Unassociated Document
As filed
with the Securities and Exchange Commission on May 10, 2010
SECURITIES
AND EXCHANGE COMMISSION
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2010
Commission
File Number 001-14951
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION
|
(Exact
name of registrant as specified in its
charter)
|
Federally
chartered instrumentality
|
|
|
of
the United States
|
|
52-1578738
|
(State
or other jurisdiction of
|
|
(I.R.S.
employer identification number)
|
incorporation
or organization)
|
|
|
|
|
|
1133
Twenty-First Street, N.W., Suite 600
|
|
|
Washington,
D.C.
|
|
20036
|
(Address
of principal executive offices)
|
|
(Zip
code)
|
(202)
872-7700
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Indicate
by check mark whether the registrant 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).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
|
¨
|
Accelerated
filer ¨ |
|
|
|
|
Non-accelerated
filer
|
x
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
As of May
3, 2010 the registrant had 1,030,780 shares of Class A Voting Common
Stock, 500,301 shares of Class B Voting Common Stock and 8,614,980
shares of Class C Non-Voting Common Stock outstanding.
PART
I - FINANCIAL INFORMATION
Item
1.
|
Condensed Consolidated
Financial Statements
|
The
following information concerning Farmer Mac’s interim unaudited condensed
consolidated financial statements is included in this report beginning on the
pages listed below:
Condensed
Consolidated Balance Sheets as of March 31, 2010 and December 31,
2009
|
|
|
3 |
Condensed
Consolidated Statements of Operations for the three months ended March 31,
2010 and 2009
|
|
|
4 |
Condensed
Consolidated Statements of Equity for the three months ended March 31,
2010 and 2009
|
|
|
5 |
Condensed
Consolidated Statements of Cash Flows for the three months ended March 31,
2010 and 2009
|
|
|
6 |
Notes
to Condensed Consolidated Financial Statements
|
|
|
7 |
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
418,211 |
|
|
$ |
654,794 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
1,198,374 |
|
|
|
1,041,923 |
|
Trading,
at fair value
|
|
|
82,826 |
|
|
|
89,972 |
|
Total
investment securities
|
|
|
1,281,200 |
|
|
|
1,131,895 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
1,793,927 |
|
|
|
2,524,867 |
|
Trading,
at fair value
|
|
|
- |
|
|
|
874,129 |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
1,793,927 |
|
|
|
3,398,996 |
|
USDA
Guaranteed Securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
781,823 |
|
|
|
- |
|
Trading,
at fair value
|
|
|
407,844 |
|
|
|
- |
|
Total
USDA Guaranteed Securities
|
|
|
1,189,667 |
|
|
|
- |
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
held for sale, at lower of cost or fair value
|
|
|
758,437 |
|
|
|
666,534 |
|
Loans
held for investment, at amortized cost
|
|
|
90,823 |
|
|
|
93,478 |
|
Loans
held for investment in consolidated trusts, at amortized
cost
|
|
|
1,789,026 |
|
|
|
- |
|
Allowance
for loan losses
|
|
|
(9,142 |
) |
|
|
(6,292 |
) |
Total
loans, net of allowance
|
|
|
2,629,144 |
|
|
|
753,720 |
|
Real
estate owned, at lower of cost or fair value
|
|
|
3,132 |
|
|
|
739 |
|
Financial
derivatives, at fair value
|
|
|
21,170 |
|
|
|
15,040 |
|
Interest
receivable
|
|
|
64,794 |
|
|
|
67,178 |
|
Guarantee
and commitment fees receivable
|
|
|
34,195 |
|
|
|
55,016 |
|
Deferred
tax asset, net
|
|
|
20,081 |
|
|
|
24,146 |
|
Prepaid
expenses and other assets
|
|
|
23,644 |
|
|
|
37,289 |
|
Total
Assets
|
|
$ |
7,479,165 |
|
|
$ |
6,138,813 |
|
|
|
|
|
|
|
|
|
|
Liabilities,
Mezzanine Equity and Equity:
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
3,404,475 |
|
|
$ |
3,662,898 |
|
Due
after one year
|
|
|
2,082,578 |
|
|
|
1,908,713 |
|
Total
notes payable
|
|
|
5,487,053 |
|
|
|
5,571,611 |
|
Debt
securities of consolidated trusts held by third parties
|
|
|
1,337,331 |
|
|
|
- |
|
Financial
derivatives, at fair value
|
|
|
110,602 |
|
|
|
107,367 |
|
Accrued
interest payable
|
|
|
47,530 |
|
|
|
39,562 |
|
Guarantee
and commitment obligation
|
|
|
31,039 |
|
|
|
48,526 |
|
Accounts
payable and accrued expenses
|
|
|
12,094 |
|
|
|
23,445 |
|
Reserve
for losses
|
|
|
6,427 |
|
|
|
7,895 |
|
Total
Liabilities
|
|
|
7,032,076 |
|
|
|
5,798,406 |
|
Mezzanine
Equity:
|
|
|
|
|
|
|
|
|
Series
B redeemable preferred stock, par value $1,000, per share 150,000 shares
authorized, issued and outstanding as of December 31, 2009 (redemption
value $150,000,000)
|
|
|
- |
|
|
|
144,216 |
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
Series
C, par value $1,000 per share, 100,000 shares authorized, 57,578 issued
and outstanding as of March 31, 2010 and December 31, 2009
|
|
|
57,578 |
|
|
|
57,578 |
|
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
|
|
|
8,613 |
|
|
|
8,611 |
|
Additional
paid-in capital
|
|
|
97,861 |
|
|
|
97,090 |
|
Accumulated
other comprehensive income
|
|
|
7,587 |
|
|
|
3,254 |
|
Retained
earnings
|
|
|
32,066 |
|
|
|
28,127 |
|
Total
Stockholders' Equity
|
|
|
205,236 |
|
|
|
196,191 |
|
Non-controlling
interest - preferred stock
|
|
|
241,853 |
|
|
|
- |
|
Total
Equity
|
|
|
447,089 |
|
|
|
196,191 |
|
Total
Liabilities, Mezzanine Equity and Equity
|
|
$ |
7,479,165 |
|
|
$ |
6,138,813 |
|
See
accompanying notes to condensed consolidated financial
statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
(in
thousands, except per share amounts)
|
|
Interest
income:
|
|
|
|
|
|
|
Investments
and cash equivalents
|
|
$ |
6,483 |
|
|
$ |
8,909 |
|
Farmer
Mac and USDA Guaranteed Securities
|
|
|
20,831 |
|
|
|
27,759 |
|
Loans
|
|
|
33,418 |
|
|
|
10,485 |
|
Total
interest income
|
|
|
60,732 |
|
|
|
47,153 |
|
Total
interest expense
|
|
|
37,115 |
|
|
|
23,713 |
|
Net
interest income
|
|
|
23,617 |
|
|
|
23,440 |
|
Provision
for loan losses
|
|
|
(2,850 |
) |
|
|
(3,534 |
) |
Net
interest income after provision for loan losses
|
|
|
20,767 |
|
|
|
19,906 |
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
|
5,919 |
|
|
|
7,410 |
|
(Losses)/gains
on financial derivatives
|
|
|
(5,804 |
) |
|
|
1,711 |
|
Gains
on trading assets
|
|
|
3,367 |
|
|
|
31,625 |
|
Other-than-temporary
impairment losses
|
|
|
- |
|
|
|
(81 |
) |
Gains
on sale of available-for-sale investment securities
|
|
|
240 |
|
|
|
3,150 |
|
Gains
on sale of loans and Farmer Mac Guaranteed Securities
|
|
|
- |
|
|
|
1,581 |
|
Lower
of cost or fair value adjustment on loans held for sale
|
|
|
(2,274 |
) |
|
|
- |
|
Other
income
|
|
|
829 |
|
|
|
234 |
|
Non-interest
income
|
|
|
2,277 |
|
|
|
45,630 |
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
3,511 |
|
|
|
4,025 |
|
General
and administrative
|
|
|
2,503 |
|
|
|
2,914 |
|
Regulatory
fees
|
|
|
563 |
|
|
|
513 |
|
Real
estate owned operating costs
|
|
|
10 |
|
|
|
21 |
|
(Recoveries)/provision
for losses
|
|
|
(1,468 |
) |
|
|
2,519 |
|
Non-interest
expense
|
|
|
5,119 |
|
|
|
9,992 |
|
Income
before income taxes
|
|
|
17,925 |
|
|
|
55,544 |
|
Income
tax expense
|
|
|
4,336 |
|
|
|
18,090 |
|
Net
income
|
|
|
13,589 |
|
|
|
37,454 |
|
Less:
Net income attributable to non-controlling interest - preferred stock
dividends
|
|
|
(4,068 |
) |
|
|
- |
|
Net
income attributable to Farmer Mac
|
|
|
9,521 |
|
|
|
37,454 |
|
Preferred
stock dividends
|
|
|
(1,970 |
) |
|
|
(3,936 |
) |
Loss
on retirement of preferred stock
|
|
|
(5,784 |
) |
|
|
- |
|
Net
income available to common stockholders
|
|
$ |
1,767 |
|
|
$ |
33,518 |
|
|
|
|
|
|
|
|
|
|
Earnings
per common share and dividends:
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.17 |
|
|
$ |
3.31 |
|
Diluted
earnings per common share
|
|
$ |
0.17 |
|
|
$ |
3.31 |
|
Common
stock dividends per common share
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
See
accompanying notes to condensed consolidated financial
statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(in
thousands)
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
58 |
|
|
$ |
57,578 |
|
|
|
9 |
|
|
$ |
9,200 |
|
Issuance
of Series C preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
11 |
|
|
|
10,800 |
|
Balance,
end of period
|
|
|
58 |
|
|
$ |
57,578 |
|
|
|
20 |
|
|
$ |
20,000 |
|
Common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
10 |
|
|
$ |
10,142 |
|
|
|
10 |
|
|
$ |
10,132 |
|
Issuance
of Class C common stock
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
3 |
|
Balance,
end of period
|
|
|
10 |
|
|
$ |
10,144 |
|
|
|
10 |
|
|
$ |
10,135 |
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
|
|
|
$ |
97,090 |
|
|
|
|
|
|
$ |
95,572 |
|
Stock-based
compensation expense
|
|
|
|
|
|
|
760 |
|
|
|
|
|
|
|
654 |
|
Issuance
of Class C common stock
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
6 |
|
Expiration
of stock options
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(1,159 |
) |
Balance,
end of period
|
|
|
|
|
|
$ |
97,861 |
|
|
|
|
|
|
$ |
95,073 |
|
Retained
earnings/(accumulated deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
|
|
|
$ |
28,127 |
|
|
|
|
|
|
$ |
(52,144 |
) |
Net
income attributable to Farmer Mac
|
|
|
|
|
|
|
9,521 |
|
|
|
|
|
|
|
37,454 |
|
Cash
dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, Series B ($8.33 per share)
|
|
|
|
|
|
|
(1,250 |
) |
|
|
|
|
|
|
(3,726 |
) |
Preferred
stock, Series C ($12.50 per share)
|
|
|
|
|
|
|
(720 |
) |
|
|
|
|
|
|
(210 |
) |
Common
stock ($0.05 per share)
|
|
|
|
|
|
|
(507 |
) |
|
|
|
|
|
|
(507 |
) |
Loss
on retirement of preferred stock
|
|
|
|
|
|
|
(5,784 |
) |
|
|
|
|
|
|
- |
|
Cumulative
effect of adoption of new accounting standard, net of tax
|
|
|
|
|
|
|
2,679 |
|
|
|
|
|
|
|
- |
|
Balance,
end of period
|
|
|
|
|
|
$ |
32,066 |
|
|
|
|
|
|
$ |
(19,133 |
) |
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
|
|
|
$ |
3,254 |
|
|
|
|
|
|
$ |
(47,412 |
) |
Change
in unrealized gain on available-for-sale securities, net of tax and
reclassification adjustments
|
|
|
|
|
|
|
4,310 |
|
|
|
|
|
|
|
1,764 |
|
Change
in unrealized gain on financial derivatives, net of tax and
reclassification adjustments
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
39 |
|
Balance,
end of period
|
|
|
|
|
|
$ |
7,587 |
|
|
|
|
|
|
$ |
(45,609 |
) |
Total
Stockholders' Equity
|
|
|
|
|
|
$ |
205,236 |
|
|
|
|
|
|
$ |
60,466 |
|
Non-controlling
interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
|
|
|
$ |
- |
|
|
|
|
|
|
$ |
- |
|
Preferred
stock - Farmer Mac II LLC
|
|
|
|
|
|
|
241,853 |
|
|
|
|
|
|
|
- |
|
Balance,
end of period
|
|
|
|
|
|
$ |
241,853 |
|
|
|
|
|
|
$ |
- |
|
Total
Equity
|
|
|
|
|
|
$ |
447,089 |
|
|
|
|
|
|
$ |
60,466 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
$ |
13,589 |
|
|
|
|
|
|
$ |
37,454 |
|
Changes
in accumulated other comprehensive income, net of tax
|
|
|
|
|
|
|
4,333 |
|
|
|
|
|
|
|
1,803 |
|
Comprehensive
income
|
|
|
|
|
|
|
17,922 |
|
|
|
|
|
|
|
39,257 |
|
Less:
Comprehensive income attributable to non-controlling
interest
|
|
|
|
|
|
|
4,068 |
|
|
|
|
|
|
|
- |
|
Total
Comprehensive income attributable to Farmer Mac
|
|
|
|
|
|
$ |
13,854 |
|
|
|
|
|
|
$ |
39,257 |
|
See
accompanying notes to condensed consolidated financial
statements.
FEDERAL
AGRICULTURAL MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
(in
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
13,589 |
|
|
$ |
37,454 |
|
Adjustments
to reconcile net income to net cash (used in)/provided by operating
activities:
|
|
|
|
|
|
|
|
|
Net
amortization of premiums and discounts on loans, investments, and Farmer
Mac and USDA Guaranteed Securities
|
|
|
1,632 |
|
|
|
1,228 |
|
Amortization
of debt premiums, discounts and issuance costs
|
|
|
1,362 |
|
|
|
4,826 |
|
Proceeds
from repayment and sale of trading investment securities
|
|
|
236 |
|
|
|
268 |
|
Purchases
of loans held for sale
|
|
|
(127,740 |
) |
|
|
(15,144 |
) |
Proceeds
from repayment of loans held for sale
|
|
|
32,963 |
|
|
|
1,538 |
|
Net
change in fair value of trading securities and financial
derivatives
|
|
|
(6,262 |
) |
|
|
(46,617 |
) |
Amortization
of transition adjustment on financial derivatives
|
|
|
34 |
|
|
|
39 |
|
Other-than-temporary
impairment losses
|
|
|
- |
|
|
|
81 |
|
Gains
on sale of loans and Farmer Mac Guaranteed Securities
|
|
|
- |
|
|
|
(1,581 |
) |
Gains
on the sale of available-for-sale investments securities
|
|
|
(240 |
) |
|
|
(3,150 |
) |
Total
provision for losses
|
|
|
1,382 |
|
|
|
6,053 |
|
Deferred
income taxes
|
|
|
289 |
|
|
|
13,290 |
|
Stock-based
compensation expense
|
|
|
760 |
|
|
|
654 |
|
Decrease
in interest receivable
|
|
|
2,384 |
|
|
|
26,119 |
|
Decrease
in guarantee and commitment fees receivable
|
|
|
20,821 |
|
|
|
4,770 |
|
Decrease
in other assets
|
|
|
15,922 |
|
|
|
25,753 |
|
Increase/(decrease)
in accrued interest payable
|
|
|
7,968 |
|
|
|
(5,649 |
) |
Decrease
in other liabilities
|
|
|
(19,931 |
) |
|
|
(9,843 |
) |
Net
cash (used in)/provided by operating activities
|
|
|
(54,831 |
) |
|
|
40,089 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of available-for-sale investment securities
|
|
|
(284,149 |
) |
|
|
- |
|
Purchases
of Farmer Mac Guaranteed Securities
|
|
|
(93,197 |
) |
|
|
(352,078 |
) |
Purchases
of loans held for investment
|
|
|
(9,226 |
) |
|
|
(14,670 |
) |
Purchases
of defaulted loans
|
|
|
(2,490 |
) |
|
|
(5,030 |
) |
Proceeds
from repayment of available-for-sale investment securities
|
|
|
57,766 |
|
|
|
82,531 |
|
Proceeds
from repayment of Farmer Mac Guaranteed Securities
|
|
|
56,912 |
|
|
|
67,277 |
|
Proceeds
from repayment of loans held for investment
|
|
|
84,464 |
|
|
|
34,034 |
|
Proceeds
from sale of available-for-sale investment securities
|
|
|
69,175 |
|
|
|
128,400 |
|
Proceeds
from sale of trading securities - fair value option
|
|
|
5,013 |
|
|
|
- |
|
Proceeds
from sale of Farmer Mac Guaranteed Securities
|
|
|
6,724 |
|
|
|
17,124 |
|
Proceeds
from sale of loans
|
|
|
763 |
|
|
|
358,953 |
|
Net
cash (used in)/provided by investing activities
|
|
|
(108,245 |
) |
|
|
316,541 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of discount notes
|
|
|
14,970,627 |
|
|
|
16,997,175 |
|
Proceeds
from issuance of medium-term notes
|
|
|
339,653 |
|
|
|
919,427 |
|
Payments
to redeem discount notes
|
|
|
(15,099,610 |
) |
|
|
(17,111,209 |
) |
Payments
to redeem medium-term notes
|
|
|
(296,590 |
) |
|
|
(1,163,000 |
) |
Payment
to third parties on debt securities of consolidated trusts
|
|
|
(72,971 |
) |
|
|
- |
|
Proceeds
from common stock issuance
|
|
|
13 |
|
|
|
9 |
|
Issuance
costs on retirement of preferred stock
|
|
|
(5,784 |
) |
|
|
- |
|
Proceeds
from preferred stock issuance - Farmer Mac II LLC
|
|
|
241,853 |
|
|
|
- |
|
Proceeds
from preferred stock issuance
|
|
|
- |
|
|
|
10,800 |
|
Retirement
of Series B Preferred stock
|
|
|
(144,216 |
) |
|
|
- |
|
Dividends
paid - Non-controlling interest - preferred stock
|
|
|
(4,005 |
) |
|
|
- |
|
Dividends
paid on common and preferred stock
|
|
|
(2,477 |
) |
|
|
(4,443 |
) |
Net
cash used in financing activities
|
|
|
(73,507 |
) |
|
|
(351,241 |
) |
Net
(decrease)/increase in cash and cash equivalents
|
|
|
(236,583 |
) |
|
|
5,389 |
|
Cash
and cash equivalents at beginning of period
|
|
|
654,794 |
|
|
|
278,412 |
|
Cash
and cash equivalents at end of period
|
|
$ |
418,211 |
|
|
$ |
283,801 |
|
See
accompanying notes to condensed consolidated financial
statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
1.
|
Accounting
Policies
|
The
interim unaudited condensed consolidated financial statements of the Federal
Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) and
subsidiaries have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”). These interim
unaudited condensed consolidated financial statements reflect all normal and
recurring adjustments that are, in the opinion of management, necessary to
present a fair statement of the financial condition and the results of
operations and cash flows of Farmer Mac for the interim periods
presented. Certain information and footnote disclosures normally
included in the annual consolidated financial statements have been condensed or
omitted as permitted by SEC rules and regulations. The December
31, 2009 condensed consolidated balance sheet presented in this report has been
derived from the Corporation’s audited 2009 consolidated financial
statements. Management believes that the disclosures are adequate to
present fairly the condensed consolidated financial statements as of the dates
and for the periods presented. These interim unaudited condensed
consolidated financial statements should be read in conjunction with the audited
2009 consolidated financial statements of Farmer Mac included in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009
filed with the SEC on March 16, 2010. Results for interim
periods are not necessarily indicative of those that may be expected for the
fiscal year. Below is a summary of Farmer Mac’s significant
accounting policies.
(a) Cash and Cash Equivalents
and Statements of Cash Flows
Farmer
Mac considers highly liquid investment securities with 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 fair
value. Changes in the balance of cash and cash equivalents are
reported in the condensed consolidated statements of cash flows. The
following table sets forth information regarding certain cash and non-cash
transactions for the three months ended March 31, 2010 and 2009.
|
|
For
the Three Months Ended
|
|
|
|
March
31, 2010
|
|
|
March
31, 2009
|
|
|
|
(in
thousands)
|
|
Cash
paid during the quarter for:
|
|
|
|
|
|
|
Interest
|
|
$ |
18,799 |
|
|
$ |
23,172 |
|
Income
taxes
|
|
|
1,500 |
|
|
|
- |
|
Non-cash
activity:
|
|
|
|
|
|
|
|
|
Real
estate owned acquired through foreclosure
|
|
|
2,393 |
|
|
|
- |
|
Loans
acquired and securitized as Farmer Mac Guaranteed
Securities
|
|
|
- |
|
|
|
17,124 |
|
Loans
acquired and securitized as loans held for investment in consolidated
trusts
|
|
|
763 |
|
|
|
- |
|
Consolidation
of Farmer Mac I Guaranteed Securities from off-balance sheet to loans held
for investment in consolidated trusts, upon the adoption of new
consolidation guidance
|
|
|
1,400,371 |
|
|
|
- |
|
Consolidation
of Farmer Mac I Guaranteed Securities from off-balance sheet to debt
securities of consolidated trusts held by third parties, upon the adoption
of new consolidation guidance
|
|
|
1,400,371 |
|
|
|
- |
|
Transfers
of available-for-sale Farmer Mac I Guaranteed Securities to loans held for
investment in consolidated trusts, upon the adoption of new consolidation
guidance
|
|
|
5,385 |
|
|
|
- |
|
Transfers
of trading Farmer Mac Guaranteed Securities - Rural Utilities to loans
held for investment in consolidated trusts, upon the adoption of new
consolidation guidance
|
|
|
451,448 |
|
|
|
- |
|
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 |
|
(b) Allowance for
Losses
As of
March 31, 2010, Farmer Mac maintained an allowance for losses to cover estimated
probable losses on loans held and loans underlying LTSPCs, Farmer Mac I
Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural
Utilities.
The
allowance for losses is increased through periodic provisions for loan losses
that are charged against net interest income and provisions for losses that are
charged to non-interest expense and is reduced by charge-offs for actual losses,
net of recoveries. Negative provisions, or releases of allowance for
losses, are recorded in the event that the estimate of probable losses as of the
end of a period is lower than the estimate at the beginning of the
period.
Farmer
Mac’s methodology for determining its allowance for losses incorporates the
Corporation’s automated loan classification system. That system
scores loans based on criteria such as historical repayment performance,
indicators of current financial condition, loan seasoning, loan size and
loan-to-value ratio. For the purposes of the loss allowance
methodology, the loans in Farmer Mac’s portfolio of loans and loans underlying
Farmer Mac I Guaranteed Securities and LTSPCs have been scored and classified
for each calendar quarter since first quarter 2000. The allowance
methodology captures the migration of loan scores across concurrent and
overlapping three-year time horizons and calculates loss rates separately within
each loan classification for (1) loans underlying LTSPCs and (2) loans
held and loans underlying Farmer Mac I Guaranteed
Securities. The calculated loss rates are applied to the current
classification distribution of unimpaired loans in Farmer Mac’s portfolio to
estimate inherent losses, on the assumption that the historical credit losses
and trends used to calculate loss rates will continue in the
future. Management evaluates this assumption by taking into
consideration factors, including:
|
·
|
geographic
and agricultural commodity/product concentrations in the
portfolio;
|
|
·
|
the
credit profile of the portfolio;
|
|
·
|
delinquency
trends of the portfolio;
|
|
·
|
historical
charge-off and recovery activities of the portfolio;
and
|
|
·
|
other
factors to capture current portfolio trends and characteristics that
differ from historical experience.
|
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
standard on accounting for contingencies issued by the Financial Accounting
Standards Board (“FASB”).
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 probable losses inherent
in those assets.
Farmer
Mac also analyzes 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 real estate owned
(“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 loans
with an updated appraised value, other updated collateral valuation or
management’s estimate of discounted collateral value, this analysis includes the
measurement of the fair value of the underlying collateral for individual loans
relative to the total recorded investment, including principal, interest and
advances. In the event that the collateral value does not support the
total recorded investment, Farmer Mac provides a specific allowance for the
difference between the recorded investment and its fair value, less estimated
costs to liquidate the collateral. For the remaining impaired assets
without updated valuations, this analysis is performed in the aggregate in
consideration of the similar risk characteristics of the assets and historical
statistics.
