7,411 |
|
Balance,
end of year
|
|
|
|
|
|
$ |
97,090 |
|
|
|
|
|
|
$ |
95,572 |
|
|
|
|
|
|
$ |
87,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings/(accumulated deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
|
|
|
$ |
(52,144 |
) |
|
|
|
|
|
$ |
94,357 |
|
|
|
|
|
|
$ |
112,577 |
|
Cumulative
effect from the adoption of FASB guidance on fair value measurements, net
of tax
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
12,108 |
|
|
|
|
|
|
|
— |
|
Balance
as of January 1
|
|
|
|
|
|
|
(52,144 |
) |
|
|
|
|
|
|
106,465 |
|
|
|
|
|
|
|
112,577 |
|
Net
income/(loss)
|
|
|
|
|
|
|
99,600 |
|
|
|
|
|
|
|
(150,363 |
) |
|
|
|
|
|
|
6,661 |
|
Preferred
stock dividends
|
|
|
|
|
|
|
(17,302 |
) |
|
|
|
|
|
|
(3,717 |
) |
|
|
|
|
|
|
(2,240 |
) |
Common
stock dividends
|
|
|
|
|
|
|
(2,027 |
) |
|
|
|
|
|
|
(4,015 |
) |
|
|
|
|
|
|
(4,119 |
) |
Repurchase
and retirement of Class C common stock
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(514 |
) |
|
|
|
|
|
|
(18,522 |
) |
Balance,
end of year
|
|
|
|
|
|
$ |
28,127 |
|
|
|
|
|
|
$ |
(52,144 |
) |
|
|
|
|
|
$ |
94,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
|
|
|
|
$ |
(47,412 |
) |
|
|
|
|
|
$ |
(2,793 |
) |
|
|
|
|
|
$ |
4,956 |
|
Cumulative
effect from the adoption of FASB guidance on fair value
measurements, net of tax
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(11,237 |
) |
|
|
|
|
|
|
— |
|
Balance
as of January 1
|
|
|
|
|
|
|
(47,412 |
) |
|
|
|
|
|
|
(14,030 |
) |
|
|
|
|
|
|
4,956 |
|
Change
in unrealized gain/(loss) on available-for-sale securities, net of tax and
reclassification adjustments
|
|
|
|
|
|
|
50,514 |
|
|
|
|
|
|
|
(33,657 |
) |
|
|
|
|
|
|
(8,122 |
) |
Change
in unrealized gain/(loss) on financial derivatives, net of tax and
reclassification adjustments
|
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
275 |
|
|
|
|
|
|
|
373 |
|
Balance,
end of year
|
|
|
|
|
|
$ |
3,254 |
|
|
|
|
|
|
$ |
(47,412 |
) |
|
|
|
|
|
$ |
(2,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
|
|
|
$ |
196,191 |
|
|
|
|
|
|
$ |
15,348 |
|
|
|
|
|
|
$ |
223,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income/(loss) (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
|
|
|
|
$ |
99,600 |
|
|
|
|
|
|
$ |
(150,363 |
) |
|
|
|
|
|
$ |
6,661 |
|
Changes
in accumulated other comprehensive income/(loss), net of
tax
|
|
|
|
|
|
|
50,666 |
|
|
|
|
|
|
|
(33,382 |
) |
|
|
|
|
|
|
(7,749 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income/(loss)
|
|
|
|
|
|
$ |
150,266 |
|
|
|
|
|
|
$ |
(183,745 |
) |
|
|
|
|
|
$ |
(1,088 |
) |
(1) See
Note 2(n) to the consolidated financial statements.
See
accompanying notes to consolidated financial statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$ |
99,600 |
|
|
$ |
(150,363 |
) |
|
$ |
6,661 |
|
Adjustments
to reconcile net income/(loss) to net cash provided by/(used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amortization/(accretion) of premiums and discounts on loans, investments,
and Farmer Mac Guaranteed Securities
|
|
|
3,926 |
|
|
|
2,001 |
|
|
|
(2,435 |
) |
Amortization
of debt premiums, discounts and issuance costs
|
|
|
12,876 |
|
|
|
79,404 |
|
|
|
130,810 |
|
Purchases
of trading investment securities
|
|
|
— |
|
|
|
— |
|
|
|
(9,090 |
) |
Proceeds
from repayment and sale of trading investment securities
|
|
|
787 |
|
|
|
6,675 |
|
|
|
5,749 |
|
Purchases
of loans held for sale
|
|
|
(164,335 |
) |
|
|
(61,525 |
) |
|
|
(55,059 |
) |
Proceeds
from repayment of loans held for sale
|
|
|
62,125 |
|
|
|
15,235 |
|
|
|
6,819 |
|
Net
change in fair value of trading securities and financial
derivatives
|
|
|
(105,060 |
) |
|
|
111,768 |
|
|
|
39,045 |
|
Gain
on repurchase of debt
|
|
|
— |
|
|
|
(864 |
) |
|
|
— |
|
Amortization
of transition adjustment on financial derivatives
|
|
|
152 |
|
|
|
275 |
|
|
|
373 |
|
Other-than-temporary
impairment losses
|
|
|
3,994 |
|
|
|
106,240 |
|
|
|
— |
|
Gains
on sale of loans and Farmer Mac Guaranteed Securities
|
|
|
(1,581 |
) |
|
|
(1,509 |
) |
|
|
— |
|
Gains
on the sale of available-for-sale investments
|
|
|
(3,353 |
) |
|
|
(316 |
) |
|
|
(288 |
) |
Gains
on the sale of real estate owned
|
|
|
— |
|
|
|
— |
|
|
|
(130 |
) |
Total
provision/(recovery) for losses
|
|
|
5,242 |
|
|
|
17,840 |
|
|
|
(142 |
) |
Deferred
income taxes
|
|
|
35,615 |
|
|
|
(40,378 |
) |
|
|
(17,090 |
) |
Stock-based
compensation expense
|
|
|
2,694 |
|
|
|
2,759 |
|
|
|
3,680 |
|
Decrease/(increase)
in interest receivable
|
|
|
5,880 |
|
|
|
18,881 |
|
|
|
(18,437 |
) |
Decrease/(increase)
in guarantee and commitment fees receivable
|
|
|
6,093 |
|
|
|
(3,305 |
) |
|
|
(17,061 |
) |
Decrease/(increase)
in other assets
|
|
|
76,382 |
|
|
|
(113,247 |
) |
|
|
(652 |
) |
(Decrease)/increase
in accrued interest payable
|
|
|
(908 |
) |
|
|
(9,534 |
) |
|
|
13,879 |
|
(Decrease)/increase
in other liabilities
|
|
|
(9,019 |
) |
|
|
940 |
|
|
|
21,052 |
|
Net
cash provided by/(used in) operating activities
|
|
|
31,110 |
|
|
|
(19,023 |
) |
|
|
107,684 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of available-for-sale investment securities (1)
|
|
|
(325,871 |
) |
|
|
(1,185,437 |
) |
|
|
(4,201,668 |
) |
Purchases
of Farmer Mac Guaranteed Securities
|
|
|
(2,047,954 |
) |
|
|
(623,179 |
) |
|
|
(227,229 |
) |
Purchases
of loans held for investment
|
|
|
(59,627 |
) |
|
|
(135,097 |
) |
|
|
(72,650 |
) |
Purchases
of defaulted loans
|
|
|
(21,269 |
) |
|
|
(58,279 |
) |
|
|
(3,911 |
) |
Proceeds
from repayment of available-for-sale investment securities
(2)
|
|
|
195,589 |
|
|
|
581,098 |
|
|
|
3,320,077 |
|
Proceeds
from repayment of Farmer Mac Guaranteed Securities
|
|
|
725,761 |
|
|
|
263,858 |
|
|
|
246,683 |
|
Proceeds
from repayment of loans held for investment
|
|
|
41,298 |
|
|
|
118,178 |
|
|
|
136,296 |
|
Proceeds
from sale of available-for-sale investment securities
|
|
|
306,506 |
|
|
|
456,506 |
|
|
|
88,563 |
|
Proceeds
from sale of Farmer Mac Guaranteed Securities
|
|
|
188,204 |
|
|
|
669,406 |
|
|
|
6,434 |
|
Proceeds
from sale of real estate owned
|
|
|
40,955 |
|
|
|
— |
|
|
|
1,537 |
|
Proceeds
from sale of loans
|
|
|
358,953 |
|
|
|
— |
|
|
|
— |
|
Net
cash (used in)/provided by investing activities
|
|
|
(597,455 |
) |
|
|
87,054 |
|
|
|
(705,868 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of discount notes
|
|
|
54,840,697 |
|
|
|
126,824,163 |
|
|
|
119,707,961 |
|
Proceeds
from issuance of medium-term notes
|
|
|
3,475,856 |
|
|
|
2,228,953 |
|
|
|
1,579,000 |
|
Payments
to redeem discount notes
|
|
|
(54,675,917 |
) |
|
|
(126,990,012 |
) |
|
|
(120,064,662 |
) |
Payments
to redeem medium-term notes
|
|
|
(2,727,000 |
) |
|
|
(2,070,136 |
) |
|
|
(1,373,550 |
) |
Tax
benefit from tax deductions in excess of compensation cost
recognized
|
|
|
— |
|
|
|
381 |
|
|
|
616 |
|
Proceeds
from common stock issuance
|
|
|
42 |
|
|
|
5,734 |
|
|
|
7,875 |
|
Purchases
of common stock
|
|
|
— |
|
|
|
(831 |
) |
|
|
(28,966 |
) |
Proceeds
from preferred stock issuance
|
|
|
48,378 |
|
|
|
9,200 |
|
|
|
— |
|
Repurchase
of preferred stock
|
|
|
— |
|
|
|
(35,000 |
) |
|
|
— |
|
Proceeds
from mezzanine equity issuance
|
|
|
— |
|
|
|
144,216 |
|
|
|
— |
|
Dividends
paid on common and preferred stock
|
|
|
(19,329 |
) |
|
|
(7,732 |
) |
|
|
(6,359 |
) |
Net
cash provided by/(used in) financing activities
|
|
|
942,727 |
|
|
|
108,936 |
|
|
|
(178,085 |
) |
Net
increase/(decrease) in cash and cash equivalents
|
|
|
376,382 |
|
|
|
176,967 |
|
|
|
(776,269 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
278,412 |
|
|
|
101,445 |
|
|
|
877,714 |
|
Cash
and cash equivalents at end of period
|
|
$ |
654,794 |
|
|
$ |
278,412 |
|
|
$ |
101,445 |
|
(1)
|
Includes
purchases of $349 million and $2.5 billion of auction rate certificates
for 2008 and 2007, respectively.
|
(2)
|
Includes
proceeds, through the normal auction process, of $286 million and $2.7
billion from auction rate certificates for 2008 and 2007,
respectively.
|
See
accompanying notes to consolidated financial statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2009, 2008 and 2007
The
Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) is
a stockholder-owned, federally chartered instrumentality of the United States
organized and existing under Title VIII of the Farm Credit Act of 1971, as
amended (12 U.S.C. §§ 2279aa et seq.) (the “Act”). Farmer Mac was
originally created by the United States Congress to establish a secondary market
for agricultural real estate and rural housing mortgage loans. This
secondary market was designed to increase the availability of long-term credit
at stable interest rates to America’s rural communities, farmers, ranchers and
rural homeowners and to provide those borrowers with the benefits of capital
markets pricing and product innovation. Since Farmer Mac’s inception,
Congress has expanded Farmer Mac’s charter to authorize the Corporation to
create the Farmer Mac II program and to purchase, and guarantee securities
backed by, loans made by cooperative lenders to finance electrification and
telecommunications systems in rural areas.
Farmer
Mac accomplishes its congressional mission of providing liquidity and lending
capacity to agricultural and rural utilities lenders by:
|
·
|
purchasing
eligible loans directly from
lenders;
|
|
·
|
guaranteeing
securities representing interests in, or secured by, pools of eligible
loans; and
|
|
·
|
issuing
long-term standby purchase commitments (“LTSPCs”) for eligible
loans.
|
Farmer
Mac conducts these activities through three programs—Farmer Mac I,
Farmer Mac II and Rural Utilities. As of December 31, 2009,
the total volume in all of Farmer Mac’s programs was
$10.7 billion.
Under the
Farmer Mac I program, Farmer Mac purchases or commits to purchase mortgage loans
secured by first liens on agricultural real estate. Farmer Mac also
guarantees securities representing interests in or obligations backed by pools
of eligible mortgage loans. The securities guaranteed by Farmer Mac
under the Farmer Mac I program are referred to as “Farmer Mac I Guaranteed
Securities.” To be eligible for the Farmer Mac I program, loans must
meet Farmer Mac’s credit underwriting, collateral valuation, documentation and
other specified standards. As of December 31, 2009, outstanding loans
held by Farmer Mac and loans that either back Farmer Mac I Guaranteed Securities
or are subject to LTSPCs in the Farmer Mac I program totaled
$7.4 billion.
Under the
Farmer Mac II program, Farmer Mac purchases the portions of loans guaranteed by
the United States Department of Agriculture (the “USDA-guaranteed portions”)
pursuant to the Consolidated Farm and Rural Development Act (7 U.S.C. §§ 1921 et
seq.) and guarantees securities backed by those USDA-guaranteed portions
(“Farmer Mac II Guaranteed Securities”). As of December 31, 2009,
outstanding Farmer Mac II Guaranteed Securities totaled $1.2
billion. Since January 2010, all purchases of USDA-guaranteed
portions under the Farmer Mac II program (other than purchases of
USDA-guaranteed portions that back Farmer Mac II Guaranteed Securities to be
sold to third parties) have been, and will continue to be, made by Farmer Mac’s
subsidiary, Farmer Mac II LLC.
Farmer
Mac’s Rural Utilities program, which is separate from the Farmer Mac I and
Farmer Mac II programs, was initiated during second quarter 2008 after
Congress expanded Farmer Mac’s authorized secondary market activities to include
rural utilities loans. Farmer Mac’s activities under this program
will be similar to those conducted under the Farmer Mac I program—loan
purchases, guarantees of securities (“Farmer Mac Guaranteed Securities – Rural
Utilities”) and issuance of LTSPCs—with respect to eligible rural utilities
loans. To be eligible for the Rural Utilities program, loans must
meet Farmer Mac’s credit underwriting and other specified
standards. From inception through third quarter 2009, Farmer Mac
retained in its portfolio all of the rural utilities loans and Farmer Mac
Guaranteed Securities – Rural Utilities under this program. During
fourth quarter 2009, Farmer Mac guaranteed a general obligation secured by
eligible rural utilities loans in the amount of $16.0 million which was sold to
third parties. To date, Farmer Mac has not issued any LTSPCs with
respect to rural utilities loans. As of December 31, 2009, the
aggregate outstanding principal balance of rural utilities loans held and Farmer
Mac Guaranteed Securities – Rural Utilities was $2.1 billion.
Farmer
Mac I Guaranteed Securities, Farmer Mac II Guaranteed Securities and
Farmer Mac Guaranteed Securities – Rural Utilities are sometimes collectively
referred to as “Farmer Mac Guaranteed Securities.” The assets
underlying Farmer Mac Guaranteed Securities include (1) securitized loans
or USDA-guaranteed portions eligible under one of Farmer Mac’s programs and (2)
general obligations of lenders secured by pools of eligible
loans. The Corporation guarantees the timely payment of principal and
interest on the resulting Farmer Mac Guaranteed
Securities. AgVantage® is a
registered trademark of Farmer Mac that is used to designate Farmer Mac’s
guarantees of securities that are related to general obligations of issuers that
are secured by pools of eligible loans. Farmer Mac may retain Farmer
Mac Guaranteed Securities in its portfolio or sell them to third
parties.
Farmer
Mac’s two principal sources of revenue are:
|
·
|
guarantee
and commitment fees received in connection with outstanding Farmer Mac
Guaranteed Securities and LTSPCs;
and
|
|
·
|
interest
income earned on assets held on balance sheet, net of related funding
costs and interest payments and receipts on financial
derivatives.
|
Farmer
Mac funds its “program” purchases of Farmer Mac Guaranteed Securities and
eligible loans primarily by issuing debt obligations of various maturities in
the public capital markets. As of December 31, 2009, Farmer Mac had
$2.3 billion of discount notes and $3.3 billion of medium-term notes
outstanding. To the extent the proceeds of debt issuance exceed
Farmer Mac’s need to fund program assets, those proceeds are invested in
“non-program” investments that must comply with regulations promulgated by the
Farm Credit Administration (“FCA”), including dollar amount, issuer
concentration, and credit quality limitations. Those regulations can
be found at 12 C.F.R. §§ 652.1-652.45 (the “Investment
Regulations”).
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The
accounting and reporting policies of Farmer Mac conform with accounting
principles generally accepted in the United States of America (“generally
accepted accounting principles” or “GAAP”). The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities (including, but not limited to,
the allowance for loan losses, reserve for losses, other-than-temporary
impairment of investment securities and fair value measurements) as of the date
of the consolidated financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ
from those estimates. The following are the significant accounting
policies that Farmer Mac follows in preparing and presenting its
consolidated financial statements:
(a)
|
Principles
of Consolidation
|
The
consolidated financial statements include the accounts of Farmer Mac and its two
subsidiaries: (1) Farmer Mac Mortgage Securities Corporation, whose principal
activities are to facilitate the purchase and issuance of Farmer Mac Guaranteed
Securities and to act as a registrant under registration statements filed with
the Securities and Exchange Commission, and (2) Farmer Mac II LLC, whose
principal activity is the operation of substantially all of the business related
to the Farmer Mac II program – primarily the acquisition of USDA-guaranteed
portions. Farmer Mac II LLC was formed as a Delaware limited
liability company on December 10, 2009. The business operations
of Farmer Mac II LLC began in January 2010. All inter-company
balances and transactions have been eliminated in consolidation.
(b)
|
Cash
and Cash Equivalents and Statements of Cash
Flows
|
Farmer
Mac considers highly liquid investment securities with maturities at the time of
purchase of three months or less to be cash equivalents. The carrying
value of cash and cash equivalents is a reasonable estimate of their approximate
fair value. Changes in the balance of cash and cash equivalents are
reported in the consolidated statements of cash flows. The following
table sets forth information regarding certain cash and non-cash transactions
for the years ended December 31, 2009, 2008 and 2007.
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
80,350 |
|
|
$ |
103,517 |
|
|
$ |
119,700 |
|
Income
taxes
|
|
|
11,500 |
|
|
|
30,069 |
|
|
|
7,809 |
|
Non-cash
activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate owned acquired through foreclosure
|
|
|
41,086 |
|
|
|
16 |
|
|
|
— |
|
Loans
acquired and securitized as Farmer Mac Guaranteed
Securities
|
|
|
28,736 |
|
|
|
98,843 |
|
|
|
1,324 |
|
Loans
previously under LTSPCs exchanged for Farmer Mac Guaranteed
Securities
|
|
|
— |
|
|
|
— |
|
|
|
681,732 |
|
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 FASB guidance on fair value measurement
|
|
|
— |
|
|
|
600,468 |
|
|
|
— |
|
Transfers
of Farmer Mac II Guaranteed Securities from held-to-maturity to trading
from the effect of adopting FASB guidance on fair value
measurement
|
|
|
— |
|
|
|
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 |
|
|
|
— |
|
|
|
— |
|
Transfers
of investment securities from trading to available-for-sale from the
exchange of GSE preferred stock
|
|
|
90,657 |
|
|
|
— |
|
|
|
— |
|
During
2009, Farmer Mac transferred securities between categories as a result of two
primary transactions. The first transaction was the sale of $354.5
million principal balance of loans during first quarter
2009. Consistent with management’s effort to preserve and strengthen
its capital position beginning in third quarter 2008, the primary purpose of the
sale was to eliminate the need to hold capital in support of the loans under
Farmer Mac’s statutory minimum capital requirements. Given the change
in management’s intention pertaining to its loan portfolio in first quarter
2009, Farmer Mac reclassified loans with an amortized cost basis of $617.1
million from loans held-for-investment to loans held-for-sale prior to the sale
of certain loans. Also in first quarter 2009, Farmer Mac transferred
$263.4 million amortized cost basis of available-for-sale Farmer Mac I
Guaranteed Securities to loans held-for-sale upon the consolidation of certain
trusts in which Farmer Mac held 100 percent of the beneficial ownership
interests. Farmer Mac then terminated the trusts and sold a portion
of the underlying loans. The $288.0 million balance disclosed above
represents the fair value of the transferred Farmer Mac I Guaranteed Securities
as of December 31, 2008.
The
second transaction occurred during third quarter 2009. Farmer Mac
accepted an exchange offer extended by CoBank, ACB (“CoBank”), an institution of
the Farm Credit System (the “FCS”) 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. 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 and losses
on trading assets.
During
2008, Farmer Mac transferred securities between categories as a result of three
separate events. The first event occurred on January 1, 2008, upon
the adoption of FASB guidance related to fair value measurement. As a
result of its election of the fair value option for certain securities, Farmer
Mac transferred $428.7 million of Farmer Mac II Guaranteed Securities from
held-to-maturity to trading and $600.5 million of investment securities from
available-to-sale to trading. See Note 13 for more information
related to fair value measurement.
The
second event occurred during second quarter 2008. On May 22, 2008,
Congress enacted into law the Food, Conservation and Energy Act of 2008, which
expanded Farmer Mac’s authorities to include providing a secondary market for
rural electric and telephone loans made by cooperative
lenders. Consequently, Farmer Mac placed its guarantee on $430.7
million principal amount of securities representing interests in rural electric
cooperative loans and $900.0 million principal amount of obligations
collateralized by rural electric cooperative loans previously held as mission
related investments under authority granted by the Farm Credit Administration
(“FCA”), Farmer Mac’s regulator. Farmer Mac reclassified these
securities from “Investment Securities” to “Farmer Mac Guaranteed Securities” on
its consolidated balance sheets based on their existing fair value
classifications (i.e., available-for-sale investment securities were transferred
to available-for-sale Farmer Mac Guaranteed Securities and trading investment
securities were transferred to trading Farmer Mac Guaranteed
Securities). The amounts disclosed above represent the fair value of
these securities as of March 31, 2008.
The third
event occurred during third quarter 2008 and primarily stemmed from the turmoil
experienced in the nation’s financial markets. As a result of
significant other-than-temporary impairment losses, Farmer Mac evaluated
strategies to preserve and strengthen its capital position, which included asset
sales and common and preferred equity offerings. Given the changes in
circumstances and management’s intention, Farmer Mac believed that the
held-to-maturity designation was no longer appropriate for Farmer Mac Guaranteed
Securities held on balance sheet. Farmer Mac reclassified all of its
held-to-maturity Farmer Mac I and Farmer Mac II Guaranteed Securities
with an amortized cost basis of $25.0 million and $493.6 million,
respectively, to available-for-sale. The amounts disclosed above are
the fair value of these securities as of September 30, 2008, which
represents the new carrying value of these securities resulting from the change
in management’s intention.