The table
below summarizes the components of Farmer Mac’s allowance for losses as of March
31, 2010 and December 31, 2009:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Allowance
for loan losses
|
|
$ |
9,142 |
|
|
$ |
6,292 |
|
Reserve
for losses:
|
|
|
|
|
|
|
|
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
- |
|
|
|
- |
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
- |
|
|
|
2,033 |
|
LTSPCs
|
|
|
6,427 |
|
|
|
5,862 |
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
15,569 |
|
|
$ |
14,187 |
|
The
following table summarizes the changes in the components of Farmer Mac’s
allowance for losses for the three months ended March 31, 2010 and
2009:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
Allowance
|
|
|
|
|
|
Total
|
|
|
Allowance
|
|
|
|
|
|
Total
|
|
|
|
for
Loan
|
|
|
Reserve
|
|
|
Allowance
|
|
|
for
Loan
|
|
|
Reserve
|
|
|
Allowance
|
|
|
|
Losses
|
|
|
for Losses
|
|
|
for Losses
|
|
|
Losses
|
|
|
for Losses
|
|
|
for Losses
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
6,292 |
|
|
$ |
7,895 |
|
|
$ |
14,187 |
|
|
$ |
10,929 |
|
|
$ |
5,506 |
|
|
$ |
16,435 |
|
Provision/(recovery)
for losses
|
|
|
2,850 |
|
|
|
(1,468 |
) |
|
|
1,382 |
|
|
|
3,534 |
|
|
|
2,519 |
|
|
|
6,053 |
|
Charge-offs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,000 |
) |
|
|
- |
|
|
|
(2,000 |
) |
Recoveries
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
765 |
|
|
|
- |
|
|
|
765 |
|
Ending
balance
|
|
$ |
9,142 |
|
|
$ |
6,427 |
|
|
$ |
15,569 |
|
|
$ |
13,228 |
|
|
$ |
8,025 |
|
|
$ |
21,253 |
|
Upon the
adoption of the new consolidation guidance on January 1, 2010, Farmer Mac
reclassified $2.0 million from the reserve for losses to the allowance for loan
losses as a result of Farmer Mac being determined the primary beneficiary of
certain VIEs with beneficial interests owned by third party investors. The
provision/(recovery) for losses for the three months ended March 31, 2010
reflects this reclassification as well as provisions of $0.9 million and $0.5
million, respectively, accounted for in the allowance for loan losses and
reserve for losses. Prior to the adoption of this guidance, Farmer Mac
classified these interests as off-balance sheet Farmer Mac I Guaranteed
Securities.
No
allowance for losses has been provided for AgVantage securities, securities
issued under the Farmer Mac II program (“Farmer Mac II Guaranteed Securities”),
or USDA 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
March 31, 2010, 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 March 31, 2010, Farmer Mac had not experienced any
credit losses on any AgVantage securities. The guaranteed portions
presented as USDA Guaranteed Securities, as well as those that collateralize
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 March 31, 2010, neither Farmer Mac nor
Farmer Mac II LLC had experienced any credit losses on any USDA
Guaranteed Securities held or on any Farmer Mac II Guaranteed
Securities.
As of
March 31, 2010, Farmer Mac individually analyzed $50.3 million of its
$83.9 million of impaired assets for collateral shortfalls against updated
appraised values, other updated collateral valuations or discounted
values. Farmer Mac evaluated the remaining $33.6 million of
impaired assets for which updated valuations were not available in the aggregate
in consideration of their similar risk characteristics and historical
statistics. Farmer Mac’s specific allowance for under-collateralized
assets was $1.5 million as of March 31, 2010, and $0.6 million as of
December 31, 2009. Farmer Mac’s non-specific or general allowances
were $14.1 million as of March 31, 2010 and $13.6 million as of December
31, 2009.
Farmer
Mac recognized interest income of approximately $0.5 million and $1.1 million on
impaired loans during the three months ended March 31, 2010 and 2009
respectively. During the three months ended March 31, 2010 and 2009,
Farmer Mac’s average investment in impaired loans was $92.6 million and
$125.7 million, respectively.
(c) Financial
Derivatives
Farmer
Mac enters into transactions involving financial derivatives principally to
protect against risk from the effects of market price or interest rate movements
on the value of certain assets, future cash flows or debt issuance, not for
trading or speculative purposes. Farmer Mac enters into interest rate
swap contracts to adjust the characteristics of its short-term debt to match
more closely the cash flow and duration characteristics of its longer-term loans
and other assets, and also to adjust the characteristics of its long-term debt
to match more closely the cash flow and duration characteristics of its
short-term assets, thereby reducing interest rate risk and often times deriving
an overall lower effective cost of borrowing than would otherwise be available
to Farmer Mac in the conventional debt market. Farmer Mac also
recognizes certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a
derivative.
Farmer
Mac manages the interest rate risk related to loans it has committed to acquire,
but has not yet purchased and permanently funded, through the use of forward
sale contracts on the debt of other government-sponsored enterprises (“GSEs”),
futures contracts involving U.S. Treasury securities and interest rate swap
contracts. Farmer Mac uses forward sale contracts on GSE securities
to reduce its interest rate exposure to changes in both U.S. Treasury rates and
spreads on Farmer Mac debt. The notional amounts of these contracts
are determined based on a duration-matched hedge ratio between the hedged item
and the hedge instrument. Gains or losses generated by these hedge
transactions should offset changes in funding costs.
All
financial derivatives are recorded on the balance sheet at fair value as a
freestanding asset or liability. Farmer Mac does not designate its
financial derivatives as fair value hedges or cash flow hedges; therefore, the
changes in the fair values of financial derivatives are reported as gains or
losses on financial derivatives in the condensed consolidated statements of
operations without any corresponding changes in the fair values of the hedged
items.
The
following tables summarize information related to Farmer Mac’s financial
derivatives as of March 31, 2010 and December 31, 2009:
|
|
March
31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
65,175 |
|
|
$ |
- |
|
|
$ |
(1,379 |
) |
|
5.70% |
|
|
0.25% |
|
|
|
|
|
7.45
|
|
Pay
fixed non-callable
|
|
|
1,214,333 |
|
|
|
- |
|
|
|
(106,330 |
) |
|
4.95%
|
|
|
0.26%
|
|
|
|
|
|
4.32
|
|
Receive
fixed callable
|
|
|
175,000 |
|
|
|
- |
|
|
|
(18 |
) |
|
0.17%
|
|
|
0.48%
|
|
|
|
|
|
1.03
|
|
Receive
fixed non-callable
|
|
|
2,058,620 |
|
|
|
22,206 |
|
|
|
(1 |
) |
|
0.45%
|
|
|
1.87%
|
|
|
|
|
|
2.19
|
|
Basis
swaps
|
|
|
253,012 |
|
|
|
52 |
|
|
|
(3,616 |
) |
|
1.49%
|
|
|
0.57%
|
|
|
|
|
|
2.07
|
|
Credit
default swaps
|
|
|
30,000 |
|
|
|
- |
|
|
|
(295 |
) |
|
1.00%
|
|
|
0.00%
|
|
|
|
|
|
1.81
|
|
Agency
forwards
|
|
|
49,488 |
|
|
|
- |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
99.77 |
|
|
|
|
Treasury
futures
|
|
|
11,300 |
|
|
|
- |
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
115.90 |
|
|
|
|
Credit
valuation adjustment
|
|
|
- |
|
|
|
(1,088 |
) |
|
|
1,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
financial derivatives
|
|
$ |
3,856,928 |
|
|
$ |
21,170 |
|
|
$ |
(110,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2010, 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 $96.4 million. As of
March 31, 2010, Farmer Mac posted assets with a fair value of $21.1
million as collateral for its derivatives in net liability
positions. If Farmer Mac had breached certain provisions of the
derivative contracts as of March 31, 2010, it could have been required
to settle its obligations under the agreements or post additional collateral of
$75.3 million.
The
following table summarizes the effects of Farmer Mac’s financial derivatives on
the condensed consolidated statements of operations for the three months ended
March 31, 2010 and 2009:
|
|
(Losses)/Gains on Financial
Derivatives
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
(4,546 |
) |
|
$ |
2,659 |
|
Agency
forwards
|
|
|
(598 |
) |
|
|
(879 |
) |
Treasury
futures
|
|
|
(249 |
) |
|
|
(9 |
) |
Credit
default swaps
|
|
|
(377 |
) |
|
|
- |
|
|
|
|
(5,770 |
) |
|
|
1,771 |
|
Amortization
of derivatives transition adjustment
|
|
|
(34 |
) |
|
|
(60 |
) |
Total
|
|
$ |
(5,804 |
) |
|
$ |
1,711 |
|
As of
March 31, 2010 and December 31, 2009, respectively, Farmer Mac had approximately
$23,000 and $0.1 million of net after-tax unrealized losses on financial
derivatives included in accumulated other comprehensive income 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 will be reclassified into earnings.
As of
March 31, 2010, Farmer Mac had outstanding basis swaps with Zions First National
Bank, a related party, with total notional amount of $96.0 million and a fair
value of $(3.6) million, compared to $105.2 million and
$(3.7) million, respectively, as of
December 31, 2009. Under the terms of those basis swaps,
Farmer Mac pays Constant Maturity Treasury-based rates and receives
LIBOR. Those swaps economically hedge most of the interest rate basis
risk related to loans Farmer Mac purchases that pay a Constant Maturity Treasury
based-rate and the discount notes Farmer Mac issues to fund the loan purchases
(the pricing of discount notes is closely correlated to LIBOR
rates). Farmer Mac recorded unrealized gains on those outstanding
basis swaps of $0.1 million for first quarter 2010, compared to unrealized
losses of $0.5 million for the same period in 2009.
(d) Earnings Per Common
Share
Basic
earnings per common share are based on the weighted-average number of shares of
common stock outstanding. Diluted earnings per common share are based
on the weighted-average number of shares of common stock outstanding adjusted to
include all potentially dilutive common stock options, stock appreciation rights
(“SARs”) and nonvested restricted stock awards. The following
schedule reconciles basic and diluted earnings per common share (“EPS”) for the
three months ended March 31, 2010 and 2009:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
Net
|
|
|
|
|
|
$
per
|
|
|
Net
|
|
|
|
|
|
$
per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
|
(in
thousands, except per share amounts)
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
1,767 |
|
|
|
10,143 |
|
|
$ |
0.17 |
|
|
$ |
33,518 |
|
|
|
10,135 |
|
|
$ |
3.31 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options, SARs and restricted stock (1)
|
|
|
|
|
|
|
308 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
Diluted
EPS
|
|
$ |
1,767 |
|
|
|
10,451 |
|
|
$ |
0.17 |
|
|
$ |
33,518 |
|
|
|
10,135 |
|
|
$ |
3.31 |
|
(1)
|
For
the three months ended March 31, 2010 and 2009, stock options, SARs and
nonvested restricted stock of 1,581,965 and 1,697,829, respectively, were
outstanding but not included in the computation of diluted earnings per
share of common stock because they were anti-dilutive. For the
three months ended March 31, 2010, 82,500 contingent shares of nonvested
restricted stock were outstanding but not included in the computation of
diluted earnings per share because the performance conditions were not
met.
|
(e) Stock-Based
Compensation
In 1997,
Farmer Mac adopted a stock option plan for directors, officers and other
employees to acquire shares of Class C Non-Voting Common
Stock. Upon stock option exercise, new shares are issued by the
Corporation. Under the plan, stock options awarded vest annually in
thirds, with the first third vesting one year after the date of
grant. If not exercised, any options granted under the 1997 plan
expire ten years from the date of grant, except that options issued to
directors, if not exercised, expire five years from the date of
grant. For all stock options granted, the exercise price is equal to
the closing price of the Class C Non-Voting Common Stock on or immediately
preceding the date of grant. As of June 30, 2008, the plan
had terminated pursuant to its terms and no further grants will be made under
it.
During 2008, Farmer
Mac’s stockholders approved the 2008 Omnibus Incentive Compensation Plan that
authorizes the grants of restricted stock, stock options and SARs, among other
alternative forms of equity-based compensation, to directors, officers and other
employees. SARs awarded to officers and employees vest annually in
thirds and SARs awarded to directors vest fully after approximately one
year. If not exercised or terminated earlier due to the termination
of employment or service on the Board, SARs granted to officers or employees
expire after ten years and those granted to directors expire after seven
years. For all SARs granted, the exercise price is equal to the
closing price of the Class C Non-Voting Common Stock on the date of
grant. SARs granted during 2009 have exercise prices ranging from
$5.93 to $7.78 per share. Restricted stock was awarded to
directors in June 2009 and vests fully after approximately one
year. Restricted stock awarded to officers in June 2009 vests after
approximately three years and only vests if certain performance conditions are
met. Restricted stock awards granted to both directors and officers
are not issued until full vesting occurs. No restricted stock awards
were granted during first quarter 2010.
For the three months ended
March 31, 2010, Farmer Mac recognized $0.8 million of
compensation expense related to stock options, SARs and restricted stock,
compared to $0.7 million for the same period in 2009.
The
following tables summarize activity related to stock options, SARs and nonvested
restricted stock awards for the three months ended March 31, 2010 and
2009:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
Stock
|
|
|
Weighted-
|
|
|
Stock
|
|
|
Weighted-
|
|
|
|
Options
|
|
|
Average
|
|
|
Options
|
|
|
Average
|
|
|
|
and
|
|
|
Exercise
|
|
|
and
|
|
|
Exercise
|
|
|
|
SARs
|
|
|
Price
|
|
|
SARs
|
|
|
Price
|
|
Outstanding,
beginning of period
|
|
|
1,799,465 |
|
|
$ |
22.68 |
|
|
|
2,237,711 |
|
|
$ |
25.54 |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Canceled
|
|
|
- |
|
|
|
- |
|
|
|
(539,882 |
) |
|
|
28.30 |
|
Outstanding,
end of period
|
|
|
1,799,465 |
|
|
$ |
22.68 |
|
|
|
1,697,829 |
|
|
$ |
24.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and SARs exercisable at the end of the period
|
|
|
1,398,269 |
|
|
$ |
25.17 |
|
|
|
1,308,518 |
|
|
$ |
24.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Nonvested
|
|
|
Average
|
|
|
Nonvested
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant-date
|
|
|
Restricted
|
|
|
Grant-date
|
|
|
|
Stock
|
|
|
Fair Value
|
|
|
Stock
|
|
|
Fair Value
|
|
Outstanding,
beginning of period
|
|
|
200,548 |
|
|
$ |
5.93 |
|
|
|
- |
|
|
$ |
- |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Canceled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding,
end of period
|
|
|
200,548 |
|
|
$ |
5.93 |
|
|
|
- |
|
|
$ |
- |
|
The
cancellations of stock options during the first three months of 2009 were due to
unvested options or SARs terminating and the cancellation of a portion of vested
options upon employee and officers’ departures from Farmer Mac. There
were no such cancellations during the first three months of
2010. There were no stock options or SARs exercised during the first
three months of 2010 or 2009.
The
following tables summarize information regarding stock options, SARs and
nonvested restricted stock outstanding as of
March 31, 2010:
|
|
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 |
|
|
9.0
years
|
|
|
|
30,000 |
|
|
8.5
years
|
|
|
|
252,000 |
|
|
9.0
years
|
|
10.00
- 14.99
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
15.00
- 19.99
|
|
|
81,722 |
|
|
4.0
years
|
|
|
|
81,722 |
|
|
4.0
years
|
|
|
|
81,722 |
|
|
4.0
years
|
|
20.00
- 24.99
|
|
|
550,588 |
|
|
4.1
years
|
|
|
|
550,588 |
|
|
4.1
years
|
|
|
|
550,588 |
|
|
4.1
years
|
|
25.00
- 29.99
|
|
|
653,487 |
|
|
4.6
years
|
|
|
|
530,290 |
|
|
4.0
years
|
|
|
|
641,680 |
|
|
4.5
years
|
|
30.00
- 34.99
|
|
|
213,668 |
|
|
1.9
years
|
|
|
|
205,669 |
|
|
1.7
years
|
|
|
|
211,268 |
|
|
1.8
years
|
|
|
|
|
1,799,465 |
|
|
|
|
|
|
|
1,398,269 |
|
|
|
|
|
|
|
1,737,258 |
|
|
|
|
|
|
|
|
Outstanding
|
|
Expected to Vest
|
|
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Nonvested
|
|
Remaining
|
|
Nonvested
|
|
Remaining
|
|
Grant-Date
|
|
Restricted
|
|
Contractual
|
|
Restricted
|
|
Contractual
|
Fair Value
|
|
Stock
|
|
Life
|
|
Stock
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
$ |
5.93
|
|
|
200,548 |
|
0.9
years
|
|
|
180,496 |
|
0.9
years
|
There
were no stock options, SARs or restricted stock granted during first quarter
2010. The weighted-average grant date fair value of options and SARs
granted during 2009 was $5.11. The fair values for SARs and stock
options were estimated using the Black-Scholes option pricing model based on the
following assumptions:
|
|
2009
|
|
Risk-free
interest rate
|
|
1.6% |
|
Expected
years until exercise
|
|
7
years
|
|
Expected
stock volatility
|
|
103.6%
|
|
Dividend
yield
|
|
3.2%
|
|
(f) Fair Value
Measurement
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 inputs (e.g., changes in market
interest rates) and unobservable inputs (e.g., changes in long-dated
volatilities).
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
7 for more information regarding fair value measurement.
(g) Consolidation of Variable
Interest Entities
Farmer
Mac has interests in various entities that are considered to be variable
interest entities (“VIEs”). These interests include investments in
securities issued by VIEs, such as Farmer Mac agricultural mortgage-backed
securities created pursuant to Farmer Mac’s securitization transactions and
mortgage and asset-backed trusts that Farmer Mac did not create. 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”). All formerly designated QSPEs
were evaluated for consolidation in accordance with the new consolidation model,
which changed the method of analyzing which party to a VIE should consolidate
the VIE. The new consolidation model uses 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 reporting enterprise
that meets both these conditions is deemed the primary beneficiary of the
VIE.
The new
consolidation standard requires the incremental assets and liabilities
consolidated upon adoption to initially be reported at their carrying
amounts. Carrying amount refers to the amount at which the assets and
liabilities would have been carried in the consolidated financial statements if
the new guidance had been effective when Farmer Mac first met the conditions to
be the primary beneficiary of the VIE. 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 amounts, adjusted, where applicable, for fair value option
elections that had been made previously. Accrued interest and
allowance for losses have also been recognized as appropriate.
Although
these new accounting standards did not change the economic risk to Farmer Mac’s
business, specifically Farmer Mac’s liquidity, credit and interest rate risks,
the adoption of these new accounting standards has a significant impact on the
presentation of Farmer Mac’s consolidated financial statements beginning in
2010. On the consolidated balance sheet, there was an increase in
loans held for investment, interest receivable, debt and accrued interest
payable, 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 and commitment
fees receivable and guarantee and commitment obligations related to the
consolidated trusts. On the income statement, there was an increase
in interest income and interest expense attributable to the assets and
liabilities of the consolidated trusts and a reclassification of a portion of
guarantee fee income to interest income.
The VIEs
in which Farmer Mac has a variable interest are limited to securitization
trusts. The major judgment in determining if Farmer Mac is the
primary beneficiary was whether Farmer Mac had the power to direct the
activities of the trust that potentially had the most significant impact on the
economic performance of the trust. Generally, the ability to make
decisions regarding default mitigation was evidence of that
power. Farmer Mac determined that it was the primary beneficiary for
the securitization trusts related to most Farmer Mac I and all Rural Utilities
securitization transactions because of its rights as guarantor under both
programs to control the default mitigation activities of the
trusts. For certain securitization trusts created when loans subject
to LTSPCs were converted to Farmer Mac I Guaranteed Securities, Farmer Mac
determined that it was not the primary beneficiary since the power to make
decisions regarding default mitigation was shared among unrelated
parties. For similar securitization transactions where the power to
make decisions regarding default mitigation was shared with a related party,
Farmer Mac determined that it was the primary beneficiary because the applicable
accounting guidance does not permit parties within a related party group to
conclude that the power is shared.
For those
trusts that Farmer Mac is the primary beneficiary, the assets and liabilities
are presented on the condensed consolidated balance sheet as “Loans held for
investment in consolidated trusts” and “Debt securities of consolidated trusts
held by third parties,” respectively. These assets can only be used
to satisfy the obligations of the trust.
For those
trusts where Farmer Mac has a variable interest but has not been determined to
be the primary beneficiary, Farmer Mac’s interests are recorded as either Farmer
Mac Guaranteed Securities or Investment Securities. Farmer Mac’s
involvement in on-balance sheet VIEs classified as Farmer Mac Guaranteed
Securities include securitization trusts under the Farmer Mac II program and
trusts related to the AgVantage program. In the case of Farmer Mac II
trusts, Farmer Mac was not determined to be the primary beneficiary because it
does not have the decision-making power over default mitigation
activities. For the AgVantage trusts, Farmer Mac currently does not
have the power to direct the activities that have the most significant economic
impact to the trust unless, as guarantor, there is a default by the issuer of
the trust securities. Should there be a default, Farmer Mac would
reassess whether it is primary beneficiary of those trusts. For VIEs
classified as Investment Securities, which include asset-backed securities and
GSE-guaranteed mortgage-backed securities, Farmer Mac was determined not to be
the primary beneficiary because of the lack of voting rights or other powers to
direct the activities of the trust. The Farmer Mac Guaranteed
Securities trusts and Investment Securities trusts have carrying amounts on the
condensed consolidated balance sheet totaling $72.7 million and $444.2 million,
respectively, which is Farmer Mac’s maximum exposure to loss. In
addition, Farmer Mac has a variable interest in off-balance sheet VIEs, which
include a guarantee of timely payment of principal and interest, totaling $2.8
billion.
(h) New Accounting
Standards
Accounting
for Transfers of Financial Assets
On
December 23, 2009, the FASB issued an Accounting Standards Update (“ASU”), which
codifies recent accounting guidance related to transfers of financial
assets. The new guidance eliminates the concept of a QSPE, changes
the requirements for derecognizing financial assets and enhances information
reported to financial statement users by increasing the transparency or
disclosures about transfers of financial assets and an entity’s continuing
involvement with transferred financial assets. Farmer Mac adopted the
ASU on January 1, 2010 and the impact of adoption was not material to Farmer
Mac’s financial condition, results of operations or cash flows.
Variable
Interest Entities
On
December 23, 2009, the FASB issued an ASU, which codifies recent accounting
guidance on consolidation of VIEs. The new guidance replaces the
quantitative-based risks-and-rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a VIE with an approach
focused on identifying which reporting entity has (1) the power to direct the
activities of a VIE that most significantly affect the entity’s economic
performance and (2) the obligation to absorb losses of, or the right to receive
benefits from, the entity. The ASU requires additional disclosures
about a reporting entity’s involvement with VIEs and about any significant
changes in risk exposure as a result of that involvement. Farmer Mac
adopted this ASU on January 1, 2010, which resulted in the consolidation of
assets and liabilities onto Farmer Mac’s balance sheet in connection with
trusts that previously qualified for the QSPE
exception. Additionally, interest income and interest expense related
to the consolidated assets and liabilities of the trusts will be reflected in
the statement of operations.
As of
December 31, 2009, Farmer Mac disclosed the impact of adopting the new
consolidation standard as an increase in consolidated assets of $292.8 million,
requiring incremental regulatory capital of $5.9 million, and an increase in
retained earnings of $2.6 million. Upon adoption, Farmer Mac
reassessed its securitization trusts created when loans subject to LTSPCs were
converted to Farmer Mac I Guaranteed Securities in consideration of the related
party relationship with certain counterparties to these transactions and
concluded that additional trusts required consolidation. The actual
impact upon adoption was an increase in consolidated assets of $1.5 billion,
which resulted in an incremental capital requirement of
$30.4 million. The transition adjustment upon adoption did not
change significantly from the reported amount, increasing retained earnings by
$2.7 million, which is presented in the Condensed Consolidated Statement of
Equity as “Cumulative effect of adoption of new accounting standard, net of
tax.”
Accounting
Standards Update on Fair Value Measurements and Disclosures
On
January 21, 2010, the FASB issued a new accounting standard, which amends FASB
guidance on fair value measurements and disclosures to add new requirements for
disclosures about transfers into and out of levels 1 and 2 and separate
disclosures about purchases, sales, issuance, and settlements relating to level
3 measurements. The new standard also clarifies existing fair value
disclosures about the level of disaggregation and about inputs and valuation
techniques used to measure fair value. The ASU is effective for first
quarter 2010 reporting except for the level 3 activity disclosures, which
are effective in first quarter 2011. Adoption of the new accounting
guidance did not have a significant impact on Farmer Mac’s fair value
disclosures.
(i) Reclassifications
Certain
reclassifications of prior period information were made to conform to the
current period presentation.
Note
2.
|
Investment
Securities
|
The
following tables present the amortized cost and estimated fair values of Farmer
Mac’s investments as of March 31, 2010 and December 31, 2009.
|
|
March 31, 2010
|
|
|
|
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 |
|
|
$ |
- |
|
|
$ |
(11,844 |
) |
|
$ |
62,256 |
|
Floating
rate asset-backed securities
|
|
|
26,163 |
|
|
|
10 |
|
|
|
(15 |
) |
|
|
26,158 |
|
Floating
rate corporate debt securities
|
|
|
218,932 |
|
|
|
654 |
|
|
|
(864 |
) |
|
|
218,722 |
|
Floating
rate Government/GSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
guaranteed
mortgage-backed securities
|
|
|
409,466 |
|
|
|
1,666 |
|
|
|
(612 |
) |
|
|
410,520 |
|
Fixed
rate GSE guaranteed mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
5,790 |
|
|
|
326 |
|
|
|
- |
|
|
|
6,116 |
|
Floating
rate GSE subordinated debt
|
|
|
70,000 |
|
|
|
- |
|
|
|
(19,464 |
) |
|
|
50,536 |
|
Fixed
rate GSE preferred stock
|
|
|
80,237 |
|
|
|
3,169 |
|
|
|
- |
|
|
|
83,406 |
|
Fixed
rate senior agency debt
|
|
|
5,485 |
|
|
|
- |
|
|
|
(2 |
) |
|
|
5,483 |
|
Fixed
rate Treasuries
|
|
|
335,148 |
|
|
|
53 |
|
|
|
(24 |
) |
|
|
335,177 |
|
Total
available-for-sale
|
|
|
1,225,321 |
|
|
|
5,878 |
|
|
|
(32,825 |
) |
|
|
1,198,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
6,472 |
|
|
|
- |
|
|
|
(5,020 |
) |
|
|
1,452 |
|
Fixed
rate GSE preferred stock
|
|
|
84,381 |
|
|
|
- |
|
|
|
(3,007 |
) |
|
|
81,374 |
|
Total
trading
|
|
|
90,853 |
|
|
|
- |
|
|
|
(8,027 |
) |
|
|
82,826 |
|
Total
investment securities
|
|
$ |
1,316,174 |
|
|
$ |
5,878 |
|
|
$ |
(40,852 |
) |
|
$ |
1,281,200 |
|
|
|
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 Treasuries
|
|
|
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 |
|
During
first quarter 2010, Farmer Mac did not recognize in earnings any
other-than-temporary impairment charges. In first quarter 2009,
Farmer Mac recognized in earnings other-than-temporary impairment charges of
$81,000 (in addition to $51.7 million other-than-temporary impairment charges
recorded in 2008) related to its investment in Fannie Mae floating rate
preferred stock.
During
the three months ended March 31, 2010, Farmer Mac received proceeds of
$69.6 million from the sale of securities from its available-for-sale
investment portfolio, resulting in gross realized gains of $0.4 million and
gross realized losses of $0.2 million. During the three months ended
March 31, 2009, Farmer Mac received proceeds of $128.4 million from the
sale of securities from its available-for-sale investment portfolio, resulting
in gross realized gains of $3.2 million.
As of
March 31, 2010 and December 31, 2009, unrealized losses on available-for-sale
investment securities were as follows:
|
|
March 31, 2010
|
|
|
|
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
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
110,348 |
|
|
$ |
(864 |
) |
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
5,385 |
|
|
|
(15 |
) |
Floating
rate auction-rate certificates backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by
Government guaranteed student loans
|
|
|
- |
|
|
|
- |
|
|
|
62,256 |
|
|
|
(11,844 |
) |
Floating
rate Government/GSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
guaranteed
mortgage-backed securities
|
|
|
89,479 |
|
|
|
(125 |
) |
|
|
109,498 |
|
|
|
(487 |
) |
Floating
rate GSE subordinated debt
|
|
|
- |
|
|
|
- |
|
|
|
50,536 |
|
|
|
(19,464 |
) |
Fixed
rate senior agency debt
|
|
|
5,484 |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
Fixed
rate Treasuries
|
|
|
175,108 |
|
|
|
(24 |
) |
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
270,071 |
|
|
$ |
(151 |
) |
|
$ |
338,023 |
|
|
$ |
(32,674 |
) |
|
|
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 Treasuries
|
|
|
117,760 |
|
|
|
(50 |
) |
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
323,725 |
|
|
$ |
(2,027 |
) |
|
$ |
442,387 |
|
|
$ |
(25,888 |
) |
The
temporary unrealized losses presented above are principally due to a general
widening of credit spreads from the dates of acquisition to March 31, 2010 and
December 31, 2009, 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 March 31, 2010, all of the
investment securities in an unrealized loss position were rated at least “A” by
Standard & Poor’s. As of December 31, 2009, all of the investment
securities in an unrealized loss position were rated at least “A,” except one
that was not rated. The unrealized losses were on 77 and
86 individual investment securities as of March 31, 2010 and
December 31, 2009, respectively.
As of
March 31, 2010, 58 of the securities in loss positions had been in loss
positions for more than 12 months and had a total unrealized loss of $32.7
million. 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. Securities in unrealized
loss positions 12 months or more have a fair value as of March 31, 2010 that is,
on average, approximately 91 percent of their amortized cost
basis. Farmer Mac believes that all these unrealized losses are
recoverable within a reasonable period of time through changes in credit spreads
or maturity and expects to recover the amortized cost basis of these
securities. Accordingly, Farmer Mac has concluded that none of the
unrealized losses on these available-for-sale investment securities represent
other-than-temporary impairment as of March 31, 2010. 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 March 31, 2010 and
2009. As of March 31, 2010, Farmer Mac owned trading investments with
an amortized cost of $90.9 million, a fair value of $82.8 million, and a
weighted-average yield of 8.10 percent. The amortized cost, fair
value and weighted-average yield of investments by remaining contractual
maturity for available-for-sale investment securities as of March 31, 2010 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 March 31, 2010
|
|
|
|
Amortized
|
|
|
|
|
|
Weighted-
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Average Yield
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
345,527 |
|
|
$ |
345,578 |
|
|
0.33% |
|
Due
after one year through five years
|
|
|
227,924 |
|
|
|
227,645 |
|
|
0.51%
|
|
Due
after five years through ten years
|
|
|
106,921 |
|
|
|
107,485 |
|
|
2.65%
|
|
Due
after ten years
|
|
|
544,949 |
|
|
|
517,666 |
|
|
2.79%
|
|
Total
|
|
$ |
1,225,321 |
|
|
$ |
1,198,374 |
|
|
1.66%
|
|
Note
3.
|
Farmer
Mac and USDA Guaranteed Securities
|
The
following table sets forth information about on-balance sheet Farmer Mac and
USDA Guaranteed Securities as of March 31, 2010 and December 31,
2009.
|
|
March 31, 2010
|
|
|
|
Available-
|
|
|
|
|
|
|
|
|
|
for-Sale
|
|
|
Trading
|
|
|
Total
|
|
|
|
|
|
Farmer
Mac I
|
|
$ |
48,080 |
|
|
$ |
- |
|
|
$ |
48,080 |
|
Farmer
Mac II
|
|
|
39,692 |
|
|
|
- |
|
|
|
39,692 |
|
Rural
Utilities
|
|
|
1,706,155 |
|
|
|
- |
|
|
|
1,706,155 |
|
Farmer
Mac Guaranteed Securities
|
|
|
1,793,927 |
|
|
|
- |
|
|
|
1,793,927 |
|
USDA
Guaranteed Securities
|
|
|
781,823 |
|
|
|
407,844 |
|
|
|
1,189,667 |
|
Total
|
|
$ |
2,575,750 |
|
|
$ |
407,844 |
|
|
$ |
2,983,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
$ |
2,547,928 |
|
|
$ |
409,362 |
|
|
$ |
2,957,290 |
|
Unrealized
gains
|
|
|
34,181 |
|
|
|
- |
|
|
|
34,181 |
|
Unrealized
losses
|
|
|
(6,359 |
) |
|
|
(1,518 |
) |
|
|
(7,877 |
) |
Fair
value
|
|
$ |
2,575,750 |
|
|
$ |
407,844 |
|
|
$ |
2,983,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Upon the
adoption of the new consolidation guidance on January 1, 2010, Farmer Mac was
determined to be the primary beneficiary of certain VIEs where Farmer Mac held
beneficial interests in trusts used as vehicles for the securitization of
agricultural real estate mortgage loans or rural utilities
loans. Prior to 2010, Farmer Mac presented these beneficial interests
as “Farmer Mac Guaranteed Securities” on the condensed consolidated balance
sheets. Upon consolidation, Farmer Mac transferred these assets from
Farmer Mac Guaranteed Securities to loans held for investment in consolidated
trusts. The transferred assets on January 1, 2010 included Farmer Mac
Guaranteed Securities – Rural Utilities with an unpaid principal balance of
$412.9 million and a fair value of $455.6 million and Farmer Mac I Guaranteed
Securities with an unpaid principal balance of $5.3 million and a fair value of
$5.6 million.
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. The assets that
Farmer Mac contributed to Farmer Mac II LLC 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. Farmer Mac did not guarantee the timely payment of
principal and interest on the $1.1 billion of contributed USDA-guaranteed
portions and will not issue Farmer Mac II Guaranteed Securities to Farmer Mac II
LLC in the future. The contributed USDA-guaranteed portions had
previously been presented as Farmer Mac II Guaranteed Securities on the
condensed consolidated financial statements of Farmer Mac and are now presented
as “USDA Guaranteed Securities” on the condensed consolidated balance
sheets. The assets of Farmer Mac II LLC would be available to
creditors of Farmer Mac only after all obligations owed to creditors of and
equity holders in Farmer Mac II LLC had been satisfied.
The
temporary unrealized losses presented above are principally due to changes in
interest rates from the date of acquisition to March 31, 2010 and December 31,
2009, as applicable. As of March 31, 2010 and December 31, 2009, the
unrealized losses presented above are related to Farmer Mac II and USDA
Guaranteed Securities, which are backed by the full faith and credit of the
United States. 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 March 31, 2010 and 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 realized no gains or losses from the sale of Farmer Mac and USDA Guaranteed
Securities for the three months ended March 31, 2010 and 2009.
The table
below presents a sensitivity analysis for the Corporation’s on-balance sheet
Farmer Mac and USDA Guaranteed Securities as of March 31, 2010 and December 31,
2009.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Fair
value of beneficial interests retained
|
|
|
|
|
|
|
in
Farmer Mac and USDA Guaranteed Securities
|
|
$ |
2,983,594 |
|
|
$ |
3,398,996 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
remaining life (in years)
|
|
|
3.4 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
prepayment speed (annual rate)
|
|
|
4.6 |
% |
|
|
3.8 |
% |
Effect
on fair value of a 10% adverse change
|
|
$ |
(1,050 |
) |
|
$ |
(18 |
) |
Effect
on fair value of a 20% adverse change
|
|
$ |
(2,030 |
) |
|
$ |
(36 |
) |
|
|
|
|
|
|
|
|
|
Weighted-average
discount rate
|
|
|
2.7 |
% |
|
|
2.8 |
% |
Effect
on fair value of a 10% adverse change
|
|
$ |
(16,366 |
) |
|
$ |
(22,081 |
) |
Effect
on fair value of a 20% adverse change
|
|
$ |
(33,145 |
) |
|
$ |
(44,531 |
) |
These
sensitivities are hypothetical. Changes in fair value based on
10 percent or 20 percent variations in assumptions generally cannot be
extrapolated because the relationship of the change in assumptions to the change
in fair value may not be linear. Also, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated
without changing any other assumption. In fact, changes in one factor
may result in changes in another (for example, increases in market interest
rates may result in lower prepayments), which might amplify or counteract the
sensitivities.
The table
below presents the outstanding principal balances for Farmer Mac loans, LTSPCs
and Farmer Mac and USDA Guaranteed Securities as of March 31, 2010 and
December 31, 2009.
Outstanding
Balance of Farmer Mac Loans and Loans Underlying
|
Farmer
Mac and USDA Guaranteed Securities and
LTSPCs
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
On-balance
sheet:
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
Loans
|
|
$ |
765,934 |
|
|
$ |
733,422 |
|
Loans
held in trusts:
|
|
|
|
|
|
|
|
|
Beneficial
interests owned by Farmer Mac
|
|
|
4,357 |
|
|
|
5,307 |
|
Beneficial
interests owned by third party investors
|
|
|
1,335,953 |
|
|
|
- |
|
Farmer
Mac Guaranteed Securities - AgVantage
|
|
|
45,050 |
|
|
|
48,800 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
USDA
Guaranteed Securities
|
|
|
1,156,930 |
|
|
|
- |
|
Farmer
Mac Guaranteed Securities
|
|
|
41,258 |
|
|
|
1,164,996 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
87,662 |
|
|
|
28,644 |
|
Loans
held in trusts:
|
|
|
|
|
|
|
|
|
Beneficial
interests owned by Farmer Mac
|
|
|
406,679 |
|
|
|
412,948 |
|
Farmer
Mac Guaranteed Securities - AgVantage
|
|
|
1,675,000 |
|
|
|
1,675,000 |
|
Total
on-balance sheet
|
|
$ |
5,518,823 |
|
|
$ |
4,069,117 |
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet:
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
AgVantage
|
|
$ |
2,945,000 |
|
|
$ |
2,945,000 |
|
LTSPCs
|
|
|
1,846,244 |
|
|
|
2,165,706 |
|
Farmer
Mac Guaranteed Securities
|
|
|
348,154 |
|
|
|
1,492,239 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Farmer
Mac Guaranteed Securities
|
|
|
39,351 |
|
|
|
34,802 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
AgVantage
|
|
|
14,235 |
|
|
|
14,240 |
|
Total
off-balance sheet
|
|
$ |
5,192,984 |
|
|
$ |
6,651,987 |
|
Total
|
|
$ |
10,711,807 |
|
|
$ |
10,721,104 |
|
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. Subsequent to the purchase, such defaulted loans are
treated as nonaccrual loans and, therefore, interest is accounted for on the
cash basis. Any decreases in expected cash flows are recognized as
impairment. The following table presents information related to
Farmer Mac’s acquisition of defaulted loans for the three months ended March 31,
2010 and 2009 and the outstanding balances and carrying amounts of all such
loans as of March 31, 2010 and December 31, 2009,
respectively.
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Unpaid
principal balance at acquisition date
|
|
$ |
2,490 |
|
|
$ |
5,064 |
|
Contractually
required payments receivable
|
|
|
2,557 |
|
|
|
5,074 |
|
Impairment
recognized subsequent to acquisition
|
|
|
1,381 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Outstanding
balance
|
|
$ |
48,672 |
|
|
$ |
50,409 |
|
Carrying
amount
|
|
|
38,086 |
|
|
|
39,810 |
|
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, USDA Guaranteed Securities, Farmer Mac II Guaranteed Securities, or
rural utilities loans held or underlying Farmer Mac Guaranteed Securities –
Rural Utilities. 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
March 31, 2010, 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 March 31, 2010, Farmer Mac had not experienced any
credit losses on any AgVantage securities. The USDA-guaranteed
portions presented as USDA Guaranteed Securities, as well as those that
collateralize Farmer Mac II Guaranteed Securities, are guaranteed by the United
States Department of Agriculture. Each USDA guarantee is an
obligation backed by the full faith and credit of the United
States. As of March 31, 2010, neither Farmer Mac nor Farmer Mac
II LLC had experienced any credit losses on any USDA Guaranteed Securities or
Farmer Mac II Guaranteed Securities. As of March 31, 2010, there were
no delinquencies and no probable losses inherent in Farmer Mac’s rural utilities
loans held or in any Farmer Mac Guaranteed Securities – Rural
Utilities. As of March 31, 2010, Farmer Mac had not experienced
any credit losses on any of those loans or securities.
|
|
90-Day
|
|
|
Net Credit
|
|
|
|
Delinquencies (1)
|
|
|
Losses (2)
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
On-balance
sheet assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
43,569 |
|
|
$ |
35,470 |
|
|
$ |
80,964 |
|
|
$ |
- |
|
|
$ |
1,235 |
|
Total
on-balance sheet
|
|
$ |
43,569 |
|
|
$ |
35,470 |
|
|
$ |
80,964 |
|
|
$ |
- |
|
|
$ |
1,235 |
|
Off-balance
sheet assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
$ |
26,866 |
|
|
$ |
14,056 |
|
|
$ |
5,270 |
|
|
$ |
- |
|
|
$ |
- |
|
Guaranteed
Securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
off-balance sheet
|
|
$ |
26,866 |
|
|
$ |
14,056 |
|
|
$ |
5,270 |
|
|
$ |
- |
|
|
$ |
- |
|
Total
|
|
$ |
70,435 |
|
|
$ |
49,526 |
|
|
$ |
86,234 |
|
|
$ |
- |
|
|
$ |
1,235 |
|
|
(1)
|
Includes
loans and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs
that are 90 days or more past due, in foreclosure, restructured after
delinquency, and in bankruptcy, excluding loans performing under either
their original loan terms or a court-approved bankruptcy
plan.
|
|
(2)
|
Includes
loans and loans underlying Farmer Mac I Guaranteed Securities and
LTSPCs.
|
Note
4. Comprehensive
Income
Comprehensive
income represents all changes in stockholders’ equity except those resulting
from investments by or distributions to stockholders, and is comprised primarily
of net income and unrealized gains and losses on securities available-for-sale,
net of related taxes. The following table sets forth Farmer Mac’s
comprehensive income for the three months ended March 31, 2010 and
2009:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
13,589 |
|
|
$ |
37,454 |
|
Available-for-sale
securities, net of tax:
|
|
|
|
|
|
|
|
|
Net
unrealized holding gains (1)
|
|
|
4,500 |
|
|
|
1,764 |
|
Reclassification
adjustment for realized gains
|
|
|
(190 |
) |
|
|
- |
|
Net
change from available-for-sale securities
|
|
|
4,310 |
|
|
|
1,764 |
|
Financial
derivatives, net of tax:
|
|
|
|
|
|
|
|
|
Reclassification
for amortization of financial derivatives
|
|
|
|
|
|
|
|
|
transition
adjustment (2)
|
|
|
23 |
|
|
|
39 |
|
Other
comprehensive income, net of tax
|
|
|
4,333 |
|
|
|
1,803 |
|
Comprehensive
income
|
|
|
17,922 |
|
|
|
39,257 |
|
Less:
Comprehensive income attributable to non-controlling
interest
|
|
|
4,068 |
|
|
|
- |
|
Total
comprehensive income attributable to Farmer Mac
|
|
$ |
13,854 |
|
|
$ |
39,257 |
|
(1)
|
Unrealized
gains on available for sale securities is shown net of income tax expense
of $2.2 million and $0.9 million for the three months ended March 31, 2010
and 2009, respectively.
|
(2)
|
Amortization
of financial derivatives transition adjustment is shown net of income tax
expense of $12,000 and $21,000 for the three months ended March 31, 2010
and 2009, respectively.
|
The
following table presents Farmer Mac’s accumulated other comprehensive income as
of March 31, 2010 and December 31, 2009 and changes in the components of
accumulated other comprehensive income for the three months ended March 31, 2010
and the year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
3,300 |
|
|
$ |
(47,214 |
) |
Net
unrealized gains, net of tax
|
|
|
4,310 |
|
|
|
50,514 |
|
Ending
balance
|
|
$ |
7,610 |
|
|
$ |
3,300 |
|
|
|
|
|
|
|
|
|
|
Financial
derivatives:
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
(46 |
) |
|
$ |
(198 |
) |
Amortization
of financial derivatives transition
|
|
|
|
|
|
|
|
|
adjustment,
net of tax
|
|
|
23 |
|
|
|
152 |
|
Ending
balance
|
|
$ |
(23 |
) |
|
$ |
(46 |
) |
Accumulated
other comprehensive income, net of tax
|
|
$ |
7,587 |
|
|
$ |
3,254 |
|
Note
5.
|
Off-Balance
Sheet Guarantees and Long-Term Standby Purchase
Commitments
|
Overview
Farmer
Mac offers approved lenders two credit enhancement alternatives to increase
their liquidity or lending capacity while retaining the cash flow benefits of
their loans: (1) Farmer Mac Guaranteed Securities, which are
available through 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. For securitization
trusts where Farmer Mac is the primary beneficiary, as described in Note 1(g),
the trust assets and liabilities are included on Farmer Mac’s condensed
consolidated balance sheet. Upon consolidation, Farmer Mac eliminates
the portion of the guarantee and commitment fees receivable and guarantee and
commitment obligations related to the consolidated trusts. For the
remainder of these transactions, 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.
Off-Balance
Sheet Farmer Mac Guaranteed Securities
Eligible
loans and other eligible assets may be placed into trusts that are used as
vehicles for the securitization of the transferred assets and the Farmer
Mac-guaranteed beneficial interests in the trusts are sold to
investors. Proceeds from new securitizations during the three months
ended March 31, 2010 and 2009 were $0.8 million and $17.1 million,
respectively. The following table summarizes cash flows received from
and paid to trusts used for securitizations:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Proceeds
from new securitizations
|
|
$ |
763 |
|
|
$ |
17,124 |
|
Guarantee
fees received
|
|
|
1,237 |
|
|
|
3,609 |
|
Purchases
of assets from the trusts
|
|
|
(2,323 |
) |
|
|
- |
|
Servicing
advances
|
|
|
(236 |
) |
|
|
(4 |
) |
Repayments
of servicing advances
|
|
|
77 |
|
|
|
2 |
|
The
following table presents the maximum principal amount of potential undiscounted
future payments that Farmer Mac could be required to make under all off-balance
sheet Farmer Mac Guaranteed Securities as of March 31, 2010 and December
31, 2009, 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
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
AgVantage
|
|
$ |
2,945,000 |
|
|
$ |
2,945,000 |
|
Farmer Mac Guaranteed Securities
|
|
|
348,154 |
|
|
|
1,492,239 |
|
Farmer
Mac II Guaranteed Securities
|
|
|
39,351 |
|
|
|
34,802 |
|
Rural
Utilities AgVantage
|
|
|
14,235 |
|
|
|
14,240 |
|
Total off-balance sheet Farmer Mac Guaranteed Securities
|
|
$ |
3,346,740 |
|
|
$ |
4,486,281 |
|
For those
securities issued or modified on or after January 1, 2003, Farmer Mac has
recorded a liability for its obligation to stand ready under the guarantee in
the guarantee and commitment obligation on the condensed consolidated balance
sheet. This liability approximated $18.7 million as of March 31,
2010 and $33.9 million as of December 31, 2009. Upon
adoption of the new consolidation guidance on January 1, 2010, Farmer Mac
eliminated $15.5 million of the guarantee and commitment obligation related to
the consolidated trusts. See Note 1(g) for more
information. As of March 31, 2010, the weighted-average
remaining maturity of all loans underlying off-balance sheet Farmer Mac
Guaranteed Securities, excluding AgVantage securities, was 14.0
years. For information on Farmer Mac’s methodology for determining
the reserve for losses on off-balance sheet Farmer Mac Guaranteed Securities,
see Note 1(b).
In the
future, Farmer Mac 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.
Long-Term
Standby Purchase Commitments (LTSPCs)
An LTSPC
is a commitment by Farmer Mac to purchase eligible loans from a segregated pool
of loans under enumerated circumstances, either for cash or in exchange for
Farmer Mac Guaranteed Securities, on one or more undetermined future
dates. As consideration for its assumption of the credit risk on
loans underlying an LTSPC, Farmer Mac receives a commitment fee payable monthly
in arrears in an amount approximating what would have been the guarantee fee if
the transaction were structured as Farmer Mac Guaranteed
Securities.
The
maximum principal amount of potential undiscounted future payments that Farmer
Mac could be requested to make under all LTSPCs, not including offsets provided
by any recourse provisions, recoveries from third parties or collateral for the
underlying loans, was $1.8 billion as of March 31, 2010 and $2.2 billion as
of December 31, 2009.
As of
March 31, 2010, the weighted-average remaining maturity of all loans underlying
LTSPCs was 14.6 years. For those LTSPCs issued or modified on or
after January 1, 2003, Farmer Mac has recorded a liability for its
obligation to stand ready under the commitment in the guarantee and commitment
obligation on the condensed consolidated balance sheet. This
liability approximated $12.3 million as of March 31, 2010 and $14.7 million as
of December 31, 2009.
Note
6.
|
Stockholders’
Equity and Mezzanine Equity
|
Common
Stock
Farmer Mac
has three classes of common stock outstanding:
|
·
|
Class
A Voting Common Stock, which may be held only by banks, insurance
companies and other financial institutions or similar entities that are
not institutions of the Farm Credit System. By federal statute,
no holder of Class A Voting Common Stock may directly or indirectly be a
beneficial owner of more than 33 percent of the outstanding shares of that
class of stock;
|
|
·
|
Class
B Voting Common Stock, which may be held only by institutions of the Farm
Credit System. There are no restrictions on the maximum
holdings of Class B Voting Common Stock;
and
|
|
·
|
Class
C Non-Voting Common Stock, which has no ownership
restrictions.
|
From
fourth quarter 2004 through fourth quarter 2008, Farmer Mac paid a quarterly
dividend of $0.10 per share on all classes of the Corporation’s common
stock. 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 that was paid 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.