(c)
|
Investments
and Farmer Mac Guaranteed
Securities
|
Farmer
Mac classifies investments and Farmer Mac Guaranteed Securities that Farmer Mac
has the positive intent and ability to hold to maturity as
held-to-maturity. Such securities are carried at cost, adjusted for
unamortized premiums and unearned discounts. Farmer Mac does not
currently classify any investments or Farmer Mac Guaranteed Securities as
held-to-maturity. Securities for which Farmer Mac does not have the
positive intent to hold to maturity are classified as available-for-sale and are
carried at estimated fair value. Unrealized gains and losses on
available-for-sale securities are reported as a component of accumulated other
comprehensive income/(loss) in stockholders’ equity. Securities
classified as trading securities are reported at their fair value, with
unrealized gains and losses included in earnings. Gains and losses on
the sale of available-for-sale and trading securities are determined using the
specific identification cost method.
Farmer
Mac determines the fair value of investment securities using quoted market
prices, when available, and evaluates the securities for other-than-temporary
impairment. Farmer Mac determines the fair value of investment
securities for which quoted market prices are not available and Farmer Mac
Guaranteed Securities based on the present value of the associated expected
future cash flows. In estimating the present value of the expected
future cash flows, management is required to make estimates and
assumptions. The key estimates and assumptions include future
discount rates and collateral repayment rates. Premiums, discounts
and other deferred costs are amortized to interest income over the estimated
life of the security using the effective interest method. Interest
income on investments and Farmer Mac Guaranteed Securities is recorded on an
accrual basis unless the collection of interest is considered
doubtful.
Farmer
Mac generally receives compensation when loans with yield maintenance provisions
underlying Farmer Mac Guaranteed Securities prepay. These yield
maintenance payments mitigate Farmer Mac’s exposure to reinvestment risk and are
calculated such that, when reinvested with the prepaid principal, they should
generate substantially the same cash flows that would have been generated had
the loans not prepaid. Yield maintenance payments are recognized as
interest income in the consolidated statements of operations upon
receipt.
Asset
securitization involves the transfer of financial assets to another entity in
exchange for cash and/or beneficial interests in the assets
transferred. Farmer Mac or third parties transfer agricultural real
estate mortgage loans or rural utilities loans into trusts that are used as
vehicles for the securitization of the transferred loans. The trusts
issue Farmer Mac Guaranteed Securities that are beneficial interests in the
assets of the trusts, to either Farmer Mac or third party
investors. Farmer Mac guarantees the timely payment of principal and
interest on the securities issued by the trusts and receives guarantee fees as
compensation for its guarantee. Farmer Mac recognizes guarantee fees
on an accrual basis over the terms of the Farmer Mac Guaranteed Securities,
which coincide with the terms of the underlying loans. As such, no
guarantee fees are unearned at the end of any reporting
period. Guarantee fees represent a reduction of the obligation under
the guarantee based on amortization using the actual prepayment experience on
the underlying loans. If Farmer Mac purchases a delinquent loan
underlying a Farmer Mac Guaranteed Security, Farmer Mac stops accruing the
guarantee fee upon the loan purchase.
The trust
vehicles used in loan securitization transactions after March 31, 2001, in
which Farmer Mac retains all the Farmer Mac Guaranteed Securities issued by the
trust, do not meet the “qualifying special purpose entity” requirements under
GAAP. Accordingly, Farmer Mac accounts for the Farmer Mac Guaranteed
Securities it retains in these transactions as loans in its consolidated balance
sheets and the guarantee fees earned on those assets are recorded as interest
income in the consolidated statements of operations. The Farmer Mac
Guaranteed Securities securitized prior to April 1, 2001 that Farmer Mac has
retained, have been recorded in Farmer Mac’s consolidated financial statements
as Farmer Mac Guaranteed Securities.
Transfers
of loans into trusts in which Farmer Mac surrenders control over the financial
assets and receives compensation other than beneficial interests in the
underlying loans are recorded as sales. The carrying amount of the
assets that are transferred in these transactions is allocated between the
assets sold and the interests retained, if any, based on the relative fair
values of each at the date of the transfer. A gain or loss is
included in income for the difference between the allocated carrying amount of
the asset sold and the net cash proceeds received.
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 all such defaulted loans at their
unpaid principal balance during the period in which Farmer Mac becomes entitled
to purchase the loans and therefore regains effective control over the
transferred loans. Considering the low loan-to-value ratios in its
portfolio, Farmer Mac believes that it is probable at the acquisition of these
loans that it will be able to collect all contractually required payments
receivable.
Please
see Note 2(q) for more information on the adoption of new accounting standards
related to transfers of financial assets and consolidation.
Real
estate owned (“REO”) consists of real estate acquired through foreclosure and is
recorded at fair value less estimated selling costs at
acquisition. Fair value is determined by appraisal or other
appropriate valuation method. Losses estimated at the time of
acquisition are charged to the allowance for loan losses. Subsequent
to the acquisition, management continues to perform periodic valuations for real
estate owned. Declines in the net realizable value (fair value less
estimated selling costs) are charged through income.
Farmer
Mac contracts with third parties to operate or preserve real estate owned and
offered for sale when appropriate to maintain property
value. Non-recoverable costs are expensed as incurred and those
related to the production of saleable goods or crops are capitalized to the
extent they are realizable. As revenues from the sale of goods or
crops are received, they are applied first to any capitalized costs and any
remaining revenues offset non-recoverable expenses incurred. Farmer
Mac had no capitalized costs as of December 31, 2009 and 2008.
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 principally to adjust the characteristics of its short-term debt to
match more closely the cash flow and duration characteristics of its longer-term
mortgage and other assets, and also to adjust the characteristics of its
long-term debt to match more closely the cash flow and duration characteristics
of its short-term assets, thereby reducing interest rate risk and also to derive
an overall lower effective cost of borrowing than would otherwise be available
to Farmer Mac in the conventional debt market. Farmer Mac is required
also to recognize certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a
derivative.
All
financial derivatives are recorded on the balance sheet at fair value as a
freestanding asset or liability. As discussed in Note 6, 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 consolidated
statements of operations.
Notes
payable are classified as due within one year or due after one year based on
their contractual maturities. Debt issuance costs and premiums and
discounts are deferred and amortized to interest expense using the effective
interest method over the contractual life of the related debt.
Farmer
Mac maintains 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.
The
allowance for losses is increased through periodic provisions for loan losses
that are charged against net interest income and provisions for losses that are
charged to non-interest expense, and is reduced by charge-offs for actual
losses, net of recoveries. Negative provisions for loan losses or
negative provisions for losses are recorded in the event that the estimate of
probable losses as of the end of a period is lower than the estimate at the
beginning of the period.
Farmer
Mac’s methodology for determining its allowance for losses incorporates the
Corporation’s 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.
|
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 and LTSPCs, in accordance with the
FASB standard on accounting for contingencies.
Farmer
Mac separately evaluates the rural utilities loans it owns, as well as the
lender obligations and loans underlying or securing its Farmer Mac Guaranteed
Securities – Rural Utilities, to determine if there are any probable losses
inherent in those assets.
Farmer
Mac also analyzes impaired assets in its portfolio for impairment in accordance
with the FASB standard on measuring individual impairment of a
loan. 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 – and
REO);
|
|
·
|
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 specifically provides an allowance for the
loan 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.
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. 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
December 31, 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 December 31, 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 December 31, 2009,
Farmer Mac had not experienced any credit losses on any Farmer Mac II Guaranteed
Securities.
(k)
|
Earnings/(Loss)
Per Common Share
|
Basic
earnings/(loss) per common share is based on the weighted-average number of
shares of common stock outstanding. Diluted earnings/(loss) per
common share is 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 non-vested restricted stock
awards. The following schedule reconciles basic and diluted
earnings/(loss) per share of common stock (“EPS”) for the years ended December
31, 2009, 2008 and 2007.
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Net
|
|
|
|
|
|
$ per
|
|
|
Net
|
|
|
|
|
|
$ per
|
|
|
Net
|
|
|
|
|
|
$ per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
|
(in thousands, except per share amounts)
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) available to common stockholders
|
|
$ |
82,298 |
|
|
|
10,138 |
|
|
$ |
8.12 |
|
|
$ |
(154,080 |
) |
|
|
10,007 |
|
|
$ |
(15.40 |
) |
|
$ |
4,421 |
|
|
|
10,369 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options, SARs and non-vested restricted shares
|
|
|
— |
|
|
|
95 |
|
|
|
(0.08 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
222 |
|
|
|
(0.01 |
) |
Diluted
EPS
|
|
$ |
82,298 |
|
|
|
10,233 |
|
|
$ |
8.04 |
|
|
$ |
(154,080 |
) |
|
|
10,007 |
|
|
$ |
(15.40 |
) |
|
$ |
4,421 |
|
|
|
10,591 |
|
|
$ |
0.42 |
|
(1)
|
For
the years ended December 31, 2009, 2008 and 2007, stock options and SARs
of 1,724,800, 2,377,544 and 380,506 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 year ended December 31,
2009, 47,143 contingent shares of non-vested restricted stock were
outstanding but not included in the computation of diluted earnings per
share because the performance conditions were not
met.
|
Deferred
federal income tax assets and liabilities are established for temporary
differences between financial and taxable income and are measured using the
current enacted statutory tax rate. Income tax expense is equal to
the income taxes payable in the current year plus the net change in the deferred
tax asset or liability balance.
Farmer
Mac evaluates its tax positions at least quarterly to identify and recognize any
liabilities related to uncertain tax positions in its federal income tax
returns. Farmer Mac, in accordance with FASB guidance on uncertainty
in income taxes, uses a two-step approach in which income tax benefits are
recognized if, based on the technical merits of a tax position, it is more
likely than not (a probability of greater than 50 percent) that the tax position
would be sustained upon examination by the taxing authority, which includes all
related appeals and litigation process. The amount of tax benefit
recognized is then measured at the largest amount of tax benefit that is greater
than 50 percent likely to be realized upon settlement with the taxing
authority, considering all information available at the reporting
date. Farmer Mac’s policy for recording interest and penalties
associated with uncertain tax positions is to record them as a component of
income tax expense. Farmer Mac establishes a valuation allowance for
deferred tax assets if it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
(m)
|
Stock-Based
Compensation
|
Farmer
Mac accounts for its stock-based employee compensation plans using the grant
date fair value method of accounting. Farmer Mac measures the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award determined using the Black-Scholes
option pricing model. The cost is recognized over the period during
which an employee is required to provide service in exchange for the
award.
Effective
January 1, 2006, Farmer Mac adopted new accounting guidance for share-based
payments using the modified prospective method of
transition. Accordingly, prior period amounts have not been
retrospectively adjusted for this change. As of January 1, 2009, all
previously issued awards that were outstanding at December 31, 2005 were fully
vested and therefore no compensation expense was recognized related to the
non-vested portion of previously issued stock option awards during
2009. During 2008 and 2007, the adoption resulted in $0.9 million and $1.4
million, respectively, of compensation expense related to the non-vested portion
of previously issued stock option awards that were outstanding as of
December 31, 2005. Additionally, Farmer Mac recognized $2.7
million, $1.9 million and $2.2 million of compensation expense related
to stock options, SARs and non-vested restricted stock awarded subsequent to
December 31, 2005, for 2009, 2008 and 2007, respectively.
(n)
|
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/(loss) for the years ended December 31,
2009, 2008 and 2007:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$ |
99,600 |
|
|
$ |
(150,363 |
) |
|
$ |
6,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding gains/(losses)
|
|
|
49,266 |
|
|
|
(70,067 |
) |
|
|
(7,935 |
) |
Reclassification
adjustment for realized losses/(gains)
|
|
|
1,248 |
|
|
|
36,410 |
|
|
|
(187 |
) |
Net
change from available-for-sale securities (1)
|
|
|
50,514 |
|
|
|
(33,657 |
) |
|
|
(8,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
for amortization of financial derivatives transition adjustment
(2)
|
|
|
152 |
|
|
|
275 |
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income/(loss), net of tax
|
|
|
50,666 |
|
|
|
(33,382 |
) |
|
|
(7,749 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income/(loss)
|
|
$ |
150,266 |
|
|
$ |
(183,745 |
) |
|
$ |
(1,088 |
) |
(1)
|
Unrealized
gains/(losses) on available for sale securities is shown net of income tax
expense of $27.2 million, taxbenefit
of $18.1 million and tax benefit of $4.4 million in 2009, 2008 and 2007,
respectively.
|
(2)
|
Amortization
of financial derivatives transition adjustment is shown net of income tax
expense of $0.1 million, $0.1 million and $0.2 million in 2009, 2008 and
2007, respectively.
|
The
following table presents Farmer Mac’s accumulated other comprehensive
income/(loss) as of December 31, 2009, 2008 and 2007 and changes in the
components of accumulated other comprehensive income/(loss) for the years ended
December 31, 2009, 2008 and 2007.
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(47,214 |
) |
|
$ |
(2,320 |
) |
|
$ |
5,802 |
|
Reclassification
adjustment to retained earnings for fair value option adoption, net of
tax
|
|
|
— |
|
|
|
(11,237 |
) |
|
|
— |
|
Adjusted
beginning balance
|
|
|
(47,214 |
) |
|
|
(13,557 |
) |
|
|
5,802 |
|
Net
unrealized gains/(losses), net of tax
|
|
|
50,514 |
|
|
|
(33,657 |
) |
|
|
(8,122 |
) |
Ending
balance
|
|
$ |
3,300 |
|
|
$ |
(47,214 |
) |
|
$ |
(2,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(198 |
) |
|
$ |
(473 |
) |
|
$ |
(846 |
) |
Amortization
of financial derivatives transition adjustment, net of tax
|
|
|
152 |
|
|
|
275 |
|
|
|
373 |
|
Ending
balance
|
|
$ |
(46 |
) |
|
$ |
(198 |
) |
|
$ |
(473 |
) |
Accumulated
other comprehensive income/(loss), net of tax
|
|
$ |
3,254 |
|
|
$ |
(47,412 |
) |
|
$ |
(2,793 |
) |
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 necessary upon adoption of the new FASB guidance related to
other-than-temporary impairments.
(o)
|
Long-Term
Standby Purchase Commitments
|
Farmer
Mac accounts for its LTSPCs in accordance with provisions of FASB guidance on
guarantee. Commitment fee income represents a reduction of the
commitment obligation based on amortization using the actual prepayment
experience on the underlying loans. See Note 2(j) for Farmer
Mac’s policy for estimating probable losses for LTSPCs and Note 12 for more
information on the accounting for LTSPCs.
Effective
January 1, 2008, Farmer Mac adopted new accounting guidance for fair value
measurements. The guidance 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).
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 FASB guidance on the fair value option for
financial instruments that 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
13 for more information regarding fair value measurement.
(q)
|
New
Accounting Standards
|
Transfers
of Financial Assets and Consolidation Standards
Effective
January 1, 2010, Farmer Mac adopted two new accounting standards that eliminated
the concept of qualifying special purpose entities (“QSPEs”) and amended the
accounting for transfers of financial assets and the consolidation model for
variable interest entities (“VIEs”). Under these new accounting
standards, the consolidation exemption for QSPEs was removed. All
formerly designated QSPEs must be evaluated for consolidation in accordance with
the new consolidation model, which changes the method of analyzing which party
to a VIE should consolidate the VIE. The current consolidation model
is replaced with a qualitative evaluation that requires consolidation of an
entity when the reporting enterprise both (1) has the power to direct matters
which significantly impact the activities and success of the entity, and (2) has
exposure to benefits and/or losses that could potentially be significant to the
entity.
The new
accounting standards require the incremental assets and liabilities consolidated
upon adoption to initially be reported at their carrying values. If
determining the carrying amounts is not practicable, the assets and liabilities
of the VIE shall be measured at fair value at the date the new standards first
apply. For the outstanding trusts consolidated effective January 1,
2010, Farmer Mac initially recorded the assets and liabilities on the
consolidated balance sheet at their carrying values. Accrued interest
and allowance for loan losses have also been recognized as
appropriate.
The
adoption of these new accounting standards will have a significant impact on the
presentation of Farmer Mac’s consolidated financial statements beginning in
2010. On the consolidated balance sheet, there will be an increase in
loans and debt and a decrease in available-for-sale and trading Farmer Mac
Guaranteed Securities, the reclassification of a portion of the reserve for
losses to allowance for loan losses, and the elimination of the guarantee assets
and guarantee obligations related to the consolidated trusts. On the
income statement, there will be an increase in interest income and interest
expense attributable to the assets and liabilities of the consolidated trusts
and reclassification of a portion of guarantee fee income.
Although
these new accounting standards do not change the economic risk to Farmer Mac’s
business, specifically Farmer Mac’s liquidity, credit, and interest rate risks,
the transition adjustment upon adoption increased consolidated assets by $292.8
million, which resulted in an incremental regulatory capital requirement of $5.9
million, and increased retained earnings by $2.6 million.
Certain
reclassifications of prior year information were made to conform to the 2009
presentation.
3.
|
RELATED
PARTY TRANSACTIONS
|
As
provided by Farmer Mac’s statutory charter, only banks, insurance companies and
other financial institutions or similar entities may hold Farmer Mac’s Class A
voting common stock and only institutions of the FCS may hold Farmer Mac’s Class
B voting common stock. Farmer Mac’s statutory charter also provides
that Class A stockholders elect five members of Farmer Mac’s 15-member board of
directors and that Class B stockholders elect five members of the board of
directors. Additionally, in order to participate in the Farmer Mac I
program, a financial institution must own a requisite amount of Farmer Mac
Class A or Class B voting common stock, based on the size and type of
institution. As a result of these requirements, Farmer Mac conducts
business with related parties in the normal course of Farmer Mac’s
business.
Although
Farmer Mac conducted business during 2007 with Farm Credit West, information
about those transactions is not included below because that institution was not
a related party during that year. Farm Credit West became a related party
in 2008 as a result of a merger in April 2008 between that institution and
Sacramento Valley Farm Credit, ACA, which was a related party in
2007. All transactions with Sacramento Valley Farm Credit during 2008
that occurred prior to the merger are included in the transactions reported for
Farm Credit West in 2008.
During
2009, Farmer Mac purchased newly originated and current seasoned eligible loans
from 62 entities (the top ten institutions generated 81.1 percent of the
purchase volume), placed loans under LTSPCs with 19 entities and conducted
Farmer Mac II transactions with 158 entities operating throughout the
United States. During 2008, Farmer Mac purchased newly originated and
current seasoned eligible loans from 74 entities (the top ten institutions
generated 76.9 percent of the purchase volume), placed loans under LTSPCs
with 23 entities and conducted Farmer Mac II transactions with 187 entities
operating throughout the United States. All related party
transactions were conducted in the ordinary course of business, with terms and
conditions comparable to those available to any other program participant not
related to Farmer Mac.
Long-Term Standby Purchase
Commitments with Related Parties:
For all
of the LTSPC transactions discussed below, Farmer Mac has a related party
relationship with each entity resulting from a member of Farmer Mac’s board of
directors being affiliated with the entity in some capacity or the entity being
a holder of at least 5 percent of the outstanding shares of a class of Farmer
Mac voting common stock. Farmer Mac’s LTSPC
activity with related parties in 2009, 2008 and 2007 is presented
below:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
|
(dollars
in thousands)
|
|
New
extensions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AgFirst
Farm Credit Bank
|
|
|
66 |
|
|
$ |
34,459 |
|
|
|
297 |
|
|
$ |
69,202 |
|
|
|
709 |
|
|
$ |
124,605 |
|
AgStar
Financial Services, ACA
|
|
|
44 |
|
|
|
14,736 |
|
|
|
180 |
|
|
|
74,555 |
|
|
|
1,837 |
|
|
|
369,347 |
|
Farm
Credit Bank of Texas
|
|
|
143 |
|
|
|
45,628 |
|
|
|
375 |
|
|
|
185,378 |
|
|
|
742 |
|
|
|
284,198 |
|
Farm
Credit of Western New York, ACA
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
545 |
|
Farm
Credit West, ACA
|
|
|
10 |
|
|
|
16,706 |
|
|
|
5 |
|
|
|
13,262 |
|
|
|
— |
|
|
|
— |
|
Sacramento
Valley Farm Credit, ACA
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
8,457 |
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Principal
|
|
|
Number of
|
|
|
Principal
|
|
|
|
Loans
|
|
|
Balance
|
|
|
Loans
|
|
|
Balance
|
|
|
|
(dollars
in thousands)
|
Aggregate
LTSPCs outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
AgFirst
Farm Credit Bank
|
|
|
2,303 |
|
|
$ |
349,513 |
|
|
|
2,700 |
|
|
$ |
397,454 |
|
AgStar
Financial Services, ACA
|
|
|
439 |
|
|
|
192,655 |
|
|
|
405 |
|
|
|
191,359 |
|
Farm
Credit Bank of Texas
|
|
|
1,542 |
|
|
|
500,457 |
|
|
|
1,545 |
|
|
|
533,495 |
|
Farm
Credit of Western New York, ACA
|
|
|
109 |
|
|
|
35,509 |
|
|
|
118 |
|
|
|
40,234 |
|
Farm
Credit West, ACA
|
|
|
85 |
|
|
|
111,981 |
|
|
|
81 |
|
|
|
101,828 |
|
For the
years ended December 31, 2009, 2008 and 2007, Farmer Mac earned the following
commitment fees from related parties:
|
|
For the Year Ended December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Commitment
fees earned by Farmer Mac:
|
|
|
|
|
|
|
|
|
|
AgFirst
Farm Credit Bank
|
|
$ |
1,552 |
|
|
$ |
1,768 |
|
|
$ |
1,586 |
|
AgStar
Financial Services, ACA
|
|
|
1,222 |
|
|
|
1,402 |
|
|
|
865 |
|
Farm
Credit Bank of Texas
|
|
|
1,902 |
|
|
|
1,780 |
|
|
|
1,349 |
|
Farm
Credit of Western New York, ACA
|
|
|
197 |
|
|
|
219 |
|
|
|
244 |
|
Farm
Credit West, ACA
|
|
|
303 |
|
|
|
301 |
|
|
|
— |
|
Sacramento
Valley Farm Credit, ACA
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
As of
December 31, 2009 and 2008, Farmer Mac had the following commitment fees
receivable from related parties:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
AgFirst
Farm Credit Bank
|
|
$ |
198 |
|
|
$ |
247 |
|
AgStar
Financial Services, ACA
|
|
|
95 |
|
|
|
93 |
|
Farm
Credit Bank of Texas
|
|
|
155 |
|
|
|
167 |
|
Farm
Credit of Western New York, ACA
|
|
|
15 |
|
|
|
17 |
|
Farm
Credit West, ACA
|
|
|
25 |
|
|
|
25 |
|
Zions First National
Bank:
The
following transactions occurred between Farmer Mac and Zions First National Bank
or its affiliates (“Zions”), which is the largest holder of Farmer Mac Class A
voting common stock and a major holder of Class C non-voting common stock,
during 2009, 2008 and 2007:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
|
(dollars
in thousands)
|
|
Purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
126 |
|
|
$ |
77,079 |
|
|
|
148 |
|
|
$ |
71,673 |
|
|
|
80 |
|
|
$ |
45,723 |
|
USDA-guaranteed
portions
|
|
|
10 |
|
|
|
2,712 |
|
|
|
5 |
|
|
|
636 |
|
|
|
11 |
|
|
|
2,333 |
|
Sales
of Farmer Mac Guaranteed Securities
|
|
|
|
|
|
|
27,797 |
|
|
|
|
|
|
|
96,143 |
|
|
|
|
|
|
|
- |
|
The
purchases of loans from Zions under the Farmer Mac I program represented
approximately 39.5 percent,
36.5 percent and 35.8 percent of Farmer Mac I loan purchase volume for the
years ended December 31, 2009, 2008 and 2007, respectively. Those
purchases represented 17.9 percent,
6.0 percent, and 2.0 percent of total program volume,
respectively. The purchases of USDA-guaranteed portions under the
Farmer Mac II program from Zions represented approximately 0.8 percent,
0.2 percent and 1.1 percent of that program’s volume for the years ended
December 31, 2009, 2008 and 2007, respectively.