Preferred
Stock
During
2010 and 2009, Farmer Mac had two series of preferred stock
outstanding:
|
·
|
Series
B preferred stock, which was newly issued on September 30, 2008 and on
December 15, 2008, is temporary equity and is reported as Mezzanine Equity
on the condensed consolidated balance sheets because it contains
redemption features that, although remote, are not solely within the
control of Farmer Mac, was repurchased and retired on January 25, 2010
such that none was outstanding on March 31, 2010;
and
|
|
·
|
Series
C preferred stock, which was newly issued during fourth quarter 2008 and
during 2009, is a component of Stockholders’ Equity on the condensed
consolidated balance sheets.
|
The
Series C preferred stock was issued pursuant to an initiative under which any
participant who used Farmer Mac for a credit enhancement or purchase transaction
in excess of $20.0 million was required to purchase an equity interest in
Farmer Mac in the form of shares of Series C preferred stock, thereby enabling
Farmer Mac to raise additional capital to support its mission of providing
liquidity and lending capacity to agricultural and rural utilities
lenders. Farmer Mac sold the 57,578 shares of Series C preferred
stock without registration under the Securities Act of 1933, as amended, in
reliance upon the exemption provided by Section 3(a)(2), for an aggregate
purchase price of $57.6 million or $1,000 per share. There were
57,578 shares of Series C preferred stock outstanding as of March 31, 2010,
all held by the National Rural Utilities Cooperative Finance Corporation
(“National Rural”). This initiative that required participants to
purchase Series C preferred stock ended in fourth quarter 2009.
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.
Non-Controlling
Interest in Subsidiary
On
January 25, 2010, Farmer Mac completed 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 Company Preferred Stock is 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.
Statutory
and Regulatory Capital Requirements
Farmer
Mac is subject to, and as of March 31, 2010 was in compliance with, its three
statutory and regulatory capital requirements:
|
·
|
Minimum
capital – Farmer Mac’s minimum capital level is equal to the sum of
2.75 percent of Farmer Mac’s aggregate on-balance sheet assets, as
calculated for regulatory purposes, plus 0.75 percent of the aggregate
off-balance sheet obligations of Farmer Mac, including Farmer Mac
Guaranteed Securities and LTSPCs;
|
|
·
|
Critical
capital – Farmer Mac’s critical capital level is equal to 50 percent
of the minimum capital requirement at that time;
and
|
|
·
|
Risk-based
capital – the Farm Credit Administration (“FCA”) has established a
risk-based capital stress test for Farmer
Mac.
|
As of
March 31, 2010, Farmer Mac’s minimum and critical capital requirements were
$244.5 million and $122.3 million, respectively, and Farmer Mac’s core
capital (common and preferred stock outstanding plus non-controlling interest –
preferred stock, additional paid-in-capital and retained earnings) level was
$439.5 million, $195.0 million above the minimum capital requirement and
$317.2 million above the critical 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, $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 March 31, 2010 was $41.7 million and Farmer Mac’s regulatory capital (core
capital plus the allowance for losses) of $455.1 million exceeded that
requirement by approximately $413.4 million. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Regulatory Matters” for more information about proposed changes to
the risk-based capital stress test applicable to Farmer Mac.
Note
7.
|
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 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.
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 GSEs, fair value is
primarily determined using a reputable and nationally recognized third party
pricing service. 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 that 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
thinly traded or not quoted 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
first quarter 2010, Farmer Mac transferred its investments in the subordinated
debt and preferred stock of CoBank, ACB and its investment in the preferred
stock of AgFirst Farm Credit Bank, with par values of $70.0 million, $88.5
million and $88.0 million, respectively, as of December 31, 2009, from level 3
measurements to level 2 measurements. Taking into consideration its own
recently executed trades during first quarter 2010, along with an increase in
observable trading activity for these securities, Farmer Mac determined that the
best estimate of fair value for these securities as of March 31, 2010 was the
fair values provided by an independent third party pricing service. Farmer
Mac corroborated the fair value measurements provided by the independent third
party pricing service through internally-developed models that employ a
discounted cash flow approach. Farmer Mac transferred these securities out
of level 3 based on their fair values as of the beginning of the quarterly
reporting period.
Available-for-Sale
and Trading Farmer Mac and USDA Guaranteed Securities
Farmer
Mac estimates the fair value of its Farmer Mac and USDA 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 and USDA Guaranteed Securities by obtaining a secondary valuation
from an independent third party pricing service.
Upon the
adoption of the new consolidation guidance on January 1, 2010, Farmer Mac was
deemed to be the primary beneficiary of certain VIEs where Farmer Mac held
beneficial interests in trusts used as vehicles for the securitization of
agricultural real estate mortgage loans or rural utilities loans. Prior to
2010, Farmer Mac presented these beneficial interests as “Farmer Mac Guaranteed
Securities” on the condensed consolidated balance sheets and reported them at
their fair value. Upon consolidation, Farmer Mac transferred these assets
from “Farmer Mac Guaranteed Securities” to “Loans held for investment in
consolidated trusts.” Going forward, these loans will be reported at their
amortized cost and will no longer be included in recurring fair value
measurements. Farmer Mac transferred these securities out of level 3 based
on their fair values as of the beginning of the quarterly reporting
period.
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
March 31, 2010, the consideration of credit risk related to both Farmer Mac and
the counterparties did not result in a material adjustment to the valuations of
Farmer Mac’s derivative portfolio. As of December 31, 2009, the
consideration of credit risk related to both Farmer Mac and the counterparties
resulted in an adjustment to the valuations of Farmer Mac’s derivative portfolio
of $0.7 million.
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 March 31,
2010, Farmer Mac recorded an adjustment of $2.4 million to report loans
held for sale at the lower of cost or fair value. 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.
Loans
Held for Investment
Certain
loans in Farmer Mac’s held for investment loan portfolio are measured at fair
value when they are determined to be impaired. Impaired loans are reported at
fair value less estimated costs to sell. The fair value of the loan is generally
based on the fair value of the underlying property, which 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 these fair values as level 3
measurements.
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
March 31, 2010, Farmer Mac’s assets and liabilities recorded at fair value
included financial instruments valued at $3.1 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 42 percent of total assets and 70 percent of financial
instruments measured at fair value as of March 31, 2010. 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.
The
following tables present information about Farmer Mac’s assets and liabilities
measured at fair value on a recurring and nonrecurring basis as of March 31,
2010 and December 31, 2009, respectively, and indicate 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 March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
62,256 |
|
|
$ |
62,256 |
|
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
26,158 |
|
|
|
- |
|
|
|
26,158 |
|
Floating
rate corporate debt securities
|
|
|
- |
|
|
|
218,722 |
|
|
|
- |
|
|
|
218,722 |
|
Floating
rate Government/GSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
guaranteed
mortgage-backed securities
|
|
|
- |
|
|
|
410,520 |
|
|
|
- |
|
|
|
410,520 |
|
Fixed
rate GSE guaranteed mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
- |
|
|
|
6,116 |
|
|
|
- |
|
|
|
6,116 |
|
Floating
rate GSE subordinated debt
|
|
|
- |
|
|
|
50,536 |
|
|
|
- |
|
|
|
50,536 |
|
Floating
rate GSE preferred stock
|
|
|
- |
|
|
|
83,406 |
|
|
|
- |
|
|
|
83,406 |
|
Treasuries
|
|
|
335,177 |
|
|
|
- |
|
|
|
- |
|
|
|
335,177 |
|
Senior
agency debt
|
|
|
- |
|
|
|
5,483 |
|
|
|
- |
|
|
|
5,483 |
|
Total
available-for-sale
|
|
|
335,177 |
|
|
|
800,941 |
|
|
|
62,256 |
|
|
|
1,198,374 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
1,452 |
|
|
|
1,452 |
|
Fixed
rate GSE preferred stock
|
|
|
- |
|
|
|
81,374 |
|
|
|
- |
|
|
|
81,374 |
|
Total
trading
|
|
|
- |
|
|
|
81,374 |
|
|
|
1,452 |
|
|
|
82,826 |
|
Total
investment securities
|
|
|
335,177 |
|
|
|
882,315 |
|
|
|
63,708 |
|
|
|
1,281,200 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
- |
|
|
|
- |
|
|
|
48,080 |
|
|
|
48,080 |
|
Farmer
Mac II
|
|
|
- |
|
|
|
- |
|
|
|
39,692 |
|
|
|
39,692 |
|
Rural
Utilities
|
|
|
- |
|
|
|
- |
|
|
|
1,706,155 |
|
|
|
1,706,155 |
|
Total
available-for-sale
|
|
|
- |
|
|
|
- |
|
|
|
1,793,927 |
|
|
|
1,793,927 |
|
Trading
- Farmer Mac II
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
Farmer Mac Guaranteed Securities
|
|
|
- |
|
|
|
- |
|
|
|
1,793,927 |
|
|
|
1,793,927 |
|
USDA
Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
- |
|
|
|
- |
|
|
|
781,823 |
|
|
|
781,823 |
|
Trading
|
|
|
- |
|
|
|
- |
|
|
|
407,844 |
|
|
|
407,844 |
|
Total
USDA Guaranteed Securities
|
|
|
- |
|
|
|
- |
|
|
|
1,189,667 |
|
|
|
1,189,667 |
|
Financial
derivatives
|
|
|
- |
|
|
|
21,170 |
|
|
|
- |
|
|
|
21,170 |
|
Total
Assets at fair value
|
|
$ |
335,177 |
|
|
$ |
903,485 |
|
|
$ |
3,047,302 |
|
|
$ |
4,285,964 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives
|
|
$ |
39 |
|
|
$ |
106,972 |
|
|
$ |
3,591 |
|
|
$ |
110,602 |
|
Total
Liabilities at fair value
|
|
$ |
39 |
|
|
$ |
106,972 |
|
|
$ |
3,591 |
|
|
$ |
110,602 |
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale, at lower of cost or fair value
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
85,248 |
|
|
$ |
85,248 |
|
Loans
held for investment, at fair value
|
|
|
- |
|
|
|
- |
|
|
|
10,522 |
|
|
|
10,522 |
|
Total
Assets at fair value
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
95,770 |
|
|
$ |
95,770 |
|
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 |
|
Treasuries
|
|
|
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 |
|
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. Net
transfers in and/or out of level 3 are based on the fair values of the assets
and liabilities as of the beginning of the quarterly reporting
period.
Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended March 31, 2010
|
|
|
|
Beginning
Balance
|
|
|
Purchases,
Sales,
Issuances
and
Settlements,
net
|
|
|
Realized and
Unrealized
Gains/(Losses)
included in
Income
|
|
|
Unrealized
Gains/(Losses)
included in
Other
Comprehensive
Income
|
|
|
Net Transfers
In
and/or Out
|
|
|
Ending
Balance
|
|
|
|
(in
thousands)
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by
Government guaranteed student loans
|
|
$ |
72,884 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(10,628 |
) |
|
$ |
- |
|
|
$ |
62,256 |
|
Floating
rate GSE subordinated debt
|
|
|
47,562 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(47,562 |
) |
|
|
- |
|
Fixed
rate GSE preferred stock
|
|
|
89,211 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(89,211 |
) |
|
|
- |
|
Total
available-for-sale investment securities
|
|
|
209,657 |
|
|
|
- |
|
|
|
- |
|
|
|
(10,628 |
) |
|
|
(136,773 |
) |
|
|
62,256 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities(1)
|
|
|
1,824 |
|
|
|
(236 |
) |
|
|
(136 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,452 |
|
Fixed
rate GSE preferred stock
|
|
|
88,148 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(88,148 |
) |
|
|
- |
|
Total
trading investment securities
|
|
|
89,972 |
|
|
|
(236 |
) |
|
|
(136 |
) |
|
|
- |
|
|
|
(88,148 |
) |
|
|
1,452 |
|
Total
investment securities
|
|
|
299,629 |
|
|
|
(236 |
) |
|
|
(136 |
) |
|
|
(10,628 |
) |
|
|
(224,921 |
) |
|
|
63,708 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I
|
|
|
56,864 |
|
|
|
(3,757 |
) |
|
|
- |
|
|
|
358 |
|
|
|
(5,385 |
) |
|
|
48,080 |
|
Farmer
Mac II
|
|
|
764,792 |
|
|
|
(305 |
) |
|
|
- |
|
|
|
(1,611 |
) |
|
|
(723,184 |
) |
|
|
39,692 |
|
Rural
Utilities
|
|
|
1,703,211 |
|
|
|
- |
|
|
|
- |
|
|
|
2,944 |
|
|
|
- |
|
|
|
1,706,155 |
|
Total
available-for-sale
|
|
|
2,524,867 |
|
|
|
(4,062 |
) |
|
|
- |
|
|
|
1,691 |
|
|
|
(728,569 |
) |
|
|
1,793,927 |
|
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 |
|
|
|
(4,062 |
) |
|
|
- |
|
|
|
1,691 |
|
|
|
(1,602,698 |
) |
|
|
1,793,927 |
|
USDA
Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
- |
|
|
|
52,897 |
|
|
|
- |
|
|
|
5,742 |
|
|
|
723,184 |
|
|
|
781,823 |
|
Trading
(2)
|
|
|
- |
|
|
|
(19,858 |
) |
|
|
5,021 |
|
|
|
- |
|
|
|
422,681 |
|
|
|
407,844 |
|
Total
USDA Guaranteed Securities
|
|
|
- |
|
|
|
33,039 |
|
|
|
5,021 |
|
|
|
5,742 |
|
|
|
1,145,865 |
|
|
|
1,189,667 |
|
Total
Assets at fair value
|
|
$ |
3,698,625 |
|
|
$ |
28,741 |
|
|
$ |
4,885 |
|
|
$ |
(3,195 |
) |
|
$ |
(681,754 |
) |
|
$ |
3,047,302 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives(3)
|
|
|
(3,653 |
) |
|
|
- |
|
|
|
62 |
|
|
|
- |
|
|
|
- |
|
|
|
(3,591 |
) |
Total
Liabilities at fair value
|
|
$ |
(3,653 |
) |
|
$ |
- |
|
|
$ |
62 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(3,591 |
) |
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held for sale, at lower of cost or fair value
|
|
$ |
28,505 |
|
|
$ |
- |
|
|
$ |
(2,274 |
) |
|
$ |
- |
|
|
$ |
59,017 |
|
|
$ |
85,248 |
|
Loans
held for investment, at fair value
|
|
|
- |
|
|
|
- |
|
|
|
(84 |
) |
|
|
- |
|
|
|
10,606 |
|
|
|
10,522 |
|
Total
Assets at fair value
|
|
$ |
28,505 |
|
|
$ |
- |
|
|
$ |
(2,358 |
) |
|
$ |
- |
|
|
$ |
69,623 |
|
|
$ |
95,770 |
|
|
(1)
|
Unrealized
losses are attributable to assets still held as of March 31, 2010 and are
recorded in gains on trading
assets.
|
|
(2)
|
Includes
unrealized losses of $1.5 million attributable to assets still held as of
March 31, 2010 that are recorded in gains on trading
assets.
|
|
(3)
|
Unrealized
gains are attributable to liabilities still held as of March 31, 2010 and
are recorded in (losses)/gains on financial
derivatives.
|
Level 3 Assets and Liabilities Measured at Fair Value for the Three Months Ended March 31, 2009
|
|
|
|
Beginning
Balance
|
|
|
Purchases,
Sales,
Issuances
and
Settlements,
Net
|
|
|
Realized and
Unrealized
Gains/(Losses)
included in
Income
|
|
|
Unrealized
Gains/(Losses)
included in
Other
Comprehensive
Income
|
|
|
Net Transfers
Out
|
|
|
Ending Balance
|
|
|
|
(in thousands)
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate auction-rate certificates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed
by Government guaranteed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
student
loans
|
|
$ |
178,577 |
|
|
$ |
(119,850 |
) |
|
$ |
- |
|
|
$ |
8,909 |
|
|
$ |
- |
|
|
$ |
67,636 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate asset-backed securities(1)
|
|
|
2,211 |
|
|
|
(268 |
) |
|
|
19 |
|
|
|
- |
|
|
|
- |
|
|
|
1,962 |
|
Fixed
rate GSE preferred stock(1)
|
|
|
161,552 |
|
|
|
(348 |
) |
|
|
15,586 |
|
|
|
- |
|
|
|
- |
|
|
|
176,790 |
|
Total
trading
|
|
|
163,763 |
|
|
|
(616 |
) |
|
|
15,605 |
|
|
|
- |
|
|
|
- |
|
|
|
178,752 |
|
Total
investment securities
|
|
|
342,340 |
|
|
|
(120,466 |
) |
|
|
15,605 |
|
|
|
8,909 |
|
|
|
- |
|
|
|
246,388 |
|
Farmer
Mac Guaranteed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac I (2)
|
|
|
349,292 |
|
|
|
2,889 |
|
|
|
- |
|
|
|
(953 |
) |
|
|
(288,012 |
) |
|
|
63,216 |
|
Farmer
Mac II
|
|
|
522,565 |
|
|
|
61,491 |
|
|
|
- |
|
|
|
4,940 |
|
|
|
- |
|
|
|
588,996 |
|
Rural
Utilities
|
|
|
639,837 |
|
|
|
270,000 |
|
|
|
- |
|
|
|
2,858 |
|
|
|
- |
|
|
|
912,695 |
|
Total
available-for-sale
|
|
|
1,511,694 |
|
|
|
334,380 |
|
|
|
- |
|
|
|
6,845 |
|
|
|
(288,012 |
) |
|
|
1,564,907 |
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer
Mac II (3)
|
|
|
496,863 |
|
|
|
(23,914 |
) |
|
|
3,732 |
|
|
|
- |
|
|
|
- |
|
|
|
476,681 |
|
Rural
Utilities(1)
|
|
|
442,687 |
|
|
|
(5,909 |
) |
|
|
12,288 |
|
|
|
- |
|
|
|
- |
|
|
|
449,066 |
|
Total
trading
|
|
|
939,550 |
|
|
|
(29,823 |
) |
|
|
16,020 |
|
|
|
- |
|
|
|
- |
|
|
|
925,747 |
|
Total
Farmer Mac Guaranteed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
2,451,244 |
|
|
|
304,557 |
|
|
|
16,020 |
|
|
|
6,845 |
|
|
|
(288,012 |
) |
|
|
2,490,654 |
|
Total
Assets at fair value
|
|
$ |
2,793,584 |
|
|
$ |
184,091 |
|
|
$ |
31,625 |
|
|
$ |
15,754 |
|
|
$ |
(288,012 |
) |
|
$ |
2,737,042 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives (4)
|
|
$ |
(3,719 |
) |
|
$ |
- |
|
|
$ |
(517 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(4,236 |
) |
Total
Liabilities at fair value
|
|
$ |
(3,719 |
) |
|
$ |
- |
|
|
$ |
(517 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(4,236 |
) |
|
(1)
|
Unrealized
gains are attributable to assets still held as of March 31, 2009 and are
recorded in gains on trading assets.
|
|
(2)
|
Includes,
as a result of the release of Farmer Mac's guarantee, the reclassification
of certain Farmer Mac Guaranteed Securities to loans
held-for-sale. As of March 31, 2009, loans held-for-sale are
reported at cost on the condensed consolidated balance sheets.
|
|
(3)
|
Includes
unrealized gains of approximately $3.4 million attributable to assets
still held as of March 31, 2009 that are recorded in gains on trading
assets.
|
|
(4)
|
Unrealized losses
are attributable to liabilities still held as of March 31, 2009 and are
recorded in (losses)/gains 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. 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.
Farmer
Mac made no fair value option elections for the three months ended March 31,
2010 and 2009. During first quarter 2010, Farmer Mac recorded net
gains on trading assets of $3.5 million for changes in fair values of the
assets selected for the fair value option, compared to net gains on trading
assets of $31.6 million for the same period ended
March 31, 2009. These gains are presented as “Gains on
trading assets” in the condensed consolidated statements of
operations.
Disclosures
about Fair Value of Financial Instruments
The
following table sets forth the estimated fair values and the carrying amounts
for financial assets, liabilities and guarantees and commitments as of March 31,
2010 and December 31, 2009 in accordance with FASB guidance on disclosures
about fair value of financial instruments.
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
|
(in thousands)
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
418,211 |
|
|
$ |
418,211 |
|
|
$ |
654,794 |
|
|
$ |
654,794 |
|
Investment
securities
|
|
|
1,281,200 |
|
|
|
1,281,200 |
|
|
|
1,131,895 |
|
|
|
1,131,895 |
|
Farmer
Mac Guaranteed Securities
|
|
|
1,793,927 |
|
|
|
1,793,927 |
|
|
|
3,398,996 |
|
|
|
3,398,996 |
|
USDA
Guaranteed Securities
|
|
|
1,189,667 |
|
|
|
1,189,667 |
|
|
|
- |
|
|
|
- |
|
Loans
|
|
|
2,771,734 |
|
|
|
2,629,144 |
|
|
|
779,185 |
|
|
|
753,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives
|
|
|
21,170 |
|
|
|
21,170 |
|
|
|
15,040 |
|
|
|
15,040 |
|
Interest
receivable
|
|
|
64,794 |
|
|
|
64,794 |
|
|
|
67,178 |
|
|
|
67,178 |
|
Guarantee
and commitment fees receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
|
14,581 |
|
|
|
13,343 |
|
|
|
14,591 |
|
|
|
15,896 |
|
Farmer
Mac Guaranteed Securities
|
|
|
18,313 |
|
|
|
20,852 |
|
|
|
36,135 |
|
|
|
39,120 |
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
|
3,404,345 |
|
|
|
3,404,475 |
|
|
|
3,665,282 |
|
|
|
3,662,898 |
|
Due
after one year
|
|
|
2,153,156 |
|
|
|
2,082,578 |
|
|
|
1,964,526 |
|
|
|
1,908,713 |
|
Debt
securities of consolidated trusts held by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
third
parties
|
|
|
1,418,285 |
|
|
|
1,337,331 |
|
|
|
- |
|
|
|
- |
|
Financial
derivatives
|
|
|
110,602 |
|
|
|
110,602 |
|
|
|
107,367 |
|
|
|
107,367 |
|
Accrued
interest payable
|
|
|
47,530 |
|
|
|
47,530 |
|
|
|
39,562 |
|
|
|
39,562 |
|
Guarantee
and commitment obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTSPCs
|
|
|
13,562 |
|
|
|
12,324 |
|
|
|
13,370 |
|
|
|
14,676 |
|
Farmer
Mac Guaranteed Securities
|
|
|
16,176 |
|
|
|
18,715 |
|
|
|
30,865 |
|
|
|
33,850 |
|
The
carrying amount 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.
Note
8.
|
Business
Segment Reporting
|
Farmer
Mac accomplishes its congressional mission of providing liquidity and lending
capacity to rural lenders through three programs – Farmer Mac I, Farmer Mac II
and Rural Utilities. Prior to first quarter 2010, Farmer Mac reported
its financial results as a single segment using GAAP-basis
income. Beginning in first quarter 2010, Farmer Mac revised its segment
financial reporting, by using core earnings, a non-GAAP financial
measure, to reflect the manner in which management has begun assessing the
Corporation’s performance since the contribution of substantially all of the
Farmer Mac II program business to a subsidiary, Farmer Mac II LLC. Farmer
Mac uses core earnings to measure corporate economic performance and develop
financial plans because, in management’s view, core earnings more accurately
represents Farmer Mac’s economic performance, transaction economics and business
trends. Core earnings differs from GAAP net income primarily by
excluding unrealized gains or losses on financial derivatives and trading
assets, lower of cost or fair value adjustments on loans held for sale and, for
first quarter 2010, other items related to the retirement of preferred stock and
the amortization of premiums on assets consolidated at fair
value.
The
financial information presented below reflects the accounts of Farmer Mac and
its subsidiaries on a consolidated basis. Accordingly, the core
earnings for Farmer Mac’s reportable operating segments will differ from the
stand-alone financial statements of Farmer Mac’s subsidiaries. These
differences will be due to various factors, including the reversal of unrealized
gains and losses related to fair value changes of trading assets and financial
derivatives, as well as the allocation of certain expenses such as dividends and
interest expense related to the issuance of capital and the incurrence of
indebtedness managed at the corporate level. The allocation of
general and administrative expenses that are not directly attributable to an
operating segment may also result in differences. The assets of
Farmer Mac’s subsidiary Farmer Mac II LLC would be available to creditors of
Farmer Mac only after all obligations owed to creditors of and equity holders in
Farmer Mac II LLC had been satisfied. As of March 31, 2010, Farmer
Mac II LLC held assets with a fair value of $1.3 billion, had no debt
outstanding, and had preferred stock outstanding with a liquidation preference
of $250.0 million.
Management
has determined that the Corporation’s operations consist of three reportable
segments – Farmer Mac I, Farmer Mac II and Rural Utilities. Farmer
Mac uses these three segments to generate revenue and manage business risk, and
each segment is based on distinct products and distinct business
activities. In addition to these three program operating segments, a
corporate segment is presented. That segment represents activity in
Farmer Mac’s non-program investment portfolio and other corporate
activities. The segment financial results include directly
attributable revenues and expenses. Corporate charges for
administrative expenses that are not directly attributable to an opeating
segment are allocated based on headcount.
Each of
the program operating segments generates revenue through purchasing loans or
securities, committing to purchase loans, or guaranteeing securities backed by
eligible loans. Purchases of both program and non-program assets are
funded through debt issuance of various maturities. Management makes
decisions about pricing, funding, guarantee and commitment fee levels, based on
inherent credit risks, resource allocation and target returns on equity
separately for each segment.