Farmer
Mac or Zions received the applicable amounts shown below with respect to
transactions between the two parties in 2009, 2008 and 2007:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Guarantee
fees received by Farmer Mac
|
|
$ |
1,393 |
|
|
$ |
1,821 |
|
|
$ |
2,016 |
|
Servicing
fees received by Zions
|
|
|
1,585 |
|
|
|
1,533 |
|
|
|
1,558 |
|
Underwriting
and loan file review fees received by Zions
|
|
|
15 |
|
|
|
13 |
|
|
|
15 |
|
Discount
note commissions received by Zions
|
|
|
18 |
|
|
|
39 |
|
|
|
17 |
|
Commercial
paper interest earned by Farmer Mac
|
|
|
— |
|
|
|
— |
|
|
|
245 |
|
Zions
received commissions for acting as dealer with respect to approximately
$678.9 million,
$823.2 million and $730.0 million par value of Farmer Mac discount notes during
2009, 2008 and 2007, respectively.
Farmer
Mac and Zions were parties to interest rate swap contracts having an aggregate
outstanding notional principal amount of approximately $105.2 million and
$131.9 million as of December 31, 2009 and 2008,
respectively. As of December 31, 2009
and 2008, Farmer Mac had net interest payable to Zions under those contracts of
approximately $2.0 million and $1.8 million,
respectively.
In May
2005, Farmer Mac entered into a 3-year lease agreement with Zions for office
space in Ames, Iowa, under which the annual rental expense was
$20,620. In 2008 and 2007, Farmer Mac paid Zions $8,591 and $22,338,
respectively, under that lease agreement, which expired according to its terms
during 2008.
AgFirst Farm Credit
Bank:
Farmer
Mac has a related party relationship with AgFirst Farm Credit Bank (“AgFirst”),
resulting from a member of Farmer Mac’s board of directors also being a member
of AgFirst’s board of directors and AgFirst being a holder of approximately
16.8 percent of Farmer Mac Class B voting common stock. In
addition to the LTSPC transactions set forth above under “Long-Term Standby
Purchase Commitments with Related Parties” in this Note 3, the additional
transactions set forth below occurred between Farmer Mac and
AgFirst.
In 2009,
2008 and 2007, AgFirst received $21,000, $26,000 and $32,000, respectively, in
servicing fees for its work as a Farmer Mac central servicer.
AgFirst
owns Farmer Mac I Guaranteed Securities backed by rural housing loans for which
Farmer Mac is the second-loss guarantor for the last 10 percent. As
of December 31, 2009 and 2008, the outstanding balance of those securities owned
by AgFirst was $374.2 million
and $464.7 million, respectively. Farmer Mac received guarantee fees
of $0.3 million for each of the years 2009, 2008 and 2007, with respect to
those securities.
In 2009,
2008 and 2007, Farmer Mac paid AgFirst $4,000, $2,000 and $2,000, respectively,
for marketing expenses related to Farmer Mac programs.
In 2009,
2008 and 2007, Farmer Mac received guarantee fees of $26,000, $59,000 and
$70,000, respectively, on the Farmer Mac I Guaranteed Securities held by
AgFirst.
Farmer
Mac also owned $88.0 million par value of AgFirst preferred stock as of December
31, 2009, 2008 and 2007.
AgStar Financial Services,
ACA:
Farmer
Mac has a related party relationship with AgStar Financial Services, ACA
(“AgStar”), resulting from a member of Farmer Mac’s board of directors being the
President and Chief Executive Officer of AgStar. In addition to the
LTSPC transactions set forth above under “Long-Term Standby Purchase Commitments
with Related Parties” in this Note 3, the additional transactions set forth
below occurred between Farmer Mac and AgStar.
In November 2004, Farmer
Mac and AgStar entered into a strategic alliance agreement as part of
Farmer Mac’s efforts to capture a greater share of the market and to serve a
cross-section of agricultural lenders in many areas of the
nation. Under the terms of that agreement, Farmer Mac paid AgStar
$100,000 in 2005 for joint marketing expenses. In 2009, 2008, and
2007, Farmer Mac paid AgStar $5,000, $4,000, and $5,000, respectively, for
marketing expenses related to Farmer Mac programs.
In 2009,
2008 and 2007, AgStar received $1.6 million, $1.9 million and
$1.9 million, respectively, in servicing fees for its work as a Farmer
Mac central servicer.
In 2009,
Farmer Mac did not purchase any loans from AgStar under the Farmer Mac I
program, compared to $0.3 million and $0.7 million in 2008 and 2007,
respectively. In addition, during 2009 Farmer Mac purchased from
AgStar $11.9 million related to two defaulted loans pursuant to the terms of an
LTSPC agreement. During 2008, Farmer Mac purchased from AgStar
$53.2 million of defaulted loans related to five ethanol plants pursuant to
the terms of an LTSPC agreement.
During
2009, 2008 and 2007, Farmer Mac sold Farmer Mac I Guaranteed Securities to
AgStar in the amount of $0.9 million, $2.7 million and $1.3 million,
respectively. Those sales did not result in a gain or loss to Farmer
Mac.
During
2009 and 2008, no existing LTSPCs were converted to Farmer Mac I Guaranteed
Securities; however, during 2007, $400.2 million of existing LTSPCs were
converted to Farmer Mac I Guaranteed Securities. The outstanding
principal balance of the converted securities as of December 31, 2009, 2008 and
2007 was $449.2 million, $533.5 million and $639.1 million,
respectively. Farmer Mac received $2.0 million, $2.4 million and $2.3
million in guarantee fees on those securities during 2009, 2008 and 2007,
respectively.
The National Rural Utilities
Cooperative Financial Corporation:
The National Rural
Utilities Cooperative Financial Corporation (“National Rural”) became a
related party in 2009 through the purchase of Farmer Mac Class A voting common
stock. Although Farmer Mac conducted business with National Rural
during 2008 and 2007, information about those transactions is not disclosed
since National Rural was not a related party during those
years. As of December 31, 2009, National Rural held
7.7 percent of Farmer Mac’s outstanding Class A voting common stock (5.2
percent of total voting shares), 15,000 shares (20 percent) of Series B-1
Preferred Stock, and 57,578 shares (100 percent) of Series C
Preferred Stock. During 2009, Farmer Mac sold 48,378 shares of Series
C Preferred Stock to National Rural. The following transactions also
occurred between Farmer Mac and National Rural during 2009.
Farmer Mac Loan Purchases and Guarantees
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31, 2009
|
|
|
|
(in thousands)
|
Rural
Utilities:
|
|
|
|
Loans
|
|
$ |
28,644 |
|
On-balance
sheet Guaranteed Securities
|
|
|
1,695,000 |
|
Off-balance
sheet Guaranteed Securities
|
|
|
16,009 |
|
|
|
|
|
|
Total
purchases
|
|
$ |
1,739,653 |
|
Those
transactions with National Rural represented 100 percent of
Farmer Mac’s loan purchase and guarantee volume under the Rural Utilities
program for 2009. Those transactions represented 69.2 percent of
total program volume for 2009. As of December 31, 2009 and for the
year then ended, Farmer Mac had guarantee fees receivable of $1.7 million from
National Rural and earned guarantee fees of $6.0 million. Farmer Mac
also had interest receivable of $8.7 million as of December 31, 2009 and
earned interest income of $32.3 million during 2009 related to its AgVantage
transactions with National Rural.
Other Related Party
Transactions:
For all
of the transactions discussed below, Farmer Mac has a related party relationship
with each entity resulting from (1) a member of Farmer Mac’s board of directors
being affiliated with the entity in some capacity or (2) the entity being a
holder of 5 percent or more a class of Farmer Mac voting common
stock.
The
following is a summary of purchases of loans, USDA-guaranteed
portions from other related parties during 2009, 2008 and 2007:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
|
(dollars in thousands)
|
|
Purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Dakota National Bank
|
|
|
14 |
|
|
$ |
4,748 |
|
|
|
15 |
|
|
$ |
4,849 |
|
|
|
14 |
|
|
$ |
5,943 |
|
USDA-guaranteed
portions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bath
State Bank
|
|
|
35 |
|
|
|
7,031 |
|
|
|
26 |
|
|
|
7,232 |
|
|
|
22 |
|
|
|
5,405 |
|
First
Dakota National Bank
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
|
2,364 |
|
Farmer
Mac received the following guarantee fees with respect to transactions with
other related parties:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Bath
State Bank
|
|
$ |
79 |
|
|
$ |
73 |
|
|
$ |
65 |
|
First
Dakota National Bank
|
|
|
229 |
|
|
|
228 |
|
|
|
271 |
|
During
2003 and 2006, Farm Credit West, ACA converted $722.3 million and $129.0
million, respectively, of existing LTSPCs to Farmer Mac I Guaranteed
Securities. The LTSPCs converted to Farmer Mac I Guaranteed
Securities in 2006 were originated by Sacramento Valley Farm Credit, ACA who
merged with Farm Credit West, ACA in 2008. The outstanding principal
balance of the converted securities as of December 31, 2009 was $670.4
million. Farmer Mac understands that the current owner of those
Farmer Mac Guaranteed Securities is U.S. AgBank, FCB, which is a major holder of
Farmer Mac Class B voting common stock. Farmer Mac received $3.0
million and $3.4 million in guarantee fees on those securities during 2009 and
2008, respectively. In 2009 and 2008, Farm Credit West, ACA received
$2.2 million and $2.4 million, respectively, in servicing fees for its work as a
Farmer Mac central servicer.
As of
December 31, 2009, 2008 and 2007, Farmer Mac owned $88.5 million par value of
preferred stock and, as of December 31, 2009 and 2008, $70.0 million of
subordinated debt issued by CoBank. Farmer Mac has a related
party relationship with CoBank resulting from a member of Farmer Mac’s board of
directors being a former executive officer of CoBank. CoBank
is also a major holder of Farmer Mac Class B voting common
stock.
On
September 30, 2008, Farmer Mac sold 60,000 shares of Series B-1 Preferred Stock
to AgFirst; AgriBank, FCB; CoBank; Farm Credit Bank of Texas; and U.S. AgBank,
FCB (collectively, the “Initial Series B-1 Investors”). Each of the
Initial Series B-1 Investors is a member of the FCS and, as of December 31, 2009
and 2008, together owned in the aggregate approximately 97.5 percent of the
shares of Farmer Mac’s Class B Voting Common Stock. Also on September
30, 2008, Farmer Mac sold 5,000 shares of Series B-2 Preferred Stock to Zions
Bancorporation, an affiliate of Zions.
The
following tables present the amortized cost and estimated fair values of Farmer
Mac’s investments as of December 31, 2009 and 2008.
|
|
December 31, 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 |
|
|
$ |
— |
|
|
$ |
(1,216 |
) |
|
$ |
72,884 |
|
Floating
rate asset-backed securities
|
|
|
58,157 |
|
|
|
26 |
|
|
|
(40 |
) |
|
|
58,143 |
|
Floating
rate corporate debt securities
|
|
|
246,758 |
|
|
|
267 |
|
|
|
(1,420 |
) |
|
|
245,605 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
404,452 |
|
|
|
1,188 |
|
|
|
(1,419 |
) |
|
|
404,221 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
6,248 |
|
|
|
289 |
|
|
|
— |
|
|
|
6,537 |
|
Floating
rate GSE subordinated debt
|
|
|
70,000 |
|
|
|
— |
|
|
|
(22,438 |
) |
|
|
47,562 |
|
Fixed
rate GSE preferred stock
|
|
|
90,543 |
|
|
|
— |
|
|
|
(1,332 |
) |
|
|
89,211 |
|
Fixed
rate Treasury bills
|
|
|
117,810 |
|
|
|
— |
|
|
|
(50 |
) |
|
|
117,760 |
|
Total
available-for-sale
|
|
|
1,068,068 |
|
|
|
1,770 |
|
|
|
(27,915 |
) |
|
|
1,041,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
6,708 |
|
|
|
— |
|
|
|
(4,884 |
) |
|
|
1,824 |
|
Fixed
rate GSE preferred stock
|
|
|
89,637 |
|
|
|
— |
|
|
|
(1,489 |
) |
|
|
88,148 |
|
Total
trading
|
|
|
96,345 |
|
|
|
— |
|
|
|
(6,373 |
) |
|
|
89,972 |
|
Total
investment securities
|
|
$ |
1,164,413 |
|
|
$ |
1,770 |
|
|
$ |
(34,288 |
) |
|
$ |
1,131,895 |
|
|
|
December 31, 2008
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
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.
|
Effective
April 1, 2009, Farmer Mac adopted the amended guidance for the recognition
and presentation of other-than-temporary impairments for debt
securities. Upon adoption, 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. As of December 31, 2009, Farmer Mac held no debt
securities for which a portion of an other-than-temporary impairment was
recognized in accumulated other comprehensive income/(loss).
During
2009, Farmer Mac recognized in earnings other-than-temporary impairment losses
on available-for-sale investment securities of $2.7 million, compared to $106.2
million in 2008. Farmer Mac had not recognized any
other-than-temporary impairment losses on its investment securities prior to
2008. All of these losses were recorded in earnings and presented as
“Other-than-temporary impairment losses” in the consolidated statement of
operations because they were deemed to be credit losses or management had the
intent to sell the security as of the balance sheet date. During
2008, Farmer Mac recorded other-than-temporary impairment losses of
$51.7 million related to its investment in Fannie Mae preferred stock and
$54.5 million related to its investment in Lehman Brothers Holdings Inc.
senior debt securities. Farmer Mac recorded additional
other-than-temporary impairment losses of $0.1 million related to its investment
in Fannie Mae preferred stock and $1.0 million related to its investment in CIT
Group Inc. corporate debt securities during 2009. Farmer Mac sold all
of these investments in 2009 and recognized a net recovery of $3.2 million,
which is presented as “Gains on sale of available-for-sale investment
securities” in the consolidated statement of operations.
During
2009, Farmer Mac also recorded other-than-temporary impairment losses of $1.6
million to write down its $49.9 million investment in HSBC Finance corporate
debt securities to its fair value of $48.3 million since management intended to
sell these securities. Farmer Mac sold $20.0 million of the HSBC
Finance corporate debt securities during 2009 and entered into credit default
swaps with notional balances totaling $30.0 million to mitigate the credit
exposure related to its remaining investment in HSBC Finance. Changes
in the fair value of the credit default swaps will be recorded in earnings;
however, only additional credit losses related to the HSBC Finance corporate
debt will be recorded in earnings since management no longer intends to sell
these securities. See Note 6 for more information related to these
credit default swaps.
During
2009, Farmer Mac received proceeds of $306.5 million from the sale of securities
from its available-for-sale investment portfolio, resulting in gross realized
gains of $4.6 million and gross realized losses of $1.2
million. During 2008, Farmer Mac received proceeds of
$456.5 million from the sale of securities from its available-for-sale
investment portfolio, resulting in gross realized gains of $0.6 million and
gross realized losses of $0.3 million.
As of
December 31, 2009, Farmer Mac’s trading securities had a fair value of $90.0
million, which reflects an unrealized loss of $6.4 million. As of
December 31, 2008, Farmer Mac’s trading securities had a fair value of $163.8
million, which reflects an unrealized loss of $24.3 million. As
of December 31, 2009 and 2008, unrealized losses on available-for-sale
securities were as follows:
|
|
December 31, 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
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
182,745 |
|
|
$ |
(1,420 |
) |
Floating
rate asset-backed securities
|
|
|
— |
|
|
|
— |
|
|
|
17,319 |
|
|
|
(40 |
) |
Floating
rate auction-rate certificates backed by Government guaranteed student
loans
|
|
|
— |
|
|
|
— |
|
|
|
72,884 |
|
|
|
(1,216 |
) |
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
116,754 |
|
|
|
(645 |
) |
|
|
121,877 |
|
|
|
(774 |
) |
Floating
rate GSE subordinated debt
|
|
|
— |
|
|
|
— |
|
|
|
47,562 |
|
|
|
(22,438 |
) |
Fixed
rate GSE preferred stock
|
|
|
89,211 |
|
|
|
(1,332 |
) |
|
|
— |
|
|
|
— |
|
Fixed
rate Treasury bills
|
|
|
117,760 |
|
|
|
(50 |
) |
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
323,725 |
|
|
$ |
(2,027 |
) |
|
$ |
442,387 |
|
|
$ |
(25,888 |
) |
|
|
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 December 31,
2009 and 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 December 31, 2009, all of the investment
securities in an unrealized loss position were rated at least “A” by Standard
& Poor’s, except two that were rated “AA-” and one that was not
rated. As of December 31, 2008, all of the investment securities in
an unrealized loss position were rated at least “A” by Standard & Poor’s,
except two that were rated “BBB+” and “BBB-”. The unrealized losses
were on 86 and 116 individual investment securities as of
December 31, 2009 and 2008, respectively.
As of
December 31, 2009, 73 of the securities in loss positions had been in
loss positions for more than 12 months and had a total unrealized loss of
$25.9 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. The unrealized
losses on those securities are principally due to a general widening of credit
spreads from the dates of acquisition. Securities in unrealized loss
positions 12 months or more have a fair value as of December 31, 2009 that is,
on average, approximately 95 percent of their amortized cost
basis. Farmer Mac believes that all these unrealized losses are
recoverable within a reasonable period of time by way of changes in credit
spreads or maturity. Accordingly, Farmer Mac has concluded that none
of the unrealized losses on these available-for-sale investment securities
represent other-than-temporary impairment as of December 31,
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.
Farmer
Mac did not own any held-to-maturity investments as of December 31, 2009 and
2008. As of December 31, 2009, Farmer Mac owned trading investment
securities with an amortized cost of $96.3 million, a fair value of $90.0
million and a weighted average yield of 8.11 percent. As of
December 31, 2008, Farmer Mac owned trading investment securities with an
amortized cost of $188.1 million, a fair value of $163.8 million and a weighted
average yield of 7.99 percent. The amortized cost, fair value
and yield of investments by remaining contractual maturity for
available-for-sale investment securities as of December 31, 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 December 31, 2009
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Average
Yield
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
160,310 |
|
|
$ |
160,260 |
|
|
|
0.31 |
% |
Due
after one year through five years
|
|
|
234,859 |
|
|
|
233,660 |
|
|
|
0.56 |
% |
Due
after five years through ten years
|
|
|
118,755 |
|
|
|
119,070 |
|
|
|
2.32 |
% |
Due
after ten years
|
|
|
554,144 |
|
|
|
528,933 |
|
|
|
2.94 |
% |
Total
|
|
$ |
1,068,068 |
|
|
$ |
1,041,923 |
|
|
|
1.95 |
% |
5.
|
FARMER
MAC GUARANTEED SECURITIES
|
The
following table sets forth information about on-balance sheet Farmer Mac
Guaranteed Securities as of December 31, 2009 and 2008.
|
|
December 31, 2009
|
|
|
|
Available-
|
|
|
|
|
|
|
|
|
|
for-Sale
|
|
|
Trading
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
$ |
56,864 |
|
|
$ |
— |
|
|
$ |
56,864 |
|
Farmer
Mac II
|
|
|
764,792 |
|
|
|
422,681 |
|
|
|
1,187,473 |
|
Rural
Utilities
|
|
|
1,703,211 |
|
|
|
451,448 |
|
|
|
2,154,659 |
|
Total
|
|
$ |
2,524,867 |
|
|
$ |
874,129 |
|
|
$ |
3,398,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
$ |
2,493,644 |
|
|
$ |
817,631 |
|
|
$ |
3,311,275 |
|
Unrealized
gains
|
|
|
39,657 |
|
|
|
56,569 |
|
|
|
96,226 |
|
Unrealized
losses
|
|
|
(8,434 |
) |
|
|
(71 |
) |
|
|
(8,505 |
) |
Fair
value
|
|
$ |
2,524,867 |
|
|
$ |
874,129 |
|
|
$ |
3,398,996 |
|
|
|
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 |
|
Effective
September 30, 2008, Farmer Mac transferred $518.6 million of its Farmer Mac
Guaranteed Securities classified as held-to-maturity to
available-for-sale. This transfer resulted in the recognition of
unrealized gains of $2.3 million and unrealized losses of $1.4
million. This change in classification and the resulting recognition
of unrealized gains and losses did not affect Farmer Mac’s regulatory core
capital or Farmer Mac’s intent to hold such securities in loss positions until
the earlier of recovery or maturity. Farmer Mac transferred these
assets since the Corporation was evaluating strategies to further strengthen its
capital position, including for example, additional asset sales as well as
offerings of common and preferred equity. Farmer Mac does not
currently classify any Farmer Mac Guaranteed Securities as
held-to-maturity. On January 25, 2010, Farmer Mac contributed
substantially all of the assets, in excess of $1.1 billion, comprising the
Farmer Mac II program to Farmer Mac’s subsidiary,
Farmer Mac II LLC. Since then, all purchases of
USDA-guaranteed portions under the Farmer Mac II program (other than purchases
of guaranteed portions that back Farmer Mac II Guaranteed Securities to be sold
to third parties) have been, and will continue to be, made by Farmer Mac’s
subsidiary, Farmer Mac II LLC. See Note 15 to the consolidated
financial statements for more information.
The
temporary unrealized losses presented above are principally due to changes in
interest rates from the date of acquisition to December 31, 2009 and December
31, 2008, as applicable. As of December 31, 2009, the unrealized losses
presented above are related to Farmer Mac II Guaranteed Securities, which are
USDA-guaranteed portions of loans 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 December 31, 2009 and
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.