Under the
Farmer Mac I program, Farmer Mac purchases or commits to purchase eligible
mortgage loans secured by first liens on agricultural real estate, including
through the issuance of LTSPCs. Farmer Mac also guarantees securities
representing interests in, or obligations secured by, pools of eligible
agricultural real estate mortgage loans, and may purchase those
securities.
Under the
Farmer Mac II program, Farmer Mac II LLC purchases USDA-guaranteed portions of
loans. Farmer Mac currently operates 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 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 in the
future.
Under the
Rural Utilities program, Farmer Mac’s business activities include loan
purchases, guarantees and purchases of securities with respect to eligible rural
utilities loans. To date, all of the business under the Rural
Utilities program has been with one lender, National Rural.
The
following table presents core earnings for Farmer Mac’s reportable operating
segments and a reconciliation to GAAP net income for the three months ended
March 31, 2010 and 2009. Farmer Mac has presented the financial
information and disclosures for the prior period to reflect the segment
disclosures as if they had been in effect for all periods
reported.
Core Earnings by Business Segment
|
|
For the Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
|
|
|
Reconciling
|
|
|
GAAP
|
|
|
|
Farmer Mac I
|
|
|
Farmer Mac II
|
|
|
Rural Utilities
|
|
|
Corporate
|
|
|
Earnings
|
|
|
Adjustments
|
|
|
Net Income
|
|
|
|
(in
thousands)
|
|
Interest
income (1)
|
|
$ |
28,234 |
|
|
$ |
12,605 |
|
|
$ |
14,401 |
|
|
$ |
6,483 |
|
|
$ |
61,723 |
|
|
$ |
(991 |
) |
|
$ |
60,732 |
|
Interest
income related to consolidated trusts owned by third parties
reclassed to guarantee fee income
|
|
|
(1,467 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,467 |
) |
|
|
1,467 |
|
|
|
- |
|
Interest
expense (2)
|
|
|
(19,624 |
) |
|
|
(10,458 |
) |
|
|
(11,742 |
) |
|
|
(3,626 |
) |
|
|
(45,450 |
) |
|
|
8,335 |
|
|
|
(37,115 |
) |
Net
effective spread
|
|
|
7,143 |
|
|
|
2,147 |
|
|
|
2,659 |
|
|
|
2,857 |
|
|
|
14,806 |
|
|
|
8,811 |
|
|
|
23,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
|
5,550 |
|
|
|
301 |
|
|
|
1,535 |
|
|
|
- |
|
|
|
7,386 |
|
|
|
(1,467 |
) |
|
|
5,919 |
|
Other
income
|
|
|
886 |
|
|
|
- |
|
|
|
- |
|
|
|
(448 |
) |
|
|
438 |
|
|
|
(4,080 |
) |
|
|
(3,642 |
) |
Non-interest
income (3)
|
|
|
6,436 |
|
|
|
301 |
|
|
|
1,535 |
|
|
|
(448 |
) |
|
|
7,824 |
|
|
|
(5,547 |
) |
|
|
2,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
(2,850 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,850 |
) |
|
|
- |
|
|
|
(2,850 |
) |
Reserve
for losses
|
|
|
1,468 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,468 |
|
|
|
- |
|
|
|
1,468 |
|
Other
non-interest expense
|
|
|
(3,059 |
) |
|
|
(796 |
) |
|
|
(1,080 |
) |
|
|
(1,652 |
) |
|
|
(6,587 |
) |
|
|
- |
|
|
|
(6,587 |
) |
Non-interest
expense (4)
|
|
|
(1,591 |
) |
|
|
(796 |
) |
|
|
(1,080 |
) |
|
|
(1,652 |
) |
|
|
(5,119 |
) |
|
|
- |
|
|
|
(5,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
9,138 |
|
|
|
1,652 |
|
|
|
3,114 |
|
|
|
757 |
|
|
|
14,661 |
|
|
|
3,264 |
|
|
|
17,925 |
|
Income
tax expense
|
|
|
(3,282 |
) |
|
|
(578 |
) |
|
|
(1,090 |
) |
|
|
1,757 |
|
|
|
(3,194 |
) |
|
|
(1,142 |
) |
|
|
(4,336 |
) |
Net
income before dividends
|
|
|
5,856 |
|
|
|
1,074 |
|
|
|
2,024 |
|
|
|
2,514 |
|
|
|
11,467 |
|
|
|
2,122 |
|
|
|
13,589 |
|
Preferred
stock dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,970 |
) |
|
|
(1,970 |
) |
|
|
(5,784 |
) |
|
|
(7,754 |
) |
Net
income
|
|
|
5,856 |
|
|
|
1,074 |
|
|
|
2,024 |
|
|
|
544 |
|
|
|
9,497 |
|
|
|
(3,662 |
) |
|
|
5,835 |
|
Non-controlling
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,068 |
) |
|
|
(4,068 |
) |
|
|
- |
|
|
|
(4,068 |
) |
Segment
core earnings
|
|
$ |
5,856 |
|
|
$ |
1,074 |
|
|
$ |
2,024 |
|
|
$ |
(3,524 |
) |
|
$ |
5,429 |
|
|
$ |
(3,662 |
) |
|
$ |
1,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets at carrying amount
|
|
$ |
2,201,000 |
|
|
$ |
1,246,906 |
|
|
$ |
2,250,586 |
|
|
$ |
1,780,673 |
|
|
|
- |
|
|
|
- |
|
|
$ |
7,479,165 |
|
Total
on- and off-balance sheet program assets at principal
balance
|
|
|
7,293,825 |
|
|
|
1,237,539 |
|
|
|
2,183,576 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,714,940 |
|
Core Earnings by Business Segment
|
|
For the Three Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
|
|
|
Reconciling
|
|
|
GAAP
|
|
|
|
Farmer Mac I
|
|
|
Farmer Mac II
|
|
|
Rural Utilities
|
|
|
Corporate
|
|
|
Earnings
|
|
|
Adjustments
|
|
|
Net Income
|
|
|
|
(in
thousands)
|
|
Interest
income (1)
|
|
$ |
15,024 |
|
|
$ |
11,445 |
|
|
$ |
11,512 |
|
|
$ |
8,908 |
|
|
$ |
46,889 |
|
|
$ |
264 |
|
|
$ |
47,153 |
|
Interest
expense (2)
|
|
|
(8,307 |
) |
|
|
(10,282 |
) |
|
|
(10,529 |
) |
|
|
(5,183 |
) |
|
|
(34,301 |
) |
|
|
10,588 |
|
|
|
(23,713 |
) |
Net
effective spread
|
|
|
6,717 |
|
|
|
1,163 |
|
|
|
983 |
|
|
|
3,725 |
|
|
|
12,588 |
|
|
|
10,852 |
|
|
|
23,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
and commitment fees
|
|
|
5,888 |
|
|
|
653 |
|
|
|
869 |
|
|
|
- |
|
|
|
7,410 |
|
|
|
- |
|
|
|
7,410 |
|
Other
income
|
|
|
2,080 |
|
|
|
- |
|
|
|
- |
|
|
|
2,801 |
|
|
|
4,881 |
|
|
|
33,339 |
|
|
|
38,220 |
|
Non-interest
income (3)
|
|
|
7,968 |
|
|
|
653 |
|
|
|
869 |
|
|
|
2,801 |
|
|
|
12,291 |
|
|
|
33,339 |
|
|
|
45,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
(3,534 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,534 |
) |
|
|
- |
|
|
|
(3,534 |
) |
Reserve
for losses
|
|
|
(2,519 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,519 |
) |
|
|
- |
|
|
|
(2,519 |
) |
Other
non-interest expense
|
|
|
(3,395 |
) |
|
|
(1,055 |
) |
|
|
(1,195 |
) |
|
|
(1,828 |
) |
|
|
(7,473 |
) |
|
|
- |
|
|
|
(7,473 |
) |
Non-interest
expense (4)
|
|
|
(5,914 |
) |
|
|
(1,055 |
) |
|
|
(1,195 |
) |
|
|
(1,828 |
) |
|
|
(9,992 |
) |
|
|
- |
|
|
|
(9,992 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
5,237 |
|
|
|
761 |
|
|
|
657 |
|
|
|
4,698 |
|
|
|
11,353 |
|
|
|
44,191 |
|
|
|
55,544 |
|
Income
tax expense
|
|
|
(1,833 |
) |
|
|
(267 |
) |
|
|
(230 |
) |
|
|
(293 |
) |
|
|
(2,624 |
) |
|
|
(15,466 |
) |
|
|
(18,090 |
) |
Net
income before dividends
|
|
|
3,404 |
|
|
|
494 |
|
|
|
427 |
|
|
|
4,405 |
|
|
|
8,729 |
|
|
|
28,725 |
|
|
|
37,454 |
|
Preferred
stock dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,936 |
) |
|
|
(3,936 |
) |
|
|
- |
|
|
|
(3,936 |
) |
Segment
core earnings
|
|
$ |
3,404 |
|
|
$ |
494 |
|
|
$ |
427 |
|
|
$ |
469 |
|
|
$ |
4,793 |
|
|
$ |
28,725 |
|
|
$ |
33,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets at carrying amount
|
|
$ |
794,052 |
|
|
$ |
1,082,391 |
|
|
$ |
1,370,407 |
|
|
$ |
1,524,027 |
|
|
|
- |
|
|
|
- |
|
|
$ |
4,770,877 |
|
Total
on- and off-balance sheet program assets at principal
balance
|
|
|
7,530,850 |
|
|
|
1,082,215 |
|
|
|
1,319,033 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,932,098 |
|
(1)
Includes adjustments for yield maintenance income and amortization of premiums
on assets consolidated at fair value to reflect core earnings
amounts.
(2) Based
on effective funding cost determined for each operating segment, including the
expense related to financial derivatives.
(3)
Adjusted for fair value changes on financial derivatives and trading assets to
reflect core earnings amounts.
(4)
Includes directly attributable costs and an allocation of indirectly
attributable costs based on headcount.
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Financial
information is consolidated to include the accounts of Farmer Mac and its
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.
This
discussion and analysis of financial condition and results of operations should
be read together with: (1) the interim unaudited condensed
consolidated financial statements and the related notes that appear elsewhere in
this report; and (2) Farmer Mac’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2009 filed with the SEC on March 16,
2010.
The
discussion below is not necessarily indicative of future
results.
Special Note Regarding
Forward-Looking Statements
Some
statements made in this report are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 pertaining to
management’s current expectations as to Farmer Mac’s future financial results,
business prospects and business developments. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
typically are accompanied by, and identified with, such terms as “anticipates,”
“believes,” “expects,” “intends,” “should” and similar phrases. The
following management’s discussion and analysis includes forward-looking
statements addressing Farmer Mac’s:
|
·
|
prospects
for earnings;
|
|
·
|
prospects
for growth in loan purchase, guarantee, securitization, and LTSPC
volume;
|
|
·
|
trends
in net interest income;
|
|
·
|
trends
in portfolio credit quality, delinquencies, and provisions for
losses;
|
|
·
|
trends
in non-program investments;
|
|
·
|
prospects
for asset impairments and allowance for
losses;
|
|
·
|
changes
in capital position; and
|
|
·
|
other
business and financial matters.
|
Management’s
expectations for Farmer Mac’s future necessarily involve a number of assumptions
and estimates and the evaluation of risks and uncertainties. Various
factors or events could cause Farmer Mac’s actual results to differ materially
from the expectations as expressed or implied by the forward-looking statements,
including the factors discussed under “Risk Factors” in Part I, Item 1A of
Farmer Mac’s Annual Report on Form 10-K for the year ended
December 31, 2009 filed with the SEC on March 16, 2010, as well as
uncertainties regarding:
|
·
|
the
availability to Farmer Mac and Farmer Mac II LLC of debt financing on
reasonable rates and terms;
|
|
·
|
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
report. Furthermore, Farmer Mac undertakes no obligation to release
publicly the results of revisions to any forward-looking statements that may be
made to reflect new information or any future events or circumstances, except as
otherwise mandated by the SEC.
Overview
During
first quarter 2010, Farmer Mac completed its efforts to raise additional
regulatory core capital and repurchased and retired its previously outstanding
mezzanine equity. The retired mezzanine equity (Series B preferred
stock) carried an annual dividend of 12 percent that was scheduled to rise to 14
percent during 2010 and to 16 percent during 2011, compared to the tax-effected
net annualized cost of the newly issued capital of approximately
5.77 percent. In addition to lowering Farmer Mac’s cost of
capital, the new capital issuance, which was effected through Farmer Mac’s
subsidiary Farmer Mac II LLC, significantly increased Farmer Mac’s excess
capital above its statutory minimum capital requirement. As of March
31, 2010, that excess was $195.0 million, compared to $120.2 million as of
December 31, 2009. With the new capital, 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 capital and liquidity to rural America.
During
first quarter 2010, loan purchase activity in the Farmer Mac I program increased
in part due to attractive long-term fixed interest rates along with farmers and
ranchers reaching Farmer Mac’s commercial bank business partners’ borrower exposure
limits. Farmer Mac’s capital position in late 2008 led 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 led
to the reduction of the flow of Farmer Mac I business volume from some of Farmer
Mac’s traditional sources during 2009. However, by the end of 2009,
Farmer Mac’s plan to raise capital was nearing completion, and Farmer Mac
positioned itself to grow the Farmer Mac I business by eliminating the
requirement to purchase the Series C preferred stock. Other
developments that favorably positioned Farmer Mac to grow the Farmer Mac I
program were:
|
·
|
Farmer
Mac expanded its marketing arrangements with the American Bankers
Association and the Independent Community Bankers of America;
and
|
|
·
|
one
of Farmer Mac’s commercial bank business partners obtained a validation
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 and continuing through the
first quarter 2010, 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 generation and transmission cooperatives and
expects to see purchase requests for these types of rural utilities loans during
2010.
Critical Accounting Policies
and Estimates
The
preparation of Farmer Mac’s consolidated financial statements in conformity with
GAAP requires the use of estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and related notes
for the periods presented. Actual results could differ from those
estimates. The critical accounting policies that are both important
to the portrayal of Farmer Mac’s financial condition and results of operations
and require complex, subjective judgments are the accounting policies
for: (1) the allowance for losses, (2) fair value measurement,
and (3) other-than-temporary impairment.
For a
discussion of Farmer Mac’s critical accounting policies related to the allowance
for losses, fair value measurement and other-than-temporary impairment and the
related use of estimates and assumptions that affect the amounts reported in the
condensed consolidated financial statements and related notes for the periods
presented, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Policies and Estimates” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009
filed with the SEC on March 16, 2010.
Results of
Operations
Farmer
Mac’s net income available to common stockholders for first quarter 2010 was
$1.8 million or $0.17 per diluted common share, compared to net income of
$33.5 million or $3.31 per diluted common share for first quarter
2009.
Farmer
Mac uses core earnings, a non-GAAP financial measure, to measure corporate
economic performance and develop financial plans because, in management’s view,
core earnings more accurately represents Farmer Mac’s economic performance,
transaction economics and business trends. Core earnings differs from
GAAP net income primarily by excluding unrealized gains or losses on financial
derivatives and trading assets, lower of cost or fair value adjustments on loans
held for sale and, for first quarter 2010, other items related to the
retirement of preferred stock and the amortization of premiums on assets
consolidated at fair value. Farmer Mac’s disclosure of this non-GAAP
measure is not intended to replace GAAP information but, rather, to supplement
it. A reconciliation of Farmer Mac’s GAAP net income available to
common stockholders to core earnings is presented in the following
table.
Reconciliation of GAAP Net Income Available to Common Stockholders to Core Earnings
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
Share
|
|
|
|
|
|
Share
|
|
|
|
(in
thousands, except per share amounts)
|
|
GAAP
net income available to common stockholders
|
|
$ |
1,767 |
|
|
$ |
0.17 |
|
|
$ |
33,518 |
|
|
$ |
3.31 |
|
Less
the effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on financial derivatives, net of tax
|
|
|
1,887 |
|
|
|
0.19 |
|
|
|
9,728 |
|
|
|
0.96 |
|
Unrealized
gains on trading assets, net of tax
|
|
|
2,188 |
|
|
|
0.21 |
|
|
|
20,557 |
|
|
|
2.03 |
|
Net
effects of settlements on agency forward contracts, net of
tax
|
|
|
206 |
|
|
|
0.02 |
|
|
|
(1,560 |
) |
|
|
(0.15 |
) |
Plus
the effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
costs on the retirement of preferred stock
|
|
|
5,784 |
|
|
|
0.57 |
|
|
|
- |
|
|
|
- |
|
Amortization
of premiums on assets consolidated at fair value, net of
tax
|
|
|
682 |
|
|
|
0.07 |
|
|
|
- |
|
|
|
- |
|
Lower
of cost or fair value adjustment on loans held for sale, net of
tax
|
|
|
1,478 |
|
|
|
0.15 |
|
|
|
- |
|
|
|
- |
|
Core
earnings
|
|
$ |
5,430 |
|
|
$ |
0.54 |
|
|
$ |
4,793 |
|
|
$ |
0.47 |
|
Farmer
Mac retired and repurchased all of the outstanding shares of Series B preferred
stock with proceeds from the completed capital raise in January
2010. As a result of the repurchase, Farmer Mac wrote off $5.8
million of deferred issuance costs related to those Series B preferred shares as
loss on retirement of preferred stock on the condensed consolidated statements
of operations.
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 first quarter 2010
loss on financial derivatives was $5.8 million, compared to a gain of $1.7
million during first quarter 2009. Fair value gains on trading assets
totaled $3.4 million for first quarter 2010, compared to gains of
$31.6 million for first quarter 2009. 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 first
quarter 2010 and as has been the case in previous reporting
periods. Future changes in those values cannot be reliably predicted;
however, as of March 31, 2010, the cumulative fair value after-tax losses
recorded on financial derivatives was $58.1 million. Over time,
Farmer Mac will realize in earnings the net effect of the cash settlements on
its interest rate swap contracts, which may on its own produce either income or
expense, but is expected to generate positive effective net spread when combined
with the interest earned and paid on the assets and liabilities Farmer Mac holds
on its balance sheet. This positive effective net spread will
continue to build retained earnings and capital over time. Although
the unrealized fair value fluctuations experienced throughout the term of the
financial derivatives will temporarily impact earnings and capital, those
fluctuations will have no permanent effect if the financial derivatives are held
to maturity, as is generally expected.
Farmer
Mac’s first quarter 2009 results benefited from two transactions that were not
replicated in first quarter 2010. The first was the sale of a pool of
loans with a total principal balance of $354.5 million. The sale
resulted in a gain of $1.6 million and a recovery of previously charged off
losses of $0.8 million. The second transaction was the sale of Lehman
Brothers Holdings Inc. senior debt securities that had been written down to
$5.4 million as of December 31, 2008. The sale of those
securities during first quarter 2009 for $8.6 million resulted in a $3.2 million
recovery of previously written off losses. That recovery was
presented as “Gains on sale of available-for-sale investment securities” on the
condensed consolidated statements of operations.
The
following sections provide more detail regarding specific components of Farmer
Mac’s results of operations.
Net
Interest Income. For first quarter 2010, net interest income
was $23.6 million, compared to $23.4 million for first quarter
2009. Net interest income for first quarter 2010 includes the
reclassification of guarantee fees of $1.5 million related
to Farmer Mac Guaranteed Securities previously reported as off-balance sheet
as a result of the adoption of the new consolidation
guidance. Excluding the impact of this reclassification, the net
interest yield was 157 basis points for the three months ended March 31, 2010,
compared to 187 basis points for the three months ended March 31,
2009.
The
following table provides information regarding interest-earning assets and
funding for the three months ended March 31, 2010 and 2009. The
balance of non-accruing loans is included in the average balance of
interest-earning loans and Farmer Mac and USDA 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
balance of consolidated loans with beneficial interests owned by third parties
is disclosed in the net effect of consolidated trusts and is not included in the
average balances of interest-earning assets and interest-bearing liabilities.
The interest income and expense associated with these trusts are shown net in
the net effect of consolidated trusts. The average rate earned on
cash and investments reflects lower short-term market rates during the three
months ended March 31, 2010 compared to the three months ended
March 31, 2009. The lower average rate on loans and Farmer
Mac and USDA Guaranteed Securities during the three months ended March 31, 2010
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 Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and investments
|
|
$ |
1,498,805 |
|
|
$ |
6,483 |
|
|
|
1.73%
|
|
|
$ |
1,665,594 |
|
|
$ |
8,909 |
|
|
|
2.14%
|
|
Loans
and Farmer Mac and USDA Guaranteed Securities (1)
|
|
|
4,147,754 |
|
|
|
35,851 |
|
|
|
3.46%
|
|
|
|
3,355,026 |
|
|
|
38,244 |
|
|
|
4.56%
|
|
Total
interest-earning assets
|
|
|
5,646,559 |
|
|
|
42,334 |
|
|
|
3.00%
|
|
|
|
5,020,620 |
|
|
|
47,153 |
|
|
|
3.76%
|
|
Funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable due within one year
|
|
|
3,180,005 |
|
|
|
2,816 |
|
|
|
0.35%
|
|
|
|
3,469,080 |
|
|
|
8,853 |
|
|
|
1.02%
|
|
Notes
payable due after one year (2)
|
|
|
2,105,604 |
|
|
|
17,368 |
|
|
|
3.30%
|
|
|
|
1,368,059 |
|
|
|
14,860 |
|
|
|
4.34%
|
|
Total
interest-bearing liabilities (3)
|
|
|
5,285,609 |
|
|
|
20,184 |
|
|
|
1.53%
|
|
|
|
4,837,139 |
|
|
|
23,713 |
|
|
|
1.96%
|
|
Net
non-interest-bearing funding
|
|
|
360,950 |
|
|
|
- |
|
|
|
|
|
|
|
183,481 |
|
|
|
- |
|
|
|
|
|
Total
funding
|
|
|
5,646,559 |
|
|
|
20,184 |
|
|
|
1.43%
|
|
|
|
5,020,620 |
|
|
|
23,713 |
|
|
|
1.89%
|
|
Net
interest income/yield prior to consolidation of certain
trusts
|
|
$ |
5,646,559 |
|
|
$ |
22,150 |
|
|
|
1.57%
|
|
|
$ |
5,020,620 |
|
|
$ |
23,440 |
|
|
|
1.87%
|
|
Net
effect of consolidated trusts (4)
|
|
|
1,367,723 |
|
|
|
1,467 |
|
|
|
0.43%
|
|
|
|
- |
|
|
|
- |
|
|
|
0.00%
|
|
Net
interest income/yield
|
|
$ |
7,014,282 |
|
|
$ |
23,617 |
|
|
|
1.35%
|
|
|
$ |
5,020,620 |
|
|
$ |
23,440 |
|
|
|
1.87%
|
|
(1)
Excludes interest income of $18.4 million related to consolidated trusts with
beneficial interests owned by third parties.
(2)
Includes current portion of long-term notes.
(3)
Excludes interest expense of $16.9 million related to consolidated trusts with
beneficial interests owned by third parties.
(4)
Includes the net effect of consolidated trusts with beneficial interests owned
by third party investors.
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 and
USDA Guaranteed Securities, as described above. The decreases in
expense reflect the decreased cost of funding due to lower interest rates in the
debt markets.
|
|
For the Three Months Ended March 31, 2010
|
|
|
|
Compared to the Three Months Ended
|
|
|
|
March 31, 2009
|
|
|
|
Increase/(Decrease) Due to
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Income
from interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Cash
and investments
|
|
$ |
(1,593 |
) |
|
$ |
(833 |
) |
|
$ |
(2,426 |
) |
Loans
and Farmer Mac and USDA Guaranteed Securities
|
|
|
(10,349 |
) |
|
|
7,956 |
|
|
|
(2,393 |
) |
Total
|
|
|
(11,942 |
) |
|
|
7,123 |
|
|
|
(4,819 |
) |
Expense
from interest-bearing liabilities
|
|
|
(5,584 |
) |
|
|
2,055 |
|
|
|
(3,529 |
) |
Change
in net interest income prior to consolidation of certain
trusts(1)
|
|
$ |
(6,358 |
) |
|
$ |
5,068 |
|
|
$ |
(1,290 |
) |
(1) Excludes the
effect of consolidated trusts with beneficial interests owned by third
parties.
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 and the amortization of certain premiums upon
consolidation. The following paragraphs describe the effects of these
items on the net interest yield and the table below presents them as adjustments
to reconcile to the net effective spread Farmer Mac earns on the difference
between its interest-earning assets and its net funding costs, including
payments for income and expense related to financial derivatives.
Farmer
Mac accounts for its financial derivatives as undesignated financial
derivatives. Accordingly, the Corporation records the income or
expense related to financial derivatives as gains and losses on financial
derivatives. For the three months ended March 31, 2010, this resulted
in an increase of the net interest yield of $8.3 million (59 basis points),
compared to an increase of the net interest yield of $10.6 million (84 basis
points) for the three months ended March 31, 2009.