During
2009, Farmer Mac realized no gains or losses from the sale of Farmer Mac
Guaranteed Securities. During 2008, Farmer Mac realized gross gains
from the sale of securities from its available-for-sale Farmer Mac Guaranteed
Securities portfolio of $1.5 million. There were no realized gains or
losses from the sale of Farmer Mac Guaranteed Securities during
2007.
As of
December 31, 2009, of the total on-balance sheet Farmer Mac Guaranteed
Securities, $2.1 billion are fixed rate or have floating rates that reset
after one year. As of December 31, 2008, of the total on-balance
sheet Farmer Mac Guaranteed Securities, $1.7 billion are fixed rate or have
floating rates that reset after one year.
The table
below presents a sensitivity analysis of the Corporation’s on-balance sheet
Farmer Mac Guaranteed Securities as of December 31, 2009 and 2008.
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Fair
value of beneficial interests retained in Farmer Mac Guaranteed
Securities
|
|
$ |
3,398,996 |
|
|
$ |
2,451,244 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
remaining life (in years)
|
|
|
3.7 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
prepayment speed (annual rate)
|
|
|
3.8 |
% |
|
|
6.9 |
% |
Effect
on fair value of a 10% adverse change
|
|
$ |
(18 |
) |
|
$ |
(620 |
) |
Effect
on fair value of a 20% adverse change
|
|
$ |
(36 |
) |
|
$ |
(1,314 |
) |
|
|
|
|
|
|
|
|
|
Weighted-average
discount rate
|
|
|
2.8 |
% |
|
|
4.6 |
% |
Effect
on fair value of a 10% adverse change
|
|
$ |
(22,081 |
) |
|
$ |
(28,463 |
) |
Effect
on fair value of a 20% adverse change
|
|
$ |
(44,531 |
) |
|
$ |
(58,385 |
) |
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.
Farmer
Mac securitizes three types of assets: agricultural real estate mortgage loans,
USDA-guaranteed portions of loans and rural utilities loans. Farmer
Mac manages the credit risk of its securitized loans, both on- and off-balance
sheet, together with its on-balance sheet loans and the loans underlying its
off-balance sheet LTSPCs. See Note 8 for more information regarding
this credit risk.
On-balance
sheet asset classes pose both interest rate risk and funding risk to Farmer Mac,
while off-balance sheet asset classes pose no such
risks. Accordingly, Farmer Mac manages its on-balance sheet loans and
USDA-guaranteed portions differently from its off-balance sheet securitized
loans and USDA-guaranteed portions and off-balance sheet loans underlying
LTSPCs.
As part
of fulfilling its guarantee obligations for Farmer Mac Guaranteed Securities and
commitments to purchase eligible loans underlying LTSPCs, Farmer Mac purchases
defaulted loans, all of which are at least 90 days delinquent at the time
of purchase, out of the loan pools underlying those securities and LTSPCs, and
records the purchased loans as such on its balance sheet.
The table
below presents the outstanding principal balances as of the periods indicated
for Farmer Mac’s on- and off-balance sheet program assets.
Outstanding
Balance of Farmer Mac Loans and Loans Underlying
Farmer
Mac Guaranteed Securities and LTSPCs
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
On-balance
sheet:
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
Loans
|
|
$ |
733,422 |
|
|
$ |
781,305 |
|
Guaranteed
Securities
|
|
|
5,307 |
|
|
|
282,185 |
|
AgVantage
|
|
|
48,800 |
|
|
|
53,300 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
1,164,996 |
|
|
|
1,013,330 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
28,644 |
|
|
|
— |
|
Guaranteed
Securities
|
|
|
2,087,948 |
|
|
|
1,054,941 |
|
Total
on-balance sheet
|
|
$ |
4,069,117 |
|
|
$ |
3,185,061 |
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet:
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
$ |
1,492,239 |
|
|
$ |
1,697,983 |
|
AgVantage
|
|
|
2,945,000 |
|
|
|
2,945,000 |
|
LTSPCs
|
|
|
2,165,706 |
|
|
|
2,224,181 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Guaranteed
Securities
|
|
|
34,802 |
|
|
|
30,095 |
|
Rural
Utilities:
|
|
|
14,240 |
|
|
|
— |
|
Total
off-balance sheet
|
|
$ |
6,651,987 |
|
|
$ |
6,897,259 |
|
Total
|
|
$ |
10,721,104 |
|
|
$ |
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 all such defaulted loans at their
unpaid principal balance during the period in which Farmer Mac becomes entitled
to purchase the loans and therefore regains effective control over the
transferred loans. Considering Farmer Mac’s low loan-to-value ratios
in its portfolio, Farmer Mac believes that it is probable at the acquisition of
these loans that it will be able to collect all contractually required payments
receivable. 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 tables present information related to Farmer Mac’s acquisition of
defaulted loans for the years ended December 31, 2009, 2008 and 2007 and
the outstanding balances and carrying amounts of all such loans as of
December 31, 2009 and 2008, respectively.
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Fair
value at acquisition date
|
|
$ |
21,269 |
|
|
$ |
58,279 |
|
|
$ |
3,911 |
|
Contractually
required payments receivable
|
|
|
21,278 |
|
|
|
63,673 |
|
|
|
4,065 |
|
Impairment
recognized subsequent to acquisition
|
|
|
8,492 |
|
|
|
5,200 |
|
|
|
— |
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
|
|
|
Outstanding
balance
|
|
$ |
50,409 |
|
|
$ |
91,942 |
|
Carrying
amount
|
|
|
29,994 |
|
|
|
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. 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 December 31, 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 December 31,
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 December 31, 2009, Farmer Mac has not experienced
any credit losses on any Farmer Mac II Guaranteed Securities.
|
|
90-Day
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies (1)
|
|
|
Net Credit Losses
|
|
|
|
As of December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
On-balance
sheet assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
35,470 |
|
|
$ |
65,060 |
|
|
$ |
7,490 |
|
|
$ |
5,292 |
|
|
$ |
39 |
|
Guaranteed
Securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
on-balance sheet
|
|
$ |
35,470 |
|
|
$ |
65,060 |
|
|
$ |
7,490 |
|
|
$ |
5,292 |
|
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
$ |
14,056 |
|
|
$ |
2,060 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Guaranteed
Securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
off-balance sheet
|
|
$ |
14,056 |
|
|
$ |
2,060 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
49,526 |
|
|
$ |
67,120 |
|
|
$ |
7,490 |
|
|
$ |
5,292 |
|
|
$ |
39 |
|
(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.
|
Because
Farmer Mac may, in its sole discretion, purchase loans in Farmer Mac Guaranteed
Securities that are 90 days delinquent, Farmer Mac records all such defaulted
loans at their unpaid principal balance during the period in which Farmer Mac
becomes entitled to purchase the loans and therefore regains effective control
over the transferred loans. Considering Farmer Mac’s low
loan-to-value ratios in its portfolio, Farmer Mac believes that it is probable
at the acquisition of these loans that it will be able to collect all
contractually required payments receivable. As a result, of the $35.5
million and $65.1 million of loans reported as 90 days delinquent as of December
31, 2009 and 2008, respectively, $7.5 million and $5.2 million are loans
subject to these “removal-of-account” provisions.
Farmer
Mac is required to recognize certain contracts and commitments as derivatives
when the characteristics of those contracts and commitments meet the definition
of a derivative as prescribed by FASB guidance. Farmer Mac enters
into financial derivative transactions principally to protect against risk from
the effects of market price or interest rate movements on the value of certain
assets, future cash flows or debt issuance, not for trading or speculative
purposes. Principally, Farmer Mac enters into interest rate swap
contracts to adjust the characteristics of its short-term debt to match more
closely the cash flow and duration characteristics of its longer-term mortgage
and other assets, and also to adjust the characteristics of its long-term debt
to match more closely the cash flow and duration characteristics of its
short-term assets, thereby reducing interest rate risk and also to derive an
overall lower effective cost of borrowing than would otherwise be available to
Farmer Mac in the conventional debt market. During third quarter
2008, Farmer Mac, for the first time, purchased pay-fixed swaptions, which
provide the option of entering into pay-fixed interest rate swaps, as part of
its overall strategy in managing interest rate risk. Those swaptions
were either terminated or expired unexercised during the third and fourth
quarters of 2008. During fourth quarter 2009, Farmer Mac entered into
credit default swaps for the first time. Farmer Mac entered into
these swaps to mitigate the credit exposure related to its investment in
corporate debt issued by HSBC Finance. Changes in the fair value of
the credit default swaps will be recorded in earnings; however, only additional
credit losses related to the HSBC Finance corporate debt will be recorded in
earnings since management no longer intends to sell these
securities. See Note 4 for more information related to Farmer Mac’s
investment in HSBC Finance corporate debt securities.
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 GSEs, futures contracts involving U.S.
Treasury securities and interest rate swaps. Farmer Mac uses forward sale
contracts on GSE securities to reduce its interest rate exposure to changes in
both Treasury rates and spreads on Farmer Mac debt and Farmer Mac Guaranteed
Securities. The notional amounts of these contracts are determined based on a
duration-matched hedge ratio between the hedged item and the hedge instrument.
Gains or losses generated by these hedge transactions should offset any changes
in funding costs or Farmer Mac Guaranteed Securities sale prices that occur
during the hedge period.
Market Risk:
Market
risk is the risk of an adverse effect resulting from changes in interest rates
or spreads on the value of a financial instrument. Farmer Mac manages market
risk associated with financial derivatives by establishing and monitoring limits
as to the degree of risk that may be undertaken. This risk is periodically
measured as part of Farmer Mac’s overall risk monitoring processes, which
include market value of equity measurements, net interest income modeling and
other measures.
Credit Risk:
Credit
risk is the risk that a counterparty will fail to perform according to the terms
of a financial contract in which Farmer Mac has an unrealized gain. Credit
losses could occur in the event of non-performance by counterparties to the
financial derivative contracts. Farmer Mac mitigates this counterparty credit
risk by contracting only with counterparties that have investment grade credit
ratings (i.e., at least BBB), establishing and maintaining collateral
requirements based upon credit ratings and entering into netting agreements.
Netting agreements provide for the calculation of the net amount of all
receivables and payables under all transactions covered by the netting agreement
between Farmer Mac and a single counterparty. Farmer Mac’s exposure to credit
risk related to its financial derivatives is represented by those counterparties
for which Farmer Mac has a net receivable, including the effect of any netting
arrangements. As of December 31, 2009 and 2008, Farmer Mac’s credit exposure to
interest rate swap counterparties, excluding netting arrangements, was $22.0
million and $32.7 million, respectively; however, including netting
arrangements, Farmer Mac’s credit exposure was $6.5 million and $8.0 million as
of December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008,
there were no financial derivatives in a net payable position where Farmer Mac
was required to pledge collateral which the counterparty had the right to sell
or repledge.
Interest Rate
Risk:
Farmer
Mac uses financial derivatives to manage its interest rate risk exposure by
modifying the interest rate reset or maturity characteristics of certain assets
and liabilities and by locking in the rates for certain forecasted issuances of
liabilities. The primary financial derivatives Farmer Mac uses include interest
rate swaps and forward sale contracts. Farmer Mac uses interest-rate swaps to
assume fixed rate interest payments in exchange for floating rate interest
payments and vice versa. Depending on the hedging relationship, the effects of
these agreements are (a) the conversion of variable rate liabilities to
longer-term fixed rate liabilities, (b) the conversion of long-term fixed rate
assets to shorter-term floating rate assets, or (c) the reduction of the
variability of future changes in interest rates on forecasted issuances of
liabilities. The net payments on these agreements are recorded as gains and
losses on financial derivatives in the consolidated statements of
operations.
Farmer
Mac accounts for its financial derivatives as undesignated financial
derivatives. As of December 31, 2009 and 2008, the net fair value of financial
derivatives totaled $(92.3) million and $(154.1) million, respectively. The
maximum term over which Farmer Mac is currently managing its exposure for
forecasted transactions is 15 years. Gains/(losses) on financial derivatives
totaled $21.3 million, $(130.4) million and $(39.9) million for the years ended
December 31, 2009, 2008 and 2007, respectively.
The
following tables summarize information related to Farmer Mac’s financial
derivatives as of December 31, 2009 and 2008:
|
|
December 31, 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
|
|
$ |
65,686 |
|
|
$ |
— |
|
|
$ |
(1,725 |
) |
|
|
5.70 |
% |
|
|
0.27 |
% |
|
|
|
|
|
7.78
|
|
Pay
fixed non-callable
|
|
|
1,236,156 |
|
|
|
5 |
|
|
|
(99,913 |
) |
|
|
4.95 |
% |
|
|
0.26 |
% |
|
|
|
|
|
4.62
|
|
Receive
fixed callable
|
|
|
300,000 |
|
|
|
236 |
|
|
|
— |
|
|
|
0.09 |
% |
|
|
0.54 |
% |
|
|
|
|
|
0.76
|
|
Receive
fixed non-callable
|
|
|
2,262,714 |
|
|
|
14,298 |
|
|
|
(2,815 |
) |
|
|
0.41 |
% |
|
|
1.80 |
% |
|
|
|
|
|
2.25
|
|
Basis
swaps
|
|
|
262,177 |
|
|
|
294 |
|
|
|
(3,673 |
) |
|
|
1.63 |
% |
|
|
0.61 |
% |
|
|
|
|
|
2.39
|
|
Credit
default swaps
|
|
|
30,000 |
|
|
|
— |
|
|
|
(214 |
) |
|
|
1.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
2.14
|
|
Agency
forwards
|
|
|
75,511 |
|
|
|
453 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
101.22
|
|
|
|
|
Treasury
futures
|
|
|
20,500 |
|
|
|
3 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
115.47
|
|
|
|
|
Credit
valuation adjustment
|
|
|
— |
|
|
|
(249 |
) |
|
|
973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
financial derivatives
|
|
$ |
4,252,744 |
|
|
$ |
15,040 |
|
|
$ |
(107,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 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 $110.5 million. As of December 31, 2009, Farmer Mac
posted assets with a fair value of $30.2 million as collateral for its
derivatives in net liability positions. If Farmer Mac had breached certain
provisions of the derivative contracts as of December 31, 2009, it could have
been required to settle its obligations under the agreements or post additional
collateral of $80.3 million.
The
following table summarizes the effects of Farmer Mac’s financial derivatives on
the consolidated statements of operations for the years ended December 31, 2009,
2008 and 2007:
|
|
Gains/(Losses) on Financial Derivatives
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
24,377 |
|
|
$ |
(127,251 |
) |
|
$ |
(38,343 |
) |
Agency
forwards
|
|
|
(2,359 |
) |
|
|
(2,132 |
) |
|
|
(958 |
) |
Treasury
futures
|
|
|
(71 |
) |
|
|
(647 |
) |
|
|
(72 |
) |
Pay-fixed
swaptions
|
|
|
— |
|
|
|
50 |
|
|
|
— |
|
Credit
default swaps
|
|
|
(416 |
) |
|
|
— |
|
|
|
— |
|
Subtotal
|
|
|
21,531 |
|
|
|
(129,980 |
) |
|
|
(39,373 |
) |
Amortization
of derivatives transition adjustment
|
|
|
(234 |
) |
|
|
(423 |
) |
|
|
(574 |
) |
Total
|
|
$ |
21,297 |
|
|
$ |
(130,403 |
) |
|
$ |
(39,947 |
) |
As of
December 31, 2009 and 2008, Farmer Mac had approximately $0.1 million and $0.2
million, respectively, 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
December 31, 2009, Farmer Mac had outstanding basis swaps with Zions First
National Bank, a related party, with a total notional amount of $105.2 million
and a fair value of $(3.7) 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 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. Accordingly, Farmer Mac
recorded unrealized gains/(losses) on those outstanding basis swaps of $0.1
million, $(2.6) million and $(3.9) million for 2009, 2008 and 2007,
respectively. See Note 3 for additional information on these related party
transactions.
Farmer
Mac’s borrowings consist of discount notes and medium-term notes, both of which
are unsecured general obligations of the Corporation. Discount notes generally
have original maturities of one year or less, whereas medium-term notes
generally have maturities of six months to 15 years.
The
following table sets forth information related to Farmer Mac’s borrowings as of
December 31, 2009 and 2008:
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Average
|
|
|
Outstanding as of
|
|
Outstanding During
|
|
|
December 31,
|
|
the Year
|
|
|
Amount
|
|
|
Rate
|
|
Amount
|
|
|
Rate
|
|
|
(dollars in thousands)
|
|
Due
within one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
notes
|
|
$ |
2,300,352 |
|
|
|
0.23 |
% |
|
$ |
1,981,495 |
|
|
|
0.60 |
% |
Medium-term
notes
|
|
|
1,186,965 |
|
|
|
0.61 |
% |
|
|
1,122,704 |
|
|
|
1.09 |
% |
Current
portion of long-term notes
|
|
|
175,581 |
|
|
|
2.77 |
% |
|
|
|
|
|
|
|
|
|
|
$ |
3,662,898 |
|
|
|
0.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term
notes due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$ |
92,181 |
|
|
|
4.31 |
% |
|
|
|
|
|
|
|
|
2012
|
|
|
547,591 |
|
|
|
2.08 |
% |
|
|
|
|
|
|
|
|
2013
|
|
|
79,841 |
|
|
|
3.55 |
% |
|
|
|
|
|
|
|
|
2014
|
|
|
1,069,429 |
|
|
|
3.66 |
% |
|
|
|
|
|
|
|
|
Thereafter
|
|
|
119,671 |
|
|
|
4.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
1,908,713 |
|
|
|
3.30 |
% |
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,571,611 |
|
|
|
1.44 |
% |
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Average
|
|
|
Outstanding as of
|
|
Outstanding During
|
|
|
December 31,
|
|
the Year
|
|
|
Amount
|
|
|
Rate
|
|
Amount
|
|
|
Rate
|
|
|
(dollars in thousands)
|
|
Due
within one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
notes
|
|
$ |
2,123,672 |
|
|
|
1.48 |
% |
|
$ |
3,113,791 |
|
|
|
2.49 |
% |
Medium-term
notes
|
|
|
963,498 |
|
|
|
2.14 |
% |
|
|
617,260 |
|
|
|
3.33 |
% |
Current
portion of long-term notes
|
|
|
669,929 |
|
|
|
3.66 |
% |
|
|
|
|
|
|
|
|
|
|
$ |
3,757,099 |
|
|
|
2.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term
notes due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$ |
185,569 |
|
|
|
3.34 |
% |
|
|
|
|
|
|
|
|
2011
|
|
|
87,166 |
|
|
|
4.87 |
% |
|
|
|
|
|
|
|
|
2012
|
|
|
135,965 |
|
|
|
4.45 |
% |
|
|
|
|
|
|
|
|
2013
|
|
|
301,396 |
|
|
|
3.99 |
% |
|
|
|
|
|
|
|
|
Thereafter
|
|
|
177,903 |
|
|
|
6.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
887,999 |
|
|
|
4.54 |
% |
|
|
|
|
|
|
|
|
Total
|
|
$ |
4,645,098 |
|
|
|
2.52 |
% |
|
|
|
|
|
|
|
|
The
maximum amount of Farmer Mac’s discount notes outstanding at any month end
during each of the years ended December 31, 2009 and 2008 was $2.6 billion
and $3.5 billion, respectively.
Callable
medium-term notes give Farmer Mac the option to redeem the debt at par value on
a specified call date or at any time on or after a specified call
date. The following table summarizes by maturity date, the amounts
and costs for Farmer Mac debt callable in 2010 as of December 31,
2009.
Debt Callable in 2010 as of
|
December 31, 2009
|
Maturity
|
|
Amount
|
|
|
Rate
|
(dollars in thousands)
|
2010
|
|
$ |
150,000 |
|
|
|
0.65 |
% |
2011
|
|
|
— |
|
|
|
0.00 |
% |
2012
|
|
|
17,000 |
|
|
|
2.16 |
% |
2013
|
|
|
— |
|
|
|
0.00 |
% |
2014
|
|
|
86,000 |
|
|
|
3.31 |
% |
Thereafter
|
|
|
62,000 |
|
|
|
4.87 |
% |
|
|
$ |
315,000 |
|
|
|
2.29 |
% |
The
following schedule summarizes the earliest interest rate reset date of total
borrowings outstanding as of December 31, 2009, including callable and
non-callable medium-term notes, assuming callable notes are redeemed at the
initial call date.
|
|
Earliest Interest Rate Reset Date
|
|
|
of Borrowings Outstanding
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
Amount
|
|
|
Rate
|
|
|
(dollars in thousands)
|
Debt
with interest rate resets in:
|
|
|
|
|
|
|
2010
|
|
$ |
3,827,549 |
|
|
|
1.38 |
% |
2011
|
|
|
92,181 |
|
|
|
4.31 |
% |
2012
|
|
|
530,615 |
|
|
|
2.08 |
% |
2013
|
|
|
79,841 |
|
|
|
3.55 |
% |
2014
|
|
|
983,587 |
|
|
|
3.69 |
% |
Thereafter
|
|
|
57,838 |
|
|
|
4.67 |
% |
Total
|
|
$ |
5,571,611 |
|
|
|
1.97 |
% |
During
2009 and 2008, Farmer Mac called $1.0 billion and $886.0 million of callable
medium-term notes, respectively.
Authority
to Borrow from the U.S. Treasury
Farmer
Mac’s statutory charter authorizes it to borrow up to $1.5 billion from the U.S.
Treasury, if necessary, to fulfill its obligations under any guarantee. The debt
would bear interest at a rate determined by the U.S. Treasury based on the then
current cost of funds to the United States. The charter requires the debt to be
repaid within a reasonable time. As of December 31, 2009, Farmer Mac had not
utilized this borrowing authority and does not expect to utilize this borrowing
authority in the near future.
Gains
and Losses on the Repurchase of Outstanding Debt
Farmer
Mac did not repurchase any of its outstanding debt in 2009 or 2007. During 2008,
Farmer Mac recognized $0.9 million of net gains on the repurchase of $120.0
million of outstanding Farmer Mac debt. All of the repurchases were from
outstanding Farmer Mac fixed rate debt that had been previously swapped to
become floating rate debt. Upon the repurchase of those debt securities, the
interest rate swaps were cancelled and the debt was replaced with new funding to
match the duration of related floating rate assets.
8.