Farmer
Mac’s net interest income and net interest yields for the three months ended
March 31, 2010 and 2009 included the benefits of yield maintenance payments
of $0.1 million (less than 1 basis point) and $0.3 million
(2 basis points), respectively. Yield maintenance payments
represent the present value of expected future interest income streams and
accelerate the recognition of interest income from the related
loans. Because the timing and size of these payments vary greatly,
variations do not necessarily indicate positive or negative trends to gauge
future financial results.
Upon
the adoption of the new consolidation guidance on January 1, 2010, Farmer Mac
was determined to be the primary beneficiary of certain VIEs where Farmer Mac
held beneficial interests in trusts used as vehicles for the securitization of
agricultural real estate mortgage loans or rural utilities
loans. Upon consolidation, Farmer Mac transferred these assets from
“Farmer Mac Guaranteed Securities” to “Loans held for investment in consolidated
trusts.” The transferred assets on January 1, 2010 included Farmer
Mac Guaranteed Securities – Rural Utilities with an unpaid principal balance of
$412.9 million and a fair value of $455.6 million. Farmer Mac
was reporting these assets at their fair values, with changes in fair value
recorded in earnings, based on its election of the fair value option in
2008. Upon consolidation of the underlying rural utilities loans,
Farmer Mac reclassified the unrealized gain of $42.7 million as of January 1,
2010 to unamortized premiums on loans held for investment. The
related premium is being amortized over the estimated remaining lives of the
underlying rural utilities loans.
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. Farmer Mac
transferred these assets at their fair value which resulted in an unamortized
premium of $39.1 million being recorded by Farmer Mac II LLC. This
premium is being amortized over the estimated remaining lives of the underlying
USDA- guaranteed portions.
Farmer
Mac’s net interest income and net interest yield for the three months ended
March 31, 2010 include expenses of $1.0 million (7 basis points) related to
the amortization of the premiums described above.
The
following table presents the net effective spread between Farmer Mac’s
interest-earning assets and its net funding costs. This spread is
measured by including income or expense related to financial derivatives and
subtracting yield maintenance payments and the amortization of premiums on assets
consolidated at fair value.
|
|
For the Three Months Ended
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
Dollars
|
|
|
Yield
|
|
|
Dollars
|
|
|
Yield
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income/yield
|
|
$ |
22,150 |
|
|
|
1.57%
|
|
|
$ |
23,440 |
|
|
|
1.87%
|
|
Expense
related to financial derivatives
|
|
|
(8,335 |
) |
|
|
-0.59%
|
|
|
|
(10,588 |
) |
|
|
-0.84%
|
|
Yield
maintenance payments
|
|
|
(57 |
) |
|
|
0.00%
|
|
|
|
(264 |
) |
|
|
-0.02%
|
|
Amortization
of premiums on assets consolidated at fair value
|
|
|
1,048 |
|
|
|
0.07%
|
|
|
|
- |
|
|
|
-
|
|
Net
effective spread
|
|
$ |
14,806 |
|
|
|
1.05%
|
|
|
$ |
12,588 |
|
|
|
1.01%
|
|
Provision
for Loan Losses. During the three months ended March 31, 2010
and 2009, Farmer Mac recorded provisions to its allowance for loan losses of
$2.9 million and $3.5 million, respectively. Upon the adoption of the
new consolidation guidance on January 1, 2010, Farmer Mac reclassified $2.0
million from the reserve for losses to the allowance for loan losses as a result
of Farmer Mac being determined the primary beneficiary of certain VIEs with
beneficial interests owned by third party investors. In addition to
this reclassification, Farmer Mac recorded provisions to its allowance for loan
losses of $0.9 million. As of March 31, 2010, Farmer Mac’s total
allowance for loan losses was $9.1 million, compared to $6.3 million
as of December 31, 2009. See “—Risk Management—Credit Risk –
Loans.”
Provision
for Losses. During the three months ended March 31, 2010,
Farmer Mac recorded a recovery of its reserve for losses of $1.5 million,
compared to provisions for losses of $2.5 million during the same period in
2009. As discussed above, Farmer Mac reclassified $2.0 million
from the reserve for losses to the allowance for loan losses upon adoption of
the new consolidation guidance. In addition to this reclassification,
Farmer Mac recorded provisions to its reserves for losses of $0.5
million. As of March 31, 2010, Farmer Mac’s reserve for losses was
$6.4 million, compared to $7.9 million as of December 31,
2009.
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 $5.9 million for first quarter 2010,
compared to $7.4 million for first quarter 2008. The decrease was
primarily due to the reclassification of $1.5 million of guarantee fee income to
interest income upon consolidation of certain VIEs with beneficial interests
owned by third party investors pursuant to the new accounting guidance regarding
consolidation.
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 for the three months ended March 31, 2010 was a net loss of $5.8
million, compared to a net gain of $1.7 million for the three months ended March
31, 2009. The components of gains and losses on financial derivatives
for the three months ended March 31, 2010 and 2009 are summarized in the
following table:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Realized:
|
|
|
|
|
|
|
Expense
related to financial derivatives
|
|
$ |
(8,335 |
) |
|
$ |
(10,588 |
) |
Losses
due to terminations or net settlements
|
|
|
(329 |
) |
|
|
(2,633 |
) |
Unrealized
gains due to fair value changes
|
|
|
2,894 |
|
|
|
14,992 |
|
Amortization
of financial derivatives transition adjustment
|
|
|
(34 |
) |
|
|
(60 |
) |
(Losses)/gains
on financial derivatives
|
|
$ |
(5,804 |
) |
|
$ |
1,711 |
|
The
accrual of periodic cash settlements for interest paid or received from Farmer
Mac’s interest rate swap contracts is shown as expense related to financial
derivatives in the table above. Payments or receipts to terminate
derivative positions or net cash settle forward sales contracts on 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
three months ended March 31, 2010 and 2009, Farmer Mac was a party to interest
rate swap contracts with one related party, Zions First National
Bank. Farmer Mac realized expenses of $0.8 million for first quarter
2010 and 2009 related to these interest rate swap contracts. Farmer
Mac recognized unrealized gains of $0.1 million and unrealized losses of
$0.5 million, respectively, for first quarter 2010 and 2009 due to changes
in the fair value of these interest rate swap contracts.
Gains
and Losses on Trading Assets. During the three months ended
March 31, 2010, Farmer Mac recognized gains on trading assets of $3.4 million,
compared to gains of $31.6 million during first quarter
2009. During first quarter 2010, Farmer Mac changed its primary
source of valuation for its investment in the preferred stock of AgFirst Farm
Credit Bank. Taking into consideration its own recently executed
trades during first quarter 2010, along with an increase in observable trading
activity for this and similar securities, Farmer Mac determined that the best
estimate of fair value for this security as of March 31, 2010 was the fair value
provided by an independent third party pricing service. Farmer Mac
corroborated the fair value measurement provided by the independent third party
pricing service through internally-developed models that employ a discounted
cash flow approach. For the three months ended March 31, 2010, Farmer
Mac recorded $1.5 million of trading losses related to the decline in the fair
value of its investment in AgFirst Farm Credit Bank preferred
stock. During first quarter 2010, Farmer Mac also recorded trading
gains of $5.0 million related to an increase in the fair value of the USDA
Guaranteed Securities contributed to its subsidiary, Farmer Mac II LLC which had
previously been selected for the fair value option.
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 the preferred stock
of AgFirst Farm Credit Bank and CoBank, ACB. The benchmark securities
previously used to derive credit spreads for estimates of fair value as of
September 30, 2008 and December 31, 2008 were preferred stock issued by large
national financial institutions. The preferred stock securities of
these large financial institutions experienced significant volatility during
first quarter 2009 due to changes in the credit quality of the issuers and the
market expectations regarding projected cash flows for the
securities. The change in the market expectations of projected future
cash flows for those securities was inconsistent with the Farm Credit System
preferred stock owned by Farmer Mac. Had Farmer Mac estimated the
fair value of the Farm Credit System preferred stock as of December 31, 2008
using the new methodology in place as of March 31, 2009, the fair values of
those securities would have been $175.0 million, an increase of approximately
$13.4 million from the estimated fair value of $161.6 million as of December 31,
2008.
Farmer
Mac made no fair value option elections during the three months ended March 31,
2010 and 2009.
Gains
and Losses on Sale of Available-for-Sale Investment
Securities. During the three months ended March 31, 2010,
Farmer Mac realized gains of $0.2 million from the sale of securities from its
available-for-sale portfolio, compared to gains of $3.2 million for the three
months ended March 31, 2009.
General
and Administrative Expenses. General and administrative
expenses, including legal, independent audit, and consulting fees, were
$2.5 million for first quarter 2010, compared to $2.9 million for
first quarter 2009. The higher level of expenses in first quarter
2009 was largely attributable to legal and consulting fees related to the
development of Farmer Mac programs and corporate governance
matters.
Regulatory
Fees.
Regulatory fees for first quarter 2010 were $0.6 million, compared to $0.5
million for first quarter 2009. FCA has advised Farmer Mac that its
estimated fees for the federal fiscal year ending September 30, 2010 will
be $2.3 million, compared to $2.1 million for the federal fiscal year ended
September 30, 2009. After the end of a federal government fiscal
year, FCA may revise its prior year estimated assessments to reflect actual
costs incurred, and has issued both additional assessments and refunds in the
past.
Income
Tax Expense/Benefit. Income tax expense totaled $4.3 million
for first quarter 2010, compared to $18.1 million for first quarter
2009. Income tax expense decreased significantly primarily due to the
decrease in pre-tax book income. Farmer Mac’s effective tax rates for
first quarter 2010 and 2009 were approximately 24.2 percent and 32.6 percent,
respectively. The change in the effective tax rate was due primarily
to the income attributed to the non-controlling interest in Farmer Mac II LLC,
for which Farmer Mac does not accrue income tax expense.
Business
Volume. During first
quarter 2010, Farmer Mac added $306.4 million of new program volume in the form
of:
|
·
|
purchases
of $77.9 million of Farmer Mac I
loans;
|
|
·
|
the
placement of $77.1 million of Farmer Mac I loans under
LTSPCs;
|
|
·
|
purchases
of $92.3 million of USDA-guaranteed portions of loans;
and
|
|
·
|
purchases
of $59.0 million of Rural Utilities
loans.
|
This new
business volume was partially offset by principal paydowns on outstanding loans
and loans underlying Farmer Mac Guaranteed Securities and
LTSPCs. Farmer Mac’s outstanding program volume was $10.7 billion as
of March 31, 2010.
The
following table sets forth loan purchase, LTSPC and guarantee activities for
current loans under the Farmer Mac I, Farmer Mac II and Rural Utilities programs
during the periods indicated:
Farmer
Mac Loan Purchases, Guarantees and LTSPCs
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
Loans
|
|
$ |
77,948 |
|
|
$ |
29,814 |
|
LTSPCs
|
|
|
77,143 |
|
|
|
65,720 |
|
AgVantage
|
|
|
- |
|
|
|
- |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
USDA
Guaranteed Securities
|
|
|
92,288 |
|
|
|
- |
|
Farmer
Mac Guaranteed Securities
|
|
|
- |
|
|
|
79,055 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
59,018 |
|
|
|
- |
|
Guaranteed
Securities
|
|
|
- |
|
|
|
270,000 |
|
Total
purchases, guarantees and commitments
|
|
$ |
306,397 |
|
|
$ |
444,589 |
|
The
outstanding principal balance of loans held and loans underlying LTSPCs and on-
and off-balance sheet Farmer Mac and USDA Guaranteed Securities was
$10.7 billion as of both March 31, 2010 and December 31,
2009. 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 and USDA Guaranteed Securities and LTSPCs
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
On-balance
sheet:
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
Loans
|
|
$ |
765,934 |
|
|
$ |
733,422 |
|
Loans
held in trusts:
|
|
|
|
|
|
|
|
|
Beneficial
interests owned by Farmer Mac
|
|
|
4,357 |
|
|
|
5,307 |
|
Beneficial
interests owned by third party investors
|
|
|
1,335,953 |
|
|
|
- |
|
Farmer
Mac Guaranteed Securities - AgVantage
|
|
|
45,050 |
|
|
|
48,800 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
USDA
Guaranteed Securities
|
|
|
1,156,930 |
|
|
|
- |
|
Farmer
Mac Guaranteed Securities
|
|
|
41,258 |
|
|
|
1,164,996 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
87,662 |
|
|
|
28,644 |
|
Loans
held in trusts:
|
|
|
|
|
|
|
|
|
Beneficial
interests owned by Farmer Mac
|
|
|
406,679 |
|
|
|
412,948 |
|
Farmer
Mac Guaranteed Securities - AgVantage
|
|
|
1,675,000 |
|
|
|
1,675,000 |
|
Total
on-balance sheet
|
|
$ |
5,518,823 |
|
|
$ |
4,069,117 |
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet:
|
|
|
|
|
|
|
|
|
Farmer
Mac I:
|
|
|
|
|
|
|
|
|
AgVantage
|
|
$ |
2,945,000 |
|
|
$ |
2,945,000 |
|
LTSPCs
|
|
|
1,846,244 |
|
|
|
2,165,706 |
|
Farmer
Mac Guaranteed Securities
|
|
|
348,154 |
|
|
|
1,492,239 |
|
Farmer
Mac II:
|
|
|
|
|
|
|
|
|
Farmer
Mac Guaranteed Securities
|
|
|
39,351 |
|
|
|
34,802 |
|
Rural
Utilities:
|
|
|
|
|
|
|
|
|
AgVantage
|
|
|
14,235 |
|
|
|
14,240 |
|
Total
off-balance sheet
|
|
$ |
5,192,984 |
|
|
$ |
6,651,987 |
|
Total
|
|
$ |
10,711,807 |
|
|
$ |
10,721,104 |
|
Of the
$10.7 billion outstanding principal balance of volume included in Farmer Mac’s
three programs as of March 31, 2010, $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 generally 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 March 31, 2010.
AgVantage
Balances by Year of Maturity
|
|
|
|
As of
|
|
|
|
March 31, 2010
|
|
|
|
(in thousands)
|
|
|
|
|
|
2010
|
|
$ |
191,850 |
|
2011
|
|
|
2,051,400 |
|
2012
|
|
|
497,000 |
|
2013
|
|
|
157,750 |
|
2014
|
|
|
761,900 |
|
Thereafter
|
|
|
1,019,385 |
|
Total
|
|
$ |
4,679,285 |
|
As shown
in the table above, $2.1 billion of the outstanding $4.7 billion of
AgVantage securities matures in 2011. If the issuer of 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. However, the income effect 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.
The
weighted-average ages of the Farmer Mac I newly originated and current seasoned
loans purchased during first quarter 2010 and 2009 was less than one
month. Of the Farmer Mac I newly originated and current seasoned
loans purchased during first quarter 2010 and first quarter 2009, 70 percent and
79 percent, respectively, had principal amortization periods longer than
the maturity date, resulting in balloon payments at maturity, with a
weighted-average remaining term to maturity of 15.6 years and 11.3 years,
respectively. The weighted-average age of delinquent loans purchased
out of securitized pools and LTSPCs during first quarter 2010 and first quarter
2009 was 4.2 years and 8.8 years, respectively.
As part
of fulfilling its guarantee obligations for Farmer Mac I Guaranteed Securities
and commitments to purchase eligible loans underlying LTSPCs, Farmer Mac
purchases defaulted loans, all of which are at least 90 days delinquent or
in material non-monetary default at the time of purchase, out of the loan pools
underlying those securities and LTSPCs, and records the purchased loans as such
on its balance sheet. The purchase price for defaulted loans
purchased out of Farmer Mac I Guaranteed Securities is the current outstanding
principal balance of the loan plus accrued and unpaid interest. The
purchase price for defaulted loans purchased under an LTSPC is the then-current
outstanding principal balance of the loan, with accrued and unpaid interest on
the defaulted loans payable out of any future loan payments or liquidation
proceeds as received. The purchase price of a defaulted loan is not
an indicator of the expected loss on that loan; many other factors affect
expected loss, if any, on loans so purchased. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Risk
Management—Credit Risk—Loans” in the Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2009 filed with the SEC on March 16,
2010.
The
following table presents Farmer Mac’s loan purchases of newly originated and
current seasoned loans and defaulted loans purchased underlying Farmer Mac I
Guaranteed Securities and LTSPCs:
|
|
For the Three Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Farmer
Mac I newly originated and current seasoned loan purchases
|
|
$ |
77,948 |
|
|
$ |
29,814 |
|
Defaulted
loans purchased underlying Farmer Mac I Guaranteed Securities owned by
third party investors
|
|
|
2,323 |
|
|
|
- |
|
Defaulted
loans purchased underlying LTSPCs
|
|
|
167 |
|
|
|
2,814 |
|
Defaulted
loans underlying on-balance sheet Farmer Mac I Guaranteed Securities
transferred to loans
|
|
|
- |
|
|
|
2,216 |
|
Total
loan purchases
|
|
$ |
80,438 |
|
|
$ |
34,844 |
|
Farmer
Mac II LLC. On January 25,
2010, Farmer Mac contributed substantially all of the assets comprising the
Farmer Mac II program (in excess of $1.1 billion) to Farmer Mac’s subsidiary,
Farmer Mac II LLC. The assets that Farmer Mac contributed to Farmer
Mac II LLC consisted primarily of USDA-guaranteed portions that had not been
securitized by Farmer Mac but also included $35.0 million of Farmer Mac II
Guaranteed Securities. Farmer Mac did not guarantee the timely
payment of principal and interest on the $1.1 billion of contributed
USDA-guaranteed portions and will not issue Farmer Mac II Guaranteed Securities
to Farmer Mac II LLC in the future. The contributed USDA-guaranteed
portions had previously been presented as Farmer Mac II Guaranteed Securities on
the condensed consolidated financial statements of Farmer Mac and are now
presented as “USDA Guaranteed Securities” on the condensed consolidated balance
sheets. The financial information presented in this report reflects
the accounts of Farmer Mac and its subsidiaries on a consolidated
basis. Accordingly, Farmer Mac’s reportable operating segments
presented in this report will differ from the stand-alone financial statements
of Farmer Mac II LLC. Those separate financial statements will be
available on the website of Farmer Mac II LLC.
The
assets of Farmer Mac II LLC would be available to creditors of Farmer Mac only
after all obligations owed to creditors of and equity holders in Farmer Mac II
LLC had been satisfied. As of March 31, 2010, Farmer Mac II LLC held
assets with a fair value of $1.3 billion, had no debt outstanding, and had
preferred stock outstanding with a liquidation preference of
$250.0 million. For more information about the formation and
operations of Farmer Mac II LLC and the features of the preferred stock issued
by Farmer Mac II LLC in January 2010, see Notes 3, 5, 6 and 8 to the
condensed consolidated financial statements and Note 15 to the consolidated
financial statements in the Corporation’s Annual Report on Form 10-K for the
year ended December 31, 2009 filed with the SEC on March 16,
2010.
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. Conditions in the agricultural
sector during 2009 and first quarter 2010 were more stable than the national
economy in general, but agriculture was not completely insulated from the
effects of the economic downturn and remained subject to traditional commodity
price cycles. Although some industries in the agricultural sector prospered,
others, such as the dairy sector, experienced operating losses throughout most
of 2009 due to oversupply and the worldwide economic slowdown. However, during
late 2009 and early 2010, the price of milk rose and average- to high-cost dairy
operators began to operate near break-even levels, while low cost producers
turned profits. By the end of the first quarter 2010, the price of milk dropped
again, putting most dairy operations back to a loss position. Based on milk
futures prices, the remainder of 2010 will continue to be a challenge for dairy
producers, which could lead to higher delinquencies and additional provisions
for losses and charge-offs. 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 during 2009; however, prices for these
commodities significantly improved during the first quarter of 2010 and resulted
in a return to profitable levels. 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; however,
margins tightened during first quarter 2010, and on average, ethanol plants
operated at breakeven levels. Farmer Mac will continue to closely monitor
developments in industries and geographic areas experiencing stress. The
cyclical credit issues related to the agricultural sector are expected to remain
within Farmer Mac’s historical experience, but are likely to be greater than the
historical average.
With
respect to the agricultural operating and lending markets, recent farmland sales
have reflected more limited investor interest and the effects of reduced
profitability in some of the noted agricultural sectors. Elevated farm input
costs and lower current commodity prices have significantly squeezed profits and
the related farmer demand for additional land, especially in the 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. The ethanol excise tax
credit that is currently set at $0.45 per gallon on pure ethanol is authorized
through December 31, 2010. Members of Congress introduced H.R. 4940 on March 25,
2010, a bill that would extend the tax credit at $0.45 for five more years. All
ethanol blended with gasoline in the U.S. qualifies for the excise tax credit,
no matter the country of origin of the ethanol. To offset this fact, U.S.
ethanol imports from non-Caribbean Basin countries are subject to a $0.54 per
gallon tariff. This tariff is in effect through December 31, 2010. If Congress
fails to extend the tax credit and tariff, ethanol production is likely to
decline due to loss of income and the industry will be significantly
stressed.
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. As the disruptions in the
financial industry subside and agricultural lenders’ business strategies are
recast, Farmer Mac has identified and is pursuing related business opportunities
and is confident new business partners will result.
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 generation and transmission 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 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
Farmer
Mac adopted two new accounting standards that eliminated the concept of QSPEs
and amended the accounting for transfers of financial assets and the
consolidation model for VIEs during first quarter 2010. The impact
upon adoption was an increase in consolidated assets and liabilities of $1.5
billion, which resulted in an incremental regulatory capital requirement of
$30.4 million. Pursuant to this new guidance, Farmer Mac will
routinely assess its securitization trusts to determine whether it is the
primary beneficiary and thereby required to consolidate the assets and
liabilities of the trust onto its balance sheet, or if determined not to be the
primary beneficiary of a previously consolidated trust, deconsolidate the assets
and liabilities from its balance sheet.
As of
March 31, 2010, Farmer Mac consolidated $1.1 billion of its outstanding
$1.4 billion securitization trusts created when loans subject to LTSPCs
were converted to Farmer Mac I Guaranteed Securities at the request of program
participants. Those securitization transactions contain provisions
resulting in shared power over default mitigation decisions. For
those transactions where the power is shared with a related party (as defined by
applicable accounting guidance), Farmer Mac was determined to be the primary
beneficiary and thus is required to consolidate the assets and liabilities of
the trust onto its balance sheet. For those transactions where the
power was shared with an unrelated party, Farmer Mac was not determined to be
the primary beneficiary and is not required to consolidate the assets and
liabilities of the trust onto its balance sheet.
Determinations
about which business partners of Farmer Mac are related parties often depend on
whether an officer or director of that business partner is a member of Farmer
Mac’s board of directors, ten of whom are elected on an annual basis by the
holders of Farmer Mac’s outstanding voting common stock. Changes in the
membership of the board of directors may result in Farmer Mac consolidating a
trust previously disclosed as off-balance sheet, or deconsolidating a trust
previously consolidated on balance sheet. Although this will have no net effect
on Farmer Mac’s net income, it may, at times, produce volatility in the
statutory minimum capital Farmer Mac is required to hold.
For more
information on Farmer Mac’s policy relating to the consolidation of VIEs, see
Note 1(g) to the condensed consolidated financial
statements. For a discussion of Farmer Mac’s related party
transactions, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Related Party Transactions” and Note 3 in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009
filed with the SEC on March 16, 2010.
Assets. Total
assets were $7.5 billion as of March 31, 2010 and $6.1 billion as of December
31, 2009. The increase in first quarter 2010 was largely attributable
to the consolidation as of March 31, 2010 of $1.3 billion of off-balance
sheet Farmer Mac Guaranteed Securities resulting from the adoption of new
consolidation guidance. A corresponding increase to liabilities of
$1.3 billion was also recorded and presented as “Debt securities of consolidated
trusts held by third parties” on the condensed consolidated balance
sheets.
As of
March 31, 2010, Farmer Mac had $418.2 million of cash and cash equivalents
compared to $654.8 million as of December 31, 2009. As of March
31, 2010, Farmer Mac had $1.3 billion of investment securities compared to
$1.1 billion as of December 31, 2009.
Liabilities
and Total Equity. During the three months ended March 31,
2010, total liabilities increased $1.2 billion as a result of the consolidation
of trusts. Total equity, including mezzanine equity, increased $106.7
million during the same period. The increase in total equity was
primarily the result of raising new capital. 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).
Regulatory
Capital. Farmer Mac was in compliance with its statutory minimum capital
requirement and its risk-based capital standard as of March 31, 2010. 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
March 31, 2010, Farmer Mac’s core capital totaled $439.5 million and exceeded
its statutory minimum capital requirement of $244.5 million by $195.0 million.
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 March 31, 2010, Farmer Mac’s risk-based capital stress test
generated a risk-based capital requirement of $41.7 million. Farmer Mac’s
regulatory capital of $455.1 million exceeded that amount by approximately
$413.4 million. Accumulated other comprehensive income/(loss) is not a component
of Farmer Mac’s core capital or regulatory capital. For more information, see
“—Liquidity and Capital Resources—Capital” and “—Regulatory
Matters.”
Off-Balance Sheet Program
Activities
Farmer
Mac offers approved lenders two credit enhancement alternatives to increase
their liquidity or lending capacity while retaining the cash flow benefits of
their loans: (1) Farmer Mac Guaranteed Securities, which are
available through each of the Farmer Mac I, Farmer Mac II and Rural Utilities
programs; and (2) LTSPCs, which are available only through the Farmer Mac I
and Rural Utilities programs. For securitization trusts where Farmer
Mac is the primary beneficiary, the trust assets and liabilities are included on
Farmer Mac’s condensed consolidated balance sheet. For the remainder
of these transactions, both of these alternatives result in the creation of
off-balance sheet obligations for Farmer Mac. In the future, Farmer
Mac 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. See Note 5 to the condensed consolidated financial statements
for further information regarding Farmer Mac’s off-balance sheet program
activities.
Risk
Management
Credit
Risk – Loans. Farmer Mac is
exposed to credit risk resulting from the failure of borrowers to repay their
loans in conjunction with a deficiency in the value of the collateral relative
to the outstanding balance of the loan and the costs of
liquidation. Farmer Mac is exposed to credit risk on:
|
·
|
loans
underlying Farmer Mac Guaranteed Securities;
and
|
|
·
|
loans
underlying LTSPCs.
|
Farmer
Mac generally assumes 100 percent of the credit risk on loans held and
loans underlying Farmer Mac I Guaranteed Securities, LTSPCs and Farmer Mac
Guaranteed Securities – Rural Utilities. Farmer Mac has direct credit
exposure on loans in non-AgVantage transactions and indirect credit exposure on
AgVantage transactions, which involve a general obligation of a lender secured
by qualified loans. The credit exposure of Farmer Mac and Farmer Mac
II LLC on USDA-guaranteed portions is covered by the full faith and credit of
the United States. Farmer Mac believes that the Corporation and
Farmer Mac II LLC have little or no credit risk exposure to USDA-guaranteed
portions because of the USDA guarantee. As of March 31, 2010, neither
Farmer Mac nor Farmer Mac II LLC had experienced any credit losses on any
USDA-guaranteed portions or Farmer Mac II Guaranteed Securities and does not
expect to incur any such losses in the future.
Farmer
Mac has established underwriting, collateral valuation and documentation
standards for eligible loans to mitigate the risk of loss from borrower defaults
and to provide guidance concerning the management, administration and conduct of
underwriting and appraisals to all participating sellers and potential sellers
in its programs. In general, Farmer Mac limits its maximum loan size
to $22.5 million for transactions involving direct exposure to credit risk on
loans and $50.0 million for AgVantage and similar Rural Utilities transactions
that involve a general obligation of a lender and include indirect exposure to
credit risk on the underlying loans. More detailed information
regarding loan limits and Farmer Mac’s underwriting and collateral valuation
standards and seller eligibility requirements are presented in “Business—Farmer
Mac Programs—Farmer Mac I—Underwriting and Collateral Valuation (Appraisal)
Standards,” “Business—Farmer Mac Programs—Farmer Mac I—Sellers” and
“Business—Farmer Mac Programs—Rural Utilities” in the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on
March 16, 2010.
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 generation
and transmission cooperative. As of March 31, 2010, there were no
delinquencies or non-performing assets in Farmer Mac’s portfolio of rural
utilities loans, which includes rural utilities loans held and rural utilities
loans underlying or securing Farmer Mac Guaranteed Securities – Rural
Utilities. Farmer Mac’s current direct credit exposure to rural
utilities loans as of March 31, 2010 was $494.3 million, all of which loans were
to electric distribution cooperatives. Farmer Mac also had indirect
credit exposure to the rural utilities loans securing Farmer Mac Guaranteed
Securities – Rural Utilities structured as AgVantage securities, some of which
were secured by loans to generation and transmission
cooperatives. See “—Credit Risk – Institutional” for more information
about Farmer Mac’s credit risk on AgVantage securities.
Farmer
Mac AgVantage securities are general obligations of institutions approved by
Farmer Mac and are secured by eligible loans in an amount at least equal to the
outstanding principal amount of the security. Farmer Mac excludes the
loans that secure AgVantage securities from the credit risk metrics it discloses
because of the credit quality of the issuing institutions, the collateralization
level for the securities, and because delinquent loans are required to be
removed from the pool of pledged loans and replaced with current eligible
loans. As of March 31, 2010, 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 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” in the Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2009 filed with the SEC on March 16, 2010. 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 March 31, 2010 and December 31, 2009:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Allowance
for loan losses
|
|
$ |
9,142 |
|
|
$ |
6,292 |
|
Reserve
for losses:
|
|
|
|
|
|
|
|
|
On-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
- |
|
|
|
- |
|
Off-balance
sheet Farmer Mac I Guaranteed Securities
|
|
|
- |
|
|
|
2,033 |
|
LTSPCs
|
|
|
6,427 |
|
|
|
5,862 |
|
Farmer
Mac Guaranteed Securities - Rural Utilities
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
15,569 |
|
|
$ |
14,187 |
|
Upon the
adoption of the new consolidation guidance on January 1, 2010, Farmer Mac
reclassified $2.0 million from the reserve for losses to the allowance for loan
losses as a result of Farmer Mac being determined the primary beneficiary of
certain VIEs where the beneficial interests were owned by third party
investors. Prior to the adoption of this guidance, Farmer Mac
classified these interests as off-balance sheet Farmer Mac I Guaranteed
Securities.
The
following table summarizes the changes in the components of Farmer Mac’s
allowance for losses for the three months ended March 31, 2010 and
2009:
|
|
For
the Three Months Ended
|
|
|
|
March
31, 2010
|
|
|
March
31, 2009
|
|
|
|
Allowance
|
|
|
|
|
|
Total
|
|
|
Allowance
|
|
|
|
|
|
Total
|
|
|
|
for
Loan
|
|
|
Reserve
|
|
|
Allowance
|
|
|
for
Loan
|
|
|
Reserve
|
|
|
Allowance
|
|
|
|
Losses
|
|
|
for
Losses
|
|
|
for
Losses
|
|
|
Losses
|
|
|
for
Losses
|
|
|
for
Losses
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
6,292 |
|
|
$ |
7,895 |
|
|
$ |
14,187 |
|
|
$ |
10,929 |
|
|
$ |
5,506 |
|
|
$ |
16,435 |
|
Provision/(recovery)
for losses
|
|
|
2,850 |
|
|
|
(1,468 |
) |
|
|
1,382 |
|
|
|
3,534 |
|
|
|
2,519 |
|
|
|
6,053 |
|
Charge-offs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,000 |
) |
|
|
- |
|
|
|
(2,000 |
) |
Recoveries
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
765 |
|
|
|
- |
|
|
|
765 |
|
Ending
balance
|
|
$ |
9,142 |
|
|
$ |
6,427 |
|
|
$ |
15,569 |
|
|
$ |
13,228 |
|
|
$ |
8,025 |
|
|
$ |
21,253 |
|
During
first quarter 2010, Farmer Mac recorded provisions to its allowance for losses
of $1.4 million, compared to provisions of $6.1 million for first quarter
2009. Farmer Mac did not record any charge-offs during first quarter
2010, compared to charge-offs of $2.0 million and recoveries of $0.8 million
during first quarter 2009. There was no previously accrued or
advanced interest on loans or Farmer Mac I Guaranteed Securities charged off in
first quarter 2010 or first quarter 2009. As of March 31, 2010,
Farmer Mac’s allowance for losses totaled $15.6 million, or 36 basis points
of the outstanding principal balance of loans held and loans underlying Farmer
Mac I Guaranteed Securities (excluding AgVantage securities) and LTSPCs,
compared to $14.2 million or 32 basis points as of
December 31, 2009.
As of
March 31, 2010, Farmer Mac’s 90-day delinquencies were $70.4 million (1.64
percent), compared to $86.2 million (1.90 percent) as of March 31, 2009. Ethanol
loans comprised $18.6 million of the 90-day delinquencies as of March 31, 2010.
Farmer Mac’s non-performing assets were down slightly from higher levels
reported earlier during the year. Those reductions are in part a result of the
reclassification of certain ethanol loans from “in bankruptcy” during second
quarter 2009 to REO and having been sold with subsequent loans to the purchasers
classified as current as of September 30, 2009. The remainder of the portfolio
benefits from the cumulative strong performance of the U.S. agricultural economy
over the past several years, which has enabled most agricultural producers in
stressed industries to manage current economic pressures and meet their
obligations on mortgage loans. As of March 31, 2010, Farmer Mac’s non-performing
assets totaled $84.0 million (1.95 percent), compared to $96.2 million (2.12
percent) as of March 31, 2009. Ethanol loans comprised $18.6 million of
non-performing assets as of March 31, 2010. 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
March 31, 2010, Farmer Mac’s ethanol exposure, which includes loans, loans
subject to LTSPCs, was $247.2 million on 29 different plants, with an
additional $50.9 million of undisbursed commitments. Other than
the undisbursed commitments, Farmer Mac is not seeking to add more ethanol loan
exposure to its portfolio. During a high-stress period for the
ethanol industry, and for VeraSun Energy Corporation and its subsidiaries in
particular, Farmer Mac purchased an interest in four ethanol plants arising from
the exposures being part of an LTSPC with a long-standing
counterparty. Each plant was sold during 2009 by the lender group of
which Farmer Mac was a part, with much of the financing of the purchaser
provided by the lender group.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2010
|
|
$ |
4,303,663 |
|
|
$ |
83,977 |
|
|
|
1.95%
|
|
|
$ |
13,542 |
|
|
$ |
70,435 |
|
|
|
1.64%
|
|
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%
|
|
(1)
Excludes loans underlying AgVantage securities.
As of
March 31, 2010, Farmer Mac individually analyzed $50.3 million of its
$83.9 million of impaired assets for collateral shortfalls against updated
appraised values, other updated collateral valuations or discounted
values. Farmer Mac evaluated the remaining $33.6 million of
impaired assets for which updated valuations were not available in the aggregate
in consideration of their similar risk characteristics and historical
statistics. As of March 31, 2010, Farmer Mac had recorded
specific allowances of $1.5 million for under-collateralized
assets. Farmer Mac’s non-specific or general allowances were $14.1
million as of March 31, 2010.
As of
March 31, 2010, the weighted-average original loan-to-value ratio (“LTV”) for
loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities
(excluding AgVantage securities) was 50.8 percent, and the weighted-average
original LTV for all non-performing assets was
54.3 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 March 31, 2010 by year of origination, geographic
region and commodity/collateral type.
Farmer Mac I Non-performing Assets as of March 31,
2010
|
|
|
|
Distribution
of
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Loans,
|
|
|
|
|
|
|
|
|
|
Loans,
|
|
|
Guarantees,
|
|
|
Non-
|
|
|
Non-
|
|
|
|
Guarantees,
|
|
|
LTSPCs
|
|
|
performing
|
|
|
performing
|
|
|
|
LTSPCs and REO
|
|
|
and REO (1)
|
|
|
Assets (2)
|
|
|
Asset Rate
|
|
|
|
(dollars
in thousands)
|
|
By
year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
1997
|
|
|
7% |
|
|
$
|
310,668
|
|
|
$
|
8,777
|
|
|
|
2.83% |
|
1997
|
|
|
3% |
|
|
|
118,646
|
|
|
|
1,635
|
|
|
|
1.38% |
|
1998
|
|
|
4% |
|
|
|
172,859
|
|
|
|
4,522
|
|
|
|
2.62% |
|
1999
|
|
|
5% |
|
|
|
236,067
|
|
|
|
4,038
|
|
|
|
1.71% |
|
2000
|
|
|
3% |
|
|
|
122,008
|
|
|
|
1,483
|
|
|
|
1.22% |
|
2001
|
|
|
5% |
|
|
|
229,798
|
|
|
|
7,705
|
|
|
|
3.35% |
|
2002
|
|
|
7% |
|
|
|
308,526
|
|
|
|
5,900
|
|
|
|
1.91% |
|
2003
|
|
|
8% |
|
|
|
347,542
|
|
|
|
3,563
|
|
|
|
1.03% |
|
2004
|
|
|
7% |
|
|
|
288,615
|
|
|
|
1,812
|
|
|
|
0.63% |
|
2005
|
|
|
10% |
|
|
|
419,219
|
|
|
|
2,260
|
|
|
|
0.54% |
|
2006
|
|
|
11% |
|
|
|
480,178
|
|
|
|
7,059
|
|
|
|
1.47% |
|
2007
|
|
|
10% |
|
|
|
440,174
|
|
|
|
13,100
|
|
|
|
2.98% |
|
2008
|
|
|
12% |
|
|
|
468,097
|
|
|
|
20,405
|
|
|
|
4.36% |
|
2009
|
|
|
6% |
|
|
|
278,958
|
|
|
|
1,718
|
|
|
|
0.62% |
|
2010
|
|
|
2% |
|
|
|
82,308
|
|
|
|
-
|
|
|
|
0.00% |
|
Total
|
|
|
100% |
|
|
$
|
4,303,663
|
|
|
$
|
83,977
|
|
|
|
1.95% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
geographic region (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
|
|
|
15% |
|
|
$
|
638,991
|
|
|
$
|
21,000
|
|
|
|
3.29% |
|
Southwest
|
|
|
39% |
|
|
|
1,693,856
|
|
|
|
18,329
|
|
|
|
1.08% |
|
Mid-North
|
|
|
22% |
|
|
|
938,489
|
|
|
|
25,598
|
|
|
|
2.73% |
|
Mid-South
|
|
|
12% |
|
|
|
530,579
|
|
|
|
9,538
|
|
|
|
1.80% |
|
Northeast
|
|
|
8% |
|
|
|
339,324
|
|
|
|
3,783
|
|
|
|
1.11% |
|
Southeast
|
|
|
4% |
|
|
|
162,424
|
|
|
|
5,729
|
|
|
|
3.53% |
|
Total
|
|
|
100% |
|
|
$
|
4,303,663
|
|
|
$
|
83,977
|
|
|
|
1.95% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
commodity/collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crops
|
|
|
39% |
|
|
$
|
1,672,630
|
|
|
$
|
25,491
|
|
|
|
1.52% |
|
Permanent
plantings
|
|
|
19% |
|
|
|
830,491
|
|
|
|
13,783
|
|
|
|
1.66% |
|
Livestock
|
|
|
28% |
|
|
|
1,194,141
|
|
|
|
20,406
|
|
|
|
1.71% |
|
Part-time
farm/rural housing
|
|
|
7% |
|
|
|
319,532
|
|
|
|
5,674
|
|
|
|
1.78% |
|
Ag
storage and processing (including ethanol facilities)
|
|
|
6% |
|
|
|
260,054
|
|
|
|
18,623
|
|
|
|
7.16% |
|
Other
|
|
|
1% |
|
|
|
26,815
|
|
|
|
-
|
|
|
|
0.00% |
|
Total
|
|
|
100% |
|
|
$
|
4,303,663
|
|
|
$
|
83,977
|
|
|
|
1.95% |
|
|
(1)
|
Excludes
loans underlying AgVantage
securities.
|
|
(2)
|
Includes
loans 90 days or more past due, in foreclosure, restructured after
delinquency, in bankruptcy (including loans performing under either their
original loan terms or a court-approved bankruptcy plan), and real estate
owned.
|
|
(3)
|
Geographic
regions - Northwest (AK, ID, MT, ND, NE, OR, SD, WA, WY); Southwest (AZ,
CA, CO, HI, NM, NV, UT); Mid-North (IA, IL, IN, MI, MN, MO, WI); Mid-South
(KS, OK, TX); Northeast (CT, DE, KY, MA, MD, ME, NC, NH, NJ, NY, OH, PA,
RI, TN, VA, VT, WV); and Southeast (AL, AR, FL, GA, LA, MS,
SC).
|
The
following table presents Farmer Mac’s cumulative net credit losses relative to
the cumulative original balance for all loans purchased and loans underlying
LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities)
as of March 31, 2010, 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 March 31,
2010
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
Original
Loans,
|
|
|
Cumulative
|
|
|
Cumulative
|
|
|
|
Guarantees,
|
|
|
Net
Credit
|
|
|
Loss
|
|
|
|
LTSPCs and REOs
|
|
|
Losses
|
|
|
Rate
|
|
|
|
(dollars
in thousands)
|
|
By
year of origination:
|
|
|
|
|
|
|
|
|
|
Before
1997
|
|
$ |
3,322,194 |
|
|
$ |
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
|
|
|
704,616 |
|
|
|
2,285 |
|
|
|
0.32%
|
|
2001
|
|
|
1,001,195 |
|
|
|
45 |
|
|
|
0.00%
|
|
2002
|
|
|
1,029,230 |
|
|
|
- |
|
|
|
0.00%
|
|
2003
|
|
|
848,235 |
|
|
|
- |
|
|
|
0.00%
|
|
2004
|
|
|
636,313 |
|
|
|
- |
|
|
|
0.00%
|
|
2005
|
|
|
757,655 |
|
|
|
131 |
|
|
|
0.02%
|
|
2006
|
|
|
765,444 |
|
|
|
9,912 |
|
|
|
1.29%
|
|
2007
|
|
|
552,861 |
|
|
|
750 |
|
|
|
0.14%
|
|
2008
|
|
|
547,851 |
|
|
|
1,821 |
|
|
|
0.33%
|
|
2009
|
|
|
315,137 |
|
|
|
1,193 |
|
|
|
0.38%
|
|
2010
|
|
|
89,807 |
|
|
|
- |
|
|
|
0.00%
|
|
Total
|
|
$ |
13,464,594 |
|
|
$ |
25,162 |
|
|
|
0.19%
|
|
By
geographic region (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
|
|
$ |
2,540,442 |
|
|
$ |
10,304 |
|
|
|
0.41%
|
|
Southwest
|
|
|
5,286,991 |
|
|
|
5,978 |
|
|
|
0.11%
|
|
Mid-North
|
|
|
2,394,882 |
|
|
|
8,882 |
|
|
|
0.37%
|
|
Mid-South
|
|
|
1,300,475 |
|
|
|
(314 |
) |
|
|
-0.02%
|
|
Northeast
|
|
|
1,024,552 |
|
|
|
83 |
|
|
|
0.01%
|
|
Southeast
|
|
|
917,252 |
|
|
|
229 |
|
|
|
0.02%
|
|
Total
|
|
$ |
13,464,594 |
|
|
$ |
25,162 |
|
|
|
0.19%
|
|
By
commodity/collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Crops
|
|
$ |
5,518,619 |
|
|
$ |
1,309 |
|
|
|
0.02%
|
|
Permanent
plantings
|
|
|
3,006,248 |
|
|
|
9,112 |
|
|
|
0.30%
|
|
Livestock
|
|
|
3,431,937 |
|
|
|
2,676 |
|
|
|
0.08%
|
|
Part-time
farm/rural housing
|
|
|
902,115 |
|
|
|
339 |
|
|
|
0.04%
|
|
Ag
storage and processing (including ethanol facilities) (2)
|
|
|
457,957 |
|
|
|
11,726 |
|
|
|
2.56%
|
|
Other
|
|
|
147,718 |
|
|
|
- |
|
|
|
0.00%
|
|
Total
|
|
$ |
13,464,594 |
|
|
$ |
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 March 31, 2010, approximately
$50.9 million of the loans were not yet disbursed by the
lender.
|
Historically,
losses and collateral deficiencies have been less prevalent in the loans secured
by real estate producing agricultural commodities that receive significant
government support (such as cotton, soybeans, wheat, and corn) and more
prevalent in those that do not receive such support (such as the protein sector,
permanent plantings and vegetables). However, the level of government support
may vary and is not necessarily the primary factor to forecast future losses and
collateral deficiencies. In Farmer Mac’s experience, another significant
determinant of ultimate losses on loans is the degree to which the collateral is
specialized or highly improved, such as permanent plantings and facilities. As
adverse economic conditions persist for the agricultural commodities or products
related to those types of collateral, the prospective sale value of the
collateral is likely to decrease and the related loans may become
under-collateralized.
This
analysis is consistent with corresponding commodity analyses, which indicate
that Farmer Mac has experienced higher loss and collateral deficiency rates in
its loans classified as permanent plantings as well as storage and processing
loans, which include Farmer Mac’s exposure to loans on ethanol
plants. Most of the loans classified as permanent plantings do not
receive significant government support and are therefore more susceptible to
adverse commodity-specific economic trends, while the collateral for storage and
processing loans is typically highly improved and specialized. Farmer
Mac anticipates that one or more particular commodity groups will be under
economic pressure at any one time and actively manages its portfolio to mitigate
concentration risks while preserving Farmer Mac’s ability to meet the financing
needs of all commodity groups. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Results of
Operations—Outlook.”
Analysis
of portfolio performance by geographic distribution indicates that, while
commodities are the primary determinant of exposure to loss, within most
commodity groups certain geographic areas allow greater economies of scale or
proximity to markets than others and, consequently, result in more successful
farms within the commodity group. Likewise, certain geographic areas
offer better growing conditions than others and, consequently, result in more
versatile and more successful farms within a given commodity group – and the
ability to switch crops among commodity groups.
Farmer Mac’s methodologies for pricing
its guarantee and commitment fees, managing credit risks and providing adequate
allowances for losses consider all of the foregoing factors and
information.
Credit
Risk – Institutional. Farmer Mac is also exposed to credit
risk arising from its business relationships with other institutions,
including:
|
·
|
issuers
of AgVantage securities and other investments held or guaranteed by Farmer
Mac;
|
|
·
|
sellers
and servicers; and
|
|
·
|
interest
rate swap contract
counterparties.
|
AgVantage
securities are general obligations of the AgVantage issuers and are secured by
eligible loans in an amount at least equal to the outstanding principal amount
of the security, with some level of 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. For a more detailed description of AgVantage securities,
see “Business—Farmer Mac Programs—Farmer Mac I—AgVantage Securities” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2009 filed with the SEC on March 16, 2010.
Outstanding
AgVantage on-balance sheet Farmer Mac I Guaranteed Securities totaled
$45.1 million and $48.8 million as of March 31, 2010 and December 31, 2009,
respectively. Farmer Mac Guaranteed Securities – Rural Utilities
structured as AgVantage transactions issued by National Rural totaled $1.7
billion as of March 31, 2010 and December 31, 2009. In addition,
outstanding off-balance sheet AgVantage Farmer Mac I Guaranteed Securities
totaled $2.9 billion as of March 31, 2010 and December 31,
2009. The following table provides information about the issuers of
AgVantage securities, as well as the required collateralization levels for those
transactions as of March 31, 2010 and December 31, 2009.
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
|
|
|
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
|
|
|
1,689,235 |
|
|
A
|
|
|
|
100%
|
|
|
|
1,689,240 |
|
|
A
|
|
|
|
100%
|
|
M&I
Bank
|
|
|
475,000 |
|
|
BBB
|
|
|
|
106%
|
|
|
|
475,000 |
|
|
BBB
|
|
|
|
106%
|
|
Other
(2)
|
|
|
15,050 |
|
|
N/A
|
|
|
111% to 120%
|
|
|
|
18,800 |
|
|
N/A
|
|
|
111% to 120%
|
|
Total
outstanding
|
|
$ |
4,679,285 |
|
|
|
|
|
|
|
|
|
$ |
4,683,040 |
|
|
|
|
|
|
|
|
(1)
MetLife was put on credit watch negative (*-) in February 2010.
(2)
Consists of AgVantage securities issued by 5 different issuers as of March 31,
2010 and 6 different issuers as of December 31, 2009.
Farmer
Mac manages institutional credit risk related to sellers and servicers by
requiring those institutions to meet Farmer Mac’s standards for
creditworthiness. Farmer Mac monitors the financial condition of those
institutions by evaluating financial statements and bank credit rating agency
reports. For more information on Farmer Mac’s approval of sellers, see
“Business—Farmer Mac Programs—Farmer Mac I—Sellers” in the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on
March 16, 2010.
Credit
Risk – Other Investments. As of March 31, 2010, Farmer Mac had
$418.2 million of cash and cash equivalents and $1.3 billion of investment
securities. The management of the credit risk inherent in these
investments is governed by Farmer Mac’s own policies and FCA’s Liquidity and
Investment Regulations.
In
general, these policies and regulations require each investment or issuer of an
investment to be highly rated by a nationally-recognized statistical rating
organization (“NRSRO”). Investments in mortgage securities and asset-backed
securities are required to have a rating in the highest NRSRO category.
Corporate debt securities with maturities of no more than five years but more
than three years are required to be rated in one of the two highest categories;
corporate debt securities with maturities of three years or less are required to
be rated in one of the three highest categories. There are 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
Liquidity and Investment Regulations and Farmer Mac’s policies also establish
concentration limits, which are intended to limit exposure to any one
counterparty. FCA’s Liquidity and Investment Regulations limit Farmer Mac’s
total credit exposure to any single issuer of securities and uncollateralized
financial derivatives is limited by regulation to 25 percent of the
Corporation’s regulatory capital (as of March 31, 2010, 25 percent of Farmer
Mac’s regulatory capital was $113.8 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 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 due to the ability of
borrowers to prepay their mortgages before the scheduled maturities, thereby
increasing the risk of asset and liability cash flow mismatches. Cash flow
mismatches in a changing interest rate environment can reduce the earnings of
the Corporation if assets repay sooner than expected and the resulting cash
flows must be reinvested in lower-yielding investments when Farmer Mac’s funding
costs cannot be correspondingly reduced, or if assets repay more slowly than
expected and the associated debt must be replaced by higher-cost
debt.