ALLOWANCE
FOR LOSSES AND CONCENTRATIONS OF CREDIT RISK
Allowance
for Losses
Farmer
Mac maintains 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 FASB
guidance on accounting for contingencies and on measuring individual impairment
of a loan. As of December 31, 2009, Farmer Mac recorded specific allowances for
losses of $0.6 million. As of December 31, 2008, Farmer Mac recorded specific
allowances for losses of $8.6 million. No allowance for losses has been provided
for AgVantage securities or for Farmer Mac II Guaranteed Securities as of
December 31, 2009 or 2008. See Note 2(c), Note 2(e), Note 2(j), Note 5 and Note
12 for more information about Farmer Mac Guaranteed Securities. Farmer Mac’s
allowance for losses is presented in two components on its consolidated balance
sheet:
|
·
|
an
“Allowance for loan losses” on loans held;
and
|
|
·
|
an
allowance for losses on loans underlying Farmer Mac I Guaranteed
Securities, LTSPCs and Farmer Mac Guaranteed Securities – Rural Utilities,
which is included in the balance sheet under “Reserve for
losses.”
|
The
allowance for losses is increased through periodic provisions for loan losses
that are charged against net interest income and provisions for losses that are
charged to non-interest expense and is reduced by charge-offs for actual losses,
net of recoveries. Negative provisions for loan losses or negative provisions
for losses are recorded in the event that the estimate of probable losses as of
the end of a period is lower than the estimate at the beginning of the
period.
The
following is a summary of the changes in the allowance for losses for each year
in the five-year period ended December 31, 2009:
|
|
Allowance
|
|
|
REO
|
|
|
|
|
|
Total
|
|
|
|
for Loan
|
|
|
Valuation
|
|
|
Reserve
|
|
|
Allowance
|
|
|
|
Losses
|
|
|
Allowance
|
|
|
for Losses
|
|
|
for Losses
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2005
|
|
$ |
4,395 |
|
|
$ |
— |
|
|
$ |
12,706 |
|
|
$ |
17,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
(3,335 |
) |
|
|
206 |
|
|
|
(859 |
) |
|
|
(3,988 |
) |
Charge-offs
|
|
|
(105 |
) |
|
|
(206 |
) |
|
|
— |
|
|
|
(311 |
) |
Recoveries
|
|
|
640 |
|
|
|
— |
|
|
|
— |
|
|
|
640 |
|
Change
in accounting estimate
|
|
|
3,281 |
|
|
|
— |
|
|
|
(8,070 |
) |
|
|
(4,789 |
) |
Balance
as of December 31, 2005
|
|
$ |
4,876 |
|
|
$ |
— |
|
|
$ |
3,777 |
|
|
$ |
8,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
(2,396 |
) |
|
|
155 |
|
|
|
(1,167 |
) |
|
|
(3,408 |
) |
Charge-offs
|
|
|
(900 |
) |
|
|
(155 |
) |
|
|
— |
|
|
|
(1,055 |
) |
Recoveries
|
|
|
365 |
|
|
|
— |
|
|
|
— |
|
|
|
365 |
|
Balance
as of December 31, 2006
|
|
$ |
1,945 |
|
|
$ |
— |
|
|
$ |
2,610 |
|
|
$ |
4,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
(215 |
) |
|
|
100 |
|
|
|
(27 |
) |
|
|
(142 |
) |
Charge-offs
|
|
|
(60 |
) |
|
|
(100 |
) |
|
|
(386 |
) |
|
|
(546 |
) |
Recoveries
|
|
|
20 |
|
|
|
— |
|
|
|
— |
|
|
|
20 |
|
Balance
as of December 31, 2007
|
|
$ |
1,690 |
|
|
$ |
— |
|
|
$ |
2,197 |
|
|
$ |
3,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
14,531 |
|
|
|
— |
|
|
|
3,309 |
|
|
|
17,840 |
|
Charge-offs
|
|
|
(5,308 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5,308 |
) |
Recoveries
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
Balance
as of December 31, 2008
|
|
$ |
10,929 |
|
|
$ |
— |
|
|
$ |
5,506 |
|
|
$ |
16,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(recovery)
for losses
|
|
|
2,853 |
|
|
|
— |
|
|
|
2,389 |
|
|
|
5,242 |
|
Charge-offs
|
|
|
(8,491 |
) |
|
|
— |
|
|
|
— |
|
|
|
(8,491 |
) |
Recoveries
|
|
|
1,001 |
|
|
|
— |
|
|
|
— |
|
|
|
1,001 |
|
Balance
as of December 31, 2009
|
|
$ |
6,292 |
|
|
$ |
— |
|
|
$ |
7,895 |
|
|
$ |
14,187 |
|
All loans
that Farmer Mac purchases, issues guarantees with respect to, or commits to
purchase under an LTSPC in the Farmer Mac I or Rural Utilities programs are
underwritten in conformance with Farmer Mac’s credit underwriting and collateral
valuation standards.
During
2009, Farmer Mac added $5.2 million to the allowance for losses, charged off
$8.5 million and recovered $1.0 million. During 2008, Farmer Mac added $17.8
million to the allowance for losses, charged off $5.3 million and recovered
$16,000. The increase in the allowance for losses beginning in 2008 was largely
attributable to Farmer Mac’s exposures to the ethanol industry. During fourth
quarter 2008, VeraSun Energy Corporation and its subsidiaries filed for Chapter
11 bankruptcy. VeraSun’s subsidiaries operated four ethanol plants that, as of
December 31, 2008, secured $41.2 million of outstanding loan participations in
Farmer Mac’s portfolio. Farmer Mac recorded a specific allowance of $8.6 million
during fourth quarter 2008, which reduced the carrying value on these loans to
$32.6 million. Farmer Mac presented the outstanding loans participations and
specific allowance as “Loans held for investment” and “Allowance for loan
losses”, respectively, on the consolidated balance sheets as of December 31,
2008.
As of
March 31, 2009, Farmer Mac’s outstanding loan participations secured by these
ethanol plants totaled $43.9 million and the specific allowance was $12.1
million, which brought the net carrying value to $31.8 million.
In second
quarter 2009, the lending groups that included Farmer Mac formed limited
liability companies through which the lending groups acquired the four ethanol
plants as part of the VeraSun bankruptcy proceedings, with the lender credit bid
prevailing at the bankruptcy auction. 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 fourth quarter 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 the
date of the acquisition of the properties, Farmer Mac presented its ownership
interest in the ethanol plants as “Real estate owned” on the consolidated
balance sheets 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, 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. 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.
As of
December 31, 2009, Farmer Mac presented its outstanding loans resulting from the
sale of the four ethanol plants as “Loans held for investment” on the
consolidated balance sheets and recorded its investment at $40.2 million, which
includes $43.4 million of unpaid principal loan balances, net of a $3.2 million
deferred gain resulting from the sale of the four 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.
The
following table presents Farmer Mac’s reserve for losses for Farmer Mac I
Guaranteed Securities, Farmer Mac Guaranteed Securities - Rural Utilities and
LTSPCs as of December 31, 2009 and 2008.
Reserve for Losses on LTSPCs,
|
|
Farmer Mac I and Rural Utilities Guaranteed Securities
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
|
$ |
— |
|
|
$ |
869 |
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
2,033 |
|
|
|
535 |
|
LTSPCs
|
|
|
5,862 |
|
|
|
4,102 |
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
|
|
— |
|
|
|
— |
|
Total
reserve for losses
|
|
$ |
7,895 |
|
|
$ |
5,506 |
|
When
certain criteria are met, such as the default of the borrower, Farmer Mac may,
in its sole discretion, repurchase the defaulted loans underlying Farmer Mac
Guaranteed Securities and is obligated to purchase those underlying an LTSPC.
Farmer Mac records all such defaulted loans at their unpaid principal balance
during the period in which Farmer Mac becomes entitled to purchase the loans and
therefore regains effective control over the transferred loans. Considering
Farmer Mac’s low loan-to-value ratios in its portfolio, Farmer Mac believes that
it is probable at the acquisition of these loans that it will be able to collect
all contractually required payments receivable.
Farmer
Mac recognized interest income of approximately $2.6 million, $3.5 million and
$3.8 million on impaired loans during the years ended December 31, 2009, 2008
and 2007, respectively. During 2009, 2008 and 2007, Farmer Mac’s average
investment in impaired loans was $140.5 million, $63.6 million and $45.2
million, respectively.
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Specific
|
|
|
Net
|
|
|
|
|
|
Specific
|
|
|
Net
|
|
|
|
Balance
|
|
|
Allowance
|
|
|
Balance
|
|
|
Balance
|
|
|
Allowance
|
|
|
Balance
|
|
|
|
(in thousands)
|
|
Impaired
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
allowance for losses
|
|
$ |
2,489 |
|
|
$ |
(550 |
) |
|
$ |
1,939 |
|
|
$ |
41,239 |
|
|
$ |
(8,600 |
) |
|
$ |
32,639 |
|
No
specific allowance for losses
|
|
|
98,721 |
|
|
|
— |
|
|
|
98,721 |
|
|
|
78,348 |
|
|
|
— |
|
|
|
78,348 |
|
Total
|
|
$ |
101,210 |
|
|
$ |
(550 |
) |
|
$ |
100,660 |
|
|
$ |
119,587 |
|
|
$ |
(8,600 |
) |
|
$ |
110,987 |
|
In
accordance with the terms of all applicable trust agreements, Farmer Mac
generally acquires all loans that collateralize Farmer Mac Guarantee Securities
that become and remain either 90 or 120 days (depending on the provisions of the
applicable agreement) or more past due on the next subsequent loan payment date.
In accordance with the terms of all LTSPCs, Farmer Mac acquires loans that are
120 days delinquent upon the request of the counterparty. During 2009, Farmer
Mac purchased 24 defaulted loans having a principal balance of $21.3 million
from pools underlying Farmer Mac Guaranteed Securities and LTSPCs. During 2008,
Farmer Mac purchased 19 defaulted loans having a principal balance of $58.3
million from pools underlying Farmer Mac Guaranteed Securities and
LTSPCs.
The
following table presents Farmer Mac’s purchases of defaulted loans underlying
Farmer Mac I Guaranteed Securities and LTSPCs.
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Defaulted
loans purchased underlying off-balance sheet Farmer Mac I Guaranteed
Securities
|
|
$ |
1,157 |
|
|
$ |
647 |
|
|
$ |
1,562 |
|
Defaulted
loans underlying on-balance sheet Farmer Mac I
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed
Securities transferred to loans
|
|
|
2,216 |
|
|
|
1,072 |
|
|
|
1,316 |
|
Defaulted
loans purchased underlying LTSPCs
|
|
|
17,896 |
|
|
|
56,560 |
|
|
|
1,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
21,269 |
|
|
$ |
58,279 |
|
|
$ |
3,911 |
|
Concentrations
of Credit Risk
The
following table sets forth the geographic and commodity/collateral
diversification, as well as the range of original loan-to-value ratios, for all
loans held and loans underlying Farmer Mac I Guaranteed Securities (excluding
AgVantage securities) and LTSPCs as of December 31, 2009 and 2008:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
By
geographic region (1):
|
|
|
|
|
|
|
Northwest
|
|
$ |
642,086 |
|
|
$ |
793,433 |
|
Southwest
|
|
|
1,722,181 |
|
|
|
1,928,669 |
|
Mid-North
|
|
|
979,714 |
|
|
|
1,065,590 |
|
Mid-South
|
|
|
537,682 |
|
|
|
609,378 |
|
Northeast
|
|
|
346,176 |
|
|
|
377,079 |
|
Southeast
|
|
|
168,803 |
|
|
|
209,814 |
|
Total
|
|
$ |
4,396,642 |
|
|
$ |
4,983,963 |
|
|
|
|
|
|
|
|
|
|
By
commodity/collateral type:
|
|
|
|
|
|
|
|
|
Crops
|
|
$ |
1,694,235 |
|
|
$ |
2,011,475 |
|
Permanent
plantings
|
|
|
853,554 |
|
|
|
959,636 |
|
Livestock
|
|
|
1,218,614 |
|
|
|
1,336,004 |
|
Part-time
farm/rural housing
|
|
|
325,666 |
|
|
|
347,629 |
|
Ag
storage and processing
|
|
|
|
|
|
|
|
|
(including
ethanol facilities)
|
|
|
276,848 |
|
|
|
294,273 |
|
Other
|
|
|
27,725 |
|
|
|
34,946 |
|
Total
|
|
$ |
4,396,642 |
|
|
$ |
4,983,963 |
|
|
|
|
|
|
|
|
|
|
By
original loan-to-value ratio:
|
|
|
|
|
|
|
|
|
0.00%
to 40.00%
|
|
$ |
1,092,520 |
|
|
$ |
1,244,700 |
|
40.01%
to 50.00%
|
|
|
755,698 |
|
|
|
885,173 |
|
50.01%
to 60.00%
|
|
|
1,218,330 |
|
|
|
1,387,808 |
|
60.01%
to 70.00%
|
|
|
1,108,683 |
|
|
|
1,260,322 |
|
70.01%
to 80.00%
|
|
|
172,503 |
|
|
|
189,542 |
|
80.01%
to 90.00%
|
|
|
48,908 |
|
|
|
16,418 |
|
Total
|
|
$ |
4,396,642 |
|
|
$ |
4,983,963 |
|
|
(1)
|
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); Southeast (AL, AR, FL, GA, LA, MS,
SC).
|
The
original loan-to-value ratio is calculated by dividing the loan principal
balance at the time of guarantee, purchase or commitment by the appraised value
at the date of loan origination or, when available, the updated appraised value
at the time of guarantee, purchase or commitment. Current loan-to-value ratios
may be higher or lower than the original loan-to-value ratios.
9.
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 FCS. 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 Class A voting common
stock;
|
|
·
|
Class
B voting common stock, which may be held only by institutions of the FCS.
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.
Throughout 2009, Farmer Mac paid a quarterly dividend of $0.05 per share on all
classes of the Corporation’s common stock. On February 4, 2010, Farmer Mac’s
board of directors declared a quarterly dividend of $0.05 per share on the
Corporation’s common stock payable on March 31, 2010. Farmer Mac’s ability to
declare and pay a dividend could be restricted if it failed to comply with
regulatory capital requirements.
Farmer
Mac made no common stock repurchases during 2009. During 2008 and 2007, Farmer
Mac repurchased 31,691 shares and 1,086,541 shares, respectively, of its Class C
non-voting common stock at average prices of $26.13 and $26.61 per share,
respectively. These repurchases reduced the Corporation’s stockholders’ equity
by approximately $0.8 million and $29.0 million, respectively. The aggregate
number of shares purchased by Farmer Mac under its stock repurchase program
reached the maximum number of authorized shares during first quarter 2008,
thereby terminating the program according to its terms.
All of
the repurchased shares under Farmer Mac’s stock repurchase programs were
purchased in open market transactions and were retired to become authorized but
unissued shares available for future issuance.
Preferred
Stock
Farmer
Mac has had three series of preferred stock outstanding. The first, Series A,
was permanent equity, was a component of Stockholders’ Equity on the
consolidated balance sheets, and was repurchased and retired on December 15,
2008, such that none was outstanding on December 31, 2009 or 2008. The second,
newly issued on September 30, 2008 and on December 15, 2008, Series B, is
temporary equity and is reported as Mezzanine Equity on the consolidated balance
sheets. This preferred stock is temporary equity because it contains redemption
features that, although remote, are not solely within the control of Farmer Mac.
The third, newly issued during fourth quarter 2008, Series C, is a component of
Stockholders’ Equity on the consolidated balance sheets. 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.
Series B Preferred
Stock
On
September 30, 2008, Farmer Mac issued 60,000 shares of its newly issued Series
B-1 Senior Cumulative Perpetual Preferred Stock (“Initial Series B-1 Preferred
Stock”) and 5,000 shares of its newly issued Series B-2 Senior Cumulative
Perpetual Preferred Stock (“Series B-2 Preferred Stock”), each having a par
value and initial liquidation preference of $1,000 per share (collectively, the
Initial Series B-1 Preferred Stock and Series B-2 Preferred Stock, the “Initial
Series B Preferred Stock”) for an aggregate purchase price of $65.0 million, or
$1,000 per share. Farmer Mac incurred $4.0 million of direct costs related to
the issuance of the Initial Series B Preferred Stock, which reduced the amount
of mezzanine equity recorded as of September 30, 2008.
On
December 15, 2008, Farmer Mac issued 70,000 shares of its newly issued Series
B-3 Senior Cumulative Perpetual Preferred Stock (“Series B-3 Preferred Stock”)
having a par value and initial liquidation preference of $1,000 per share for a
purchase price of $70 million and an additional 15,000 shares of Series B-1
Preferred Stock (the “Supplemental Series B-1 Preferred Stock”) for a purchase
price of $15.0 million. Farmer Mac incurred $1.8 million of direct costs related
to the issuance of the Series B-3 Preferred Stock and Supplemental Series B-1
Preferred Stock, which reduced the amount of mezzanine equity recorded as of
December 31, 2008. The Initial Series B Preferred Stock, the Supplemental Series
B-1 Preferred Stock and the Series B-3 Preferred Stock are together referred to
as the “Series B Preferred Stock.”
On
January 25, 2010, Farmer Mac used part of the proceeds from the sale of $250.0
million of Farmer Mac II LLC’s preferred stock to repurchase and retire all
$150.0 million of the outstanding Series B Preferred Stock. Prior to that time,
the Series B Preferred Stock ranked senior to Farmer Mac’s outstanding Class A
voting common stock, Class B voting common stock, Class C non-voting common
stock and Series C Preferred Stock with respect to dividends, distributions upon
a change in control, liquidation, and dissolution or winding up of Farmer Mac.
Each series of Series B Preferred Stock ranked pari passu with the others.
See Note 15 for more information on the subsidiary’s preferred stock
issuance.
Dividends
on the Series B Preferred Stock compound quarterly at an annual rate of 10.0
percent of the then-applicable Liquidation Preference (as defined below) per
share. On approximately each of the first three anniversary dates after the
related issuance date, the annual rate on the Series B Preferred Stock will
increase to 12.0 percent, 14.0 percent, and 16.0 percent, respectively.
Dividends on the Series B Preferred Stock accrue and cumulate from the date last
paid, whether or not declared by Farmer Mac’s board of directors, and are
payable quarterly in arrears out of legally available funds when and as declared
by the board of directors on each dividend payment date. Farmer Mac may pay
dividends on the Series B Preferred Stock without paying dividends on any
outstanding class or series of stock that ranks junior to the Series B Preferred
Stock.
Farmer
Mac has the right, but not the obligation, to redeem all, but not less than all,
of the issued and outstanding shares of Series B Preferred Stock at a price
equal to the then-applicable Liquidation Preference amount beginning nine months
from issuance and on each subsequent dividend payment date. In addition, Farmer
Mac must redeem all, but not less than all, of the outstanding shares of Series
B Preferred Stock at a price equal to the then-applicable Liquidation Preference
amount under specified circumstances, including (1) in the event that any
indebtedness of Farmer Mac or its subsidiaries (“Farmer Mac Debt”) becomes or is
declared due and payable prior to the stated maturity thereof or is not paid
when it becomes due and payable, (2) an event of default occurs with respect to
any Farmer Mac Debt, or (3) Farmer Mac becomes bankrupt or insolvent or a
receiver or conservator is appointed for Farmer Mac. The redemption price for
any shares of Series B Preferred Stock redeemed by Farmer Mac will be payable in
cash equal to the par value of the Series B Preferred Stock ($1,000 per share),
plus all accrued but unpaid dividends (the “Liquidation Preference”) or, at the
election of Farmer Mac, payable in Farmer Mac program assets or other assets
acceptable to the holders of the Series B Preferred Stock. Because of these
mandatory redemption features, the Series B Preferred Stock is classified as
mezzanine equity on Farmer Mac’s consolidated balance sheet. Although the Series
B Preferred Stock is classified as mezzanine equity, outside of the equity
section of the consolidated balance sheet, it is a component of Farmer Mac’s
core capital for statutory and regulatory capital compliance
purposes.
Upon a
change in control of Farmer Mac, holders of the Series B Preferred Stock will be
entitled to receive an amount in cash equal to the Liquidation Preference.
Except as required by applicable law, the holders of the Series B Preferred
Stock are not entitled to any voting rights.
On
January 25, 2010, Farmer Mac used part of the proceeds from the sale of $250.0
million of a subsidiary’s preferred stock to repurchase and retire all $150.0
million of the outstanding Series B Preferred Stock. See Note 15 to the
consolidated financial statements for more information.
Series C Preferred
Stock
In fourth
quarter 2008, Farmer Mac began to require its business partners to purchase an
equity interest in Farmer Mac in the form of shares of Farmer Mac’s Series C
Non-Voting Cumulative Preferred Stock (“Series C Preferred Stock”) in connection
with transactions involving pools of loans in excess of $20.0 million. The
amount of the required investment was equal to 1.25 percent greater than the
Corporation’s required statutory minimum capital for the pool of loans being
accepted by Farmer Mac. The requirement was instituted to ensure that Farmer Mac
had adequate capital to support new business in fulfilling its mission, In
December 2009, Farmer Mac eliminated the requirement to purchase Series C
Preferred Stock in connection with new business.
Series C
Preferred Stock has a par value of $1,000 per share, an initial liquidation
preference of $1,000 per share and shall consist of up to 75,000 shares. Series
C Preferred Stock ranks senior to Farmer Mac’s outstanding Class A voting common
stock, Class B voting common stock, Class C non-voting common stock and any
other common stock of Farmer Mac issued in the future. Series C Preferred Stock
ranks junior to Farmer Mac’s outstanding Series B Preferred Stock.
Dividends
on Series C Preferred Stock compound quarterly at an annual rate of 5.0 percent
of the then-applicable Liquidation Preference per share. The annual rate will
increase to (1) 7.0 percent on the January 1st
following the fifth anniversary of the applicable issue date and (2) 9.0 percent
on the January 1st
following the tenth anniversary of the applicable issue date. Dividends on
Series C Preferred Stock will accrue and cumulate from the applicable issue date
whether or not declared by the board of directors and will be payable quarterly
in arrears out of legally available funds when and as declared by the board of
directors on each dividend payment date—March 31, June 30, September 30 and
December 31 of each year, beginning March 31, 2009. Farmer Mac may pay dividends
on Series C Preferred Stock without paying dividends on any outstanding class or
series of stock that ranks junior to Series C Preferred Stock.
Farmer
Mac has the right, but not the obligation, to redeem some or all of the issued
and outstanding shares of Series C Preferred Stock at a price equal to the
then-applicable Liquidation Preference beginning on the first anniversary of the
applicable issue date and on each subsequent dividend payment date. Farmer Mac’s
redemption right with respect to Series C Preferred Stock is subject to receipt
of the prior written approval of FCA, if required.
During
2009 and 2008, Farmer Mac sold 48,378 shares and 9,200 shares, respectively, of
its newly issued Series C Preferred Stock to National Rural. Farmer Mac sold
these shares without registration under the Securities Act of 1933, in reliance
upon the exemption provided by Section 3(a)(2), for an aggregate purchase price
of $48.4 million and $9.2 million, or $1,000 per share, respectively. Farmer Mac
had 57,578 shares of Series C Preferred Stock outstanding as of December 31,
2009.
Equity-based
Incentive Compensation Plans
In 1997,
Farmer Mac adopted a stock option plan for directors, officers and other
employees to acquire shares of Class C non-voting common stock. Upon stock
option exercise, new shares are issued by the Corporation. Under the plan, stock
options awarded vest annually in thirds, with the first third vesting one year
after the date of grant. If not exercised, any options granted under the 1997
plan expire 10 years from the date of grant, except that options issued to
directors since June 1, 1998, if not exercised, expire five years from the date
of grant. For all stock options granted, the exercise price is equal to the
closing price of the Class C non-voting common stock on or immediately preceding
the date of grant. As of June 30, 2008, the plan had terminated pursuant to its
terms and no further grants will be made under it.
At the
June 5, 2008 Annual Meeting of Stockholders, Farmer Mac’s stockholders approved
the 2008 Omnibus Incentive Compensation Plan that authorizes the grants of
restricted stock, 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 10 years and those granted to
directors expire after 7 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 during 2009 have exercise prices ranging from $5.93 to $7.78
and SARS granted during 2008 have exercise prices ranging from $7.35 to $28.94
per share. During 2009, restricted stock awards were issued to directors with a
vesting period of one year and restricted stock awards were issued to officers
vesting in three years provided certain performance targets are
met.
The
following tables summarize stock options, SARs and non-vested restricted stock
activity for the years ended December 31, 2009, 2008 and 2007:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Stock
|
|
|
Weighted-
|
|
|
Stock
|
|
|
Weighted-
|
|
|
Stock
|
|
|
Weighted-
|
|
|
|
Options
|
|
|
Average
|
|
|
Options
|
|
|
Average
|
|
|
Options
|
|
|
Average
|
|
|
|
and
|
|
|
Exercise
|
|
|
and
|
|
|
Exercise
|
|
|
and
|
|
|
Exercise
|
|
|
|
SARs
|
|
|
Price
|
|
|
SARs
|
|
|
Price
|
|
|
SARs
|
|
|
Price
|
|
Outstanding,
beginning of year
|
|
|
2,237,711 |
|
|
$ |
25.54 |
|
|
|
2,218,199 |
|
|
$ |
25.48 |
|
|
|
2,145,705 |
|
|
$ |
23.83 |
|
Granted
|
|
|
210,000 |
|
|
|
6.33 |
|
|
|
429,770 |
|
|
|
24.41 |
|
|
|
486,427 |
|
|
|
29.48 |
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
(264,297 |
) |
|
|
21.43 |
|
|
|
(377,596 |
) |
|
|
21.14 |
|
Canceled
|
|
|
(648,246 |
) |
|
|
27.27 |
|
|
|
(145,961 |
) |
|
|
28.86 |
|
|
|
(36,337 |
) |
|
|
26.62 |
|
Outstanding,
end of year
|
|
|
1,799,465 |
|
|
$ |
22.68 |
|
|
|
2,237,711 |
|
|
$ |
25.54 |
|
|
|
2,218,199 |
|
|
$ |
25.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and SARs exercisable at end of year
|
|
|
1,398,262 |
|
|
$ |
25.17 |
|
|
|
1,490,150 |
|
|
$ |
25.25 |
|
|
|
1,360,222 |
|
|
$ |
24.46 |
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Non-vested
|
|
|
Average
|
|
|
Non-vested
|
|
|
Average
|
|
|
Non-vested
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant-date
|
|
|
Restricted
|
|
|
Grant-date
|
|
|
Restricted
|
|
|
Grant-date
|
|
|
|
Stock
|
|
|
Fair Value
|
|
|
Stock
|
|
|
Fair Value
|
|
|
Stock
|
|
|
Fair Value
|
|
Outstanding,
beginning of year
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Granted
|
|
|
200,548 |
|
|
|
5.93 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Canceled
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Outstanding,
end of year
|
|
|
200,548 |
|
|
$ |
5.93 |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
The
cancellations of stock options or SARs during 2009, 2008 and 2007 were due
either to unvested awards terminating in accordance with the provisions of the
applicable stock option plans upon directors’ or employees’ departures from
Farmer Mac, by voluntary forfeiture, or vested awards terminating unexercised on
their expiration date. Of the 648,246 awards canceled in 2009, 614,746 were a
result of employee or directors departures from Farmer Mac and 33,500 were a
result of awards terminating unexercised on their expiration date.
There
were no exercises of stock options during 2009. Farmer Mac received $5.7 million
and $8.0 million from the exercise of stock options during 2008 and 2007,
respectively. During 2008 and 2007, the reduction of income tax payable as a
result of the deduction for the exercise of stock options was $0.9 million and
$0.7 million, respectively. In total, the additional paid-in capital received
from the exercise of stock options was $5.9 million and $7.4 million for 2008
and 2007, respectively.
During
2009, Farmer Mac recorded a reduction to additional paid-in capital of $1.2
million as vested stock options expired unexercised. There were no such
reductions in 2008 or 2007.
During
the year ended December 31, 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 cash retainers, Farmer Mac cash settled an aggregate of
9,566 of share-based payments for $41,000 to five directors who elected to
receive such stock in lieu of their cash retainers. During the similar period
ended December 31, 2008, Farmer Mac settled 5,166 of share-based payments for
$70,000 to the seven directors who elected to receive such stock in lieu of
their cash retainers. During the similar period ended December 31, 2007, Farmer
Mac settled 1,720 of share-based payments for $52,000 to the nine directors who
elected to receive such stock in lieu of their cash retainers.
The
following tables summarize information regarding stock options, SARs and
non-vested restricted stock outstanding as of December 31, 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
|
|
|
300,000 |
|
|
9.3
years
|
|
|
|
30,000 |
|
|
8.8
years
|
|
|
|
252,000 |
|
|
9.3
years
|
|
10.00
- 14.99
|
|
|
— |
|
|
—
|
|
|
|
— |
|
|
—
|
|
|
|
— |
|
|
—
|
|
15.00
- 19.99
|
|
|
81,722 |
|
|
4.2
years
|
|
|
|
81,722 |
|
|
4.2
years
|
|
|
|
81,722 |
|
|
4.2
years
|
|
20.00
- 24.99
|
|
|
550,588 |
|
|
4.3
years
|
|
|
|
550,588 |
|
|
4.3
years
|
|
|
|
550,588 |
|
|
4.3
years
|
|
25.00
- 29.99
|
|
|
653,487 |
|
|
4.8
years
|
|
|
|
530,288 |
|
|
4.3
years
|
|
|
|
641,680 |
|
|
4.8
years
|
|
30.00
- 34.99
|
|
|
213,668 |
|
|
2.1
years
|
|
|
|
205,664 |
|
|
1.9
years
|
|
|
|
211,267 |
|
|
2.1
years
|
|
|
|
|
1,799,465 |
|
|
|
|
|
|
|
1,398,262 |
|
|
|
|
|
|
|
1,737,257 |
|
|
|
|
|
|
|
Outstanding
|
|
Expected to Vest
|
|
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Non-vested
|
|
Remaining
|
|
Non-vested
|
|
Remaining
|
|
Grant-Date
|
|
Restricted
|
|
Contractual
|
|
Restricted
|
|
Contractual
|
|
Fair Value
|
|
Stock
|
|
Life
|
|
Stock
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.93
|
|
200,548
|
|
1.1
years
|
|
180,493
|
|
1.1
years
|
|
The
weighted average exercise price of the 1,737,257 options or SARs vested or
expected to vest as of December 31, 2009 was $23.05.
As of
December 31, 2009, the intrinsic value of options, SARs and non-vested
restricted stock outstanding, exercisable and vested and expected to vest was
$1.4 million. During 2008 and 2007, the total intrinsic value of options
exercised was $2.6 million, $3.8 million, respectively. As of
December 31, 2009, there was $2.1 million of total unrecognized compensation
cost related to non-vested stock options, SARS and restricted stock
awards. This cost is expected to be recognized over a weighted-average
period of 1.4 years.
The
weighted-average grant date fair values of options, SARs and restricted stock
awards granted in 2009, 2008 and 2007 were $5.11, $9.71 and $11.24,
respectively. Under the fair value-based method of accounting for stock-based
compensation cost, Farmer Mac recognized compensation expense of $2.7 million,
$2.8 million and $3.7 million during 2009, 2008 and 2007, respectively. The fair
values of stock options and SARs were estimated using the Black-Scholes option
pricing model based on the following assumptions:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Risk-free
interest rate
|
|
|
1.6 |
% |
|
|
2.4 |
% |
|
|
4.8 |
% |
Expected
years until exercise
|
|
7 years
|
|
|
6 years
|
|
|
6 years
|
|
Expected
stock volatility
|
|
|
103.6 |
% |
|
|
52.2 |
% |
|
|
36.0 |
% |
Dividend
yield
|
|
|
3.2 |
% |
|
|
2.2 |
% |
|
|
1.4 |
% |
The
risk-free interest rates used in the model were based on the U.S. Treasury yield
curve in effect at the grant date. Farmer Mac used historical data to estimate
the timing of option exercises and stock option cancellation rates used in the
model. Expected volatilities were based on historical volatility of Farmer Mac’s
Class C common stock. The dividend yields were based on the expected dividends
as a percentage of the value of Farmer Mac’s Class C common stock on the grant
date.
Since
restricted stock awards will be issued upon vesting regardless of the stock
price, expected stock volatility is not considered in determining grant date
fair value. Restricted stock awards also accrue dividends which are paid at
vesting. The grant date fair value of the restricted stock awarded in 2009 was
$5.93, which was the price of the stock on the date granted.
Statutory
and Regulatory Capital Requirements
Farmer
Mac is subject to three statutory and regulatory capital
requirements:
|
·
|
Statutory
minimum capital requirement – Farmer Mac’s statutory minimum capital level
is an amount of core capital (stockholders’ equity less accumulated other
comprehensive (loss)/income plus mezzanine equity) 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, specifically including:
|
|
o
|
the
unpaid principal balance of outstanding Farmer Mac Guaranteed
Securities;
|
|
o
|
instruments
issued or guaranteed by Farmer Mac that are substantially equivalent to
Farmer Mac Guaranteed Securities, including LTSPCs;
and
|
|
o
|
other
off-balance sheet obligations of Farmer
Mac.
|
|
·
|
Statutory
critical capital requirement – Farmer Mac’s critical capital level is an
amount of core capital equal to 50 percent of the total minimum capital
requirement at that time.
|
|
·
|
Risk-based
capital requirement – Farmer Mac’s charter directs FCA to establish a
risk-based capital stress test for Farmer Mac, using specified stress-test
parameters.
|
Farmer
Mac is required to comply with the higher of the minimum capital requirement or
the risk-based capital requirement.
As of
December 31, 2009, Farmer Mac’s minimum and critical capital requirements were
$217.0 million and $108.5 million, respectively, and its actual core capital
level was $337.2 million, which was $120.2 million above the minimum capital
requirement and $228.7 million above the critical capital requirement as of that
date. 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, which was $13.5 million above the minimum
capital requirement and $110.2 million above the critical capital requirement as
of that date.
Based on
the risk-based capital stress test, Farmer Mac’s risk-based capital requirement
as of December 31, 2009 was $35.9 million, and Farmer Mac’s regulatory capital
(core capital plus the allowance for losses) of $351.3 million exceeded that
amount by approximately $315.4 million.
The
components of the provision for federal income taxes for the years ended
December 31, 2009, 2008 and 2007 were as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Current
|
|
$ |
16,902 |
|
|
$ |
17,514 |
|
|
$ |
17,007 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances
for losses
|
|
|
787 |
|
|
|
(4,392 |
) |
|
|
234 |
|
Financial
derivatives
|
|
|
20,588 |
|
|
|
(33,251 |
) |
|
|
(14,839 |
) |
Securities
classified as trading
|
|
|
15,146 |
|
|
|
(3,724 |
) |
|
|
— |
|
Stock
option expense
|
|
|
(953 |
) |
|
|
(966 |
) |
|
|
(1,288 |
) |
Premium
amortization
|
|
|
(896 |
) |
|
|
(900 |
) |
|
|
(1,286 |
)
|
Other
|
|
|
943 |
|
|
|
2,855 |
|
|
|
89 |
|
Total
deferred
|
|
|
35,615 |
|
|
|
(40,378 |
) |
|
|
(17,090 |
) |
Income
tax expense/(benefit)
|
|
$ |
52,517 |
|
|
$ |
(22,864 |
) |
|
$ |
(83 |
) |
A
reconciliation of tax at the statutory federal tax rate to the income tax
provision for the years ended December 31, 2009, 2008 and 2007 is as
follows:
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(dollars in thousands)
|
|
Tax
expense/(benefit) at statutory rate
|
|
$ |
53,241 |
|
|
$ |
(60,630 |
) |
|
$ |
2,302 |
|
Effect
of non-taxable dividend income
|
|
|
(1,934 |
) |
|
|
(2,337 |
) |
|
|
(2,584 |
) |
Deferred
tax asset valuation allowance for capital losses on investment
securities
|
|
|
1,120 |
|
|
|
39,989 |
|
|
|
— |
|
Other
|
|
|
90 |
|
|
|
114 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense/(benefit)
|
|
$ |
52,517 |
|
|
$ |
(22,864 |
) |
|
$ |
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Effective
tax rate
|
|
|
34.5 |
% |
|
|
-13.2 |
% |
|
|
-1.3 |
% |
The
components of the deferred tax assets and liabilities as of December 31, 2009
and 2008 were as follows:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Basis
differences related to financial derivatives
|
|
$ |
34,192 |
|
|
$ |
54,780 |
|
Allowance
for losses
|
|
|
4,965 |
|
|
|
5,752 |
|
Unrealized
losses on available-for-sale securities
|
|
|
— |
|
|
|
25,423 |
|
Stock-based
compensation
|
|
|
2,438 |
|
|
|
2,693 |
|
Other-than-temporary
impairment on investments
|
|
|
37,408 |
|
|
|
37,184 |
|
(Valuation
allowance)
|
|
|
(36,788 |
) |
|
|
(36,563 |
) |
Amortization
of premiums on investments
|
|
|
4,322 |
|
|
|
3,426 |
|
(Valuation
allowance)
|
|
|
(4,322 |
) |
|
|
(3,426 |
) |
Other
|
|
|
1,780 |
|
|
|
1,441 |
|
Total
deferred tax assets
|
|
|
43,995 |
|
|
|
90,710 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability:
|
|
|
|
|
|
|
|
|
Gains
on assets classified as trading
|
|
|
17,941 |
|
|
|
2,796 |
|
Unrealized
gains on available-for-sale securities
|
|
|
1,777 |
|
|
|
— |
|
Other
|
|
|
131 |
|
|
|
121 |
|
Total
deferred tax liability
|
|
|
19,849 |
|
|
|
2,917 |
|
Net
deferred tax asset
|
|
$ |
24,146 |
|
|
$ |
87,793 |
|
A
valuation allowance is required to reduce a deferred tax asset to an amount that
is more likely than not to be realized. Future realization of the tax benefit
from a deferred tax asset depends on the existence of sufficient taxable income
of the appropriate character. After the evaluation of both positive and negative
objective evidence regarding the likelihood that its deferred tax assets will be
realized, Farmer Mac established a valuation allowance of $41.1 million and
$40.0 million as of December 31, 2009 and 2008, respectively, which was
attributable to non-deductible capital losses on investment securities. Farmer
Mac did not establish a valuation allowance for the remainder of its deferred
tax assets because it believes it is more likely than not that those deferred
tax assets will be realized.
In
determining its deferred tax asset valuation allowance, Farmer Mac considered
its taxable income of the appropriate character (for example, ordinary income or
capital gain) within the carry back, carry forward period available under the
tax law and its determination that a significant portion of the cumulative
pre-tax losses for the three year period ended December 31, 2009 was the result
of the recognition of financial derivatives at fair value which did not result
in a net operating loss for tax purposes.
On
January 1, 2007, Farmer Mac adopted FASB guidance on uncertain tax positions and
recorded a $1.5 million liability for such positions with a corresponding $1.5
million increase in deferred tax assets. As of December 31, 2009 and 2008, both
the recorded liability for uncertain tax positions and the corresponding
deferred tax asset were $1.4 million and $0.9 million, respectively.
The
following table presents the changes in unrecognized tax benefits for the years
ended December 31, 2009 and 2008.
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
934 |
|
|
$ |
851 |
|
|
$ |
1,474 |
|
Increases
based on tax positions related to current year
|
|
|
458 |
|
|
|
126 |
|
|
|
(441 |
) |
Reductions
for tax positions of prior years
|
|
|
— |
|
|
|
(43 |
) |
|
|
(182 |
) |
Ending
balance
|
|
$ |
1,392 |
|
|
$ |
934 |
|
|
$ |
851 |
|
The
resolution of the unrecognized tax benefits presented above would represent
temporary differences between Farmer Mac’s net income and taxable income and,
therefore, would not result in a change to the Corporation’s effective tax rate.
As of December 31, 2009 and 2008, accrued interest payable related to
unrecognized tax benefits was immaterial and no tax penalty was recorded. It is
reasonably possible that changes in the gross balance of unrecognized tax
benefits may occur within the next 12 months. Tax years 2006 through 2009 remain
subject to examination.
Farmer
Mac makes contributions to a defined contribution retirement plan for all of its
employees. Farmer Mac contributed 13.2 percent of the lesser of an employee’s
gross salary or the maximum compensation permitted under the Economic Growth and
Tax Relief Reconciliation Act of 2001 (“EGTRRA”) ($245,000 for 2009, $230,000
for 2008 and $225,000 for 2007), plus 5.7 percent of the difference between: (1)
the lesser of the gross salary or the amount established under EGTRRA; and (2)
the Social Security Taxable Wage Base. Employees are fully vested after having
been employed for approximately three years. Expense for this plan for the years
ended December 31, 2009, 2008 and 2007 was $0.8 million, $0.7 million and $0.7
million, respectively.
12.
|
OFF-BALANCE
SHEET GUARANTEES AND LTSPCs, COMMITMENTS AND
CONTINGENCIES
|
Farmer
Mac offers approved agricultural and rural residential mortgage 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 the Farmer Mac I program, the Farmer Mac
II program or the Rural Utilities program, and (2) LTSPCs, which are available
through the Farmer Mac I program or Rural Utilities program. Both of these
alternatives result in the creation of off-balance sheet obligations for Farmer
Mac. Farmer Mac accounts for these transactions and other financial guarantees
in accordance with FASB guidance on accounting for guarantees. 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, 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. 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 loans.
The
contractual terms of Farmer Mac’s guarantees range from less than 1 year to 30
years. However, the actual term of each guarantee may be significantly less than
the contractual term based on the prepayment characteristics of the related
agricultural real estate mortgage loans. Farmer Mac’s maximum potential exposure
under these guarantees is comprised of the unpaid principal balance of the
underlying agricultural real estate mortgage loans. Guarantees issued or
modified on or after January 1, 2003 are recorded in the consolidated balance
sheets. Farmer Mac’s maximum potential exposure was $6.2 billion and $6.4
billion as of December 31, 2009 and 2008, respectively. Farmer Mac’s maximum
potential exposure for guarantees issued prior to January 1, 2003, which are not
recorded on the consolidated balance sheets, was $377.2 million and $469.4
million as of December 31, 2009 and 2008, respectively. The maximum exposure
from these guarantees is not representative of the actual loss Farmer Mac is
likely to incur, based on historical loss experience. In the event Farmer Mac
was required to make payments under its guarantees, Farmer Mac would have the
right to enforce the terms of the loans, and in the event of default, would have
access to the underlying collateral. For information on Farmer Mac’s methodology
for determining the reserve for losses for its financial guarantees, see Note
2(j) and Note 8. The following table presents changes in Farmer Mac’s guarantee
and commitment obligation in the consolidated balance sheets for the years ended
December 31, 2009, 2008 and 2007.
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Beginning
balance, January 1
|
|
$ |
54,954 |
|
|
$ |
52,130 |
|
|
$ |
35,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to the guarantee and commitment obligation (1)
|
|
|
3,168 |
|
|
|
8,512 |
|
|
|
24,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of the guarantee and commitment obligation
|
|
|
(9,596 |
) |
|
|
(5,688 |
) |
|
|
(7,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance, December 31
|
|
$ |
48,526 |
|
|
$ |
54,954 |
|
|
$ |
52,130 |
|
(1)
Represents the fair value of the guarantee and commitment obligation at
inception.
Off-Balance
Sheet Farmer Mac Guaranteed Securities
Agricultural
real estate mortgage loans, rural utilities loans and other related 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. Farmer Mac is obligated under its guarantee to
ensure that the securities make timely payments to investors of principal and
interest based on the underlying loans, regardless of whether the trust has
actually received such scheduled loan payments. As consideration for Farmer
Mac’s assumption of the credit risk on these securities, Farmer Mac receives
guarantee fees that are recognized as earned on an accrual basis over the life
of the loan and based upon the outstanding balance of the Farmer Mac Guaranteed
Security.
Farmer
Mac is required to perform under its obligation when the underlying loans for
the off-balance sheet Farmer Mac Guaranteed Securities do not make their
scheduled installment payments. When a loan underlying a Farmer Mac I Guaranteed
Security becomes 90 days or more past due, Farmer Mac may, in its sole
discretion, repurchase the loan from the trust and generally does repurchase
such loans, thereby reducing the principal balance of the outstanding Farmer Mac
I Guaranteed Security.
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 December 31, 2009 and 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
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Farmer
Mac I Guaranteed Securities
|
|
$ |
1,492,239 |
|
|
$ |
1,697,983 |
|
AgVantage
|
|
|
2,945,000 |
|
|
|
2,945,000 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
34,802 |
|
|
|
30,095 |
|
Rural
Utilities
|
|
|
14,240 |
|
|
|
— |
|
Total
off-balance sheet Farmer Mac Guaranteed Securities
|
|
$ |
4,486,281 |
|
|
$ |
4,673,078 |
|
If Farmer
Mac repurchases a loan that is collateral for a Farmer Mac Guaranteed Security,
Farmer Mac would have the right to enforce the terms of the loan, and in the
event of a default, would have access to the underlying collateral. Farmer Mac
typically recovers its investment in the defaulted loans purchased either
through borrower payments, loan payoffs, payments by third parties or
foreclosure and sale of the property securing the loans.
Farmer
Mac has recourse to the USDA for any amounts advanced for the timely payment of
principal and interest on Farmer Mac II Guaranteed Securities. That recourse is
the USDA guarantee, a full faith and credit obligation of the United States that
becomes enforceable if a lender fails to repurchase the USDA-guaranteed portion
from its owner within 30 days after written demand from the owner when (a) the
borrower under the guaranteed loan is in default not less than 60 days in the
payment of any principal or interest due on the USDA-guaranteed portion, or (b)
the lender has failed to remit to the owner the payment made by the borrower on
the USDA-guaranteed portion or any related loan subsidy within 30 days after the
lender’s receipt of the payment.