Yield
maintenance provisions and other prepayment penalties contained in many
agricultural mortgage loans reduce, but do not eliminate, prepayment risk,
particularly in the case of a defaulted loan where yield maintenance may not be
collected. Those provisions require borrowers to make an additional payment when
they prepay their loans so that, when reinvested with the prepaid principal,
yield maintenance payments generate substantially the same cash flows that would
have been generated had the loan not prepaid. Those provisions create a
disincentive to prepayment and compensate the Corporation for some of its
interest rate risks. As of March 31, 2010, 19 percent of the outstanding balance
of loans in the Farmer Mac I program where Farmer Mac either owned the loan or
the beneficial interest in the underlying loan had yield maintenance provisions
and 11 percent had other forms of prepayment protection (together covering 50
percent of all loans with fixed interest rates). Of the Farmer Mac I current
loans purchased in first quarter 2010, none had yield maintenance or other forms
of prepayment protection. As of March 31, 2010, none of the USDA-guaranteed
portions held or underlying Farmer Mac II Guaranteed Securities had yield
maintenance provisions; however, 16 percent contained prepayment penalties. Of
the USDA-guaranteed portions purchased in first quarter 2010, 8 percent
contained various forms of prepayment penalties. As of March 31, 2010, 22
percent of the rural utilities loans owned by Farmer Mac had yield maintenance
provisions. Of the rural utilities loans purchased in first quarter 2010,
33 percent had yield maintenance provisions. As of March 31, 2010, all of
the rural utilities loans held in trusts where Farmer Mac owned the
beneficial interest in the underlying loan 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.
Farmer
Mac’s $418.2 million of cash and cash equivalents mature within three months and
are funded with discount notes having similar maturities. As of March
31, 2010, $769.6 million of the $1.3 billion of investment securities
(60 percent) were floating rate securities with rates that adjust within one
year or fixed rate securities with original maturities between three months and
one year. Such securities are funded with floating rate medium-term
notes or discount notes that closely match the rate adjustment dates of the
associated investments. As of March 31, 2010, Farmer Mac had outstanding
discount notes of $2.2 billion, medium-term notes that mature within one year of
$1.2 billion and medium-term notes that mature after one year of $2.1
billion.
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.
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. Farmer Mac’s MVE sensitivity decreased
significantly during the first quarter 2010. This reduction in
sensitivity resulted from the $250.0 million of preferred stock issued by the
Corporation’s subsidiary, Farmer Mac II LLC. This transaction
extended the duration of Farmer Mac’s liabilities relative to its assets thereby
reducing MVE sensitivity. The following schedule summarizes the
results of Farmer Mac’s MVE sensitivity analysis as of March 31, 2010 and
December 31, 2009 to an immediate and instantaneous uniform or “parallel”
shift in the yield curve.
|
|
Percentage Change in MVE from
Base Case
|
|
Interest Rate
|
|
March 31,
|
|
|
December 31,
|
|
Scenario
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
+
300 bp
|
|
|
-1.2%
|
|
|
|
-23.1%
|
|
+
200 bp
|
|
|
0.6%
|
|
|
|
-13.8%
|
|
+
100 bp
|
|
|
1.4%
|
|
|
|
-5.4%
|
|
-
100 bp
|
|
|
*
|
|
|
|
*
|
|
-
200 bp
|
|
|
*
|
|
|
|
*
|
|
-
300 bp
|
|
|
*
|
|
|
|
*
|
|
|
*
|
As
of the date indicated, a parallel shift of the U.S. Treasury yield curve
by the number of basis points indicated produced negative interest rates
for portions or all of this curve.
|
As of
March 31, 2010, 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 minus 1.8 months, compared to
plus 1.1 months as of December 31, 2009. This change
in duration gap is also attributable to the preferred stock issued by Farmer Mac
II LLC. Duration matching helps to maintain the correlation of cash
flows and stabilize portfolio earnings even when interest rates are not
stable.
As of
March 31, 2010, a parallel increase of 100 basis points would have
decreased Farmer Mac’s net interest income (“NII”), a shorter-term measure of
interest rate risk, by 9.2 percent, while a parallel decrease of
25 basis points would have decreased NII by 3.0 percent. Farmer
Mac also measures the sensitivity of both MVE and NII to a variety of
non-parallel interest rate shocks, including flattening and steepening yield
curve scenarios. As of March 31, 2010, both MVE and NII
showed similar or lesser sensitivity to non-parallel shocks than to the parallel
shocks.
The
economic effects of financial derivatives are included in the Corporation’s MVE,
NII and duration gap analyses. Farmer Mac enters into the following
financial derivative transactions principally to protect against risk from the
effects of market price or interest rate movements on the value of assets,
future cash flows, 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
March 31, 2010, Farmer Mac had $3.8 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,
$2.2 billion were receive-fixed interest rate swaps, $0.3 billion were
basis swaps and $30.0 million were credit default swaps.
Liquidity and Capital
Resources
Farmer
Mac depends on regular access to the capital markets for liquidity, and Farmer
Mac maintained access to the capital markets at favorable rates throughout first
quarter 2010. 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
106 days of liquidity during first quarter 2010 and had 105 days of
liquidity as of March 31, 2010.
Debt
Issuance. Farmer Mac funds its purchases of program and
non-program assets primarily by issuing debt obligations of various maturities
in the public capital markets. Debt obligations issued by Farmer Mac
include discount notes and fixed and floating rate medium-term notes, including
callable notes. Farmer Mac also issues discount notes and medium-term
notes to obtain funds to finance its investment activities, transaction costs,
guarantee payments and LTSPC purchase obligations. See
“Business—Financing—Debt Issuance” in the Corporation’s Annual Report on Form
10-K for the year ended December 31, 2009 filed with the SEC on March 16,
2010 for more information about Farmer Mac’s debt issuance.
Farmer
Mac’s board of directors has authorized the issuance of up to $7.0 billion
of discount notes and medium-term notes (of which $5.5 billion was outstanding
as of March 31, 2010), subject to periodic review of the adequacy of
that level relative to Farmer Mac’s borrowing requirements. Farmer
Mac invests the proceeds of such issuances in loans, Farmer Mac Guaranteed
Securities, and non-program investment assets in accordance with policies
established by its board of directors and subject to regulations established by
FCA.
Liquidity. The
funding and liquidity needs of Farmer Mac’s business are driven by the purchase
of loans, USDA-guaranteed portions and Farmer Mac Guaranteed Securities; the
maturities of and interest payments on Farmer Mac’s discount notes and
medium-term notes; and payment of principal and interest on Farmer Mac
Guaranteed Securities. Farmer Mac’s primary sources of funds to meet
these needs are:
|
·
|
principal
and interest payments and ongoing guarantee and commitment fees received
on loans, Farmer Mac Guaranteed Securities, and
LTSPCs;
|
|
·
|
principal
and interest payments received from investment securities;
and
|
|
·
|
the
issuance of new discount notes and medium-term
notes.
|
Farmer
Mac’s short-term borrowing costs have remained at favorable levels despite
continued market volatility. 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 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.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Cash
and cash equivalents
|
|
$ |
418,211 |
|
|
$ |
654,794 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Guaranteed
by GSEs and US Government agencies
|
|
|
972,612 |
|
|
|
753,439 |
|
Corporate
debt securities
|
|
|
218,722 |
|
|
|
245,605 |
|
Asset-backed
securities principally backed by Government
|
|
|
|
|
|
|
|
|
guaranteed student loans (1)
|
|
|
89,866 |
|
|
|
132,851 |
|
Total
|
|
$ |
1,699,411 |
|
|
$ |
1,786,689 |
|
|
(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.
Farmer
Mac held $62.3 million of ARCs as of March 31, 2010, compared to
$72.9 million as of December 31, 2009. As of March 31, 2010,
Farmer Mac’s carrying value of its ARCs was 84 percent of par. The
discounted carrying value reflects uncertainty regarding the ability to obtain
par in the absence of any active market trading.
As of
March 31, 2010 and December 31, 2009, Farmer Mac had a remaining investment of
$0.5 million and $5.3 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 condensed consolidated balance
sheets.
Capital. During
the three months ended March 31, 2010, Farmer Mac issued $250.0 million of
non-voting, non-cumulative preferred stock of its newly formed subsidiary Farmer
Mac II LLC and simultaneously retired and repurchased all $150.0 million Farmer
Mac Series B preferred stock. No Series C preferred stock was issued
in first quarter 2010. For more information about the Series C
preferred stock, see Note 6 to the condensed consolidated financial statements
and Farmer Mac’s Form 10-K for the fiscal year ended December 31, 2009 filed
with the SEC on March 16, 2010. See “—Balance Sheet
Review—Capital” for more information about Farmer Mac’s capital position and
“—Regulatory Matters” for more information about proposed changes to the
risk-based capital stress test applicable to Farmer Mac.
Other
Matters
Dividends. For
first quarter 2010 and for each quarter in 2009, Farmer Mac’s board of directors
declared a quarterly dividend of $0.05 per share on the Corporation’s common
stock. 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 be
restricted if it were to fail to comply with the applicable regulatory capital
requirements. See “Business—Government Regulation of Farmer
Mac—Regulation—Capital Standards—Enforcement levels” in Farmer Mac’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 filed with
the SEC on March 16, 2010.
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. The public comment period for the proposed
rule closed April 22, 2010. Farmer Mac has provided written
comments on the proposed rule to FCA.
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. Farmer Mac is required to hold capital at the
higher of the statutory minimum capital requirement or the amount required by
the risk-based capital stress test. As of March 31, 2010, Farmer Mac’s minimum
capital requirement was $244.5 million, and Farmer Mac’s core capital level was
$439.5 million, $195.0 million above the minimum capital requirement. Based on
the risk-based capital stress test currently in effect, Farmer Mac’s risk-based
capital requirement as of March 31, 2010 was $41.7 million, and Farmer Mac’s
regulatory capital of $455.1 million exceeded that requirement by approximately
$413.4 million.
Supplemental
Information
The
following tables present quarterly and annual information regarding loan
purchases, guarantees and LTSPCs and outstanding loans, guarantees and
LTSPCs.
|
|
|
|
Farmer Mac I
|
|
|
Farmer Mac II
|
|
|
Rural Utilities
|
|
|
|
|
|
|
Loans and
|
|
|
|
|
|
and USDA
|
|
|
Loans and
|
|
|
|
|
|
|
Guaranteed
|
|
|
|
|
|
Guaranteed
|
|
|
Guaranteed
|
|
|
|
|
|
|
Securities
|
|
|
LTSPCs (1)
|
|
|
Securities
|
|
|
Securities (2)
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
For
the quarter ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2010
|
|
$ |
77,948 |
|
|
$ |
77,143 |
|
|
$ |
92,288 |
|
|
$ |
59,018 |
|
|
$ |
306,397 |
|
December
31, 2009
|
|
|
86,872 |
|
|
|
108,646 |
|
|
|
94,936 |
|
|
|
16,009 |
|
|
|
306,463 |
|
September
30, 2009
|
|
|
40,732 |
|
|
|
37,083 |
|
|
|
76,119 |
|
|
|
553,644 |
|
|
|
707,578 |
|
June
30, 2009
|
|
|
37,900 |
|
|
|
22,717 |
|
|
|
96,322 |
|
|
|
900,000 |
|
|
|
1,056,939 |
|
March
31, 2009
|
|
|
29,814 |
|
|
|
65,720 |
|
|
|
79,055 |
|
|
|
270,000 |
|
|
|
444,589 |
|
December
31, 2008
|
|
|
72,137 |
|
|
|
121,440 |
|
|
|
87,455 |
|
|
|
230,000 |
|
|
|
511,032 |
|
September
30, 2008
|
|
|
508,179 |
|
|
|
239,170 |
|
|
|
83,672 |
|
|
|
- |
|
|
|
831,021 |
|
June
30, 2008
|
|
|
53,838 |
|
|
|
116,472 |
|
|
|
79,700 |
|
|
|
1,330,676 |
|
|
|
1,580,686 |
|
March
31, 2008
|
|
|
37,468 |
|
|
|
53,281 |
|
|
|
53,114 |
|
|
|
- |
|
|
|
143,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
195,318 |
|
|
|
234,166 |
|
|
|
346,432 |
|
|
|
1,739,653 |
|
|
|
2,515,569 |
|
December
31, 2008
|
|
|
671,622 |
|
|
|
530,363 |
|
|
|
303,941 |
|
|
|
1,560,676 |
|
|
|
3,066,602 |
|
(1)
|
During
2005, Farmer Mac began issuing LTSPCs for the construction of agricultural
storage and processing facilities, primarily ethanol
facilities. As of March 31, 2010, approximately $50.9 million
of the loans underlying those $458.0 million of LTSPCs were not yet
disbursed by the lender.
|
(2)
|
The
enactment of the Farm Bill on May 22, 2008 expanded Farmer Mac’s
authorities to include providing a secondary market for rural electric and
telephone loans made by cooperative
lenders.
|
|
|
Guarantees and LTSPCs and USDA Guarantees
|
|
|
|
Farmer Mac I
|
|
|
Farmer Mac II
|
|
|
Rural Utilities
|
|
|
|
|
|
|
Loans and
|
|
|
|
|
|
and USDA
|
|
|
Loans and
|
|
|
|
|
|
|
Guaranteed
|
|
|
|
|
|
Guaranteed
|
|
|
Guaranteed
|
|
|
|
|
|
|
Securities
|
|
|
LTSPCs
|
|
|
Securities
|
|
|
Securities
|
|
|
Total
|
|
|
|
(in thousands)
|
|
As
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2010 (1)
|
|
$ |
5,444,448 |
|
|
$ |
1,846,244 |
|
|
$ |
1,237,539 |
|
|
$ |
2,183,576 |
|
|
$ |
10,711,807 |
|
December
31, 2009
|
|
|
5,224,768 |
|
|
|
2,165,706 |
|
|
|
1,199,798 |
|
|
|
2,130,832 |
|
|
|
10,721,104 |
|
September
30, 2009
|
|
|
5,227,939 |
|
|
|
2,135,445 |
|
|
|
1,141,570 |
|
|
|
2,266,592 |
|
|
|
10,771,546 |
|
June
30, 2009
|
|
|
5,241,145 |
|
|
|
2,181,712 |
|
|
|
1,115,025 |
|
|
|
1,819,033 |
|
|
|
10,356,915 |
|
March
31, 2009
|
|
|
5,313,680 |
|
|
|
2,216,564 |
|
|
|
1,082,215 |
|
|
|
1,319,033 |
|
|
|
9,931,492 |
|
December
31, 2008
|
|
|
5,759,773 |
|
|
|
2,224,181 |
|
|
|
1,043,425 |
|
|
|
1,054,941 |
|
|
|
10,082,320 |
|
September
30, 2008
|
|
|
5,724,867 |
|
|
|
2,264,880 |
|
|
|
995,639 |
|
|
|
824,941 |
|
|
|
9,810,327 |
|
June
30, 2008
|
|
|
5,474,303 |
|
|
|
1,997,172 |
|
|
|
960,278 |
|
|
|
1,330,676 |
|
|
|
9,762,429 |
|
March
31, 2008
|
|
|
5,521,945 |
|
|
|
1,943,181 |
|
|
|
959,444 |
|
|
|
- |
|
|
|
8,424,570 |
|
(1)
|
The
Loans and Guaranteed Securities and LTSPCs amounts reflect the conversion
of $265.8 million of existing LTSPCs to Farmer Mac I Guaranteed Securities
during the first quarter 2010 at the request of a program
participant.
|
Outstanding Balance of Loans Held and Loans Underlying
|
|
On-Balance Sheet Farmer Mac and USDA Guaranteed Securities
|
|
|
|
|
|
|
5-to-10-Year
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
ARMs &
|
|
|
1-Month-to-
|
|
|
Held in
|
|
|
|
Fixed Rate
|
|
|
Resets
|
|
|
3 Year ARMs
|
|
|
Portfolio
|
|
|
|
(in thousands)
|
|
As
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2010
|
|
$ |
2,431,701 |
|
|
$ |
1,340,856 |
|
|
$ |
1,840,181 |
|
|
$ |
5,612,738 |
|
December
31, 2009
|
|
|
1,983,749 |
|
|
|
729,700 |
|
|
|
1,439,267 |
|
|
|
4,152,716 |
|
September
30, 2009
|
|
|
2,138,544 |
|
|
|
685,553 |
|
|
|
1,403,298 |
|
|
|
4,227,395 |
|
June
30, 2009
|
|
|
1,716,678 |
|
|
|
649,078 |
|
|
|
1,303,332 |
|
|
|
3,669,088 |
|
March
31, 2009
|
|
|
1,728,174 |
|
|
|
660,398 |
|
|
|
759,535 |
|
|
|
3,148,107 |
|
December
31, 2008
|
|
|
1,659,983 |
|
|
|
746,623 |
|
|
|
819,234 |
|
|
|
3,225,840 |
|
September
30, 2008
|
|
|
1,412,136 |
|
|
|
699,611 |
|
|
|
743,146 |
|
|
|
2,854,893 |
|
June
30, 2008
|
|
|
1,974,048 |
|
|
|
772,859 |
|
|
|
739,642 |
|
|
|
3,486,549 |
|
March
31, 2008
|
|
|
963,336 |
|
|
|
748,584 |
|
|
|
342,496 |
|
|
|
2,054,416 |
|
Item
3.
|
Quantitative and
Qualitative Disclosures About Market
Risk
|
Farmer
Mac is exposed to market risk attributable to changes in interest
rates. Farmer Mac manages this market risk by entering into various
financial transactions, including financial derivatives, and by monitoring its
exposure to changes in interest rates. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Risk
Management—Interest Rate Risk” for more information about Farmer Mac’s exposure
to interest rate risk and strategies to manage such risk. For
information regarding Farmer Mac’s use of and accounting policies for financial
derivatives, see Note 1(c) to the condensed consolidated financial statements
contained in this report. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity and Capital
Resources” for further information regarding Farmer Mac’s debt issuance and
liquidity risks.
Item
4.
|
Controls and
Procedures
|
(a) Management’s Evaluation of
Disclosure Controls and Procedures. Farmer Mac maintains
disclosure controls and procedures designed to ensure that information required
to be disclosed in the Corporation’s periodic filings under the Securities
Exchange Act of 1934 (the “Exchange Act”), including this report, is recorded,
processed, summarized and reported on a timely basis. These
disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed under the Exchange Act is
accumulated and communicated to the Corporation’s management on a timely basis
to allow decisions regarding required disclosure. Management,
including Farmer Mac’s Chief Executive Officer (the “CEO”) and Chief Financial
Officer (the “CFO”), has evaluated the effectiveness of the design and operation
of the Corporation’s disclosure controls and procedures (as defined under
Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31,
2010.
The
Corporation carried out the evaluation required by paragraph (b) of Exchange Act
Rules 13a-15 and 15d-15, under the supervision and with the participation of
management, including the CEO and CFO, of the effectiveness of Farmer Mac’s
disclosure controls and procedures. Based upon this evaluation, the
CEO and CFO concluded that the Corporation’s disclosure controls and procedures
were effective as of March 31, 2010.
(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 March
31, 2010 that has materially affected, or is reasonably likely to materially
affect, Farmer Mac’s internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
None.
There
were no material changes from the risk factors previously disclosed in Farmer
Mac’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with
the SEC on March 16, 2010.
Item
2.
|
Unregistered Sales of
Equity Securities and Use of
Proceeds
|
|
(a)
|
Farmer
Mac is a federally chartered instrumentality of the United States and its
debt and equity securities are exempt from registration pursuant to
Section 3(a)(2) of the Securities Act of
1933.
|
During
first quarter 2010, one type of transaction occurred related to Farmer Mac
common stock that was not registered under the Securities Act of 1933 and not
otherwise reported on a Current Report on Form 8-K. On
January 21, 2010, 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 1,802 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 $7.01 per
share, which was the closing price of the Class C Non-Voting Common Stock on
December 31, 2009 as reported by the New York Stock Exchange.
Item
3.
|
Defaults Upon Senior
Securities
|
Item
4.
|
(Removed and
Reserved)
|
Item
5.
|
Other
Information
|
*
|
3.1
|
-
|
Title
VIII of the Farm Credit Act of 1971, as most recently amended by the Food,
Conservation and Energy Act of 2008 (Form 10-Q filed August 12,
2008).
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3.2
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-
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Amended
and Restated By-Laws of the Registrant (Form 10-K filed March 17,
2008).
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4.1
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-
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Specimen
Certificate for Farmer Mac Class A Voting Common Stock (Form 10-Q filed
May 15, 2003).
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*
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4.2
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-
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Specimen
Certificate for Farmer Mac Class B Voting Common Stock (Form 10-Q filed
May 15, 2003).
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*
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4.3
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Specimen
Certificate for Farmer Mac Class C Non-Voting Common Stock (Form 10-Q
filed May 15, 2003).
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*
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4.4
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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).
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*
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4.5
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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).
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*
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4.6
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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).
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*
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4.7
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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).
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†*
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10.1
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Amended
and Restated 1997 Incentive Plan (Form 10-Q filed November 14,
2003).
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†*
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10.1.1
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Form
of stock option award agreement under 1997 Incentive Plan (Form 10-K filed
March 16, 2005).
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†*
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10.1.2
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2008
Omnibus Incentive Plan (Form 10-Q filed August 12,
2008).
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*
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Incorporated
by reference to the indicated prior
filing.
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**
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Filed
with this report.
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†
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Management
contract or compensatory
plan.
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#
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Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
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†*
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10.1.3
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Form
of SAR Agreement under the 2008 Omnibus Incentive Plan (Previously filed
as Exhibit 10 to Form 8-K filed June 11, 2008).
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†*
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10.1.4
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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).
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†*
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10.1.5
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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).
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†*
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10.2
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Employment
Agreement dated as of March 1, 2009 between Michael A. Gerber and the
Registrant (Form 10-Q filed May 12, 2009).
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†*
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10.3
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Compiled
Amended and Restated Employment Contract dated as of June 5, 2008 between
Tom D. Stenson and the Registrant (Previously filed as Exhibit 10.4 to
Form 10-Q filed August 12, 2008).
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†*
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10.4
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Compiled
Amended and Restated Employment Contract dated June 5, 2008 between
Timothy L. Buzby and the Registrant (Previously filed as Exhibit 10.5 to
Form 10-Q filed August 12, 2008).
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†*
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10.4.1
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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).
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†*
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10.5
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Compiled
Amended and Restated Employment Contract dated June 5, 2008 between Mary
K. Waters and the Registrant (Previously filed as Exhibit 10.6 to Form
10-Q filed August 12, 2008).
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10.6
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Exhibit
number reserved for future use.
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10.7
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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).
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10.8
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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).
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10.9
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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).
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*
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Incorporated
by reference to the indicated prior
filing.
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**
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Filed
with this report.
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†
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Management
contract or compensatory
plan.
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#
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Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
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*#
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10.10
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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).
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*#
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10.11
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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).
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*#
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10.11.1
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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).
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*#
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10.12
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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).
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*#
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10.13
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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).
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*#
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10.13.1
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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).
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10.13.2
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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).
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10.14
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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).
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*#
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10.15
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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).
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*#
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10.16
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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).
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Incorporated
by reference to the indicated prior
filing.
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**
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Filed
with this report.
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†
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Management
contract or compensatory
plan.
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#
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Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
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*#
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10.16.1
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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).
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*#
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10.17
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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).
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†*
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10.18
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Form
of Indemnification Agreement for Directors (Previously filed as Exhibit
10.1 to Form 8-K filed April 9, 2008).
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†*
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10.19
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Description
of compensation agreement between the Registrant and its directors (Form
10-Q filed August 9, 2007).
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†*
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10.20
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Agreement
and General Release dated as of January 30, 2009 between Henry D. Edelman
and the Registrant (Form 10-Q filed May 12, 2009).
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†*
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10.21
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Agreement
and General Release dated as of February 6, 2009 between Nancy E.
Corsiglia and the Registrant (Form 10-Q filed May 12,
2009).
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*
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21
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List
of Registrant’s subsidiaries (Form 10-K filed March 16,
2010).
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**
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31.1
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Certification
of Chief Executive Officer relating to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended March 31, 2010, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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**
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31.2
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Certification
of Chief Financial Officer relating to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended March 31, 2010, pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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**
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32
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Certification
of Chief Executive Officer and Chief Financial Officer relating to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2010, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
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*
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Incorporated
by reference to the indicated prior
filing.
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**
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Filed
with this report.
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†
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Management
contract or compensatory
plan.
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#
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Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
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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
May 10,
2010
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By:
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/s/
Michael A. Gerber
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Michael
A. Gerber
President
and Chief Executive Officer
(Principal
Executive
Officer)
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/s/
Timothy L. Buzby
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Timothy
L. Buzby
Vice
President – Chief Financial Officer
(Principal
Financial Officer)
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