The
following table summarizes cash flows received from and paid to the trusts that
hold agricultural real estate mortgage loans in off-balance sheet Farmer Mac I
Guaranteed Securities.
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from new securitizations
|
|
$ |
28,736 |
|
|
$ |
98,843 |
|
|
$ |
1,324 |
|
Guarantee
fees received
|
|
|
12,206 |
|
|
|
12,134 |
|
|
|
11,647 |
|
Purchases
of assets from the trusts
|
|
|
1,157 |
|
|
|
647 |
|
|
|
1,562 |
|
Servicing
advances
|
|
|
20 |
|
|
|
9 |
|
|
|
31 |
|
Repayments
of servicing advances
|
|
|
29 |
|
|
|
2 |
|
|
|
39 |
|
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 consolidated balance sheets. This
liability approximated $33.9 million as of December 31, 2009 and $37.1 million
as of December 31, 2008. As of December 31, 2009 and 2008, the weighted-average
remaining maturity of all loans underlying off-balance sheet Farmer Mac
Guaranteed Securities, excluding AgVantage securities, was 13.3 years and 13.9
years, respectively. As of December 31, 2009 and 2008, the weighted-average
remaining maturity of the off-balance sheet AgVantage securities was 3.4 years
and 4.4 years, respectively. For information on Farmer Mac’s methodology for
determining the reserve for losses on off-balance sheet Farmer Mac Guaranteed
Securities, see Note 2(j) and Note 8.
Long-Term
Standby Purchase Commitments
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 a swap for Farmer Mac Guaranteed Securities.
An LTSPC
permits a seller to nominate from its portfolio a segregated pool of loans for
participation in the Farmer Mac I program, which are retained in the seller’s
portfolio and serviced by the seller. Farmer Mac reviews the loan pool to
confirm that it conforms to Farmer Mac’s underwriting standards. Upon Farmer
Mac’s approval of the eligible loans, the seller effectively transfers the
credit risk on those loans to Farmer Mac, thereby reducing the seller’s credit
and concentration risk exposures and, consequently, its regulatory capital
requirements and its loss reserve requirements. Credit risk is transferred
through Farmer Mac’s commitment to purchase the segregated loans from the
counterparty based on Farmer Mac’s original credit review and acceptance of the
credit risk on the loans.
The
specific events or circumstances that would require Farmer Mac to purchase some
or all of the segregated loans under its LTSPCs include: (1) the failure of the
borrower under any loan to make installment payments under that loan for a
period of at least four months; or (2) the determination by the holder of the
LTSPC to sell or exchange some or all of the loans under the LTSPC to Farmer
Mac.
Farmer
Mac purchases loans subject to an LTSPC at:
|
·
|
par
(if the loans become delinquent for at least four months or are in
material non-monetary default), with accrued and unpaid interest on the
defaulted loans payable out of any future loan payments or liquidation
proceeds as received;
|
|
·
|
a
mark-to-market price or in exchange for Farmer Mac I Guaranteed Securities
(if the loans are not delinquent and are standard loan products as to
which Farmer Mac offers daily rates for commitments to purchase);
or
|
|
·
|
either
(1) a mark-to-market negotiated price for all (but not some) loans in the
pool, based on the sale of Farmer Mac I Guaranteed Securities in the
capital markets or the funding obtained by Farmer Mac through the issuance
of matching debt in the capital markets, or (2) in exchange for Farmer Mac
I Guaranteed Securities (if the loans are not four months
delinquent).
|
As of
December 31, 2009 and 2008, 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 $2.2
billion and $2.2 billion, respectively.
In the
event of loan default, Farmer Mac would have the right to enforce the terms of
the loans including the right to foreclose upon the collateral underlying such
loans. Farmer Mac believes that it will typically recover its investment in the
defaulted loans purchased either through borrower payments, loan payoffs,
payments by third parties or foreclosure and sale of the
collateral.
As of
December 31, 2009 and 2008, the weighted-average remaining maturity of all loans
underlying LTSPCs was 14.9 years and 15.3 years, respectively. 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 consolidated balance sheet. This
liability approximated $14.7 million as of December 31, 2009 and $17.9 million
as of December 31, 2008. For information on Farmer Mac’s methodology for
determining the reserve for losses for LTSPCs, see Note 2(j) and Note
8.
Commitments
Farmer
Mac enters into mandatory and optional delivery commitments to purchase loans.
Most loan purchase commitments entered into by Farmer Mac are mandatory
commitments, in which Farmer Mac charges a fee to extend or cancel the
commitment. As of December 31, 2009 and 2008, commitments to purchase Farmer Mac
I and II loans totaled $33.2 million and $26.7 million, respectively, all of
which were mandatory commitments. Any optional loan purchase commitments are
sold forward under optional commitments to deliver Farmer Mac Guaranteed
Securities that may be cancelled by Farmer Mac without penalty.
Farmer
Mac is exposed to interest rate risk from the time it commits to purchase a loan
to the time it either: (a) sells Farmer Mac Guaranteed Securities backed by the
loan or (b) issues debt to retain the loan in its portfolio. There were no
commitments to sell Farmer Mac Guaranteed Securities as of December 31, 2009 and
2008. Farmer Mac manages the interest rate risk related to loans not yet sold or
funded as a retained investment through the use of forward sale contracts
involving government-sponsored enterprise debt, futures contracts involving U.S.
Treasury securities and interest rate swaps. See Note 2(h) and Note 6 for
information regarding financial derivatives.
Rental
expense for Farmer Mac’s office space for each of the years ended December 31,
2009, 2008 and 2007 was $0.7 million, $0.6 million and $0.7 million,
respectively. The future minimum lease payments under Farmer Mac’s
non-cancelable leases for its office space and other contractual obligations are
as follows:
|
|
|
|
|
Other
|
|
|
|
Future Minimum
|
|
|
Contractual
|
|
|
|
Lease Payments
|
|
|
Obligations
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
2010
|
|
$ |
694 |
|
|
$ |
629 |
|
2011
|
|
|
608 |
|
|
|
377 |
|
2012
|
|
|
15 |
|
|
|
245 |
|
2013
|
|
|
14 |
|
|
|
63 |
|
2014
|
|
|
7 |
|
|
|
— |
|
Thereafter
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
1,338 |
|
|
$ |
1,314 |
|
Other
contractual obligations in the table above include minimum amounts due under
non-cancelable agreements to purchase goods or services that are enforceable and
legally binding and specify all significant terms. These agreements include
agreements for the provision of consulting services, information technology
support, equipment maintenance, and financial analysis software and services.
The amounts actually paid under these agreements will likely be higher due to
the variable components of some of these agreements under which the ultimate
obligation owed is determined by reference to actual usage or hours
worked.
Legal
Proceedings
On
December 5, 2008, a lawsuit was filed in the United States District Court for
the District of Columbia 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. The lawsuit alleges,
among other things, violations of Section 10(b) of the Securities Exchange Act
of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder by all
defendants and violations of Section 20(a) of the Exchange Act by the individual
defendants in relation to statements and omissions concerning the financial
condition of the Corporation alleged to be materially false or misleading. The
complaint alleged that Farmer Mac made false and misleading statements that had
the effect of artificially inflating the price of its securities during the
period referenced above. The complaint also alleged that Farmer Mac failed to
disclose material information relating to impairment costs and/or depreciation
expenses and that Farmer Mac used overly optimistic assumptions with respect to
asset valuations and investments, the size of Farmer Mac’s exposure to Lehman
Brothers Holdings Inc. and Fannie Mae, and its performance relative to estimates
of future performance. The December 5, 2008 complaint requested class
certification, compensatory damages, and other remedies, but did not specify the
amount of damages sought. On February 23, 2009, the Court appointed lead
plaintiffs for the litigation. On February 26, 2010, the Court entered a
stipulation of voluntary dismissal between the parties pursuant to which the
lead plaintiffs voluntarily dismissed their case and agreed not to further
pursue or assert any claims against the parties that were asserted, or could
have been asserted, in the action or otherwise relate to the subject matter of
the action.
13.
FAIR
VALUE DISCLOSURES
Fair
Value Measurement
Effective
January 1, 2008, Farmer Mac adopted FASB guidance on fair value measurements
which defines fair value, establishes a hierarchy for ranking fair value
measurements, and expands disclosures about fair value measurements. Fair value
is defined 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 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 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, 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 likely 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 financial instruments
that are not reported at fair value each period but are subject to fair value
adjustments in certain circumstances are referred to as non-recurring fair value
measurements.
Recurring
Fair Value Measurements and Classification
Available-for-Sale
and Trading Investment Securities
The fair
value of investments in U.S. Treasuries is based on unadjusted quoted prices in
active markets. Farmer Mac
classifies these fair value measurements as level 1.
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, duration, 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.
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. 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, credit
default 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
December 31, 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 $0.7 million. As of December 31, 2008, the consideration
of credit risk, Farmer Mac’s or 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
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. As of December 31, 2009, Farmer Mac recorded an adjustment of $0.1
million to report loans held for sale at the lower of cost or fair value. As of
December 31, 2008, Farmer Mac’s loans held for sale were reported at
cost.
Real
Estate Owned
Farmer
Mac initially records 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
December 31, 2009, Farmer Mac’s assets and liabilities recorded at fair value
included financial instruments valued at $3.7 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 61
percent of total assets and 80 percent of financial instruments measured at fair
value as of December 31, 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 December 31,
2009 and 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 December 31, 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
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
72,884 |
|
|
$ |
72,884 |
|
Floating
rate asset-backed securities
|
|
|
— |
|
|
|
58,143 |
|
|
|
— |
|
|
|
58,143 |
|
Floating
rate corporate debt securities
|
|
|
— |
|
|
|
245,605 |
|
|
|
— |
|
|
|
245,605 |
|
Floating
rate Government/GSE guaranteed mortgage-backed securities
|
|
|
— |
|
|
|
404,221 |
|
|
|
— |
|
|
|
404,221 |
|
Fixed
rate GSE guaranteed mortgage-backed securities
|
|
|
— |
|
|
|
6,537 |
|
|
|
— |
|
|
|
6,537 |
|
Floating
rate GSE subordinated debt
|
|
|
— |
|
|
|
— |
|
|
|
47,562 |
|
|
|
47,562 |
|
Fixed
rate GSE preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
89,211 |
|
|
|
89,211 |
|
Treasury
bills
|
|
|
117,760 |
|
|
|
— |
|
|
|
— |
|
|
|
117,760 |
|
Total
available-for-sale
|
|
|
117,760 |
|
|
|
714,506 |
|
|
|
209,657 |
|
|
|
1,041,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
— |
|
|
|
— |
|
|
|
1,824 |
|
|
|
1,824 |
|
Fixed
rate GSE preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
88,148 |
|
|
|
88,148 |
|
Total
trading
|
|
|
— |
|
|
|
— |
|
|
|
89,972 |
|
|
|
89,972 |
|
Total
investment securities
|
|
|
117,760 |
|
|
|
714,506 |
|
|
|
299,629 |
|
|
|
1,131,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
— |
|
|
|
— |
|
|
|
56,864 |
|
|
|
56,864 |
|
Farmer
Mac II
|
|
|
— |
|
|
|
— |
|
|
|
764,792 |
|
|
|
764,792 |
|
Rural
Utilities
|
|
|
— |
|
|
|
— |
|
|
|
1,703,211 |
|
|
|
1,703,211 |
|
Total
available-for-sale
|
|
|
— |
|
|
|
— |
|
|
|
2,524,867 |
|
|
|
2,524,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II
|
|
|
— |
|
|
|
— |
|
|
|
422,681 |
|
|
|
422,681 |
|
Rural
Utilities
|
|
|
— |
|
|
|
— |
|
|
|
451,448 |
|
|
|
451,448 |
|
Total
trading
|
|
|
— |
|
|
|
— |
|
|
|
874,129 |
|
|
|
874,129 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
— |
|
|
|
— |
|
|
|
3,398,996 |
|
|
|
3,398,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives
|
|
|
3 |
|
|
|
15,037 |
|
|
|
— |
|
|
|
15,040 |
|
Total
Assets at fair value
|
|
$ |
117,763 |
|
|
$ |
729,543 |
|
|
$ |
3,698,625 |
|
|
$ |
4,545,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives
|
|
$ |
— |
|
|
$ |
103,714 |
|
|
$ |
3,653 |
|
|
$ |
107,367 |
|
Total
Liabilities at fair value
|
|
$ |
— |
|
|
$ |
103,714 |
|
|
$ |
3,653 |
|
|
$ |
107,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28,505 |
|
|
$ |
28,505 |
|
Total
Assets at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28,505 |
|
|
$ |
28,505 |
|
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.
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2009
|
|
|
|
|
|
|
Purchases,
|
|
|
Realized and
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
|
|
|
Unrealized
|
|
|
Gains/(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances and
|
|
|
Gains/(Losses)
|
|
|
included in Other
|
|
|
Net
|
|
|
|
|
|
|
Beginning
|
|
|
Settlements,
|
|
|
included in
|
|
|
Comprehensive
|
|
|
Transfers In
|
|
|
Ending
|
|
|
|
Balance
|
|
|
net
|
|
|
Income
|
|
|
Income
|
|
|
and/or Out
|
|
|
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 |
) |
|
$ |
— |
|
|
$ |
14,157 |
|
|
$ |
— |
|
|
$ |
72,884 |
|
Floating
rate GSE subordinated debt
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,570 |
) |
|
|
49,132 |
|
|
|
47,562 |
|
Fixed
rate GSE preferred stock
|
|
|
— |
|
|
|
(114 |
) |
|
|
— |
|
|
|
(1,332 |
) |
|
|
90,657 |
|
|
|
89,211 |
|
Total
available-for-sale investment securities
|
|
|
178,577 |
|
|
|
(119,964 |
) |
|
|
— |
|
|
|
11,255 |
|
|
|
139,789 |
|
|
|
209,657 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities(1)
|
|
|
2,211 |
|
|
|
(785 |
) |
|
|
398 |
|
|
|
— |
|
|
|
— |
|
|
|
1,824 |
|
Fixed
rate GSE preferred stock(2)
|
|
|
161,552 |
|
|
|
(1,168 |
) |
|
|
18,421 |
|
|
|
— |
|
|
|
(90,657 |
) |
|
|
88,148 |
|
Total
trading investment securities
|
|
|
163,763 |
|
|
|
(1,953 |
) |
|
|
18,819 |
|
|
|
— |
|
|
|
(90,657 |
) |
|
|
89,972 |
|
Total
investment securities
|
|
|
342,340 |
|
|
|
(121,917 |
) |
|
|
18,819 |
|
|
|
11,255 |
|
|
|
49,132 |
|
|
|
299,629 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
349,292 |
|
|
|
(2,219 |
) |
|
|
— |
|
|
|
(2,197 |
) |
|
|
(288,012 |
) |
|
|
56,864 |
|
Farmer
Mac II
|
|
|
522,565 |
|
|
|
228,773 |
|
|
|
— |
|
|
|
13,454 |
|
|
|
— |
|
|
|
764,792 |
|
Rural
Utilities
|
|
|
639,837 |
|
|
|
1,045,000 |
|
|
|
— |
|
|
|
18,374 |
|
|
|
— |
|
|
|
1,703,211 |
|
Total
available-for-sale
|
|
|
1,511,694 |
|
|
|
1,271,554 |
|
|
|
— |
|
|
|
29,631 |
|
|
|
(288,012 |
) |
|
|
2,524,867 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II(3)
|
|
|
496,863 |
|
|
|
(77,881 |
) |
|
|
3,699 |
|
|
|
— |
|
|
|
— |
|
|
|
422,681 |
|
Rural
Utilities(1)
|
|
|
442,687 |
|
|
|
(11,994 |
) |
|
|
20,755 |
|
|
|
— |
|
|
|
— |
|
|
|
451,448 |
|
Total
trading
|
|
|
939,550 |
|
|
|
(89,875 |
) |
|
|
24,454 |
|
|
|
— |
|
|
|
— |
|
|
|
874,129 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
2,451,244 |
|
|
|
1,181,679 |
|
|
|
24,454 |
|
|
|
29,631 |
|
|
|
(288,012 |
) |
|
|
3,398,996 |
|
Total
Assets at fair value
|
|
$ |
2,793,584 |
|
|
$ |
1,059,762 |
|
|
$ |
43,273 |
|
|
$ |
40,886 |
|
|
$ |
(238,880 |
) |
|
$ |
3,698,625 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives(4)
|
|
$ |
(3,719 |
) |
|
$ |
— |
|
|
$ |
66 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(3,653 |
) |
Total
Liabilities at fair value
|
|
$ |
(3,719 |
) |
|
$ |
— |
|
|
$ |
66 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(3,653 |
) |
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale, at lower of cost or fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(139 |
) |
|
$ |
— |
|
|
$ |
28,644 |
|
|
$ |
28,505 |
|
REO
|
|
|
— |
|
|
|
(41,786 |
) |
|
|
— |
|
|
|
— |
|
|
|
41,786 |
|
|
|
— |
|
Total
Assets at fair value
|
|
$ |
— |
|
|
$ |
(41,786 |
) |
|
$ |
(139 |
) |
|
$ |
— |
|
|
$ |
70,430 |
|
|
$ |
28,505 |
|
(1)
|
Unrealized
gains are attributable to assets still held as of December 31, 2009 and
are recorded in gains/(losses) on trading
assets.
|
(2)
|
Includes
unrealized gains of approximately $8.3 million attributable to assets
still held as of December 31, 2009 that are recorded in gains/(losses) on
trading assets.
|
(3)
|
Includes
unrealized gains of $1.4 million attributable to assets still held as of
December 31, 2009 that are recorded in gains/(losses) on trading
assets.
|
(4)
|
Unrealized
gains are attributable to liabilities still held as of December 31, 2009
and are recorded in gains/(losses) on financial
derivatives.
|
Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2008
|
|
|
|
|
|
|
Purchases,
|
|
|
Realized and
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
|
|
|
Unrealized
|
|
|
Gains/(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances and
|
|
|
Gains/(Losses)
|
|
|
included in Other
|
|
|
Net
|
|
|
|
|
|
|
Beginning
|
|
|
Settlements,
|
|
|
included in
|
|
|
Comprehensive
|
|
|
Transfers In
|
|
|
Ending
|
|
|
|
Balance
|
|
|
net
|
|
|
Income
|
|
|
Income
|
|
|
and/or Out
|
|
|
Balance
|
|
|
|
(in thousands)
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed by Government guaranteed student
loans (1)
|
|
$ |
— |
|
|
$ |
62,406 |
|
|
$ |
— |
|
|
$ |
(15,373 |
) |
|
$ |
131,544 |
|
|
$ |
178,577 |
|
Floating
rate corporate debt securities
|
|
|
— |
|
|
|
400,000 |
|
|
|
— |
|
|
|
(669 |
) |
|
|
(399,331 |
) |
|
|
— |
|
Fixed
rate corporate debt securities
|
|
|
500,138 |
|
|
|
— |
|
|
|
— |
|
|
|
2,951 |
|
|
|
(503,089 |
) |
|
|
— |
|
Total
available-for-sale securities
|
|
|
500,138 |
|
|
|
462,406 |
|
|
|
— |
|
|
|
(13,091 |
) |
|
|
(770,876 |
) |
|
|
178,577 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities(2)
|
|
|
8,179 |
|
|
|
(939 |
) |
|
|
(5,029 |
) |
|
|
— |
|
|
|
— |
|
|
|
2,211 |
|
Fixed
rate mortgage-backed securities
|
|
|
415,813 |
|
|
|
29,367 |
|
|
|
13,846 |
|
|
|
— |
|
|
|
(459,026 |
) |
|
|
— |
|
Fixed
rate GSE preferred stock(2)
|
|
|
— |
|
|
|
(659 |
) |
|
|
(16,889 |
) |
|
|
— |
|
|
|
179,100 |
|
|
|
161,552 |
|
Total
trading
|
|
|
423,992 |
|
|
|
27,769 |
|
|
|
(8,072 |
) |
|
|
— |
|
|
|
(279,926 |
) |
|
|
163,763 |
|
Total
investment securities
|
|
|
924,130 |
|
|
|
490,175 |
|
|
|
(8,072 |
) |
|
|
(13,091 |
) |
|
|
(1,050,802 |
) |
|
|
342,340 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
338,958 |
|
|
|
(23,036 |
) |
|
|
— |
|
|
|
8,378 |
|
|
|
24,992 |
|
|
|
349,292 |
|
Farmer
Mac II
|
|
|
— |
|
|
|
41,856 |
|
|
|
— |
|
|
|
(12,869 |
) |
|
|
493,578 |
|
|
|
522,565 |
|
Rural
Utilities
|
|
|
— |
|
|
|
(270,000 |
) |
|
|
— |
|
|
|
7,417 |
|
|
|
902,420 |
|
|
|
639,837 |
|
Total
available-for-sale
|
|
|
338,958 |
|
|
|
(251,180 |
) |
|
|
— |
|
|
|
2,926 |
|
|
|
1,420,990 |
|
|
|
1,511,694 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II(3)
|
|
|
428,670 |
|
|
|
55,234 |
|
|
|
12,959 |
|
|
|
— |
|
|
|
— |
|
|
|
496,863 |
|
Rural
Utilities(2)
|
|
|
— |
|
|
|
(5,734 |
) |
|
|
(10,605 |
) |
|
|
— |
|
|
|
459,026 |
|
|
|
442,687 |
|
Total
trading
|
|
|
428,670 |
|
|
|
49,500 |
|
|
|
2,354 |
|
|
|
— |
|
|
|
459,026 |
|
|
|
939,550 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
767,628 |
|
|
|
(201,680 |
) |
|
|
2,354 |
|
|
|
2,926 |
|
|
|
1,880,016 |
|
|
|
2,451,244 |
|
Total
Assets at fair value
|
|
$ |
1,691,758 |
|
|
$ |
288,495 |
|
|
$ |
(5,718 |
) |
|
$ |
(10,165 |
) |
|
$ |
829,214 |
|
|
$ |
2,793,584 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Derivatives(4)
|
|
$ |
(1,106 |
) |
|
$ |
— |
|
|
$ |
(2,613 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(3,719 |
) |
Total
Liabilities at fair value
|
|
$ |
(1,106 |
) |
|
$ |
— |
|
|
$ |
(2,613 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(3,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
— |
|
|
$ |
(142,756 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
142,756 |
|
|
$ |
— |
|
(1)
|
Includes
the fair value of Farmer Mac's put rights related to $119.9 million (par
value) of its ARC holdings. See Note 4 to the consolidated
financial statements for more information related to these put
rights.
|
(2)
|
Unrealized
losses are attributable to assets still held as of December 31, 2008 and
are recorded in gains/(losses) on trading
assets.
|
(3)
|
Includes
unrealized gains of approximately $13.8 million attributable to assets
still held as of December 31, 2008 that are recorded in gains/(losses) on
trading assets.
|
(4)
|
Unrealized
losses are attributable to liabilities still held as of December 31, 2008
and are recorded in gains/(losses) on financial
derivatives.
|
Fair
Value Option
FASB
guidance on the fair value option for financial instruments 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 the FASB guidance, 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. Due
to the significant declines in the fair values of investment securities
attributable to the widening of credit spreads experienced during 2008, such
financial reporting offsets were not achieved. For 2008, Farmer Mac
recorded net losses on trading assets of $5.6 million for changes in fair
values of the assets selected for the fair value option. These losses
are presented as “Gains/(losses) on trading assets” in the consolidated
statements of operations.
During
fourth quarter 2008, Farmer Mac also elected to measure put rights related to
$119.9 million (par value) of its ARC holdings at fair value upon the
election of the fair value option. See Note 4 for more information
related to these put rights.
Farmer
Mac made no fair value option elections during 2009 and recorded gains of $42.9
million for changes in the fair value of the assets selected for the fair value
option during 2008. These gains are presented as “Gains/(losses) on
trading assets” in the 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 December 31,
2009 and 2008 in accordance with FASB guidance on disclosures about fair value
of financial instruments.
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
|
(in
thousands)
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
654,794 |
|
|
$ |
654,794 |
|
|
$ |
278,412 |
|
|
$ |
278,412 |
|
Investment
securities
|
|
|
1,131,895 |
|
|
|
1,131,895 |
|
|
|
1,235,859 |
|
|
|
1,235,859 |
|
Farmer
Mac Guaranteed Securities
|
|
|
3,398,996 |
|
|
|
3,398,996 |
|
|
|
2,451,244 |
|
|
|
2,451,244 |
|
Loans
|
|
|
779,185 |
|
|
|
753,720 |
|
|
|
789,613 |
|
|
|
774,596 |
|
Financial
derivatives
|
|
|
15,040 |
|
|
|
15,040 |
|
|
|
27,069 |
|
|
|
27,069 |
|
Interest
receivable
|
|
|
67,178 |
|
|
|
67,178 |
|
|
|
73,058 |
|
|
|
73,058 |
|
Guarantee
and commitment fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
|
14,591 |
|
|
|
15,896 |
|
|
|
20,434 |
|
|
|
19,232 |
|
Farmer
Mac Guaranteed Securities
|
|
|
36,135 |
|
|
|
39,120 |
|
|
|
36,071 |
|
|
|
41,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
|
3,665,282 |
|
|
|
3,662,898 |
|
|
|
3,773,430 |
|
|
|
3,757,099 |
|
Due
after one year
|
|
|
1,964,526 |
|
|
|
1,908,713 |
|
|
|
944,490 |
|
|
|
887,999 |
|
Financial
derivatives
|
|
|
107,367 |
|
|
|
107,367 |
|
|
|
181,183 |
|
|
|
181,183 |
|
Accrued
interest payable
|
|
|
39,562 |
|
|
|
39,562 |
|
|
|
40,470 |
|
|
|
40,470 |
|
Guarantee
and commitment obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
|
13,370 |
|
|
|
14,676 |
|
|
|
19,058 |
|
|
|
17,856 |
|
Farmer
Mac Guaranteed Securities
|
|
|
30,865 |
|
|
|
33,850 |
|
|
|
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.
14.
|
QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
|
|
|
2009 Quarter Ended
|
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
|
(in
thousands, except per share amounts)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
44,762 |
|
|
$ |
42,828 |
|
|
$ |
41,750 |
|
|
$ |
47,153 |
|
Interest
expense
|
|
|
21,992 |
|
|
|
23,031 |
|
|
|
21,849 |
|
|
|
23,713 |
|
Net
interest income
|
|
|
22,770 |
|
|
|
19,797 |
|
|
|
19,901 |
|
|
|
23,440 |
|
(Provision)/recovery
for loan losses
|
|
|
(1,914 |
) |
|
|
(3,098 |
) |
|
|
5,693 |
|
|
|
(3,534 |
) |
Net
interest income after (provision)/ recovery for loan
losses
|
|
|
20,856 |
|
|
|
16,699 |
|
|
|
25,594 |
|
|
|
19,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
|
8,319 |
|
|
|
8,168 |
|
|
|
7,908 |
|
|
|
7,410 |
|
Gains/(losses)
on financial derivatives
|
|
|
5,791 |
|
|
|
(7,733 |
) |
|
|
21,528 |
|
|
|
1,711 |
|
(Losses)/gains
on trading assets
|
|
|
(13,434 |
) |
|
|
25,047 |
|
|
|
35 |
|
|
|
31,625 |
|
Other-than-temporary
impairment losses
|
|
|
— |
|
|
|
(1,621 |
) |
|
|
(2,292 |
) |
|
|
(81 |
) |
Gains/(losses)
on sale of available-for-sale investment securities
|
|
|
440 |
|
|
|
63 |
|
|
|
(300 |
) |
|
|
3,150 |
|
Gains
on sale of loans and Farmer Mac Guaranteed Securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,581 |
|
Other
income
|
|
|
230 |
|
|
|
874 |
|
|
|
101 |
|
|
|
234 |
|
Non-interest
income
|
|
|
1,346 |
|
|
|
24,798 |
|
|
|
26,980 |
|
|
|
45,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
7,043 |
|
|
|
6,132 |
|
|
|
6,525 |
|
|
|
9,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
15,159 |
|
|
|
35,365 |
|
|
|
46,049 |
|
|
|
55,544 |
|
Income
tax expense
|
|
|
4,796 |
|
|
|
13,097 |
|
|
|
16,534 |
|
|
|
18,090 |
|
Net
income
|
|
|
10,363 |
|
|
|
22,268 |
|
|
|
29,515 |
|
|
|
37,454 |
|
Preferred
stock dividends
|
|
|
(4,868 |
) |
|
|
(4,368 |
) |
|
|
(4,130 |
) |
|
|
(3,936 |
) |
Net
income available to common stockholders
|
|
$ |
5,495 |
|
|
$ |
17,900 |
|
|
$ |
25,385 |
|
|
$ |
33,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.54 |
|
|
$ |
1.77 |
|
|
$ |
2.50 |
|
|
$ |
3.31 |
|
Diluted
earnings per common share
|
|
$ |
0.53 |
|
|
$ |
1.74 |
|
|
$ |
2.49 |
|
|
$ |
3.31 |
|
Common
stock dividends per common share
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
|
2008 Quarter Ended
|
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
|
(in
thousands, except per share amounts)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
56,191 |
|
|
$ |
60,583 |
|
|
$ |
66,812 |
|
|
$ |
72,109 |
|
Interest
expense
|
|
|
31,095 |
|
|
|
39,260 |
|
|
|
42,454 |
|
|
|
54,171 |
|
Net
interest income
|
|
|
25,096 |
|
|
|
21,323 |
|
|
|
24,358 |
|
|
|
17,938 |
|
Provision
for loan losses
|
|
|
(13,800 |
) |
|
|
(731 |
) |
|
|
— |
|
|
|
— |
|
Net
interest income after provision for loan losses
|
|
|
11,296 |
|
|
|
20,592 |
|
|
|
24,358 |
|
|
|
17,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(loss)/income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
|
7,807 |
|
|
|
7,281 |
|
|
|
6,659 |
|
|
|
6,634 |
|
(Losses)/gains
on financial derivatives
|
|
|
(100,712 |
) |
|
|
(19,021 |
) |
|
|
31,050 |
|
|
|
(41,720 |
) |
Gains/(losses)
on trading assets
|
|
|
11,025 |
|
|
|
(14,507 |
) |
|
|
(17,268 |
) |
|
|
10,111 |
|
Other-than-temporary
impairment losses
|
|
|
(3,788 |
) |
|
|
(97,108 |
) |
|
|
(5,344 |
) |
|
|
— |
|
Gains/(losses)
on sale of available-for-sale investment securities
|
|
|
251 |
|
|
|
(85 |
) |
|
|
150 |
|
|
|
— |
|
(Losses)/gains
on sale of loans and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac Guaranteed Securities
|
|
|
(22 |
) |
|
|
1,531 |
|
|
|
— |
|
|
|
— |
|
Gains
on the repurchase of debt
|
|
|
24 |
|
|
|
840 |
|
|
|
— |
|
|
|
— |
|
Other
income
|
|
|
98 |
|
|
|
192 |
|
|
|
662 |
|
|
|
461 |
|
Non-interest
(loss)/income
|
|
|
(85,317 |
) |
|
|
(120,877 |
) |
|
|
15,909 |
|
|
|
(24,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
11,405 |
|
|
|
8,246 |
|
|
|
6,721 |
|
|
|
6,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income
before income taxes
|
|
|
(85,426 |
) |
|
|
(108,531 |
) |
|
|
33,546 |
|
|
|
(12,816 |
) |
Income
tax (benefit)/expense
|
|
|
(26,327 |
) |
|
|
(2,973 |
) |
|
|
11,555 |
|
|
|
(5,119 |
) |
Net
(loss)/income
|
|
|
(59,099 |
) |
|
|
(105,558 |
) |
|
|
21,991 |
|
|
|
(7,697 |
) |
Preferred
stock dividends
|
|
|
(2,019 |
) |
|
|
(578 |
) |
|
|
(560 |
) |
|
|
(560 |
) |
Net
(loss)/income available to common stockholders (1)
|
|
$ |
(61,118 |
) |
|
$ |
(106,136 |
) |
|
$ |
21,431 |
|
|
$ |
(8,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss)/earnings per common share
|
|
$ |
(6.03 |
) |
|
$ |
(10.55 |
) |
|
$ |
2.15 |
|
|
$ |
(0.84 |
) |
Diluted
(loss)/earnings per common share
|
|
$ |
(6.03 |
) |
|
$ |
(10.55 |
) |
|
$ |
2.13 |
|
|
$ |
(0.84 |
) |
Common
stock dividends per common share
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
(1)
The net
losses to common stockholders during the first, third and fourth quarters of
2008 are primarily driven by unrealized fair value losses recognized on
financial derivatives and other-than-temporary impairment losses resulting from
Farmer Mac's investment in Fannie Mae Preferred Stock and Lehman Brothers
Holding Inc. corporate debt securities.
Formation
of Subsidiary and Preferred Stock Issuance
On
January 25, 2010, Farmer Mac announced the completion of a private offering of
securities consisting of $250.0 million aggregate face amount of Farm Asset
Linked Capital Securities (the “FALConS”) issued by FALConS Trust I, a newly
formed Delaware statutory trust (the “Trust”). The FALConS represent undivided
beneficial ownership interests in 250,000 shares of Non-Cumulative Perpetual
Preferred Stock (the “Company Preferred Stock”) of Farmer Mac’s subsidiary,
Farmer Mac II LLC, a newly formed Delaware limited liability
company. The Company Preferred Stock has a liquidation preference of
$1,000 per share.
The
$250.0 million of proceeds from the offering of the FALConS were used by the
Trust to purchase the Company Preferred Stock from Farmer Mac. Farmer
Mac II LLC issued its Company Preferred Stock and its common equity interest to
Farmer Mac as consideration for the contribution by Farmer Mac to Farmer Mac II
LLC of substantially all of the assets, in excess of $1.1 billion,
comprising the Farmer Mac II program business. Farmer Mac used
the proceeds from the sale of the Company Preferred Stock to the Trust to
repurchase and retire Farmer Mac’s outstanding Series B Preferred Stock, which
had an aggregate liquidation preference of $150.0 million, and for general
corporate purposes.
The
assets that Farmer Mac contributed to Farmer Mac II LLC in January 2010
consisted primarily of USDA-guaranteed portions that had not been securitized by
Farmer Mac (i.e., transferred to a trust whereby Farmer Mac II Guaranteed
Securities were issued) but also included $35.0 million of Farmer Mac II
Guaranteed Securities as well as certain intangible assets used in the operation
of the Farmer Mac II program. Farmer Mac did not guarantee the timely
payment of principal and interest on the $1.1 billion of contributed
USDA-guaranteed portions, which had previously been presented as Farmer Mac II
Guaranteed Securities on the consolidated financial statements of Farmer
Mac.
Going
forward, Farmer Mac II LLC will operate substantially all of the business
related to the Farmer Mac II program (primarily the acquisition of
USDA-guaranteed portions), which Farmer Mac has operated since
1992. In the future, Farmer Mac will no longer purchase and hold
USDA-guaranteed portions and will operate only that part of the Farmer Mac II
program that involves the transfer of USDA-guaranteed portions to trusts and the
issuance of Farmer Mac II Guaranteed Securities, and will only do so to the
extent that Farmer Mac is approached or referred by an
investor. Farmer Mac will not issue Farmer Mac II Guaranteed
Securities to Farmer Mac II LLC in the future. Both “USDA-guaranteed
portions” and “Farmer Mac II Guaranteed Securities” will be presented in the
consolidated financial statements of Farmer Mac beginning in 2010.
Dividends
on the Company Preferred Stock will be payable if, when and as declared by
Farmer Mac II LLC’s board of directors, quarterly, on a non-cumulative basis, on
March 30, June 30, September 30, and December 30, of each year, commencing on
March 30, 2010. For each quarterly period from the date of issuance
of the FALConS to but excluding the payment date occurring on March 30, 2015,
the dividend rate on the Company Preferred Stock will be 8.875 percent per
annum. For each quarterly period from March 30, 2015 to but excluding
the payment date occurring on March 30, 2020, the dividend rate on the Company
Preferred Stock will be 10.875 percent per annum. For each quarterly
period beginning on March 30, 2020, the dividend rate on the Company Preferred
Stock will be an annual rate equal to three-month LIBOR plus 8.211
percent. Dividends on the Company Preferred Stock will be
non-cumulative, so dividends that are not declared for a payment date will not
accrue. The FALConS and the Company Preferred Stock are perpetual and
have no maturity date, and holders of the FALConS have no redemption
rights. The Company Preferred Stock will be permanent equity of
Farmer Mac II LLC and presented as “Non-controlling interest – preferred stock”
within permanent equity on the consolidated balance sheets of Farmer Mac
beginning in 2010.
On March
10, 2010, Farmer Mac II LLC’s board of directors declared a dividend of $16.02
per share on the Company Preferred Stock, which represents 8.875% per annum on
the liquidation preference of $1,000 per share from and including January 25,
2010 to but excluding March 30, 2010 (on the basis of a 360-day year
comprised of twelve 30-day months). The dividend will be paid on
March 30, 2010 to holders of record as of March 15, 2010.
The
Reserve Primary Fund
As of
December 31, 2009, Farmer Mac had an investment of $5.3 million in The Reserve
Primary Fund (the “Fund”), which is presented in “Prepaid expenses and other
assets” in the consolidated balance sheets. The Fund is a money
market fund that suspended redemptions and is being liquidated. The
Fund adopted a plan for the orderly liquidation of its assets, subject to the
supervision of the SEC. Farmer Mac received a distribution of $4.8
million from the Fund in January 2010, reducing the amount receivable from the
Fund to $0.5 million. Farmer Mac will continue to monitor
developments with respect to the recovery of its remaining investment in the
Fund.
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
None.
Item
9A.
|
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 Exchange Act,
including this Annual Report on Form 10-K, 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 and Chief Financial Officer, 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 December 31, 2009. Based on management’s assessment, the Chief
Executive Officer and the Chief Financial Officer have concluded that Farmer
Mac’s disclosure controls and procedures were effective as of December 31,
2009.
See Item
8 above for management’s report on internal control over financial reporting and
the accompanying report of independent registered public accounting
firm.
(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
December 31, 2009 that have materially affected, or are reasonably likely to
materially affect, Farmer Mac’s internal control over financial
reporting.
Item
9B.
|
Other
Information
|
None.
PART
III
Item
10.
|
Directors,
Executive Officers and Corporate
Governance
|
Farmer
Mac has adopted a Code of Business Conduct and Ethics (the “Code”) that applies
to all directors, officers, employees and agents of Farmer Mac, including Farmer
Mac’s principal executive officer, principal financial officer, principal
accounting officer and other senior financial officers. A copy of the
Code is available in the “Investors—Corporate Governance” section of Farmer
Mac’s internet website (www.farmermac.com). Farmer Mac will post any
amendment to, or waiver from, a provision of the Code in that same section of
its internet website. A print copy of the Code is available free of
charge upon written request to Farmer Mac’s Corporate Secretary.
Additional
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 28,
2010.
Item
11.
|
Executive
Compensation
|
The
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 28,
2010.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 28,
2010.
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 28,
2010.
Item
14.
|
Principal
Accountant Fees and Services
|
The
information required by this item is incorporated by reference to the
Corporation’s definitive proxy statement to be filed on or about April 28,
2010.
PART
IV
Item
15.
|
Exhibits
and Financial Statement Schedules
|
|
(a) (1)
|
Financial
Statements.
|
Refer to
Item 8 above.
|
(2)
|
Financial
Statement Schedules.
|
All
schedules are omitted since they are not applicable, not required or the
information required to be set forth therein is included in the consolidated
financial statements or in notes thereto.
*
|
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).
|
*
|
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.
|
*
|
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 (Form 10-Q filed November
9, 2009).
|
|
|
|
|
†*
|
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).
|
|
|
|
|
†*
|
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 (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 (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).
|
*
|
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.
|
†*
|
10.5
|
-
|
Compiled
Amended and Restated Employment Contract dated June 5, 2008 between Mary
K. Waters and the Registrant (Form 10-Q filed August 12,
2008).
|
|
|
|
|
|
10.6
|
-
|
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).
|
|
|
|
|
*#
|
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).
|
*
|
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.
|
*
|
10.13.2
|
-
|
Amendment
No. 2 dated as of September 1, 2002 to Long Term Standby Commitment to
Purchase dated as of August 1, 1998, as amended by Amendment No. 1 dated
as of January 1, 2000, between AgFirst Farm Credit Bank and the Registrant
(Form 10-Q filed November 14, 2002).
|
|
|
|
|
*
|
10.14
|
-
|
Lease
Agreement, dated June 28, 2001 between EOP – Two Lafayette, L.L.C. and the
Registrant (Previously filed as Exhibit 10.10 to Form 10-K filed March 27,
2002).
|
|
|
|
|
*#
|
10.15
|
-
|
Long
Term Standby Commitment to Purchase dated as of August 1, 2007 between
Farm Credit Bank of Texas and the Registrant (Previously filed as Exhibit
10.20 to Form 10-Q filed November 8, 2007).
|
|
|
|
|
*#
|
10.16
|
-
|
Long
Term Standby Commitment to Purchase dated as of June 1, 2003 between Farm
Credit Bank of Texas and the Registrant (Form 10-Q filed November 9,
2004).
|
|
|
|
|
*#
|
10.16.1
|
-
|
Amendment
No. 1 dated as of December 8, 2006 to Long Term Standby Commitment to
Purchase dated as of June 1, 2003 between Farm Credit Bank of Texas and
the Registrant (Form 10-K filed March 15, 2007).
|
|
|
|
|
*#
|
10.17
|
-
|
Central
Servicer Delinquent Loan Servicing Transfer Agreement dated as of July 1,
2004 between AgFirst Farm Credit Bank and the Registrant (Form 10-Q filed
November 9, 2004).
|
|
|
|
|
†*
|
10.18
|
-
|
Form
of Indemnification Agreement for Directors (Previously filed as Exhibit
10.1 to Form 8-K filed April 9, 2008).
|
|
|
|
|
†*
|
10.19
|
-
|
Description
of compensation agreement between the Registrant and its directors (Form
10-Q filed August 9, 2007).
|
|
|
|
|
†*
|
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
|
-
|
List
of the Registrant’s
subsidiaries.
|
*
|
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.
|
**
|
31.1
|
-
|
Certification
of Chief Executive Officer relating to the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 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 Annual Report on
Form 10-K for the year ended December 31, 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 Annual Report on Form 10-K for the year ended December 31,
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
/s/ Michael A. Gerber
|
|
March 16, 2010
|
By:
|
Michael
A. Gerber
|
|
Date
|
|
President
and
|
|
|
|
Chief
Executive Officer
|
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Lowell L. Junkins
|
|
Acting
Chairman of the Board and
|
|
March
16, 2010
|
Lowell
L. Junkins
|
|
Director
|
|
|
|
|
|
|
|
/s/ Michael A. Gerber
|
|
President
and Chief Executive
|
|
March
16, 2010
|
Michael
A. Gerber
|
|
Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/ Timothy L. Buzby
|
|
Vice
President – Chief Financial
|
|
March
16, 2010
|
Timothy
L. Buzby
|
|
Officer
and Treasurer
(Principal
Financial and
Accounting
Officer)
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Julia Bartling
|
|
Director
|
|
March
16, 2010
|
Julia
Bartling
|
|
|
|
|
|
|
|
|
|
/s/ Dennis L. Brack
|
|
Director
|
|
March
16, 2010
|
Dennis
L. Brack
|
|
|
|
|
|
|
|
|
|
/s/ Grace T. Daniel
|
|
Director
|
|
March
16, 2010
|
Grace
T. Daniel
|
|
|
|
|
|
|
|
|
|
/s/ Paul A. DeBriyn
|
|
Director
|
|
March
16, 2010
|
Paul
A. DeBriyn
|
|
|
|
|
|
|
|
|
|
/s/ James R. Engebretsen
|
|
Director
|
|
March
16, 2010
|
James
R. Engebretsen
|
|
|
|
|
|
|
|
|
|
/s/ Dennis A. Everson
|
|
Director
|
|
March
16, 2010
|
Dennis
A. Everson
|
|
|
|
|
|
|
|
|
|
/s/ Ernest M. Hodges
|
|
Director
|
|
March
16, 2010
|
Ernest
M. Hodges
|
|
|
|
|
|
|
|
|
|
/s/ Brian P. Jackson
|
|
Director
|
|
March
16, 2010
|
Brian
P. Jackson
|
|
|
|
|
|
|
|
|
|
/s/ Mitchell A. Johnson
|
|
Director
|
|
March
16, 2010
|
Mitchell
A. Johnson
|
|
|
|
|
|
|
|
|
|
/s/ Glen O. Klippenstein
|
|
Director
|
|
March
16, 2010
|
Glen
O. Klippenstein
|
|
|
|
|
|
|
|
|
|
/s/ Clark B. Maxwell
|
|
Director
|
|
March
16, 2010
|
Clark
B. Maxwell
|
|
|
|
|
|
|
|
|
|
/s/ Brian J. O’Keane
|
|
Director
|
|
March
16, 2010
|
Brian
J. O’Keane
|
|
|
|
|
|
|
|
|
|
/s/ John Dan Raines, Jr.
|
|
Director
|
|
March
16, 2010
|
John
Dan Raines, Jr.
|
|
|
|
|